AMBASSADOR APARTMENTS INC, 10-K, 1997-03-31

AMBASSADOR APARTMENTS INC
10-K, 1997-03-31
REAL ESTATE INVESTMENT TRUSTS

Previous: XAVIER CORP, NT 10-K, 1997-03-31

Next: WESTSIDE FINANCIAL CORP /GA/, 10KSB, 1997-03-31

<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

[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: 1-14132

AMBASSADOR APARTMENTS, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S><C>
MARYLAND 36-3948161
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

77 WEST WACKER DRIVE, SUITE 4040, CHICAGO, ILLINOIS 60601
(Address of principal executive offices) (Zip Code)
</TABLE>

(312) 917-1600
(Registrant's telephone number, including area code)

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

Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.01 par value New York Stock Exchange

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

NONE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (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 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 the 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. [ ]

The aggregate market value of voting stock held by nonaffiliates was $257.5
million based upon the sale price of registrant's Common Stock as of March 24,
1997.

At March 24, 1997, 9,176,180 shares of the Registrant's Common Stock were
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference certain information from the Registrant's
definitive proxy statement for its 1997 annual meeting to be filed with the
Securities and Exchange Commission no later than 120 days subsequent to the
Company's fiscal year end.
<PAGE> 2

AMBASSADOR APARTMENTS, INC.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PART I. Page
----
<S> <C> <C>
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . 19
Cautionary Statement for Purposes of the Safe Harbor of the Private Litigation Reform Act of 1995 . 19

PART II.

Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

PART III.

Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . 37
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . 38
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . 38

PART IV.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . . . . 39

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
</TABLE>
<PAGE> 3

PART I

ITEM 1. BUSINESS

FORMATION OF THE COMPANY

Ambassador Apartments, Inc. (formerly Prime Residential, Inc.) (together
with its consolidated and unconsolidated investments in real estate limited
partnerships, the "Company") was organized in Maryland on April 15, 1994. For
the fiscal years ending December 31, 1994 and December 31, 1995, the Company
has made an election to be treated as a real estate investment trust ("REIT")
under the Internal Revenue Code of 1986, as amended. In addition, upon filing
of the Company's 1996 Federal income tax return, the Company will make an
election to qualify as a REIT for the period ending December 31,1996 under the
Internal Revenue Code of 1986, as amended.

On August 31, 1994 the Company completed an initial public offering (the
"Offering") of 7,821,000 shares of Common Stock at $16.00 per share. On
September 12, 1994, the underwriters of the Offering exercised their over
allotment option to purchase 1,137,525 shares of Common Stock at $16.00 per
share.

Upon consummation of the Offering, the Company contributed the initial
net proceeds from the Offering and the exercise of the underwriters' over
allotment option in exchange for 7,821,000 and 1,137,525, respectively, common
units of partnership interest ("Common Units") of Ambassador Apartments, L.P.
(formerly Prime Residential, L.P.) a Delaware limited partnership (the
"Operating Partnership").

On August 15, 1996, the Company issued 1,351,351 shares of Class A Senior
Cumulative Convertible Preferred Stock, par value $.01 per share (the "Class A
Preferred Stock") and contributed the net proceeds to the Operating Partnership
in exchange for 1,351,351 preferred units of partnership interest in the
Operating Partnership (the "Class A Preferred Units"). For additional
information regarding the Class A Preferred Stock, see "Markets for the
Registrant's Common Equity and Related Stockholder Matters."

The Company is the sole general partner of the Operating Partnership and
owns 91.31% of the outstanding Common Units and 100% of the Class A Preferred
Units as of March 24, 1997. Dividends declared or paid to holders of Common
Stock and Class A Preferred Stock are based upon distributions received by the
Company from the Operating Partnership with respect to its Common Units and
Preferred Units.

GENERAL

The Company is a self-administered and self-managed REIT engaged in the
ownership and management of garden style apartment properties leased primarily
to middle income tenants. As of December 31, 1996, the Company owned 49
apartment communities (the "Properties" or singularly a "Property") with a
total of 14,564 units located in Arizona, Colorado, Florida, Georgia, Illinois,
Tennessee and Texas. On March 13, 1997, the Company acquired Palencia
Apartments in Tampa,
<PAGE> 4

Florida with 420 units for $14.9 million. As of March 24, 1997 the Company
owned 14,984 units in 50 properties. In addition, the Company manages one
property containing 252 units for an unrelated third party.

Management believes its overall portfolio size, management operations and
property concentrations in selected geographic markets provide economies of
scale regarding operating expenses, advertising, marketing, and insurance.
Management also believes that a geographic distribution of the properties in a
number of strategically selected markets helps insulate the overall portfolio's
economic returns from regional economic fluctuations. The Company will
continue to focus on acquisitions in its principal markets which represent
metropolitan areas in which the Company owns more than 1,000 apartments
("Principal Markets"). The Company's Principal Markets currently include
Phoenix and Tucson, Arizona; Austin, Houston and San Antonio, Texas. The
Company expects to expand its operations into other markets that exhibit
attractive investment potential.

BUSINESS PHILOSOPHY AND BACKGROUND

The Company's mission is to deliver long term growth in value and
increasing earnings for its stockholders by providing:

1. An organization dedicated to excellence,
2. Affordable, quality housing for its residents,
3. Respect and opportunity for its employees, and
4. Socially responsible corporate behavior to its customers and the
communities in which it invests.

The Company seeks to increase the value and size of its portfolio using
the following strategies:

Increase property net operating income - The Company believes it will
experience higher revenue collections and reasonably predictable operating
expenses at many of its Properties through professional management, economies
of scale and improving local rental markets. The Company believes its property
management teams are experts in their markets and provide the level of service
necessary to generate growth in revenues. The key elements of attracting and
retaining high quality residents are having a thorough understanding of all of
the Company's customers and focusing on communications between all levels of
the Company.

Operating expenses, other than property taxes, have remained relatively
stable for the past year at the Company-owned properties. This has been due
to effective management policies, renovation and preventive maintenance
expenditures that reduced annual operating expenses and increases in buying
power in those markets where the Company has a strong presence. The Company
expects continued improvement in the key demographic trends (household
formation, employment growth and population growth) in most of its Principal
Markets through 1997.

2
<PAGE> 5

Acquisitions and dispositions - The Company intends to continue to
acquire investment grade apartment complexes with an emphasis on properties
that can be financed with tax-exempt bonds, or those which already have bond
financing. While there is much trade media discussion about the rising cost of
Class A apartment acquisitions, the Company believes that good opportunities
for investment continue to be available at reasonable prices for Class B
apartments in most of the Company's markets. Management also continues to
identify new markets that exhibit demographic fundamentals consistent with the
Company's primary business objectives.

The Company's asset management staff reviews its portfolio continuously
to identify changes in submarkets and to determine whether a sale or exchange
of a property, or an interest in a property is warranted.

Tax-exempt bond financing - The Company believes that it is the only
publicly traded real estate investment company using long term, low cost
tax-exempt bond financing as its principal source of permanent financing.
Tax-exempt bonds provide one of the lowest cost of debt capital available in
the market and can be used to finance acquisition and renovation of properties
as well as new construction. The Company believes that this financing strategy
will help provide a superior level of total return to shareholders on a risk
adjusted basis. In particular, the Company believes that the enhanced return
on its equity investment that it receives from the use of tax-exempt bonds
out weighs any offsetting disadvantage from resident income and/or rent
restrictions as well as other costs imposed by such financing. The Company
hopes to complete the new financing of several properties in its portfolio with
tax-exempt bonds during 1997 as well as continue to attempt to acquire
properties with existing bond financing in place.

THE INDUSTRY/PRINCIPAL MARKETS

The Company believes that firms that compete in the middle income sector
of the apartment industry differentiate themselves based upon the level of
service they provide to their customers. Prospective residents have many
similarly priced choices for housing. The customer's final decision will be
based on property appearance, location and the quality of customer service.
The Company seeks to distinguish itself by providing high quality customer
service to both prospective and existing residents by training and motivating
its management teams to exceed industry standards in all areas. Prior to the
purchase of a property, a detailed renovation and marketing plan is created
which outlines the approach the Company will take to improve the property's
performance and operating results. Close attention is paid to marketing
requirements such as drive-by appeal, physical appearance, signage, clubhouse,
amenities, model apartments and brochures in an effort to give the Company's
properties an advantage over their competition. As a result of this focus on
service and appearance, the Company believes that its resident retention rate
is higher than industry averages and, as a result, turnover and capital
improvement costs are lower.

In most of the markets where the Company owns property, the rental
rates have been increasing over the past three years. As market occupancies
exceed 95%, there is an upward pressure on rental rates that typically grow
faster than the median income levels. This situation can create higher
turnover of existing residents and higher operating expenses. The

3
<PAGE> 6

Company believes that its customer service program allows for increases in
market rental rates while maintaining lower overall resident turnover; this
results in lower operating expenses than most of its competition.

The Company believes that there is currently an imbalance of supply and
demand of middle income apartments in its markets. While there has been a
recent increase in the number of apartment starts in Atlanta, Austin, Phoenix,
Houston and San Antonio, the majority of the properties being built are at
costs that are typically approximately twice the average cost of the Company's
apartments. Rental rates at new properties are substantially higher than those
at the Company's properties and its typical middle income resident cannot
afford to live at these newly constructed luxury properties.

The Company has the personnel and capabilities to develop its own
apartment communities. However, the Company does not believe that current
returns on new development are sufficient to offset the risks associated with
the construction and lease up of new communities. The Company will continue to
monitor its markets to determine when the appropriate conditions occur to allow
new development within the Company's total return criteria.

RECENT DEVELOPMENTS

On March 5, 1997, Nomura Asset Capital Corporation funded $21.5 million
of 10 year, fixed rate financing, secured by the Country Club West and Courtney
Park Properties, located in Greeley and Ft. Collins, Colorado, respectively.
The loan bears interest at 8.08% and is based on a 30 year amortization
schedule. Net proceeds from the closing were used to repay outstanding
principal on the Revolving Loan, as described below.

On March 6, 1997, variable rate tax-exempt bonds of $6.0 million were
issued for the benefit of the Crossroads Apartments, in Phoenix, Arizona (the
"Crossroads Bonds"). The bonds, which are collateralized by Crossroads, will
mature on December 15, 2036 and are credit enhanced by Federal National
Mortgage Association ("FNMA"). The credit enhancement matures on December 1,
2021. Restricted escrowed bond funds of $204,000 have been set aside to fund
future renovation costs at Crossroads. The Company used net proceeds of
$5.7 million to repay outstanding principal on the Revolving Loan.

In order to hedge against fluctuations in interest rates on the
Crossroads Bonds, effective March 3, 1997, the Company entered into a swap
transaction with Credit Lyonnais New York Branch ("CLNY") pursuant to which the
Company will pay a fixed rate on the $6.0 million variable rate tax-exempt
bonds encumbering Crossroads. Under the terms of the swap agreement, the
Company will pay, monthly in advance, a fixed rate of 4.85% to CLNY and receive
a floating rate based on the PSA Municipal Swap Index. The swap agreement
matures on March 3, 2004.

On March 13, 1997, the Company acquired Palencia for $14.9 million.
Palencia is a 420 unit apartment complex located in Tampa, Florida. The
Company financed this acquisition by assuming

4
<PAGE> 7

$13.3 million of fixed rate tax exempt bonds, encumbering the Palencia
Property, and funding the remainder of the purchase price with working capital.

COMPETITION

All of the Company's properties are located in metropolitan areas. There
are numerous other apartment properties within the market area of each property
which could have a material effect on the rental rates charged at the
properties, as well as the Company's ability to rent apartments at the
properties. The Company competes for residents and apartment property
acquisitions with others who may have greater resources than the Company and
whose officers, employees and directors may have more experience in operating
and acquiring apartment properties than that of the Company's officers,
employees and directors. In addition, single-family housing and all forms of
multifamily residential properties provide housing alternatives to potential
tenants of the Company's properties.

EMPLOYEES/PROPERTY MANAGEMENT

The Company's headquarters are located at 77 West Wacker Drive, Suite
4040, Chicago, Illinois, 60601, telephone (312) 917-1600. Regional offices are
located in Atlanta, Georgia and San Antonio, Texas and Phoenix, Arizona. There
were approximately 500 employees as of March 24, 1997, including 56 corporate
and 444 property management employees.

The Company provides complete property management services to each
property in its portfolio including on-site management supervision, leasing,
marketing, accounting and training. The Company does not utilize third party
management companies. Each of the 50 on-site property managers and their staff
report to an area/district manager located in each market who reports to the
Director of Property Management. Each property is treated as an individual
business operation established with an annual budget, defined policies and
procedures, full time on-site professional staffing and supervision. The
Company uses property management and accounting computer systems that are
linked to the regional and corporate offices to provide timely information to
senior management. The Company's asset management system utilizes the leasing,
marketing and accounting information created at each site to permit senior
management to monitor the performance and operations of each property. In
1997, the Company will continue to increase its commitment to training and
education for each of its employees. The intention is to further improve
service to the Company's customers and the returns to the Company's
shareholders.

ENVIRONMENTAL MATTERS

General

Under various Federal, state and local laws and regulations, an owner of
real estate is liable for the costs of removal or remediation of certain
hazardous or toxic substances on such property. Such laws often impose such
liability without regard to whether the owner knew of, or was responsible for,
the presence of such hazardous or toxic substances. The costs of remediation
or removal of such substances may be substantial, and the presence of such
substances, or the failure

5
<PAGE> 8

to promptly remediate such substances, may adversely affect the owner's ability
to sell such real estate or to borrow using such real estate as collateral.
Moreover, certain of the Company's loan documents provide for recourse
liability in connection with hazardous or toxic substances.

The Company does not believe that any of its properties are currently
subject to any environmental liability which would have a material adverse
effect on the Company's business, assets or results of operations.
Furthermore, except as described below, the Company believes that the
properties are in compliance in all material respects with all Federal, state
and local ordinances and regulations regarding hazardous or toxic substances.
Except as described below, the Company has not been notified by any
governmental authority of any noncompliance, liability or other claim relating
to hazardous or toxic substances in connection with any of its properties. No
assurance can be given that future laws, ordinances or regulations will not
impose any material environmental liability; that any prior owner of a property
did not create any material environmental condition not known to the Company;
or that the current environmental condition of the properties will not be
affected by tenants and occupants of the properties, by the condition (such as
the presence of underground storage tanks or contamination of ground water) of
properties in the vicinity of the Company's properties or by third parties
unrelated to the Company.

ACM's and PCB's

The Company is aware of the presence of asbestos-containing materials
("ACMs") and polychlorinated biphenyls ("PCBs") at certain of its properties as
noted in the property schedule on page 10. Limited quantities of ACMs are
present in such materials as floor coverings, acoustical tile and mastic, and
ceiling treatments at certain properties. However, these ACMs generally are in
good condition and the Company has implemented operations and maintenance
plans, and provides its staff with training in the maintenance of ACMs, at
properties where ACMs are present. The Company will replace or repair any
damaged ACMs, and, where appropriate, ACMs will be abated in buildings which
undergo renovation. Most of the properties have fluid electrical transformers
owned by the local utility companies, many of which have not been tested for
PCBs. Under Federal regulations, untested fluid transformers must be
considered PCB-contaminated, and the Company must assume that some of these
transformers may contain PCBs. The local utilities are legally responsible for
these transformers and their maintenance, as well as for remediating any
contamination they may cause. The Company has requested that the utility
companies that own these transformers test transformers on the properties which
have not been tested previously. If any transformer is found to be
PCB-contaminated, the Company will request the utility company that owns such
transformer to replace it.

Tierra Bonita

The Tierra Bonita property acquired by the Company in February, 1995
("Tierra Bonita") is located within the Tucson International Airport Superfund
Site (the "TIA Site"), a site identified by the U.S. Environmental Protection
Agency (the "EPA") as containing hazardous substances. According to an
informational brochure dated September, 1994 prepared by the EPA (the
"Informational Brochure"), the EPA has found that a regional aquifer located
140 feet beneath Tierra

6
<PAGE> 9

Bonita (the aquifer is not a source of water for the property) has been
contaminated with trichloroethylene, a hazardous substance. Nine parties are
listed in the Informational Brochure as potentially responsible for clean-up at
the TIA Site (the Company is not listed as a potentially responsible party)
pursuant to the federal Superfund law, known officially as the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"). Systems
designed to remove the contaminants from the aquifer are operating at the TIA
Site.

Although the Company, based solely on its ownership of Tierra Bonita,
might also be considered potentially responsible under CERCLA, the Information
Brochure indicates that the EPA is pursuing only those parties that either (i)
disposed of hazardous substances on their property within the TIA Site or (ii)
owned or operated facilities where hazardous substances were disposed. A Phase
I Environmental Site Assessment on the property commissioned by the Company in
December, 1994 concluded that past and present activities at the property have
not contributed to the contamination of the regional aquifer. In addition, the
EPA's project manager for the TIA Site indicated to the consultants that an
enforcement action will not be brought against the Company because such
activities appear not to have contributed to the contamination of the aquifer.
The Company does not expect to incur expenses with respect to the clean up of
the contamination at the TIA Site, nor does the Company expect such
contamination to adversely affect operation of Tierra Bonita.

7
<PAGE> 10

ITEM 2. PROPERTIES

As of December 31, 1996, the Company owned 49 apartment complexes (the
"Properties") located in seven states. The Properties consist of garden or
townhouse style apartments that appeal primarily to tenants with middle level
incomes. Of the apartments, 2.5% are efficiency apartments, 58.1% are
one-bedroom apartments, 38.9% are two-bedroom apartments and the remaining 0.5%
are three-bedroom apartments. The Properties typically consist of two-and
three-story buildings in a landscaped setting. The size of the apartments
range from 400 to 2,000 square feet and average approximately 780 square feet.

Of the 49 Properties, 41 Properties containing 83% of the total number of
apartments were constructed or substantially renovated since 1983. As of
December 31, 1996, the weighted average age of the apartments (since date of
construction or major renovation) is 6.35 years. The average number of
apartments per Property is 297 apartments and the average monthly rent per
apartment and per square foot during the twelve months ended December 31, 1996
was $515 and $0.66, respectively.

Tenant leases at the Properties are generally for six to twelve-month
terms and require security deposits which range up to one month's rent. The
Properties contain common area amenities, which may include swimming pools,
clubhouses, tennis courts, security gates and extensive landscaping, and
interior apartment amenities, such as vaulted ceilings, wood-burning
fireplaces, washers/dryers, ceiling fans, microwaves, mini blinds, cable
television connections and monitored security systems. The Company believes
that the amenity packages at the Properties are comparable to those of
competitive multifamily properties in their respective markets.

Fee title to each of the Properties is held in a property partnership
(the "Property Partnership") in which the Operating Partnership or another
direct or indirect subsidiary of the Company is a general partner. The Company
(or a direct or indirect subsidiary of the Company) and the Operating
Partnership own 100% of the partnership interests in, and control, the Property
Partnerships that own 34 of the Properties. The Company (or a direct or
indirect subsidiary of the Company) and the Operating Partnership own a 1%
general partnership interest and 49.1% limited partnership interest in two
partnerships that own 9 and 4 properties, respectively, (Ambassador I, L.P. and
Ambassador VII, L.P. as further described, below). The Company (or a direct or
indirect subsidiary of the Company) and the Operating Partnership own a 50% and
49.9% general partnership interest, respectively, in the Property Partnerships
that own the Williamsburg Property and the Brook Run Property. The third
parties that own the remaining interests in these Property Partnerships have
equal voting rights with respect to certain significant decisions of such
partnerships. These two Property Partnerships are not consolidated in the
Company's financial statements.

8
<PAGE> 11

The following table presents certain information concerning the Company's
Properties as of December 31, 1996:

PROFILE OF COMPANY'S PROPERTIES AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
1995 Average 1996 Average
Monthly Rent(3) Monthly Rent(3) % Rent
Date of --------------- --------------- Change
Construction/ Number 1995 1996 Per Per Per SF
Market Area/ Major of Apart- Average Average Square Per Square Per 1995
Property Name Renovation(1) ments Occupancy(2) Occupancy(2) Foot Apt. Foot Apt. to 1996
- ------------- ------------- --------- ------------ ------------ ------ ----- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TEXAS
Austin
Aspen Hills............... 1986/1992 344 95.15% 89.50% $0.77 $628 $0.77 $627 0.0%
Royal Crest*.............. 1973/1991 204 94.57 95.08 0.58 464 0.62 489 6.9
Summit Creek.............. 1985 164 93.95 93.05 0.74 546 0.76 560 2.7
Prime Crest.*............. 1973/1991 148 94.03 92.43 0.57 450 0.62 492 8.8
Bent Oaks................. 1979/1994 146 96.52 97.35 0.74 535 0.77 563 4.1
Broadmoor................. 1980/1995 200 94.84 95.02 0.78 491 0.85 535 9.0
Houston
The Mills*................ 1979/1995 708 78.22 89.45 0.49 424 0.50 431 2.0
Trails of Ashford*........ 1979/1996 514 87.53 90.73 0.53 405 0.54 409 1.9
Sandalwood................ 1979/1996 352 93.78 90.25 0.50 342 0.51 349 2.0
Westway Village........... 1979/1996 326 92.68 94.97 0.59 422 0.60 428 1.7
Cypress Ridge*............ 1979/1996 268 88.56 87.99 0.51 370 0.53 384 3.9
San Antonio
Braesview*................ 1982/1993 396 93.48 92.22 0.59 567 0.58 561 -1.7
La Jolla.................. 1975/1992 300 93.04 93.29 0.72 492 0.72 491 0.0
Harbor Cove............... 1980/1992 256 95.23 95.10 0.64 420 0.65 430 1.6
Cape Cod*................. 1985 244 94.38 95.89 0.67 483 0.67 482 0.0
Eagle's Nest.............. 1973/1991 226 94.92 93.62 0.58 393 0.59 406 1.7
Mesa Ridge................ 1986 200 91.69 92.44 0.64 474 0.63 461 -1.6
The Stratford............. 1979/1995 269 89.32 93.50 0.52 574 0.50 557 -3.8
Shallow Creek*............ 1982/1996 208 90.69 90.52 0.63 461 0.62 455 -1.6
Windridge*................ 1983 276 89.74 92.50 0.62 443 0.63 448 1.6
ARIZONA
Phoenix/Mesa
Privado Park.............. 1984/1995 352 96.63 95.51 0.56 421 0.63 468 12.5
Vista Ventana............. 1982/1996 275 93.23 96.38 0.56 382 0.62 425 10.7
Crossroads*............... 1979 316 91.97 93.60 0.54 344 0.64 408 18.5
Shadow Creek.............. 1984/1995 266 95.85 94.24 0.63 459 0.67 491 6.3
Tatum Gardens*............ 1985 128 93.62 95.00 0.54 583 0.57 611 5.6
Pine Shadows(4)........... 1983 272 -- 95.26 -- -- 0.70 491 --
Madera Point(4)........... 1986 256 -- 92.60 -- -- 0.67 500 --
Heather Ridge(4).......... 1983 252 -- 94.16 -- -- 0.67 448 --
Tucson
Quail Ridge............... 1975/1994 253 93.43 92.55 0.75 489 0.77 501 2.7
Tierrra Bonita............ 1986 410 89.90 89.86 0.53 369 0.54 374 1.9
Stonybrook(4)............. 1983 411 -- 91.28 -- -- 0.72 416 --
LaJolla de Tucson(4*)..... 1978 223 -- 88.30 -- -- 0.68 410 --
ILLINOIS
Chicago
Williamsburg.............. 1970/1992 329 93.84 94.63 0.70 749 0.72 768 2.9
Brookdale Lakes........... 1990 200 95.89 92.81 0.93 890 0.98 938 5.4
Brook Run................. 1986 182 95.84 91.93 0.99 923 1.02 958 3.0
FLORIDA
Tampa/Clearwater
Coral Cove................ 1985 200 93.58 94.08 0.64 501 0.66 514 3.1
Hidden Lake(4)............ 1983 267 -- 95.57 -- -- 0.74 497 --
The Woodlands(4).......... 1983 416 -- 92.93 -- -- 0.73 472 --
Orlando
Sun Lake(4)............... 1986 600 -- 95.98 -- -- 0.60 529 --
Daytona Beach
Arbors(4)................. 1988 224 -- 95.01 -- -- 0.61 542 --
Ocean Oaks(4)............. 1988 296 -- 92.16 -- -- 0.62 564 --
West Palm Beach
Village Crossing(4)....... 1986 189 -- 92.96 -- -- 0.75 668 --
Haverhill Commons(4) 1986 222 -- 94.30 -- -- 0.58 594 --
</TABLE>

9
<PAGE> 12

(1) Major renovation ("Major Renovation") is defined as a
renovation of a Property that includes one or more of the
following which, in total, involve an aggregate expenditure
of an amount not less than $2,000 times the number of
apartments in the Property: roof replacement; resurfacing of
parking lots; exterior painting; structural or exterior
repairs; replacement of appliances or carpeting; and
installation, repair or replacement of Property-wide
amenities.
(2) Occupancy is defined as the number of occupied apartments
divided by the total number of apartments, expressed as a
percentage. Average occupancy for any period represents the
average of the monthly occupancies over such period.
Occupancy for a month represents the occupancy as set forth
on the rent roll as of the close of the monthly accounting
period. "Occupied apartments" includes all apartments
occupied by tenants under an effective lease.
(3) Average monthly rent per apartment for any property for any
period is defined as (a) the total rental revenue for the
period divided by the number of months in the period,
divided by (b) the product of (i) occupancy at the Property
during such period (defined in note (2) above) times (ii)
the number of apartments in the Property.
(4) Properties purchased by the Company in 1996 did not have
certain historical operating data for years prior to 1996.
The Company was able to obtain unaudited operating
statistics for each month of 1996 to arrive at the year end
occupancies and rental rates.
* These properties contain ACM's and or PCB's as described on
page 6

The following property was acquired by the Company in 1997:

<TABLE>
<CAPTION>
1995 Average 1996 Average
Monthly Rent(3) Monthly Rent(3)
Date of --------------- ---------------
Construction/ Number 1995 1996 Per Per
Market Area/ Major of Apart- Average Average Square Per Square Per
Property Name Renovation(1) ments Occupancy(2) Occupancy(2) Foot Apt Foot Apt
- ------------- ------------- ----- ------------ ------------ ------ --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FLORIDA
Tampa
Palencia........... 1986 420 -- 95.00%(a) -- -- 0.75(a) 571(a)
</TABLE>

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

(a) Reflects occupancy/rent as of March 13, 1997, date of acquisition.

10
<PAGE> 13

MORTGAGE AND TAX-EXEMPT BOND FINANCING

OVERVIEW

As of December 31, 1996, the aggregate indebtedness of the Company
was approximately $359.3 million, of which $279.4 million (77.8%) was long-term
tax-exempt bond financing (secured, directly or indirectly, by mortgages on the
Properties). The Properties are subject to mortgage indebtedness in the
aggregate principal amount of $387.6 million, which includes $28.3 million of
variable rate tax-exempt indebtedness secured by the two Properties in which
the Company has an approximately 50% general partnership interest. The
Property Partnerships owning these two Properties are not consolidated in the
Company's financial statements. Of this debt of unconsolidated Property
Partnerships, 100% of the Williamsburg Property and $10.0 million of the $11.8
million of Brook Run Property is nonrecourse to the Company, the Operating
Partnership or the relevant Property Partnership. See "Indebtedness of
Unconsolidated Partnerships". Below is a schedule summarizing the Company's
indebtedness.

<TABLE>
<CAPTION>
INDEBTEDNESS OUTSTANDING AS OF DECEMBER 31, 1996

ANNUAL ESTIMATED MATURITY OF
PROPERTY PLEDGED INTEREST FIXED OR PRINCIPAL ANNUAL DEBT CREDIT MATURITY OF
AS COLLATERAL RATE* VARIABLE** BALANCE SERVICE*** ENHANCEMENTS DEBT
- ------------------------ ---------- ------------ ------------- ---------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
TAX EXEMPT BONDS
- ------------------------
Falls of Bells Ferry 4.95% Fixed (D) 28,935,000 1,430,836 Feb. 1, 2009 Feb. 1, 2009
Aspen Hills 5.78% Variable 9,800,000 607,600 Dec. 1, 2021 Dec. 15, 2021
Braesview 5.78% Variable 20,500,000 1,271,000 Dec. 1, 2021 Dec. 15, 2021
Cape Cod 5.78% Variable 8,100,000 502,200 Dec. 1, 2021 Dec. 15, 2021
Eagle's Nest 5.78% Variable 5,200,000 322,400 Dec. 1, 2021 Dec. 15, 2026
Brookdale Lakes 5.78% Variable 14,800,000 917,600 Dec. 1, 2021 Dec. 15, 2021
Harbor Cove 5.78% Variable 5,900,000 365,800 Dec. 1, 2021 Dec. 15, 2021
LaJolla 5.78% Variable 10,000,000 620,000 Dec. 1, 2021 Dec. 15, 2021
Mesa Ridge 5.78% Variable 5,100,000 316,200 Dec. 1, 2021 Dec. 15, 2021
Windridge 5.78% Variable 6,270,000 388,740 Dec. 1, 2021 Dec. 15, 2021
The Stratford 5.78% Variable 5,945,000 368,590 Dec. 1, 2021 Dec. 15, 2021
Prime Crest 5.78% Variable 2,400,000 148,800 Dec. 1, 2021 Dec. 15, 2021
Royal Crest 5.78% Variable 3,400,000 210,800 Dec. 1, 2021 Dec. 15, 2021
Bent Oaks 5.78% Variable 4,400,000 272,800 Dec. 1, 2021 Dec. 15, 2023
The Mills 5.78% Variable 14,575,000 903,650 Dec. 1, 2021 Dec. 15, 2026
Shallow Creek 5.78% Variable 2,300,000 142,600 Dec. 1, 2021 Dec. 15, 2026
Franklin Oaks 5.78% Variable 17,700,000 1,097,400 Dec. 1, 2021 Dec. 15, 2021
Privado Park 5.78% Variable 9,200,000 570,400 Dec. 1, 2021 Dec. 15, 2034
Vista Ventana 5.78% Variable 6,400,000 396,800 Dec. 1, 2021 Dec. 15, 2034
Shadow Creek 5.78% Variable 5,600,000 347,200 Dec. 1, 2021 Dec. 15, 2034
Quail Ridge 5.78% Variable 6,400,000 396,800 Dec. 1, 2021 Dec. 15, 2034
Tierra Bonita 5.78% Variable 6,000,000 372,000 Dec. 1, 2021 Dec. 15, 2034
Madera Point 5.81% Fixed 7,180,000 416,440 Jun. 1, 2026 Jun. 1, 2026
Broadmoor 6.19% Fixed 6,000,000 372,000 Jun. 1, 2026 Jun. 1, 2026
Cypress Ridge 6.19% Fixed 4,250,000 263,500 Jun. 1, 2026 Jun. 1, 2026
Sun Lake 6.49% Fixed 15,478,000 990,592 Oct. 1, 2025 Oct. 1, 2025
Ocean Oaks (B) 7.85% Variable 10,920,000 857,220 Aug. 1, 1997 Aug. 1, 2015
Arbors (B) 7.85% Variable 7,280,000 571,480 Aug. 1, 1997 Aug. 1, 2015
Haverhill Commons (B) 8.50% Fixed 10,950,000 930,750 Aug. 1, 1997 Dec. 1, 2007
Village Crossing (B) 8.50% Fixed 9,800,000 833,000 Aug. 1, 1997 Dec. 1, 2007
Crossings of Bellevue 9.30% Fixed 8,572,000 531,464 May 1, 1997 May 1, 1997
---------- ------------- ----------
6.19% 279,355,000 17,736,662
Subtotal
</TABLE>

11
<PAGE> 14

<TABLE>
<S> <C> <C> <C> <C> <C>
Conventional Financing
- ----------------------
Tatum Gardens 7.88% Fixed 3,483,000 274,460 Apr. 11, 2026
Wesway Village 7.88% Fixed 4,927,000 388,248 Apr. 11, 2026
Coral Cove 7.88% Fixed 4,031,000 317,643 Apr. 11, 2026
Summit Creek 7.88% Fixed 3,583,000 282,340 Apr. 11, 2026
Revolving Loan (C) 7.50% Variable 63,950,000 4,796,250 Jun. 26, 1999
--------- ------------ ------------
7.58% 79,974,000 6,058,941
Subtotal

INDEBTEDNESS OF UNCONSOLIDATED
LIMITED PARTNERSHIPS - TAX EXEMPT BONDS
- --------------------------------------------------
Williamsburg 5.78% Variable 16,500,000 1,023,000 Dec. 1, 2021 Dec. 15, 2021
Brook Run 5.85% Fixed 11,800,000 690,300 Dec. 1, 2004 Dec. 15, 2007
--------- ------------ ------------
5.81% 28,300,000 1,713,300
Subtotal

GRAND TOTAL
- -------------------------
Average Interest Cost 6.45%
Weighted Average Maturity
of Indebtedness 19.2 Years
Weighted Average Maturity
Credit Enhancement 19.8 Years
</TABLE>
* Includes interest at fixed rate or at swap rate under applicable hedge
agreements, fees for credit enhancement, remarketing, servicing and
trustee services.
** All variable rate tax exempt debt is covered by interest rate swaps as
follows:
All variable rate bonds except for Arbors and Ocean Oaks - 4.636% for
7 years with Credit Lyonnais, New York Branch. Arbors and
Ocean Oaks - 4.850% for 7 years with Goldman Sachs.
*** Annual Debt Service includes interest and deposits to reserve funds
for tax exempt bond financing and actual debt amortization for
conventional financing. $243,994,000 of the $387,629,000 of total
indebtedness is fully amortizing on amortization schedules
ranging from 25 to 30 years.
(A) Crossings of Bellevue has received a commitment from FNMA to credit
enhance the bonds under the FNMA Facility, as defined below. It is
anticipated that the bonds will be refunded as variable rate bonds
prior to May 1, 1997.

(B) These bonds (which aggregate $39.0 million of face amount) are owned
by a trust in which the Company, through the Operating Partnership, is
a member of an LLC that is a partner in the trust. The Company
receives interest in excess of distributions paid to other partners in
the trust. Those other partners receive tax exempt interest as
follows:

$27 million @ 6.5%
$10 million @ 12 %
--- ----
$37 million 7.99% average

The trust purchased the bonds for $37.5 million. The LLC in which
the Company is a member holds the remaining $1.95 million.

(C) The Revolving Loan from Bank One carries interest rates ranging from
170 to 195 basis points over 30 day LIBOR, depending upon the
Company's Interest Coverage Ratio. The properties included in the
Revolving Loan as of December 31, 1996 are Trails of Ashford,
Sandalwood, Pine Shadows, Heather Ridge, LaJolla De Tucson, Hidden
Lakes, Woodlands, Crossroads, Courtney Park and Country Club
West. See "Recent Developments" for refinances of certain of the
properties in the Revolving Loan.

(D) The Falls of Bells Ferry Bonds are one year fixed rate bonds whose
interest is reset annually.

TAX EXEMPT DEBT

The interest rates on approximately $188.2 million of the Company's
total variable rate tax-exempt bond financing as of December 31, 1996 are
determined weekly by a remarketing agent to equal the minimum interest rate
necessary for the bonds to be remarketed at par. While these bonds are
remarketed at variable rates, the Company has hedged itself against interest
rate fluctuations (See "Interest Rate Protection"). Each issue of variable rate
bonds is secured by a letter of credit or similar instrument (referred to as
"credit enhancement") issued by a bank or other financial institution (a
"credit enhancer"). The purpose of the credit enhancement is to secure the
borrower's obligation to pay principal and interest on the bonds and to permit
the bonds to receive an investment-grade rating, thereby lowering the interest
costs from those of an unrated debt instrument. If a credit enhancer advances
money under its credit

12
<PAGE> 15

enhancement commitment to pay principal and interest on the bonds, the related
Property Partnership will be obligated to reimburse the credit enhancer, which
obligation generally will be secured by a mortgage on the related property. If
the Property Partnership fails to so reimburse a credit enhancer, the credit
enhancer may foreclose on the Properties that secure that reimbursement
obligation. Each credit enhancement agreement terminates on a specified date
that is prior to the maturity date of the related bonds. When the existing
credit enhancement expires and if the Property Partnership does not obtain
replacement credit enhancement prior to that date, the variable rate bonds will
be subject to a mandatory tender. Furthermore, if the credit rating of a credit
enhancer is lowered, the interest cost of the bonds affected will increase or
the bonds evidencing the debt could be unmarketable.

A bondholder may tender the bonds during the variable rate interest
period and receive principal, plus accrued interest through the tender date.
Upon tender, the remarketing agent will immediately remarket the bonds. In the
event the remarketing agent fails to remarket any of the bonds, the Partnership
is obligated to purchase those bonds for which they may draw on the credit
enhancement. The remarketing agent receives a fee of between 0.08% and 0.125%
per annum on the outstanding bonds' balance, payable quarterly in arrears on
$188.2 million of variable rate tax-exempt bonds which are reset weekly, and
0.325% on $28.9 million of fixed rate tax-exempt bonds which are reset
annually. Such fees are included as financing fees in the consolidated and
combined statements of operations.

CREDIT ENHANCEMENT OF TAX-EXEMPT BONDS

Of the Company's total $307.7 million in tax-exempt bonds outstanding
(including unconsolidated joint ventures of the Company) as of December 31,
1996, $295.7 million are credit enhanced by one of five credit enhancement
providers. $17.4 million are credit enhanced by Financial Security Assurance
("FSA") for a term of 30 years, $186.5 million are credit enhanced by FNMA for
a term of 25 years, $28.9 million are enhanced by Guardian Federal Savings Bank
through February, 2009, $11.8 million will be financed by Financial Guarantee
Insurance Company ("FGIC") through November 2004, $27.0 million is credit
enhanced by Bank One, Arizona through August 1997, and additional amounts of
$15.5 million and $8.6 million are credit enhanced by FNMA through October,
2025 and May, 1997, respectively. These credit enhancement facilities are
described in more detail below.

On October 1, 1996, FSA provided credit enhancement, through Insurance
and Indemnity Agreements, for the Cypress Ridge and Broadmoor bonds (the
"Cypress Ridge and Broadmoor Bonds") in the amount of $4.3 million and $6.0
million, respectively (see "Tax-Exempt Bonds Issued In 1996"). On December 1,
1996, FSA also provided $7.2 million of credit enhancement for the benefit of
the Madera Point bonds (the "Madera Point Bonds"), which allowed the Company to
sell the bonds that it purchased when it acquired the Madera Point Property on
February 9, 1996. The credit enhancement provides the bonds with 30 years of
credit enhancement currently rated AAA. Under the terms of the credit
enhancement agreements, the Company was required to prepay 10 years of credit
enhancement fees (approximately $776,000), which is included in other assets
and will be expensed over a ten year period. At the end of the tenth year, an
annual insurance premium will be due in the amount of 0.6% payable monthly in
advance on the face amount of the Cypress Ridge and Broadmoor Bonds and the
Madera Point Bonds. The Insurance and Indemnity Agreements have expiration
dates consistent with the redemption dates of the bonds themselves, which
begin on June 1, 2006 with final maturity of the bonds on June 1 and December
1, 2026. The Company used $8.7

13
<PAGE> 16

million of the proceeds from the Cypress Ridge and Broadmoor Bonds to repay the
Revolving Loan and the remaining $1.6 million to fund issuance costs
associated with the transaction and capital improvements on the two properties.
Proceeds from the sale of the Madera Point Bonds were used to augment working
capital.

On December 18, 1996, the Company replaced its letters of credit
previously held by Bank of America, Bank One, Arizona and CLNY on approximately
$186.5 million of existing variable rate tax-exempt bonds associated with 22 of
its properties (including Williamsburg) with a single facility (The, "FNMA
Facility") issued by FNMA. FNMA has established three separate mortgage pools
as collateral for providing credit enhancement on the bonds. The first
collateral pool consist of $119.8 million of variable rate tax-exempt bonds
relating to 13 Properties owned by Ambassador VIII, L.P. The second collateral
pool consist of $50.2 million of variable rate tax-exempt bonds relating to
eight Properties owned by Ambassador I, L.P. The third collateral pool
consists of $16.5 million of variable rate tax-exempt bonds relating to the
Williamsburg Property. FNMA is entitled to credit enhancement fees on the FNMA
Facility at a weighted average rate of 1.04% per annum of the outstanding bond
amount, less any cash collateral. FNMA also receives a reserve fee of 0.375%
per annum on the amount of cash collateral posted with respect to the FNMA
Facility. The credit enhancement and reserve fees are payable monthly in
advance. As additional collateral, the Company also deposited $15.2 million
into an interest bearing escrow account. The Company is also making monthly
principal reserve payments of approximately $245,000 to FNMA which may be used
to redeem bonds. The FNMA facility matures on December 1, 2021.

TAX-EXEMPT BONDS ISSUED IN 1996

On April 17, 1996 and November 13, 1996, the Harris County Housing
Finance Corporation issued $4.3 million and $14.6 million in tax-exempt bonds
for the benefit of Cypress Ridge and The Mills Properties, respectively. On
May 1, 1996 and November 26, 1996, Travis County Housing Finance Corporation
and Bexar County Housing Finance Corporation issued $6.0 million and $2.3
million in tax exempt bonds for the benefit of Broadmoor and Shallow Creek
Properties, respectively. Collectively these four bond issues comprise the
"1996 Bonds". The Cypress Ridge and Broadmoor bonds are credit enhanced by
FSA and The Mills and Shallow Creek Bonds are credit enhanced by FNMA. See
"Credit Enhancement; Tax-Exempt Debt".

The Mills and Shallow Creek bonds bear interest at a floating rate
that is reset weekly by the remarketing agent at the minimum rate required to
remarket the bonds at par. The Mills and Shallow Creek bonds were issued to
finance, in part, the purchase of The Mills and Shallow Creek Properties and to
provide approximately $2.5 million for the renovation of such properties. In
addition, the Cypress Ridge and Broadmoor Bonds bear interest at a fixed rate
ranging from 5.7% to 6.35% depending upon the maturity of each series of bonds
(as defined in the Insurance and Indemnity Agreement). The Cypress Ridge and
Broadmoor Bonds were issued to finance, in part, the purchase of the Cypress
Ridge and Broadmoor Properties and to provide approximately $2.0 million for
the renovation of such properties.

A portion of the proceeds of the 1996 Bonds were released to the
Company to reimburse it for acquisition costs of the Properties and the
remainder of the proceeds were released to the Company as actual expenses were
incurred with respect to renovation of the properties. The renovation of these
properties is expected to consist generally of roof repairs, siding, painting
and carpeting of apartments, parking lot repair and appliance replacements. The
Company anticipates

14
<PAGE> 17

that this work will be completed within two years from the respective dates of
issue of the 1996 Bonds (as required by the Internal Revenue Code), and will be
accomplished without displacement of existing residents. The Cypress Ridge and
Broadmoor Bonds are subject to mandatory redemption dates with maturities that
begin on June 1, 2006 with final maturity of the bonds on June 1, 2026. The
Mills and Shallow Creek bonds mature December 15, 2026.

PURCHASE OF TAX-EXEMPT BONDS

On February 9, 1996, the Company acquired the Madera Point Property
for $11.0 million. Madera Point is a 256 unit apartment complex located in
Mesa, Arizona. As part of the purchase price, the Company acquired the $8.1
million fixed rate Madera Point Bonds which are collateralized by the Madera
Point Property. On December 1, 1996 the Company sold a $7.2 million portion of
the Madera Point Bonds. Under the terms of the bond loan agreement, the
Company is making interest payments at a fixed rate of 5.3% to 5.9% depending
upon the maturity date of each series of bonds. Credit enhancement of the
Madera Point Bonds is provided by FSA. See "Credit Enhancement of Tax-Exempt
Bonds. The Madera Point Bonds are subject to mandatory redemption dates
beginning on June 1, 2006 with final maturity of the bonds on June 1, 2026.
The Company intends to sell the remaining $945,000 in Madera Point Bonds as
fixed rate without credit enhancement.

On May 23, 1996, the Company acquired the Stonybrook Property and
assumed its $4.1 million fixed rate tax-exempt bonds (the "Stonybrook Bonds")
for $8.9 million. Stonybrook is a 411 unit apartment complex located in
Tucson, Arizona. The Company financed this acquisition of the property and the
bonds by borrowing the remainder under its line of credit. Under the terms of
the bond loan agreement, the Company currently makes interest payments and
principal redemption. As a result of the remarketing which occurred on October
1, 1994, the interest rate was reset to 7.375% through the maturity date of the
bonds, which is October 1, 1999. On October 1, 1996, 1997 and 1998 the
Stonybrook Bonds are subject to mandatory sinking fund redemption of $45,000,
$50,000 and $50,000, respectively. At December 31, 1996, the Company owned the
Stonybrook Bonds. The Company expects to remarket the Stonybrook Bonds as
fixed rate certificates without credit enhancement.

ASSUMPTION OF TAX-EXEMPT BONDS

On August 20, 1996, the Company acquired four properties: Haverhill
Commons, Village Crossing, The Arbors and Ocean Oaks, (collectively, the
"Florida Properties"), for $38.6 million. Haverhill Commons is a 189 unit
apartment complex located in West Palm Beach, Florida; Village Crossing is a
222 unit apartment complex which is also located in West Palm Beach, Florida;
The Arbors is a 224 unit property located in Deland, Florida and Ocean Oaks is
a 296 unit apartment complex located in Port Orange, Florida. The acquisition
of the Florida Properties was financed through the assumption of the Florida
Bonds, as defined below. The remaining $1.1 million, including closing costs,
were funded under the Revolving Loan. The Company, through GP Municipal
Holdings, LLC, an Illinois limited liability company in which the Operating
Partnership is a member ("G.P. Holdings") acquired the $39.0 million in face
amount of the tax exempt bonds encumbering the four properties (the "Florida
Bonds") for $37.5 million. The Company financed the acquisition of the Florida
Properties and the Florida Bonds with proceeds from the Revolving Loan.

The interest rate on $9.8 million and $10.9 million of the Florida
Bonds, which encumber the Village Crossing and Haverhill Commons Properties,
respectively, is reset annually by the remarketing agent on December 1 of each
year. At December 31, 1996 the rate is 8.5% (pay rate of

15
<PAGE> 18

6.0% and 2.5% deferred rate) and is paid monthly in arrears. Deferred
interest, if any, is paid every August 1, and February 1. These bonds were
issued by Housing Finance Authority of Palm Beach County and have a maturity
date of December 1, 2007. Interest on $7.3 million and $10.9 million of
Florida Bonds, which encumber the Arbors and Ocean Oaks Properties,
respectively, is currently calculated using a variable rate determined by the
remarketing agent of the bonds. The interest rate is currently reset on a
weekly basis. These bonds were issued by Housing Finance Authority of Volusia
County and have a maturity date of August 1, 2015.

Concurrent with the acquisition of the Florida Properties, the
Company, through G.P. Holdings, contributed its interest in the Florida Bonds
to TEB Municipal Trust I, a New York Trust ("TEB") in which G.P. Holdings is
the managing depositor. TEB sold $27.0 million in Class A Receipt of
beneficial interests in TEB. The Class A Receipt is credit enhanced by Bank
One, Akron and is priced as AA rated, seven day variable rate tax-exempt bonds.
The interest rate on the Class A Receipt is swapped for seven years at 4.85%
with Goldman Sachs. On October 25, 1996, TEB sold the $10.0 million Class B
Receipt to a group of individual investors. The Class B Receipt earns interest
at a fixed rate of 12% per annum, paid monthly. G.P. Holdings holds the
remaining $2.0 million Class G Receipt which earns interest equal to the excess
of interest earned by TEB ownership of the Florida Bonds over distributions
paid to the Class A and Class B Receipt holders. Under the terms of the LLC
agreement, the Company receives 100% of any excess cash flows, as defined, from
G.P. Holdings.

On October 1, 1996, the Company acquired the Crossings of Bellevue for
$15.8 million. Crossings of Bellevue is a 300 unit apartment complex located
in Bellevue, Tennessee. The Company financed this acquisition by assuming $8.6
million of variable rate tax-exempt bonds (the "Bellevue Bonds") and borrowed
the remainder under its Bank One Loan. Under the terms of the Bellevue Bonds
note agreement, the Company currently makes monthly principal and interest
payments based on a 30 year amortization. The Bellevue Bonds bear interest at
9.3% and were issued by The Industrial Development Board of the Metropolitan
Government of Nashville and Davidson County. The Bellevue Bonds are guaranteed
by FNMA and mature on May 1, 1997. The Company has received a commitment from
FNMA to include the Bellevue Bonds under the FNMA Facility thereby making them
variable rate with interest reset on a weekly basis.

On November 21, 1996, the Company acquired Sun Lake apartments for
$24.3 million. Sun Lake is a 600 unit apartment complex located in Lake Mary,
Florida. The Company financed this acquisition by assuming $15.5 million of
variable rate, tax-exempt bonds (the "Sun Lake Bonds") and borrowed the
remainder under its Bank One Loan. Under the terms of the Sun Lake Bonds note
agreement, the Company currently makes monthly principal and interest payment
based on a 30 year amortization. The Sun Lake Bonds bear interest at 6.49% and
were issued by the Orange County Housing Finance Authority. The Sun Lake Bonds
are also guaranteed by FNMA and mature on November 1, 2005.

INTEREST RATE PROTECTION

16
<PAGE> 19

receives a floating rate based upon the PSA Municipal Swap Index. This swap
agreement matures on December 9, 2003 and replaced two LIBOR based swaps the
Company had previously entered into with Nomura Capital Services, Inc. ("NCSI")
($94 million entered into on May 26, 1995 and $17.0 million on March 14, 1996).

On October 3, 1996, the Company entered into a swap transaction with
Goldman Sachs to hedge against fluctuations in the variable interest rate on
the Class A Receipts in TEB. Under the swap transaction, the Company pays a
fixed rate of 6.83% on a notional amount of $26.5 million and receives a
floating rate equal to 90 day LIBOR. This swap results in an effective
interest rate on the $27.0 million in certificates of 4.85%. Management
believes that there is a reasonable correlation between changes in the LIBOR
rate (on which, the fixed rate the Company pays, was based) and the J.J. Kenny
Index (an index of AA rated variable rate tax exempt bonds). Since 1981, the
Kenny Index has averaged approximately 72.5% of 30 day LIBOR.

In order to hedge against variations in the relationship between LIBOR
and the Kenny Index the Company entered into a three year swap on March 14,
1996 with NCSI in which the Company pays a floating rate equal to 71% of 30 day
LIBOR and receives a floating rate equal to the J.J. Kenny Index on a notional
amount of $130 million (the "Basis Risk Swap"). On November 26, 1996 this swap
was assigned from NCSI to Salomon Brothers Holding Company. The excess in
notional amount of swaps ($6.0 million LIBOR and $103.0 million in Basis Risk
Swap) is currently unallocated and will be used to hedge against variable
interest rate risk on future bond indebtedness.

The Company has adopted a policy regarding the hedging of total
variable rate debt. This policy provides that at no time will the Company have
more than 30% of its variable rate debt that is not hedged by an interest rate
cap, swap or other interest rate protection agreement. In addition, the
Company will maintain a 1.3 times debt service coverage ratio based upon (a)
hedged debt at the applicable interest rate cap and swap strike prices and (b)
unhedged debt at a rate of 10% per annum. As of December 31, 1996 and March 24,
1997, the Company has successfully hedged all of its variable rate tax-exempt
debt through the interest rate swap transaction. This policy may be changed
from time to time by the Board of Directors in its discretion. As of December
31, 1996 and March 24, 1997, the Company had $64.0 million and $38.8 million,
respectively, in variable rate debt that was not hedged by any interest rate
protection and was in compliance with the foregoing policies. With respect to
all variable rate tax-exempt debt outstanding as of March 24, 1997, all of
which is hedged, an increase in short-term tax-exempt rates of 1% would not
affect funds from operating activities (assuming exchange of all Common Units
and after taking into consideration the effect of the interest swap
transactions).

RECOURSE OBLIGATIONS

All of the Company's $279.4 million of tax-exempt mortgage debt as of
December 31, 1996, is considered nonrecourse, although certain mortgages
are cross-defaulted or cross-collateralized with other mortgages or Properties.
In addition, the Operating Partnership has a recourse obligation with respect
to its borrowings under the Revolving Loan pursuant to the Company's agreement
to guarantee repayment of such borrowings.

17
<PAGE> 20

THE REVOLVING LOAN

Concurrently with the Offering, the Company entered into an agreement
for a revolving credit facility (the "Nomura Revolving Loan") with Nomura Asset
Capital Corporation ("Nomura") for approximately $43.5 million (subsequently
increased to $100.0 million) with a recourse guarantee from the Operating
Partnership (or the Company, if the Operating Partnership ceases to exist).
Borrowings under this facility bore interest at a floating rate equal to 1.75%
per annum above the 30-day LIBOR.

On June 26, 1996 the Company refinanced the Nomura Revolving Loan with
Bank One, Arizona, NA (the "Bank One Loan"). The Bank One Loan bears interest
between LIBOR plus 1.70% and LIBOR plus 1.90% (as defined in the Bank One Loan
Credit Agreement) and has a maximum commitment of $75.0 million based upon the
amount of collateral pledged by the Company. As of December 31, 1996, the
amount available under the Bank One Loan is approximately $64.0 million; the
amount available will be increased as additional properties are added to the
collateral pool. As of December 31, 1996, ten properties are pledged as
collateral under the Bank One Loan and $64.0 million is outstanding. The Bank
One Loan matures on June 26, 1999; however, the Company may request one year
extensions pursuant to the terms of the agreement. The Nomura Revolving Loan
and the Bank One Loan are collectively referred to as (the "Revolving Loan")

INDEBTEDNESS OF UNCONSOLIDATED PARTNERSHIPS

As of December 31, 1996, the unconsolidated Property Partnerships had
total debt outstanding of $28.3 million, all of which is long-term tax-exempt
financing (secured, directly or indirectly, by mortgages on the related
Properties). The Property Partnership that owns the Williamsburg Property has
outstanding $16.5 million of which 100% is non recourse. The Property
Partnership that owns the Brook Run Property has outstanding $11.8 million of
bonds that bear interest of 5.375% per annum, with an all-in cost of
approximately 5.88%. This debt is marketed based on credit enhancement that is
supported by a recourse standby purchase agreement from the unaffiliated third
party partner that owns, through a subsidiary, 50% of the partnership interests
in the Property Partnership. The credit enhancement expired on November 30,
1995 and the Property Partnership acquired $11.8 million of the tax-exempt
bonds. A general partner of the Property Partnership provided the financing to
enable it to acquire such bonds. The Company's Management is currently in
negotiations with FGIC to provide credit enhancement and has received a
commitment from FGIC to do so. The Company expects to have the new credit
enhancement in place in April 1997. The interest rate on the temporary
financing provided by the Property Partnership's general partner is prime plus
1%. The standby purchase agreement expires on November 30, 2003. The standby
purchase provider will have recourse to the Operating Partnership (or the
Company, if the Operating Partnership ceases to exist) for any loss to it with
respect to the $11.8 million of bonds, but this recourse will be limited to an
amount equal to one-half of 30% of the principal amount of the bonds relating
to the Brook Run property, as such amount may be reduced by redemption or other
early repayment other than in connection with the application of proceeds of
any collateral securing such bonds or credit enhancement, plus one-half of 30%
of all accrued and unpaid interest due and owing with respect to such bonds
plus all costs and expenses of enforcing such recourse obligation.

18
<PAGE> 21

ITEM 3. LEGAL PROCEEDINGS

There are no material pending legal proceedings, other than ordinary
routine litigation incidental to its business, to which the Company is a party
or of which any of its property is the subject.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE LITIGATION REFORM ACT OF 1995

Except for historical matters, the matters discussed in this Form 10-K
are forward-looking statements that involve risks and uncertainties.
Forward-looking statements in this Form 10-K include, but are not limited to,
statements under the following headings: (i) under the caption "Business --
Business Philosophy and Background" as to future revenue collections, operating
expenses, demographic trends, and investment opportunities, (ii) under the
caption "Business -- Environmental Matters -- Tierra Bonita" as to future clean
up expenses and the effect of contamination on the operation of Tierra Bonita,
(iii) under the caption "Market for the Registrant's Common Equity and Related
Stockholder Matters" as to future dividends and distributions, (iv) under the
caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Sources and Uses of
Cash -- Short-term Liquidity Needs" as to future access to capital resources,
short-term liquidity requirements, extraordinary capital expenditures, and
sufficiency of working capital, (v) under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Sources and Uses of Cash -- Long-term Liquidity Needs" as
to meeting long-term liquidity requirements through borrowings, and (vi) under
the caption "Properties -- Mortgage and Tax-Exempt Bond Financing --- Purchase
of Tax-exempt Bonds" as to remarketing of Stonybrook Bonds.

The Company wishes to caution readers that in addition to the
important factors described elsewhere in this Form 10-K, the following
important factors, among others, sometimes have affected and in the future
could affect the Company's actual results and could cause the Company's actual
results during fiscal 1997 and beyond to differ materially from those expressed
in any forward-looking statements made by or on behalf of the Company:

FINANCING RISKS

A substantial portion of the Company's currently outstanding
indebtedness bears interest at rates that adjust based on prevailing market
interest rates. Although the Company has interest rate protection agreements
which hedge its exposure to increases in interest expense for a portion of its
variable rate debt, increases in the interest rates on the variable rate debt
would adversely affect the Company's cash flow and could reduce the amount of
funds available for distribution to stockholders. The Company's variable rate
long-term tax-exempt bonds are marketed based on credit enhancement provided by
unaffiliated third parties. Certain of these variable rate tax-exempt bonds

19
<PAGE> 22

also have the benefit of standby credit enhancement commitments. If the Company
is unable to replace any credit enhancement when it expires, or to remarket the
applicable bonds without credit enhancement, the indebtedness under such bonds
could be accelerated, in which event lenders would be entitled to foreclose
under the mortgages securing such indebtedness. The interest cost of the
credit-enhanced debt will increase or the debt could be unmarketable (with the
resulting risk of acceleration and foreclosure) if the existing credit
enhancement is not replaced upon its expiration or if the credit rating of a
credit enhancement provider is lowered. If prevailing interest rates or other
factors at the time of refinancing result in higher interest rates on
refinancings, the Company's interest expense would increase, which would
adversely affect the Company's cash available for distributions and its ability
to pay expected distributions to stockholders. If the Company were unable to
refinance its indebtedness on acceptable terms, or at all, the Company might be
forced to dispose of one or more of the Properties upon disadvantageous terms,
and if the Company is unable to meet its obligations under any financing
agreement, a loss could be sustained as a result of foreclosure on the relevant
Property or pool of Properties securing such obligation.

RISKS OF EQUITY REAL ESTATE INVESTMENTS

An apartment property's income and value may be adversely affected by
the national and regional economic climates, local real estate conditions such
as the oversupply of apartments or a reduction in demand for apartments,
availability of "for purchase" housing, the attractiveness of the properties to
tenants, competition from other apartment properties, the ability of the owner
to provide adequate maintenance and to obtain adequate insurance, and increased
operating costs (including real estate taxes). A substantial percentage of the
total number of the Company's apartments are located in Texas, Arizona and
Florida. The Company's income will also be adversely affected if a
significant number of tenants are unable to pay rent or if the apartments
cannot be rented on favorable terms. In addition, the income and value of an
apartment property are affected by such factors, among others, as changes in
zoning, building, environmental, rent control and other laws and regulations,
changes in real property taxes and interest rates, the availability of
financing and acts of God (such as earthquakes and floods) and other factors
beyond the control of the Company. The Company is exposed to the various types
of litigation that may be brought against a property owner or manager in the
ordinary course.

RISKS OF RENOVATION, DEVELOPMENT AND ACQUISITIONS

The Company has in the past and may in the future renovate properties
it acquires. In addition, the Company may develop new apartment properties if
it determines that such development is warranted. In connection with any
renovation or development project, the Company will bear certain risks,
including the risks of construction delays or cost overruns that may increase
project costs and could make such project uneconomical, the risk that occupancy
or rental rates at a completed project will not be sufficient to enable the
Company to pay operating expenses or earn its targeted rate of return on its
investment, and the risk of incurrence of pre-development costs in connection
with projects that are not pursued to completion. In case of an unsuccessful
renovation or development project, the Company's loss could exceed its
investment in such project. The Company intends to actively continue to
acquire multifamily properties. Acquisitions entail risks that investments will
fail to perform in accordance with expectations and that judgments with respect
to the costs of improvements to bring an acquired property up to standards
established for the market position intended for that property will prove
inaccurate, as well as general investment risks associated with any new real
estate investment.

20
<PAGE> 23

REGULATION

The Company is subject to a number of Federal, state and local
regulations, such as the Americans with Disabilities Act and the Fair Housing
Amendments Act of 1988, and additional legislation may impose further burdens
or restrictions on owners of apartment communities. The costs of compliance
with such laws may be substantial, and limits or restrictions on completion of
certain renovations may limit application of the Company's investment strategy
in certain instances or reduce overall returns on its investments.

COMPETITION

There are numerous real estate companies which compete with the
Company in seeking apartment properties for acquisition and development, and
for tenants to occupy such properties. The Company may be competing with
companies that have greater resources than the Company and whose officers and
directors or trustees have more experience than the Company's officers and
directors. In addition, the availability of single-family housing and other
forms of multifamily residential properties, such as manufactured housing
communities, provide alternatives to potential tenants of apartment properties.
These competitive factors could adversely affect the income generated by the
Properties.

ADVERSE TAX CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT

If the Company fails to qualify as a REIT in any taxable year, the
Company would not be allowed a deduction for distributions to stockholders in
computing taxable income, and such distributions would be subject to federal
income tax at regular corporate rates. As a result, such a failure could
adversely affect the Company's business, results of operations and financial
condition, its ability to make distributions to its stockholders, and the
market value and marketability of the Common Stock.

CONSEQUENCES OF FAILURE TO QUALIFY AS PARTNERSHIP

The Company believes that the Operating Partnership and each of the
other partnerships in which the Company has a direct or indirect interest
("Subsidiary Partnerships") are properly treated as partnerships for federal
income tax purposes. If the Operating Partnership or any Subsidiary
Partnership were to fail to qualify as a partnership for federal income tax
purposes, the Operating Partnership or the affected Subsidiary Partnership
would be taxable as a corporation, and the Company could cease to qualify as a
REIT for federal income tax purposes. In addition, the Subsidiary Partnerships
that own property in Texas presently fall outside of the jurisdiction of the
Texas franchise tax, which currently only applies to corporations and limited
liability companies. If such a Subsidiary Partnership is determined to be
taxable as a corporation or the Texas franchise tax law is amended to apply to
partnerships, such Subsidiary Partnership would be subject to Texas franchise
tax.

21
<PAGE> 24

PART II

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

The Company's Common Stock commenced trading on August 31, 1994 and
was traded on the Nasdaq National Market under the symbol "PRES". On December
27, 1995, the Company listed its shares on the New York Stock Exchange ("NYSE")
under the symbol "AAH" and discontinued listing on the Nasdaq National Market.
The following table sets forth for the periods indicated, the dividends and the
high and low sale prices for the Company's Common Stock as reported by the
Nasdaq National Market and the NYSE.

<TABLE>
<CAPTION>
1996 High Low Dividends Paid
---------------------------- --------------- ------------- --------------
<S> <C> <C> <C>
Fourth Quarter $ 24 $ 17 7/8 0.40
Third Quarter 18 3/4 15 7/8 0.40
Second Quarter 18 3/4 16 0.40
First Quarter 20 1/8 16 7/8 0.40
1995
----------------------------
Fourth Quarter 18 3/4 15 3/8 0.40
Third Quarter 15 3/4 14 7/8 0.40
Second Quarter 15 5/8 14 1/4 0.40
First Quarter 16 14 3/4 0.40
</TABLE>

The holders of Common Stock are entitled to receive dividends when and
as declared by the Board of Directors. The declaration of dividends in the
future will be reviewed by the Board of Directors in light of the Company's
earnings, financial condition and capital requirements. The Company expects to
be able to maintain its current level of dividends and to distribute at least
95% of its REIT taxable income through 1997. In order to qualify to be taxed
as a REIT, the Company must make annual distributions to stockholders of at
least 95% of its REIT taxable income.

At March 24, 1997, there were approximately 2,500 holders of record of
the Common Stock.

On August 15, 1996, the Company issued 1,351,351 shares of Class A
Preferred Stock, for $18.50 per share or an aggregate amount of $25 million to
the Five Arrows Realty Securities L.L.C. ("Five Arrows") which was exempt from
registration under the Securities Act of 1933, as amended, (the "Securities
Act") by virtue of Section 4(2) thereunder as a transaction not involving a
public offering. The Company contributed the net proceeds of approximately
$24.1 million, after deducting a placement fee to Rothchild Realty, Inc. and
closing costs to the Operating Partnership in exchange for 1,351,351 Class A
Preferred Units of the Operating Partnership. The dividend on the Class A
Preferred Stock issued and outstanding is paid quarterly at an annual rate of
(i) $1.68 per share of Class A Preferred Stock, on or prior to August 14, 1997,
(ii) for the period August 15, 1997 through August 14, 1998, $1.73 per share of
Class A Preferred Stock, (iii) for the period August 14, 1998 through August
15, 1999, $1.78 per share of Class A Preferred Stock, (iv) for the period
August 14, 1999 through August 15, 2001, $1.84 per share of Class A Preferred
Stock, (v) for the period August 15, 2001 through August 14, 2002, $1.98 per
share of Class A Preferred Stock and (V) on or after August 15, 2002 the greater
of (x) $1.68 per Class A Preferred Stock per annum, or (y) the product of 1.05
times the dividend per share paid on the Common Stock.

The Class A Preferred Stock is convertible into Common Stock at the
sole and absolute discretion of the holder. If converted on or prior to August
14, 1997, the number of shares of Class A Preferred Stock convertible into
shares of Common Stock is determined by dividing the number

22
<PAGE> 25

of shares of Class A Preferred Stock by 1.08. If the conversion occurs after
August 15, 1997, the number of shares of Class A Preferred Stock convertible
into shares of Common Stock is determined by dividing the number of Class A
Preferred Stock by 1.0.

The Company has the right to redeem the Class A Preferred Stock on or
after August 15, 2001. Prior to August 14, 2002, the Company has the right to
redeem this Class A Preferred Stock at a premium of 1.06% of the per share
purchase price of $18.50. The premium paid for the Class A Preferred Stock
decreases over an eight year period to zero by August 15, 2010. In the event
of a change of ownership of the Company, the Company may be required by the
holder of Class A Preferred Stock to purchase all of the shares of Class A
Preferred Stock at a price equal to the lessor of (i) $19.98 or (ii) the price
at which the Company has the right to redeem shares of Class A Preferred Stock
from the holders as described above.

Except as limited by law, the holders of the Class A Preferred Stock
are entitled to vote or consent on all matters submitted to the holders of
Common Stock with the Common Stock as a single class. Each share of Class A
Preferred Stock will entitle the holder to one vote for each share of Common
Stock into which such Class A Preferred Stock is convertible as of the record
date for such vote or consent . For so long as Five Arrows and its affiliates
are the holders of at least 675,675 shares of the Class A Preferred Stock or
shares of Class A Preferred Stock convertible into at least 5% of the Common
Stock on a fully diluted basis (the "Minimum Threshold"), the holders of Class
A Preferred Stock are entitled to elect one director to the board and an
additional director if the regular quarterly dividend on the Common stock is
less than $.40 per share or the Company fails to achieve certain specified
operating targets for three consecutive quarters. If Five Arrows and its
affiliates are not the holders of at least the Minimum Threshold, the holders
of the Class A Preferred are entitled to elect a number of directors to the
Board equal to two minus the number of directors elected and serving pursuant
to the preceding sentence if the Company fails to pay in full the quarterly
dividend in respect of the Class A Preferred Stock for three consecutive
quarters.

On March 6, 1997, the Company issued 17,280 and 84,375 shares of
Common Stock to Richard F. Cavenaugh, a former executive officer of the
Company, and LG Trust, a trust in which Mr. Cavenaugh is the trustee and a
beneficiary, respectively, in exchange for an equal number of Common Units
pursuant to the terms of the Exchange Rights Agreement, dated as of August 31,
1994, among the Company, Mr. Cavenaugh and LG Trust, among others. Such
transactions were exempt from registration under the Securities Act by virtue of
section 4(2) thereunder as transactions not involving a public offering. On
March 13, 1997 LG Trust sold its shares of Common Stock and used a portion of
the proceeds to repay the $1.35 million note plus accrued interest that the
Operating Partnership had made to LG Trust to acquire the Common Units. Also,
on March 13, 1997, Mr. Cavenaugh sold 7,280 shares of Common Stock. In
addition, on February 5, 1997, Mr. Cavenaugh exercised options to purchase
115,000 shares of Common Stock in the Company.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial and operating
information on a historical basis for the Company and Prime Properties (the
predecessor of the Company, the "Predecessor"). The following information
should be read in conjunction with all of the financial statements and notes
thereto included elsewhere in this Form 10-K. The historical operating data
for the years

23
<PAGE> 26

ended December 31, 1996, 1995, 1994, 1993, and 1992 have been derived from the
historical Financial Statements of the Company and the Predecessor.

"Funds from Operations" (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview") does not represent
cash flow from operating activities in accordance with GAAP and is not
indicative of cash available to fund all of the Company's cash needs. Funds
from Operations should not be considered as an alternative to net income or any
other GAAP measure as an indicator of performance and should not be considered
as an alternative to cash flows as a measure of liquidity or ability to make
distributions. In addition, the Company believes that the book value of the
Properties, which reflects historical costs of such real estate assets less
accumulated depreciation, is not necessarily indicative of the current market
value of the Properties.

24
<PAGE> 27
SELECTED FINANCIAL DATA
AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND
PRIME PROPERTIES (THE PREDECESSOR TO THE COMPANY)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
The Company Predecessor
------------------------------------------- ------------------------------------
August 31 January 1
Year Ended Year Ended through through Year Ended December
December 31, December 31, December 31, August 30, --------------------
1996 1995 1994 1994 1993 1992
------------ ------------ ------------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenue $ 70,194 $ 53,381 $ 14,680 $ 20,434 $ 20,024 $ 14,750
Property operating 27,465 21,574 5,745 9,069 9,016 7,431
General and administrative 5,225 5,078 1,459 298 164 --
Property Management fees -- -- -- 1,109 1,184 956
Depreciation 13,430 8,894 2,101 3,190 3,271 2,285
Amortization of deferred financing fees 1,829 2,792 622 333 262 133
(Income) losses from unconsolidated
real estate limited partnerships (233) 320 162 -- -- --
--------- --------- --------- -------- -------- --------
Income from operations 22,478 14,723 4,591 6,435 6,127 3,945
Interest expense 17,417 9,487 1,738 5,776 5,748 5,134
--------- --------- --------- -------- -------- --------
Income (loss) before minority interest,
gain on sale of rental property, loss
on sale of interest rate cap and
extraordinary item 5,061 5,236 2,853 659 379 (1,189)
Income allocated to minority interest(1) (1,883) (615) (332) -- -- --
--------- --------- --------- -------- -------- --------
Income (loss) before gain on sale of
rental property, loss on sale of
interest rate cap and
extraordinary item 3,178 4,621 2,521 659 379 (1,189)
Gain on sale of rental property net
of minority interest -- 966 -- -- -- --
--------- --------- --------- -------- -------- --------
Income (loss) before loss on sale of
interest rate cap and
extraordinary item 3,178 5,587 2,521 659 379 (1,189)
Loss on sale of interest rate cap,
net of minority interest (2,084) -- -- -- -- --
--------- --------- --------- -------- -------- --------
Income (loss) before
extraordinary item 1,094 5,587 2,521 659 379 (1,189)
Extraordinary item, net of
minority interest (4,653) 4,360 (772) -- -- --
--------- --------- --------- -------- -------- --------
Net (loss) income (3,599) 9,947 1,749 659 379 (1,189)
Income allocated to preferred
shareholders 851 -- -- -- -- --
--------- --------- --------- -------- -------- --------
Net (loss) income applicable to
common shareholders $ (4,410) $ 9,947 $ 1,749 $ 659 $ 379 $ (1,189)
========= ========= ========= ======== ======== ========
(Loss) Income per weighted average
share of Common Stock outstanding:
Before extraordinary item $ 0.03 $ 0.62 $ 0.28 -- -- --
========= ========= =========
Extraordinary item $ (0.52) $ 0.49 $ (0.09) -- -- --
========= ========= =========
Net income $ (0.49) $ 1.11 $ 0.19 -- -- --
========= ========= =========
Weighted average Common Stock
outstanding 8,958,525 8,958,525 8,847,547 -- -- --
========= ========= =========
SUPPLEMENTAL INFORMATION:
Net cash provided by operating
activities $ 19,087 $ 21,592 $ 5,245 $ 4,935 $ 4,807 $ 509
Cash used in investing activities (79,975) (60,142) (80,488) (1,731) (64,155) (9,851)
Net cash provided by (used in)
financing activities 59,620 41,396 77,667 (2,405) 60,669 9,242
Funds from Operations(2) 18,312 15,627 5,093 3,849 3,650 1,096
Funds from Operations per share(2) $ 1.85 $ 1.57 $ 0.51 $ 0.39 $ 0.37 $ 0.11
Distributions per share $ 1.60 $ 1.20 $ 0.538 -- -- --
Number of apartment units at
end of period 14,564 10,636 8,185(3) 5,090 5,090 2,812
Number of Properties at end of period 49(3) 36(3) 39(3) 21 21 11
BALANCE SHEET DATA:
Rental property before accumulated
depreciation 495,292 343,869 $ 235,916 $168,164 $166,433 $102,278
Net rental property 461,952 323,959 224,436 157,689 159,148 98,264
Total assets 514,784 359,989 244,511 187,316 166,407 104,951
Total debt 359,329 229,981 112,800(4) 182,300 163,900 106,399
Net equity (deficit) 90,448 109,173 109,962 (1,781) (2,422) (5,151)
</TABLE>

25
<PAGE> 28

_________________________________________

(1) Reflects allocation of income to minority interests (Limited Partners of
the Operating Partnership, Investor I, and Investor II).
(2) Funds from Operations represents net income (loss) computed in accordance
with GAAP income (before minority interest and extraordinary item),
excluding gains (or losses) from debt restructuring or sales of property,
plus depreciation, and after adjustments for unconsolidated partnerships
and joint ventures. Depreciation of real estate assets consists of 13,265
and $8,819 for the years ended December 31, 1996 and 1995, respectively,
and $2,101 for the period from August 31, 1994 through December 31, 1994
and $3,190 for the period January 1, 1994 through August 30, 1994, and
$3,271 and $2,285 for the years ended December 31, 1993 and 1992,
respectively. Funds from Operations does not represent cash flow from
operating activities in accordance with GAAP and is not indicative of cash
available to fund all of the Company's cash needs. Funds from Operations
should not be considered as an alternative to net income or any other GAAP
measure as an indicator of performance and should not be considered as an
alternative to cash flows as a measure of liquidity or ability to make
distributions (See page 27). Funds from Operations per share is based upon
9,922,508 shares of Common Stock and Common Units outstanding at December
31, 1996.
(3) Includes unconsolidated Property Partnerships.
(4) Does not include indebtedness in the aggregate amount of $28,300,000 of
bonds payable by the unconsolidated Property Partnerships.

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

OVERVIEW

The following discussion should be read in conjunction with "Selected
Financial and Operating Information" and the Consolidated and Combined
Financial Statements and notes thereto appearing elsewhere in this Form 10-K.
As of December 31, 1996, the Company owned 49 multifamily residential
properties, including interests held in two unconsolidated joint ventures.

The Company believes that to facilitate a clear understanding of its
operating results, funds from operations ("FFO") should be examined in
conjunction with net income as presented in the Consolidated and Combined
Financial Statements. Industry analysts generally consider FFO an appropriate
measure of performance of an equity REIT. FFO is defined by the National
Association of Real Estate Investment Trusts ("NAREIT") as net income (loss)
computed in accordance with generally accepted accounting principles ("GAAP"),
excluding gains or (losses) from debt restructuring or sales of property plus
depreciation and amortization, after adjustments for unconsolidated
partnerships and joint ventures. FFO should not be considered as an
alternative to net income as an indication of the Company's performance or as
an alternative to cash flows as a measure of liquidity or the ability to make
distributions.

In 1995, the Board of Governors of NAREIT approved a revision to the
method for computing FFO. The pre 1995 computation method for FFO permits a
company to "add back" to net income all depreciation and amortization in the
calculation of FFO. The current method for computing FFO only permits a
company to "add back" (i) depreciation of real estate assets and (ii)
amortization of capitalized leasing expenses and tenant allowances or
improvements. Items such as amortization of deferred financing fees and
depreciation of computer software and a company's office improvements are
specifically excluded from the computation and may not be "added back" to FFO.
The current method for computing FFO has been adopted by the Company, and
reports of the Company for operating periods commencing January 1, 1996
disclose FFO in compliance with the revised computation method.

26
<PAGE> 29

The following table sets forth the calculations of FFO for the Company
for the year ended December 31, 1996 under NAREIT's current computation
method.

<TABLE>
<CAPTION>
(IN 000'S)
--------------
<S> <C>
Net income before minority interest, loss on sale of interest rate
cap and extraordinary item . . . . . . . . . . . . . . . . . . . $ 5,061

Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . 13,265

Amortization of deferred financing fees . . . . . . . . . . . . . --

Adjustment to joint ventures . . . . . . . . . . . . . . . . . . 1,139

Non-recurring FFO adjustments (1) . . . . . . . . . . . . . . . . 1,297
--------------
FFO before distributions to Investors I and II and Class A
Preferred Stockholders . . . . . . . . . . . . . . . . . . . . . 20,762

Distributions declared to Investors I and II . . . . . . . . . . (1,599)

Distributions to Class A Preferred Stockholders . . . . . . . . . (851)
--------------

Funds from operations . . . . . . . . . . . . . . . . . . . . . . $ 18,312
==============
</TABLE>

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

(1) The non-recurring adjustment relates to costs incurred with respect to (i)
resignation of executive officer ($182,886), (ii) changing the name of the
Company ($229,666), (iii) increased interest costs as a result of replacing
remarketing agents ($259,678), (iv) cash collateralized letters of credit
for Cypress Ridge and Broadmoor until permanent credit enhancement was
obtained ($90,544), (v) moving share listing to the New York Stock Exchange
($84,696), (vi) fire/flood damage in excess of experience ($148,387), (vii)
final costs pertaining to 1995 purchase of the Company's fixed rate bonds
($71,641), and (viii) closing costs for the preferred stock issuance,
formation of Jupiter-I, L.P. and Jupiter-II, L.P., and the FNMA credit
enhancement facility ($229,548).

RESULTS OF OPERATIONS

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

From January 1, 1996 through December 31, 1996 the Company acquired
thirteen additional Properties comprising 3,928 additional units (the "1996
Acquired Properties"). In connection with the acquisition of Madera Point,
Stonybrook and the Florida Properties, the Company acquired $8.1 million, $4.1
and $39.0 million in face amount, respectively, of tax-exempt bonds. The
acquisition of the Crossings of Bellevue and Sun Lake resulted in the
assumption of $8.6 million and $15.5 million, respectively, of variable rate
tax-exempt bonds.

Four separate issuances of new tax-exempt bonds totaling $27.2 million
occurred during 1996 to partially fund acquisition costs and to provide funds
for renovation of the Properties that encumber the respective bond issues. $4.3
million in bonds were issued in April with respect to Cypress Ridge, $6.0
million were issued in May with respect to Broadmoor, and $14.6 million and
$2.3 million were issued in November with respect to The Mills and Shallow
Creek, respectively. Additionally, in December the Company sold $7.2 million
of variable rate tax-exempt bonds which it owned and which are secured by
Madera Point.

27
<PAGE> 30

The Company is the sole general partner of the Operating Partnership
and owns 90.28% of the Common Units and 100% of the Class A Preferred Units as
of December 31, 1996. Dividends declared or paid to holders of Common Stock
and Class A Preferred Stock are based upon such distributions received by the
Company with respect to its Common Units and Class A Preferred Units.

The acquisition of the 1996 Acquired Properties and the corresponding
assumption of variable rate tax-exempt bonds and the issuance of additional
variable rate tax-exempt bonds resulted in significant changes in operating
results for the twelve month period ended December 31, 1996 compared to the
same period in 1995.

For the twelve month period ended December 31, 1996, income before
minority interest, gain on sale of rental property, loss on sale of interest
rate cap and extraordinary item decreased by approximately $175,000, or 3.3%,
to $5.1 million for the twelve month period ended December 31, 1996 when
compared to the same period in 1995. While total revenues increased
significantly, this increase was more than offset by increases in depreciation,
interest expense and financing fees. These items are discussed in greater
detail below.

Total revenues increased $16.8 million, or 31.5%, to $70.2 million for
the twelve month period ended December 31, 1996 when compared with the same
period in 1995. Of this increase, $8.0 million was associated with the 1996
Acquired Properties. Of the remaining $8.8 million increase in total revenue,
$1.8 million related to increases in total revenue at Properties owned by the
Company during all of 1995 and 1996 ("same store sales") and $7.0 million
related to owning Properties acquired in 1995 for a full 12 months in 1996.

Total expenses exclusive of depreciation, amortization of deferred
financing fees and interest expense increased $8.2 million, or 29.7%, to $35.7
million for the twelve month period ended December 31, 1996 when compared with
the same period in 1995. Property operating expenses increased $3.4 million
primarily due to the acquisition of the 1996 Acquired Properties.
Approximately $600,000 of the $1.1 million increase in real estate taxes
related to the 1996 Acquired Properties, and the remaining $500,000 increase in
real estate taxes related to properties acquired prior to 1996. General and
administrative expenses increased $1.6 million, also reflective of the 1996
Acquired Properties. Financing fees increased $1.8 million for the twelve
month period ended December 31, 1996, when compared to the same period in 1995
reflecting the full year impact of fees associated with the credit enhancement
agreements related to the Previously Issued Bonds which were entered into
during September 1995. These credit enhancement agreements were canceled and
replaced in December 1996 as a result of the Company entering into the FNMA
Facility.

Depreciation increased $4.5 million, or 50.6%, to $13.4 million for
the twelve month period ended December 31, 1996 when compared with the same
period in 1995. This increase is primarily related to an increase in
depreciable assets associated with the acquisition of the 1996 Acquired
Properties and a full years depreciation of the Properties acquired in 1995.

Interest expense increased $5.2 million, or 58.4%, to $14.1 million for
the twelve month period ended December 31, 1996 when compared to the same
period in 1995. This increase includes approximately $2.2 million in interest
expense associated with the 1996 Acquired Properties and approximately $239,000
in interest expense in connection with the 1996 Bonds. Approximately $1.3
million of the increase reflects a full year of interest paid with respect to
the financing of the acquisition of the properties acquired in 1995.
Furthermore, the Company paid an additional $550,000 of interest on the

28
<PAGE> 31

revolving loan agreements in 1996 compared to 1995, due to higher average
balances on the Revolving Loan in 1996 compared to 1995.

Amortization of deferred financing fees declined by $1.0 million, or
35.7%, to $1.8 million primarily as a result of a write-off of deferred
financing fees related to the credit enhancement agreements which were replaced
by the FNMA Facility and deferred financing fees associated with the Nomura
Revolving Loan were fully amortized as of June 1, 1996.

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

Concurrently with the Offering, the Company acquired interests in
certain properties (the "Prime Properties") owned or controlled by the
Predecessor and purchased five properties in Houston, Texas (the "Houston
Properties") containing 2,168 units from an unaffiliated third party seller.
From the Offering through December 31, 1995, the Company acquired ten
additional properties (the "Additional Properties"). Additionally, on December
15, 1995, the Company sold the Laurelwood property for approximately $7.7
million. Seven separate issuances of variable rate tax-exempt bonds totaling
$43.9 million (the "Previously Issued Bonds") were issued in June, July and
September 1994, and March and August 1995 to reimburse acquisition costs and
renovate seven properties. Of the Previously Issued Bonds, $4.4 million and
$6.4 million were issued with respect to Bent Oaks and Vista Ventana,
respectively, in June 1994; $9.2 million was issued with respect to Privado
Park in July 1994; $6.4 million was issued with respect to Quail Ridge in
September 1994; $6.0 million and $5.6 million, respectively, were issued with
respect to Tierra Bonita and Shadow Creek in March 1995; and $5.9 million was
issued in August 1995 with respect to The Stratford. In addition, on April 25,
1995, the Company sold the $6.3 million of variable rate tax-exempt bonds which
it owned and which are secured by Windridge. Furthermore, in connection with
the acquisition of Franklin Oaks and Falls of Bells Ferry, the Company assumed
$17.7 million and $29.5 million, respectively, of tax-exempt bonds. The
Franklin Oaks bonds are secured by such property and the Falls of Bells Ferry
bonds are secured by such property and a pledge of approximately $3.3 million
in certificates of deposits purchased by the Company upon the acquisition of
such property.

The inclusion of the Additional Properties, the Previously Issued
Bonds, and the sale of the Windridge bonds in the consolidated financial
statements of the Company accounted for the significant changes in operating
results for the twelve month period ended December 31, 1995, when compared to
the same period in 1994.

For the twelve month period ended December 31, 1995, income before
allocation to minority interest, gain on sale of rental property, and
extraordinary item increased $1.7 million to $5.2 million when compared to the
same period in 1994. These increases were primarily due to increases in rental
and other revenues, partially offset by increases in total expenses of the
Company. The aforementioned increases are discussed in greater detail below.

Total revenues increased $18.3 million, or 52.0%, to $53.4 million for
the twelve month period ended December 31, 1995 when compared with the same
period in 1994. Of this increase, $18.9 million is attributable to the 15
properties which comprise the Houston Properties and the Additional Properties
(collectively, the "Previously Acquired Properties"), $2.8 million related to
an increase in revenue derived from the Prime Properties and $271,000 was an
increase in management fees earned in connection with management agreements
with respect to the Company's two joint venture investments and two third party

<PAGE> 32

management agreements that the Company entered into concurrently with the
Offering. These increases in revenues were partially offset by a decrease in
revenues of $1.8 million as a result of the Company's change in accounting for
its investment in the Williamsburg Limited Partnership ("Williamsburg"), which
was previously included in the combined financial statements of the
Predecessor.

Total expenses (exclusive of depreciation, amortization of deferred
financing fees and interest expense) increased $9.0 million, or 48.6%, to $27.5
million for the twelve month period ended December 31, 1995, compared with the
same period in 1994. Property operating expenses increased $4.5 million,
primarily due to the acquisition of the Previously Acquired Properties. Real
estate taxes increased $1.6 million. Of this increase in real estate taxes,
$2.0 million related to the Previously Acquired Properties and approximately
$382,000 related to an increase with respect to the original Prime Properties
(excluding Williamsburg), partially offset by the elimination of approximately
$667,000 in real estate taxes resulting from the Company's change in accounting
for its investment in the Williamsburg. General and administrative expenses
increased $2.4 million. This increase was due primarily to increased
administrative costs incurred in connection with the Company's corporate
overhead as a result of becoming a public company and increasing the size of
its portfolio from 5,090 units at August 31, 1994 to 10,636 units at December
31, 1995. Repairs and maintenance increased $239,000, primarily attributable
to the Previously Acquired Properties. Property and asset management fees
decreased $1.1 million. This decrease is attributable to the Company
self-managing all of its properties and the elimination of certain fees paid to
Kemper Investors Life Insurance Company and Federal Kemper Life Assurance (the
"Kemper Lenders") effective upon consummation of the Offering. Financing fees
increased $812,000 as a result of increased credit enhancement costs associated
with the Previously Issued Bonds.

Depreciation and amortization increased $5.4 million, or 87.1%, to
$11.7 million for the twelve month period ended December 31, 1995 when compared
to the same period in 1994. This increase is primarily related to an increase
in depreciable assets associated with the purchase of the Previously Acquired
Properties and an increase in amortization associated with the purchase of
interest rate protection at the time of the Offering and bond issuance costs
relating to the Previously Issued Bonds.

Interest expense increased $2.0 million, or 30.0%, to $8.9 million for
the twelve month period ended December 31, 1995 when compared to the same
period in 1994. This increase includes approximately $2.2 million in interest
costs (net of interest rate protection proceeds) associated with the Previously
Issued Bonds and approximately $3.1 million of interest costs incurred in
connection with the Nomura Revolving Loan and the Bank One Loan. These
increases were partially offset by a reduction in interest costs of $2.4
million attributable to the repayment of certain mortgage indebtedness upon
consummation of the Offering, a $166,000 decrease in interest costs (net of
interest rate protection) on the original bonds and the elimination of
approximately $605,000 in interest as a result of the Company's change in
accounting for its investment in Williamsburg, which was previously included in
the combined financial statement of the Predecessor.

30
<PAGE> 33

LIQUIDITY AND CAPITAL RESOURCES

SOURCES AND USES OF CASH

Class A Preferred Stock Issuance

On August 15, 1996, the Company issued 1,351,351 shares of Class A
Preferred Stock at $18.50 per share. The Company received approximately $24.1
million in proceeds from the issuance, net of placement fees and expenses. The
Company contributed the net proceeds to the Operating Partnership in exchange
for 1,351,351 Class A Preferred Units of the Operating Partnership. The
Operating Partnership, in turn, used such proceeds primarily to repay the
Revolving Loan.

Capital Contributions

On March 27, 1996, the Company, through its affiliates, formed two new
limited partnerships, Jupiter-I, L.P. and Jupiter-II, L.P., which hold 99%
limited partnership interests in Ambassador I, L.P. and Ambassador VII, L.P.,
respectively. The Company, through its affiliates, holds a 1% general
partnership interest in both Ambassador I, L.P. and Ambassador VII, L.P. and a
49.6% general partnership interest in both Jupiter-I, L.P. and Jupiter-II, L.P.
Ambassador I, L.P. currently owns nine Properties (Bent Oaks, Privado Park,
Quail Ridge, Vista Ventana, Shadow Creek, Mountain View, Windridge, Tierra
Bonita and the Stratford) and Ambassador VII, L.P. currently owns four
Properties (Summit Creek, Westway Village, Coral Cove and Tatum Gardens).

In return for a capital contribution of $17.8 million, Investor I (a
Japanese Corporation) received a 50.4% limited partnership interest in
Jupiter-I, L.P. In return for a capital contribution of $5.2 million, Investor
II, a Japanese individual, received a 50.4% limited partnership interest in
Jupiter-II, L.P. The Company used the proceeds to pay approximately $1.4
million of underwriting fees and formation costs for Jupiter-I, L.P. and
Jupiter-II, L.P. and approximately $21.6 million to repay principal outstanding
on the Revolving Loan.

In connection with the formation of Jupiter-II, L.P., Nomura provided
a $16.1 million, seven year term loan collateralized by the Ambassador VII,
L.P. Properties. The loan was subsequently securitized on October 25, 1996.
The Company makes monthly principal and interest payments based on an interest
rate of 7.88% and a 30 year amortization schedule. Net proceeds from the long
term financing were used to repay principal outstanding on the Revolving Loan.

To the extent available, and after payment of a 5% property management
fee and a $35,000 asset management fee paid to the Company, the following cash
distributions shall be made from Ambassador I, L.P. to the partners of
Jupiter-I, L.P. First, Investor I shall receive an 8.5% per annum cumulative
priority return on its original investment, paid monthly in arrears. Second,
the Company shall receive an 8.5% per annum cumulative priority return on its
capital contribution (as defined) into Jupiter-I, L.P., paid monthly in
arrears. Third, the Company shall receive excess cash flow up to a specified
amount (as defined), paid quarterly in arrears. Fourth, any remaining excess
cash flow from Ambassador I, L.P. will be paid quarterly in arrears, 30% to
Investor I and 70% to the Company. During 1996, Ambassador I, L.P. distributed
approximately $1.1 million to Investor I and $1.4 million to the Company.

31
<PAGE> 34

To the extent available, and after payment of a 5% property management
fee and a $15,000 asset management fee paid to the Company, the following cash
distributions shall be made from Ambassador VII, L. P. to the partners of
Jupiter-II, L.P. First, Investor II shall receive an 8.5% per annum cumulative
priority return on its original investment, paid monthly in arrears. Second,
the Company shall receive an 8.5% per annum cumulative priority return on its
capital contribution (as defined) in Jupiter-II, L.P., paid monthly in arrears.
Third, the Company shall receive excess cash flow up to a specified amount (as
defined), paid quarterly in arrears. Fourth, any remaining excess cash flow
from Ambassador VII, L.P. will be paid quarterly in arrears, 30% to Investor II
and 70% to the Company. During 1996, Ambassador VII, L.P. distributed
approximately $300,000 to Investor II, and $317,000 to the Company.

Joint Venture

In August 1996, the Company entered into a joint venture with an
affiliated entity to form G.P. Holdings. The Company owns a 49.6% interest in
the G.P. Holdings. The Company advanced $37.5 million to the G.P. Holdings to
purchase the Florida Bonds on behalf of TEB. TEB then issued three
certificates which represent ownership interests in the Florida Bonds: a
Class A Receipt, a Class B Receipt, and a Class G receipt. TEB sold the Class
A Receipt to an unrelated third party for $27.0 million on August 27, 1996.
TEB sold the Class B Receipt to G.P. Holdings for $10.0 million on August
27, 1996, and G.P. Holdings resold the Class B Receipt for $10.0 million to an
unaffiliated third party on October 28, 1996. G.P. Holdings purchased a $2.0
million face amount Class G Receipt for $575,000, which G.P. Holdings still
owns. G.P. Holdings used net proceeds from the sale of the Class A and Class B
Receipts of $36 million to repay the Company for the advance.

Funds are distributed to the receipt holders to the extent that funds
are available ("Available Funds") in TEB. Distributions to holders of the
Class B Receipt are subordinated to distributions to holders of the Class A
Receipt, and distributions to holders of the Class G receipt are subordinated
to distributions to holders of the Class B Receipt and other fees as defined by
the investment agreement. Class A Receipt holders earn a variable interest
rate, reset weekly, on their $27 million investment. Class B Receipt holders
earn a fixed rate of 12% on their $10 million investment. Class G Receipt
holders receive any balance of Available Funds. During 1996, G.P. Holdings
received distributions of approximately $122,000 with respect to the Class B
Receipt prior to its sale by G.P. Holdings and approximately $57,000 with
respect to the Class G Receipt.

Recently Issued Tax-Exempt Bonds

Four properties received new tax-exempt bonds during 1996. Net
proceeds were used to pay down principal outstanding on the Company's revolving
credit agreements. See "Properties - Mortgage and Tax-Exempt Bond Financing -
Recently Issued Tax Exempt Bonds" for additional information.

<TABLE>
<CAPTION>
(IN 000'S) CREDIT
DATE OF ISSUE ISSUER* PROPERTY AMOUNT ENHANCER
-------------- ----------------- ------------- --------- --------
<S> <C> <C> <C> <C>
Apr. 17, 1996 Harris County HFC Cypress Ridge $ 4,250 FSA
May 1, 1996 Bexar County HFC Broadmoor 6,000 FSA
Nov. 13, 1996 Harris County HFC The Mills 14,575 FNMA
Nov. 26, 1996 Travis County HFC Shallow Creek 2,300 FNMA
</TABLE>

32
<PAGE> 35

*HFC denotes Housing Finance Corporation

Scheduled Debt Maturities

On May 1, 1997, the Crossings of Bellevue's tax-exempt bond amount of
$8.6 million is scheduled to mature. The Company has received a commitment
from FNMA to provide credit enhancement for the Bellevue Bonds under the FNMA
Facility. Management intends to refinance this amount upon maturity under the
FNMA Facility. The Falls of Bells Ferry is required to make an annual sinking
fund payment amount. At December 31, 1996, the Company had pledged $3.3
million as collateral, a portion of which shall be released in each of the next
five years as sinking fund payments become due. There are no other balloon
maturities of the Company's tax-exempt bond issues over the next five years.

During 1996, in connection with the replacement of credit enhancement
with the FNMA Facility, the Company paid off the remaining balance ($810,000)
of the $1.2 million loan issued with respect to the LaJolla Property in San
Antonio, Texas. At December 31, 1996, the Company makes monthly principal
reduction payments or principal reserve payments of $320,000 on approximately
$211.5 million, or 75.7%, of its bonds payable.

Revolving Credit Agreements

Concurrently with the Offering, the Company entered into the Nomura
Revolving Loan with Nomura for approximately $43.5 million and subsequently
increased to $100.0 million. Borrowings under this facility accrued interest
at a floating rate equal to 1.75% per annum above the 30-day LIBOR.

On June 26, 1996, the Company refinanced the Nomura Revolving Loan
with a facility from Bank One, Arizona, NA. The Bank One Loan bears interest
between LIBOR plus 1.70% and LIBOR plus 1.95% (as defined in the Bank One Loan
Credit Agreement) and has a maximum commitment of $75.0 million based upon the
amount of collateral pledged by the Company. As of December 31, 1996, the
amount available under the Bank One Loan is approximately $64.0 million; the
amount available will be increased as additional properties are added to the
collateral pool. As of December 31, 1996, ten properties are pledged as
collateral under the Bank One Loan and $64.0 million is outstanding. The Bank
One Loan matures on June 26, 1999; however, the Company may request one year
extensions pursuant to the terms of the agreement.

Swap Agreements

As of December 31, 1996, the Company has hedged against fluctuations
in interest rates on all of the $213.5 million of the Company's variable rate
tax exempt debt and variable rate tax exempt certificates through October 3,
2003. On December 9, 1996, the Company entered into a swap transaction with
CLNY in which the Company pays a fixed rate of 4.636% on a notional amount of
$186.5 million and receives a floating rate based upon the PSA Municipal Swap
Index. This swap agreement matures on December 9, 2003 and replaced two LIBOR
based swaps the Company had previously entered into with Nomura Capital
Services, Inc. ("NCSI") ($94 million entered into on May 26, 1995 and $17
million on March 14, 1996).

33
<PAGE> 36

On October 8, 1996, the Company entered into a swap transaction with
Goldman Sachs to hedge against fluctuations in the variable interest rate on
the Class A Receipts in TEB. Under the swap transaction, the Company pays a
fixed rate of 6.83% on a notional amount of $26.5 million and receives a
floating rate equal to 90 day LIBOR. This swap results in an effective
interest rate on the $27.0 million in certificates of 4.85%. Management
believes that there is a reasonable correlation between changes in the LIBOR
rate (on which the fixed rate was based) and the J.J. Kenny Index (an index of
AA rated variable rate tax exempt bonds). Since 1981, the Kenny Index has
averaged approximately 72.5% of 30 day LIBOR.

In order to hedge against variations in the relationship between LIBOR
and the Kenny Index the Company entered into a three year swap on March 14,
1996 with NCSI in which the Company pays a floating rate equal to 71% of 30 day
LIBOR and receives a floating rate equal to the J.J. Kenny Index on a notional
amount of $130 million (the "Basis Risk Swap"). On November 26, 1996 this swap
was assigned from NCSI to Salomon Brothers Holding Company. The excess in
notional amount of swaps ($6.0 million LIBOR and $103.0 million in Basis Risk
Swap) are currently unallocated and will be used to hedge against variable
interest rate risk on future bond fundings.

The Company has adopted a policy regarding the hedging of total
variable rate debt. This policy provides that at no time will the Company have
more than 30% of its variable rate debt is not hedged by an interest rate cap,
swap or other interest rate protection agreement; in addition, the Company will
maintain a 1.3 times debt service coverage ratio based upon (a) hedged debt at
the applicable interest rate cap and swap strike prices and (b) unhedged debt
at a rate of 10% per annum. As of December 31, 1996 and March 24, 1997, the
Company has successfully hedged all of its variable rate tax-exempt debt
through the interest rate swap transaction. This policy may be changed from
time to time by the Board of Directors in its discretion. As of December 31,
1996 and March 24, 1997, the Company had $64.0 million and $38.8 million,
respectively, in variable rate debt that was not hedged by any interest rate
protection and was in compliance with the foregoing policies. With respect to
all variable rate tax-exempt debt outstanding as of March 24, 1997, all of
which is hedged, an increase in short-term tax-exempt rates of 1% would not
affect funds from operating activities (assuming exchange of all Common Units
and after taking into consideration the effect of the interest rate protection
agreement and swap transaction).

Short-term Liquidity Needs

Management believes that the Company will continue to have access to
the capital resources necessary to expand and develop its business. The
Company expects to meet its short-term liquidity requirements generally through
its net cash provided by operating activities. Management believes that the
Properties have been properly maintained on a current and regular basis, and
therefore does not anticipate any extraordinary capital expenditures over the
next twelve months. Management believes that the reserve from cash flows from
operating activities will be sufficient to meet the Company's working capital
requirements, including projected capital expenditures (and any increases in
interest expense on the Company's variable rate debt).

Long-term Liquidity Needs

The Company expects to meet its long-term liquidity requirements, such
as scheduled debt maturities, future property acquisitions and capital
improvements, by long-term collateralized or uncollateralized borrowings
including the Revolving Loan.

34
<PAGE> 37

A portion of the renovation costs to upgrade certain properties has
been obtained through the issuance of variable rate, tax-exempt bonds. As a
result of these bonds issuances, the Company has remaining funds of
approximately $549,000 at December 31, 1996 which the Company is required to
spend on rehabilitating these certain properties. This amount will be released
to the Company as actual costs are incurred, subject to the maintenance of
certain covenants relating to the specific properties.

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

Cash and cash equivalents decreased $1.3 million to $4.0 million at
December 31, 1996 compared to December 31, 1995. This decrease was due to a
decrease in cash provided by operating activities and an increase in cash used
in investing activities, partially offset by an increase in cash provided by
financing activities.

Net cash provided by operating activities decreased $2.5 million to
$19.1 million for the twelve month period ended December 31, 1996 when compared
to the same period in 1995. The primary reason for the decrease was due to
earlier payments of real estate taxes during 1996 as compared to 1995.

Net cash used in investing activities increased $21.4 million to $80.0
million for the twelve month period ended December 31, 1996 when compared to
the same period in 1995. This increase is primarily attributable to an
increase of $4.4 million for acquisitions and an increase of $4.0 million in
building improvements during 1996 as compared to 1995. Additionally, the
Company received $7.7 million of net proceeds from the sale of the Laurelwood
property in 1995, whereas no properties were sold in 1996.

Net cash provided by financing activities increased $19.8 million to
$59.6 million for the twelve month period ended December 31, 1996 when compared
to the same period in 1995. This increase is primarily due to net proceeds of
$24.1 million from the sale of the Class A Preferred Stock and proceeds of
$23.0 million for capital contributions from Investor I and Investor II ,
partially offset by a $14.7 million reduction of the amount borrowed under the
revolving loan agreements, a $7.7 million decrease in the amount of proceeds
received from new bond issuances, and a $4.2 million increase in financing fees
paid.

35
<PAGE> 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and schedules required under Regulation S-X
promulgated under the Securities Act of 1933 are identified in Item 14 and are
incorporated herein by reference.

QUARTERLY FINANCIAL DATA

The following unaudited quarterly data has been prepared on the
basis of a December 31 year end:

<TABLE>
<CAPTION>
1996
-------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Total revenues $ 15,625 $ 16,235 $ 17,483 $ 20,851
============ =========== =========== ==========
Net operating income (a) $ 8,428 $ 8,993 $ 9,293 $ 10,790
============ =========== =========== ==========
Funds from Operations (b) $ 4,315 $ 4,344 $ 4,634 $ 5,019
============ =========== =========== ==========
Income (loss) before Minority Interest,
loss on sale of interest rate cap
and extraordinary item $ 1,355 $ 1,280 $ 1,638 $ 788
Income allocated to Minority Interest (195) (282) (555) (851)

Loss on sale of interest rate cap, net of
minority interest (2,084) -- -- --
------------ ----------- ----------- ----------
Income before extraordinary item (924) 998 1,083 (63)
Extraordinary item (net of Minority
Interest -- -- -- (4,653)
------------ ----------- ----------- ----------
Net loss income (924) 998 1,083 (4,716)
Income allocated to preferred shareholders -- -- 283 568
------------ ----------- ----------- ----------
Net (loss) income allocated to common $ (924) $ 998 $ 800 $ (5,284)
============ =========== =========== ==========
Weighted average shares of Common Stock
outstanding 8,958,525 8,958,525 8,958,525 8,958,525
============ =========== =========== =========
Earnings per share of Common Stock $ (0.10) $ 0.11 $ 0.09 $ (0.59)
============ =========== =========== =========
Earnings per share of Common Stock before
extraordinary item $ (0.10) $ 0.11 $ 0.09 $ (0.07)
============ =========== =========== =========

1995
-------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Total revenues $ 11,330 $ 12,379 $ 14,204 $ 15,468
============ =========== =========== ==========
Net operating income (a) $ 5,799 $ 6,157 $ 7,301 $ 8,356
============ =========== =========== ==========
Funds from Operations (b) $ 3,946 $ 3,606 $ 4,181 $ 3,939
============ =========== =========== ==========
Income (loss) before Minority Interest,
gain on sale of rental property and
extraordinary item 2,048 1,500 953 735
Income allocated to Minority Interest (227) (191) (48) (149)

Gain on sale of rental property -- -- -- 966
------------ ----------- ----------- ----------
Income before extraordinary item 1,821 1,309 905 1,552
Extraordinary item (net of minority
interest -- 2,657 2,146 (443)
------------ ----------- ----------- ----------
Net income $ 1,821 $ 3,966 $ 3,051 $ 1,109
============ =========== =========== ==========
Weighted average shares of Common Stock
outstanding 8,958,525 8,958,525 8,958,525 8,958,525
============ =========== =========== ==========
Earnings per share of Common Stock $ 0.20 $ 0.44 $ 0.34 $ 0.13
============ =========== =========== ==========
Earnings per share of Common Stock
before extraordinary item $ 0.20 $ 0.14 $ 0.10 $ 0.18
============ =========== =========== ==========

</TABLE>

(a) Operating income is defined as total revenues less property operating, real
estate tax expense, general and administrative expenses, advertising and
marketing, repairs and maintenance and bad debt expenses. Operating income is
a measure of the performance of the operations of the properties before the
effects of depreciation, amortization, financing fees, losses from
unconsolidated real estate limited partnerships and interest expense.
Operating income is not necessarily an indication of the performance of the
Company or a measure of liquidity.
(b) See Note (2) to Selected Financial data.

36
<PAGE> 39

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS OF THE REGISTRANT

The information below sets forth, as of March 24, 1997, for each executive
officer of the Company such officer's name, business experience during the past
five years, age and year first elected an executive officer.

<TABLE>
<CAPTION>
Year
First Elected
Name of Executive Officer Position Age An Officer
------------------------- -------- --- ----------
<S> <C> <C> <C>
David M. Glickman Chief Executive Officer, 45 1994
Chairman of the Board

Adam D. Peterson Executive Vice President, 33 1994
Chief Financial Officer
Thomas J. Coorsh Senior Vice President 47 1996
of Operations, Secretary
</TABLE>

DAVID M. GLICKMAN. Chief Executive Officer of the Company since August 1994
and Chairman of the Board since March 1995. From May 1992 to August 1994, Mr.
Glickman served as Executive Vice President of The Prime Group, Inc. and was a
member of The Prime Group, Inc. 's Executive Committee. For more than 20 years
prior to joining The Prime Group, Inc., Mr. Glickman was employed by Heitman
Financial, Ltd., and from 1983 to 1992 served as President and a director of
Heitman Advisory Corporation, a registered investment advisor specializing in
real estate asset management on behalf of tax-exempt and other institutional
investors.

ADAM D. PETERSON. Executive Vice President since December 1996 and Chief
Financial Officer of the Company since August 1994. From September 1991 to
August 1994 Mr. Peterson served as an Asset Manager for The Prime Group, Inc.
and, in November 1992, was elected Vice President of Portfolio Management. Mr.
Peterson is a Certified Public Accountant and a member of the American
Institute of Certified Public Accountants.

37
<PAGE> 40

THOMAS J. COORSH. Senior Vice President of Operations since June 1996 and
Secretary of the Company since December 1996. From November 1993 until joining
the Company in June of 1996, Mr. Coorsh was the Chief Financial Officer for the
Brauvin Real Estate Funds, a Chicago based syndicator of real estate limited
partnerships. From March 1992 until November 1993, Mr. Coorsh was
self-employed as a business consultant. From 1990 to 1992 Mr. Coorsh was the
Senior Vice President of Finance and Chief Accounting Officer for Lexington
Homes, Illinois' largest home builder. Mr. Coorsh is a Certified Public
Accountant and a member of the American Institute of Certified Public
Accountants and the Illinois CPA Society.

Other information required by Item 10 will be contained in a
definitive proxy statement which the Registrant anticipates will be filed with
the Securities and Exchange Commission no later than 120 days subsequent to the
Company's fiscal year end, and thus have been omitted in accordance with
General Instruction G(3) to Form 10-K.

ITEMS 11, 12 AND 13

EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by Item 11, Item 12 and Item 13 will be
contained in a definitive proxy statement which the Registrant anticipates will
be filed with the Securities and Exchange Commission no later than 120 days
subsequent to the Company's fiscal year end, and thus has been omitted in
accordance with General Instruction G(3) to Form 10-K.

38
<PAGE> 41

PART IV

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

(A)(1) AND (A)(2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

See Index to Financial Statements at page F-1.

All schedules, other than those included herein, are omitted because
they are not applicable or the required information is shown in the financial
statements or notes.

(A)(3) EXHIBITS
EXHIBIT
NUMBER
3.1 Form of Amended and Restated Charter of Ambassador Apartments, Inc.,
formerly Prime Residential, Inc. ("Ambassador") (incorporated by
reference to Exhibit 3.1 to Ambassador's Registration Statement on
Form S-11 (Registration No. 33-77972) ("Registration Statement 33-
77972"))
3.2 Articles of Amendment to Amended and Restated Articles of
Incorporation of Ambassador (incorporated by reference to Exhibit 3.3
to Ambassador's Current Report on Form 8-K dated May 29, 1996)
3.3 Compiled Charter of Ambassador as of June 1, 1996 (incorporated by
reference to Exhibit 3.4 to Ambassador's Current Report on Form 8- K
dated May 29, 1996)
3.4 Articles Supplementary Classifying 1,351,351 Shares of Preferred
Stock as Class A Senior Cumulative Convertible Preferred Stock and
1,351,351 Shares of Excess Stock as Excess Class A Preferred Stock of
Ambassador (incorporated by reference to Exhibit 3.5 to Ambassador's
Current Report on Form 8-K dated August 16, 1996)
3.5 Form of Amended and Restated Bylaws of Ambassador (incorporated by
reference to Exhibit 3.1 to Registration Statement 33-77972)
4.1 Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.4 to Ambassador's Registration Statement on Form S-3
(Registration No. 333-22199))
10.1 Form of Amended and Restated Agreement of Limited Partnership of the
Operating Partnership (incorporated by reference to Exhibit 10.1 to
Registration Statement 33-77972)
10.2 Amendment No. 1 to Amended and Restated Agreement of Limited
Partnership of the Operating Partnership (incorporated by reference
to Exhibit 10.45 to Ambassador's Current Report on Form 8-K dated
August 16, 1996)
10.3 Amendment No. 2 to Amended and Restated Agreement of Limited
Partnership of the Operating Partnership (incorporated by reference
to Exhibit 10.46 to Ambassador's Current Report on Form 8-K dated
August 16, 1996)
10.4 Amendment No. 3 to Amended and Restated Agreement of Limited
Partnership of the Operating Partnership (incorporated by reference
to Exhibit 10.47 to Ambassador's Current Report on Form 8-K dated
August 16, 1996)
10.5 Contribution Agreement, dated April 18, 1994, among Ambassador, Prime
and Richard F. Cavenaugh (incorporated by reference to Exhibit 10.2
to Registration Statement 33-77972)
10.6 Form of First Amendment to Contribution Agreement among Ambassador,
Prime and Richard F. Cavenaugh (incorporated by reference to Exhibit
10.2(A) to Registration Statement 33-77972)

<PAGE> 42

10.7 Form of Agreement to Purchase Interests among Ambassador, the
Operating Partnership, KILICO Realty Corporation and KFC Portfolio
Corp. (incorporated by reference to Exhibit 10.3 to Registration
Statement 33-77972)
10.8 Form of Property Management Agreement between the Operating
Partnership and Brookdale Village Partners, Ltd. (incorporated by
reference to Exhibit 10.4 to Registration Statement 33-77972)
10.9 Form of Property Management Agreement between the Operating
Partnership and Fairways Partners Limited Partnership (incorporated
by reference to Exhibit 10.5 to Registration Statement 33-77972)
10.10 Form of Property Management Agreement between the Operating
Partnership and Williamsburg Limited Partnership (incorporated by
reference to Exhibit 10.34 to Registration Statement 33-77972)
10.11 Form of Property Management Agreement between Quail Run Associates,
Ltd. and the Operating Partnership (re: Brook Run Property)
(incorporated by reference to Exhibit 10.36 to Registration Statement
33-77972)
10.12 Form of Noncompetition Agreement among Ambassador, the Operating
Partnership, Michael W. Reschke and PGI (incorporated by reference to
Exhibit 10.10 to Registration Statement 33-77972)
10.13 Form of Registration Rights Agreement among Ambassador, Prime,
Richard F. Cavenaugh and LG Trust (incorporated by reference to
Exhibit 10.13 to Registration Statement 33-77972)
10.14 Interest Rate Protection Agreement, dated August 24, 1994, between
the Company and Nomura Capital Services, Inc. (incorporated by
reference to Exhibit 10.15 to Registration Statement 33-77972)
10.15 Agreement of Sale and Purchase of Partnership Interests, dated May
25, 1994, by and between Prime Group Limited Partnership, Richard J.
Brown and Cambridge Homes, Inc. (incorporated by reference to Exhibit
10.16 to Registration Statement 33-77972)
10.16 Letter Agreements, dated July 6, 1994 and July 15, 1994, amending
Agreement of Sale and Purchase of Partnership Interests by and
between Prime Group Limited Partnership, Richard J. Brown and
Cambridge Homes, Inc. (incorporated by reference to Exhibit 10.16(A)
to Registration Statement 33-77972)
10.17 Form of Exchange Rights Agreement among the Company and the Limited
Partners of the Operating Partnership (incorporated by reference to
Exhibit 10.17 to Registration Statement 33-77972)
10.18 Form of Purchase Option Agreement and Right of First Refusal between
the Operating Partnership and Fairways Partners Limited Partnership
(incorporated by reference to Exhibit 10.18 to Registration Statement
33-77972)
10.19 Form of Amended and Restated Agreement of Partnership of Williamsburg
Limited Partnership (incorporated by reference to Exhibit 10.19 to
Registration Statement 33-77972)
10.20 Form of Amended and Restated Agreement of Partnership of Brook Run
Associates, L.P. (incorporated by reference to Exhibit 10.20 to
Registration Statement 33-77972)
10.21 Form of Environmental Remediation and Indemnity Agreement (entered
into by the Operating Partnership with respect to certain Property
Partnerships) (incorporated by reference to Exhibit 10.22 to
Registration Statement 33-77972)

40
<PAGE> 43

10.22 Form of ADA Indemnity Agreement (entered into by the Operating
Partnership with respect to certain Property Partnerships)
(incorporated by reference to Exhibit 10.23 to Registration Statement
33-77972)
10.23 Form of Assignment and Assumption Agreement among The Prime Group,
Inc., Prime Multifamily of Illinois and the Operating Partnership
(environmental indemnity with respect to the Williamsburg Property)
(incorporated by reference to Exhibit 10.25 to Registration Statement
33-77972)
10.24 Form of Multi-Family Assets Sharing Agreement among the Operating
Partnership, Prime, David M. Glickman, Richard F. Cavenaugh, KILICO
Realty Corporation and KFC Portfolio Corp. (incorporated by reference
to Exhibit 10.32 to Registration Statement 33-77972)
10.25 Form of Investment Safekeeping Securities Custody Agreement between
Bank One, Arizona, N.A. and Ambassador I, L.P. (formerly Prime MFP
Limited Partnership) (incorporated by reference to Exhibit 10.29 to
Registration Statement 33-77972)
10.26 Form of Pledge and Security Agreement between Prime and Kemper
Investors Life Insurance Company (incorporated by reference to
Exhibit 10.33 to Registration Statement 33-77972)
10.27 Form of Lock-up Agreement between Prime, PGLP and Friedman, Billings,
Ramsey & Co., Inc. ("FBR") (incorporated by reference to Exhibit
10.28(A) to Registration Statement 33-77972)
10.28 Form of Lock-up Agreement between David M. Glickman and FBR
(incorporated by reference to Exhibit 10.28(B) to Registration
Statement 33-77972)
10.29 Form of Lock-up Agreement between Richard F. Cavenaugh, LG Trust and
FBR (incorporated by reference to Exhibit 10.28(C) to Registration
Statement 33-77972)
10.30 Form of Lock-up Agreement between Adam D. Peterson and FBR
(incorporated by reference to Exhibit 10.28(D) to Registration
Statement 33-77972)
10.31 Form of Officers and Directors Indemnification Agreement
(incorporated by reference to Exhibit 10.14 to Registration Statement
33-77972)
10.32 Form of Employment Agreement between Ambassador and David M. Glickman
(incorporated by reference to Exhibit 10.7 to Registration Statement
33-77972)
10.33 Form of Employment Agreement between Ambassador and Richard F.
Cavenaugh (incorporated by reference to Exhibit 10.6 to Registration
Statement 33-77972)
10.34 Form of Employment Agreement between Ambassador and Adam D. Peterson
(incorporated by reference to Exhibit 10.9 to Registration Statement
33-77972)
10.35 Form of Note, Pledge and Security Agreement, and letter re:
distributions between the Operating Partnership and David M. Glickman
(incorporated by reference to Exhibit 10.30 to Registration Statement
33-77972)
10.36 Form of Note, Pledge and Security Agreement, and letter re:
distributions among the Operating Partnership, Richard F. Cavenaugh
and LG Trust (incorporated by reference to Exhibit 10.27 to
Registration Statement 33-77972)
10.37 Form of Note, Pledge, and Security Agreement, and letter re:
distributions between the Operating Partnership and Adam D. Peterson
(incorporated by reference to Exhibit 10.35 to Registration Statement
33-77972)
10.38 Employment Agreement, dated as of May 21, 1996, between Ambassador
and Thomas J. Coorsh
10.39 Resignation and Release, dated December 20, 1996, between Ambassador
and Richard F. Cavenaugh

41
<PAGE> 44

10.40 The 1994 Stock Incentive Plan for Officers, Directors and Key
Employees of Ambassador Apartments, Inc., Ambassador Apartments, L.P.
and Subsidiaries (incorporated by reference to Exhibit 4.1 to
Ambassador's Registration Statement on Form S-3 (Registration No.
333- 20713))
10.41 Amendment to The 1994 Stock Incentive Plan for Officers, Directors
and Key Employees of Ambassador Apartments, Inc., Ambassador
Apartments, L.P. and Subsidiaries.
10.42 The 1996 Stock Incentive Plan for Officers, Directors and Key
Employees of Ambassador Apartments, Inc., Ambassador Apartments, L.P.
and Subsidiaries, as amended March 20, 1997
10.43 Loan Agreement and collateral documents, dated August 31, 1994 among
Nomura, the Operating Partnership and Ambassador (incorporated by
reference to Exhibit 10.24 to Ambassador's Annual Report on Form 10-K
for the year ended December 31, 1994)
10.44 Amended and Restated Note Agreement dated February 15, 1995 and
collateral documents among Nomura, the Operating Partnership and
Ambassador (incorporated by reference to Exhibit 10.24A to
Ambassador's Annual Report on Form 10-K for the year ended December
31, 1994)
10.45 First Amendment to Amended and Restated Note Agreement dated August
16, 1995, among Nomura, the Operating Partnership and Ambassador
(incorporated by reference to Exhibit 24B to Ambassador's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995)
10.46 SWAP Transaction Agreement dated May 24, 1995 between Ambassador and
Nomura Capital Services Inc. (incorporated by reference to Exhibit
10.37 to Ambassador's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995)
10.47 Credit Agreement dated as of September 20, 1995 by and between the
Operating Partnership and Credit Lyonnais, New York Branch
(incorporated by reference to Exhibit 10.38 to Ambassador's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995)
10.48 Agreement of Limited Partnership of Jupiter-I, L.P. dated as of March
27, 1996 (incorporated by reference to Exhibit 10.38 to Ambassador's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996)
10.49 Agreement of Limited Partnership of Jupiter-II, L.P. dated as of
March 27, 1996 (incorporated by reference to Exhibit 10.38(A) to
Ambassador's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996)
10.50 Agreement and Undertaking, dated as of March 27, 1996, among
Ambassador, Yugenkaisha Sanko Sekiyu, Jupiter-I, L.P. and AJ One
Limited Partnership (incorporated by reference to Exhibit 10.39 to
Ambassador's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996)
10.51 Agreement and Undertaking, dated as of March 27, 1996, among
Ambassador, Makoto Maki, Jupiter-II, L.P. and AJ Two Limited
Partnership (incorporated by reference to Exhibit 10.39(A) to
Ambassador's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996)
10.52 Credit Agreement, dated June 26, 1996, between Ambassador II, L.P.
and Bank One, Arizona, N.A. (incorporated by reference to Exhibit
10.40 to Ambassador's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996)
10.53 Promissory Note, dated June 26, 1996, by Ambassador II, L.P. to Bank
One, Arizona, N.A. (incorporated by reference to Exhibit 10.41 to
Ambassador's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996)

42
<PAGE> 45

10.54 Investment Agreement, dated as of August 15, 1996, among Ambassador,
the Operating Partnership and Five Arrows Realty Securities L.L.C.
(incorporated by reference to Exhibit 10.42 to Ambassador's Current
Report on Form 8-K dated August 16, 1996)
10.55 Supplemental Agreement, dated as of August 16, 1996, between
Ambassador and Five Arrows Realty Securities L.L.C. (incorporated by
reference to Exhibit 10.43 to Ambassador's Current Report on Form 8-K
dated August 16, 1996)
10.56 Registration Rights Agreement, dated as of August 16, 1996, between
Ambassador and Five Arrows Realty Securities L.L.C. (incorporated by
reference to Exhibit 10.44 to Ambassador's Current Report on Form 8-K
dated August 16, 1996)
10.57 Master Reimbursement Agreement by and between Federal National
Mortgage Association and Ambassador VIII, L.P. dated as of December
1, 1996 (incorporated by reference to Exhibit 10.49 to Ambassador's
Current Report on Form 8-K dated December 18, 1996)
21.1 List of subsidiaries
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
99.1 Amended and Restated Certificate of Limited Partnership of the
Operating Partnership (incorporated by reference to Exhibit 99.3 to
Ambassador's Current Report on Form 8-K dated August 16, 1996)

(b) Reports on Form 8-K

The Company's current report on Form 8-K dated December 18, 1996
disclosed information under item 5 with respect to the Company
entering into the FNMA Facility.

43
<PAGE> 46

SIGNATURES

Pursuant to the requirements of Section 13 and 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.

AMBASSADOR APARTMENTS, INC.
Dated: March 24, 1997

By:/s/ David M. Glickman
---------------------------
David M. Glickman
Chairman of the Board and
Chief Executive Officer

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

<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ David M. Glickman Chairman of the Board and March 24, 1997
- --------------------- Chief Executive Officer
David M. Glickman

/s/ Adam D. Peterson Executive Vice President and March 24, 1997
- -------------------- Chief Financial and Accounting
Adam D. Peterson Officer

/s/ Norman R. Bobins Director March 24, 1997
- --------------------
Norman R. Bobins

/s/ David B. Heller Director March 24, 1997
- -------------------
David B. Heller

/s/ Richard F. Levy Director March 24, 1997
- -------------------
Richard F. Levy

/s/ Jane R. Patterson Director March 24, 1997
- ---------------------
Jane R. Patterson

/s/ Michael W. Reschke Director March 24, 1997
- ----------------------
Michael W. Reschke

/s/ Matthew W. Kaplan Director March 24, 1997
- ---------------------
Matthew W. Kaplan
</TABLE>

44
<PAGE> 47

AMBASSADOR APARTMENTS, INC.

INDEX TO FINANCIAL STATEMENTS
AND
FINANCIAL STATEMENT SCHEDULES
(ITEMS 14(a)(1) AND (a)(2))

<TABLE>
<CAPTION>
(a)(1) FINANCIAL STATEMENTS Page
----
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2

Consolidated balance sheets of Ambassador Apartments, Inc. as of December
31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3

Consolidated statements of operations of Ambassador Apartments, Inc. for the
years ended December 31, 1996 and 1995 and for the period from August 31, 1994
through December 31, 1994 and combined statements of operations of
Prime Properties (the Predecessor to Ambassador Apartments, Inc.) for the
period from January 1, 1994 through August 30, 1994 . . . . . . . . . . . . . . . . . . . . . . . F-4

Consolidated statements of changes in stockholder's equity of Ambassador Apartments,
Inc. and Prime Properties' (the Predecessor to Ambassador Apartments, Inc.) net
deficit for the years ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . F-5

Consolidated statements of cash flows of Ambassador Apartments, Inc. for the years
ended December 31, 1996 and 1995 and for the period from August 31, 1994 through
December 31, 1994 and combined statements of cash flows of Prime Properties
(the Predecessor to Ambassador Apartments, Inc.) for the period from January 1, 1994
through August 30, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6

Notes to consolidated and combined financial statements . . . . . . . . . . . . . . . . . . . . . . . F-7

(a)(2) FINANCIAL STATEMENT SCHEDULES

Schedule III - Real Estate and Accumulated Depreciation as of
December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
</TABLE>

Schedules, other than those listed, are omitted for the reason that
they are not applicable or equivalent information has been included elsewhere
herein.

F-1
<PAGE> 48

REPORT OF INDEPENDENT AUDITORS

Stockholders and Board of Directors
Ambassador Apartments, Inc.

We have audited the accompanying consolidated balance sheets of
Ambassador Apartments, Inc. (the "Company") as of December 31, 1996 and 1995,
and the related statements of operations, stockholders' equity and cash flows
for the years then ended and the period from August 31, 1994 through December
31, 1994. We have also audited the accompanying combined statements of
operations, partners' deficit, and cash flows of Prime Properties (the
Predecessor to the Company) for the period from January 1, 1994 through August
30, 1994. Our audits also included the financial statement schedule listed in
the Index at Item 14(a) . These financial statements and schedule are the
responsibility of the Company's and Predecessor's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

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

In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Ambassador Apartments, Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for the years then ended and for
the period from August 31, 1994 through December 31, 1994, and the combined
results of operations and cash flows for Prime Properties for the period from
January 1, 1994 through August 30, 1994, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.

Ernst & Young LLP

Chicago, Illinois
January 27, 1997
except for note 15, as to which the date
is March 13, 1997 and note 2(J), as to
which the date is March 31, 1997

F-2
<PAGE> 49

AMBASSADOR APARTMENTS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)

1996 1995
------------ ------------
<S> <C> <C>

ASSETS
Rental property:
Land.......................................... $ 82,124 $ 57,718
Buildings and improvements.................... 407,002 283,062
Furniture and equipment....................... 6,166 3,089
------------ ------------
495,292 343,869
Accumulated depreciation........................ (33,340) (19,910)
------------ ------------
461,952 323,959

Cash and cash equivalents....................... 4,002 5,270
Escrow deposits................................. 30,897 12,945
Escrowed bond funds - restricted................ 549 2,779
Note receivable - Officer....................... 1,000 1,000
Accounts receivable............................. 1,870 1,230
Investment in and advances to unconsolidated
real estate limited partnership............... 4,549 657
Deferred financing costs, net................... 9,640 11,530
Other........................................... 1,325 619
------------- ------------
Total assets.................................... $ 515,784 $ 359,989
============= ============

LIABILITIES AND EQUITY
Bonds payable................................... $ 279,355 $ 182,050
Notes payable................................... 79,974 47,931
Accrued interest................................ 913 ---
Real estate taxes payable....................... 3,837 4,998
Tenant security deposits........................ 2,231 1,632
Accounts payable and other liabilities.......... 2,138 2,143
Distributions/dividends payable................. 750 ---
------------- -------------
$ 369,198 $ 238,754
------------- -------------

Minority interest.............................. $ 32,006 $ 12,062
Preferred Stock, $.01 par value; 20,000 shares
authorized, 1,351,351 shares of Class A
Senior Cumulative Convertible Preferred
Stock issued and outstanding................. 24,132 ---
Stockholders' equity:
Common Stock, $.01 par value; 100,000,000
shares authorized, 8,958,525 shares issued
and outstanding ........................... 90 90
Additional paid-in capital................... 112,975 112,957
Distributions in excess of accumulated
earnings................................... (22,617) (3,874)
------------- -------------
Total stockholders' equity..................... 90,448 109,173
------------- -------------
Total liabilities and equity................... $ 515,784 $ 359,989
============= =============

</TABLE>
See accompanying notes to consolidated and combined financial statements.

F-3
<PAGE> 50

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS OF THE COMPANY AND COMBINED
STATEMENTS OF OPERATIONS OF THE PREDECESSOR
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
AMBASSADOR APARTMENTS, INC. PRIME PROPERTIES
--------------------------------------------------------- -------------------
Year Ended Year Ended
December 31, December 31, August 31, 1994 to January 1, 1994 to
1996 1995 December 31, 1994 August 30, 1994
---------------- ---------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Revenues:
Rental . . . . . . . . . . . . . . . . . $ 64,842 $ 49,966 $ 13,161 $ 19,146
Other . . . . . . . . . . . . . . . . . 5,352 3,415 1,519 1,288
---------------- ---------------- ----------------- -----------------
Total revenues . . . . . . . . . . . . . 70,194 53,381 14,680 20,434
Expenses:
Property operating . . . . . . . . . . . 16,853 13,477 3,599 5,406
Real estate taxes . . . . . . . . . . . 6,327 5,255 1,334 2,367
General and administrative . . . . . . . 5,225 3,612 1,167 --
Depreciation . . . . . . . . . . . . . . 13,430 8,894 2,101 3,190
Advertising and marketing . . . . . . . 1,329 1,088 240 353
Repairs and maintenance . . . . . . . . . 2,522 1,754 572 943
Property management fees . . . . . . . . -- -- -- 937
Asset management fees . . . . . . . . . . -- -- -- 172
Financing fees . . . . . . . . . . . . . 3,272 1,466 271 383
Bad debt . . . . . . . . . . . . . . . . 434 584 292 298
Interest . . . . . . . . . . . . . . . . 14,145 8,903 1,467 5,393
Amortization of deferred financing
fees . . . . . . . . . . . . . . . . . 1,829 2,792 622 333
(Income) losses from investment
in unconsolidated real estate
limited partnerships . . . . . . . . . . (233) 320 162 --
---------------- ---------------- ----------------- -----------------
Total expenses . . . . . . . . . . . . . 65,133 48,145 11,827 19,775
---------------- ---------------- ----------------- -----------------
Income before minority interest, gain
on sale of rental property, loss on
sale of interest rate cap, and
extraordinary item . . . . . . . . . . . 5,061 5,236 2,853 659

Income allocated to minority interest . . (1,883) (615) (332) --
---------------- ---------------- ----------------- -----------------
Income before gain on sale of rental
property, loss on sale of interest rate
cap and extraordinary item . . . . . . . 3,178 4,621 2,521 659
Gain on sale of rental property,
net of minority interest . . . . . . . . -- 966 -- --
---------------- ---------------- ----------------- -----------------
Income before loss on sale of interest
rate cap and extraordinary item . . . . . 3,178 5,587 2,521 659

Loss on sale of interest rate cap,
net of minority interest . . . . . . . . (2,084) -- -- --
---------------- ---------------- ----------------- -----------------

Income before extraordinary item . . . . 1,094 5,587 2,521 659

Extraordinary item, net of minority
interest . . . . . . . . . . . . . . . . (4,653) 4,360 (772) --
---------------- ---------------- ----------------- -----------------
Net (loss) income . . . . . . . . . . . . (3,559) 9,947 1,749 659
Income allocated to preferred
shareholders . . . . . . . . . . . . . . 851 -- -- --
---------------- ---------------- ----------------- -----------------
Net (loss) income applicable to
common shareholders . . . . . . . . . . . $ (4,410) $ 9,947 $ 1,749 $ 659
================ ================ ================= =================
PRIMARY EARNINGS PER SHARE OF COMMON
STOCK:
(Loss) income per weighted average
share of common stock outstanding:
Before extraordinary item . . . . . . . . $ 0.03 $ 0.62 $ 0.28

Extraordinary item . . . . . . . . . . . (0.52) 0.49 (0.09)
---------------- ---------------- -----------------
Net (loss) income . . . . . . . . . . . . $ (0.49) $ 1.11 $ 0.19
================ ================ =================
Weighted average common stock
outstanding . . . . . . . . . . . . . . . 8,958,525 8,958,525 8,847,547
================ ================ =================

FULLY DILUTED EARNINGS PER SHARE OF
COMMON STOCK:
Before extraordinary item . . . . . . . . $ 0.22

Extraordinary item . . . . . . . . . . . (0.55)
----------------
Net (loss) income . . . . . . . . . . . . $ (0.33)
================
Weighted average fully diluted
shares outstanding . . . . . . . . . . . 10,348,645
================
</TABLE>

See accompanying notes to consolidated and combined financial statements.

F-4
<PAGE> 51

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
OF THE COMPANY AND THE PREDECESSOR'S NET DEFICIT
(Dollars In Thousands, Except For Per Share Amounts)

<TABLE>
<CAPTION>
1996 1995 1994
------------------- ------------------- --------------------
<S> <C> <C> <C>
COMMON STOCK, $0.01 PAR VALUE
Balance, beginning of year . . . . . . . . . . . . $ 90 $ 90 $ --
------------------- ------------------- --------------------
Net proceeds from the offering . . . . . . . . . -- -- 90
------------------- ------------------- --------------------
Balance, end of year . . . . . . . . . . . . . . . $ 90 $ 90 $ 90
=================== =================== ====================
Paid-in capital

PAID-IN CAPITAL
Balance, beginning of year . . . . . . . . . . . . $ 112,957 $ 112,943 $ --
Net proceeds from the offering . . . . . . . . . -- -- 127,476
Principal payments on notes receivable for
issuance of common units . . . . . . . . . . . 18 14 3
Adjustments for minority interests ownership
in operating partnership . . . . . . . . . . . -- -- (14,536)
------------------- ------------------- --------------------
Balance, end of year . . . . . . . . . . . . . . . $ 112,975 $ 112,957 $ 112,943
=================== =================== ====================

DISTRIBUTIONS IN EXCESS OF ACCUMULATED EARNINGS
Balance, beginning of year . . . . . . . . . . . . $ (3,874) $ (3,071) $ --
Net (loss) income applicable to Common
Shareholders . . . . . . . . . . . . . . . (4,410) 9,947 1,749
Distributions . . . . . . . . . . . . . . . . . (14,333) (10,750) (4,820)
------------------- ------------------- --------------------
Balance, end of year . . . . . . . . . . . . . . . $ (22,617) $ (3,874) $ (3,071)
=================== =================== ====================

PREDECESSOR'S NET DEFICIT
Balance, beginning of year . . . . . . . . . . . . $ -- $ -- $ (2,422)
Net income . . . . . . . . . . . . . . . . . . -- -- 659
Contributions . . . . . . . . . . . . . . . . . -- -- 1,690
Distributions . . . . . . . . . . . . . . . . . -- -- (1,708)
Reclassification of net deficit in connection
with the reorganization . . . . . . . . . . -- -- 1,781
------------------- ------------------- --------------------
Balance, end of year . . . . . . . . . . . . . . . $ -- $ -- $ --
=================== =================== ====================
</TABLE>

See accompanying notes to consolidated and combined financial statements.

F-5
<PAGE> 52

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS OF THE COMPANY AND COMBINED
STATEMENTS OF CASH FLOWS OF THE PREDECESSOR
(Dollars In Thousands)

<TABLE>
<CAPTION>
AMBASSADOR APARTMENTS, INC. PRIME PROPERTIES
---------------------------------------------- ----------------
YEAR ENDED YEAR ENDED AUGUST 31, 1994 JANUARY 1, 1994
DECEMBER 31, DECEMBER 31, TO DECEMBER 31, TO AUGUST 30,
1996 1995 1994 1994
------------ ------------ --------------- ----------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income . . . . . . . . . . . . . . . $ (3,559) $ 9,947 $ 1,749 $ 659
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . 13,430 8,894 2,101 3,190
Bad debt expense . . . . . . . . . . . . . . 434 584 292 298
Amortization of deferred financing fees . . . 1,829 2,792 622 333
Minority interest . . . . . . . . . . . . . . 1,883 615 332 --
Extraordinary item, net of minority
interest . . . . . . . . . . . . . . . . . . . 4,653 (4,360) 772 --
Loss on sale of interest rate cap, net of
minority interest . . . . . . . . . . . . . . 2,084 -- -- --
Gain on sale of rental property, net of
minority interest . . . . . . . . . . . . . . -- (966) -- --
Write-off of deferred letter of
credit fees . . . . . . . . . . . . . . . . . -- 1,374 -- --
(Income) losses from investment in
unconsolidated real estate limited
partnerships . . . . . . . . . . . . . . . . (233) 320 162 --
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . (1,074) (448) (1,155) (329)
Other assets . . . . . . . . . . . . . . . (706) (182) (437) 129
Accrued interest payable . . . . . . . . . 913 (92) (119) (119)
Real estate taxes payable . . . . . . . . (1,161) 1,925 1,390 210
Tenant security deposits . . . . . . . . . 599 526 348 26
Accounts payable and other
liabilities . . . . . . . . . . . . . . . . (5) 663 (812) 538
------------- ----------- -------------- --------------
Net cash provided by operating
activities . . . . . . . . . . . . . . . . 19,087 21,592 5,245 4,935
------------- ----------- -------------- --------------
INVESTING ACTIVITIES
Purchase of rental property . . . . . . . . . . (59,951) (55,565) (66,148) --
Improvements to rental property . . . . . . . . (16,189) (12,227) (1,746) (1,731)
Advances to unconsolidated real estate
limited partnerships . . . . . . . . . . . . . . (39,883) -- -- --
Repayment from unconsolidated real estate
limited partnerships . . . . . . . . . . . . . . 36,048 -- -- --
Note receivable - Officer . . . . . . . . . . . -- -- (1,000) --
Net proceeds from sale of rental property . . . -- 7,650 -- --
Cash from contributed assets . . . . . . . . . . -- -- 3,423 --
Contribution to unconsolidated real estate
limited partnerships . . . . . . . . . . . . . . -- (28) (557) --
Distribution from unconsolidated real estate
limited partnerships . . . . . . . . . . . . . . -- 1,640 50 --
Purchase of partnership interests . . . . . . . -- -- (14,460) --
------------- ----------- -------------- --------------
Net cash used in investing activities . . . . (79,975) (58,530) (80,438) (1,731)
------------- ----------- -------------- --------------
FINANCING ACTIVITIES
Net proceeds from common stock offering . . . . -- -- 127,566 --
Capital Contributions from Investor I and II . . 23,000 -- -- --
Net proceeds from preferred stock offering . . . 24,132 -- -- --
Proceeds from sale of interest rate cap . . . . 1,485 -- -- --
Decrease (increase) in escrowed bond
funds-restricted . . . . . . . . . . . . . . . 2,230 1,035 16,278 (20,089)
Proceeds from bonds payable . . . . . . . . . . 34,305 42,015 6,400 20,000
Payment to sinking fund . . . . . . . . . . . . -- (550) -- --
Escrow deposits . . . . . . . . . . . . . . . . (17,952) (12,945) -- --
Proceeds from notes payable . . . . . . . . . . 145,721 102,362 -- --
Purchase of bonds payable . . . . . . . . . . . (12,217) (15,053) -- --
Repayment of notes payable . . . . . . . . . . . (113,744) (55,631) (59,070) (1,600)
Deferred financing fees paid . . . . . . . . . . (9,762) (5,587) (8,332) (698)
Partner capital contributions . . . . . . . . . 18 14 3 1,690
Distributions to predecessor owners . . . . . . -- -- (3,859) --
Dividends paid to preferred stockholders . . . . (284) -- -- --
Dividends paid to common stockholders . . . . . (14,333) (14,333) (1,237) --
Distributions paid to minority interest . . . . (2,979) (1,543) (132) --
Distributions to partners . . . . . . . . . . . -- -- -- (1,708)
------------- ----------- -------------- --------------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . . . . . 59,620 39,784 77,617 (2,405)
------------- ----------- -------------- --------------
Net (decrease) increase in cash . . . . . . . . . . (1,268) 2,846 2,424 799
Cash and cash equivalents at beginning of
period . . . . . . . . . . . . . . . . . . . . . . 5,270 2,424 -- 2,850
------------- ----------- -------------- --------------
Cash and cash equivalents at end of period . . . . $ 4,002 $ 5,270 $ 2,424 $ 3,649
============= =========== ============== ==============
</TABLE>
See accompanying notes to consolidated and combined financial statements.

F-6
<PAGE> 53
AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

1. FORMATION AND ORGANIZATION OF THE COMPANY

Ambassador Apartments, Inc., formerly Prime Residential, Inc.,
(together with its consolidated and unconsolidated investments in real estate
limited partnerships, the "Company") was organized in Maryland on April 15,
1994. The Company was formed to continue the residential rental operations
business of The Prime Group, Inc. and certain of its affiliates (collectively
"PGI"). The Company will continue to make an election to qualify as a real
estate investment trust ("REIT") under the Internal Revenue Code of 1986, as
amended, for Federal income tax purposes.

The Company is a self-administered and self-managed REIT engaged in
the ownership and management of residential rental properties leased primarily
to middle income tenants. As of December 31, 1996, the company owns interests
in 49 apartment communities with a total of 14,564 units located in Arizona,
Colorado, Florida, Georgia, Illinois, Tennessee and Texas. The Company's
principal markets with more than 1,000 units include Phoenix and Tucson,
Arizona; Orlando, Florida; and Austin, Houston and San Antonio, Texas.

On August 31, 1994, the Company completed an initial public offering
(the "Offering") of 7,821,000 shares of Common Stock at $16.00 per share. On
September 12, 1994, the underwriters of the Offering exercised their over
allotment option to purchase 1,137,525 shares of Common Stock at $16.00 per
share.

Upon consummation of the Offering, the Company contributed the initial
net proceeds of $110.5 million from the Offering in exchange for 7,821,000
common units of partnership interest ("Common Units") of Ambassador Apartments,
L.P., formerly Prime Residential, L.P. (the "Operating Partnership"). The
Company contributed the net proceeds of $17.1 million from the exercise of the
underwriters' over allotment option to the Operating Partnership in exchange
for 1,137,525 Common Units.

The Company is the sole general partner of the Operating Partnership
and owns 90.28% of the Common Units and 100% of the Class A Preferred Units
(defined below) as of December 31, 1996. Dividends declared or paid to holders
of Common Stock and Class A Preferred Stock are based upon such distributions
received by the Company with respect to its Common Units and Class A Preferred
Units.

Upon consummation of the Offering, PGI contributed its interest in the
predecessor to the Company (the "Predecessor") to the Operating Partnership in
exchange for a limited partnership interest represented by 846,703 Common
Units, approximately $3.0 million in reimbursement of formation costs advanced
by PGI and the right to receive an additional 441,000 Common Units (the
"Performance Units") which will be issued if certain performance criteria are
met. None of the performance criteria has been met as of December 31, 1996.
Of the 846,703 Common Units received by PGI, 156,250 Common Units were
immediately transferred by PGI to a senior executive of the Company in exchange
for such executive's interest in PGI. PGI also transferred the right to
receive 90,000 Performance Units to the same senior executive. Another senior
executive contributed his interests in the Predecessor to the Operating
Partnership in exchange for 17,280 Common Units and the right to receive up to
9,000 Performance Units. PGI and senior executives

F-7
<PAGE> 54

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(the "Limited Partners") hold all of their Common Units as limited partners of
the Operating Partnership.

Unless the context requires otherwise, all references to the Company
herein mean Ambassador Apartments, Inc. and those entities owned or controlled
by Ambassador Apartments, Inc., including the Operating Partnership. The
combined financial statements of the Predecessor include the accounts of eleven
property partnerships which owned the 21 Prime Properties (the "Predecessor
Partnerships"). The Predecessor Partnerships were considered to be entities
under common ownership and management. Upon consummation of the Offering, PGI
sold a 50% interest in one Predecessor Partnership (Williamsburg Limited
Partnership) to a senior executive of PGI. PGI then contributed to the
Operating Partnership its ownership interest in ten of the Predecessor
Partnerships and its remaining 50% ownership interest in Williamsburg Limited
Partnership, which is accounted for as a joint venture using the equity method
of accounting. The Company also acquired for $400,000 a 49.9% general
partnership interest in a partnership ("Brook Run") which is accounted for as a
joint venture using the equity method of accounting. Effective December 31,
1995, a partner in Brook Run with a 0.1% limited partnership interest assigned
his interest to the Company.

In August 1996, the Company entered into a joint venture with an
affiliated entity to form G.P. Municipal Holdings, L.L.C. ("G.P. Holdings")
(see Note 2). The Company owns a 49.6% interest in G.P. Holdings, which is
accounted for as a joint venture using the equity method of accounting.

At December 31, 1996 the interests of the Company are represented by
three types of partnerships (collectively, the "Property Partnerships"): 1)
interests in the partnerships owned by the Company prior to the Offering (the
"Predecessor Partnerships"), 2) newly created partnerships which own certain
properties acquired by the Company or transferred from other partnerships (the
"New Partnerships"), and 3) real estate limited partnerships in which the
Company owns a joint venture interest (the "Joint Venture Partnerships"). The
following tables set forth the Property Partnerships and their corresponding
operating properties.

F-8
<PAGE> 55

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PREDECESSOR PARTNERSHIPS OPERATING PROPERTIES
- ------------------------------------------ ------------------------------------------------------------
<S> <C> <C> <C>
Eagle's Nest Partnership None (1)
LaJolla Partnership None (1)
Cape Cod Partnership None (1)
Braesview Partnership None (1)
Mesa Ridge Partnership None (1)
Prime H.C. Limited Partnership None (1)
Prime Aspen Limited Partnership None (1)
Brookdale Lakes Partners None (1)
Prime Crest, L.P. None (1)
Ambassador I, L.P. Privado Park Quail Ridge Windridge
(formerly Prime MFP Limited Partnership) Shadow Creek Tierra Bonita Bent Oaks
Vista Ventana The Stratford Mountain View

NEW PARTNERSHIPS
----------------
Ambassador II Limited Partnership Sandalwood Country Club West Pine Shadows
(formerly Prime MFP II Limited Trails of Ashford Courtney Park Hidden Lake
Crossroads Heather Ridge Woodlands
LaJolla de Tucson

Ambassador III, L. P. Sun Lake
(formerly Prime MFP III Limited

Ambassador IV, L.P. Falls of Bells Ferry
(formerly Prime MFP IV Limited

Ambassador V, L.P. None
(formerly Prime MFP V Limited

Ambassador VI, L.P. Cypress Ridge Madera Point
(formerly Prime MFP VI Limited Broadmoor Stonybrook

Ambassador VII, L.P. Coral Cove Summit Creek
(formerly Prime MFP VII Limited Tatum Gardens Westway Village

Ambassador VIII, L.P. Eagle's Nest Harbor Cove The Mills
Cape Cod Prime Crest Shallow Creek
LaJolla Royal Crest Franklin Oaks
Mesa Ridge Aspen Hills Crossings of Bellevue
Braesview Brookdale Lakes

Ambassador/CRM Florida Partners Arbors Village Crossing
Limited Partnership Ocean Oaks Haverhill Commons

JOINT VENTURE PARTNERSHIPS
--------------------------
Williamsburg Limited Partnership Williamsburg
Brook Run Associates Brook Run
G.P. Municipal Holdings, LLC N/A
</TABLE>

(1) Transferred properties to Ambassador VIII, L.P. concurrently with the
closing of the FNMA Facility, as described below.

F-9
<PAGE> 56

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(a) Basis of Presentation

The accompanying consolidated financial statements include, subsequent
to the Offering, the accounts of the Company, the Operating Partnership and all
entities in which the Company has majority interest or control. The effects of
all significant intercompany balances and transactions have been eliminated in
the consolidated and combined presentation.

Investments in Joint Venture Partnerships which the Company does not
have a majority interest in, or control of, are accounted for on the equity
method, except that any gains or losses of Williamsburg Limited Partnership
resulting from financing transactions are allocated to the Company, the
managing general partner of Williamsburg Limited Partnership. To the extent
the Company's investment basis differs from its share of the capital of an
unconsolidated Partnership, such difference is amortized over the depreciable
life (20 years) of the unconsolidated Partnership's investment assets.

Certain amounts in the 1995 and 1994 financial statements have been
reclassified to conform with the 1996 consolidated presentation. Such
reclassifications have not changed the results of operations for 1995 and 1994.

(b) Revenue Recognition

Rental revenue is recognized as income in the period earned.

All property renovation costs, including construction, architectural
design and other similar renovation costs incurred during the renovation
period, are capitalized to rental property.

(d) Cash Equivalents

All highly liquid investments, with a maturity of three months or less
when purchased, are considered to be cash equivalents.

(e) Rental Property

Rental property is carried at lower of cost or fair value.

The Company evaluates its rental properties periodically for
indicators of impairment, including recurring operating losses and other
significant adverse changes in the business climate that affect the recovery of
the recorded asset value. If rental property is considered impaired, a loss is
provided to reduce the net carrying value of the asset to its estimated fair
value. No impairment losses are included in the accompanying financial
statements.

F-10
<PAGE> 57

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

Depreciation is calculated on the straight-line basis over the
estimated useful lives of the assets which are as follows:

<TABLE>
<S> <C>
Building . . . . . . . . . . . . . . . . . . . . . 30-40 years
Building improvements . . . . . . . . . . . . . . . 5-30 years
Furniture and equipment . . . . . . . . . . . . . . 3-12 years
</TABLE>

Expenditures for ordinary maintenance and repairs are expensed to
operations as incurred. Significant renovations and improvements which improve
and/or extend the useful life of the asset are capitalized and depreciated over
their estimated useful life.

(f) Income Taxes

The Company will continue to make an election to qualify as a REIT.
Under the applicable provisions of the Internal Revenue Code of 1996, as
amended, a REIT will generally not be subject to Federal income tax so long as
it distributes at least 95% of its REIT taxable income to its shareholders and
complies with certain other requirements. Even if the Company qualifies as a
non-taxable entity for Federal income tax purposes, the Company may be subject
to certain state or local taxes on its income and property depending on the tax
laws of particular states. Prior to the Offering, no provision for Federal
income taxes has been made in the accompanying combined financial statements of
the Predecessor as the liability for any such taxes is that of the partners of
the respective combined entities rather than the Predecessor.

As of December 31, 1996 the bases of the Company's net assets reported
in the Company's consolidated financial statements exceeded the tax bases by
approximately $6.0 million.

(g) Deferred Financing Costs

Deferred financing costs include costs incurred to obtain long-term
financing and interest rate protection. The deferred financing costs are being
amortized over the terms of their respective agreements on a straight-line
basis. During 1996, unamortized deferred financing costs of approximately $9.8
million were fully amortized due to sale of the interest rate cap, early
repayment of bridge financing, and reissuance of certain bonds in connection
with replacement of credit enhancement. During 1995, unamortized deferred
financing costs were written off upon the Company's acquisition of its fixed
rate bonds, termination of standby purchase agreements with the Lumbermens
Mutual Casualty Company ("Kemper Lender"), and the Company's sale of the
Laurelwood property. The total unamortized financing costs written off due to
the transactions mentioned above was approximately $2.0 million. Unamortized
financing costs written off due to early repayment of debt in 1994 were
approximately $855,000.

<TABLE>
<CAPTION>
(IN 000's)
DECEMBER 31
-----------------------------------------
1996 1995 1994
---------- ----------- -----------
<S> <C> <C> <C>
$ 25,558 $ 15,796 $ 12,163
Deferred financing costs . . . . . . . . . . .

Accumulated amortization . . . . . . . . . . . (15,918) (4,266) (1,474)
---------- ----------- -----------
$ 9,640 $ 11,530 $ 10,689
========== =========== ===========
</TABLE>

F-11
<PAGE> 58

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(h) Minority Interest

Concurrently with the formation of the Operating Partnership, PGI and
certain senior executives of the Company contributed assets in exchange for
863,983 Common Units, and certain senior executives purchased 100,000 Common
Units in the Operating Partnership. PGI and certain senior executives of the
Company hold these Common Units as Limited Partners. The partners' equity of
the Operating Partnership excludes loans made by the Operating Partnership to
certain senior executives of the Company in the amounts of $1.4 million and
$250,000 ($1.3 million and $244,000, respectively, at December 31, 1996) to
acquire 84,375 and 15,625 Common Units, respectively. However, the minority
interest percentage in the Operating Partnership includes such Common Units
because these executives will receive all of the benefits of a Common Unit
holder. The loans are collateralized by pledges of the Common Units acquired
with the loan proceeds. The loans bear interest at the prime rate (8.50% at
December 31, 1996 and 1995) plus 0.50% per annum and have a maturity date of
August 31, 2004.

The 963,983 Common Units held by Limited Partners have the same
characteristics as 963,983 shares of Common Stock in as much as they share
proportionately in any distributions of the Operating Partnership. The
minority interest ownership percentage is calculated by dividing the number of
Common Units held by Limited Partners divided by the total number of
outstanding Common Units.

In return for a capital contribution of $17.8 million, a Japanese
corporation ("Investor I") received a 50.4% limited partnership interest in
Jupiter-I, L.P. In return for a capital contribution of $5.2 million, a
Japanese individual ("Investor II") received a 50.4% limited partnership
interest in Jupiter-II, L.P. The Company used the proceeds to pay
approximately $1.4 million of placement fees and formation costs for Jupiter-I,
L.P. and Jupiter-II, L.P. and approximately $21.6 million to repay principal
outstanding on the Company's Nomura Revolving Loan (defined below). The
Company treats as minority interest any profits and losses allocated to
Investor I and Investor II in accordance with the respective partnership
agreements of Jupiter-I, L.P. and Jupiter-II, L.P.

The partnership agreements of Jupiter-I, L.P. and Jupiter-II, L.P.
provide that profits and losses will generally be distributed to the partners
as follows. All depreciation of the applicable properties (see above) shall be
allocated to the partners in proportion to their respective ownership
percentages. All other profit and loss (excluding depreciation) from the
applicable properties shall be allocated to the partners in proportion to the
amount of cash distributed to each partner during the year (see below).

F-12
<PAGE> 59

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

To the extent available, the following cash distributions shall be
made to the partners of Jupiter-I, L.P. First, Investor I shall receive an
8.5% per annum cumulative priority return on its original investment, paid
monthly in arrears. Second, the Company shall receive an 8.5% per annum
cumulative priority return on its capital contribution (as defined) into
Jupiter-I, L.P., paid monthly in arrears. Third, the Company shall receive
excess cash flow up to a specified amount (as defined), paid quarterly in
arrears. Fourth, any remaining excess cash flow from Ambassador I, L.P. is
paid quarterly in arrears, 30% to Investor I and 70% to the Company.

To the extent available, the following cash distributions shall be
made from Ambassador VII, L.P. to the partners of Jupiter-II, L.P. First,
Investor II receives an 8.5% per annum cumulative priority return on its
original investment, paid monthly in arrears. Second, the Company receives an
8.5% per annum cumulative priority return on its capital contribution (as
defined) into Jupiter-II, L.P., paid monthly in arrears. Third, the Company
receives excess cash flow up to a specified amount (as defined), paid quarterly
in arrears. Fourth, any remaining excess cash flow from Ambassador VII, L.P.
is paid quarterly in arrears, 30% to Investor II and 70% to the Company.

At any time following the fifth, but automatically upon the seventh,
anniversary of the formation of Jupiter-I, L.P. and Jupiter-II, L.P., Investor
I and Investor II are each entitled to a redemption of their partnership
interests in the form of cash and/or Common Stock in the Company. The election
of the form of the redemptions (cash or stock) is at the sole and absolute
discretion of the Company. The Company has reserved 1,195,233 shares of Common
Stock for issuance upon conversion of the limited partnership interests by
Investor I and Investor II.

(i) Earnings Per Share of Common Stock

Primary earnings (loss) per Common Stock were computed by dividing
earnings (loss) after deduction of Class A Preferred Stock dividends by the
average number of common and dilutive equivalent shares outstanding, which
there are none. Fully diluted per share of Common Stock amounts assume
conversion of Class A Preferred Stock and the elimination of the related Class
A Preferred Stock dividend requirement as well as conversion of Investor I and
Investor II limited partnership interests in certain of the Company's
consolidated subsidiaries into Common Stock and elimination of the related
Minority Interest representing income allocated to Investor I and II. The
conversion of a Common Unit to Common Stock will have no effect on earnings per
share of Common Stock since the allocation of earnings to a Common Unit is
equivalent to earnings allocated to a share of Common Stock.

F-13
<PAGE> 60

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(j) Derivative Financial Instruments

The Company has entered into swap transactions to modify the interest
characteristics with respect to certain of its variable rate tax-exempt bonds
(see Note 2). The agreements involve the exchange of amounts based on a fixed
interest rate for amounts based on variable rates over the life of the
agreement without an exchange for the notional amount upon which the payments
are based. The differential to be paid or received as interest rates change is
accrued and recognized as an adjustment of interest expense related to the
debt. The related amount payable to or receivable from the counter party is
included in other liabilities or accounts receivable. The fair value of any
swap agreement that qualifies as a hedge is not recognized in the financial
statements. The gain or loss on any termination of the interest rate swap
agreement will be deferred and amortized as an adjustment to interest expense
related to the debt over the remaining term of the original contractual life of
the terminated swap agreement. In the event of the early extinguishment of the
related debt, any realized or unrealized gain or loss from the swap would be
recognized in income coincident with the extinguishment. Other swap agreements
are recorded at fair value.

The Company purchased interest rate protection to hedge its exposure
to increases in interest costs for certain other of its variable rate
tax-exempt bonds (see Note 2). The premium paid for the Company's interest
rate protection is included in deferred financing costs and is amortized
ratably over the term of the related interest rate protection agreement.
Payments received as a result of the specified interest rate index exceeding
the strike price are accrued in accounts receivable and are recognized as a
reduction of interest expense (the accrual accounting method). Upon any
termination of the interest rate protection agreement, any gain or loss is
recognized in income coincident with the termination.

The Company is exposed to credit loss in the event of non performance
by counter-parties on the interest rate swap agreements, but the Company does
not expect non-performance by any of these counter parties. The amount of such
exposure is generally limited to the amount of any payments due but not yet
received from the counter party.

(k) Use of Estimates

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

F-14
<PAGE> 61

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(l) Stock Based Compensation

Effective January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation." This Statement defines a fair value
based method of accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method of accounting for
all of their employee stock compensation plans. However, it also allows an
entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Under the fair value based method, compensation cost is measured at the grant
date based on the value of the award and is recognized over the service period,
which is usually the vesting period. Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market price of the
stock at the grant date or other measurement date over the amount an employee
must pay to acquire the stock. The Company has elected to continue to account
for its employee stock compensation plans under APB Opinion No. 25. Unaudited
pro forma disclosures of net earnings and earnings per share, as if the fair
value based method of accounting defined in SFAS No. 123 had been applied, are
presented in Note 6.

F-15
<PAGE> 62

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

2. DEBT (A)

DECEMBER 31,
---------------------------------
1996 1995 MATURITY DATE
-------- -------- -------------
(IN 000'S)
<S> <C> <C> <C>

BONDS PAYABLE
Prime Crest (B)(D).......................... $ 2,400 $ 2,400 12/21
Royal Crest (B)(D).......................... 3,400 3,400 12/21
Aspen Hills (B)(D).......................... 9,800 9,800 12/21
Eagle's Nest (B)(D)......................... 5,200 5,200 12/21
LaJolla (B)(D).............................. 10,000 10,000 12/21
Cape Cod (B)(D)............................. 8,100 8,100 12/21
Braesview (B)(D)............................ 20,500 20,500 12/21
Mesa Ridge (B)(D)........................... 5,100 5,100 12/21
Harbor Cove (B)(D).......................... 5,900 5,900 12/21
Brookdale Lakes (B)(D)...................... 14,800 14,800 12/26
Bent Oaks (B)(D)............................ 4,400 4,400 12/23
Privado Park (B)(D)......................... 9,200 9,200 12/33
Quail Ridge (B)(D).......................... 6,400 6,400 12/33
Shadow Creek (B)(D)......................... 5,600 5,600 12/33
Vista Ventana (B)(D)........................ 6,400 6,400 12/33
Cypress Ridge (C)(E)........................ 4,250 -- 06/26
The Mills (B)(D)............................ 14,575 -- 12/26
The Stratford (B)(D)........................ 5,945 5,945 12/21
Broadmoor (C)(E)............................ 6,000 -- 06/26
Windridge (B)(D)............................ 6,270 6,270 12/21
Shallow Creek (B)(D)........................ 2,300 -- 12/26
Tierra Bonita (B)(D)........................ 6,000 6,000 12/33
Franklin Oaks (B)(D)........................ 17,700 17,700 12/21
Falls of Bells Ferry (H).................... 28,935 28,935 02/09
Madera Point (C)(E)......................... 7,180 -- 06/26
Arbors (B)(F)............................... 7,280 -- 08/15
Ocean Oaks (B)(F)........................... 10,920 -- 08/15
Village Crossing (F)........................ 9,800 -- 12/07
Haverhill Commons (F)....................... 10,950 -- 12/07
Crossings of Bellevue (G)................... 8,572 -- 05/97
Sun Lake (G)................................ 15,478 -- 10/25
-------- --------
Total Bonds Payable......................... $279,355 $182,050
======== ========

NOTES PAYABLE
Bank One Loan (J) $ 63,950 $ -- 06/99
LaJolla Note (I) -- 930 --
Coral Cove (K) 4,031 -- 04/26
Summit Creek (K) 3,583 -- 04/26
Tatum Gardens (K) 3,483 -- 04/26
Westway Village (K) 4,927 -- 04/26
Nomura Revolving Loan (J) -- 47,001 --
-------- --------
Total Notes Payable $ 79,974 $ 47,931
======== ========
</TABLE>

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

F-16
<PAGE> 63

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(A) Debt is collateralized by substantially all of the assets of the
respective Partnerships.

(B) Permanent financing for these properties has been provided by variable
rate tax-exempt revenue bonds (the "Bonds"). Under the terms of the
bond loan agreements, the respective issuing Partnerships are to make
interest-only payments calculated using a variable rate determined by
the remarketing agents of the Bonds. The rates ranged from 2.5% to
7.0% for the year ended December 31, 1996, 2.7% to 6.0% for the year
ended December 31, 1995 and 1.75% to 5.55% in 1994. Under certain
conditions, the interest rate on the Bonds may be converted to a fixed
rate at the request of the respective Partnership. A bondholder may
tender the Bonds during the variable interest rate period and receive
principal, plus accrued interest through the tender date. Upon
tender, the remarketing agents shall immediately remarket the Bonds.
In the event the remarketing agents fail to remarket any of the Bonds,
the Partnerships are obligated to purchase those Bonds, for which they
may draw on the letters of credit. The remarketing agents receive a
fee between 0.08% and 0.125% per annum of the outstanding Bond
balance, payable quarterly in arrears. Such fees are included as
financing fees in the accompanying consolidated and combined
statements of operations.

Under the terms of the bond loan agreements, the Bond proceeds were
deposited in escrow accounts with trustee third-party banks. The Bond
funds were used for development costs including the acquisition and
rehabilitation of the properties owned by the Partnerships. As of
December 31, 1996, $549,000 remains in escrow for future renovation
programs.

(C) Permanent financing for these properties has been provided by fixed
rate tax-exempt term bonds (the "Term Bonds"). Under the terms of the
bond loan agreements, the respective issuing Partnerships are to make
interest-only payments using a fixed rate ranging from 5.3% to 6.35%
depending upon the maturity date of each series of bonds. The Term
Bonds proceeds were deposited into escrow accounts with trustee
third-party banks. The Term Bonds funds were used for development
costs including the acquisition and rehabilitation of the properties
owned by the Partnerships. As of December 31, 1996, there were no
funds in escrow for future renovation costs associated with the Term
Bonds. The Term Bonds are subject to mandatory redemption dates
beginning on June 1, 2006 with final maturity of the Term Bonds on
June 1, 2026.

(D) On December 18, 1996, the Company replaced its letters of credit on
approximately $186.5 million of existing variable rate tax-exempt
bonds associated with 22 of its properties (including Williamsburg)
with a single facility (the "FNMA Facility") issued by Federal
National Mortgage Association ("FNMA"). FNMA has established three
separate mortgage pools as collateral for providing credit enhancement
on the bonds. The first pool, which consists of 13 properties that
have a carrying value of approximately $140.6 million at December 31,
1996, collateralizes $119.8 million of variable rate tax-exempt bonds.
The second pool collateralizes $50.2 million of variable rate
tax-exempt bonds relating to eight properties owned by Ambassador I,
L.P. (formerly Prime MFP Limited Partnership), whose carrying value
approximated $61.0 million at December 31, 1996. The third pool
collateralizes $16.5 million of variable rate tax- exempt bonds
relating to the Williamsburg property, whose carrying value
approximated $15.0 million at December 31, 1996. The credit
enhancement agreements are collateralized by first mortgages on the
properties.

F-17
<PAGE> 64

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

FNMA is entitled to credit enhancement fees on the FNMA Facility at a
weighted average rate of 1.04% per annum of the base value of the
bonds, less any cash collateral. FNMA also receives a reserve fee of
0.38% per annum on the amount of cash collateral with respect to the
FNMA Facility. The credit enhancement and reserve fees are payable
monthly in advance.

As additional collateral, the Company deposited $15.2 million with
FNMA into an interest bearing escrow account. The Company is also
making monthly principal reserve payments of approximately $243,000 to
FNMA which will be used to redeem bonds. The FNMA credit enhancement
matures on December 1, 2021.

(E) On October 1, 1996, the Company entered into Insurance and Indemnity
Agreements with Financial Security Assurance, Inc. ("FSA") to provide
credit enhancement for these three bond issues. The Company made a
ten year prepayment of the insurance premium in the amount of
$775,937, which is included in other assets and will be expensed over
a ten year period. In addition, an annual insurance premium will be
due in the amount of 0.6% payable monthly in advance on the face
amount of the bonds, commencing June 12, 2006. The Insurance and
Indemnity Agreements have expiration dates consistent with the
redemption dates of the bonds themselves with maturities that begin on
June 1, 2006 with final maturity of the bonds on June 1, 2026. The
Insurance and Indemnity Agreements are collateralized by first
mortgages on the properties, whose carrying value approximated $22.3
million at December 31, 1996.

(F) Permanent financing for these properties has been provided by variable
rate tax-exempt bonds (the "Florida Bonds"). The interest rate on
$20.7 million of the Florida Bonds is reset annually by the
remarketing agent on December 1 of each year. At December 31, 1996
the rate was 8.5% (pay rate of 6.0% and 2.5% deferred rate) and is
paid monthly in arrears. Deferred interest, if any, is paid every
August 1 and February 1. These bonds were issued by Housing Finance
Authority of Palm Beach County and have a maturity date of December 1,
2007. Interest on the remaining $18.2 million Florida Bonds is
currently calculated using a variable rate determined by the
respective remarketing agent of the bonds. The interest rate is
currently reset on a weekly basis. These bonds were also issued by
Housing Finance Authority of Volusia County and have a maturity date
of August 1, 2015. The Company's obligation under the Florida Bonds
is collateralized by first mortgages on the properties, whose carrying
value approximated $38.3 million at December 31, 1996.

Concurrent with the acquisition of the Florida Properties, the
Company, through G.P. Holdings, contributed its interest in the
Florida Bonds to TEB Municipal Trust I, a New York Trust ("TEB") in
which G.P. Holdings is the managing depositor of TEB. TEB, in turn,
sold $27.0 million in Class A certificates of beneficial interests in
TEB. The Class A certificates are credit enhanced by Bank One, Akron
and are priced as AA rated seven day variable rate tax exempt bonds.
The interest rate on the Class A certificates is swapped for seven
years at 4.85% with Goldman Sachs. On October 25, 1996, TEB sold
$10.0 million in Class B certificates to a group of individual
investors. The Class B certificates earn interest at a fixed rate of
12% per annum, paid monthly. G.P. Holdings holds the remaining $2.0
million in Class G certificates which earn interest equal to the
excess of interest earned by TEB

F-18
<PAGE> 65

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

ownership of the Florida Bonds over distributions paid to the Class A
and Class B certificate holders. Under the terms of the LLC
agreement, the Company received 100% of any excess cash flows, as
defined, from G.P. Holdings at December 31, 1996.

(G) Under the terms of the Bellevue Bonds note agreement, the Company
currently makes monthly principal and interest payments based on a
30-year amortization. The Bellevue Bonds bear interest at 9.3% and
were issued by The Industrial Development Board of the Metropolitan
Government of Nashville and Davidson County. The Bellevue Bonds are
guaranteed by FNMA and mature on May 1, 1997. The Company is
currently negotiating with FNMA to include the Bellevue Bonds under
the FNMA Facility. The guaranty is collateralized by a first mortgage
on the property, whose carrying value approximated $15.7 million at
December 31, 1996.

Under the terms of the Sun Lake Bonds note agreement, the Company
currently makes monthly principal and interest payment based on a 30-
year amortization. The Sun Lake Bonds bear interest at 6.45% and were
issued by the Orange County Housing Finance Authority. The Sun Lake
Bonds are also guaranteed by FNMA and mature on October 1, 2025. The
guaranty is collateralized by a first mortgage on the property, whose
carrying value approximated $24.3 million at December 31, 1996.

(H) Under the terms of the Falls Bonds loan agreement, the issuing
Partnership is to make interest-only payments calculated using a one-
year fixed rate determined by the remarketing agents of the Falls
Bonds which is adjusted annually on January 15. The rate was 3.55% at
December 31, 1996 and 5.25% at December 31, 1995. Under certain
conditions the interest rate on the Falls Bonds may be converted to a
long-term fixed rate at the request of the Partnership.

The Falls Bonds are collateralized by an irrevocable letter of credit
issued by Guardian Savings and Loan Association. A letter of credit
fee of 1% per annum of the outstanding amount of the letter of credit
for the period from September 1, 1995 through August 15, 2004, and 2%
per annum of the outstanding amount of the letter of credit from
August 16, 2004 through August 15, 2006, and 2 1/2% per annum from
August 16, 2006 through February 1, 2009. The letter of credit is
collateralized by a mortgage on the property, whose carrying value
approximated $31.3 million at December 31, 1996, and cash placed in
escrow with Guardian Savings and Loan Association of $3.3 million.
The cash collateral will remain in place for as long as the Letter of
Credit is outstanding. The letter of credit expires on February 1,
2009. The total commitment outstanding under the letter of credit at
December 31, 1996 is approximately $29.5 million. The due date of the
Falls Bonds would be accelerated upon the expiration of the letter of
credit unless the letter of credit is extended or replaced.

A bondholder may tender the Falls Bonds during the one year fixed rate
period and receive principal, plus accrued interest through the tender
date. Upon tender, the remarketing agents shall immediately remarket
the Falls Bonds. In the event the remarketing agents fail to remarket
any of the Falls Bonds, the Partnerships are obligated to purchase the
Falls Bonds, for which they may draw on the letters of credit. The
remarketing agents receive a fee of

F-19
<PAGE> 66

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

0.325% per annum payable quarterly in arrears. Such fees are included
as financing fees in the accompanying consolidated statement of
operations.

(I) Pursuant to a rehabilitation loan agreement with the City of San
Antonio, the loan bore no interest as long as certain rehabilitation
restrictions were met and required monthly principal payments of
$10,000 which began on February 1, 1995. On December 18, 1996, the
Company repaid the entire outstanding principal balance on this loan.

(J) Concurrent with the Offering, the Company entered into an agreement
for a revolving credit facility (the "Nomura Revolving Loan") with
Nomura Asset Capital Corporation ("Nomura") for approximately $43.5
million which was subsequently increased to $100.0 million.
Borrowings under this facility bore interest at a floating rate equal
to 1.75% per annum above the 30-day LIBOR rate.

On June 26, 1996, the Company refinanced its Nomura Revolving Loan,
with Bank One Arizona, NA (the "Bank One Loan"). The Bank One Loan
bears interest at a variable rate between LIBOR plus 1.70% and 1.95%
(as defined in the Bank One Loan Credit Agreement) and has a maximum
commitment of $75.0 million based upon the amount of collateral
pledged by the Company. As of December 31, 1996, the amount available
under the Bank One Loan is approximately $64.0 million. As of
December 31, 1996, ten properties, whose carrying value approximated
$85.8 million, are pledged as collateral under the Bank One Loan and
$64.0 million was outstanding. The Bank One Loan matures on June 26,
1999. However, the Company may request one year extensions pursuant
to the terms of the agreement.

The Company was not in compliance with certain covenants relating to
its Bank One Loan as of December 31, 1996. However, the Company has
obtained a waiver covering the period through June 30, 1997 and is
currently negotiating with Bank One to modify the loan agreement. The
ultimate outcome of their negotiations cannot be determined at this
time. Accordingly, 1997 maturities in the five year debt schedule
below incudes the outstanding principal amount of the Bank One Loan.

(K) Ambassador VII, L.P. (formerly Prime MFP VII Limited Partnership) was
formed to own four properties (Coral Cove, Westway Village, Summit
Creek and Tatum Gardens). In connection with the formation of
Jupiter-II, L.P., Nomura provided a $16.1 million loan collateralized
by the four properties, whose carrying value approximated $23.7
million at December 31, 1996. Under the terms of the loan agreements,
payments of principal and interest at a rate equal to 7.88% based on a
30- year amortization are due monthly in advance. The loan matures on
April 11, 2026.

Interest Rate Protection Facilities

On August 31, 1994, the Company acquired an interest rate cap for
approximately $5.6 million to protect itself from interest rate fluctuations.
On March 14, 1996, the Company sold its interest rate protection contract for
approximately $1.5 million. As a result of this sale, the Company recognized
$2.1 million loss, net of minority interest.

F-20
<PAGE> 67

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

On May 26, 1995, the Company entered into a swap transaction with
Nomura Capital Services, Inc. ("NCSI") pursuant to which the Company paid a
fixed rate on approximately $130.0 million of its variable rate tax-exempt
bonds. Under the terms of the swap agreement, the Company paid, quarterly in
advance, a fixed rate of 6.498% on a notional amount of $94.0 million to NCSI,
which results in an effective interest rate of 4.7% on $130.0 million of the
Company's variable rate tax-exempt bonds, and NCSI paid a variable amount based
on 72.5% of 30 day LIBOR rate on $94.0 million notional amount. Management
believes that there is a reasonable correlation between changes in the LIBOR
rate (on which the fixed rate was based) and the Kenny Index (the tax-exempt
bond index.) The swap agreement had a maturity date of May 26, 2005. However,
this swap agreement was canceled on December 9, 1996 as described below.

On February 27, 1996, the Company entered into a swap transaction with
NCSI (subsequently assigned to Salomon Brothers) pursuant to which the Company
pays a variable rate (71% of 30-day LIBOR) on a notional amount of $130.0
million of variable rate tax-exempt bonds to Salomon Brothers. The Company
receives a floating rate based on the Kenny Index. This swap agreement matures
on February 26, 1999.

On March 14, 1996, the Company entered into an additional interest
rate swap transaction with NCSI pursuant to which the Company paid a fixed rate
of 6.55% on a notional amount of approximately $17.0 million to NCSI, which
resulted in an effective interest rate of approximately 4.72% on $23.6 million
of variable rate tax-exempt bonds. This swap agreement had a maturity date of
March 17, 2003. However, this swap agreement was also canceled on December 9,
1996 as described below.

On October 3, 1996, the Company entered into an interest rate swap
transaction with Goldman Sachs Capital Markets, L.P. ("Goldman") pursuant to
which the Company pays a fixed rate of $26.5 million of its variable rate
tax-exempt bonds. Under this swap agreement, the Company pays, quarterly in
advance, a fixed rate of 6.84% to Goldman and receives a floating rate based on
a 30-day LIBOR.

On December 9, 1996, the Company canceled its swap agreements with
respect to its $94.0 million and $17.0 million swap transaction entered into
with NCSI and entered into a new swap transaction with Credit Lyonnais New York
Branch ("CLNY"). Pursuant to this swap agreement, the Company pays a fixed
rate on $186.5 million (including Williamsburg Limited Partnership) of its
variable rate tax-exempt bonds. Under the terms of the agreement, the Company
pays a fixed rate of 4.636% on a notional amount of $186.5 million to CLNY and
receives a floating rate based on the PSA Municipal Swap Index. The swap
agreement matures on December 9, 2003.

The loss on cancellation of the swap agreements of approximately $1.4
million will be amortized over the original life of the swap and recognized as
an adjustment to interest expense on the underlying bonds.

F-21
<PAGE> 68

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

Other
Interest costs were as follows:
<TABLE>
<CAPTION>
(IN 000'S)
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
$ 14,145 $ 8,903 $ 6,860
Total interest incurred . . . . . . . . .
Interest paid . . . . . . . . . . . . . . 13,232 8,995 7,098
</TABLE>

Scheduled principal payments of bonds and notes payable and sinking
fund deposits as of December 31, 1996 are as follows:

<TABLE>
<CAPTION>
(IN 000'S)
-----------
<S> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,893
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,373
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,387
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,407
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,427
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269,842
---------
$ 359,329
=========
</TABLE>

3. TRANSACTIONS WITH RELATED PARTIES

Prior to the Offering, PGI and/or certain subsidiaries of Kemper
Corporation ("Kemper Companies") were entitled to payments and fees for various
services performed for the Predecessor.

<TABLE>
<CAPTION>
(IN 000'S)
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
-- -- $937(A)
Property management fees . . . . . . . . . .

Asset management fees . . . . . . . . . . . . -- -- 172(A)

- ----------------------------
</TABLE>

(A) Incurred and paid prior to the Offering.

There were no amounts due to PGI and/or Kemper Companies at December
31, 1996 or 1995.

4. UTILITY DEPOSITS

Certain Partnerships are required to place escrow deposits with local
utility companies. The deposits are typically for a two year period and accrue
interest at an average rate of approximately 4% per annum. Total utility
deposits, including accrued interest, at December 31, 1996 and December 31,
1995 are approximately $1.0 million and $746,600, respectively. Such deposits
are included in accounts receivable.

5. NOTE RECEIVABLE--OFFICER

Concurrently with the Offering, the Operating Partnership made a
limited recourse loan to a senior executive of the Company in the amount of
$1.0 million which he used to pay income taxes due in connection with the
transfer by PGI to him of 156,250 Common Units. The loan is

F-22
<PAGE> 69

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

collateralized by a subordinate pledge of these Common Units. The loan bears
interest at 8% per annum and matures on March 1, 1998.

6. STOCK OPTION PLAN

In 1994, the Company established a stock option plan for the purpose
of attracting and retaining directors, executive officers and other significant
employees (the "1994 Option Plan"). The Company authorized the issuance of
options to purchase 425,000 shares of Common Stock. In 1996, however, the
Company's board of directors amended the 1994 Option Plan to increase the
number of options to purchase Common Stock from 425,000 to 469,000.

Options to purchase an aggregate of 322,000 shares of Common Stock
were granted at a purchase price of $16 per share to Michael W. Reschke and
three executive officers. Options to purchase an aggregate of 30,000 shares of
Common Stock were also granted to four outside directors at a purchase price of
$16 per share. These options vest at a rate 33 1/3% per year over the next
three years. These initial options have a grant date of August 31, 1994 and a
term of ten years.

In 1995, options to purchase 19,000 shares of Common Stock were
granted under the 1994 Option Plan at a purchase price of between $15.53 per
share and $16 per share to certain key employees. These options vested in
certain cases immediately upon the grant date or up to two years, and they have
terms of five to ten years.

In 1996, options to purchase 90,000 shares of Common Stock were
granted to four executive officers of the Company, pursuant to the 1994 Option
Plan, at a purchase price of between $17.50 and $18.65 per share. Certain of
these options vest ratably over the next 48 months and have a term of ten
years. The remaining options vest over six months and a ten year term. The
Company also granted options to purchase 18,000 shares of Common Stock to
certain key employees at a purchase price of $16.95 per share. These options
vested immediately upon the grant date of the options and have a five year
term.

The board of directors of the Company established a new stock option
plan in 1996 (the "1996 Option Plan") to attract and retain directors,
executive officers and other significant employees. The 1996 plan is subject
to stockholder approval at the Company's May 15, 1997 annual meeting. Under the
1996 Option Plan, the Company authorized the issuance of an additional 200,000
shares of Common Stock (subsequently increased to 250,000 in March 1997) .
During 1996 options to purchase an aggregate of 85,000 shares of Common Stock
at a purchase price of $22 per share were granted to three executive officers
of the Company. The options vest ratably over the next 48 months and have a
term of ten years. Additionally, under the 1996 Option Plan, options to
purchase an aggregate of 37,500 shares of Common Stock were granted to four
outside directors of the Company and Michael W. Reschke. These options vested
immediately upon the grant date and have a ten year term.

At December 31, 1996, none of the options granted has been exercised
under either the 1994 or 1996 Option Plan. Options for 67,500 and 51,000
shares of Common Stock are available for grant at December 31, 1996 and 1995,
respectively.

F-23
<PAGE> 70

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

Information on stock options is shown in the following table:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING EXERCISABLE OPTIONS
--------------------------------- --------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
JANUARY 1, 1994 -- --
Options granted 352,000 $16.00
Options canceled (10,000) 16.00
--------------------------------
DECEMBER 31, 1994 342,000 16.00 -- --
Options granted 19,000 15.64
--------------------------------
DECEMBER 31, 1995 361,000 15.98 160,999 $15.95
Options granted 230,500 20.26
--------------------------------
DECEMBER 31, 1996 591,500 $17.63 391,750 $16.90
================================
</TABLE>

Exercise prices for options outstanding as of December 31, 1996 ranged
from $15.25 to $22.00. The weighted-average remaining contractual life of
those options is 8.2 years.

The Company measures compensation cost using the intrinsic value-based
method of accounting. Had compensation cost been determined using the fair
market value-based accounting method for options granted in 1996 and 1995,
unaudited pro forma information would be as follows (in thousands except for
earnings per share information):

<TABLE>
<CAPTION>
1996 1995
-------------- ---------------
<S> <C> <C>
$ (5,068) $ 9,862
Unaudited pro forma net (loss) income
Unaudited pro forma earnings per common
share (0.57) 1.10
Unaudited pro forma fully diluted earnings
per share (0.40) N/A
</TABLE>

The weighted average fair value of an option granted in 1996 and 1995
was $6.16 and $5.16, respectively. For purposes of fair market value
disclosures, the fair market value of an option grant was estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions:

<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Risk-free interest rate 5.7% 6.8%
Dividend yields *0.0% *0.0%
Volatility 19.0% 19.0%
Expected life of option (years) 4.6 5.0
</TABLE>

* Assumes that stock price reflects dividend rate.

7. SAVINGS PLAN

Effective January 1, 1996, the Company established for the employees
of the Company a retirement plan with a salary deferral retirement feature,
which qualifies under section 401 of the Code (the "401(k) Plan"). The 401(k)
Plan permits the employees of the Company to defer a portion

F-24
<PAGE> 71

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

of their compensation in accordance with the provisions of section 401(k) of
the Code. The 401(k) Plan allows participants to defer up to 15% of their
eligible compensation on a pre-tax basis subject to certain maximum amounts.
In addition, a profit sharing feature of the 401(k) Plan provides for a
contribution by the Company to be made annually (beginning in February 1997 and
in each February thereafter) on behalf of each participant in an amount, if
any, as determined by the Company based upon a to-be-determined percentage of
increases in profitability from year to year. In February 1997, the Company
contributed a total of $33,000 on behalf of the participants. This amount is
accrued at December 31, 1996, and is included in accounts payable and other
liabilities. Amounts contributed by the Company on behalf of the participant
will vest over a period of five years (20% per year). Amounts contributed by
the Company and amounts contributed by the participants will be held in trust
until distributed to the participant pursuant to the provisions of the 401(k)
Plan.

8. GAIN ON SALE OF RENTAL PROPERTY

On December 15, 1995, the Company sold the Laurelwood property for
$7.7 million, net of closing costs. Laurelwood had a net cost basis of $6.6
million, net of accumulated depreciation of approximately $464,000. The
Company also wrote-off approximately $20,000 of unamortized deferred financing
fees. As a result of the transaction described above, the Company realized a
gain of approximately $966,000, net of minority interest of approximately
$104,000.

9. PREFERRED STOCK

The Company is authorized to issue up to 20 million shares of
preferred stock. On August 15, 1996, the Company issued 1,351,351 shares of
Class A Senior Cumulative Convertible Preferred Stock ("Class A Preferred
Stock"), par value $.01, for $18.50 per share or an aggregate amount of $25
million. Net of underwriting discounts and expenses, the Company received
approximately $24.1 million in net proceeds from the issuance. The Company
contributed the proceeds to the Operating Partnership in exchange for 1,351,351
preferred units of partnership interest ("Class A Preferred Units") of the
Operating Partnership. The Operating Partnership, in turn, used such proceeds
primarily for property acquisitions.

The dividend on the Class A Preferred Stock issued and outstanding is
paid quarterly at an annual rate of (i) $1.68 per share of Class A Preferred
Stock, on or prior to August 14, 1997, (ii) for the period August 15, 1997
through August 14, 1998, $1.73 per share of Class A Preferred Stock, (iii) for
the period August 15, 1998 through August 14, 1999, $1.78 per share of Class A
Preferred Stock, (iv) for the period August 15, 1999 through August 14, 2001,
$1.84 per share of Class A Preferred Stock, (v) for the period August 15, 2001
through August 14, 2002, $1.89 per share of Class A Preferred Stock, and (vi)
on or after August 15, 2002, the greater of (x) $1.68 per Class A Preferred
Stock, per annum or (y) the product of 1.05 of the dividend paid to Common
Stock.

The Class A Preferred Stock is convertible into common stock at the
sole and absolute discretion of the holder. If converted on or prior to August
14, 1997, the number of shares of Class A Preferred Stock convertible into
shares of Common Stock is determined by dividing the number of shares of Class
A Preferred Stock by 1.08. If the conversion occurs after August 15, 1997, the

F-25
<PAGE> 72

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

number of shares of Class A Preferred Stock convertible into shares of Common
Stock is determined by dividing the number of shares of Class A Preferred Stock
by 1.0.

The Company has the right to redeem the Class A Preferred Stock on or
after August 15, 2001. Prior to August 14, 2002, the Company has the right to
redeem this Class A Preferred Stock at a premium of 1.06% of the per share
purchase price of $18.50. The premium paid for the Class A Preferred Stock
decreases over an eight year period to zero by August 15, 2010. In the event
of a change of ownership of the Company, the Company may be required by the
holder of Class A Preferred Stock to purchase all of the shares of Class A
Preferred Stock at a price equal to the lesser of (i) $19.98 or (ii) the price
at which the Company has the right to redeem shares of Class A Preferred Stock
from the holders as described above.

Except as limited by law, the holders of the Class A Preferred Stock
are entitled to vote or consent on all matters submitted to the holders or
Common Stock together with the common stock as a single class. Each share of
Preferred Stock will entitle the holder to one vote for each share of common
stock into which such Preferred Stock is convertible as of the record date for
such vote or consent.

10. DIVIDENDS AND DISTRIBUTIONS TO STOCKHOLDERS AND MINORITY INTEREST

The total dividends declared to holders of Common Stock in 1996 and
1995 were approximately $14.3 million and $10.8 million, respectively,
representing $1.60 and $1.20, respectively, per share. Dividends paid to
holders of Common Stock in both 1996 and 1995 were $14.3 million. Of the
dividends paid to stockholders in 1996, approximately $0.94 per share of Common
Stock is considered to be a return of capital and $0.66 per share of Common
Stock is considered to be capital gain.

The total dividends authorized for payment to holders of Class A
Preferred Stock in 1996 were approximately $851,000, representing $0.63 per
share. Dividends paid to holders of Class A Preferred Stock in 1996 were
approximately $284,000.

Total distributions to the Minority Interest include distributions to
the Common Units held by the Limited Partners as well as distributions made to
Investor I and Investor II. Amounts declared in 1996 and 1995 for the Common
Units held by the Limited Partners represent $1.60 and $1.20, respectively, per
Common Unit. The following table summarizes the distributions declared and
paid to the Minority Interest during 1996 and 1995:

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995
--------------------- ---------------------
DECLARED PAID DECLARED PAID
-------- ---- -------- ----
<S> <C> <C> <C> <C>
Limited Partners $1,542 $1,542 $1,157 $1,543
Investor I 1,274 1,129 -- --
Investor II 346 308 -- --
</TABLE>

11. FAIR VALUES OF FINANCIAL INSTRUMENTS

F-26
<PAGE> 73

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

The following methods and assumptions were used by management in
estimating fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amount reported in
the balance sheet for cash and cash equivalents approximates fair
value.
ESCROW DEPOSITS: The carrying amount reported in the balance
sheet for escrow deposits approximates fair value.
ESCROWED BOND FUNDS-RESTRICTED: The carrying amount reported
in the balance sheet for escrowed bond funds-restricted approximates
fair value.
NOTE RECEIVABLE-OFFICER: The carrying amount reported in the
balance sheet for the note receivable officer approximates fair value.
INTEREST RATE CAP: The fair value of the interest rate cap
agreement is estimated based on the Company's current replacement
costs for similar interest rate protection contracts.
INTEREST SWAP: The fair value of the interest rate swap is
estimated based on current settlement values.
BONDS PAYABLE: The carrying amounts of the Company's
tax-exempt variable rate bonds approximate their fair value. Fair
value of fixed rate tax-exempt bonds are estimated using discounted
cash flow analyses, based on quoted market prices for similar
borrowings.
NOTES PAYABLE: The carrying amounts of the Company's notes
payable approximate their fair values based on the Company's current
borrowing rates for similar types of borrowing arrangements. The
carrying amount of accrued interest approximates its fair value.

The carrying amounts and fair values of the Company's financial
instruments at December 31, 1996 and 1995 are as follows:

(IN 000'S) (IN 000'S)
1996 1995
----------------------------- -----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents $ 4,002 $ 4,002 $ 5,270 $ 5,270
Escrow deposits 30,897 30,897 12,945 12,945

Escrowed bond funds - restricted 549 549 2,779 2,779
Note receivable - officer 1,000 1,000 1,000 1,000
Interest rate cap -- -- 4,440 1,500

LIABILITIES:
Bonds payable 279,355 279,355 182,050 182,050
Notes payable 79,974 79,974 47,931 47,931
Interest rate swap 798 1,459 -- 4,064
</TABLE>

12. EXTRAORDINARY ITEM

During 1996, unamortized deferred financing costs were written off
upon reissuance of certain bonds in connection with replacement of credit
enhancement. As a result, the Company recognized an extraordinary loss of
approximately $4.3 million, which is net of minority interest of

F-27
<PAGE> 74

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

$1.5 million. The Company also wrote off unamortized deferred financing costs
upon the early repayment of bridge financing; the Company recognized an
extraordinary loss of approximately $209,000, which is net of minority interest
of $22,000. In addition, the Company's share of income/loss from investments
in unconsolidated real estate limited partnerships includes an extraordinary
loss of $159,000, which is net of minority interest of $17,000.

As a result of the Company's acquisition of its fixed rate bonds (see
Note 2) and subsequent discounts to the original purchase price paid to
purchase such bonds, the Company recognized an extraordinary gain of
approximately $2.3 million in 1995, net of minority interest of $253,000 and
the $562,000 write-off of deferred financing costs and other loan fees
associated with the bridge financing used to acquire the fixed rate bonds. In
addition, the Company's share of income/loss from investments in unconsolidated
real estate limited partnerships includes extraordinary income of $2.0 million,
net of minority interest of $218,000.

During 1994, unamortized deferred financing costs were written off
upon the repayment of certain mortgage indebtedness. As a result, the Company
recognized an extraordinary item of approximately $772,000, net of minority
interest of $83,000.

13. ACQUISITIONS

During the year ended December 31, 1996, the Company acquired the
properties listed below. Each property was purchased from an unaffiliated
third party. The acquisitions have been accounted for using the purchase
method of accounting and, accordingly, the acquired assets are included in the
statement of operations from their respective dates of acquisition.
Acquisition cost includes the purchase price of the property and related
closing costs.

<TABLE>
<CAPTION>
(IN 000's)
PURCHASE DATE PROPERTY LOCATION UNITS ACQUISITION COST
- --------------- ------------------------- ----------------------- ----- ------------------
<S> <C> <C> <C> <C>
02/09/96 Madera Point (1) Mesa, AZ 256 $11,021
04/18/96 LaJolla de Tucson Tucson, AZ 223 4,883
05/23/96 Stonybrook (2) Tucson, AZ 411 8,938
08/20/96 The Arbors (3) DeLand, FL 224 7,721
08/20/96 Ocean Oaks (3) Port Orange, FL 296 11,471
08/20/96 Village Crossing (3) W. Palm Beach, FL 222 9,253
08/20/96 Haverhill Commons (3) W. Palm Beach, FL 189 10,114
09/30/96 Pine Shadows Tempe, AZ 272 9,451
09/30/96 Heather Ridge Phoenix, AZ 252 7,302
10/01/96 Crossings of Bellevue (4) Nashville, TN 300 15,789
10/28/96 Hidden Lake Tampa, FL 267 5,856
10/28/96 The Woodlands Tampa, FL 416 9,117
11/21/96 Sun Lake (5) Lake Mary, FL 600 24,318
</TABLE>

(1) The Company financed a portion of the acquisition of Madera Point by
assuming $8.1 million of tax exempt bonds. Concurrently with the acquisition,
the Company also purchased the bonds, a portion of which were subsequently sold
(see Note 2).
(2) The Company financed a portion of the acquisition of Stonybrook by
assuming $4.1 million of tax exempt bonds. Concurrently with the acquisition,
the Company also purchased and continues to hold the bonds.

F-28
<PAGE> 75

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(3) The Company financed a portion of the acquisition of The Arbors, Ocean
Oaks, Village Crossing, and Haverhill Commons (collectively, the "Florida
Properties") by assuming $39.0 million of tax exempt bonds. Concurrently with
the acquisition, the Company also purchased the $39.0 million in tax-exempt
bonds for $37.5 million, of which $37.0 was subsequently sold (See note 2).
(4) The Company financed a portion of the acquisition of the Crossings of
Bellevue by assuming $8.6 million of variable-rate, tax exempt bonds.
(5) The Company financed a portion of the acquisition of Sun Lake by
assuming $15.5 million of variable-rate, tax exempt bonds.

F-29
<PAGE> 76

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

14. LEGAL PROCEEDINGS

The Company is involved in a variety of legal proceedings arising in
the ordinary course of business. It is management's belief that,
collectively, all such proceedings are not expected to have a material impact
on the Company's financial position.

15. SUBSEQUENT EVENTS

On January 23, 1997, the Board of Directors declared a quarterly
dividend of $0.40 per share to the stockholders of the Company for the quarter
ended December 31, 1996. The dividends were paid on February 18, 1997 to
holders of record as of February 10, 1997.

On January 23, 1997, the Board of Directors also authorized
distribution of $385,593, or $0.40 per unit holder, to limited partners of the
Operating Partnership for the quarter ended December 31, 1996. The
distributions were paid on February 18, 1997.

On February 5, 1997, a former executive officer of the Company
exercised his option to purchase 115,000 shares of Common Stock at grant prices
between $16.00 and $18.65 per share.

On March 5, 1997, Nomura Asset Capital Corporation funded $21.5
million of 10 year, fixed rate financing, secured by Country Club West and
Courtney Park. The loan bears interest at 8.08% and is based on a 30 year
amortization. Net proceeds from the closing were used to repay outstanding
principal on the Bank One Loan.

On March 6, 1997, variable rate, tax-exempt bonds of $6.0 million were
issued for Crossroads. The bonds, which are collateralized by Crossroads, will
mature on December 15, 2036. Escrowed bond funds - restricted of $204,000 have
been set aside to reimburse Crossroads for future renovation costs. The
Company used net proceeds of $5.7 million to repay outstanding principal on the
Revolving Loan.

In order to hedge against fluctuations in interest rates on
the bonds encumbering the Crossroads property, effective March 3, 1997, the
Company entered into a swap transaction with Credit Lyonnais New York Branch
("CLNY"). Pursuant to the swap transaction, the Company will pay a fixed rate
on $6.0 million of its variable rate, tax-exempt bonds. Under the terms of the
swap agreement, the Company will pay, monthly in advance, a fixed rate of
4.850% to CLNY and receive a floating rate based on PSA Municipal Swap Index.
The swap agreement matures on March 3, 2004.

On March 6, 1997, the Company issued 17,280 and 84,375 shares of
Common Stock to a former executive officer of the Company and LG Trust, a trust
in which the executive officer is the trustee, in exchange for an equal number
of Common Units pursuant to the terms of the Exchange Rights Agreement.

On March 13, 1997, the Company acquired Palencia for $14.9 million. Palencia
is a 420 unit apartment complex located in Tampa, Florida. The Company
financed a portion of this acquisition by assuming $13.3 million of fixed rate,
tax exempt bonds, which are collateralized by Palencia.

F-30
<PAGE> 77

AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND PRIME PROPERTIES
(THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

16. PRO FORMA FINANCIAL INFORMATION - UNAUDITED

The following unaudited table of pro forma information has been
prepared as if the acquisition of 13 properties in 1996, the acquisition of
seven properties in 1995, and the formation of G.P. Holdings had occurred as
of the beginning of each year presented. In management's opinion, the pro
forma is not indicative of consolidated results of operations that may have
occurred had the above transactions taken place on January 1 of each year.

<TABLE>
<CAPTION>
(IN 000'S EXCEPT PER SHARE AMOUNTS)
PRO FORMA FOR THE YEAR ENDED
---------------------------------------------
(UNAUDITED)
1996 1995
------------------- -------------------
<S> <C> <C>

Total revenue $ 88,157 $ 83,215
Property operating expenses 38,742 35,960
Depreciation and amortization 18,230 17,020
Interest 23,674 21,113
Income from investment in unconsolidated real estate
limited partnerships (771) (647)
------------------- -------------------
Total expense 79,875 73,446
------------------- -------------------
Income before minority interest, gain on sale of rental
property, loss on sale of interest rate cap, and
extraordinary $ 8,282 $ 9,769
=================== ===================
Income per share of Common Stock $ 0.74 $ 0.98
=================== ===================
</TABLE>

The pro forma financial information includes the following
adjustments: (i) an increase to rental revenues; (ii) an increase in general
and administrative expense; (iii) an increase in interest expenses; (iv) an
increase in amortization; (v) an increase in depreciation.

Net income has not been reduced for Minority Interests, and net income
per share assumes that all limited partnership interests in the Operating
Partnership have been converted to shares of Common Stock; therefore, the total
Common Stock outstanding at January 1, 1995 was 9,922,508 and January 1, 1996
would have been 11,117,741.

Total Common Stock Outstanding at December 31, 1996 includes the minimum of
1,195,233 shares reserved for issuance upon conversion of Investors I and II
limited partnership interests in Jupiter- I, L.P. and Jupiter-II, L.P., under
certain circumstances.

F-31
<PAGE> 78

AMBASSADOR APARTMENTS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
COST CAPITALIZED SUBSEQUENT TO
ACQUISITION
INITIAL COST TO COMPANY ---------------------------------------
------------------------------------- BUILDINGS &
BUILDINGS, IMPROVEMENTS
ENCUM- FURNITURE & FURNITURE &
DESCRIPTION BRANCES LAND EQUIPMENT LAND EQUIPMENT TOTAL
----------- ------- ---- --------- ---- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Management Business $ -- $ -- $ -- $ -- $ 1,473 $ 1,473

Properties:

Prime Crest (Austin, TX) 2,400 670 857 314 2,477 2,791

Royal Crest (Austin, TX) 3,400 805 1,183 392 3,215 3,607

Aspen Hills (Austin, TX) 9,800 2,051 4,891 -- 3,830 3,830

Eagle's Nest (San Antonio, TX) 5,200 975 1,791 181 4,048 4,229

LaJolla (San Antonio, TX) 10,000 1,944 1,434 484 10,459 10,943

Cape Cod (San Antonio, TX) 8,100 1,360 5,617 259 2,587 2,846

Braesview (San Antonio, TX) 20,500 2,599 14,916 380 5,203 5,583

Mesa Ridge (San Antonio, TX) 5,100 630 3,654 189 2,301 2,490

Harbor Cove (San Antonio, TX) 5,900 1,174 3,575 -- 1,289 1,289

Brookdale Lakes (Naperville, IL) 14,800 1,295 -- 234 17,993 18,227

Bent Oaks (Austin, TX) 4,400 1,078 3,823 16 889 905

Coral Cove (Clearwater, FL) 4,031 1,289 4,570 22 504 526

Mountain View -- 644 8,552 28 774 802
(Colorado Springs, CO)

Privado Park (Mesa, AZ) 9,200 600 6,898 39 1,890 1,929

Quail Ridge (Tucson, AZ) 6,400 1,202 4,023 28 1,146 1,174

Shadow Creek (Phoenix, AZ) 5,600 1,559 5,526 29 1,074 1,103

Summit Creek (Austin, TX) 3,583 1,067 4,013 18 485 503

Tatum Gardens (Phoenix, AZ) 3,483 916 4,171 14 264 278

Vista Ventana (Phoenix, AZ) 6,400 1,146 4,581 32 981 1,013

Cypress Ridge (Houston, TX) 4,250 1,306 2,649 -- 1,090 1,090

The Mills (Houston, TX) 14,575 5,773 10,187 -- 2,886 2,886

</TABLE>

<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
CARRIED AT CLOSE OF PERIOD
--------------------------------
BUILDINGS & DATE
IMPROVEMENTS CONSTRUCTED
FURNITURE & ACCUMULATED (C)
DESCRIPTON LAND EQUIPMENT TOTAL DEPRECIATION ACQUIRED(A)
---------- ---- ------------ ----- ------------ -----------

<S> <C>
Management Business $ -- $ 1,473 $ 1,473 $ 550

Properties:

Prime Crest (Austin, TX) 984 3,334 4,318 533 Mar. 1990 (A)

Royal Crest (Austin, TX) 1,197 4,398 5,595 727 Mar. 1990 (A)

Aspen Hills (Austin, TX) 2,051 8,721 10,772 1,437 June 1991 (A)

Eagle's Nest (San Antonio, TX) 1,156 5,839 6,995 1,113 Jan. 1990 (A)

LaJolla (San Antonio, TX) 2,428 11,893 14,321 1,680 June 1990 (A)

Cape Cod (San Antonio, TX) 1,619 8,204 9,823 1,303 June 1990 (A)

Braesview (San Antonio, TX) 2,979 20,119 23,098 3,027 Nov. 1990 (A)

Mesa Ridge (San Antonio, TX) 819 5,955 6,774 987 Nov. 1990 (A)

Harbor Cove (San Antonio, TX) 1,174 4,864 6,038 838 June 1991 (A)

Brookdale Lakes (Naperville, IL) 1,529 17,993 19,522 3,306 Dec. 1990 (C)

Bent Oaks (Austin, TX) 1,094 4,712 5,806 551 Oct. 1993 (A)

Coral Cove (Clearwater, FL) 1,311 5,074 6,385 577 Oct. 1993 (A)

Mountain View 672 9,326 9,998 1,075 Oct. 1993 (A)
(Colorado Springs, CO)

Privado Park (Mesa, AZ) 639 8,788 9,427 962 Oct. 1993 (A)

Quail Ridge (Tucson, AZ) 1,230 5,169 6,399 632 Oct. 1993 (A)

Shadow Creek (Phoenix, AZ) 1,588 6,600 8,188 746 Oct. 1993 (A)

Summit Creek (Austin, TX) 1,085 4,498 5,583 506 Oct. 1993 (A)

Tatum Gardens (Phoenix, AZ) 930 4,435 5,365 523 Oct. 1993 (A)

Vista Ventana (Phoenix, AZ) 1,178 5,562 6,740 628 Oct. 1993 (A)

Cypress Ridge (Houston, TX) 1,306 3,739 5,045 291 Aug. 1994 (A)

The Mills (Houston, TX) 5,773 13,073 18,846 1,081 Aug. 1994 (A)

</TABLE>

S-1
<PAGE> 79

AMBASSADOR APARTMENTS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
INITIAL COST TO COST CAPITALIZED SUBSEQUENT TO
COMPANY ACQUISITION
----------------------- ---------------------------------
BUILDINGS &
BUILDINGS, IMPROVEMENTS
ENCUM- FURNITURE & FURNITURE &
DESCRIPTION BRANCES LAND EQUIPMENT LAND EQUIPMENT TOTAL
----------- ------- ---- ----------- ---- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Sandalwood (Houston, TX) $ 4,275 $1,647 $ 3,625 $ - $1,687 $1,687

Trails of Ashford (Houston, TX) 8,062 2,056 6,949 - 1,423 1,423

Westway Village (Houston, TX) 4,927 2,961 4,506 1,033 1,033

Stratford (San Antonio, TX) 5,945 1,583 8,722 - 1,390 1,390

The Broadmoor (Austin, TX) 6,000 1,158 4,626 - 1,027 1,027

Windridge (San Antonio, TX) 6,270 1,122 7,278 - 672 672

Shallow Creek (San Antonio, TX) 2,300 1,083 5,017 - 740 740

Tierra Bonita (Tucson, AZ) 6,000 1,550 6,250 - 1,371 1,371

Country Club West (Greely, CO) 10,062 646 12,254 - 694 694

Courtney Park (Fort Collins, CO) 9,450 1,556 10,344 - 593 593

Crossroads (Phoenix, AZ) 5,663 432 7,004 - 633 633

Franklin Oaks (Franklin, TN) 17,700 2,932 21,570 - 730 730

Falls of Bells Ferry (Atlanta, GA) 28,935 6,250 25,751 - 646 646

Madera Point (Mesa, AZ) 7,180 453 10,568 - 570 570

LaJolla de Tucson (Tucson, AZ) 3,450 954 3,929 - 849 849

Stonybrook (Tucson, AZ) - 1,732 7,206 - 281 281

The Arbors (Deland, FL) 7,280 1,528 6,193 - 25 25

Ocean Oaks (Port Orange, FL) 10,920 2,272 9,199 - 50 50

Village Crossing 9,800 2,015 7,238 - 38 38
(West Palm Beach, FL)

Haverhill Commons 10,950 2,251 7,863 - 85 85
(West Palm Beach, FL)

Heather Ridge (Phoenix, AZ) 5,175 1,460 5,842 - 22 22

Pine Shadows (Tempe, AZ) 6,638 1,890 7,561 - 13 13

<CAPTION>
GROSS AMOUNT AT WHICH CARRIED
AT CLOSE OF PERIOD
--------------------------------------
BUILDINGS & DATE
IMPROVEMENTS CONSTRUCTED
FURNITURE & ACCUMULATED (C)
DESCRIPTION LAND EQUIPMENT TOTAL DEPRECIATION ACQUIRED(A)
----------- ------- ------------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C>

Sandalwood (Houston, TX) $1,647 $ 5,312 $ 6,959 $ 379 Aug. 1994(A)

Trails of Ashford (Houston, TX) 2,056 8,372 10,428 660 Aug. 1994(A)

Westway Village (Houston, TX) 2,961 5,539 8,500 510 Aug. 1994(A)

Stratford (San Antonio, TX) 1,583 10,112 11,695 816 Sept. 1994(A)

The Broadmoor (Austin, TX) 1,158 5,653 6,811 446 Sept. 1994(A)

Windridge (San Antonio, TX) 1,122 7,950 9,072 637 Oct. 1994(A)

Shallow Creek (San Antonio, TX) 1,083 5,757 6,840 441 Jan. 1995(A)

Tierra Bonita (Tucson, AZ) 1,550 7,621 9,171 531 Feb. 1995(A)

Country Club West (Greely, CO) 646 12,948 13,594 798 April 1995(A)

Courtney Park (Fort Collins, CO) 1,556 10,937 12,493 676 April 1995(A)

Crossroads (Phoenix, AZ) 432 7,637 8,069 429 May 1995(A)

Franklin Oaks (Franklin, TN) 2,932 22,300 25,232 1,097 Aug. 1995(A)

Falls of Bells Ferry (Atlanta, GA) 6,250 26,397 32,647 1,305 Aug. 1995(A)

Madera Point (Mesa, AZ) 453 11,138 11,591 367 Feb. 1996(A)

LaJolla de Tucson (Tucson, AZ) 954 4,778 5,732 130 April 1996(A)

Stonybrook (Tucson, AZ) 1,732 7,487 9,219 192 May 1996(A)

The Arbors (Deland, FL) 1,528 6,218 7,746 95 Aug. 1996(A)

Ocean Oaks (Port Orange, FL) 2,272 9,249 11,521 143 Aug. 1996(A)

Village Crossing 2,015 7,276 9,291 111 Aug. 1996(A)
(West Palm Beach, FL)

Haverhill Commons 2,251 7,948 10,199 121 Aug. 1996(A)
(West Palm Beach, FL)

Heather Ridge (Phoenix, AZ) 1,460 5,864 7,324 55 Sept. 1996(A)

Pine Shadows (Tempe, AZ) 1,890 7,574 9,464 71 Sept. 1996(A)

</TABLE>

S-2
<PAGE> 80

AMBASSADOR APARTMENTS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(Dollars in Thousands)

INITIAL COST COST CAPITALIZED
TO COMPANY SUBSEQUENT TO ACQUISITION
----------------------- ---------------------------------------
BUILDINGS &
BUILDINGS, IMPROVEMENTS
ENCUM- FURNITURE & FURNITURE &
DESCRIPTION BRANCES LAND EQUIPMENT LAND EQUIPMENT TOTAL
----------- ------- ---- --------- ---- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Crossings of Bellevue $ 8,572 $ 1,871 $ 13,918 $ -- $ 50 $ 50
(Nashville, TN)

Hidden Lake (Tampa, FL) 4,369 1,257 4,599 -- 17 17

Woodlands (Tampa, FL) 6,806 1,939 7,178 -- 31 31

Sun Lake (Lake Mary, FL) 15,478 4,784 19,534 -- 5 5
-------- ------- -------- ----- ------- -------

$359,329 $79,465 $331,635 $2,659 $81,533 $84,192
======== ======= ======== ====== ======= =======

GROSS AMOUNT AT WHICH CARRIED
AT CLOSE OF PERIOD
---------------------------------------
BUILDINGS &
IMPROVEMENTS DATE
FURNITURE & ACCUMULATED CONSTRUCTED (C)
DESCRIPTION LAND EQUIPMENT TOTAL DEPRECIATION ACQUIRED (A)
----------- ---- ------------ ----- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Crossings of Bellevue $ 1,871 $ 13,968 $ 15,839 $ 121 Oct. 1996(A)
(Nashville, TN)

Hidden Lake (Tampa, FL) 1,257 4,616 5,873 30 Oct. 1996(A)

Woodlands (Tampa, FL) 1,939 7,209 9,148 49 Oct. 1996(A)

Sun Lake (Lake Mary, FL) 4,784 19,539 24,323 57 Nov. 1996(A)
-------- ------- -------- -------

$ 82,124 $413,168 $495,292 $33,340
======== ======== ======== =======

</TABLE>

S-3

<PAGE> 1

EXHIBIT 10.38

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into May 21,
1996 between Ambassador Apartments, Inc., a Maryland corporation ("Employer")
and the sole general partner of Ambassador Apartments, L.P. a Delaware limited
partnership (the "Operating Partnership") (Employer and the Operating
Partnership are sometimes together referred to as the "Company"), and Tom
Coorsh, an individual domiciled in the State of Illinois ("Executive").

R E C I T A L S

A. The Company is engaged primarily in the acquisition, development,
construction, renovation, leasing, ownership and management of multifamily
apartment properties throughout the United States.

B. Employer believes that it would benefit from the application of
Executive's particular and unique skill, experience and background to the
management and operation of Employer.

C. Executive wishes to commit himself to serve the Company in the
position set forth herein on the terms herein provided.

D. The parties wish by this Agreement to set forth the terms and
condition of the employment relationship between Employer and Executive.

Employer and Executive hereby agree as follows:

1. EMPLOYMENT AND DUTIES. During the Employment Term (as defined in
Section 2), Employer agrees to employ Executive, and Executive agrees to be
employed by Employer, as Senior Vice President of Employer on the terms and
conditions provided in this Agreement. Executive shall conduct, operate, manage
and promote the business of the Company, and exercise such other powers and
authority as are customarily inherent in a similar position in a comparable
publicly held entity or as provided by the By-laws of Employer ("By-laws"). The
Board of Directors of Employer (the "Board") may from time to time further
define and clarify Executive's duties and services hereunder or under the
By-laws in a manner consistent with the scope of work set forth herein.
Executive agrees to devote his best efforts and substantially all of his
business time, attention, energy and skill to performing his duties to Employer
under this Agreement.

1
<PAGE> 2

2. TERM. THE INITIAL term of this Agreement (the "Initial Term") shall
commence on June 17, 1996 (the "Effective Date") and expire on December 31,
1996 (the "Scheduled Termination Date"), provided, that this Agreement shall
extend automatically for one-year terms following the Initial Term, (each a
"Renewal Term" and, together with the Initial Term, the "Employment Term"),
unless either party shall give the other party, prior to 120 days before the
end of the Initial Term or respective Renewal Term, written notice of its
intention to terminate this Agreement.

3. COMPENSATION AND RELATED MATTERS.

(a) BASE SALARY. As compensation for performing the services required
by this Agreement, and during the Employment Term, Employer shall pay to
Executive an annual salary of no less than $130,000 ("Base Compensation"),
payable in accordance with the general policies and procedures for payment of
salaries to its executive personnel implemented by Employer (but no less
frequently than monthly), subject to withholding for applicable federal, state
and local taxes. Increases in Base Compensation, if any, shall be determined by
the Board or the Compensation and Benefits Committee of the Board (the
"Committee") based on periodic reviews of Executive's performance conducted on
at least an annual basis.

(b) BONUS. In addition to Base Compensation, the Board or the
Committee in its sole and absolute discretion may, but shall in no event be
obligated to, authorize the payment of a bonus to the Executive, payable in
cash or shares of Common Stock of the Employer ("Common Stock"), based upon
achievement of corporate and individual performance objectives established by
the Board or the Committee, as applicable.

(C) BENEFITS. During the Employment Term and subject to the
limitations and alternative rights set forth in this Section 3(c), Executive
and his eligible dependents shall have the right to participate in any
retirement, pension, insurance, health or other benefit plan or program that
has been or is hereafter adopted by Employer (or in which Employer
participates) according to the terms of such plan or program with all the
benefits, rights and privileges as are enjoyed by any other senior executive
officer of Employer. If the participation of Executive would adversely affect
the qualification of a plan intended to be qualified under Section 401(a) of
the Internal Revenue Code as the same may be amended from time to time (the
"Code"), Employer shall have the right to exclude Executive from that plan in
return for his participation in (x) a nonqualified deferred

2
<PAGE> 3

compensation plan or (y) an arrangement providing substantially comparable
benefits under a plan that is either a qualified or nonqualified plan under the
Code, at Employer's option.

(d) VACATION AND LEAVES OF ABSENCE. Executive shall be entitled to
three weeks of paid vacation leave during each 12-month period and paid
holidays in accordance with Employer's established policies. In addition to the
foregoing, Executive may be granted leaves of absence with or without pay for
such other reasons as shall be mutually agreed upon by the Board and Executive.

(e) EXPENSES. Executive shall be reimbursed, subject to the Company's
receipt of invoices or similar records as the Company may reasonably request in
accordance with its policy and procedures, for all reasonable and necessary
expenses incurred by the Executive in the performance of his duties hereunder.

4. STOCK OPTION PLAN.

(a) INITIAL GRANT OF OPTIONS. Employer has established a stock
incentive plan in the form included as an Exhibit to the Registration Statement
(the "Stock Incentive Plan"). The Stock Incentive Plan initially provides,
among other things, for the issuance from time to time of options to purchase
an aggregate of up to 425,000 shares of Common Stock ("Options''). On the
Effective Date, Employer shall grant to Executive 15,000 Options (the "Initial
Grant'') that will vest on December 31, 1996 and, to the extent vested and
subject to Section 4(c), shall be exercisable at the public closing price of
the Common Stock on May 31, 1996.

(b) STATUS AND EXERCISE OF OPTIONS UPON TERMINATION OF EMPLOYMENT. If
Executive leaves his employment with the Company for any reason set forth in
Section 5(a)(i), 5(b)(i) or 5(c), all his invested Options shall automatically
and fully vest. If Executive leaves his employment with Employer for any reason
other than as set forth in 5(a)(i), 5(b)(i) or 5(c), all invested Options shall
be forfeited. Upon Executive Is termination of employment, Executive (in the
case of his death, Executives personal representative or heirs) shall be
entitled to exercise all Options vested as of the date of termination of
employment at any time during the 90 days following the date of termination of
employment, or one year following the date of termination of employment in the
case of death or disability, but in no event later than the applicable
unexpired exercise period set forth in the Stock Incentive Plan.

3
<PAGE> 4

(c) GENERAL PROVISIONS. It is acknowledged and agreed that the terms
and conditions of any Options issued to Executive shall be governed by the
Stock Incentive Plan except to the extent inconsistent with this Agreement, in
which case this Agreement controls. The grant of the Options contemplated by
this Section 4 shall not preclude Executive's participation in or under any
other incentive compensation program applicable to senior executive officers of
Employer, and Executive shall participate in any incentive compensation program
uniformly applicable to all senior executive officers of Employer (as opposed
to individually negotiated arrangements). The Options granted under Section
4(a) hereof shall be for a term ending August 31, 2004.

5. TERMINATION AND TERMINATION BENEFITS.

(a) TERMINATION BY EMPLOYER. (i) WITHOUT CAUSE. Employer may terminate
this Agreement and Executive's employment at any time for any reason or for no
reason at all upon two weeks' prior written notice to Executive. Employer may
elect to require Executive to continue his employment under this Agreement for a
period up to 60 days. In connection with the termination of Executive's
employment pursuant to this Section 5(a)(i), Executive shall (A) be paid his
Base Compensation and any bonus otherwise payable to him in accordance with
Sections 3(a) and 3(b) and be entitled to the benefits set forth in Sections
3(c), 3(d) and 3(e) up to the effective date of such termination and (B) receive
the Termination Compensation specified in Section 5(d).

(ii) WITH CAUSE. Employer may terminate this Agreement with cause
immediately with written notice to Executive. Employer may elect to require
Executive to continue to perform his duties under this Agreement for a period
up to 30 days following notice of termination. In connection with the
termination of Executive's employment pursuant to this Section 5(a)(ii),
Executive shall (A) be paid his Base Compensation up to the effective date of
such termination, (B) forfeit his entitlement to any bonus otherwise payable to
him in accordance with Section 3(b) and (c) be entitled to the benefits set
forth in Sections 3(c), 3(d) and 3(e) up to the effective date of such
termination. For purposes of this Section 5(a)(ii), "cause" shall mean a
finding by the Board:

(x) that the Executive has materially harmed the Company, the
Operating Partnership or any entity in which the Company or the Operating
Partnership owns an interest through an act of dishonesty or material conflict
of interest which relates to the performance of Executive's duties hereunder,

4
<PAGE> 5

(y) that Executive was convicted of a felony,

(z) that Executive failed to perform in any material respects his
material duties under this Agreement (other than a failure due to disability)
after written notice specifying the failure and a reasonable opportunity to
cure (it being understood that if Executive's failure to perform is not of a
type requiring a single action to fully cure, then Executive may commence the
cure promptly after such written notice and thereafter diligently prosecute
such cure to completion).

(iii) DISABILITY. If due to illness, physical or mental disability, or
other incapacity, Executive shall fail during any four consecutive months to
perform the duties required by this Agreement, Employer may terminate this
Agreement upon 30 days' written notice to Executive. In such event, Executive
shall (A) continue to receive his Base Compensation payable to him in
accordance with Section 3(a) and be entitled to the benefits set forth in
Sections 3(c) (or the after tax cash equivalent thereof), 3(d) and 3(e) up to
the effective date of such termination, (B) be paid any bonus otherwise payable
to him in accordance with Section 3(b) and (c) receive the Termination
Compensation specified in Section 5(d). This Section 5(a)(iii) shall not limit
the entitlement of Executive, his estate or beneficiaries to any disability or
other benefits available to Executive under any disability insurance or other
benefits plan or policy which is maintained by Employer for Executive's
benefit.

(b) TERMINATION BY EXECUTIVE. (i) WITH GOOD REASON OR AFTER CHANGE OF
CONTROL. Executive may terminate this Agreement with good reason or within six
months following any change of control of Employer upon written notice to
Employer. At the election of Employer, Executive shall continue his employment
under this Agreement for a period up to 30 days following notice of
termination. In such event, Executive shall (A) be paid his Base Compensation
and any bonus otherwise payable to him in accordance with Sections 3(a) and
3(b) and be entitled to the benefits set forth in Sections 3(c), 3(d) and 3(e)
up to the effective date of such termination and (B) receive the Termination
Compensation specified in Section 5(d).

For purposes of this Section 5(b)(i):

"good reason" shall mean (x) the breach by Employer of any of its obligations
hereunder and the failure of Employer to cure such

5
<PAGE> 6

breach within 30 days after receipt by the Company of a written notice from
Executive specifying in reasonable detail the nature of the breach or (y) any
material diminution in the scope of Executive's responsibilities and duties;
and

a "change of control" shall be deemed to have occurred if:

(1) any "person" (as such term-is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended), other than (A) a trustee or
other fiduciary holding securities under an employee benefit plan of the
Company, (B) a corporation owned directly or indirectly by the stockholders of
Employer in substantially the same proportions as their ownership of stock of
Employer, or controlled directly or indirectly by the stockholders of Employer,
or (c) David M. Glickman, Richard F. Cavenaugh, or any of their respective
affiliates, becomes the "beneficial owner" (as defined in Rule 13d-3 under said
Act), directly or indirectly, of securities of Employer representing 50% or
more of the total voting power represented by Employer's then outstanding
securities which vote generally in the election of directors (referred to
herein as "Voting Securities");

(2) during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board and any new directors whose
election by the Board or nomination for election by Employer's stockholders was
approved by a vote of at least two-thirds of the directors then still in office
who either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority of the Board; or

(3) the stockholders of Employer approve a merger or consolidation of
Employer with any other corporation, other than a merger or consolidation which
would result in the Voting Securities of Employer outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into Voting Securities of the surviving entity) at least 50% of the
total voting power represented by the Voting Securities of Employer or such
surviving entity outstanding immediately after such merger or consolidation; or

(4) the stockholders of Employer approve a plan of complete
liquidation of Employer or an agreement for the sale or disposition by Employer
of (in one transaction or a series of transactions) all or substantially all of
Employer's assets.

(ii) WITHOUT GOOD REASON. Executive may terminate this Agreement at
any time for any reason or for no reason at all upon 60 days' written notice to
Employer, during which period Executive shall

6
<PAGE> 7

continue to perform his duties under this Agreement if Employer so elects,
provided, that, by written notice to Executive, Employer shall have the right
to accelerate the effective date of such termination to any date following
Executive's notice of termination (including the day on which such notice is
given). In connection with the termination of Executive's employment pursuant
to this Section 5(b)(ii), Executive shall be paid his Base Compensation and any
bonus otherwise payable to him in accordance with Sections 3(a) and 3(b) and be
entitled to the benefits set forth in Sections 3(c), 3(d) and 3(e) up to the
effective date of termination, but shall not be entitled to receive the
Termination Compensation specified in Section 5(d).

(c) DEATH. Notwithstanding any other provision of this Agreement, this
Agreement shall terminate on the date of Executive's death. In this event,
Executive's estate shall not be entitled to receive the Termination
Compensation specified in Section 5(d), but shall be entitled to any bonus
otherwise payable to Executive by reason of Executives performance up to the
date of Executive's death in accordance with Sections 3(a) and 3(b). This
Section 5(c) shall not limit the entitlement of Executive under any insurance
or other benefits plan or policy which is maintained by Employer for
Executive's benefit.

(d) TERMINATION COMPENSATION. In the event of a termination of this
Agreement pursuant to Section 5(a)(i), 5(a)(iii) or 5(b)(i), Employer shall pay
to Executive, within 30 days of termination, an amount in one lump sum
("Termination Compensation") equal to 50% of Executive's annual Base
Compensation as of the effective date of termination.

6. COVENANTS OF EXECUTIVE.

(a) NO CONFLICTS. Executive represents and warrants that he is not
personally subject to any agreement, order or decree which restricts his
acceptance of this Agreement and performance of his duties with Employer
hereunder.

(b) RESTRICTIVE COVENANT. During the Employment Term and, except as
set forth in the last sentence of this Section 6(b), for a period of one year
following the termination of the Employment Term (the Employment Term and such
one-year period are referred to together as the "Restrictive Period"), except
as a passive investor and except for investments held at the date hereof and
identified on Exhibit A, the Executive shall not engage in, directly or
indirectly, or be interested in (as owner, partner, shareholder, employee,
director, officer, agent, consultant or otherwise), with or without
compensation, the acquisition, development, construction, renovation,

7
<PAGE> 8

leasing, ownership or management of multifamily apartment properties in the
Territory. For purposes of this Agreement,

a "PASSIVE INVESTMENT" is an investment where (i) Executive beneficially holds
an equity interest in such investment which is no greater than 5` of all equity
interests in such entity or venture, whether or not such entity or venture is
subject to the reporting requirements of the Securities Exchange Act of 1934
and (ii) Executive's return is based in all material aspects upon the money or
other assets invested and as to which no services are provided;

a "PRINCIPAL MARKET" is a geographic market area in which the Company, directly
or indirectly through the Operating Partnership or any of their respective
subsidiaries or affiliates (collectively, the "Group"), during the Employment
Term and, for purposes of the Restrictive Period following the termination of
the Employment Term, on the last day of the Employment Term, (i) owns or
manages more than 700 apartment units or (ii) (A) owns or manages, or has a
binding agreement to acquire or develop, not less than 250 apartment units and
(B) has a current plan, approved by the Company's Board of Directors in good
faith and not for the purpose of increasing the scope of this provision, to own
or manage more than 700 apartment units during the following 12-month period;
and

"TERRITORY" means (i) during the Employment Term, anywhere in the world, and
(ii) during the one-year period following the termination of the Employment
Term, the Principal Market.

The provisions of this Section 6(b) shall be of no further force or
effect in the event of a termination of Executive's employment by Employer
pursuant to Section 5(a)(i), or by Executive pursuant to Section 5(b)(i) within
six months following a change of control of Employer.

(c) NO SOLICITATION. During the Restrictive Period, Executive shall
not, directly or indirectly, solicit or contact any employee of any member of
the Group with a view to inducing or encouraging such employee to leave the
employ of the Company or such other person for the purpose of being hired by
Executive, an employer affiliated with Executive or any competitor of any
member of the Group.

(d) NON-DISCLOSURE. Executive shall not disclose or use, during the
Restrictive Period or any time thereafter, except in the pursuit of the
Business for or on behalf of the Group, any Trade Secret (as hereafter defined)
of the Group, whether such Trade Secret is in

8
<PAGE> 9

Executive's memory or embodied in writing or other physical form. For his
Section 6(d), "Trade Secret" means any information which derives independent
economic value, actual or potential, with respect to the Group from not being
generally known to, and not being readily ascertainable by proper means by,
other persons who can obtain economic value from its disclosure or use and is
the subject of efforts to maintain its secrecy that are reasonable under the
circumstances, including, but not limited to, trade secrets, tenant lists and
other proprietary commercial information. However, the term 'Trade Secrets"
shall not include general 'know-how" information acquired by Executive during
the course of his employment which could have been obtained by him from public
sources without the expenditure of significant time, effort and expense which
does not relate to the Group.

(e) RETURN OF DOCUMENTS. Upon termination of employment, Executive
shall return all originals and copies of books, records, documents, customer
lists, sales materials, tapes, keys, credit cards and other tangible property
of Employer within Executive's possession or under his control, but
specifically excluding personal effects of Executive such as his personal
rolodex and diary.

(f) ACKNOWLEDGMENT. Executive acknowledges that he will be directly
and materially involved as a senior executive in all important policy and
operational decisions of Employer and other members of the Group. Executive
further acknowledges that the scope of the foregoing restrictions has been
specifically bargained between Employer and Executive, each being fully
informed of all relevant facts. Accordingly, Executive acknowledges that the
foregoing restrictions of this Section 6 are fair and reasonable, are minimally
necessary to protect Employer, other members of the Group, the stockholders of
Employer and the public from the unfair acquisition of Executive who, as a
result of his employment with Employer, will have had unlimited access to the
most confidential and important information of Employer, other members of the
Group, and the business and future plans of the Group.

7. PRIOR AGREEMENT. This Agreement supersedes and is In lieu of any
and all other employment arrangements between Executive and Employer or its
predecessor or any subsidiary and any and all such employment agreements and
arrangements are hereby terminated and deemed of no further force or effect.

8. ASSIGNMENT. Neither this Agreement nor any rights or duties of
Executive hereunder shall be assignable by Executive and any such purported
assignment by him shall be void. Employer may assign all or any of its rights
hereunder to any member of the Group, and to any

9
<PAGE> 10

other person provided that substantially all of the assets of the Company are
also transferred to such other person.

9. SUCCESSOR TO EMPLOYER. The Company will require any successor or
assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all the business or assets of the Company,
as the case may be, expressly, absolutely and unconditionally to assume and
agree to perform this Agreement in the same manner and to the same extent that
the Company would be required to perform it if no such succession or assignment
had taken place. Any failure of the Company to obtain such agreement prior to
the effectiveness of any such succession or assignment shall be a material
breach of this Agreement. This Agreement shall inure to the benefit of and be
enforceable by Executive's personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Executive should die while any amounts are still payable to Executive
hereunder, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to Executive's devisee, legatee or
other designee or, if there be no such designee, to Executive's estate.

10. NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been duly given if
delivered personally, by overnight courier service, or by facsimile
transmission, in any case with receipt acknowledged, or three days after being
sent by registered or certified mail, return receipt requested, postage
prepaid, to the following addresses (or to any other address that any party may
designate by notice to the other parties hereto):

(a) if to Executive, to:

Tom Coorsh
4335 Lindenwood
Northbrook, IL 60062

(b) if to Employer, to:

Ambassador Apartments
77 West Wacker Drive, Suite 4040
Chicago, IL 60601
Attention: President
Telephone: (312) 917-1600
Facsimile: (312) 917-0910

10
<PAGE> 11

With a copy to:

Anne Larson
Connelly, Sheeran & Moran
350 North LaSalle Street, Suite 750
Chicago, IL 60610
Telephone: (312) 321-1969
Facsimile: (312) 321-1968

11. AMENDMENT. This Agreement may not be changed, modified or amended
except in writing signed by both parties hereto.

12. WAIVER OF BREACH. The waiver by either party of the breach of any
provision of this Agreement shall not operate or be construed as a waiver of
any subsequent breach by either party.

13. SEVERABILITY. Employer and Executive each expressly agree and
contract that it is not the intention of either party to violate any public
policy, statutory or common law, and that if any sentence, paragraph, clause or
combination of the same of this Agreement is in violation of the law of any
state where applicable, such sentence, paragraph, clause or combination of the
same shall be void in the jurisdictions where it is unlawful, and the remainder
of such paragraph and this Agreement shall remain binding on the parties to
make the covenants of this Agreement binding only to the extent that it may be
lawfully done under existing applicable laws. In the event that any part of any
covenant of this Agreement is determined by a court of competent jurisdiction
to be overly broad thereby making the covenant unenforceable, the parties
hereto agree, and it is their desire that such court shall substitute a
judicially enforceable limitation in its place, and that as so modified the
covenant shall be binding upon the parties as if originally set forth herein.

14. OPPORTUNITY TO EMPLOY COUNSEL. Executive acknowledges receipt of a
copy of this Agreement prior to his employment by Employer and also
acknowledges that he has had ample time and opportunity to employ counsel of
his choice to provide advice concerning the terms and conditions of this
Agreement and Executive's prospective employment with Employer.

15. EQUITABLE RELIEF. In the event of any breach by either party of
any of the covenants contained in this Agreement, including, without
limitation, any covenant contained in Section 6, it is specifically understood
and agreed that the other party shall be entitled, in addition to any other
remedy which it may have, to equitable relief by way of injunction, an
accounting or otherwise and,

11
<PAGE> 12

in the case of Employer, to notify any employer or prospective employer of
Executive as to the terms and conditions hereof.

16. INDEMNIFICATION. Executive shall indemnify the Company for any and
all consequential damages, costs and expenses resulting from any of his acts or
omissions that constitute bad faith, willful or intentional conduct that cause
harm to the Company's business or reputation. Executive also shall indemnify
the Company for any and all consequential damages, costs and expenses resulting
from his acts of omission constituting reckless disregard of his duties to the
Company following notice thereof by either Employer or the Operating
Partnership after either becomes aware of such conduct and Executive's failure
to so cure within 30 days.

17. GOVERNING LAW. This Agreement shall be governed by, and construed,
interpreted and enforced in accordance with the laws of the State of Illinois,
exclusive of the conflict of laws provisions of the State of Illinois.

18. NOTICE OF FUTURE EMPLOYMENT. Executive agrees that during the 12
consecutive months immediately following the termination of this Agreement,
Employee will within 14 days of each instance of new employment, notify
Employer in writing of the identify of his new employer and the job title
associated with such employment.

12
<PAGE> 13

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

AMBASSADOR APARTMENTS, INC.

By: /s/ David M. Glickman
---------------------------------
David M. Glickman
Chairman of the Board and
Chief Executive Officer

/s/ Thomas J. Coorsh
---------------------------------
Tom Coorsh

13
<PAGE> 14

EXHIBIT A
to
EMPLOYMENT AGREEMENT

NONE

<PAGE> 1

Exhibit 10.39

Resignation and Release

This Agreement is entered into on December 20, 1996, between Richard
F. Cavenaugh ("Executive") and Ambassador Apartments, Inc., a Maryland
corporation (the "Company").

WHEREAS, Executive and the Company are parties to that certain
Employment Agreement, dated August 23, 1994 (the "Employment Agreement"); and

WHEREAS, Executive and the Company mutually desire to resolve all
matters based upon, relating to or arising from the creation, existence or
termination of the "employer/employee" relationship between them, including
pursuant to the Employment Agreement.

Accordingly, Executive and the Company mutually agree as follows:

1. Resignation. Executive hereby confirms his resignation, effective
as of the close of business on the date hereof (the "Termination Date"), of his
employment with the Company and from any and all positions that he holds as an
officer of the Company (including, but not limited to, the offices of President
and Chief Operating Officer), as a member of the Board of Directors of the
Company, as a member of any management or Board committee of the Company, as a
trustee, representative, agent, signatory or other similar position in
connection with or for the benefit of the Company, and as an officer, director,
member of any committee, trustee, representative, agent, signatory or other
similar position of any and all subsidiaries and affiliates of the Company,
provided, however, in the event that Executive may not resign from such
position until a successor has been appointed, Executive's resignation from any
such position shall be effective on the date of such appointment. The Company
hereby confirms its acceptance of such resignation, and the Company shall use
its best efforts (and Executive will cooperate with the Company) to make any
required appointments and to remove Executive as a trustee, agent,
representative, signatory or other similar position, as quickly as possible
after the Termination Date.

2. Termination and Post-Termination Benefits.

(a) On the Termination Date, the Company will pay Executive by check
an amount equal to the sum of (i) $75,000 and (ii) all accrued and unpaid
salary at his current annual rate through the Termination Date, subject to
customary withholding for applicable federal, state and local taxes.

(b) On January 2, 1997, not later than 2 p.m. local time, the Company
will pay Executive $100,000 by wire transfer of immediately available funds to
an account designated by Executive, subject to customary withholding for
applicable federal, state and local taxes.

(c) On or within the applicable period following the Termination
Date, Executive shall be provided with a notice and election form for purposes
of electing continuation coverage under the Company's group health plan in
accordance with Section 4980B of the Internal Revenue

<PAGE> 2

Code of 1986, as amended, and Executive will be responsible for payment of the
required premium on a timely basis and shall be permitted to select coverage
per the Company's then existing procedures with respect to such plan; provided
that 10 days prior to any cancellation of Executive's coverage, the Company
shall give Executive notice of such intended cancellation and the reasons
therefore, and shall for such 10 day period give Executive the right to cure
such cancellation if it is for nonpayment of the required premium.

(d) The Company will reimburse Executive for reasonable and necessary
business expenses incurred by him in the course of performing his duties as an
officer of the Company through the Termination Date upon receiving appropriate
documentation in accordance with the Company's normal policies and subject to
reasonable approval by the Chief Executive Officer of the Company.

(e) To the extent permitted by the terms of such plan and applicable
law, the Company shall contribute to Executive's account under the Company's
401(k) plan, the pro rata portion that Executive would have otherwise received
but for the termination of his employment with the Company of any contribution
made by the Company, in its sole and absolute discretion, pursuant to the
profit sharing features of such plan in February 1997, and such amount shall
vest in accordance with, and for all purposes other than the contribution set
forth in this Section 2(e), be subject to the terms of such plan taking into
account the fact that Executive's employment with the Company terminated on the
date hereof.

(f) For a period of six months after the Termination Date, the
Company will forward all personal mail and items (including e-mail) received at
the offices of the Company to such address as shall be designated by Executive
and provided any callers with the phone number designated by Executive as a
forwarding number.

(g) The Company shall supply Executive with required tax information
with respect to Ambassador Apartments, L.P., a Delaware limited partnership
(the "Partnership"), at the same time such information is distributed to the
other partners of the Partnership.

(h) The Company will issue a press release concerning the termination
of Executive's employment in substantially the form of the attached Exhibit A
(the "Press Release") and will respond to any inquiries concerning the
circumstances of the termination of Executive's employment (including reference
checks from prospective employers of Executive) by referring the person making
the inquiry to the Press Release and advising such person that it is the
Company's policy not to comment beyond the text of Press Release and confirming
dates of employment.

4. Stock Options. Notwithstanding any provisions to the contrary
contained in the Employment Agreement or the stock option agreements pursuant
to which such stock options were granted, the 90,000 stock options granted to
Executive in August, 1994 and the 25,000 stock options granted to Executive in
January, 1996 shall be fully vested and exercisable on the Termination Date and
shall be exercisable for a period of 90 days thereafter. Executive
acknowledges that such stock options will not be exercisable by Executive after
such 90 day period.

-2-

<PAGE> 3

5. Employment Agreement.

(a) For all purposes of the Employment Agreement, the Employment Term
shall end on the Termination Date.

(b) The Company waives Executive's compliance with the provisions of
Section 6(b) of the Employment Agreement, and Executive acknowledges and
confirms that the other provisions of Section 6 of the Employment Agreement
remain in full force and effect and are binding on Executive in accordance with
their terms.

6. Partnership Agreement Indemnification. The Company, on its own
behalf and as the General Partner of the Partnership, releases Executive and LG
Trust from their respective indemnification obligations pursuant to Article XII
of the Amended and Restated Agreement of Limited Partnership of the
Partnership, other than in connection with fraud or a criminal act by such
person. The Company shall indemnify and hold harmless, Executive and LG Trust
from and against all claims, obligations, demands, damages, costs,
liabilities, losses, fees and expenses that Executive or LG Trust may suffer
resulting from, arising out of, relating to, in the nature of or caused by any
failure of Executive or LG Trust to be released from the indemnification
obligations as set forth in the prior sentence.

7. Indemnity by the Company. The Company shall indemnify, to the
fullest extent permitted by Maryland law, as applicable from time to time,
Executive, his heirs, successors and assigns, LG Trust and the Cavenaugh Family
Trust against any judgments, penalties, fines, settlements and reasonable
expenses and any other liabilities arising in connection with any action, suit,
or proceeding (whether civil, criminal, administrative or investigative) in
which such person is or was made a party to, or is threatened to be made a
party to, or is or was involved in because of any action alleged to have been
taken or omitted in by Executive in his capacity as a director or officer or
agent of the Company or any of its affiliates or subsidiaries (for whatever
reason, including without limitation, insurance claims, litigation, casualty
losses, director's and officer's liability, or securities laws), and the
Company shall pay or reimburse all reasonable expenses incurred by such person
in connection with any threatened, pending or completed action, suit or
proceeding (whether civil, criminal, administrative or investigative) in which
such person is a party because of any action alleged to have been taken or
omitted by Executive in his capacity as a director or officer or agent of the
Company or any of its affiliates or subsidiaries (for whatever reason,
including without limitation, insurance claims, litigation, casualty losses,
director's and officer's liability, or securities laws), in advance of the
final disposition of the proceeding, to the fullest extent permitted by, and in
accordance with the applicable requirements of, Maryland law, as applicable
from time to time, in each case, other than in connection with fraud or a
criminal act by Executive. In addition, the Company irrevocably and
unconditionally releases and discharges Executive, his heirs, successors and
assigns, LG Trust and the Cavenaugh Family Trust (separately and collectively
"Executive Released Parties"), jointly and individually, from any and all
claims, obligations, demands, damages, and causes of action of any nature or
kind whatsoever, known or unknown, which the Company, its affiliates, related
companies or entities, successors and assigns have or may have against the
Executive Released Parties based upon, relating to, or arising from the any
action taken by Executive by and within the scope of his authority as a
officer, director, employee or other agent of the Company or any of its
subsidiaries or affiliates during the period of his employment with the

- 3 -
<PAGE> 4

Company (other than in connection with fraud or a criminal act by Executive).
It being understood that the foregoing release will not release Executive, his
heirs, successors and assigns, LG Trust and the Cavenaugh Family Trust from any
current or future obligation under the terms of any written agreement that
survives the execution of this Agreement to which such person is bound or has
enter other than by and within the scope of Executive's authority as an
officer, director, employee or other agent of the Company.

8. Sales of Securities. Other than the exercise of the stock options
described in Section 4, Executive will not, for a period of two full business
days after the publication of the Press Release, purchase or sell, or contract
to purchase or sell, directly or indirectly, any shares of Common Stock, par
value $.01 per share, of the Company (the "Common Stock") or any right to
acquire or dispose of Common Stock.

9. Release by Executive. As consideration for the Company's
agreements contained herein, Executive irrevocably and unconditionally releases
and discharges the Company, its officers, directors, shareholders, agents,
employees, affiliates, related companies or entities, successors and assigns
(separately and collectively "Company Released Parties"), jointly and
individually, from any and all claims, obligations, demands, damages, and
causes of action of any nature or kind whatsoever, known or unknown, which
Executive, his heirs, successors or assigns have or may have against the
Company Released Parties based upon, relating to, or arising from the creation,
existence or termination of the "employer/employee" relationship, including but
not limited to claims under the Employment Agreement, or claims of
discrimination under any federal state or local law, rule or regulation,
whether those claims are past or present, whether they arise from equity,
common law, or statute, whether they arise from labor laws or discrimination
laws, such as the Age Discrimination in Employment Act, Title VII of the Civil
Rights Act of 1964, as amended, or any other law, rule or regulation. This
release is for any relief, no matter how called, including but not limited to
wages, backpay, frontpay, compensatory damages, punitive damages or damages for
pain or suffering, or attorney fees. Further, Executive agrees he will not be
entitled to any benefit from any claim or proceeding filed by him or on his
behalf with any agency or court which is within the scope of this Agreement.
It being understood that the foregoing release will not release Company, its
affiliates, related companies or entities, successors and assigns from any
current or future obligation under the terms of any written agreement that
survives the execution of this Agreement to which such person is bound or has
enter other than the Employment Agreement.

10. Settlement of Claims. The Company and Executive agree that the
execution of this Agreement is in compromise and final settlement among the
parties of all matters, constitutes full satisfaction of all claims made or
which could be made based upon, relating to or arising from the creation,
existence or termination of the "employer/employee" relationship, and does not
in any way admit liability or wrongdoing by any party.

11. Understanding of Agreement. Executive acknowledges that he has
carefully read and fully understands this Agreement, including the release
included herein, that he has had the opportunity to have an attorney explain to
him the terms of the foregoing, and that he knows and understands the contents
of the foregoing, that he executes this Agreement knowingly and voluntarily as
his own free act and deed and that this Agreement was freely negotiated and
entered into without fraud, duress or coercion and with full knowledge of its
significance, effects and consequences.

- 4 -
<PAGE> 5

12. Entire Agreement. This Agreement (including the documents
referenced herein) is the complete agreement between the parties, and there are
no written or oral understandings, promises or agreements directly or
indirectly related to this Agreement that are not incorporated herein in full.

13. Interpretation. Section headings used in this Agreement are for
ease of reference only and are not intended as substantive terms hereof. This
Agreement shall be governed by and interpreted under the laws of the State of
Illinois without giving effect to the conflict of laws provisions thereof.

In witness whereof, the parties have executed and delivered this
Agreement on and as of the date first written above.

/s/ Richard F. Cavenaugh
---------------------------
Richard F. Cavenaugh

AMBASSADOR APARTMENTS, INC.

By: /s/ David M. Glickman
-------------------------
David M. Glickman
Chairman of the Board and
Chief Executive Officer

- 5 -

<PAGE> 1

EXHIBIT 10.41

AMENDMENT TO
THE 1994 STOCK INCENTIVE PLAN FOR
OFFICERS, DIRECTORS AND
KEY EMPLOYEES OF
AMBASSADOR APARTMENTS, INC.,
AMBASSADOR APARTMENTS, L.P.
AND SUBSIDIARIES

The 1994 Stock Incentive Plan for Officers, Directors and Key
Employees of Ambassador Apartments, Inc., Ambassador Apartments, L.P. and
Subsidiaries was adopted, effective August 31, 1994 (the "1994 Plan"), for the
benefit of those officers, key employees and directors. The 1994 Plan is
hereby amended as follows:

1. Amendment. Section 2.1 of the 1994 Plan is hereby amended by deleting
the first sentence thereof in its entirety and substituting the following
therefor:

"The shares of stock subject to Options shall be shares of Common Stock,
and the aggregate number of such shares which may be issued upon exercise
of such Options shall not exceed 469,000."

2. No Further Amendment. Except as set forth above, the 1994 Plan shall
continue in full force and effect without modification.

<PAGE> 1

EXHIBIT 10.42

THE 1996 STOCK INCENTIVE PLAN FOR
OFFICERS, DIRECTORS AND
KEY EMPLOYEES OF
AMBASSADOR APARTMENTS, INC.,
AMBASSADOR APARTMENTS, L.P.
AND SUBSIDIARIES*

*As amended March 20, 1997

<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 "Award Limit" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 "Beneficiary" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.4 "Board" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.5 "Capital Stock" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.6 "Cause" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.7 "Change in Control" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.8 "Code" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.9 "Committee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.10 "Common Stock" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.11 "Common Units" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.12 "Company" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.13 "Company Charter" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.14 "Company Employee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.15 "Company Subsidiary" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.16 "Director" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.17 "Disability" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.18 "Employee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.19 "Employer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.20 "Exchange Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.21 "Expiration Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.22 "Exchange Factor" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.23 "Fair Market Value" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.24 "Good Reason" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.25 "Incentive Stock Option" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.26 "Independent Director" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.27 "Non-Qualified Stock Option" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.28 "Operating Partnership" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.29 "Operating Partnership Employee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.30 "Operating Partnership Purchase Price" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.31 "Operating Partnership Subsidiary" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.32 "Option" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.33 "Option Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.34 "Optionee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.35 "Plan" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.36 "Property Partnership" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.37 "Property Partnership Employee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.38 "Property Partnership Purchase Price" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.39 "Property Partnership Subsidiary" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.40 "Retirement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.41 "Rule 16b-3" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.42 "Securities Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.43 "Stock Ownership Limit" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.44 "Subsidiary" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.45 "Subsidiary Corporation" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.46 "Ten Percent Shareholder" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.47 "Termination of Directorship" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.48 "Termination of Employment" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
</TABLE>

i
<PAGE> 3

<TABLE>
<S> <C>
1.49 Gender and Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

ARTICLE II
SHARES SUBJECT TO PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.1 Shares Subject to Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.2 Unexercised Options and Other Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.3 Effect of Certain Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

ARTICLE III
GRANTING OF OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.1 Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.2 Qualification of Incentive Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.3 Granting of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

ARTICLE IV
TERMS OF OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.1 Option Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.2 Option Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.3 Option Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.4 Option Vesting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.5 Exercise of Option after Termination of Employment or Directorship . . . . . . . . . . . . . . . . . . 13
4.6 Limitation in Terms of Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

ARTICLE V
EXERCISE OF OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.1 Partial Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.2 Manner of Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.3 Transfer of Shares to a Company Employee or Independent Director . . . . . . . . . . . . . . . . . . . 17
5.4 Transfer of Shares to an Operating Partnership Employee . . . . . . . . . . . . . . . . . . . . . . . . 17
5.5 Transfer of Shares to a Property Partnership Employee . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.6 Transfer of Payment to the Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.7 Conditions to Issuance of Stock Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.8 Rights as Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.9 Ownership and Transfer Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
5.10 Restrictions on Exercise of Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

ARTICLE VI
ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.1 Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.2 Duties and Powers of Committee; Board Ratification of Grants . . . . . . . . . . . . . . . . . . . . . 20
6.3 Majority Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.4 Compensation; Professional Assistance; Good Faith Actions . . . . . . . . . . . . . . . . . . . . . . . 20
6.5 Delegation of Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.6 No Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.7 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

ARTICLE VIIMISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.1 Not Transferable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>

ii
<PAGE> 4

<TABLE>
<S> <C> <C>
7.2 Amendment, Suspension or Termination of this Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.3 Changes in Common Stock or Assets of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.4 Merger of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.5 Effective Date; Approval of Plan by Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.6 Tax Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.7 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
7.8 Limitations Applicable to Section 16 Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
7.9 Effect of Plan Upon Options and Other Compensation Plans . . . . . . . . . . . . . . . . . . . . . . . 25
7.10 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
7.11 Titles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
7.12 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>

iii
<PAGE> 5

THE 1996 STOCK INCENTIVE PLAN FOR
OFFICERS, DIRECTORS AND
KEY EMPLOYEES OF
AMBASSADOR APARTMENTS, INC.,
AMBASSADOR APARTMENTS, L.P.
AND SUBSIDIARIES

The 1996 Stock Incentive Plan for Officers, Directors and Key
Employees of Ambassador Apartments, Inc., Ambassador Apartments, L.P. and
Subsidiaries (the "Plan") was adopted, effective December 19, 1996, for the
benefit of those officers, key employees and directors. The purposes of the
plan are as follows:

(1) To provide an additional incentive for officers, directors
and key employees of Ambassador Apartments, Inc., a Maryland corporation (the
"Company"), Ambassador Apartments, L.P., a Delaware limited partnership (the
"Operating Partnership"), and their Subsidiaries (as such terms are defined in
the Plan) to further the growth, development and financial success of the
Company by personally benefiting through the ownership of Company stock which
will reflect such growth, development and financial success.

(2) To enable the Company, the Operating Partnership and the
Subsidiaries to obtain and retain the services of such officers, directors and
key employees considered essential to their long term success by offering them
an opportunity to own stock in the Company which will reflect their growth,
development and financial success.

ARTICLE I
DEFINITIONS

1.1 GENERAL

Wherever the following terms are used in this Plan they shall have
the meaning specified below, unless the context clearly indicates otherwise.

1.2 "AWARD LIMIT" shall mean 100,000 shares of Common Stock.

1.3 "BENEFICIARY" shall mean the person or persons properly designated
by the Optionee, including his spouse or heirs at law, to exercise such
Optionee's rights under this Plan in the event of the Optionee's death, or if
the Optionee has not designated such person or persons, or such person or
persons shall all have predeceased the Optionee, the executor or administrator
of the Optionee's estate. Designation, revocation and redesignation of
Beneficiaries must be made in writing in accordance with rules established by
the Committee and shall be effective, upon delivery of such writing to the
Committee.

<PAGE> 6

1.4 "BOARD" shall mean the Board of Directors of the Company.

1.5 "CAPITAL STOCK" shall mean all classes or series of stock of the
Company.

1.6 "CAUSE" shall mean any one or more of the following have occurred:

(a) a finding by the Board that an Optionee has materially
harmed the Company or the Operating Partnership through an act of
dishonesty or material conflict of interest which relates to the
performance of the Optionee's duties as an Employee, under his employment
agreement or otherwise, or as a Director;

(b) an Optionee's conviction of a felony;

(c) an Optionee's failure to perform in any material respect his
duties as an Employee, under his employment agreement or otherwise, or as
a Director (other than a failure due to disability) after written notice
specifying the failure and a reasonable opportunity to cure (it being
understood that if an Optionee's failure to perform is not of a type
requiring a single action to fully cure, then the Optionee may commence
the cure promptly after such written notice and thereafter diligently
prosecute such cure to completion); or

(d) the material breach by an Optionee of any of his obligations
under his employment agreement, if any, or any written policies or
directives of the Board as determined by the Board in good faith in its
sole discretion, and the failure of the Optionee to cure such breach
within 30 days after receipt by the Optionee of a written notice
specifying in reasonable detail the nature of the breach.

1.7 "CHANGE IN CONTROL" shall be deemed to have occurred if:

(a) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act), other than (i) a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or any
other Employer, (ii) a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportions as
their ownership of the Common Stock, or controlled directly or indirectly
by the stockholders of the Company, or (iii) David M. Glickman or any of
his affiliates becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Company representing 50% or more of the total voting power represented by
the Company's then outstanding securities which vote generally in the
election of Directors (referred to herein as "Voting Securities"); or

2
<PAGE> 7

(b) during any period of two consecutive years, individuals who
at the beginning of such period constitute the Board and any new
Directors whose election by the Board or nomination for election by the
Company's stockholders was approved by a vote of at least two- thirds of
the Directors then still in office who either were Directors at the
beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority of
the Board; or

(c) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation other than a
merger or consolidation which would result in the Voting Securities of
the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into Voting
Securities of the surviving entity) at least 50% of the total voting
power represented by the Voting Securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation, and such transaction is consummated; or

(d) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale, assignment,
conveyance, transfer, lease or other disposition by the Company of (in
one transaction or a series of transactions) all or substantially all of
the Company's assets, and such transaction is consummated.

1.8 "CODE" shall mean the Internal Revenue Code of 1986, as amended,
and the regulations promulgated thereunder.

1.9 "COMMITTEE" shall mean a committee of the Board, appointed as
provided in Section 6.1, or the Board until such Committee is appointed or if
required so that the Plan and this Agreement comply with the provisions of the
exemptive rule under Section 16 of the Exchange Act.

1.10 "COMMON STOCK" shall mean the common stock of the Company, par
value $.01 per share.

1.11 "COMMON UNITS" shall mean partnership units designated as "Common
Units" under the Amended and Restated Agreement of Limited Partnership of the
Operating Partnership, as amended from time to time.

1.12 "COMPANY" shall have the meaning set forth in the first
introductory paragraph.

1.13 "COMPANY CHARTER" shall mean the Articles of Amendment and
Restatement of the Articles of Incorporation of the Company, as amended and
supplemented from time to time.

3
<PAGE> 8

1.14 "COMPANY EMPLOYEE" shall mean any officer or other employee (as
defined in accordance with Section 3401(c) of the Code) of the Company or of
any entity which is then a Company Subsidiary.

1.15 "COMPANY SUBSIDIARY" shall mean any corporation, partnership or
other entity (other than the Company) in an unbroken chain beginning with the
Company if all of them in the aggregate, other than the last one in the
unbroken chain, then own stock or other interests possessing 50 percent or more
of the total combined economic interests or the total combined voting power of
all classes of stock or other interests in each of the others in such chain;
provided, however, that "Company Subsidiary" shall not include the Operating
Partnership or any Operating Partnership Subsidiary.

1.16 "DIRECTOR" shall mean a member of the Board.

1.17 "DISABILITY" shall mean a physical or mental condition resulting
from any medically determinable physical or mental impairment that renders an
Optionee incapable of engaging in any substantial gainful employment and that
can be expected to result in death or that has lasted and can be expected to
last for a continuous period in the aggregate of no less than four consecutive
months, as determined by the Committee in good faith in its sole discretion.

1.18 "EMPLOYEE" shall mean any Company Employee, Operating Partnership
Employee or Property Partnership Employee.

1.19 "EMPLOYER" shall mean the Company, a Company Subsidiary, the
Operating Partnership or an Operating Partnership Subsidiary.

1.20 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended from time to time.

1.21 "EXPIRATION DATE" shall mean the last day of the term of the
Option as established in Section 4.3.

1.22 "EXCHANGE FACTOR" shall have the meaning set forth in the Exchange
Rights Agreement, dated as of August 31, 1994, among the Company and certain
limited partners of the Operating Partnership, as such agreement may be amended
from time to time, including but not limited to any amendment to make a future
limited partner of the Operating Partnership a party to such agreement.

1.23 "FAIR MARKET VALUE" of a share of Common Stock shall mean the per
share value of the Common Stock as of a given date, determined as follows:

4
<PAGE> 9

(a) If the Common Stock is listed or admitted for trading on the
New York Stock Exchange (or if not, on another national securities
exchange upon which the Common Stock is listed), the Fair Market Value of
the Common Stock is the last reported sales price of the Common Stock for
composite transactions on the New York Stock Exchange (or if not listed
on the New York Stock Exchange, such other national securities exchange)
on such date or, if there were no sales on such date, the last date on
which there were sales.

(b) If the Common Stock is not traded on any national securities
exchange, but is quoted on the National Association of Securities
Dealers, Inc. Automated Quotation System (the "NASDAQ System") or any
similar system of automated dissemination of quotations of prices in
common use, the Fair Market Value of the Common Stock is (i) if the
Common Stock is then listed as a national market issue under the NASDAQ
System, the last reported sales price of the Common Stock on the NASDAQ
System on such date or, if there were no sales on such date, the last
date on which there were sales or (ii) if the Common Stock is then not
listed as a national market issue under the NASDAQ System, the mean
between the closing representative bid and asked prices for the Common
Stock on the NASDAQ System (or such similar quotation system) on such
date.

(c) If neither clause (a) nor clause (b) of this definition is
applicable, or the Board determines in good faith that the value
determined in accordance with clause (a) or (b), as otherwise applicable,
does not represent the fair market value of the shares within the meaning
of Section 422 or Section 162(m) of the Code, the Fair Market Value of
the Common Stock is the fair market value per share as of such valuation
date, as determined by the Board in good faith and in accordance with
uniform principles consistently applied.

1.24 "GOOD REASON" shall mean:

(a) the material breach by an Employer of its obligations under
any written employment agreement which may exist between an Employer and
the Employee and the failure of the Employer to cure such breach within
30 days after receipt by the Employer of a written notice from the
Employee specifying in reasonable detail the nature of the breach; or

(b) any material diminution in the scope of an Employee's
responsibilities and duties.

1.25 "INCENTIVE STOCK OPTION" shall mean an Option which conforms to
the applicable provisions of Section 422 of the Code and which is designated as
an Incentive Stock Option by the Committee.

5
<PAGE> 10

1.26 "INDEPENDENT DIRECTOR" shall mean a member of the Board who is not
also an Employee.

1.27 "NON-QUALIFIED STOCK OPTION" shall mean an Option which is not
designated as an Incentive Stock Option.

1.28 "OPERATING PARTNERSHIP" shall have the meaning set forth in the
first introductory paragraph.

1.29 "OPERATING PARTNERSHIP EMPLOYEE" shall mean any officer or other
employee (as defined in accordance with Section 3401(c) of the Code) of the
Operating Partnership or any entity which is then an Operating Partnership
Subsidiary (other than a Property Partnership Employee).

1.30 "OPERATING PARTNERSHIP PURCHASE PRICE" shall have the meaning set
forth in Section 5.4.

1.31 "OPERATING PARTNERSHIP SUBSIDIARY" shall mean each of the Property
Partnerships or any other corporation, partnership or other entity (other than
the Operating Partnership) in an unbroken chain beginning with the Operating
Partnership if all of them in the aggregate, other than the last one in the
unbroken chain, then own more than 50 percent of the total combined economic
interests or the total combined voting power of all classes of stock or other
interests in each of the others.

1.32 "OPTION" shall mean a stock option granted pursuant to this Plan.
An Option granted pursuant to this Plan shall, as determined by the Committee,
be either a Non-Qualified Stock Option or an Incentive Stock Option; provided,
however, that Options granted to Independent Directors and to Employees who are
not Employees of the Company or of a Subsidiary Corporation shall be
Non-Qualified Stock Options.

1.33 "OPTION AGREEMENT" shall have the meaning set forth in Section
4.1.

1.34 "OPTIONEE" shall mean an Employee or an Independent Director to
whom an Option is granted under the Plan.

1.35 "PLAN" shall mean The 1996 Stock Incentive Plan for Officers,
Directors and Key Employees of Ambassador Apartments, Inc., Ambassador
Apartments, L.P. and Subsidiaries, as amended from time to time.

1.36 "PROPERTY PARTNERSHIP" shall mean Ambassador Texas Partners, L.P.,
Ambassador I, L.P., Ambassador II, L.P., Ambassador III, L.P., Ambassador IV,
L.P., Ambassador V, L.P., Ambassador VI, L.P., Ambassador VII, L.P., Ambassador
VIII, L.P., Ambassador IX, L.P., Ambassador X, L.P., Ambassador XI, L.P., each
of which is a

6
<PAGE> 11

limited partnership, and any other Operating Partnership Subsidiary designated
as such by the Board.

1.37 "PROPERTY PARTNERSHIP EMPLOYEE" shall mean any officer or other
employee (as defined in accordance with Section 3401(c) of the Code) of a
Property Partnership or any entity which is then a Property Partnership
Subsidiary.

1.38 "PROPERTY PARTNERSHIP PURCHASE PRICE" shall have the meaning set
forth in Section 5.5(a).

1.39 "PROPERTY PARTNERSHIP SUBSIDIARY" shall mean any corporation,
partnership, or other entity (other than a Property Partnership) in an unbroken
chain beginning with a Property Partnership if all of them in the aggregate,
other than the last one in the unbroken chain, then own more than 50 percent of
the total combined economic interests or total combined voting power of all
classes of stock or other interests in each of the others.

1.40 "RETIREMENT" shall mean (a) an Employee's Termination of
Employment upon or after attainment of age 65 and completion of five years of
service with the Company and/or any other Employer or at such earlier time with
the permission of the Committee, or (b) an Independent Director's Termination
of Directorship upon or after attainment of age 65.

1.41 "RULE 16B-3" shall mean that certain Rule 16b-3 under the Exchange
Act, as such Rule may be amended from time to time.

1.42 "SECURITIES ACT" shall mean the Securities Act of 1933, as amended
from time to time.

1.43 "STOCK OWNERSHIP LIMIT" shall mean (a) the "Common Stock Ownership
Limit" restrictions on ownership and transfer provided in the Company Charter;
(b) the "Aggregate Stock Ownership Limit" restrictions on ownership and
transfer provided in the Company Charter; and (c) any other restrictions on
ownership or transfer set forth in the Company Charter.

1.44 "SUBSIDIARY" shall mean a Company Subsidiary or an Operating
Company Subsidiary (including, without limitation, any Property Partnership and
Property Partnership Subsidiary).

1.45 "SUBSIDIARY CORPORATION" shall mean a Company Subsidiary that
qualifies as a subsidiary corporation within the meaning of Section 424(f) of
the Code.

1.46 "TEN PERCENT SHAREHOLDER" shall mean an Employee who owns (or is
deemed to own by reason of the attribution rules of Section 424(d) of the Code)
stock possessing more than ten percent of the total combined voting power of
all classes of stock of the Company or any Company Subsidiary that is a
Subsidiary Corporation.

7
<PAGE> 12

1.47 "TERMINATION OF DIRECTORSHIP" shall mean the time when an Optionee
who was an Independent Director ceases to be a Director of the Company for any
reason.

1.48 "TERMINATION OF EMPLOYMENT" shall mean the time when the
employee-employer relationship between the Optionee and an Employer is
terminated for any reason, other than (a) termination where there is a
simultaneous reemployment or continuing employment of an Optionee by another
Employer, and (b) at the sole and absolute discretion of the Committee, a
termination which results in a temporary severance of the employee-employer
relationship that does not exceed one year; provided, however, that, if an
Employer ceases to qualify as same under the Plan as a result of a sale of
stock or other interests or any similar event, a Termination of Employment of
the Optionees who were employed by such Employer immediately prior to such
cessation shall be deemed to have occurred. The Committee, in its sole and
absolute discretion, shall determine the effect of all other matters and
questions relating to Termination of Employment, including, but not limited to,
the question of whether a Termination of Employment resulted from a discharge
for Cause or a resignation by the employee for Good Reason, and all questions
of whether particular leaves of absence shall constitute Terminations of
Employment; provided, however, that, with respect to Incentive Stock Options, a
leave of absence shall constitute a Termination of Employment if, and to the
extent that, such leave of absence interrupts employment for the purposes of
Section 422(a)(2) of the Code and the then applicable regulations and revenue
rulings under said Section. Notwithstanding any other provision of this Plan,
an Employer has an absolute and unrestricted right to terminate an Employee's
employment at any time for any reason whatsoever, with or without Cause, except
to the extent expressly provided otherwise in writing.

1.49 GENDER AND NUMBER

Wherever the masculine gender is used it shall include the
feminine and neuter and wherever a singular pronoun is used it shall include
the plural, unless the context clearly indicates otherwise.

ARTICLE II
SHARES SUBJECT TO PLAN

2.1 SHARES SUBJECT TO PLAN

The shares of stock subject to Options shall be shares of Common
Stock, and the aggregate number of such shares which may be issued upon
exercise of such Options shall not exceed 250,000. Notwithstanding anything
herein to the contrary, no single Optionee may be granted Options in any year
to purchase shares of Common Stock which, in the aggregate, exceed the Award
Limit. The shares

8
<PAGE> 13

of Common Stock issuable upon exercise of an Option may be either previously
authorized but unissued shares or issued shares which have been repurchased by
the Company.

2.2 UNEXERCISED OPTIONS AND OTHER RIGHTS

If any Option expires or is canceled without having been fully
exercised, the number of shares subject to such Option but as to which such
Option was not exercised prior to its expiration or cancellation may again be
the subject of an Option granted hereunder so long as the Optionee to whom such
Options had previously been granted received no benefits of ownership of the
underlying shares of Common Stock to which such Options related.

2.3 EFFECT OF CERTAIN EXERCISES

If any shares of Common Stock issuable pursuant to any Option are
surrendered as a payment for the price due on the exercise of said Option, the
number of shares of Common Stock issuable but so surrendered shall be charged
against the maximum number of shares of Common Stock that may be issued under
this Plan and shall not be considered Options that the Optionee with respect
thereto received no benefits of ownership. In the event shares of Common Stock
are withheld pursuant to Section 7.6 hereof, the number of shares that would
have been issuable but that are withheld pursuant to the provisions of Section
7.6 shall be charged against the maximum number of shares of Common Stock that
may be issued under this Plan and shall not be considered Options that the
Optionee with respect thereto received no benefits of ownership.

ARTICLE III
GRANTING OF OPTIONS

3.1 ELIGIBILITY

Employees eligible to participate in the Plan are those full or
part-time officers and other Employees who are responsible for or contribute to
the management, growth or profitability of the Company and the other Employers
and who are selected from time to time by the Committee, in its sole and
absolute discretion. Independent Directors shall be eligible to be granted
Non-Qualified Stock Options.

3.2 QUALIFICATION OF INCENTIVE STOCK OPTIONS

No Incentive Stock Option shall be granted unless such Option when
granted qualifies as an "incentive stock option" under Section 422 of the Code,
including, in the case of an Incentive Stock Option granted to a Ten Percent
Shareholder, the provisions of Section 422(c)(5) of the Code which provides
that an Incentive Stock Option granted to a Ten Percent Shareholder must have
an

9
<PAGE> 14

Option price of at least 110% of the Fair Market Value of the stock subject
thereto on the date of grant and cannot have a term longer than five years.
Options granted under the Plan to Employees who are not Employees of the
Company or of a Subsidiary Corporation do not qualify as "incentive stock
options" under Sections 422 of the Code. Unless the Committee in its sole
discretion provides otherwise in the Option Agreement, if all or any portion of
an Option that is intended to qualify as an "incentive stock option" under
Section 422 of the Code (a) does not qualify as such when granted, such Option
(or such portion) shall be treated as a Non-Qualified Option, and (b) qualified
as an "incentive stock option" when granted but later no longer qualifies as
such, such Option (or such portion) shall thereafter be treated as a
Non-Qualified Stock Option. To the extent that the aggregate Fair Market Value
of shares of Common Stock with respect to which "incentive stock options"
(within the meaning of Section 422 of the Code, but without regard to Section
422(d) of the Code) are exercisable for the first time by an Optionee during
any calendar year (under the Plan and all other incentive stock option plans of
the Company and any Subsidiary Corporation) exceed $100,000, such Options shall
be treated as Non-Qualified Options to the extent required by Section 422 of
the Code. The rule set forth in the preceding sentence shall be applied by
taking Options into account in the order in which they were granted. For these
purposes, the Fair Market Value shall be determined as of the date of grant of
the Option.

3.3 GRANTING OF OPTIONS

(a) Subject to availability of shares as provided under Section
2.1 and 7.2, the Committee shall from time to time, in its absolute
discretion:

(i) Determine which Employees are key Employees and select
from among the Independent Directors and the key Employees
(including Independent Directors and Employees to whom Options
have previously been granted under the Plan) such of them as in
its opinion should be granted Options;

(ii) Determine the number of shares to be subject to such
Options granted to the selected Independent Directors and key
Employees;

(iii) Subject to Sections 3.1 and 3.2, determine whether
such Options are to be Incentive Stock Options or Non-Qualified
Stock Options; and

(iv) Determine the terms and conditions of such Options,
consistent with this Plan, including, but not limited to, such
terms and conditions as may be required by Section 162(m) of the
Code.

10
<PAGE> 15

(b) Upon the selection of an Independent Director or a key
Employee to be granted an Option, the Committee shall instruct the
Secretary (or other authorized officer of the Company) to issue the
Option and may impose such conditions on the grant of the Option as it
deems appropriate. Without limiting the generality of the preceding
sentence, the Committee may, in its sole and absolute discretion and on
such terms as it deems appropriate, require as a condition to the grant
of an Option to an Independent Director or an Employee that the
Independent Director or Employee surrender for cancellation some or all
of the unexercised Options which have been previously granted to such
Independent Director or Employee under this Plan. An Option, the grant
of which is conditioned upon such surrender, may have an Option price
lower (or higher) than the Option price of such surrendered Option, may
cover the same (or a lesser or greater) number of shares as such
surrendered Option, may contain such other terms as the Committee deems
appropriate, and shall be exercisable in accordance with its terms,
without regard to the number of shares, price, exercise period or any
other term or condition of such surrendered Option.

(c) Any Incentive Stock Option granted under this Plan may be
modified by the Committee to disqualify such Option from treatment as an
"incentive stock option" under Section 422 of the Code; provided,
however, that prior to such modification the Committee must obtain a
written consent of the Optionee relating to such modification.

ARTICLE IV
TERMS OF OPTIONS

4.1 OPTION AGREEMENT

Each Option shall be evidenced by a written Option Agreement (the
"Option Agreement"), which shall be executed by the Optionee and an authorized
officer of the Company (and in the case of an Option granted to an Employee,
his Employer, if different), and which shall contain such terms and conditions
as the Committee shall determine, consistent with this Plan. Option Agreements
evidencing Incentive Stock Options shall contain such terms and conditions as
may be necessary to meet the applicable provisions of Section 422 of the Code.

4.2 OPTION PRICE

Subject to Section 3.2, the price per share of the shares subject
to each Option shall be set by the Committee in its sole and absolute
discretion; provided, however, that such price shall not be less than 100% of
the Fair Market Value of a share of Common Stock on the date the Option is
granted.

11
<PAGE> 16

4.3 OPTION TERM

Subject to Section 3.2, the term of an Option shall be set by the
Committee in its sole and absolute discretion; provided, however, that such
term shall not be more than ten years from the date the Option is granted. The
last day of the terms of the Option shall be the Option's Expiration Date.

4.4 OPTION VESTING

(a) No Option may be exercised in whole or in part until it has
vested or otherwise becomes exercisable in accordance with the terms of
this Plan and the Option Agreement pursuant to which such Option was
granted.

(b) The period during which the right to exercise an Option in
whole or in part vests in the Optionee shall be determined by the
Committee in its sole and absolute discretion and set forth in the Option
Agreement, and the Committee may determine that an Option may not be
exercised in whole or in part for a specified period after it is granted
and that such Option may vest in one or more installments. At any time
after grant of an Option to an Optionee, the Committee may, in its sole
and absolute discretion and subject to whatever terms and conditions it
selects, accelerate the period during which all or any portion of an
Option granted to an Optionee vests or becomes exercisable.

(c) Upon an Employee's Termination of Employment for Cause, any
and all Options held by such Employee (whether or not vested or
exercisable) shall be forfeited and shall immediately terminate effective
with such Termination of Employment; provide, however, that the Committee
may in its sole discretion provide that all or a part of any Option, to
the extent exercisable as of such date, can be exercised for a period of
up to one month from the date of Termination of Employment.

(d) The portion of any Option granted to an Employee that has
not vested and become exercisable upon the Employee's Termination of
Employment shall be forfeited and shall immediately terminate effective
with such Termination of Employment; provided, however, that in the sole
discretion of the Committee, the Option Agreement with respect to an
Employee may provide that the unvested portion of any Option shall
immediately become vested and exercisable (in whole or in part) in the
event of a Change in Control, the Employee's Termination of Employment by
reason of his Disability, by the Employer not for Cause, by the Employee
for Good Reason, as a result of the Employee's Retirement, or if the
Employee dies while an Employee.

12
<PAGE> 17

(e) Upon an Independent Director's Termination of Directorship
for Cause, any and all Options held by such Independent Director (whether
or not vested or exercisable) shall be forfeited and shall immediately
terminate effective with such Termination of Directorship; provided,
however, that the Committee may in its sole discretion provide that all
or a part of any Option, to the extent exercisable as of such date, can
be exercised for a period of up to one month from the date of Termination
of Directorship.

(f) The portion of any Option granted to an Independent Director
that has not vested and become exercisable upon the Director's
Termination of Directorship shall be forfeited and shall immediately
terminate effective with such Termination of Directorship; provided,
however, that in the sole discretion of the Committee, the Option
Agreement with respect to an Independent Director may provide that the
unvested portion of any Option shall immediately become vested and
exercisable (in whole or in part) in the event of a Termination of
Directorship for any reason other than Cause.

4.5 EXERCISE OF OPTION AFTER TERMINATION OF EMPLOYMENT OR DIRECTORSHIP

(a) An Option granted to an Employee may be exercised only while
the Optionee is an Employee; provided, however, that the Committee may
determine in its sole discretion and an Option Agreement may provide that
an Option granted to an Employee may be exercised, to the extent that the
Optionee could have done so immediately preceding the Optionee's
Termination of Employment (and to the extent, if any, such Option became
exercisable under the Option Agreement as a result of such termination),
subsequent to such Optionee's Termination of Employment, subject to the
following limitations:

(i) If the Optionee dies while an Employee, the Optionee's
Beneficiary may exercise the Option not later than 12 months after
the Optionee's death; or

(ii) If the Optionee's Termination of Employment is due to
the Optionee's Disability or Retirement, the Optionee (or the
Optionee's personal representative) may exercise the Option no
later than 12 months after such termination; or

(iii) If the Optionee's Termination of Employment is for any
reason other than those set forth in (i) or (ii) above and is not
for Cause, the Optionee may exercise the Option within three
months after such termination; or

(iv) If the Optionee dies during a period described in
clause (ii) or (iii) above for the exercise of an

13
<PAGE> 18

Option after the Optionee's Termination of Employment, the
Optionee's Beneficiary may exercise such Option no later than the
expiration of such extended period; or

(v) If the Optionee's Termination of Employment is for
Cause, the Optionee may not exercise any portion of the Option
thereafter except to the extent and at the times permitted by the
Committee in accordance with Section 4.4(c); and

(vi) Notwithstanding (i) through (v) above or anything in
an Option Agreement or the Plan to the contrary, (A) at any time
after the grant of an Option to an Employee, the Committee, in its
sole and absolute discretion and subject to whatever terms and
conditions it selects, may provide that the Option may be
exercised after the relevant extended period set forth above, and
(B) no Option may be exercised later than its Expiration Date in
any circumstances.

(b) An Option granted to an Independent Director may be
exercised only while the Optionee is an Independent Director; provided,
however, that the Committee may determine in its sole discretion and an
Option Agreement may provide that an Option granted to an Independent
Director may be exercised, to the extent that the Optionee could have
done so immediately preceding the Optionee's Termination of Directorship
(and to the extent, if any, such Option became exercisable under the
Option Agreement as a result of such termination), subsequent to such
Optionee's Termination of Directorship, subject to the following
limitations:

(i) If the Optionee dies while a Director, the Optionee's
Beneficiary may exercise the Option within 12 months after the
Optionee's death; or

(ii) If the Optionee's Termination of Directorship is due
to Disability or Retirement, the Optionee (or the Optionee's
personal representative) may exercise the Option no later than 12
months after such termination; or

(iii) If the Optionee's Termination of Directorship is for
any reason other than those set forth in (i) or (ii) above and is
not for Cause, the Optionee may exercise the Option within three
months after such termination; or

(iv) If the Optionee dies during a period described in
clause (ii) or (iii) above for the exercise of an Option after the
Optionee's Termination of Directorship, the Optionee's Beneficiary
may exercise such Option no later than the expiration of such
extended period; or

14
<PAGE> 19

(v) If the Optionee's Termination of Directorship is for
Cause, the Optionee may not exercise any portion of the Option
thereafter except to the extent and at the times permitted by the
Committee in accordance with Section 4.4(e); and

(vi) Notwithstanding (i) through (v) above or anything
contained in an Option Agreement or the Plan to the contrary, (A)
at any time after the grant of an Option to an Independent
Director, the Committee, in its sole and absolute discretion and
subject to whatever terms and conditions its selects, may provide
that the Option may be exercised after the relevant extended
period set forth above, and (B) no Option may be exercised later
than its Expiration Date in any circumstances.

4.6 LIMITATION IN TERMS OF OPTION

The Company shall not grant an Option which, and no Option shall
be exercisable to the extent that it, will, or is likely to, result in a
violation of Section 5.10.

ARTICLE V
EXERCISE OF OPTIONS

5.1 PARTIAL EXERCISE

An exercisable Option may be exercised in whole or in part.
However, an Option shall not be exercisable with respect to fractional shares
and the Committee may require that, by the terms of the Option, a partial
exercise be with respect to a minimum number of shares.

5.2 MANNER OF EXERCISE

All or a portion of an exercisable Option shall be deemed
exercised upon:

(a) Delivery of all of the following to the Secretary of the
Company or his office (or his delegate):

(i) A written notice complying with the applicable rules
established by the Committee, stating that the Option, or a
portion thereof, is exercised. The notice shall be signed by the
Optionee or other person then entitled to exercise the Option or a
portion thereof, and a copy thereof shall be delivered at the same
time to the Operating Partnership with respect to an Operating
Partnership Employee and to the Property Partnership with respect
to a Property Partnership Employee;

15
<PAGE> 20

(ii) Such representations and documents as the Committee,
in its sole and absolute discretion, deems necessary or advisable
to effect compliance with all applicable provisions of the
Securities Act and any other federal or state securities laws or
regulations. The Committee or Board may, in its absolute
discretion, also take whatever additional actions it deems
appropriate to effect such compliance including, without
limitation, placing legends on share certificates and issuing
stop-transfer notices to agents and registrars; and

(iii) In the event that the Option shall be properly
exercised by any person or persons other than the Optionee,
appropriate proof of the right of such person or persons to
exercise the Option.

(b) Full payment in cash, by certified or bank check or other
instrument acceptable to the Committee for the shares with respect to
which the Option, or portion thereof, is being exercised to:

(i) the Secretary of the Company (with respect to an Option
of an Independent Director and a Company Employee);

(ii) the Operating Partnership (with respect to an Option of
an Operating Partnership Employee); or

(iii) the Property Partnership (with respect to Options of a
Property Partnership Employee).

Notwithstanding the preceding sentence, at the sole and absolute
discretion of the Committee, the terms of an Option granted to any
Employee may with the approval of the Committee, in its sole and absolute
discretion:

(A) allow payment, in whole or in part, through the
delivery of shares of Common Stock owned by the Optionee duly
endorsed for transfer with a Fair Market Value on the date of
delivery equal to the aggregate exercise price of the Option or
the portion thereof intended to be paid through the delivery of
shares of Common Stock; or

(B) allow payment, in whole or in part, through the
surrender of shares of Common Stock then issuable upon the
exercise of the Option having a Fair Market Value on the date of
Option exercise equal to the aggregate exercise price of the
Option or the portion thereof intended to be paid through the
delivery of shares of Common Stock, including a "cashless
exercise"; or

(C) (x) allow a delay in payment up to 30 days from the
date the Option, or portion thereof, is exercised, (y) allow
payment, in whole or in part, through the

16
<PAGE> 21

delivery of property of any kind which constitutes good and
valuable consideration, or (z) allow payment through any
combination of the consideration provided in clauses (A),
(B) and (C).

5.3 TRANSFER OF SHARES TO A COMPANY EMPLOYEE OR INDEPENDENT DIRECTOR

Subject to Section 5.7, as soon as practicable after receipt by
the Company, pursuant to Section 5.2(b)(i), of payment for the shares with
respect to which an Option, or portion thereof, is exercised by an Optionee who
is an Independent Director or a Company Employee (or any Beneficiary thereof),
the Company shall transfer to the Optionee the number of shares to which such
Optionee is entitled upon such exercise.

5.4 TRANSFER OF SHARES TO AN OPERATING PARTNERSHIP EMPLOYEE

Subject to Section 5.7, as soon as practicable after receipt by
the Operating Partnership pursuant to Section 5.2(b)(ii), of payment for the
shares with respect to which an Option, or portion thereof, is exercised by an
Optionee who is an Operating Partnership Employee (or any Beneficiary thereof),
with respect to each such exercise:

(a) the Company shall sell to the Operating Partnership and the
Operating Partnership shall purchase the number of shares for which such
Option is being exercised for an aggregate purchase price (the "Operating
Partnership Purchase Price") equal to the product of (i) the number of
such shares multiplied by (ii) the Fair Market Value of a share of Common
Stock on the date of the exercise; and

(b) the Operating Partnership shall sell such shares to the
Optionee in return for the amount of the payment made by the Optionee to
the Operating Partnership pursuant to Section 5.2(b).

5.5 TRANSFER OF SHARES TO A PROPERTY PARTNERSHIP EMPLOYEE

Subject to Section 5.7, as soon as practicable after receipt by a
Property Partnership, pursuant to Section 5.2(b)(iii), of payment for the
shares with respect to which an Option, or portion thereof, is exercised by an
Optionee who is a Property Partnership Employee (or any Beneficiary thereof),
with respect to each such exercise:

(a) the Company shall sell to the Property Partnership and the
Property Partnership shall purchase the number of shares of Common Stock
for which such Option is being exercised for an aggregate purchase price
(the "Property Partnership Purchase Prices") equal to the product of (i)
such

17
<PAGE> 22

number of shares multiplied by (ii) the Fair Market Value of a share of
Common Stock on the date of exercise; and

(b) the Property Partnership shall sell such shares to the
Optionee in return for the amount of the payment made by the Optionee to
the Property Partnership pursuant to Section 5.2(b).

5.6 TRANSFER OF PAYMENT TO THE PARTNERSHIP

As soon as practicable after receipt by the Company with respect
to the exercise of any Option, or portion thereof, of the amount described in
Section 5.2(b)(i), the Operating Partnership Purchase Price or the Property
Partnership Purchase Price, the Company shall transfer to the Operating
Partnership an amount of cash equal to such payment and the Operating
Partnership shall issue additional Common Units to the Company corresponding to
the number of shares of Common Stock issuable upon the exercise of the relevant
Option multiplied by a fraction, the numerator of which is one and the
denominator of which is the Exchange Factor in effect on the date of such
transfer.

5.7 CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES

No certificate or certificates for shares of stock purchased upon
the exercise of any Option, or portion thereof, shall be required to be issued
prior to fulfillment of all of the following conditions:

(a) The admission of such shares to listing on all stock
exchanges on which such class of stock is then listed;

(b) The completion of any registration or other qualification of
such shares under any state or federal law, or under the rulings or
regulations of the Securities and Exchange Commission or any other
governmental regulatory body which the Committee shall, in its sole and
absolute discretion, deem necessary or advisable;

(c) The obtaining of any approval or other clearance from any
state or federal governmental agency which the Committee shall, in its
sole and absolute discretion, determine to be necessary or advisable;

(d) The lapse of such reasonable period of time following the
exercise of the Option as the Committee may establish from time to time
for reasons of administrative convenience; and

(e) The receipt of full payment for such shares, including
payment of any applicable withholding tax in accordance with Section 7.6.

18
<PAGE> 23

5.8 RIGHTS AS STOCKHOLDERS

The holders of Options shall not be, nor have any of the rights or
privileges of, stockholders of the Company in respect of any shares purchasable
upon the exercise of any part of an Option unless and until certificates
representing such shares have been issued to such holders.

5.9 OWNERSHIP AND TRANSFER RESTRICTIONS

Shares acquired through the exercise of an Option shall be subject
to the restrictions on ownership and transfer set forth in the Company Charter.
The Committee, in its sole and absolute discretion, may impose such additional
restrictions on the ownership and transferability of the shares purchasable
upon the exercise of an Option as it deems appropriate in order to preserve the
qualification of the Company as a real estate investment trust, within the
meaning of Sections 856 through 860 of the Code. The Committee may require an
Employee to give the Company prompt notice of any disposition of shares of
Common Stock acquired by exercise of an Incentive Stock Option within either of
(a) two years from the date of granting such Option to such Employee or (b) one
year after the transfer of such shares to such Employee. Any such restriction
or notice requirement shall be set forth in the respective Option Agreement and
may be referred to on the certificates evidencing such shares.

5.10 RESTRICTIONS ON EXERCISE OF OPTION

An Option is not exercisable if, in the sole and absolute
discretion of the Committee, the exercise of such Option would likely result in
any of the following:

(a) The Optionee's ownership of Capital Stock being in violation
of the Stock Ownership Limit; or

(b) Income to the Company that could impair the Company's status
as a real estate investment trust, within the meaning of Sections 856
through 860 of the Code.

Notwithstanding any other provision of this Plan, the Optionee
shall have no rights under this Plan to acquire Options or Common Stock which
would otherwise be prohibited under the Company Charter.

ARTICLE VI
ADMINISTRATION

6.1 COMMITTEE

19
<PAGE> 24

The Committee shall consist solely of two or more Directors,
appointed by and holding office at the pleasure of the Board, each of whom is
not then an Employee and each of whom is both a "Non-Employee Director" as
defined by Rule 16b-3 and an "outside director" within the meaning of Section
162(m)(4)(C)(i) of the Code; provided, however, that if one or more of the
members of the Committee does not qualify as such a "Non-Employee Director" or
"outside director" at the time any Option is granted, such Option nevertheless
shall be deemed to be properly authorized and issued under the Plan and shall
remain in full force and effect subject to the other terms and conditions
contained in the Plan and the relevant Option Agreement. Appointment of
Committee members shall be effective upon acceptance of appointment. Committee
members may resign at any time by delivering written notice to the Board.
Vacancies in the Committee may be filled by the Board.

6.2 DUTIES AND POWERS OF COMMITTEE; BOARD RATIFICATION OF GRANTS

It shall be the duty of the Committee to conduct the general
administration of this Plan in accordance with its provisions. The Committee
shall have the power to interpret this Plan, the Options, and the Option
Agreements, and to adopt such rules for the administration, interpretation, and
application of this Plan as are consistent therewith and to interpret, amend or
revoke any such rules. Any such interpretations and rules with respect to
Incentive Stock Options shall be consistent with the provisions of Section 422
of the Code. Notwithstanding any other provision of this Plan to the contrary,
the Board, in establishing or authorizing any committee of the Board to act as
the Committee, may require that any or all of the grants of Options by the
Committee with respect to the Plan be subject to ratification by the Board
and/or another committee of the Board.

6.3 MAJORITY RULE

The Committee shall act by a majority of its members in attendance
at a meeting at which a quorum is present or by a memorandum or other written
instrument signed by all members of the Committee.

6.4 COMPENSATION; PROFESSIONAL ASSISTANCE; GOOD FAITH ACTIONS

Members of the Committee shall receive such compensation for their
services as members as may be determined by the Board. All expenses and
liabilities which members of the Committee or Board incur in connection with
the administration of this Plan shall be borne by the Company. The Committee
may, with the approval of the Board, employ attorneys, consultants,
accountants, appraisers, brokers or other persons. The Committee, the Board,
the Company and the Company's officers and Directors and all other persons
charged with responsibility for administering the Plan shall be entitled to
rely upon the advice, opinions or valuations

20
<PAGE> 25

of any such persons. All actions taken and all interpretations and
determinations made by the Committee or Board in good faith shall be final and
binding upon all persons, including the Optionees and the Employers. No
members of the Committee or Board shall be personally liable for any action,
determination or interpretation made in good faith with respect to this Plan or
any Option, and all members of the Committee and Board shall be fully protected
by the Company in respect of any such action, determination or interpretation.

6.5 DELEGATION OF AUTHORITY

The Committee may, in its sole and absolute discretion, delegate
to the Chief Financial Officer, the Secretary or any other proper officer of
the Company, or more than one of them, any or all of the administrative duties
and authority of the Committee under this Plan, other than the authority to
make grants or awards under this Plan to Employees who are directors or
officers of the Company within the meaning of Rule 16(a)-1(b) of the Exchange
Act or whose total compensation is required to be reported to the Company's
stockholders under the Exchange Act, to determine the price, timing or amount
of such grants or awards or to determine any other matter required by Rule
16b-3 or Code Section 162(m) to be determined in the sole and absolute
discretion of the Committee.

6.6 NO LIABILITY

No member of the Board or the Committee, Director, officer of the
Company or other Employee shall be liable, responsible or accountable in
damages or otherwise for any determination made or other action taken or any
failure to act by such person with respect to this Plan so long as such person
is not determined to be guilty by a final adjudication of willful misconduct
with respect to such determination, action or failure to act.

6.7 INDEMNIFICATION

To the fullest extent permitted by law, each of the members of the
Board and the Committee and each of the Directors, officers of the Company and
the Employees shall be held harmless and be indemnified by the Company for any
liability, loss (including amounts paid in settlement), damages or expenses
(including reasonable attorneys' fees) suffered by virtue of any
determinations, acts or failures to act, or alleged acts or failures to act, in
connection with the administration of this Plan so long as such person is not
determined by a final adjudication to be guilty of willful misconduct with
respect to such determination, action or failure to act.

21
<PAGE> 26

ARTICLE VII
MISCELLANEOUS PROVISIONS

7.1 NOT TRANSFERABLE

Options under this Plan may not be sold, pledged, assigned, or
transferred in any manner other than by will or the laws of descent and
distribution; provided, however, that, subject to the Stock Ownership Limit, an
Optionee may designate a Beneficiary to exercise his Option or other rights
under this Plan after his death, and, with respect to Non-Qualified Stock
Options, the Committee, in its sole discretion, may provide in the Option
Agreement that the Optionee may transfer, without consideration of the
transfer, all or a portion of his Options to members of his immediate family
(i.e., children, grandchildren or spouse), to trusts for the benefit of
immediate family members, to partnerships in which such family members are the
only parties and to charitable institutions; provided, however, prior to any
such transfer, the Optionee shall deliver written notice to the Company
describing in reasonable detail the proposed transfer together with an opinion
of counsel which (to the Company's satisfaction) is knowledgeable in securities
law matters to the effect that such transfer and the ownership and exercise of
such Option by the proposed transferee, taking into account any covenants or
restrictions mutually agreeable to the Company, the Optionee and the proposed
transferee, may be effected without registration under the Securities Act of
the Option or the Common Stock issuable upon exercise thereof. No Option or
interest or right therein shall be liable for the debts, contracts or
engagements of the Optionee or his successors in interest or shall be subject
to disposition by transfer, alienation, anticipation, pledge, encumbrance,
assignment or any other means whether such disposition be voluntary or
involuntary or by operation of law by judgment, levy, attachment, garnishment
or any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect;
provided, however, that nothing in this Section 7.1 shall prevent transfers by
will or by the applicable laws of descent and distribution or, if provided in
the Option Agreement, to an immediate family member, to trusts for the benefit
of immediate family members, to partnerships in which such family members are
the only parties and to charitable institutions, as provided above. Except as
provided in this Section 7.1 and the Option Agreement, an Option shall be
exercised during the Optionee's lifetime only the Optionee or his guardian or
legal representative.

7.2 AMENDMENT, SUSPENSION OR TERMINATION OF THIS PLAN

This Plan may be wholly or partially amended or otherwise
modified, suspended or terminated at any time or from time to time by the
Board. Furthermore, without approval of the Company's stockholders given with
12 months before or after the action by the

22
<PAGE> 27

Board, no action of the Board may, except as provided in Section 7.3,
materially increase the limits imposed in Section 2.1 on the maximum number of
shares which may be issued under this Plan, materially modify the eligibility
requirements of Section 3.1, reduce the minimum Option price requirements of
Section 4.2, extend the limit imposed in this Section 7.2 on the period during
which Options may be granted or otherwise materially increase the benefits
accruing to participants under the Plan and no action of the Committee or Board
may be taken that would otherwise require stockholder approval as a matter of
applicable law, regulation or rule. No amendment, suspension or termination of
this Plan shall, without the consent of the holder of an Option, alter or
impair any rights or obligations under any Option theretofore granted or
awarded, unless the award itself otherwise expressly so provides. No Option may
be granted or awarded during any period of suspension nor after termination of
this Plan, and in no event may any Incentive Stock Option be granted under this
Plan after the first to occur of the following events:

(a) the expiration of ten years from the date the Plan is
adopted by the Board; or

(b) the expiration of ten years from the date the Plan is
approved by the Company's stockholders under Section 7.5.

7.3 CHANGES IN COMMON STOCK OR ASSETS OF THE COMPANY

In the event that the outstanding shares of Common Stock are
hereafter changed into or exchanged for cash or a different number or kind of
shares or other securities of the Company, by reason of recapitalization,
reclassification, stock split up, stock dividend, or combination of shares,
appropriate adjustments shall be made by the Committee in the number and kind
of shares of stock for the purchase of which Options may be granted, including
adjustments of the limitation in Section 2.1 (and, to the extent permitted
under Section 162(m) of the Code, the Award Limit) on the maximum number and
kind of shares of stock which may be issued.

In the event of such a change or exchange other than by reason of
reorganization (and other than for stock or securities of another corporation,
which shall be subject to the provisions of Section 7.4), the Committee shall
also make an appropriate and equitable adjustment in the number and kind of
shares of stock as to which all outstanding Options, or portions thereof then
unexercised, shall be exercisable. Such adjustment shall be made with the
intent that after the change or exchange of shares of stock, each Optionee's
proportionate interest shall be maintained as before the occurrence of such
event. Such adjustment in an outstanding Option may include a necessary or
appropriate corresponding adjustment in Option exercise price, but shall be
made without change in the total price applicable to the Option, or the
unexercised portion thereof (except for any change in the

23
<PAGE> 28

aggregate price resulting from rounding-off of share quantities or prices).

Where an adjustment of the type described above is made to an
Incentive Stock Option under this Section, the adjustment will be made in a
manner which will not be considered a "modification" under the provisions of
subsection 424(h)(3) of the Code.

In the event of a "spin-off" or other substantial distribution of
assets of the Company which has a material diminutive effect upon the Fair
Market Value of the Common Stock, the Committee may, in its sole and absolute
discretion, make an appropriate and equitable adjustment to the Option price to
reflect such diminution.

7.4 MERGER OF THE COMPANY

In the event of the merger or consolidation of the Company with or
into another corporation or other entity, the exchange of all or substantially
all of the assets of the Company for the securities of another or other entity,
the acquisition by another corporation or person of all or substantially all of
the Company's assets or 80% or more of the Company's then outstanding voting
stock, or the liquidation or dissolution of the Company:

(a) At the sole and absolute discretion of the Committee, the
terms of an Option may provide that it may not be exercised after such
event; and

(b) In its sole and absolute discretion, and on such terms as it
shall deem appropriate, the Committee may provide either by the terms of
such Option or by a resolution adopted prior to the occurrence of such
event that, for a specified period of time prior to such event, such
Option shall be exercisable as to all shares of stock covered thereby,
notwithstanding anything to the contrary in the Plan or the Option
Agreement evidencing such Option.

7.5 EFFECTIVE DATE; APPROVAL OF PLAN BY STOCKHOLDERS

Subject to the approval of the Company's stockholders (by the
holders of a majority of the shares of the Company present or represented and
entitled to vote at the meeting at which the Plan is considered), the Plan
shall be effective as of December 19, 1996 and shall continue in effect
thereafter until terminated or suspended by the Committee. Options may be
granted prior to such stockholder approval, provided, however, that such
Options shall not be exercisable prior to the time when this Plan is approved
by the stockholders, and provided further, that all Options granted under this
Plan shall be canceled and become null and void and of no effect, retroactive
to the date of grant, and the Plan shall be null and void and of no effect,
retroactive to the date of Board

24
<PAGE> 29

approval, in the event the Plan is not approved by Company's stockholders prior
to the first anniversary of its approval by the Board. The Company shall take
such actions with respect to the Plan as may be necessary to satisfy the
requirements of Rule 16b-3.

7.6 TAX WITHHOLDING

Each Optionee shall, no later than the date as of which the value
of any shares received upon the exercise of an Option first becomes includable
in gross income for federal income tax purposes, pay or make arrangements
satisfactory to the Committee regarding payment of any sums required by
federal, state or local tax law to be withheld with respect to such Option.
The Committee may, in its sole and absolute discretion, allow such Optionee to
elect to have shares of Common Stock withheld (or allow the return of shares of
Common Stock) having a Fair Market Value equal to all or a portion of the sums
required to be withheld. If, as allowed by the Committee, the Optionee elects
to have shares of Common Stock withheld (or allow the return of shares of
Common Stock) having a Fair Market Value equal to all or a portion of the sums
required to be withheld, the value of the shares of Common Stock to be withheld
(or returned as the case may be) will equal to the Fair Market Value of such
shares (less any costs or taxes associated with the sale of such shares) on the
date that the amount of tax to be withheld is to be determined (the "Tax
Date"). Elections by such persons to have shares of Common Stock withheld for
this purpose will be subject to the following restrictions: (a) the election
must be made on or prior to the Tax Date, (b) the election must be irrevocable,
(c) the election shall be subject to the disapproval of the Committee, (d) if
the person is an officer of the Company within the meaning of Section 16 of the
Exchange Act, the election shall be subject to such additional restrictions as
the Committee may impose in an effort to secure the benefits of any regulations
thereunder, and (e) any stock ownership resulting from such withholding shall
not violate the Stock Ownership Limit set forth in the Company Charter.

7.7 LOANS

The Committee may, in its sole and absolute discretion, extend one
or more loans to Optionees in connection with the exercise of Options granted
under this Plan. The terms and conditions of any such loan shall be set by the
Committee.

7.8 LIMITATIONS APPLICABLE TO SECTION 16 PERSONS

Notwithstanding any other provision of this Plan, any Option
granted to an Optionee who is then subject to Section 16 of the Exchange Act
shall be subject to any additional limitations set forth in any applicable
exemptive rule under Section 16 of the Exchange Act (including any amendment to
Rule 16b-3 of the Exchange Act) the compliance with which is necessary for the
application of such exemptive rule. Any such additional limitation shall be
set

25
<PAGE> 30

forth in an annex to this Plan, such annex to be incorporated herein by the
reference and made part of this Plan.

7.9 EFFECT OF PLAN UPON OPTIONS AND OTHER COMPENSATION PLANS

The adoption of this Plan shall not affect any other compensation
or incentive plans established by the Company, the Operating Partnership, the
Property Partnerships or any other Employer. Nothing in this Plan shall be
construed to limit the right of any of them (a) to establish any other forms of
incentives or compensation for their employees and directors or (b) to grant or
assume options or other rights otherwise than under this Plan in connection
with any proper corporate or partnership purpose including but not limited to
the grant or assumption of options in connection with the acquisition by
purchase, lease, merger, consolidation or otherwise, of the business, stock or
assets of any corporation, partnership, firm or association.

7.10 COMPLIANCE WITH LAWS

This Plan, the granting and vesting of Options under this Plan and
the issuance and delivery of shares of Common Stock upon the exercise of
Options granted hereunder are subject to compliance with all applicable federal
and state laws, rules and regulations (including but not limited to state and
federal securities law and federal margin requirements) and to such approvals
by any listing, regulatory or governmental authority as may, in the opinion of
counsel for the Company, be necessary or advisable in connection therewith.
Any securities delivered under this Plan shall be subject to such restrictions,
and the person acquiring such securities shall, if requested by the Company,
provide such assurances and representations to the Company as the Company may
deem necessary or desirable to assure compliance with all applicable legal
requirements. To the extent permitted by applicable law, the Plan and Options
granted or awarded hereunder shall be deemed amended to the extent necessary to
conform to such laws, rules and regulations.

7.11 TITLES

Titles are provided herein for convenience only and are not
intended to be the basis for interpretation or construction of this Plan.

7.12 GOVERNING LAW

This Plan and any agreements hereunder shall be administered,
interpreted and enforced under the internal laws of the State of Illinois
without regard to conflicts of laws thereof.

<PAGE> 1
Exhibit 21

LIST OF SUBSIDIARIES

<TABLE>
<CAPTION>
Entity Ownership/Partners State of Formation
------ ------------------ ------------------
<S> <C> <C>
Ambassador Apartments, L.P. Ambassador Apartments, Inc. Delaware

The Prime Group, Inc.

Richard F. Cavenaugh

LG Trust

David M. Glickman

Adam D. Peterson

Robert Rudnik

Warren John

Edward John

Ray Grinvalds

Michael Reschke

Prime Group IV, L.P.

Ambassador Apartments Texas, Inc. Ambassador Apartments, Inc. Delaware
(100% Common Stock)

Ambassador I, Inc. Ambassador Apartments, Inc. Delaware
(100% Common Stock)

Ambassador II, Inc. Ambassador Apartments, Inc. Delaware
(100% Common Stock)

Ambassador Texas Partners, L.P. Ambassador Apartments Texas, Inc. Delaware
Ambassador Apartments, L.P.

Ambassador IV, Inc. Ambassador Apartments, Inc. Delaware
(100% Common Stock)

Ambassador V, Inc. Ambassador Apartments, Inc. Delaware
(100% Common Stock)

Ambassador VI, Inc. Ambassador Apartments, Inc. Delaware
(100% Common Stock)

Ambassador VII, Inc. Ambassador Apartments, Inc. Delaware
(100% Common Stock)

A.J. One, Inc. Ambassador Apartments, Inc. Delaware
(100% Common Stock)

Ambassador VIII, Inc. Ambassador Apartments, Inc. Delaware
(100% Common Stock)

Ambassador IX, Inc. Ambassador Apartments, Inc. Delaware
(100% Common Stock)

</TABLE>
1
<PAGE> 2

Entity Ownership/Partners State of Formation
----- ------------------ ------------------
<S> <C> <C>
A.J. Two, Inc. Ambassador Apartments, Inc. Delaware
(100% Common Stock)

Ambassador Florida Partners, Inc. Ambassador Apartments, Inc. Delaware
(100% Common Stock)

Ambassador I, L.P. Ambassador I, Inc. Illinois

Ambassador II, L.P. Ambassador II, Inc. Texas
Ambassador Apartments, L.P.

Braesview Partnership Ambassador Texas, Inc. Texas
Ambassador Texas Partners, L.P.

Cape Cod Partnership Ambassador Texas, Inc. Texas
Ambassador Texas Partners, L.P.

Eagle's Nest Partnership Ambassador Texas, Inc. Texas
Ambassador Texas Partners, L.P.

Mesa Ridge Partnership Ambassador Texas, Inc. Texas
Ambassador Texas Partners, L.P.

LaJolla Partnership Ambassador Texas, Inc. Texas
Ambassador Texas Partners, L.P.

Prime Aspen Limited Partnership Ambassador Texas Partners, L.P. Texas
Ambassador Apartments, L.P.

AJ One, L.P. AJ One, Inc. Delaware
Ambassador Apartments, L.P.

AJ Two, L.P. AJ Two, Inc. Delaware
Ambassador Apartments, L.P.

Jupiter I, L.P. Yugenkeisha Sekiyu Delaware
AJ One Limited Partnership

Jupiter II, L.P. Makito Maki Delaware
AJ Two Limited Partnership

Prime H.C. Limited Partnership Ambassador Texas Partners, L.P. Texas
Ambassador Apartments, L.P.

Prime Crest, L.P. Ambassador Texas Partners, L.P. Texas
Ambassador Apartments, L.P.

Brookdale Lakes Partnership Ambassador Apartments, Inc. Illinois
Ambassador Apartments, L.P.

</TABLE>

2
<PAGE> 3

<TABLE>
<CAPTION>
Entity Ownership/Partners State of Formation
------ ------------------ ------------------
<S> <C> <C>
Williamsburg Limited Partnership Ambassador IX, L.P. Illinois
Williamsburg Group L.L.C.
Richard Curto

Brook Run Associates, L.P. Ambassador Apartments, L.P. Illinois
Kemper Realty Corp.

Ambassador III, L.P. Ambassador Texas, Inc. Delaware
Ambassador Texas Partners, L.P.

Ambassador IV, L.P. Ambassador IV, Inc. Delaware
Ambassador Apartments, L.P.

Ambassador V, L.P. Ambassador V, Inc. Delaware
Ambassador Apartments, L.P.

Ambassador VI, L.P. Ambassador VI, Inc. Delaware
Ambassador Apartments, L.P.

Ambassador VII, L.P. Jupiter II, L.P. Delaware
Ambassador VII, Inc.

Ambassador CRM Florida Ambassador Florida Partners Delaware
Partners Limited Partnership Limited Partnership

Ambassador Apartments, L.P.

G.P. Municipal Holdings, LLC Ambassador Apartments, L.P. Delaware
Triton Financial Group, Inc.

Ambassador Florida Partners Limited Ambassador Florida Partners, Inc. Delaware
Partnership Ambassador Apartments, L.P.

TEB Municipal Trust I G.P. Municipal Holdings, LLC
Bank One Akron, N.A.

Ambassador VIII, L.P. Ambassador VIII, Inc. Delaware
Ambassador Apartments, L.P.

Ambassador IX, L.P. Ambassador IX, Inc. Delaware
Ambassador Apartments, L.P.

</TABLE>
3

<PAGE> 1

Exhibit 23.1

Consent of Independent Auditors

We consent to the incorporation by reference in the Registration Statement
(Form S-8) pertaining to the Ambassador Apartments, Inc. (formerly Prime
Residential, Inc.) (the "Company") Stock Incentive Plan and Amendment No. 1 to
the Company's Registration Statement (Form S-3) and related Prospectus for the
registration of 101,655 shares of its common stock of our report dated January
27, 1997 (except Note 15 , as to which the date is March 13, 1997 and Note
2(J), as to which the date is March 31, 1997) with respect to the consolidated
financial statements and schedule of Ambassador Apartments, Inc. included in
this Annual Report (Form 10-K) for the year ended December 31, 1996

Ernst & Young LLP

Chicago, Illinois
March 31, 1997

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,002
<SECURITIES> 0
<RECEIVABLES> 1,870
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 461,952
<DEPRECIATION> 33,340
<TOTAL-ASSETS> 515,784
<CURRENT-LIABILITIES> 0
<BONDS> 279,355
0
0
<COMMON> 90
<OTHER-SE> 112,975
<TOTAL-LIABILITY-AND-EQUITY> 515,784
<SALES> 0
<TOTAL-REVENUES> 70,194
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,145
<INCOME-PRETAX> 3,178
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,410)
<EPS-PRIMARY> (0.49)
<EPS-DILUTED> (0.33)

</TABLE>