TARRAGON REALTY INVESTORS INC - 10-K Annual Report

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

FORM 10-K
(mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR

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

FOR THE TRANSITION PERIOD FROM .................... TO ....................

COMMISSION FILE NUMBER 0-22999
-------

TARRAGON REALTY INVESTORS, INC.
-------------------------------
(Exact name of registrant as specified in its charter)

NEVADA 94-2432628
- ---------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1775 BROADWAY, 23RD FLOOR, NEW YORK, NY 10019
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (212) 949-5000
--------------

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

Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, $.01 PAR VALUE
10% CUMULATIVE PREFERRED STOCK, $.01 PAR VALUE

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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]

The aggregate market value of the shares of voting and non-voting common equity
held by non-affiliates of the Registrant, computed by reference to the price of
the last trade as reported by the National Association of Securities Dealers
Automated Quotation System as of June 28, 2002 (the last business day of
registrant's most recently completed second fiscal quarter) was an aggregate
value of $70,480,593 based upon a total of 4,547,135 shares held as at June 28,
2002, by persons believed to be non-affiliates of the Registrant. The basis of
this calculation does not constitute a determination by the Registrant that any
persons or entities are affiliates of the Registrant as defined in Rule 405 of
the Securities Act of 1933, as amended. Such calculation if made as of a date
within sixty days of this filing would yield a greater value. As of March 3,
2003, there were 11,799,865 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission for Registrant's 2002 Annual Meeting of Shareholders to be held in
June 2003 are incorporated by reference into Part III.

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INDEX TO
ANNUAL REPORT ON FORM 10-K

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PART I

ITEM 1. BUSINESS

General

Tarragon Realty Investors, Inc., is a real estate investor and developer of
for-sale housing and rental communities. We own or have an interest in about
15,000 apartment units and 1.4 million square feet of commercial space located
primarily in Florida, Connecticut, and Texas. While a majority of our assets
consist of stabilized, income real estate, we dedicate increasing amounts of
capital and attention to development of rental and for-sale housing and
condominium conversion activities.

We were incorporated in Nevada on April 2, 1997. We are the ultimate successor
in interest to Vinland Property Trust, a California business trust formed in
July 1973, and National Income Realty Trust, also a California business trust,
organized in October 1978.

Tarragon's common stock is traded on the NASDAQ National Market System under the
symbol "TARR." Our principal executive offices are located at 1775 Broadway,
23rd Floor, New York, New York 10019, and our telephone number is 212-949-5000.

Tarragon has approximately 351 employees, including 234 site-level property
employees (such as property managers and maintenance staff) and 117 corporate
employees. Tarragon has employment contracts with only William S. Friedman,
Robert C. Rohdie, and Robert P. Rothenberg. Mr. Friedman is President and Chief
Executive Officer of Tarragon and Chairman of our Board of Directors. Mr. Rohdie
is President and Chief Executive Officer of Tarragon Development Corporation, a
wholly owned subsidiary of Tarragon, and a member of our Board of Directors
since February 2000. Mr. Rothenberg is Chief Operating Officer of Tarragon and a
member of our Board of Directors since September 2000. The terms of their
employment contracts are contained in our proxy statement to be filed with the
SEC by April 30, 2003, in connection with our annual meeting of stockholders to
be held in June 2003.

Tarragon's web site address is www.tarragonrealty.com. Tarragon makes available,
free of charge, on its website its annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and all amendments to those
reports as soon as reasonably practicable after such material is electronically
filed with the Securities and Exchange Commission.

Business Plan and Investment Policy

We divide our business into three principal segments - the operation of our
investment portfolio, property development, and for-sale housing. Our objective
for each segment is to increase value for shareholders and to obtain a high
return on investment through the application of management skill, experience,
and capital investment.

Our investment portfolio of stabilized apartment communities and commercial
properties is the largest segment and the one whose operation most resembles
that of traditional real estate investment trusts (REITs). Funds generated by
the operation, sale, or refinancing of properties in the investment portfolio
support our overhead and finance our development activities. The investment
portfolio represents approximately 75% of our real estate assets.

The second segment is property development through which we create new
investment properties, primarily multifamily apartment communities, which, upon
stabilization, become part of our investment portfolio. The development
activities benefit from the insights into market conditions and tenant tastes
provided by our

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property operation and management. In turn, the expertise in construction,
purchasing and financing, which are central to the property development process,
assists our property managers in efficiently maintaining and leasing our
stabilized properties. During the last six years, we have invested increasing
amounts in new construction and development projects, either directly or in
partnership with others, and we expect this trend to continue. Properties under
development, renovation, or repositioning represent approximately 15% of our
real estate assets.

The third segment is the development of housing for sale in which we build or
renovate condominium, townhouse, or traditional homes for sale to residents. In
2002, we began to report on the assets in the For-Sale Housing Division in a
third segment because we have expanded these activities. In 2000 and 2001, these
assets were included in our Development Division. Although it represents just
10% of our real estate assets, this is our most rapidly growing division.

In evaluating future projects, we place the greatest weight on our subjective
forecast of the future return on investment, adjusted for risk. We have
frequently acquired under-managed and under-performing multifamily projects in
areas in which we already had a presence both for the anticipated return from
the asset and to enhance the efficiency of our existing portfolio. The actual
number and mix of types of income-producing real estate and real estate
interests we acquire will depend on market conditions and other circumstances
existing at the time of acquisition, as well as the availability of capital.

We have financed acquisitions, development, and capital improvements largely
through mortgages and internally generated funds and, to a lesser extent,
through property sales and joint ventures. We expect these sources to provide
the bulk of funds for future investments. Nevertheless, the availability and
cost of credit are key factors in our ability to continue to make new
investments.

Competition

Tarragon has not experienced difficulty in locating investment opportunities.
Ownership of land for development and properties in which we invest is highly
fragmented among individuals, partnerships, and public and private entities. No
single entity or person dominates the market for such opportunities. At any
given time, many apartment properties or land parcels suitable for development
are available for purchase in the various markets where we seek additional
investment opportunities. We believe that there is and will continue to be a
strong demand for housing in these markets and that the factors discussed above
provide a market where a sufficient number of attractive investment
opportunities will be available to allow Tarragon to continue to expand through
development and acquisitions. However, since the success of any multifamily real
estate investment is affected by factors outside of our control, including
government regulations and controls, general demand for apartment living,
interest rates, operating costs, and job growth, there can be no assurance that
we will be successful in our strategy to continue to profit through development
and acquisitions.

Tarragon is subject to the risks associated with development, ownership,
operation, and financing of real estate. These risks include, but are not
limited to, liability for environmental hazards; changes in general or local
economic conditions; increases in interest rates and insurance and the
availability of mortgage financing which may render the development,
acquisition, sale, or refinancing of a property difficult or unattractive and
which may make debt service burdensome; changes in real estate and zoning laws;
changes in income taxes, real estate taxes, or federal or local economic or rent
controls; floods, earthquakes, and other acts of nature; acts of terrorism; and
other factors beyond our control. The illiquidity of real estate investments
generally may impair our ability to respond promptly to changing circumstances.
We believe that some of these risks are partially mitigated by the
diversification by geographic region and property type of our real estate.
However, to the extent new investments continue to be concentrated in any
particular region or property type, the advantages of diversification may
diminish.

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Executive Officers of the Registrant

Part III of this 10-K is incorporated by reference to a proxy statement to be
filed with the SEC in connection with our annual meeting of stockholders to be
held in June 2003. Information required by Item 10. "DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT" with respect to Directors will be included in our
proxy statement. The following discussion sets forth information required by
Item 10. "DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT" with respect to
Tarragon's executive officers.

William S. Friedman (59) has served as President, Chief Executive Officer and a
director of Tarragon since April 1997. He has also been Chairman of the Board of
Directors since December 2000. He previously served as a Trustee (from March
1988), Chief Executive Officer (from December 1993), President (from December
1988), acting Chief Financial Officer (from May 1990 to February 1991),
Treasurer (from August to September 1989), and acting Principal Financial and
Accounting Officer (from December 1988 to August 1989) of Vinland Property Trust
(until July 1997) and National Income Realty Trust (until November 1998).

Robert C. Rohdie (62) has been a director of Tarragon and President and Chief
Executive Officer of Tarragon Development Corporation, a wholly owned subsidiary
of Tarragon responsible for real estate development and renovation projects,
since February 2000. Since 1988, Mr. Rohdie has also served as President of
Rohdhouse Investments, Inc., his wholly owned real estate development company,
which acted as Tarragon's joint venture partner in new construction and
development projects from 1997 through 2000. Mr. Rohdie has been an attorney at
law since 1965.

Robert P. Rothenberg (44) has been a director and the Chief Operating Officer of
Tarragon since September 2000. Mr. Rothenberg has been the managing member of
APA Management LLC, a real estate investment and management company, since 1994.
He is also a Managing Member of Ansonia LLC, which together with Tarragon has
acquired close to 2600 apartments in the State of Connecticut since 1997. Mr.
Rothenberg was a co-managing member of Accord Properties Associates, LLC, which
managed the Ansonia portfolio in Connecticut and was acquired by Tarragon in
January 2001.

Chris Clinton (56) has been Senior Vice President - Commercial Asset Management
of Tarragon and its predecessors, Vinland Property Trust and National Income
Realty Trust, since March 1994. He also served as Vice President of Vinland
Property Trust and National Income Realty Trust from October 1988 to March 1994.

Kathryn Mansfield (42) has been Executive Vice President of Tarragon since
December 1998 and Secretary and Corporate Counsel of Tarragon since May 1998.
She also served as Vice President of Tarragon and its predecessor, National
Income Realty Trust, from May 1998 to December 1998. Prior to joining Tarragon,
she was Vice President and Senior Counsel for CB Richard Ellis, Inc., formerly
CB Commercial Real Estate Group, Inc., from October 1994 to May 1998. Ms.
Mansfield has been an attorney at law since 1984.

Todd C. Minor (44) has been Executive Vice President of Tarragon since November
2001 and Treasurer of Tarragon and its predecessors, Vinland Property Trust and
National Income Realty Trust, since December 1996. He also served as Senior Vice
President of Tarragon and its predecessors from March 1994 to December 1998 and
Vice President from April 1991 to July 1993.

Erin D. Pickens (41) has been Executive Vice President and Chief Financial
Officer of Tarragon since December 1998. She previously served as Vice President
and Chief Accounting Officer for Tarragon and its predecessors, Vinland Property
Trust and National Income Realty Trust, from September 1996 to November 1998.
She served as Accounting Manager of Vinland Property Trust and National Income
Realty Trust from June 1995 to August 1996. Ms. Pickens has been a Certified
Public Accountant since 1990.

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Charles Rubenstein (44) has been Executive Vice President of Tarragon since
December 1998 and General Counsel since September 1998. He also served as Senior
Vice President for Tarragon and its predecessor, National Income Realty Trust,
from September 1998 to December 1998. Prior to joining Tarragon, he was employed
as General Counsel for Simpson Housing Limited Partnership in Denver, Colorado
from January 1996 to February 1998. Mr. Rubenstein has been an attorney at law
since 1984.

Todd M. Schefler (46) became Executive Vice President - Development for Tarragon
in January 2003. He also served as Senior Vice President - Development from May
2001 to December 2002, and as Vice President - Structured Transactions of
Tarragon from January 2000 through May 2001. Prior to joining Tarragon, Mr.
Schefler was employed by Burroughs Development Corporation of Paramus, New
Jersey as a Senior Vice President - Acquisitions and Finance from April 1998 to
December 1999, and as Vice President from April 1994 to August 1997. He also
served as President of TMS Realty Inc., a real estate finance and development
consulting firm, from September 1997 to April 1998.

Saul Spitz (51) joined Tarragon as Executive Vice President of Acquisitions in
September 2000. He has been a member of APA Management LLC, a real estate
investment and management company, since September 1994. He has also been a
member of Ansonia LLC, which together with Tarragon has acquired close to 2600
apartments in the state of Connecticut, since November 1997. Mr. Spitz was a
co-managing member of Accord Properties Associates, LLC, which managed the
Ansonia portfolio in Connecticut, from 1998 through January 2001, when it was
acquired by Tarragon.

Eileen A. Swenson (52) joined Tarragon as President of Tarragon Management, Inc.
in September 2000. Ms. Swenson founded and served as President of Accord
Properties Associates, LLC and its predecessor, Accord Ventures, Inc., from
August 1994 through January 2001, when it was acquired by Tarragon. Ms. Swenson
has been a Certified Property Manager since 1987.

William M. Thompson (43) became Executive Vice President - Operations in March
2003. He joined Tarragon as Executive Vice President and Chief Information
Officer in September 2000. He served as Chief Financial Officer of Accord
Properties Associates, LLC from August 1998 through January 2001, when it was
acquired by Tarragon. Mr. Thompson was previously Chief Financial Officer of
Myers Northeast, a Connecticut based property management firm, from November
1992 until August 1998. Mr. Thompson has been a Certified Public Accountant
since 1982.

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ITEM 2. PROPERTIES

At December 31, 2002, our real estate portfolio consisted of 99 properties,
including 68 apartment communities (three currently under construction), eight
office buildings, 11 retail properties, two condominium conversions, three
condominium developments, and seven tracts of land. Of these properties, five
were included in For-Sale Housing inventory, and three properties were held for
sale. The remaining 91 properties were held for investment. Unconsolidated joint
ventures owned 26 of the 99 properties. Most of our properties are pledged to
secure mortgages. We believe our properties are adequately covered by liability
and casualty insurance, consistent with industry standards.

The following tables summarize information about our Investment Division
apartment portfolio and communities in our Development and For-Sale Housing
Divisions, including those owned through unconsolidated joint ventures.

Tarragon Realty Investors, Inc.
Investment Division Apartments
Summarized by Market
December 31, 2002

7

TARRAGON REALTY INVESTORS, INC.
INVESTMENT DIVISION APARTMENTS
DECEMBER 31, 2002

8

TARRAGON REALTY INVESTORS, INC.
INVESTMENT DIVISION APARTMENTS
DECEMBER 31, 2002

9

TARRAGON REALTY INVESTORS, INC.
INVESTMENT DIVISION APARTMENTS
DECEMBER 31, 2002

(1) Tarragon owns 49% of the partnerships that own these properties but
consolidates them because it controls them.

(2) These properties were sold in the first quarter of 2003.

(3) For properties owned by unconsolidated joint ventures, this balance
represents the net carrying value on the books of the joint venture.

The Investment Division also has 15 commercial properties with a total of
1,063,770 square feet.

TARRAGON REALTY INVESTORS, INC.
DEVELOPMENT DIVISION APARTMENTS
DECEMBER 31, 2002

The Development Division also has one community with 524 apartments and four
commercial properties with a total of 373,131 square feet under reposition.
Reposition is defined as extensive renovation to the interior or exterior of the
property or implementation of significant management strategies to increase
economic occupancy and revenue of the property.

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TARRAGON REALTY INVESTORS, INC.
FOR SALE HOUSING COMMUNITIES
DECEMBER 31, 2002

Projects in the For-Sale Housing Division's pipeline include second phases of
both Las Olas River House and Pine Crest and developments in Fort Myers,
Florida, and Hoboken, New Jersey. Pine Crest is an existing property we are
renovating and converting to homes for sale, and renovation of the second phase
is planned to commence in April 2003 and to include 118 homes. We have obtained
approval from the City of Fort Lauderdale, Florida, for 48,000 square feet of
retail space in the second phase of Las Olas River House. We are also seeking
approval for a 25-story tower above the retail space that will include 44 homes.
We plan to begin construction in the summer of 2003. We expect to begin
construction of a 131-unit condominium project in Ft. Myers, Florida, in April
2003 on land purchased in December 2002. Tarragon has formed joint ventures, in
which it owns interests ranging from 40% to 50%, to develop a total of 1,000
condominium homes and 137 affordable apartments in Hoboken, New Jersey. In
February 2003, one of our joint ventures obtained site plan approval from the
City of Hoboken, New Jersey for three luxury condominium projects with a total
of 436 units. Another of our Hoboken joint ventures also received Developer
designation, and are awaiting site plan approval from the City of Hoboken for an
additional 351 condominium homes and 87 affordable rental apartments.

ITEM 3. LEGAL PROCEEDINGS

Tarragon is a party to various claims and routine litigation arising in the
ordinary course of business. We do not believe that the results of these claims
and litigation, individually or in the aggregate, will have a material adverse
effect on our business, financial position, or results of operations.

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

During the fourth quarter of the fiscal year covered by this report, no matter
was submitted to a vote of security holders.

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PART II

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

Our common stock is listed on the NASDAQ National Market System under the symbol
"TARR." The following table sets forth the high and low bid quotations of our
common stock reported by the NASDAQ system for the periods indicated.
Over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commissions, and may not necessarily represent actual
transactions. The quotations have been restated to give effect to a 10% stock
dividend paid in April 2002 and a three-for-two stock split effective February
14, 2003.

According to the transfer agent's records, at March 3, 2003, our common stock
was held by approximately 5,318 holders, including beneficial holders. On March
3, 2003, the closing price of our common stock was $13.58.

No cash dividends were paid to common stockholders in 2002 and 2001. In 2000,
the Board of Directors discontinued cash dividends on Tarragon's common stock.
In December 2001, the Board of Directors authorized a 10% common stock dividend
that was paid on April 26, 2002, to holders of record on April 15, 2002. In
January 2003, the Board of Directors approved a three-for-two stock split
effective February 14, 2003.

[This space intentionally left blank.]

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ITEM 6. SELECTED FINANCIAL DATA

Please read the following information along with the Consolidated Financial
Statements and Notes and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Form 10-K.
Dollar amounts are in thousands, except per share amounts.

- ----------

(1) Per share data have been restated to give effect to the 10% stock dividends
declared in December 2000 and December 2001 and a three-for-two stock split
in February 2003.

(2) Prior to 2002, For-sale housing inventory was presented with Real estate
held for sale.

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

Please read this discussion along with the Consolidated Financial Statements and
Notes found at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."

RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-K

In addition to historical information, this Form 10-K contains forward-looking
statements. Forward-looking statements are expressions of our current beliefs
and expectations, based on information currently available to us, estimates, and
projections about our industry, and certain assumptions made by our management.
These statements are not historical facts. We use words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," and similar
expressions to identify our forward-looking statements, which include, among
other things, our anticipated financings and sales of properties and For-Sale
Housing inventory.

Because we are unable to control or predict many of the factors that will
determine our future performance and financial results, including future
economic, competitive, and market conditions, our forward-looking statements are
not guarantees of future performance. They are subject to risks, uncertainties,
and errors in assumptions that could cause our actual results to differ
materially from those reflected in our forward-looking statements. We believe
that the assumptions underlying our forward-looking statements are reasonable.
However, you should not place undue reliance on these forward-looking
statements. They only reflect our view and expectations as of the date of this
Form 10-K. We undertake no obligation to publicly update or revise any
forward-looking statement in light of new information, future events, or
otherwise.

CRITICAL ACCOUNTING POLICIES

Asset Impairment

We periodically review the carrying values of our properties. Accounting
principles generally accepted in the United States of America ("GAAP") requires
that the carrying value of a property held for sale not exceed the lower of its
cost or its estimated fair value less costs to sell. In instances where a
property's estimated fair value less costs to sell is less than its carrying
value at the time of evaluation, we provide an allowance for loss by making a
charge against operations. Our review of properties held for sale generally
includes selective site inspections, comparing the property's current rents to
market rents, reviewing the property's expenses and maintenance requirements,
discussions with the property manager, and a review of the surrounding area. We
may make adjustments to estimated fair values based on future reviews.

We also evaluate our properties held for investment for impairment whenever
events or changes in circumstances indicate that a property's carrying value may
not be recoverable. This evaluation generally consists of reviewing the
property's cash flow and current and projected market conditions, as well as
changes in general and local economic conditions. If we conclude that a property
has been impaired, its carrying value is written down to estimated fair value
with a charge against current earnings.

Investments in Joint Ventures Accounted for Using the Equity Method

We use the equity method to account for investments in partnerships and joint
ventures over which we exercise significant influence but do not control. Under
the equity method, our initial investments are increased by our proportionate
share of the partnerships' operating income and additional advances and
decreased by our proportionate share of the partnerships' operating losses and
distributions received. All significant intercompany transactions are
eliminated.

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We have investments in 21 partnerships or joint ventures in which we hold
noncontrolling interests or our outside partners have significant participating
rights, as defined by the Financial Accounting Standards Board's Emerging Issues
Task Force in its 96-16 Abstract. The net effect of not consolidating these
joint ventures has been to reduce consolidated total assets, total liabilities,
and gross revenues and expenses but has had no effect on reported net income or
loss except in instances where we have received distributions from a joint
venture in excess of our investment in the joint venture, with the excess
recorded as income.

Revenue Recognition

Rental, interest, and management fee revenue are recognized when earned. Revenue
from long term laundry and cable service contracts is deferred and amortized to
income on the straight-line basis over the terms of the contracts.

Gains on sales of real estate are recognized when and to the extent permitted by
SFAS No. 66 - "Accounting for Sales of Real Estate." Until the requirements of
SFAS No. 66 for full profit recognition have been met, transactions are
accounted for using the deposit, installment, cost recovery, or financing
method, whichever is appropriate.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, "Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections," which, among other things, rescinded SFAS
No. 4, "Reporting Gains and Losses from Extinguishment of Debt." SFAS No. 4
required gains and losses from extinguishments of debt to be classified as
extraordinary items, if material. Under SFAS No. 145, gains and losses on
extinguishments of debt will no longer be classified as extraordinary unless
they meet the unusual in nature and infrequency of occurrence criteria in the
Accounting Principles Board's Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
which is expected to be rare. SFAS No. 145 is effective for fiscal years
beginning after May 15, 2002. Upon our adoption of SFAS No. 145 in January 2003,
prepayment penalties or exit fees and the write-off of deferred financing
expenses in connection with repayment of debt prior to maturity will no longer
be classified as extraordinary items, but there will be no impact on our
reported net income or loss. Such expenses were $846,000 during 2002, $605,000
in 2001, and $2.7 million in 2000. We also recognized an extraordinary gain on
debt forgiveness of $420,000 in October 2001 upon the discounted payoff of the
mortgage secured by Orlando Central Park.

In November 2002, the FASB issued Interpretation (FIN) 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of SFAS No. 5,
"Accounting for Contingencies," SFAS No. 57, "Related Party Disclosures," and
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." FIN 45
requires guarantors to recognize a liability at the inception of guarantee
arrangements within its scope. Guarantors are also required to provide
additional disclosures for guarantees. The disclosure requirements are effective
for financial statements of interim or annual periods ending after December 15,
2002. The initial recognition and measurement provisions are applicable
prospectively to all guarantees issued or modified after December 31, 2002. We
are currently evaluating the effect that adoption of this pronouncement will
have on our financial statements.

In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." FIN 46 clarifies the application of Accounting Research Bulletin 51,
"Consolidated Financial Statements," for certain entities that do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties or in which equity
investors do not have the characteristics of a controlling financial interest
("variable interest entities"). Variable interest entities within the scope of
FIN 46 will be required to be consolidated by their primary beneficiary. The
primary beneficiary of a variable interest entity is

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determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. We are in the process of
determining what impact, if any, the adoption of the provisions of FIN 46 will
have upon our financial condition or results of operations.

ENVIRONMENTAL MATTERS

Under federal, state, and local environmental laws, ordinances, and regulations,
Tarragon may be liable for removal or remediation costs, as well as other costs
(such as fines or injuries to persons and property) where our employees may have
arranged for removal, disposal, or treatment of hazardous or toxic substances.
In addition, environmental laws impose liability for release of
asbestos-containing materials into the air, and third parties can seek recovery
from Tarragon for personal injury associated with those materials. We are not
aware of any liability relating to these matters that would have a material
adverse effect on our business, financial position, or results of operations.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of cash are property operations, borrowings, and proceeds
from the sale of properties. We believe these sources will continue to meet our
cash requirements, including debt service payments, property maintenance and
improvements, development costs for properties under construction, projected
purchases of existing properties, dividends on preferred stock, and planned
repurchases of common stock. Although we expect these sources of cash to be
sufficient to fund planned uses of cash, we can make no assurance that the
expected sales and refinancings of properties will be completed as planned.

Proceeds from borrowings are expected to continue to be a key source of cash for
Tarragon. In 2003, we expect to generate net proceeds from mortgage borrowings
on consolidated and unconsolidated properties of $30 million. We have a $20
million unsecured line of credit with affiliates of William S. Friedman, our
President and Chief Executive Officer and Chairman of our Board of Directors.
The line of credit matures in January 2004. All of these funds are available to
us as of December 31, 2002, as there was no outstanding balance. We have an
additional $10.3 million available under two lines of credit that mature in
2004.

We have sold four consolidated properties since December 31, 2002, for $26.4
million, receiving net proceeds of $12.6 million. We expect to generate an
additional $5 million in net proceeds from the sale of consolidated properties
during the remainder of 2003.

At December 31, 2002, we had entered into contracts to sell 15 of the remaining
27 units at 5600 Collins Avenue for an aggregate contract price of $4.4 million.
We had also entered into contracts to sell 28 units at Pine Crest Village I at
Victoria Park for an aggregate contract price of $6.5 million. We began the
conversion of Pine Crest to homes for sale in 2002 and expect to begin closing
sales in the second quarter of 2003. In 2003, we expect to generate net cash
proceeds of $25 million from the sale of For-Sale Housing inventory from both
5600 Collins and Pine Crest.

16

Contractual Commitments

The following table summarizes information regarding contractual commitments (in
thousands).

Of the 2003 scheduled debt maturities, the loans provide for extension options
of two years for $19.8 million and one year for $7.7 million. Of the 2004 and
2005 scheduled maturities, the loans provide for extension options of two years
for $29.8 million and one year for $10.2 million, and $6 million of the 2004
scheduled maturities was repaid in January 2003. We intend to extend the loans
or pay them off as they come due largely through refinancings. We believe we can
arrange such new financing as may be needed to repay maturing notes.

We have guaranteed $7.8 million of mortgages on three unconsolidated properties.
$925,000 relates to a mortgage that matures in 2012, $2.8 million relates to a
mortgage that matures in 2003, and $4.1 million relates to a mortgage that
matures in 2004. We have also guaranteed construction loans totaling $168.4
million on four unconsolidated properties, including the $90 million
construction loan for the Las Olas River House condominium development. This
loan was closed in March 2002, has a December 31, 2002, balance of $6.9 million,
and matures in 2005. The construction loan provides for a one-year extension.
The aggregate balance of the other construction loans at December 31, 2002, is
$71.4 million. These construction loans mature in 2003 or 2004 and have one- or
two-year extension options.

Cash Flows from Operating Activities

Our net cash flow provided by operating activities increased by $10 million in
2002 compared to 2001. Net cash flow provided by operating activities increased
by $19.5 million in 2001 compared to 2000. These increases were primarily due to
increases in the excess of For-sale housing inventory sales collected over
renovation costs of the condominium conversion. Additionally, the lease-up of
newly constructed apartment communities contributed to the increases.

Cash Flows from Investing Activities

During 2002, net cash used in investing activities decreased $24 million
compared to 2001 principally related to unconsolidated partnerships and joint
ventures. In 2002, Tarragon received its share of net proceeds from the sale of
five partnership properties totaling $13.2 million. In 2001, one partnership
property was sold, and Tarragon received $1.8 million. Additionally, in 2001,
Tarragon advanced $8.1 million to One Las Olas in connection with development of
its luxury condominium project. In 2002, the partnership obtained construction
financing and repaid Tarragon $4.8 million, although Tarragon advanced an
additional $4.6 million to the partnership that plans to develop the second
phase of this project. Excluding amounts advanced or received related to Las
Olas, we advanced funds for development costs of joint venture properties of
$2 million in 2002 and $4.1 million in 2001. We spent $29.5 million in 2002 and
$43.8 million in 2001 on development costs for consolidated properties under
construction.

Cash flows from investing activities were very similar for 2001 compared to
2000. In 2000, we advanced $5.4 million to joint ventures for property
development costs and spent $35.7 million on development costs for consolidated
properties.

17

See "Sales of Consolidated Properties" below for the detail of net cash proceeds
from the sale of consolidated properties during the last three years.

Cash Flows from Financing Activities

Cash provided by financing activities decreased $30 million in 2002 compared to
2001 chiefly due to net repayments of advances under our line of credit with
affiliates of William S. Friedman in 2002 of $12.2 million, while we borrowed
net advances of $5 million during 2001. We received $7.1 million from
unconsolidated partnerships and joint ventures representing our share of net
financing proceeds in 2002. In 2001, such distributions totaled $10.4 million.
Cash provided by financing activities decreased $17 million in 2001 compared to
2000, as distributions from partnerships' financing activities totaled $29
million in 2000.

As stated previously, proceeds from borrowings are a significant source of cash
for Tarragon. In 2002, we received net proceeds of $15.4 million from financings
of consolidated properties. We also received $30.7 million from construction
loan borrowings. In 2001, net cash proceeds from financing were $11.6 million,
and construction loan borrowings were $43.2 million. In 2000, net cash proceeds
from financing were $22.3 million, and construction loan borrowings were $34.2
million.

Common Stock Repurchase Program

The Board of Directors has authorized a common stock repurchase program. We
intend to continue to repurchase shares of our common stock as long as we
believe the fair market value of our net assets per share is substantially
greater than the market price of our common stock. We repurchased 326,982 shares
of our common stock in open market and negotiated transactions in 2002 at a cost
of $4.7 million. We repurchased 265,708 shares in 2001 and 549,652 shares in
2000 for an aggregate $3.2 million in 2001 and $5.7 million in 2000. Subject to
market conditions, we expect to repurchase shares of our common stock in 2003 at
a rate consistent with that of the prior three years. As of December 31, 2002,
Tarragon had authority to repurchase an additional 630,406 common shares.

18

Sales of Consolidated Properties

The following table summarizes sales of consolidated properties during the last
three years (in thousands). In accordance with SFAS No. 144, the gains on sale
of Collegewood Apartments and English Village Apartments were presented in
discontinued operations for the year ended December 31, 2002.

19

For-Sale Housing Inventory Sales

The following table summarizes the sales of For-sale housing inventory for 2000
through 2002. Due to an increase in estimated costs to complete the condominium
conversion of 5600 Collins Avenue, we recorded For-sale housing inventory
write-downs in 2002 totaling $2.7 million.

RESULTS OF OPERATIONS

2002 COMPARED TO 2001

Consolidated Properties

At December 31, 2002, our consolidated apartment communities included 9,815
operating units, and our consolidated commercial properties had an aggregate 1.2
million square feet. The following table summarizes the components of aggregate
property level net operating results for all of our consolidated properties for
the years ended December 31, 2002 and 2001.

20

The following table presents the changes in property level revenues and expenses
caused by properties consolidated, deconsolidated, or sold during the two-year
period and new development properties in lease-up.

- ----------

(a) In connection with a change in control, Antelope Pines and Woodcreek Garden
were consolidated beginning April 2002.

(b) Includes three commercial properties and four apartment communities.

(c) Due to a change in control in connection with forming joint ventures, The
Club at Danforth, The Links at Georgetown, The Liberty Building, and The
Vineyard at Eagle Harbor were deconsolidated in 2001.

(d) Includes six properties recently completed or under construction that began
lease-up in 2001 or 2002.

Other increases in rental revenue are due to a 1% increase in scheduled rents
and a 6% decrease in vacancy losses. Other increases in property operating
expenses are chiefly due to property tax refunds received in 2001, higher costs
of insurance in 2002, and increased management fee expense since out-sourcing
management to many of our properties in 2001 and 2002. These increased expenses
were partially offset by lower utility costs in 2002. Other decreases in
interest expense are due to paying off or paying down several mortgages and
decreases in interest rates on our variable rate debt.

The following table presents operating information about our portfolio of 41
consolidated apartment properties with 8,151 units owned for all of 2002 and
2001.

Rental revenue increased chiefly due to generally higher rental rates, as well
as decreased vacancy losses due to higher occupancy at several properties.
Average overall economic occupancy increased slightly from 90% in 2001 to 91.5%
in 2002. The increase in property operating expenses was due to higher property
management fees and property insurance costs, partially offset by lower utility
expenses, as discussed above.

Unconsolidated Partnerships and Joint Ventures

The following table summarizes the components of equity in income of
unconsolidated partnerships and joint ventures for 2002 and 2001.

21

Gain on sale of real estate for 2002 includes a $25.2 million gain on the sale
of Devonshire Apartment Owners' sole property, The Villages at Gateway. The
reduction in gain recognized for distributions in excess of investment
recognized in 2000 relates to Devonshire Apartment Owners. This income was
recognized in connection with the transfer of ownership of The Villages at
Gateway to the joint venture in July 2000 and represented distribution of
financing proceeds in excess of our investment in the joint venture.

Discontinued operations include the net operating results of Stone Creek
Associates and the gain on sale of its only property in December 2002.

Distributions in excess of investment are primarily related to distributions of
financing proceeds of joint ventures in which we have recovered our investment.
In these situations, the joint ventures' debt is non-recourse to Tarragon, and
Tarragon has not committed to fund any cash flow deficits of the joint ventures.

The following table presents the effect of properties consolidated,
deconsolidated, or sold during the two-year period and new development
properties in lease-up on aggregate joint ventures' property level revenues and
expenses.

- ----------

(a) In connection with a change in control, Antelope Pines and Woodcreek Garden
were consolidated beginning April 2002.

(b) Includes four apartment communities sold in 2002. Operating results for a
fifth property sold have been presented in discontinued operations.

(c) Due to a change in control in connection with forming joint ventures, The
Club at Danforth, The Links at Georgetown, The Liberty Building, and The
Vineyard at Eagle Harbor were deconsolidated in 2001.

(d) Includes three partnerships with properties recently completed or under
construction that began lease-up in 2001 or 2002.

22

Corporate Expenses

Corporate general and administrative expenses increased $963,000 for 2002
compared to 2001. We incurred $531,000 of expenses in connection with potential
acquisitions or development projects or financing transactions that were not
selected for further investment. Additionally, we recognized expense of $317,000
in 2002 in connection with stock options granted. We adopted the fair value
expense recognition provisions of SFAS No. 123 effective July 1, 2002, and we
recognized no expense in 2001 for stock options granted. Partially offsetting
these increases was a $796,000 decrease due to ceasing amortization of goodwill
in connection with the adoption of SFAS No. 142 in January 2002. The bulk of the
remaining increase is related to development-related personnel additions and
compensation increases.

Property general and administrative expenses decreased $409,000 for 2002
compared to 2001, primarily due to a change to third party property management
for certain of our properties and a related reduction in property management
staff during 2001 and 2002.

2001 COMPARED TO 2000

Consolidated Properties

At December 31, 2001, our consolidated apartment communities included 9,837
operating units, and our consolidated operating commercial properties had an
aggregate 1.1 million square feet. The following table summarizes the components
of aggregate property level net operating results for all of our consolidated
properties for the years ended December 31, 2001 and 2000.

The following table presents the changes in property level revenues and expenses
caused by properties acquired, deconsolidated, or sold during the two-year
period and new development properties in lease-up.

- ----------

(a) Includes three apartment communities in which we bought out our outside
partners' interests in February 2000.

(b) Includes three commercial properties and seven apartment communities.

(c) Due to a change in control in connection with forming joint ventures, The
Club at Danforth, The Links at Georgetown, The Liberty Building, and The
Vineyard at Eagle Harbor were deconsolidated in 2001, and The Villages at
Gateway (formerly known as Devonshire Apartments) was deconsolidated in
2000.

(d) Includes four properties recently completed that began lease-up in 2000 or
2001.

23

Other increases in property operating expenses are primarily due to higher
utility and insurance costs and increased management fee expense since
out-sourcing management to many of our properties in 2001. Other decreases in
interest expense are due to paying off or paying down several mortgages and
decreases in interest rates on our variable rate debt.

The following table presents operating information about our portfolio of 40
consolidated apartment properties with 7,699 units owned for all of 2001 and
2000.

Unconsolidated Partnerships and Joint Ventures

The following table summarizes the components of equity in income of
unconsolidated partnerships and joint ventures for 2001 and 2000.

Distributions in excess of investment are primarily related to distributions of
financing proceeds of joint ventures in which we have recovered our investment.
In these situations, the joint ventures' debt is non-recourse to Tarragon, and
Tarragon has not committed to fund any cash flow deficits of the joint ventures.

24

The following table presents the effect of properties deconsolidated during the
two-year period and renovated properties that were stabilized in 2000 on
aggregate joint ventures' property level revenues and expenses.

- ----------

(a) In connection with a change in control in connection with forming
joint ventures, The Club at Danforth, The Links at Georgetown, The
Liberty Building, and The Vineyard at Eagle Harbor were deconsolidated
in 2001, and the Villages at Gateway was deconsolidated in 2000.

(b) Includes four Ansonia properties that were renovated and stabilized in
2000.

Corporate Expenses

Corporate general and administrative expenses increased $1.8 million for 2001
compared to 2000 primarily due to additional positions relating to development
and higher rent in the corporate office in New York, which was relocated in June
2000.

SEGMENT OPERATING RESULTS

Investment Division

Net operating income (rental revenue less property operating expenses) for our
41 same store Investment Division apartment communities with 7,185 units
(consolidated and unconsolidated) increased $1.1 million, or 4.7%, in 2002
compared to 2001 and increased $489,000, or 2.2% in 2001 compared to 2000. These
increases were mostly due to increases in revenues: 3.7% in 2002 compared to
2001 and 4.3% in 2001 compared to 2000. Net operating income as a percentage of
rental revenue for these properties was 45.1% in 2002, 44.7% in 2001, and 45.6%
in 2000.

The 18 (ten consolidated and eight unconsolidated) apartment communities
stabilized during 2000, 2001, or 2002, contributed net operating income of $25.2
million in 2002 and $8 million in 2001 to the Investment Division. Prior to
their stabilization, their operating results were presented in the Development
Division.

Tarragon uses funds from operations ("FFO") along with net income or loss
computed in accordance with GAAP to measure the performance of the properties in
its Investment Division. See NOTE 16. "SEGMENT REPORTING" in the Notes to
Consolidated Financial Statements for the definition of FFO. The 41 same store
apartment communities with 7,185 units, both consolidated and unconsolidated,
reported an increase of $2 million, or 26%, in FFO in 2002 compared to 2001 and
an increase of $751,000, or 11%, in 2001 compared to 2000.

The 18 apartment communities stabilized during 2000, 2001, or 2002 contributed
FFO of $9.3 million in 2002 and $3.3 million in 2001 to the Investment Division.

25

Development Division

Tarragon measures the performance of its Development Division primarily by net
profit from third party and intercompany sales. Net profit from intercompany
sales is the excess of the properties' estimated fair values over their net
carrying values at the date they are determined to be stabilized and moved into
the Investment Division. Gains on transfers of assets between segments do not
represent gains recognizable in accordance with GAAP and, accordingly, are
eliminated for purposes of consolidated reporting.

In 2002, the Development Division reported net profit of $51.7 million on the
transfer of 11 consolidated and five unconsolidated properties to the Investment
Division upon the determination that they were stabilized. In 2001, the
Development Division reported net profit of $12.2 million on the transfer of
properties that had become stabilized (five consolidated and five
unconsolidated) to the Investment Division.

For-Sale Housing Division

Tarragon also measures the performance of its For-Sale Housing Division
primarily by net profit from third party and intercompany sales. Although it is
our smallest division, it is expected to be our most rapidly growing division.
Prior to 2002, the assets currently in our For-Sale Housing Division were
reported along with the Development Division.

26

Estimated Fair Market Value of Net Assets Per Common Share

Tarragon also measures its performance by changes in estimated fair market value
of net assets per common share, as presented in the following table. All per
share amounts have been restated to give effect to the February 14, 2003,
three-for-two stock split.

- ----------

(1) Book value per common share represents total stockholders equity less
preferred stock liquidation preference divided by shares outstanding.
Amounts have been restated to give effect to the April 2002 10% stock
dividend and the February 2003 three-for-two stock split.

(2) Estimated fair market values have been determined using the following
procedures. For properties with appraisals ordered by lenders in connection
with mortgage financing performed within two years for 2000 and within one
year for 2001 and 2002, the appraised values are used. We have estimated
the fair market value of our condominium conversions using the unit
contract or offering prices less estimated selling costs and remaining
costs of unit renovations. For 2000, we estimated the fair market value of
one property that was sold in February 2001 at such sale price, and we
estimated the fair market values of two properties using current written
offers to purchase from third parties. For 2001, we estimated the fair
market values of ten properties then under contract for sale at such
contract sale prices. Six of these were sold in 2002. We estimated the fair
market value of a nearly completed commercial property under construction
at the amount of a written offer less estimated costs to complete
construction. For 2001, we estimated the fair market values of four
properties using contract prices from recently terminated sale contracts
with third parties. For 2002, we estimated the fair market value of five
properties under contract at such contract prices. Three of these
properties were sold in the first quarter of 2003. Also for 2002, we
estimated the fair market values of two properties based on written offers
to purchase from third parties. For land and all other properties under
development or construction or in initial lease-up, the historical cost
basis net carrying values are used. For all other properties, we engaged
Marcus & Millichap, a national real estate investment brokerage company, to
perform Broker's Opinions of Value, and these values are used. Estimated
fair market values of investments in and advances to partnerships reflect
Tarragon's interest in the estimated fair market values of the net assets
(real estate value less mortgage debt).

(3) The estimated fair market value of our net assets is computed by adding the
excess of our estimated fair market values of our real estate and
investments in and advances to partnerships over their book values to and
subtracting intangible assets and deferred charges from book value equity.
Estimated fully diluted fair market value of net assets per common share
has been computed assuming all outstanding stock options have been
exercised. Per share amounts have been restated to give effect to the April
2002 10% stock dividend and the February 2003 three-for-two stock split.

27

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Tarragon is exposed to market risk from changes in interest rates that may
adversely affect our financial position, results of operations, and cash flows.
In seeking to minimize the risks from interest rate fluctuations, we manage such
exposure through our regular operating and financing activities. We do not trade
or speculate in financial instruments. In addition, we may incur losses due to
declines in the market price of our stock because of a put agreement described
below.

At December 31, 2002, Tarragon had four interest rate caps with aggregate
notional values of $35.7 million that mature between May 2005 and December 2006.
The carrying values of the caps are adjusted quarterly to their estimated fair
values, with the changes in value charged or credited to interest expense. At
December 31, 2002, if the rates on which the fair values are based had been 100
basis points lower, our interest expense for 2002 would have been higher by
$40,000. If the rates on which the fair values are based had been 100 basis
points higher, our interest expense would have been lower by $56,000.

At December 31, 2002, Tarragon had approximately $241 million of variable rate
debt. The primary base rate is the 30-day LIBOR. Using this balance of debt, if
LIBOR or any other indexes on which the rates are based increased by 100 basis
points (1%), our pre-tax earnings would decrease by approximately $2.37 million
(based on our expected level of interest capitalized) and cash flows would
decrease by approximately $2.34 million (based on our currently available
interest reserves). On the other hand, if interest rates decreased by 100 basis
points, our pre-tax earnings would increase by approximately $2.37 million and
cash flows would increase by approximately $2.20 million.

At December 31, 2002, unconsolidated partnerships had approximately $131 million
of variable rate debt. A 100 basis point increase in the index on which the
rates are based would reduce our pre-tax earnings by approximately $857,000
(based on our current operations-sharing ratios in the partnerships and the
expected level of interest capitalized), while a 100 basis point decrease would
increase our pre-tax earnings by approximately $857,000. Assuming these
partnerships distribute all of their available cash to the partners, our cash
flow would decrease by $832,000 if interest rates increase by 1%, and would
increase by $621,000 if interest rates decrease by 1%, (based on our currently
available interest reserves).

In 2002, we sold a put option for $10,000 to an unaffiliated investor. During a
period of one year expiring June 2003, the investor has the right to sell and we
have an obligation to purchase up to a total of 150,000 shares of our common
stock then owned or held by the investor at $10 per share. Any exercise of the
put option by the investor must be in a minimum amount of 7,500 shares per
delivery. The sale price was recorded as a liability as of the date of sale. If
the price of our common stock falls below $10 during the term of the put
agreement, the difference between the market price of the stock and the $10 put
price multiplied by 150,000 shares will be recorded as a charge to earnings and
a corresponding increase to the liability. At March 3, 2003, the closing price
of our common stock was $13.58.

[This space intentionally left blank.]

28

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS