CRESCENT FINANCE CO - 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, 2003.
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 NUMBERS 333-42293
333-89194-01

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CRESCENT FINANCE COMPANY *

-----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

DELAWARE 75-2531304
DELAWARE 42-1536518
- --------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
777 Main Street, Suite 2100, Fort Worth, Texas 76102

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(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code (817) 321-2100
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Securities registered pursuant to Section 12(b) of the Act: None
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 twelve (12) months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past ninety (90) days.

YES [X] NO [ ]

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).

YES [X] NO [ ]

As of June 30, 2003, the aggregate market value of the 2,242,714 units of
limited partnership interest held by non-affiliates of the registrant was
approximately $74.5 million, based on the closing price on the New York Stock
Exchange of $16.61 for common shares of beneficial interest of Crescent Real
Estate Equities Company. Each unit is exchangeable for two common shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission for Crescent Real Estate Equities Company's 2004 Annual Meeting of
Shareholders to be held in June 2004 are incorporated by reference into Part
III.

* Crescent Finance Company meets the conditions set forth in General Instruction
I (1) (a) and (b) of Form 10-K and therefore is filing this form with the
reduced disclosure format.

TABLE OF CONTENTS

PAGE

PART I.
Item 1. Business................................................................................ 3
Item 2. Properties.............................................................................. 15
Item 3. Legal Proceedings....................................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders..................................... 24

PART II.

Item 5. Market for Registrant's Common Equity and Related Unitholder Matters.................... 25
Item 6. Selected Financial Data................................................................. 27
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................................... 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 66
Item 8. Financial Statements and Supplementary Data............................................. 67
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................................
Item 9A. Controls and Procedures................................................................. 200

PART III.

Item 10. Trust Managers and Executive Officers of the Registrant................................. 200
Item 11. Executive Compensation.................................................................. 200
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Unitholder Matters............................................... 201
Item 13. Certain Relationships and Related Transactions.......................................... 201
Item 14. Principal Accountant Fees and Services.................................................. 201

PART IV.

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................ 201

2

PART I

ITEM 1. BUSINESS

THE COMPANY

Crescent Real Estate Equities Limited Partnership, a Delaware limited
partnership ("CREELP" and, together with its direct and indirect ownership
interests in limited partnerships, corporations and limited liability companies,
the "Operating Partnership"), was formed under the terms of a limited
partnership agreement dated February 9, 1994. The Operating Partnership is
controlled by Crescent Real Estate Equities Company, a Texas real estate
investment trust (the "Company" or "Crescent Equities"), through the Company's
ownership of all of the outstanding stock of Crescent Real Estate Equities,
Ltd., a Delaware corporation ("the General Partner"), which owns a 1% general
partner interest in the Operating Partnership. In addition, the Company owns
an approximately 84% limited partner interest in the Operating Partnership,
with the remaining approximately 15% limited partner interest held by other
limited partners.

All of the limited partners of the Operating Partnership, other than
the Company, own, in addition to limited partner interests, units. Each unit
entitles the holder to exchange the unit (and the related limited partner
interest) for two common shares of the Company or, at the Company's option, an
equivalent amount of cash. For purposes of this report, the term "unit" or "unit
of partnership interest" refers to the limited partner interest and, if
applicable, related units held by a limited partner. Accordingly, as of December
31, 2003, the Company's approximately 84% limited partner interest has been
treated as equivalent, for purposes of this report, to 49,052,048 units and the
remaining approximately 15% limited partner interest has been treated as
equivalent, for purposes of this report, to 8,873,347 units. In addition, the
Company's 1% general partner interest has been treated as equivalent, for
purposes of this report, to 585,105 units.

The Company owns its assets and carries on its operations and other
activities through the Operating Partnership and its other subsidiaries. The
limited partnership agreement of the Operating Partnership acknowledges that all
of the Company's operating expenses are incurred for the benefit of the
Operating Partnership and provides that the Operating Partnership shall
reimburse the Company for all such expenses. Accordingly, expenses of the
Company are reimbursed by the Operating Partnership.

Crescent Finance Company, a Delaware corporation wholly-owned by the
Operating Partnership, was organized in March 2002 for the sole purpose of
acting as co-issuer with the Operating Partnership of $375.0 million aggregate
principal amount of 9.25% senior notes due 2009. Crescent Finance Company does
not conduct operations of its own.

At December 31, 2003, the assets and operations of the Operating
Partnership were divided into four investment segments as follows:

- Office Segment;

- Resort/Hotel Segment;

- Residential Development Segment; and

- Temperature-Controlled Logistics Segment.

Within these segments, the Operating Partnership owned in whole or in
part the following real estate assets (the "Properties") as of December 31,
2003:

- OFFICE SEGMENT consisted of 72 office properties,
(collectively referred to as the "Office Properties"), located
in 27 metropolitan submarkets in seven states, with an
aggregate of approximately 30.0 million net rentable square
feet.

- RESORT/HOTEL SEGMENT consisted of five luxury and destination
fitness resorts and spas with a total of 1,036 rooms/guest
nights and four upscale business-class hotel properties with a
total of 1,771 rooms (collectively referred to as the
"Resort/Hotel Properties").

- RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Operating
Partnership's ownership of common stock representing interests
ranging from 98% to 100% in four residential development
corporations (collectively referred to as the "Residential
Development Corporations"), which in turn, through partnership
arrangements, owned in whole or in part 23 upscale residential
development properties (collectively referred to as the
"Residential Development Properties").

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- TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of the
Operating Partnership's 40% interest in Vornado Crescent
Portland Partnership (the "Temperature-Controlled Logistics
Partnership") and a 56% non-controlling interest in the
Vornado Crescent Carthage and KC Quarry, L.L.C. The
Temperature-Controlled Logistics Partnership owns all of the
common stock, representing substantially all of the economic
interest, of AmeriCold Realty Corporation (the
"Temperature-Controlled Logistics Corporation"), a REIT. As of
December 31, 2003, the Temperature-Controlled Logistic
Corporation directly or indirectly owned 87
temperature-controlled logistics properties (collectively
referred to as the "Temperature-Controlled Logistics
Properties") with an aggregate of approximately 440.7 million
cubic feet (17.5 million square feet) of warehouse space. As
of December 31, 2003, Vornado Crescent Carthage and KC Quarry
L.L.C. owned two quarries and the related land. The Operating
Partnership accounts for its interests in the
Temperature-Controlled Logistics Partnership and in the
Vornado Crescent Carthage and KC Quarry, L.L.C. as
unconsolidated equity entities.

See Note 3, "Segment Reporting," included in Item 8, "Financial
Statements and Supplementary Data," for a table showing selected financial
information for each of these investment segments for the years ended December
31, 2003, 2002, and 2001, and total assets, consolidated property level
financing, consolidated other liabilities, and minority interests for each of
these investment segments at December 31, 2003 and 2002.

See Note 1, "Organization and Basis of Presentation," included in Item
8, "Financial Statements and Supplementary Data," for a table that lists the
principal subsidiaries of the Operating Partnership and the properties owned by
such subsidiaries.

See Note 9, "Investments in Unconsolidated Companies," included in Item
8, "Financial Statements and Supplementary Data," for a table that lists the
Operating Partnership's ownership in significant unconsolidated joint ventures
and investments as of December 31, 2003, including eight Office Properties and
two Residential Development Corporations. See Note 8, "Temperature-Controlled
Logistics," included in Item 8, "Financial Statements and Supplementary Data,"
for information regarding the Operating Partnership's ownership interest in the
Temperature-Controlled Logistics Properties.

For purposes of segment reporting as defined in Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of an
Enterprise and Related Information," and this Annual Report on Form 10-K, the
Office Properties, the Resort/Hotel Properties, the Residential Development
Properties and the Temperature-Controlled Logistics Properties are considered
four separate reportable segments. However, for purposes of investor
communications, the Operating Partnership classifies its luxury and destination
fitness resorts and spas and Residential Development Properties as a single
group referred to as the "Resort and Residential Development Sector" due to the
similar characteristics of targeted customers. This group does not contain the
four business-class hotel properties. Instead, for investor communications, the
four business-class hotel properties are classified with the
Temperature-Controlled Logistics Properties as the Operating Partnership's
"Investment Sector."

BUSINESS OBJECTIVES AND STRATEGIES

BUSINESS OBJECTIVES

The Operating Partnership's primary business objective is to provide an
attractive return on equity to the Company's shareholders, through its focus on
increasing earnings, cash flow growth and predictability, along with continually
strengthening its balance sheet. The Operating Partnership also strives to
attract and retain the best talent available and to empower management through
the development and implementation of a cohesive set of operating, investing and
financing strategies that will align their interests with the interests of the
Company's shareholders.

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OPERATING STRATEGIES

The Operating Partnership seeks to enhance its operating performance by
distinguishing itself as the leader in its core investment segments through
asset quality, customer service and economies of scale with dominant market
share.

The Operating Partnership's operating strategies include:

- operating the Office Properties as long-term investments;

- providing exceptional customer service;

- increasing occupancies, rental rates and same-store net
operating income;

- emphasizing brand recognition of the Operating Partnership's
premier Class A Office Properties and luxury and destination
fitness resorts and spas; and

- using the Operating Partnership's operating platform to
provide superior asset management services to partners and
third parties.

INVESTING STRATEGIES

The Operating Partnership focuses on investment opportunities primarily
within the Office Segment in markets considered "demand-driven," or to have high
levels of in-migration by corporations, affordable housing costs, moderate costs
of living, and other attributes creating an attractive business environment.
These investment opportunities are evaluated in light of the Operating
Partnership's long-term investment strategy of investing in assets within
markets that have significant potential for long-term growth. Investment
opportunities are expected to provide growth in earnings and cash flow after
applying management skills, renovation and expansion capital and strategic
vision.

The Operating Partnership's investment strategies include:

- capitalizing on strategic acquisition opportunities,
including acquisitions with joint venture capital resources,
primarily within the Operating Partnership's investment
segments;

- continually reviewing opportunities to dispose of assets based
on current and prospective market valuations;

- investing in securities and loans primarily to real estate
companies to maximize returns on excess capital; and

- evaluating future repurchases of the Company's common shares,
considering stock price, cost of capital, alternative
investment options and growth implications.

FINANCING STRATEGIES

The Operating Partnership employs a disciplined set of financing
strategies to fund its operating and investing activities.

The Operating Partnership's financing strategies include:

- funding operating expenses, debt service payments and
distributions to unitholders, primarily through cash flow from
operations, and return of capital from the Residential
Development Segment;

5

- taking advantage of market opportunities to refinance existing
debt to reduce interest cost, where appropriate replace
secured debt with unsecured debt, maintain a conservative debt
maturity schedule and expand the Operating Partnership's
lending group;

- minimizing the Operating Partnership's exposure to market
changes in interest rates through fixed rate debt and interest
rate swaps as appropriate; and

- utilizing a combination of debt, equity, joint venture capital
and selected asset disposition alternatives to finance
acquisition and development opportunities.

EMPLOYEES

As of March 3, 2004, the Operating Partnership had approximately 728
employees. None of these employees are covered by collective bargaining
agreements. The Operating Partnership considers its employee relations to be
good.

ENVIRONMENTAL MATTERS

The Operating Partnership and its Properties are subject to a variety
of federal, state and local environmental, health and safety laws, including:

- Comprehensive Environmental Response, Compensation, and
Liability Act, as amended ("CERCLA");

- Resource Conservation & Recovery Act;

- Clean Water Act;

- Clean Air Act;

- Toxic Substances Control Act; and

- Occupational Safety & Health Act.

The application of these laws to a specific property that the Operating
Partnership owns will be dependent on a variety of property-specific
circumstances, including the former uses of the property and the building
materials used at each property. Under certain environmental laws, principally
CERCLA and comparable state laws, a current or previous owner or operator of
real estate may be required to investigate and clean up certain hazardous or
toxic substances, asbestos-containing materials, or petroleum product releases
at the property. They may also be held liable to a governmental entity or third
parties for property damage and for investigation and clean up costs such
parties incur in connection with the contamination, whether or not the owner or
operator knew of, or was responsible for, the contamination. In addition, some
environmental laws create a lien on the contaminated site in favor of the
government for damages and costs it incurs in connection with the contamination.
The owner or operator of a site also may be liable under certain environmental
laws and common law to third parties for damages and injuries resulting from
environmental contamination emanating from the site. Such costs or liabilities
could exceed the value of the affected real estate. The presence of
contamination or the failure to remediate contamination may adversely affect the
owner's ability to sell or lease real estate or to borrow using the real estate
as collateral.

Compliance by the Operating Partnership with existing environmental,
health and safety laws has not had a material adverse effect on the Operating
Partnership's financial condition and results of operations, and management does
not believe it will have such an impact in the future. In addition, the
Operating Partnership has not incurred, and does not expect to incur any
material costs or liabilities due to environmental contamination at Properties
it currently owns or has owned in the past. However, the Operating Partnership
cannot predict the impact of new or changed laws or regulations on its current
Properties or on properties that it may acquire in the future. The Operating
Partnership has no current plans for substantial capital expenditures with
respect to compliance with environmental, health and safety laws.

6

INDUSTRY SEGMENTS

OFFICE SEGMENT

OWNERSHIP STRUCTURE

As of December 31, 2003, the Operating Partnership owned or had an
interest in 72 Office Properties located in 27 metropolitan submarkets in seven
states, with an aggregate of approximately 30.0 million net rentable square
feet. The Operating Partnership, as lessor, has retained substantially all of
the risks and benefits of ownership of the Office Properties and accounts for
the leases of its 64 consolidated Office Properties as operating leases.
Sixty-three of the Office Properties are wholly-owned and nine are owned through
joint ventures, one of which is consolidated and eight of which are
unconsolidated. Additionally, the Operating Partnership provides management and
leasing services for the majority of its Office Properties.

See Item 2, "Properties," for more information about the Operating
Partnership's Office Properties. See Note 1, "Organization and Basis of
Presentation," of Item 8, "Financial Statements and Supplementary Data," for a
table that lists the principal subsidiaries of the Operating Partnership and the
Properties owned by such subsidiaries. See Note 9, "Investments in
Unconsolidated Companies," of Item 8, "Financial Statements and Supplementary
Data," for a table that lists the Operating Partnership's ownership in the eight
Office Properties in which the Operating Partnership owned an interest through
unconsolidated joint ventures.

RECENT DEVELOPMENTS

During the year ended December 31, 2003, the Operating Partnership
acquired The BAC-Colonnade Building ("The Colonnade"), in Miami, Florida;
acquired two Office Properties and two retail parcels within Hughes Center in
Las Vegas, Nevada; entered into a joint venture which acquired an office
building, BriarLake Plaza, in Houston, Texas; disposed of the Las Colinas Plaza
retail property in Dallas, Texas; disposed of four Office Properties held
through Woodlands Office Equities - `95 Limited Partnership ("WOE"); and
disposed of its 52.5% economic interest in The Woodlands Commercial Properties
Company, L.P. (Woodlands CPC").

Subsequent to December 31, 2003, the Operating Partnership acquired an
additional five office properties and seven retail parcels within Hughes Center.

See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Developments," for additional
information regarding these transactions.

MARKET INFORMATION

The Office Property portfolio reflects the Operating Partnership's
strategy of investing in first-class ("Class A") assets within markets that have
significant potential for long-term rental growth. Within its selected
submarkets, the Operating Partnership has focused on premier locations that
management believes are able to attract and retain the highest quality tenants
and command premium rents. Consistent with its long-term investment strategies,
the Operating Partnership has sought transactions where it was able to acquire
properties that have strong economic returns based on in-place tenancy and also
have a dominant position within the submarket due to quality and/or location.
Accordingly, management's long-term investment strategy not only demands
acceptable current cash flow return on invested capital, but also considers
long-term cash flow growth prospects. The Operating Partnership applies a
well-defined leasing strategy in order to capture the potential rental growth in
the Operating Partnership's portfolio of Office Properties from occupancy gains
within the markets and the submarkets in which the Operating Partnership has
invested.

In selecting the Office Properties, the Operating Partnership analyzed
demographic and economic data to focus on markets expected to benefit from
significant long-term employment growth. The demographic conditions, economic
conditions and trends (population growth and employment growth) favoring the
markets in which the Operating Partnership has invested are projected to
continue to exceed the national averages, as illustrated in the following table.
In addition, the

7

Operating Partnership considers these markets "demand-driven" due to high levels
of in-migration by corporations, affordable housing costs, moderate cost of
living, and the presence of centrally located travel hubs, making all areas of
the country easily accessible.

PROJECTED POPULATION GROWTH AND EMPLOYMENT GROWTH FOR ALL OPERATING
PARTNERSHIP MARKETS

Population Employment
Growth Growth
Metropolitan Statistical Area 2004-2007 2004-2007
- -------------------------------------- ---------- ----------

Albuquerque, NM 6.3% 10.2%
Austin, TX 12.1 17.6
Colorado Springs, CO 6.1 12.2
Dallas, TX 8.3 11.3
Denver, CO 4.9 7.3
Fort Worth, TX 8.5 11.7
Houston, TX 7.3 9.3
Las Vegas, NV 14.7 15.4
Miami, FL 4.0 6.4
Phoenix, AZ 11.6 15.3
San Diego, CA 6.9 9.7
United States 3.5 5.8

- ---------------
Source: Compiled from information published by Economy.com, Inc.

TEXAS

As of December 2003, Texas' economy and employment were still weak, but
showed stronger performance and more positive direction than a year ago. During
the year ended December 2003, 45,100 jobs were created in Texas for a 0.5%
increase, according to the Texas Workforce Commission. Statistics from the U.S.
Bureau of Labor Statistics show that for the same period, national employment
was down approximately 62,000 jobs. As of December 2003, the Texas unemployment
rate was 5.8%, compared to the December 2002 level of 5.9% and the December 2003
national rate of 5.4%.

DALLAS

The rate of employment decline in Dallas decreased significantly in
2003. According to the Texas Workforce Commission, at the end of the year, the
Dallas Primary Metropolitan Statistical Area ("PMSA") total nonfarm employment
was down 6,500 jobs, or 0.3%, compared to a decline of 30,900 jobs, or 1.6%, in
2002. The unemployment rate was still weak at 6.0% as of December 2003, but
improved compared to the 6.4% rate at December 2002.

In 2003, Dallas' office market continued to soften, although by the end
of 2003, it was showing signs of stabilization. Net economic absorption
(excluding sublet space) totaled approximately negative 4.4 million square feet,
including negative 1.0 million square feet in Class A office space, according to
CoStar data. Physical net absorption including sublet space,was negative 2.7
million square feet, indicating positive movement in the sublet market. Class A
office physical net absorption, including sublet space, turned positive in 2003
at 130,000 square feet. Completions of new office space totaled only 1.1 million
square feet for the entire Dallas market; approximately half of this space is
Class A. Occupancy levels at December 2003 were 75.5% for all office space and
80.1% for Class A office space.

HOUSTON

According to the Texas Workforce Commission, Houston's employment was
flat to slightly down through most of the year, but ended 2003 with some job
growth, an additional 4,000 jobs, or 0.2%. In 2002, based on December data,
Houston lost 13,300 jobs, or 0.6%. As of December 2003, the Houston unemployment
rate was 5.9%, compared to 5.6% as of December 2002.

8

In 2003, Houston's office market softened slightly; by the end of 2003,
however, the market appeared close to stabilization. Net economic net absorption
(excluding sublet space) totaled approximately negative 1.1 million square feet,
including negative 345,000 square feet in Class A office space, according to
CoStar data. Physical net absorption including sublet space, was negative 1.4
million square feet. Class A office physical net absorption, including sublet
space, was negative 222,000 square feet in 2003. Houston office completions of
new office space totaled 2.1 million square feet, of which 1.7 million square
feet is Class A. Occupancy levels at December 2003 were 83.8% for all office
space and 85.5% for Class A office space.

AUSTIN

Austin's economy picked up momentum in 2003. Based on December 2003
data from the Texas Workforce Commission, employment in the metropolitan region
grew by 7,100 jobs, or 1.1%, compared to a decrease of 900 jobs in 2002 (0.1%)
and a decrease of 23,900 jobs in 2001 (3.5%). As of December 2003, Austin's
unemployment rate was 4.5%, compared to 5.0% as of December 2002.

In 2003, Austin's office market remained weak. By the end of 2003,
however, the market was close to stabilization. Net economic absorption
(excluding sublet space) totaled approximately negative 1.6 million square feet,
including negative 742,000 square feet in Class A office space, according to
CoStar data. Physical net absorption, including sublet space, in 2003 was
positive 185,000 square feet, indicating strong absorption of sublet space.
Class A office physical net absorption, including sublet space, was also
positive in 2003 at 791,000 square feet. Office completions of new office space
totaled 775,000 square feet. Occupancy levels at December 2003 were 81.6% for
all office space and 78.8% for Class A office space.

DENVER

In 2003, Denver's economy nearly stabilized after two years of job
losses, based on unemployment figures and month-to-month changes in nonfarm
employment. According to the U.S. Bureau of Labor Statistics, as of December
2003, the unemployment rate was 5.9%, unchanged from the prior year.

2003 was a difficult period for the Denver office market, but there
were some positive signs by the end of the year. Net economic absorption
(excluding sublet space) totaled approximately negative 1.9 million square feet,
but only 95,000 of this was Class A office space, according to CoStar data.
Physical net absorption, including sublet space, in 2003 was negative 1.2
million square feet. Class A office physical net absorption, including sublet
space, turned positive in 2003 at 430,000 square feet. Office completions of new
office space totaled only 883,000 square feet of which 540,000 square feet was
Class A. Occupancy levels at December 2003 were 82.8% for all office space and
82.1% for Class A office space.

MIAMI

Miami continues to enjoy economic recovery and expansion. According to
the U.S. Bureau of Labor Statistics, the metropolitan region suffered in 2001
and lost 16,600 jobs, or 1.6% based on December data. In 2002, Miami added 7,600
jobs or 0.7% and in 2003 the metro area gained 9,700 jobs, or 0.9%. As of
December 2003, the Miami unemployment rate was 6.1% compared to 7.0% as of
December 2002.

In 2003, the Miami office market still experienced some softness, but
showed positive conditions in the second half of the year. The 36 million square
foot market experienced very slight negative absorption of 60,000 square feet
for the year ended December 2003 but had improved fourth quarter absorption of
329,000 square feet, according to Real Data Information Systems, Inc. data.
Class A office physical net absorption, including sublet space, totaled 31,000
square feet in 2003, and 301,000 square feet in the fourth quarter according to
RealData Information Systems, Inc. Occupancy levels at December 2003 were 82.7%
for all office space and 81.8% for Class A office space.

LAS VEGAS

Las Vegas' economic expansion in 2003 was one of the strongest in the
U.S. and reflected increasing momentum. According to the U.S. Bureau of Labor
Statistics, the metropolitan region added 33,600 jobs, or 4.2% (based on
December 2003 nonfarm employment data from the Nevada Department of Employment,
Training & Rehabilitation). The increase is

9

nearly double that of the prior year (18,100 jobs, or 2.3%). As of December
2003, the Las Vegas unemployment rate was 4.4%, compared to 5.0% at December
2002, and to the national rate of 5.4%.

In 2003, the Las Vegas office market continued to reflect relatively
healthy market conditions. The 20 million square foot market absorbed 928,000
square feet, according to Grubb & Ellis data. Class A office physical net
absorption totaled 154,000 square feet in 2003. Occupancy levels as of December
2003, were 87.4% for all office space and 89.2% for Class A office space.

COMPETITION

The Operating Partnership's Office Properties, primarily Class A
properties located within the southwest, individually compete against a wide
range of property owners and developers, including property management companies
and other REITs, that offer space in similar classes of office properties (for
example, Class A and Class B properties.) A number of these owners and
developers may own more than one property. The number and type of competing
properties in a particular market or submarket could have a material effect on
the Operating Partnership's ability to lease space and maintain or increase
occupancy or rents in its existing Office Properties. Management believes,
however, that the quality services and individualized attention that the
Operating Partnership offers its tenants, together with its active preventive
maintenance program and superior building locations within markets, enhance the
Operating Partnership's ability to attract and retain tenants for its Office
Properties. In addition, as of December 31, 2003, on a weighted average basis,
the Operating Partnership owned approximately 16% of the Class A office space in
the 27 submarkets in which the Operating Partnership owned Class A office
properties, and 25.3% of the Class B office space in the one submarket in which
the Operating Partnership owned Class B office properties. Management believes
that ownership of a significant percentage of office space in a particular
market reduces property operating expenses, enhances the Operating Partnership's
ability to attract and retain tenants and potentially results in increases in
Operating Partnership net income.

DIVERSIFIED TENANT BASE

The Operating Partnership's top five tenants accounted for
approximately 11% of the Operating Partnership's total Office Segment rental
revenues for the year ended December 31, 2003. The loss of one or more of the
Operating Partnership's major tenants would have a temporary adverse effect on
the Operating Partnership's financial condition and results of operations until
the Operating Partnership is able to re-lease the space previously leased to
these tenants. Based on rental revenues from office leases in effect as of
December 31, 2003, no single tenant accounted for more than 5% of the Operating
Partnership's total Office Segment rental revenues for 2003.

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RESORT/HOTEL SEGMENT

OWNERSHIP STRUCTURE

As of December 31, 2003, the Operating Partnership owned or had an
interest in nine Resort/Hotel Properties. The Operating Partnership holds one of
the Resort/Hotel Properties, the Fairmont Sonoma Mission Inn & Spa, through a
joint venture arrangement, pursuant to which the Operating Partnership owns an
80.1% interest in the limited liability company that owns the Sonoma Mission Inn
& Spa. The remaining Resort/Hotel Properties are wholly-owned.

Eight of the Resort/Hotel Properties are leased to taxable REIT
subsidiaries that the Operating Partnership owns or in which it has an interest.
The Omni Austin Hotel is leased to HCD Austin Corporation, an unrelated third
party.

Third party operators manage eight of the Resort/Hotel Properties.
Ventana Inn and Spa is managed by Sonoma Management Company, or "Sonoma
Management," an entity in which the Operating Partnership held a 10% interest
until it sold its interest to the 90% owner in 2003. In addition, five of the
Resort/Hotel Properties that are managed by third party operators are subject to
a Master Asset Management and Administrative Services Agreement with Sonoma
Management, pursuant to which Sonoma Management receives asset management and
incentive fees from the Operating Partnership.

RECENT DEVELOPMENTS

On November 21, 2003, Manalapan Hotel Partners, L.L.C. ("Manalapan"),
owned 50% by the Operating Partnership and 50% by WB Palm Beach Investors,
L.L.C., sold the Ritz Carlton Palm Beach Resort/Hotel Property in Palm Beach,
Florida. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Developments," for additional
information regarding this transaction.

MARKET INFORMATION

Lodging demand is highly dependent upon the global economy and volume
of business travel. Immediately prior to September 11, 2001, the hospitality
industry enjoyed record profits. However, the weak global economy which
continued throughout 2002 and 2003, resulted in weak performance for 2002, and
much of 2003. Leisure travel recovered slightly in 2003, but business travel
remained weak. As a result, market conditions were flat in 2003. National hotel
occupancy in 2003 increased 0.3% over 2002. The average daily room rate declined
1.7%, and revenue per available room (a combination of occupancy and room rates
and the chief measure of hotel market performance) increased just 0.2% over
2002. For the "upper upscale" segment of the market (most comparable to the
Operating Partnership's portfolio), revenue per available room declined 1.2% in
2003 from the prior year.

COMPETITION

Most of the Operating Partnership's upscale business class Resort/Hotel
Properties in Denver, Albuquerque, Austin and Houston are business and
convention center hotels that compete against other business and convention
center hotels. The Operating Partnership believes that its luxury and
destination fitness resorts and spas are unique properties due to location,
which creates barriers for competition to enter, concept and high replacement
cost. However, the luxury and destination fitness resorts and spas do compete
against business-class hotels or middle-market resorts in their geographic
areas, as well as against luxury resorts nationwide and around the world.

11

RESIDENTIAL DEVELOPMENT SEGMENT

OWNERSHIP STRUCTURE

As of December 31, 2003, the Operating Partnership owned common stock
representing interests of 98% to 100% in four Residential Development
Corporations, which in turn, through joint ventures or partnership arrangements,
owned in whole or in part 23 Residential Development Properties. The Residential
Development Corporations are responsible for the continued development and the
day-to-day operations of the Residential Development Properties.

RECENT DEVELOPMENTS

On December 31, 2003, the Operating Partnership disposed of its
interest in The Woodlands Residential Development Property. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Recent Developments," for additional information regarding this
transaction.

COMPETITION AND MARKET INFORMATION

The Operating Partnership's Residential Development Properties compete
against a variety of other housing alternatives in each of their respective
areas. These alternatives include other planned developments, pre-existing
single-family homes, condominiums, townhouses and non-owner occupied housing,
such as luxury apartments. Management believes that Desert Mountain and the
properties owned by CRDI, representing the Operating Partnership's most
significant investments in Residential Development Properties, contain certain
features that provide competitive advantages to these developments.

Desert Mountain, a luxury residential and recreational private
community in Scottsdale, Arizona, offers six 18-hole Jack Nicklaus signature
golf courses with adjacent clubhouses. Management believes Desert Mountain has
few direct competitors due in part to the superior environmental attributes and
the amenity package that Desert Mountain offers to its members. Sources of
competition come from the resale market of existing lots and homes within Desert
Mountain and from smaller, less developed projects in the area. However,
management believes Desert Mountain's current inventory is superior to the
inventory available on the resale market and in nearby developments, as the
remaining lots are in the best locations within Desert Mountain. In addition to
the quality of the remaining lots, Desert Mountain's amenity package continues
to be unparalleled, and future residential golf development in the Scottsdale
area is limited due to the lack of water available for golf course use.

CRDI invests primarily in mountain resort residential real estate in
Colorado and California, and residential real estate in downtown Denver,
Colorado. Management believes that the Properties owned by CRDI have limited
direct competitors because the projects' locations are unique, land availability
is limited, and development rights are restrictive in most of these locations.

Residential development demand is highly dependent upon the national
economy, mortgage interest rates, and home sales. A slowing economy, which
continued into the first half of 2003, contributed to flat or reduced lot and
acre absorption, and to reduced average sales prices, primarily at Desert
Mountain and at The Woodlands.

12

TEMPERATURE-CONTROLLED LOGISTICS SEGMENT

OWNERSHIP STRUCTURE

As of December 31, 2003, the Operating Partnership held a 40% interest
in the Temperature-Controlled Logistics Partnership, which owns all of the
common stock, representing substantially all of the economic interest, of the
Temperature-Controlled Logistics Corporation, which directly or indirectly owns
the 87 Temperature-Controlled Logistics Properties, with an aggregate of
approximately 440.7 million cubic feet (17.5 million square feet) of warehouse
space.

The Temperature-Controlled Logistics Corporation leases the
Temperature-Controlled Logistics Properties to AmeriCold Logistics, a limited
liability company owned 60% by Vornado Operating L.P. and 40% by a subsidiary of
Crescent Operating, Inc. ("COPI"). The Operating Partnership has no economic
interest in AmeriCold Logistics. See Note 23, "COPI," in Item 8, "Financial
Statements and Supplementary Data," for information on the proposed acquisition
of COPI's 40% interest in AmeriCold Logistics by a new entity to be owned by the
Company's shareholders and the Operating Partnership's unitholders.

AmeriCold Logistics, as sole lessee of the Temperature-Controlled
Logistics Properties, leases the Temperature-Controlled Logistics Properties
from the Temperature-Controlled Logistics Corporation under three triple-net
master leases, as amended. On February 22, 2001, the Temperature-Controlled
Logistics Corporation and AmeriCold Logistics agreed to restructure certain
financial terms of the leases, including a reduction of the rental obligation
for 2001 and 2002, the increase of the Temperature-Controlled Logistics
Corporation's share of capital expenditures for the maintenance of the
properties (effective January 1, 2000), and the extension of the date on which
deferred rent is required to be paid to December 31, 2003. On March 2, 2004, the
Temperature-Controlled Logistics Corporation and Americold Logistics amended the
leases to further extend the deferred rent period to December 31, 2005 from
December 31, 2004. The parties previously extended the deferred rent period to
December 31, 2004 from December 31, 2003, on March 7, 2003. The Operating
Partnership recognizes rental income from the Temperature-Controlled Logistics
Properties when earned and collected, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Unconsolidated
Investments" for additional information.

On February 23, 2004, Alec Covington, President and Chief Executive
Officer of AmeriCold Logistics, resigned effective March 31, 2004, to take an
opportunity in an unrelated industry. A search to identify a successor is
currently underway. Anthony Cossentino, Chief Financial Officer, will oversee
the AmeriCold business and Mike O'Connell, who has been with AmeriCold for over
ten years, has been promoted to be in charge of all operations and, until a
successor is in place, will report to Mr. Cossentino.

VORNADO CRESCENT CARTHAGE AND KC QUARRY, L.L.C.

As of December 31, 2003, the Operating Partnership held a 56%
non-controlling interest in Vornado Crescent Carthage and KC Quarry, L.L.C.
("VCQ"). The assets of VCQ include two quarries and the related land.

RECENT DEVELOPMENTS

On February 5, 2004, the Temperature-Controlled Logistics Corporation
completed a $254.4 million mortgage financing with Morgan Stanley Mortgage
Capital Inc., secured by 21 of its owned and seven of its leased
temperature-controlled logistics properties. The loan matures in April 2009,
bears interest at LIBOR plus 295 basis points (with a LIBOR floor of 1.5% with
respect to $54.4 million of the loan) and requires principal payments of $5.0
million annually. The net proceeds to the Temperature-Controlled Logistics
Corporation were approximately $225.0 million, after closing costs, escrow
reserves and the repayment of approximately $12.9 million in existing mortgages.
On February 6, 2004, the Temperature-Controlled Logistics Corporation
distributed cash of approximately $90.0 million to the Operating Partnership.

BUSINESS AND INDUSTRY INFORMATION

AmeriCold Logistics provides frozen food manufacturers with
refrigerated warehousing and transportation management services. The
Temperature-Controlled Logistics Properties consist of production, distribution
and public facilities. Production facilities differ from distribution facilities
in that they typically serve one or a small number of customers located nearby.
These customers store large quantities of processed or partially processed
products in the facility until they are further processed or shipped to the next
stage of production or distribution. Distribution facilities primarily serve
customers who store a wide variety of finished products to support shipment to
end-users, such as food retailers and food service companies, in a specific
geographic market. Public facilities generally serve the needs of local and
regional

13

customers under short-term agreements. Food manufacturers and processors use
public facilities to store capacity overflow from their production facilities or
warehouses.

AmeriCold Logistics' transportation management services include freight
routing, dispatching, freight rate negotiation, backhaul coordination, freight
bill auditing, network flow management, order consolidation and distribution
channel assessment. AmeriCold Logistics' temperature-controlled logistics
expertise and access to both the frozen food warehouses and distribution
channels enable the customers of AmeriCold Logistics to respond quickly and
efficiently to time-sensitive orders from distributors and retailers.

AmeriCold Logistics' customers consist primarily of national, regional
and local frozen food manufacturers, distributors, retailers and food service
organizations. A breakdown of AmeriCold Logistics' largest customers includes:

PERCENTAGE OF
2003 REVENUE
-------------

H.J. Heinz Company 15 %
ConAgra Foods, Inc. 13
Philip Morris USA Inc. (Kraft) 8
Sara Lee Corp. 5
Tyson Foods, Inc. 4
General Mills, Inc. 4
McCain Foods, Inc. 4
Schwan Corp. 4
Nippon Suisan (Gorton's) 2
J.R. Simplot Company 2
Other 39
---
TOTAL 100 %
===

COMPETITION

AmeriCold Logistics is the largest operator of public refrigerated
warehouse space in North America. As a result, AmeriCold Logistics does not have
any competitors of comparable size. AmeriCold Logistics operates in an
environment in which competition is national, regional and local in nature and
in which the range of service, temperature-controlled logistics facilities,
customer mix, service performance and price are the principal competitive
factors.

14

ITEM 2. PROPERTIES

The Operating Partnership considers all of its Properties to be in good
condition, well-maintained, suitable and adequate to carry on the Operating
Partnership's business.

OFFICE PROPERTIES

As of December 31, 2003, the Operating Partnership owned or had an
interest in 72 Office Properties, located in 27 metropolitan submarkets in seven
states with an aggregate of approximately 30.0 million net rentable square feet.
The Operating Partnership's Office Properties are located primarily in the
Dallas and Houston, Texas, metropolitan areas. As of December 31, 2003, the
Operating Partnership's Office Properties in Dallas and Houston represented an
aggregate of approximately 72% of its office portfolio based on total net
rentable square feet (33% for Dallas and 39% for Houston).

OFFICE PROPERTIES TABLE(1)

The following table shows, as of December 31, 2003, certain information
about the Operating Partnership's Office Properties. In the table, "CBD" means
central business district.

WEIGHTED
AVERAGE
FULL-SERVICE
RENTAL
NET RATE PER
RENTABLE ECONOMIC OCCUPIED
NO. OF YEAR AREA OCCUPANCY SQ. FT.
STATE, CITY, PROPERTY PROPERTIES SUBMARKET COMPLETED (SQ. FT.) PERCENTAGE (2)
- -------------------------- ---------- --------- --------- --------- ----------- ------------

STABLIZED PROPERTIES
TEXAS
DALLAS
Bank One Center (3) 1 CBD 1987 1,530,957 81 % $ 22.60
The Crescent (4) 2 Uptown/Turtle Creek 1985 1,299,522 91 33.03
Fountain Place 1 CBD 1986 1,200,266 97 21.60
Trammell Crow Center (5) 1 CBD 1984 1,128,331 89 23.78
Stemmons Place 1 Stemmons Freeway 1983 634,381 82 17.56
Spectrum Center (6) 1 Quorum/Bent Tree (7) 1983 598,250 83 23.21
Waterside Commons 1 Las Colinas 1986 458,906 71 17.90
125 E. John Carpenter Freeway 1 Las Colinas 1982 446,031 75 (8) 21.35
The Aberdeen 1 Quorum/Bent Tree (7) 1986 320,629 100 19.43
MacArthur Center I & II 1 Las Colinas 1982/1986 298,161 84 22.23
Stanford Corporate Centre 1 Quorum/Bent Tree (7) 1985 275,372 87 21.83
12404 Park Central (9) 1 LBJ Freeway 1987 239,103 0 0
Palisades Central II 1 Richardson (10) 1985 237,731 83 19.97
3333 Lee Parkway 1 Uptown/Turtle Creek 1983 233,543 43 (8) 22.30
Liberty Plaza I & II (11) 1 Quorum/Bent Tree (7) 1981/1986 218,813 12 18.05
The Addison 1 Quorum/Bent Tree (7) 1981 215,016 99 23.46
Palisades Central I 1 Richardson (10) 1980 180,503 71 19.99
Greenway II 1 Richardson (10) 1985 154,329 100 16.26
Greenway I & IA 2 Richardson (10) 1983 146,704 19 14.47
Addison Tower 1 Quorum/Bent Tree (7) 1987 145,886 82 18.95
5050 Quorum 1 Quorum/Bent Tree (7) 1981 133,799 51 18.85
---------- ---------- --- ------------
Subtotal/Weighted Average 23 10,096,233 80 % $ 23.09
---------- ---------- --- ------------
FORT WORTH
Carter Burgess Plaza 1 CBD 1982 954,895 91 % $ 18.32
---------- ---------- --- ------------
HOUSTON
Greenway Plaza 10 Greenway Plaza (12) 1969-1982 4,348,052 87 % $ 20.67
Houston Center (13) 4 CBD 1974-1983 2,955,146 85 (8) 21.97
Post Oak Central 3 West Loop/Galleria 1974-1981 1,279,759 90 19.77
Five Houston Center (14) 1 CBD 2002 580,875 92 30.77
Five Post Oak Park (15) 1 West Loop/Galleria 1986 567,396 90 20.94
Four Westlake Park (16) 1 Katy Freeway West (17) 1992 561,065 100 22.83
Three Westlake Park (16) 1 Katy Freeway West (17) 1983 414,792 100 23.50
1800 West Loop South (18) 1 West Loop/Galleria 1982 399,777 69 20.06
---------- ---------- --- ------------
Subtotal/Weighted Average 22 11,106,862 88 % $ 21.69
---------- ---------- --- ------------
AUSTIN
Frost Bank Plaza 1 CBD 1984 433,024 78 % $ 22.39
301 Congress Avenue (19) 1 CBD 1986 418,338 59 25.50
Bank One Tower (16) 1 CBD 1974 389,503 94 24.34
Austin Centre 1 CBD 1986 343,664 69 22.57
The Avallon 3 Northwest 1993/1997 318,217 100 24.69
Barton Oaks Plaza One 1 Southwest 1986 98,955 94 24.72
---------- ---------- --- ------------
Subtotal/Weighted Average 8 2,001,701 80 % $ 23.96
---------- ---------- --- ------------

15

WEIGHTED
AVERAGE
FULL-SERVICE
RENTAL
NET RATE PER
RENTABLE ECONOMIC OCCUPIED
NO. OF YEAR AREA OCCUPANCY SQ. FT.
STATE, CITY, PROPERTY PROPERTIES SUBMARKET COMPLETED (SQ. FT.) PERCENTAGE (2)
- -------------------------- ---------- --------- --------- ---------- ----------- ------------

COLORADO
DENVER
Johns Manville Plaza 1 CBD 1978 675,400 91 % $ 21.93
707 17th Street (20) 1 CBD 1982 550,805 59 (8) 23.05
Ptarmigan Place 1 Cherry Creek 1984 418,630 61 20.34
Regency Plaza One 1 Denver Technology Center 1985 309,862 89 21.67
55 Madison 1 Cherry Creek 1982 137,176 82 20.11
The Citadel 1 Cherry Creek 1987 130,652 95 25.09
44 Cook 1 Cherry Creek 1984 124,174 86 21.35
---- ---------- --- ---------
Subtotal/Weighted Average 7 2,346,699 77 % $ 21.93
---- ---------- --- ---------
COLORADO SPRINGS
Briargate Office and
Research Center 1 Colorado Springs 1988 260,046 79 % $ 18.55
---- ---------- --- ---------
FLORIDA
MIAMI
Miami Center (21) 1 CBD 1983 782,211 96 % $ 29.62
Datran Center 2 South Dade/Kendall 1986/1988 476,412 88 26.18
---- ---------- --- ---------
Subtotal/Weighted Average 3 1,258,623 93 % $ 28.39
---- ---------- --- ---------
ARIZONA
PHOENIX
Two Renaissance Square 1 Downtown/CBD 1990 476,373 88 % $ 26.08
---- ---------- --- ---------
NEW MEXICO
ALBUQUERQUE
Albuquerque Plaza 1 CBD 1990 366,236 85 % $ 19.03
---- ---------- --- ---------
CALIFORNIA
SAN DIEGO
Chancellor Park (22) 1 University Town Centre 1988 195,733 75 % (8) $ 29.25
---- ---------- --- ---------
NEVADA
LAS VEGAS
Hughes Center (23) 2 Central East 1986/1999 209,147 88 % $ 28.86
---- ---------- --- ---------
STABILIZED TOTAL/WEIGHTED
AVERAGE 70 29,272,548 84 % (8) $ 22.63 (24)
==== ========== === ==========
PROPERTIES NOT STABILIZED
TEXAS
HOUSTON
BriarLake Plaza (25)(26) 1 Westchase 2000 502,410 89 % $ 26.44
---- ----------
FLORIDA
MIAMI
The BAC - Colonnade Building(25) 1 Coral Gables 1989 216,115 92 % $ 32.88
---- ----------
TOTAL PORTFOLIO 72 29,991,073
==== ==========

---------------------------------
(1) Office Property Table data is presented at 100% without giving effect to
the Operating Partnership's actual ownership percentage in joint ventured
properties.

(2) Calculated in accordance with GAAP based on base rent payable as of
December 31, 2003, giving effect to free rent and scheduled rent increases
and including adjustments for expenses payable by or reimbursable from
customers.

(3) The Operating Partnership has a 49.5% limited partner interest and a 0.5%
general partner interest in the partnership that owns Bank One Center.

(4) The Crescent Office Towers and The Crescent Atrium are now reflected
together as The Crescent.

(5) The Operating Partnership owns the principal economic interest in Trammell
Crow Center through its ownership of fee simple title to the Property
(subject to a ground lease and a leasehold estate regarding the building)
and two mortgage notes encumbering the leasehold interests in the land and
building.

(6) In May 2003, the Operating Partnership, through its subsidiaries, exercised
its option to acquire legal ownership of Spectrum Center in exchange for
the mortgage notes it previously held.

(7) Submarket name changed to Quorum/Bent Tree from Far North Dallas. Name
changed to better reflect the area of the submarket in which the building
is located.

(8) Leases have been executed at certain Office Properties but had not
commenced as of December 31, 2003. If such leases had commenced as of
December 31, 2003, the percent leased for all Office Properties would have
been 86%. Properties whose percent leased exceeds economic occupancy by 5
percentage points or more are as follows: 125 E. John Carpenter Freeway -
83%, 3333 Lee Parkway - 51%, Houston Center - 94%, 707 17th Street - 67%,
and Chancellor Park - 84%.

(9) 12404 Park Central is currently considered held for sale. A $3.4 million
impairment (before minority interest) was recorded in the fourth quarter of
2003 related to this Property.

(10) Submarket name changed to Richardson from Richardson/Plano. Name changed to
better reflect the area of the submarket in which the building is located.

16

(11) Liberty Plaza I & II is currently considered held for sale. A $4.3 million
impairment (before minority interest) was recorded in the fourth quarter of
2003 related to this Property.

(12) Submarket name changed to Greenway Plaza from Richmond-Buffalo Speedway.
Name changed to better reflect the area of the submarket in which the
building is located.

(13) Houston Center Shops is now reflected with Houston Center.

(14) Property statistics now include Five Houston Center which was deemed
stabilized in September 2003.

(15) Property statistics now include Five Post Oak Park which was deemed
stabilized in December 2003.

(16) The Operating Partnership has a 0.1% general partner interest and a 19.9%
limited partner interest in the partnerships that own Four Westlake Park,
Three Westlake Park, and Bank One Tower.

(17) Submarket name changed to Katy Freeway West from Katy Freeway. Name changed
to better reflect the area of the submarket in which the building is
located.

(18) 1800 West Loop South is currently considered held for sale. A $16.4 million
impairment (before minority interest) was recorded in 2003 related to this
Property.

(19) The Operating Partnership has a 1% general partner interest and a 49%
limited partner interest in the partnership that owns 301 Congress Avenue.

(20) 707 17th Street was formerly known as MCI Tower.

(21) The Operating Partnership has a 40% member interest in the limited
liability company that owns Miami Center.

(22) In September 2003, the Operating Partnership acquired unencumbered fee
title to Chancellor Park, as a result of merging the previously held
mortgage note out of existence.

(23) Hughes Center consists of six wholly-owned office properties and one joint
ventured office property. The Operating Partnership acquired two
wholly-owned office properties as of December 31, 2003. In February 2004,
the Operating Partnership acquired (a) the remaining four wholly-owned
properties, and (b) a 67% partnership interest in the joint ventured
property. Hughes Center is collectively considered stabilized, with an
average occupancy of 93% upon acquisition.

(24) The weighted average full-service cash rental rate per square foot
calculated based on base rent payable for Operating Partnership Office
Properties as of December 31, 2003, without giving effect to free rent and
scheduled rent increases that are taken into consideration under GAAP but
including adjustments for expenses paid by or reimbursed from customers is
$22.57.

(25) Property statistics exclude BriarLake Plaza (which was acquired on October
8, 2003) and The BAC - Colonnade Building (which was acquired on August 26,
2003). These office properties will be included in portfolio statistics
once stabilized. Stabilization is deemed to occur upon the earlier of (a)
achieving 93% occupancy or (b) one year following the date placed
in-service or acquisition date.

(26) The Operating Partnership has a 30% member interest in the limited
liability company that owns BriarLake Plaza.

The following table shows, as of December 31, 2003, the principal
business conducted by the tenants at the Operating Partnership's Office
Properties, based on information supplied to the Operating Partnership from the
tenants. Based on rental revenues from office leases in effect as of December
31, 2003, no single tenant accounted for more than 5% of the Operating
Partnership's total Office Segment rental revenues for 2003.

Percent of
Leased Sq.
Industry Sector Ft.
- ------------------------- ------------

Professional Services (1) 29 %
Financial Services (2) 21
Energy(3) 20
Telecommunications 5
Technology 5
Manufacturing 4
Food Service 3
Government 3
Retail 3
Medical 2
Other (4) 5
---
TOTAL LEASED 100 %
===

- ----------------------------
(1) Includes legal, accounting, engineering, architectural and advertising
services.

(2) Includes banking, title and insurance and investment services.

(3) Includes oil and gas and utility companies.

(4) Includes construction, real estate and other industries.

17

AGGREGATE LEASE EXPIRATIONS OF OFFICE PROPERTIES

The following tables show schedules of lease expirations for leases in
place as of December 31, 2003, for the Operating Partnership's total Office
Properties and for Dallas, Houston and Austin, Texas, Denver, Colorado, and
Miami, Florida, individually, for each of the 10 years beginning with 2004.

TOTAL OFFICE PROPERTIES(1)

(1) Lease expiration data is presented at 100% without giving effect to the
Operating Partnership's actual ownership percentage in joint ventured
properties and excludes non-stabilized Office Properties.

(2) Signed renewals extend the expiration dates of in-place leases to the end of
the renewal term.

(3) Calculated based on base rent payable under leases for net rentable square
feet expiring (after renewals), giving effect to free rent and scheduled
rent increases taken into account under GAAP and including adjustments for
expenses payable by or reimbursable from customers based on current expense
levels.

(4) As of December 31, 2003, leases totaling 3,060,023 square feet (including
renewals of 2,337,470 square feet and new leases of 722,553 square feet)
have been signed and will commence during 2004. These signed leases
represent approximately 62% of gross square footage expiring during 2004.

(5) Expirations by quarter are as follows: Q1: 872,095 square feet Q2: 537,587
square feet Q3: 668,753 square feet Q4: 516,291 square feet.

(6) Expirations by quarter are as follows: Q1: 632,422 square feet Q2: 732,267
square feet Q3: 925,124 square feet Q4: 529,584 square feet.

(7) Reconciliation of Occupied Square Feet to Net Rentable Area:

DALLAS OFFICE PROPERTIES(1)

(1) Lease expiration data is presented at 100% without giving effect to the
Operating Partnership's actual ownership percentage in joint ventured
properties and excludes non-stabilized Office Properties.

(2) Signed renewals extend the expiration dates of in-place leases to the end of
the renewed term.

(3) Calculated based on base rent payable under leases for net rentable square
feet expiring (after renewals), giving effect to free rent and scheduled
rent increases taken into account under GAAP and including adjustments for
expenses payable by or reimbursable from customers based on current expense
levels.

(4) As of December 31, 2003, leases totaling 868,696 square feet (including
renewals of 747,740 square feet and new leases of 120,956 square feet) have
been signed and will commence during 2004. These signed leases represent
approximately 64% of gross square footage expiring during the remainder of
2004.

(5) Expirations by quarter are as follows: Q1: 180,107 square feet Q2 : 71,832
square feet Q3: 209,529 square feet Q4: 155,012 square feet.

(6) Expirations by quarter are as follows: Q1: 184,838 square feet Q2: 138,900
square feet Q3: 555,590 square feet Q4: 146,735 square feet.

HOUSTON OFFICE PROPERTIES (1)

(1) Lease expiration data is presented at 100% without giving effect to the
Operating Partnership's actual ownership percentage in joint ventured
properties and excludes non-stabilized Office Properties.

(2) Signed renewals extend the expiration dates of in-place leases to the end of
the renewed term.

(3) Calculated based on base rent payable under leases for net rentable square
feet expiring (after renewals), giving effect to free rent or scheduled rent
increases taken into account under GAAP and including adjustments for
expenses payable by or reimbursable from customers based on current expense
levels.

(4) As of December 31, 2003, leases totaling 1,498,485 square feet (including
renewals of 1,102,168 square feet and new leases of 396,317 square feet)
have been signed and will commence during 2004. These signed leases
represent approximately 74% of gross square footage expiring during the
remainder of 2004.

(5) Expirations by quarter are as follows: Q1: 379,277 square feet Q2: 227,142
square feet Q3: 140,531 square feet Q4: 180,612 square feet.

(6) Expirations by quarter are as follows: Q1: 176,171 square feet Q2: 142,240
square feet Q3: 184,778 square feet Q4: 134,537 square feet.

AUSTIN OFFICE PROPERTIES (1)

(1) Lease expiration data is presented at 100% without giving effect to the
Operating Partnership's actual ownership percentage in joint ventured
properties and excludes non-stabilized Office Properties.

(2) Signed renewals extend the expiration dates of in-place leases to the end of
the renewed term.

(3) Calculated based on base rent payable under leases for net rentable square
feet expiring (after renewals), giving effect to free rent or scheduled rent
increases taken into account under GAAP and including adjustments for
expenses payable by or reimbursable from customers based on current expense
levels.

(4) As of December 31, 2003, leases totaling 33,854 square feet (including
renewals of 12,896 square feet and new leases of 20,958 square feet) have
been signed and will commence during 2004. These signed leases represent
approximately 8% of gross square footage expiring during the remainder of
2004.

(5) Expirations by quarter are as follows: Q1: 104,525 square feet Q2: 22,931
square feet Q3: 249,986 square feet Q4: 17,074 square feet.

(6) Expirations by quarter are as follows: Q1: 92,036 square feet Q2: 349,844
square feet Q3: 31,140 square feet Q4: 30,218 square feet.

DENVER OFFICE PROPERTIES (1)

(1) Lease expiration data is presented at 100% without giving effect to the
Operating Partnership's actual ownership percentage in joint ventured
properties and excludes non-stabilized Office Properties.

(2) Signed renewals extend the expiration dates of in-place leases to the end of
the renewed term.

(3) Calculated based on base rent payable under leases for net rentable square
feet expiring (after renewal), giving effect to free rent or scheduled rent
increases taken into account under GAAP and including adjustments for
expenses payable by or reimbursable from customers based on current expense
levels.

(4) As of December 31, 2003, leases totaling 311,164 square feet (including
renewals of 226,871 square feet and new leases of 84,293 square feet) have
been signed and will commence during 2004. These signed leases represent
approximately 60% of gross square footage expiring during the remainder of
2004.

(5) Expirations by quarter are as follows: Q1: 140,412 square feet Q2: 119,499
square feet Q3: 14,238 square feet Q4: 14,362 square feet.

(6) Expirations by quarter are as follows: Q1: 122,740 square feet Q2: 28,390
square feet Q3: 13,956 square feet Q4: 155,390 square feet.

MIAMI OFFICE PROPERTIES (1)

(1) Lease expiration data is presented at 100% without giving effect to the
Operating Partnership's actual ownership percentage in joint ventured
properties and excludes non-stabilized Office Properties.

(2) Signed renewals extend the expiration dates of in-place leases to the end of
the renewed term.

(3) Calculated based on base rent payable under leases for net rentable square
feet expiring (after renewals), giving effect to free rent or scheduled rent
increases taken into account under GAAP and including adjustments for
expenses payable by or reimbursable from customers based on current expense
levels.

(4) As of December 31, 2003, leases totaling 84,507 square feet (including
renewals of 76,055 square feet and new leases of 8,452 square feet) have
been signed and will commence during 2004. These signed leases represent
approximately 38% of gross square footage expiring during the remainder of
2004.

(5) Expirations by quarter are as follows: Q1: 27,554 square feet Q2: 50,192
square feet Q3: 30,484 square feet Q4: 36,419 square feet.

(6) Expirations by quarter are as follows: Q1: 25,450 square feet Q2: 20,635
square feet Q3 61,644 square feet Q4: 36,458 square feet.

OTHER OFFICE PROPERTIES (1)

(1) Lease expiration data is presented at 100% without giving effect to the
Operating Partnership's actual ownership percentage in joint ventured
properties and excludes non-stabilized Office Properties. Includes
Ft. Worth, Colorado Springs, Phoenix, Albuquerque, San Diego, and Las Vegas.

(2) Signed renewals extend the expiration dates of in-place leases to the end of
the renewed term.

(3) Calculated based on base rent payable under leases for net rentable square
feet expiring (after renewals), giving effect to free rent or scheduled rent
increases taken into account under GAAP and including adjustments for
expenses payable by or reimbursable from customers based on current expense
levels.

(4) As of December 31, 2003, leases totaling 263,317 square feet (including
renewals of 171,740 square feet and new leases of 91,577 square feet) have
been signed and will commence during 2004. These signed leases represent
approximately 67% of gross square footage expiring during 2004.

(5) Expirations by quarter are as follows: Q1: 40,220 square feet Q2: 45,991
square feet Q3: 23,985 square feet Q4: 112,812 square feet.

(6) Expirations by quarter are as follows: Q1: 31,187 square feet Q2: 52,258
square feet Q3: 78,016 square feet Q4: 26,246 square feet.

RESORT/HOTEL PROPERTIES(1)

The following table shows certain information for the years ended
December 31, 2003 and 2002, with respect to the Operating Partnership's
Resort/Hotel Properties. The information for the Resort/Hotel Properties is
based on available rooms, except for Canyon Ranch-Tucson and Canyon Ranch-Lenox,
which measure their performance based on available guest nights.

FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------
REVENUE
AVERAGE AVERAGE PER
OCCUPANCY DAILY AVAILABLE
YEAR RATE RATE ROOM/GUEST NIGHT
COMPLETED/ ------------------ ---------------- -----------------
RESORT/HOTEL PROPERTY LOCATION RENOVATED ROOMS 2003 2002 2003 2002 2003 2002
- --------------------- -------- --------- ----- ---- ---- ---- ---- ---- ----

UPSCALE BUSINESS CLASS HOTELS:
Denver Marriott City Center Denver, CO 1982/1994 613 73 % 75 % $128 $117 $ 93 $ 89
Hyatt Regency Albuquerque Albuquerque, NM 1990 395 72 71 104 106 75 76

Omni Austin Hotel(2) Austin, TX 1986 375 75 70 113 116 84 81

Renaissance Houston Hotel Houston, TX 1975/2000 388 62 63 108 110 67 70
----- --- ---- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 1,771 71 % 71 % $115 $113 $ 82 $ 80
===== === ==== ==== ==== ==== ====

LUXURY RESORTS AND SPAS:
Park Hyatt Beaver Creek Resort
and Spa Avon, CO 1989/2001 275 60 % 59 % $278 $280 $166 $166
Fairmont Sonoma Mission Inn &
Spa(3) Sonoma, CA 1927/1987/1997 228 61 61 245 264 150 162
Ventana Inn & Spa Big Sur, CA 1975/1982/1988 62 75 71 412 393 309 279
----- --- ---- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 565 62 % 61 % $282 $288 $174 $177
===== === ==== ==== ==== ==== ====

GUEST
DESTINATION FITNESS RESORTS AND NIGHTS
SPAS:
Canyon Ranch-Tucson Tucson, AZ 1980 259 (4)
Canyon Ranch-Lenox Lenox, MA 1989 212 (4)
----- --- ---- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 471 76 % 77 % $661 $641 $475 $471
===== === ==== ==== ==== ==== ====

LUXURY AND DESTINATION FITNESS RESORTS COMBINED 68 % 69 % $469 $464 $311 $310
=== ==== ==== ==== ==== ====

GRAND TOTAL/WEIGHTED AVERAGE FOR RESORT/HOTEL PROPERTIES 2,807 70 % 70 % $241 $238 $166 $164
===== === ==== ==== ==== ==== ====

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

(1) Resort/Hotel Property Table is presented at 100% without any adjustment to
give effect to the Operating Partnership's actual ownership in Resort/Hotel
Properties.

(2) The Omni Austin Hotel is leased to HCD Austin Corporation.

(3) The Operating Partnership has an 80.1% member interest in the limited
liability company that owns Fairmont Sonoma Mission Inn & Spa.

(4) Represents available guest nights, which is the maximum number of guests
the resort can accommodate per night.

22

RESIDENTIAL DEVELOPMENT PROPERTIES

The following table shows certain information as of December 31, 2003,
relating to the Residential Development Properties.

TOTAL TOTAL
RESIDENTIAL RESIDENTIAL TOTAL LOTS/UNITS LOTS/UNITS
RESIDENTIAL DEVELOPMENT DEVELOPMENT LOTS/ DEVELOPED CLOSED
DEVELOPMENT PROPERTIES TYPE OF CORPORATION'S SUNITS SINCE SINCE
CORPORATION(1) (RDP) RDP(2) LOCATION OWNERSHIP % PLANNED INCEPTION INCEPTION
- -------------- --------------- ------- -------- ------------- ------- --------- ---------

Desert Mountain Desert Mountain SF Scottsdale, AZ 93.0% 2,436 2,396 2,304
----- ----- -----
Development
Corporation

Crescent Resort Eagle Ranch SF Eagle, CO 60.0% 1,323 651 643
Development, Main Street
Inc. (6) Junction CO Breckenridge, 30.0% 36 36 36
CO
Main Street
Station CO Breckenridge, 30.0% 82 82 81
CO
Main Street
Station
Vacation Club TS Breckenridge, 30.0% 42 42 27
CO
Riverbend SF Charlotte, NC 60.0% 650 335 335
Three Peaks
(Eagle's Nest) SF Silverthorne, 30.0% 391 253 191
CO
Park Place at
Riverfront CO Denver, CO 64.0% 70 70 68
Park Tower at
Riverfront CO Denver, CO 64.0% 61 61 60
Promenade Lofts
at Riverfront CO Denver, CO 64.0% 66 66 66
Creekside at
Riverfront CO Denver, CO 64.0% 40 40 26
Delgany Lofts CO Denver, CO 64.0% 44 - -
Cresta TH Edwards, CO 60.0% 25 25 22
Snow Cloud CO Avon, CO 64.0% 54 54 54
Horizon Pass Lodge CO Avon, CO 64.0% 31 - -
Horizon Pass
Townhomes TH Avon, CO 64.0% 9 - -
One Vendue Range CO Charleston, SC 62.0% 50 50 50
Old Greenwood SF/TS Truckee, CA 71.2% 249 103 76
Tahoe Mountain
Resorts SF/CO/TH/ Tahoe, CA 57% - 71.2% - (7) - (7) - (7)
TS
----- ----- -----
TOTAL CRESCENT RESORT DEVELOPMENT, INC. 3,223 1,868 1,735
----- ----- -----

Mira Vista Mira Vista SF Fort Worth, TX 100.0% 740 740 724
----- ----- -----
Development
Corp.

Houston Area Falcon Point SF Houston, TX 100.0% 510 491 468
Development Falcon Landing SF Houston, TX 100.0% 623 613 613
Corp. Spring Lakes SF Houston, TX 100.0% 520 416 369
----- ----- -----

TOTAL HOUSTON AREA DEVELOPMENT CORP. 1,653 1,520 1,450
----- ----- -----
TOTAL 8,052 6,524 6,213
===== ===== =====

AVERAGE
RESIDENTIAL CLOSED RANGE OF
RESIDENTIAL DEVELOPMENT SALE PRICE PROPOSED
DEVELOPMENT PROPERTIES PER LOT/ SALE PRICES
CORPORATION(1) (RDP) UNIT ($)(3) PER LOT/UNIT ($)(4)
- -------------- --------------- ----------- -------------------

Desert Mountain Desert Mountain 538,000 450,000 - 4,000,000(5)

Development
Corporation

Crescent Resort Eagle Ranch 81,000 50,000 - 150,000
Development, Main Street
Inc. (6) Junction 462,000 300,000 - 580,000

Main Street
Station 494,000 215,000 - 1,065,000

Main Street
Station
Vacation Club 1,188,000 380,000 - 4,600,000

Riverbend 31,000 25,000 - 38,000
Three Peaks
(Eagle's Nest) 258,000 135,000 - 425,000

Park P