SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission file number: 0-49782

T REIT, Inc.

(Exact name of registrant as specified in its charter)

1551 N. Tustin Avenue, Suite 200

Santa Ana, California 92705

(Address of principal executive offices)

(877) 888-7348

(Registrant’s telephone number, including area code)

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

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

Title of Class:

Common Stock

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 þ          No o

      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.     o

      As of June 30, 2004, the aggregate market value of common stock held by non-affiliates of the registrant was approximately $44,426,000 (based on the price for which each share was sold).

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

      As of March 31, 2005, there were 4,606,000 shares of common stock of T REIT, Inc. outstanding.

T REIT, INC.

(A VIRGINIA CORPORATION)

TABLE OF CONTENTS

PART I

Significant events occurring since November 22, 2004 (the filing date of the Form 10-Q for the third quarter of 2004) include:

      As set forth in our registration statement that we originally filed in 1999, we were formed with the intent to be listed on a national stock exchange, quoted on a quotation system of a national securities association or merged with an entity whose shares are so listed or quoted. At that time, we intended that if we were not so listed or quoted by February 22, 2010, we would submit for our shareholders’ vote a proposal to liquidate our company. As a result of (i) current market conditions, (ii) the increasing costs of corporate compliance (including, without limitation, all federal, state and local regulatory requirements applicable to us, including the Sarbanes-Oxley Act of 2002, as amended) and (iii) the possible need to reduce our monthly distributions, in November, 2004 our board of directors began to investigate whether liquidating now would provide our shareholders with a greater return on our shareholder’s investment over a reasonable period of time, than through implementation of other alternatives considered. After reviewing the issues facing us, our board of directors concluded on December 2, 2004 that we should explore the possibility of a plan of liquidation. On December 29, 2004, a special committee of our independent directors, including Messrs. D. Fleet Wallace and W. Brand Inlow, was formed to analyze whether liquidation of all of our assets is in our shareholders best interests. On December 29, 2004, we also engaged Robert A. Stanger & Co., Inc., or Stanger, as our financial advisor to (i) assist in a review of the pros and cons of those alternatives, including a potential plan of liquidation and (ii) render opinions as to the fairness of the consideration to be received in any potential transactions. After consideration of the alternatives reasonably available to us, the special committee and our board of directors approved the preparation of a plan of liquidation and a proxy statement to be presented to the special committee and our board of directors for further approval. On February 16, 2005, the special committee unanimously determined that the terms of the plan of liquidation are fair to, and in your best interests and approved the sale of all of our assets and our dissolution pursuant to a plan of liquidation; the foregoing remains subject to our board of directors’ and shareholders’ approval, respectively.

      In connection with our initial public offering of common stock conducted through a best effort offering from February 22, 2000 through June 1, 2002, we disclosed the prior performance of all public and non-public investment programs sponsored by Triple Net Properties, LLC, our Advisor. We now have determined that there were certain errors in those prior performance tables. In particular, the financial information in the tables was stated to be presented on a GAAP basis. Generally the tables for the public programs were not presented on a GAAP basis and the tables for the non-public programs were prepared and presented on a tax or cash accounting basis. Moreover, a number of the prior performance data figures were themselves incorrect, even as presented on a tax or cash basis. In particular, certain calculations of depreciation and amortization were not on an income tax basis for a limited liability company investment. In general, the resulting effect is an overstatement of our Advisor’s program and aggregate portfolio operating results. Our board of directors is considering alternatives to address the errors in the prior performance tables.

Our Company

      We were formed as a Virginia corporation in December 1998 and were qualified and elected to be taxed as a real estate investment trust, or REIT, for federal income tax purposes. We were organized to acquire, manage and invest in a diversified portfolio of real estate projects or interests therein of office, industrial, retail and service properties located primarily in the following states: Alaska; Florida; Iowa; Michigan; Minnesota; Nevada; North Carolina; South Carolina; South Dakota; Tennessee; Texas; Virginia; Washington; Wisconsin; and Wyoming. We completed our first property acquisition on September 26, 2000. As of December 31, 2004, we owned interests in eleven properties, including two consolidated

interests in office properties and nine unconsolidated interests in office properties located in the following four states: California, Texas, Illinois and Nevada.

      We conduct business and own properties through T REIT, L.P., or the Operating Partnership, which was formed as a Virginia limited partnership in December 1998. We are the sole general partner of the Operating Partnership and have control over the affairs of the Operating Partnership.

      Our day-to-day operations are managed by Triple Net Properties, LLC, or our Advisor, under an advisory agreement, or our Advisory Agreement. Our Advisor is affiliated with us in that the two entities have common officers and a common director, some of whom also own an equity interest in our Advisor. Our Advisor engages affiliated entities, including Triple Net Properties Realty, Inc., or Realty, an affiliate of our Advisor, which was solely owned by Anthony W. Thompson, our chief executive officer, president and chairman of the board of directors, until his resignation as chief executive officer and president in August 2004, through December 31, 2004 (effective January 1, 2005, Mr. Thompson owns 88% of Realty), a real estate brokerage and management company, to provide various services for our properties. Our Advisor and Realty were formed in 1998 to serve as an asset and property manager for real estate investment trusts, syndicated real estate limited partnerships, limited liability companies and similar real estate entities.

      We have been operating, and subject to our board of directors’ and shareholders’ approval of a plan of liquidation, which has not yet been submitted for approval or been approved, we intend to continue operating as a REIT for federal and state income tax purposes. To maintain our REIT status, we are required to distribute annually as distributions at least 90% of our REIT taxable income, as defined by the Internal Revenue Code, or the Code, to our shareholders, among other requirements. If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax on our taxable income at regular corporate tax rates. As of December 31, 2004, we believe we are in compliance with all relevant REIT requirements.

      Our Advisor’s principal executive offices are located at 1551 N. Tustin Avenue, Suite 200, Santa Ana, California 92705 and its telephone number is (877) 888-7348. Our Advisor’s website is www.1031nnn.com. We make our periodic and current reports available on our Advisor’s web-site after these materials are filed with the Securities and Exchange Commission, or the SEC. They are also available in print to any shareholder upon request. We do not maintain our own website or have an address or telephone separate from our Advisor. Since we pay a management fee to our Advisor, we do not pay rent for the use of their space.

Developments During 2004

      During 2004:

Current Investment Objectives and Policies

General

      Subject to our board of directors’ and our shareholders’ approval of the plan of liquidation, which has not yet been submitted for approval or been approved, our primary investment objective is to obtain current income from investments in real estate. Pursuant thereto, we have sought to:

      To the extent feasible, we will strive to invest in a diversified portfolio of properties or interests therein, in terms of geography, type of property and types of tenants, that will satisfy our investment

objectives. However, we cannot assure you that we will attain all of these objectives or that shareholder capital will not decrease.

Acquisition Strategies

      Subject to our board of directors’ and our shareholders’ approval of the plan of liquidation, which has not yet been submitted for approval or been approved, under the current business plan, we will continue to primarily acquire, through wholly-owned subsidiaries of our Operating Partnership, wholly-owned and undivided tenant-in-common, or TIC, interests in office, industrial, retail and service properties. We will continue to seek to acquire properties (or interests therein) leased by creditworthy tenants under net leases. We may continue to acquire properties through joint ventures or the acquisition of substantially all of the interests of an entity which in turns owns the property. In connection with the purchase of undivided TIC interests in properties, we may continue to purchase TIC interests in properties where the other TICs are participating in tax-free exchanges arranged by our Advisor. Such transactions will earn our Advisor or its affiliates’ commissions on the tax-free exchanges, and may impact the extent to which we participate in such acquisitions.

      Subject to our board of directors’ and our shareholders’ approval of the plan of liquidation, which has not yet been submitted for approval or been approved, we may continue to primarily acquire properties with cash and mortgage or other debt; however, we may acquire some properties free and clear of mortgage indebtedness by paying the entire purchase price for such property in cash or in units in our Operating Partnership. With respect to properties purchased on an all-cash basis, we may later incur mortgage indebtedness by obtaining loans secured by selected properties if favorable financing terms are available to us. The proceeds from such loans, if any, would be used to acquire additional properties and increase our cash flow. Although not required by our articles of incorporation or bylaws, as a policy matter, we do not intend to incur indebtedness in excess of 70% of the aggregate fair market value of all our properties, as determined at the end of each calendar year. In addition, we do not intend to incur secured indebtedness on a specific property in excess of approximately 80% of such property’s fair market value.

      Under our current acquisition strategies, the majority of properties we may acquire in the future will be at least 75% leased on the acquisition date. We expect that most of the applicable leases will be “net” leases with initial terms of 10 to 15 years, but generally not less than five years and usually providing for a base minimum annual rent with periodic increases. “Net” leases typically require that tenants pay all or a majority of the operating expenses, including real estate taxes, special assessments, utilities, insurance and building repairs related to the property, in addition to lease payments.

      In acquiring a property, we may enter into arrangements with the seller of a property in support of minimum cash flow requirements from the property, obtain an option on a property or commit to purchase a property subject to completion of renovation or construction.

      As of December 31, 2004, three of our properties or interests in properties were located in California, three in Nevada, four in Texas and one in Illinois. Our consolidated properties were 98% leased as of December 31, 2004 and our unconsolidated properties were 89% leased as of December 31, 2004.

      To assist us in our acquisition efforts, our Advisor and its affiliates may purchase properties in their own name, assume loans in connection with the purchase of properties and temporarily hold title to such properties for the purpose of facilitating the acquisition of such properties, borrowing money or obtaining financing, completing construction of properties or for any other purpose related to its business. We may also acquire properties from entities advised by our Advisor. Such acquisitions must be approved by a majority of our directors, including a majority of our independent directors.

Acquisition Standards

      Subject to our board of directors’ and our shareholders’ approval of the plan of liquidation, which has not yet been submitted for approval or been approved, based on our Advisor’s prior real estate experience, we believe our Advisor has the ability to identify properties capable of meeting our current investment objectives. In evaluating potential acquisitions, the primary factor considered is the property’s current and

projected cash flow. We also consider a number of other factors relating to a property, including, without limitation, its:

Our Advisor has substantial discretion with respect to the selection of specific properties; however, purchase agreements must be approved by our board of directors.

      We will not close the purchase of any property unless and until we obtain an environmental assessment, a minimum of Phase I review, for each property purchased and are generally satisfied with the environmental status of the property.

      In purchasing properties, we will be subject to risks generally incident to the ownership of real estate, including:

Disposition Strategies

      Subject to our board of directors’ and our shareholders’ approval of the plan of liquidation, which has not yet been submitted for approval or been approved, we currently consider various factors when evaluating potential property dispositions. These factors include, without limitation, the following:

Operating Strategies

      Subject to our board of directors’ and our shareholders’ approval of the plan of liquidation, which has not yet been submitted for approval or been approved, our primary operating strategy is to acquire suitable properties and to enhance the performance and value of those properties through management strategies designed to address the needs of current and prospective tenants. Management strategies include:

Financing Policies

      We conduct substantially all of our investment and debt-financing activities through our Operating Partnership. We have also financed our investments through a combination of equity as well as secured debt. The terms of our credit facility and secured notes contain various financial covenants which require satisfaction of certain total debt-to-asset ratios, secured debt-to-total-asset ratios, debt service coverage ratios, as well as other limitations. A primary objective of our financing policy is to manage our financial position to allow us to raise capital from time to time at competitive rates. As of December 31, 2004, approximately 22% of our outstanding debt had a weighted average fixed interest rate of 5.25% per annum, which limits the risk of fluctuating interest rates.

      We may utilize certain derivative financial instruments at times to limit interest rate risk. The derivatives we enter into, and the only derivative transactions approved by our board of directors, are those which are used for hedging purposes rather than investment purposes. If an anticipated hedging transaction does not occur, any positive or negative value of the derivative will be recognized immediately in net income.

      Subject to our board of directors’ and our shareholders’ approval of the plan of liquidation, which has not yet been submitted for approval or been approved, to the extent that our board of directors decides to obtain additional capital, we may elect to retain our earnings (subject to the provisions of the Internal Revenue Code, or Code, requiring distributions of taxable income to maintain REIT status), or dispose of some of our properties or utilize a combination of these methods.

Tax Status

      We elected to be taxed as a REIT for federal income tax purposes under Sections 856 through 860 of the Code, and believe that we have qualified since our first year of operations. As long as we qualify for taxation as a REIT, we generally will not be subject to federal income tax to the extent we distribute at least 100% of our REIT taxable income to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Unless entitled to relief under specific statutory provisions, we will also be disqualified for taxation as a REIT for the four taxable years following the year in which we lose our qualification. Even if we qualify as a REIT, we may be subject to certain state and local taxes on our income and property and to federal income and excise taxes on our undistributed income.

Distribution Policy

      In order to qualify as a REIT for federal income tax purposes, we must distribute at least 90% of our taxable income (excluding capital gains) to our shareholders. The declaration of monthly distributions on common shares is at the discretion of our board of directors and our board will determine the amount of distributions based on then prevailing circumstances. Distribution amounts depend on our funds from

operations, financial condition and capital requirements, annual distribution requirements under the REIT provisions of the Code and other factors our board of directors deem relevant. Subject to our board of directors’ and our shareholders’ approval of the plan of liquidation, which has not yet been submitted for approval or been approved, we may need to reduce the amount of our monthly distributions in 2005, which may ultimately impact our ability to meet our REIT distribution requirements.

Competition

      We compete with a considerable number of other real estate companies to lease office space, some of which may have greater marketing and financial resources. Principal factors of competition in our business are the quality of properties (including the design and condition of improvements), leasing terms (including rent and other charges and allowances for tenant improvements), attractiveness and convenience of location, the quality and breadth of tenant services provided and reputation as an owner and operator of quality office properties in the relevant market. Our ability to compete also depends upon, among other factors, trends of the national and local economies, financial condition and operating results of current and prospective tenants, availability and cost of capital, including capital raised by incurring debt, construction and renovation costs, taxes, governmental regulations, legislation and population trends.

      In the event that we elect to acquire additional properties, we will also compete with other buyers who are also interested in acquiring such properties, which may result in an increase in the cash that we pay for such properties or may result in us ultimately not being able to acquire such properties. Recently, competition to acquire office properties, or other real estate assets has increased due, in part, to the renewed interest in the sector from private equity sources, including foreign investors. In some cases, this competition has caused acquisition prices to increase making it more challenging for us to be competitive in the acquisition of new investments.

      Additionally, at the time we elect to dispose of one or more of our properties, we will be in competition with sellers of similar properties to locate suitable purchasers, which may result in us receiving lower proceeds from the disposal or result in us not being able to dispose of the property due to the lack of an acceptable return.

      We hold interests in properties located in California, Texas, Nevada and Illinois. Other entities managed by our Advisor also own interests in the Chicago, Illinois property in which we own an interest. Entities managed by our Advisor or its affiliates own several properties located in California, Nevada and Texas and such properties are managed by Realty. Our properties may face competition in these states from such other properties owned, operated or managed by our Advisor or our Advisor’s affiliates. Our Advisor or its affiliates have interests that may vary from ours in these states.

Government Regulations

      Many laws and governmental regulations are applicable to our properties and changes in these laws and regulations, or their interpretation by agencies and the courts, occur frequently.

      Costs of Compliance with the Americans with Disabilities Act. Under the Americans with Disabilities Act of 1990, or ADA, all public accommodations must meet federal requirements for access and use by disabled persons. Although we believe that we are in substantial compliance with present requirements of the ADA, none of our properties have been audited, nor have investigations of our properties been conducted to determine compliance. We may incur additional costs in connection with the ADA. Additional federal, state and local laws also may require modifications to our properties or restrict our ability to renovate our properties. We cannot predict the cost of compliance with the ADA or other legislation. If we incur substantial costs to comply with the ADA or any other legislation, our financial condition, results of operations, cash flow and ability to satisfy our debt service obligations and pay distributions could be adversely affected.

      Costs of Government Environmental Regulation and Private Litigation. Environmental laws and regulations hold us liable for the costs of removal or remediation of certain hazardous or toxic substances on our properties. These laws could impose liability without regard to whether we are responsible for the presence or release of the hazardous materials. Government investigations and remediation actions may have substantial costs and the presence of hazardous substances on a property could result in personal injury or similar claims

by private plaintiffs. Various laws also impose liability on persons who arrange for the disposal or treatment of hazardous or toxic substances for the cost of removal or remediation of hazardous substances at the disposal or treatment facility. These laws often impose liability whether or not the person arranging for the disposal ever owned or operated the disposal facility. As the owner and operator of our properties, we may be deemed to have arranged for the disposal or treatment of hazardous or toxic substances.

      Use of Hazardous Substances by Some of Our Tenants. Some of our tenants routinely handle hazardous substances and wastes on our properties as part of their routine operations. Environmental laws and regulations subject these tenants, and potentially us, to liability resulting from such activities. We require our tenants, in their leases, to comply with these environmental laws and regulations and to indemnify us for any related liabilities. We are unaware of any material noncompliance, liability or claim relating to hazardous or toxic substances or petroleum products in connection with any of our properties.

      Other Federal, State and Local Regulations. Our properties are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If we fail to comply with these various requirements, we may incur governmental fines or private damage awards. While we believe that our properties are currently in material compliance with all of these regulatory requirements, we do not know whether existing requirements will change or whether future requirements will require us to make significant unanticipated expenditures that will adversely affect our ability to make distributions to our shareholders. We believe, based in part on engineering reports which are generally obtained at the time we acquire the properties, that all of our properties comply in all material respects with current regulations. However, if we were required to make significant expenditures under applicable regulations, our financial condition, results of operations, cash flow and ability to satisfy our debt service obligations and to pay distributions could be adversely affected.

Significant Tenants

      As of December 31, 2004, two of our tenants accounted for 10% or more of our aggregate annual rental income.

      Our Advisor has been advised that ACS Health Services, Inc., or ACS, a tenant in the AmberOaks property, in which we own a 75% TIC, will not be renewing their lease, which expired on February 28, 2005. ACS currently occupies 44,000 square feet of the premises, which represents approximately 21% of the gross leasing area of the 207,000 square feet at the AmberOaks property. The tenant may occupy the space for an undetermined length of time beyond the term of the lease in accordance with hold over provisions in the lease or vacate the premises. As of March 31, 2005, ACS has exercised its hold over provision until May 31, 2005. From January 1, 2005 through May 31, 2005, we will amortize $341,000 related to the intangible assets associated with ACS.

Employees

      We have no employees and our executive officers are all employees of our Advisor. Substantially all work performed for us is performed by employees of our Advisor and its affiliates.

Financial Information About Industry Segments

      Subject to our board of directors’ and our shareholders’ approval of the plan of liquidation, which has not yet been submitted for approval or been approved, we are in the business of owning, managing, operating, leasing, acquiring, developing, investing in and disposing of office, industrial and service

properties. We internally evaluate all properties as one industry segment and, accordingly, do not report segment information.

Real Estate Investments

      As of December 31, 2004, we owned interests in eleven properties including two consolidated properties and nine unconsolidated properties. Our interests in the unconsolidated properties are held either as a TIC interests in the property or as a member of a limited liability company, or LLC, that owns a TIC interest in the property. The consolidated properties have an aggregate gross leaseable area, or GLA, of approximately 275,000 square feet. The unconsolidated properties have an aggregate GLA of approximately 1,658,000 square feet.

      During the year ended December 31, 2004, we purchased one consolidated property and two interests in unconsolidated properties, and we sold one consolidated property and one interest in an unconsolidated property.

      The following table presents certain additional information about our properties at December 31, 2004:

      Investments in unconsolidated real estate consist of our investments in undivided TICs and LLCs. The following table presents our investment in each unconsolidated property at December 31, 2004:

      The following information generally applies to our properties:

      The following is a summary of the relationships of us and our affiliates as of December 31, 2004:

T REIT, Inc.

Congress Center

      The following is a summary of our relationship with entities with ownership interests in Congress Center.

AmberOaks Corporate Center

      The following is a summary of our relationship with entities with ownership interests in AmberOaks.

City Center West “A” Building

      The following is a summary of our relationship with entities with ownership interests in City Center West “A” Building.

County Center Drive

      The following is a summary of our relationship with entities with ownership interests in County Center Drive.

Emerald Plaza

      The following is a summary of our relationship with entities with ownership interests in Emerald Plaza.

Enclave Parkway

      The following is a summary of our relationship with entities with ownership interests in Enclave Parkway.

Oakey Building

      The following is a summary of our relationship with entities with ownership interests in Oakey Building.

Pacific Corporate Park

      The following is a summary of our relationship with entities with ownership interest in Pacific Corporate Park.

Reno Trademark

      The following is a summary of our relationship with entities with ownership interests in Reno Trademark.

Titan Building and Plaza

      The following is a summary of our relationship with entities with ownership interests in Titan Building and Plaza.

Affiliated Companies

      The following is a summary detailing the relationships that Anthony W. Thompson has with our Advisor, NNN Capital Corp., and Realty at December 31, 2004.

Lease Expiration Table

      The following schedule presents the sensitivity of our annual base rent due to lease expirations for the next ten years at our consolidated properties as of December 31, 2004, by number, percentage of total aggregate gross leaseable area, or GLA, and annual base rent.

Indebtedness

      At December 31, 2004, we had secured mortgage loans outstanding on our consolidated and proportionate share of unconsolidated properties representing aggregate indebtedness of approximately $19,285,000 and $30,424,000, respectively. See Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 9 to the financial statements included with this report.

      On September 16, 2004, our Advisor advised us that it learned that the SEC is conducting an investigation referred to as “In the matter of Triple Net Properties, LLC.” The SEC has requested information from our Advisor relating to disclosure in securities offerings (including offerings by us, G REIT, Inc. and A REIT, Inc.) and the exemption from the registration requirements of the Securities Act for the private offerings in which our Advisor and its affiliated entities were involved and exemptions from the registration requirements of the Exchange Act for several entities. The SEC has requested financial and other information regarding these entities as well as the limited liability companies advised by our Advisor, including us. Our Advisor has advised us that it intends to cooperate fully with the SEC’s

investigation. This investigation could involve us and our required periodic reports under the Exchange Act and fines, penalties or administrative remedies could be asserted against us.

      We cannot at this time assess the outcome of the investigation by the SEC. Therefore, at this time, we have not accrued any loss contingencies in accordance with Statement of Financial Accounting Standards No. 5.

      On February 11, 2004, Clearview Properties filed a petition in the District Court of the 270th Judicial District, Harris County, Texas against Property Texas SC One Corporation, Clarion Partners, LLC, Granite Partners I, LLC, three unaffiliated entities, and us, our Advisor and Realty, or the Triple Net Entities. The complaint alleged that the Triple Net Entities willfully and intentionally interfered with an agreement between Property One and Clearview for the sale of certain real property located in Houston, Texas by Property One to Clearview. On January 7, 2005, Clearview filed an amended complaint which also alleged that the Triple Net Entities breached a contract between Clearview and the Triple Net Entities for the sale of the Houston, Texas property by Clearview to the Triple Net Entities and for conspiracy with Property One to breach this contract. The maximum potential exposure to us is uncertain as Clearview has failed to specifically allege a monetary amount of loss as the result of our alleged involvement. On February 4, 2005, we filed a motion for summary judgment in our favor which is scheduled to be heard on April 1, 2005. On March 25, 2005, Clearview filed an amended complaint which named T REIT, L.P. as an additional defendant. If Clearview were to prevail in this action, it could have a material adverse impact on our results of operations and our ability to pay distributions to our stockholders.

      On July 19, 2004, Michael R. and Patricia C. Long, as Trustees of the Michael R. and Patricia C. Long 2001 Trust, or the purchasers, filed a petition in the District Court of the 25th Judicial District Guadalupe County, Texas against T REIT-Seguin, LLC, Peck-Seguin, LLC, Lake Air Mall-Seguin, LLC, Chicago Title Company and our Advisor, collectively, the sellers. Through our wholly owned subsidiary T REIT-Seguin, we purchased a 26% interest in the Seguin Corners Shopping Center in November 2000. The Seguin Corners Shopping Center subsequently was sold to the purchasers in August 2002. The petition alleges that the sellers misrepresented and/or failed to disclose that they did not own and could not convey the property in its entirety to the purchasers. If the purchasers prevail in this action, it could have a material adverse impact on our result of operations and our ability to pay distributions to our stockholders.

      Other than the above, to our knowledge, there are no material pending legal proceedings. We also have routine litigation incidental to the business to which we are a party or of which certain of our properties are subject.

      No matters were submitted to a vote of security holders during the fourth quarter of 2004.

PART II

Market Information

      There is no established public trading market for our shares of common stock.

      Effective May 24, 2001 we adopted a share repurchase plan, or the Repurchase Plan, which provides eligible shareholders with limited liquidity by enabling them to sell their common stock back to us, at the sole discretion of the board of directors. To be eligible to participate in the Repurchase Plan, a shareholder must offer for resale at least 25% of the total number of his shares and must have owned such shares for at least one year. The price paid by us per share varies with the terms of the Repurchase Plan. Repurchase are effected by us on or about the last day of each calendar quarter. Funding for the Repurchase Plan currently comes from the proceeds received by us from operating revenues. We repurchased 34,000 shares of our common stock for $304,000 during the year ended December 31, 2004.

Shareholders

      As of March 31, 2005, we had 2,043 shareholders of record.

Distributions

      Since, April 1, 2001, we have paid monthly cash distributions to the holders of our common stock at an annual rate of $0.825 per share (8.25% based on a $10.00 purchase price). The declaration of distributions is at the discretion of our board of directors who will determine the amount of distributions on a regular basis. The amount of distributions will depend on our funds from operations, financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Code and other factors our board of directors deem relevant at that time.

      Subject to our board of directors’ and our shareholders’ approval of the plan of liquidation, which has not yet been submitted for approval or been approved, we may need to reduce the amount of our monthly distributions in 2005, which may ultimately impact our ability to meet our REIT distribution requirements.

      Additionally, we are required to distribute 90% of our REIT taxable income (excluding capital gains) on an annual basis in order to qualify as a REIT for federal income tax purposes. We may be required to use borrowings under our credit facility, if necessary, to meet REIT distribution requirements and maintain our REIT status. We have historically distributed amounts in excess of our taxable income resulting in a return of capital to our shareholders. We anticipate that our current distribution rate will meet our REIT requirements for 2005. Amounts accumulated for distribution to shareholders are invested primarily in interest-bearing accounts and short-term interest-bearing securities, which are consistent with our intention to maintain our qualification as a REIT. Such investments may include, among others, investments in marketable equity securities, certificates of deposit and interest-bearing bank deposits.

Equity Compensation Plan Information

      Our equity compensation plan information is as follows:

      The following should be read with the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes thereto.

SELECTED FINANCIAL DATA

T REIT, INC.

      The following discussion should be read in conjunction with Item 6, “Selected Financial Data,” and our historical consolidated financial statements and related notes thereto included elsewhere in this report.

Forward-Looking Statements

      Historical results and trends should not be taken as indicative of future operations. Our statements contained in this report that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Actual results may differ materially from those included in the forward-looking statements. We intend these forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements, which are based on our assumptions and describe future plans, strategies and expectations for ourselves, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “prospects,” or similar expressions as well as any statements referring to the plan of liquidation or possibility thereof. Our ability to predict results or the actual effect of our future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations and our future prospects on a consolidated basis include, without limitation, the following: changes in economic conditions generally and the real estate market specifically; legislative/regulatory changes (including changes to laws governing the taxation of REITs); availability of capital; interest rates; competition; supply and demand for operating properties in our current and proposed market areas and generally accepted accounting principles; the possibility of a plan of liquidation; and policies and guidelines applicable to REITs. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning us and our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.

Overview and Background

      We were organized in December 1998 to acquire, manage, and invest in a diversified portfolio of real estate (or interests therein) comprised of office, industrial, retail and service properties located primarily in the following states: Alaska; Florida; Iowa; Michigan; Minnesota; Nevada; North Carolina; South Carolina; South Dakota; Tennessee; Texas; Virginia; Washington; Wisconsin; and Wyoming. We completed our first property acquisition in September 2000. As of December 31, 2004, we owned interests in eleven properties, including interests in two consolidated properties and interests in nine unconsolidated properties. We have a limited basis for comparison between 2004 and 2003, and between 2003 and 2002, respectively, is limited due to the number of acquisitions and dispositions during these years.

      We have been operating and intend to continue operating as a REIT for federal and state income tax purposes. To maintain our REIT status, we are required to distribute annually as distributions at least 90% of our REIT taxable income, as defined by the Internal Revenue Code, or Code, to our shareholders, among other requirements. If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax on our taxable income at regular corporate tax rates. As of December 31, 2004, we believe we are in compliance with all relevant REIT requirements.

      We are externally advised by Triple Net Properties, LLC, or our Advisor, pursuant to the terms of an advisory agreement, or the Advisory Agreement. Our Advisor is primarily responsible for managing our day-to-day operations and assets, subject to the supervision of our board of directors. The Advisory Agreement between us and our Advisor has a one-year term, and is subject to successive one-year renewals with the written consent of the parties, including a majority of our independent directors. The current term of the Advisory Agreement expired on February 22, 2005 and our Advisor continues to manage us on a month-to-month basis.

      Our Advisor is affiliated with us in that the two entities have common officers and a common director, some of whom also own an equity interest in our Advisor. Our Advisor engages affiliated entities, including Triple Net Properties Realty, Inc., or Realty, an affiliate of our Advisor, which was solely owned by Anthony W. Thompson, our chairman of the board of directors, and our chief executive officer and

president until his resignation as chief executive officer and president effective August 18, 2004, through December 31, 2004 (effective January 1, 2005, Mr. Thompson owns 88% of Realty), a real estate brokerage and management company, to provide various services for the properties. Our Advisor and Realty were formed in 1998 to serve as an asset and property manager for real estate investment trusts, syndicated real estate limited partnerships, limited liability companies and similar real estate entities.

Business Strategy

      As set forth in our registration statement that we originally filed in 1999, we were formed with the intent to be listed on a national stock exchange, quoted on a quotation system of a national securities association or merged with an entity whose shares are so listed or quoted. At that time, we intended that if we were not so listed or quoted by February 22, 2010, we would submit for our shareholder’s vote a proposal to liquidate our company. As a result of (i) current market conditions, (ii) the increasing costs of corporate compliance (including, without limitation, all federal, state and local regulatory requirements applicable to us, including the Sarbanes-Oxley Act of 2002, as amended) and (iii) the possible need to reduce our monthly distributions, in November, 2004 our board of directors began to investigate whether liquidating now would provide our shareholders with a greater return on our shareholder’s investment over a reasonable period of time, than through implementation of other alternatives considered. After reviewing the issues facing us, our board of directors concluded on December 2, 2004 that we should explore the possibility of a plan of liquidation. On December 29, 2004, a special committee of our independent directors, including Messrs. D. Fleet Wallace and W. Brand Inlow, was formed to analyze whether liquidation of all of our assets is in our shareholders best interests. On December 29, 2004, we also engaged Robert A. Stanger & Co., Inc., or Stanger, as our financial advisor to (i) assist in a review of the pros and cons of those alternatives, including a potential plan of liquidation and (ii) render opinions as to the fairness of the consideration to be received in any potential transactions. Our board of directors is currently considering the prospects of an approval of a plan of liquidation. In the event of its approval thereof, our board of directors will include their recommendation in a proxy statement for approval by our shareholders of the plan of liquidation at our next annual meeting.

      Subject to our board of directors’ and shareholders’ approval of a plan of liquidation, our primary business strategy currently is to actively manage our property portfolio to seek to achieve gains in rental and occupancy rates, control operating expenses and maximize income from ancillary operations and services. We believe that new real estate investments will have a significant impact on our future results of operations. If we are not successful in completing additional acquisitions, our future results of operations could be negatively impacted due to the dilutive impact of the uninvested funds. We may also sell existing properties and place the net proceeds therefrom into new investment properties we believe will generate long-term value.

      On January 20, 2004, through our wholly-owned subsidiary, T REIT — AmberOaks, LP, we purchased a 75% undivided tenant-in-common interest, or TIC, in three buildings at AmberOaks Corporate Center located in Austin, Texas from an unaffiliated third party. Three unaffiliated entities purchased the remaining 25% TICs in the property.

      The total purchase price for this consolidated real estate property was $22,965,000. The purchase was financed by a $15,000,000 loan secured by the property from North Houston Bank. The mortgage requires interest only payments through February 15, 2006 and, thereafter, principal and interest payments through the maturity date of the loan on January 20, 2007, with an option to extend the term of the loan for up to 24 months until January 20, 2009. The interest rate on the mortgage loan is the prime rate plus 1.0% subject to a floor of 5.5%. The seller paid a sales commission to Realty of $585,000, or 2.3% of the purchase price. AmberOaks is a three-building Class A office portfolio totaling 207,000 square feet of gross leasable area, or GLA, and is part of an eight-building complex built during 1999-2001. An affiliate of our Advisor purchased the remaining five buildings. During the twelve months ended December 31, 2004, we recorded $5,085,000 in lease intangible assets related to our acquisition of AmberOaks.

      On February 27, 2004, we purchased 43 acres of land, including 36 acres of land situated under Gateway Mall from an unaffiliated third party for a cash purchase price, including closing costs, of $1,631,000.

      On April 2, 2004, we, as a member of NNN Oakey Building 2003, LLC, purchased a 9.8% interest in the Oakey Building in Las Vegas, Nevada from an unaffiliated third party. In the purchase transaction, we acquired a 9.8% interest in Oakey Building and 2003 Value Fund, LLC, an affiliated party, who is also managed by our advisor, acquired a 75.5% interest in Oakey Building and unaffiliated members acquired the remaining 14.8% of Oakey Building. The total purchase price for the Oakey Building was $8,137,000. Our total initial investment was $670,000. The purchase was financed by $4,000,000 in borrowings secured by the property. The loan is payable to the Ivan Halaj and Vilma Halaj Inter Vivos Trust. The loan requires principal and interest payments at a fixed interest rate of 10% per annum until the due date of April 1, 2005. The loan has been extended until October 1, 2005 and bears interest at a fixed interest rate of 8.0% per annum. The seller of the property paid a sales commission to Realty of $237,000, or 2.9% of the purchase price. The Oakey Building is a Class A office building of approximately 104,000 square foot of GLA located in Las Vegas, Nevada.

      On July 26, 2004, we, as a member of NNN Emerald Plaza, LLC, purchased a 2.7% interest in the Emerald Plaza Building in San Diego, CA from an unaffiliated third party for $1,000,000.

      As of December 31, 2004, Emerald Plaza is owned by the following interest holders as TICs:

      As of December 31, 2004, NNN Emerald Plaza, LLC which owns an aggregate 20.5% interest in Emerald Plaza, is owned by the following members, with the proportionate membership interest and interest in Emerald Plaza listed next to each as well:

      The LLC members include NNN 2003 Value Fund, LLC, an affiliated party who is also managed by our advisor, and affiliated members including certain of our executives who are also executives of our Advisor.

      The total purchase price was $100,940,000 and was financed by $68,500,000 in borrowings under a secured loan from Citigroup Global Markets Realty Corp. The loan requires interest only payments through the maturity date of June 17, 2007 at a variable interest rate of 4.85% per annum. The seller of the property paid a sales commission to Realty of $2,940,000, or 2.9% of the purchase price. Emerald Plaza is a Class A office tower of approximately 354,525 square foot of GLA located in downtown San Diego, California.

      On January 9, 2003, we, as a member of Congress Center, LLC, purchased a 10.3% interest in Congress Center from an unaffiliated third party. Congress Center is a 16-story Class A office building of approximately 525,000 square feet of gross leaseable area, or GLA, located in Chicago, Illinois.

      As of December 31, 2004, Congress Center is owned by the following interest holders as TICs:

      As of December 31, 2004, NNN Congress Center, LLC, which owns an aggregate 28.9% interest in Congress Center, is owned by the following members, with the proportionate membership interest and interest in Congress Center listed next to each:

      Affiliated entities purchased the remaining undivided TICs in the property. The total purchase price for Congress Center was $136,108,000. Our total investment was $5,000,000. The seller of the property paid a sales commission to Realty of $2,000,000, or 1.5% of the purchase price.

      At the time of acquisition, the purchasers obtained a first mortgage loan in the amount of $81,989,000, with an interest rate at the 30-day LIBOR rate plus 175 basis points. The purchasers also obtained a mezzanine loan for $15,000,000. This loan reflected an interest rate at the 30-day LIBOR rate plus 675 basis points. Both the mortgage and mezzanine loans were refinanced on September 3, 2004. The purchasers are jointly and severally liable for the total debt of $97,500,000, which consists of the following three loans: $80,000,000, with monthly interest only payments with the balance due on October 1, 2014 at a fixed rate of 5.635% per annum; $15,000,000, with monthly interest only payments with the balance due on October 1, 2014 at a fixed rate of 5.635% per annum; and $2,500,000, with interest only payments until October 1, 2006 at which time principal and interest is due monthly on a 30-year amortization at an fixed interest rate of 7.0% per annum. In connection with the Congress Center refinancing, the unamortized portion of the capitalized loan costs of $580,000 were expensed in September 2004 by Congress Center along with $253,000 in prepayment penalties related to the early termination of the loan.

      On January 29, 2003, through our wholly-owned subsidiary, T REIT — Gateway Mall ND, LLC, we purchased Gateway Mall in Bismarck, North Dakota from an unaffiliated third party for a purchase price of $9,000,000. Gateway Mall is a multi-tenant regional mall of 334,000 square feet of GLA on a 45-acre site located in Bismarck, North Dakota. The property is subject to a ground lease expiring in 2028 with ten 5-year option periods thereafter. The seller of the property paid a sales commission to Realty of $250,000, or 2.8% of the purchase price.

      On December 22, 2003, we, as a member of Enclave Parkway, LLC, we purchased a 3.3% interest in Enclave Parkway in Houston, Texas from an unaffiliated third party. The total purchase price for Enclave Parkway was $34,500,000. Our total investment was $437,500. Enclave Parkway is a 207,000 square foot of GLA Class A office building situated in Houston’s energy corridor. The seller of the property paid a sales commission to Realty of $1,000,000, or 2.9% of the purchase price.

      On March 18, 2004, we sold Gateway Mall to an unaffiliated third party for a sales price of $11,600,000. The sale of Gateway Mall included the underlying 36 acres of land described above. Net sales proceeds included cash of $2,452,000 and a note receivable in the amount of $8,700,000. The note was secured by a pledge agreement, bears interest at 6% per annum and matured on June 14, 2004. The note was refinanced by the buyer and we received $6,500,000 on July 9, 2004 and issued an adjustable note receivable for $2,200,000 (Note 7 to the consolidated financial statements ). The note bore interest at 8.6% per annum and matures on August 1, 2006. In connection with the sale of Gateway Mall, we repaid a note payable secured by the property with an outstanding balance of $4,876,000. We recorded a gain on the sale of $769,000. At closing, we paid a real estate commission to Realty of $339,000, or 2.9% of the selling price.

      On September 9, 2004, we sold the remaining seven acres of the Gateway Mall land to an unaffiliated third party for $1,385,000. Net sales proceeds included cash of $794,000 and a note receivable in the amount of $528,000. The note is secured by a pledge agreement, bore interest at 4% per annum and was due on March 7, 2005. The note was paid in full on March 7, 2005. We recorded a gain on the sale of $854,000. At closing, we paid a real estate commission to Realty of $44,000, or 3.2% of the selling price.

      On December 27, 2004, the Saddleback Financial Center property, in Laguna Hills, California, of which we owned a 25% TIC, was sold to an unaffiliated third party for a net sales price of $15,325,000. In connection with that sale, the property repaid a mortgage note payable secured by the property with an outstanding balance of $7,269,000. We received net cash proceeds totaling $1,619,000 after closing costs and other transaction expenses. The sale resulted in us recording a net gain of $853,000. We paid a property disposition fee to Realty of $115,000, or 3.0% of the net sales price, and sales commissions to unaffiliated brokers of $55,000, or 1.5% of the net sales price.

      On January 11, 2003, we sold the Northstar Crossing Shopping Center in Garland, Texas to an unaffiliated third party for a sales price of $4,200,000. In connection with the sale, we repaid a note payable secured by the property with an outstanding balance of $2,866,579 and received net cash proceeds totaling $1,015,000 after payment of closing costs and other transaction expenses. The sale resulted in a net loss of $191,400. At closing, we paid a sales commission to an unaffiliated broker of $168,000, or 4.0% of the selling price. We reinvested the net proceeds from the sale in other income producing commercial property.

      On August 11, 2003, we sold the Thousand Oaks Shopping Center in San Antonio, Texas to an unaffiliated third party for a sales price of $15,880,000. In connection with the sale, we repaid a note payable secured by the property with an outstanding balance of $8,750,000 and received net cash proceeds totaling $6,100,000 after payment of closing costs and other transaction expenses. The sale resulted in a net gain of $2,100,000. At closing, we paid a sales commission to Realty of $175,000, or 1.1% of the selling price, and a sales commission to an unaffiliated broker of $317,600, or 2.0% of the selling price. We reinvested the net proceeds from the sale in a like-kind exchange under Section 1031 of the Code.

      On September 25, 2003, we sold the Pahrump Valley Junction Shopping Center in Pahrump, Nevada to an unaffiliated third party for a sales price of $18,985,000. In connection with the sale, we repaid a note

payable secured by the property with an outstanding balance of $11,884,000 and received net cash proceeds of $5,950,000 after closing costs and other transaction expenses. The sale resulted in a net gain of $874,000. We paid a sales commission to Realty of $175,000, or 1.0% of the sales price, and sales commissions to unaffiliated brokers of $629,700, or 3.3% of the sales price. We reinvested the net proceeds from the sale in other income producing commercial property.

Critical Accounting Policies

      The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, or GAAP, requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We believe that our critical accounting policies are those that require significant judgments and estimates such as those related to revenue recognition, allowance for doubtful accounts, impairment of real estate assets, purchase price allocation, deferred assets, and qualification as a REIT. These estimates are made and evaluated on an on-going basis using information that is currently available as well as various other assumptions believed to be reasonable under the circumstances. Actual results could vary from those estimates and those estimates could be different under different assumptions or conditions.

      Statement of Financial Accounting Standards, or SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and requires that, in a period in which a component of an entity either has been disposed of or is classified as held for sale, the income statements for current and prior periods shall report the results of operations of the component as discontinued operations. On March 18, 2004, we sold Gateway Mall to an unaffiliated third party, as described above. As a result of such sale, we reclassified amounts related to Gateway Mall in the consolidated financial statements to reflect the reclassification required by SFAS No. 144. We included revised presentations of the following items that were originally filed in our Annual Report on Form 10-K for the year ended December 31, 2003, or the Form 10-K: (i) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; (ii) Item 8. Financial Statements and Supplementary Data; and (iii) Item 15. Financial Statement Schedules. The revised presentations reflect the reclassification of Gateway Mall as a discontinued operation pursuant to the requirements of Statement of Financial Accounting Standards, or SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets”.

      Accordingly, revenues, operating costs and expenses, and other non-operating results for the discontinued operations of Gateway Mall have been excluded from our results from continuing operations for all periods presented herein. The financial results for Gateway Mall are presented in our Consolidated Statements of Operations in a single line item entitled “Income from discontinued operations” and the related assets and liabilities are presented in the Consolidated Balance Sheets in line items entitled “Property held for sale, net” and “Notes payable secured by property held for sale.”

      We recognized base rental income on a straight-line basis over the terms of the respective lease agreements. Differences between rental income recognized and amounts contractually due under the lease agreements are credited or charged, as applicable, to rent receivable. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments under lease agreements. We also maintain an allowance for deferred rent receivables arising from the straight-lining of rents. The adequacy of this allowance is determined by continually evaluating individual tenant receivables considering the tenant’s financial condition, security deposits, letters of credit, lease guarantees and current economic conditions.

      We state real estate investments at depreciated cost. We assess the impairment of a real estate asset when events or changes in circumstances indicate that the net book value may not be recoverable. Factors

which we consider important and which we believe could trigger an impairment review include the following:

      In the event that the carrying amount of a property exceeds the sum of the undiscounted cash flows (excluding interest) that are expected to result from the use and eventual disposition of the property, we would recognize an impairment loss to the extent the carrying amount exceeded the estimated fair value of the property. The estimation of expected future net cash flows is inherently uncertain and relies on subjective assumptions dependent upon future and current market conditions and events that affect the ultimate value of the property. It requires us to make assumptions related to future rental rates, tenant allowances, operating expenditures, property taxes, capital improvements, occupancy levels, and the estimated proceeds generated from the future sale of the property. We estimate the fair value using available market information or other industry valuation techniques such as present value calculations.

      In accordance with Statement of Financial Accounting Standard, or SFAS, No. 141, Business Combinations, we, with the assistance from independent valuation specialists, allocate the purchase price of acquired properties to tangible and identified intangible assets based on their respective fair values. The allocation to tangible assets (building and land) is based upon our determination of the value of the property as if it were vacant using discounted cash flow models similar to those used by independent appraisers. Factors which we consider include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. Additionally, the purchase price of the applicable property is allocated to the above or below market value of in-place leases and the value of in-place leases and related tenant relationships.

      The value allocable to the above or below market component of the acquired in-place leases is determined based upon the present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between (i) the contractual amounts to be paid pursuant to the lease over its remaining term, and (ii) management’s estimate of the amounts that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to above market leases are included in the intangible in-place lease asset and below market lease values are included in intangible lease liability in the accompanying condensed consolidated financial statements and are amortized to rental income over the weighted average remaining term of the acquired leases with each property.

      The total amount of other intangible assets acquired is further allocated to in-place lease costs and the value of tenant relationships based on management’s evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant. Characteristics considered by management in allocating these values include the nature and extent of the credit quality and expectations of lease renewals, among other factors.

      These allocations are subject to change based on continuing valuation analysis or other evidence, until the allocations are finalized or the stipulated time of one year from the date of acquisition.

      Property held for sale is carried at the lower of cost or estimated fair value less cost to sell and such property is no longer depreciated.

      We account for our investments in unconsolidated real estate operating properties using the equity method of accounting. Accordingly, we report our net equity in our proportionate share of the total investments in unconsolidated real estate as “Investment in unconsolidated real estate” on our Consolidated Balance Sheets. We report our proportionate share of the total earnings of our investments in unconsolidated real estate as “Equity in the earnings of unconsolidated real estate” on our Consolidated Statements of Operations.

      Costs incurred for debt financing and property leasing are capitalized as deferred assets. Deferred financing costs include amounts paid to lenders and others to obtain financing. Such costs are amortized over the term of the related loan. Amortization of deferred financing costs is included in interest expense in our statements of operations. Deferred leasing costs include leasing commissions that are amortized using the straight-line method over the term of the related lease. Unamortized financing and leasing costs are charged to expense in the event of debt prepayment or early termination of the lease.

Qualification as a REIT

      We have been organized and operated, and intend to continue to operate, so as to qualify for taxation as a REIT under the Code. Our qualification and taxation as a REIT depends on our ability to meet, through actual annual operating results, asset diversification, distribution levels and diversity of stock ownership, and numerous requirements established under highly technical and complex Code provisions.

      If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. Moreover, unless entitled to relief under specific statutory provisions, we also would be disqualified as a REIT for four taxable years following the year during which qualification was lost.

Factors Which May Influence Results of Operations

      The amount of rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space and space available from unscheduled lease terminations at the existing rental rates. Negative trends in one or more of these factors could adversely affect our rental income in future periods.

      As of December 31, 2004, our consolidated properties were 98% leased to 20 tenants. 21% of the leased square footage expires during 2005. Our leasing strategy for 2005 focuses on negotiating renewals for leases scheduled to expire during the year and identifying new tenants or existing tenants seeking additional space to occupy the square footage for which we are unable to negotiate such renewals. Of the leases expiring in 2005, we anticipate, but cannot assure, that approximately 9.2% of the tenants will renew for another term. At the time the leases expire and the tenants do not renew the lease, we will write-off all associated intangibles.

      Our Advisor has learned that ACS Health Services, Inc., or ACS, a tenant in the AmberOaks property, in which we own a 75% TIC interest, will not be renewing their lease, which expired on February 28, 2005. ACS currently occupies 44,000 square feet of GLA of the premises, which represents approximately 21% of the gross leasing area of the 207,000 square feet of GLA at the AmberOaks property. The tenant may occupy the space for an undetermined length of time beyond the term of the lease in accordance with hold over provisions in the lease or vacate the premises. As of March 31, 2005, ACS has exercised its hold over provision until May 31, 2005. From January 1, 2005 through May 31, 2005, we will amortize $341,000 related to the intangible assets associated with ACS.

      The Sarbanes-Oxley Act and related laws, regulations and standards relating to corporate governance and disclosure requirements applicable to public companies have increased the costs of compliance with corporate governance, reporting and disclosure practices which are now required of us. In addition, these laws, rules and regulations create new legal bases for administrative enforcement, civil and criminal proceedings against us in case of non-compliance, thereby increasing its risks of liability and potential sanctions. We expect that our efforts to comply with these laws and regulations will continue to involve significant, and potentially increasing costs, and any failure to comply could result in fees, fines, penalties

or administrative remedies, which could reduce and/or delay the amount of distributions under the plan of liquidation.

      Under the current Advisory Agreement, our Advisor currently bears the increased cost of compliance under the Sarbanes-Oxley Act, and related rules and regulations; however, the Advisory Agreement terminated on February 22, 2005. As of March 31, 2005, we had not negotiated a new advisory agreement. We expect that our Advisor might require that under the terms of any new advisory agreement we will bear the cost of complying with the Sarbanes-Oxley Act, and related rules and regulations. These costs were unanticipated at the time of our formation and may have a material impact on our results of operations due to our relatively small size. Furthermore, we expect that these costs will increase in the future due to our continuing implementation of compliance programs mandated by these requirements. Any increased costs may affect our ability to distribute funds to our shareholders.

Results of Operations

      Our operating results are primarily comprised of income derived from our properties. Because of the significant property acquisitions and dispositions throughout the years ended December 31, 2004, 2003 and 2002, the comparability of financial data from period to period will be limited.

      Rental income increased by $3,891,000, or 364%, to $4,959,000 for the year ended December 31, 2004 compared to $1,068,000 for the year ended December 31, 2003. $3,875,000, or 99.6%, of the increase was directly related to the acquisition of AmberOaks in January 2004.

      Rental expenses increased by $1,603,000, or 605%, to $1,868,000 for the year ended December 31, 2004 compared to $265,000 for the year ended December 31, 2003. $1,400,000, or 87% of the increase was

directly related to the acquisition of AmberOaks in January 2004. Further contributing to the increase was an increase in property taxes, administration fees, ground maintenance expenses for University Heights of $94,000, or 6% of the increase, offset by a decrease in management fees for University Heights of $1,000.

      General and administrative expenses consist primarily of third party professional legal and accounting fees related to our SEC filing requirements. General and administrative expenses increased $449,000, or 55%, to $1,264,000 for the year ended December 31, 2004 compared to $815,000 for the year ended December 31, 2003. $50,000, or 11%, was directly related to the acquisition of AmberOaks in January 2004. Further contributing to the increase was an increase in costs due to regulatory filings of $181,000, or 40% of the increase.

      Depreciation and amortization expense increased by $1,811,000 or 1,207% to $1,961,000 for the year ended December 31, 2004, compared to $150,000 for the year ended December 31, 2003. $1,772,000, or 98% of the increase, was attributable to the acquisition of AmberOaks in January 2004.

      Interest expense (including amortization of deferred financing costs) increased by $882,000, or 289%, to $1,187,000 for the year ended December 31, 2004, compared to $305,000 for the year ended December 31, 2003. The increase was attributable to the interest on the mortgage note for the acquisition of AmberOaks in January 2004 of $808,000, or 92% of the increase.

      Interest income increased by $333,000, or 287%, to $449,000 for the year ended December 31, 2004 compared to $116,000 for the year ended December 31, 2003. This increase was primarily due to interest of $263,000, or 79%, on note receivables issued during 2004 for the sale of Gateway Mall in March and September, 2004.

      Dividend income increased to $86,000 as a result of investments in marketable securities as of December, 31, 2004.

      Gain on sale of marketable securities was due to the purchase and sale of our short-term investment in marketable securities of $109,000 for the year ended December 31, 2004.

      Equity in earnings of unconsolidated real estate decreased by $579,000, or 50%, to $581,000 for the year ended December 31, 2004, from $1,160,000 for the year ended December 31, 2003. The decline is partially due to our proportionate share of operating losses sustained on Congress Center of ($302,000), Oakey Building of ($19,000), and Emerald Plaza of ($54,000), and the proportionate share of the write off of prepaid loan costs, of $85,000, or 14.7%, due to the refinancing of the Congress Center property.

      Income (loss) from continuing operations before discontinued operations and minority interest was ($96,000), or $0.00 per basic and diluted share, for the year ended December 31, 2004, compared to $809,000, or $0.17 per basic and diluted share, for the year ended December 31, 2003.

      Gain on sale of real estate investments decreased by $148,000, or 6%, to $2,466,000 for the year ended December 31, 2004 from $2,614,000 for the year ended December 31, 2003. The decrease is a result of the sale of one unconsolidated property and Gateway Mall land in the current year compared to three properties in the prior year.

      Minority interests decreased by $85,000, to $85,000, during the year ended December 31, 2004, when compared with the prior period. The decrease was due to the loss on AmberOaks, which was purchased in January 2004.

      Income from discontinued operations decreased $677,000, or 88% to $89,000 for the year ended December 31, 2004 from $766,000 for the year ended December 31, 2003. The decrease is primarily due to the net operating results of Gateway Mall, which was sold on March 18, 2004 and Gateway Mall land sold on September 9, 2004. Income from discontinued operations for the year ended December 31, 2003 was due to the net operating results of North Star Shopping Center, Thousand Oaks, Pahrump Valley Junction Shopping Center, and Gateway Mall.

      Net income was $2,544,000, or $0.55, per basic and dilutive share and $4,189,000, or $0.90, per basic share and dilutive share, for the years ended December 31, 2004 and 2003, respectively.

      Rental income increased by $764,000, or 251%, to $1,068,000 for the year ended December 31, 2003 compared to $304,000 for the year ended December 31, 2002. $695,000, or 91%, of the increase was attributable to a full year’s ownership of University Heights Business Park.

      Rental expenses increased by $163,000, or 160%, to $265,000 for the year ended December 31, 2003 compared to $102,000 for the year ended December 31, 2002. $96,000, or 59%, of the increase was attributable to a full year’s ownership in 2003 of University Heights.

      General and administrative expenses consist primarily of third party professional legal and accounting fees related to our SEC filing requirements. General and administrative expenses increased $276,000, or 51%, to $815,000 for the year ended December 31, 2003 compared to $539,000 for the year ended December 31, 2002. The increase was due to the increase in accounting and legal fees due to regulatory filings.

      Depreciation and amortization expense increased by $129,000, or 614%, to $150,000 for the year ended December 31, 2003, compared to $21,000 for the year ended December 31, 2002. $138,000, or 107%, of the increase was attributable to a full year’s ownership in 2003 of University Heights.

      Interest expense (including amortization of deferred financing costs) increased by $292,000, or 2,246% to $305,000 for the year ended December 31, 2003 compared to $13,000 for the year ended December 31, 2002. This increase was attributable to full year’s interest expense related to a mortgage loan of $4,345,000, secured by University Heights of $232,000.

      Interest income decreased by $167,000, or 59%, to $116,000 for the year ended December 31, 2003 compared to $283,000 for the year ended December 31, 2002. This decrease was primarily due to the collection of a related party loan from Western Real Estate Investment Trust, Inc., or W REIT. In March 2001, we advanced W REIT a $1,380,000 mortgage note that bore interest of 12% per annum. The total mortgage loan was paid in full on September 30, 2002 with the applicable interest. We received $125,000 of interest related to the note in 2002.

      Equity in earnings of unconsolidated real estate increased by $34,000, or 3%, to $1,160,000 for the year ended December 31, 2003, from $1,126,000 for the year ended December 31, 2002. The increase is primarily due to the operating results of Congress Center which was acquired in 2003.

      Income from continuing operations was $809,000 or $0.17 per basic and diluted share, for the year ended December 31, 2003, compared to $1,038,000, or $0.26 per basic and diluted share, for the year ended December 31, 2002.

      Gain on sale of real estate investments increased by $2,401,000, or 1,127%, to $2,614,000 for the year ended December 31, 2003, from $213,000 for the year ended December 31, 2002. The increase is primarily a result of the sales of North Star Shopping Center, Thousand Oaks, and Pahrump Valley Junction Shopping Center during 2003 and the sales of our interests in Plaza Del Rey and Seguin Corners during 2002.

      Income from discontinued operations decreased $276,000, or 26%, to $766,000 for the year ended December 31, 2003, compared to $1,042,000 for the year ended December 31, 2002. The decrease is primarily due to the net operating results of three properties sold in 2003 and one in 2004, which includes rental income and expenses, interest expense and depreciation related to the properties through the date of sale.

      Net income was $4,189,000, or $0.90 per basic and dilutive share, and $2,293,000, or $0.57 per basic share and dilutive share, for the years ended December 31, 2003 and 2002, respectively.

Liquidity and Capital Resources

      Net cash provided by operating activities increased $640,000 to $3,590,000 for the year ended December 31, 2004 compared to net cash provided by operating activities of $2,950,000 for the year ended December 31, 2003. The increase was primarily due to an increase in depreciation and amortization for AmberOaks of $1,772,000, which was acquired in 2004, offset by a decline in net income of $1,645,000, or 39%, and other non cash charges and working capital.

      Net cash used in investing activities was $14,333,000 for the year ended December 31, 2004, a decrease of $16,850,000 from net cash provided by investing activities of $2,517,000 for the year ended December 31, 2003. The decrease is primarily attributed to a reduction in the net proceeds from real estate dispositions as a result of the sale of three operating properties in the prior year as compared to one in the current year, $23,519,000 cash outlay for the purchase of operating properties, and $1,125,000 purchase of investments in unconsolidated real estate, partially offset by the collection of notes receivable of $6,576,000 in 2004.

      Net cash provided by financing activities was $5,783,000 for the year ended December 31, 2004, an increase of $5,190,000, from net cash provided by financing activities of $593,000 for the year ended December 31, 2003. The increase is primarily attributable to the borrowing related to the purchase of AmberOaks in 2004 of $15,000,000 offset by the repayment of mortgage debt related to the sale of Gateway Mall in 2004 of $4,876,000 as well as the issuance of the mortgage in 2003 of $5,000,000 for the purchase of Gateway Mall.

      As a result of the above, cash and cash equivalents decreased $4,960,000 for the year ended December 31, 2004 to $7,229,000.

      We seek to create and maintain a capital structure that allows for financial flexibility and diversification of capital resources. Our primary source of liquidity to fund distributions, debt service, leasing costs and capital expenditures is net cash from operations. Our primary sources of liquidity is to fund property acquisitions, temporary working capital and unanticipated cash needs is our credit facility of

$1,000,000. As of December 31, 2004 and 2003, our total debt as a percentage of total capitalization was 34.4% and 19.5%, respectively.

      We are required to distribute 90% of our REIT taxable income (excluding capital gains) on an annual basis in order to qualify as a REIT for federal income tax purposes. Accordingly, we intend to continue to make, but have not contractually bound ourself to make, regular monthly distributions to holders of our common stock from cash flow from operating activities. All such distributions are at the discretion of our board of directors. We may be required to use borrowings under our credit facility, if necessary, to meet REIT distribution requirements and maintain our REIT status. We have historically distributed amounts in excess of our taxable income resulting in a return of capital to our shareholders. We anticipate that our current distribution rate will meet our REIT requirements for 2005. Amounts accumulated for distribution to shareholders are invested primarily in interest-bearing accounts and short-term interest-bearing securities, which are consistent with our intention to maintain our qualification as a REIT. Such investments may include, for example, investments in marketable equity securities, certificates of deposit and interest-bearing bank deposits.

      Subject to our board of directors’ and our shareholders’ approval of the plan of liquidation, we believe that we will have sufficient capital resources to satisfy our liquidity needs over the next twelve months. However, we may be unable to fund future cash distributions. We estimate we will have $1,158,000 of commitments and capital expenditures over the next twelve months comprised of the following: $65,000 in secured debt principal repayments; and $1,093,000 in capital expenditures, budgeted capital improvements, tenant improvements and leasing costs for our portfolio. There can be, however, no assurance that we will not exceed these estimated expenditure and distribution levels or be able to obtain additional sources of financing on commercially favorable terms, or at all.

      In the event that there is a shortfall in net cash available due to factors including, without limitation, the timing of such distributions or the timing of the collections of receivables, we may seek to obtain capital to pay distributions by means of secured debt financing through one or more third parties. We have additional equity to borrow from our consolidated properties for such purposes. We may also pay distributions from cash from capital transactions, including without limitation, the sale of one or more of our properties.

      Our distributions of amounts in excess of our taxable income have resulted in a return of capital to our stockholders. The income tax treatment for distributions reportable for the years ended December 31, 2004, 2003 and 2002, was as follows:

      Subject to our board of directors’ and our shareholders’ approval of the plan of liquidation, we expect to meet our long-term liquidity requirements, which may include property acquisitions, through retained cash flow, borrowings under our credit facility, additional long-term secured and unsecured borrowings, dispositions of assets, issuance of common or preferred units of the Operating Partnership, and the potential issuance of debt or equity securities. We do not intend to reserve funds to retire existing debt upon maturity. We will instead, seek to refinance such debt at maturity or retire such debt through the issuance of equity securities, as market conditions permit.

      Our Advisor has learned that ACS Health Services, Inc., or ACS, a tenant in the AmberOaks property, in which we own a 75% TIC interest, will not be renewing their lease, which expires on February 28, 2005. ACS currently occupies 44,000 square feet of GLA of the premises, which represents approximately 21% of the 207,000 square feet of GLA at the AmberOaks property. The tenant may

occupy the space for an undetermined length of time beyond the term of the lease in accordance with hold over provisions in the lease or they may vacate the premises. As of March 31, 2005, ACS has exercised its hold over provision until May 31, 2005. From January 1, 2005 through May 31, 2005, we will amortize $341,000 related to the intangible assets associated with ACS.

      If we experience lower occupancy levels, reduced rental rates, reduced revenues as a result of asset sales, increased capital expenditures and leasing costs compared to historical levels due to competitive market conditions for new and renewal leases, the effect would be a reduction of net cash provided by operating activities. If any or all of these events occur and our board of directors continues to declare distributions to our shareholders at current levels, we may experience a cash flow deficit in subsequent periods. In connection with such a shortfall in net cash available, we may seek to obtain capital to pay distributions by means of secured debt financing through one or more third parties. This estimate is based on various assumptions which are difficult to predict, including the levels of leasing activity at year end and related leasing costs. Any changes in these assumptions could impact the financial results and our ability to fund working capital and unanticipated cash needs. To the extent any distributions are made to our shareholders in excess of accumulated earnings, the excess distributions are considered a return of capital to our shareholders for federal income tax purposes to the extent of basis in our stock, and generally as capital gain thereafter.

      A material adverse change in the net cash provided by operating activities may affect our ability to fund these items and may affect the financial performance covenants under our credit facility with Fleet National Bank, or Fleet. If we fail to meet our financial performance covenants and are unable to reach a satisfactory resolution with the lenders, and the credit facility could become unavailable to us or the interest charged on the credit facility could increase. Our performance covenants require that our leverage shall not exceed 60%, that our net worth shall not be less than $10,000,000, that we shall not maintain unencumbered cash and cash equivalents approved by Fleet of at least $500,000, and that we shall maintain a debt service coverage of at least 1.50 to 1.0. Any of these circumstances could adversely affect our ability to fund working capital and unanticipated cash needs and acquisition costs.

      Distributions are determined by our board of directors and are dependent on a number of factors, including the amount of funds available for distribution, our financial condition, any decision by our board of directors to reinvest funds rather than to distribute the funds, our capital expenditures, the annual distribution required to maintain REIT status under the Code, and other factors our board of directors may deem relevant.

Capital Resources

      Our primary sources of capital are cash from real estate operations, our ability to leverage any increased market value in the real estate assets owned by us and the ability to obtain debt financing from third parties. As of December 31, 2004, we had additional equity to borrow from the existing properties of $3,200,000. We derive substantially all of our revenues from tenants under leases at the properties. The operating cash flow therefore depends materially on the rents that we are able to charge our tenants and the ability of these tenants to make their rental payments.

      The primary uses of cash are to fund distributions to our shareholders, to fund capital investment in the existing portfolio of operating assets, to fund new acquisitions and for debt service. We may also regularly require capital to invest in the existing portfolio of operating assets in connection with routine capital improvements, deferred maintenance on properties recently acquired, and leasing activities, including funding tenant improvements, allowances and leasing commissions. The amounts of the leasing-related expenditures can vary significantly depending on negotiations with tenants and the willingness of tenants to pay higher base rents over the life of the leases.

      We anticipate our source for the payment of the distributions to be funds from operating activities as well as short-term and long-term debt and net proceeds from the sale of one or more of our properties. We will require up to approximately $1,093,000 for the year ended December 31, 2005, for capital expenditures including, without limitation, tenant and/or capital improvements and lease commissions. We

intend to incur debt to provide funds for these expenditures to the extent the reserves or deposit with the lender of $1,691,000 as of December 31, 2004, is not sufficient or cannot be used for theses expenditures. Subsequent to December 31, 2004, we entered into a binding agreement for the sale of City Center West A and County Center Drive on January 24 and 26, 2005, respectively. On February 11, 2005, one of the three buildings in Pacific Corporate Park was sold to an unaffiliated third party. Subject to our board of directors’ and our shareholders’ approval of the plan of liquidation, which has not yet been submitted for approval or been approved, upon the sale of these properties, we may use the net proceeds to invest in additional properties.

      Mortgages and contracts payable, including mortgages secured by property held for sale, were $19,285,000 and $9,250,000 at December 31, 2004 and 2003, respectively. Notes and contracts payable as a percentage of total capitalization increased to 34.4% at December 31, 2004 from 19.5% at December 31, 2003. This increase was due to the issuance of the mortgage with the acquisition of AmberOaks offset in part by the sale of Gateway Mall and subsequent payment of the note related to the property.

      On September 3, 2003, we entered into an agreement with Fleet for a credit facility in the amount of $1,000,000. This credit facility bears interest at Fleet’s prime rate plus 50 basis points. The applicable credit facility matured on September 2, 2004 and has two one-year extensions. On September 21, 2004, we extended the credit facility for one year until September 30, 2005. The credit facility is subject to a fee of 1% to be paid one-third on each of the effective date, the first anniversary and the second anniversary thereof. As of December 31, 2004, we had no outstanding amount under the credit facility.

      As of December 31, 2004, we had $7,229,000 in cash and cash equivalents.

      In order to qualify as a REIT for federal income tax purposes, we are required to make distributions to our shareholders of at least 90% of REIT taxable income. In the event that there is a shortfall in net cash available due to various factors, including, without limitation, the timing of such distributions or the timing of the collections of receivables, we may seek to obtain capital to pay distributions by means of secured or unsecured debt financing through one or more third parties. We have additional equity to borrow from our consolidated properties that could be used for such purposes. We may also pay distributions from cash from capital transactions, including, without limitation, the sale of one or more of our properties.

      Total mortgage debt of unconsolidated properties was $224,547,000 and $159,888,000 as of December 31, 2004 and 2003, respectively. Our share of unconsolidated debt was $30,424,000 and $30,300,000 at December 31, 2004 and December 31, 2003, respectively, as set forth in the summary below. The increase was due to the refinancing of Congress Center in September 2004 along with the purchase of interests in the unconsolidated investments of Oakey Building and Emerald Plaza in April 2004 and July 2004, respectively, offset in part by the sale of Saddleback Financial in December 2004.

      On September 3, 2004, our Advisor refinanced Congress Center, or the borrower, with three loans totaling $97,500,000, through Principal Commercial Funding and Principal Life Insurance. We own a 10.3% interest in Congress Center, and in connection with our payment obligations under the three loans our liability is limited to the extent of our interest in Congress Center and any rents we are entitled to therefrom. In connection with the Congress Center refinancing, the total unamortized portion of the capitalized loan costs of $580,000 were expensed in September 2004 along with $253,000 in prepayment penalties related to the early termination of the loan.

      A summary of the three notes are as follows:

      Unconsolidated debt due to related parties

      We may obtain secured or unsecured debt financing through one or more third parties, including Cunningham Lending Group, LLC, or Cunningham, an entity wholly owned by Anthony Thompson, our Advisor, and NNN 2004 Notes Program, LLC, or, 2004 Notes Program, a subsidiary of our Advisor. As of December 31, 2004, the following notes were outstanding:

      Cunningham

      Triple Net Properties, LLC

      2004 Notes Program

      Insurance Coverage

      The insurance coverage provided through third-party insurance carriers is subject to coverage limitations. For each type of insurance coverage described below, should an uninsured or underinsured loss occur, we could lose all or a portion of our investment in, and anticipated cash flows from, one or more of the properties. In addition, there can be no assurance that third-party insurance carriers will be able to maintain reinsurance sufficient to cover any losses that may be incurred.

      Our principal liquidity needs include, but are not limited to, payments of interest and principal on outstanding indebtedness, which includes mortgages on our two consolidated properties. As of December 31, 2004, both University Heights and AmberOaks were subject to existing mortgages which had an aggregate principal amount outstanding of $19,285,000, which consisted of $4,285,000, or 22% allocable fixed rate debt at a weighted average interest rate of 5.25% per annum and $15,000,000 of variable rate debt at a weighted average interest rate of 5.75% per annum. As of December 31, 2004, the weighted average interest rate on our outstanding mortgages was 5.64% per annum. The scheduled principal payments for the next five years, as of December 31, 2004 are as follows:

      The following table provides information with respect to the maturities and scheduled principal repayments of our secured debt and scheduled interest payments of our fixed rate debt at December 31, 2004. The table also provides information about the minimum commitments due in connection with our lease guarantee at December 31, 2004. The table does not reflect available extension options.

      There are no off-balance sheet transactions, arrangements or obligations (including contingent obligations) that have, or are reasonably likely to have a current or future material effect on our financial condition, changes in the financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

      We define Funds from Operations, or FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trust, or NAREIT, as revised in February 2004. The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property but including asset impairment write downs, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated joint ventures are calculated to reflect FFO.

      We consider FFO to be an appropriate supplemental measure of a REIT’s operating performance as it is based on a net income analysis of property portfolio performance that excludes non-cash items such as depreciation. The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time. Since real estate values historically rise and fall with market conditions, presentations of operating results for a REIT, using historical accounting for depreciation, could be less informative. The use of FFO is recommended by the REIT industry as a supplemental performance measure.

      Presentation of this information is intended to assist the reader in comparing the operating performance of different REITs, although it should be noted that not all REITs calculate FFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO is not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income as an indication of our performance.

      Our FFO reporting complies with NAREIT’s policy described above.

      The following is the calculation of FFO for the years ended December 31, 2004, 2003 and 2002, respectively:

      On September 16, 2004, our Advisor advised us that it learned that the SEC is conducting an investigation referred to as “In the matter of Triple Net Properties, LLC.” The SEC has requested information from our Advisor relating to disclosure in securities offerings (including offerings by us, G REIT, Inc. and A REIT, Inc.) and the exemption from the registration requirements of the Securities Act for the private offerings in which our Advisor and its affiliated entities were involved and exemptions from the registration requirements of the Exchange Act for several entities. The SEC has requested financial and other information regarding these entities as well as the limited liability companies advised by our Advisor, including us. Our Advisor has advised us that it intends to cooperate fully with the SEC’s investigation. This investigation could involve us and our required periodic reports under the Exchange Act and fines, penalties or administrative remedies could be asserted against us.

      We cannot at this time assess the outcome of the investigation by the SEC. Therefore, at this time, we have not accrued any loss contingencies in accordance with Statement of Financial Accounting Standards No. 5.

      We will be exposed to inflation risk as income from long-term leases is expected to be the primary source of cash flows from operations. We expect that there will be provisions in the majority of our tenant leases that would protect it from the impact of inflation. These provisions include rent steps, reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements on a per square foot allowance. However, due to the long-term nature of the leases, the leases may not re-set frequently enough to cover inflation.

Subsequent Events

      On January 24, 2005, a binding sale agreement was entered into for the sale of the City Center West “A” Building, of which we own an 89.1% undivided tenant in common interest, to the United Insurance Company of America, an unaffiliated third party, for a total sales price of $27,610,000. In connection with this agreement, the buyer will assume a promissory note secured by the property with an outstanding balance at March 15, 2005 of $12,484,000. Our net cash proceeds will be approximately $12,604,000 after closing costs and other transaction expenses. The sale will result in us recording a net

gain of approximately $4,954,000. The sale of City Center West “A” Building is expected to close on April 19, 2005. A commission will be paid to Realty upon the sale of the property in the amount of $414,000, or 1.5% of the purchase price.

      On January 26, 2005, a binding sale agreement was entered into for the sale of County Center Drive, Temecula, California, otherwise known as the County Center Drive Building, of which we own a 16% undivided tenant in common interest, to Hall Investment Company, Inc., an unaffiliated third party, for a total sales price of $7,200,000. Our net cash proceeds from this sale will be approximately $739,000 after closing costs and other transaction expenses. The sale will result in us recording a net gain of approximately $320,000. The sale of County Center Drive is expected to close at the beginning of April, 2005. A commission will be paid to Realty upon the sale of the property in the amount of $108,000, or 1.5% of the purchase price.

      On February 11, 2005, the 25351 Commerce Centre Drive, Lake Forest, California property, one of the three buildings in the Pacific Corporate Park, of which we own a 22.8% membership interest, was sold to Tomlinson & Sons, an unaffiliated third party, for a total sale price of $4,900,000. In connection with the sale, the borrowers repaid $4,005,000 of a promissory note secured by all three buildings. Our net proceeds from this sale were approximately $933,000 after closing costs and other transaction expenses, which were used to pay down the debt on the two remaining buildings in the Pacific Corporate Park complex, of which we own a 22.8% membership interest. The sale resulted in a net gain to us of $400,000. A property disposition fee was paid to Realty of $49,000, or 1% of the total sales price and sales commissions to unaffiliated brokers of $244,000, or 5% of the total sale price.

      We entered the agreements to sell our interests in the City Center West “A” Building and the County Center Drive Building and sold our interest in the Pacific Corporate Park, all in accordance with our regular business practices regarding dispositions of our properties. We entered into these actions in our normal course of business. Subject to our board of directors’ and our shareholders’ approval of the plan of liquidation, which has not yet been submitted for approval or been approved, we presently intend to reinvest the net proceeds from the sales or potential sales of these properties in accordance with our regular business practices regarding purchases and sales of our properties, which may include reinvestment of the net proceeds in other real estate investments that qualify for like-kind exchange treatment under Section 1031 of the Code.

      Our Advisor has been advised that ACS Health Services, Inc., or ACS, a tenant in the AmberOaks property, in which we own a 75% TIC, will not be renewing their lease, which expired on February 28, 2005. ACS currently occupies 44,000 square feet of the premises, which represents approximately 21% of the gross leasing area of the 207,000 square feet at the AmberOaks property. The tenant may occupy the space for an undetermined length of time beyond the term of the lease in accordance with hold over provisions in the lease or vacate the premises. As of March 31, 2005, ACS has exercised its hold over provision until May 31, 2005. From January 1, 2005 through May 31, 2005, we will amortize $341,000 related to the intangible assets associated with ACS.

     Other

      As set forth in our registration statement that we originally filed in 1999, we were formed with the intent to be listed on a national stock exchange, quoted on a quotation system of a national securities association or merged with an entity whose shares are so listed or quoted. At that time, we intended that if we were not so listed or quoted by February 22, 2010, we would submit for our shareholders’ vote a proposal to liquidate our company. As a result of (i) current market conditions, (ii) the increasing costs of corporate compliance (including, without limitation, all federal, state and local regulatory requirements applicable to us, including the Sarbanes-Oxley Act of 2002, as amended) and (iii) the possible need to reduce our monthly distributions, in November, 2004 we began to investigate whether liquidating now would provide our shareholders with a greater return on our shareholder’s investment over a reasonable period of time, than through implementation of other alternatives considered. After reviewing the issues facing us, our board of directors concluded on December 2, 2004 that we should explore the possibility of a plan of liquidation. On December 29, 2004, a special committee of our independent directors, including

Messrs. D. Fleet Wallace and W. Brand Inlow, was formed to analyze whether liquidation of all of our assets is in our shareholders best interests. On December 29, 2004, we also engaged Robert A. Stanger & Co., Inc. as our financial advisor to (i) assist in a review of the pros and cons of those alternatives, including a potential plan of liquidation and (ii) render opinions as to the fairness of the consideration to be received in any potential transactions. Our board of directors is currently considering the prospects of an approval of a plan of liquidation, however, it has not made a decision thereon at this time. In the event of its approval thereof, our board of directors will include its recommendation in a proxy statement for approval by our shareholders of the plan of liquidation at our next annual meeting.

New Accounting Pronouncements

      In December 2004, the FASB issued Statement 123 (revised), “Share-Based Payment,” or “FAS 123R”. FAS 123R requires that all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. The new standard will be effective in the first reporting period ending after June 15, 2005. The adoption of this statement is not expected to have a material effect on our results of operations or financial condition.

      In April 2004, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position FAS 129-1, “Disclosure Requirements under FASB Statement No. 129, Disclosure of Information about Capital Structure, Relating to Contingently Convertible Financial Instruments,” or FAS 129-1. FAS 129-1 provides guidance on disclosures of contingently convertible financial instruments, including those containing contingent conversion requirements that have not been met and are not otherwise required to be included in the calculation of diluted earnings per share. The statement was effective immediately, and applies to all existing and newly created securities. The adoption of this statement did not have a material effect on our results of operations or financial condition.

      In March 2004, the Emerging Issues Task Force, or EITF, reached a consensus on Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” or EITF 03-1. EITF 03-1 provides guidance for determining when an investment is other-than-temporarily impaired to be applied in reporting periods beginning after June 15, 2004 and contains disclosure requirements effective in annual financial statements for fiscal years ending after December 15, 2003 for investments accounted for under SFAS Nos. 115 and 124. For all other investments within the scope of this Issue, the disclosures are effective for fiscal years ending after June 15, 2004. In September 2004, the FASB delayed the accounting provisions of EITF 03-1; however, the disclosure requirements remain effective. We have evaluated the impact of the adoption of EITF 03-1 and do not believe it will have a material effect on our financial condition or results of operations.

      In December 2003, FASB revised FIN 46, Consolidation of Variable Interest Entities, issued in January 2003, an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements (FIN 46R). FIN 46R requires that variable interest entities be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. FIN 46R also requires disclosures about variable interest entities that companies are not required to consolidate but in which a company has a significant variable interest. The consolidation requirements of FIN 46R apply immediately to variable interest entities created after December 31, 2003. The consolidation requirements will apply to entities established prior to December 31, 2003, in the first fiscal year or in the interim period beginning after December 15, 2004. The Company does not believe the adoption of such interpretation will have a material impact on its results of operations or financial condition.

Risk Factors

      On September 16, 2004, our Advisor advised us that it learned that the SEC is conducting an investigation referred to as “In the matter of Triple Net Properties, LLC.” The SEC has requested information from our Advisor relating to disclosure in securities offerings (including offerings by us, G REIT, Inc. and A REIT, Inc.) and the exemption from the registration requirements of the Securities

Act for the private offerings in which our Advisor and its affiliated entities were involved and exemptions from the registration requirements of the Exchange Act for several entities. The SEC has requested financial and other information regarding these entities as well as the limited liability companies advised by our Advisor, including us. Our Advisor has advised us that it intends to cooperate fully with the SEC’s investigation. This investigation could involve us and our required periodic reports under the Exchange Act and fines, penalties or administrative remedies could be asserted against us which could have a material adverse impact on our results of operations and our ability to pay distributions to our stockholders.

      In connection with our initial public offering of common stock conducted through a best efforts offering from February 22, 2000 through June 1, 2002, we disclosed the prior performance of all public and non-public investment programs sponsored by Triple Net Properties, LLC, our Advisor. We now have determined that there were certain errors in those prior performance tables. In particular, the financial information in the tables was stated to be presented on a GAAP basis. Generally the tables for the public programs were not presented on a GAAP basis and the tables for the non-public programs were prepared and presented on a tax or cash accounting basis. Moreover, a number of the prior performance data figures were themselves incorrect, even as presented on a tax or cash basis. In particular, certain calculations of depreciation and amortization were not on an income tax basis for a limited liability company investment. In general, the resulting effect is an overstatement of our Advisor’s program and aggregate portfolio operating results. The overstatement of results could result in lawsuits or other actions against us which could have a material adverse effect upon our business and results of operations.

      The Sarbanes-Oxley Act and related laws, regulations and standards relating to corporate governance and disclosure requirements applicable to public companies have increased the costs of corporate governance, reporting and disclosure practices which are now required of us. We expect that our efforts to comply with the Sarbanes-Oxley Act and applicable laws and regulations will continue to involve significant, and potentially increasing, costs. In addition, these laws, rules and regulations create new legal bases for administrative enforcement, civil and criminal proceedings against us in case of non-compliance, thereby increasing its risks of liability and potential sanctions. Under the current Advisory Agreement, the Advisor currently bears the increased cost of compliance under the Sarbanes-Oxley Act, and related rules and regulations; however, the Advisory Agreement terminated on February 22, 2005. As of March 31, 2005, we had not negotiated a new advisory agreement. We expect that the Advisor might require that under the terms of any new advisory agreement we will bear the costs of complying with the Sarbanes-Oxley Act, and related rules and regulations directly.

      While we are not aware of any material non-compliance with the Sarbanes-Oxley Act and related laws and regulations, we were formed prior to the enactment of these new corporate governance standards and, as a result, we did not have all of the newly required procedures and policies in place at the time of enactment. Any failure to comply could result in fees, fines, penalties or administrative remedies, which could negatively impact our results of operations and ability to pay distributions.

      Distributions payable to our shareholders may include a return of capital as well as a return in excess of capital. Distributions exceeding taxable income will constitute a return of capital for federal income tax purposes to the extent of a shareholder’s basis. Distributions in excess of tax basis will constitute capital gain.

      By owning shares of our common stock, our shareholders will be subjected to the risks associated with owning real estate. Ownership of real estate is subject to significant risks. The performance of your investment in us is subject to risks related to the ownership and operation of real estate, including, without limitation, the following:

      If our assets decrease in value, the value of your investment will likewise decrease and you could lose some or all of your investment.

      We face significant competition from other owners, operators and developers of office properties. All or substantially all of our properties face competition from similar properties in the same markets. Such competition may affect our ability to attract and retain tenants and may reduce the rents we are able to charge. These competing properties may have vacancy rates higher than our properties, which may cause their owners to rent space at lower rental rates than those charged by us or to provide greater tenant improvement allowances or other leasing concessions. As a result, we may be required to provide rent concessions, incur charges for tenant improvements and other inducements, or we may not be able to timely lease the space, all of which would adversely impact our results of operations, liquidity and financial condition, which could reduce distributions to our shareholders. In the event that we elect to acquire additional properties, we will compete with other buyers who are also interested in acquiring such properties, which may result in an increase in the cost that we pay for such properties or may result in us ultimately not being able to acquire such properties. At the time we elect to dispose of one or more of our properties, we will be in competition with sellers of similar properties to locate suitable purchasers, which may result in us receiving lower proceeds from the disposal or result in us not being able to dispose of the property due to the lack of an acceptable return.

      We compete for investment opportunities with entities with substantially greater financial resources. These entities may be able to accept more risk than we can manage wisely. This competition may limit the number of suitable investment opportunities offered to us. This competition also may increase the bargaining power of property owners seeking to sell to us, making it more difficult for us to acquire properties. In addition, we believe that competition from entities organized for purposes similar to ours has increased and is likely to increase in the future.

      Our investments in office properties are subject to varying degrees of risk that generally arise from the ownership of real estate. The underlying value of our properties and the ability to make distributions to our members depend upon the ability of the tenants of our properties to generate enough income in excess of applicable operating expenses to make their lease payments to us. Changes beyond our control may adversely affect the tenants’ ability to make lease payments and, consequently, would substantially reduce both its income from operations and its ability to make distributions to its members. These changes include, among others, the following:

      Due to these changes, among others, tenants and lease guarantors, if any, may be unable to make their lease payments. A default by a tenant or the failure of a tenant’s guarantor to fulfill its obligations, or other early termination of a lease could, depending upon the size of the leased premises and our Advisor’s ability to successfully find a substitute tenant, have a material adverse effect on our revenues and cash available for distribution to its members.

      Our business is subject to risks associated with investment solely in real estate. Real estate investments are relatively illiquid. Our ability to vary our portfolio in response to changes in economic and other conditions is limited. We cannot provide assurance that we will be able to dispose of a property when we want or need to. Consequently, the sale price for any property may not recoup or exceed the amount of our investment.

      We are advised by our Advisor pursuant to an Advisory Agreement that expired on February 22, 2005. Our Advisor currently manages our daily operations, provides our executive officers without an executed agreement and pays certain of our state, federal and local corporate compliance costs, including, without limitation, costs incurred in complying with the Sarbanes-Oxley Act. We expect that our Advisor might require that we bear certain of these compliance costs directly under the terms of any new Advisory Agreement, including the compliance costs associated with the Sarbanes-Oxley Act, as a condition to agreeing to extend the terms of the Advisory Agreement. If we are unable to successfully negotiate an extension of the Advisory Agreement on terms as favorable as our current Advisory Agreement, or at all, our operating expenses may increase. We would also incur additional transition costs if we were either to become self-managed or enter an advisory relationship with a new advisor. Additionally, if we become self-managed or engage a new advisor, we may be unable to complete the plan of liquidation in as expeditious a manner as might otherwise be the case or on terms as favorable to us as our Advisor may be able to do so, because of the loss of our Advisor’s experience and familiarity with our assets and business.

      Our portfolio lacks geographic diversity due to its limited size and the fact that all of our properties are located in only four states: California; Texas; Illinois; and Nevada. This geographic concentration of properties exposes us to economic downturns in these states. A regional recession in any of these states could adversely affect our ability to generate or increase operating revenues, attract new tenants or dispose of properties. In addition, our properties may face competition in these geographic regions from other properties owned, operated or managed by our Advisor or its affiliates. Our Advisor or its affiliates have interests that may vary from ours in such geographic markets.

      As of December 31, 2004, rent paid by the two largest tenants at our consolidated properties represented 33% of our annualized revenues. The revenues generated by the properties these tenants occupy is substantially dependent on the financial condition of these tenants and, accordingly, any event of bankruptcy, insolvency or a general downturn in the business of any of these large tenants may result in the failure or delay of such tenants’ rental payments which may have an adverse impact on our financial performance and our ability to pay distributions to our shareholders.

      We endeavor to maintain comprehensive insurance on each of the properties we own, including liability and fire and extended coverage, in amounts sufficient to permit the replacement of the properties in the event of a total loss, subject to applicable deductibles. However, we could still suffer a loss due to the cost to repair any damage to properties that are not insured or are underinsured. There are types of losses, generally of a catastrophic nature, such as losses due to terrorism, wars, earthquakes, floods or acts of God that are either uninsurable or not economically insurable. If such a catastrophic event were to occur, or cause the destruction of one or more of our properties, we could lose both our invested capital and anticipated profits from such property or properties. Additionally, we could default under debt or other agreements if the cost and/or availability of certain types of insurance makes it impractical or impossible to comply with covenants relating to the insurance we are required to maintain under such agreements. In such instances, we may be required to self-insure against certain losses or seek other forms of financial assurance. Additionally, inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it infeasible to use insurance proceeds to replace a property if it is damaged or destroyed. Under such circumstances, the insurance proceeds received by us might not be adequate to restore our economic position with respect to the affected property.

      We have acquired our interests in the Congress Center, Pacific Corporate Park, Enclave Parkway, Oakey Building and Emerald Plaza properties through co-ownership arrangements with one or more affiliates of our Advisor. Each co-owner is required to approve all sales, refinancings, leases and lease amendments. These acquisitions were financed, in part, by loans under which we may have been are jointly and severally liable for the entire loan amount along with the other co-owners. The terms of these co-ownership arrangements may be more favorable to the co-owner than to our shareholders. In addition, investing in properties through co-ownership arrangements subjects that investment to risks not present in a wholly-owned property, including, among others, the following:

      Actions by co-owner(s) requiring unanimous consent of co-owners might have the result of blocking actions that are in our best interests subjecting the applicable property to liabilities in excess of those otherwise contemplated and may have the effect of reducing our cash available for distribution to our stockholders. It also may be difficult for us to sell our interest in any co-ownership arrangement at the time we deem best for our shareholders.

      There currently is no public market for our common stock. Additionally, our articles of incorporation contain restrictions on the ownership and transfer of our stock, and these restrictions may inhibit your ability to sell your common stock. We have a share repurchase plan, however, it is limited in terms of the number of shares which may be repurchased annually. It may be difficult for you to sell your shares promptly or at all. If you are able to sell your common stock, you may only be able to do so at a substantial discount from the price you paid.

      We are managed by our Advisor, subject to the oversight of our board of directors. Thus, our ability to achieve our investment objectives and to pay distributions is dependent upon the performance of our Advisor and its key employees in the discovery and acquisition of investments, the selection of tenants, the determination of any financing arrangements, the management of our assets and operation of our day-to-day activities. We rely on the management ability of our Advisor and the oversight of our board of directors as well as the management of any entities or ventures in which we co-invest. If our Advisor suffers or is distracted by adverse financial or operational problems in connection with its operations unrelated to us, our Advisor’s ability to allocate time and/or resources to our operations may be adversely affected. If our Advisor is unable to allocate sufficient resources to oversee and perform our operations for any reason, our results of operations would be adversely impacted. Please see “— Conflicts of Interest — The conflicts of interest described below may mean we will not be managed solely in the best interests of our shareholders.”

      We rely on borrowings and other external sources of financing to partially fund the costs of new investments, capital expenditures and other items. As of December 31, 2004, we had approximately $19,285,000 of debt outstanding related to our portfolio of properties. Accordingly, we are subject to the risks normally associated with debt financing, including, without limitation, the risk that our cash flow may not be sufficient to cover required debt service payments. There is also a risk that, if necessary, existing indebtedness will not be able to be refinanced or that the terms of such refinancing will not be as favorable as the terms of the existing indebtedness.

      In addition, if we cannot meet our required mortgage payment obligations, the property or properties subject to such mortgage indebtedness could be foreclosed upon by, or otherwise transferred to, our lender, with a consequent loss of income and asset value to us. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but we may not receive any cash proceeds.

      The mortgages on our properties contain customary restrictive covenants, including provisions that may limit the borrowing subsidiary’s ability, without the prior consent of the lender, to incur additional indebtedness, further mortgage or transfer the applicable property, discontinue insurance coverage, change

the conduct of its business or make loans or advances to, enter into any transaction of merger or consolidation with, or acquire the business, assets or equity of, any third party. In addition, any future lines of credit or loans may contain financial covenants, further restrictive covenants and other obligations.

      If we materially breach such covenants or obligations in our debt agreements, the lender may have the right to, among other remedies, seize our income from the property securing the loan or legally declare a default on the obligation, require us to repay the debt immediately and foreclose on the property securing the loan. If we were to breach such covenants or obligations, we may then have to sell properties either at a loss or at a time that prevents us from achieving a higher price. Any failure to pay our indebtedness when due or failure to cure events of default could result in higher interest rates during the period of the loan default and could ultimately result in the loss of properties through foreclosure. Additionally, if the lender were to seize our income from the property securing the loan, we would no longer have any discretion over the use of the income, which may adversely impact our ability to fund our dividend payments and thus, may cause us to fail to satisfy the REIT distribution requirements.

      We rely on debt financing for our acquisition of new investments and for meeting capital expenditure obligations, among other things. The SEC investigation of our Advisor described above, or any related enforcement action by government authorities against our Advisor or us, could result in defaults or alleged defaults under our existing loan agreements or could make it more difficult for us to obtain new debt financing or prevent us from satisfying customary debt covenants or conditions required by existing loan documents, including conditions for additional advances.

      The commercial real estate market is currently experiencing a substantial influx of capital from investors. This substantial flow of capital, combined with significant competition for real estate, may result in inflated purchase prices for such assets. To the extent we purchase real estate in such an environment, we are subject to the risk that if the real estate market ceases to attract the same level of capital investment in the future as it is currently attracting, or if the number of companies seeking to acquire such assets decreases, our returns will be lower and the value of our assets may not appreciate or may decrease significantly below the amount we paid for such assets.

      Our ability to pay distributions may be adversely affected by the risks described herein. We cannot assure you that we will be able to continue to pay distributions at the same rate or, at all, in the future. We also cannot assure you that the receipt of income from additional property acquisitions or dispositions will necessarily increase our cash available for distribution to our shareholders.

      Our board of directors may alter our investment policies at any time without shareholder approval. Changes to these policies may adversely affect our financial performance and our ability to maintain or pay distributions.

      Neither the track record of our Advisor in managing us, nor its performance with entities similar to ours shall imply or predict (directly or indirectly) any level of our future performance or the future performance of our Advisor. Our Advisor’s performance and our performance is dependent on future events and is, therefore, inherently uncertain. Past performance cannot be relied upon to predict future events for a variety of factors, including, without limitation, varying business strategies, different local and

national economic circumstances, different supply and demand characteristics relevant to buyers and sellers of assets, varying degrees of competition and varying circumstances pertaining to the capital markets.

Conflicts of Interest

      Our Advisor’s officers and members of its board of managers have conflicts of interest relating to the management of our business and properties. Accordingly, those parties may make decisions or take actions based on factors other than in the best interest of our shareholders.

      Our Advisor also advises G REIT, Inc., NNN 2002 Value Fund, LLC, and NNN 2003 Value Fund, LLC and other private tenant-in-common and other programs that may compete with us or otherwise have similar business interests and/or investment objectives. Some of our Advisor’s officers and managers also serve as officers and directors of G REIT, NNN 2002 Value Fund, LLC and NNN 2003 Value Fund, LLC. Mr. Thompson and the members of the board of managers and key executives of our Advisor collectively own approximately 43% of our Advisor.

      As officers, directors, managers and partial owners of entities that do business with us or that have interests in competition with our own interests, these individuals will experience conflicts between their fiduciary obligations to us and their fiduciary obligations to, and pecuniary interests in, our Advisor and its affiliated entities. These conflicts of interest could:

      If our Advisor or its affiliates breach their fiduciary obligations to us, we may not meet our investment objectives, which could reduce the expected cash available for distribution to our shareholders.

      Any existing or future agreements between us and our Advisor, Realty or their affiliates were not and will not be reached through arm’s length negotiations. Thus, such agreements may not solely reflect your interests as a shareholder. For example, the operating agreement and the management agreement were not the result of arm’s length negotiations. As a result, these agreements may be relatively more favorable to the other counterparty than to us.

Risks associated with being a REIT

      We have elected to be taxed as a REIT. To maintain REIT status, we must satisfy a number of highly technical requirements on a continuing basis. Those requirements seek to ensure, among other things, the following:

      Due to the complex nature of these rules, the available guidance concerning interpretation of the rules, the importance of ongoing factual determinations and the possibility of adverse changes in the law, administrative interpretations of the law and changes in our business, no assurance can be given that we will qualify as a REIT for any particular year.

      If we fail to qualify as a REIT, we will be taxed as a regular corporation, and distributions to our shareholders will not be deductible in computing our taxable income. The resulting corporate income tax liabilities could materially reduce the distributable cash flow to our shareholders and funds available for reinvestment. Moreover, we might not be able to elect to be treated as a REIT for the next four taxable years after the year during which we ceased to qualify as a REIT. In addition, if we later requalified as a REIT, we might be required to pay a full corporate-level tax on any unrealized gains in its assets as of the date of requalification and to make distributions to our shareholders equal to any earnings accumulated during the period of non-REIT status. In we do not maintain our status as a REIT, we will not be required to make distributions to our shareholders.

      In order to qualify and maintain our qualification as a REIT, we are required to distribute to our shareholders at least 90% of our annual ordinary taxable income. In addition, the Code will subject us to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by us with respect to any calendar year are less than the sum of (i) 85% of our ordinary income for that year, (ii) 95% of our capital gain net income for that year and (iii) 100% of our undistributed taxable income from prior years.

      We expect our income, if any, to consist almost solely of our portion of the Operating Partnership’s income, and the cash available for the payment of distributions by us to our shareholders will consist of our portion of cash distributions made by the Operating Partnership. As the general partner of the Operating Partnership, we will determine the amount of any distributions made by the Operating Partnership. However, we must consider a number of factors in making such distributions, including:

      Differences in timing between the actual receipt of income and actual payment of deductible expenses and the inclusion of such income and deduction of such expenses when determining our taxable income, as well as the effect of nondeductible capital expenditures, the creation of reserves, the use of cash to purchase shares under our share redemption program or required debt amortization payments, could result in our having taxable income that exceeds cash available for distribution.

      In view of the foregoing, we may be unable to meet the REIT minimum distribution requirements and/or avoid the 4% excise tax described above. In certain cases, we may decide to borrow funds in order to meet the REIT minimum distribution and/or avoid the 4% excise tax even if we believe that the then prevailing market conditions generally are not favorable for such borrowings or that such borrowings would not be advisable in the absence of such tax considerations.

      In order to maintain our qualification as a REIT, we are required to distribute to our shareholders at least 90% of our annual ordinary taxable income. This requirement limits our ability to retain income or cash flow from operations to finance the acquisition of new investments. We will explore acquisition

opportunities from time to time with the intention of expanding our operations and increasing our profitability. We anticipate that we will use debt and equity financing for such acquisitions because of our inability to retain significant earnings. Consequently, if we cannot obtain debt or equity financing on acceptable terms, our ability to acquire new investments and expand our operations will be adversely affected.

      Changes to the laws and regulations affecting us, including changes to securities laws and changes to the Code applicable to the taxation of REITs may harm our business. New legislation may be enacted into law or new interpretations, rulings or regulations could be adopted, any of which could harm us and our shareholders, potentially with retroactive effect.

      Generally, distributions paid by REITs are not eligible for the 15% U.S. federal income tax rate on certain corporate distributions, with certain exceptions. The more favorable treatment of regular corporate distributions could cause domestic non-corporate investors to consider stocks of other corporations that pay distributions as more attractive relative to stocks of REITs. It is not possible to predict whether the reduced 15% tax rate on certain corporate distributions will affect the market price of our common stock or what the effect will be.

      We will incur a 100% tax on the net income derived from any sale or other disposition of property, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of a trade or business, which effectively limits our ability to sell properties other than on a selected basis. These restrictions on our ability to sell our properties could have an adverse effect on our financial position, results from operations, cash flows, and ability to repay indebtedness and to pay distributions to our stockholders. We believe that none of our portfolio assets are held-for-sale to customers and that a sale of any of our portfolio assets would not be in the ordinary course of our business.

Risks associated with adoption of a plan of liquidation

      Our potential implementation of a plan of liquidation involves many risks, including, without limitation: (i) implementation of a plan of liquidation may cause us to fail to qualify as a REIT, which would substantially reduce the funds available for distribution to our shareholders; (ii) if our shareholders approve the plan of liquidation, they will no longer participate in any future earnings or growth of our assets or benefit from any increases in the value of our assets once such assets are sold; and (iii) approval of the plan of liquidation may lead to shareholder litigation which could result in substantial costs and distract our management.

      In the event of our liquidation, our Advisor, Realty or another affiliate of our Advisor will be paid to liquidate our assets pursuant to the Advisory Agreement. Such fee will be the lesser of: (i) 3% of the contracted for sales price of the property; or (ii) 50% of the competitive real estate commission. Additionally, the property disposition fee to our Advisor or an affiliate of our Advisor shall not exceed, when added to the sums we pay to any unaffiliated parties in connection with the disposition of the underlying property: (i) 6% of the contracted for sales price or (ii) the competitive real estate commission. Our Advisor, Realty or another affiliate of our Advisor also has agreements with certain affiliated co-owners of our properties, under which our Advisor will also receive fees for the disposition of the affiliated co-owners’ interests in the underlying property. Our Advisor also owns 22,000 shares of our common stock, and, therefore, if our board of directors and our shareholders approve the plan of liquidation, our Advisor will be entitled to receive distributions on those shares.

      Additionally, under the current Advisory Agreement, we pay costs incurred in connection with preparing reports to be filed pursuant to the Exchange Act, and our Advisor pays certain of our state, federal and local compliance costs including, without limitation, costs incurred in connection with our compliance with the Sarbanes-Oxley Act. These costs will be material and our Advisor expects these amounts to be approximately $500,000 during 2005 and 2006. If the plan of liquidation is approved by our board of directors and our shareholders, our Advisor will be relieved of these expenses once our company is no longer subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, and related rules and regulations.

      If our board of directors’ and shareholders’ approve the plan of liquidation, which has not yet been submitted for approval or approved, Jack R. Maurer, our chief executive officer and president, will become entitled to receive incentive bonuses from our Advisor in consideration for his work in implementing the plan of liquidation, if it is proposed for approval and approved, and if specified performance goals are met in our liquidation. If we achieve distributions within our estimated net liquidation value range, Mr. Maurer will receive incentive bonuses from our Advisor, in addition to his regular salary from our Advisor.

      If our board of directors and shareholders approve the plan of liquidation, W. Brand Inlow and D. Fleet Wallace, members of our board of directors and the special committee, will become entitled to receive milestone payments, if specified goals are met.

      If our shareholders approve the plan of liquidation, our shareholders will also be approving the right of our special committee in its discretion to pay retention and incentive based bonuses to some or all of our key officers from time to time.

      Our executive officers and directors own a total of 1,218 shares of our common stock, for which they will receive distributions in connection with our liquidation.

      The plan of liquidation being contemplated (but which has not as yet been submitted for approval by our board of directors or our shareholders) provides that we may sell one or more of our properties to an affiliate of our company or an affiliate of our Advisor, but only if the transaction is approved by the special committee. If we enter such a transaction, we expect that the special committee will require that Stanger opine to us as to the fairness of the consideration to be received by us in such transaction, from a financial point of view, or conduct an appraisal of the underlying property as a condition to their approval. In no event will the special committee approve a transaction if: (i) Stanger concludes after a review of the information then available, including any pending offers, letters of intent, contracts for sale, appraisals or other data, that the consideration to be received by us is not fair to us from a financial point of view; (ii) Stanger concludes that the consideration to be received is less than the appraised value of the property; or (iii) we have received a higher offer for the property from a credible party whom we reasonably believe is ready, able and willing to close the transaction on the contract terms.

      Approximately 78% of our mortgage notes payable at December 31, 2004 were subject to variable interest rates, therefore, we are exposed to market changes in interest rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve our objectives we may borrow at fixed rates or variable rates with the lowest margins available and in some cases, with the ability to convert variable rates to fixed rates. We may enter into derivative financial instruments such as interest rate swaps, caps and treasury locks in order to mitigate our interest rate risk on a related financial instrument. We do not enter into derivative or interest rate transactions for speculative purposes.

      Our interest rate risk is monitored using a variety of techniques. The table below provides information about our mortgage debt obligations, and presents the principal amounts and weighted average interest rates by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes:

      The weighted average interest rate of our mortgage debt as of December 31, 2004 was 5.64% per annum. At December 31, 2004, our mortgage debt consisted of $4,285,000, or 22% of the total debt, at a fixed interest rate of 5.25% per annum and $15,000,000, or 78% of the total debt, at a weighted average variable interest rate of 5.75% per annum. An increase in the variable interest rate on certain mortgages payable consititutes a market risk. As of December 31, 2004, for example, a 0.25% increase in LIBOR would have increased our overall annual interest expense by $37,500 or 4.35%. This sensitivity analysis contains certain simplifying assumptions, for example, it does not consider the impact of changes in prepayment risk. Certain of our loans contain substantial prepayment penalties and/or defeasance provisions that could preclude the repayment of the loans prior to their maturity dates.

      Our exposure to market changes in interest rates is similar to that which we faced at December 31, 2003. The table below presents, as of December 31, 2003, the principal amounts and weighted average interest rates by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes.

      The weighted average interest rate of our mortgage debt as of December 31, 2003 was 4.2% per annum. At December 31, 2003, our mortgage debt consisted of $4,904,000, or 53% of the total debt, at a weighted average variable interest rate averaging 3.27% per annum and $4,346,000 or 47% of the total debt at a fixed interest rate of 5.25% per annum. An increase in the variable interest rate on certain mortgages payable constitutes a market risk. As of December 31, 2003, for example, a 0.25% increase in LIBOR would have increased our overall annual interest expense by $12,000, or 7.65%. This sensitivity analysis contains certain simplifying assumptions, for example, it does not consider the impact of changes in prepayment risk. Certain of our loans contain substantial prepayment penalties and/or defeasance provisions that could preclude the repayment of the loans prior to their maturity dates.

      See the index at “Item 15. Exhibits, Financial Statement Schedules.”

Dismissal of Grant Thornton LLP and Engagement of Deloitte & Touche, LLP

      Effective February 8, 2004, our board of directors dismissed Grant Thornton LLP, or Grant Thornton, as our independent certified public accountants based on the recommendation of the audit committee of our board of directors. Effective February 8, 2004, our board of directors retained Deloitte & Touche, LLP, or Deloitte, as its independent registered public accounting firm, based on the recommendation of the audit committee.

      The report of Grant Thornton on our financial statements for the fiscal year ended December 31, 2002 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. During the period of Grant Thornton’s engagement, there were no disagreements with Grant Thornton on any matter of accounting principles or practice, financial statement disclosure or auditing scope or procedure, which disagreement(s), if not resolved to the satisfaction of Grant Thornton, would have caused it to make reference to the subject matter of the disagreement(s) in connection with its report.

      There were no “reportable events” (as defined in Item 304(a)(1)(v) of Regulation S-K) that occurred during the period of Grant Thornton’s engagement.

      Grant Thornton provided us with a letter addressed to the SEC stating that it had reviewed the statements included in our Current Report on Form 8-K, dated February 8, 2004, and filed with the SEC on February 12, 2004, and that it agreed with our statement regarding Grant Thornton. A copy of this letter was filed as Exhibit 16.1 to the Current Report on Form 8-K.

      Prior to our engagement of Deloitte, we did not consult with Deloitte regarding (1) the application of accounting principles to a specified transaction, either completed or proposed, (2) the type of audit opinion that might be rendered by Deloitte on our financial statements, or (3) any other matter that was the subject of a disagreement between us and our auditor (as defined in Item 304(a)(1)(iv) of Regulation S-K and its related instructions) or a reportable event (as described in Item 304(a) (1)(v) of Regulation S-K).