HALLWOOD REALTY PARTNERS L P - 10-K Annual Report

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

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FORM 10-K

MARK ONE
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

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

FOR THE TRANSITION PERIOD - FROM TO
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COMMISSION FILE NUMBER: 1-10643

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HALLWOOD REALTY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)

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DELAWARE 75-2313955
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

3710 RAWLINS
SUITE 1500
DALLAS, TEXAS 75219-4298
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (214) 528-5588

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

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.
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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The aggregate market value of units held by nonaffiliates of the registrant
as of March 22, 2002 was $88,159,000.

CLASS: UNITS REPRESENTING LIMITED PARTNERSHIP INTERESTS.
OUTSTANDING AT MARCH 22, 2002: 1,589,948 UNITS.

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PAGE 1 OF 45

HALLWOOD REALTY PARTNERS, L.P.

TABLE OF CONTENTS

PAGE 2 of 45

PART I

ITEM 1. BUSINESS

DESCRIPTION OF THE BUSINESS

Hallwood Realty Partners, L.P. ("HRP"), a publicly traded Delaware limited
partnership, operates in the commercial real estate segment. HRP's activities
include the acquisition, ownership and operation of its commercial real estate
assets. Units representing limited partnership interests are traded on the
American Stock Exchange under the symbol "HRY".

As of December 31, 2001, HRP owned fourteen real estate properties (the
"Properties") located in six states containing 5,073,000 net rentable square
feet (for additional information, see Item 2 - Properties). HRP seeks to
maximize the value of its real estate by making capital and tenant improvements,
by executing marketing programs to attract and retain tenants, and by
controlling or reducing, where possible, operating expenses.

Hallwood Realty, LLC ("Realty" or the "General Partner"), a Delaware limited
liability company and indirectly wholly-owned subsidiary of The Hallwood Group
Incorporated ("Hallwood"), is HRP's general partner and is responsible for asset
management of HRP and its Properties, including decision-making responsibility
for financing, refinancing, acquiring and disposing of properties. In addition,
Realty provides general operating and administrative services to HRP. Hallwood
Commercial Real Estate, LLC ("HCRE"), another indirectly wholly-owned subsidiary
of Hallwood, provides property management, leasing and construction supervision
services to the Properties.

RISKS, COMPETITION AND OTHER FACTORS

DETERIORATION IN ECONOMIC CONDITIONS AND THE REAL ESTATE MARKETS COULD HARM
HRP'S BUSINESS.

The commercial real estate industry depends on a number of factors relating to
general global, national, regional and local economic conditions, including
inflation, interest rates, taxation policies, availability of credit, employment
levels, and wage and salary levels. A negative trend in any of these conditions
could adversely affect HRP's business. If a substantial number of tenants
default on their leases, choose not to renew, or if rental rates decrease, HRP's
financial position could be adversely affected. Such effects could include a
decline in acquisition, disposition and leasing activity; a decline in the
supply of capital invested in commercial real estate; or a decline in the value
of real estate.

HRP's cash flow would be adversely affected by decreases in the performance of
the properties it owns. Property performance typically depends upon the ability
to attract and retain creditworthy tenants; the ability to manage operating
expenses; the magnitude of defaults by tenants under their respective leases;
governmental regulations; the nature and extent of competitive properties;
financial and economic conditions generally and in the specific areas where
properties are located; and the real estate market generally. Expenses may
increase due to unexpected or higher repairs and maintenance costs, inflation,
services and costs required to retain tenants or to sign new tenants,
unsuccessful appeals of rising real estate taxes, changes in interest rates,
higher insurance costs, the outcome of existing or future litigation, as well as
other factors, many of which are beyond the control of HRP.

HRP MAYBE SENSITIVE TO CHANGES IN INTEREST RATES.

Because only one of its mortgage loans has a floating interest rate, HRP's
exposure to changes in market interest rates is limited to the difference
between the market rate in effect at the time a loan matures compared to its
existing loan rate. As of December 31, 2001, HRP had mortgage loans totaling
$176,224,000 with fixed interest rates from 6.97% to 8.7% (with an effective
average interest rate of 8.21%). These loans mature between 2005 and 2020. At
the time of loan maturity, a higher market interest rate compared to the
existing rate will have a negative impact on the amount of mortgage proceeds
secured from a refinancing, as well as a decrease in cash flow from future
operations due to the higher interest rate.

HRP's $25,000,000 mortgage loan secured by Allfirst Building bears interest at
LIBOR plus 130 basis points, and therefore HRP's actual cash interest costs are
affected by changes in market interest rates. The interest rate for this loan
was 3.44% as of December 31, 2001. Assuming a 100 basis point, or 1%, change in
LIBOR, interest paid by HRP would increase or decrease by approximately $250,000
on an annual basis.

PAGE 3 of 45

RISKS, COMPETITION AND OTHER FACTORS (CONTINUED)

INSURANCE RISKS HAVE INCREASED AS A RESULT OF RECENT EVENTS.

Due in large part to the terrorist activities of September 11, 2001, HRP
believes that insurance companies are re-examining many aspects of their
business, and may consider taking certain actions in the wake of these terrorist
activities. Among such actions which insurance companies may take are increasing
premiums, mandating higher self-insured retentions and deductibles, reducing
limits, restricting coverages, imposing exclusions (such as sabotage and
terrorism), and refusing to underwrite certain risks and classes of business.
Significantly increased premiums, mandated exclusions, or changes in limits,
coverages, terms and conditions could adversely affect HRP's ability to obtain
appropriate insurance coverages at reasonable costs.

HRP MAY INCUR ENVIRONMENTAL LIABILITY IN ITS ROLE AS A PROPERTY OWNER.

Various national, state and local laws and regulations impose liability on real
property owners, such as HRP, for the cost of investigating, cleaning up or
removing contamination caused by hazardous or toxic substances. The liability
may be imposed even if the original actions were legal and HRP did not know of,
or was not responsible for, the presence of such hazardous or toxic substances.
HRP may also be solely responsible for the entire payment of the liability if it
is subject to joint and several liability with other responsible parties who are
unable to pay. HRP may be subject to additional liability if it fails to
disclose environmental issues to a buyer or lessee of property or if a third
party is damaged or injured as a result of environmental contamination emanating
from the site. HRP cannot be sure that any of such liabilities to which it may
become subject will not have a material adverse effect upon its business,
results of operations or financial condition.

Parklane Towers, as well as certain other properties to a lesser extent, are
known to contain asbestos. Removal of asbestos at Parklane Towers is not
required because it is cementitious, it is not friable and because the
procedures in HRP's site environmental program Operations and Maintenance Manual
are performed as required.

HRP MAY HAVE DIFFICULTY DISPOSING OF ASSETS WHEN IT HAS TO DO SO.

HRP's basic investment strategy is to hold real estate assets until what it
believes to be an optimal time to sell them. Normally, this will be during
relatively strong real estate markets. However, factors beyond HRP's control
could make it necessary for HRP to dispose of real estate properties during weak
markets. Following a period when the market value of HRP's assets fell
significantly, it could be required to sell assets at a time when it may be very
inopportune to do so. Further, markets for real estate assets are not usually
highly liquid, which can make it particularly difficult to realize acceptable
prices when disposing assets during weak markets.

IF HRP DOES NOT GENERATE SUFFICIENT CASH FLOWS FROM OPERATIONS, IT MAY NEED
ADDITIONAL CAPITAL.

To date, HRP has financed its operations with cash from profitably operating its
established properties. If HRP does not generate enough cash from operations to
finance its business in the future, it will need to raise additional funds
through public or private financing or asset sales. If HRP borrows money, it may
be required to agree to restrictions limiting its operating flexibility. If HRP
requires additional funds and is not able to obtain such funds, it would have a
material adverse effect on its operations.

SOME OF HRP'S LOANS CONTAIN COVENANTS AND RESTRICTIONS, WHICH AFFECT
FLEXIBILITY.

HRP has two mortgage loans that require compliance with a loan covenant, which
if not met will trigger a default. The loans require the properties securing
each loan to maintain a liquidity ratio, specifically a debt service coverage
ratio. Debt service coverage ratio is the relationship of adjusted net operating
income (as defined in each loan agreement) for the previous twelve months to the
loan's annual debt service. The ratio, for the loan requiring a minimum 1.15
ratio, was 2.35, 2.19, and 1.91 for 2001, 2000, and 1999, respectively. The
ratio, for the loan requiring a minimum 1.10 ratio, was 1.94, 2.45, and 2.24 for
the same periods. Accordingly, HRP was in compliance with its loans' covenants
for the three years ended December 31, 2001. As of December 31, 2001, the
outstanding balance of the loans is $113,649,000.

Additionally, these two mortgage loans contain restrictions that limit certain
actions. With respect to the properties encumbered by these loans, HRP cannot
incur additional debt. Also, its ability to sell a property, or a portion
thereof, is limited because of the requirement to substitute collateral at a
currently cost-prohibitive rate. These loans also, under certain circumstances,
may restrict the ability of HRP to merge, to consolidate or to liquidate.

PAGE 4 of 45

RISKS, COMPETITION AND OTHER FACTORS (CONTINUED)

HRP IS SUBJECT TO LITIGATION.

HRP is currently a party to certain litigation in Delaware state court, as
described more fully in Item 3 - Legal Proceedings. The trial court in that
matter ruled that the defendants other than HRP pay a judgment in the amount of
$3,417,423, plus pre-judgment interest from August 1995 to HRP. The plaintiff
and certain defendants have appealed that ruling. In October 2001, HRP received
the $3,417,423 judgment together with $2,987,576 of pre-judgment and
post-judgment interest, subject to an arrangement that it be returned in full or
part if the judgment is modified or reversed on appeal. If the appellate court
reverses the judgment, any subsequent ruling by the trial court on remand may be
more or less favorable to HRP.

HRP IS SUBJECT TO COMPETITION.

The Properties are subject to substantial competition from similar properties in
the vicinity in which they are located. In addition, there are numerous other
potential investors seeking to purchase improved real property and many property
holders seeking to dispose of real estate with which HRP will compete, including
companies substantially larger than HRP and with substantially greater
resources.

OTHER RISKS.

Realty and HCRE, on behalf of HRP, monitor compliance with the Americans with
Disabilities Act and are currently not aware of any material non-compliance
issues.

HRP does not directly employ any individuals. All 95 employees rendering
services on behalf of HRP and its Properties are employees of Realty and/or
HCRE.

Allfirst Bank, the principal tenant of Allfirst Building, has options to
purchase the building from HRP in either 2004 or 2006.

The business of HRP involves only one industry segment. Accordingly, all
information required by Item 101(b) of Regulation S-K is included in the
Consolidated Financial Statements included in Item 8. HRP has no foreign
operations and its business is not seasonal.

OCCUPANCY AND MAJOR TENANT INFORMATION

For information regarding occupancy, percentages of square feet scheduled to
expire by calendar year, and major tenants, see "Liquidity and Capital
Resources" in Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.

PAGE 5 of 45

ITEM 2. PROPERTIES

As of December 31, 2001, HRP owned fourteen properties in six states with
5,073,000 net rentable square feet.

PAGE 6 of 45

For information regarding encumbrances to which the properties are subject and
the status of related mortgage loans, see "Liquidity and Capital Resources" in
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations, as well as Note 6 to the Consolidated Financial Statements and
Schedule III in Item 8 - Financial Statements and Supplemental Information.

OFFICE SPACE -

HRP leases and shares offices with Hallwood in Dallas, Texas under a lease which
expires November 30, 2008. HRP has a one-time option to terminate the lease
effective November 30, 2005. The minimum cash rental payments are $149,000,
$315,000, and $315,000 for 2002, 2003 and 2004, respectively, of which HRP's
portion is approximately $100,000, $210,000 and $210,000 for 2002, 2003 and
2004, respectively.

PAGE 7 of 45

ITEM 3. LEGAL PROCEEDINGS

Beginning in 1997, HRP has been a defendant in two lawsuits that were brought by
Gotham Partners, L.P. in the Delaware Court of Chancery.

The first suit was filed on February 27, 1997 in the Court of Chancery for New
Castle County, Delaware, styled Gotham Partners, L.P. v. Hallwood Realty
Partners, L.P. and Hallwood Realty Corporation (C.A. No. 15578), and it sought
access to certain books and records of HRP and was subsequently settled,
allowing certain access. On April 9, 2001 the case was dismissed.

The second action was filed on June 20, 1997 in a separate complaint in the
Court of Chancery for New Castle County, Delaware, styled Gotham Partners, L.P.
v. Hallwood Realty Partners, L.P., et al. (C.A. No. 15754). This action alleges
claims of breach of fiduciary duties, breach of HRP's partnership agreement, and
fraud in connection with certain transactions involving HRP's units in the mid
1990's. Hallwood is alleged to have aided and abetted the alleged breaches. On
June 21, 2000, after completing fact discovery, all parties moved for summary
judgment on several issues. In September and October, 2000, the Delaware court
issued three separate written opinions resolving the summary judgment motions.
In the opinions, the court ruled that trial would be required as to all issues,
except that (i) Gotham was found to have standing to pursue its derivative
claims; (ii) defendants were entitled to judgment dismissing the fraud claim;
(iii) the General Partner was entitled to judgment dismissing the breach of
fiduciary duty claims brought against it; and (iv) the General Partner's outside
directors were entitled to judgment dismissing all claims brought against them.

A five-day trial was held in January 2001. On July 18, 2001, the Delaware Court
of Chancery rendered its opinion. In its decision, the court determined that an
option plan and a sale of units to Hallwood in connection with a reverse unit
split implemented by HRP in 1995 were in compliance with HRP's partnership
agreement. The court also found that the sale of units to Hallwood in connection
with a 1995 odd-lot offer by HRP did not comply with certain procedures required
by the HRP partnership agreement. The court ruled that the defendants other than
HRP pay a judgment in the amount of $3,417,423, plus pre-judgment interest from
August 1995 to HRP. The judgment amount represents what the court determined was
an underpayment by Hallwood. The court's judgment is not final until all
rehearings and appeals have been exhausted. In August 2001, plaintiff and
certain defendants appealed the Court of Chancery's judgment to the Delaware
Supreme Court. Those appeals are pending. Oral arguments were heard on February
12, 2002, and a rehearing en banc was held on March 26, 2002. In October 2001,
HRP received the $3,417,423 judgment together with $2,987,576 of pre-judgment
and post-judgment interest, subject to an arrangement that it be returned in
full or part if the judgment is modified or reversed on appeal. If the appellate
court reverses the judgment, any subsequent ruling by the trial court on remand
may be more or less favorable to HRP. As a result of the appeals and the
uncertainty of their outcome, HRP recorded the judgment and interest as
"Deferred Litigation Proceeds" on its balance sheet.

On February 15, 2000, HRP filed a lawsuit in the United States District Court
for the Southern District of New York styled Hallwood Realty Partners, L.P. v.
Gotham Partners L.P., et al. (Civ. No. 00 CV 1115) alleging violations of the
Securities Exchange Act of 1934 by certain purchasers of its units, including
Gotham Partners, L.P., Gotham Partners III, L.P., Private Management Group,
Inc., Interstate Properties, Steven Roth and EFO Realty, Inc., by virtue of
those purchasers' misrepresentations and/or omissions in connection with filings
required under the Securities Exchange Act of 1934. The complaint further
alleged that defendants, by acquiring more than 15% of the outstanding HRP
units, have triggered certain rights under its Unit Purchase Rights Agreement,
for which HRP was seeking declaratory relief. HRP sought various forms of
relief, including declaratory judgments, divestiture, corrective disclosures, a
"cooling-off" period and damages, including costs and disbursements. On November
16, 2000, the court granted HRP's motion to add as defendants Gotham Holdings
II, L.L.C., Hallwood Investors, L.P., Liberty Realty Partners, L.P. and
EFO/Liberty, Inc. and to remove EFO Realty, Inc. as a defendant.

Discovery was completed in December 2000 and trial was held in February 2001. On
February 23, 2001, the court rendered a decision in favor of the defendants and
on February 28, 2001, the court ordered the complaint dismissed. HRP filed a
Notice of Appeal on March 29, 2001 with respect to the February 28, 2001
dismissal of the complaint and other matters. All parties filed briefs with the
Second Circuit. Oral arguments were heard on March 4, 2002.

HRP is from time to time involved in various other legal proceedings and claims
which arise in the ordinary course of business. These matters are generally
covered by insurance. Management believes that the resolution of these matters
will not have a material adverse effect on HRP's financial position, cash flow
or operations.

PAGE 8 of 45

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

No matters were submitted to a vote of the security holders of HRP during the
fourth quarter of 2001.

PART II

ITEM 5. MARKET FOR REGISTRANT'S UNITS AND RELATED SECURITY HOLDER MATTERS

HRP's units are traded on the American Stock Exchange under the symbol "HRY". As
of March 22, 2002, there were approximately 26,000 unitholders owning the
1,589,948 units outstanding. HRP has not paid any cash distributions since
February, 1992. Each quarter Realty reviews HRP's capacity to make cash
distributions to its partners.

The following table shows the range of sales prices for the periods indicated,
as reported by the American Stock Exchange:

PAGE 9 of 45

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial data regarding HRP's results
of operations and financial position as of the dates indicated. This information
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in Item 7 and the
Consolidated Financial Statements and notes thereto contained in Item 8.

NOTES TO SELECTED FINANCIAL DATA:

(a) Acquisition and development activity from 1999 to 2001 increased HRP's
real estate assets. These increases were partially offset by
depreciation and amortization. Prior to 1999, real estate assets
declined in each of the years, primarily due to depreciation and
amortization exceeding the additions of tenant and property
improvements.

(b) Partners' capital includes Accumulated Other Comprehensive Income of
$1,204,000 as of December 31, 2001. Partners' capital balance is
allocated 99% to the limited partners and 1% to the General Partner.

PAGE 10 of 45

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

This discussion should be read in conjunction with Item 6 - Selected Financial
Data and Item 8 - Financial Statements and Supplemental Information.

RESULTS OF OPERATIONS:

2001 VERSUS 2000 -

REVENUE FROM PROPERTY OPERATIONS in 2001 increased $3,033,000, or 4.6%, compared
to 2000. The following table illustrates the components of the change:

Net rental income increased due to revenues generated from the addition and
completion of one development property at Corporate Square in mid-2000
($1,971,000), overall higher rental rates at most of HRP's real estate
properties, and an increase in average occupancy between years from 89.4% to
90.9%. As of December 31, 2001, HRP had leases executed and in place for
approximately 91% of the portfolio's net rentable square feet (excluding a
125,000 square foot development property at Executive Park). Other property
income increased primarily due to increases in tenant expense recoveries.

GAIN FROM PROPERTY SALES of $4,184,000 in 2001 is comprised of the January sale
of one building at Seattle Business Parks for a gross selling price of
$3,287,000, resulting in a gain of $2,109,000; the January sale of one building
at Fairlane Commerce Park for a gross selling price of $575,000, resulting in a
gain of $153,000; and the March sale of Joy Road Distribution Center for a gross
selling price of $5,326,000, resulting in a gain of $1,922,000.

INTEREST INCOME increased by $75,000, or 7.7%, as a result of increased earnings
on overnight investments due to a higher average cash balance available for
investment, partially offset by lower interest rates.

PROPERTY OPERATING EXPENSES for 2001 increased $641,000, or 2.4%, compared to
2000. The increase is comprised primarily of the following components:

o Operating costs with respect to the addition of the one development
property at Corporate Square completed in mid-2000 were $629,000 greater
than in 2001.

o Professional fees decreased $705,000 primarily due to costs incurred in
2000 for research and analysis of potential property development
projects.

o Combined, all other operating costs increased $717,000, or about 2.7%,
of which none are individually significant.

INTEREST EXPENSE for 2001 increased $143,000, or 0.9%, compared to 2000 as a
result of an increase in mortgage loan interest of $845,000 (due to a higher
average mortgage loan balance), partially offset by the capitalization of
$486,000 of interest for construction of the development project at Executive
Park (as described in Note 5 to the Consolidated Financial Statements), and a
decrease in loan cost amortization and other interest costs of $216,000.

DEPRECIATION AND AMORTIZATION EXPENSE was consistent between years and increased
$64,000, or 0.4%.

GENERAL AND ADMINISTRATIVE EXPENSES for 2001 decreased $690,000, or 13.7%,
compared to 2000 primarily due to $601,000 of non-qualified unit option
compensation in 2000.

LITIGATION COSTS were $3,808,000 and $5,663,000 for 2001 and 2000, respectively,
and are related to the lawsuits described in Item 3 - Legal Proceedings and Note
11 to the Consolidated Financial Statements.

PAGE 11 of 45

RESULTS OF OPERATIONS (CONTINUED) -

LOSS ON EARLY EXTINGUISHMENT OF DEBT of $559,000 in 2001 is from the early
payoff of the loan secured by Joy Road Distribution Center and the refinancing
of a loan secured by a portion of Corporate Square and is comprised of
prepayment penalties of $423,000 and the writeoff of $136,000 of unamortized
loan costs associated with the retired loans.

2000 VERSUS 1999 -

REVENUE FROM PROPERTY OPERATIONS in 2000 increased $7,587,000, or 12.9%,
compared to 1999. The following table illustrates the components of the change:

Net rental income increased as the result of overall higher rental rates, the
August 1999 to January 2000 acquisitions of Riverbank Plaza, Gulley Road
Industrial Park, and Fountain View Business Center ($2,532,000), and the
completion of a new building at Corporate Square in mid-2000 ($1,402,000).
Collectively these four properties are referred as "New Properties". These
increases to rental income were partially offset by a decline in average
occupancy, in the aggregate, between years from 93.1% to 89.4%. The decrease in
average occupancy was primarily due to Joy Road Distribution Center's drop from
98% occupancy at year-end 1999 to 28% occupancy at year-end 2000. As of December
31, 2000, HRP had leases executed and in place for approximately 90% of the
portfolio's net rentable square feet. Other property income increased primarily
due to increases in tenant expense recoveries.

INTEREST INCOME increased $60,000 as a result of additional earnings on
overnight investments due to slightly higher interest rates, partially offset by
lower average cash balances available for investment.

PROPERTY OPERATING EXPENSES for 2000 increased $2,590,000, or 10.8%, compared to
1999. The increase is comprised primarily of the following components:

o Operating costs with respect to the New Properties contributed
$1,362,000 towards the overall increase.

o Professional fees increased primarily due to $539,000 of costs for
research and analysis of potential property development projects.

o Combined, all other operating costs increased $689,000, or 2.9%, between
the years.

INTEREST EXPENSE for 2000 increased $1,742,000, or 12.7%, compared to 1999 as a
result of an increase in mortgage loan interest of $1,442,000 (including
$1,453,000 for the New Properties) due to a higher average mortgage loan
balance, in the aggregate and, due to a lesser extent, an increase in loan cost
amortization and other interest of $300,000.

DEPRECIATION AND AMORTIZATION EXPENSE increased $2,500,000, or 20.8%, due to
$1,137,000 of depreciation for the New Properties and increases of $584,000 of
depreciation and $779,000 of lease commission amortization for comparable
properties.

GENERAL AND ADMINISTRATIVE EXPENSES for 2000 increased $1,229,000, or 32.2%,
compared to 1999, as a result of $601,000 of non-cash compensation generated
from the exercise of unit options in May 2000, (see Note 8 to the Consolidated
Financial Statements), $414,000 of higher professional fees incurred with
proposed acquisitions, and $284,000 of increases to travel, insurance and
miscellaneous costs and expenses.

LITIGATION COSTS were $5,663,000 and $2,105,000 for 2000 and 1999, respectively,
and are related to the lawsuits described in Item 3 - Legal Proceedings and Note
11 to the Consolidated Financial Statements.

LOSS ON EARLY EXTINGUISHMENT OF DEBT of $389,000 in 2000 is from the early
payoff of the loan secured by Bradshaw Business Parks and is comprised of a
prepayment penalty of $286,000 and the writeoff of $103,000 of unamortized loan
costs associated with the retired loan.

PAGE 12 of 45

LIQUIDITY AND CAPITAL RESOURCES

GENERAL INFORMATION -

HRP operates in the commercial real estate industry. HRP's activities include
the acquisition, ownership and operation of its commercial real estate assets.
While it is the General Partner's intention to operate HRP's existing real
estate investments and to acquire and operate additional real estate
investments, Realty also continually evaluates each of HRP's real estate
investments in light of current economic trends, operations, and other factors
to determine if any should be considered for disposal.

As of December 31, 2001, HRP owned fourteen real estate assets (the
"Properties"), located in six states containing 5,073,000 net rentable square
feet. HRP seeks to maximize the value of its real estate by making capital and
tenant improvements, by executing marketing programs to attract and retain
tenants, and by controlling or reducing, where possible, operating expenses.

HRP fully consolidates into its financial statements majority owned entities.
For each of the three years in the period ended December 31, 2001, all entities
and Properties were fully owned. All significant intercompany balances and
transactions have been eliminated in consolidation.

HRP has, in three situations, created a Special Purpose Entity ("SPE"). These
SPEs were formed at the request of lenders for the express purpose of
strengthening the collateral for the loans by isolating (for Federal bankruptcy
law purposes) the assets and liabilities of the SPEs. In all cases and since
their various formation dates, these wholly-owned entities (including their
assets, liabilities and results of operations) have been fully consolidated into
the financial statements of HRP.

CRITICAL ACCOUNTING POLICIES -

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and judgments that affect the reported amounts of certain assets,
liabilities, revenues, expenses, and related disclosures. Actual results may
differ from these estimates under different assumptions or conditions.

In December 2001, the SEC requested that registrants identify "critical
accounting policies" in Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations. The SEC indicated that a
"critical accounting policy" is one that is both important to the portrayal of
an entity's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. HRP
believes that the following of its accounting policies fit this description:

Revenue Recognition - Statement of Financial Accounting Standards ("SFAS") No.
13 "Accounting for Leases" requires management to estimate the economic life of
lease payments. However, this does not require subjective input by management,
as rental income is recognized on a straight-line basis over the lease term, as
defined in each respective lease. These adjustments to convert cash rental
income (which may include free rent and periodic rental rate increases over the
term of the lease) to straight-line rental income increased revenues by
$256,000, $569,000, and $778,000 in 2001, 2000, and 1999, respectively.

Impairment of Long-Lived Assets - HRP records impairment losses on its real
estate assets when events and circumstances indicate that the assets might be
impaired or the undiscounted cash flows estimated to be generated by those
assets are less than the carrying value of that asset. In such cases, an
impaired asset would be written down to its fair value. Our cash flow estimates
are based on historical results adjusted to our best estimate of future market
and operating conditions. For the three years ended December 31, 2001, HRP has
not recorded a write-down, or impairment of the carrying value of any real
estate property, based on these calculations.

PAGE 13 of 45

LIQUIDITY AND CAPITAL RESOURCES - (CONTINUED)

Significant and other accounting policies are described in Note 2 to the
Consolidated Financials Statements in Item 8. The policies listed are not
intended to be a comprehensive list of all of our accounting policies. In most
cases, the accounting treatment of a particular transaction is specifically
dictated by accounting principles generally accepted in the United States of
America, with no need for management's judgment in the application. There are
also areas in which management's judgment in selecting any available alternative
would not produce a materially different result than those recorded and
reported.

CASH SOURCES, CASH USES AND COMMITMENTS -

HRP's cash position increased $8,456,000 during 2001 to $24,913,000 as of
December 31, 2001. The sources of cash during the year were $15,872,000 of cash
provided by operating activities, $10,000,000 of mortgage principal proceeds,
$8,435,000 of net cash proceeds from property sales, and $6,405,000 of
litigation judgment and interest described in Item 3 - Legal Proceedings. The
uses of cash were $9,417,000 for property and tenant improvements, $13,406,000
for property development costs, $3,987,000 for scheduled mortgage principal
payments, $2,760,000 of mortgage principal repayments from mortgage refinance
proceeds, $2,125,000 for the early payoff of mortgage principal in conjunction
with a property sale, $423,000 for mortgage prepayment penalties, and $138,000
for loan fees and expenses.

For the foreseeable future, HRP anticipates that mortgage principal payments,
tenant and capital improvements, lease commissions and litigation costs will be
funded by net cash from operations. We believe that there will be sufficient
cash from operations to meet these needs because HRP has leases in place as of
December 31, 2001 to provide $55,261,000 of minimum rental payments during 2002
(see "Lease Agreements and Major Tenant Information" discussed within Item 7 and
Note 7 to the Consolidated Financial Statements). HRP had $54,443,000 of minimum
rental payments estimated for 2001 (based on leases in place as of December 31,
2000), however the actual rental payments recorded for 2001 were $60,494,000.
Our ability to fund operations in the future will depend upon continued success
in maintaining current occupancy levels, retaining current tenants, and
attracting new tenants. The primary sources of capital to fund any future
acquisitions or developments will be proceeds from the sale, financing or
refinancing of one or more of its Properties.

Each quarter Realty reviews HRP's capacity to make cash distributions. HRP has
not made any cash distributions since February, 1992. In addition to the
commitment described below with regards to the development project at Executive
Park, HRP has estimated and budgeted tenant and capital improvements of
$10,852,000 and lease commissions of $2,261,000 for 2002.

PROPERTY DEVELOPMENT AT EXECUTIVE PARK -

In early 2001, HRP demolished a 1-story office building at its Executive Park
property in Atlanta, Georgia that contained 18,000 net rentable square feet. In
order to do so, HRP had to obtain a release of the building from Executive
Park's mortgage lien by substituting for such collateral $608,000 of United
States Treasury Bonds, which have various maturity dates through December 2007.
In February 2001, HRP began constructing a 5-story office building containing
125,000 net rentable square feet. The estimated construction and development
costs for the building and its parking garage (excluding the existing land
costs, lease commissions and tenant improvements to be spent after a lease is
executed, and loan fees once financing is secured) are approximately
$15,650,000. As of December 31, 2001, HRP had incurred and capitalized
$13,656,000 of construction and development costs. The building and its parking
garage, excluding tenant finish-out, is estimated to be completed by the end of
March, 2002. All development costs have been and are estimated to continue to be
from existing cash funds until the property is substantially leased, at which
time it is anticipated that loan financing will be secured. Costs for lease
commissions, tenant improvements and loan fees are dependant upon the terms of
each lease agreement and yet to be determined, as no pre-leasing has been done.
HRP anticipates leasing substantially all of the building by late 2002.

RISKS, COMPETITION AND OTHER FACTORS -

For information about risks, see "Risks, Competition and Other Factors" in Item
1 - Business.

PAGE 14 of 45

LIQUIDITY AND CAPITAL RESOURCES - (CONTINUED)

LEASE AGREEMENTS AND MAJOR TENANT INFORMATION -

Lease provisions generally require HRP's tenants to pay fixed rental amounts
plus their proportionate share of certain building operating costs and real
property taxes. In addition, certain leases include provisions for annual rental
adjustments. Revenue from expense recoveries, included in property operations,
was $4,197,000, $3,315,000, and $2,539,000 in 2001, 2000, and 1999,
respectively. At December 31, 2001, the Properties, in the aggregate, were 91%
occupied (excluding a 125,000 square foot development property at Executive
Park). The following table sets forth the minimum cash rental payments to be
received from leases in place as of December 31, 2001 (in thousands):

Based on leases in place as of December 31, 2001, set forth below are the
percentages of square feet scheduled for lease expirations for each calendar
year, assuming that none of the tenants exercise early termination or renewal
options:

2002 22%
2003 17%
2004 11%
2005 12%
2006 16%
Thereafter 22%

During 2001 and 2000, two tenants leasing space contributed 10% or more of HRP's
revenues. Ford Motor Company and affiliates ("Ford") leases space in Parklane
Towers and Fairlane Commerce Park. Ford accounted for 12% and 11% of revenues in
2001 and 2000, respectively. The General Services Administration ("GSA") leases
space in Corporate Square and Executive Park. GSA accounted for 14% and 12% of
revenues in 2001 and 2000, respectively.

As of December 31, 2001, Ford occupied 206,000 square feet of office space under
8 leases at Parklane Towers and 291,000 square feet of office, technical
laboratory and industrial space under 10 leases at Fairlane Commerce Park. These
leases expire between 2002 and 2010 and most contain renewal options, providing
for one to ten year renewals. As of December 31, 2001, GSA occupied 327,000
square feet of office space at Executive Park under 5 leases which expire
between 2002 and 2011 and 309,000 square feet of office space at Corporate
Square under 2 leases which expire in 2013 (with a right to early terminate in
2008) and 2020. The remaining tenants are not concentrated in any one industry,
nor is HRP otherwise dependent on any group of related tenants for 10% or more
of its revenues.

ACCOUNTING STANDARDS -

In August 2001, SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" was issued. The provisions of this statement are effective
for HRP beginning on January 1, 2002. HRP believes that the impact of adopting
SFAS No. 144 will be limited to the requirement that the results of operations
of disposed properties, for current and historical presentation, be classified
as discontinued operations. This will result in the reclassification of
historical operations for property dispositions that occur in current periods.

PAGE 15 of 45

LIQUIDITY AND CAPITAL RESOURCES - (CONTINUED)

LITIGATION & JUDGMENT -

On July 18, 2001, the Delaware Court of Chancery rendered it opinion for the
action styled Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., et al.
(C.A. No. 15754). The court ruled that the defendants other than HRP pay a
judgment in the amount of $3,417,423, plus pre-judgment interest from August
1995 to HRP. The judgment amount represents what the court determined was an
underpayment by Hallwood. The court's judgment is not final until all rehearings
and appeals have been exhausted. In August 2001, plaintiff and certain
defendants appealed the Court of Chancery's judgment to the Delaware Supreme
Court. Those appeals are pending. (For more information about this litigation
and the lawsuit filed in United States District Court of the Southern District
of New York, see Item 3 - Legal Proceedings and Note 11 to the Consolidated
Financial Statements.)

In October 2001, HRP received the $3,417,423 judgment together with $2,987,576
of pre-judgment and post-judgment interest, subject to an arrangement that it be
returned in full or part if the judgment is modified or reversed on appeal. As a
result of the appeals and the uncertainty of their outcome, HRP recorded the
judgment and interest as "Deferred Litigation Proceeds" on its balance sheet.

MORTGAGE LOANS -

Substantially all of the buildings in HRP's real estate properties were
encumbered and pledged as collateral by eleven non-recourse mortgage loans
aggregating $201,224,000 as of December 31, 2001. These mortgage loans have
interest rates varying from 3.44% to 8.70% (with an effective average interest
rate of 7.6%) and mature between 2005 and 2020. Other than Allfirst Building's
mortgage ($25,000,000), all mortgages have fixed interest rates. Most of the
mortgage loans require monthly principal payments with balloon payments due at
maturity. The following table shows for the years presented the principal and
balloon payments that are required (in thousands):

Since August 2000, HRP has had available a $2,000,000 revolving line of credit,
which now matures on July 29, 2002. The line of credit has a variable interest
rate of either prime plus 0.50% or LIBOR plus 3.0% and requires monthly interest
payments, but no principal amortization. HRP has not borrowed against this
facility.

On August 7, 2001, HRP refinanced a mortgage loan secured by a portion of
Corporate Square with a new lender. The interest rate was reduced to 7.7% from
8.625% and the maturity date was extended six years to August 2011. The monthly
principal payments amortize the loan over 22.5 years. The loan proceeds of
$10,000,000 were used to pay the outstanding mortgage principal balance of
$2,760,000 with the former lender, to pay a prepayment penalty of $409,000, to
pay transaction costs of $142,000, and for general working capital. The
prepayment penalty along with the writeoff of $105,000 of unamortized loan costs
associated with the retired loan were expensed and are included in the
Consolidated Statements of Operations as an extraordinary item.

HRP has two mortgage loans that require compliance with a loan covenant, which
if not met will trigger a default. The loans require the properties securing
each loan to maintain a liquidity ratio, specifically a debt service coverage
ratio. Debt service coverage ratio is the relationship of adjusted net operating
income (as defined in each loan agreement) for the previous twelve months to the
loan's annual debt service. The ratio, for the loan requiring a minimum 1.15
ratio, was 2.35, 2.19, and 1.91 for 2001, 2000, and 1999, respectively. The
ratio, for the loan requiring a minimum 1.10 ratio, was 1.94, 2.45, and 2.24 for
the same periods. Accordingly, HRP was in compliance with its loans' covenants
for the three years ended December 31, 2001. As of December 31, 2001, the
outstanding balance of the loans is $113,649,000.

PAGE 16 of 45

LIQUIDITY AND CAPITAL RESOURCES - (CONTINUED)

PROPERTY DISPOSITIONS -

In March 2001, HRP sold Joy Road Distribution Center that contained 442,000 net
rentable square feet on 21 acres for a gross selling price of $5,326,000. The
carrying value of the assets was $2,994,000. The sale resulted in $4,916,000 of
net proceeds to HRP and a net gain of $1,922,000. The net sale proceeds were
used to pay the outstanding mortgage principal balance of $2,125,000, to pay a
prepayment penalty of $14,000 to the lender, and to add $2,777,000 to general
working capital. The prepayment penalty along with the writeoff of $31,000 of
unamortized loan costs associated with the retired loan were expensed and are
included in the Consolidated Statements of Operations as an extraordinary item.

In January 2001, HRP sold one of the warehouse buildings at Seattle Business
Parks that contained 63,000 net rentable square feet on 3.9 acres for a gross
selling price of $3,287,000. The carrying value of the assets was $885,000. The
sale resulted in $2,994,000 of net proceeds, which were added to HRP's working
capital, and a net gain of $2,109,000.

Also in January 2001, HRP sold one building at Fairlane Commerce Park that
contained less than 2,000 net rentable square feet on 0.5 acres for a gross
selling price of $575,000. The carrying value of the assets was $372,000. The
sale resulted in $525,000 of net proceeds, which were added to HRP's working
capital, and a net gain of $153,000.

TRANSACTIONS WITH RELATED PARTIES -

Realty receives certain fees in connection with the ongoing management of HRP,
including an asset management fee, acquisition fees and disposition fees.
Specifically, Realty is entitled to receive an asset management fee equal to 1%
of the net aggregate base rents of the Properties, acquisition fees equal to 1%
of the purchase price of newly acquired properties, and disposition fees with
respect to real estate investments, other than the properties owned at the time
of HRP's formation in 1990, equal to 10% of the amount, by which the sales price
of a property exceeds the purchase price of such property.

HCRE receives compensation in connection with the management of the Properties,
which includes a property management fee, lease commissions and construction
supervision fees. The management contracts expire June 30, 2004 and provide for
basic compensation from a property management fee in an amount equal to 2.85% of
cash receipts collected from the Properties' tenants, lease commissions equal to
the current commission market rate as applied to the net aggregate rent (none
exceeding 6% of the net aggregate rent), and construction supervision fees for
administering all construction projects equal to 5% of the total contracted
costs of each capital expenditure or tenant improvement project.

Realty and HCRE are compensated for services provided to HRP and its Properties
as described above. The following table sets forth such compensation and
reimbursements paid by HRP (in thousands):

(a) These costs are mostly recorded as general and administrative expenses
and represent reimbursement to Realty, at cost, for administrative level
salaries and compensation, bonuses, employee and director insurance, and
allocated overhead costs. HRP pays its account balance with Realty on a
monthly basis.

In January 2001, HRP acquired a construction development consulting contract
from Hallwood regarding a project in Tulsa, Oklahoma with an unrelated third
party. In connection therewith, HRP reimbursed Hallwood for its actual costs
incurred of $281,000.

PAGE 17 of 45

LIQUIDITY AND CAPITAL RESOURCES - (CONTINUED)

INFLATION -

Inflation did not have a significant impact on HRP during the three years ended
December 31, 2001 and is not anticipated to have a material impact in 2002.

FORWARD-LOOKING STATEMENTS -

In the interest of providing investors with certain information regarding HRP's
future plans and operations, certain statements set forth in this Form 10-K
relate to management's future plans, objectives and expectations. Such
statements are forward-looking statements. Although any forward-looking
statements contained in this Form 10-K or otherwise expressed by or on behalf of
HRP are, to the knowledge and in the judgment of the officers and directors of
the General Partner, expected to prove true and come to pass, management is not
able to predict the future with absolute certainty. Although HRP believes that
the assumptions underlying the forward-looking statements are reasonable, any of
the assumptions could be inaccurate and, therefore, there can be no assurance
that the forward-looking statements will prove to be accurate.

Forward-looking statements involve known and unknown risks and uncertainties,
which may cause HRP's actual performance and financial results in future periods
to differ materially from any projection, estimate or forecasted result. These
risks and uncertainties include the risks identified under "Risks, Competition
and Other Factors" in Item 1 - Business.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

On July 27, 2000, HRP sold its interest rate swap agreement for $1,597,000. HRP
had entered into the interest rate swap agreement in 1998 to reduce its exposure
to changes in interest rates for the loan secured by Allfirst Building. This
interest rate swap agreement effectively fixed the loan's cash interest rate at
6.78%, as opposed to the mortgage loan interest rate of LIBOR plus 1.30% (or
7.94% at the time of the swap agreement sale). The proceeds from the sale were
designated for general working capital purposes. For financial reporting
purposes, the proceeds are being amortized over the life of the loan as a
reduction to interest expense. As of December 31, 2000, the unamortized balance,
included on the balance sheet in "Prepaid rent, security deposits and other",
was $1,481,000. During 2001, as the result of the adoption of SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" HRP reclassified
the remaining unamortized gain from liabilities to accumulated other
comprehensive income. The proceeds will continue to be amortized over the life
of Allfirst Building's mortgage payable as a reduction to interest expense. As
of December 31, 2001, the unamortized balance, included on the balance sheet as
"Accumulated other comprehensive income", was $1,204,000.

Also on July 27, 2000 and in connection with the sale of the swap agreement, HRP
purchased an interest rate cap for Allfirst Building's mortgage loan for
$288,000, which limits HRP's exposure to changing interest rates to a maximum of
10%. This interest rate cap, which has a notional amount of $25,000,000, has
terms consistent with Allfirst Building's mortgage loan. Allfirst Building's
cash interest rate was 3.44% and 8.12% as of December 31, 2001 and 2000,
respectively. The interest rate cap is a derivative and designated as a cash
flow hedge. Hedge effectiveness is measured based on using the intrinsic value
of the interest rate cap. All changes in the fair value of the time value of the
cap are recorded directly to earnings. With the January 1, 2001 adoption SFAS
No. 133, HRP recorded the cumulative effect of the adoption as a reduction to
income of $192,000, or the amount of the difference between the carrying value
as of January 1, 2001 of $267,000 and the then estimated fair value of $75,000,
all of which represented change in time value. Thereafter, on a quarterly basis,
HRP has recorded changes in the estimated fair value of the cap in interest
expense. As of December 31, 2001, the estimated fair value of the interest rate
cap was $68,000.

Other than Allfirst Building's mortgage ($25,000,000), all mortgages have fixed
interest rates. Accordingly, changes in LIBOR or the prime rate do not
significantly impact the amount of interest paid by HRP. Assuming a 100 basis
point, or 1%, change in LIBOR, interest paid by HRP would increase or decrease
by approximately $250,000 on an annual basis.

PAGE 18 of 45

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION

INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION

PAGE 19 of 45

INDEPENDENT AUDITORS' REPORT

To the Partners of Hallwood Realty Partners, L.P.

We have audited the accompanying consolidated balance sheets of Hallwood Realty
Partners, L.P. and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, partners' capital and cash flows
for each of the three years in the period ended December 31, 2001. Our audit for
the year ended December 31, 2001 also included the financial statement schedule
listed in the Index at Item 8. These financial statements and financial
statement schedule are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedule based upon our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Hallwood Realty Partners, L.P. and
subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

DELOITTE & TOUCHE LLP

Dallas, Texas
February 15, 2002

PAGE 20 of 45

HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT UNIT AMOUNTS)

See notes to consolidated financial statements.

PAGE 21 of 45

HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)

See notes to consolidated financial statements.

PAGE 22 of 45

HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS EXCEPT UNIT AMOUNTS)

See notes to consolidated financial statements.

PAGE 23 of 45

HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

See notes to consolidated financial statements.

PAGE 24 of 45

HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2001

1. ORGANIZATION

Hallwood Realty Partners, L.P. ("HRP"), a publicly traded Delaware limited
partnership, operates in the commercial real estate industry. HRP's
activities include the acquisition, ownership and operation of its
commercial real estate assets. Units representing limited partnership
interests are traded on the American Stock Exchange under the symbol "HRY".
As of December 31, 2001, there were 1,589,948 units outstanding.

As of December 31, 2001, HRP owned fourteen real estate assets (the
"Properties"), located in six states containing 5,073,000 net rentable
square feet. HRP seeks to maximize the value of its real estate by making
capital and tenant improvements, by executing marketing programs to attract
and retain tenants, and by controlling or reducing, where possible,
operating expenses.

Hallwood Realty, LLC ("Realty" or the "General Partner"), a Delaware limited
liability company and indirectly wholly-owned subsidiary of The Hallwood
Group Incorporated ("Hallwood"), is HRP's general partner and is responsible
for asset management of HRP and its Properties, including decision-making
responsibility for financing, refinancing, acquiring and disposing of
properties. In addition, Realty provides general operating and
administrative services to HRP. Hallwood Commercial Real Estate, LLC
("HCRE"), another indirectly wholly-owned subsidiary of Hallwood, provides
property management, leasing and construction supervision services to the
Properties.

2. ACCOUNTING POLICIES

CONSOLIDATION

HRP fully consolidates into its financial statements majority owned
entities. For each of the three years in the period ended December 31, 2001,
all entities and Properties were fully owned. All significant intercompany
balances and transactions have been eliminated in consolidation.

HRP has, in three situations, created a Special Purpose Entity ("SPE").
These SPEs were formed at the request of lenders for the express purpose of
strengthening the collateral for the loans by isolating (for Federal
bankruptcy law purposes) the assets and liabilities of the SPEs. In all
cases and since their various formation dates, these wholly-owned entities
(including their assets, liabilities and results of operations) have been
fully consolidated into the financial statements of HRP.

CASH AND CASH EQUIVALENTS

HRP considers highly liquid investments with original maturities of three
months or less at the time of purchase to be cash equivalents.

PROPERTY

Property is stated at cost. Renovations and improvements are capitalized;
maintenance and repairs are expensed. When an asset is sold or otherwise
disposed of, the related cost and accumulated depreciation are removed from
the accounts and any gain or any previously unanticipated loss is recognized
in the year of sale or disposition. HRP records impairment losses on its
real estate assets when events and circumstances indicate that the assets
might be impaired or the undiscounted cash flows estimated to be generated
by those assets are less than the carrying value of that asset. In such
cases, an impaired asset would be written down to its fair value. Our cash
flow estimates are based on historical results adjusted to our best estimate
of future market and operating conditions. For the three years ended
December 31, 2001, HRP has not recorded a write-down, or impairment of the
carrying value of any real estate property, based on these calculations.

Depreciation of buildings is computed using the straight-line method over
estimated useful lives ranging from 15 to 43 years. Equipment and other
improvements are depreciated on the straight-line method over estimated
useful lives ranging from 3 to 23 years. Tenant improvements are capitalized
and amortized over the terms of the respective leases or useful life, if
shorter.

PAGE 25 of 45

HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2001

2. ACCOUNTING POLICIES - (CONTINUED)

HRP capitalizes all costs related to the development and construction of its
projects, including interest of $486,000, $493,000, and $124,000 in 2001,
2000, and 1999, respectively. The development period of a project is
considered to have begun when activities related to the construction of the
project or a portion thereof have commenced. All costs for construction are
capitalized and allocated to each building; capitalization of such costs is
discontinued when the building is available for occupancy.

HRP would accrue for losses associated with environmental remediation
obligations if such losses were probable and reasonably estimable. Accruals
for estimated losses from environmental remediation obligations would
generally be recognized no later than completion of a remedial feasibility
study. Such accruals would be adjusted as further information developed or
circumstances changed. Costs of future expenditures for environmental
remediation obligations would not be discounted to their present value.
Recoveries of environmental remediation costs from other parties are
recorded as assets when their receipt is deemed probable. HRP's management
is not aware of any environmental remediation obligations which would
materially affect the operations, financial position or cash flows of HRP
and therefore has made no loss accruals.

OTHER ASSETS

Lease concessions and commissions are amortized over the terms of the
respective leases. Leases at the Properties expire from 2002 to 2020. Loan
costs are amortized over the terms of the respective loans. The loans mature
between 2005 and 2020. Amortization of lease commissions, included in
depreciation and amortization expense, was $2,889.000, $3,180,000, and
$2,286,000 in 2001, 2000, and 1999, respectively. Amortization of loan
costs, included in interest expense, was $624,000, $855,000, and $536,000 in
2001, 2000, and 1999, respectively. The caption "Prepaid expenses and other
assets" on the Consolidated Balance Sheets includes unamortized effective
rent adjustments, prepaid real estate taxes, prepaid insurance and other
miscellaneous deposits and prepaid expenses.

REVENUE RECOGNITION

Rental income is recognized as earned on a straight-line basis over the
terms of the respective leases. Amortization of effective rent income
adjustments, included in property operations revenues, was $256,000,
$569,000, and $778,000 in 2001, 2000, and 1999, respectively. Lease
provisions generally require tenants to pay their proportionate share of
certain building operating costs and real property taxes. Revenue from these
expense recoveries, included in property operations, are recorded as earned
and was $4,197,000, $3,315,000, and $2,539,000 in 2001, 2000, and 1999,
respectively.

INTEREST RATE AGREEMENTS

HRP has used an interest rate swap as a hedge against interest exposure of
variable rate debt. HRP's only interest rate swap was sold in July 2000.
Differences between amounts paid or received in this interest rate
agreement, which was designated as a hedge, were included in interest
expense as the payments were made or received. HRP was exposed to
credit-related gains or losses in the event of non-performance by
counterparties, however none of the counterparties failed to meet their
obligations during the term of the agreement. In July 2000, in connection
with the sale of the interest rate swap, HRP purchased an interest rate cap
derivative that limits its interest rate exposure on its mortgage for
Allfirst Building (see Notes 6 and 9 for more information).

INCOME TAXES

Currently, HRP is a non-taxable entity. Federal and state income taxes, if
any, are the responsibility of the individual partners. Accordingly, the
Consolidated Financial Statements do not include a provision for income
taxes. However, certain business and franchise taxes are the responsibility
of HRP and subsidiary entities. These business and franchise taxes, included
in general and administrative expenses, were $178,000, $182,000, and
$243,000 in 2001, 2000, and 1999, respectively. HRP's tax returns are
subject to examination by federal and state taxing authorities. If HRP's
amounts are ultimately changed by the taxing authorities, the tax liability
of the partners could be changed accordingly. Additionally, no assurance can
be given that the federal or state governments will not pass legislation
that will characterize HRP as an association taxable as a corporation for
federal income tax purposes. Such classification may have an adverse effect
on HRP.

PAGE 26 of 45

HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2001

2. ACCOUNTING POLICIES - (CONTINUED)

COMPUTATION OF NET INCOME (LOSS) PER UNIT

Basic earnings per unit is computed by dividing results attributable to the
limited partners' interests by the weighted average number of units
outstanding. Earnings per unit assuming dilution is computed by dividing
results attributable to the limited partners' interests by the weighted
average number of units and potential units outstanding. Options to acquire
units were issued during 1995 and are considered to be potential units. The
number of potential units is computed using the treasury stock method which
assumes that the increase in the number of units is reduced by the number of
units which could have been repurchased by HRP with the proceeds from the
exercise of these options. The following table illustrates the amounts used
to calculate the weighted average number of units outstanding:

ACCOUNTING PRONOUNCEMENTS AND OTHER

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of certain assets, liabilities, revenues, expenses, and related
disclosures, as of and for the reporting periods. Actual results may differ
from these estimates under different assumptions or conditions. Certain
reclassifications have been made in the prior year amounts to conform to the
classifications used in the current year. The reclassifications had no
effect on previously reported results.

The policies listed are not intended to be a comprehensive list of all of
our accounting policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by accounting principles
generally accepted in the United States of America, with no need for
management's judgment in the application. There are also areas in which
management's judgment in selecting any available alternative would not
produce a materially different results.

Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities" [as amended by SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133" and SFAS No. 138 "Accounting
for Certain Derivative Instruments and Certain Hedging Activities (an
amendment of FASB Statement No. 133)] establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. All
derivatives, whether designated in hedging relationships or not, are
required to be recorded on the balance sheet at fair value. HRP adopted
these statements on January 1, 2001. In connection with this adoption, HRP
determined it had one derivative, an interest rate cap (see Notes 6 and 9
for more information).

In August 2001, SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" was issued. The provisions of this statement are
effective beginning on January 1, 2002. HRP believes that the impact of
adopting SFAS No. 144 will be limited to the requirement that the results of
operations of disposed properties, for current and historical presentation,
be classified as discontinued operations. This will result in the
reclassification of historical operations for property dispositions that
occur in current periods.

PAGE 27 of 45

HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2001

3. TRANSACTIONS WITH RELATED PARTIES

Realty receives certain fees in connection with the ongoing management of
HRP, including an asset management fee, acquisition fees and disposition
fees. Specifically, Realty is entitled to receive an asset management fee
equal to 1% of the net aggregate base rents of the Properties, acquisition
fees equal to 1% of the purchase price of newly acquired properties, and
disposition fees with respect to real estate investments, other than the
properties owned at the time of HRP's formation in 1990, equal to 10% of the
amount, by which the sales price of a property exceeds the purchase price of
such property.

HCRE receives compensation in connection with the management of the
Properties, which includes a property management fee, lease commissions and
construction supervision fees. The management contracts expire June 30, 2004
and provide for basic compensation from a property management fee in an
amount equal to 2.85% of cash receipts collected from the Properties'
tenants, lease commissions equal to the current commission market rate as
applied to the net aggregate rent (none exceeding 6% of the net aggregate
rent), and construction supervision fees for administering all construction
projects equal to 5% of the total contracted costs of each capital
expenditure or tenant improvement project.

Realty and HCRE are compensated for services provided to HRP and its
Properties as described above. The following table sets forth such
compensation and reimbursements paid by HRP (in thousands):

(a) These costs are mostly recorded as general and administrative expenses
and represent reimbursement to Realty, at cost, for administrative level
salaries and compensation, bonuses, employee and director insurance, and
allocated overhead costs. HRP pays its account balance with Realty on a
monthly basis.

In January 2001, HRP acquired a construction development consulting contract
from Hallwood regarding a project in Tulsa, Oklahoma with an unrelated third
party. In connection therewith, HRP reimbursed Hallwood for its actual costs
incurred of $281,000.

4. STATEMENTS OF CASH FLOWS

Cash interest payments were $14,947,000 (net of capitalized interest of
$486,000), $13,831,000 (net of capitalized interest of $523,000),
$13,114,000 (net of capitalized interest of $94,000) in 2001, 2000, and
1999, respectively.

Supplemental disclosure of noncash investing and financing activities are as
follows -

As of December 31, 2001, HRP had a construction payable for property
development costs at Executive Park of $250,000.

In October 1999, HRP acquired Gulley Road Industrial Park for $8,249,000
including the assumption of an outstanding mortgage of $5,149,000.

PAGE 28 of 45

HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2001

5. PROPERTY TRANSACTIONS

PROPERTY DEVELOPMENT AT EXECUTIVE PARK -

In early 2001, HRP demolished a 1-story office building at its Executive
Park property in Atlanta, Georgia that contained 18,000 net rentable square
feet. In order to do so, HRP had to obtain a release of the building from
Executive Park's mortgage lien by substituting for such collateral $608,000
of United States Treasury Bonds, which have various maturity dates through
December 2007. In February 2001, HRP began constructing a 5-story office
building containing 125,000 net rentable square feet. The estimated
construction and development costs for the building and its parking garage
(excluding the existing land costs, lease commissions and tenant
improvements to be spent after a lease is executed, and loan fees once
financing is secured) are approximately $15,650,000. As of December 31,
2001, HRP had incurred and capitalized $13,656,000 of construction and
development costs. The building and its parking garage, excluding tenant
finish-out, is estimated to be completed by the end of March, 2002. All
development costs have been and are estimated to continue to be from
existing cash funds until the property is substantially leased, at which
time it is anticipated that loan financing will be secured. Costs for lease
commissions, tenant improvements and loan fees are dependant upon the terms
of each lease agreement and yet to be determined, as no pre-leasing has been
done. HRP anticipates leasing substantially all of the building by late
2002.

PROPERTY DEVELOPMENT AT CORPORATE SQUARE -

During the second quarter of 2000, HRP completed new construction of a
6-story office building containing approximately 151,000 net rentable square
feet that was commenced in the second quarter of 1999. It was constructed on
undeveloped land within the Corporate Square complex in Atlanta, Georgia. A
20-year lease with the General Services Administration for the entire
building was executed in 1999 and the tenant began paying rent August 2000.

The building construction, tenant improvements, lease commissions and loan
costs totaled $18,779,000 (excluding the original land cost). In 1999, HRP
incurred, in connection with the leasing of the entire project, $2,982,000
of lease commissions.

An interim-construction loan was secured in August 1999 that funded
$12,621,000 of the costs ($6,998,000 in 1999 and $5,623,000 in 2000). On
August 31, 2000, HRP secured permanent financing of $21,500,000. The loan's
monthly payment is based on a twenty-year amortization period and matures
August 15, 2020 and has a fixed interest rate of 7.97%. The loan proceeds
repaid the interim-construction loan and replenished working capital for the
completed project.

ACQUISITIONS -

On January 26, 2000, HRP acquired three 3-story office buildings in San
Diego, California (Fountain View Business Center) containing approximately
89,000 net rentable square feet on 4.3 acres of land. The acquisition cost
was $7,791,000.

In October 1999, HRP acquired a 5-building industrial park in Dearborn,
Michigan (Gulley Road Industrial Park) containing approximately 154,000 net
rentable square feet on 11 acres of land. The acquisition costs of
$8,249,000 included the assumption of a then outstanding mortgage loan of
$5,149,000.

In August 1999, HRP acquired two 3-story office buildings in San Diego,
California (Riverbank Plaza) containing approximately 40,000 net rentable
square feet on 1.6 acres of land for $2,354,000 in cash. The property was
unoccupied from December 1999 through April 2000 during a $1,765,000
property and tenant improvement renovation.

PAGE 29 of 45

HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2001

5. PROPERTY TRANSACTIONS - (CONTINUED)

DISPOSITIONS -

In March 2001, HRP sold Joy Road Distribution Center that contained 442,000
net rentable square feet on 21 acres for a gross selling price of
$5,326,000. The carrying value of the assets was $2,994,000. The sale
resulted in $4,916,000 of net proceeds to HRP and a net gain of $1,922,000.
The net sale proceeds were used to pay the outstanding mortgage principal
balance of $2,125,000, to pay a prepayment penalty of $14,000 to the lender,
and to add $2,777,000 to general working capital. The prepayment penalty
along with the writeoff of $31,000 of unamortized loan costs associated with
the retired loan were expensed and are included in the Consolidated
Statements of Operations as an extraordinary item.

In January 2001, HRP sold one of the warehouse buildings at Seattle Business
Parks that contained 63,000 net rentable square feet on 3.9 acres for a
gross selling price of $3,287,000. The carrying value of the assets was
$885,000. The sale resulted in $2,994,000 of net proceeds, which were added
to HRP's working capital, and a net gain of $2,109,000.

Also in January 2001, HRP sold one building at Fairlane Commerce Park that
contained less than 2,000 net rentable square feet on 0.5 acres for a gross
selling price of $575,000. The carrying value of the assets was $372,000.
The sale resulted in $525,000 of net proceeds, which were added to HRP's
working capital, and a net gain of $153,000.

6. MORTGAGES PAYABLE

Substantially all of the buildings in HRP's real estate properties were
encumbered and pledged as collateral by eleven non-recourse mortgage loans
aggregating $201,224,000 as of December 31, 2001 and $200,096,000 as of
December 31, 2000. These mortgage loans have interest rates varying from
3.44% to 8.70% (with an effective average interest rate of 7.6%) and mature
between 2005 and 2020. Other than Allfirst Building's mortgage, all
mortgages have fixed interest rates. Most of the mortgage loans require
monthly principal payments with balloon payments due at maturity. The
following table sets forth, by real estate property, the mortgages payable
balances, maturity dates, and interest rates as of December 31, 2001 (in
thousands):

(a) Variable interest rate. LIBOR plus 1.30%.

(b) Call options exercisable by lender on 2-1-2011 and 2-1-2016.

PAGE 30 of 45

HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2001

6. MORTGAGES PAYABLE - (continued)

The following table shows for the years presented the principal and balloon
payments that are required (in thousands):

The following discussions pertain to financing and refinancing activities of
HRP during the three years ended December 31, 2001.

ALLFIRST BUILDING -

On July 27, 2000, HRP sold its interest rate swap agreement for $1,597,000.
HRP had entered into the interest rate swap agreement in 1998 to reduce its
exposure to changes in interest rates for the loan secured by Allfirst
Building. This interest rate swap agreement effectively fixed the loan's
cash interest rate at 6.78%, as opposed to the mortgage loan interest rate
of LIBOR plus 1.30% (or 7.94% at the time of the swap agreement sale). The
proceeds from the sale were designated for general working capital purposes.
For financial reporting purposes, the proceeds are being amortized over the
life of the loan as a reduction to interest expense. As of December 31,
2000, the unamortized balance, included on the balance sheet in "Prepaid
rent, security deposits and other", was $1,481,000. During 2001, as the
result of the adoption of SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities", HRP reclassified the remaining
unamortized gain from liabilities to accumulated other comprehensive income.
The proceeds will continue to be amortized over the life of Allfirst
Building's mortgage payable as a reduction to interest expense. As of
December 31, 2001, the unamortized balance, included on the balance sheet as
"Accumulated other comprehensive income", was $1,204,000.

Also on July 27, 2000 and in connection with the sale of the swap agreement,
HRP purchased an interest rate cap for Allfirst Building's mortgage loan for
$288,000, which limits HRP's exposure to changing interest rates to a
maximum of 10%. This interest rate cap, which has a notional amount of
$25,000,000, has terms consistent with Allfirst Building's mortgage loan.
Allfirst Building's cash interest rate was 3.44% and 8.12% as of December
31, 2001 and 2000, respectively. The interest rate cap is a derivative and
designated as a cash flow hedge. Hedge effectiveness is measured based on
using the intrinsic value of the interest rate cap. All changes in the fair
value of the time value of the cap are recorded directly to earnings. With
the January 1, 2001 adoption of SFAS No. 133, HRP recorded the cumulative
effect of the adoption as a reduction to income of $192,000, or the amount
of the difference between the carrying value as of January 1, 2001 of
$267,000 and the then estimated fair value of $75,000, all of which
represented change in time value. Thereafter, on a quarterly basis, HRP has
recorded changes in the estimated fair value of the cap in interest expense.
As of December 31, 2001, the estimated fair value of the interest rate cap
was $68,000.

BRADSHAW BUSINESS PARKS -

In December 2000, HRP refinanced Bradshaw Business Park's existing loan with
a new lender. The interest rate was reduced to 8.1% from 8.5% and the
maturity date was extended over ten years to a call option date in February
2011. The monthly principal payments amortize the loan over 20 years. The
loan proceeds of $12,500,000 were used (i) to pay the outstanding principal
balance of $5,724,000 with the former lender, (ii) to pay transaction costs
of $267,000, (iii) to pay a prepayment penalty of $286,000, (iv) to fund
$288,000 of loan reserves, and (v) to add $5,935,000 to general working
capital. The prepayment penalty along with the writeoff of $103,000 of
unamortized loan costs associated with the retired loan were expensed and
are included in the Consolidated Statements of Operations as an
extraordinary item.

PAGE 31 of 45

HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2001

6. MORTGAGES PAYABLE - (CONTINUED)

CORPORATE SQUARE -

On August 7, 2001, HRP refinanced a mortgage loan secured by a portion of
Corporate Square with a new lender. The interest rate was reduced to 7.7%
from 8.625% and the maturity date was extended six years to August 2011. The
monthly principal payments amortize the loan over 22.5 years. The loan
proceeds of $10,000,000 were used to pay the outstanding mortgage principal
balance of $2,760,000 with the former lender, to pay a prepayment penalty of
$409,000, to pay transaction costs of $142,000, and for general working
capital. The prepayment penalty along with the writeoff of $105,000 of
unamortized loan costs associated with the retired loan were expensed and
are included in the Consolidated Statements of Operations as an
extraordinary item.

An interim-construction loan was secured in August 1999 that funded
$12,621,000 of a development project at Corporate Square (see Note 5 for
further information). The loan provided $6,998,000 in 1999 and $5,623,000
in 2000. On August 31, 2000, HRP secured permanent financing of $21,500,000.
The loan's monthly payment is based on a twenty-year amortization period and
matures August 15, 2020 and has a fixed interest rate of 7.97%. The loan
proceeds repaid the interim-construction loan and replenished working
capital for the completed project.

FOUNTAIN VIEW -

In January 2000, HRP obtained financing of $5,500,000 in connection with the
acquisition of Fountain View Business Center (three 3-story office buildings
in San Diego, California). The loan has a monthly payment based on a
twenty-year amortization, matures in ten years and has a fixed interest rate
of 8.17%.

JOY ROAD DISTRIBUTION CENTER -

In August 2000, HRP received $3,000,000 of loan proceeds from a promissory
term note secured by Joy Road Distribution Center in Detroit, Michigan. The
loan proceeds were for general working capital purposes. The loan was
scheduled to mature July 31, 2002, however it was paid off in March 2001
when Joy Road Distribution Center was sold. The loan had a variable interest
rate of either prime plus 0.50% or LIBOR plus 3.0%.

LINE OF CREDIT -

Since August 2000, HRP has had available a $2,000,000 revolving line of
credit, which now matures on July 29, 2002. The line of credit has a
variable interest rate of either prime plus 0.50% or LIBOR plus 3.0% and
requires monthly interest payments, but no principal amortization. HRP has
not borrowed against this facility.

RIVERBANK PLAZA -

In May 2000, HRP closed on a new mortgage generating $2,500,000 of loan
proceeds and is secured by Riverbank Plaza, which was acquired in August
1999 in a cash transaction. The loan's monthly payment is based on a
twenty-year amortization, matures in ten years and has a fixed interest rate
of 8.29%. The loan proceeds were for general working capital purposes.

PAGE 32 of 45

HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2001

7. LEASE AGREEMENTS AND MAJOR TENANT INFORMATION

Lease provisions generally require HRP's tenants to pay fixed rental amounts
plus their proportionate share of certain building operating costs and real
property taxes. In addition, certain leases include provisions for annual
rental adjustments. Revenue from expense recoveries, included in property
operations, was $4,197,000, $3,315,000, and $2,539,000 in 2001, 2000, and
1999, respectively. At December 31, 2001, the Properties, in the aggregate,
were 91% occupied (excluding a 125,000 square foot development property at
Executive Park). The following table sets forth the minimum cash rental
payments to be received from leases in place as of December 31, 2001 (in
thousands):

During 2001 and 2000, two tenants leasing space contributed 10% or more of
HRP's revenues. Ford Motor Company and affiliates ("Ford") leases space in
Parklane Towers and Fairlane Commerce Park. Ford accounted for 12% and 11%
of revenues in 2001 and 2000, respectively. The General Services
Administration ("GSA") leases space in Corporate Square and Executive Park.
GSA accounted for 14% and 12% of revenues in 2001 and 2000, respectively.

As of December 31, 2001, Ford occupied 206,000 square feet of office space
under 8 leases at Parklane Towers and 291,000 square feet of office,
technical laboratory and industrial space under 10 leases at Fairlane
Commerce Park. These leases expire between 2002 and 2010 and most contain
renewal options, providing for one to ten year renewals. As of December 31,
2001, GSA occupied 327,000 square feet of office space at Executive Park
under 5 leases which expire between 2002 and 2011 and 309,000 square feet of
office space at Corporate Square under 2 leases which expire in 2013 (with a
right to early terminate in 2008) and 2020. The remaining tenants are not
concentrated in any one industry, nor is HRP otherwise dependent on any
group of related tenants for 10% or more of its revenues.

HRP leases and shares offices with Hallwood in Dallas, Texas under a lease
which expires November 30, 2008. HRP has a one-time option to terminate the
lease effective November 30, 2005. The minimum cash rental payments are
$149,000, $315,000, and $315,000 for 2002, 2003 and 2004, respectively, of
which HRP's portion is approximately $100,000, $210,000 and $210,000 for
2002, 2003 and 2004, respectively.

8. PARTNERS' CAPITAL

In 1995, HRP issued options totaling 86,000 units to certain executives of
Realty and HCRE with an exercise price of $11.875 per unit. The options were
vested over a three year period ending in 1997. The options expire on
February 27, 2005 and generally, the optionees may borrow the amounts
necessary to exercise the options from HRP. As of December 31, 2001, 17,200
options had been exercised (all during 2000), none have been canceled and
68,800 options remained exercisable. No options have been granted since the
adoption of the disclosure only provisions of SFAS No. 123 - "Accounting for
Stock Based Compensation".

As part of the resignation of Brian Troup as an officer and director of
Hallwood and HRP's general partner on December 21, 1999, Hallwood
transferred 82,608 units of HRP that it owned to a trust controlled by Mr.
Troup. On May 12, 2000, Mr. Troup exercised his unit options to purchase
17,200 HRP units at the option plan's exercise price of $11.875 per unit,
which generated $601,000 of non-cash compensation. Also on May 12, 2000, HRP
purchased and retired all of Mr. Troup's above-mentioned 99,808 units at
$46.825 per unit (the average of the closing market prices of the units for
the twenty trading days prior to the purchase). As a result of these
transactions, HRP's outstanding units decreased from 1,672,556 to 1,589,948.

PAGE 33 of 45

HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2001

9. COMPREHENSIVE INCOME

The components of other comprehensive income for the three years ended
December 31, 2001 are shown as follows (in thousands):

10. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

Estimated fair value amounts of certain financial instruments have been
determined using available market information based upon negotiations held
by Realty with potential lenders or other appropriate valuation
methodologies that require considerable judgment in interpreting market data
and developing estimates. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts that HRP could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value amounts.

The fair value of financial instruments that are short-term or re-price
frequently and have a history of negligible credit losses is considered to
approximate their carrying value. These include cash and cash equivalents,
short term receivables, accounts payable and other liabilities. Real estate
and other assets are not considered financial instruments.

Management has reviewed the fair values of its mortgages payable in
connection with interest rates currently available to HRP for borrowing with
similar characteristics and maturities (approximately 7.5% and 8.0% as of
December 31, 2001 and 2000, respectively). Based on those interest rates,
management has determined that the estimated fair values of HRP's mortgages
payable as of December 31, 2001 and 2000 would equal approximately
$204,158,000 and $200,564,000, respectively, as compared to the carrying
values of $201,224,000 and $200,096,000, respectively.

The estimated fair value of HRP's interest rate cap as of December 31, 2001
and 2000 was $68,000 and $75,000, respectively, based on quotes obtained
from the issuer of the cap agreement (see Note 6 for more information). The
carrying value of HRP's interest rate cap as of December 31, 2001 and 2000
was $68,000 and $267,000, respectively.

As of December 31, 2001 and 2000, the fair value information presented
herein is based on pertinent information available to management. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date and,
therefore current estimates of fair value may differ significantly from the
amounts presented herein.

PAGE 34 of 45

HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2001

11. COMMITMENTS AND CONTINGENCIES

LITIGATION

Beginning in 1997, HRP has been a defendant in two lawsuits that were
brought by Gotham Partners, L.P. in the Delaware Court of Chancery.

The first suit was filed on February 27, 1997 in the Court of Chancery for
New Castle County, Delaware, styled Gotham Partners, L.P. v. Hallwood Realty
Partners, L.P. and Hallwood Realty Corporation (C.A. No. 15578), and it
sought access to certain books and records of HRP and was subsequently
settled, allowing certain access. On April 9, 2001 the case was dismissed.

The second action was filed on June 20, 1997 in a separate complaint in the
Court of Chancery for New Castle County, Delaware, styled Gotham Partners,
L.P. v. Hallwood Realty Partners, L.P., et al. (C.A. No. 15754). This action
alleges claims of breach of fiduciary duties, breach of HRP's partnership
agreement, and fraud in connection with certain transactions involving HRP's
units in the mid 1990's. Hallwood is alleged to have aided and abetted the
alleged breaches. On June 21, 2000, after completing fact discovery, all
parties moved for summary judgment on several issues. In September and
October, 2000, the Delaware court issued three separate written opinions
resolving the summary judgment motions. In the opinions, the court ruled
that trial would be required as to all issues, except that (i) Gotham was
found to have standing to pursue its derivative claims; (ii) defendants were
entitled to judgment dismissing the fraud claim; (iii) the General Partner
was entitled to judgment dismissing the breach of fiduciary duty claims
brought against it; and (iv) the General Partner's outside directors were
entitled to judgment dismissing all claims brought against them.

A five-day trial was held in January 2001. On July 18, 2001, the Delaware
Court of Chancery rendered its opinion. In its decision, the court
determined that an option plan and a sale of units to Hallwood in connection
with a reverse unit split implemented by HRP in 1995 were in compliance with
HRP's partnership agreement. The court also found that the sale of units to
Hallwood in connection with a 1995 odd-lot offer by HRP did not comply with
certain procedures required by the HRP partnership agreement. The court
ruled that the defendants other than HRP pay a judgment in the amount of
$3,417,423, plus pre-judgment interest from August 1995 to HRP. The judgment
amount represents what the court determined was an underpayment by Hallwood.
The court's judgment is not final until all rehearings and appeals have been
exhausted. In August 2001, plaintiff and certain defendants appealed the
Court of Chancery's judgment to the Delaware Supreme Court. Those appeals
are pending. Oral arguments were heard on February 12, 2002, and a rehearing
en banc was held on March 26, 2002. In October 2001, HRP received the
$3,417,423 judgment together with $2,987,576 of pre-judgment and
post-judgment interest, subject to an arrangement that it be returned in
full or part if the judgment is modified or reversed on appeal. If the
appellate court reverses the judgment, any subsequent ruling by the trial
court on remand may be more or less favorable to HRP. As a result of the
appeals and the uncertainty of their outcome, HRP recorded the judgment and
interest as "Deferred Litigation Proceeds" on its balance sheet.

On February 15, 2000, HRP filed a lawsuit in the United States District
Court for the Southern District of New York styled Hallwood Realty Partners,
L.P. v. Gotham Partners L.P., et al. (Civ. No. 00 CV 1115) alleging
violations of the Securities Exchange Act of 1934 by certain purchasers of
its units, including Gotham Partners, L.P., Gotham Partners III, L.P.,
Private Management Group, Inc., Interstate Properties, Steven Roth and EFO
Realty, Inc., by virtue of those purchasers' misrepresentations and/or
omissions in connection with filings required under the Securities Exchange
Act of 1934. The complaint further alleged that defendants, by acquiring
more than 15% of the outstanding HRP units, have triggered certain rights
under its Unit Purchase Rights Agreement, for which HRP was seeking
declaratory relief. HRP sought various forms of relief, including
declaratory judgments, divestiture, corrective disclosures, a "cooling-off"
period and damages, including costs and disbursements. On November 16, 2000,
the court granted HRP's motion to add as defendants Gotham Holdings II,
L.L.C., Hallwood Investors, L.P., Liberty Realty Partners, L.P. and
EFO/Liberty, Inc. and to remove EFO Realty, Inc. as a defendant.

Discovery was completed in December 2000 and trial was held in February
2001. On February 23, 2001, the court rendered a decision in favor of the
defendants and on February 28, 2001, the court ordered the complaint
dismissed. HRP filed a Notice of Appeal on March 29, 2001 with respect to
the February 28, 2001 dismissal of the complaint and other matters. All
parties filed briefs with the Second Circuit. Oral arguments were heard on
March 4, 2002.

PAGE 35 of 45

HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2001

11. COMMITMENTS AND CONTINGENCIES - (CONTINUED)

HRP is from time to time involved in various other legal proceedings and
claims which arise in the ordinary course of business. These matters are
generally covered by insurance. Management believes that the resolution of
these matters will not have a material adverse effect on HRP's financial
position, cash flow or operations.

ASBESTOS

The environmental laws of the federal government and of certain state and
local governments impose liability on current property owners for the
cleanup of hazardous and toxic substances discharged on such property. This
liability may be imposed without regard to the timing, cause or person
responsible for the release of such substances onto the property. HRP could
be subject to additional liability in the event that it owns properties
having such environmental problems. Parklane Towers, as well as certain
other properties to a lesser extent, are known to contain asbestos. Removal
of asbestos at Parklane Towers is not required because it is cementitious,
it is not friable and because the procedures in HRP's site environmental
program Operations and Maintenance Manual are performed as required.

RIGHTS PLAN

HRP has a Unit Purchase Rights Agreement ("Rights Plan") that provides for a
distribution of one right for each unit of HRP to holders of record at the
close of business as of December 10, 1990. The rights will become
exercisable only in the event, with certain exceptions, an acquiring party
accumulates 15 percent or more of HRP's units, or if a party commences or
announces an intent to commence a tender offer or exchange offer to acquire
30 percent or more of such units. Each right will entitle the holder to buy
one additional unit at a price of $250. In addition, upon the occurrence of
certain events, holders of the rights will be entitled to purchase either
HRP units or shares in an "acquiring entity" at half of market value. HRP
will generally be entitled to redeem the rights at $.01 per right at any
time on or prior to the tenth day following the acquisition of a 15 percent
or greater interest in its units.

Although it is HRP's position in the litigation filed in the Southern
District of New York that certain holders of HRP's units have become an
"Acquiring Person" under the Rights Plan by virtue of obtaining dispositive
power over more than 15% of the outstanding units, a final determination of
this issue will be made by the court. As a result, the General Partner has
amended the Rights Plan, among other things, to postpone the "Distribution
Date" under the Rights Plan based on the General Partner's current
understanding of the facts. By taking such action, the rights will become
exercisable, if at all, only after the final resolution by a court that an
"Acquiring Person" exists for the purposes of the Rights Plan. Additionally,
the expiration of the redemption period under the Rights Plan has also been
extended pending litigation. However, if additional facts come to the
General Partner's attention or the status or unit ownership of any
unitholder change in any respect, the General Partner will review the
circumstances at that time and may change its conclusions. HRP has also
amended the Rights Plan to extend the expiration period of the rights until
one year after entry of an order, which is final and not subject to appeal,
resolving the above-mentioned lawsuit.

OTHER

In addition to the commitment previously described in Note 5 with regards to
Executive Park, HRP has estimated and budgeted tenant and capital
improvements of $10,852,000 and lease commissions of $2,261,000 for 2002.

PAGE 36 of 45

HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2001

12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Set forth below is selected quarterly financial data for the years ended
December 31, 2001 and 2000 (in thousands except per unit amounts):

(a) Litigation costs were $2,690, $639, $206 and $273 in the first, second,
third, and fourth quarters of 2001, respectively. Litigation costs were
$616, $1,292, $1,359 and $2,396 in the first, second, third, and fourth
quarters of 2000, respectively. (See Note 11 to the Consolidated Financial
Statements for more information.)

(b) Unit options are considered antidilutive in the fourth quarter of 2000 and
therefore are not taken into consideration in the computation of earnings
per unit assuming dilution.

PAGE 37 of 45

HALLWOOD REALTY PARTNERS, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
(IN THOUSANDS)

See notes to Schedule III on following page.

PAGE 38 of 45

HALLWOOD REALTY PARTNERS, L.P.
NOTES TO SCHEDULE III
DECEMBER 31, 2001
(IN THOUSANDS)

(A) PROPERTY LOCATIONS ARE AS FOLLOWS:

(B) RECONCILIATION OF CARRYING COSTS (in thousands):

(C) COMPUTATION OF DEPRECIATION:

Depreciation of buildings is computed using the straight-line method
over estimated useful lives ranging from 15 to 43 years. Equipment and
other improvements are depreciated on the straight-line method over
estimated useful lives ranging from 3 to 23 years. Tenant improvements
are capitalized and amortized over the term of the respective leases or
useful life, if shorter.

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

None.

PAGE 39 of 45

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

HRP has no officers or directors. Realty, as general partner, performs functions
generally performed by officers and directors. Realty was formed in Delaware as
a corporation in January 1990 and became a limited liability company in December
1998.

BUSINESS EXPERIENCE OF DIRECTORS AND OFFICERS OF REALTY -

ANTHONY J. GUMBINER, 57, CHAIRMAN OF THE BOARD AND DIRECTOR OF REALTY
Mr. Gumbiner has served as director and Chairman of the Board of Realty
since January 1990. He has served as a director and Chairman of the
Board since 1981 and Chief Executive Officer since 1984 of Hallwood. He
has also served as Hallwood's President and Chief Operating Officer
since December 21, 1999. He has served as a director of Hallwood
Holdings S.A. since 1984. Formerly, he served as Chairman of the Board
and Chief Executive Officer of Hallwood Energy Corporation and its
predecessors ("HEC") from 1987 until HEC was sold in 2001. Mr. Gumbiner
is also a solicitor of the Supreme Court of Judicature of England.

WILLIAM L. GUZZETTI, 58, PRESIDENT AND DIRECTOR OF REALTY
Mr. Guzzetti has been President, Chief Operating Officer and a director
of Realty since January 1990. He has served as Executive-Vice President
of Hallwood since October 1989 and in that capacity may devote a portion
of his time to the activities of Hallwood, including the management of
real estate investments, acquisitions and restructurings of entities
controlled by Hallwood. He also served as President, Chief Operating
Officer and a director of HEC from 1985 until HEC was sold in 2001 and
in that capacity devoted a portion of his time to the activities of HEC.
He is a member of The Florida Bar and the State Bar of Texas.

JOHN G. TUTHILL, 58, EXECUTIVE VICE PRESIDENT AND SECRETARY
Mr. Tuthill has been an Executive Vice President and Secretary of Realty
since January 1990. He joined Hallwood in October 1989 to head all
property management functions, having previously served as President of
Southmark Commercial Management since November 1986, where he was
responsible for a diversified real estate portfolio of over 18,000,000
square feet.

UDO H. WALTHER, 54, SENIOR VICE PRESIDENT
Mr. Walther has been a Senior Vice President of Realty since November
1998. Mr. Walther was a member of the Board of Directors of Realty from
June 1994 to November 1998. Mr. Walther had been President and Chief
Executive Officer of Walther Group, Inc., a full service design and
construction consultancy, and President of Precept Builders, Inc. from
1991 to 1998. Previously, Mr. Walther was a Partner at Trammell Crow
Company, Project Manager with HCB Contractors and Marketing Vice
President for Researched Investments, Ltd.

JEFFREY D. GENT, 54, VICE PRESIDENT - FINANCE
Mr. Gent joined Hallwood in March 1990 as the Vice President-Finance. He
previously served as Vice President-Finance of Southmark Commercial
Management since September 1984, where he was responsible for the
financial functions of a diversified real estate portfolio of over
18,000,000 square feet.

ALAN G. CRISP, 60, DIRECTOR OF REALTY
Mr. Crisp was Chairman and Chief Executive Officer of Atlantic
Metropolitan Holdings (U.K.) plc from 1979 until 1988, when he joined
Interallianz Bank Zurich AG. From 1988 to 1993, he was General Manager
of the London Office of the Bank. Since 1994, Mr. Crisp has been a
consultant for various international companies. He is a Fellow of the
Royal Institution of Chartered Surveyors and holds a B.A. (Hons) Degree
and is a Master of Literature from Oxford University.

WILLIAM F. FORSYTH, 52, DIRECTOR OF REALTY
Mr. Forsyth has been Chairman of Kildalton & Co., an investment
management consultancy based in Edinburgh, Scotland since 1992. He
graduated in law at Edinburgh University in 1971, and is a member of the
Society of Investment Analysts in the United Kingdom.

EDWARD T. STORY, 58, DIRECTOR OF REALTY
Mr. Story has been President and Chief Executive Officer of SOCO
International, plc, an oil and gas company, since September, 1991. Prior
to September 1991, he was Founder and Chairman of Thaitex Petroleum
Company, Co-founder and Chief Financial Officer of Conquest Exploration
Company, the Chief Financial Officer for Superior Oil Company and
Exploration and Production Controller with Exxon Corporation.

PAGE 40 of 45

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - (CONTINUED)

Section 16(a) of the Securities and Exchange Act of 1934 requires the officers
and directors of Hallwood Realty, LLC and persons who own more than ten percent
of HRP's units to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "SEC"). Officers, directors and greater
than ten percent owners are required by the SEC regulations to furnish HRP with
copies of all Section 16(a) forms they file. Based solely on a review of the
copies of such forms furnished to HRP, or written representations from certain
reporting persons that no forms were required of those persons, HRP believes
that during the period January 1, 2001 to December 31, 2001, all officers and
directors of Hallwood Realty, LLC and ten percent owners complied with
applicable filing requirements, except that, as alleged in litigation filed in
the Southern District of New York, HRP believes that certain holders of HRP's
units have obtained dispositive power over more than 15% of the outstanding
units, which has not been properly disclosed. A final determination of this
issue will be made by the court.

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION COMMITTEE INTERLOCKS, INSIDER PARTICIPATION AND COMPENSATION OF
DIRECTORS

Realty does not have a compensation committee and compensation decisions are
made by the Board of Directors of Realty. During 2001, Messrs. Gumbiner and
Guzzetti served on the Board of Directors of Realty. Mr. Gumbiner is also Chief
Executive Officer of Hallwood and Realty, and a member of the Board of Directors
of Hallwood, which serves as the compensation committee for Hallwood. Mr.
Guzzetti is also President and Chief Operating Officer of Realty, and Executive
Vice President of Hallwood. Messrs. Forsyth, Crisp, and Story were each paid
$25,000, $25,000, and $20,000 in 2001, 2000, and 1999, respectively, for
director fees.

Realty receives certain fees in connection with the ongoing management of HRP,
including an asset management fee, acquisition fees and disposition fees.
Specifically, Realty is entitled to receive an asset management fee equal to 1%
of the net aggregate base rents of the Properties, acquisition fees equal to 1%
of the purchase price of newly acquired properties, and disposition fees with
respect to real estate investments, other than the properties owned at the time
of HRP's formation in 1990, equal to 10% of the amount, by which the sales price
of a property exceeds the purchase price of such property.

HCRE receives compensation in connection with the management of the Properties,
which includes a property management fee, lease commissions and construction
supervision fees. The management contracts expire June 30, 2004 and provide for
basic compensation from a property management fee in an amount equal to 2.85% of
cash receipts collected from the Properties' tenants, lease commissions equal to
the current commission market rate as applied to the net aggregate rent (none
exceeding 6% of the net aggregate rent), and construction supervision fees for
administering all construction projects equal to 5% of the total contracted
costs of each capital expenditure or tenant improvement project.

Realty and HCRE are compensated for services provided to HRP and its Properties
as described above. The following table sets forth such compensation and
reimbursements paid by HRP (in thousands):

- ----------

(a) Represents executive officers' gross salary before contributions to
the qualified 401(k) Tax Favored Savings Plan.

(b) Represents employer matching contributions to the 401(k) Tax Favored
Savings Plan or payments in lieu thereof made under a special bonus
arrangement.

In 1995, HRP issued options totaling 86,000 units to certain executives of
Realty and HCRE with an exercise price of $11.875 per unit. The following table
discloses for each of the executive officers of Realty the number of these
options held by each of the executive officers and the potential realizable
values for their options at December 31, 2001. None of the executive officers
exercised any options during the year ended December 31, 2001 and HRP has not
granted SARs.

AGGREGATED OPTION/SAR EXERCISES IN 2001
AND OPTION/SAR VALUES AT DECEMBER 31, 2001

PAGE 42 of 45

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information as of March 22, 2002 concerning the
number of HRP units owned beneficially by (l) the persons who, to the knowledge
of the management, beneficially owned more than 5% of the units outstanding on
such date, (2) each director and (3) the present directors and executive
officers of Realty as a group:

(a) Unless otherwise indicated, each of the persons named has sole
voting and investment power with respect to the units reported.

(b) See discussion in Item 3 regarding certain litigation filed in the
Southern District of New York.

(c) Represented by the following address: c/o Hallwood Realty, LLC, 3710
Rawlins, Suite 1500, Dallas, Texas, 75219.

(d) Comprised of currently exercisable options to purchase 25,800 units.

(e) Includes currently exercisable options to purchase 15,000 units.

(f) Includes currently exercisable options to purchase 60,800 units.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See Note 3 to the Consolidated Financial Statements included in Item 8 for
information covered by this item.

PAGE 43 of 45

PART IV

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

(1) Financial Statements.

See Index contained in Item 8.

(2) Reports on Form 8-K.

No reports on Form 8-K were filed during the fourth quarter of 2001 or in
2002 prior to the filing of this Form 10-K for the year ended December 31,
2001.

(3) Exhibits.

The response to this portion of Item 14 is incorporated by reference as
detailed in the Exhibit Index.

(4) Financial Statement Schedules.

See Index contained in Item 8.

PAGE 44 of 45

SIGNATURES

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

HALLWOOD REALTY PARTNERS, L.P.
BY: HALLWOOD REALTY, LLC
GENERAL PARTNER

DATE: March 22, 2002 BY: /s/ WILLIAM L. GUZZETTI
-------------- -------------------------------------
William L. Guzzetti
President and Chief Operating Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-K for the year ended December 31, 2001, has been signed below
by the following persons on behalf of the Registrant in the capacities and on
the date indicated.

PAGE 45 of 45

HALLWOOD REALTY PARTNERS, L.P.
EXHIBIT INDEX

* Constitutes a management compensation plan.