HALLWOOD REALTY PARTNERS L P - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q

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

FOR THE QUARTER ENDED SEPTEMBER 30, 2002

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

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve (12) months (or for such shorter
period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past ninety (90)
days.
Yes X No
------- --------

THE REGISTRANT IS A LIMITED PARTNERSHIP AND ISSUES UNITS REPRESENTING
OWNERSHIP OF LIMITED PARTNER INTERESTS.

NUMBER OF UNITS OUTSTANDING AT NOVEMBER 12, 2002: 1,589,948

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Page 1

HALLWOOD REALTY PARTNERS, L.P.

FORM 10-Q

TABLE OF CONTENTS

Page 2

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

See notes to consolidated financial statements.

Page 3

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

See notes to consolidated financial statements.

Page 4

HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)

See notes to consolidated financial statements.

Page 5

HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS EXCEPT UNIT AMOUNTS)
(UNAUDITED)

See notes to consolidated financial statements.

Page 6

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

See notes to consolidated financial statements.

Page 7

HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 30,
2002 and 2001
(unaudited)

1 ORGANIZATION AND ACCOUNTING POLICIES

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 September 30, 2002 there were 1,589,948 units
outstanding.

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 real estate
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 for HRP's real estate
properties.

The accompanying unaudited consolidated financial statements of
Hallwood Realty Partners, L.P. have been prepared in accordance with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnote
disclosures required by accounting principles generally accepted in
the United States of America for complete financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included. These financial statements should be
read in conjunction with the audited consolidated financial statements
and related disclosures thereto included in Form 10-K for the year
ended December 31, 2001.

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, and expenses as of
and for the reporting periods. Actual results may differ from these
estimates. Operating results for the three and nine months ended
September 30, 2002 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2002.
Reclassifications, including the gross up of certain revenues for
expenses that were previously netted against revenues, have been made
in the prior periods to confirm to the classifications used in the
current period. The reclassifications had no effect on previously
reported net income.

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

Page 8

HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 30,
2002 and 2001
(unaudited)

2 TRANSACTIONS WITH RELATED PARTIES

Realty and HCRE are compensated for services provided to HRP and its
real estate properties and are reimbursed, at cost, for certain costs
and expenses. In particular, since HRP does not directly employ any
individuals, the compensation and other costs related to approximately
100 employees rendering services on behalf of the Partnership and its
properties are reimbursed to Realty and HCRE by HRP. HRP pays its
account balances with Realty and HCRE on a monthly basis. The
following table sets the amounts paid by HRP (in thousands):

(a) These costs are recorded as general and
administrative expenses and represent reimbursement
to Realty for administrative level employee and
director compensation, officer and director liability
insurance, and allocated overhead costs.

(b) As of September 30, 2002, $388,000 of the 2002 lease
commissions are accrued and are related to the
development project at Executive Park and are
scheduled to be paid in 2003. See Note 5.

(c) These costs are recorded as property operating
expenses and represent reimbursement to HCRE for
property-level employee compensation and related
expenses.

3 COMPUTATION OF NET INCOME PER UNIT

Basic net income per unit is computed by dividing net income
attributable to the limited partners' interests by the weighted
average number of units outstanding. Net income per unit assuming
dilution is computed by dividing net income 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 (in thousands):

Page 9

HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 30,
2002 and 2001
(unaudited)

4 STATEMENTS OF CASH FLOWS

Supplemental disclosure of cash flow information -

Cash interest payments were $7,122,000 (net of capitalized
interest of $256,000) and $12,139,000 (net of capitalized
interest of $248,000) in the nine months ended September 30,
2002 and 2001, respectively.

Supplemental disclosure of noncash investing and financing activities -

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

5 PROPERTY DEVELOPMENT

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 128,000
net rentable square feet. The building and its parking garage,
excluding tenant finish-out, was completed in April 2002. HRP incurred
and capitalized $15,370,000 of construction and development costs,
which included all of the costs for the building and its parking
garage (excluding the existing land costs). A 7-year lease for the
entire building, with an option for 5 additional years, with the
General Services Administration was executed in September 2002 and
will commence upon the completion of tenant improvements, estimated to
be sometime between May and August 2003. The lease commissions
incurred were $777,000, while the tenant improvements are estimated to
be $4,500,000. All development and leasing costs have been or will be
paid from cash funds on hand; however, it is anticipated that loan
financing of $11,000,000 to $15,000,000 will be secured in the second
half of 2003.

6 LITIGATION

On June 20, 1997, an action was filed against HRP, the General
Partner, its directors, and Hallwood by Gotham Partners, L.P. in the
Court of Chancery of the State of 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.

Page 10

HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 30,
2002 and 2001
(unaudited)

6 LITIGATION (CONTINUED)

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 split of units 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 to HRP in the amount of $3,417,423, plus
pre-judgment interest from August 1995. The judgment amount represents
what the court determined was an underpayment by Hallwood. In August
2001, plaintiff and certain defendants appealed the Court of
Chancery's judgment to the Delaware Supreme Court. In October 2001,
HRP received the $3,417,423 judgment together with $2,987,576 of
interest, subject to an arrangement that it be returned in full or
part if the judgment is modified or reversed on appeal. Oral arguments
were heard on February 12, 2002, and a rehearing en banc was held on
March 26, 2002. On August 29, 2002, the Supreme Court affirmed the
judgment of the trial court that the remaining defendants other than
HRP are jointly and severally liable to HRP. The Supreme Court
reversed the trial court's determination of damages, and remanded the
case to the trial court to fashion appropriate relief. A hearing on
the remand proceedings was held before the Court of Chancery on
October 25, 2002. Since the appellate court reversed the judgment, any
subsequent ruling by the trial court on remand may be more or less
favorable to HRP. As a result of the uncertainty of the litigation's
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. Oral argument was heard on March 4, 2002. On April 11, 2002, the
U.S. Court of Appeals for the Second Circuit upheld the lower court's
ruling in favor of defendants. On April 25, 2002, HRP filed with the
court a Petition for Rehearing and Rehearing En Banc with respect to
the April 11, 2002 decision. On June 3, 2002, the Second Circuit
denied that petition. HRP has not sought further appellate review and
the determination in favor of defendants is now final.

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 11

HALLWOOD REALTY PARTNERS, L.P.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES

RESULTS OF OPERATIONS

THIRD QUARTER OF 2002 COMPARED TO THE THIRD QUARTER OF 2001

REVENUE FROM PROPERTY OPERATIONS for the third quarter of 2002 increased
$48,000, or 0.3%, compared to the 2001 third quarter. The following table
illustrates the components of the change, in thousands:

Rental income, net $ 201
Other property income (153)
----------
Net increase $ 48
==========

Net rental income increased primarily due to an overall increase in rental rates
offset by a decrease in average occupancy between periods from 91.5% to 86.6%.
Average occupancy for the third quarter of 2002 was 88.8% excluding the new, but
unoccupied, building at Executive Park, which was completed in April 2002 - see
Note 5 to the Consolidated Financial Statements for more information. Other
property income decreased primarily due to a lease termination fee that was
received in the 2001 period.

REVENUE FROM PARKING, CONSTRUCTION AND TENANT SERVICES for the third quarter of
2002 decreased $1,009,000, or 50.4%, primarily as a result of a few major
construction service projects completed in the 2001 period. By their nature, the
demand for and size of construction service projects can vary significantly from
time to time.

INTEREST INCOME decreased by $49,000, or 20.9%, as a result of decreased
earnings on overnight cash investments due to significantly lower interest rates
available between the periods.

PROPERTY OPERATING EXPENSES for the third quarter of 2002 increased $237,000, or
3.5%, compared to the same period in 2001. The increase is comprised primarily
of the following components:

o Real estate taxes increased $79,000 primarily due the addition
of the development building at Executive Park.

o Combined, all other operating costs increased $158,000, or
about 2.3% between the periods, and include general increases
in janitorial costs, utilities, and property level salaries.

PARKING, CONSTRUCTION AND TENANT SERVICES EXPENSE for the third quarter of 2002
decreased $816,000, or 61.8%, primarily as a result of a few major construction
service projects completed in the 2001 period. By their nature, the demand for
and size of construction service projects can vary significantly from time to
time.

INTEREST EXPENSE for the third quarter of 2002 increased $36,000, or 0.9%,
compared to the same period in 2001, due to the capitalization of $248,000 of
interest for construction of the development project at Executive Park in the
2001 quarter, partially offset by changes in the estimated fair value of an
interest rate cap and offset by lower mortgage interest. Mortgage interest
decreased primarily due to a lower interest rate for HRP's only variable rate
mortgage secured by Allfirst Building. (For more information about the interest
rate cap and the variable rate mortgage, see Item 3 - Quantitative and
Qualitative Disclosures About Market Risk contained in this Form 10-Q.)

DEPRECIATION AND AMORTIZATION EXPENSE increased $166,000, or 4.8%, primarily due
to depreciation for the newly completed building at Executive Park .

GENERAL AND ADMINISTRATIVE EXPENSES for the third quarter of 2002 decreased
$25,000, or 2.3%, compared to the same period in 2001, due to a decrease in
certain professional fees, but partially offset by increases in state franchise
taxes, partnership level personnel costs, and certain overhead and insurance
costs.

LITIGATION COSTS were $106,000 and $206,000 for the third quarter of 2002 and
2001, respectively, and are related to the lawsuits described in Note 6 to the
Consolidated Financial Statements.

Page 12

HALLWOOD REALTY PARTNERS, L.P.

RESULTS OF OPERATIONS (CONTINUED)

FIRST NINE MONTHS OF 2002 COMPARED TO THE FIRST NINE MONTHS OF 2001

REVENUE FROM PROPERTY OPERATIONS for the first nine months of 2002 decreased
$82,000, or 0.2%, compared to the first nine months of 2001. The following table
illustrates the components of the change, in thousands:

Rental income, net $ 242
Other property income (324)
----------
Net decrease $ (82)
==========

Net rental income increased primarily due to an overall increase in rental rates
offset by a decrease in average occupancy between periods from 91.6% to 87.6%.
Average occupancy for the first nine months of 2002 was 89.1% excluding the new,
but unoccupied, building at Executive Park, which was completed in April 2002 -
see Note 5 to the Consolidated Financial Statements for more information. Other
property income decreased due to a reduction in tenant expense recoveries.

REVENUE FROM PARKING, CONSTRUCTION AND TENANT SERVICES for the first nine months
of 2002 decreased $1,514,000, or 24.7%, primarily as a result of a few major
construction service projects completed in the 2001 period. By their nature, the
demand for and size of construction service projects can vary significantly from
time to time.

GAIN FROM PROPERTY SALES of $4,223,000 in the first nine months of 2001 is
comprised of the sale of one building at Seattle Business Parks for a gross
selling price of $3,287,000, resulting in a gain of $2,148,000; the sale of Joy
Road Distribution Center for a gross selling price of $5,326,000, resulting in a
gain of $1,922,000; and the sale of one building at Fairlane Commerce Park for a
gross selling price of $575,000, resulting in a gain of $153,000.

INTEREST INCOME decreased by $419,000, or 47.2%, as a result of decreased
earnings on overnight cash investments due to significantly lower interest rates
available between the periods.

PROPERTY OPERATING EXPENSES for the first nine months of 2002 increased $10,000,
or 0.05%, compared to the same period in 2001. The decrease is comprised
primarily of the following components:

o Utilities decreased $464,000 primarily due to overall lower
electrical and natural gas usage.

o Combined, all other operating costs increased $474,000, or
about 2.3% between the periods, and include general increases
in property level salaries, real estate taxes, and property
and liability insurance premiums.

PARKING, CONSTRUCTION AND TENANT SERVICES EXPENSE for the first nine months of
2002 decreased $1,065,000, or 26.4%, primarily as a result of a few major
construction service projects completed in the 2001 period. By their nature, the
demand for and size of construction service projects can vary significantly from
time to time.

INTEREST EXPENSE for the first nine months of 2002 decreased $665,000, or 5.6%,
compared to the first nine months of 2001, as a result of a decrease in mortgage
interest of $610,000 (primarily due to a lower interest rate for HRP's only
variable rate mortgage secured by Allfirst Building) and a decrease in loan cost
amortization and other interest costs of $55,000.

DEPRECIATION AND AMORTIZATION EXPENSE increased $409,000, or 3.8%, primarily due
to depreciation for the newly completed building at Executive Park.

GENERAL AND ADMINISTRATIVE EXPENSES for the first nine months of 2002 increased
$59,000, or 2.0%, compared to the first nine months of 2001, due to increases in
certain professional fees, state franchise taxes, and overhead costs.

LITIGATION COSTS were $471,000 and $3,535,000 for the first nine months of 2002
and 2001, respectively, and are related to the lawsuits described in Note 6 to
the Consolidated Financial Statements.

Page 13

HALLWOOD REALTY PARTNERS, L.P.

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 September 30, 2002, HRP owned 14 real estate assets (the "Properties"),
located in six states containing 5,198,000 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.

This Form 10-Q should be read in conjunction with the audited consolidated
financial statements and related disclosures thereto included in Form 10-K for
the year ended December 31, 2001.

CASH SOURCES, CASH USES AND COMMITMENTS -

HRP's cash position increased $7,247,000 during the first nine months of 2002 to
$32,160,000 as of September 30, 2002. The source of cash during the period was
$16,440,000 of cash provided by operating activities. The uses of cash were
$4,374,000 for property and tenant improvements, $1,964,000 for property
development costs, $2,845,000 for scheduled mortgage principal payments, and
$10,000 for loan fees.

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 had leases in place as of
December 31, 2001 to provide $55,261,000 of minimum rental payments during 2002.
HRP had $54,443,000 of minimum rental payments estimated for the prior year in
2001 (based on leases in place as of December 31, 2000), however the actual
rental payments for 2001 were $60,494,000. For the nine months ended September
30, 2002 and 2001, HRP's actual rental payments were $46,169,000 and
$45,948,000, respectively. 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, as well as sustaining or increasing
rental rates. 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.

In addition to the commitment described below with regards to the development
project at Executive Park, HRP currently has estimated commitments for tenant
and capital improvements of $2,400,000 for projects either in progress or for
projects identified to be done. Additionally, HRP estimates that it may spend
about $550,000 for the remainder of 2002 for lease commissions.

PROPERTY DEVELOPMENT -

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
128,000 net rentable square feet. The building and its parking garage, excluding
tenant finish-out, was completed in April 2002. HRP incurred and capitalized
$15,370,000 of construction and development costs, which included all of the
costs for the building and its parking garage (excluding the existing land
costs). A 7-year lease for the entire building, with an option for 5 additional
years, with the General Services Administration was executed in September 2002
and will commence upon the completion of tenant improvements, estimated to be
sometime between May and August 2003. The lease commissions incurred were
$777,000, while the tenant improvements are estimated to be $4,500,000. All
development and leasing costs have been or will be paid from cash funds on hand;
however, it is anticipated that loan financing of $11,000,000 to $15,000,000
will be secured in the second half of 2003.

Page 14

HALLWOOD REALTY PARTNERS, L.P.

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

LITIGATION & JUDGMENT -

On July 18, 2001, the Delaware Court of Chancery rendered its 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 to HRP in the amount of $3,417,423, plus pre-judgment interest from
August 1995. The judgment amount represents what the court determined was an
underpayment by Hallwood. In August 2001, plaintiff and certain defendants
appealed the Court of Chancery's judgment to the Delaware Supreme Court. In
October 2001, HRP received the $3,417,423 judgment together with $2,987,576 of
interest, subject to an arrangement that it be returned in full or part if the
judgment is modified or reversed on appeal. Oral arguments were heard on
February 12, 2002, and a rehearing en banc was held on March 26, 2002. On August
29, 2002, the Supreme Court affirmed the judgment of the trial court that the
remaining defendants other than HRP are jointly and severally liable to HRP. The
Supreme Court reversed the trial court's determination of damages, and remanded
the case to the trial court to fashion appropriate relief. (For more information
about this litigation and the lawsuit filed in United States District Court of
the Southern District of New York, see Note 6 to the Consolidated Financial
Statements.) Since the appellate court reversed the judgment, any subsequent
ruling by the trial court on remand may be more or less favorable to HRP. As a
result of the uncertainty of the litigation's 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 $198,379,000 as of September 30, 2002. These mortgage loans have
interest rates ranging from 3.12% to 8.70% (with an effective average interest
rate of 7.57%) 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. Based upon loan amortizations in effect, HRP is required to pay
approximately $827,000 of principal payments during the remainder of 2002.

Since August 2000, HRP has had available a $2,000,000 revolving line of credit,
which matures on July 29, 2003. 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.

TRANSACTIONS WITH RELATED PARTIES -

For information about transactions with related parties, see Note 2 to the
Consolidated Financial Statements.

INFLATION -

Inflation did not have a significant impact on HRP during 2001 or for the nine
months ended September 30, 2002. Additionally, inflation is not anticipated to
have a material impact on HRP for the rest of 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-Q
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-Q 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 in Item 1 - Business -
"Risks, Competition and Other Factors" contained in HRP's Form 10-K for the year
ended December 31, 2001.

Page 15

HALLWOOD REALTY PARTNERS, L.P.

ITEM 3. 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. 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 September 30, 2002 and December 31, 2001, the unamortized balance,
included on the balance sheet as "Accumulated other comprehensive income", was
$996,000 and $1,204,000, respectively.

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 3.12% and 3.44% as of September 30, 2002 and December 31,
2001, 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 September 30, 2002 and December 31, 2001, the
estimated fair value of the interest rate cap was $144,000 and $68,000,
respectively.

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.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. It is the conclusion
of the registrant's principal executive officer and principal financial
officer that the registrant's disclosure controls (as defined in
Exchange Act rules 13a-14 and 15d-14), based on their evaluation of
these controls and procedures as of a date within 90 days of the filing
of this quarterly report, are effective.

(b) Changes in internal controls. There were no significant changes in the
registrant's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their
evaluation.

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HALLWOOD REALTY PARTNERS, L.P.

PART II - OTHER INFORMATION

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HALLWOOD REALTY PARTNERS, L.P.

SIGNATURE

Pursuant to the requirements 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.
------------------------------
(Registrant)

By: HALLWOOD REALTY, LLC
General Partner

Date: November 12, 2002 By: /s/ JEFFREY D. GENT
----------------- ------------------------------------
Jeffrey D. Gent
Vice President - Finance
(Principal Financial and Accounting Officer)

Page 18

HALLWOOD REALTY PARTNERS, L.P.

CERTIFICATION FOR QUARTERLY REPORTS ON FORM 10-Q

I, Anthony J. Gumbiner, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Hallwood Realty
Partners, L.P.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: November 12, 2002 /s/ Anthony J. Gumbiner
----------------- -----------------------
Anthony J. Gumbiner
Chief Executive Officer

Page 19

HALLWOOD REALTY PARTNERS, L.P.

CERTIFICATION FOR QUARTERLY REPORTS ON FORM 10-Q

I, Jeffrey D. Gent, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Hallwood Realty
Partners, L.P.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: November 12, 2002 /s/ Jeffrey D. Gent
----------------- -------------------
Jeffrey D. Gent
Vice President - Finance
(Principal Financial and
Accounting Officer)

Page 20