CRESCENT FINANCE CO - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR QUARTER ENDED June 30, 2004
COMMISSION FILE NO. 333-42293
333-89194-01

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CRESCENT FINANCE COMPANY*
-----------------------------------------------------
(Exact name of registrant as specified in its charter)

DELAWARE 75-2531304
DELAWARE 42-1536518
- --------------------------------------------- ---------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)

777 Main Street, Suite 2100, Fort Worth, Texas 76102
- --------------------------------------------------------------------------------
(Address of principal executive offices)(Zip code)

Registrant's telephone number, including area code (817) 321-2100

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 report) and (2) has been subject to such filing
requirements for the past ninety (90) days.

YES X NO
-------------- ----------------

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

YES X NO
-------------- ----------------

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

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
FORM 10-Q
TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION PAGE

Item 1. Financial Statements

Consolidated Balance Sheets at June 30, 2004 (unaudited) and December 31, 2003
(unaudited)........................................................................... 3

Consolidated Statements of Operations for the three and six months ended
June 30, 2004 and 2003 (unaudited).................................................... 4

Consolidated Statement of Partners' Capital for the six months ended
June 30, 2004 (unaudited)............................................................. 5

Consolidated Statements of Cash Flows for the six months ended June 30, 2004
and 2003 (unaudited).................................................................. 6

Notes to Consolidated Financial Statements............................................ 7

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................................... 37

Item 3. Quantitative and Qualitative Disclosures About Market Risk............................ 67

Item 4. Controls and Procedures............................................................... 67

PART II: OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K...................................................... 68

PART I

ITEM 1. FINANCIAL STATEMENTS

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
(unaudited)

The accompanying notes are an integral part of these consolidated
financial statements.

3

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit data)
(unaudited)

The accompanying notes are an integral part of these consolidated
financial statements.

4

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(dollars in thousands)
(unaudited)

The accompanying notes are an integral part of these consolidated
financial statements.

5

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)

The accompanying notes are an integral part of these consolidated
financial statements.

6

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

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

All of the limited partners of the Operating Partnership, other than
the Company, own, in addition to limited partner interests, units. Each unit
entitles the holder to exchange the unit (and the related limited partner
interest) for two common shares of the Company or, at the Company's option, an
equivalent amount of cash. For purposes of this report, the term "unit" or "unit
of partnership interest" refers to the limited partner interest and, if
applicable, related units held by a limited partner. Accordingly, as of June 30,
2004, the Company's approximately 84% limited partner interest has been treated
as equivalent, for purposes of this report, to 49,075,822 units and the
remaining approximately 15% limited partner interest has been treated as
equivalent, for purposes of this report, to 8,864,311 units. In addition, the
Company's 1% general partner interest has been treated as equivalent, for
purposes of this report, to 585,254 units.

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

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

The following table shows, by consolidated entity, the consolidated
subsidiaries of the Operating Partnership that owned or had an interest in real
estate assets and the real estate assets that each subsidiary owned or had an
interest in as of June 30, 2004.

Operating Wholly-owned assets - The Avallon IV,
Partnership Datran Center (two office properties),
Houston Center (three office properties and
the Houston Center Shops), and Dupont
Centre. These properties are included in
the Operating Partnership's Office Segment.

Non wholly-owned assets, consolidated - 301
Congress Avenue (50% interest) and Fountain
Place (0.1%), included in the Operating
Partnership's Office Segment. Sonoma
Mission Inn (80.1% interest), included in
the Operating Partnership's Resort/Hotel
Segment.

See Note 6, "Other Transactions," for a
description of the Fountain Place Office
Property transaction.

Non wholly-owned assets, unconsolidated -
Bank One Center (50% interest), Bank One
Tower (20% interest), Three Westlake Park
(20% interest), Four Westlake Park (20%
interest), Miami Center (40% interest), 5
Houston Center (25% interest), BriarLake
Plaza (30% interest) and Five Post Oak Park
(30% interest). These properties are
included in the Operating Partnership's
Office Segment. Temperature-Controlled
Logistics Properties (40% interest in 87
properties), included in the Operating
Partnership's Temperature-Controlled
Logistics Segment.

Hughes Wholly-owned assets - Hughes Center
Center Entities(1) Properties (seven office properties each in
a separate limited liability company).
These properties are included in the
Operating Partnership's Office Segment.

Non wholly-owned asset, consolidated - 3770
Hughes Parkway (67% interest), included in
the Operating Partnership's Office Segment.

Crescent Real Estate Funding Wholly-owned assets - The Aberdeen, The
I, L.P. ("Funding I") Avallon I, II & III, Carter Burgess Plaza,
The Citadel, The Crescent Atrium, The
Crescent Office Towers, Regency Plaza One,
Waterside Commons and 125 E. John Carpenter
Freeway. These properties are included in
the Operating Partnership's Office Segment.

Crescent Real Estate Funding Wholly-owned assets - Greenway Plaza Office
III, IV and V, L.P. Properties (ten Office Properties). These
("Funding III, IV and V")(2) properties are included in the Operating
Partnership's Office Segment. Renaissance
Houston Hotel is included in the Operating
Partnership's Resort/Hotel Segment.

7

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Crescent Real Estate Wholly-owned asset - Canyon Ranch - Lenox,
Funding VI, L.P. included in the Operating Partnership's
("Funding VI") Resort/Hotel Segment.

Crescent Real Estate Funding Wholly-owned assets - The Addison, Austin
VIII, L.P. ("Funding VIII") Centre, The Avallon V, Chancellor Park, 816
Congress, Greenway I & IA (two office
properties), Greenway II, Johns Manville
Plaza, Palisades Central I, Palisades
Central II, Stemmons Place, Trammell Crow
Center(3), 3333 Lee Parkway, 5050 Quorum,
44 Cook and 55 Madison. These properties
are included in the Operating Partnership's
Office Segment. The Canyon Ranch - Tucson,
Omni Austin Hotel, and Ventana Inn & Spa,
all of which are included in the Operating
Partnership's Resort/Hotel Segment.

Crescent Real Estate Funding Wholly-owned assets - Post Oak Central
X, L.P. ("Funding X") (three Office Properties). These properties
are included in the Operating Partnership's
Office Segment.

Crescent Real Estate Funding Wholly-owned assets - 12404 Park Central,
XII, L.P. ("Funding XII") Albuquerque Plaza, Barton Oaks Plaza,
Briargate Office and Research Center,
MacArthur Center I & II, Stanford Corporate
Center, and Two Renaissance Square. These
properties are included in the Operating
Partnership's Office Segment. The Hyatt
Regency Albuquerque and the Park Hyatt
Beaver Creek Resort & Spa. These properties
are included in the Operating Partnership's
Resort/Hotel Segment.

Crescent 707 17th Street, Wholly-owned assets - 707 17th Street,
L.L.C included in the Operating Partnership's
Office Segment, and The Denver Marriott
City Center, included in the Operating
Partnership's Resort/Hotel Segment.

Crescent Spectrum Center, L.P. Non wholly-owned asset, consolidated -
Spectrum Center (approximately 100%
interest), included in the Operating
Partnership's Office Segment.

Crescent Colonnade, L.L.C. Wholly-owned asset - The BAC-Colonnade
Building, included in the Operating
Partnership's Office Segment.

Mira Vista Development Corp. Non wholly-owned asset, consolidated - Mira
("MVDC") Vista (98% interest), included in the
Operating Partnership's Residential
Development Segment.

Houston Area Development Non wholly-owned assets, consolidated -
Corp. ("HADC") Falcon Point (98% interest), Falcon Landing
(98% interest) and Spring Lakes (98%
interest). These properties are included in
the Operating Partnership's Residential
Development Segment.

Desert Mountain Development Non wholly-owned assets, consolidated -
Corporation ("DMDC") Desert Mountain (93% interest), included in
the Operating Partnership's Residential
Development Segment.

Crescent Resort Development Non wholly-owned assets, consolidated -
Inc. ("CRDI") Brownstones (64% interest), Creekside at
Riverfront (64% interest), Cresta (60%
interest), Delgany (64% interest), Eagle
Ranch (60% interest), Gray's Crossing (71%
interest), Horizon Pass Lodge (64%
interest), Horizon Pass Townhomes (64%
interest), Hummingbird (64% interest), Main
Street Station (30% interest), Northstar
(57% interest), Old Greenwood (71%
interest), Park Place at Riverfront (64%
interest), Park Tower at Riverfront (64%
interest), Riverbend (60% interest),
Riverfront Park (64% interest). These
properties are included in the Operating
Partnership's Residential Development
Segment.

Non wholly-owned assets, unconsolidated -
Blue River Land Company, L.L.C. - Three
Peaks (30% interest) and EW Deer Valley,
L.L.C. (42% interest), included in the
Operating Partnership's Residential
Development Segment.

Crescent TRS Holdings Corp. Non wholly-owned assets, unconsolidated -
two quarries (56% interest). These
properties are included in the Operating
Partnership's Temperature-Controlled
Logistics Segment.

- ----------
(1) In addition, the Operating Partnership owns nine retail parcels
located in Hughes Center.

(2) Funding III owns nine of the ten office properties in the Greenway
Plaza office portfolio and the Renaissance Houston Hotel; Funding IV
owns the central heated and chilled water plant building located at
Greenway Plaza; and Funding V owns 9 Greenway, the remaining office
property in the Greenway Plaza office portfolio.

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

See Note 8, "Investments in Unconsolidated Companies," for a table that
lists the Operating Partnership's ownership in significant unconsolidated joint
ventures and investments as of June 30, 2004.

See Note 9, "Notes Payable and Borrowings Under Credit Facility," for a
list of certain other subsidiaries of the Operating Partnership and the Company,
all of which are consolidated in the Operating Partnership's or the Company's
financial statements and were formed primarily for the purpose of obtaining
secured debt or joint venture financing.

8

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEGMENTS

The assets and operations of the Operating Partnership were divided
into four investment segments at June 30, 2004, as follows:

o Office Segment;

o Resort/Hotel Segment;

o Residential Development Segment; and

o Temperature-Controlled Logistics Segment.

Within these segments, the Operating Partnership owned in whole or in
part the following real estate assets (the "Properties") as of June 30, 2004:

o OFFICE SEGMENT consisted of 75 office properties (collectively
referred to as the "Office Properties"), located in 28 metropolitan
submarkets in seven states, with an aggregate of approximately 30.0
million net rentable square feet. Sixty-five of the Office
Properties are wholly-owned and ten are owned through joint
ventures, two of which are consolidated and eight of which are
unconsolidated.

o RESORT/HOTEL SEGMENT consisted of five luxury and destination
fitness resorts and spas with a total of 1,036 rooms/guest nights
and four upscale business-class hotel properties with a total of
1,771 rooms (collectively referred to as the "Resort/Hotel
Properties"). Eight of the Resort/Hotel Properties are wholly-owned
and one is owned through a joint venture that is consolidated.

o RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Operating
Partnership's ownership of common stock representing interests of
98% to 100% in four residential development corporations
(collectively referred to as the "Residential Development
Corporations"), which in turn, through partnership arrangements,
owned in whole or in part 28 upscale residential development
properties (collectively referred to as the "Residential Development
Properties").

o TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of the Operating
Partnership's 40% interest in Vornado Crescent Portland Partnership
(the "Temperature-Controlled Logistics Partnership") and a 56%
non-controlling interest in the Vornado Crescent Carthage and KC
Quarry L.L.C. ("VCQ"). The Temperature-Controlled Logistics
Partnership owns all of the common stock, representing substantially
all of the economic interest, of AmeriCold Realty Trust (the
"Temperature-Controlled Logistics Corporation"), a REIT. As of June
30, 2004, the Temperature-Controlled Logistics Corporation directly
or indirectly owned 87 temperature-controlled logistics properties
(collectively referred to as the "Temperature-Controlled Logistics
Properties") with an aggregate of approximately 440.7 million cubic
feet (17.5 million square feet) of warehouse space. As of June 30,
2004, VCQ owned two quarries and the related land. The Operating
Partnership accounts for its interests in the Temperature-Controlled
Logistics Partnership and in VCQ as unconsolidated equity entities.

See Note 3, "Segment Reporting," for a table showing selected financial
information for each of these investment segments for the three and six months
ended June 30, 2004 and 2003, and total assets, consolidated property level
financing, consolidated other liabilities, and minority interests for each of
these investment segments at June 30, 2004 and December 31, 2003.

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three- and six- month
periods ended June 30, 2004 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2004.

The condensed consolidated balance sheet at December 31, 2003 has been
derived from the audited consolidated financial statements at that date but does
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.

You should read these consolidated financial statements in conjunction
with the consolidated financial statements and footnotes thereto in the
Operating Partnership's annual report on Form 10-K for the year ended December
31, 2003.

Certain amounts in prior period financial statements have been
reclassified to conform to current period presentation.

9

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This section should be read in conjunction with the more detailed
information regarding the Operating Partnership's significant accounting
policies contained in the Operating Partnership's Annual Report on Form 10-K for
the year ended December 31, 2003.

ADOPTION OF NEW ACCOUNTING STANDARD

EITF 03-1. At the March 17-18, 2004 meeting, consensus was reached by
the FASB Emerging Issues Task Force on EITF 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments." The
Consensus applies to investments in debt and equity securities within the scope
of SFAS Nos. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and 124, "Accounting for Certain Investments Held by Not-for-Profit
Organizations." It also applies to investments in equity securities that are
both outside SFAS No. 115's scope and not accounted for under the equity method.
The Task Force reached a consensus that certain quantitative and qualitative
disclosures should be required for securities that are impaired at the balance
sheet date but for which an other-than-temporary impairment has not been
recognized. The new impairment guidance creates a model that calls for many
judgments and additional evidence gathering in determining whether or not
securities are other-than-temporarily impaired and lists some of these
impairment indicators. The impairment accounting guidance is effective for
periods beginning after June 15, 2004 and the disclosure requirements for annual
reporting periods are effective for periods ending after June 15, 2004. The
Operating Partnership adopted EITF 03-1 effective July 1, 2004 and expects no
impact on the Operating Partnership's financial condition or its results of
operations.

SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION OF VARIABLE INTEREST ENTITIES. On January 15, 2003, the
FASB approved the issuance of Interpretation 46, "Consolidation of Variable
Interest Entities," ("FIN 46"), an interpretation of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements." In December 2003, the FASB
issued FIN 46R, "Consolidation of Variable Interest Entities" ("FIN 46R"), which
amended FIN 46. Under FIN 46R, consolidation requirements are effective
immediately for new Variable Interest Entities ("VIEs") created after January
31, 2003. The consolidation requirements apply to existing VIEs for financial
periods ending after March 15, 2004, except for special purpose entities which
had to be consolidated by December 31, 2003. VIEs are generally a legal
structure used for business enterprises that either do not have equity investors
with voting rights, or have equity investors that do not provide sufficient
financial resources for the entity to support its activities. The objective of
the new guidance is to improve reporting by addressing when a company should
include in its financial statements the assets, liabilities and activities of
other entities such as VIEs. FIN 46R requires VIEs to be consolidated by a
company if the company is subject to a majority of the expected losses of the
VIE's activities or entitled to receive a majority of the entity's expected
residual returns or both.

The adoption of FIN 46R did not have a material impact to the Operating
Partnership's financial condition or results of operations. Due to the adoption
of this Interpretation and management's assumptions in application of the
guidelines stated in the Interpretation, the Operating Partnership has
consolidated GDW LLC, a subsidiary of DMDC, as of December 31, 2003 and Elijah
Fulcrum Fund Partners, L.P. ("Elijah") as of January 1, 2004. Elijah is a
limited partnership whose purpose is to invest in the SunTx Fulcrum Fund, L.P.
SunTx Fulcrum Fund, L.P.'s objective is to invest in a portfolio of acquisitions
that offer the potential for substantial capital appreciation. While it was
determined that one of the Operating Partnership's unconsolidated joint
ventures, Main Street Partners, L.P., and its investments in Canyon Ranch Las
Vegas, L.L.C., CR License, L.L.C. and CR License II, L.L.C. ("Canyon Ranch
Entities") are VIEs under FIN 46R, the Operating Partnership is not the primary
beneficiary and is not required to consolidate these entities under other GAAP.
The Operating Partnership's maximum exposure to loss is limited to its equity
investment of approximately $52.0 million in Main Street Partners, L.P. and $5.1
million in the Canyon Ranch Entities at June 30, 2004.

In connection with the Hughes Center acquisition, the Operating
Partnership entered into two separate exchange agreements with a third party
intermediary. The first exchange agreement includes two parcels of undeveloped
land and the second exchange agreement includes the 3930 Hughes Parkway Office
Property. Both agreements were for a maximum term of 180 days and allow the
Operating Partnership to pursue favorable tax treatment on other properties sold
by the Operating Partnership within this period. During the 180-day periods,
which will end on August 28, 2004 and November 6, 2004, respectively, the third
party intermediary is the legal owner of the properties, although the Operating
Partnership controls the properties, retains all of the economic benefits and
risks associated with these properties and indemnifies the third party

10

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

intermediary and, therefore, the Operating Partnership fully consolidates these
properties. The Operating Partnership will take legal ownership of the
properties no later than on the expiration of the 180-day period.

Further, in connection with the Hughes Center acquisition, the
Operating Partnership entered into an exchange agreement with a third party
intermediary for six of the Office Properties and the nine retail parcels. This
agreement was for a maximum term of 180 days and allowed the Operating
Partnership to pursue favorable tax treatment on other properties sold by the
Operating Partnership within this period. During the 180-day period, which ended
on June 28, 2004, the third party intermediary was the legal owner of the
properties, although the Operating Partnership controlled the properties,
retained all of the economic benefits and risks associated with these properties
and indemnified the third party intermediary and, therefore, the Operating
Partnership fully consolidated these properties. On June 28, 2004, the Operating
Partnership took legal ownership of the Office Properties and the nine retail
parcels.

STOCK-BASED COMPENSATION. Effective January 1, 2003, the Operating
Partnership adopted the fair value expense recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," on a prospective basis as
permitted by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure," which requires that the fair value of stock options at the date
of grant be amortized ratably into expense over the appropriate vesting period.
During the six months ended June 30, 2004, the Company and the Operating
Partnership granted stock and unit options and the Operating Partnership
recognized compensation expense that was not significant to its results of
operations. With respect to the Company's stock options and the Operating
Partnership's unit options which were granted prior to 2003, the Operating
Partnership accounted for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations ("APB No. 25"). Had
compensation cost been determined based on the fair value at the grant dates for
awards under the Plans consistent with SFAS No. 123, the Operating Partnership's
net loss and loss per unit would have been reduced to the following pro forma
amounts:

11

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARKETABLE SECURITIES. The Operating Partnership has classified and
recorded its marketable securities in accordance with SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Realized gains or losses
on the sale of securities are recorded based on specific identification. When a
decline in the fair value of marketable securities is determined to be
other-than-temporary, the cost basis is written down to fair value and the
amount of the write-down is included in earnings for the applicable period.
Investments in securities with no readily determinable market value are reported
at cost, as they are not considered marketable under SFAS No. 115, and total
$5.5 million at June 30, 2004 and December 31, 2003.

The following tables present the cost, fair value and unrealized gains
and losses as of June 30, 2004 and December 31, 2003 and the realized gains and
change in Accumulated Other Comprehensive Income ("OCI") for the six months
ended June 30, 2004 and 2003 for the Operating Partnership's marketable
securities.

- ----------
(1) Held to maturity securities are carried at amortized cost and consist
of $173.9 million of U.S. Treasury and government sponsored agency
securities purchased for the sole purpose of funding debt service
payments on the LaSalle Note II and $13.8 million of bonds included in
"Other assets, net" in the accompanying Consolidated Balance Sheets at
June 30, 2004. See Note 9, "Notes Payable and Borrowings Under Credit
Facility," for additional information on the defeasance of the LaSalle
Note II.

(2) Available for sale securities consist of marketable securities which
the Operating Partnership intends to hold for an indefinite period of
time. These securities are included in "Other assets, net" in the
accompanying Consolidated Balance Sheets and are marked to market
value on a monthly basis with the corresponding unrealized gain or
loss recorded in OCI.

In July 2004, Fresh Choice, Inc., in which the Operating Partnership
owns $5.5 million Series B Preferred shares reported at cost at June 30, 2004
and December 31, 2003, filed for protection under Chapter 11 of the U.S.
Bankruptcy Court in order to facilitate a reorganization and restructuring. At
June 13, 2004, the accrued liquidation preference on the Series B Preferred
shares was $9.1 million. Based on the Operating Partnership's evaluation of its
preferred interest in Fresh Choice, the Operating Partnership estimates the
value of its shares at a minimum to be equal to the investment balance of $5.5
million.

12

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

EARNINGS PER SHARE. SFAS No. 128, "Earnings Per Share," ("EPS") specifies the
computation, presentation and disclosure requirements for earnings per share.

Basic EPS is computed by dividing net income available to partners by
the weighted average number of units outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue units were exercised or converted into units, where such
exercise or conversion would result in a lower EPS amount. The Operating
Partnership presents both basic and diluted earnings per unit.

The following tables present reconciliations for the three and six
months ended June 30, 2004 and 2003 of basic and diluted earnings per unit from
"Loss before discontinued operations and cumulative effect of a change in
accounting principle" to "Net loss available to partners." The table also
includes weighted average units on a basic and diluted basis, which for the
periods presented, are the same.

- ----------

(1) Anti-dilutive units not included are 57 and 6 for the three months ended
June 30, 2004 and 2003, respectively.

- ----------

(1) Anti-dilutive units not included are 109 and 4 for the six months ended
June 30, 2004 and 2003, respectively.

13

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS

3. SEGMENT REPORTING

For purposes of segment reporting as defined in SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," the
Operating Partnership currently has four major investment segments based on
property type: the Office Segment; the Resort/Hotel Segment; the Residential
Development Segment; and the Temperature-Controlled Logistics Segment.
Management utilizes this segment structure for making operating decisions and
assessing performance.

The Operating Partnership uses funds from operations ("FFO") as the
measure of segment profit or loss. FFO, as used in this document, is based on
the definition adopted by the Board of Governors of the National Association of
Real Estate Investment Trusts ("NAREIT") and means:

o Net Income (Loss) - determined in accordance with GAAP;

o excluding gains (losses) from sales of depreciable operating
property;

o excluding extraordinary items (as defined by GAAP);

o plus depreciation and amortization of real estate assets; and

o after adjustments for unconsolidated partnerships and joint
ventures.

The Operating Partnership calculates FFO available to partners -
diluted in the same manner, except that Net Income (Loss) is replaced by Net
Income (Loss) Available to Partners.

NAREIT developed FFO as a relative measure of performance of an equity
REIT to recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. The Operating Partnership
considers FFO available to partners - diluted and FFO appropriate measures of
performance for an operating partnership of an equity REIT and for its
investment segments. However, FFO available to partners - diluted and FFO should
not be

14

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

considered as alternatives to net income determined in accordance with GAAP as
an indication of the Operating Partnership's operating performance.

The Operating Partnership's measures of FFO available to partners -
diluted and FFO may not be comparable to similarly titled measures of operating
partnerships of REITs (other than the Company) if those REITs apply the
definition of FFO in a different manner than the Operating Partnership.

Selected financial information related to each segment for the three
and six months ended June 30, 2004 and 2003, and total assets, consolidated
property level financing, consolidated other liabilities, and minority interests
for each of the segments at June 30, 2004 and December 31, 2003, are presented
below:

See footnotes to the following table.

15

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

See footnotes to the following table.

See footnotes to the following table.

16

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

See footnotes to the following table.

- ----------

(1) The property revenue includes lease termination fees (net of the write-off
of deferred rent receivables) of approximately $5.9 million and $0.9
million for the three months ended June 30, 2004 and 2003, respectively and
$7.2 million and $2.9 million for the six months ended June 30, 2004 and
2003, respectively.

(2) The Operating Partnership sold its interest in The Woodlands Land
Development Company, L.P. on December 31, 2003.

(3) For purposes of this Note, Corporate and Other includes the total of:
interest and other income, corporate general and administrative expense,
interest expense, amortization of deferred financing costs, extinguishment
of debt, other expenses, and equity in net income of unconsolidated
companies-other.

(4) The Operating Partnership's net book value for the Residential Development
Segment includes total assets, consolidated property level financing,
consolidated other liabilities and minority interest totaling $496 million
at June 30, 2004. The primary components of net book value are $332 million
for CRDI, consisting of Tahoe Mountain Resort properties of $192 million,
Denver development properties of $61 million and Colorado Mountain
development properties of $79 million, $132 million for Desert Mountain and
$32 million for other land development properties.

(5) Total assets by segment are inclusive of investments in unconsolidated
companies.

(6) Non-income producing land held for investment or development of $82.5
million by segment is as follows: Corporate $79.0 million and Resort/Hotel
$3.5 million.

(7) Includes U.S. Treasury and government sponsored agency securities of $173.9
million.

(8) Inclusive of Corporate bonds, credit facility, the $75 million Fleet Term
Loan and Funding II defeased debt.

17

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. ASSET ACQUISITIONS

OFFICE PROPERTIES

During January and February 2004, in accordance with the original
purchase contract, the Operating Partnership acquired an additional five Class A
Office Properties and seven retail parcels located within Hughes Center in Las
Vegas, Nevada from the Rouse Company. One of these Office Properties is owned
through a joint venture in which the Operating Partnership acquired a 67%
interest. The remaining four Office Properties are wholly-owned by the Operating
Partnership. The Operating Partnership acquired these five Office Properties and
seven retail parcels for approximately $175.3 million, funded by the Operating
Partnership's assumption of approximately $85.4 million in mortgage loans and by
a portion of the proceeds from the sale of the Operating Partnership's interests
in The Woodlands on December 31, 2003. The Operating Partnership recorded the
loans assumed at their fair value of approximately $93.2 million, which includes
$7.8 million of premium. The five Office Properties are included in the
Operating Partnership's Office Segment.

On March 31, 2004, the Operating Partnership acquired Dupont Centre, a
250,000 square foot Class A office property, located in the John Wayne Airport
submarket of Irvine, California. The Operating Partnership acquired the Office
Property for approximately $54.3 million, funded by a draw on the Operating
Partnership's credit facility and subsequently placed a $35.5 million
non-recourse first mortgage loan on the property. This Office Property is
wholly-owned and included in the Operating Partnership's Office Segment.

On May 10, 2004, the Operating Partnership completed the purchase of
the remaining Hughes Center Office Property in Las Vegas, Nevada for
approximately $18.3 million. The purchase was funded by a draw on the Operating
Partnership's credit facility. This Office Property is wholly-owned and included
in the Operating Partnership's Office Segment.

UNDEVELOPED LAND

On March 1, 2004, in accordance with the agreement to acquire the
Hughes Center Properties, the Operating Partnership completed the purchase of
two tracts of undeveloped land in Hughes Center from the Rouse Company for $10.0
million. The purchase was funded by a $7.5 million loan from the Rouse Company
and a draw on the Operating Partnership's credit facility.

5. DISCONTINUED OPERATIONS

In accordance with SFAS No. 144,"Accounting for the Impairment or
Disposal of Long-Lived Assets," the results of operations of the assets sold or
held for sale have been presented as "Income from discontinued operations," gain
or loss on the assets sold or held for sale have been presented as "Loss on real
estate from discontinued operations" and impairments on the assets sold or held
for sale have been presented as "Impairment charges related to real estate
assets from discontinued operations" in the accompanying Consolidated Statements
of Operations for the three and six months ended June 30, 2004 and 2003. The
carrying value of the assets held for sale has been reflected as "Properties
held for disposition, net" in the accompanying Consolidated Balance Sheets as of
June 30, 2004 and December 31, 2003.

ASSETS SOLD

On March 23, 2004, the Operating Partnership completed the sale of the
1800 West Loop South Office Property in Houston, Texas. The sale generated
proceeds, net of selling costs, of approximately $28.2 million and a net gain of
approximately $0.2 million. The Operating Partnership previously recorded an
impairment charge of approximately $16.4 million during the year ended December
31, 2003. The proceeds from the sale were used primarily to pay down the
Operating Partnership's credit facility. This property was wholly-owned.

On March 31, 2004, the Operating Partnership sold its last remaining
behavioral healthcare property. The sale generated proceeds, net of selling
costs, of approximately $2.0 million and a net loss of approximately $0.4
million. This property was wholly-owned.

On April 13, 2004, the Operating Partnership completed the sale of the
Liberty Plaza Office Property in Dallas, Texas. The sale generated proceeds, net
of selling costs, of approximately $10.8 million and a net loss of approximately
$0.2 million. The Operating Partnership previously recorded an impairment charge
of approximately $4.3 million during the year

18

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ended December 31, 2003. The proceeds from the sale were used primarily to pay
down the Operating Partnership's credit facility. This property was
wholly-owned.

On June 17, 2004, the Operating Partnership completed the sale of the
Ptarmigan Place Office Property in Denver, Colorado. The sale generated
proceeds, net of selling costs, of approximately $25.3 million and a net loss of
approximately $2.4 million. The Operating Partnership previously recorded an
impairment charge of approximately $0.6 million during the quarter ended March
31, 2004. In addition, the Operating Partnership completed the sale of
approximately 3.0 acres of undeveloped land adjacent to Ptarmigan Place. The
sale generated proceeds, net of selling costs, of approximately $2.9 million and
a net gain of approximately $0.9 million. The proceeds from these sales were
used to pay down a portion of the Operating Partnership's Bank of America Fund
XII Term Loan. The property and adjacent land were wholly-owned.

On June 29, 2004, the Operating Partnership completed the sale of the
Addison Tower Office Property in Dallas, Texas. The sale generated proceeds, net
of selling costs, of approximately $8.8 million and a net gain of approximately
$0.2 million. The proceeds from the sale were used primarily to pay down the
Operating Partnership's credit facility. This property was wholly-owned.

ASSETS HELD FOR SALE

The following Properties are classified as held for sale as of June 30,
2004.

----------
(1) This property was sold in July 2004.

(2) The Operating Partnership has entered into a contract to sell
this property. The sale is expected to close in the third
quarter of 2004.

OFFICE SEGMENT

As of June 30, 2004, the Operating Partnership determined that 3333 Lee
Parkway, in the Uptown/Turtle Creek submarket in Dallas, Texas was no longer
held for sale due to the Property no longer being actively marketed for sale due
to changes in market conditions. The Property has been reclassified from
"Properties held for disposition, net" to "Land," "Building and improvements,
net of accumulated depreciation," and "Other assets, net" in the accompanying
Consolidated Balance Sheets with a net book value of $14.3 million at June 30,
2004. In addition, approximately $0.1 million has been reclassified from "Income
from discontinued operations" to "Office Property revenue," "Office Property
real estate taxes," "Office Property operating expenses" and "Depreciation and
Amortization" in the accompanying Consolidated Statements of Operations for the
six months ended June 30, 2004.

SUMMARY OF ASSETS HELD FOR SALE

The following table indicates the major asset classes of the properties
held for sale.

----------

(1) Includes three Office Properties, two Resort/Hotel Properties and other
assets.

(2) Includes seven Office Properties, two Resort/Hotel Properties, one
behavioral healthcare property and other assets.

19

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables present total revenues, operating and other
expenses, depreciation and amortization, impairments of real estate assets and
realized loss on sale of properties for the six months ended June 30, 2004 and
2003, for properties included in discontinued operations.

6. OTHER TRANSACTIONS

On June 28, 2004, the Operating Partnership completed a transaction
related to the Fountain Place Office Property with Crescent FP Investors, L.P.,
("FP Investors"), a limited partnership that is owned 99.9% by LB FP L.L.C., an
affiliate of Lehman Brothers Holding, Inc., (the affiliate is referred to as
"Lehman"), and 0.1% by the Operating Partnership. In the transaction, the
Fountain Place Office Property was, for tax purposes, sold to FP Investors for
$168.2 million, including the assumption by FP Investors of a new $90.0 million
loan from Lehman Capital. The Operating Partnership received net proceeds of
approximately $78.2 million. This transaction resulted in the completion of a
reverse Section 1031 like-kind exchange associated with the Operating
Partnership's prior purchase of a portion of the Hughes Center office portfolio.

Included in the terms of this transaction is a provision which provides
Lehman the unconditional right to require the Operating Partnership to purchase
Lehman's interest in FP Investors for an agreed upon fair value of $79.9 million
at any time until November 30, 2004. For GAAP purposes, under SFAS No. 66,
"Accounting for Sales of Real Estate," this unconditional right, or contingency,
results in the transaction requiring accounting associated with a financing
transaction. As a result, no gain has been recorded on the transaction and the
Operating Partnership's accompanying financial statements continue to include
the Office Property, related debt and operations until expiration of the
contingency. The fair value of the contingency, $79.9 million, is included in
the "Accounts payable, accrued expenses and other liabilities" line item in the
Operating Partnership's Consolidated Balance Sheet at June 30, 2004.

Also on June 28, 2004, the Operating Partnership paid off the $220.0
million Deutsche Bank - CMBS loan with proceeds from the Fountain Place Office
Property transaction and a draw on the Operating Partnership's revolving credit
facility. See Note 9, "Notes Payable and Borrowings Under Credit Facility," for
further information relating to the $90.0 million loan with Lehman Capital,
secured by the Fountain Place Office Property.

20

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. TEMPERATURE-CONTROLLED LOGISTICS SEGMENT

TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES

AmeriCold Logistics, a limited liability company owned 60% by Vornado
Operating L.P. and 40% by a subsidiary of Crescent Operating, Inc. ("COPI"), as
sole lessee of the Temperature-Controlled Logistics Properties, leases the
Temperature-Controlled Logistics Properties from the Temperature-Controlled
Logistics Corporation under three triple-net master leases, as amended. The
Operating Partnership has no interest in COPI or AmeriCold Logistics. On March
2, 2004, the Temperature-Controlled Logistics Corporation and AmeriCold
Logistics amended the leases to further extend the deferred rent period to
December 31, 2005, from December 31, 2004. The parties previously extended the
deferred rent period to December 31, 2004 from December 31, 2003, on March 7,
2003.

Under terms of the leases, AmeriCold Logistics elected to defer $26.9
million of the total $78.9 million of rent payable for the six months ended June
30, 2004. The Operating Partnership's share of the deferred rent was $10.8
million. The Operating Partnership recognizes rental income from the
Temperature-Controlled Logistics Properties when earned and collected and has
not recognized the $10.8 million of deferred rent in equity in net income of the
Temperature-Controlled Logistics Properties for the six months ended June 30,
2004. As of June 30, 2004, the Temperature-Controlled Logistics Corporation's
deferred rent and valuation allowance from AmeriCold Logistics were $109.3
million and $101.2 million, respectively, of which the Operating Partnership's
portions were $43.7 million and $40.5 million, respectively.

As a result of the continuing inability of AmeriCold Logistics to pay
the full amount of the rent due under the leases without deferral elections, the
Operating Partnership anticipates that the Temperature-Controlled Logistics
Corporation may restructure the leases in 2004, although it is under no
obligation to do so.

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

For information regarding the planned sale of COPI's interest in
AmeriCold Logistics, see Note 16, "COPI."

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

On January 20, 2004, VCQ purchased $6.1 million of trade receivables
from Americold Logistics at a 2% discount. VCQ used cash from a $6.0 million
contribution from its owners, of which approximately $2.4 million represented
the Operating Partnership's contribution for the purchase of the trade
receivables. The receivables were collected during the first quarter of 2004. On
March 29, 2004, VCQ purchased an additional $4.1 million of receivables from
AmeriCold Logistics at a 2% discount. VCQ used cash from collection of the trade
receivables previously purchased. The remaining $2.0 million was distributed to
its owners, of which $0.8 million was received by the Operating Partnership on
April 1, 2004. On July 2, 2004, VCQ purchased an additional $6.0 million of
receivables from AmeriCold Logistics at a 2% discount. VCQ used cash from
collection of the trade receivables previously purchased.

21

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. INVESTMENTS IN UNCONSOLIDATED COMPANIES

The following is a summary of the Operating Partnership's ownership in
significant unconsolidated joint ventures and investments as of June 30, 2004.

24

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY STATEMENTS OF OPERATIONS:

SUMMARY STATEMENTS OF OPERATIONS:

(1) The Operating Partnership sold its interest in The Woodlands Land
Development Company, L.P. on December 31, 2003.

(2) Inclusive of the preferred return paid to Vornado Realty Trust (1% per
annum of the total combined assets).

25

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNCONSOLIDATED DEBT ANALYSIS

The following table shows, as of June 30, 2004, information about the
Operating Partnership's share of unconsolidated fixed and variable rate debt and
does not take into account any extension options, hedge arrangements or the
entities' anticipated pay-off dates.

- ----------

(1) URS Real Estate, L.P. and AmeriCold Real Estate, L.P., subsidiaries of
the Temperature-Controlled Logistics Corporation, expect to repay this
note on the Optional Prepayment Date of April 11, 2008. The overall
weighted average maturity would be 3.74 years based on this date.

(2) On February 5, 2004, the Temperature-Controlled Logistics Corporation
completed a mortgage financing with Morgan Stanley Mortgage Capital,
Inc., secured by twenty-one of its owned and seven of its leased
properties. The loan bears interest at LIBOR + 295 basis points (with a
LIBOR floor of 1.5% with respect to $54.4 million of the loan) and
requires principal payments of $5.0 million annually. In connection
with this loan, the Operating Partnership entered into an interest-rate
cap agreement with a maximum LIBOR of 6.5% on the entire loan.

(3) Senior Note - Note A: $81.4 million at variable interest rate, LIBOR +
189 basis points, $4.8 million at variable interest rate, LIBOR + 250
basis points with a LIBOR floor of 2.50%. Note B: $23.9 million at
variable interest rate, LIBOR + 650 basis points with a LIBOR floor of
2.50%. Mezzanine Note - $19.2 million at variable interest rate, LIBOR
+ 890 basis points with a LIBOR floor of 3.0%. In connection with this
loan, the Operating Partnership entered into an interest-rate cap
agreement with a maximum LIBOR of 4.52% on all notes. All notes are
amortized based on a 25-year schedule.

(4) The Operating Partnership and its joint venture partner each obtained
separate Letters of Credit to guarantee the repayment of up to $4.3
million each of principal of the Main Street Partners, L.P. loan.

(5) The variable rate loan has an interest rate of LIBOR + 300 basis
points. A fully consolidated entity of CRDI, of which CRDI owns 88.3%,
provides an unconditional guarantee of up to 70% of the outstanding
balance of up to a $9.0 million loan to Blue River Land Company, L.L.C.
There was approximately $3.1 million outstanding at June 30, 2004 and
the amount guaranteed was $2.2 million.

26

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY

The following is a summary of the Operating Partnership's debt
financing at June 30, 2004:

SECURED DEBT

27

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(1) In August 2007, the interest rate will increase, and the Operating
Partnership is required to remit, in addition to the monthly debt service
payment, excess property cash flow, as defined, to be applied first against
principal and thereafter against accrued excess interest, as defined. It is
the Operating Partnership's intention to repay the note in full at such
time (August 2007) by making a final payment of approximately $221.7
million.

(2) In October 2006, the interest rate will adjust based on current interest
rates at that time. It is the Operating Partnership's intention to repay
the note in full at such time (October 2006) by making a final payment of
approximately $177.8 million.

(3) In December 2003 and January 2004, the Operating Partnership purchased a
total of $179.6 million in U.S. Treasuries and government sponsored agency
securities ("defeasance investments") to substitute as collateral for this
loan. The cash flow from the defeasance investments (principal and
interest) will match the total debt service payments of this loan.

28

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4) The Operating Partnership's obligations under this loan were transferred to
FP Investors L.L.C. as part of the transaction in connection with the
Fountain Place Office Property. See Note 6, "Other Transactions," for
further information regarding this transaction.

(5) The Operating Partnership assumed these loans in connection with the Hughes
Center acquisitions. The following table lists the premium associated with
the assumption of above market interest rate debt which is included in the
balance outstanding at June 30, 2004 and the effective interest rate of the
debt including the premium.

The $7.7 million was recorded as an increase in the carrying amount of the
underlying debt and is being amortized as a reduction of interest expense
through maturity of the underlying debt.

(6) This facility is a $37.6 million line of credit secured by certain DMDC
land and asset improvements ("revolving credit facility"), notes receivable
("warehouse facility") and additional land ("short-term facility"). The
line restricts the revolving credit facility to a maximum outstanding
amount of $26.0 million and is subject to certain borrowing base
limitations and bears interest at prime (at June 30, 2004, the interest
rate was 4.0%). The warehouse facility bears interest at prime plus 100
basis points (at June 30, 2004, the interest rate was 5.0%) and is limited
to $10.0 million. The short-term facility bears interest from prime plus 50
basis points to prime plus 100 basis points (at June 30, 2004, the interest
rates were 4.5% to 5.0%) and is limited to $1.6 million. The blended rate
at June 30, 2004, for the revolving credit facility, the warehouse facility
and the short-term facility was 4.3%.

(7) The Operating Partnership's joint venture partner, which owns a 19.9%
interest in the Sonoma Mission Inn & Spa, had funded $10.0 million of
renovations at the Sonoma Mission Inn & Spa through a mezzanine loan. The
Net Operating Income Hurdle Date, as defined in the loan agreement, is the
date as of which the Sonoma Mission Inn & Spa has achieved an aggregate
Adjusted Net Operating Income, as defined in the loan agreement, of $12
million for a period of 12 consecutive calendar months.

(8) In July 2010, the interest rate will adjust based on current interest rates
at that time. It is the Operating Partnership's intention to repay the note
in full at such time (July 2010) by making a final payment of approximately
$6.1 million.

(9) Includes $14.6 million of fixed rate debt ranging from 2.9% to 10.5% and
$61.1 million of variable rate debt ranging from 3.4% to 4.5%.

(10) The $400.0 million Credit Facility with Fleet is an unsecured revolving
line of credit to Funding VIII and guaranteed by the Operating Partnership.
Availability under the line of credit is subject to certain covenants
including limitations on total leverage, fixed charge ratio, debt service
coverage, minimum tangible net worth, and specific mix of office and hotel
assets and average occupancy of Office Properties. At June 30, 2004, the
maximum borrowing capacity under the credit facility was $392.0 million.
The outstanding balance excludes letters of credit issued under the
Operating Partnership's credit facility of $7.6 million which reduce the
Operating Partnership's maximum borrowing capacity.

On June 28, 2004, the Operating Partnership paid off the $220.0 million
Deutsche Bank-CMBS loan with proceeds from the Fountain Place transaction and a
draw on the Operating Partnership's credit facility. See Note 6, "Other
Transactions," for additional information regarding the Fountain Place
transaction. The loan was secured by the Funding X Properties and Spectrum
Center. In July 2004, the Operating Partnership unwound the $220.0 million
interest rate cap with JP Morgan Chase that corresponded to this loan.

The following table shows information about the Operating Partnership's
consolidated fixed and variable rate debt and does not take into account any
extension options, hedging arrangements or the Operating Partnership's
anticipated payoff dates.

----------
(1) Balance excludes hedges. The percentages for fixed rate debt and
variable rate debt, including the $400.0 million of hedged variable
rate debt, are 81% and 19%, respectively.

(2) Excludes effect of extension options on Bank of America Fund XII Term
Loan and expected early payment of LaSalle Note I, JP Morgan Mortgage
Note, or the Nomura Funding VI Note.

(3) Including the effect of hedge arrangements, the overall weighted
average interest rate would have been 6.82%.

29

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Listed below are the aggregate principal payments by year required as
of June 30, 2004 under indebtedness of the Operating Partnership. Scheduled
principal installments and amounts due at maturity are included and are based on
contractual maturities and do not include extension options.

- ----------
(1) Excludes effect of extension options on Bank of America Fund XII Term Loan
and expected early payment of LaSalle Note I, JP Morgan Mortgage Note, or
the Nomura Funding VI Note.

The Operating Partnership is generally obligated by its debt agreements
to comply with financial covenants, affirmative covenants and negative
covenants, or some combination of these types of covenants. Failure to comply
with covenants generally will result in an event of default under that debt
instrument. Any uncured or unwaived events of default under the Operating
Partnership's loans can trigger an increase in interest rates, an acceleration
of payment on the loan in default, and for the Operating Partnership's secured
debt, foreclosure on the property securing the debt. In addition, a default by
the Operating Partnership or any of its subsidiaries with respect to any
indebtedness in excess of $5.0 million generally will result in a default under
the Credit Facility, 2007 Notes, 2009 Notes, the Bank of America Fund XII Term
Loan, the Fleet Fund I Term Loan and the Fleet Term Loan after the notice and
cure periods for the other indebtedness have passed. As of June 30, 2004, no
event of default had occurred, and the Operating Partnership was in compliance
with all covenants related to its outstanding debt. The Operating Partnership's
debt facilities generally prohibit loan pre-payment for an initial period, allow
pre-payment with a penalty during a following specified period and allow
pre-payment without penalty after the expiration of that period. During the six
months ended June 30, 2004, there were no circumstances that required prepayment
or increased collateral related to the Operating Partnership's existing debt.

DEFEASANCE OF LASALLE NOTE II

In January 2004, the Operating Partnership released the remaining
properties in Funding II by reducing the Fleet Fund I and II Term Loan by $104.2
million and purchasing an additional $170.0 million of U.S. Treasury and
government sponsored agency securities with an initial weighted average yield of
1.76%. The Operating Partnership placed those securities into a collateral
account for the sole purpose of funding payments of principal and interest on
the remainder of the LaSalle Note II. The cash flow from the securities is
structured to match the cash flow (principal and interest payments) required
under the LaSalle Note II. The retirement of the Fleet loan and the purchase of
the defeasance securities were funded through the $275 million Bank of America
Fund XII Term Loan. The collateral for the Bank of America loan is 10 of the 11
properties previously in the Funding II collateral pool, which are now held in
Funding XII. The Bank of America loan is structured to allow the Operating
Partnership the flexibility to sell, joint venture or long-term finance these 10
assets over the next 36 months. The final Funding II property, Liberty Plaza,
was moved to the Operating Partnership and subsequently sold in April 2004.

In addition to the subsidiaries listed in Note 1, "Organization and
Basis of Presentation," certain other subsidiaries of the Operating Partnership
and the Company were formed primarily for the purpose of obtaining secured and
unsecured debt or joint venture financings. These entities, all of which are
consolidated by the Operating Partnership or the Company, and are grouped based
on the Properties to which they relate, are: Funding I Properties (CREM
Holdings, LLC, Crescent Capital Funding, LLC, Crescent Funding Interest, LLC,
CRE Management I Corp.); Funding III Properties (CRE Management III Corp.);
Funding IV Properties (CRE Management IV Corp.); Funding V Properties (CRE
Management V Corp.); Funding VI Properties (CRE Management VI Corp.); Funding
VIII Properties (CRE Management VIII, LLC); 707 17th Street (Crescent 707 17th
Street, LLC); Funding X Properties (CREF X Holdings Management, LLC, CREF X
Holdings, L.P., CRE Management X, LLC); Funding XII Properties (CREF XII Parent
GP, LLC, CREF XII Parent L.P., CREF XII Holding GP, LLC, CREF Holdings, L.P.,
CRE Management XII, LLC); Spectrum Center (Spectrum Mortgage Associates, L.P.,
CSC Holdings Management, LLC, Crescent SC Holdings, L.P., CSC Management, LLC),
The BAC-Colonnade (CEI Colonnade Holdings, LLC), and Crescent Finance Company.

30

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. CASH FLOW HEDGES

The Operating Partnership uses derivative financial instruments to
convert a portion of its variable rate debt to fixed rate debt and to manage its
fixed to variable rate debt ratio. As of June 30, 2004, the Operating
Partnership had three cash flow hedge agreements which are accounted for in
conformity with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an Amendment of FASB Statement No.
133."

The following table shows information regarding the Operating
Partnership's interest rate swaps designated as cash flow hedge agreements
during the six months ended June 30, 2004, and additional interest expense and
unrealized gains (losses) recorded in Accumulated Other Comprehensive Income
("OCI").

In addition, two of the Operating Partnership's unconsolidated
companies have cash flow hedge agreements of which the Operating Partnership's
portion of change in unrealized gains reflected in OCI was approximately $0.4
million for the six months ended June 30, 2004.

The Operating Partnership has designated its cash flow hedge agreements
as cash flow hedges of LIBOR-based monthly interest payments on a designated
pool of variable rate LIBOR indexed debt that re-prices closest to the reset
dates of each cash flow hedge agreement. The cash flow hedges have been and are
expected to remain highly effective. Changes in the fair value of these highly
effective hedging instruments are recorded in OCI. The effective portion that
has been deferred in OCI will be reclassified to earnings as interest expense
when the hedged items impact earnings. If a cash flow hedge falls outside
80%-125% effectiveness for a quarter, all changes in the fair value of the cash
flow hedge for the quarter will be recognized in earnings during the current
period. If it is determined based on prospective testing that it is no longer
likely a hedge will be highly effective on a prospective basis, the hedge will
no longer be designated as a cash flow hedge in conformity with SFAS No. 133, as
amended. The Operating Partnership had no ineffectiveness related to its cash
flow hedges, resulting in no earnings impact due to ineffectiveness for the six
months ended June 30, 2004.

INTEREST RATE CAP

In March 2004, in connection with the Bank of America Fund XII Term
Loan, the Operating Partnership entered into a LIBOR interest rate cap struck at
6.00% for a notional amount of approximately $206.3 million through August 31,
2004, $137.5 million from September 1, 2004 through February 28, 2005, and $68.8
million from March 1, 2005 through March 1, 2006. Simultaneously, the Operating
Partnership sold a LIBOR interest rate cap with the same terms. Since these
instruments do not reduce the Operating Partnership's net interest rate risk
exposure, they do not qualify as hedges and changes to their respective fair
values are charged to earnings as the changes occur. As the significant terms of
these arrangements are the same, the effects of a revaluation of these
instruments are expected to offset each other.

31

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. COMMITMENTS AND CONTINGENCIES

GUARANTEE COMMITMENTS

The FASB issued Interpretation 45, "Guarantors' Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"), requiring a guarantor to disclose its
guarantees. The Operating Partnership's guarantees in place as of June 30, 2004
are listed in the table below. For the guarantees on indebtedness, no triggering
events or conditions are anticipated to occur that would require payment under
the guarantees and management believes the assets associated with the loans that
are guaranteed are sufficient to cover the maximum potential amount of future
payments and therefore, would not require the Operating Partnership to provide
additional collateral to support the guarantees. The Operating Partnership has
not recorded a liability associated with these guarantees as they were entered
into prior to the adoption of FIN 45.

- ----------

(1) The Operating Partnership provides a $7.6 million letter of credit to
support the payment of interest and principal of the Eagle Ranch
Metropolitan District Revenue Development Bonds.

(2) See Note 8, "Investments in Unconsolidated Companies," for a
description of the terms of this debt.

(3) A fully consolidated entity of CRDI, of which CRDI owns 88.3%, provides
an unconditional guarantee of up to 70% of the outstanding balance of
up to a $9.0 million loan to Blue River Land Company, L.L.C. There was
approximately $3.1 million outstanding at June 30, 2004 and the amount
guaranteed was $2.2 million.

(4) The Operating Partnership and its joint venture partner each obtained
separate Letters of Credit to guarantee the repayment of up to $4.3
million each of the Main Street Partners, L.P. loan.

OTHER COMMITMENTS

In 2003, the Operating Partnership entered into a one year option
agreement for the future sale of approximately 1.5 acres of undeveloped
investment land located in Houston, Texas, for approximately $7.8 million. The
Operating Partnership received $0.01 million of consideration in 2003. The
option agreement may be extended up to four years on a yearly basis at the
option of the prospective purchaser for additional consideration.

See Note 16, "COPI," for a description of the Operating Partnership's
commitments related to the agreement with COPI, executed on February 14, 2002.

CONTINGENCIES

See Note 6, "Other Transactions," for information on the Operating
Partnership's $79.9 million contingent obligation included in the "Accounts
payable, accrued expenses and other liabilities" line item in the Operating
Partnership's Consolidated Balance Sheet at June 30, 2004, related to the
Fountain Place Office Property transaction.

The Operating Partnership has a contingent obligation of approximately
$0.9 million related to a construction warranty matter. The Operating
Partnership believes it is probable that a significant amount would be recovered
through reimbursements from third parties.

32

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. MINORITY INTEREST

Minority interest in real estate partnerships represents joint venture
or preferred equity partners' proportionate share of the equity in certain real
estate partnerships. The Operating Partnership holds a controlling interest in
the real estate partnerships and consolidates the real estate partnerships into
the financial statements of the Operating Partnership. Income in the real estate
partnerships is allocated to minority interest based on weighted average
percentage ownership during the year.

The following table summarizes the minority interest as of June 30,
2004 and December 31, 2003:

The following table summarizes the minority interests' share of net
loss (income) for the six months ended June 30, 2004 and 2003:

13. PARTNERS' CAPITAL

Each Operating Partnership unit may be exchanged for either two common
shares of the Company or, at the election of the Company, cash equal to the fair
market value of two common shares at the time of the exchange. When a unitholder
exchanges a unit, the Company's percentage interest in the Operating Partnership
increases. During the six months ended June 30, 2004, there were 9,036 units
exchanged for 18,072 common shares of the Company.

DISTRIBUTIONS

The following table summarizes the distributions paid or declared to
unitholders and preferred unitholders during the six months ended June 30, 2004
(dollars in thousands, except per unit amounts).

33

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SERIES A PREFERRED OFFERING

On January 15, 2004, the Company completed an offering (the "January
2004 Series A Preferred Offering") of an additional 3,400,000 Series A
Convertible Cumulative Preferred Shares (the "Series A Preferred Shares") at a
$21.98 per share price and with a liquidation preference of $25.00 per share for
aggregate total offering proceeds of approximately $74.7 million. The Series A
Preferred Shares are convertible at any time, in whole or in part, at the option
of the holders into common shares of the Company at a conversion price of $40.86
per common share (equivalent to a conversion rate of 0.6119 common shares per
Series A Preferred Share), subject to adjustment in certain circumstances. The
Series A Preferred Shares have no stated maturity and are not subject to sinking
fund or mandatory redemption. At any time, the Series A Preferred Shares may be
redeemed, at the Company's option, by paying $25.00 per share plus any
accumulated accrued and unpaid distributions. Dividends on the additional Series
A Preferred Shares are cumulative from November 16, 2003, and are payable
quarterly in arrears on the fifteenth of February, May, August and November,
commencing February 16, 2004. The annual fixed dividend on the Series A
Preferred Shares is $1.6875 per share.

In connection with the January 2004 Series A Preferred Offering, the
Operating Partnership issued additional Series A Preferred Units to the Company
in exchange for the contribution of the net proceeds, after underwriting
discounts, offering costs and dividends accrued on the units up to the issuance
date of approximately $71.0 million. The Operating Partnership used the net
proceeds to pay down the Operating Partnership's credit facility.

14. INCOME TAXES

TAXABLE CONSOLIDATED ENTITIES

Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities of taxable consolidated
entities for financial reporting purposes and the amounts used for income tax
purposes. For the six months ended June 30, 2004, the taxable consolidated
entities were comprised of the taxable REIT subsidiaries of the Operating
Partnership.

Income or losses of the Operating Partnership are allocated to the
partners of the Operating Partnership for inclusion in their respective income
tax calculations. Accordingly, no provision or benefit for income taxes has been
made other than for certain consolidated subsidiaries. The Operating Partnership
consolidates certain taxable REIT subsidiaries, which are subject to federal and
state income tax. For the six months ended June 30, 2004 and 2003, the Operating
Partnership's federal income tax benefit from continuing operations was $6.6
million and $5.5 million, respectively. The Operating Partnership's $6.6 million
income tax benefit at June 30, 2004 consists primarily of $5.2 million for the
Residential Development Segment and $3.3 million for the Resort/Hotel Segment
partially offset by $0.8 million tax expense for the Office Segment and $1.1
million expense for other taxable REIT subsidiaries.

The Operating Partnership's total net tax asset of approximately $27.9
million at June 30, 2004 includes $17.3 million of net deferred tax assets. SFAS
No. 109, "Accounting for Income Taxes," requires a valuation allowance to reduce
the deferred tax assets reported if, based on the weight of the evidence, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. There was no change in the valuation allowance during the six
months ended June 30, 2004.

15. RELATED PARTY TRANSACTIONS

LOANS TO EMPLOYEES AND TRUST MANAGERS OF THE COMPANY FOR EXERCISE OF STOCK
OPTIONS AND UNIT OPTIONS

As of June 30, 2004, the Operating Partnership had approximately $38.0
million loan balances outstanding, inclusive of current interest accrued of
approximately $0.2 million, to certain employees and trust managers of the
Operating Partnership and the Company on a recourse basis pursuant to the
Company's stock incentive plans and the Operating Partnership's unit incentive
plans pursuant to an agreement approved by the Board of Trust Managers and the
Executive Compensation Committee of the Company. The proceeds of these loans
were used by the employees and the trust managers to acquire common shares of
the Company and units of the Operating Partnership pursuant to the exercise of
vested stock and unit options. Pursuant to the loan agreements, these loans bear
interest at a rate of 2.52% per year, payable quarterly, and mature on July 28,
2012 and may be repaid in full or in part at any time without premium or
penalty. Mr. Goff had a loan representing $26.4 million of the $38.0 million
total outstanding loans at June 30, 2004. No conditions exist at June 30, 2004
which would cause any of the loans to be in default. Effective July 29, 2002,
the Operating Partnership ceased offering to its employees and trust managers
the option to obtain loans pursuant to the Company's and the Operating
Partnership's stock and unit incentive plans.

34

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

OTHER

On June 28, 2002, the Operating Partnership purchased the home of an
executive officer of the General Partner and the Company to facilitate the
hiring and relocation of this executive officer. The purchase price was
approximately $2.6 million, consistent with a third-party appraisal obtained by
the Operating Partnership. Shortly after the purchase of the home, certain
changes in the business environment in Houston resulted in a weakened
housing market. In May 2004, the Operating Partnership completed the sale of the
home for proceeds, net of selling costs, of approximately $1.8 million. The
Operating Partnership previously recorded an impairment charge of approximately
$0.6 million, net of taxes, during the year ended December 31, 2003. The
purchase was part of the officer's relocation agreement with the Operating
Partnership.

16. COPI

On February 14, 2002, the Operating Partnership and COPI entered into
an agreement (the "Agreement") pursuant to which COPI and the Operating
Partnership agreed to jointly seek approval by the bankruptcy court of a
pre-packaged bankruptcy plan for COPI. The Operating Partnership agreed to fund
certain of COPI's costs, claims and expenses relating to the bankruptcy and
related transactions. From February 14, 2002 through June 30, 2004, the
Operating Partnership loaned to COPI, or paid directly on COPI's behalf,
approximately $13.2 million to fund these costs, claims and expenses, $2.1
million of which was funded in the six months ended June 30, 2004. The Operating
Partnership also agreed to issue common shares of the Company with a dollar
value of approximately $2.2 million to the COPI stockholders.

In addition, the Operating Partnership agreed to use commercially
reasonable efforts to assist COPI in arranging COPI's repayment of its $15.0
million obligation to Bank of America, together with any accrued interest. COPI
obtained the loan from Bank of America primarily to participate in investments
with the Operating Partnership. As a condition to making the loan, Bank of
America required Richard E. Rainwater, the Chairman of the Board of Trust
Managers of the Company, and John C. Goff, Vice-Chairman of the Board of Trust
Managers and Chief Executive Officer of the Company and sole director and Chief
Executive Officer of the General Partner, to enter into a support agreement with
COPI and Bank of America, pursuant to which Messrs. Rainwater and Goff agreed to
make additional equity investments in COPI under certain circumstances. The
Operating Partnership and COPI are assessing other alternatives for the sale of
COPI's 40% interest in the tenant of the Temperature-Controlled Logistics
properties, AmeriCold Logistics. At this time, the Operating Partnership does
not expect to spin-off to its unitholders and the shareholders of the Company a
new entity that would purchase COPI's interest in AmeriCold Logistics. COPI has
agreed that it will use the proceeds of the sale of its interest in AmeriCold
Logistics to repay Bank of America in full.

On March 10, 2003, COPI filed a plan under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the Northern
District of Texas. On June 22, 2004, the bankruptcy court confirmed the
bankruptcy plan, as amended. Effectiveness of the pre-packaged bankruptcy plan
for COPI is contingent upon a number of conditions, including the sale of COPI's
interest in AmeriCold Logistics, the repayment of COPI's obligation to Bank of
America prior to October 21, 2004 and the issuance by the Company of common
shares to the COPI stockholders.

17. SUBSEQUENT EVENTS

ASSET ACQUISITIONS

On August 6, 2004, the Operating Partnership acquired Alhambra Plaza, a
318,000 square foot Class A Office Property, located in the Coral Gables
submarket of Miami, Florida. The Operating Partnership acquired the Office
Property for approximately $72.3 million, funded by the Operating Partnership's
assumption of a $45.0 million loan from Wachovia Bank and a draw on the
Operating Partnership's credit facility. The Office Property is wholly-owned and
will be included in the Operating Partnership's Office Segment.

35

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ASSET DISPOSITIONS

On July 2, 2004, the Operating Partnership completed the sale of the
5050 Quorum Office Property in Dallas, Texas. The sale generated proceeds, net
of selling costs, of approximately $8.9 million and a loss of approximately $0.1
million. The Operating Partnership previously recorded an impairment charge of
approximately $1.0 million during the quarter ended March 31, 2004. The proceeds
from the sale were used primarily to pay down the Operating Partnership's credit
facility. This property was wholly-owned. The Operating Partnership will
continue to provide management and leasing services for this property.

On July 29, 2004, the Operating Partnership completed the sale of the
12404 Park Central Office Property in Dallas, Texas. The sale generated
proceeds, net of selling costs, of approximately $9.3 million. During the three
months ended June 30, 2004, the Operating Partnership recorded an impairment
charge of approximately $0.5 million. The Operating Partnership previously
recorded impairment charges totaling approximately $4.2 million, $3.4 million
during the year ended December 31, 2003 and $0.8 million during the quarter
ended March 31, 2004. The proceeds from the sale were used primarily to pay down
the Bank of America Fund XII Term Loan. This property was wholly-owned. The
Operating Partnership will continue to provide management and leasing services
for this property.

36

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INDEX TO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Forward-Looking Statements............................................................ 38

Overview.............................................................................. 39

Recent Developments................................................................... 42

Results of Operations

Three and six months ended June 30, 2004 and 2003................................ 44

Liquidity and Capital Resources

Cash Flows for the six months ended June 30, 2004................................ 51

Equity and Debt Financing............................................................. 56

Unconsolidated Investments............................................................ 60

Significant Accounting Policies....................................................... 61

Funds from Operations................................................................. 65

37

FORWARD-LOOKING STATEMENTS

You should read this section in conjunction with the consolidated
interim financial statements and the accompanying notes in Item 1,"Financial
Statements," of this document and the more detailed information contained in the
Operating Partnership's Form 10-K for the year ended December 31, 2003. In
management's opinion, all adjustments (consisting of normal and recurring
adjustments) considered necessary for a fair presentation of the unaudited
interim financial statements are included. Capitalized terms used but not
otherwise defined in this section have the meanings given to them in the notes
to the consolidated financial statements in Item 1, "Financial Statements."

This Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements are generally
characterized by terms such as "believe," "expect," "anticipate" and "may."

Although the Operating Partnership believes that the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, the Operating Partnership's actual results could differ materially
from those described in the forward-looking statements.

CONFORM TO PRESS RELEASE

The following factors might cause such a difference:

o The Operating Partnership's ability, at its office properties, to
timely lease unoccupied square footage and timely re-lease occupied
square footage upon expiration on favorable terms, which continue to be
adversely affected by existing real estate conditions (including
vacancy rates in particular markets, decreased rental rates and
competition from other properties) and may be adversely affected by
general economic downturns;

o The continuation of relatively high vacancy rates and reduced rental
rates in the Operating Partnership's office portfolio as a result of
the conditions within the Operating Partnership's principal markets;

o Adverse changes in the financial condition of existing tenants, in
particular El Paso Energy and its affiliates which provide 4.6% of the
Operating Partnership's annualized office revenues;

o Further deterioration in the resort/business-class hotel markets or in
the market for residential land or luxury residences, including
single-family homes, townhomes and condominiums, or in the economy
generally;

o Financing risks, such as the Operating Partnership's ability to
generate revenue sufficient to service and repay existing or additional
debt, increases in debt service associated with increased debt and with
variable-rate debt, the Operating Partnership's ability to meet
financial and other covenants and the Operating Partnership's ability
to consummate financings and refinancings on favorable terms and within
any applicable time frames;

o The ability of the Operating Partnership to dispose of its investment
land, and other non-core assets, on favorable terms and within
anticipated timeframes;

o The ability of the Operating Partnership to reinvest available funds at
anticipated returns and consummate anticipated office acquisitions and
within anticipated time frames;

o Further or continued adverse conditions in the temperature-controlled
logistics business (including both industry-specific conditions and a
general downturn in the economy) which may further jeopardize the
ability of the tenant to pay all current and deferred rent due;

o The ability of the Operating Partnership and COPI to satisfy the
remaining conditions to achieve effectiveness of the COPI bankruptcy
plan, including COPI's sale of the temperature-controlled logistics
tenant, its repayment of the loan from Bank of America prior to October
21, 2004, and the Operating Partnership's issuance of common shares of
the Company to the COPI stockholders;

o The concentration of a significant percentage of the Operating
Partnership's assets in Texas;

o The existence of complex regulations relating to the Company's status
as a REIT, the effect of future changes in REIT requirements as a
result of new legislation and the adverse consequences of the failure
to qualify as a REIT; and

o Other risks detailed from time to time in the Company's and the
Operating Partnership's filings with the Securities and Exchange
Commission.

38

Given these uncertainties, readers are cautioned not to place undue
reliance on such statements. The Operating Partnership is not obligated to
update these forward-looking statements to reflect any future events or
circumstances.

OVERVIEW

The Operating Partnership divides its assets and operations into four
investment segments: Office, Resort/Hotel, Residential Development and
Temperature-Controlled Logistics. The primary business of the Operating
Partnership is its Office Segment, which consisted of 75 Office Properties and
represented 67% of gross assets as of June 30, 2004.

Capital flows in the real estate industry have changed significantly
over the last few years. Institutions as well as other investors, principally
U.S. pension funds, have increased their allocation to real estate and it
appears that this will continue for the foreseeable future. This inflow of
capital has created a uniquely attractive environment for the sale of assets as
well as joint ventures. Likewise, the acquisition environment is highly
competitive, making it more difficult to provide returns to common equity that
are comparable to those achieved in acquisitions made during the 1990's.

The Operating Partnership has adapted its strategy to align itself with
institutional partners, with the goal of transitioning towards being a real
estate investment management company. Rather than competing with the substantial
inflow of capital into the acquisition market, the Operating Partnership is
focusing on acquiring assets jointly with these institutional investors, moving
existing assets into joint-venture arrangements with these investors, and
capitalizing on its award-winning platform in office management and its leasing
expertise to continue to provide these services, for a fee, for the properties
in the ventures. Where possible, the Operating Partnership will strive to
negotiate performance based incentives that allow for additional equity to be
earned if return targets are exceeded.

Consistent with this strategy, the Operating Partnership continually
evaluates its existing portfolio for potential joint-venture opportunities. In
the near to mid-term, the Operating Partnership could more than double its
existing level of joint ventures to over $2 billion by contributing existing
assets to ventures. As with previous ventures, the Operating Partnership would
be a minority partner but would continue to provide leasing and management
services to the ventures. In addition, the Operating Partnership is targeting
the sale of an additional $200 million in non-core assets by the end of 2004,
including land holdings that are currently not contributing to the Operating
Partnership's earnings. Also included in these sales, are two business class
hotels which the Operating Partnership believes it can sell at attractive
gains, and at the same time further simplify its business model. As these
ventures and sales are completed, the Operating Partnership will assess the
potential benefits of utilizing a portion of the net proceeds to
repurchase shares of the Company consistent with the requirements of its
existing debt.

OFFICE SEGMENT

The following table shows the performance factors used by management to
assess the operating performance of the Office Segment.

- ----------
(1) Economic occupancy reflects the occupancy of all tenants paying rent.
Excluding held for sale properties, economic occupancy is 87.0% and 84.8%
at June 30, 2004 and December 31, 2003, respectively.

(2) Leased occupancy reflects the amount of contractually obligated space,
whether or not commencement has occurred. Excluding held for sale
properties, leased occupancy is 88.1% and 87.3% at June 30, 2004 and
December 31, 2003, respectively.

(3) Same-store NOI (net operating income) represents office property net
income excluding depreciation, amortization, interest expense and
non-recurring items such as lease termination fees for Office Properties
owned for the entirety of the comparable periods.

(4) Includes held for sale properties.

(5) Excludes held for sale properties.

The Operating Partnership continues to expect that 2004 will be a year
of stabilization in the Office Segment rather than meaningful growth, with
projected average and year end occupancy remaining relatively flat compared to
2003. Tenant

39

improvement and leasing costs in 2004 are expected to be in line with 2003.
Same-store NOI is expected to decline by 3% to 6% in 2004, which is a lower rate
of decline than that experienced in 2003.

The Operating Partnership's tenant base continues to be diversified,
with the top five tenants accounting for approximately 11.2% of total Office
Segment rental revenues for the six months ended June 30, 2004. The loss of one
or more of the Operating Partnership's major tenants, in particular El Paso
Energy and its affiliates which provide 4.6% of the Operating Partnership's
annualized Office Segment revenues, would have a temporary adverse effect on the
Operating Partnership's financial condition and results of operations until the
Operating Partnership is able to re-lease the space previously leased to these
tenants.

RESORT/HOTEL SEGMENT

The following table shows the performance factors used by management to
assess the operating performance of the Resort/Hotel Segment, excluding
held-for-sale properties.

Decreases in occupancy at the Operating Partnership's upscale business
class hotels are primarily attributable to increased competition in the
convention business causing major cities to compete for conventions that have
historically gone to secondary markets and new convention style hotels adding
approximately 1,200 rooms in the Houston market and approximately 800 rooms in
the Austin market. The occupancy decrease at the Operating Partnership's luxury
and destination fitness resorts is partially driven by decreased occupancy at
Sonoma Mission Inn (from 74% in the second quarter 2003 to 62% in the second
quarter 2004) as a result of the renovation of 97 rooms which were taken out of
service in November 2003. Renovation was completed in the second quarter of 2004
and the 97 rooms were put back into service. In addition, occupancy decreased 25
percentage points (from 81% in the second quarter 2003 to 56% in the second
quarter 2004) at Ventana Inn as a result of the renovation of 12 suites which
were taken out of service in April 2004. The Operating Partnership anticipates a
minimal change in occupancy and a modest increase in revenue per available room
in 2004 at the Resort/Hotel Properties as the economy and the travel industry
continue to recover offset by the financial impact of Sonoma Mission Inn and
Ventana Inn renovations in 2004.

RESIDENTIAL DEVELOPMENT SEGMENT

The following tables show the performance factors used by management to
assess the operating performance of the Residential Development Segment.
Information is provided for the Desert Mountain Residential Development Property
and the CRDI Residential Development Properties, which represent the Operating
Partnership's significant investments in this Segment as of June 30, 2004.

Desert Mountain

40

- ----------
(1) Includes equity golf membership

- ----------
(1) Includes equity golf membership

Desert Mountain is in the latter stages of development and has
primarily its premier lots remaining in inventory. An increase in lot sales,
combined with higher average sales prices in 2004 compared to 2003, is expected
to result in improved results in 2004.

CRDI

CRDI, which invests primarily in mountain resort residential real
estate in Colorado and California and residential real estate in downtown
Denver, Colorado, is highly dependent upon the national economy and customer
demand. In 2004, management expects that CRDI will be primarily affected by
product mix available at its Residential Development Properties as product
inventory is developed in 2004 for delivery in 2005.

LIQUIDITY

The Operating Partnership's primary sources of liquidity are cash flow
from operations, its credit facility, return of capital from the Residential
Development Segment, and proceeds from asset sales and joint ventures. The
Operating Partnership believes cash flow from operations will be sufficient to
offset normal operating expenses, as well as capital requirements (including
property improvements, tenant improvements and leasing commissions) in 2004. The
cash flow from the Residential Development segment is cyclical in nature and
primarily focused in the last quarter of each year. The Operating Partnership
expects to meet any interim short falls in operating cash flow caused by this
cyclicality through working capital draws under the credit facility. As of June
30, 2004, the Operating Partnership had $151.9 million in borrowing capacity
remaining under its credit facility. However, net cash flows from operations are
not anticipated to fully cover the projected distributions on the Operating
Partnership's units for the next 18 months. The Operating Partnership expects to
use return of capital from the Residential Development Segment, estimated at
approximately $85 million, for 2004 and business initiatives including
investment land sales and other income to cover the shortfall.

Through the sale of the Woodlands in December 2003, the issuance of
preferred shares of the Company and additional financing of Temperature -
Controlled Logistics this year, and planned additional leverage on Hughes Center
assets, the Operating Partnership has an additional $260 million in liquidity to
make new investments throughout 2004, of which $63 million has been invested
through June 30, 2004. Additionally, the Operating Partnership continues to
execute on its capital recycling program and has sold six office properties
generating proceeds, net of selling costs, of $94.2 million which were used to
pay down a portion of the Bank of America Fund XII Term Loan and to reduce the
amount outstanding under the credit facility.

41

RECENT DEVELOPMENTS

ASSET ACQUISITIONS

OFFICE PROPERTIES

During January and February 2004, in accordance with the original
purchase contract, the Operating Partnership acquired an additional five Class A
Office Properties and seven retail parcels located within Hughes Center in Las
Vegas, Nevada from the Rouse Company. One of these Office Properties is owned
through a joint venture in which the Operating Partnership acquired a 67%
interest. The remaining four Office Properties are wholly-owned by the Operating
Partnership. The Operating Partnership acquired these five Office Properties and
seven retail parcels for approximately $175.3 million, funded by the Operating
Partnership's assumption of approximately $85.4 million in mortgage loans and by
a portion of the proceeds from the sale of the Operating Partnership's interests
in The Woodlands on December 31, 2003. The Operating Partnership recorded the
loans assumed at their fair value of approximately $93.2 million, which includes
$7.8 million of premium. The five Office Properties are included in the
Operating Partnership's Office Segment.

On March 31, 2004, the Operating Partnership acquired Dupont Centre, a
250,000 square foot Class A office property, located in the John Wayne Airport
submarket of Irvine, California. The Operating Partnership acquired the Office
Property for approximately $54.3 million, funded by a draw on the Operating
Partnership's credit facility and subsequently placed a $35.5 million
non-recourse first mortgage loan on the property. This Office Property is
wholly-owned and included in the Operating Partnership's Office Segment.

On May 10, 2004, the Operating Partnership completed the purchase of
the remaining Hughes Center Office Property in Las Vegas, Nevada for
approximately $18.3 million. The purchase was funded by a draw on the Operating
Partnership's credit facility. This Office Property is wholly-owned and included
in the Operating Partnership's Office Segment.

On August 6, 2004, the Operating Partnership acquired Alhambra Plaza, a
318,000 square foot Class A Office Property, located in the Coral Gables
submarket of Miami, Florida. The Operating Partnership acquired the Office
Property for approximately $72.3 million, funded by the Operating Partnership's
assumption of $45.0 million loan from Wachovia Bank and a draw on the Operating
Partnership's credit facility. The Office Property is wholly-owned and will be
included in the Operating Partnership's Office Segment.

UNDEVELOPED LAND

On March 1, 2004, in accordance with the agreement to acquire the
Hughes Center Properties, the Operating Partnership completed the purchase of
two tracts of undeveloped land in Hughes Center from the Rouse Company for $10.0
million. The purchase was funded by a $7.5 million loan from the Rouse Company
and a draw on the Operating Partnership's credit facility.

ASSET DISPOSITIONS

On March 23, 2004, the Operating Partnership completed the sale of the
1800 West Loop South Office Property in Houston, Texas. The sale generated
proceeds, net of selling costs, of approximately $28.2 million and a net gain of
approximately $0.2 million. The Operating Partnership previously recorded an
impairment charge of approximately $16.4 million during the year ended December
31, 2003. The proceeds from the sale were used primarily to pay down the
Operating Partnership's credit facility. This property was wholly-owned.

On March 31, 2004, the Operating Partnership sold its last remaining
behavioral healthcare property. The sale generated proceeds, net of selling
costs, of approximately $2.0 million and a net loss of approximately $0.4
million. This property was wholly-owned.

On April 13, 2004, the Operating Partnership completed the sale of the
Liberty Plaza Office Property in Dallas, Texas. The sale generated proceeds, net
of selling costs, of approximately $10.8 million and a net loss of approximately
$0.2 million. The Operating Partnership previously recorded an impairment charge
of approximately $4.3 million during the year ended December 31, 2003. The
proceeds from the sale were used primarily to pay down the Operating
Partnership's credit facility. This property was wholly-owned.

42

On June 17, 2004, the Operating Partnership completed the sale of the
Ptarmigan Place Office Property in Denver, Colorado. The sale generated
proceeds, net of selling costs, of approximately $25.3 million and a net loss of
approximately $2.4 million. The Operating Partnership previously recorded an
impairment charge of approximately $0.6 million during the quarter ended March
31, 2004. In addition, the Operating Partnership completed the sale of
approximately 3.0 acres of undeveloped land adjacent to Ptarmigan Place. The
sale generated proceeds, net of selling costs, of approximately $2.9 million and
a net gain of approximately $0.9 million. The proceeds from these sales were
used to pay down a portion of the Operating Partnership's Bank of America Fund
XII Term Loan. The property and adjacent land were wholly-owned.

On June 29, 2004, the Operating Partnership completed the sale of the
Addison Tower Office Property in Dallas, Texas. The sale generated proceeds, net
of selling costs, of approximately $8.8 million and a net gain of approximately
$0.2 million. The proceeds from the sale were used primarily to pay down the
Operating Partnership's credit facility. This property was wholly-owned.

On July 2, 2004, the Operating Partnership completed the sale of the
5050 Quorum Office Property in Dallas, Texas. The sale generated proceeds, net
of selling costs, of approximately $8.9 million and a loss of approximately $0.1
million. The Operating Partnership previously recorded an impairment charge of
approximately $1.0 million during the quarter ended March 31, 2004. The proceeds
from the sale were used primarily to pay down the Operating Partnership's credit
facility. This property was wholly-owned. The Operating Partnership will
continue to provide management and leasing services for this property.

On July 29, 2004, the Operating Partnership completed the sale of the
12404 Park Central Office Property in Dallas, Texas. The sale generated
proceeds, net of selling costs, of approximately $9.3 million. During the three
months ended June 30, 2004, the Operating Partnership recorded an impairment
charge of approximately $0.5 million. The Operating Partnership previously
recorded impairment charges totaling approximately $4.2 million, $3.4 million
during the year ended December 31, 2003 and $0.8 million during the quarter
ended March 31, 2004. The proceeds from the sale were used primarily to pay down
the Bank of America Fund XII Term Loan. This property was wholly-owned. The
Operating Partnership will continue to provide management and leasing services
for this property.

OTHER TRANSACTIONS

On June 28, 2004, the Operating Partnership completed a transaction
related to the Fountain Place Office Property with Crescent FP Investors, L.P.,
("FP Investors"), a limited partnership that is owned 99.9% by LB FP L.L.C., an
affiliate of Lehman Brothers Holding, Inc., (the affiliate is referred to as
"Lehman"), and 0.1% by the Operating Partnership. In the transaction, the
Fountain Place Office Property was, for tax purposes, sold to FP Investors for
$168.2 million, including the assumption by FP Investors of a new $90.0 million
loan from Lehman Capital. The Operating Partnership received net proceeds of
approximately $78.2 million. This transaction resulted in the completion of a
reverse Section 1031 like-kind exchange associated with the Operating
Partnership's prior purchase of a portion of the Hughes Center office portfolio.

Included in the terms of this transaction is a provision which provides
Lehman the unconditional right to require the Operating Partnership to purchase
Lehman's interest in FP Investors for an agreed upon fair value of $79.9 million
at any time until November 30, 2004. For GAAP purposes, under SFAS No. 66,
"Accounting for Sales of Real Estate," this unconditional right, or contingency,
results in the transaction requiring accounting associated with a financing
transaction. As a result, no gain has been recorded on the transaction and the
Operating Partnership's accompanying financial statements continue to include
the Office Property, related debt and operations until expiration of the
contingency. The fair value of the contingency, $79.9 million, is included in
the "Accounts payable, accrued expenses and other liabilities" line item in the
Operating Partnership's Consolidated Balance Sheet at June 30, 2004.

Also on June 28, 2004, the Operating Partnership paid off the $220.0
million Deutsche Bank - CMBS loan with proceeds from the Fountain Place Office
Property transaction and a draw on the Operating Partnership's revolving credit
facility. See Note 9, "Notes Payable and Borrowings Under Credit Facility,"
included in Item 1 "Financial Statements," for further information relating to
the $90.0 million loan with Lehman Capital, secured by the Fountain Place Office
Property.

43

RESULTS OF OPERATIONS

The following table shows the Operating Partnership's variance in
dollars between the three and six months ended June 30, 2004 and 2003.

44

COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2004 TO THE THREE MONTHS ENDED
JUNE 30, 2003

PROPERTY REVENUES

Total property revenues increased $7.6 million, or 3.5%, to $227.6
million for the three months ended June 30, 2004, as compared to $220.0 million
for the three months ended June 30, 2003. The primary components of the increase
in total property revenues are discussed below.

o Office Property revenues increased $13.0 million, or 10.9%, to $131.8
million, primarily due to:

o an increase of $12.0 million from the acquisitions of The
Colonnade in August 2003, the Hughes Center Properties in
December 2003 through May 2004, and Dupont Centre in March 2004;

o an increase of $5.0 million in net lease termination fees; and

o an increase of $0.6 million primarily resulting from third party
management services and related direct expense reimbursements;
partially offset by

o a decrease of $4.7 million from the 54 consolidated Office
Properties (excluding 2003 and 2004 acquisitions and properties
held for sale) that the Operating Partnership owned or had an
interest in, primarily due to a decrease in full service weighted
average rental rates, a decrease in recoveries due to expense
reductions, and a decline in net parking revenue, partially
offset by a 0.4 point increase in same-store average occupancy
(from 85.7% to 86.1%).

o Resort/Hotel Property revenues increased $1.0 million, or 2.5%, to
$40.3 million, primarily due to:

o an increase of $1.2 million at the Luxury and Destination Fitness
Resorts, primarily Canyon Ranch Tucson and Canyon Ranch Lenox,
related to a 3% increase in revenue per available room (from $290
to $299) as a result of a 10% increase in average daily rate
(from $444 to $489).

o Residential Development Property revenues decreased $6.4 million, or
10.3%, to $55.6 million, primarily due to:

o a decrease of $17.3 million in CRDI revenues related to product
mix in lots and units available for sale in 2004 versus 2003,
primarily at the One Vendue project in Charleston, South Carolina
which had sales in 2003, but none in 2004 as the project sold out
in 2003; partially offset by

o an increase of $8.9 million in real estate sales primarily due to
increased lot sales at DMDC of 12 lots (from 11 to 23) and
increased lot sales at MVDC of 10 lots (from 3 to 13 lots); and

o an increase of $1.8 million in club revenue at DMDC and CRDI,
primarily due to increased membership levels at DMDC and
the full impact in 2004 of the sale of Tahoe Club memberships at
the Tahoe Mountain Resorts Property, which began selling
memberships in mid-2003.

PROPERTY EXPENSES

Total property expenses increased $0.5 million, or 0.3%, to $148.0
million for the three months ended June 30, 2004, as compared to $147.5 million
for the three months ended June 30, 2003. The primary components of the
variances in property expenses are discussed below.

o Office Property expenses increased $1.8 million, or 3.1%, to $60.4
million, primarily due to:

o an increase of $4.1 million from the acquisition of The Colonnade
in August 2003, the Hughes Center Properties in December 2003
through May 2004 and Dupont Centre in March 2004; and

o an increase of $0.4 million related to the cost of providing
third party management services to joint venture properties,
which is offset by increased third party fee income and direct
expense reimbursements; partially offset by

o a decrease of $2.6 million from the 54 consolidated Office
Properties (excluding 2003 and 2004 acquisitions and properties
held for sale) that the Operating Partnership owned or had an
interest in, primarily due to:

o $1.9 million decrease in property taxes and insurance;

o $1.5 million decrease in utilities expense; partially
offset by

o $0.4 million increase in administrative expenses.

45

o Resort/Hotel Property expenses increased $2.5 million, or 7.5%, to
$35.8 million, due to:

o an increase of $1.9 million in operating expenses, general and
administrative costs, and advertising at the Destination Fitness
Resorts primarily related to increases in employee health
insurance costs and an increase in occupancy of 5 percentage
points at Canyon Ranch Tucson; and

o an increase of $0.6 million in operating expenses at the resorts.

o Residential Development Property expenses decreased $3.8 million, or
6.8%, to $51.8 million, primarily due to:

o a decrease of $15.6 million primarily due to a reduction in cost
of sales related to product mix in lots and units available for
sale in 2004 versus 2003 at CRDI, primarily at the One Vendue
project in Charleston, South Carolina which had sales in 2003,
but none in 2004 as the project sold out in 2003; partially
offset by

o an increase of $6.8 million in DMDC and MVDC cost of sales due to
increased lot sales compared to 2003;

o an increase of $2.4 million in marketing expenses at certain CRDI
projects; and

o an increase of $2.0 million in club operating expenses due to an
increase in membership and restaurant addition at CRDI and the
golf course additions at DMDC.

OTHER INCOME/EXPENSE

Total other expenses increased $20.2 million, or 26.0%, to $97.8
million for the three months ended June 30, 2004, compared to $77.6 million for
the three months ended June 30, 2003. The primary components of the increase in
total other expenses are discussed below.

OTHER INCOME

Other income decreased $6.3 million, or 87.7%, to $1.0 million for the
three months ended June 30, 2004, as compared to $7.3 million for the three
months ended June 30, 2003. The primary components of the decrease in other
income are discussed below.

o Interest and other income increased $1.8 million primarily due to $0.7
million of interest on U.S. Treasury and government sponsored agency
securities purchased in December 2003 and January 2004 related to debt
defeasance, $0.5 million of dividends received on other marketable
securities and a $0.3 million increase in interest on certain notes
resulting from note amendments in December 2003.

o Equity in net income of unconsolidated companies decreased $7.4
million, or 164.4%, to a $2.9 million loss, primarily due to:

o a decrease of $3.0 million in equity in net income ($1.9 million
attributable to Residential Development Properties and $1.1
million to Office Properties) primarily due to net income
recorded in 2003 for the Operating Partnership's interests in the
entities through which the Operating Partnership held its
interests in The Woodlands, which were sold in December 2003;

o a decrease of $2.3 million in Temperature-Controlled Logistics
Properties equity in net income primarily due to a decrease in
rental revenues net of deferred rent and an increase in interest
expense primarily attributable to the $254.4 million financing
with Morgan Stanley Mortgage Capital, Inc. in February 2004; and

o a decrease of $1.4 million in Resort/Hotel Properties equity in
net income primarily due to net income recorded in 2003 for the
Operating Partnership's interest in the Ritz-Carlton Hotel
Property, which was sold in November 2003, and included a $1.1
million payment which the Operating Partnership received from the
operator of the Resort/Hotel Property pursuant to the terms of
the operating agreement because the property did not achieve the
specified net operating income level.

46

OTHER EXPENSES

Other expenses increased $13.9 million, or 16.4%, to $98.8 million for
the three months ended June 30, 2004, as compared to $84.9 million for the three
months ended June 30, 2003. The primary components of the increase in other
expenses are discussed below.

o Depreciation expense increased $9.5 million, or 28.9%, to $42.4
million, primarily due to:

o $7.6 million increase in Office Property depreciation expense,
attributable to:

o $3.2 million from the acquisitions of The Colonnade in
August 2003 and the Hughes Center Properties in December
2003 through May 2004, and Dupont Centre in March 2004;
and

o $4.4 million due to an increase in leasehold
improvements, lease commissions, building improvements,
and accelerated depreciation of leasehold improvements
and lease commissions upon lease terminations;

o $1.5 million increase in Residential Development Property
depreciation expense; and

o $0.6 million increase in Resort/Hotel Property depreciation
expense.

o Interest expense increased $2.4 million, or 5.6%, to $45.4 million due
to an increase of approximately $273.0 million in the weighted average
debt balance, partially offset by a 0.76 percentage point decrease in
the weighted average interest rate (from 7.18% to 6.42%) primarily due
to the refinancing and new financings of fixed rate debt at lower
interest rates and the termination of $400.0 million in cash flow
hedges, which were replaced with $400.0 million of cash flow hedges
resulting in a 3.1 percentage point reduction in strike prices (from
6.6% to 3.5%).

o Corporate general and administrative expense increased $1.1 million, or
19.3%, to $6.8 million primarily due to salary merit increases, cost
increases of employee benefits and restricted stock compensation
recorded in 2004.

o Extinguishment of debt increased $1.0 million due to the write off of
deferred financing costs associated with the reduction of the Bank of
America Fund XII Term Loan funded by proceeds from the sale of the
Ptarmigan Place Office Property and adjacent land and the payoff of the
$220.0 million Deutsche Bank-CMBS Loan in June 2004 funded with
proceeds from the Fountain Place Office Property transaction and a draw
on the credit facility.

o Amortization of deferred financing costs increased $0.5 million, or
19.2%, to $3.1 million primarily due to the addition of deferred
financing costs related to debt restructuring and refinancing
associated with the $275.0 million secured loan with Bank of America
and Deutsche Bank in January 2004.

DISCONTINUED OPERATIONS

Income from discontinued operations on assets sold and held for sale
decreased $2.9 million, or 67.4%, to $1.3 million, primarily due to:

o a decrease of $2.5 million due to an aggregate $2.4 million loss on
three Office Properties sold in 2004 compared to a $0.1 million gain on
one Office Property in 2003;

o a decrease of $1.0. million due to the reduction of net income
associated with properties held for sale in 2004 compared to 2003;

o a decrease of $0.5 million due to the impairment of one Office Property
in 2004; partially offset by

o an increase of $1.0 million due to impairments recorded in 2003 on
behavioral healthcare properties.

47

COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2004 TO THE SIX MONTHS ENDED JUNE
30, 2003

PROPERTY REVENUES

Total property revenues increased $12.0 million, or 2.8%, to $447.9
million for the six months ended June 30, 2004, as compared to $435.9 million
for the six months ended June 30, 2003. The primary components of the increase
in total property revenues are discussed below.

o Office Property revenues increased $14.7 million, or 6.1%, to $254.4
million, primarily due to:

o an increase of $20.8 million from the acquisitions of The
Colonnade in August 2003, the Hughes Center Properties in
December 2003 through May 2004, and Dupont Centre in March 2004;

o an increase of $4.2 million in net lease termination fees;

o an increase of $1.6 million primarily resulting from third party
management services and related direct expense reimbursements;
partially offset by

o a decrease of $11.2 million from the 54 consolidated Office
Properties (excluding 2003 and 2004 acquisitions and properties
held for sale) that the Operating Partnership owned or had an
interest in, primarily due to a decrease in full service weighted
average rental rates, a decrease in recoveries due to expense
reductions, and a decline in net parking revenues; and

o a decrease of $0.8 million due to nonrecurring revenue earned in
2003.

o Residential Development Property revenues decreased $2.4 million, or
2.3%, to $103.3 million, primarily due to:

o a decrease of $22.6 million in CRDI revenues related to product
mix in lots and units available for sale in 2004 versus 2003,
primarily at the One Vendue project in Charleston, South Carolina
which had sales in 2003, but none in 2004 as project sold out in
2003, partially offset by the Old Greenwood project in Tahoe,
California which had sales in 2004, but none in the six months
ended June 2003 as product was not available for sale until
December 2003; partially offset by

o an increase of $17.1 million primarily due to increased sales of
15 lots (from 24 to 39) at DMDC and increased sales of 12 lots
(from 4 to 16 lots) at MVDC; and

o an increase of $3.5 million in club revenue at DMDC and CRDI,
primarily due to increased membership levels at DMDC and the full
impact in 2004 of the sale of Tahoe Club memberships at the Tahoe
Mountain Resorts Property, which began selling memberships in
mid-2003.

PROPERTY EXPENSES

Total property expenses increased $0.7 million, or 0.2%, to $287.4
million for the six months ended June 30, 2004, as compared to $286.7 million
for the six months ended June 30, 2003. The primary components of the variances
in property expenses are discussed below.

o Office Property expenses increased $2.8 million, or 2.4%, to $119.2
million, primarily due to:

o an increase of $6.7 million from the acquisition of The Colonnade
in August 2003, the Hughes Center Properties in December 2003
through May 2004 and Dupont Centre in March 2004; and

o an increase of $0.7 million related to the cost of providing
third party management services to joint venture properties,
which is offset by increased third party fee income and direct
expense reimbursements; partially offset by

o a decrease of $4.0 million from the 54 consolidated Office
Properties (excluding 2003 and 2004 acquisitions and properties
held for sale) that the Operating Partnership owned or had an
interest in, primarily due to:

o $3.5 million decrease in property taxes, insurance and
legal fees;

o $2.2 million decrease in building repairs and maintenance;
partially offset by

o $0.6 million increase in administrative expenses; and

o $0.5 million increase in nonrecoverable leasing costs.

o Resort/Hotel Property expenses increased $2.6 million, or $3.5%, to
$75.9 million, primarily due to:

o an increase of $3.6 million in operating expenses, general and
administrative costs, and advertising at the Destination Fitness
Resorts primarily related to increases in employee health
insurance costs and an increase in occupancy of 2 percentage
points at Canyon Ranch Tucson; offset by

o a decrease of $0.7 million in resort property operating and
management fee expense related to a 6 percentage point decrease
in occupancy (from 60% to 54%).

48

o Residential Development Property expenses decreased $4.7 million, or
4.8%, to $92.3 million, primarily due to:

o a decrease of $22.0 million primarily due to a reduction in cost
of sales related to product mix in lots and units available for
sale in 2004 versus 2003 at CRDI primarily at the One Vendue
project in Charleston, South Carolina which had sales in 2003,
but none in 2004 as the project sold out in 2003, partially
offset by the Old Greenwood project in Tahoe, California which
had sales in 2004, but none in the six months ended June 30,
2003, as product was not available for sale until December 2003;
partially offset by

o an increase of $10.1 million in DMDC and MVDC cost of sales due
to increased lot sales compared to 2003;

o an increase of $4.1 million in marketing expenses at certain CRDI
projects; and

o an increase of $3.5 million in club operating expenses due to an
increase in membership and restaurant addition at CRDI and the
golf course additions at DMDC.

OTHER INCOME/EXPENSE

Total other expenses increased $31.1 million, or 19.3%, to $192.1
million for the six months ended June 30, 2004, compared to $161.0 million for
the six months ended June 30, 2003. The primary components of the increase in
total other expenses are discussed below.

OTHER INCOME

Other income decreased $9.0 million, or 71.4%, to $3.6 million for the
six months ended June 30, 2004, as compared to $12.6 million for the six months
ended June 30, 2003. The primary components of the decrease in other income are
discussed below.

o Interest and other income increased $3.1 million primarily due to $1.4
million of interest on U.S. Treasury and government sponsored agency
securities purchased in December 2003 and January 2004 related to debt
defeasance, $0.7 million of dividends received on other marketable
securities and a $0.5 million increase in interest on certain notes
resulting from note amendments in December 2003.

o Equity in net income of unconsolidated companies decreased $11.3
million, or 137.8%, to a $3.1 million loss, primarily due to:

o a decrease of $4.7 million in Temperature-Controlled Logistics
Properties equity in net income primarily due to a decrease in
rental revenues net of deferred rent and an increase in interest
expense primarily attributable to the $254.4 million financing
with Morgan Stanley Mortgage Capital, Inc. in February 2004;

o a decrease of $4.4 million equity in net income ($2.8 million
attributable to Residential Development Properties and $1.6
million to Office Properties) primarily due to net income
recorded in 2003 for the Operating Partnership's interests in the
entities through which the Operating Partnership held its
interests in The Woodlands, which were sold in December 2003; and

o a decrease of $2.4 million in Resort/Hotel Properties equity in
net income primarily due to net income recorded in 2003 for the
Operating Partnership's interest in the Ritz-Carlton Hotel
Property which was sold in November 2003 and included a $1.1
million payment which the Operating Partnership received from the
operator of the Resort/Hotel Property pursuant to the terms of
the operating agreement because the Property did not achieve the
specified net operating income level.

OTHER EXPENSES

Other expenses increased $22.2 million, or 12.8%, to $195.7 million for
the six months ended June 30, 2004, as compared to $173.5 million for the six
months ended June 30, 2003. The primary components of the increase in other
expenses are discussed below.

o Interest expense increased $4.2 million, or 4.9%, to $90.4 million due
to an increase of approximately $337.0 million in the weighted average
debt balance, partially offset by a 0.75 percentage point decrease in
the weighted average interest rate (from 7.31% to 6.56%) primarily due
to the refinancing and new financings of fixed rate debt at lower
interest rates and the termination of $400.0 million in cash flow
hedges, which were replaced with $400.0 million of cash flow hedges
resulting in a 3.1 percentage point reduction in strike prices (from
6.6% to 3.5%).

49

o Extinguishment of debt increased $2.9 million due to the write off of
deferred financing costs associated with reduction of the Fleet Fund I
and II Term Loan in January 2004, reduction of the Bank of America Fund
XII Term Loan funded by proceeds from the sale of Ptarmigan Place
Office Property and adjacent land and the payoff of the $220.0 million
Deutsche Bank-CMBS Loan in June 2004 funded with proceeds from the
Fountain Place Office Property transaction and a draw on the credit
facility.

o Corporate general and administrative expense increased $2.1 million, or
18.1%, to $13.7 million primarily due to salary merit increases, cost
increases of employee benefits and restricted stock compensation
recorded in 2004.

o Depreciation expense increased $13.1 million, or 19.1%, to $81.6
million, primarily due to:

o $10.1 million increase in Office Property depreciation expense,
attributable to:

o $5.9 million from the acquisitions of The Colonnade in
August 2003 and the Hughes Center Properties in December
2003 though May 2004 and Dupont Centre in March 2004; and

o $4.2 million due to an increase in leasehold improvements,
lease commissions, building improvements, and accelerated
depreciation of leasehold improvements and lease
commissions upon lease terminations;

o $2.0 million increase in Residential Development Property
depreciation expense; and

o $1.2 million increase in Resort/Hotel Property depreciation
expense.

o Amortization of deferred financing costs increased $1.8 million, or
36.0%, to $6.8 million primarily due to the addition of deferred
financing costs related to debt restructuring and refinancing
associated with the $275.0 million secured loan with Bank of America
and Deutsche Bank in January 2004.

o Impairment charges decreased $1.2 million primarily due to the $1.2
million impairment of the North Dallas Athletic Club in the first
quarter 2003.

DISCONTINUED OPERATIONS

Income from discontinued operations on assets sold and held for sale
increased $8.8 million, or 114.3%, to an income of $1.1 million, primarily due
to:

o an increase of $15.0 million due to the impairment of the 1800 West
Loop South Office Property in 2003;

o an increase of $1.8 million due to impairments recorded in 2003 on the
behavioral healthcare properties; partially offset by

o a decrease of $3.1 million due to the reduction of net income
associated with properties held for sale in 2004 compared to 2003;

o a decrease of $2.9 million due to the impairments of three Office
Properties in 2004; and

o a decrease of $2.2 million due to the loss on four Office Properties
and one behavioral healthcare property sold in 2004.

50

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

OPERATING ACTIVITIES

The Operating Partnership's cash provided by operating activities of
$24.8 million is attributable to Property operations.

INVESTING ACTIVITIES

The Operating Partnership's cash used in investing activities of $135.0
million is primarily attributable to:

o $169.8 million purchase of U.S. Treasuries and government
sponsored agency securities in connection with the defeasance of
LaSalle Note II;

o $164.4 million for the acquisition of investment properties,
primarily due to the acquisition of Hughes Center and Dupont
Centre Office Properties;

o $46.7 million for revenue and non-revenue enhancing tenant
improvement and leasing costs for Office Properties;

o $22.1 million for property improvements for rental properties,
primarily attributable to non-recoverable building improvements
for the Office Properties, renovations at Sonoma Mission Inn and
Ventana Inn, and replacement of furniture, fixtures and equipment
for the Resort/Hotel Properties;

o $17.3 million for development of amenities at the Residential
Development Properties;

o $2.4 million of additional investment in Temperature-Controlled
Logistics Properties;

o $1.9 million for development of investment properties; and

o $0.9 million of additional investment in unconsolidated
Residential Development Properties.

The cash used in investing activities is partially offset by:

o $113.3 million decrease in restricted cash, due primarily to
decreased escrow deposits for the purchase of the Hughes Center
Office Properties in January and February 2004;

o $90.8 million from return of investment in Temperature-Controlled
Logistics Properties due primarily to the $254.4 million of
additional financing at the Temperature-Controlled Logistics
Corporation;

o $78.8 million of proceeds from property sales, primarily due to
the sale of the 1800 West Loop South, Liberty Plaza, Ptarmigan
Place and Addison Tower Office Properties;

o $5.5 million of proceeds from defeasance investment maturities;

o $0.7 million from return of investment in unconsolidated Office
Properties; and

o $0.6 million from return of investment in unconsolidated
Resort/Hotel Properties.

FINANCING ACTIVITIES

The Operating Partnership's cash provided by financing activities of
$88.3 million is primarily attributable to:

o $407.5 million of proceeds from other borrowings, primarily as a
result of the new Bank of America Fund XII Term Loan secured by
the Fund XII Properties, the new Lehman Capital Note secured by
the Fountain Place Office Property, and the new Metropolitan Life
Note VII secured by the Dupont Centre Office Property;

o $319.0 million of proceeds from borrowings under the Operating
Partnership's credit facility;

51

o $79.9 million of proceeds from the Fountain Place Office Property
transaction;

o $71.0 million of net proceeds from issuance of Series A Preferred
Units;

o $47.2 million of proceeds from borrowings for construction costs
for infrastructure development at the Residential Development
Properties;

o $1.1 million of capital contributions from joint venture
partners; and

o $0.4 million capital contributions to the Operating Partnership.

The cash provided by financing activities is partially offset by:

o $372.8 million of payments under other borrowings, due primarily
to the pay off of the Deutsche Bank-CMBS Loan, the pay down of
the Fleet Fund I Term Loan and the pay down of the Bank of
America Fund XII Term Loan;

o $325.5 million of payments under the Operating Partnership's
credit facility;

o $87.8 million of distributions to common unitholders;

o $24.5 million of Residential Development Property note payments;

o $16.0 million of distributions to preferred unitholders;

o $6.1 million of debt financing costs primarily associated with
the $275 million Bank of America and Deutsche Bank Term Loan and
the Lehman Capital Note;

o $3.9 million of capital distributions to joint venture partners;
and

o $1.1 million of amortization of debt premiums.

LIQUIDITY REQUIREMENTS

DEBT FINANCING SUMMARY

The following tables show summary information about the Operating
Partnership's debt, including its share of unconsolidated debt, as of June 30,
2004. Additional information about the significant terms of the Operating
Partnership's debt financing arrangements and its unconsolidated debt is
contained in Note 9, "Notes Payable and Borrowings under Credit Facility" and
Note 8, "Investments in Unconsolidated Companies," of Item 1, "Financial
Statements."

Listed below are the aggregate principal payments by year required as
of June 30, 2004. Scheduled principal installments and amounts due at maturity
are included.

- ----------
(1) Excludes effect of extension options on Bank of America Fund XII Term Loan
and expected early payment of LaSalle Note I, JP Morgan Mortgage Note, or
the Nomura Funding VI Note.

52

OFF-BALANCE SHEET ARRANGEMENTS - GUARANTEE COMMITMENTS

The FASB issued Interpretation 45, "Guarantors' Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," requiring a guarantor to disclose its guarantees. The
Operating Partnership's guarantees in place as of June 30, 2004 are listed in
the table below. For the guarantees on indebtedness, no triggering events or
conditions are anticipated to occur that would require payment under the
guarantees and management believes the assets associated with the loans that are
guaranteed are sufficient to cover the maximum potential amount of future
payments and therefore, would not require the Operating Partnership to provide
additional collateral to support the guarantees. The Operating Partnership has
not recorded a liability associated with these guarantees as they were entered
into prior to the adoption of FIN 45.

- ----------
(1) All amounts are approximate.
(2) Reflects the Operating Partnership's estimate of the breakdown between
short-term and long-term capital expenditures.
(3) The capital expenditures reflect the Operating Partnership's ownership
percentage of 30% for Five Post Oak Park Office Property.
(4) Located within the Houston Center Office Property complex.
(5) As of June 30, 2004, the Operating Partnership had invested $40.0 million
in Tahoe Mountain Club, which includes the acquisition of land and
development of a golf course and retail amenities. During 2004, the
Operating Partnership is developing a swim and fitness facility,
clubhouse, and completing the golf course.
(6) The Operating Partnership has a $2.4 million construction loan with the
purchaser of the land, which will be secured by 9 developed lots and a
$0.4 million letter of credit.
(7) The Sonoma Mission Inn rooms remodel was completed and all rooms were
returned to service in July 2004.
(8) This commitment is related to the Operating Partnership's investment in a
private equity fund and its general partner. The commitment is based on
cash contributions and distributions and does not consider equity gains
or losses.
(9) The Operating Partnership and COPI are assessing other alternatives for
the sale of COPI's 40% interest in the tenant of the
Temperature-Controlled Logistics properties, AmeriCold Logistics. At this
time, the Operating Partnership does not expect to spin-off to its
shareholders a new entity that would purchase COPI's interest in
AmeriCold Logistics.

In April 2004, the Operating Partnership entered into agreements with
Ritz-Carlton Hotel Company, L.L.C. to develop the first Ritz-Carlton hotel and
condominium project in Dallas, Texas with development to commence upon reaching
an acceptable level of pre-sales for the residences. The development plans
include a Ritz-Carlton with approximately 216 hotel rooms and 70 residences.
Construction on the development is anticipated to begin in the first quarter of
2005.

LIQUIDITY OUTLOOK

The Operating Partnership expects to fund its short-term capital
requirements of approximately $30.7 million through a combination of net cash
flow from operations and borrowings under the Operating Partnership's credit
facility or additional debt facilities. As of June 30, 2004, the Operating
Partnership had maturing debt obligations of $547.0 million through June 30,
2005, consisting primarily of its credit facility, Fleet Fund I Term Loan and
the Lehman Capital Note. The Operating Partnership plans to refinance the credit
facility and the Fleet Fund I Term Loan in 2004. The Lehman Capital Note is also
expected to be refinanced. The remaining maturities consist primarily of normal
principal amortization and will be meet with cash flow from operations. In
addition, $38.1 million of debt relating to the Residential Developments is
maturing within the next 12 months and will be retired with the sales of the
corresponding land or units or will be refinanced.

The Operating Partnership expects to meet its other short-term
liquidity requirements, consisting of normal recurring operating expenses,
principal and interest payment requirements, non-revenue enhancing capital
expenditures and revenue

54

enhancing capital expenditures (such as property improvements, tenant
improvements and leasing costs), distributions to shareholders and unitholders,
and unfunded expenses related to the COPI bankruptcy, primarily through cash
flow provided by operating activities. The Operating Partnership expects to fund
the remainder of these short-term liquidity requirements with borrowings under
the Operating Partnership's credit facility, return of capital from Residential
Development Properties, proceeds from the sale of non-core investments, other
business initiatives or the joint venture of Properties, and borrowings under
additional debt facilities.

The Operating Partnership's long-term liquidity requirements as of June
30, 2004 consist primarily of $2.2 billion of debt maturing after June 30, 2005.
The Operating Partnership also has $3.8 million of long-term capital expenditure
requirements. The Operating Partnership anticipates meeting these long-term
maturity obligations primarily through refinancing maturing debt with long-term
secured and unsecured debt and through other debt and equity financing
alternatives as well as cash proceeds received from the sale or joint venture of
Properties.

Debt and equity financing alternatives currently available to the
Operating Partnership to satisfy its liquidity requirements and commitments for
material capital expenditures include:

o Additional proceeds from the Operating Partnership's Credit Facility
under which the Operating Partnership had up to $151.9 million of
borrowing capacity available as of June 30, 2004;

o Additional proceeds from the refinancing of existing secured and
unsecured debt;

o Additional debt secured by existing underleveraged properties;

o Issuance of additional unsecured debt; and

o Equity offerings including preferred and/or convertible securities or
joint ventures of existing properties.

The following factors could limit the Operating Partnership's ability
to utilize these financing alternatives:

o The reduction in the operating results of the Properties supporting the
Operating Partnership's Credit Facility to a level that would reduce
the availability of funds under the Credit Facility;

o A reduction in the operating results of the Properties could limit the
Operating Partnership's ability to refinance existing secured and
unsecured debt, or extend maturity dates or could result in an uncured
or unwaived event of default;

o The Operating Partnership may be unable to obtain debt or equity
financing on favorable terms, or at all, as a result of the financial
condition of the Operating Partnership or market conditions at the time
the Operating Partnership seeks additional financing;

o Restrictions under the Operating Partnership's debt instruments or
outstanding equity may prohibit it from incurring debt or issuing
equity on terms available under then-prevailing market conditions or at
all; and

o The Operating Partnership may be unable to service additional or
replacement debt due to increases in interest rates or a decline in the
Operating Partnership's operating performance.

The Operating Partnership's portion of unconsolidated debt maturing
through June 30, 2005 is $74.4 million. The Operating Partnership's portion of
unconsolidated debt maturing after June 30, 2005 is $410.0 million.
Unconsolidated debt is the liability of the unconsolidated entity, is typically
secured by that entity's property, and is non-recourse to the Operating
Partnership except where a guarantee exists.

55

EQUITY AND DEBT FINANCING

SERIES A PREFERRED OFFERING

On January 15, 2004, the Company completed an offering (the "January
2004 Series A Preferred Offering") of an additional 3,400,000 Series A
Convertible Cumulative Preferred Shares (the "Series A Preferred Shares") at a
$21.98 per share price and with a liquidation preference of $25.00 per share for
aggregate total offering proceeds of approximately $74.7 million. The Series A
Preferred Shares are convertible at any time, in whole or in part, at the option
of the holders, into common shares of the Company at a conversion price of
$40.86 per common share (equivalent to a conversion rate of 0.6119 common shares
per Series A Preferred Share), subject to adjustment in certain circumstances.
The Series A Preferred Shares have no stated maturity and are not subject to
sinking fund or mandatory redemption. At any time, the Series A Preferred Shares
may be redeemed, at the Company's option, by paying $25.00 per share plus any
accumulated accrued and unpaid distributions. Dividends on the additional Series
A Preferred Shares are cumulative from November 16, 2003, and are payable
quarterly in arrears on the fifteenth of February, May, August and November,
commencing February 16, 2004. The annual fixed dividend on the Series A
Preferred Shares is $1.6875 per share.

In connection with the January 2004 Series A Preferred Offering, the
Operating Partnership issued additional Series A Preferred Units to the Company
in exchange for the contribution of the net proceeds, after underwriting
discounts, offering costs and dividends accrued on the units up to the issuance
date of approximately $71.0 million. The Operating Partnership used the net
proceeds to pay down the Operating Partnership's credit facility.

56

DEBT FINANCING ARRANGEMENTS

The significant terms of the Operating Partnership's primary debt
financing arrangements existing as of June 30, 2004, are shown below:

- ----------
(1) For more information regarding the terms of the Operating Partnership's
debt financing arrangements, including properties securing the Operating
Partnership's secured debt and the method of calculation of the interest
rate for the Operating Partnership's variable rate debt, see Note 9, "Notes
Payable and Borrowings under the Credit Facility," included in Item 1,
"Financial Statements."

(2) In December 2003, the Operating Partnership defeased approximately $8.7
million of this loan to release one of the Funding II Properties securing
the loan by purchasing $9.6 million in U.S. Treasuries and government
sponsored agency securities to substitute as collateral. On January 15,
2004, the Operating Partnership defeased approximately $150.7 million to
release the remainder of the Funding II properties by purchasing $170.0
million in U.S. Treasuries and government sponsored agency securities. The
earnings and principal maturity from these investments will pay the
principal and interest associated with the LaSalle Note II.

(3) Includes a portion of total premiums of $7.7 million reflecting market
value of debt acquired with purchase of Hughes Center portfolio.

(4) This loan has one one-year extension option.

(5) The outstanding balance excludes letters of credit issued under the credit
facility of $7.6 million.

(6) The overall weighted average interest rate does not include the effect of
the Operating Partnership's cash flow hedge agreements. Including the
effect of these agreements, the overall weighted average interest rate
would have been 6.82%.

57

The Operating Partnership is generally obligated by its debt agreements
to comply with financial covenants, affirmative covenants and negative
covenants, or some combination of these types of covenants. The financial
covenants to which the Operating Partnership is subject include, among others,
leverage ratios, debt service coverage ratios and limitations on total
indebtedness. The affirmative covenants to which the Operating Partnership is
subject under its debt agreements include, among others, provisions requiring
the Operating Partnership to comply with all laws relating to operation of any
Properties securing the debt, maintain those Properties in good repair and
working order, maintain adequate insurance and provide timely financial
information. The negative covenants under the Operating Partnership's debt
agreements generally restrict the Operating Partnership's ability to transfer or
pledge assets or incur additional debt at a subsidiary level, limit the
Operating Partnership's ability to engage in transactions with affiliates and
place conditions on the Operating Partnership's or a subsidiary's ability to
make distributions.

Failure to comply with covenants generally will result in an event of
default under that debt instrument. Any uncured or unwaived events of default
under the Operating Partnership's loans can trigger an increase in interest
rates, an acceleration of payment on the loan in default, and for the Operating
Partnership's secured debt, foreclosure on the property securing the debt, and
could cause the credit facility to become unavailable to the Operating
Partnership. In addition, an event of default by the Operating Partnership or
any of its subsidiaries with respect to any indebtedness in excess of $5.0
million generally will result in an event of default under the Credit Facility,
2007 Notes, 2009 Notes, Bank of America Fund XII Term Loan, the Fleet Fund I
Term Loan and the Fleet Term Loan after the notice and cure periods for the
other indebtedness have passed. As a result, any uncured or unwaived event of
default could have an adverse effect on the Operating Partnership's business,
financial condition, or liquidity.

The Operating Partnership's debt facilities generally prohibit loan
prepayment for an initial period, allow prepayment with a penalty during a
following specified period and allow prepayment without penalty after the
expiration of that period. During the six months ended June 30, 2004, there were
no circumstances that required prepayment penalties or increased collateral
related to the Operating Partnership's existing debt.

On June 28, 2004, the Operating Partnership paid off the $220.0 million
Deutsche Bank-CMBS loan with proceeds from the Fountain Place transaction and a
draw on the Operating Partnership's credit facility. See "Recent Developments,"
in this Item 2, for additional information regarding the Fountain Place
transaction. The loan was secured by the Funding X Properties and Spectrum
Center. In July 2004, the Operating Partnership unwound the $220.0 million
interest rate cap with JP Morgan Chase that corresponded to this loan.

DEFEASANCE OF LASALLE NOTE II

In January 2004, the Operating Partnership released the remaining
properties in Funding II by reducing the Fleet Fund I and II Term Loan by $104.2
million and purchasing an additional $170.0 million of U.S. Treasury and
government sponsored agency securities with an initial weighted average yield of
1.76%. The Operating Partnership placed those securities into a collateral
account for the sole purpose of funding payments of principal and interest on
the remainder of the LaSalle Note II. The cash flow from the securities is
structured to match the cash flow (principal and interest payments) required
under the LaSalle Note II. The retirement of the Fleet loan and the purchase of
the defeasance securities were funded through the $275 million Bank of America
Fund XII Term Loan. The collateral for the Bank of America loan is 10 of the 11
properties previously in the Funding II collateral pool, which are now held in
Funding XII. The Bank of America loan is structured to allow the Operating
Partnership the flexibility to sell, joint venture or long-term finance these 10
assets over the next 36 months. The final Funding II property, Liberty Plaza,
was moved to the Operating Partnership and subsequently sold in April 2004.

UNCONSOLIDATED DEBT ARRANGEMENTS

As of June 30, 2004, the total debt of the unconsolidated joint
ventures and equity investments in which the Operating Partnership has ownership
interests was $1.3 billion, of which the Operating Partnership's share was
$484.4 million. The Operating Partnership had guaranteed $6.4 million of this
debt as of June 30, 2004. Additional information relating to the Operating
Partnership's unconsolidated debt financing arrangements is contained in Note 8,
"Investments in Unconsolidated Companies," of Item 1, "Financial Statements."

58

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Operating Partnership uses derivative financial instruments to
convert a portion of its variable rate debt to fixed rate debt and to manage its
fixed to variable rate debt ratio. As of June 30, 2004, the Operating
Partnership had three cash flow hedge agreements which are accounted for in
conformity with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an Amendment of FASB Statement No.
133."

The following table shows information regarding the Operating
Partnership's interest rate swaps designated as cash flow hedge agreements
during the six months ended June 30, 2004, and additional interest expense and
unrealized gains (losses) recorded in Accumulated Other Comprehensive Income
("OCI").

- ----------
(1) The remaining 50% interest in Main Street Partners, L.P. is owned by Trizec
Properties, Inc.

(2) The remaining 60% interest in Crescent Miami Center, L.L.C. is owned by an
affiliate of a fund managed by JP Morgan Fleming Asset Management, Inc.

(3) The remaining 70% interest in Crescent Five Post Oak Park, L.P. is owned by
an affiliate of General Electric Pension Fund Trust.

(4) The remaining 70% interest in Crescent One BriarLake Plaza, L.P. is owned
by affiliates of JP Morgan Fleming Asset Management, Inc.

(5) The remaining 75% interest in Crescent 5 Houston Center, L.P. is owned by a
pension fund advised by JP Morgan Fleming Asset Management, Inc.

(6) The remaining 80% interest in each of Austin PT BK One Tower Office Limited
Partnership, Houston PT Three Westlake Office Limited Partnership and
Houston PT Four Westlake Office Limited Partnership is owned by an
affiliate of General Electric Pension Fund Trust.

(7) The remaining 44% in Vornado Crescent Carthage and KC Quarry, L.L.C. is
owned by Vornado Realty Trust, L.P.

(8) The remaining 60% interest in Vornado Crescent Portland Partnership is
owned by Vornado Realty Trust, L.P.

(9) The remaining 50% interest in Blue River Land Company, L.L.C. is owned by
parties unrelated to the Operating Partnership. Blue River Land Company,
L.L.C. was formed to acquire, develop and sell certain real estate property
in Summit County, Colorado.

(10) Of the remaining 50% interest in Canyon Ranch Las Vegas, L.L.C., 35% is
owned by an affiliate of the management company of two of the Operating
Partnership's Resort/Hotel Properties and 15% is owned by the Operating
Partnership through its investments in CR License II, L.L.C. Canyon Ranch
Las Vegas, L.L.C. operates a Canyon Ranch spa in a hotel in Las Vegas.

(11) The remaining 58.3% interest in EW Deer Valley, L.L.C. is owned by parties
unrelated to the Operating Partnership. EW Deer Valley, L.L.C. was formed
to acquire, hold and dispose of its 3.3% ownership interest in Empire
Mountain Village, L.L.C. Empire Mountain Village, L.L.C. was formed to
acquire, develop and sell certain real estate property at Deer Valley Ski
Resort next to Park City, Utah.

(12) The remaining 70% interest in CR License, L.L.C. is owned by an affiliate
of the management company of two of the Operating Partnership's
Resort/Hotel Properties. CR License, L.L.C. owns the licensing agreement
related to certain Canyon Ranch trade names and trademarks.

(13) The remaining 70% interest in CR License II, L.L.C. is owned by an
affiliate of the management company of two of the Operating Partnership's
Resort/Hotel Properties. CR License II, L.L.C. and its wholly-owned
subsidiaries provide management and development consulting services to a
variety of entities in the hospitality, real estate, and health and
wellness industries.

(14) Of the remaining 76.5% of SunTx Fulcrum Fund, 37.1% is owned by SunTx
Capital Partners, L.P. and the remaining 39.4% is owned by a group of
individuals unrelated to the Operating Partnership. SunTx Fulcrum Fund,
L.P.'s objective is to invest in a portfolio of acquisitions that offer the
potential for substantial capital appreciation.

(15) SunTx Capital Partners, L.P. is the general Partner of the SunTx Fulcrum
Fund, L.P. The remaining 85.6% interest in SunTx Capital Partners, L.P. is
owned by parties unrelated to the Operating Partnership.

(16) G2 was formed for the purpose of investing in commercial mortgage backed
securities and other commercial real estate investments. The remaining
87.5% interest in G2 is owned by Goff-Moore Strategic Partners, L.P.
("GMSPLP") and by parties unrelated to the Operating Partnership. G2 is
managed and controlled by an entity that is owned equally by GMSPLP and
GMAC Commercial Mortgage Corporation ("GMACCM"). The ownership structure of
GMSPLP consists of an approximately 86% limited partnership interest owned
directly and indirectly by Richard E. Rainwater, Chairman of the Board of
Trust Managers of the Company, and an approximately 14% general partnership
interest, of which approximately 6% is owned by Darla Moore, who is married
to Mr. Rainwater, and approximately 6% is owned by John C. Goff,
Vice-Chairman of the Company's Board of Trust Managers and Chief Executive
Officer of the Company and sole director and Chief Executive Officer of the
General Partner. The remaining approximately 2% general partnership
interest is owned by unrelated parties.

60

TEMPERATURE-CONTROLLED LOGISTICS SEGMENT

AmeriCold Logistics, a limited liability company owned 60% by Vornado
Operating L.P. and 40% by a subsidiary of Crescent Operating, Inc. ("COPI"), as
sole lessee of the Temperature-Controlled Logistics Properties, leases the
Temperature-Controlled Logistics Properties from the Temperature-Controlled
Logistics Corporation under three triple-net master leases, as amended. The
Operating Partnership has no interest in COPI or AmeriCold Logistics. On March
2, 2004, the Temperature-Controlled Logistics Corporation and AmeriCold
Logistics amended the leases to further extend the deferred rent period to
December 31, 2005, from December 31, 2004. The parties previously extended the
deferred rent period to December 31, 2004 from December 31, 2003, on March 7,
2003.

Under terms of the leases, AmeriCold Logistics elected to defer $26.9
million of the total $78.9 million of rent payable for the six months ended June
30, 2004. The Operating Partnership's share of the deferred rent was $10.8
million. The Operating Partnership recognizes rental income from the
Temperature-Controlled Logistics Properties when earned and collected and has
not recognized the $10.8 million of deferred rent in equity in net income of the
Temperature-Controlled Logistics Properties for the six months ended June 30,
2004. As of June 30, 2004, the Temperature-Controlled Logistics Corporation's
deferred rent and valuation allowance from AmeriCold Logistics were $109.3
million and $101.2 million, respectively, of which the Operating Partnership's
portions were $43.7 million and $40.5 million, respectively.

As a result of the continuing inability of AmeriCold Logistics to pay
the full amount of the rent due under the leases without deferral elections, the
Operating Partnership anticipates that the Temperature-Controlled Logistics
Corporation may restructure the leases in 2004, although it is under no
obligation to do so.

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

SIGNIFICANT ACCOUNTING POLICIES

CRITICAL ACCOUNTING POLICIES

The Operating Partnership's discussion and analysis of financial
condition and results of operations is based on its consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Operating Partnership to make estimates and judgments
that affect the reported amounts of assets, liabilities, and contingencies as of
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. The Operating Partnership evaluates its
assumptions and estimates on an ongoing basis. The Operating Partnership bases
its estimates on historical experience and on various other assumptions that it
believes to be reasonable under the circumstances. These estimates form the
basis for making judgments about the carrying values of assets and liabilities
where that information is available from other sources. Certain estimates are
particularly sensitive due to their significance to the financial statements.
Actual results may differ significantly from management's estimates.

The Operating Partnership believes that the most significant accounting
policies that involve the use estimates and assumptions as to future
uncertainties and, therefore, may result in actual amounts that differ from
estimates are the following:

o Impairments,

o Acquisition of operating properties,

o Relative sales method and percentage of completion (Residential
Development entities),

o Gain recognition on sale of real estate assets,

o Consolidation of variable interest entities, and

o Allowance for doubtful accounts.

IMPAIRMENTS. Real estate and leasehold improvements are classified as
long-lived assets held for sale or long-lived assets to be held and used. In
accordance with SFAS No. 144, the Operating Partnership records assets held for
sale at the lower of carrying value or sales price less costs to sell. For
assets classified as held and used, these assets are tested for recoverability
when events or changes in circumstances indicate that the estimated carrying
amount may not be recoverable. An impairment loss is recognized when expected
undiscounted future cash flows from a Property is less than the carrying value
of the Property. The Operating Partnership's estimates of cash flows of the
Properties requires the Operating

61

Partnership to make assumptions related to future rental rates, occupancies,
operating expenses, the ability of the Operating Partnership's tenants to
perform pursuant to their lease obligations and proceeds to be generated from
the eventual sale of the Operating Partnership's Properties. Any changes in
estimated future cash flows due to changes in the Operating Partnership's plans
or views of market and economic conditions could result in recognition of
additional impairment losses.

If events or circumstances indicate that the fair value of an
investment accounted for using the equity method has declined below its carrying
value and the Operating Partnership considers the decline to be "other than
temporary," the investment is written down to fair value and an impairment loss
is recognized. The evaluation of impairment for an investment would be based on
a number of factors, including financial condition and operating results for the
investment, inability to remain in compliance with provisions of any related
debt agreements, and recognition of impairments by other investors. Impairment
recognition would negatively impact the recorded value of our investment and
reduce net income.

ACQUISITION OF OPERATING PROPERTIES. The Operating Partnership
allocates the purchase price of acquired properties to tangible and identified
intangible assets acquired based on their fair values in accordance with SFAS
No. 141, "Business Combinations."

In making estimates of fair value for purposes of allocating purchase
price, management utilizes sources, including, but not limited to, independent
value consulting services, independent appraisals that may be obtained in
connection with financing the respective property, and other market data.
Management also considers information obtained about each property as a result
of its pre-acquisition due diligence, marketing and leasing activities in
estimating the fair value of the tangible and intangible assets acquired.

The aggregate value of the tangible assets acquired is measured based
on the sum of (i) the value of the property and (ii) the present value of the
amortized in-place tenant improvement allowances over the remaining term of each
lease. Management's estimates of the value of the property are made using models
similar to those used by independent appraisers. Factors considered by
management in its analysis include an estimate of carrying costs such as real
estate taxes, insurance, and other operating expenses and estimates of lost
rentals during the expected lease-up period assuming current market conditions.
The value of the property is then allocated among building, land, site
improvements, and equipment. The value of tenant improvements is separately
estimated due to the different depreciable lives.

The aggregate value of intangible assets acquired is measured based on
the difference between (i) the purchase price and (ii) the value of the tangible
assets acquired as defined above. This value is then allocated among
above-market and below-market in-place lease values, costs to execute similar
leases (including leasing commissions, legal expenses and other related
expenses), in-place lease values and customer relationship values.

Above-market and below-market in-place lease values for acquired
properties are calculated based on the present value (using a market interest
rate which reflects the risks associated with the leases acquired) of the
difference between (i) the contractual amounts to be paid pursuant to the
in-place leases and (ii) management's estimate of fair market lease rates for
the corresponding in-place leases, measured over a period equal to the remaining
non-cancelable term of the lease for above-market leases and the initial term
plus the term of the below-market fixed rate renewal option, if any, for
below-market leases. The Operating Partnership performs this analysis on a lease
by lease basis. The capitalized above-market lease values are amortized as a
reduction to rental income over the remaining non-cancelable terms of the
respective leases. The capitalized below-market lease values are amortized as an
increase to rental income over the initial term plus the term of the
below-market fixed rate renewal option, if any, of the respective leases.

Management estimates costs to execute leases similar to those acquired
at the property at acquisition based on current market conditions. These costs
are recorded based on the present value of the amortized in-place leasing costs
on a lease by lease basis over the remaining term of each lease.

The in-place lease values and customer relationship values are based on
management's evaluation of the specific characteristics of each customer's lease
and the Operating Partnership's overall relationship with that respective
customer. Characteristics considered by management in allocating these values
include the nature and extent of the Operating Partnership's existing business
relationships with the customer, growth prospects for developing new business
with the customer, the customer's credit quality, and the expectation of lease
renewals, among other factors. The in-place lease value and customer
relationship value are both amortized to expense over the initial term of the
respective leases and projected renewal periods, but in no event does the
amortization period for the intangible assets exceed the remaining depreciable
life of the building.

Should a tenant terminate its lease, the unamortized portion of the
in-place lease value and the customer relationship value and above-market and
below-market in-place lease values would be charged to expense.

62

RELATIVE SALES METHOD AND PERCENTAGE OF COMPLETION. The Operating
Partnership uses the accrual method to recognize earnings from the sale of
Residential Development Properties when a third-party buyer had made an adequate
cash down payment and has attained the attributes of ownership. If a sale does
not qualify for the accrual method of recognition, deferral methods are used as
appropriate including the percentage-of-completion method. In certain cases,
when the Operating Partnership receives an inadequate cash down payment and
takes a promissory note for the balance of the sales price, revenue recognition
is deferred until such time as sufficient cash is received to meet minimum down
payment requirements. The cost of residential property sold is defined based on
the type of product being purchased. The cost of sales for residential lots is
generally determined as a specific percentage of the sales revenues recognized
for each Residential Development project. The percentages are based on total
estimated development costs and sales revenue for each Residential Development
project. These estimates are revised annually and are based on the then-current
development strategy and operating assumptions utilizing internally developed
projections for product type, revenue and related development costs. The cost of
sale for residential units (such as townhomes and condominiums) is determined
using the relative sales value method. If the residential unit has been sold
prior to the completion of infrastructure cost, and those uncompleted costs are
not significant in relation to total costs, the full accrual method is utilized.
Under this method, 100% of the revenue is recognized, and a commitment liability
is established to reflect the allocated estimated future costs to complete the
residential unit. If the Operating Partnership's estimates of costs or the
percentage of completion is incorrect, it could result in either an increase or
decrease in cost of sales expense or revenue recognized and therefore, an
increase or decrease in net income.

GAIN RECOGNITION ON SALE OF REAL ESTATE ASSETS. The Operating
Partnership performs evaluations of each real estate sale to determine if full
gain recognition is appropriate in accordance with SFAS No. 66, "Accounting for
Sales of Real Estate." The application of SFAS No. 66 can be complex and
requires the Operating Partnership to make assumptions including an assessment
of whether the risks and rewards of ownership have been transferred, the extent
of the purchaser's investment in the property being sold, whether the Operating
Partnership's receivables, if any, related to the sale are collectible and are
subject to subordination, and the degree of the Operating Partnership's
continuing involvement with the real estate asset after the sale. If full gain
recognition is not appropriate, the Operating Partnership accounts for the sale
under an appropriate deferral method.

CONSOLIDATION OF VARIABLE INTEREST ENTITIES. On January 15, 2003, the
FASB approved the issuance of Interpretation 46, "Consolidation of Variable
Interest Entities," ("FIN 46"), an interpretation of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements." In December 2003, the FASB
issued FIN 46R, "Consolidation of Variable Interest Entities" ("FIN 46R"), which
amended FIN 46. Under FIN 46R, consolidation requirements are effective
immediately for new Variable Interest Entities ("VIEs") created after January
31, 2003. The consolidation requirements apply to existing VIEs for financial
periods ending after March 15, 2004, except for special purpose entities which
had to be consolidated by December 31, 2003. VIEs are generally a legal
structure used for business enterprises that either do not have equity investors
with voting rights, or have equity investors that do not provide sufficient
financial resources for the entity to support its activities. The objective of
the new guidance is to improve reporting by addressing when a company should
include in its financial statements the assets, liabilities and activities of
other entities such as VIEs. FIN 46R requires VIEs to be consolidated by a
company if the company is subject to a majority of the expected losses of the
VIE's activities or entitled to receive a majority of the entity's expected
residual returns or both.

The adoption of FIN 46R did not have a material impact to the Operating
Partnership's financial condition or results of operations. Due to the adoption
of this Interpretation and management's assumptions in application of the
guidelines stated in the Interpretation, the Operating Partnership has
consolidated GDW LLC, a subsidiary of DMDC, as of December 31, 2003 and Elijah
Fulcrum Fund Partners, L.P. ("Elijah") as of January 1, 2004. Elijah is a
limited partnership whose purpose is to invest in the SunTx Fulcrum Fund, L.P.
SunTx Fulcrum Fund, L.P.'s objective is to invest in a portfolio of acquisitions
that offer the potential for substantial capital appreciation. While it was
determined that one of the Operating Partnership's unconsolidated joint
ventures, Main Street Partners, L.P., and its investments in Canyon Ranch Las
Vegas, L.L.C., CR License, L.L.C. and CR License II, L.L.C. ("Canyon Ranch
Entities") are VIEs under FIN 46R, the Operating Partnership is not the primary
beneficiary and is not required to consolidate these entities under other GAAP.
The Operating Partnership's maximum exposure to loss is limited to its equity
investment of approximately $52.0 million in Main Street Partners, L.P. and $5.1
million in the Canyon Ranch Entities at June 30, 2004.

In connection with the Hughes Center acquisition, the Operating
Partnership entered into two separate exchange agreements with a third party
intermediary. The first exchange agreement includes two parcels of undeveloped
land and the second exchange agreement includes the 3930 Hughes Parkway Office
Property. Both agreements were for a maximum term of 180 days and allow the
Operating Partnership to pursue favorable tax treatment on other properties sold
by the Operating Partnership within this period. During the 180-day periods,
which will end on August 28, 2004 and November 6, 2004, respectively, the third
party intermediary is the legal owner of the properties, although the Operating
Partnership controls the properties, retains all of the economic benefits and
risks associated with these properties and indemnifies the third party

63

intermediary and, therefore, the Operating Partnership fully consolidates these
properties. The Operating Partnership will take legal ownership of the
properties no later than on the expiration of the 180-day period.

Further, in connection with the Hughes Center acquisition, the
Operating Partnership entered into an exchange agreement with a third party
intermediary for six of the Office Properties and the nine retail parcels. This
agreement was for a maximum term of 180 days and allowed the Operating
Partnership to pursue favorable tax treatment on other properties sold by the
Operating Partnership within this period. During the 180-day period, which ended
on June 28, 2004, the third party intermediary was the legal owner of the
properties, although the Operating Partnership controlled the properties,
retained all of the economic benefits and risks associated with these properties
and indemnified the third party intermediary and, therefore, the Operating
Partnership fully consolidated these properties. On June 28, 2004, the Operating
Partnership took legal ownership of the Office Properties.

ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Operating Partnership's accounts
receivable balance is reduced by an allowance for amounts that may become
uncollectible in the future. The Operating Partnership's receivable balance is
composed primarily of rents and operating cost recoveries due from its tenants.
The Operating Partnership also maintains an allowance for deferred rent
receivables which arise from the straight-lining of rents. The allowance for
doubtful accounts is reviewed at least quarterly for adequacy by reviewing such
factors as the credit quality of the Operating Partnership's tenants, any
delinquency in payment, historical trends and current economic conditions. If
the assumptions regarding the collectibility of accounts receivable prove
incorrect, the Operating Partnership could experience write-offs in excess of
its allowance for doubtful accounts, which would result in a decrease in net
income.

ADOPTION OF NEW ACCOUNTING STANDARD

EITF 03-1. At the March 17-18, 2004 meeting, consensus was reached by
the FASB Emerging Issues Task Force on EITF 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments." The
Consensus applies to investments in debt and equity securities within the scope
of SFAS Nos. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and 124, "Accounting for Certain Investments Held by Not-for-Profit
Organizations." It also applies to investments in equity securities that are
both outside SFAS No. 115's scope and not accounted for under the equity method.
The Task Force reached a consensus that certain quantitative and qualitative
disclosures should be required for securities that are impaired at the balance
sheet date but for which an other-than-temporary impairment has not been
recognized. The new impairment guidance creates a model that calls for many
judgments and additional evidence gathering in determining whether or not
securities are other-than-temporarily impaired and lists some of these
impairment indicators. The impairment accounting guidance is effective for
periods beginning after June 15, 2004 and the disclosure requirements for annual
reporting periods are effective for periods ending after June 15, 2004. The
Operating Partnership adopted EITF 03-1 effective July 1, 2004 and expects no
impact on the Operating Partnership's financial condition or its results of
operations.

64

FUNDS FROM OPERATIONS

FFO, as used in this document, means:

o Net Income (Loss) - determined in accordance with GAAP;

o excluding gains (or losses) from sales of depreciable operating
property;

o excluding extraordinary items (as defined by GAAP);

o plus depreciation and amortization of real estate assets; and

o after adjustments for unconsolidated partnerships and joint
ventures.

The Operating Partnership calculates FFO available to partners -
diluted in the same manner, except that Net Income (Loss) is replaced by Net
Income (Loss) Available to Partners.

The National Association of Real Estate Investment Trusts ("NAREIT")
developed FFO as a relative measure of performance and liquidity of an equity
REIT to recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. The Operating Partnership
considers FFO available to partners - diluted and FFO appropriate measures of
performance for an operating partnership of an equity REIT and for its
investment segments. However, FFO available to partners - diluted and FFO should
not be considered an alternative to net income determined in accordance with
GAAP as an indication of the Operating Partnership's operating performance

The aggregate cash distributions paid to unitholders for the six months
ended June 30, 2004 and 2003 were $87.8 million and $87.1 million, respectively.
The Operating Partnership reported FFO available to partners before impairments
charges related to real estate assets - diluted of $58.6 million and $77.9
million, for the six months ended June 30, 2004 and 2003, respectively. The
Operating Partnership reported FFO available to partners after impairments
charges related to real estate assets - diluted of $55.7 million and $59.8
million, for the six months ended June 30, 2004 and 2003, respectively.

An increase or decrease in FFO available to partners - diluted does not
necessarily result in an increase or decrease in aggregate distributions because
the Company's Board of Trust Managers is not required to increase distributions
on a quarterly basis unless necessary for the Company to maintain REIT status.
However, the Company must distribute 90% of its REIT taxable income (as defined
in the Code). Therefore, a significant increase in FFO available to partners -
diluted will generally require an increase in distributions to unitholders
although not necessarily on a proportionate basis.

Accordingly, the Operating Partnership believes that to facilitate a
clear understanding of the consolidated historical operating results of the
Operating Partnership, FFO available to partners - diluted should be considered
in conjunction with the Operating Partnership's net income and cash flows
reported in the consolidated financial statements and notes to the financial
statements. However, the Operating Partnership's measure of FFO available to
partners - diluted may not be comparable to similarly titled measures of
operating partnerships of REITs (other than the Company) because these REITs may
apply the definition of FFO in a different manner than the Operating
Partnership.

65

CONSOLIDATED STATEMENTS OF FUNDS FROM OPERATIONS
(in thousands)

- ----------
(1) Includes interest and other income, income/loss from other unconsolidated
companies, other expenses, depreciation and amortization of non-real estate
assets and amortization of deferred financing costs.

(2) See calculations for the amounts presented in the reconciliation following
this table.

66

The following schedule reconciles the Operating Partnership's basic
weighted average units to the diluted weighted average units presented above:

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

No material changes in the Operating Partnership's market risk occurred
from December 31, 2003 through June 30, 2004. Information regarding the
Operating Partnership's market risk at December 31, 2003 is contained in Item
7A, "Quantitative and Qualitative Disclosures About Market Risk," in the
Operating Partnership's Annual Report on Form 10-K for the year ended December
31, 2003.

ITEM 4. CONTROLS AND PROCEDURES

The Operating Partnership and Crescent Finance Company maintain
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Operating Partnership's and Crescent Finance
Company's reports under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms,
and that such information is accumulated and communicated to the Operating
Partnership's and Crescent Finance Company's management, including the Chief
Executive Officer and Chief Financial Officer of the General Partner and
Crescent Finance Company, as appropriate, to allow timely decisions regarding
required disclosure based closely on the definition of "disclosure controls and
procedures" in Rule 13a-15(e) promulgated under the Exchange Act. In designing
and evaluating the disclosure controls and procedures, management recognized
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.

As of June 30, 2004, the Operating Partnership and Crescent Finance
Company carried out an evaluation, under the supervision and with the
participation of the Operating Partnership's and Crescent Finance Company's
management, including the Chief Executive Officer and Chief Financial Officer of
the General Partner and Crescent Finance Company, of the effectiveness of the
design and operation of the Operating Partnership's and Crescent Finance
Company's disclosure controls and procedures. Based on the foregoing, the Chief
Executive Officer and Chief Financial Officer of the General Partner and
Crescent Finance Company concluded that the Operating Partnership's and Crescent
Finance Company's disclosure controls and procedures were effective at the
reasonable assurance level.

During the three months ended June 30, 2004, there was no change in the
Operating Partnership's and Crescent Finance Company's internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Operating Partnership's and Crescent Finance Company's
internal control over financial reporting.

67

PART II

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

The exhibits required by this item are set forth on the Exhibit Index
attached hereto.

(b) Reports on Form 8-K

None.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
each of the Registrants has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
(Registrant)
By: Crescent Real Estate Equities, Ltd.
Its General Partner

By /s/ John C. Goff
-------------------------------------------------------
John C. Goff
Date: August 6, 2004 Sole Director and Chief Executive Officer

By /s/ Jerry R. Crenshaw, Jr
-------------------------------------------------------
Jerry R. Crenshaw, Jr.
Executive Vice President and Chief Financial Officer
Date: August 6, 2004 (Principal Financial and Accounting Officer)

CRESCENT FINANCE COMPANY
(Registrant)

By /s/ John C. Goff
-------------------------------------------------------
John C. Goff
Date: August 6, 2004 Sole Director and Chief Executive Officer

By /s/ Jerry R. Crenshaw, Jr
-------------------------------------------------------
Jerry R. Crenshaw, Jr.
Executive Vice President and Chief Financial Officer
Date: August 6, 2004 (Principal Financial and Accounting Officer)

69

INDEX TO EXHIBITS