VORNADO REALTY LP - 10-K Annual Report

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EXHIBIT INDEX ON PAGE 154

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-K

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the Fiscal Year Ended: DECEMBER 31, 2002
Or

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

For the transition period from _________________ to _________________

Commission File Number: 000-22635

VORNADO REALTY L.P.
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(Exact name of Registrant as specified in its charter)

DELAWARE 13-3925979
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

888 SEVENTH AVENUE, NEW YORK, NEW YORK 10019
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(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number including area code: (212) 894-7000

Securities registered pursuant to Section 12(b) of the Act: NONE

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

Class A Units of Limited Partnership Interest
Series A Preferred Units of Limited Partnership Interest

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

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES /X/ NO / /

There is no public market for the Class A units of limited partnership
interest of Vornado Realty L.P. Based on the closing price of Vornado Realty
Trust's common shares on June 28, 2002, which are issuable upon redemption of
the Class A units, the aggregate market value of the Class A units held by
non-affiliates of the registrant, i.e. by persons other than Vornado Realty
Trust and the officers and trustees of Vornado Realty Trust, was
approximately $985,068,000.

DOCUMENTS INCORPORATED BY REFERENCE

PART III: Portions of Vornado Realty Trust's Proxy Statement for Annual Meeting
of Shareholders to be held on May 28, 2003.

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TABLE OF CONTENTS

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(1) Vornado Realty Trust, the Registrant's general partner, will file a
definitive Proxy Statement pursuant to Regulation 14A involving the
election of directors with the Securities and Exchange Commission not later
than 120 days after December 31, 2002, which is incorporated by reference
herein. Information relating to Executive Officers of Vornado Realty Trust
appears on page 53 of this Annual Report on Form 10-K.

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FORWARD LOOKING STATEMENTS

Certain statements contained herein constitute forward-looking statements
as such term is defined in Section 27A of the Securities Act of 1933, as amended
(the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Forward-looking statements are not guarantees
of performance. Our future results, financial condition and business may differ
materially from those expressed in these forward-looking statements. You can
find many of these statements by looking for words such as "believes",
"expects", "anticipates", "estimates", "intends", "plans" or similar expressions
in this annual report on Form 10-K. These forward-looking statements are subject
to numerous assumptions, risks and uncertainties. Many of the factors that will
determine these items are beyond our ability to control or predict. For further
discussion of these factors, see "Item 1. Business - Certain Factors That May
Adversely Affect the Company's Business and Operations" in this annual report on
Form 10-K.

For these statements, we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. You are cautioned not to place undue reliance on our
forward-looking statements, which speak only as of the date of this annual
report on Form 10-K or the date of any document incorporated by reference. All
subsequent written and oral forward-looking statements attributable to us or any
person acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained or referred to in this section. We do not
undertake any obligation to release publicly any revisions to our
forward-looking statements to reflect events or circumstances after the date of
this Form 10-K.

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PART I

ITEM 1. BUSINESS

THE COMPANY

Vornado Realty L.P. (the "Operating Partnership" and/or the "Company") is a
Delaware limited partnership. Vornado Realty Trust ("Vornado"), a
fully-integrated real estate investment trust ("REIT"), is the sole general
partner of, and owned approximately 79% of the common limited partnership
interest in, the Operating Partnership at February 3, 2003. All references to
the "Company" refer to the Operating Partnership and its consolidated
subsidiaries.

The Company currently owns directly or indirectly:

OFFICE PROPERTIES ("OFFICE"):

(i) all or portions of 74 office properties aggregating approximately
27.7 million square feet in the New York City metropolitan area (primarily
Manhattan) and in the Washington D.C. and Northern Virginia area;

RETAIL PROPERTIES ("RETAIL"):

(ii) 62 retail properties in six states and Puerto Rico aggregating
approximately 12.5 million square feet, including 1.8 million square feet
built by tenants on land leased from the Company;

MERCHANDISE MART PROPERTIES:

(iii) 8.6 million square feet of showroom and office space, including
the 3.4 million square foot Merchandise Mart in Chicago;

TEMPERATURE CONTROLLED LOGISTICS:

(iv) a 60% interest in the Vornado Crescent Portland Partnership that
owns 88 cold storage warehouses nationwide with an aggregate of
approximately 441.5 million cubic feet of refrigerated space leased to
AmeriCold Logistics;

OTHER REAL ESTATE INVESTMENTS:

(v) 33.1% of the outstanding common stock of Alexander's, Inc.
("Alexander's");

(vi) the Hotel Pennsylvania in New York City consisting of a hotel
portion containing 1.0 million square feet with 1,700 rooms and a commercial
portion containing .4 million square feet of retail and office space;

(vii) a 21.7% interest in The Newkirk Master Limited Partnership which
owns office, retail and industrial properties net leased primarily to credit
rated tenants, and various debt interests in such properties;

(viii) eight dry warehouse/industrial properties in New Jersey
containing approximately 2.0 million square feet; and

(ix) other investments, including interests in other real estate,
marketable securities and loans and notes receivable.

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OBJECTIVES AND STRATEGY

The Company's business objective is to maximize unitholder value. The
Company intends to achieve its business objective by continuing to pursue its
investment philosophy and executing its operating strategies through:

- Maintaining a superior team of operating and investment
professionals and an entrepreneurial spirit;
- Investing in properties in select markets, such as New York City and
Washington, D.C., where the Company believes there is high
likelihood of capital appreciation;
- Acquiring quality properties at a discount to replacement cost and
where there is a significant potential for higher rents;
- Investing in retail properties in select under-stored locations such
as the New York City metropolitan area;
- Investing in fully integrated operating companies that have a
significant real estate component with qualified, experienced
operating management and strong growth potential which can benefit
from the Company's access to efficient capital;
- Developing/redeveloping the Company's existing properties to
increase returns and maximize value; and
- On occasion, providing specialty financing to real estate companies.

The Company expects to finance its growth, acquisitions and investments
using internally generated funds, proceeds from possible asset sales and by
accessing the public and private capital markets.

2002 ACQUISITIONS

CHARLES E. SMITH COMMERCIAL REALTY L.P.

On January 1, 2002, the Company completed the combination of Charles E.
Smith Commercial Realty L.P. ("CESCR") with Vornado. Prior to the combination,
Vornado owned a 34% interest in CESCR. The consideration for the remaining 66%
of CESCR was approximately $1,600,000,000, consisting of 15.6 million newly
issued Vornado Operating Partnership units and approximately $1 billion of debt
(66% of CESCR's total debt). The purchase price paid by the Company was
determined based on the weighted average closing price of the equity issued to
CESCR unitholders for the period beginning two business days before and two
business days after the date the acquisition was agreed to and announced on
October 19, 2001. The Company also capitalized as part of the basis of the
assets acquired approximately $32,000,000 for third party acquisition related
costs, including advisory, legal and other professional fees that were
contemplated at the time of the acquisition. The operations of CESCR are
consolidated into the accounts of the Company beginning January 1, 2002. Prior
to this date the Company accounted for its 34% interest on the equity method.
See page 79 for unaudited pro forma financial information for the year ended
December 31, 2001.

CRYSTAL GATEWAY ONE

On July 1, 2002, the Company acquired a 360,000 square foot office building
from a limited partnership, which was approximately 50% owned by Mr. Robert H.
Smith and Mr. Robert P. Kogod, trustees of the Company, and members of their
families, in exchange for approximately 325,700 newly issued Vornado Operating
Partnership units (valued at $13,679,000) and the assumption of $58,500,000 of
debt. The building is located in the Crystal City complex in Arlington, Virginia
where the Company already owns 24 office buildings containing over 6.9 million
square feet, which it acquired on January 1, 2002, in connection with the
Company's acquisition of CESCR. The operations of Crystal Gateway One are
consolidated into the accounts of the Company from the date of acquisition.

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LAS CATALINAS MALL

On September 23, 2002, the Company increased its interest in the Las
Catalinas Mall located in Caguas, Puerto Rico (San Juan area) to 100% by
acquiring the 50% of the mall and 25% of the Kmart anchor store it did not
already own. The purchase price was $48,000,000, including $32,000,000 of
indebtedness. The Las Catalinas Mall, which opened in 1997, contains 492,000
square feet, including a 123,000 square foot Kmart and a 138,000 square foot
Sears owned by the tenant. Prior to September 23, 2002, the Company accounted
for its investment on the equity method. Subsequent to this date the operations
of Las Catalinas are consolidated into the accounts of the Company.

MONMOUTH MALL

On October 10, 2002, a joint venture in which the Company has a 50%
interest acquired the Monmouth Mall, an enclosed super regional shopping center
located in Eatontown, New Jersey containing approximately 1.5 million square
feet, including four department stores, three of which aggregating 731,000
square feet are owned by the tenants. The purchase price was approximately
$164,700,000, including transaction costs of $4,400,000. The Company made a
$7,000,000 common equity investment in the venture and provided it with
$23,500,000 of preferred equity yielding 14%. The venture financed the purchase
of the Mall with $135,000,000 of floating rate debt at LIBOR plus 2.05%, with a
LIBOR floor of 2.50% on $35,000,000, a three year term and two one-year
extension options. The Company accounts for its investment on the equity method
as the Company does not have unilateral control over the joint venture.

Further details of the Company's acquisition activities are disclosed in
Part II. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

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DEVELOPMENT AND REDEVELOPMENT PROJECTS

The following table sets forth certain information for
development/redevelopment projects: ($ in millions)

In addition to the projects noted above, the Company is in the process of
redeveloping fifteen of its shopping centers, seven of which include locations
previously leased to Bradlees. The total cost of this redevelopment program,
which includes the demolition of existing buildings, site work and tenant
improvements, is estimated to be approximately $40 million. The Company is also
in the pre-development phase of a number of projects including: (i) retail space
in the Penn Plaza area and at 715 Lexington Avenue, (ii) repositioning of the
Hotel Pennsylvania and (iii) expansions of the Green Acres and Monmouth malls.

There can be no assurance that the above projects will be commenced or will
be successful.

The capital requirements of Alexander's and Temperature Controlled
Logistics are described in Item 2: Properties.

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VORNADO OPERATING COMPANY ("VORNADO OPERATING")

The Company and Vornado Operating are parties to certain agreements
described below.

AGREEMENT WITH VORNADO OPERATING

The Company and Vornado Operating are parties to an Agreement pursuant to
which, among other things, (i) the Company will under certain circumstances
offer Vornado Operating an opportunity to become the lessee of certain real
property owned now or in the future by the Company (under mutually satisfactory
lease terms) and (ii) Vornado Operating will not make any real estate investment
or other REIT-Qualified investment unless it first offers the Company the
opportunity to make such investment and the Company has rejected that
opportunity.

Under the Agreement, the Company provides Vornado Operating with certain
administrative, corporate, accounting, financial, insurance, legal, tax, data
processing, human resources and operational services. For these services,
Vornado Operating compensates the Company in an amount determined in good faith
by the Company as the amount an unaffiliated third party would charge Vornado
Operating for comparable services and reimburses the Company for certain costs
incurred and paid to third parties on behalf of Vornado Operating. Pursuant to
the Agreement, compensation for such services was approximately $330,000,
$371,000, and $330,000 for the years ended December 31, 2002, 2001, and 2000.

Vornado Operating and the Company each have the right to terminate the
Agreement if the other party is in material default of the Agreement or upon 90
days written notice to the other party at any time after December 31, 2003. In
addition, the Company has the right to terminate the Agreement upon a change in
control of Vornado Operating.

VORNADO OPERATING'S MANAGEMENT

Messrs. Roth, Fascitelli, West and Wight are directors of Vornado
Operating. Mr. Roth is also Chairman of the Board and Chief Executive Officer of
Vornado Operating, Mr. Fascitelli is also President of Vornado Operating, and
certain other members of the Company's senior management hold corresponding
positions with Vornado Operating.

TEMPERATURE CONTROLLED LOGISTICS BUSINESS

On March 11, 1999, the Vornado Crescent Portland Partnership in which the
Company has a 60% general partnership interest and Crescent Real Estate Equities
has a 40% general partnership interest, sold all of the non-real estate assets
of Temperature Controlled Logistics encompassing the operations of the
temperature controlled business to a new partnership ("AmeriCold Logistics")
owned 60% by Vornado Operating Company and 40% by Crescent Operating Inc.
AmeriCold Logistics leases the underlying temperature controlled warehouses used
in this business from the Vornado Crescent Portland Partnership ("the Landlord")
which continues to own the real estate through its ownership of AmeriCold Realty
Trust. The leases, as amended, generally have a 15 year term with two-five year
renewal options and provide for the payment of fixed base rent and percentage
rent based on revenue AmeriCold Logistics receives from its customers. The
contractual rent for 2002 was $150,000,000. The Landlord's share of annual
maintenance capital expenditures is $9,500,000. In accordance with the leases,
AmeriCold Logistics deferred payment of $32,248,000 of 2002 rent due to the
Landlord, of which the Company's share was $19,349,000. Based on the joint
venture's policy of recognizing rental income when earned and collection is
assured or cash is received, the joint venture did not recognize this rent in
the year ended December 31, 2002. At December 31, 2002, the Company's share of
the joint venture's total deferred rent receivable from the tenant is
$24,350,000. On December 31, 2001, the Landlord released the tenant from its
obligation to pay $39,812,000 of rent deferred in 2001 and 2000, of which the
Company's share was $23,887,000. This amount equaled the rent which was not
recognized as income by the joint venture and accordingly had no profit and loss
effect to the Company.

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REVOLVING CREDIT AGREEMENT

Vornado Operating was granted a $75,000,000 unsecured revolving credit
facility from the Company which expires on December 31, 2004. Borrowings under
the revolving credit facility bear interest at LIBOR plus 3%. The Company
receives a commitment fee equal to 1% per annum on the average daily unused
portion of the facility. No amortization is required to be paid under the
revolving credit facility during its term. The revolving credit facility
prohibits Vornado Operating from incurring indebtedness to third parties (other
than certain purchase money debt and certain other exceptions) and prohibits
Vornado Operating from paying dividends. As of December 31, 2002, $21,989,000
was outstanding under the revolving credit facility after the repayment of
$9,500,000 by Vornado Operating, primarily from its share of the proceeds from
the sale of AmeriCold's quarries to a new partnership owned 44% by the Company
and 56% by Crescent Real Estate Equities.

Vornado Operating has disclosed that in the aggregate its investments do
not, and for the foreseeable future are not expected to, generate sufficient
cash flow to pay all of its debts and expenses. Further, Vornado Operating
states that its only investee, AmeriCold Logistics ("Tenant"), anticipates that
its Landlord, a partnership 60% owned by the Company and 40% owned by Crescent
Real Estate Equities, will need to restructure the leases between the Landlord
and the Tenant to provide additional cash flow to the Tenant (the Landlord has
previously restructured the leases to provide additional cash flow to the
Tenant). Management anticipates a further lease restructuring and the sale
and/or financing of assets by AmeriCold Logistics, and accordingly, Vornado
Operating is expected to have a source to repay the debt under this facility,
which may be extended. Since January 1, 2002, the Company has not recognized
interest income on the debt under this facility.

OTHER INVESTMENTS

The Company's other investments are comprised of:

The Company does not have direct or indirect control over its unconsolidated
partially-owned entities as the Company's joint venture partners have shared
Board/Management representation and authority, substantive participating
rights on all significant business decisions, including acquisitions and
dispositions of any real property assets, financing, operating and capital
budgets and the hiring of a Chief Executive Officer and therefore does not
consolidate their operations and financial position and applies the equity
method of accounting in accordance with generally accepted accounting
principles. The Company includes its share of partially-owned entities debt in
reporting its exposure to a change in interest rates under Item 7A
"Quantitative and Qualitative Disclosures about Market Risk" and in its ratio
of debt-to-enterprise value as disclosed on page 96. See Note 4 - "Investments
in Partially-Owned Entities" to the consolidated financial statements in this
annual report on Form 10-K for details by investment.

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See notes on following page.

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(1) MONMOUTH MALL JOINT VENTURE

On October 10, 2002, a joint venture in which the Company has a 50%
interest acquired the Monmouth Mall, an enclosed super regional shopping
center located in Eatontown, New Jersey containing approximately 1.5
million square feet, including four department stores, three of which
aggregating 731,000 square feet are owned by the tenants. The purchase
price was approximately $164,700, including transaction costs of $4,400.
The Company made a $7,000 common equity investment in the venture and
provided it with $23,500 of preferred equity yielding 14%. The venture
financed the purchase of the Mall with $135,000 of floating rate debt at
LIBOR plus 2.05%, with a LIBOR floor of 2.50% on $35,000, a three year term
and two one-year extension options.

(2) STARWOOD CERUZZI JOINT VENTURE

The Starwood Ceruzzi Joint Venture was formed in 2000 by the Company, the
80% non-managing partner, and Starwood Ceruzzi, the 20% managing partner
(which has equal Board and Management representation), to acquire fee and
leasehold interests in properties formerly occupied by Hechinger Inc., a
home improvement retailer which was liquidated. In the first quarter of
2000, the joint venture acquired two fee interests containing 210,000
square feet and four leasehold interests containing 400,000 square feet in
properties located in Pennsylvania, Virginia, Maryland and Ohio. Of the two
fee interests acquired, one of the fee interests was sold in March 2001 for
$8,000, resulting in a gain of $1,744 (of which the Company's share was
$1,395) and the other fee interest is available for sale or lease. One of
the leasehold interests was net leased to Home Depot in 2002. Two of the
other three properties were leased in 2002 to a supermarket tenant that has
since filed for bankruptcy protection and rejected the leases. As such, the
other three leasehold interests are currently vacant. The venture has no
debt.

(3) PRIME GROUP REALTY, L.P.

On April 30, 2002, the Company and Cadim, inc. ("Cadim") acquired 7,944,893
Prime Group Realty L.P. partnership units at a foreclosure auction. The
price paid for the units by application of a portion of Primestone's
indebtedness to the Company and Cadim was $8.35 per unit, the April 30,
2002 closing price of shares of Prime Group Realty Trust ("PGE") on the New
York Stock Exchange. On June 28, 2002, pursuant to the terms of the
participation agreement, the Company transferred 3,972,447 of the
partnership units to Cadim. In the second quarter of 2002, in accordance
with foreclosure accounting, the Company recorded a loss on the Primestone
foreclosure of $17,671 calculated based on (i) the acquisition price of the
units and (ii) its valuation of the amounts realizable under the guarantees
by affiliates of Primestone, as compared with the net carrying amount of
the investment at April 30, 2002. In the third quarter of 2002, the Company
recorded a $2,229 write-down on its investment based on costs expended to
realize the value of the guarantees. Further, in the fourth quarter of
2002, the Company recorded a $15,857 write-down of its investment
consisting of (i) $14,857 to adjust the carrying amount of the Prime Group
units to $4.61 per unit, the closing price of PGE shares on December 31,
2002 on the New York Stock Exchange and (ii) $1,000 for estimated costs to
realize the value of the guarantees. The Company considered the decline in
the value of the units which are convertible into stock to be other than
temporary as of December 31, 2002, based on the fact that the market value
of the stock has been less than its cost for more than six months, the
severity of the decline, market trends, the financial condition and
near-term prospects of Prime Group and other relevant factors.

At December 31, 2002, the Company's carrying amount of the investment was
$23,408, of which $18,313 represents the carrying amount of the 3,972,447
partnership units owned by the Company ($4.61 per unit), $6,100 represents
the amount expected to be realized under the guarantees, partially offset
by $1,005 representing the Company's share of Prime Group Realty's net loss
through September 30, 2002 (see Note 4. Investments in and Advances to
Partially-Owned Entities to the consolidated financial statements in this
Form 10-K). Prior to April 30, 2002, this investment was in the form of a
loan and was included in Notes and Mortgage Loans Receivable on the balance
sheet.

At February 3, 2003, the closing price of PGE shares on the New York Stock
Exchange was $5.30 per share. The ultimate realization of the Company's
investment will depend upon the future performance of the Chicago real
estate market and the performance of PGE, as well as the ultimate
realizable value of the net assets supporting the guarantees and the
Company's ability to collect under the guarantees. In addition, the Company
will continue to monitor this investment to determine whether additional
write-downs are required based on (i) declines in value of the shares of
PGE (for which the partnership units are exchangeable) which are "other
than temporary" as used in accounting literature and (ii) the amount
expected to be realized under the guarantees.

(4) THE PALISADES JOINT VENTURE

The Palisades Joint Venture was formed in 1999 to develop an 855,000 square
foot high-rise residential tower in Fort Lee, New Jersey, containing 538
apartments. The joint venture agreement provides for the Company to
contribute 95% of the equity and receive 75% of the net profit after a 10%
preferred return. The development of the Palisades residential complex was
substantially complete as of March 1, 2002. Accordingly, the Company placed
the property into service on March 1, 2002 and discontinued the
capitalization of interest and other property specific costs. As of
December 31, 2002, the property, which is now in the lease-up phase, is 55%
occupied (298 of the 538 total apartments have been leased).

(5) STUDENT HOUSING

In January 2000, the Company and its joint venture partner acquired a
252-unit student housing complex in Gainesville, Florida, for approximately
$27,000. The Company has a 90% interest in the joint venture.

(6) CAPITAL TRUST PREFERRED SECURITIES

At December 31, 2002, the Company owns $30,000 of 8.25% step-up convertible
junior subordinated debentures which are convertible into shares of Class A
common stock of Capital Trust (NYSE:CT) at a conversion price of $7.00 per
share. The securities are redeemable by Capital Trust, in whole or in part,
on or after September 30, 2004. Mr. Roth, the Chairman and Chief Executive
Officer of Vornado Realty Trust, is a member of the Board of Directors of
Capital Trust, nominated by the Company.

(7) DEARBORN CENTER

The Company's investment of $23,392 represents a 38.5% interest in $60,758
funded of a $65,000 mezzanine loan to an entity whose sole asset is
Dearborn Center, a 1.5 million square foot high-rise office tower under
construction in Chicago. The entity is owned by Prime Group Realty L.P. and
another investor. The Company is a member of a loan syndicate led by a
money center bank. The proceeds of the loan are being used to finance the
construction, and are subordinate to a $225,000 first mortgage. The loan is
due January 21, 2004, three years from the date of the initial draw, and
provides for a 1 year extension at the borrower's option (assuming net
operating income at a specified level and a cash reserve sufficient to fund
interest for the extension period). The loan bears interest at 12% per
annum plus additional interest ranging from a minimum of 9.5% to a maximum
of 11.5%.

(8) CAPI

In March 1999, in connection with the Company's acquisition of land under
certain of the CESCR office properties from CAPI, the Company made a
$41,200 recourse loan to CAPI, which matures in June 2004. Interest on the
loan was 8.5% at December 31, 2002. The loan is secured by approximately
1,100,000 of the Company's Series E-1 convertible preferred units issued to
CAPI. Each Series E-1 convertible preferred unit is convertible into 1.1364
shares of the Company's common shares.

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FINANCING ACTIVITIES

On June 24, 2002, the Company completed an offering of $500,000,000
aggregate principal amount of 5.625% senior unsecured notes due June 15, 2007.
Interest on the notes is payable semi-annually on June 15th and December 15th,
commencing December 15, 2002. The net proceeds of approximately $496,300,000,
were used to repay the mortgages on 350 North Orleans, Two Park Avenue, the
Merchandise Mart and Seven Skyline. On June 27, 2002, the Company entered into
interest rate swaps that effectively converted the interest rate on the
$500,000,000 senior unsecured notes due 2007 from a fixed rate of 5.625% to a
floating rate of LIBOR plus .7725%, based upon the trailing 3 month LIBOR rate
(2.15% at December 31, 2002).

On February 25, 2002, Vornado sold 884,543 shares to a closed-end fund
and 514,200 shares to a unit investment trust based on the closing price of
$42.96 on the NYSE. The net proceeds to the Company were approximately
$57,042,000.

Further details of the Company's financing activities are disclosed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Part II of this annual report on Form 10-K.

At December 31, 2002, the ratio of debt-to-enterprise value (market equity
value plus debt less cash) was 45% based on debt of $4.966 billion, including
the Company's proportionate share of debt of partially-owned non-consolidated
entities. In the future, in connection with the Company's strategy for growth,
this percentage may change. The Company's policy concerning the incurrence of
debt may be reviewed and modified from time to time without the vote of
shareholders.

The Company may seek to obtain funds through equity offerings, debt
financings or asset sales, although there is no express policy with respect
thereto. The Company may offer units in exchange for property and may repurchase
or otherwise re-acquire its shares or any other securities in the future.

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ADJUSTED EBITDA BY SEGMENT AND REGION

The following table sets forth the percentage of the Company's Adjusted
EBITDA(1) by segment and region for the years ended December 31, 2002, 2001, and
2000. The pro forma column gives effect to the January 1, 2002 acquisition by
the Company of the remaining 66% interest in CESCR described previously, as if
it had occurred on January 1, 2001.

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(1) Adjusted EBITDA represents EBITDA adjusted for gains or losses on
sales of depreciable real estate, the effect of straight-lining of
rent escalations, the amortization of below market leases net of
above market leases and minority interest. Management considers
Adjusted EBITDA a supplemental measure for making decisions and
assessing the performance of its segments. Adjusted EBITDA is
presented as a measure of "operating performance" which enables the
reader to identify trends from period to period and may be used to
compare "same store" operating performance to other companies, as
well as providing a measure for determining funds available to
service debt. Adjusted EBITDA may not be comparable to similarly
titled measures employed by other companies.

(2) Other includes the Temperature Controlled Logistics segment which
has cold storage warehouses in 32 states. See page 44 for details.

ALEXANDER'S

The Company owns 33.1% of the outstanding shares of common stock of
Alexander's. See "Interstate Properties" below for a description of Interstate's
ownership of the Company and Alexander's.

Alexander's has 6 properties (see Item 2. Properties--Alexander's).

At December 31, 2002, the Company had loans receivable from Alexander's of
$119,000,000, including $24,000,000 drawn under the $50,000,000 line of credit
the Company granted to Alexander's on August 1, 2000. The maturity date of the
loan and the line of credit is the earlier of January 3, 2006 or the date the
Alexander's Lexington Avenue construction loan is repaid. The interest rate on
the loan and line of credit, which resets quarterly using the same spread to
treasuries as presently exists with a 3% floor for treasuries, is 12.48% at
December 31, 2002. The Company believes that although Alexander's has disclosed
that it does not have positive cash flow sufficient to repay this loan to the
Company currently, Alexander's will be able to repay the loan upon the
successful development and permanent financing of its Lexington Avenue
development project or through asset sales.

The Company manages, develops and leases the Alexander's properties under a
management and development agreement and a leasing agreement pursuant to which
the Company receives annual fees from Alexander's. Further, the Company has
agreed to guarantee, among other things, the lien free, timely completion of the
construction of Alexander's Lexington Avenue development project and funding of
project costs in excess of a stated budget, if not funded by Alexander's. These
agreements are described in Note 4 to the Company's consolidated financial
statements. See Item 2 - "Properties" for a description of Alexander's
properties and development and redevelopment projects.

Messrs. Roth, Fascitelli, Mandelbaum, West and Wight, directors of the
Company, are also directors of Alexander's. Mr. Roth is also Chief Executive
Officer of Alexander's and Mr. Fascitelli is also President of Alexander's.
Joseph Macnow, Executive Vice President - Finance and Administration and Chief
Financial Officer of the Company, is also Executive Vice President - Finance and
Administration and Chief Financial Officer of Alexander's.

Alexander's common stock is listed on the New York Stock Exchange under the
symbol "ALX".

-12-

INTERSTATE PROPERTIES

As of December 31, 2002, Interstate Properties and its partners owned
approximately 12.9% of the common shares of beneficial interest of the Company,
27.5% of Alexander's common stock and beneficial ownership of 7.9% of Vornado
Operating (17.0% assuming redemption of 447,017 units of Vornado Operating that
are redeemable for cash, or at Vornado Operating's election, common stock of
Vornado Operating). Interstate Properties is a general partnership in which
Steven Roth, David Mandelbaum and Russell B. Wight, Jr. are the partners. Mr.
Roth is the Chairman of the Board and Chief Executive Officer of the Company,
the Managing General Partner of Interstate Properties, and the Chief Executive
Officer and a director of both Alexander's and Vornado Operating. Mr. Wight is a
trustee of the Company and is also a director of both Alexander's and Vornado
Operating. Mr. Mandelbaum is a trustee of the Company and is also a director of
Alexander's.

COMPETITION

The Company's business segments - Office, Retail, Merchandise Mart
Properties, Temperature Controlled Logistics, and Other -- operate in highly
competitive environments. The Company has a large concentration of properties in
the New York City metropolitan area and in the Washington, D.C. and Northern
Virginia area. The Company competes with a large number of real estate property
owners and developers. Principal factors of competition are rent charged,
attractiveness of location and quality and breadth of services provided. The
Company's success depends upon, among other factors, trends of the national and
local economies, financial condition and operating results of current and
prospective tenants and customers, availability and cost of capital,
construction and renovation costs, taxes, governmental regulations, legislation
and population trends.

TENANTS WHICH ACCOUNTED FOR OVER 10% OF REVENUES

The U.S. Government provides a significant proportion of the Company's
revenues. In 2002, the U.S. Government accounted for 16.8% of the Office
segment's revenues, and 11.4% of the Company's total revenues. The loss of this
tenant would have a material adverse effect on the Office segment and the
Company's finances as a whole.

ENVIRONMENTAL REGULATIONS

The Company's operations and properties are subject to various federal,
state and local laws and regulations concerning the protection of the
environment including air and water quality, hazardous or toxic substances and
health and safety. Under certain of these environmental laws a current or
previous owner or operator of real estate may be required to investigate and
clean up hazardous or toxic substances released at a property. The owner or
operator may also be held liable to a governmental entity or to third parties
for property damage or personal injuries and for investigation and clean-up
costs incurred by those parties because of the contamination. These laws often
impose liability without regard to whether the owner or operator knew of the
release of the substances or caused the release. The presence of contamination
or the failure to remediate contamination may impair the Company's ability to
sell or lease real estate or to borrow using the real estate as collateral.
Other laws and regulations govern indoor and outdoor air quality including those
that can require the abatement or removal of asbestos-containing materials in
the event of damage, demolition, renovation or remodeling and also govern
emissions of and exposure to asbestos fibers in the air. The maintenance and
removal of lead paint and certain electrical equipment containing
polychlorinated biphenyls (PCBs) and underground storage tanks are also
regulated by federal and state laws. The Company could incur fines for
environmental compliance and be held liable for the costs of remedial action
with respect to the foregoing regulated substances or tanks or related claims
arising out of environmental contamination or exposure at or from the Company's
properties.

Each of the Company's properties has been subjected to varying degrees of
environmental assessment at various times. The environmental assessments did not
reveal any material environmental condition. However, identification of new
compliance concerns or undiscovered areas of contamination, changes in the
extent or known scope of contamination, discovery of additional sites, human
exposure to the contamination or changes in cleanup or compliance requirements
could result in significant costs to the Company.

-13-

INSURANCE

The Company carries comprehensive liability and all risk property insurance
(fire, flood, extended coverage and rental loss insurance) with respect to its
assets. The Company's all risk insurance policies in effect before September 11,
2001 did not expressly exclude coverage for hostile acts, except for acts of
war. Since September 11, 2001, insurance companies have for the most part
excluded terrorist acts from coverage in all risk policies. The Company has
generally been unable to obtain all risk insurance which includes coverage for
terrorist acts for policies it has renewed since September 11, 2001, for each of
its businesses. In 2002, the Company obtained $200,000,000 of separate aggregate
coverage for terrorist acts for each of its New York City Office, Washington,
D.C. Office, Retail and Merchandise Mart businesses and $60,000,000 for its
Temperature Controlled Logistics business. Therefore, the Company is at risk for
financial loss in excess of these limits for terrorist acts (as defined), which
loss could be material.

The Company's debt instruments, consisting of mortgage loans secured by its
properties (which are generally non-recourse to the Company), its senior
unsecured notes due 2007 and its revolving credit agreement, contain customary
covenants requiring the Company to maintain insurance. There can be no assurance
that the lenders under these instruments will not take the position that an
exclusion from all risk insurance coverage for losses due to terrorist acts is a
breach of these debt instruments that allows the lenders to declare an event of
default and accelerate repayment of debt. In the second quarter of 2002, the
Company received correspondence from four lenders regarding terrorism insurance
coverage, which the Company has responded to. In these letters the lenders took
the position that under the agreements governing the loans provided by these
lenders the Company was required to maintain terrorism insurance on the
properties securing the various loans. The aggregate amount of borrowings under
these loans as of December 31, 2002 was approximately $770.4 million, and there
was no additional borrowing capacity. Subsequently, the Company obtained an
aggregate of $360 million of separate coverage for "terrorist acts". To date,
one of the lenders has acknowledged to the Company that it will not raise any
further questions based on the Company's terrorism insurance coverage in place,
and the other three lenders have not raised any further questions regarding the
Company's insurance coverage. If lenders insist on greater coverage for these
risks, it could adversely affect the Company's ability to finance and/or
refinance its properties and to expand its portfolio.

On November 26, 2002, the Terrorism Risk Insurance Act of 2002 was signed
into law. Under this new legislation, through 2004 (with a possible extension
through 2005), regulated insurers must offer coverage in their commercial
property and casualty policies (including existing policies) for losses
resulting from defined "acts of terrorism". As a result of the legislation, in
February 2003 the Company obtained $300 million of per occurrence coverage for
terrorist acts for its New York City Office, Washington, D.C. Office and
Merchandise Mart businesses, of which $240 million is for Certified Acts, as
defined in the legislation. The Company maintains $200 million and $60 million
of separate aggregate coverage that it had in 2002 for each of its Retail and
Temperature Controlled Logistics businesses (which has been renewed as of
January 1, 2003). The Company's current Retail property insurance carrier has
advised the Company that there will be an additional premium of approximately
$11,000 per month through the end of the policy term (June 30, 2003), for "Acts
of Terrorism" coverage, as defined in the new legislation and that the situation
may change upon renewal.

CERTAIN ACTIVITIES

Acquisitions and investments are not required to be based on specific
allocation by type of property. The Company has historically held its properties
for long-term investment; however, it is possible that properties in the
portfolio may be sold in whole or in part, as circumstances warrant, from time
to time. Further, the Company has not adopted a policy that limits the amount or
percentage of assets which would be invested in a specific property. While the
Company may seek the vote of its shareholders in connection with any particular
material transaction, generally the Company's activities are reviewed and may be
modified from time to time by its Board of Trustees without the vote of
shareholders.

EMPLOYEES

As of December 31, 2002, the Company had approximately 1,422 employees
consisting of 276 in the Office Properties segment (including 193 as a result of
the CESCR acquisition), 58 in the Retail Properties segment, 476 in the
Merchandise Mart Properties segment, 417 at the Hotel Pennsylvania and 195
corporate staff. This does not include employees of partially-owned entities.

SEGMENT DATA

The Company operates in four business segments: Office Properties, Retail
Properties, Merchandise Mart Properties and Temperature Controlled Logistics.
The Company engages in no foreign operations. Information related to the
Company's business segments for the years 2002, 2001 and 2000 is set forth in
Note 17 to the Company's consolidated financial statements in this annual report
on Form 10-K.

-14-

The Company's principal executive offices are located at 888 Seventh
Avenue, New York, New York 10019; telephone (212) 894-7000.

INTERNET ACCESS

Copies of the Company's Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, as well
as Reports on Forms 3, 4 and 5 regarding Officers, Trustees or 10% Beneficial
Owners of the Company, filed or furnished pursuant to Section 13(a), 15(d) or
16(a) of the Securities Exchange Act of 1934 are available free of charge
through the Company's website (www.vno.com) as soon as reasonably practicable
after the Company electronically files the material with, or furnishes it to,
the Securities and Exchange Commission.

CERTAIN FACTORS THAT MAY ADVERSELY AFFECT THE COMPANY'S BUSINESS AND OPERATIONS

Set forth below are certain factors that may adversely affect the Company's
business and operations.

REAL ESTATE INVESTMENTS' VALUE AND INCOME FLUCTUATE DUE TO VARIOUS FACTORS.

THE VALUE OF REAL ESTATE FLUCTUATES DEPENDING ON CONDITIONS IN THE
GENERAL ECONOMY AND THE REAL ESTATE BUSINESS. THESE CONDITIONS MAY ALSO LIMIT
THE COMPANY'S REVENUES AND AVAILABLE CASH.

The factors that affect the value of the Company's real estate include,
among other things, national, regional and local economic conditions;
consequences of any armed conflict involving, or terrorist attack against, the
United States; the Company's ability to secure adequate insurance; local
conditions such as an oversupply of space or a reduction in demand for real
estate in the area; competition from other available space; whether tenants
consider a property attractive; the financial condition of the Company's
tenants, including the extent of tenant bankruptcies or defaults; whether the
Company is able to pass some or all of any increased operating costs it
experiences through to tenants; how well the Company manages its properties;
increased interest rates; increases in real estate taxes and other expenses;
decreases in market rental rates; the timing and costs associated with property
improvements and rentals; changes in taxation or zoning laws; government
regulations; availability of financing on acceptable terms or at all; potential
liability under environmental or other laws or regulations; and general
competitive factors.

The rents the Company receives and the occupancy levels at its properties
may decline as a result of adverse changes in any of these factors. If the
Company's rental revenues decline, it generally would expect to have less cash
available to distribute to its security holders. In addition, some of the
Company's major expenses, including mortgage payments, real estate taxes and
maintenance costs, generally do not decline when the related rents decline. If
rents decline while costs remain the same, the Company's income and funds
available for distribution to its security holders would decline.

THE COMPANY DEPENDS ON LEASING SPACE TO TENANTS ON ECONOMICALLY FAVORABLE
TERMS AND COLLECTING RENT FROM ITS TENANTS, WHO MAY NOT BE ABLE TO PAY.

The Company's financial results depend on leasing space in its properties
to tenants on economically favorable terms. In addition, because substantially
all of the Company's income comes from rentals of real property, its income and
funds available for distribution to its security holders will decrease if a
significant number of its tenants cannot pay their rent. If a tenant does not
pay its rent, the Company might not be able to enforce its rights as landlord
without delays and might incur substantial legal costs. For information
regarding the bankruptcy of the Company's tenants, see "--Bankruptcy of tenants
may decrease the Company's revenues and available cash" below.

-15-

BANKRUPTCY OF TENANTS MAY DECREASE THE COMPANY'S REVENUES AND AVAILABLE
CASH.

A number of companies, including some of the Company's tenants, have
declared bankruptcy in recent years, and other tenants may declare bankruptcy or
become insolvent in the future. If a major tenant declares bankruptcy or becomes
insolvent, the rental property where it leases space may have lower revenues and
operational difficulties, and, in the case of the Company's shopping centers,
the Company may have difficulty leasing the remainder of the affected property.
The Company's leases generally do not contain restrictions designed to ensure
the creditworthiness of its tenants. As a result, the bankruptcy or insolvency
of a major tenant could result in a lower level of funds from operations
available for distribution to the Company's security holders.

U.S. Airways Group Inc. leases 296,000 square feet from the Company for its
headquarters in Washington, D.C. U.S. Airways has been adversely affected by the
downturn in air travel as a result of the terrorist attacks and economic
decline. On August 11, 2002, US Airways filed for protection under Chapter 11 of
the U.S. Bankruptcy Code. Effective January 1, 2003, the Company agreed to amend
its lease with US Airways at Crystal City to (i) reduce the tenant's space by
90,732 square feet to 205,600 square feet (ii) reduce the annual escalated rent
from $36.00 to $29.75 per square foot with 2.5% annual base rent escalations,
(iii) provide the tenant with up to $1,200,000 of tenant allowances and (iv)
loan the tenant up to $1,000,000 at 9% per annum for additional tenant
improvements which is to be repaid over the lease term. This lease modification
is subject to a confirmed plan of reorganization by the Bankruptcy Court.

In February 2003, Koninklijke Ahold NV, parent of Stop & Shop, announced
that it overstated its 2002 and 2001 earnings by at least $500 million and is
under investigation by the U.S. Justice Department and Securities and Exchange
Commission. See "Item 2. Properties - Retail Segment - Former Bradlees
locations" for information about former Bradlees leases guaranteed by Stop &
Shop. The Company cannot predict what effect, if any, this situation may have on
Stop & Shop's ability to satisfy its obligation under the Bradlees guarantees
and rent for existing Stop & Shop leases aggregating approximately $10.5 million
per annum.

The risk that some of the Company's tenants may declare bankruptcy is
higher because of the September 11, 2001 terrorist attacks and the resulting
decline in the economy.

SOME OF THE COMPANY'S POTENTIAL LOSSES MAY NOT BE COVERED BY INSURANCE.

For a discussion of risks related to the Company's insurance coverage, see
"Item 1. Business - Insurance."

THE COMPANY MAY ACQUIRE OR DEVELOP NEW PROPERTIES, AND THIS MAY CREATE
RISKS.

The Company may acquire or develop properties or acquire other real estate
companies when it believes that an acquisition or development is consistent with
its business strategies. The Company may not, however, succeed in consummating
desired acquisitions or in completing developments on time or within its budget.
The Company also might not succeed in leasing newly developed or acquired
properties at rents sufficient to cover their costs of acquisition or
development and operations.

The Company has experienced rapid growth in recent years, increasing its
total assets from approximately $565,000,000 at December 31, 1996 to
approximately $9 billion at December 31, 2002. This growth included the
acquisition of Charles E. Smith Commercial Realty L.P. on January 1, 2002, which
increased the Company's total assets as of that date by $2,506,000,000, of which
$1,758,000,000 (66%) is attributable to the acquisition of assets and
$748,000,000 (34%) is attributable to Charles E. Smith Commercial Realty L.P.
becoming a wholly owned subsidiary of the Operating Partnership and therefore
being consolidated rather than accounted for under the equity method. The
Company may not be able to maintain a similar rate of growth in the future or
manage its past and any future growth effectively. The Company's failure to do
so may have a material adverse effect on its financial condition and results of
operations. Difficulties in integrating acquisitions may prove costly or
time-consuming and could divert management's attention.

THE COMPANY MAY NOT BE PERMITTED TO DISPOSE OF CERTAIN PROPERTIES OR PAY
DOWN THE DEBT ASSOCIATED WITH THOSE PROPERTIES WHEN IT MIGHT OTHERWISE DESIRE TO
DO SO WITHOUT INCURRING ADDITIONAL COSTS.

As part of an acquisition of a property, the Company may agree with the
seller that it will not dispose of the acquired properties or reduce the
mortgage indebtedness on them for significant periods of time unless it pays
certain of the resulting tax costs of the seller. These agreements could result
in the Company holding on to properties that it would otherwise sell and not
paying down or refinancing indebtedness that it would otherwise pay down or
refinance.

-16-

IT MAY BE DIFFICULT TO BUY AND SELL REAL ESTATE QUICKLY, AND TRANSFER
RESTRICTIONS APPLY TO SOME OF THE COMPANY'S MORTGAGED PROPERTIES.

Equity real estate investments are relatively difficult to buy and sell
quickly. The Company therefore has limited ability to vary its portfolio
promptly in response to changes in economic or other conditions. Some of the
Company's properties are mortgaged to secure payment of indebtedness. If the
Company is unable to meet its mortgage payments, the lender could foreclose on
the properties and the Company could incur a loss. In addition, if the Company
wishes to dispose of one or more of the mortgaged properties, it might not be
able to obtain release of the lien on the mortgaged property. If a lender
forecloses on a mortgaged property or if a mortgage lien prevents the Company
from selling a property, its funds available for distribution to its security
holders could decline. For information relating to the mortgages on the
Company's properties, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and the
notes to the Company's consolidated financial statements in this annual report
on Form 10-K.

A SIGNIFICANT PROPORTION OF THE COMPANY'S PROPERTIES ARE IN THE NEW YORK
CITY/NEW JERSEY AND WASHINGTON, D.C. METROPOLITAN AREAS AND ARE AFFECTED BY THE
ECONOMIC CYCLES AND RISKS INHERENT TO THOSE REGIONS.

During 2002, 71% of the Company's Adjusted EBITDA came from properties
located in New Jersey and the New York City and Washington, D.C. metropolitan
areas. The Company may continue to concentrate a significant portion of its
future acquisitions in New Jersey and the New York City and Washington, D.C.
metropolitan areas. Like other real estate markets, the real estate markets in
these areas have experienced economic downturns in the past, and the Company
cannot predict how the current economic conditions will impact these markets in
both the short and long term. Further declines in the economy or a decline in
the real estate markets in these areas could hurt the Company's financial
performance and the value of its properties. The factors affecting economic
conditions in these regions include: business layoffs or downsizing; industry
slowdowns; relocations of businesses; changing demographics; increased
telecommuting and use of alternative work places; financial performance and
productivity of the publishing, advertising, financial, technology, retail,
insurance and real estate industries; infrastructure quality; and any oversupply
of or reduced demand for real estate.

It is impossible for the Company to assess the future effects of the
current uncertain trends in the economic and investment climates of the New York
City/New Jersey and Washington, D.C. regions, and more generally of the United
States, on the real estate markets in these areas. If these conditions persist,
they may adversely affect the Company's businesses and future profitability.

ON JANUARY 1, 2002, THE COMPANY COMPLETED THE ACQUISITION OF THE 66%
INTEREST IN CHARLES E. SMITH COMMERCIAL REALTY L.P. THAT IT DID NOT PREVIOUSLY
OWN. THE TERMS OF THE MERGER RESTRICT THE COMPANY'S ABILITY TO SELL OR OTHERWISE
DISPOSE OF, OR TO FINANCE OR REFINANCE, THE PROPERTIES FORMERLY OWNED BY CHARLES
E. SMITH COMMERCIAL REALTY L.P., WHICH COULD RESULT IN THE COMPANY'S INABILITY
TO SELL THESE PROPERTIES AT AN OPPORTUNE TIME AND INCREASED COSTS TO THE
COMPANY.

The Company has agreed to restrictions on its ability to sell, finance,
refinance and, in some instances, pay down existing financing on the Charles E.
Smith Commercial Realty L.P. properties for a period of up to 20 years, under a
tax reporting and protection agreement that the Company entered into at the
closing of the merger. This agreement prohibits the Company from taking these
actions unless the Operating Partnership also pays the contributing partners
based on their tax liabilities as a result of the sale. These arrangements may
significantly reduce the Company's ability to sell, finance or repay
indebtedness secured by the subject properties or assets.

In addition, subject to limited exceptions, the Company is restricted from
selling or otherwise transferring or disposing of certain properties located in
the Crystal City area of Arlington, Virginia or an interest in its division that
manages the majority of its office properties in the Washington, D.C.
metropolitan area, which we refer to as the "Smith Division," for a period of 12
years with respect to certain properties located in the Crystal City area of
Arlington, Virginia or six years with respect to an interest in the Smith
Division. These restrictions, which currently cover approximately 13.0 million
square feet of space, could result in the Company's inability to sell these
properties or an interest in the Smith Division at an opportune time and
increased costs to the Company.

THE COMPANY MAY INCUR COSTS TO COMPLY WITH ENVIRONMENTAL LAWS.

For a discussion of risks related to the Company's compliance with
environmental laws, see "Item 1. Business - Environmental Regulations."

-17-

REAL ESTATE IS A COMPETITIVE BUSINESS.

For a discussion of risks related to competition in the real estate business,
see "Item 1. Business - Competition."

THE TERRORIST ATTACKS OF SEPTEMBER 11, 2001 IN NEW YORK CITY AND THE
WASHINGTON, D.C. AREA MAY ADVERSELY AFFECT THE VALUE OF THE COMPANY'S PROPERTIES
AND ITS ABILITY TO GENERATE CASH FLOW.

THERE MAY BE A DECREASE IN DEMAND FOR SPACE IN LARGE METROPOLITAN AREAS
THAT ARE CONSIDERED AT RISK FOR FUTURE TERRORIST ATTACKS, AND THIS DECREASE MAY
REDUCE THE COMPANY'S REVENUES FROM PROPERTY RENTALS.

The Company has significant investments in large metropolitan areas,
including the New York/New Jersey, Washington, D.C. and Chicago metropolitan
areas. In the aftermath of the terrorist attacks, tenants in these areas may
choose to relocate their business to less populated, lower-profile areas of the
United States that are not as likely to be targets of future terrorist activity.
This in turn would trigger a decrease in the demand for space in these areas,
which could increase vacancies in the Company's properties and force it to lease
its properties on less favorable terms. As a result, the value of the Company's
properties and the level of its revenues could decline materially.

THE COMPANY'S INVESTMENT IN HOTEL PENNSYLVANIA IS DEPENDENT ON THE TRAVEL
INDUSTRY, AND THAT INVESTMENT HAS BEEN AND MAY CONTINUE TO BE IMPACTED SEVERELY
BY THE TERRORIST ATTACKS AND THE CURRENT ECONOMIC DOWNTURN.

The Company's investment in Hotel Pennsylvania is directly dependent on the
travel industry generally and the number of visitors to New York City in
particular. Since September 11, 2001, there has been a substantial decline in
travel and tourism generally, and in particular New York City. Accordingly,
there has been a significant reduction in occupancy at Hotel Pennsylvania. As a
result, revenues generated by this investment have been impacted severely by
that decline, and the Company expects this impact on revenues to continue.

ALL OF THE COMPANY'S TEMPERATURE CONTROLLED LOGISTICS WAREHOUSES ARE LEASED
TO ONE TENANT, AND THAT TENANT IS EXPERIENCING OPERATING DIFFICULTIES.

The Operating Partnership owns a 60% general partnership interest in a
partnership, which we refer to as the "Vornado Crescent Portland Partnership,"
that owns 88 cold storage warehouses nationwide with an aggregate of
approximately 441.5 million cubic feet of refrigerated, frozen and dry storage
space. The Vornado Crescent Portland Partnership sold all of the non-real estate
assets encompassing the operations of the temperature controlled business to a
new partnership named AmeriCold Logistics, owned 60% by Vornado Operating
Company, which we refer to as "Vornado Operating," and 40% by Crescent Operating
Inc. AmeriCold Logistics leases the underlying temperature controlled warehouses
used in this business from the Vornado Crescent Portland Partnership, which
continues to own the real estate. During 2002, AmeriCold Logistics generated
approximately 8% of the Company's Adjusted EBITDA. The leases, as amended,
generally have a 15 year term with two-five year renewal options and provide for
the payment of fixed base rent and percentage rent based on revenue AmeriCold
Logistics receives from its customers. The contractual rent for 2002 was
$150,000,000. The Landlord's share of annual maintenance capital expenditures is
$9,500,000. In accordance with the leases, AmeriCold Logistics deferred payment
of $32,248,000 of 2002 rent due to the Landlord, of which the Company's share
was $19,349,000. Based on the joint venture's policy of recognizing rental
income when earned and collection is assured or cash is received, the joint
venture did not recognize this rent in the year ended December 31, 2002. At
December 31, 2002, the Company's share of the joint venture's total deferred
rent receivable from the tenant is $24,350,000. On December 31, 2001, the
Landlord released the tenant from its obligation to pay $39,812,000 of rent
deferred in 2001 and 2000, of which the Company's share was $23,887,000. This
amount equaled the rent which was not recognized as income by the joint venture
and accordingly had no profit and loss effect to the Company.

To the extent that the operations of AmeriCold Logistics may affect its
ability to pay rent, including percentage rent due under the leases, the Company
indirectly bears the risks associated with AmeriCold Logistics' cold storage
business. The cold storage business is extremely competitive. Factors affecting
AmeriCold Logistics' ability to compete include, among others, (a) warehouse
locations, (b) customer mix and (c) availability, quality and price of
additional services.

-18-

THE COMPANY MAY NOT BE ABLE TO OBTAIN CAPITAL TO MAKE INVESTMENTS.

Vornado depends primarily on external financing to fund the growth of
its business. This is because one of the requirements of the Internal Revenue
Code of 1986, as amended, for a REIT is that it distributes 90% of its net
taxable income, excluding net capital gains, to its shareholders. The
Company's partnership agreement requires it to make reasonable efforts to
make distributions that are sufficient for Vornado to meet its 90%
distribution requirement. The Company's access to debt or equity financing
depends on banks' willingness to lend and on conditions in the capital
markets. The Company and other companies in the real estate industry have
experienced limited availability of bank loans and capital markets financing
from time to time. Although the Company believes that it will be able to
finance any investments it may wish to make in the foreseeable future,
financing other than what it already has available might not be available on
acceptable terms.

For information about the Company's available sources of funds, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and the notes to the consolidated
financial statements in this annual report on Form 10-K.

THE COMPANY'S OWNERSHIP STRUCTURE AND RELATED-PARTY TRANSACTIONS MAY GIVE
RISE TO CONFLICTS OF INTEREST.

STEVEN ROTH AND INTERSTATE PROPERTIES MAY EXERCISE SUBSTANTIAL INFLUENCE
OVER THE COMPANY. THEY AND SOME OF VORNADO'S OTHER TRUSTEES AND OFFICERS HAVE
INTERESTS OR POSITIONS IN OTHER ENTITIES THAT MAY COMPETE WITH THE COMPANY.

As of December 31, 2002, Interstate Properties, a New Jersey general
partnership, and its partners owned approximately 12.9% of the common shares of
Vornado, the Company's general partner, and approximately 27.5% of the common
stock of Alexander's, Inc. and beneficially owned approximately 7.9% of the
common stock of Vornado Operating (approximately 17.0% assuming redemption of
447,017 units of Vornado Operating L.P., the operating subsidiary of Vornado
Operating, that are beneficially owned by Interstate Properties and redeemable
for common stock of Vornado Operating). Steven Roth, David Mandelbaum and
Russell B. Wight, Jr. are the three partners of Interstate Properties. Mr. Roth
is the Chairman of the Board and Chief Executive Officer of Vornado, the
managing general partner of Interstate Properties, the Chief Executive Officer
and a director of Alexander's and the Chairman of the Board and Chief Executive
Officer of Vornado Operating. Mr. Wight is a trustee of Vornado and is also a
director of both Alexander's and Vornado Operating. Mr. Mandelbaum is a trustee
of Vornado and is also a director of Alexander's.

As of December 31, 2002, the Company owned 33.1% of the outstanding common
stock of Alexander's. Alexander's is a REIT engaged in leasing, managing,
developing and redeveloping properties, focusing primarily on the locations
where its department stores operated before they ceased operations in 1992.
Alexander's has six properties, which are located in the New York City
metropolitan area. Mr. Roth and Michael D. Fascitelli, the President and a
trustee of Vornado, are directors of Alexander's. Messrs. Mandelbaum, Richard R.
West and Wight are trustees of Vornado and are also directors of Alexander's.

Because of these overlapping interests, Mr. Roth and Interstate Properties
may have substantial influence over Vornado, Alexander's and Vornado Operating
and on the outcome of any matters submitted to Vornado, Alexander's or Vornado
Operating's shareholders for approval. In addition, certain decisions concerning
the Company's operations or financial structure may present conflicts of
interest among Messrs. Roth, Mandelbaum and Wight and Interstate Properties and
the Company's other security holders. In addition, Mr. Roth and Interstate
Properties may in the future engage in a wide variety of activities in the real
estate business which may result in conflicts of interest with respect to
matters affecting the Company, Alexander's or Vornado Operating, such as which
of these entities or persons, if any, may take advantage of potential business
opportunities, the business focus of these entities, the types of properties and
geographic locations in which these entities make investments, potential
competition between business activities conducted, or sought to be conducted, by
the Company, Interstate Properties, Alexander's and Vornado Operating,
competition for properties and tenants, possible corporate transactions such as
acquisitions and other strategic decisions affecting the future of these
entities.

The Company currently manages and leases the real estate assets of
Interstate Properties under a management agreement for which the Company
receives an annual fee equal to 4% of base rent and percentage rent and certain
other commissions. The management agreement has a term of one year and is
automatically renewable unless terminated by either of the parties on 60 days'
notice at the end of the term. The Company earned $1,655,000 and $1,450,000 of
management fees

-19-

under the management agreement for the years ended December 31, 2001 and 2002.
Because the Company and Interstate Properties are controlled by the same
persons, as described above, the terms of the management agreement and any
future agreements between the Company and Interstate Properties may not be
comparable to those the Company could have negotiated with an unaffiliated third
party.

THE COMPANY ENGAGES IN TRANSACTIONS WITH VORNADO OPERATING ON TERMS THAT
MAY OR MAY NOT BE COMPARABLE TO THOSE IT COULD NEGOTIATE WITH UNAFFILIATED THIRD
PARTIES.

In October 1998, Vornado Operating was spun off from the Company in order
to own assets that the Company could not itself own and conduct activities that
the Company could not itself conduct. In addition to being trustees of Vornado,
the Company's general partner, Messrs. Roth, Fascitelli, West and Wight are
directors of Vornado Operating. Mr. Roth is also Chairman of the Board and Chief
Executive Officer of Vornado Operating, Mr. Fascitelli is also President of
Vornado Operating, and certain other members of Vornado's senior management hold
corresponding positions with Vornado Operating.

The Operating Partnership entered into a $75,000,000 unsecured revolving
credit facility with Vornado Operating that expires on December 31, 2004.
Borrowings under the revolving credit agreement bear interest at LIBOR plus 3%.
The Operating Partnership receives an annual commitment fee equal to 1% on the
average daily unused portion of the facility. Vornado Operating is not required
to pay any amortization under the revolving credit agreement during its term.
The revolving credit agreement prohibits Vornado Operating from incurring
indebtedness to third parties, other than certain purchase money debt and
certain other exceptions, and prohibits Vornado Operating from paying dividends.
As of December 31, 2002, $21,989,000 was outstanding under the revolving credit
agreement.

The Operating Partnership and Vornado Operating are parties to an agreement
under which, among other things, (a) the Operating Partnership will offer
Vornado Operating, under certain circumstances, an opportunity to become the
lessee of certain real property owned now or in the future by the Operating
Partnership under mutually satisfactory lease terms and (b) Vornado Operating
will not make any real estate investment or other investments known as
REIT-qualified investments unless it first offers the Operating Partnership the
opportunity to make the investment and the Operating Partnership has rejected
that opportunity. Under this agreement, the Operating Partnership provides
Vornado Operating with administrative, corporate, accounting, financial,
insurance, legal, tax, data processing, human resources and operational
services. For these services, Vornado Operating compensates the Operating
Partnership in an amount determined in good faith by the Operating Partnership
as the amount an unaffiliated third party would charge Vornado Operating for
comparable services and reimburses the Operating Partnership for certain costs
incurred and paid to third parties on behalf of Vornado Operating. Under this
agreement, compensation for these services was approximately $330,000, $371,000
and $330,000 for the years ended December 31, 2000, 2001 and 2002. Vornado
Operating and the Operating Partnership each have the right to terminate this
agreement if the other party is in material default of the agreement or upon 90
days' written notice to the other party at any time after December 31, 2003. In
addition, the Operating Partnership has the right to terminate this agreement
upon a change in control of Vornado Operating.

Vornado Operating's restated certificate of incorporation specifies that
one of its corporate purposes is to perform this agreement and, for so long as
the agreement remains in effect, prohibits Vornado Operating from making any
real estate investment or other REIT-qualified investment without first offering
the opportunity to the Operating Partnership in the manner specified in this
agreement.

The Company and Vornado Operating may enter into additional transactions in
the future. Because Vornado and Vornado Operating share common senior management
and because a majority of Vornado's trustees also constitute the majority of the
directors of Vornado Operating, the terms of the foregoing agreements and any
future agreements between the Company and Vornado Operating may not be
comparable to those the Company could have negotiated with an unaffiliated third
party.

-20-

THERE MAY BE CONFLICTS OF INTEREST BETWEEN THE COMPANY AND ALEXANDER'S.

As of December 31, 2002, the Company owned 33.1% of the outstanding common
stock of Alexander's. Alexander's is a REIT engaged in leasing, managing,
developing and redeveloping properties, focusing primarily on the locations
where its department stores operated before they ceased operations in 1992.
Alexander's has six properties. Interstate Properties, which is further
described above, owned an additional 27.5% of the outstanding common stock of
Alexander's as of December 31, 2002. Mr. Roth, Chairman of the Board and
Chief Executive Officer of Vornado, the Company's general partner, is Chief
Executive Officer and a director of Alexander's, and Mr. Fascitelli,
President and a trustee of Vornado, is President and a director of
Alexander's. Messrs. Mandelbaum, West and Wight, trustees of Vornado, are
also directors of Alexander's. Alexander's common stock is listed on the New
York Stock Exchange under the symbol "ALX."

At December 31, 2002, the Operating Partnership had loans receivable from
Alexander's of $119,000,000 at an interest rate of 12.48%. These loans mature on
the earlier of January 3, 2006 or the date that Alexander's Lexington Avenue
construction loan is repaid in full. The Operating Partnership manages, develops
and leases the Alexander's properties under management and development
agreements and leasing agreements under which the Operating Partnership receives
annual fees from Alexander's. These agreements have a one-year term expiring in
March of each year, except that the Lexington Avenue management and development
agreements have a term lasting until substantial completion of development of
the Lexington Avenue property, and are all automatically renewable. Because
Vornado and Alexander's share common senior management and because a majority of
the trustees of Vornado also constitute the majority of the directors of
Alexander's, the terms of the foregoing agreements and any future agreements
between the Company and Alexander's may not be comparable to those the Company
could have negotiated with an unaffiliated third party.

For a description of Interstate Properties' ownership of Vornado, Vornado
Operating and Alexander's, see "--Steven Roth and Interstate Properties may
exercise substantial influence over the Company. They and some of Vornado's
other trustees and officers have interests or positions in other entities that
may compete with the Company" above.

ARCHSTONE-SMITH TRUST PROVIDES SERVICES TO THE COMPANY UNDER AGREEMENTS
THAT WERE NOT NEGOTIATED AT ARM'S LENGTH.

The Company has agreements with Archstone-Smith Trust under which the
Company leases office space to Archstone-Smith Trust and shares the cost of
certain office-related services with it that were not negotiated at arm's
length. These agreements were entered into by Charles E. Smith Commercial Realty
in 1997, before the Company's January 1, 2002 acquisition of Charles E. Smith
Commercial Realty, at a time when Mr. Smith and Mr. Kogod were in control of
both Charles E. Smith Commercial and the Charles E. Smith Residential Division
of Archstone-Smith. Mr. Smith and Mr. Kogod, who became members of Vornado's
board of trustees on January 1, 2002, are also trustees and shareholders of
Archstone-Smith Trust.

THE COMPANY'S ORGANIZATIONAL AND FINANCIAL STRUCTURE GIVES RISE TO
OPERATIONAL AND FINANCIAL RISKS.

THE COMPANY DEPENDS ON ITS SUBSIDIARIES' DIVIDENDS AND DISTRIBUTIONS, AND
THESE SUBSIDIARIES' CREDITORS AND PREFERRED SECURITY HOLDERS ARE ENTITLED TO
PAYMENT OF AMOUNTS PAYABLE TO THEM BY THE SUBSIDIARIES BEFORE THE SUBSIDIARIES
MAY PAY ANY DIVIDENDS OR DISTRIBUTIONS TO THE COMPANY.

The Operating Partnership holds substantially all of its properties and
assets through subsidiaries. The Operating Partnership therefore depends for
substantially all of its cash flow on cash distributions to it by its
subsidiaries. The creditors of each subsidiary are entitled to payment of that
subsidiary's obligations to them, when due and payable, before distributions may
be made by that subsidiary to the Company. Thus, the Operating Partnership's
ability to make distributions to holders of its securities, including its notes,
depends on its subsidiaries' ability first to satisfy their obligations to their
creditors and then to make distributions to the Operating Partnership.

In addition, the Company may participate in any distribution of the assets
of any of its subsidiaries upon the liquidation, reorganization or insolvency
of the subsidiary, only after the claims of the creditors, including trade
creditors, and preferred security holders, if any, of the subsidiary are
satisfied.

-21-

THE COMPANY HAS INDEBTEDNESS, AND THIS INDEBTEDNESS MAY INCREASE.

As of December 31, 2002, the Company had approximately $4.966 billion in
total debt outstanding. The Company's ratio of total debt to total enterprise
value was 45%. When we say "enterprise value" in the preceding sentence, we mean
market equity value of the Company plus debt less cash. In the future, the
Company may incur additional debt, and thus increase its ratio of total debt to
total enterprise value, to finance acquisitions or property developments.

The Indenture limits the Company's total outstanding debt, as defined,
other than certain debt between Vornado Realty Trust, Vornado Realty L.P. or a
subsidiary of either of them, to 60% of total assets, as defined, and also
requires any entity resulting from certain business combinations with the
Company to assume the Company's obligations on the notes under the Indenture,
and that such business combinations not result in a default under the Indenture.
Except for such limitations and requirements, the Indenture does not contain any
provisions that would limit the Company's ability to incur indebtedness or that
would afford its security holders protection in the event of: a highly leveraged
or similar transaction involving us or any of our affiliates; a change of
control of the Company; or a reorganization, restructuring, merger or similar
transaction involving us or Vornado that may adversely affect the Company's
security holders.

LOSS OF THE COMPANY'S KEY PERSONNEL COULD HARM ITS OPERATIONS.

The Company is dependent on the efforts of Steven Roth, the Chairman of the
Board of Trustees and Chief Executive Officer of Vornado, and Michael D.
Fascitelli, the President of Vornado. While the Company believes that it
could find replacements for these key personnel, the loss of their services
could harm its operations.

-22-

ITEM 2. PROPERTIES

The Company currently owns, directly or indirectly, Office properties,
Retail properties, Merchandise Mart properties and Temperature Controlled
Logistics refrigerated warehouses. The Company also owns or has investments in
Alexander's, Hotel Pennsylvania, The Newkirk Master Limited Partnership, and dry
warehouses and industrial buildings.

OFFICE SEGMENT

The Company currently owns all or a portion of 74 office properties
containing approximately 27.7 million square feet. Of these properties, 21
contain 14.3 million square feet and are located in the New York City
metropolitan area (primarily Manhattan) (the "New York City Office Properties")
and 53 contain 13.4 million square feet and are located in the Washington, D.C.
and Northern Virginia area (the "CESCR Office Properties"). Prior to January 1,
2002, the Company owned a 34% interest in CESCR. On January 1, 2002, the Company
acquired the remaining 66% interest.

The following data on pages 23 to 26 covers the New York City Office
Properties. The CESCR Office Properties are described on pages 27 to 30.

NEW YORK CITY OFFICE PROPERTIES:

The New York City Office Properties contain: (i) 13,164,000 square feet of
office space, (ii) 805,000 square feet of retail space and (iii) 332,000 square
feet of garage space (6 garages).

The following table sets forth the percentage of the New York City Office
Properties 2002 revenue by tenants' industry:

The Company's New York City Office property lease terms generally range
from five to seven years for smaller tenant spaces to as long as 20 years for
major tenants. Leases typically provide for step-ups in rent periodically over
the term of the lease and pass through to tenants the tenant's share of
increases in real estate taxes and operating expenses over a base year.
Electricity is provided to tenants on a submetered basis or included in rent
based on surveys and adjusted for subsequent utility rate increases. Leases also
typically provide for tenant improvement allowances for all or a portion of the
tenant's initial construction costs of its premises.

No tenant in the New York City office segment accounted for more than 10%
of the Company's total revenue. Below is a listing of tenants which accounted
for 2% or more of the New York City Office Properties revenues in 2002:

-23-

The following tables set forth lease expirations for the office and retail
portions of the New York City Office Properties as of December 31, 2002, for
each of the next 10 years assuming that none of the tenants exercise their
renewal options.

OFFICE SPACE:

- ----------
(1) Excludes 492,000 square feet at 909 Third Avenue leased to the U.S. Post
Office. The annual escalated rent is $3,533,000 or $7.18 per square foot.
The U.S. Post Office has 6 five-year renewal options remaining.

RETAIL SPACE:

The following table sets forth the occupancy rate and the average annual
escalated rent per square foot for the New York City Office properties at the
end of each of the past five years.

-24-

During 2002, 609,000 square feet of New York City office space was leased
at a weighted average initial rent per square foot of $44.70. The Company's
ownership interest in the leased square footage is 579,000 square feet at a
weighted average initial rent per square foot of $44.82, a 30.0% increase over
the weighted average escalated rent per square foot of $34.11 for the expiring
leases. Following is the detail by building:

- ----------
(1) Most leases include periodic step-ups in rent, which are not
reflected in the initial rent per square foot leased.

In addition to the office space noted above, the Company leased 48,000
square feet of retail space at a weighted average initial rent of $112.01 per
square foot. Further, the Company leased 140,000 square feet of garage space at
a weighted average initial rent per square foot of $19.02.

-25-

New York City Office Properties

The following table sets forth the New York City Office Properties owned by
the Company as of December 31, 2002:

- ----------
(1) These properties are 100% ground leased with the exception of 150
East 58th Street where less than 10% is ground leased.
(2) See Note 6 to the consolidated financial statements in this
annual report on Form 10-K for further details.
(3) Excludes portion of the building under development.

-26-

CHARLES E. SMITH COMMERCIAL REALTY ("CESCR") OFFICE PROPERTIES:

CESCR owns 53 office buildings in the Washington D.C. and Northern Virginia
area containing 13.4 million square feet. As of December 31, 2002, 45 percent of
CESCR's property portfolio is leased to various agencies of the U.S. government
(General Services Administration "GSA").

CESCR office leases are typically for three to five year terms, and may
provide for extension options at either pre-negotiated or market rates. Most
leases provide for annual rental escalations throughout the lease term, plus
recovery of increases in real estate taxes and certain property operating
expenses. Annual rental escalations are typically based upon either fixed
percentage increases or the consumer price index. Leases also typically provide
for tenant improvement allowances for all or a portion of the tenant's initial
construction costs of its premises.

The following table sets forth the percentage of CESCR's Office properties
2002 revenue by tenants' industry:

Below is a listing of tenants which accounted for 2% or more of the CESCR
Office properties revenues during 2002:

- ----------
(1) On August 11, 2002, US Airways filed for protection under Chapter 11 of
the U.S. Bankruptcy Code. Effective January 1, 2003, the Company agreed
to amend its lease with US Airways at Crystal City to (i) reduce the
tenant's space by 90,732 square feet to 205,600 square feet (ii) reduce
the annual escalated rent from $36.00 to $29.75 per square foot with
2.5% annual base rent escalations, (iii) provide the tenant with up to
$1,200,000 of tenant allowances and (iv) loan the tenant up to
$1,000,000 at 9% per annum for additional tenant improvements which is
to be repaid over the lease term. This lease modification is subject to
a confirmed plan of reorganization by the Bankruptcy Court.

-27-

The following table sets forth as of December 31, 2002 CESCR lease
expirations for each of the next 10 years, assuming that none of the tenants
exercise their renewal options.

- ----------
(1) Of the square feet expiring in 2003, 626,000 square feet has been renewed or
is currently in negotiations to be renewed.

Included in the above table are U.S. Patent and Trademark Office leases
expiring from 2003 through 2006 as follows: 139,000 square feet in 2003,
1,179,000 square feet in 2004, 513,000 square feet in 2005 and 107,000 square
feet in 2006. The U.S. Patent and Trademark Office is scheduled to relocate its
offices beginning in the second half of 2004. The Company expects that all
leases expiring prior to March 2004 will be extended or renewed to 2004 or 2005.

The following table sets forth the occupancy rate and the average annual
escalated rent per square foot for the CESCR properties at the end of each of
the past five years:

-28-

During 2002, CESCR leased 2,025,047 square feet of space at a weighted
average initial rent per square foot of $31.29, a 5.5% increase over the
weighted average escalated rent per square foot of $29.66 for the expiring
leases. Following is the detail by building and/or complex:

----------
(1) Most leases include periodic step-ups in rent which are not
reflected in the initial rent per square foot leased.

The above table excludes 317,000 square feet leased at an average initial
rent of $29.21 that was vacant at the time of the Company's acquisition of CESCR
or had been vacant for more than 9 months.

CESCR manages an additional 5.1 million square feet of office and other
commercial properties in the Washington, D.C. area for third parties.

-29-

CESCR Office Properties

The following table sets forth the CESCR Office Properties as of December
31, 2002:

NOTES:

(1) These properties are 100% ground leased.
(2) See note 6 to the consolidated financial statements in this annual
report on Form 10-K for further details.

-30-

RETAIL SEGMENT

The Company owns 62 retail properties of which 51 are strip shopping
centers primarily located in the Northeast and Mid-Atlantic states, two are
regional malls located in San Juan, Puerto Rico, two are super-regional malls
located in Nassau County, Long Island, New York and in Monmouth County, New
Jersey and seven are retail sites located in Manhattan. The Company's strip
shopping centers and malls are generally located on major regional highways in
mature, densely populated areas. The Company believes these properties attract
consumers from a regional, rather than a neighborhood market place because of
their location on regional highways.

The Company's strip shopping centers which contain an aggregate of 9.3
million square feet, are substantially (over 80%) leased to large stores (over
20,000 square feet). Tenants include destination retailers such as discount
department stores, supermarkets, home improvement stores, discount apparel
stores, membership warehouse clubs and "category killers." Category killers are
large stores which offer a complete selection of a category of items (e.g.,
toys, office supplies, etc.) at low prices, often in a warehouse format. Tenants
typically offer basic consumer necessities such as food, health and beauty aids,
moderately priced clothing, building materials and home improvement supplies,
and compete primarily on the basis of price.

The Company's two regional malls are the Montehiedra Mall which contains
554,000 square feet and is anchored by Home Depot, Kmart and Marshalls and the
Las Catalinas Mall which contains 354,000 square feet and is anchored by Kmart
and Sears, which owns its store. On September 23, 2002, the Company increased
its interest in the Las Catalinas Mall to 100% by acquiring the 50% of the mall
and the 25% of Kmart's anchor store it did not already own.

The Green Acres Mall is a 1.6 million square foot super-regional mall
located in Long Island, New York. The Green Acres Mall is anchored by four major
department stores: three of which, Sears, Roebuck and Co., J.C. Penney Company,
Inc. and Federated Department Stores, Inc. ("Federated") doing business as
Macy's, are operating and the fourth, also leased to Federated (previously
occupied by Stern's), is currently dark, however, Federated continues to pay the
rent. The complex also includes The Plaza at Green Acres, a 188,000 square foot
strip shopping center which is anchored by National Wholesale Liquidators. The
Company has entered into a lease with Wal-Mart for the other anchor store at the
Plaza, which is subject to governmental approvals.

The Monmouth Mall, located in Eatontown, New Jersey was acquired on October
10, 2002, by a joint venture in which the Company has a 50% interest. The mall
is a super regional mall containing 1.5 million square feet and anchored by four
department store tenants (Macy's, Lord & Taylor, J.C. Penney's and Boscovs),
three of which own 731,000 square feet of the 1.5 million square feet.

The following table sets forth the percentage of the Retail Portfolio 2002
rentals by type of retailer:

The Manhattan retail sites include six operating properties containing
127,000 square feet, including 43,000 square feet of new retail space at 435
Seventh Avenue leased to Hennes & Mauritz. The seventh property, 4 Union Square
South, is currently under development.

-31-

The following tables set forth the occupancy rate and the average annual
base rent per square foot for the retail properties at the end of each of the
past five years.

STRIP SHOPPING CENTERS:

REGIONAL AND SUPER REGIONAL MALLS:

The aggregate occupancy rate for the 12.5 million square feet of retail
properties at December 31, 2002 is 88.3%. The occupancy rate includes leases for
490,000 square feet at five locations (4%) which have not commenced at December
31, 2002. Three of these locations aggregating 268,000 square feet are ground
leased to Lowe's which plans to demolish the existing buildings and construct
its own stores at the sites and two locations containing 223,000 square feet are
leased to Wal-Mart, which plans to demolish an existing building and construct
its own store at one of the sites and occupy the existing store at the other
site. All of these redevelopment projects are subject to governmental approvals
and in some cases, the relocation of existing tenants.

The Company's shopping center lease terms range from 5 years or less in
some instances for smaller tenant spaces to as long as 25 years for major
tenants. Leases generally provide for additional rents based on a percentage of
tenants' sales and pass through to tenants of the tenants' share of all common
area charges (including roof and structure in strip shopping centers, unless it
is the tenant's direct responsibility), real estate taxes and insurance costs
and certain capital expenditures. Percentage rent accounted for less than 1% of
total shopping center revenues in 2002. None of the tenants in the Retail
Segment accounted for more than 10% of the Company's total revenues.

Below is a listing of tenants which accounted for 2% or more of the Retail
property revenues in 2002:

-32-

FORMER BRADLEES LOCATIONS:

The Company previously leased 18 locations to Bradlees which closed all of
its stores in February 2001. The leases for four former Bradlees locations were
assigned by Bradlees to other retailers. The Company has re-leased nine of the
other former Bradlees locations; three to Kohl's, two each to Lowe's and Haynes
Furniture, and one each to Home Depot and Wal-Mart. Lowe's and Wal-Mart will
demolish the existing properties and construct their own stores, subject to the
receipt of various governmental approvals and the relocation of existing
tenants. Of the remaining five locations which are currently vacant, two of the
leases are guaranteed and the rent is being paid by Stop & Shop, a wholly-owned
subsidiary of Koninklijke Ahold NV (formerly Royal Ahold NV), an international
food retailer. Stop & Shop remains contingently liable for rent at a number of
the former Bradlees locations for the term of the Bradlees leases.

Property rentals for the year ended December 31, 2002, include $5,000,000
of additional rent which, effective December 31, 2002, was re-allocated to the
former Bradlees locations in Marlton, Turnersville, Bensalem and Broomall and is
payable by Stop & Shop, pursuant to the Master Agreement and Guaranty, dated May
1, 1992. This amount is in addition to all other rent guaranteed at the former
Bradlees locations. On January 8, 2003, Stop & Shop filed a complaint with the
United States District Court claiming the Company has no right to reallocate and
therefore continue to collect the $5,000,000 of annual rent from Stop & Shop
because of the expiration of the East Brunswick, Jersey City, Middletown, Union
and Woodbridge leases to which the $5,000,000 of additional rent was previously
allocated. The additional rent provision of the guaranty expires at the earliest
in 2012. The Company intends to vigorously contest Stop & Shop's position.

In February 2003, Koninklijke Ahold NV, parent of Stop & Shop, announced
that it overstated its 2002 and 2001 earnings by at least $500 million and is
under investigation by the U.S. Justice Department and Securities and Exchange
Commission. The Company cannot predict what effect, if any, this situation may
have on Stop & Shop's ability to satisfy its obligation under the Bradlees
guarantees and rent for existing Stop & Shop leases aggregating approximately
$10.5 million per annum.

The following table sets forth as of December 31, 2002 lease expirations
for each of the next 10 years assuming that none of the tenants exercise their
renewal options.

-33-

During 2002, approximately 902,000 square feet of retail space was leased
at a weighted average rent per square foot of $13.58, a 33.8% increase over the
weighted average rent per square foot of $10.15 for the expiring leases and
1,117,000 square feet of land was ground leased to retailers at a weighted
average rent per square foot of $6.69. Following is the detail by property:

- ----------
(1) Most leases include periodic step-ups in rent, which are not reflected
in the initial rent per square foot leased.
(2) Lowe's will demolish the existing buildings and construct its own
buildings in Jersey City, Dover and Union and Wal-Mart will demolish
the existing building and construct its own building in Chicopee. These
leases are expected to commence within the next 12 to 24 months upon
receipt of various governmental approvals, and the relocation of
existing tenants.

-34-

Retail Properties

The following table sets forth the Retail Properties as of December 31,
2002:

-35-

(1) These properties are ground leased.
(2) See note 6 to the consolidated financial statements in this annual
report on Form 10-K for further details.
(3) On January 9, 2003, this property was sold for $4.5 million, which
resulted in a gain of $2.6 million to be recognized in the first
quarter of 2003.
(4) Under development.

-36-

MERCHANDISE MART SEGMENT

The Merchandise Mart Properties are a portfolio of 9 properties containing
an aggregate of 8.6 million square feet.

Below is a breakdown of square feet by location and use as of December 31,
2002.

OFFICE SPACE

The following table sets forth the percentage of the Merchandise Mart
Properties office revenues by tenants' industry during 2002:

-37-

The average lease term ranges from three to five years for smaller tenants
to as long as 15 years for large tenants. Leases typically provide for step-ups
in rent periodically over the term of the lease and pass through to tenants the
tenants' share of increases in real estate taxes and operating expenses for a
building over a base year. Electricity is provided to tenants on a submetered
basis or included in rent and adjusted for subsequent utility rate increases.
Leases also typically provide for tenant improvement allowances for all or a
portion of the tenant's initial construction of its premises. None of the
tenants in the Merchandise Mart Properties segment accounted for more than 10%
of the Company's total revenue. Below is a listing of the Merchandise Mart
Properties office tenants which accounted for 2% or more of the Merchandise Mart
Properties' revenues in 2002:

On December 30, 2002, the Company entered into a lease modification
agreement with Bankers Life and Casualty ("Bankers") to (i) extend the term for
107,000 square feet from November 30, 2008 (the date it was scheduled to expire)
to November 30, 2018, (ii) maintain 70,000 square feet through November 30,
2008, (iii) surrender 83,000 square feet on March 1, 2003, (which the Company
has re-leased to RBC Mortgage Company for a 15-year term) and (iv) vacate the
remaining 43,000 square feet. Bankers is not part of the bankruptcy filing of
its parent company, Conseco.

On November 25, 2002, the Chicago Transit Authority notified the Company
that it is exercising its right to terminate its lease as of November 30, 2004,
which was scheduled to expire on November 30, 2007. In connection with the
termination, the Company received a payment of $794,000 in November 2002 and
will receive an additional $750,000 in 2004.

The following table sets forth the occupancy rate and the average escalated
rent per square foot for the Merchandise Mart Properties' office space at the
end of each of the past five years.

-38-

The following table sets forth as of December 31, 2002 office lease
expirations for each of the next 10 years assuming that none of the tenants
exercise their renewal options.

During 2002, 164,000 square feet of office space was leased at a weighted
average initial rent per square foot of $26.97, an increase of 1.2% over the
weighted average escalated rent per square foot of $26.66 for the leases
expiring. Following is the detail by building:

----------
(1) Most leases include periodic step-ups in rent, which are not
reflected in the initial rent per square foot leased.

SHOWROOM SPACE

The showrooms provide manufacturers and wholesalers with permanent and
temporary space in which to display products for buyers, specifiers and end
users. The showrooms are also used for hosting trade shows for the contract
furniture, casual furniture, gifts, carpet, residential furnishings, building
products, crafts, apparel and design industries. Merchandise Mart Properties own
and operate five of the leading furniture and gifts trade shows including the
contract furniture industry's largest annual trade show, NeoCon, which attracts
over 50,000 attendees each June and is hosted at the Merchandise Mart building
in Chicago. The Market Square Complex co-hosts the home furniture industry's
semi-annual (April and October) market weeks which occupy over 11,500,000 square
feet in the High Point, North Carolina region.

The following table sets forth the percentage of the Merchandise Mart
properties showroom revenues by tenants' industry during 2002:

-39-

The following table sets forth the occupancy rate and the average escalated
rent per square foot for this space at the end of each of the past five years.

The following table sets forth as of December 31, 2002 showroom lease
expirations for each of the next 10 years assuming that none of the tenants
exercise their renewal options.

In 2002, 911,000 square feet of showroom space was leased at a weighted
average initial rent per square foot of $18.99, a 2.0% increase over the
weighted average escalated rent per square foot of $18.63 for the leases
expiring. Following is the detail by building:

----------
(1) Most leases include periodic step-ups in rent which are not reflected
in the initial rent per square foot leased.

RETAIL STORES

The Merchandise Mart Properties' portfolio also contains approximately
202,000 square feet of retail stores which was 83.9% occupied at December 31,
2002.

-40-

Merchandise Mart Properties:

The following table sets forth the Merchandise Mart Properties owned by the
Company as of December 31, 2002:

----------
(1) See Note 6 to the consolidated financial statements in this annual
report on Form 10-K for further details.

-41-

TEMPERATURE CONTROLLED LOGISTICS SEGMENT

The Company has a 60% interest in Vornado Crescent Portland Partnership
("the Landlord") that owns 88 cold storage warehouses, through a wholly-owned
subsidiary (AmeriCold Realty Trust), with an aggregate of approximately 441.5
million cubic feet. AmeriCold Logistics leases all of the partnerships'
facilities. The Temperature Controlled Logistics segment is headquartered in
Atlanta, Georgia.

AmeriCold Logistics provides the food industry with refrigerated
warehousing and transportation management services. Refrigerated warehouses are
comprised of production, distribution and public facilities. Production
facilities typically serve one or a small number of customers, generally food
processors which are located nearby. These customers store large quantities of
processed or partially processed products in the facilities until they are
shipped to the next stage of production or distribution. Distribution facilities
primarily warehouse a wide variety of customers' finished products until future
shipment to end-users. Each distribution facility generally services the
surrounding regional market. Public facilities generally serve the needs of
local and regional customers under short-term agreements. Food manufacturers and
processors use these facilities to store capacity overflow from their production
facilities or warehouses. AmeriCold Logistics' transportation management
services include freight routing, dispatching, freight rate negotiation,
backhaul coordination, freight bill auditing, network flow management, order
consolidation and distribution channel assessment. AmeriCold Logistics'
temperature controlled logistics expertise and access to both frozen food
warehouses and distribution channels enable its customers to respond quickly and
efficiently to time-sensitive orders from distributors and retailers.

AmeriCold Logistics' customers consist primarily of national, regional and
local frozen food manufacturers, distributors, retailers and food service
organizations. A breakdown of AmeriCold Logistics' largest customers during 2002
include:

On December 31, 2002, AmeriCold Logistics sold its Carthage, Missouri and
Kansas City, Kansas quarries for $20,000,000 in cash (appraised value) to a
joint venture owned 44% by the Company and 56% by Crescent Real Estate Equities.

-42-

Temperature Controlled Logistics Properties

The following table sets forth certain information for the Temperature
Controlled Logistics properties as of December 31, 2002:

- ----------
(1) Leasehold interest

-44-

ALEXANDER'S PROPERTIES

The Company owns 33.1% of Alexander's outstanding common shares. The
following table shows the location, approximate size and leasing status of each
of the properties owned by Alexander's as of December 31, 2002.

- ----------
(1) Excludes parking garages.
(2) Excludes 339,000 square foot Macy's store, owned and operated by Federated
Department Stores, Inc.
(3) Leased by Alexander's through January 2027. Classified as an asset held
for sale by Alexander's at December 31, 2002.
(4) Ground leased to IKEA.

The development plans at Lexington Avenue consist of an approximately 1.3
million square foot multi-use building. The building will contain approximately
154,000 net rentable square feet of retail (45,000 square feet of which has been
leased to Hennes & Mauritz), approximately 878,000 net rentable square feet of
office (695,000 square of which has been leased to Bloomberg L.P.) and 248,000
square feet of residential condominium units (through a taxable REIT
subsidiary). Construction is expected to be completed in 2004. On July 3, 2002
Alexander's finalized a $490,000,000 loan with HVB Real Estate Capital (Hypo
Vereinsbank) to finance the construction of the Lexington Avenue property (the
"Construction Loan"). The estimated construction costs in excess of the
construction loan of approximately $140,000,000 will be provided by Alexander's.
The Construction Loan has an interest rate of LIBOR plus 2.5% (currently 3.94%)
and a term of forty-two months subject to two one-year extensions. Alexander's
received an initial funding of $55,500,000 under the Construction Loan of which
$25,000,000 was used to repay the Alexander's term loan to a bank in the amount
of $10,000,000 and a secured note in the amount of $15,000,000. Of the total
construction budget of approximately $630,000,000, $162,000,000 has been
extended through December 31, 2002 and an additional $184,000,000 has been
committed. Pursuant to the Construction Loan, the Company has agreed to
guarantee among other things, the lien free, timely completion of the
construction of the project and funding of project costs in excess of a stated
loan budget, if not funded by Alexander's (the "Completion Guarantee"). The
$6,300,000 estimated fee payable by Alexander's to the Company for the
Completion Guarantee is 1% of construction costs (as defined). In addition, if
the Company should advance any funds under the Completion Guarantee in excess of
the $26,000,000 currently available under the secured line of credit, interest
on those advances is at 15% per annum.

On August 30, 2002, Alexander's sold its Third Avenue property located in
the Bronx, New York. The 173,000 square foot property was sold for $15,000,000
resulting in a gain of $10,366,000, of which the Company's share was $3,524,000.

-45-

THE NEWKIRK MASTER LIMITED PARTNERSHIP

In 1998, the Company and affiliates of Apollo Real Estate Investment Fund
III, L.P. ("Apollo") formed a joint venture to acquire general and limited
partnership interests in the Newkirk real estate partnerships. Since its
formation, the joint venture has acquired equity interests in 91 partnerships
which own approximately 19.6 million square feet of real estate and first and
second mortgages secured by a portion of these properties. The Company owned a
30% interest in the joint venture with the balance owned by Apollo. On January
1, 2002, the Newkirk partnerships were merged into The Newkirk Master Limited
Partnership (the "MLP") to create a vehicle to enable the partners to have
greater access to capital and future investment opportunities. In connection
with the merger, the Company received limited partner interests in the MLP equal
to an approximate 21.1% interest and Apollo received limited partner interests
in the MLP equal to an approximate 54.5% interest. At December 31, 2002, the
Company has a 21.7% interest in the MLP and Apollo has a 55.9% interest.
Further, the joint venture is the general partner of the MLP.

Simultaneously, the MLP completed a $225,000,000 secured financing
collateralized by its interests in the entities that own the properties, subject
to the existing first and certain second mortgages on those properties. The loan
bears interest at LIBOR plus 5.5% with a LIBOR floor of 3% (8.5% at December 31,
2002) and matures on January 31, 2005, with two one-year extension options. As a
result of the financing, on February 6, 2002 the MLP repaid approximately
$28,200,000 of existing joint venture debt and distributed approximately
$37,000,000 to the Company.

The Company's equity investment in the joint venture at December 31, 2002
was comprised of:

Investments in limited partnerships... $ 134,200,000
Mortgages and loans receivable........ 39,511,000
Other................................. 8,754,000
---------------
$ 182,465,000
===============

The Company's share of the joint venture debt was approximately
$312,679,000 at December 31, 2002.

The following table sets forth a summary of the real estate owned by the
MLP:

As of December 31, 2002, the occupancy rate of the properties is 99.9%.

-46-

The primary lease terms range from 20 to 25 years from their original
commencement dates with rents, typically above market, which fully amortize the
first mortgage debt on the properties. In addition, tenants generally have
multiple renewal options, with rents, on average, below market.

Below is a listing of tenants which accounted for 2% or more of the MLP's
revenues in 2002:

----------
(1) On February 12, 2002, Kaiser Aluminum, which leases an office
building located in Oakland, California, filed for protection
under Chapter 11 of the U.S. Bankruptcy Code. To date, this lease
has not been assumed or rejected.

The following table sets forth lease expirations for each of the next 10
years, as of December 21, 2002, assuming that none of the tenants exercise their
renewal options.

-47-

Newkirk Master Limited Partnership Properties

The following table sets forth The Newkirk Master Limited Partnership
Properties as of December 31, 2002:

-48-

-49-

- ----------
(1) leasehold interest.

-50-

HOTEL PENNSYLVANIA

The Hotel Pennsylvania is located in New York City on Seventh Avenue
opposite Madison Square Garden and consists of a hotel portion containing
1,000,000 square feet of hotel space with 1,700 rooms and a commercial portion
containing 400,000 square feet of retail and office space.

The Hotel is dependent on tourism and was severely impacted by the events
of September 11, 2001, accelerating a trend which began in the first quarter of
2001. The following table presents rental information for the Hotel:

As of December 31, 2002, the property's retail and office space was 47% and
53% occupied compared to 56% and 61% as of December 2001. 25 tenants occupy the
retail and office space. Annual rent per square foot of retail and office space
in 2002 was $40 and $12 compared to $50 and $21 in 2001 and $45 and $17 in 2000.

DRY WAREHOUSE/INDUSTRIAL PROPERTIES

The Company's dry warehouse/industrial properties consist of eight
buildings in New Jersey containing approximately 2.0 million square feet. The
average term of a tenant's lease is three to five years.

The following table sets forth the occupancy rate and average annual rent
per square foot at the end of each of the past four years.

In November 2002, the Company entered into an agreement to ground lease its
East Brunswick industrial property to Lowe's. Lowe's will demolish the existing
warehouse containing 326,000 square feet and construct its own retail store.
This lease is subject to various governmental approvals.

-51-

ITEM 3. LEGAL PROCEEDINGS

The Company is from time to time involved in legal actions arising in the
ordinary course of its business. In the opinion of management, after
consultation with legal counsel, the outcome of such matters, including in
respect of the matter referred to below, is not expected to have a material
adverse effect on the Company's financial position or results of operation.

PRIMESTONE

As previously disclosed, Primestone filed an amended counterclaim against
the Company in Delaware Chancery Court on July 31, 2002, alleging, among other
things, that Vornado's April 30, 2002 foreclosure on the collateral pledged by
Primestone did not comply with the Uniform Commercial Code. On December 19,
2002, the Delaware Chancery Court dismissed all of Primestone's counterclaims.
On January 17, 2003, Primestone filed a notice of appeal. In its brief filed on
February 14, 2003, Primestone asked the Delaware Supreme Court to reverse the
Delaware Chancery court's decision that (1) Vornado's foreclosure auction was
held in a commercially reasonable manner, and (2) Vornado did not tortiously
interfere with Primestone business relations. This litigation is continuing.

Primestone and several affiliates commenced an action against the Company
on May 3, 2002 in New York Supreme Court, alleging substantially the same causes
of action as in its amended counterclaim in the Delaware Chancery Court. On June
10, 2002, Vornado moved to dismiss this action. This litigation is continuing.

On May 9, 2002, five affiliates of Primestone asserted counterclaims in an
action which the Company had commenced against them on March 28, 2002 in New
York Supreme Court. The counterclaims are virtually identical to the claims
asserted in the May 3, 2002 action. On May 29, 2002, Vornado filed an answer
denying the essential allegations of the counterclaims. This litigation is
continuing.

STOP & SHOP

On January 8, 2003, Stop & Shop filed a complaint with the United States
District Court claiming the Company has no right to reallocate and therefore
continue to collect the $5,000,000 of annual rent from Stop & Shop pursuant to
the Master Agreement and Guaranty, because of the expiration of the East
Brunswick, Jersey City, Middletown, Union and Woodbridge leases to which the
$5,000,000 of additional rent was previously allocated. The additional rent
provision of the guaranty expires at the earliest in 2012. The Company intends
to vigorously contest Stop & Shop's position.

-52-

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

No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 2002.

EXECUTIVE OFFICERS OF THE REGISTRANT

The Operating Partnership is managed by Vornado, its general partner. The
following is a list of the names, ages, principal occupations and positions with
Vornado of the executive officers of Vornado and the positions held by such
officers during the past five years. All executive officers of Vornado have
terms of office which run until the next succeeding meeting of the Board of
Trustees of Vornado following the Annual Meeting of Shareholders unless they are
removed sooner by the Board.

-53-

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED UNITHOLDERS
MATTERS

There is no established trading market for the units of the Operating
Partnership. At December 31, 2002, there were 1,633 Class A unitholders of
record.

DIVIDENDS AND DISTRIBUTIONS

During the year ended December 31, 2002, the Company declared four
quarterly unit distributions in the amounts of $0.66, $0.66, $0.66 and
$0.68 per unit from the first to the fourth quarter, respectively.

During the year ended December 31, 2001, the Company declared four
quarterly unit distributions in the amounts of $0.53, $0.53, $0.60 and $0.97 per
unit from the first to the fourth quarter, respectively.

RECENT SALES OF UNREGISTERED SECURITIES

In 2000, the Company issued 244,247 Class A units in connection with the
acquisition of equity investments in certain limited partnerships that own real
estate. The Class A units were issued without registration under the Securities
Act of 1933 in reliance on Regulation D promulgated under that Act.

During 2000, the Company also issued 840,000 Series D-6 Preferred Units,
7,200,000 Series D-7 Preferred Units and 360,000 Series D-8 Preferred Units to
institutional investors for net proceeds of $20,475,000, $175,500,000 and
$8,775,000, respectively. These preferred units were issued without registration
under the Securities Act of 1933 in reliance on Section 4(2) of that Act.

In 2001, the Company issued 205,823 Class A units in connection with the
acquisition of equity investments in certain limited partnerships that own real
estate. The Class A units were issued without registration under the Securities
Act of 1933 in reliance on Regulation D promulgated under that Act.

On July 1, 2001, the Company issued 29,092 Class A units in connection
with the acquisition of real estate. The Class A units were issued without
registration under the Securities Act of 1933 in reliance on Section 4(2) of
that Act.

On September 21, 2001, the Company issued 1,800,000 Series D-9 Preferred
Units to an institutional investor for net proceeds of approximately
$43,875,000. The Series D-9 Preferred Units were issued without registration
under the Securities Act of 1933 in reliance on Section 4(2) of that Act.

During 2001, the Company also issued 400,000 F-1 Preferred Units in
connection with the acquisition of a leasehold interest in real estate. The
Series F-1 Preferred Units were issued without registration under the Securities
Act of 1933 in reliance on Section 4(2) of that Act.

In 2002, the Company issued 15,967,651 Class A units in connection with the
acquisition of interests in limited partnerships that own real estate. The Class
A units were issued without registration under the Securities Act of 1933 in
reliance on Regulation D promulgated under that Act.

-54-

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

-55-

ITEM 7. 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.

OVERVIEW

Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a discussion of the Company's consolidated financial
statements for the years ended December 31, 2002, 2001 and 2000.

Operating results for the year ended December 31, 2002, reflect the
Company's January 1, 2002 acquisition of the remaining 66% of Charles E. Smith
Commercial Realty L.P. ("CESCR") and the resulting consolidation of CESCR's
operations. See Supplemental Information, page 79, for Condensed Pro Forma
Operating Results for the year ended December 31, 2001 giving effect to the
CESCR acquisition as if it had occurred on January 1, 2001.

-56-

CRITICAL ACCOUNTING POLICIES

In preparing the consolidated financial statements management has made
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates. Set forth below is a summary of the accounting policies
that management believes are critical to the preparation of the consolidated
financial statements. The summary should be read in conjunction with the more
complete discussion of the Company's accounting policies included in Note 2 to
the consolidated financial statements in this annual report on Form 10-K.

REAL ESTATE

Real estate is carried at cost, net of accumulated depreciation and
amortization. As of December 31, 2002, the Company's carrying amount of its real
estate, net of accumulated depreciation is $6.8 billion. Maintenance and repairs
are charged to operations as incurred. Depreciation requires an estimate by
management of the useful life of each property as well as an allocation of the
costs associated with a property to its various components. If the Company does
not allocate these costs appropriately or incorrectly estimates the useful lives
of its real estate, depreciation expense may be misstated.

Upon acquisitions of real estate, the Company assesses the fair value of
acquired assets (including land, buildings, tenant improvements and acquired
above and below market leases and the origination cost of acquired in-place
leases in accordance with SFAS No. 141) and acquired liabilities, and allocate
purchase price based on these assessments. The Company assesses fair value based
on estimated cash flow projections that utilize appropriate discount and
capitalization rates and available market information. Estimates of future cash
flows are based on a number of factors including the historical operating
results, known trends, and market/economic conditions that may affect the
property. The Company's properties are reviewed for impairment if events or
circumstances change indicating that the carrying amount of the assets may not
be recoverable. If the Company incorrectly estimates the values at acquisition
or the undiscounted cash flows, initial allocations of purchase price and future
impairment charges may be different. The impact of the Company's estimates in
connection with acquisitions and future impairment analysis could be material to
the Company's financial statements.

NOTES AND MORTGAGE LOANS RECEIVABLE

The Company evaluates the collectibility of both interest and principal of
each of its notes and mortgage loans receivable ($86.6 million as of December
31, 2002) if circumstances warrant to determine whether it is impaired. If the
Company fails to identify that the investee or borrower are unable to perform,
the Company's bad debt expense may be different.

PARTIALLY-OWNED ENTITIES

The Company accounts for its investments in partially-owned entities
($997.7 million as of December 31, 2002) under the equity method when the
Company's ownership interest is more than 20% but less than 50% and the Company
does not exercise direct or indirect control. When partially-owned investments
are in partnership form, the 20% threshold may be reduced. Factors that the
Company considers in determining whether or not it exercises control include
substantive participating rights of partners on significant business decisions,
including dispositions and acquisitions of assets, financing and operating and
capital budgets, board and management representation and authority and other
contractual rights of its partners. To the extent that the Company is deemed to
control these entities, these entities would have to be consolidated and
therefore impact the balance sheet, operations and related ratios. On a periodic
basis the Company evaluates whether there are any indicators that the value of
the Company's investments in partially-owned entities are impaired. An
investment is impaired if management's estimate of the value of the investment
is less than the carrying amount. The ultimate realization of the Company's
investment in partially-owned entities is dependent on a number of factors
including the performance of the investee and market conditions. If the Company
determines that a decline in the value of its investee is other than temporary,
then an impairment charge would be recorded.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company periodically evaluates the collectibility of amounts due from
tenants and maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of tenants to make required payments under the
lease agreement. The Company also maintains an allowance for receivables arising
from the straight-lining of rents. This receivable arises from earnings
recognized in excess of amounts currently due under the lease agreements.
Management exercises judgment in establishing these allowances and considers
payment history and current credit status in developing these estimates. If
estimates differ from actual results this would impact reported results.

-57-

REVENUE RECOGNITION

The Company has the following revenue sources and revenue recognition
policies:

- Base Rents -- income arising from tenant leases. These rents are
recognized over the non-cancelable term of the related leases on a
straight-line basis which includes the effects of rent steps and free
rent abatements under the leases.

- Percentage Rents -- income arising from retail tenant leases which are
contingent upon the sales of the tenant exceeding a defined threshold.
These rents are recognized in accordance with SAB 101, which states
that this income is to be recognized only after the contingency has
been removed (i.e. sales thresholds have been achieved).

- Hotel Revenues -- income arising from the operation of the Hotel
Pennsylvania which consists of rooms revenue, food and beverage
revenue, and banquet revenue. Income is recognized when rooms are
occupied. Food and beverage and banquet revenue are recognized when
the services have been rendered.

- Trade Show Revenues -- income arising from the operation of trade
shows, including rentals of booths. This revenue is recognized in
accordance with the booth rental contracts when the trade shows have
occurred.

- Expense Reimbursement Income -- income arising from tenant leases
which provide for the recovery of all or a portion of the operating
expenses and real estate taxes of the respective property. This income
is accrued in the same periods as the expenses are incurred.

Before the Company recognizes revenue, it assesses among other things, its
collectibility. If the Company incorrectly determines the collectibility of its
revenue, its net income and assets could be overstated.

-58-

Below is a summary of Net income and Adjusted EBITDA(1) by segment for the
years ended December 31, 2002, 2001 and 2000. Prior to 2001, income from the
Company's preferred stock affiliates ("PSAs") was included in income from
partially-owned entities. On January 1, 2001, the Company acquired the common
stock of its PSAs and converted these entities to taxable REIT subsidiaries.
Accordingly, the Hotel portion of the Hotel Pennsylvania and the management
companies (which provide services to the Company's business segments and operate
the Trade Show business of the Merchandise Mart division) have been consolidated
effective January 1, 2001. Amounts for the year ended December 31, 2000 have
been reclassified to give effect to the consolidation of these entities, as if
consolidated as of January 1, 2000 (see page 61 for the details of the
reclassifications by line item). In addition, the Company has revised Adjusted
EBITDA as previously reported for the year ended December 31, 2001 and 2000 to
include income from the early extinguishment of debt of $1,170,000 in 2001 and
expense from the early extinguishment of debt of $1,125,000 in 2000 because such
items are no longer treated as extraordinary items in accordance with Generally
Accepted Accounting Principles.

- ----------
See Notes on page 62.

-59-

- ----------
See Notes on page 62.

-60-

- ----------
See Notes on page 62.

Prior to 2001, income from the Company's investments in preferred stock
affiliates ("PSAs") was included in income from partially-owned entities. On
January 1, 2001, the Company acquired the common stock of its PSAs and converted
these entities to taxable REIT subsidiaries. Accordingly, the operations of the
Hotel portion of the Hotel Pennsylvania and the operations of the management
companies (which provide services to the Company's business segments and operate
the Trade Show business of the Merchandise Mart division) have been consolidated
effective January 1, 2001. Amounts for the year ended December 31, 2000 have
been reclassified to give effect to the consolidation of these entities, as of
January 1, 2000. The effect of these reclassifications in 2000 was as follows:

(i) reduction in equity in income of partially-owned entities $ (8,599,000)
(ii) increase in rental revenues 64,501,000
(iii) increase in other income 8,325,000
(iv) increase in operating expenses (41,233,000)
(v) increase in depreciation and amortization (6,906,000)
(vi) increase in general and administrative expenses (6,984,000)
(vii) increase in interest and debt expense (9,104,000)
----------------
(viii) net impact $ --
================

These reclassifications had no effect on reported Net Income or Adjusted
EBITDA for the year ended December 31, 2000 and no impact to any other year.

-61-

NOTES:

(1) Adjusted EBITDA represents income before interest, taxes, depreciation and
amortization, extraordinary or non-recurring items, gains or losses on
sales of depreciable real estate, the effect of straight-lining of rent
escalations, amortization of acquired below market leases net of above
market leases and minority interest. Management considers Adjusted EBITDA a
supplemental measure for making decisions and assessing the performance of
its segments. Adjusted EBITDA should not be considered a substitute for net
income or a substitute for cash flow as a measure of liquidity. Adjusted
EBITDA is presented as a measure of "operating performance" which enables
the reader to identify trends from period to period and may be used to
compare "same store" operating performance to other companies, as well as
providing a measure for determining funds available to service debt.
Adjusted EBITDA may not be comparable to similarly titled measures employed
by other companies. In addition, the Company has revised Adjusted EBITDA as
previously reported for the year ended December 31, 2001 and 2000 to
include income from the early extinguishment of debt of $1,170 in 2001 and
expense from the early extinguishment of debt of $1,125 in 2000 because
such items are no longer treated as Extraordinary Items in accordance with
Generally Accepted Accounting Principles.

(2) Adjusted EBITDA - Other is comprised of:

-62-

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001

REVENUES

The Company's revenues, which consist of property rentals, tenant expense
reimbursements, hotel revenues, trade shows revenues, amortization of above and
below market leases acquired under SFAS No. 141, and other income, were
$1,435,070,000 for the year ended December 31, 2002, compared to $985,773,000 in
the year ended December 31, 2001, an increase of $449,297,000 of which
$423,128,000 resulted from the acquisition of the remaining 66% of CESCR and the
resulting consolidation of its operations. Below are the details of the increase
(decrease) by segment:

(amounts in thousands)

- ----------
(1) Average occupancy and REVPAR for the Hotel Pennsylvania were 65% and $58
for the year ended December 31, 2002 compared to 63% and $70 for the prior
year.
(2) Reflects a decrease of $3,580 resulting from the rescheduling of two trade
shows from the fourth quarter in which they were previously held to the
first quarter of 2003.

See supplemental information on page 78, for details of leasing activity
and corresponding changes in occupancy.

-63-

EXPENSES

The Company's expenses were $880,254,000 for the year ended December 31,
2002, compared to $600,626,000 in the year ended December 31, 2001, an increase
of $279,628,000 of which $202,852,000 resulted from the acquisition of the
remaining 66% of CESCR and the resulting consolidation of its operations. Below
are the details of the increase by segment:

- ----------
(1) Results primarily from (i) a $9,725 increase in insurance, security and
real estate taxes, largely reimbursed by tenants, and (ii) $2,639 for an
allowance for straight-line rent receivables.
(2) Results primarily from (i) increases in insurance costs which are
reimbursed by tenants, (ii) a $402 payment of Puerto Rico taxes related
to the prior year, (iii) $2,280 in bad debt allowances for accounts
receivable and receivables arising from the straight-lining of rents in
2002 and (iv) lease termination fees and real estate tax refunds netted
against expenses in 2001, which aggregated $1,500.
(3) Results primarily from the rescheduling of two trade shows from the
fourth quarter in which they were previously held to the first quarter of
2003.
(4) Reflects (i) increased insurance costs of $1,366, (ii) a charge of $312
from the settlement of a 1998 utility assessment, and (iii) an increase
in real estate taxes of $1,725.
(5) Reflects a charge of $954 in connection with the termination of a
contract and the write-off of related deferred costs.
(1) Reflects a charge in 2002 of $6,874 for the write-off of pre-development
costs at the 20 Times Square project and a charge in 2001 of $5,223 in
connection with the World Trade Center acquisition not consummated.

INCOME APPLICABLE TO ALEXANDER'S

Income applicable to Alexander's (loan interest income, management,
leasing, development and commitment fees, and equity in income) was $29,653,000
in the year ended December 31, 2002, compared to $25,718,000 in the year ended
December 31, 2001, an increase of $3,935,000. This increase resulted from (i)
$6,915,000 of development and commitment fees in connection with Alexander's
Lexington Avenue development project, (ii) the Company's $3,524,000 share of
Alexander's gain on sale of its Third Avenue property, partially offset by (iii)
the Company's $6,298,000 share of Alexander's gain on the sale of its Fordham
Road property in the prior year.

-64-

INCOME FROM PARTIALLY-OWNED ENTITIES

In accordance with accounting principles generally accepted in the United
States of America, the Company reflects the income it receives from (i) entities
it owns less than 50% of and (ii) entities it owns more than 50% of, but which
have a partner who has shared board and management representation and authority
and substantive participating rights on all significant business decisions, on
the equity method of accounting resulting in such income appearing on one line
in the Company's consolidated statements of income. Below is the detail of
income from partially-owned entities by investment as well as the increase
(decrease) in income from partially-owned entities for the year ended December
31, 2002 as compared to the prior year:

- ----------
(1) On January 1, 2002, the Company acquired the remaining 66% of CESCR it did
not previously own. Accordingly, CESCR is consolidated as of January 1,
2002.
(2) On September 20, 2002, the Company acquired the remaining 50% of the Mall
and 25% of the Kmart anchor store that it did not previously own.
Accordingly, Las Catalinas is consolidated for the period from September 20,
2002 to December 31, 2002.
(3) On October 10, 2002, a joint venture, in which the Company has a 50%
interest, acquired the Monmouth Mall.
(4) Vornado's interest in the equity in net income of the Monmouth Mall includes
a preferred return of $748 for the year ended December 31, 2002.
(5) The prior year includes $1,394 for the Company's share of a gain on sale of
a property.
(6) The year ended December 31, 2002 excludes 570 Lexington Avenue which was
sold in May 2001.
(7) The prior year includes $2,000 for the Company's share of equity in loss of
its Russian Tea Room ("RTR") investment. In the third quarter of 2001, the
Company wrote-off its entire net investment in RTR based on the operating
losses and an assessment of the value of the real estate.

-65-

INTEREST AND OTHER INVESTMENT INCOME

Interest and other investment income (interest income on mortgage loans
receivable, other interest income and dividend income) was $31,685,000 for the
year ended December 31, 2002, compared to $54,385,000 in the year ended December
31, 2001, a decrease of $22,700,000. This decrease resulted primarily from a
decrease of (i) $12,347,000 due to the non-recognition of income on the mortgage
loan to Primestone, which was foreclosed on April 30, 2002, (ii) $4,626,000 due
to a lower yield on the investment of the proceeds received from the May 2002
repayment of the Company's loan to NorthStar Partnership L.P. (22% yield in
2001) and (iii) $2,269,000 due to the non-recognition of income on the loan to
Vornado Operating.

INTEREST AND DEBT EXPENSE

Interest and debt expense was $239,525,000 for the year ended December 31,
2002, compared to $173,076,000 in the year ended December 31, 2001, an increase
of $66,449,000. This increase was comprised of (i) $100,013,000 from the
acquisition of the remaining 66% of CESCR and the resulting consolidation of its
operations, partially offset by (ii) a $32,035,000 savings from a 202 basis
point reduction in weighted average interest rates of the Company's variable
rate debt and (iii) lower average outstanding debt balances.

NET (LOSS) GAIN ON DISPOSITION OF WHOLLY-OWNED AND PARTIALLY-OWNED ASSETS OTHER
THAN DEPRECIABLE REAL ESTATE

The following table sets forth the details of net gain on disposition of
wholly-owned and partially-owned assets other than depreciable real estate for
the years ended December 31, 2002 and 2001:

GAIN ON TRANSFER OF MORTGAGES

In the year ended December 31, 2002, the Company recorded a net gain of
$2,096,000 resulting from payments to the Company by third parties that assumed
certain of the Company's mortgages. Under these transactions the Company paid to
the third parties that assumed the Company's obligations the outstanding amounts
due under the mortgages and the third parties paid the Company for the benefit
of assuming the mortgages. The Company has been released by the creditors
underlying these loans.

GAIN ON SALE OF KINZIE PARK CONDOMINIUM UNITS

The Company recognized a gain of $2,156,000 during 2002, from the sale of
residential condominiums in Chicago, Illinois.

NET GAIN ON SALE OF AIR RIGHTS

The Company recognized a net gain of $1,688,000 in the year ended December
31, 2002. See Note 3 to the consolidated financial statements in this annual
report on form 10-K for further details.

-66-

PRIMESTONE FORECLOSURE AND IMPAIRMENT LOSSES

On September 28, 2000, the Company made a $62,000,000 loan to Primestone
Investment Partners, L.P. ("Primestone"). The Company received a 1% up-front fee
and was entitled to receive certain other fees aggregating approximately 3% upon
repayment of the loan. The loan bore interest at 16% per annum. Primestone
defaulted on the repayment of this loan on October 25, 2001. The loan was
subordinate to $37,957,000 of other debt of the borrower that liened the
Company's collateral. On October 31, 2001, the Company purchased the other debt
for its face amount. The loans were secured by 7,944,893 partnership units in
Prime Group Realty, L.P., the operating partnership of Prime Group Realty Trust
(NYSE:PGE) and the partnership units are exchangeable for the same number of
common shares of PGE. The loans are also guaranteed by affiliates of Primestone.

On November 19, 2001, the Company sold, pursuant to a participation
agreement with a subsidiary of Cadim inc., a Canadian pension fund, a 50%
participation in both loans at par for approximately $50,000,000 reducing the
Company's net investment in the loans at December 31, 2001 to $56,768,000
including unpaid interest and fees of $6,790,000. The participation did not meet
the criteria for "sale accounting" under SFAS 140 because Cadim was not free to
pledge or exchange the assets. Accordingly, the Company was required to account
for this transaction as a borrowing secured by the loan, rather than as a sale
of the loan by classifying the participation as an "Other Liability" and
continuing to report the outstanding loan balance at 100% in "Notes and Mortgage
Loans Receivable" on the balance sheet. Under the terms of the participation
agreement, cash payments received shall be applied (i) first, to the
reimbursement of reimbursable out-of-pocket costs and expenses incurred in
connection with the servicing, administration or enforcement of the loans after
November 19, 2001, and then to interest and fees owed to the Company through
November 19, 2001, (ii) second, to the Company and Cadim, pro rata in proportion
to the amount of interest and fees owed following November 19, 2001 and (iii)
third, 50% to the Company and 50% to Cadim as recovery of principal.

On April 30, 2002, the Company and Cadim acquired the 7,944,893 partnership
units at a foreclosure auction. The price paid for the units by application of a
portion of Primestone's indebtedness to the Company and Cadim was $8.35 per
unit, the April 30, 2002 closing price of shares of PGE on the New York Stock
Exchange. On June 28, 2002, pursuant to the terms of the participation
agreement, the Company transferred 3,972,447 of the partnership units to Cadim.

In the second quarter, in accordance with foreclosure accounting, the
Company recorded a loss on the Primestone foreclosure of $17,671,000 calculated
based on (i) the acquisition price of the units and (ii) its valuation of the
amounts realizable under the guarantees by affiliates of Primestone, as compared
with the net carrying amount of the investment at April 30, 2002. In the third
quarter of 2002, the Company recorded a $2,229,000 write-down on its investment
based on costs expended to realize the value of the guarantees. Further, in the
fourth quarter of 2002, the Company recorded a $15,857,000 write-down of its
investment in Prime Group consisting of (i) $14,857,000 to adjust the carrying
amount of the Prime Group units to $4.61 per unit, the closing price of PGE
shares on the New York Stock Exchange at December 31, 2002 and (ii) $1,000,000
for estimated costs to realize the value of the guarantees. The Company
considered the decline in the value of the units which are convertible into
stock to be other than temporary as of December 31, 2002, based on the fact that
the market value of the stock has been less than its cost for more than six
months, the severity of the decline, market trends, the financial condition and
near-term prospects of Prime Group and other relevant factors.

At December 31, 2002, the Company's carrying amount of the investment was
$23,908,000, of which $18,313,000 represents the carrying amount of the
3,972,447 partnership units owned by the Company ($4.61 per unit), $6,100,000
represents the amount expected to be realized under the guarantees, partially
offset by $1,005,000 representing the Company's share of Prime Group Realty's
net loss through September 30, 2002 (see Note 4. Investments in and Advances to
Partially-Owned Entities).

At February 3, 2003, the closing price of PGE shares on the New York Stock
Exchange was $5.30 per share. The ultimate realization of the Company's
investment will depend upon the future performance of the Chicago real estate
market and the performance of PGE, as well as the ultimate realizable value of
the net assets supporting the guarantees and the Company's ability to collect
under the guarantees. In addition, the Company will continue to monitor this
investment to determine whether additional write-downs are required based on (i)
declines in value of the shares of PGE (for which the partnership units are
exchangeable) which are "other than temporary" as used in accounting literature
and (ii) the amount expected to be realized under the guarantees.

-67-

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

Upon the adoption of SFAS No. 142 - Goodwill and Other Intangible Assets,
on January 1, 2002, the Company wrote-off all of the goodwill associated with
the Hotel Pennsylvania and the Temperature Controlled Logistics businesses
aggregating $30,129,000. This write-off was reflected as a cumulative effect of
a change in accounting principle in 2002.

MINORITY INTEREST

Minority interest was $3,185,000 for the year ended December 31, 2002
compared to $2,520,000 for the prior year, an increase of $665,000.

ADJUSTED EBITDA

Below are the details of the changes by segment in Adjusted EBITDA.

- ----------
(1) Represents operations which were owned for the same period in each year and
excludes non-recurring income and expenses.
(2) Adjusted EBITDA and the same store percentage increase was $303,368 and 5.0%
for the New York City office portfolio and $269,957 and 4.1% for the CESCR
portfolio.
(3) Primarily due to lower occupancy and increases in allowances for bad debt
expense as a result of the K-Mart and other bankruptcies and the expiration
of the Stop & Shop guarantees of several former Bradlees locations. Average
occupancy for the year ended December 31, 2002 was 88.3% (84.0% excluding
leases which have not commenced as described in the following sentences) as
compared to 92% at December 31, 2001. The 88.3% occupancy rate includes
leases for 490,000 square feet at five locations which have not commenced as
of December 31, 2002. Three of these locations aggregating 268,000 square
feet are ground leased to Lowe's which plans to demolish the existing
buildings and construct its own stores at the sites and two locations
containing 223,000 square feet are leased to Wal-Mart, which plans to
demolish an existing building and construct its own store at one of the
sites and occupy the existing store at the other site. All of these
redevelopment projects are subject to governmental approvals and in some
cases, the relocation of existing tenants.
(4) Primarily due to the Company's share of losses from the Starwood Ceruzzi
venture in 2002 of $1,416 (before depreciation) from properties placed in
service, as compared to a gain of $1,394 from the sale of one of the
venture's assets in 2001. Adjusted EBITDA aggregating $2,600 from the
acquisitions in the fourth quarter of 2002 of a 50% interest in the Monmouth
Mall and the remaining 50% interest in the Las Catalinas Mall the Company
did not previously own, was offset by lease termination fees and other
refunds in the fourth quarter of 2001.
(5) The net of a $1,685 or 1.5% same store increase in the core portfolio and a
$3,300 or a 66% decline at the LA Mart as a result of rent reductions and
increased marketing expenditures.
(6) The Company reflects its 60% share of Vornado Crescent Portland
Partnership's ("the Landlord") rental income it receives from AmeriCold
Logistics, its tenant, which leases the underlying temperature controlled
warehouses used in its business. The Company's joint venture does not
recognize rental income unless earned and collection is assured or cash is
received. The Company did not recognize its $19,349 share of the rent the
joint venture was due for the year ended December 31, 2002. The tenant has
advised the Landlord that (i) its revenue for the year ended December 31,
2002 from the warehouses it leases from the Landlord, is lower than last
year by .1%, and (ii) its gross profit before rent at these warehouses for
the corresponding period decreased by $614 (a .001% decrease). The decrease
in revenue is primarily attributable to a reduction in customer inventory
turns, a rate reduction with a significant customer and temporary plant
shut-downs. The decrease in gross profit is primarily attributable to higher
insurance and workers' compensation. In addition, the tenant's cash
requirements for capital expenditures, debt service and a non-recurring
pension funding were $8,293 higher in the current year than in the prior
year, which impacted the ability of the tenant to pay rent.
(7) The decrease in same store operations was primarily due to (i) a $14,973
reduction in investment income and (ii) a $9,342 reduction in operating
results at the Hotel Pennsylvania, partially offset by (iii) additional
development and commitment fees from Alexander's and (iv) income from the
Newkirk MLP. The reduction in investment income is primarily due to the
reinvestment of the proceeds received from the repayment of the Company's
$75,000 loan to NorthStar Partnership LP. in May 2002 at lower yields (1.5%
vs. 22%) and not recognizing income on the Company's foreclosed loan to
Primestone and outstanding loan to Vornado Operating. The Hotel
Pennsylvania's operating results reflect a reduction in average occupancy
and REVPAR to 65% and $58 for the year ended December 31, 2002, compared to
63% and $70 for the year ended December 31, 2001.
(8) Reflects net non-recurring items included in Adjusted EBITDA (see page 64
footnote 2 for details)

-68-

YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000

REVENUES

The Company's revenues, which consist of property rentals, tenant expense
reimbursements and other income, were $985,773,000 in the year ended December
31, 2001 compared to $926,151,000 in the prior year, an increase of $59,622,000.
These increases by segment resulted from:

- ----------
(1) Results primarily from the 14th Street and Union Square property being taken
out of service for redevelopment on February 9, 2001 and the sale of the
Company's Texas properties on March 2, 2000.
(2) Results primarily from the termination of the Sports Authority lease at the
Hotel Pennsylvania in January 2001.
(3) Average occupancy and REVPAR for the Hotel Pennsylvania were 63% and $70 for
the year ended December 31, 2001 and 76% and $87 for the year ended December
31, 2000.
(4) Reflects a decrease of $2,514 in property rentals arising from the
straight-lining of rent escalations.

See Supplemental Information on page 78 for details of leasing activity.

-69-

EXPENSES

The Company's expenses were $600,626,000 in the year ended December 31,
2001, compared to $551,101,000 in the prior year, an increase of $49,525,000.
This increase by segment resulted from:

----------
(1) Includes $1,900 for the collection of a receivable from a commercial
tenant of the Hotel in 2001 which was previously fully reserved.

INCOME APPLICABLE TO ALEXANDER'S

Income applicable to Alexander's (loan interest income, management, leasing
and development fees, and equity in income) was $25,718,000 in the year ended
December 31, 2001, compared to $17,363,000 in the prior year, an increase of
$8,355,000. This increase resulted primarily from the Company's share of
Alexander's gain on sale of its Fordham Road property on January 12, 2001.

-70-

INCOME FROM PARTIALLY-OWNED ENTITIES

In accordance with generally accepted accounting principles, the Company
reflects the income it receives from (i) entities it owns less than 50% of and
(ii) entities it owns more than 50% of, but which have a partner who has shared
board and management representation and authority and substantive participating
rights on all significant business decisions, on the equity method of accounting
resulting in such income appearing on one line in the Company's consolidated
statements of income. Below is the detail of income from partially-owned
entities by investment as well as the increase (decrease) in income from
partially-owned entities for the year ended December 31, 2001 as compared to the
prior year:

-71-

INTEREST AND OTHER INVESTMENT INCOME

Interest and other investment income (interest income on mortgage loans
receivable, other interest income, dividend income and net gains on marketable
securities) was $54,385,000 for the year ended December 31, 2001, compared to
$33,798,000 in the prior year, an increase of $20,587,000. This increase
resulted primarily from the acquisition of NorthStar subordinated unsecured debt
(22% effective rate) on September 19, 2000 and a loan to Primestone Investment
Partners, L.P. on September 28, 2000 (20% effective rate).

On September 28, 2000, the Company made a $62,000,000 loan to Primestone
Investment Partners, L.P. The Company received a 1% upfront fee and is entitled
to receive certain other fees aggregating approximately 3% upon repayment of the
loan. The loan bears interest at 16% per annum. Primestone Investment Partners,
L.P. defaulted on the repayment of this loan on October 25, 2001. The Company's
loan was subordinate to $37,957,000 of other debt of the borrower that liened
the Company's collateral. On October 31, 2001, the Company purchased the other
debt for its face amount. The loans are secured by 7,944,893 partnership units
in Prime Group Realty, L.P., the operating partnership of Prime Group Realty
Trust (NYSE:PGE), which units are exchangeable for the same number of shares of
PGE. The loans are also guaranteed by affiliates of the borrower. The Company
has commenced foreclosure proceedings with respect to the collateral.

On November 19, 2001 the Company sold, pursuant to a participation
agreement with a subsidiary of Cadim inc., a Canadian pension fund, a 50%
participation in both loans at par for approximately $50,000,000 reducing the
Company's net investment in the loans at December 31, 2001 to $56,768,000
including unpaid interest and fees of $6,790,000. Under the terms of the
participation agreement, cash payments received shall be applied (i) first, to
the reimbursement of reimbursable out-of-pocket costs and expenses incurred in
connection with the servicing, administration or enforcement of the loans after
November 19, 2001, (ii) second, to the Company and Cadim pro rata in proportion
to the amount of interest and fees owed to them (all of such fees and interest
accrued through November 19, 2001 are for the account of Vornado and all of such
fees and interest accrued after November 19, 2001 accrue on a 50/50 basis to the
Company and Cadim) and (iii) third, 50% to the Company and 50% to Cadim. The
Company has agreed that in the event the Company acquires the collateral in a
foreclosure proceeding it will, upon the request of Cadim, deliver 50% of such
collateral to Cadim.

For financial reporting at December 31, 2002, purposes, the gross amount of
the loan, $106,768,000, is included in "Notes and mortgage loans receivable" and
Cadim's 50% participation, $50,000,000, is reflected in "Other liabilities". The
Company did not recognize income on these loans for the period from November 19,
2001 through December 31, 2001, and will not recognize income until such time
that cash is received or foreclosure proceedings have been consummated.

Included in interest and other investment income for the year ended
December 31, 2001, is $2,422,000 of interest income from the $31,424,000 note
receivable the Company has from Vornado Operating. Vornado Operating has only
one significant asset, its investment in AmeriCold Logistics and does not
generate positive cash flow sufficient to cover all of its expenses.
Accordingly, commencing January 1, 2002, the Company will no longer recognize
the interest income due on the $31,424,000 loan until Vornado Operating is cash
flow positive in an amount sufficient to fund the interest due to the Company.

INTEREST AND DEBT EXPENSE

Interest and debt expense was $173,076,000 for the year ended December 31,
2001, compared to $180,505,000 in the prior year, a decrease of $7,429,000. This
decrease resulted primarily from a $36,270,000 savings from a 289 basis point
reduction in weighted average interest rate on variable rate debt partially
offset by interest on higher average outstanding loan balances. Interest and
debt expense includes amortization of debt issuance costs of $8,458,000 and
$8,423,000 for the years ended December 31, 2001 and 2000.

-72-

NET LOSS ON DISPOSITION OF WHOLLY-OWNED AND PARTIALLY-OWNED ASSETS OTHER THAN
DEPRECIABLE REAL ESTATE

The following table sets forth the details of net loss on disposition of
wholly-owned and partially-owned assets other than depreciable real estate for
the year ended December 31, 2001 (no gains/losses in 2000):

($ in thousands)
WHOLLY-OWNED ASSETS:
Write-off of investments in technology companies........... $ (16,513)
PARTIALLY-OWNED ASSETS:
After-tax net gain on sale of Park Laurel condominium units 15,657
Write-off of net investment in the Russian Tea Room ("RTR") (7,374)
Other...................................................... 160
-------------
$ (8,070)
=============

WRITE-OFF INVESTMENTS IN TECHNOLOGY COMPANIES
In the first quarter of 2001, the Company recorded a charge of
$4,723,000 resulting from the write-off of an equity investment in a
technology company. In the second quarter of 2001, the Company recorded
an additional charge of $13,561,000 resulting from the write-off of all
of its remaining equity investments in technology companies due to both
the deterioration of the financial condition of these companies and the
lack of acceptance by the market of certain of their products and
services. In the fourth quarter of 2001, the Company recorded $1,481,000
of income resulting from the reversal of a deferred rent liability
relating to the termination of an agreement permitting one of the
technology companies access to its properties.

AFTER-TAX NET GAIN ON SALE OF PARK LAUREL CONDOMINIUM UNITS
In the third and fourth quarters of 2001, the Park Laurel Joint
Venture (69% interest owned by the Company) completed the sale of 52
condominium units of the total 53 units and received proceeds of
$139,548,000. The Company's share of the after tax net gain was
$15,657,000 and is after a charge of $3,953,000 (net of tax benefit of
$1,826,000) for awards accrued under the venture's incentive compensation
plan.

WRITE-OFF OF NET INVESTMENT IN RTR
In the third quarter of 2001, the Company wrote-off its entire net
investment of $7,374,000 in RTR based on the operating losses and an
assessment of the value of the real estate.

GAINS ON SALE OF REAL ESTATE

In September 1998, Atlantic City condemned the Company's property.
In the third quarter of 1998, the Company recorded a gain of $1,694,000,
which reflected the condemnation award of $3,100,000, net of the carrying
value of the property of $1,406,000. The Company appealed the amount and
on June 27, 2001, was awarded an additional $3,050,000, which has been
recorded as a gain in the quarter ended June 30, 2001.

On August 6, 2001, the Company sold its leasehold interest in
550/600 Mamaroneck Avenue for $22,500,000, which approximated its net
book value.

On May 17, 2001, the Company sold its 50% interest in 570 Lexington
Avenue for $60,000,000, resulting in a gain of $12,445,000.

During 2000, the Company sold (i) its three shopping centers located
in Texas for $25,750,000, resulting in a gain of $2,560,000 and (ii) its
Westport, Connecticut office property for $24,000,000, resulting in a
gain of $8,405,000.

-73-

OTHER

The Company recorded the cumulative effect of a change in accounting
principle of $4,110,000 in the first quarter of 2001. The Company had previously
marked-to-market changes in the value of stock purchase warrants through
accumulated other comprehensive loss. Under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended, those changes are
recognized through earnings, and accordingly, the Company has reclassified
$4,110,000 from accumulated other comprehensive loss to the consolidated
statement of income as of January 1, 2001. Future changes in value of such
securities will be recorded through earnings.

Minority interest was $2,520,000 for the year ended December 31, 2001,
compared to $1,965,000 for the prior year, an increase of $555,000.

ADJUSTED EBITDA

Below are the details of the changes by segment in Adjusted EBITDA.

($ in thousands)

- ----------
(1) Represents operations which were owned for the same period in each year.

(2) Adjusted EBITDA and the same store percentage increase was $295,222 and
13.7% for the New York City office portfolio and $84,943 and 3.6% for the
CESCR portfolio.

(3) The tenant has reported that (i) its revenue for the year ended December 31,
2001 from the warehouses it leases from the Landlord, is lower than last
year by 4.2% and (ii) its gross profit before rent at these warehouses for
the corresponding period is lower than last year by $26,764 (a 14.4%
decline). This decrease is attributable to a reduction in total customer
inventory stored at the warehouses and customer inventory turns.

Based on the Landlord's policy of recognizing rental income when earned and
collection is assured or cash is received, the Company did not recognize
$15,281 and $8,606 of the rent it was due in the years ended December 31,
2001 and 2000. On December 31, 2001 the Landlord released the tenant from
its obligation to pay $39,812 of deferred rent of which the Company's share
was $23,887. This amount equals the rent which was not recognized as income
by the Company and accordingly had no profit and loss effect to the Company.

(4) Included in "Other" is $2,422 of interest income from the $31,424 note
receivable the Company has from Vornado Operating. Vornado Operating has
only one significant asset, its investment in AmeriCold Logistics and does
not generate positive cash flow sufficient to cover all of its expenses.
Accordingly, commencing January 1, 2002, the Company no longer recognizes
interest income due on the $31,424 loan until Vornado Operating is cash flow
positive in an amount sufficient to fund the interest due to the Company.

-74-

SUPPLEMENTAL INFORMATION

THREE MONTHS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001

Below is a summary of Net Income and Adjusted EBITDA by segment for the
three months ended December 31, 2002 and 2001.

- ----------
See notes on following page.

-75-

- ----------
(1) Adjusted EBITDA represents EBITDA adjusted for gains or losses on sales of
depreciable real estate, the effect of straight-lining of rent escalations,
amortization of acquired below market leases net of above market leases and
minority interest. Management considers Adjusted EBITDA a supplemental
measure for making decisions and assessing the performance of its segments.
Adjusted EBITDA is presented as a measure of "operating performance" which
enables the reader to identify trends from period to period and may be used
to compare "same store" operating performance to other companies, as well as
providing a measure for determining funds available to service debt.
Adjusted EBITDA may not be comparable to similarly titled measures employed
by other companies.

(2) Adjusted EBITDA - Other is comprised of:

(3) Interest and debt expense, depreciation and amortization and
straight-lining of rents included in the reconciliation of net income to
EBITDA or Adjusted EBITDA reflects amounts which are netted in income from
partially-owned entities.

(4) Net of $6,987 and $7,630 of rent not recognized as income for the fourth
quarter of 2002 and 2001, respectively.

-76-

Below are the details of the changes by segment in Adjusted EBITDA.

- ----------
(1) Represents operations, which were owned for the same period in each year.

(2) Adjusted EBITDA and same store percentage increase was $75,303 and 3.8% for
the New York City office portfolio and $69,396 and 3.6% for the CESCR
portfolio.

(3) Primarily due to lower occupancy and increases in allowances for bad debt
expense as a result of the K-Mart and other bankruptcies and the expiration
of the Stop & Shop guarantees of several former Bradlees locations. Average
occupancy for the quarter ended December 31, 2002 was 86%, (82% excluding
leases which have not commenced) as compared to 92% at December 31, 2001.

(4) Primarily due to Adjusted EBITDA aggregating $2,600 from the acquisitions in
the fourth quarter of 2002 of a 50% interest in the Monmouth Mall and the
remaining 50% interest in the Las Catalinas Mall the Company did not
previously own, offset by lease termination fees and other refunds in the
fourth quarter of 2001.

(5) Primarily due to rescheduling of two trade shows from the fourth quarter of
2002 to the first quarter of 2003.

(6) Primarily due to the reinvestment of the proceeds received from the
repayment of the Company's $75,000 loan to NorthStar Partnership L.P. in May
2002 at lower yields and from not recognizing income on the Company's
foreclosed loan to Primestone and loan to Vornado Operating.

(7) Reflects net non-recurring items included in Adjusted EBITDA.

In comparing the financial results of the Company's segments on a quarterly
basis, the following should be noted:

- The third quarter financial results of the Office and Merchandise Mart
segments have historically been impacted by higher net utility costs
than in each other quarter of the year;
- The fourth quarter financial results of the Retail segment have
historically been higher than the first three quarters due to the
recognition of percentage rental income in that quarter; and
- The second and fourth quarter financial results of the Merchandise
Mart segment have historically been higher than the first and third
quarters due to major trade shows occurring in those quarters.

Below are the details of the changes by segment in Adjusted EBITDA for the
three months ended December 31, 2002 compared to the three months ended
September 30, 2002:

- ----------
(1) Adjusted EBITDA and same store percentage increase was $75,303 and 6.1% for
the New York City office portfolio and $69,396 and 2.2% for the CESCR
portfolio.
(2) Reflects higher income due to timing of trade shows.
(3) Primarily due to seasonality of tenant's operations.

-77-

LEASING ACTIVITY

The following table sets forth certain information for the properties the
Company owns directly or indirectly, including leasing activity:

- ----------
(1) Most leases include periodic step-ups in rent, which are not reflected in
the initial rent per square foot leased.
(2) Ground leases.

In addition to the above, 48,000 square feet of retail space
included in the NYC office properties was leased at an initial rent of
$112.01 per square foot for the year ended December 31, 2002. Further,
the Company leased 140,000 square feet of garage space at a weighted
average initial rent per square foot of $19.02.

-78-

PRO FORMA OPERATING RESULTS - CESCR ACQUISITION

Below is a summary of net income and Adjusted EBITDA for the years ended
December 31, 2002 and 2001, giving effect to the following transactions as if
they had occurred on January 1, 2001: (i) the acquisition of the remaining 66%
of CESCR on January 1, 2002 and (ii) the Company's November 21, 2001 sale of
9,775,000 common units and the use of proceeds to repay indebtedness.

SENIOR UNSECURED DEBT COVENANT COMPLIANCE RATIOS

The following ratios as of and for the three months ended December 31,
2002, are computed pursuant to the covenants and definitions of the Company's
senior unsecured notes due 2007.

The covenants and definitions of the Company's senior unsecured notes due
2007 are described in Exhibit 4.2 to the quarterly report on Form 10-Q for the
three months ended September 30, 2002.

-79-

RELATED PARTIES

LOAN AND COMPENSATION AGREEMENTS

At December 31, 2002, the loan due from Mr. Roth, in accordance with his
employment arrangement, was $13,122,500 ($4,704,500 of which is shown as a
reduction in shareholders' equity). The loan bears interest at 4.49 % per annum
(based on the applicable Federal rate) and matures in January 2006. The Company
also provided Mr. Roth with the right to draw up to $15,000,000 of additional
loans on a revolving basis. Each additional loan will bear interest, payable
quarterly, at the applicable Federal rate on the date the loan is made and will
mature on the sixth anniversary of the loan.

On May 29, 2002, Mr. Roth replaced common shares of the Company securing
the Company's outstanding loan to Mr. Roth with options to purchase common
shares of the Company with a value of not less than two times the loan amount.
As a result of the decline in the value of the options, Mr. Roth supplemented
the collateral with cash and marketable securities.

At December 31, 2002, loans due from Mr. Fascitelli, in accordance with his
employment agreement, aggregated $8,600,000. The loans, which were scheduled to
mature in 2003, have been extended to 2006 in connection with the extension of
Mr. Fascitelli's employment agreement (discussed below) and bear interest,
payable quarterly at a weighted average interest rate of 3.97% (based on the
applicable Federal rate).

Pursuant to his 1996 employment agreement, Mr. Fascitelli became
entitled to a deferred payment consisting of $5 million in cash and a
convertible obligation payable November 30, 2001, at the Company's option, in
either 919,540 Company common shares or the cash equivalent of their
appreciated value, so long as such appreciated value is not less than $20
million. The Company delivered 919,540 shares to a rabbi trust upon execution
of the 1996 employment agreement. The Company accounted for the stock
compensation as a variable arrangement in accordance with Plan B of EITF No.
97-14 "Accounting for Deferred Compensation Arrangements Where Amounts Earned
Are Held in a Rabbi Trust and Invested" as the agreement permitted settlement
in either cash or common shares. Following the guidance in EITF 97-14, the
Company recorded changes in fair value of its compensation obligation with a
corresponding increase in the liability "Officer's Deferred Compensation".
Effective as of June 7, 2001, the payment date was deferred until November
30, 2004. Effective as of December 14, 2001, the payment to Mr. Fascitelli
was converted into an obligation to deliver a fixed number of shares (919,540
shares), establishing a measurement date for the Company's stock compensation
obligation, accordingly the Company ceased accounting for the Rabbi Trust
under Plan B of the EITF and began Plan A accounting. Under Plan A, the
accumulated liability representing the value of the shares on December 14,
2001, was reclassified as a component of Partners' Capital as "Deferred
compensation shares earned but not yet delivered." In addition, future
changes in the value of the shares are no longer recognized as additional
compensation expense. The fair value of this obligation was $34,207,000 at
December 31, 2002. The Company has reflected this liability as Deferred
Compensation Shares Not Yet Delivered in the Partners' Capital section of the
balance sheet. For the years ended December 31, 2001 and 2000, the Company
recognized approximately $4,744,000 and $3,733,000 of compensation expense of
which $2,612,000 and $1,968,000 represented the appreciation in value of the
shares in each period and $2,132,000 and $1,765,000 represented dividends
paid on the shares.

Effective January 1, 2002, the Company extended its employment agreement
with Mr. Fascitelli for a five-year period through December 31, 2006. Pursuant
to the extended employment agreement, Mr. Fascitelli is entitled to receive a
deferred payment on December 31, 2006 of 626,566 Vornado common shares which are
valued for compensation purposes at $27,500,000 (the value of the shares on
March 8, 2002, the date the extended employment agreement was executed). The
shares are held in a rabbi trust for the benefit of Mr. Fascitelli and vested
100% on December 31, 2002. The extended employment agreement does not permit
diversification, allows settlement of the deferred compensation obligation by
delivery of these shares only, and permits the deferred delivery of these
shares. The value of these shares was amortized ratably over the one year
vesting period as compensation expense.

Pursuant to the Company's annual compensation review in February 2002 with
Joseph Macnow, the Company's Chief Financial Officer, the Compensation Committee
approved a $2,000,000 loan to Mr. Macnow, bearing interest at the applicable
federal rate of 4.65% per annum and due January 1, 2006. The loan, which was
funded on July 23, 2002, was made in conjunction with Mr. Macnow's June 2002
exercise of options to purchase 225,000 Vornado common shares. The loan is
collateralized by assets with a value of not less than two times the loan
amount. As a result of the decline in the value of the options, Mr. Macnow
supplemented the collateral with cash and marketable securities.

One other executive officer of the Company has a loan outstanding pursuant
to an employment agreement totaling $1,500,000 at December 31, 2002. The loan
matures in April 2005 and bears interest at the applicable Federal rate provided
(4.5% at December 31, 2002).

-80-

TRANSACTIONS WITH AFFILIATES AND OFFICERS AND TRUSTEES OF THE COMPANY

Alexander's

The Company owns 33.1% of Alexander's. Mr. Roth and Mr. Fascitelli are
Officers and Directors of Alexander's, the Company provides various services to
Alexander's in accordance with management, development and leasing agreements
and the Company has made loans to Alexander's aggregating $119,000,000 at
December 31, 2002. These agreements and the loans are described in Note 4 to the
Company's consolidated financial statements - Investments in Partially-Owned
Entities in this annual report on form 10-K.

The Company constructed a $16.3 million community facility and low-income
residential housing development (the "30th Street Venture"), in order to receive
163,728 square feet of transferable development rights, generally referred to as
"air rights". The Company donated the building to a charitable organization. The
Company sold 106,796 square feet of these air rights to third parties at an
average price of $120 per square foot. An additional 28,821 square feet of air
rights was sold to Alexander's at a price of $120 per square foot for use at
Alexander's 59th Street development project (the "59th Street Project"). In each
case, the Company received cash in exchange for air rights. The Company
identified third party buyers for the remaining 28,111 square feet of air rights
related to the 30th Street Venture. These third party buyers wanted to use the
air rights for the development of two projects located in the general area of
86th Street which was not within the required geographical radius of the
construction site nor in the same Community Board as the low-income housing and
community facility project. The 30th Street Venture asked Alexander's to sell
28,111 square feet of the air rights it already owned to the third party buyers
(who could use them) and the 30th Street Venture would replace them with 28,111
square feet of air rights. In October 2002, the Company sold 28,111 square feet
of air rights to Alexander's for an aggregate sales price of $3,059,000 (an
average of $109 per square foot). Alexander's then sold an equal amount of air
rights to the third party buyers for an aggregate sales price of $3,339,000 (an
average of $119 per square foot).

Interstate Properties

The Company manages and leases the real estate assets of Interstate
Properties pursuant to a management agreement for which the Company receives an
annual fee equal to 4% of base rent and percentage rent and certain other
commissions. The management agreement has a term of one year and is
automatically renewable unless terminated by either of the parties on sixty
days' notice at the end of the term. Although the management agreement was not
negotiated at arms length, the Company believes based upon comparable fees
charged by other real estate companies that its terms are fair to the Company.
For the years ended December 31, 2002, 2001 and 2000, $1,450,000, $1,655,000,
and $1,418,000 of management fees were earned by the Company pursuant to the
management agreement.

Building Maintenance Service Company ("BMS")

On January 1, 2003, the Company acquired BMS, a company which provides
cleaning and related services primarily to the Company's Manhattan office
properties, for $13,000,000 in cash from the estate of Bernard Mendik and
certain other individuals including Mr. Greenbaum, one of the Company's
executive officers. The Company paid BMS $53,024,000, $51,280,000, and
$47,493,000 for the years ended December 31, 2002, 2001 and 2000 for services
rendered at the Company's Manhattan office properties. Although the terms and
conditions of the contracts pursuant to which these services were provided were
not negotiated at arms length, the Company believes based upon comparable
amounts charged to other real estate companies that the terms and conditions of
the contracts were fair to the Company.

Vornado Operating Company and AmeriCold Logistics

In October 1998, Vornado Operating was spun off from the Company in order
to own assets that the Company could not itself own and conduct activities that
the Company could not itself conduct. The Company granted Vornado Operating a
$75,000,000 unsecured revolving credit facility which expires on December 31,
2004. Borrowings under the revolving credit facility bear interest at LIBOR plus
3%. The Company receives a commitment fee equal to 1% per annum on the average
daily unused portion of the facility. No amortization is required to be paid
under the revolving credit facility during its term. The revolving credit
facility prohibits Vornado Operating from incurring indebtedness to third
parties (other than certain purchase money debt and certain other exceptions)
and prohibits Vornado Operating from paying dividends. As of December 31, 2002,
$21,989,000 was outstanding under the revolving credit facility.

-81-

Vornado Operating has disclosed that in the aggregate its investments do
not, and for the foreseeable future are not expected to, generate sufficient
cash flow to pay all of its debts and expenses. Further, Vornado Operating
states that its only investee, AmeriCold Logistics ("Tenant"), anticipates that
its Landlord, a partnership 60% owned by the Company and 40% owned by Crescent
Real Estate Equities, will need to restructure the leases between the Landlord
and the Tenant to provide additional cash flow to the Tenant (the Landlord has
previously restructured the leases to provide additional cash flow to the
Tenant). Management anticipates a further lease restructuring and the sale
and/or financing of assets by AmeriCold Logistics, and accordingly, Vornado
Operating is expected to have a source to repay the debt under this facility,
which may be extended. Since January 1, 2002, the Company has not recognized
interest income on the debt under this facility.

On December 31, 2002, the Company and Crescent Real Estate Equities formed
a joint venture to acquire the Carthage, Missouri and Kansas City, Kansas
quarries from AmeriCold Logistics, the Company's tenant at the cold storage
warehouses (Temperature Controlled Logistics), for $20,000,000 in cash
(appraised value). The Company contributed cash of $8,800,000 to the joint
venture representing its 44% interest. AmeriCold Logistics used the proceeds
from the sale to repay a portion of a loan to Vornado Operating. Vornado
Operating then repaid $9,500,000 of the amount outstanding under the Company's
revolving credit facility. On December 31, 2002, the joint venture purchased
$5,720,000 of trade receivables from AmeriCold at a 2% discount, of which the
Company's share was $2,464,000.

Other

The Company owns preferred securities in Capital Trust, Inc. ("Capital
Trust") totaling $29,212,000 at December 31, 2002. Mr. Roth, the Chairman and
Chief Executive Officer of Vornado Realty Trust, is a member of the Board of
Directors of Capital Trust nominated by the Company.

On May 17, 2001, the Company sold its 50% interest in 570 Lexington Avenue
to the other venture partner, an entity controlled by the late Bernard Mendik, a
former trustee and executive officer of the Company, for $60,000,000, resulting
in a gain to the Company of $12,445,000. The sale was initiated by the Company's
partner and was based on a competitive bidding process handled by an independent
broker. The Company believes that the terms of the sale was at arm's length and
were fair to the Company.

During 2002 and 2001, the Company paid approximately $147,000 and $136,000
for legal services to a firm in which one of the Company's trustees is a member.

On January 1, 2001, the Company acquired the common stock of various
preferred stock affiliates which was owned by Officers and Trustees of the
Company and converted the affiliates to taxable REIT subsidiaries. The total
acquisition price was $5,155,000. The purchase price, which was the estimated
fair value, was determined by both independent appraisal and by reference to the
individuals' pro rata share of the earnings of the preferred stock affiliates
during the three-year period that these investments were held.

-82-

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

YEAR ENDED DECEMBER 31, 2002

Cash and cash equivalents were $208,200,000 at December 31, 2002, as
compared to $265,584,000 at December 31, 2001, a $57,384,000 decrease.

Cash flow provided by operating activities of $499,825,000 was primarily
comprised of (i) income of $370,302,000, (ii) adjustments for non-cash items of
$167,762,000, partially offset by (iii) the net change in operating assets and
liabilities of $38,239,000. The adjustments for non-cash items were comprised of
(i) a cumulative effect of change in accounting principle of $30,129,000, (ii)
amortization of Officer's deferred compensation expense of $27,500,000, (iii)
depreciation and amortization of $205,826,000, (iv) minority interest of
$3,185,000, (v) the write-off of $6,874,000 of 20 Times Square pre-development
costs, (vi) impairment losses on Primestone of $35,757,000, partially offset by
(vii) the effect of straight-lining of rental income of $36,478,000, (viii)
equity in net income of partially-owned entities and income applicable to
Alexander's of $74,111,000 and (ix) amortization of below market leases, net of
$12,634,000.

Net cash used in investing activities of $24,117,000 was comprised of (i)
recurring capital expenditures of $52,728,000, (ii) non-recurring capital
expenditures of $42,227,000, (iii) development and redevelopment expenditures of
$63,619,000, (iv) investment in notes and mortgages receivable of $56,935,000,
(v) investments in partially-owned entities of $100,882,000, (vi) acquisitions
of real estate of $23,665,000, (vii) cash restricted, primarily mortgage escrows
of $21,471,000 partially offset by proceeds from (viii) distributions from
partially-owned entities of $126,077,000, (ix) repayments on notes receivable of
$124,500,000 and (x) proceeds from the sale of marketable securities of
$87,896,000.

Net cash used in financing activities of $533,092,000 was primarily
comprised of (i) Class A unit distributions of $364,730,000, (ii) preferred unit
distributions of $119,214,000, (iii) repayments of borrowings of $731,238,000,
(iv) redemption of perpetual preferred units of $25,000,000, partially offset by
proceeds from (v) the issuance of Class A units of $56,453,000, (vi) proceeds
from borrowings of $628,335,000, of which $499,280,000 was from the issuance of
the Company's senior unsecured notes on June 24, 2002, and (vii) the exercise of
employee unit options of $26,272,000.

Below are the details of capital expenditures, leasing commissions and
development and redevelopment expenditures for the year ended December 31, 2002.

- ----------
(1) Includes reimbursements from tenants for expenditures incurred in the prior
year.

-83-

Capital expenditures are categorized as follows:

Recurring -- capital improvements expended to maintain a property's
competitive position within the market and tenant improvements and
leasing commissions for costs to re-lease expiring leases or renew or
extend existing leases.

Non-recurring -- capital improvements completed in the year of
acquisition and the following two years which were planned at the time of
acquisition and tenant improvements and leasing commissions for space
which was vacant at the time of acquisition of a property.

Development and redevelopment expenditures include all hard and soft costs
associated with the development or redevelopment of a property, including tenant
improvements, leasing commissions and capitalized interest and operating costs
until the property is substantially complete and ready for its intended use.

ACQUISITIONS

Acquisitions of individual properties are recorded as acquisitions of real
estate assets. Acquisitions of businesses are accounted for under the purchase
method of accounting. The purchase price for property acquisitions and
businesses acquired is allocated to acquired assets and assumed liabilities
using their relative fair values as of the acquisition date based on valuations
and other studies. Initial valuations are subject to change until such
information is finalized no later than 12 months from the acquisition date.

CHARLES E. SMITH COMMERCIAL REALTY L.P.

On January 1, 2002, the Company completed the combination of Charles E.
Smith Commercial Realty L.P. ("CESCR") with Vornado. Prior to the combination,
Vornado owned a 34% interest in CESCR. The consideration for the remaining 66%
of CESCR was approximately $1,600,000,000, consisting of 15.6 million newly
issued Vornado Operating Partnership units and approximately $1 billion of debt
(66% of CESCR's total debt). The purchase price paid by the Company was
determined based on the weighted average closing price of the equity issued to
CESCR unitholders for the period beginning two business days before and ending
two business days after the date the acquisition was agreed to and announced on
October 19, 2001. The Company also capitalized as part of the basis of the
assets acquired approximately $32,000,000 for third party acquisition related
costs, including advisory, legal and other professional fees that were
contemplated at the time of the acquisition. The operations of CESCR are
consolidated into the accounts of the Company beginning January 1, 2002. Prior
to this date the Company accounted for its 34% interest on the equity method.
See page 84 for unaudited pro forma financial information for the year ended
December 31, 2001.

CRYSTAL GATEWAY ONE

On July 1, 2002, the Company acquired a 360,000 square foot office building
from a limited partnership, which is approximately 50% owned by Mr. Robert H.
Smith and Mr. Robert P. Kogod and members of the Smith and Kogod families,
trustees of the Company, in exchange for approximately 325,700 newly issued
Vornado Operating Partnership units (valued at $13,679,000) and the assumption
of $58,500,000 of debt. The building is located in the Crystal City complex in
Arlington, Virginia where the Company already owns 24 office buildings
containing over 6.9 million square feet, which it acquired on January 1, 2002,
in connection with the Company's acquisition of CESCR. The operations of Crystal
Gateway One are consolidated into the accounts of the Company from the date of
acquisition.

BUILDING MAINTENANCE SERVICE COMPANY ("BMS")

On January 1, 2003, the Company acquired BMS, a company which provides
cleaning and related services primarily to the Company's Manhattan office
properties, for $13,000,000 in cash from the estate of Bernard Mendik and
certain other individuals including Mr. Greenbaum, one of the Company's
executive officers.

LAS CATALINAS MALL

On September 23, 2002, the Company increased its interest in the Las
Catalinas Mall located in Caguas, Puerto Rico (San Juan area) to 100% by
acquiring the 50% of the mall and 25% of the Kmart anchor store it did not
already own. The purchase price was $48,000,000, including $32,000,000 of
indebtedness. The Las Catalinas Mall, which opened in 1997, contains 492,000
square feet, including a 123,000 square foot Kmart and a 138,000 square foot
Sears owned by the tenant.

-84-

MONMOUTH MALL

On October 10, 2002, a joint venture in which the Company has a 50%
interest, acquired the Monmouth Mall, an enclosed super regional shopping center
located in Eatontown, New Jersey containing approximately 1.5 million square
feet, including four department stores, three of which aggregating 731,000
square feet are owned by the tenants. The purchase price was approximately
$164,700,000, including transaction costs of $4,400,000. The Company made a
$7,000,000 common equity investment in the venture and provided it with
$23,500,000 of preferred equity yielding 14%. The venture financed the purchase
of the Mall with $135,000,000 of floating rate debt at LIBOR plus 2.05%, with a
LIBOR floor of 2.50% on $35,000,000, a three year term and two one-year
extension options. The Company's investment in the Monmouth will be accounted
for under the equity method as the Company does not have unilateral control over
the joint venture.

CARTHAGE, MISSOURI AND KANSAS CITY, KANSAS QUARRIES

On December 31, 2002, the Company and Crescent Real Estate Equities formed
a joint venture to acquire the Carthage, Missouri and Kansas City, Kansas
quarries from AmeriCold Logistics', the Company's tenant at the cold storage
warehouses (Temperature Controlled Logistics) for $20,000,000 in cash (appraised
value). The Company contributed cash of $8,800,000 to the joint venture
representing its 44% interest.

The Company's future success will be affected by its ability to integrate
the assets and businesses it acquires and to effectively manage those assets and
businesses. The Company currently expects to continue to grow. However, its
ability to do so will be dependent on a number of factors, including, among
others, (a) the availability of reasonably priced assets that meet the Company's
acquisition criteria and (b) the price of the Company's common shares, the rates
at which the Company is able to borrow money and, more generally, the
availability of financing on terms that, in the Company's view, make such
acquisitions financially attractive.

-85-

YEAR ENDED DECEMBER 31, 2001

Cash flow provided by operating activities of $387,685,000 was primarily
comprised of (i) income of $373,581,000, (ii) adjustments for non-cash items of
$2,155,000, and (iii) the net change in operating assets and liabilities of
$19,374,000. The adjustments for non-cash items were primarily comprised of (i)
a cumulative effect of change in accounting principle of $4,110,000, (ii) the
write-off of the Company's remaining equity investments in technology companies
of $16,513,000, (iii) the write-off of its entire net investment of $7,374,000
in the Russian Tea Room, (iv) depreciation and amortization of $123,862,000, (v)
minority interest of $2,520,000, partially offset by (vi) the effect of
straight-lining of rental income of $27,230,000, and (vii) equity in net income
of partially-owned entities and income applicable to Alexander's of
$106,330,000.

Net cash used in investing activities of $79,722,000 was primarily
comprised of (i) recurring capital expenditures of $41,093,000, (ii)
non-recurring capital expenditures of $25,997,000, (iii) development and
redevelopment expenditures of $145,817,000, (iv) investment in notes and
mortgages receivable of $83,879,000, (v) investments in partially-owned entities
of $109,332,000, (vi) acquisitions of real estate of $11,574,000, offset by,
(vii) proceeds from the sale of real estate of $162,045,000, and (viii)
distributions from partially-owned entities of $114,218,000.

Net cash used in financing activities of $179,368,000 was primarily
comprised of (i) proceeds from borrowings of $554,115,000, (ii) proceeds from
the issuance of Class A units of $377,193,000, (iii) proceeds from the
issuance of preferred units of $52,673,000, offset by, (iv) repayments of
borrowings of $835,257,000, (v) Class A unit distributions of $201,813,000,
and (vi) preferred unit distributions of $134,141,000.

Below are the details of capital expenditures, leasing commissions and
development and redevelopment expenditures.

-86-

YEAR ENDED DECEMBER 31, 2000

Cash flow provided by operating activities of $249,921,000 was primarily
comprised of (i) income of $334,400,000 and (ii) adjustments for non-cash items
of $34,412,000 offset by (iii) the net change in operating assets and
liabilities of $39,102,000 and (iv) the net gain on sale of real estate of
$10,965,000. The adjustments for non-cash items were primarily comprised of (i)
depreciation and amortization of $99,846,000 and (ii) minority interest of
$1,965,000, partially offset by (iii) the effect of straight-lining of rental
income of $32,206,000 and (iv) equity in net income of partially-owned entities
and income applicable to Alexander's of $104,017,000.

Net cash used in investing activities of $699,375,000 was primarily
comprised of (i) capital expenditures of $171,782,000, (ii) investment in notes
and mortgages receivable of $144,225,000, (iii) acquisitions of real estate of
$199,860,000, (iv) investments in partially-owned entities of $99,974,000, (v)
cash restricted of $183,788,000, of which $173,500,000 represents funds escrowed
in connection with a mortgage financing, partially offset by (vi) proceeds from
the sale of real estate of $47,945,000 and distributions from partially-owned
entities of $68,799,000. Below are the details of acquisitions of real estate,
investments in partially-owned entities, investments in notes and mortgages
receivable and capital expenditures.

($ in thousands)

In addition to the expenditures noted above, the Company recorded leasing
commissions of $26,133,000 in the year ended December 31, 2000, of which
$24,333,000 was attributable to New York City Office properties, $647,000 was
attributable to Retail properties and $1,153,000 was attributable to Merchandise
Mart properties.

Net cash provided by financing activities of $473,813,000 was primarily
comprised of (i) proceeds from borrowings of $1,195,108,000, (ii) proceeds from
issuance of preferred units of $204,750,000, partially offset by, (iii)
repayments of borrowings of $633,655,000, (iv) Class A unit distributions of
$168,688,000 and (v) preferred unit distributions of $116,212,000.

-87-

Below are the cash flows provided by (used in) operating, investing and
financing activities:

CERTAIN FUTURE CASH REQUIREMENTS

For 2003, the Company has budgeted approximately $197.3 million for capital
expenditures (excluding acquisitions) and leasing commissions as follows:

- ----------
(1) Represents the Company's 60% share of the Vornado Crescent Portland
Partnership's obligation to fund $9,500 of capital expenditures per annum.
(2) Primarily for the Hotel Pennsylvania.

In addition to the capital expenditures reflected above, the Company is
currently engaged in certain development and redevelopment projects for which it
has budgeted approximately $230.9 million to be expended as outlined in the
"Development and Redevelopment Projects" section of Item 1--Business. The $230.9
million does not include amounts for other projects which are also included in
the "Development and Redevelopment Projects" section of Item 1 -Business, as no
budgets for them have been finalized. There can be no assurance that any of the
above projects will be ultimately completed, completed on time or completed for
the budgeted amount.

No cash requirements have been budgeted for the capital expenditures and
amortization of debt of Alexander's, The Newkirk MLP, or any other entity that
is partially owned by the Company. These investees are expected to fund their
own cash requirements.

-88-

FINANCING ACTIVITIES AND CONTRACTUAL OBLIGATIONS

Below is a schedule of the Company's contractual obligations and
commitments at December 31, 2002:

($ in thousands)

- ----------
(1)Includes $153,659, which is offset by an equivalent amount of cash held
in a restricted mortgage escrow amount.

The Company is reviewing various alternatives for the repayment or
refinancing of debt coming due during 2003. The Company has $1 billion available
under its revolving credit facility which matures in July 2003 and a number of
properties which are unencumbered.

The Company's credit facility contains customary conditions precedent to
borrowing such as the bring down of customary representations and warranties as
well as compliance with financial covenants such as minimum interest coverage
and maximum debt to market capitalization. The facility provides for higher
interest rates in the event of a decline in the Company's ratings below
Baa3/BBB. This facility also contains customary events of default which could
give rise to acceleration and include such items as failure to pay interest or
principal and breaches of financial covenants such as maintenance of minimum
capitalization and minimum interest coverage.

The Company carries comprehensive liability and all risk property insurance
(fire, flood, extended coverage and rental loss insurance) with respect to its
assets. The Company's all risk insurance policies in effect before September 11,
2001 do not expressly exclude coverage for hostile acts, except for acts of war.
Since September 11, 2001, insurance companies have for the most part excluded
terrorist acts from coverage in all risk policies. The Company has generally
been unable to obtain all risk insurance which includes coverage for terrorist
acts for policies it has renewed since September 11, 2001, for each of its
businesses. In 2002, the Company obtained $200,000,000 of separate coverage for
terrorist acts for each of its New York City Office, Washington, D.C. Office,
Retail and Merchandise Mart businesses and $60,000,000 for its Temperature
Controlled Logistics business. Therefore, the Company is at risk for financial
loss in excess of these limits for terrorist acts (as defined), which loss could
be material.

The Company's debt instruments, consisting of mortgage loans secured by its
properties (which are generally non-recourse to the Company), its senior
unsecured notes due 2007 and its revolving credit agreement, contain customary
covenants requiring the Company to maintain insurance. There can be no assurance
that the lenders under these instruments will not take the position that an
exclusion from all risk insurance coverage for losses due to terrorist acts is a
breach of these debt instruments that allows the lenders to declare an event of
default and accelerate repayment of debt. The Company has received
correspondence from four lenders regarding terrorism insurance coverage, which
the Company has responded to. In these letters the lenders took the position
that under the agreements governing the loans provided by these lenders the
Company was required to maintain terrorism insurance on the properties securing
the various loans. The aggregate amount of borrowings under these loans as of
December 31, 2002 was approximately $770.4 million, and there was no additional
borrowing capacity. Subsequently, the Company obtained an aggregate of $360
million of separate coverage for "terrorist acts". To date, one of the lenders
has acknowledged to the Company that it will not raise any further questions
based on the Company's terrorism insurance coverage in place, and the other
three lenders have not raised any further questions regarding the Company's
insurance coverage. If lenders insist on greater coverage for these risks, it
could adversely affect the Company's ability to finance and/or refinance its
properties and to expand its portfolio.

-89-

On November 26, 2002, the Terrorism Risk Insurance Act of 2002 was signed
into law. Under this new legislation, through 2004 (with a possible extension
through 2005), regulated insurers must offer coverage in their commercial
property and casualty policies (including existing policies) for losses
resulting from defined "acts of terrorism". The Company cannot currently
anticipate whether the scope and cost of such coverage will be commercially
reasonable. As a result of the legislation, in February 2003 the Company
obtained $300 million of per occurrence coverage for terrorist acts for its New
York City Office, Washington, D.C. Office and Merchandise Mart businesses, of
which $240 million is for Certified Acts, as defined in the legislation. The
Company maintains $200 million and $60 million of separate aggregate coverage
that it had in 2002 for each of its Retail and Temperature Controlled Logistics
businesses (which has been renewed as of January 1, 2003). The Company's current
Retail property insurance carrier has advised the Company that there will be an
additional premium of approximately $11,000 per month through the end of the
policy term (June 30, 2003) for "Acts of Terrorism" coverage, as defined in the
new legislation and that the situation may change upon renewal.

In addition, many of the Company's non-recourse mortgages contain debt
service covenants which if not satisfied could require cash collateral. These
covenants are not "ratings" related.

In conjunction with the closing of Alexander's Lexington Avenue
construction loan on July 3, 2002, the Company agreed to guarantee, among other
things, the lien free, timely completion of the construction of the project and
funding of all project costs in excess of a stated budget, as defined in the
loan agreement, if not funded by Alexander's.

CORPORATE

On June 24, 2002, the Company completed an offering of $500,000,000
aggregate principal amount of 5.625% senior unsecured notes due June 15, 2007.
Interest on the notes is payable semi-annually on June 15th and December 15th,
commencing December 15, 2002. The net proceeds of approximately $496,300,000
were used to repay the mortgages on 350 North Orleans, Two Park Avenue, the
Merchandise Mart and Seven Skyline. On June 27, 2002, the Company entered into
interest rate swaps that effectively converted the interest rate on the
$500,000,000 senior unsecured notes due 2007 from a fixed rate of 5.625% to a
floating rate of LIBOR plus .7725%, based upon the trailing 3 month LIBOR rate
(2.5% if set on December 31, 2002).

On February 25, 2002, Vornado sold 884,543 common shares to a closed-end
fund and 514,200 shares to a unit investment trust based on the closing price of
$42.96 on the NYSE. An equivalent amount of Class A units were issued by the
Operating Partnership to Vornado for net proceeds of approximately $57,042,000.

The Company and Vornado have an effective shelf registration under which
Vornado can offer an aggregate of approximately $895,479,000 of equity
securities and Vornado Realty L.P. can offer an aggregate of $500,720,000 of
debt securities.

The Company anticipates that cash from continuing operations will be
adequate to fund business operations and the payment of dividends and
distributions on an on-going basis for more than the next twelve months;
however, capital outlays for significant acquisitions will require funding from
borrowings or equity offerings.

-90-

RECENTLY ISSUED ACCOUNTING STANDARDS

SFAS NO. 141 - BUSINESS COMBINATIONS

SFAS No. 141 - BUSINESS COMBINATIONS requires companies to account for the
value of leases acquired and the costs of acquiring such leases separately from
the value of the real estate for all acquisitions subsequent to July 1, 2001.
Accordingly, the Company has evaluated the leases in place for (i) the remaining
66% of CESCR it did not previously own which it acquired on January 1, 2002,
(ii) the remaining 50% of the Las Catalinas Mall it did not previously own which
it acquired on September 23, 2002 and (iii) a 50% interest in the Monmouth Mall
which it acquired on October 10, 2002; to determine whether they were acquired
at market, above market or below market. The Company's evaluations were based on
(i) the differences between contractual rentals and the estimated market rents
over the applicable lease term discounted back to the date of acquisition
utilizing a discount rate adjusted for the credit risk associated with the
respective tenants and (ii) the estimated cost of acquiring such leases giving
effect to the Company's history of providing tenant improvements and paying
leasing commissions.

As a result of its evaluations, as of December 31, 2002, the Company has
recorded a deferred credit of $48,430,000 representing the value of acquired
below market leases, deferred charges of $15,976,000, for the value of acquired
above market leases and $3,621,000 for origination costs. In addition, in the
year ended December 31, 2002 the Company has recognized property rentals of
$12,634,000 for the amortization of below market leases net of above market
leases, and depreciation expense of $1,214,000 for the amortization of the lease
origination costs and additional building depreciation resulting from the
reallocation of the purchase price of the applicable properties.

SFAS NO. 142 - GOODWILL AND OTHER INTANGIBLE ASSETS

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS (effective January 1, 2002). SFAS No. 142 specifies that
goodwill and some intangible assets will no longer be amortized but instead be
subject to periodic impairment testing. SFAS No. 142 provides specific guidance
for impairment testing of these assets and removes them from the scope of SFAS
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS. The Company's
goodwill balance on December 31, 2001 of $30,129,000 consisted of $14,639,000
related to the Hotel Pennsylvania acquisition and $15,490,000 related to the
acquisition of the Temperature Controlled Logistics businesses.

Prior to January 1, 2002, the Company performed impairment testing in
accordance with SFAS 121. The Company reviewed for impairment whenever events or
changes in circumstances indicated that the carrying amount of an asset may not
be recoverable. Given the decrease in the estimated market values and the
deteriorating performance of Hotel Pennsylvania and Temperature Controlled
Logistics, the Company performed a review for recoverability estimating the
future cash flows expected to result from the use of the assets and their
eventual disposition. As of December 31, 2001, the sum of the expected cash
flows (undiscounted and without interest charges) exceeded the carrying amounts
of goodwill, and therefore no impairments were recognized.

Upon adoption of SFAS 142 on January 1, 2002, the Company tested the
goodwill for impairment at the reporting level unit utilizing the prescribed
two-step method. The first step compared the fair value of the reporting unit
(determined based on a discounted cash flow approach) with its carrying amount.
As the carrying amount of the reporting unit exceeded its fair value, the second
step of the impairment test was performed to measure the impairment loss. The
second step compared the implied fair value of goodwill with the carrying amount
of the goodwill. As the carrying amounts of the goodwill exceeded the fair
values, on January 1, 2002 the Company wrote-off all of the goodwill of the
Hotel and the Temperature Controlled Logistics business as an impairment loss
totaling $30,129,000. The write-off has been reflected as a cumulative effect of
change in accounting principle on the income statement.

Previously reported "Income before gains on sale of real estate and
cumulative effect of change in accounting principle" and "Net income applicable
to Class A units" for the year ended December 31, 2001 would have been
approximately $1,230,000 higher, or $2.35 and $2.48 per Class A unit diluted, if
such goodwill was not amortized in the prior year.

-91-

SFAS NO. 143 - ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS AND SFAS NO. 144
- - ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS

In August 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS (effective January 1, 2003) and SFAS No. 144, ACCOUNTING
FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS (effective January 1, 2002).
SFAS No. 143 requires the recording of the fair value of a liability for an
asset retirement obligation in the period which it is incurred. SFAS No. 144
supersedes current accounting literature and now provides for a single
accounting model for long-lived assets to be disposed of by sale and requires
discontinued operations presentation for disposals of a "component" of an
entity. The adoption of these statements did not have a material effect on the
Company's financial statements; however under SFAS No. 144, if the Company were
to dispose of a material operating property, such property's results of
operations will have to be separately disclosed as discontinued operations in
the Company's financial statements.

SFAS NO. 145 - RESCISSION OF SFAS NO. 4, 44, AND 64, AMENDMENT OF SFAS NO.
13, AND TECHNICAL CORRECTIONS

In April 2002, the FASB issued SFAS No. 145, RESCISSION OF SFAS NO. 4, 44,
AND 64, AMENDMENT OF SFAS NO. 13, AND TECHNICAL CORRECTIONS. SFAS No. 145
requires, among other things, (i) that the modification of a lease that results
in a change of the classification of the lease from capital to operating under
the provisions of SFAS No. 13 be accounted for as a sale-leaseback transaction
and (ii) the reporting of gains or losses from the early extinguishment of debt
as extraordinary items only if they met the criteria of Accounting Principles
Board Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS. The rescission of
SFAS No. 4 is effective January 1, 2003. The amendment of SFAS No. 13 is
effective for transactions occurring on or after May 15, 2002. The adoption of
this statement did not have a material effect on the Company's financial
statements.

SFAS NO. 146 - ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL
ACTIVITIES

In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES (effective January 1, 2003). SFAS No. 146
replaces current accounting literature and requires the recognition of costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. The Company does not
anticipate that the adoption of this statement will have a material effect on
the Company's financial statements.

SFAS NO. 148 - ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE - AN AMENDMENT OF FASB STATEMENT NO. 123

On August 7, 2002, the Company announced that beginning January 1, 2003, it
will expense the cost of employee stock options in accordance with the SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION. In December 2002, the FASB issued
SFAS No. 148 - ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE - AN AMENDMENT OF FASB STATEMENT NO. 123 to amend the transition and
disclosure provisions of SFAS No. 123. Specifically, SFAS No. 123, as amended,
would permit two additional transition methods for entities that adopt the fair
value method of accounting for stock based employee compensation. The Company
will adopt SFAS No. 123 prospectively by valuing and accounting for employee
stock options granted in 2003 and thereafter. The Company will utilize a
binomial valuation model and appropriate market assumptions to determine the
value of each grant. Stock-based compensation expense will be recognized on a
straight-line basis over the vesting period of the respective grants.

FASB Interpretation No. 45 - GUARANTOR'S ACCOUNTING AND DISCLOSURE
REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF
OTHERS.

In November 2002, the FASB issued Interpretation No. 45 - GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, Including Indirect
Guarantees of Indebtedness of Others, which elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. The initial recognition
and measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. The
Company believes that the adoption of this interpretation will not have a
material effect to the Company's financial statements.

-92-

FASB Interpretation No. 46 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES

In January 2003, the FASB issued Interpretation No. 46 - CONSOLIDATION OF
VARIABLE INTEREST ENTITIES, which requires the consolidation of an entity by an
enterprise (i) if that enterprise, known as a "primary beneficiary", has a
variable interest that will absorb a majority of the entity's expected losses if
they occur, receive a majority of the entity's expected residual returns if they
occur, or both and (ii) if the entity is a variable interest entity, as defined
by Interpretation No. 46. An entity is a variable interest entity if (a) the
total equity investment at risk in the entity is not sufficient to permit the
entity to finance its activities without additional subordinated financial
support from other parties or (b) the equity investors do not have the
characteristics of a controlling financial interest in the entity.
Interpretation No. 46 applies immediately to all variable interest entities
created after January 31, 2003. For variable interest entities created by public
companies before February 1, 2003, Interpretation No. 46 must be applied no
later than the beginning of the first interim or annual reporting period
beginning after June 15, 2003. The initial determination of whether an entity is
a variable interest entity shall be made as of the date at which a primary
beneficiary becomes involved with the entity and reconsidered as of the date one
of three triggering events described by Interpretation No. 46 occur. The Company
does not believe that the adoption of this Interpretation will have a material
effect on its financial statements.

-93-

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has exposure to fluctuations in market interest rates. Market
interest rates are highly sensitive to many factors, beyond the control of the
Company. Various financial vehicles exist which would allow management to
mitigate the impact of interest rate fluctuations on the Company's cash flows
and earnings.

As of December 31, 2002 the Company has entered into an interest rate swap
described in footnote 1 to the table below. Management may engage in additional
hedging strategies in the future, depending on management's analysis of the
interest rate environment and the costs and risks of such strategies.

The Company's exposure to a change in interest rates on its wholly-owned
and partially-owned debt (all of which arises out of non-trading activity) is as
follows:

($ in thousands, except per unit amounts)

- ----------
(1) Includes $533,600 for the Company's senior unsecured notes due 2007, as the
Company entered into interest rate swap agreements that effectively
converted the interest rate from a fixed rate of 5.625% to a floating rate
of LIBOR plus .7725%, based upon the trailing 3 month LIBOR rate (2.18% if
set on December 31, 2002). In accordance with SFAS 133, as amended,
accounting for these swaps requires the Company to fair value the debt at
each reporting period. At December 31, 2002, the fair value adjustment was
$34,245, and is included in the balance of the senior unsecured notes
above.

(2) The effect of a 1% change in wholly-owned debt base rates shown above
excludes $153,659 of variable rate mortgage financing, cross-collateralized
by the Company's 770 Broadway and 595 Madison Avenue office properties, as
the proceeds are held in a restricted mortgage escrow account which bears
interest at the same rate as the loans.

(3) The effect of a 1% change in partially-owned debt base rates shown above is
calculated after including $45,229 representing the Company's 14.9% share
of Prime Group Realty L.P.'s ("PGE") outstanding variable rate debt as at
September 30, 2002. PGE has not filed its annual report on Form 10-K for
the year ended December 31, 2002, prior to the filing of this annual report
on Form 10-K.

The fair value of the Company's debt, based on discounted cash flows at
the current rate at which similar loans would be made to borrowers with similar
credit ratings for the remaining term of such debt, exceeds the aggregate
carrying amount by approximately $178,566,000 at December 31, 2002.

-94-

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

-95-

INDEPENDENT AUDITORS' REPORT

Partners
Vornado Realty L.P.
New York, New York

We have audited the accompanying consolidated balance sheets of Vornado Realty
L.P. as of December 31, 2002 and 2001, and the related consolidated statements
of income, partners' capital and cash flows for each of the three years in the
period ended December 31, 2002. Our audits also included the financial statement
schedules listed in the Index at Item 15. These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedules based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Vornado Realty L.P. at December
31, 2002 and 2001, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2002 in conformity
with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information set
forth therein.

As discussed in Note 2 to the consolidated financial statements, on January 1,
2002, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 142 "GOODWILL AND OTHER INTANGIBLE ASSETS."

DELOITTE & TOUCHE LLP

Parsippany, New Jersey
March 6, 2003

-96-

VORNADO REALTY L.P.

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

-97-

VORNADO REALTY L.P.

CONSOLIDATED STATEMENTS OF INCOME

See notes to consolidated financial statements.

-98-

VORNADO REALTY L.P.

CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL

See notes to consolidated financial statements.

-99-

VORNADO REALTY L.P.

CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL

See notes to consolidated financial statements.

-100-

VORNADO REALTY L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to consolidated financial statements.

-101-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BUSINESS

Vornado Realty L.P. (the "Operating Partnership" and/or the "Company") is a
Delaware limited partnership. Vornado Realty Trust ("Vornado"), a
fully-integrated real estate investment trust ("REIT"), is the sole general
partner of, and owned approximately 79% of the common limited partnership
interest in, the Operating Partnership at February 3, 2003. All references to
the "Company" refer to the Operating Partnership and its consolidated
subsidiaries.

The Company currently owns directly or indirectly:

OFFICE PROPERTIES ("OFFICE"):

(i) all or portions of 74 office properties aggregating approximately
27.7 million square feet in the New York City metropolitan area (primarily
Manhattan) and in the Washington D.C. and Northern Virginia area;

RETAIL PROPERTIES ("RETAIL"):

(ii) 62 retail properties in six states and Puerto Rico aggregating
approximately 12.5 million square feet, including 1.8 million square feet
built by tenants on land leased from the Company;

MERCHANDISE MART PROPERTIES:

(iii) 8.6 million square feet of showroom and office space, including
the 3.4 million square foot Merchandise Mart in Chicago;

TEMPERATURE CONTROLLED LOGISTICS:

(iv) a 60% interest in the Vornado Crescent Portland Partnership that
owns 88 cold storage warehouses nationwide with an aggregate of
approximately 441.5 million cubic feet of refrigerated space leased to
AmeriCold Logistics;

OTHER REAL ESTATE INVESTMENTS:

(v) 33.1% of the outstanding common stock of Alexander's, Inc.
("Alexander's");

(vi) the Hotel Pennsylvania in New York City consisting of a hotel
portion containing 1.0 million square feet with 1,700 rooms and a commercial
portion containing .4 million square feet of retail and office space;

(vii) a 21.7% interest in The Newkirk Master Limited Partnership which
owns office, retail and industrial properties net leased primarily to credit
rated tenants, and various debt interests in such properties;

(viii) eight dry warehouse/industrial properties in New Jersey
containing approximately 2.0 million square feet; and

(ix) other investments, including interests in other real estate,
marketable securities and loans and notes receivable.

-102-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION: The accompanying consolidated financial statements
include the accounts of Vornado Realty L.P. and entities in which the Company
has a 50% or greater interest, provided that the Company exercises direct or
indirect control. All significant intercompany amounts have been eliminated. The
Company considers the guidance in APB 18, SOP 78-9 and EITF 96-16 in determining
whether it does or does not control joint ventures on a case-by-case basis,
taking into account board representation, management representation and
authority and the contractual and substantive participating rights of its
partners/members. If the approval of all of the partners/members is
contractually required with respect to major decisions, such as operating and
capital budgets, the sale, exchange or other disposition of any real property
assets, the hiring of a Chief Executive Officer, the commencement, compromise or
settlement of any lawsuit, legal proceeding or arbitration or the placement of
any new or additional financing secured by any assets of the joint venture, then
the Company does not control the venture and therefore will not consolidate the
entity, despite the fact that it may own 50% or more of the relevant entity.
This is the case with respect to Temperature Controlled Logistics, Monmouth
Mall, 400 North LaSalle, MartParc Orleans, MartParc Wells, 825 Seventh Avenue
and Starwood Ceruzzi. If the Company is able to unilaterally make major
decisions for the partially owned entity and owns an interest greater than 50%,
the Company has control and therefore consolidates the entity. The Company
accounts for investments under the equity method when the Company's ownership
interest is more than 20% but less than 50% and the Company does not exercise
direct or indirect control. When partially-owned investments are in partnership
form, the 20% threshold may be reduced. For all other investments, the Company
uses the cost method. Equity investments are recorded initially at cost and
subsequently adjusted for the Company's share of the net income or loss and cash
contributions and distributions to or from these entities.

Prior to January 1, 2001, the Company's equity interests in partially-owned
entities also included investments in preferred stock affiliates (corporations
in which the Company owned all of the preferred stock and none of the common
equity). Ownership of the preferred stock entitled the Company to substantially
all of the economic benefits in the preferred stock affiliates. On January 1,
2001, the Company acquired the common stock of the preferred stock affiliates,
which was owned by the Officers and Trustees of the Company, and converted them
to taxable REIT subsidiaries. Accordingly, the Hotel portion of the Hotel
Pennsylvania and the management companies (which provide services to the
Company's business segments and operate the Trade Show business of the
Merchandise Mart division) have been consolidated beginning January 1, 2001.

Management has made estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.

RECLASSIFICATIONS: Certain prior year balances have been reclassified in
order to conform to current year presentation.

REAL ESTATE: Real estate is carried at cost, net of accumulated
depreciation and amortization. Betterments, major renewals and certain costs
directly related to the acquisition, improvement and leasing of real estate are
capitalized. Maintenance and repairs are charged to operations as incurred. For
redevelopment of existing operating properties, the net book value of the
existing property under redevelopment plus the cost for the construction and
improvements incurred in connection with the redevelopment are capitalized to
the extent the capitalized costs of the property do not exceed the estimated
fair value of the redeveloped property when complete. If the cost of the
redeveloped property, including the undepreciated net book value of the property
carried forward, exceeds the estimated fair value of redeveloped property, the
excess is charged to expense. Depreciation is provided on a straight-line basis
over the assets' estimated useful lives which range from 7 to 40 years. Tenant
allowances are amortized on a straight-line basis over the lives of the related
leases, which approximates the useful lives of the assets. Additions to real
estate include interest expense capitalized during construction of $6,677,000,
$12,171,000, and $12,269,000 for the years ended December 31, 2002, 2001, and
2000.

-103-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Upon acquisitions of real estate, the Company assesses the fair value of
acquired assets (including land, buildings, tenant improvements, acquired above
and below market leases and the origination cost of acquired in-place leases in
accordance with SFAS No. 141) and acquired liabilities, and allocate purchase
price based on these assessments. The Company assesses fair value based on
estimated cash flow projections that utilize appropriate discount and
capitalization rates and available market information. Estimates of future cash
flows are based on a number of factors including the historical operating
results, known trends, and market/economic conditions that may affect the
property. The Company's properties are reviewed for impairment if events or
circumstances change indicating that the carrying amount of the assets may not
be recoverable. If the Company incorrectly estimates the values at acquisition
or the undiscounted cash flows, initial allocations of purchase price and future
impairment charges may be different.

CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of highly
liquid investments purchased with original maturities of three months or less.
Cash and cash equivalents does not include cash escrowed under loan agreements
and cash restricted in connection with an officer's deferred compensation
payable.

ALLOWANCE FOR DOUBTFUL ACCOUNTS: The Company periodically evaluates the
collectibility of amounts due from tenants and maintains an allowance for
doubtful accounts for estimated losses resulting from the inability of tenants
to make required payments under the lease agreements. The Company also maintains
an allowance for receivables arising from the straight-lining of rents. This
receivable arises from earnings recognized in excess of amounts currently due
under the lease agreements. Management exercises judgment in establishing these
allowances and considers payment history and current credit status in developing
these estimates.

MARKETABLE SECURITIES: The Company has classified debt and equity
securities which it intends to hold for an indefinite period of time
(including warrants to acquire equity securities) as securities available for
sale; equity securities it intends to buy and sell on a short term basis as
trading securities; and preferred stock investments as securities held to
maturity. Unrealized gains and losses on trading securities are included in
earnings. Unrealized gains and losses on securities available for sale are
included as a component of Partners' Capital and other comprehensive income.
Realized gains or losses on the sale of securities are recorded based on
specific identification. A portion of the Company's preferred stock
investments are redeemable and accounted for in accordance with EITF 99-20
"Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets." Income is recognized
by applying the prospective method of adjusting the yield to maturity based
on an estimate of future cash flows. If the value of the investment based on
the present value of the future cash flows is less than the Company's
carrying amount, the investments will be written-down to fair value through
earnings. Investments in securities of non-publicly traded companies are
reported at cost, as they are not considered marketable under SFAS No. 115.

At December 31, 2002 and 2001, marketable securities had an aggregate cost
of $41,665,000 and $117,284,000 and an aggregate market value of $42,525,000 and
$126,774,000 (of which $0 and $13,888,000 represents trading securities;
$2,020,000 and $49,763,000 represents securities available for sale; and
$40,505,000 and $63,123,000 represent securities held to maturity). Gross
unrealized gains and losses were $860,000 and $0 at December 31, 2002, and
$14,738,000 and $5,243,000 at December 31, 2001.

NOTES AND MORTGAGE LOANS RECEIVABLE: The Company's policy is to record
mortgages and notes receivable at the stated principal amount less any discount
or premiums. The Company accretes or amortizes any discounts or premiums over
the life of the related loan receivable utilizing the effective interest method.
The Company evaluates the collectibility of both interest and principal of each
of its loans, if circumstances warrant, to determine whether it is impaired. A
loan is considered to be impaired, when based on current information and events,
it is probable that the Company will be unable to collect all amounts due
according to the existing contractual terms. When a loan is considered to be
impaired, the amount of the loss accrual is calculated by comparing the recorded
investment to the value determined by discounting the expected future cash flows
at the loan's effective interest rate or, as a practical expedient, to the value
of the collateral if the loan is collateral dependent. Interest on impaired
loans is recognized on a cash basis.

DEFERRED CHARGES: Direct financing costs are deferred and amortized over
the terms of the related agreements as a component of interest expense. Direct
costs related to leasing activities are capitalized and amortized on a
straight-line basis over the lives of the related leases. All other deferred
charges are amortized on a straight-line basis, which approximates the effective
interest rate method, in accordance with the terms of the agreements to which
they relate.

-104-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

FAIR VALUE OF FINANCIAL INSTRUMENTS: All financial instruments of the
Company are reflected in the accompanying consolidated balance sheets at amounts
which, in management's estimation, based upon an interpretation of available
market information and valuation methodologies (including discounted cash flow
analyses with regard to fixed rate debt) are considered appropriate. The fair
value of the Company's debt is approximately $178,566,000 in excess of the
aggregate carrying amount at December 31, 2002. Such fair value estimates are
not necessarily indicative of the amounts that would be realized upon
disposition of the Company's financial instruments.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: Statement of Financial
Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES (SFAS 133), as amended and interpreted, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. As required
by SFAS 133, the Company records all derivatives on the balance sheet at fair
value. The accounting for changes in the fair value of derivatives depends on
the intended use of the derivative and the resulting designation. Derivatives
used to hedge the exposure to changes in the fair value of an asset, liability,
or firm commitment attributable to a particular risk, such as interest rate
risk, are considered fair value hedges. Derivatives used to hedge the exposure
to variability in expected future cash flows, or other types of forecasted
transactions, are considered cash flow hedges. The cumulative effect of
implementing SFAS No. 133 on January 1, 2001, was $4,110,000.

For derivatives designated as fair value hedges, changes in the fair value
of the derivative and the hedged item related to the hedged risk are recognized
in earnings. For derivatives designated as cash flow hedges, the effective
portion of changes in the fair value of the derivative is initially reported in
other comprehensive income (outside of earnings) and subsequently reclassified
to earnings when the hedged transaction affects earnings, and the ineffective
portion of changes in the fair value of the derivative is recognized directly in
earnings. The Company assesses the effectiveness of each hedging relationship by
comparing the changes in fair value or cash flows of the derivative hedging
instrument with the changes in fair value or cash flows of the designated hedged
item or transaction. For derivatives not designated as hedges, changes in fair
value are recognized in earnings. Additionally, the Company does not use
derivatives for trading or speculative purposes and currently does not have any
derivatives that are not designated as hedges.

On June 27, 2002, the Company entered into interest rate swaps that
effectively converted the interest rate on the $500,000,000 senior unsecured
notes due 2007 from a fixed rate of 5.625% to a floating rate of LIBOR plus
..7725%, based upon the trailing 3 month LIBOR rate (2.18% at December 31, 2002).
These swaps were designated and effective as fair value hedges, with a fair
value of $34,245,000 at December 31, 2002, which is included in Other Assets on
the Company's balance sheet. Accounting for these swaps also requires the
Company to recognize changes in the fair value of the debt during each reporting
period. At December 31, 2002, the fair value adjustment of $34,245,000, based on
the fair value of the swaps, is included in the balance of the Senior Unsecured
Notes. Because the hedging relationship qualifies for the "short-cut" method, no
hedge ineffectiveness on these fair value hedges was recognized during 2002.

REVENUE RECOGNITION: The Company has the following revenue sources and
revenue recognition policies:

Base Rents -- income arising from tenant leases. These rents are recognized over
the non-cancelable term of the related leases on a straight-line basis which
includes the effects of rent steps and free rent abatements under the leases.

Percentage Rents -- income arising from retail tenant leases which are
contingent upon the sales of the tenant exceeding a defined threshold. These
rents are recognized in accordance with SAB 101, which states that this income
is to be recognized only after the contingency has been removed (i.e. sales
thresholds have been achieved).

Hotel Revenues -- income arising from the operation of the Hotel Pennsylvania
which consists of rooms revenue, food and beverage revenue, and banquet revenue.
Income is recognized when rooms are occupied. Food and beverage and banquet
revenue are recognized when the services have been rendered.

Trade Show Revenues -- income arising from the operation of trade shows,
including rentals of booths. This revenue is recognized in accordance with the
booth rental contracts when the trade shows have occurred.

Expense Reimbursement Income -- income arising from tenant leases which provide
for the recovery of all or a portion of the operating expenses and real estate
taxes of the respective property. This income is accrued in the same periods as
the expenses are incurred. Contingent rents are not recognized until realized.

-105-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

INCOME TAXES: No provision has been made for income taxes in the
accompanying consolidated financial statements of the Operating Partnership
since such taxes, if any, are the responsibility of the partners.

The Company owns stock in corporations that have elected to be treated for
Federal income tax purposes, as taxable REIT subsidiaries ("TRS"). The value of
the combined TRS stock cannot and does not exceed 20% of the value of the
Company's total assets. A TRS is taxable on its net income at regular corporate
tax rates. For the 2002 tax year, the total income tax is approximately
$1,430,000.

The net basis of the Company's assets and liabilities for tax purposes is
approximately $2,822,000,000 lower than the amount reported for financial
statement purposes.

At December 31, 2002, the Company had a capital loss carryover of
approximately $73,000,000. The capital loss carryover is available to offset
future capital gains that would otherwise be required to be distributed as
dividends to shareholders.

AMOUNTS PER CLASS A UNIT: Basic earnings per Class A Unit is computed based
on weighted average units outstanding. Diluted earnings per Class A unit
considers the effect of outstanding options, warrants and convertible or
redeemable securities.

STOCK BASED COMPENSATION: In 2002 and prior years, the Company accounted
for stock-based compensation using the intrinsic value method. Under the
intrinsic value method compensation cost is measured as the excess, if any, of
the quoted market price of Vornado's stock at the date of grant over the
exercise price of the option granted. Compensation cost for stock options, if
any, is recognized ratably over the vesting period. The Company's policy is to
grant options with an exercise price equal to the quoted market price of
Vornado's stock on the grant date. An equivalent number of Class A units are
issued when options are exercised. Accordingly, no compensation cost has been
recognized for the Company's stock option plans. See Note 8 - Employees' Share
Option Plan for details of the Company's outstanding employee share options and
the related pro forma stock-based employee compensation cost. Effective January
1, 2003, the Company adopted SFAS No. 123 "Accounting for Stock Based
Compensation" as amended by SFAS No. 148 "Accounting for Stock - Based
Compensation - Transition and Disclosure." The Company will adopt SFAS No. 123
prospectively by valuing and accounting for employee stock options granted in
2003 and thereafter. The Company will utilize a binomial valuation model and
appropriate market assumptions to determine the value of each grant. Stock-based
compensation expense will be recognized on a straight-line basis over the
vesting period of the respective grants.

In addition to employee stock option grants, the Company has also granted
restricted shares to certain of its employees that vest over a three to five
year period. The Company records the value of each restricted share award as
stock-based compensation expense based on the Company's closing stock price on
the NYSE on the date of grant on a straight-line basis over the vesting period.
As of December 31, 2002, the Company has 250,927 restricted shares or rights to
receive restricted shares outstanding to employees of the Company, excluding
626,566 shares issued to the Company's President in connection with his
employment agreement. The Company recognized $1,868,000 of stock-based
compensation expense in 2002 for the portion of these shares that vested during
the year.

-106-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

RECENTLY ISSUED ACCOUNTING STANDARDS

SFAS No. 141 - BUSINESS COMBINATIONS requires companies to account for the
value of leases acquired and the costs of acquiring such leases separately from
the value of the real estate for all acquisitions subsequent to July 1, 2001.
Accordingly, the Company has evaluated the leases in place for (i) the remaining
66% of CESCR it did not previously own which it acquired on January 1, 2002,
(ii) the remaining 50% of the Las Catalinas Mall it did not previously own which
it acquired on September 23, 2002 and (iii) a 50% interest in the Monmouth Mall
which it acquired on October 10, 2002, to determine whether they were acquired
at market, above market or below market. The Company's evaluations were based on
(i) the differences between contractual rentals and the estimated market rents
over the applicable lease term discounted back to the date of acquisition
utilizing a discount rate adjusted for the credit risk associated with the
respective tenants and (ii) the estimated cost of acquiring such leases giving
effect to the Company's history of providing tenant improvements and paying
leasing commissions.

As a result of its evaluations, as of December 31, 2002, the Company has
recorded a deferred credit of $48,430,000 representing the value of acquired
below market leases, deferred charges of $15,976,000 for the value of acquired
above market leases and $3,621,000 for origination costs. In addition, in the
year ended December 31, 2002 the Company has recognized property rentals of
$12,634,000, for the amortization of below market leases net of above market
leases, and depreciation expense of $1,214,000 for the amortization of the lease
origination costs and additional building depreciation resulting from the
reallocation of the purchase price of the applicable properties.

SFAS NO. 142 - GOODWILL AND OTHER INTANGIBLE ASSETS

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS (effective January 1, 2002). SFAS No. 142 specifies that
goodwill and some intangible assets will no longer be amortized but instead be
subject to periodic impairment testing. SFAS No. 142 provides specific guidance
for impairment testing of these assets and removes them from the scope of SFAS
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS. The Company's
goodwill balance on December 31, 2001 of $30,129,000 consisted of $14,639,000
related to the Hotel Pennsylvania acquisition and $15,490,000 related to the
acquisition of the Temperature Controlled Logistics businesses.

Prior to January 1, 2002, the Company performed impairment testing in
accordance with SFAS 121. The Company reviewed for impairment whenever events or
changes in circumstances indicated that the carrying amount of an asset may not
be recoverable. Given the decrease in the estimated market values and the
deteriorating performance of Hotel Pennsylvania and Temperature Controlled
Logistics, the Company performed a review for recoverability estimating the
future cash flows expected to result from the use of the assets and their
eventual disposition. As of December 31, 2001, the sum of the expected cash
flows (undiscounted and without interest charges) exceeded the carrying amounts
of goodwill, and therefore no impairments were recognized.

Upon adoption of SFAS 142 on January 1, 2002, the Company tested the
goodwill for impairment at the reporting level unit utilizing the prescribed
two-step method. The first step compared the fair value of the reporting unit
(determined based on a discounted cash flow approach) with its carrying amount.
As the carrying amount of the reporting unit exceeded its fair value, the second
step of the impairment test was performed to measure the impairment loss. The
second step compared the implied fair value of goodwill with the carrying amount
of the goodwill. As the carrying amounts of the goodwill exceed the fair values,
on January 1, 2002 the Company wrote-off all of the goodwill of the Hotel and
the Temperature Controlled Logistics businesses as an impairment loss totaling
$30,129,000. The write-off has been reflected as a cumulative effect of change
in accounting principle on the income statement.

Previously reported "Income before gains on sale of real estate and
cumulative effect of change in accounting principle" and "Net income applicable
to Class A units" for the year ended December 31, 2001 would have been
approximately $1,230,000 higher, or $2.35 and $2.48 per Class A unit diluted, if
such goodwill was not amortized in the prior year.

-107-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

SFAS NO. 143 - ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS AND SFAS NO. 144
- - ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS

In August 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS (effective January 1, 2003) and SFAS No. 144, ACCOUNTING
FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS (effective January 1, 2002).
SFAS No. 143 requires the recording of the fair value of a liability for an
asset retirement obligation in the period which it is incurred. SFAS No. 144
supersedes current accounting literature and now provides for a single
accounting model for long-lived assets to be disposed of by sale and requires
discontinued operations presentation for disposals of a "component" of an
entity. The adoption of these statements did not have a material effect on the
Company's financial statements; however under SFAS No. 144, if the Company were
to dispose of a material operating property, such property's results of
operations will have to be separately disclosed as discontinued operations in
the Company's financial statements.

SFAS NO. 145 - RESCISSION OF SFAS NO. 4, 44, AND 64, AMENDMENT OF SFAS NO.
13, AND TECHNICAL CORRECTIONS

In April 2002, the FASB issued SFAS No. 145, RESCISSION OF SFAS NO. 4, 44,
AND 64, AMENDMENT OF SFAS NO. 13, AND TECHNICAL CORRECTIONS. SFAS No. 145
requires, among other things, (i) that the modification of a lease that results
in a change of the classification of the lease from capital to operating under
the provisions of SFAS No. 13 be accounted for as a sale-leaseback transaction
and (ii) the reporting of gains or losses from the early extinguishment of debt
as extraordinary items only if they met the criteria of Accounting Principles
Board Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS. The rescission of
SFAS No. 4 is effective January 1, 2003. The amendment of SFAS No. 13 is
effective for transactions occurring on or after May 15, 2002. The adoption of
this statement did not have a material effect on the Company's financial
statements.

SFAS NO. 146 - ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL
ACTIVITIES

In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES (effective January 1, 2003). SFAS No. 146
replaces current accounting literature and requires the recognition of costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. The Company does not
anticipate that the adoption of this statement will have a material effect on
the Company's financial statements.

SFAS NO. 148 - ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE - AN AMENDMENT OF FASB STATEMENT NO. 123

On August 7, 2002, the Company announced that beginning January 1, 2003, it
will expense the cost of employee stock options in accordance with SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. In December 2002, the FASB issued
Statement No. 148 - ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE - AN AMENDMENT OF FASB STATEMENT NO. 123 to amend the transition and
disclosure provisions of SFAS No. 123. Specifically, SFAS No. 123, as amended,
would permit two additional transition methods for entities that adopt the fair
value method of accounting for stock based employee compensation. The Company
will adopt SFAS No. 123 prospectively by valuing and accounting for employee
stock options granted in 2003 and thereafter. The Company will utilize a
binomial valuation model and appropriate market assumptions to determine the
value of each grant. Stock-based compensation expense will be recognized on a
straight-line basis over the vesting period of the respective grants.

FASB INTERPRETATION NO. 45 - GUARANTOR'S ACCOUNTING AND DISCLOSURE
REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF
OTHERS

In November 2002, the FASB issued Interpretation No. 45 - GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS, which elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. The initial recognition
and measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. The
Company believes that the adoption of this interpretation will not have a
material effect to the financial statements.

-108-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

FASB INTERPRETATION NO. 46 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES

In January 2003, the FASB issued Interpretation No. 46 - CONSOLIDATION OF
VARIABLE INTEREST ENTITIES, which requires the consolidation of an entity by an
enterprise (i) if that enterprise, known as a "primary beneficiary", has a
variable interest that will absorb a majority of the entity's expected losses if
they occur, receive a majority of the entity's expected residual returns if they
occur, or both and (ii) if the entity is a variable interest entity, as defined
by Interpretation No. 46. An entity is a variable interest entity if (a) the
total equity investment at risk in the entity is not sufficient to permit the
entity to finance its activities without additional subordinated financial
support from other parties or (b) the equity investors do not have the
characteristics of a controlling financial interest in the entity.
Interpretation No. 46 applies immediately to all variable interest entities
created after January 31, 2003. For variable interest entities created by public
companies before February 1, 2003, Interpretation No. 46 must be applied no
later than the beginning of the first interim or annual reporting period
beginning after June 15, 2003. The initial determination of whether an entity is
a variable interest entity shall be made as of the date at which a primary
beneficiary becomes involved with the entity and reconsidered as of the date one
of three triggering events described by Interpretation No. 46 occur. The Company
does not believe that the adoption of this Interpretation will have a material
effect on its financial statements.

-109-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

3. ACQUISITIONS AND DISPOSITIONS

The Company completed approximately $1,834,600,000 of real estate
acquisitions or investments in 2002 and $19,200,000 in 2001. These acquisitions
were consummated through subsidiaries or preferred stock affiliates of the
Company. Acquisitions of business were recorded under the purchase method of
accounting. Related net assets and results of operations have been included in
these financial statements since their respective dates of acquisition. The pro
forma effect of the individual acquisitions and in the aggregate other than
Charles E. Smith Commercial Realty, were not material to the Company's
historical results of operations.

Acquisitions of individual properties are recorded as acquisitions of real
estate assets. Acquisitions of businesses are accounted for under the purchase
method of accounting. The purchase price for property acquisitions and
businesses acquired is allocated to acquired assets and assumed liabilities
using their relative fair values as of the acquisition date based on valuations
and other studies. Initial valuations are subject to change until such
information is finalized no later than 12 months from the acquisition date.

OFFICE:

CHARLES E. SMITH COMMERCIAL REALTY INVESTMENT ("CESCR")

On January 1, 2002, the Company completed the combination of CESCR with
Vornado. CESCR has a dominant market position in the Washington, D.C. and
Northern Virginia area, owning approximately 12.4 million square feet in 53
office properties as well as a highly competent management team. In the
Company's opinion, the assets were acquired at below replacement cost and with
below market leases. As a result of the combination, the Company will be in
position to capitalize on the favorable supply/demand characteristics of the
Washington, D.C office markets. Prior to the combination, Vornado owned a 34%
interest in CESCR. The consideration for the remaining 66% of CESCR was
approximately $1,600,000,000, consisting of 15.6 million newly issued Vornado
Operating Partnership units and approximately $1 billion of debt (66% of CESCR's
total debt). The purchase price paid by the Company was determined based on the
weighted average closing price of the equity issued to CESCR unitholders for the
period beginning two business days before and ending two business days after the
date the acquisition was agreed to and announced on October 19, 2001. The
Company also capitalized as part of the basis of the assets acquired
approximately $32,000,000 for third party acquisition related costs, including
advisory, legal and other professional fees that were contemplated at the time
of the acquisition. The following table summarizes the estimated fair value of
assets acquired and liabilities assumed at January 1, 2002, the date of
acquisition.

(Amounts in thousands)

Land, buildings and improvements.............. $ 1,681,000
Intangible deferred charges................... 36,000
Working capital............................... 41,000
-------------
Total Assets Acquired......................... 1,758,000
-------------

Mortgages and notes payable................... 1,023,000
Intangible deferred credit.................... 62,000
Other liabilities............................. 34,000
-------------
Total Liabilities Assumed..................... 1,119,000
-------------

Net Assets Acquired........................... $ 639,000
=============

The Company's estimate of the weighted average useful life of acquired
intangibles is approximately three years. This acquisition was recorded as a
business combination under the purchase method of accounting. The purchase price
was allocated to acquired assets and assumed liabilities using their relative
fair values as of January 1, 2002 based on valuations and other studies. The
operations of CESCR are consolidated into the accounts of the Company beginning
January 1, 2002. Prior to this date the Company accounted for its 34% interest
on the equity method.

-110-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The unaudited pro forma information set forth below presents the condensed
consolidated statements of income for the Company for the year ended December
31, 2001 as if the following transactions had occurred on January 1, 2001, (i)
the acquisition of CESCR described above and (ii) the Company's November 21,
2001 sale of 9,775,000 Class A units and the use of proceeds to repay
indebtedness.

Condensed Consolidated Statements of Income For the Year Ended
(in thousands, except per unit amounts) December 31,
----------------------------
Pro Forma
2002 2001
----------- -----------

Revenues............................................................... $ 1,435,070 $ 1,384,933
=========== ===========
Income before gains on sale of real estate and cumulative effect of
change in accounting principle....................................... $ 400,431 $ 431,207
Gains on sale of real estate........................................... -- 15,495
Cumulative effect of change in accounting principle.................... (30,129) (4,110)
----------- -----------
Net income............................................................. 370,302 442,592
Preferred unit distributions........................................... (119,214) (130,815)
----------- -----------
Net income applicable to Class A units................................. $ 251,088 $ 311,777
=========== ===========
Net income per Class A unit - basic.................................... $ 1.97 $ 2.97
=========== ===========
Net income per Class A unit - diluted.................................. $ 1.92 $ 2.89
=========== ===========

CRYSTAL GATEWAY ONE

On July 1, 2002, the Company acquired a 360,000 square foot office building
from a limited partnership, which is approximately 50% owned by Mr. Robert H.
Smith and Mr. Robert P. Kogod and members of the Smith and Kogod families,
trustees of the Company, in exchange for approximately 325,700 newly issued
Vornado Operating Partnership units (valued at $13,679,000) and the assumption
of $58,500,000 of debt. The building is located in the Crystal City complex in
Arlington, Virginia where the Company already owns 24 office buildings
containing over 6.9 million square feet, which it acquired on January 1, 2002,
in connection with the Company's acquisition of CESCR. The operations of Crystal
Gateway One are consolidated into the accounts of the Company from the date of
acquisition.

BUILDING MAINTENANCE SERVICE COMPANY

On January 1, 2003, the Company acquired the Building Maintenance Service
Company for $13,000,000 in cash, which provides cleaning and related services
and security services to office properties, including the Company's Manhattan
office properties. This company was previously owned by the estate of Bernard
Mendik and certain other individuals including Mr. Greenbaum, one of the
Company's executive officers. This acquisition was recorded as a business
combination under the purchase method of accounting.

RETAIL:
LAS CATALINAS MALL

On September 23, 2002, the Company increased its interest in the Las
Catalinas Mall located in Caguas, Puerto Rico (San Juan area) to 100% by
acquiring the 50% of the mall and 25% of the Kmart anchor store it did not
already own. The purchase price was $48,000,000, of which $16,000,000 was paid
in cash and $32,000,000 was debt assumed. The Las Catalinas Mall, which opened
in 1997, contains 492,000 square feet, including a 123,000 square foot Kmart and
a 138,000 square foot Sears owned by the tenant. Prior to September 23, 2002,
the Company accounted for its investment on the equity method. Subsequent to
this date the operations of Las Catalinas are consolidated into the accounts of
the Company.

MONMOUTH MALL

On October 10, 2002, a joint venture in which the Company has a 50%
interest, acquired the Monmouth Mall, an enclosed super regional shopping center
located in Eatontown, New Jersey containing approximately 1.5 million square
feet, including four department stores, three of which aggregating 731,000
square feet are owned by the tenants. The purchase price was approximately
$164,700,000, including transaction costs of $4,400,000. The Company made a
$7,000,000 cash investment in the form of common equity to the venture and
provided it with cash of $23,500,000 representing preferred equity yielding 14%.
The venture financed the purchase of the Mall with $135,000,000 of floating rate
debt at LIBOR plus 2.05%, with a LIBOR floor of 2.50% on $35,000,000, a three-
year term and two one-year extension options. The Company accounts for its
investment on the equity method.

-111-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

OTHER:

On December 31, 2002, the Company and Crescent Real Estate Equities formed
a joint venture to acquire the Carthage, Missouri and Kansas City, Kansas
quarries from AmeriCold Logistics, the Company's tenant at the cold storage
warehouses (Temperature Controlled Logistics) facilities for $20,000,000 in cash
(appraised value). The Company contributed cash of $8,800,000 to the joint
venture representing its 44% interest. The Company accounts for its investment
in the venture on the equity method.

DISPOSITIONS:

The following table sets forth the details of sales, dispositions,
write-offs and other similar transactions for the years ended December 31, 2002,
2001 and 2000:

($ in thousands)

GAIN ON TRANSFER OF MORTGAGES

In the year ended December 31, 2002, the Company recorded a net gain of
approximately $2.1 million resulting from payments to the Company by third
parties that assumed certain of the Company's mortgages. Under these
transactions the Company paid to the third parties that assumed the Company's
obligations the outstanding amounts due under the mortgages and the third
parties paid the Company for the benefit of assuming the mortgages. The Company
has been released by the creditors underlying these loans.

NET GAIN ON SALE OF AIR RIGHTS

The Company constructed a $16.3 million community facility and low-income
residential housing development (the "30th Street Venture"), in order to receive
163,728 square feet of transferable development rights, generally referred to as
"air rights". The Company donated the building to a charitable organization. The
Company sold 106,796 square feet of these air rights to third parties at an
average price of $120 per square foot. An additional 28,821 square feet of air
rights was sold to Alexander's at a price of $120 per square foot for use at
Alexander's 59th Street development project (the "59th Street Project"). In each
case, the Company received cash in exchange for air rights. The Company
identified third party buyers for the remaining 28,111 square feet of air rights
of the 30th Street Venture. These third party buyers wanted to use the air
rights for the development of two projects located in the general area of 86th
Street which was not within the required geographical radius of the construction
site nor in the same Community Board as the low-income housing and community
facility project. The 30th Street Venture asked Alexander's to sell 28,111
square feet of the air rights it already owned to the third party buyers (who
could use them) and the 30th Street Venture would replace them with 28,111
square feet of air rights. In October 2002, the Company sold 28,111 square feet
of air rights to Alexander's for an aggregate sales price of $3,059,000 (an
average of $109 per square foot). Alexander's then sold an equal amount of air
rights to the third party buyers for an aggregate sales price of $3,339,000 (an
average of $119 per square foot).

-112-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

GAIN ON SALE OF KINZIE PARK CONDOMINIUM UNITS

The Company recognized a gain of $2,156,000 during 2002, from the sale of
residential condominiums in Chicago, Illinois.

PRIMESTONE FORECLOSURE AND IMPAIRMENT LOSSES

On September 28, 2000, the Company made a $62,000,000 loan to Primestone
Investment Partners, L.P. ("Primestone"). The Company received a 1% up-front fee
and was entitled to receive certain other fees aggregating approximately 3% upon
repayment of the loan. The loan bore interest at 16% per annum. Primestone
defaulted on the repayment of this loan on October 25, 2001. The loan was
subordinate to $37,957,000 of other debt of the borrower that liened the
Company's collateral. On October 31, 2001, the Company purchased the other debt
for its face amount. The loans were secured by 7,944,893 partnership units in
Prime Group Realty, L.P., the operating partnership of Prime Group Realty Trust
(NYSE:PGE) and the partnership units are exchangeable for the same number of
common shares of PGE. The loans are also guaranteed by affiliates of Primestone.

On November 19, 2001, the Company sold, pursuant to a participation
agreement with a subsidiary of Cadim inc., a Canadian pension fund, a 50%
participation in both loans at par for approximately $50,000,000 reducing the
Company's net investment in the loans at December 31, 2001 to $56,768,000
including unpaid interest and fees of $6,790,000. The participation did not meet
the criteria for "sale accounting" under SFAS 140 because Cadim was not free to
pledge or exchange the assets. Accordingly, the Company was required to account
for this transaction as a borrowing secured by the loan, rather than as a sale
of the loan by classifying the participation as an "Other Liability" and
continuing to report the outstanding loan balance at 100% in "Notes and Mortgage
Loans Receivable" on the balance sheet. Under the terms of the participation
agreement, cash payments received shall be applied (i) first, to the
reimbursement of reimbursable out-of-pocket costs and expenses incurred in
connection with the servicing, administration or enforcement of the loans after
November 19, 2001, and then to interest and fees owed to the Company through
November 19, 2001, (ii) second, to the Company and Cadim, pro rata in proportion
to the amount of interest and fees owed following November 19, 2001 and (iii)
third, 50% to the Company and 50% to Cadim as recovery of principal.

On April 30, 2002, the Company and Cadim acquired the 7,944,893 partnership
units at a foreclosure auction. The price paid for the units by application of a
portion of Primestone's indebtedness to the Company and Cadim was $8.35 per
unit, the April 30, 2002 closing price of shares of PGE on the New York Stock
Exchange. On June 28, 2002, pursuant to the terms of the participation
agreement, the Company transferred 3,972,447 of the partnership units to Cadim.

In the second quarter, in accordance with foreclosure accounting, the
Company recorded a loss on the Primestone foreclosure of $17,671,000 calculated
based on (i) the acquisition price of the units and (ii) its valuation of the
amounts realizable under the guarantees by affiliates of Primestone, as compared
with the net carrying amount of the investment at April 30, 2002. In the third
quarter of 2002, the Company recorded a $2,229,000 write-down on its investment
based on costs expended to realize the value of the guarantees. Further, in the
fourth quarter of 2002, the Company recorded a $15,857,000 write-down of its
investment in Prime Group consisting of (i) $14,857,000 to adjust the carrying
amount of the Prime Group units to $4.61 per unit, the closing price of PGE
shares on December 31, 2002 on the New York Stock Exchange and (ii) $1,000,000
for estimated costs to realize the value of the guarantees. The Company
considered the decline in the value of the units which are convertible into
stock to be other than temporary as of December 31, 2002, based on the fact that
the market value of the units which are convertible into stock has been less
than its cost for more than six months, the severity of the decline, market
trends, the financial condition and near-term prospects of Prime Group and other
relevant factors.

At December 31, 2002, the Company's carrying amount of the investment was
$23,408,000, of which $18,313,000 represents the carrying amount of the
3,972,447 partnership units owned by the Company ($4.61 per unit), $6,100,000
represents the amount expected to be realized under the guarantees, offset by
$1,005,000 representing the Company's share of Prime Group Realty's net loss
through September 30, 2002 (see Note 4. Investments in and Advances to
Partially-Owned Entities). Prior to April 30, 2002, this investment was in the
form of a loan and was included in Notes and Mortgage Loans Receivable on the
balance sheet.

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VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

At February 3, 2003, the closing price of PGE shares on the New York Stock
Exchange was $5.30 per share. The ultimate realization of the Company's
investment will depend upon the future performance of the Chicago real estate
market and the performance of PGE, as well as the ultimate realizable value of
the net assets supporting the guarantees and the Company's ability to collect
under the guarantees. In addition, the Company will continue to monitor this
investment to determine whether additional write-downs are required based on (i)
declines in value of the shares of PGE (for which the partnership units are
exchangeable) which are "other than temporary" as used in accounting literature
and (ii) the amount expected to be realized under the guarantees.

WRITE-OFF INVESTMENTS IN TECHNOLOGY COMPANIES

In the first quarter of 2001, the Company recorded a charge of $4,723,000
resulting from the write-off of an equity investment in a technology company. In
the second quarter of 2001, the Company recorded an additional charge of
$13,561,000 resulting from the write-off of all of its remaining equity
investments in technology companies due to both the deterioration of the
financial condition of these companies and the lack of acceptance by the market
of certain of their products and services. In the fourth quarter of 2001, the
Company recorded $1,481,000 of income resulting from the reversal of a deferred
liability relating to the termination of an agreement permitting one of the
technology companies access to its properties.

PARK LAUREL CONDOMINIUM PROJECT

In the third quarter of 2001, the Park Laurel joint venture (69% interest
owned by the Company) completed the sale of 52 condominium units of the total 53
units and received proceeds of $139,548,000. The Company's share of the after
tax net gain was $15,657,000. The Company's share of the after-tax net gain
reflects $3,953,000 (net of tax benefit of $1,826,000) awards accrued under the
venture's incentive compensation plan.

WRITE-OFF OF NET INVESTMENT IN RTR

In the third quarter of 2001, the Company wrote-off its entire net
investment of $7,374,000 in RTR based on the operating losses and an assessment
of the value of the real estate.

NET GAINS ON SALE OF REAL ESTATE:

On August 6, 2001, the Company sold its leasehold interest in 550/600
Mamaroneck Avenue for $22,500,000, which approximated book value.

In September 1998, Atlantic City condemned the Company's property. In the
third quarter of 1998, the Company recorded a gain of $1,694,000, which
reflected the condemnation award of $3,100,000, net of the carrying value of the
property of $1,406,000. The Company appealed the amount and on June 27, 2001,
was awarded an additional $3,050,000, which has been recorded as a gain in the
quarter ended June 30, 2001.

On May 17, 2001, the Company sold its 50% interest in 570 Lexington Avenue
for $60,000,000, resulting in a gain of $12,445,000.

During 2000, the Company sold (i) its three shopping centers located in
Texas for $25,750,000, resulting in a gain of $2,560,000 and (ii) its Westport,
Connecticut office property for $24,000,000, resulting in a gain of $8,405,000.

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VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

4. INVESTMENTS IN PARTIALLY-OWNED ENTITIES

The Company's investments in partially-owned entities and income recognized
from such investments is disclosed below. Summarized financial data is provided
for (i) investments in entities which exceed 10% of the Company's total assets
and (ii) investments in which the Company's share of partially-owned entities
pre-tax income exceeds 10% of the Company's net income.

BALANCE SHEET DATA:

----------
(1) Vornado owned a 34% interest in CESCR in 2001. On January 1, 2002, the
Company acquired the remaining 66% of CESCR. See Note 3 -
"Acquisitions and Dispositions" for details of the acquisition.
(2) The Company's investment in and advances to Newkirk Joint Ventures is
comprised of

On January 2, 2002, the Newkirk Joint Ventures' partnership interests
were merged into a master limited partnership (the "MLP") in which the
Company has a 21.7% interest. In conjunction with the merger, the MLP
completed a $225,000 mortgage financing collateralized by its
properties, subject to the existing first and certain second mortgages
on those properties. The loan bears interest at LIBOR plus 5.5% with a
LIBOR floor of 3% (8.5% at February 3, 2003) and matures on January
31, 2005, with two one-year extension options. As a result of the
financing on February 6, 2002, the MLP repaid approximately $28,200 of
existing debt and distributed approximately $37,000 to the Company. In
2003, the Company expects to receive distributions of approximately
$9,000 from the Newkirk MLP.

(3) On October 10, 2002, a joint venture in which the Company owns a 50%
interest acquired the Monmouth Mall. See Note 3 - "Acquisitions and
Dispositions" for further details.
(4) As at December 31, 2002, includes a 20% interest in a property which
was part of the CESCR acquisition in January 2002.
(5) The credit balance at December 31, 2001, is a result of the accrual of
awards under the ventures incentive compensation plan.

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VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Below is a summary of the debt of partially owned entities as of December
31, 2002 and 2001, none of which is guaranteed by the Company.

(Amounts in thousands)

Based on the Company's ownership interest in the partially-owned entities
above, the Company's share of the debt of these partially-owned entities was
$1,048,108,000 and $1,319,535,000 as of December 31, 2002 and 2001.

- ----------
(1) Balance as of September 30, 2002, as Prime Group's annual report on Form
10-K for the year ended December 31, 2002, has not been filed prior to the
filing of this annual report on Form 10-K.
(2) The Company increased its interest in Las Catalinas to 100% on September
23, 2002. Accordingly, Las Catalinas is consolidated as of September 30,
2002.
(3) On November 18, 2002 the Russian Tea Room mortgage loans were repaid with
proceeds from the sale of the property.

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VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

INCOME STATEMENT DATA:

- ----------
(1) Equity in income in 2002 includes the Company's $3,524 share of Alexander's
gain on sale of its Third Avenue property. Equity in income in 2001
includes (i) the Company's $6,298 share of Alexander's gain on sale of its
Fordham Road property, (ii) a charge of $1,684 representing the Company's
share of abandoned development costs and (iii) $1,170 representing the
Company's share of Alexander's gain on the early extinguishment of debt on
its Fordham Road property. Management and leasing fee income include fees
of $350 and $520 paid to the Company in 2002 and 2001 in connection with
sales of real estate.
(2) Alexander's capitalizes the fees and interest charged by the Company.
Because the Company owns 33.1% of Alexander's, the Company recognizes 66.9%
of such amounts as income and the remainder is reflected as a reduction of
the Company's carrying amount of the investment in Alexander's.
(3) The Company owned a 34% interest in CESCR. On January 1, 2002, the Company
acquired the remaining 66% of CESCR it did not previously own. Accordingly,
CESCR is consolidated as of January 1, 2002.
(4) Represents the Company's interests in 330 Madison Avenue (24.8%), 825
Seventh Avenue (50%) and 570 Lexington Avenue (50%). On May 17, 2001, the
Company sold its 50% interest in 570 Lexington Avenue for $60,000,
resulting in a gain of $12,445 which is not included in income in the table
above.
(5) Represents the Company's share of net loss for the period from April 30,
2002 (date of acquisition) to September 30, 2002, which includes (i) a loss
of $357 from discontinued operations and (ii) a loss of $147 from the sale
of real estate. The Company's share of equity in income or loss for the
period from October 1, 2002 to December 31, 2002 will be recognized in
earnings in the quarter ended March 31, 2003, as the investee has not
released its earnings for the year ended December 31, 2002 prior to the
filing of the Company's annual report on Form 10-K.

-117-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

ALEXANDER'S

OWNERSHIP

The Company owns 1,655,000 common shares or 33.1% of the outstanding common
stock of Alexander's at December 31, 2002. Alexander's is managed by and its
properties are leased and developed by the Company pursuant to management,
leasing and development agreements with one-year terms expiring in March of each
year, which are automatically renewable. In conjunction with the closing of the
Alexander's Lexington Avenue construction loan on July 3, 2002, these agreements
were revised to cover the Alexander's Lexington Avenue property separately.
Further, the Lexington Avenue management and development agreements were amended
to provide for a term lasting until substantial completion of the development of
the property, with automatic renewals, and for the payment of the development
fee upon the earlier of January 3, 2006, or the payment in full of the
construction loan encumbering the property. The Company is entitled to a
development fee estimated to be approximately $26,300,000, based on 6% of
construction costs, as defined, of which $7,667,000 has been recognized as
income during the year ended December 31, 2002.

DEBT

At December 31, 2002, the Company had loans receivable from Alexander's of
$119,000,000, including $24,000,000 drawn under the $50,000,000 line of credit
the Company granted to Alexander's on August 1, 2000. The maturity date of the
loan and the line of credit is the earlier of January 3, 2006 or the date the
Alexander's Lexington Avenue construction loan is repaid. The interest rate on
the loan and line of credit, which resets quarterly using the same spread to
treasuries as presently exists with a 3% floor for treasuries, is 12.48% at
December 31, 2002. The Company believes that although Alexander's has disclosed
that it does not have positive cash flow sufficient to repay this loan to the
Company currently, Alexander's will be able to repay the loan upon the
successful development and permanent financing of its Lexington Avenue
development project or through asset sales.

On July 3, 2002, Alexander's finalized a $490,000,000 loan with HVB Real
Estate Capital (HYPO Vereinsbank) to finance the construction of its
approximately 1.3 million square foot multi-use building at its 59th Street and
Lexington Avenue location. The estimated construction costs in excess of the
construction loan of approximately $140,000,000 will be provided by Alexander's.
The loan has an interest rate of LIBOR plus 2.5% and a term of forty-two months
plus two one-year extensions. Alexander's has received an initial funding of
$55,500,000 under the loan of which $25,000,000 was used to repay existing loans
and notes payable. Pursuant to this loan, Vornado has agreed to guarantee, among
other things, the lien free, timely completion of the construction of the
project and funding of project costs in excess of a stated budget, as defined in
the loan agreement, if not funded by Alexander's (the "Completion Guarantee").
The $6,300,000 estimated fee payable by Alexander's to the Company for the
Completion Guarantee is 1% of construction costs (as defined) and is payable at
the same time that the development fee is payable. In addition, if the Company
should advance any funds under the Completion Guarantee in excess of the
$26,000,000 currently available under the secured line of credit, interest on
those advances is at 15% per annum.

AGREEMENTS WITH ALEXANDER'S

Alexander's is managed by and its properties are leased by the Company,
pursuant to agreements with a one-year term expiring in March of each year which
are automatically renewable. The annual management fee payable to the Company by
Alexander's is equal to the sum of (i) $3,000,000, (ii) 3% of the gross income
from the Kings Plaza Mall, and (iii) 6% of development costs with minimum
guaranteed fees of $750,000 per annum.

The leasing agreement provides for the Company to generally receive a fee
of (i) 3% of sales proceeds and (ii) 3% of lease rent for the first ten years of
a lease term, 2% of lease rent for the eleventh through the twentieth years of a
lease term and 1% of lease rent for the twenty-first through thirtieth year of a
lease term, subject to the payment of rents by Alexander's tenants. Such amount
is receivable annually in an amount not to exceed $2,500,000 until the present
value of such installments (calculated at a discount rate of 9% per annum)
equals the amount that would have been paid at the time the transactions which
gave rise to the commissions occurred. At December 31, 2002, $410,000 is due to
the Company under this agreement.

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VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

ALEXANDER'S

OTHER

The Company constructed a $16.3 million community facility and low-income
residential housing development (the "30th Street Venture"), in order to receive
163,728 square feet of transferable development rights, generally referred to as
"air rights". The Company donated the building to a charitable organization. The
Company sold 106,796 square feet of these air rights to third parties at an
average price of $120 per square foot. An additional 28,821 square feet of air
rights was sold to Alexander's at a price of $120 per square foot for use at
Alexander's 59th Street development project (the "59th Street Project"). In each
case, the Company received cash in exchange for air rights. The Company
identified third party buyers for the remaining 28,111 square feet of air rights
related to the 30th Street Venture. These third party buyers wanted to use the
air rights for the development of two projects located in the general area of
86th Street which was not within the required geographical radius of the
construction site nor in the same Community Board as the low-income housing and
community facility project. The 30th Street Venture asked Alexander's to sell
28,111 square feet of the air rights it already owned to the third party buyers
(who could use them) and the 30th Street Venture would replace them with 28,111
square feet of air rights. In October 2002, the Company sold 28,111 square feet
of air rights to Alexander's for an aggregate sales price of $3,059,000 (an
average of $109 per square foot). Alexander's then sold an equal amount of air
rights to the third party buyers for an aggregate sales price of $3,339,000 (an
average of $119 per square foot).

On October 5, 2001, Alexander's entered into a ground lease for its
Paramus, N.J. property with IKEA Property, Inc. The lease has a 40-year term
with an option to purchase at the end of the 20th year for $75,000,000. Further,
Alexander's has obtained a $68,000,000 interest only, non-recourse mortgage loan
on the property from a third party lender. The interest rate on the debt is
5.92% with interest payable monthly until maturity in October 2011. The triple
net rent each year is the sum of $700,000 plus the amount of debt service on the
mortgage loan. If the purchase option is not exercised at the end of the 20th
year, the triple net rent for the last 20 years must include debt service
sufficient to fully amortize the $68,000,000 over the remaining 20 year lease
period.

On May 1, 2001, Alexander's entered into a lease agreement with Bloomberg
L.P., for approximately 695,000 square feet of office space. The initial term of
the lease is for 25 years, with one ten-year renewal option. Base annual net
rent is $34,529,000 in each of the first four years and $38,533,000 in the fifth
year with similar percentage increases each four years. There can be no
assurance that this project ultimately will be completed, completed on time or
completed for the budgeted amount. If the project is not completed on a timely
basis, the lease may be cancelled and significant penalties may apply.

On August 30, 2002, Alexander's sold its Third Avenue property, located in
the Bronx, New York, which resulted in a gain of $10,366,000. On January 12,
2001, Alexander's sold its Fordham Road property located in the Bronx, New York,
for $25,500,000, which resulted in a gain of $19,026,000. In addition,
Alexander's paid off the mortgage on its Fordham Road property at a discount,
which resulted in a gain from early extinguishment of debt of $3,534,000 in the
first quarter of 2001.

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VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

5. NOTES AND MORTGAGE LOANS RECEIVABLE

LOAN TO COMMONWEALTH ATLANTIC PROPERTIES ("CAPI")

On March 4, 1999 the Company made an additional $242,000,000 investment in
Charles E. Smith Commercial Realty L.P. ("CESCR") by contributing to CESCR the
land under certain CESCR office properties in Crystal City, Arlington, Virginia
and partnership interests in certain CESCR subsidiaries. The Company acquired
these assets from Commonwealth Atlantic Properties, Inc. ("CAPI"), an affiliate
of Lazard Freres Real Estate Investors L.L.C., for $242,000,000, immediately
prior to the contribution to CESCR. In addition, the Company acquired from CAPI
for $8 million the land under a Marriott Hotel located in Crystal City. The
Company paid the $250,000,000 purchase price to CAPI by issuing 4,998,000 of the
Company's Series E-1 convertible preferred units. In connection with these
transactions, the Company agreed to make a five-year $41,200,000 loan to CAPI
with interest at 8%, increasing to 9% ratably over the term. The loan is secured
by approximately 1.1 million of the Company's Series E-1 convertible preferred
units issued to CAPI. Each Series E-1 convertible preferred unit is convertible
into 1.1364 of the Company's common shares. The total value of these units, on
an as-converted basis, was $46,500,000 based on a closing price of $37.20 per
common share on December 31, 2002.

LOAN TO VORNADO OPERATING COMPANY ("VORNADO OPERATING")

At December 31, 2002, the amount outstanding under the revolving credit
agreement with Vornado Operating was $21,989,000. Vornado Operating has
disclosed that in the aggregate its investments do not, and for the foreseeable
future are not expected to, generate sufficient cash flow to pay all of its
debts and expenses. Further, Vornado Operating states that its only investee,
AmeriCold Logistics ("Tenant"), anticipates that its Landlord, a partnership 60%
owned by the Company and 40% owned by Crescent Real Estate Equities, will need
to restructure the leases between the Landlord and the Tenant to provide
additional cash flow to the Tenant (the Landlord has previously restructured the
leases to provide additional cash flow to the Tenant). Management anticipates a
further lease restructuring and the sale and/or financing of assets by AmeriCold
Logistics, and accordingly, Vornado Operating is expected to have a source to
repay the debt under this facility, which may be extended. Since January 1,
2002, the Company has not recognized interest income on the debt under this
facility. The Company has assessed the collectibility of this loan as of
December 31, 2002 and determined that it is not impaired.

DEARBORN CENTER MEZZANINE CONSTRUCTION LOAN

As of December 31, 2002, $60,758,000 is outstanding under the Dearborn
Center Mezzanine Construction Loan to a special purpose entity, of which
$23,392,000 has been funded by the Company, representing a 38.5% interest. The
special purpose entity's sole asset is Dearborn Center, a 1.5 million square
foot high-rise office tower under construction in Chicago. The entity is owned
by Prime Group Realty L.P. and another investor. The Company is a member of a
loan syndicate led by a money center bank. The proceeds of the loan are being
used to finance the construction, and are subordinate to a $225,000,000 first
mortgage. The loan is due January 21, 2004, three years from the date of the
initial draw, and provides for a 1-year extension at the borrower's option
(assuming net operating income at a specified level and a cash reserve
sufficient to fund interest for the extension period). The loan bears interest
at 12% per annum plus additional interest upon repayment ranging from a minimum
of 9.5% to 11.5%.

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VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

6. DEBT

Following is a summary of the Company's debt:

(Amounts in thousands)

-121-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

- ----------
(1) On January 11, 2001, the Company completed a $105,000 refinancing of its
888 Seventh Avenue office building. The loan bears interest at a fixed rate
of 6.63% and matures on February 1, 2006. A portion of the proceeds
received was used to repay the then existing mortgage of $55,000.
(2) On January 1, 2002, the Company acquired the remaining 66% of CESCR it did
not previously own. Prior to January 1, 2002, the Company's share of
CESCR's debt was included in Investments in and Advances to Partially-Owned
Entities. In connection with the acquisition, CESCR's fixed rate debt of
$1,282,780 was fair valued at $1,317,428 under purchase accounting.
(3) On September 23, 2002, the Company acquired the 50% of the Mall and the 25%
of Kmart's anchor store it did not already own. Prior to this date, the
Company accounted for its investment on the equity method and the Company's
share of the debt was included in Investments in and Advances to
Partially-Owned Entities.
(4) On July 11, 2001, the Company completed a $50,000 refinancing of its Market
Square Complex. The loan bears interest at a fixed rate of 7.95% per annum
and matures in July 2011. The proceeds received were used to repay the then
existing mortgage of $49,000.
(5) On October 16, 2001, the Company completed a $49,000 refinancing of its
Washington Design Center property. The loan bears interest at a fixed rate
of 6.95% and matures on October 16, 2011. A portion of the proceeds
received was used to repay the then existing mortgage of $23,000.
(6) On September 20, 2001, the Company completed a $50,000 mortgage financing,
cross collateralized by its eight industrial warehouse properties. The loan
bears interest at a fixed rate of 6.95% per annum and matures on October 1,
2011.
(7) On June 21, 2002, one of the lenders purchased the other participant's
interest in the loan. At the same time, the loan was extended for one year,
with certain modifications including, (i) making the risk of a loss due to
terrorism (as defined) not covered by insurance recourse to the Company and
(ii) the granting of two 1-year renewal options to the Company.
(8) On April 1, 2002, the Company increased its mortgage financing cross
collateralized by its 770 Broadway/595 Madison Avenue properties by
$115,000. On July 15, 2002, the Company repaid $84,841 with proceeds
received from a third party which resulted in a gain on transfer of
mortgages of $2,096. The proceeds of the loan are in a restricted mortgage
escrow account which bears interest at the same rate as the loan, and at
December 31, 2002 totals $153,659.
(9) On June 24, 2002, the Company completed an offering of $500,000 aggregate
principal amount of 5.625% senior unsecured notes due June 15, 2007.
Interest on the notes is payable semi-annually on June 15th and December
15th, commencing December 15, 2002. The notes were priced at 99.856% of
their face amount to yield 5.659%. The net proceeds of approximately
$496,300 were used to repay the mortgage payable on 350 North Orleans, Two
Park Avenue, the Merchandise Mart and Seven Skyline. On June 27, 2002, the
Company entered into interest rate swaps that effectively converted the
interest rate on the $500,000 senior unsecured notes due 2007 from a fixed
rate of 5.625% to a floating rate of LIBOR plus .7725%, based upon the
trailing 3 month LIBOR rate (2.15% if set on December 31, 2002). As a
result of the hedge accounting for the interest rate swap on the Company's
senior unsecured debt, the Company recorded a fair value adjustment of
$34,245, as of December 31, 2002 which is equal to the fair value of the
interest rate swap asset.

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VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The net carrying amount of properties collateralizing the notes and
mortgages amounted to $4,938,012,000 at December 31, 2002. As at December 31,
2002, the principal repayments for the next five years and thereafter are as
follows:

($ in thousands)

----------
(1) Includes $153,659 which is offset by an equivalent amount of
cash held in a restricted mortgage escrow account.

The Company's debt instruments, consisting of mortgage loans secured by its
properties (which are generally non-recourse to the Company), its revolving
credit agreement and its senior unsecured notes due 2007, contain customary
covenants requiring the Company to maintain insurance. There can be no assurance
that the lenders under these instruments will not take the position that an
exclusion from all risk insurance coverage for losses due to terrorist acts is a
breach of these debt instruments that allows the lenders to declare an event of
default and accelerate repayment of debt. The Company has received
correspondence from four lenders regarding terrorism insurance coverage, to
which the Company has responded. In these letters the lenders took the position
that under the agreements governing the loans provided by these lenders the
Company was required to maintain terrorism insurance on the properties securing
the various loans. The aggregate amount of borrowings under these loans as of
December 31, 2002 was approximately $770.4 million, and there was no additional
borrowing capacity. Subsequently, the Company obtained an aggregate of $360
million of separate coverage for "terrorist acts". To date, one of the lenders
has acknowledged to the Company that it will not raise any further questions
based on the Company's terrorism insurance coverage in place, and the other
three lenders have not raised any further questions regarding the Company's
insurance coverage. If lenders insist on greater coverage for these risks, it
could adversely affect the Company's ability to finance and/or refinance its
properties and to expand its portfolio.

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VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

7. PARTNERS' CAPITAL

- ----------
(1) Increases to $3.38 in March 2006.
(2) Holders have the right to require the Company to redeem the outstanding F-1
units for cash equal to the Liquidation Preference of $25.00 per unit.
(3) Convertible at the option of the holder for an equivalent amount of the
Company's preferred units and redeemable at the Company's option after the
5th anniversary of the date of issuance (ranging from December 1998 to
September 2001).
(4) Included in Class A units are 108,629,736 and 99,035,023 units owned by the
general partner at December 31, 2002 and 2001, respectively.
(5) Class A units are redeemable at the option of the holder for common shares
of beneficial interest in Vornado, on a one-for-one basis, or at the
Company's option for cash.

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VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

8. EMPLOYEES' SHARE OPTION PLAN

The Company grants various officers and employees incentive share options
and non-qualified options to purchase common shares of Vornado. Options granted
are at prices equal to 100% of the market price of Vornado's shares at the date
of grant. Shares vest on a graduated basis, becoming fully vested 36 months
after grant. All options expire ten years after grant. An equivalent number of
Class A units are issued when options are exercised.

The Plan also provides for the award of Stock Appreciation Rights,
Performance Shares and Restricted Stock, as defined. As of December 31, 2002,
there were 250,927 restricted shares or rights to receive restricted shares
outstanding, excluding 626,566 shares issued to the Company's President in
connection with his employment agreement.

In 2002 and prior years, the Company accounted for stock-based compensation
using the intrinsic value method. Accordingly, no stock-based compensation was
recognized in the Company's financial statements for these years. If
compensation cost for Plan awards had been determined based on fair value at the
grant dates, net income and income per Class A unit would have been reduced to
the pro-forma amounts below, for the years ended December 31, 2002, 2001, and
2000:

-125-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The fair value of each option grant is estimated on the date of grant using
an option-pricing model with the following weighted-average assumptions used for
grants in the periods ending December 31, 2002, 2001 and 2000.

A summary of the Plan's status and changes during the years then ended, is
presented below:

-126-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The following table summarizes information about options outstanding under
the Plan at December 31, 2002:

Shares available for future grant under the Plan at December 31, 2002 were
9,963,500, of which 2,500,000 are subject to shareholder approval.

9. RETIREMENT PLAN

In December 1997, benefits under the Company's Retirement Plan were frozen.
Prior to December 31, 1997, the Company's qualified plan covered all full-time
employees. The Plan provided annual pension benefits that were equal to 1% of
the employee's annual compensation for each year of participation. The funding
policy is in accordance with the minimum funding requirements of ERISA.

Pension expense includes the following components:

* Not applicable, as benefits under the Plan were frozen in December 1997.

-127-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The following table sets forth the Plan's funded status and the amount
recognized in the Company's balance sheet:

($ in thousands)

Plan assets are invested in U.S. government obligations and securities
backed by U.S. government guaranteed mortgages.

-128-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

10. LEASES

AS LESSOR:

The Company leases space to tenants in office buildings and shopping
centers under operating leases. Most of the leases provide for the payment of
fixed base rentals payable monthly in advance. Shopping center leases provide
for the pass-through to tenants of real estate taxes, insurance and maintenance.
Office building leases generally require the tenants to reimburse the Company
for operating costs and real estate taxes above their base year costs. Shopping
center leases also provide for the payment by the lessee of additional rent
based on a percentage of the tenants' sales. As of December 31, 2002, future
base rental revenue under non-cancelable operating leases, excluding rents for
leases with an original term of less than one year and rents resulting from the
exercise of renewal options, is as follows:

These amounts do not include rentals based on tenants' sales. These
percentage rents approximated $1,832,000, $2,157,000, and $4,825,000 for the
years ended December 31, 2002, 2001, and 2000.

FORMER BRADLEES LOCATIONS

The Company previously leased 18 locations to Bradlees which closed all of
its stores in February 2001. The Company has re-leased nine of the former
Bradlees locations; three to Kohl's, two each to Lowe's and Haynes Furniture,
and one each to Home Depot and Wal-Mart. Lowe's and Wal-Mart will construct
their own stores, subject to the receipt of various governmental approvals and
the relocation of existing tenants. In addition, the leases for four other
former Bradlees locations were assigned by Bradlees to other retailers. Of the
remaining five locations which are currently vacant, two of the leases are
guaranteed and the rent is being paid by Stop & Shop, a wholly-owned subsidiary
of Koninklijke Ahold NV (formerly Royal Ahold NV), an international food
retailer. Stop & Shop remains contingently liable for rent at a number of the
former Bradlees locations for the term of the Bradlees leases.

Property rentals for the year ended December 31, 2002, include $5,000,000
of additional rent which was re-allocated to the former Bradlees locations in
Marlton, Turnersville, Bensalem and Broomall and is payable by Stop & Shop,
pursuant to the Master Agreement and Guaranty, dated May 1, 1992. This amount is
in addition to all other rent guaranteed at the former Bradlees locations. On
January 8, 2003, Stop & Shop filed a complaint with the United States District
Court claiming the Company has no right to reallocate and therefore continue to
collect the $5,000,000 of annual rent from Stop & Shop because of the expiration
of the East Brunswick, Jersey City, Middletown, Union and Woodbridge leases to
which the $5,000,000 of additional rent was previously allocated. The additional
rent provision of the guaranty expires at the earliest in 2012. The Company
intends to vigorously contest Stop & Shop's position.

In February 2003, Koninklijke Ahold NV, parent of Stop & Shop, announced
that it overstated its 2002 and 2001 earnings by at least $500 million and is
under investigation by the U.S. Justice Department and Securities and Exchange
Commission. The Company cannot predict what effect, if any, this situation
involving Koninklijke Ahold NV may have on Stop & Shop's ability to satisfy its
obligation under the Bradlees guarantees and rent for existing Stop & Shop
leases aggregating approximately $10,500,000 million per annum.

-129-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Except for the U.S. Government, which accounted for 11.4% of the Company's
revenue, none of the Company's other tenants represented more than 10% of total
revenues for the year ended December 31, 2002.

AS LESSEE:
The Company is a tenant under operating leases for certain properties.
These leases will expire principally during the next thirty years. Future
minimum lease payments under operating leases at December 31, 2002, are as
follows:

Rent expense was $17,157,000, $15,433,000, and $15,248,000 for the years
ended December 31, 2002, 2001, and 2000.

-130-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

11. COMMITMENTS AND CONTINGENCIES

At December 31, 2002, the Company's $1,000,000,000 revolving credit
facility had a zero balance, and the Company utilized $9,112,000 of availability
under the facility for letters of credit and guarantees. In addition there were
$7,667,000 of other letters of credit outstanding.

In conjunction with the closing of Alexander's Lexington Avenue
construction loan on July 3, 2002, the Company agreed to guarantee, among other
things, the lien free, timely completion of the construction of the project and
funding of all project costs in excess of a stated budget, as defined in the
loan agreement, if not funded by Alexander's (see note 4 - Investments in and
Advances to Partially-Owned Entities).

Each of the Company's properties has been subjected to varying degrees of
environmental assessment at various times. The environmental assessments did not
reveal any material environmental contamination. However, there can be no
assurance that the identification of new areas of contamination, changes in the
extent or known scope of contamination, the discovery of additional sites, or
changes in cleanup requirements would not result in significant costs to the
Company.

The Company carries comprehensive liability and all risk property insurance
(fire, flood, extended coverage and rental loss insurance) with respect to its
assets. The Company's all risk insurance policies in effect before September 11,
2001 do not expressly exclude coverage for hostile acts, except for acts of war.
Since September 11, 2001, insurance companies have for the most part excluded
terrorist acts from coverage in all risk policies. The Company has generally
been unable to obtain all risk insurance which includes coverage for terrorist
acts for policies it has renewed since September 11, 2001, for each of its
businesses. In 2002, the Company obtained $200,000,000 of separate coverage for
terrorist acts for each of its New York City Office, Washington, D.C. Office,
Retail and Merchandise Mart businesses and $60,000,000 for its Temperature
Controlled Logistics business. Therefore, the Company is at risk for financial
loss in excess of these limits for terrorist acts (as defined), which loss could
be material.

The Company's debt instruments, consisting of mortgage loans secured by its
properties (which are generally non-recourse to the Company), its senior
unsecured notes due 2007 and its revolving credit agreement, contain customary
covenants requiring the Company to maintain insurance. There can be no assurance
that the lenders under these instruments will not take the position that an
exclusion from all risk insurance coverage for losses due to terrorist acts is a
breach of these debt instruments that allows the lenders to declare an event of
default and accelerate repayment of debt. In the second quarter of 2002, the
Company received correspondence from four lenders regarding terrorism insurance
coverage, which the Company has responded to. In these letters the lenders took
the position that under the agreements governing the loans provided by these
lenders the Company was required to maintain terrorism insurance on the
properties securing the various loans. The aggregate amount of borrowings under
these loans as of December 31, 2002 was approximately $770.4 million, and there
was no additional borrowing capacity. Subsequently, the Company obtained an
aggregate of $360 million of separate coverage for "terrorist acts". To date,
one of the lenders has acknowledged to the Company that it will not raise any
further questions based on the Company's terrorism insurance coverage in place,
and the other three lenders have not raised any further questions regarding the
Company's insurance coverage. If lenders insist on greater coverage for these
risks, it could adversely affect the Company's ability to finance and/or
refinance its properties and to expand its portfolio.

From time to time, the Company has disposed of substantial amounts of real
estate to third parties for which, as to certain properties, it remains
contingently liable for rent payments or mortgage indebtedness.

There are various legal actions against the Company in the ordinary course
of business. In the opinion of management, after consultation with legal
counsel, the outcome of such matters will not have a material effect on the
Company's financial condition, results of operations or cash flow.

The Company enters into agreements for the purchase and resale of U.S.
government obligations for periods of up to one week. The obligations purchased
under these agreements are held in safekeeping in the name of the Company by
various money center banks. The Company has the right to demand additional
collateral or return of these invested funds at any time the collateral value is
less than 102% of the invested funds plus any accrued earnings thereon. The
Company had $33,393,000 and $15,235,000 of cash invested in these agreements at
December 31, 2002 and 2001.

-131-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

12. RELATED PARTY TRANSACTIONS

LOAN AND COMPENSATION AGREEMENTS

On May 29, 2002, Mr. Roth replaced common shares of the Company securing
the Company's outstanding loan to Mr. Roth with options to purchase common
shares of the Company with a value of not less than two times the loan amount.
As a result of the decline in the value of the options, Mr. Roth supplemented
the collateral with cash and marketable securities.

At December 31, 2002, the loan due from Mr. Roth in accordance with his
employment arrangement was $13,122,500 ($4,704,500 of which is shown as a
reduction in partners' capital). The loan bears interest at 4.49 % per annum
(based on the applicable Federal rate) and matures in January 2006. The
Company also provided Mr. Roth with the right to draw up to $15,000,000 of
additional loans on a revolving basis. Each additional loan will bear
interest, payable quarterly, at the applicable Federal rate on the date the
loan is made and will mature on the sixth anniversary of the loan.

At December 31, 2002, loans due from Mr. Fascitelli, in accordance with his
employment agreement, aggregated $8,600,000. The loans which were scheduled to
mature in 2003 have been extended to 2006 in connection with the extension of
Mr. Fascitelli's employment agreement (discussed below), and bear interest,
payable quarterly at a weighted average interest rate of 3.97% (based on the
applicable Federal rate).

Pursuant to his 1996 employment agreement, Mr. Fascitelli became
entitled to a deferred payment consisting of $5 million in cash and a
convertible obligation payable November 30, 2001, at the Company's option, in
either 919,540 Company common shares or the cash equivalent of their
appreciated value, so long as such appreciated value is not less than $20
million. The Company delivered 919,540 shares to a rabbi trust upon execution
of the 1996 employment agreement. The Company accounted for the stock
compensation as a variable arrangement in accordance with Plan B of EITF No.
97-14 "Accounting for Deferred Compensation Arrangements Where Amounts Earned
Are Held in a Rabbi Trust and Invested" as the agreement permitted settlement
in either cash or common shares. Following the guidance in EITF 97-14, the
Company recorded changes in fair value of its compensation obligation with a
corresponding increase in the liability "Officer's Deferred Compensation".
Effective as of June 7, 2001, the payment date was deferred until November
30, 2004. Effective as of December 14, 2001, the payment to Mr. Fascitelli
was converted into an obligation to deliver a fixed number of shares (919,540
shares) establishing a measurement date for the Company's stock compensation
obligation; accordingly the Company ceased accounting for the Rabbi Trust
under Plan B of the EITF and began Plan A accounting. Under Plan A, the
accumulated liability representing the value of the shares on December 14,
2001, was reclassified as a component of Partners' Capital as "Deferred
compensation shares earned but not yet delivered." In addition, future
changes in the value of the shares are no longer recognized as additional
compensation expense. The fair value of this obligation was $34,207,000 at
December 31, 2002. The Company has reflected this liability as Deferred
Compensation Shares Not Yet Delivered in the Partners' Capital section of the
balance sheet. For the years ended December 31, 2001 and 2000, the Company
recognized approximately $4,744,000 and $3,733,000 of compensation expense of
which $2,612,000 and $1,968,000 represented the appreciation in value of the
shares in each period and $2,132,000 and $1,765,000 represented dividends
paid on the shares.

Effective January 1, 2002, the Company extended its employment agreement
with Mr. Fascitelli for a five-year period through December 31, 2006. Pursuant
to the extended employment agreement, Mr. Fascitelli is entitled to receive a
deferred payment on December 31, 2006 of 626,566 Vornado common shares which are
valued for compensation purposes at $27,500,000 (the value of the shares on
March 8, 2002, the date the extended employment agreement was executed). The
shares are being held in a rabbi trust for the benefit of Mr. Fascitelli and
vested 100% on December 31, 2002. The extended employment agreement does not
permit diversification, allows settlement of the deferred compensation
obligation by delivery of these shares only, and permits the deferred delivery
of these shares. The value of these shares is being amortized ratably over the
one year vesting period as compensation expense.

Pursuant to the Company's annual compensation review in February 2002 with
Joseph Macnow, the Company's Chief Financial Officer, the Compensation Committee
approved a $2,000,000 loan to Mr. Macnow, bearing interest at the applicable
federal rate of 4.65% per annum and due January 1, 2006. The loan, which was
funded on July 23, 2002, was made in conjunction with Mr. Macnow's June 2002
exercise of options to purchase 225,000 Vornado common shares. The loan is
collateralized by assets with a value of not less than two times the loan
amount. As a result of the decline in the value of the options, Mr. Macnow
supplemented the collateral with cash and marketable securities.

-132-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

One other executive officer of the Company has a loan outstanding pursuant
to an employment agreement totaling $1,500,000 at December 31, 2002. The loan
matures in April 2005 and bears interest at the applicable Federal rate provided
(4.5% at December 31, 2002).

TRANSACTIONS WITH AFFILIATES AND OFFICERS AND TRUSTEES OF THE COMPANY

ALEXANDER'S

The Company owns 33.1% of Alexander's. Mr. Roth and Mr. Fascitelli are
Officers and Directors of Alexander's and the Company provides various services
to Alexander's in accordance with management and leasing agreements. See Note 4
"Investments in Partially-Owned Entities" for further details.

The Company constructed a $16.3 million community facility and low-income
residential housing development (the "30th Street Venture"), in order to receive
163,728 square feet of transferable development rights, generally referred to as
"air rights". The Company donated the building to a charitable organization. The
Company sold 106,796 square feet of these air rights to third parties at an
average price of $120 per square foot. An additional 28,821 square feet of air
rights was purchased by Alexander's at a price of $120 per square foot for use
at Alexander's 59th Street development project (the "59th Street Project"). In
each case, the Company received cash in exchange for air rights. The Company
identified third party buyers for the remaining 28,111 square feet of air rights
related to the 30th Street Venture. These third party buyers wanted to use the
air rights for the development of two projects located in the general area of
86th Street which was not within the required geographical radius of the
construction site nor in the same Community Board as the low-income housing and
community facility project. The 30th Street Venture asked Alexander's to sell
28,111 square feet of the air rights it already owned to the third party buyers
(who could use them) and the 30th Street Venture would replace them with 28,111
square feet of air rights. In October 2002, the Company sold 28,111 square feet
of air rights to Alexander's for an aggregate purchase price of $3,059,000 (an
average of $109 per square foot). Alexander's then sold an equal amount of air
rights to the third party buyers for an aggregate purchase price of $3,339,000
(an average of $119 per square foot).

INTERSTATE PROPERTIES

The Company currently manages and leases the real estate assets of
Interstate Properties pursuant to a management agreement for which the Company
receives an annual fee equal to 4% of base rent and percentage rent and certain
other commissions. The management agreement has a term of one year and is
automatically renewable unless terminated by either of the parties on sixty
days' notice at the end of the term. Although the management agreement was not
negotiated at arm's length, the Company believes based upon comparable fees
charged by other real estate companies, that its terms are fair to the Company.
For the years ended December 31, 2002, 2001, and 2000, $1,450,000, $1,655,000,
and $1,418,000 of management fees were earned by the Company pursuant to the
management agreement.

BUILDING MAINTENANCE SERVICE COMPANY ("BMS")

On January 1, 2003, the Company acquired BMS, a company which provides
cleaning and related services primarily to the Company's Manhattan office
properties, for $13,000,000 in cash from the estate of Bernard Mendik and
certain other individuals including Mr. Greenbaum, an executive officer of the
Company. The Company paid BMS $53,024,000, $51,280,000, and $47,493,000 for the
years ended December 31, 2002, 2001 and 2000 for services rendered to the
Company's Manhattan office properties. Although the terms and conditions of the
contracts pursuant to which these services were provided were not negotiated at
arms length, the Company believes based upon comparable amounts charged to other
real estate companies that the terms and conditions of the contracts were fair
to the Company.

-133-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

VORNADO OPERATING COMPANY

In October 1998, Vornado Operating Company ("Vornado Operating") was spun
off from the Company in order to own assets that the Company could not itself
own and conduct activities that the Company could not itself conduct. The
Company granted Vornado Operating a $75,000,000 unsecured revolving credit
facility (the "Revolving Credit Agreement") which expires on December 31, 2004.
Borrowings under the Revolving Credit Agreement bear interest at LIBOR plus 3%.
The Company receives a commitment fee equal to 1% per annum on the average daily
unused portion of the facility. No amortization is required to be paid under the
Revolving Credit Agreement during its term. The Revolving Credit Agreement
prohibits Vornado Operating from incurring indebtedness to third parties (other
than certain purchase money debt and certain other exceptions) and prohibits
Vornado Operating from paying dividends.

Vornado Operating has disclosed that in the aggregate its investments do
not, and for the foreseeable future are not expected to, generate sufficient
cash flow to pay all of its debts and expenses. Further, Vornado Operating
states that its only investee, AmeriCold Logistics ("Tenant"), anticipates that
its Landlord, a partnership 60% owned by the Company and 40% owned by Crescent
Real Estate Equities, will need to restructure the leases between the Landlord
and the Tenant to provide additional cash flow to the Tenant (the Landlord has
previously restructured the leases to provide additional cash flow to the
Tenant). Management anticipates a further lease restructuring and the sale
and/or financing of assets by AmeriCold Logistics, and accordingly, Vornado
Operating is expected to have a source to repay the debt under this facility,
which may be extended. Since January 1, 2002, the Company has not recognized
interest income on the debt under this facility.

CARTHAGE, MISSOURI AND KANSAS CITY, KANSAS QUARRIES

On December 31, 2002, the Company and Crescent Real Estate Equities
formed a joint venture to acquire the Carthage, Missouri and Kansas City, Kansas
quarries from AmeriCold Logistics, the tenant of the Temperature Controlled
Logistics facilities for $20,000,000 in cash. The Company contributed cash of
$8,800,000 to the joint venture representing its 44% interest. AmeriCold
Logistics used the proceeds from the sale to repay a portion of a loan to
Vornado Operating. Vornado Operating then repaid $9,500,000 of the amount
outstanding under the Company's Revolving Credit Facility. On December 31, 2002,
the joint venture purchased $5,720,000 of trade receivables from AmeriCold
Logistics at a 2% discount, of which the Company's share was $2,464,000.

OTHER

The Company owns preferred securities in Capital Trust, Inc. ("Capital
Trust") totaling $29,212,000 at December 31, 2002. Mr. Roth, the Chairman and
Chief Executive Officer of Vornado Realty Trust, is a member of the Board of
Directors of Capital Trust.

On May 17, 2001, the Company sold its 50% interest in 570 Lexington Avenue
to the other venture partner, an entity controlled by the late Bernard Mendik, a
former trustee and executive officer of the Company, for $60,000,000, resulting
in a gain to the Company of $12,445,000. The sale was initiated by the Company's
partner and was based on a competitive bidding process handled by an independent
broker. The Company believes that the terms of the sale were at arm's length and
were fair to the Company.

During 2002 and 2001, the Company paid $147,000 and $136,000 for legal
services to a firm in which one of the Company's trustees is a member.

On January 1, 2001, the Company acquired the common stock of various
preferred stock affiliates which was owned by Officers and Trustees of the
Company and converted them to taxable REIT subsidiaries. The total acquisition
price was $5,155,000. The purchase price, which was the estimated fair value,
was determined by both independent appraisal and by reference to the
individuals' pro rata share of the earnings of the preferred stock affiliates
during the three-year period that these investments were held.

In connection with the Park Laurel condominium project, in 2001 the joint
venture accrued $5,779,000 of awards under the venture's incentive compensation
plan.

-134-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

13. INCOME PER CLASS A UNIT

The following table sets forth the computation of basic and diluted income
per Class A unit:

-135-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

15. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)

The following summary represents the results of operations for each quarter
in 2002, 2001 and 2000:

----------
(1) The total for the year may differ from the sum of the quarters as
a result of weighting.
(2) Restated to include the effect of SFAS 141 - Business
Combinations, for the amortization of above and below market
leases acquired in 2002. The effect of restatement on each of the
first three quarters on net income and net income per Class A unit
was $940 or $.02 per diluted Class A unit.

16. COSTS OF ACQUISITIONS AND DEVELOPMENT NOT CONSUMMATED

The Company has a 70% interest in a joint venture to develop an office
tower over the Port Authority Bus Terminal in New York City. Current market
conditions have resulted in the joint venture writing off $9,700,000 in the
fourth quarter of 2002, representing all pre-development costs capitalized to
date, of which the Company's share is $6,874,000.

In 2001, the Company was unable to reach a final agreement with the Port
Authority of NY & NJ to conclude a net lease of the World Trade Center.
Accordingly, the Company wrote-off costs of $5,223,000 primarily associated with
the World Trade Center.

-136-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

17. SEGMENT INFORMATION

The Company has four business segments: Office, Retail, Merchandise Mart
Properties and Temperature Controlled Logistics. Prior to 2001, income from the
Company's preferred stock affiliates ("PSAs") was included in income from
partially-owned entities. On January 1, 2001, the Company acquired the common
stock of its PSAs and converted these entities to taxable REIT subsidiaries.
Accordingly, the Hotel portion of the Hotel Pennsylvania and the management
companies (which provide services to the Company's business segments and operate
the Trade Show business of the Merchandise Mart division) have been consolidated
effective January 1, 2001. Amounts for the years ended December 31, 2000 have
been reclassified to give effect to the consolidation of these entities as if
consolidated as of January 1, 2000. In addition, the Company has revised
Adjusted EBITDA as previously reported for the year ended December 31, 2001 and
2000 to include income from the early extinguishment of debt of $1,170,000 in
2001 and expense from the early extinguishment of debt of $1,125,000 in 2000
because such items are no longer treated as extraordinary items in accordance
with Generally Accepted Accounting Principles.

See notes on page 140.

-137-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

See notes on page 140.

-138-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

----------
See notes on following page.

-139-

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTES:

(1) Adjusted EBITDA represents EBITDA adjusted for gains or losses on
sales of depreciable real estate, the effect of straight-lining of
rent escalations, amortization of acquired above and below market
leases and minority interest. Management considers Adjusted EBITDA a
supplemental measure for making decisions and assessing the
performance of its segments. Adjusted EBITDA should not be considered
a substitute for net income or a substitute for cash flow as a measure
of liquidity. Adjusted EBITDA is presented as a measure of "operating
performance" which enables the reader to identify trends from period
to period and may be used to compare "same store" operating
performance to other companies, as well as providing a measure for
determining funds available to service debt. Adjusted EBITDA may not
be comparable to similarly titled measures employed by other
companies.

(2) Adjusted EBITDA - Other is comprised of:

(3) Interest and debt expense, depreciation and amortization,
straight-lining of rents and gains on sale of real estate included in
the reconciliation of net income to EBITDA or Adjusted EBITDA reflects
amounts which are netted in income from partially-owned entities.

(4) Excludes rent not recognized of $19,348, $15,281 and $9,787 for the
years ended December 31, 2002, 2001 and 2000.

(5) Includes the reversal of $1,266 and $4,765 of expenses in 2001 and
2000 representing the non-cash appreciation in the value of shares
held in a rabbi trust in connection with a deferred compensation
arrangement for the Company's President.

-140-

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information relating to trustees of Vornado, the Company's general partner,
will be contained in a definitive Proxy Statement involving the election of
trustees under the caption "Election of Trustees", which Vornado will file
with the Securities and Exchange Commission pursuant to Regulation 14A under
the Securities Exchange Act of 1934 not later than 120 days after December
31, 2002, and such information is incorporated herein by reference.
Information relating to Executive Officers of Vornado appears at page 53 of
this Annual Report on Form 10-K. Also incorporated herein by reference is the
information under the caption ("Other Matters - 16(a) Beneficial Ownership")
of the Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

Information relating to executive compensation of Vornado, the Company's
general partner, will be contained in the Proxy Statement referred to above in
Item 10, "Directors and Executive Officers of the Registrant", under the
captions "Executive Compensation" and such information is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED UNITHOLDER MATTERS

Information relating to security ownership of certain beneficial owners
and management of Vornado, the Company's general partner, will be contained in
the Proxy Statement referred to in Item 10, "Directors and Executive Officers of
the Registrant", under the caption "Principal Security Holders" and such
information is incorporated herein by reference.

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information as of December 31, 2002, regarding
Vornado's equity compensation plans.

----------
(1) All of the shares remaining available for future issuance under plans
approved by the security holders may be issued as restricted stock
units or performance shares.
(2) Does not include common shares issuable in exchange for deferred stock
units pursuant to the compensation agreements described below under
the heading "Material Features of Equity Compensation Arrangements Not
Approved by Shareholders."

-141-

MATERIAL FEATURES OF EQUITY COMPENSATION ARRANGEMENTS NOT APPROVED BY
SHAREHOLDERS

The Company has awarded deferred stock units under individual arrangements
with two of its employees. Shareholder approval was not required for these
awards under the current rules of the New York Stock Exchange because the awards
were made as an inducement to these employees to enter into employment contracts
with the Company.

The Company awarded Sandeep Mathrani 23,798 deferred stock units pursuant
to an agreement dated as of March 4, 2002. Under this agreement, Mr. Mathrani's
deferred stock units vest over a three-year period and he is entitled to
dividend equivalent payments with regard to each vested unit. On March 4, 2005,
Mr. Mathrani will receive one common share for each of his deferred stock units,
subject to deferral at the election of Mr. Mathrani in accordance with the terms
of the agreement.

The Company awarded Melvyn Blum 148,148 deferred stock units pursuant to an
agreement dated as of December 29, 2000. Under this agreement, Mr. Blum's
deferred stock units vest over a five-year period and he is entitled to dividend
equivalent payments with regard to each vested unit. In addition, Mr. Blum's
agreement requires the Company to provide an effective registration statement
covering any common shares distributed to Mr. Blum. Pursuant to an amendment to
this agreement dated as of February 13, 2003, the Company agreed to pay Mr. Blum
an amount in cash equal to the market value of 88,889 common shares in respect
of the deferred units that had vested under his agreement as of such date. The
amendment also provides that Mr. Blum will receive one common share in respect
of each remaining deferred stock unit on the vesting date of such unit, subject
to deferral at the election of Mr. Blum in accordance with the terms of the
agreement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information relating to certain relationships and related transactions will
be contained in the Proxy Statement referred to in Item 10, "Directors and
Executive Officers of the Registrant", under the caption "Certain Relationships
and Related Transactions" and such information is incorporated herein by
reference.

ITEM 14. CONTROLS AND PROCEDURES

Within the 90-day period prior to the filing of this Annual Report on Form
10-K, an evaluation was carried out under the supervision and with the
participation of the management of Vornado Realty Trust, or sole general
partner, including the Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective. No significant changes were made in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

1. The consolidated financial statements are set forth in Item
8 of this Annual Report on Form 10-K.

The following financial statement schedules should be read in conjunction
with the financial statements included in Item 8 of this Annual Report on Form
10-K.

Schedules other than those listed above are omitted because they are not
applicable or the information required is included in the consolidated financial
statements or the notes thereto.

The following exhibits listed on the Exhibit Index are filed with this
Annual Report on Form 10-K.

EXHIBIT NO.
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors

(b) Reports on Form 8-K and Form 8-K/A - During the last quarter of the
period covered by this Annual Report on Form 10-K the Company did not file any
reports on Form 8-K.

-143-

SIGNATURES

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

VORNADO REALTY L.P.
(Registrant)

By: Vornado Realty Trust,
its General Partner

By: /s/ Joseph Macnow
Joseph Macnow, Executive Vice President-
Finance and Administration and
Chief Financial Officer

Date: March 25, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:

-144-

CERTIFICATION

I, Steven Roth, certify that:

1. I have reviewed this annual report on Form 10-K of Vornado Realty L.P.;

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

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

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

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

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

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

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

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

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

6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

March 25, 2003

/s/ Steven Roth
- --------------------------------------------
Steven Roth,
Chief Executive Officer of Vornado Realty Trust,
sole general partner of Vornado Realty L.P.

-145-

CERTIFICATION

I, Joseph Macnow, certify that:

1. I have reviewed this annual report on Form 10-K of Vornado Realty L.P.;

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

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

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

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

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

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

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

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

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

6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

March 25, 2003

/s/ Joseph Macnow
- --------------------------------------------
Joseph Macnow,
Chief Financial Officer of Vornado Realty Trust,
sole general partner of Vornado Realty L.P.

-146-

VORNADO REALTY L.P.
AND SUBSIDIARIES

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS

-147-

VORNADO REALTY L.P.
AND SUBSIDIARIES

SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002

(AMOUNTS IN THOUSANDS)

-148-

VORNADO REALTY L.P.
AND SUBSIDIARIES

SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002

(AMOUNTS IN THOUSANDS)

-149-

VORNADO REALTY L.P.
AND SUBSIDIARIES

SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002

(AMOUNTS IN THOUSANDS)

-150-

VORNADO REALTY L.P.
AND SUBSIDIARIES

SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002

(AMOUNTS IN THOUSANDS)

-151-

VORNADO REALTY L.P.
AND SUBSIDIARIES

SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002

(AMOUNTS IN THOUSANDS)

* These encumbrances are cross collateralized under a blanket mortgage in the
amount of $487,246 at December 31, 2002.

Notes:
(1) Initial cost is cost as of January 30, 1982 (the date on which Vornado
commenced real estate operations) unless acquired subsequent to that
date -- see Column H.
(2) The net basis of the company's assets and liabilities for tax purposes
is approximately $2,822,000 lower than the amount reported for
financial statement purposes.
(3) Date of original construction -- many properties have had substantial
renovation or additional construction -- see Column D.
(4) Buildings on these properties were demolished. As a result, the cost
of the buildings and improvements, net of accumulated depreciation,
were transferred to land. In addition, the cost of the land in Kearny
property is net of a $1,615 insurance recovery.

-152-

VORNADO REALTY L.P.
AND SUBSIDIARIES

SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION

(AMOUNTS IN THOUSANDS)

The following is a reconciliation of real estate assets and accumulated
depreciation:

-153-

EXHIBIT INDEX

- ----------
* Incorporated by reference.

-154-

- ----------
* Incorporated by reference.

-155-

- ----------
* Incorporated by reference.

-156-

- ----------
* Incorporated by reference.

-157-

- ----------
* Incorporated by reference.

-158-

- ----------
* Incorporated by reference.
** Management contract or compensatory plan.

-159-

- ----------
* Incorporated by reference.

-160-

- ----------
* Incorporated by reference.
** Management contract or compensatory plan.

-161-

- ----------
* Incorporated by reference.
** Management contract or compensatory plan.

-162-

- ----------
* Incorporated by reference.
** Management contract or compensatory plan.

-163-

- ----------
* Incorporated by reference.
** Management contract or compensatory plan.

-164-