Crescent Real Estate Equities Co (CEI) SEC Annual Report (10-K) for 2006

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)


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

For the fiscal year ended December 31, 2006


o		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 1-13038

CRESCENT REAL ESTATE EQUITIES COMPANY

(Exact name of registrant as specified in its charter)


TEXAS		52-1862813

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


777 Main Street, Suite 2100, Fort Worth, Texas		76102

(Address of principal executive offices)		(Zip code)

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

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


		Name of Each Exchange
Title of each class:		on Which Registered:
Common Shares of Beneficial Interest par value $0.01 per share		New York Stock Exchange
Series A Convertible Cumulative Preferred Shares of Beneficial Interest par value $0.01 per share		New York Stock Exchange
Series B Cumulative Redeemable Preferred Shares of Beneficial Interest par value $0.01 per share		New York Stock Exchange

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES ☑ NO o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

YES o NO ☑

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days.

YES ☑ NO o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☑ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o NO ☑

As of June 30, 2006, the aggregate market value of the 94,283,113 common shares held by non-affiliates of the registrant was approximately $1.8 billion.


Number of Common Shares outstanding as of March 5, 2007:			102,807,311
Number of Series A Preferred Shares outstanding as of March 5, 2007:			14,200,000
Number of Series B Preferred Shares outstanding as of March 5, 2007:			3,400,000

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement to be filed with the Securities and Exchange Commission for Registrant's 2007 Annual Meeting of Shareholders are incorporated by reference into Part III.

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	Page
PART I.

Item 1. Business		3
Item 1A. Risk Factors		12
Item 1B. Unresolved Staff Comments		24
Item 2. Properties		24
Item 3. Legal Proceedings		34
Item 4. Submission of Matters to a Vote of Security Holders		34

PART II.

Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities		35
Item 6. Selected Financial Data		38
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations		39
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		72
Item 8. Financial Statements and Supplementary Data		73
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		137
Item 9A. Controls and Procedures		137
Item 9B. Other Information		142

PART III.

Item 10. Trust Managers, Executive Officers and Corporate Governance		142
Item 11. Executive Compensation		142
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters		142
Item 13. Certain Relationships and Related Transactions, and Trust Manager Independence		142
Item 14. Principal Accountant Fees and Services		142

PART IV.

Item 15. Exhibits and Financial Statement Schedules		143
List of Subsdiaries
Consent of Ernst & Young LLP
Consent of Deloitte & Touche LLP
Certifications of CEO and CFO Pursuant to Section 302
Certifications of CEO and CFO Pursuant to Section 906

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PART I

Item 1. Business

References to "we," "us" or "our" refer to Crescent Real Estate Equities Company and, unless the context otherwise requires, Crescent Real Estate Equities Limited Partnership, which we refer to as our Operating Partnership, and our other direct and indirect subsidiaries. We conduct our business and operations through the Operating Partnership, our other subsidiaries and our joint ventures. References to "Crescent" refer to Crescent Real Estate Equities Company. The sole general partner of the Operating Partnership is Crescent Real Estate Equities, Ltd., a wholly-owned subsidiary of Crescent Real Estate Equities Company, which we refer to as the General Partner.

Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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 "plans," "intends," "estimates," "anticipates," "expects," "believes" or similar expressions in this 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 1A. Risk Factors" in this 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 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 .

General

We operate as a real estate investment trust, or REIT, for federal income tax purposes and provide management, leasing and development services for some of our properties.

At December 31, 2006, our assets and operations consisted of four investment segments:

	•		Office Segment;

	•		Resort Residential Development Segment;

	•		Resort/Hotel Segment; and

	•		Temperature-Controlled Logistics Segment.

Within these segments, we owned in whole or in part the following operating real estate assets, which we refer to as the Properties, as of December 31, 2006:

	•		Office Segment consisted of 71 office properties, which we refer to as the Office Properties, located in 26 metropolitan submarkets in eight states, with an aggregate of approximately 27.6 million net rentable square feet. Fifty-four of the Office Properties are wholly-owned and 17 are owned through joint ventures, one of which is consolidated in our financial statements contained in Item 8, "Financial Statements and Supplementary Data," and 16 of which are unconsolidated.

	•		Resort Residential Development Segment consisted of our ownership of common stock representing interests of 98% to 100% in four Resort Residential Development Corporations and two limited partnerships, which are consolidated. These Resort Residential Development Corporations, through partnership arrangements, owned, in whole or in part, 30 active and planned upscale resort residential development properties, which we refer to as the Resort Residential Development Properties.

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	•		Resort/Hotel Segment consisted of five luxury and destination fitness resorts and spas with a total of 949 rooms/guest nights and three upscale business-class hotel properties with a total of 1,376 rooms, which we refer to as the Resort/Hotel Properties. Five of the Resort/Hotel Properties are wholly-owned, one is owned through a joint venture that is consolidated and two are owned through joint ventures that are unconsolidated.

	•		Temperature-Controlled Logistics Segment consisted of our 31.7% interest in AmeriCold Realty Trust, or AmeriCold, a REIT. As of December 31, 2006, AmeriCold operated 104 facilities, of which 91 were wholly-owned or leased, one was partially-owned and 12 were managed for outside owners. The 92 owned or leased and partially-owned facilities, which we refer to as the Temperature-Controlled Logistics Properties, had an aggregate of approximately 497.8 million cubic feet (19.0 million square feet) of warehouse space. AmeriCold also owned one quarry and the related land.

See Note 3, "Segment Reporting," included in Item 8, "Financial Statements and Supplementary Data," for a table showing selected financial information for each of these investment segments for the three years ended December 31, 2006, 2005 and 2004, and total assets, consolidated property level financing, consolidated other liabilities and minority interests for each of these investment segments at December 31, 2006 and 2005.

See Note 1, "Organization and Basis of Presentation," included in Item 8, "Financial Statements and Supplementary Data," for a table that lists our principal subsidiaries and the properties that they own.

See Note 10, "Investments in Unconsolidated Companies," included in Item 8, "Financial Statements and Supplementary Data," for a table that lists our ownership in significant unconsolidated joint ventures and investments as of December 31, 2006.

Business Objectives and Strategies Overview

We are a REIT with assets and operations divided into four investment segments: Office, Resort Residential Development, Resort/Hotel and Temperature-Controlled Logistics. Our strategy has two key elements as outlined below.

First, we selectively invest in premier office properties in markets that offer attractive returns on invested capital. We may align ourselves with institutional partners to enhance our return on equity when compared to the returns we receive as a 100% owner. Where possible, we negotiate performance-based incentives on our joint ventures that allow for additional equity to be earned if return targets are exceeded. For example, we earned promoted interests on the sales of the Three Westlake and Four Westlake joint venture Office Properties in 2006. We currently hold 43% of our office portfolio in joint ventures.

We selectively develop new office properties where the opportunity exists for attractive returns. In August 2006, we completed, with JMI Realty, a 232,330 square-foot, three-building complex in San Diego, California and sold our interest in the property in December 2006 for a $10.4 million gain. We are also developing a 239,000 square-foot office building as an addition to the Hughes Center complex in Las Vegas, Nevada. We are co-developing with Hines a 267,000 square-foot office building in Irvine, California, and with Champion Partners, a 144,380 square-foot, two-building office complex in Austin, Texas.

Second, we invest in real estate businesses that offer returns equal to or superior to what we are able to achieve in our office investments. We develop and sell residential properties in resort locations primarily through Crescent Resort Development, Inc., with Harry Frampton and his East West Partners development team, with the most significant project in terms of future cash flow being our investment in Tahoe Mountain Resorts in California. This development encompasses more than 2,500 total lots and units, of which 532 have been sold, 73 are currently in inventory and over 1,950 are scheduled for development over the next 14 years, and is expected to generate in excess of $5.0 billion in sales. We view our resort residential developments as a business and believe that, beyond the net present value of existing projects, there is value in our strategic relationships with the development teams and our collective ability to identify and develop new projects. In addition, we sometimes serve as the primary developer, such as The Ritz-Carlton Phases I and II. Also, we provide mezzanine financing to other office, hotel and residential investors where we see attractive returns relative to owning the equity. We currently have approximately $124.3 million of mezzanine notes.

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In 2005, we also completed the recapitalization of our Canyon Ranch® investment. In addition to its wellness facilities in Tucson, Arizona and Lenox, Massachusetts and its Spa Club operation at the Venetian Resort in Las Vegas, Nevada, Canyon Ranch partners with developers to establish Canyon Ranch Living communities at which the focal point is a large, comprehensive wellness facility and earns fees for the licensing of the brand name to these communities, providing design and technical services, and the ongoing management of the facilities. One such development is under construction in Miami Beach and an agreement that will pave the way for the development of a Canyon Ranch Living community in Chicago, Illinois, and others, are under consideration or in negotiation.

During 2006, we conducted an extensive review of our strategic alternatives, and in late August received an offer to purchase certain assets. Our Board of Trust Managers established a special committee of independent trust managers to assist in its consideration of the strategic alternatives and to respond to the offer that was received. The Special Committee hired an independent investment banker and counsel to assist with its review. The Special Committee has rejected the offer received, and on November 1, 2006, instituted a formal review of our strategic alternatives.

On March 1, 2007, we announced that we had concluded the review of strategic alternatives first announced on November 1, 2006. Based on that review, we adopted a plan, which we refer to as the Strategic Plan, designed to simplify our business model by concentrating on our core office properties business.

Key elements of the Strategic Plan include:

	•		Sale of all resort and hotel assets. Properties to be sold include the Fairmont Sonoma Mission Inn & Spa ® , Ventana Inn & Spa in Big Sur, California, the Park Hyatt Beaver Creek Resort & Spa, and three business-class hotels.

	•		Sale of resort residential developments. Properties and assets to be sold include Crescent Resort Development and Desert Mountain Development Corporation.

	•		Opportunistic sale of office properties. Properties to be sold include virtually all suburban Dallas properties and all Austin properties, as well as our single assets in Phoenix, Arizona, and in Seattle, Washington.

	•		Reduction of general and administrative expenses by more than $17.0 million, or $0.14 per share. Implementation of savings began immediately on March 1, 2007 and is expected to be fully phased in by the end of 2007. We expect to take a charge of approximately $5.0 million for severance costs.

	•		Use of sales proceeds to retire debt . We plan to first use the proceeds from asset sales to retire debt. We expect that our balance sheet will be significantly strengthened and our cost of capital lowered, giving us capacity for growth.

	•		Alignment of dividend . We intend to align our dividend with industry-accepted pay-out ranges to allow for retention of capital for growth.

In addition to the above elements, we are considering alternatives for our interest in Canyon Ranch ® in conjunction with the founders of Canyon Ranch ® . We will communicate our dividend plans as we execute asset sales. After completing these dispositions, our remaining office portfolio is expected to consist of 22.6 million square feet, of which 11.7 million square feet, or 52%, will be owned in joint venture. Our effective ownership will be 14.0 million square feet.

Available Information

You can find our Web site on the Internet at www.crescent.com. We provide free of charge on our Web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after electronically filed with or furnished to the Securities and Exchange Commission.

Employees

As of March 5, 2007, we had approximately 748 employees. In connection with our Strategic Plan, the number of employees is expected to be reduced significantly by the end of 2007. None of these employees are covered by collective bargaining agreements. We consider our employee relations to be good.

Tax Status

We have elected to be taxed as a REIT under Sections 856 through 860 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, and operate in a manner intended to enable us to continue to qualify as a REIT. As a REIT, we generally will not be subject to corporate federal income tax on net income that we currently distribute to our shareholders, provided that we satisfy certain organizational and operational requirements including the requirement to distribute at least 90% of our REIT taxable income to our shareholders each year. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates. We are subject to certain state and local taxes.

We have elected to treat certain of our corporate subsidiaries as taxable REIT subsidiaries, each of which we refer to as a TRS. In general, a TRS may perform additional services for our tenants and may engage in any real estate or non-real estate business (except for the operation or management of health care facilities or lodging facilities or the provision to any person, under a franchise, license or otherwise, of rights to any brand name under which any lodging facility or health care facility is operated). A TRS is subject to corporate federal income tax.

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Environmental and Health and Safety Matters

We and our Properties are subject to a variety of federal, state and local environmental, health and safety laws, including:

	•		Comprehensive Environmental Response, Compensation, and Liability Act, as amended (CERCLA);

	•		Resource Conservation & Recovery Act;

	•		Clean Water Act;

	•		Clean Air Act;

	•		Toxic Substances Control Act; and

	•		Occupational Safety & Health Act.

The application of these laws to a specific property that we own will be dependent on a variety of property-specific circumstances, including the former uses of the property and the building materials used at each property. Under certain environmental laws, principally CERCLA and comparable state laws, a current or previous owner or operator of real estate may be required to investigate and clean up certain hazardous or toxic substances, asbestos-containing materials, or petroleum product releases at the property. They may also be held liable to a governmental entity or third parties for property damage and for investigation and clean up costs such parties incur in connection with the contamination, whether or not the owner or operator knew of, or was responsible for, the contamination. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. The owner or operator of a site also may be liable under certain environmental laws and common law to third parties for damages and injuries resulting from environmental contamination emanating from the site. Such costs or liabilities could exceed the value of the affected real estate. The presence of contamination or the failure to remediate contamination may adversely affect the owner's ability to sell or lease real estate or to borrow using the real estate as collateral.

Our compliance with existing environmental, health and safety laws has not had a material adverse effect on our financial condition or results of operations. To further protect our financial interests regarding environmental matters, we have in place a Pollution and Remediation Legal Liability insurance policy which will respond in the event of certain future environmental liabilities. Certain of our properties contain asbestos-containing building materials, or ACBM. Environmental law requires that ACBM be properly managed and maintained and may impose fines and penalties on building owners or operators for failure to comply with these requirements. For properties where ACBM have been identified or are suspected, an operations and maintenance plan has been prepared and implemented. If properties undergo major renovations or are demolished, certain environmental regulations are in place which specify the manner in which ACBM must be handled and disposed. We believe that we are compliant with current environmental regulations and that any ACBM have been appropriately contained.

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INDUSTRY SEGMENTS

Office Segment

Ownership Structure

As of December 31, 2006, we owned or had an interest in 71 Office Properties located in 26 metropolitan submarkets in eight states, with an aggregate of approximately 27.6 million net rentable square feet. As lessor, we have retained substantially all of the risks and benefits of ownership of the Office Properties and account for the leases of our 55 consolidated Office Properties as operating leases. Fifty-four of the Office Properties are wholly-owned and 17 are owned through joint ventures, one of which is consolidated and 16 of which are unconsolidated. Additionally, we provide management and leasing oversight services for all of our Office Properties.

Market Information

The Office Property portfolio reflects our strategy of investing in first-class assets within markets that have significant potential for long-term rental growth. Within our selected submarkets, we have focused on premier locations that management believes are able to attract and retain the highest quality tenants and command premium rents. We have sought new acquisitions that have strong economic returns based on in-place tenancy and/or strong value-creation potential given the market and our core competencies. Moreover, we have also sought assets with dominant positions within their markets and submarkets due to quality and/or location, which mitigates the risks of market volatility. Accordingly, management's investment strategy not only demands an acceptable current cash flow return on invested capital, but also considers cash flow growth prospects. We apply a well-defined leasing strategy in order to capture the potential revenue growth in our portfolio of Office Properties from occupancy gains and rental rate increases in the markets and the submarkets in which we have invested.

In selecting the Office Properties, we have analyzed demographic, economic and market data to identify metropolitan areas expected to enjoy significant long-term employment and office demand growth. The markets in which we are currently invested are projected to continue to exceed national employment and population growth rates, as illustrated in the following table. In addition, we consider these markets "demand-driven." Our office investment strategy also includes metropolitan regions with above national average economic expansion rates combined with significant office development supply constraints. Additionally, our investment strategy seeks geographic and regional economic diversification within the markets expected to experience excellent economic and office demand growth.

Our major office markets, which include Dallas, Houston, Austin, Denver, Miami and Las Vegas, currently enjoy rising employment and are anticipated to be among the leading metropolitan areas for population and employment growth over the next three years.

Projected Population Growth and Employment Growth for all Company Markets


	Population			Employment
	Growth			Growth
Metropolitan Statistical Area	2007-2009			2007-2009
United States		2.7	%		3.4	%
Atlanta, GA		6.2			6.0
Austin, TX		8.6			9.2
Colorado Springs, CO		4.2			5.7
Dallas, TX		6.1			6.1
Denver, CO		3.6			4.3
Fort Worth, TX		6.1			6.3
Houston, TX		6.0			6.2
Las Vegas, NV		10.9			10.1
Miami, FL		3.6			3.9
Orange County, CA		3.1			4.3
Phoenix, AZ		7.0			9.0
Seattle, WA		4.9			6.0


Source:		Moody's \| Economy.com, data represents total percentage change for years 2007, 2008 and 2009.

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Unemployment Rates for Company Markets


	As of December 31,
Market	2006			2005
United States		4.3	%		4.6	%
Texas		4.1			4.8
Dallas		4.0			4.6
Houston		4.0			5.1
Austin		3.2			3.9
Denver		3.9			4.5
Miami		3.5			3.6
Las Vegas		4.2			3.5


Source:		U.S. Bureau of Labor Statistics and Texas Workforce Commission. Not seasonally adjusted.

The performance of all of our office markets improved in 2006. Occupancy rose in all of our major markets with the exception of Las Vegas. All markets had positive net absorption, and Dallas, Houston, and Austin significantly outpaced 2005. Occupancy increases of 2.7 percentage points in Houston and 3.8 percentage points in Austin were particularly strong. Miami and Las Vegas remain very healthy markets even though gains slowed from the 2005 pace.

Office Market Absorption and Occupancy for Major Company Markets


	Economic Net				Economic Net
	Absorption (1)				Absorption (1)
	All Classes				Class A					Economic Occupancy (2)						Economic Occupancy (2)
	(in square feet)				(in square feet)					All Classes						Class A
Market	2006		2005		2006		2005			2006			2005			2006			2005
Dallas		3,514,000		549,000		2,707,000		1,250,000			78.3	%		77.5	%		82.6	%		80.9	%
Houston		5,814,000		1,007,000		4,443,000		(207,000	)		85.8			83.1			88.4			83.7
Austin		1,966,000		1,177,000		1,300,000		458,000			88.3			84.5			89.7			83.7
Denver		2,473,000		2,761,000		1,672,000		887,000			85.6			84.5			88.1			85.5
Miami		778,000		1,998,000		692,000		757,000			92.7			91.4			92.0			88.7
Las Vegas		900,000		2,068,000		241,000		305,000			89.8			91.5			92.6			91.9


Sources:		CoStar Group for non-medical and non-owner-occupied buildings greater than 15,000 square feet (Dallas, Houston, Austin, Denver and Miami); Grubb & Ellis Las Vegas (Las Vegas).

(1)		Economic net absorption is the change in leased space from one period to another.

(2)		Economic occupancy reflects the occupancy of all tenants paying rent.

One of the reasons for the improved occupancy in 2006 is that all of our major markets, except Dallas, have relatively low levels of Class A office construction and demand levels outpacing new supply. Dallas has an active development arena, about on par with demand levels. Most markets experienced increases in new supply delivered in 2006, and all of the major markets had much higher levels of space under construction at the end of 2006.

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Office Market Construction Activity for Major Company Markets


	Office Space				Office Space				Office Space Under
	Completions				Completions				Construction
(in square feet)	All Classes				Class A				2006
Market	2006		2005		2006		2005		All Classes		Class A
Dallas		2,759,000		649,000		1,699,000		215,000		3,087,000		2,596,000
Houston		1,377,000		970,000		850,000		192,000		2,514,000		889,000
Austin		378,000		384,000		148,000		-		1,247,000		807,000
Denver		1,677,000		454,000		596,000		-		803,000		292,000
Miami		369,000		588,000		255,000		36,000		3,077,000		1,170,000
Las Vegas		2,956,000		2,569,000		-		365,000		2,821,000		1,187,000


Sources:		CoStar Group (Dallas, Houston, Austin, Denver and Miami); Restrepo Consulting Group, LLC (Las Vegas).

Competition

Our Office Properties, primarily Class A properties located within the Southwest, individually compete against a wide range of property owners and developers, including property management companies and other REITs that offer space in similar classes of office properties (specifically Class A properties). A number of these owners and developers may own more than one property. The number and type of competing properties in a particular market or submarket could have a material effect on our ability to lease space and maintain or increase occupancy or rents in our existing Office Properties. We believe, however, that the quality services and individualized attention that we offer our tenants, together with our active preventive maintenance program and superior building locations within markets, enhance our ability to attract and retain tenants for our Office Properties. In addition, as of December 31, 2006, on a weighted average basis, we owned approximately 12% of the Class A office space in the 26 submarkets in which we owned Class A office properties. We believe that ownership of a significant percentage of office space in a particular market reduces property operating expenses, enhances our ability to attract and retain tenants and potentially results in increases in our net income.

Diversified Tenant Base

Our top ten tenants accounted for approximately 13.5% of our total Office Segment revenues as of December 31, 2006. The loss of major tenants could have a temporary adverse effect on our financial condition and results of operations until we are able to re-lease the space previously leased to these tenants. Based on rental revenues from office leases in effect as of December 31, 2006, no single tenant accounted for more than 2.5% of our total Office Segment revenues for 2006.

In June 2005, we entered into an agreement with our then largest office tenant, El Paso Energy Services Company and certain of its subsidiaries, which terminated El Paso's leases totaling 888,000 square feet at Greenway Plaza in Houston, Texas, effective December 31, 2007. Under the agreement, El Paso is required to pay us $65.0 million in termination fees in periodic installments through December 31, 2007, and $62.0 million in rent according to the original lease terms from July 1, 2005 through December 31, 2007. As of December 31, 2006, we have collected $35.0 million of the lease termination fee. For the years ended December 31, 2006 and 2005, we recognized $38.8 million and $8.5 million, respectively, in net termination fees, which includes accelerated termination fees and contractual full-service rents resulting from the re-lease of approximately 463,000 square feet. As of December 31, 2006, El Paso was current on all rent obligations.

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Resort Residential Development Segment

Ownership Structure

As of December 31, 2006, we owned equity interests of 98% to 100% in four Resort Residential Development Corporations and two limited partnerships which are consolidated. These Resort Residential Development Corporations, through partnership arrangements, owned in whole or in part 30 active and planned upscale resort residential development properties, which we refer to as the Resort Residential Development Properties. The partnerships, for the majority of which we are not the general partner, are responsible for the continued development and the day-to-day operations of the Resort Residential Development Properties.

Competition and Market Information

Our Resort Residential Development Properties compete against a variety of other housing alternatives in each of their respective areas. These alternatives include other planned developments, pre-existing single-family homes, condominiums and townhouses. These developments focus primarily on the buying power of aging baby boomers. Management believes that the properties owned by Crescent Resort Development Inc., or CRDI, and Desert Mountain Development Corporation, or Desert Mountain, representing our most significant investments in Resort Residential Development Properties, contain certain features that provide competitive advantages to these developments.

CRDI invests primarily in mountain resort residential real estate in Colorado and California, as well as in downtown Denver, Colorado. Management believes that the Properties owned by CRDI have limited direct competitors because of the projects' locations, unique product offerings, limited land availability and restricted development rights.

Desert Mountain, a luxury resort residential and recreational private community in Scottsdale, Arizona, offers six 18-hole Jack Nicklaus signature golf courses with adjacent clubhouses. Management believes Desert Mountain has few direct competitors due in part to the superior natural surroundings and the amenity package that Desert Mountain offers to its members. Sources of competition come from the resale market of existing lots and homes within Desert Mountain and from a few smaller projects in the area. In addition, future resort residential golf development in the Scottsdale area is limited due to the lack of water available for golf course use.

Resort residential development demand is highly dependent upon the national economy, home sales and, to a lesser extent, on mortgage interest rates. The national economy achieved healthy economic expansion in 2006 as a result of strong business growth, and mortgage rates rose only marginally (the 30-year average mortgage rate rose by 50 basis points in the first half of the year and then declined by the same in the second half). Nevertheless, the housing sector did slow down considerably. Our markets were somewhat impacted by the housing slowdown, but less than most primary housing markets. In general, we found that the volume of housing transactions declined in our markets, but the pricing held up well or improved. For example, in Eagle County, Colorado where a large CRDI resort development is located, sales volume fell 23% compared to 2005, but the average sales price climbed due to the rising percentage of high end sales in the area.

Resort/Hotel Segment

Ownership Structure

As of December 31, 2006, we owned or had an interest in five luxury and destination fitness resorts and spas and three upscale business-class hotel properties, which we refer to as the Resort/Hotel Properties. We hold one of the Resort/Hotel Properties, the Fairmont Sonoma Mission Inn & Spa, through a joint venture arrangement, pursuant to which we own an 80.1% interest in the limited liability company, which is consolidated, that owns the property. We hold two of the Resort/Hotel Properties, Canyon Ranch Tucson and Canyon Ranch Lenox, through an unconsolidated joint-venture arrangement, pursuant to which we own a 48% interest in the limited liability companies that own the properties. The remaining five Resort/Hotel Properties are wholly-owned.

Seven of the Resort/Hotel Properties are leased to taxable REIT subsidiaries that we own or in which we have an interest. The Omni Austin Hotel is leased to HCD Austin Corporation, an unrelated third party. Third-party operators manage all of the Resort/Hotel Properties.

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Market Information

Lodging demand is highly dependent upon the global economy and volume of business travel as well as leisure travel. The hospitality market has enjoyed three years of strong market recovery as measured by occupancy, room rates and revenue per available room, or RevPAR, (RevPAR is a combination of occupancy and room rates and is the chief measure of hotel market performance). In 2006, the national occupancy rate, as reported by Smith Travel Research, experienced a 0.3 percentage point increase to 63.4%, a 7.5% gain in RevPAR and a 7.0% rise in average daily room rates, or ADR. For the luxury section of the industry, the most comparable to our portfolio, hotel occupancy rose 1.2 percentage points to 71.4%, RevPAR climbed 11.7% and ADR increased 9.1% . New hotel construction is still very limited in the nation and in our markets, although it is rising. In 2006, the increase to total hotel supply in the United States was a low 0.6%. The luxury hotel inventory rose by 3.0%.

Competition

We believe that our luxury and destination fitness resorts and spas are unique properties due to location, concept and high replacement cost, all of which create barriers for competition to enter. However, the luxury and destination fitness resorts and spas do compete against business-class hotels or middle-market resorts in their geographic areas, as well as against luxury resorts nationwide and around the world. Our upscale business-class Resort/Hotel Properties in Denver, Austin and Houston are business and convention center hotels that compete against other business and convention center hotels.

Temperature-Controlled Logistics Segment

Ownership Structure

As of December 31, 2006, the Temperature-Controlled Logistics Segment consisted of our 31.7% interest in AmeriCold Realty Trust, or AmeriCold, a REIT, which is unconsolidated. AmeriCold operates 104 facilities, of which 91 are wholly-owned or leased, one is partially-owned and 12 are managed for outside owners. The 92 owned or leased facilities, which we refer to as the Temperature-Controlled Logistics Properties, have an aggregate of approximately 497.8 million cubic feet (19.0 million square feet) of warehouse space. AmeriCold also owns one quarry and the related land.

Business and Industry Information

AmeriCold provides the food industry with refrigerated warehousing, transportation management services and other logistical services. The Temperature-Controlled Logistics Properties consist of production, distribution and public facilities. In addition, AmeriCold manages facilities owned by its customers for which it earns fixed and incentive fees. Production facilities differ from distribution facilities in that they typically serve one or a small number of customers located nearby. These customers store large quantities of processed or partially processed products in the facility until they are further processed or shipped to the next stage of production or distribution. Distribution facilities primarily serve customers who store a wide variety of finished products to support shipment to end-users, such as food retailers and food service companies, in a specific geographic market. Public facilities generally serve the needs of local and regional customers under short-term agreements. Food manufacturers and processors use public facilities to store capacity overflow from their production facilities or warehouses. These facilities also provide a number of additional services such as blast freezing, import/export and labeling.

AmeriCold provides supply chain management solutions to food manufacturers and retailers who require multi-temperature storage, handling and distribution capability for their products. Service offerings include comprehensive transportation management, supply chain network modeling and optimization, consulting and grocery retail-based distribution strategies such as multi-vendor consolidation, direct-store delivery (DSD) and seasonal product distribution. AmeriCold's technology provides food manufacturers with real-time detailed inventory information via the Internet.

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AmeriCold's customers consist primarily of national, regional and local food manufacturers, distributors, retailers and food service organizations. A breakdown of AmeriCold's largest customers includes:


	Percentage of
	2006 Segment Revenue
H.J. Heinz Company		17.9	%
ConAgra Foods, Inc.		9.6
Altria Group Inc. (Kraft Foods)		5.7
Schwan Corp.		4.3
Tyson Foods, Inc.		4.1
General Mills, Inc.		3.5
Sara Lee Corp.		3.3
McCain Foods Limited		3.2
U.S. Government		3.1
Smithfield Companies Inc.		2.9
Wayne Farms LLC		2.6
Rich Products Corp.		2.4
Jack in the Box Inc.		2.3
J. R. Simplot Company		2.2
Other		32.9

Total		100.0	%

Competition

AmeriCold is the largest operator of temperature-controlled warehouse space in North America. As a result, AmeriCold does not have any competitors of comparable size. AmeriCold operates in an environment in which competition is national, regional and local in nature and in which the range of service, temperature-controlled logistics facilities, customer mix, service performance and price are the principal competitive factors.

Item 1A. Risk Factors

If we are unable to effectively implement the Strategic Plan, our business, financial condition, operating results and common share price could suffer.

The implementation of the Strategic Plan requires us to complete sales of numerous properties and businesses, and effect a substantial reduction in our general and administrative expenses, which will include a significant reduction in personnel. No assurance can be given that we will be able to fully implement the Strategic Plan, or that the implementation will not have an adverse effect on our operations or financial condition. If we fail to implement the Strategic Plan, or if the implementation is longer, more costly or otherwise less successful than projected, we could be subject to various adverse consequences, including, but not limited to, the following:

	•		we may face various disruptions to the operation of our business as a result of the substantial time and effort invested by our management in connection with the Strategic Plan, and may be unable to respond effectively to competitive pressures or take advantage of new business opportunities;

	•		our decision to implement the Strategic Plan may cause harm to relationships with our employees and/or may divert employee attention away from day-to-day operations of our business;

	•		our decision to implement the Strategic Plan requires cooperation of our strategic business partners, including our relationships with the management of Canyon Ranch and East West Partners;

	•		regardless of our ability to consummate the Strategic Plan, we would remain liable for significant costs relating thereto, including, among others, severance and retention payments, and accounting, legal and financial advisory expenses; and

	•		an announcement that we have abandoned or cannot fully implement the Strategic Plan could trigger a decline in our common share price to the extent that our share price reflects a market assumption that we will complete the Strategic Plan.

Our Strategic Plan calls for us to make substantial divestitures. We may be unable to make these divestitures on terms that are acceptable, or at all.

We anticipate making a number of divestitures of our hotel and resort properties, our non-core office properties and our resort and residential development business in accordance with our Strategic Plan. Real estate investments generally cannot be sold quickly. Our ability to do so on favorable terms may be limited by the availability of interested purchasers and internal demand on our resources. We, and our advisors, may not be able to identify purchasers and negotiate acceptable terms on a timely basis or at all. We may not be able to sell these properties for a gain relative to current net book value of such properties. To the extent we are unable to sell these properties for our book value, we may be required to take a non-cash impairment charge or loss on the sale, either of which would reduce our net income.

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Our failure to have an effective system of internal controls over financial reporting could hinder our ability to accurately or timely report our financial results, which could have an adverse effect on our business, results of operations or financial condition.

Although we have received an opinion from our independent registered public accounting firm, Ernst & Young LLP, that the financial statements included in this Annual Report on Form 10-K present fairly, in all material respects, in conformity with U.S. generally accepted accounting principles, our consolidated financial position, results of operations and cash flows for the periods indicated therein, our management concluded, as of December 31, 2006, that our internal control over financial reporting was not effective as a result of three incorrect accounting items, described further in Item 8, "Financial Statements and Supplementary Data", Note 1, Organization and Basis of Presentation, that constituted material weaknesses. These accounting items, which are highly complex and subject to interpretation, have since been corrected. You should note that any control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, and there can be no assurance that we will be able to maintain effective internal controls over financial reporting in the future. An ineffective control environment, if not remedied, could result in a misstatement of our financial statements that could cause a delay in periodic filings with the SEC and such delay could cause a violation of debt covenants.

We derive the substantial majority of our office rental revenues from geographically concentrated markets.

As of December 31, 2006, approximately 66% of our office portfolio, based on total net rentable square feet, was located in the metropolitan areas of Houston and Dallas, Texas. Due to our geographic concentration in these metropolitan areas, any deterioration in economic conditions in the Houston or Dallas metropolitan areas, or in other geographic markets in which we in the future may acquire substantial assets, could adversely affect our results of operations and our ability to make distributions to our shareholders and could decrease our cash flow. In addition, we compete for tenants based on rental rates, attractiveness and location of a property and quality of maintenance and management services. An increase in the supply of properties competitive with ours in these markets could have a material adverse effect on our ability to attract and retain tenants in these markets.

Our performance and value are subject to general risks associated with the real estate industry.

Our economic performance and the value of our real estate assets, and consequently the value of our investments, will be adversely affected if our Office, Resort Residential Development, Resort/Hotel and Temperature-Controlled Logistics Properties do not generate revenues sufficient to meet our operating expenses, including debt service and capital expenditures. Any reduction in the revenues that our properties generate will adversely affect our cash flow and ability to meet our obligations. As a real estate company, we are susceptible to the following real estate industry risks:

	•		downturns in the national, regional and local economic conditions where our properties are located;

	•		competition from other Office, Resort Residential Development, Resort/Hotel and Temperature-Controlled Logistics properties;

	•		adverse changes in local real estate market conditions, such as oversupply or reduction in demand for office space, luxury residences, Resort/Hotel space or Temperature-Controlled Logistics storage space;

	•		changes in tenant preferences that reduce the attractiveness of our properties to tenants;

	•		tenant defaults;

	•		zoning or other regulatory restrictions;

	•		decreases in market rental rates;

	•		costs associated with the need to periodically repair, renovate and re-lease space;

	•		increases in the cost of maintenance, insurance and other operating costs, including real estate taxes, associated with one or more properties, which may occur even when circumstances such as market factors and competition cause a reduction in revenues from one or more properties; and

	•		illiquidity of real estate investments, which may limit our ability to vary our portfolio promptly in response to changes in economic or other conditions.

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We depend on leasing office space to tenants on economically favorable terms and collecting rent from our tenants, who may not be able to pay.

Our financial results depend significantly on leasing space in our office properties to tenants on economically favorable terms. In addition, because a large portion of our income comes from the renting of real property, our income, funds available to pay debt and funds available for distribution to our shareholders will decrease if a significant number of our tenants cannot pay their rent. If a tenant does not pay its rent, we might not be able to enforce our rights as landlord without delays and might incur substantial legal costs.

A number of companies, including some of our 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 financial difficulties. Our leases generally do not contain restrictions designed to ensure the creditworthiness of our 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 our shareholders or the payment of our debt.

We maintain an allowance for doubtful accounts that is reviewed for adequacy by assessing such factors as the credit quality of our tenants, any delinquency in payment, historical trends and current economic conditions. If our assumptions regarding the collectibility of tenant accounts receivable prove incorrect, we could experience write-offs in excess of the allowance for doubtful accounts, which would result in a decrease in our earnings. Bad debt as a percentage of office rental revenue has averaged less than 0.3% over the last three years.

We may experience difficulty or delay in renewing leases or re-leasing space.

We derive most of our revenue in the form of rent received from our tenants. We are subject to the risks that, upon expiration, leases for space in our office properties may not be renewed, the space may not be re-leased, or the terms of renewal or re-lease, including the cost of required renovations or concessions to tenants, may be less favorable than current lease terms. In the event of any of these circumstances, our results of operations and our ability to meet our obligations could be adversely affected.

As of December 31, 2006, leases of office space for approximately 2.0 million, 2.3 million and 2.5 million square feet , representing approximately 8.4%, 9.7% and 10.4% of net rentable area , expire in 2007, 2008 and 2009, respectively. During these same three years , leases of approximately 22.0% of the net rentable area of our office properties in Dallas and approximately 31.5% of the net rentable area of our office properties in Houston expire.

Our results of operations depends on the ability of El Paso Energy to meet its obligations pursuant to its lease termination agreement with us.

	•		$65.0 million in termination fees in periodic installments through December 31, 2007 (of which $35.0 million has been received as of December 31, 2006, and is included in restricted cash in our Consolidated Balance Sheets as it is required to be escrowed with the lender); and

	•		$62.0 million in rent according to original contractual lease terms from July 1, 2005, through December 31, 2007 (of which $39.8 million has been received as of December 31, 2006).

If El Paso does not comply with the terms of the agreement, our revenues will decline, which will adversely affect our results of operations and reduce the cash available for distribution to our shareholders or the payment of our debt.

We may have limited flexibility in dealing with our jointly owned investments.

Our organizational documents do not limit the amount of funds that we may invest in properties and assets jointly with other persons or entities. As of December 31, 2006, approximately 43% of the net rentable area of our office properties was held jointly with other persons or entities. In addition, three of our five Resort/Hotel properties, all of our Resort Residential Development properties and our Temperature-Controlled Logistics properties were owned jointly.

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Joint ownership of properties may involve special risks, including the possibility that our partners or co-investors might:

	•		become bankrupt;

	•		have economic or other business interests or goals which are unlike or incompatible with our business interests or goals;

	•		be in a position to take action contrary to our suggestions or instructions, or in opposition to our policies or objectives (including actions that may be inconsistent with our REIT status); and

	•		have different objectives from us regarding the appropriate timing and pricing of any sale or refinancing of the properties.

Joint ownership also gives a third party the opportunity to influence the return we can achieve on some of our investments and may adversely affect our results of operations and our ability to meet our obligations. In addition, in many cases we do not control the timing or amount of distributions that we receive from the joint investment, and amounts otherwise available for distribution to us instead may be reinvested in the property or used for other costs and expenses of the joint operation.

We also have joint venture agreements that contain buy-sell clauses that could require us to buy or sell our interest at a time we do not deem favorable for financial or other reasons, including the availability of cash at such time and the impact of tax consequences resulting from any sale.

The management and leasing agreements under which we operate our Office Properties owned through joint ventures may be terminated after an initial period.

We generally manage the day-to-day operations of our 17 properties held through joint ventures pursuant to separate management and leasing agreements. Under these agreements we receive fees for management of the properties and leasing commissions. The management and leasing agreements may be terminated, after an initial period of one to five years, by our partners in the joint ventures. The termination of one or more of the management and leasing agreements would result in the loss of the management fees and leasing commissions payable under such agreement or agreements.

The performance of our Resort Residential Development Properties is affected by national, regional and local economic conditions.

Our Resort Residential Development Properties, which include Desert Mountain and CRDI properties, are generally targeted toward purchasers of high-end primary residences or seasonal secondary residences. As a result, the economic performance and value of these properties is particularly sensitive to changes in national, regional and local economic and market conditions. Economic downturns may discourage potential customers from purchasing new, larger primary residences or vacation or seasonal homes. In addition, other factors may affect the performance and value of a property adversely, including changes in laws and governmental regulations (including those governing usage, zoning and taxes), changes in interest rates (including the risk that increased interest rates may result in decreased sales of lots in any resort residential development property) and the availability to potential customers of financing. Adverse changes in any of these factors, each of which is beyond our control, could reduce the income that we receive from the properties, and adversely affect our ability to meet our obligations.

In many cases, we do not develop our Resort Residential Development Properties and are dependent on the developer of these properties.

Some of our Resort Residential Development Corporations co-own Resort Residential Development properties in partnership with third parties, which are the developers of the properties. Our partner for the majority of our Resort Residential Development properties is Harry Frampton and his East West Partners development team. Our income from the development and sale of these properties may be adversely affected if East West Partners fails to control costs and provide quality services and workmanship or if it fails to maintain a quality brand name. In addition, although we have entered into agreements with East West Partners that contain limited non-competition provisions, at certain times and upon certain conditions, East West Partners may develop, and in some cases own or invest in, Resort Residential Development properties that compete with our properties, which may result in conflicts of interest. As a result, East West Partners may in the future make decisions regarding competing properties that would not be in our best interests. While we believe that we could find a replacement for East West Partners, the loss of its services could have an adverse effect on the financial performance of our Resort Residential Development Segment.

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The revenues from our eight Resort/Hotel Properties depend on third-party operators that we do not control.

We own or have an interest in eight Resort/Hotel properties, seven of which are leased to our own subsidiaries. We currently lease the remaining Resort/Hotel property, the Omni Austin Hotel, to a third-party entity, HCD Austin Corporation. To maintain our status as a REIT, third-party property managers manage each of the eight Resort/Hotel properties. As a result, we are unable to directly implement strategic business decisions with respect to the operation and marketing of our Resort/Hotel properties, such as decisions about quality of accommodations, room-rate structure and the quality and scope of other amenities such as food and beverage facilities and similar matters. The amount of revenue that we receive from the Resort/Hotel properties is dependent on the ability of the property managers to maintain and increase the gross receipts from these properties. If the gross receipts of our Resort/Hotel Properties decline, our revenues will decrease as well, which could adversely affect our results of operations and reduce the amount of cash available to meet our obligations.

The revenues from our eight Resort/Hotel Properties are subject to risks associated with the hospitality industry.

The following factors, among others, are common to the Resort/Hotel industry, and may reduce the receipts generated by our Resort/Hotel Properties.

	•		Based on features such as access, location, quality of accommodations, room-rate structure and, to a lesser extent, the quality and scope of other amenities such as food and beverage facilities, our Resort/Hotel properties compete for guests with other resorts and hotels, a number of which have greater marketing and financial resources than our lessees or the Resort/Hotel property managers;

	•		If there is an increase in operating costs resulting from inflation or other factors, we or the property managers may not be able to offset the increase by increasing room rates;

	•		Our Resort/Hotel Properties are subject to fluctuating and seasonal demands for business travel and tourism; and

	•		Our Resort/Hotel Properties are subject to general and local economic conditions that may affect the demand for travel in general and other factors that are beyond our control, such as acts of terrorism.

Military actions against terrorists, new terrorist attacks (actual or threatened) and other political events could cause a lengthy period of uncertainty that might increase customer reluctance to travel and therefore adversely affect our results of operations and our ability to meet our obligations.

Development and construction risks could adversely affect our profitability.

We currently are developing, expanding or renovating some of our office or Resort/Hotel Properties. In addition, our Resort Residential Development Properties engage in the development of raw land and construction of single-family homes, condominiums, town homes and time-share units. These activities may be exposed to the following risks, each of which could adversely affect our results of operations and our ability to meet our obligations:

	•		We may be unable to obtain, or suffer delays in obtaining, necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations, which could result in increased costs or our abandonment of these activities;

	•		We may incur costs for development, expansion or renovation of a property which exceed our original estimates due to increased costs for materials or labor or other costs that were unexpected;

	•		We may not be able to obtain financing with favorable terms, which may make us unable to proceed with our development and other related activities on the schedule we originally planned or at all;

	•		We may be unable to complete construction and sale or lease-up of a lot, office property or resort residential development unit on schedule, which could result in increased debt service expense or construction costs;

	•		We may lease, rent or sell developed properties at below expected rental rates, room rates or unit prices; and

	•		Occupancy rates, rents or unit sales at newly completed properties may fluctuate depending on a number of factors, including market and economic conditions, and may result in our investment not being profitable.

Additionally, the time frame required for development, construction and lease-up of these properties means that we may have to wait a few years for a significant cash return. As a REIT, we are required to make cash

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distributions to our shareholders. If our cash flows from operations are not sufficient, we may be forced to borrow to fund these distributions, which could affect our ability to meet our other obligations.

Many real estate costs are fixed, even if income from our properties decreases.

Our financial results depend primarily on leasing space in our office properties to tenants, renting rooms at our resorts and hotels and successfully developing and selling lots, single-family homes, condominiums, town homes and time-share units at our residential development properties, in each case on terms favorable to us. Fixed costs associated with real estate investment, such as real estate taxes and insurance costs, generally do not decrease even when a property is not fully occupied, or the rate of sales at a project decreases, or other circumstances cause a reduction in income from the investment.

Payment of distributions on any class of our shares may be adversely affected by the level of our debt and the terms and number of our other shares that rank on an equal basis with or senior to that class of shares.

Payment of distributions due on our common shares is subordinated to distributions on our preferred shares, and distributions on both our common and our preferred shares will be subordinated to all of our existing and future debt and will be structurally subordinated to the payment of dividends and distributions on equity, if any, issued by our subsidiaries, including the Operating Partnership. In addition, we may issue additional shares of the same or another class or series of shares that rank on a parity with any class or series of our shares as to the payment of distributions and the amounts payable upon liquidation, dissolution or winding up of our business.

The amount of debt that we have and the restrictions imposed by that debt could adversely affect our business and our financial condition.

We have a substantial amount of debt. As of December 31, 2006, we had approximately $2.3 billion of consolidated debt outstanding, of which approximately $1.5 billion was secured by approximately 57% of our gross total assets.

Our organizational documents do not limit the level or amount of debt that we may incur. We do not have a policy limiting the ratio of our debt to our total capitalization or assets. The amount of debt we have and may have outstanding could have important consequences to you. For example, it could:

	•		make it difficult to satisfy our debt service requirements;

	•		prevent us from making distributions on our outstanding common shares and preferred shares;

	•		require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for operations, property acquisitions and other appropriate business opportunities that may arise in the future;

	•		require us to dedicate increased amounts of our cash flow from operations to payments on our variable rate, unhedged debt if interest rates rise;

	•		limit our flexibility in planning for, or reacting to, changes in our business and the factors that affect the profitability of our business;

	•		limit our ability to obtain additional financing, if we need it in the future for working capital, debt refinancing, capital expenditures, acquisitions, development or other general corporate purposes; and

	•		limit our flexibility in conducting our business, which may place us at a disadvantage compared to competitors with less debt.

Our ability to make scheduled payments of the principal of, to pay interest on, or to refinance, our indebtedness will depend on our future performance, which to a certain extent is subject to economic, financial, competitive and other factors beyond our control. There can be no assurance that our business will continue to generate sufficient cash flow from operations in the future to service our debt or meet our other cash needs. If we are unable to do so, we may be required to refinance all or a portion of our existing debt, or to sell assets or obtain additional financing. We cannot assure you that any such refinancing, sale of assets or additional financing would be possible on terms that we would find acceptable.

If we were to breach certain of our debt covenants, our lenders could require us to repay the debt immediately, and, if the debt is secured, could immediately take possession of the property securing the loan. In addition, if any other lender declared its loan in an amount in excess of $5.0 million due and payable as a result of a default, the holders of our public and private notes, along with the lenders under our credit facility and certain other lenders would be able to require that those debts be paid immediately. As a result, any default under our debt

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covenants could have an adverse effect on our financial condition, results of operations and our ability to meet our obligations.

We are obligated to comply with financial and other covenants in our debt that could restrict our operating activities, and the failure to comply could result in defaults that accelerate the payment under our debt.

Our secured debt generally contains customary covenants, including, among others, provisions:

	•		relating to the maintenance of the property securing the debt;

	•		relating to minimum acceptable insurance coverage on our properties;

	•		restricting our ability to pledge assets or create other liens;

	•		restricting our ability to incur additional debt;

	•		restricting our ability to amend or modify existing leases; and

	•		restricting our ability to enter into transactions with affiliates.

Our unsecured debt generally contains various restrictive covenants. The covenants in our unsecured debt include, among others, provisions restricting our ability to:

	•		incur additional debt;

	•		incur additional secured debt and subsidiary debt;

	•		make certain distributions, investments and other restricted payments, including distribution payments on our or our subsidiaries' outstanding common and preferred equity;

	•		limit the ability of restricted subsidiaries to make payments to us;

	•		enter into transactions with affiliates;

	•		create certain liens;

	•		enter into certain sale-leaseback transactions; and

	•		consolidate, merge or sell all or substantially all of our assets.

In addition, certain covenants in our bank facilities require us and our subsidiaries to maintain certain financial ratios, which include minimum debt service ratios, maximum leverage ratios, maximum distributions on preferred and common shares and, in the case of the Operating Partnership, a minimum tangible net worth limitation and a fixed charge coverage ratio. The indentures under which our senior unsecured debt have been issued require us to meet thresholds for a number of customary financial and other covenants, including maximum leverage ratios, minimum debt service coverage ratios, maximum secured debt as a percentage of total undepreciated assets, and ongoing maintenance of unencumbered assets, in order to incur additional debt.

Any of the covenants described in this risk factor may restrict our operations and our ability to pursue potentially advantageous business opportunities. Our failure to comply with these covenants could also result in an event of default that, if not cured or waived, could result in the acceleration of all or a substantial portion of our debt.

Many factors affect the trading price of our shares.

As with other publicly traded securities, the trading price of our shares will depend on a number of factors that change from time to time, including:

	•		our financial condition, performance and prospects;

	•		the market for similar securities;

	•		additional issuance of other classes or series of our shares, particularly preferred shares, or the issuance of debt securities;

	•		the amount of distributions paid on our common and preferred shares;

	•		an announcement regarding future dividend pay-out ranges on our common shares;

	•		general economic and financial market conditions; and

	•		prevailing interest rates, increases in which may have a negative effect on the trading value of our preferred shares.

Rising interest rates could adversely affect our cash flow and the market price of our outstanding debt securities and preferred shares.

Of our approximately $2.3 billion of debt outstanding as of December 31, 2006, approximately $479.6 million bears interest at variable rates and is unhedged. We also may borrow additional funds at variable interest rates in the future. To mitigate part of this risk, we have entered, and in the future may enter into other transactions to limit our exposure to rising interest rates. Increases in interest rates, or the loss of the benefits of any

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interest rate hedging arrangements, would increase our interest expense on our variable rate debt, which could adversely affect cash flow and our ability to service our debt and meet our obligations. In addition, an increase in market interest rates may lead purchasers of our securities to demand a higher annual yield, which could adversely affect the market price of our outstanding debt securities and preferred shares.

The level of our distributions to our common shareholders is highly dependent on the implementation of our Strategic Plan.

Lower occupancy levels, reduced rental rates, increased leasing costs and reduced revenues as a result of asset sales have had the effect of reducing our cash flow from operations. For year ended December 31, 2006, our cash flow from operations was insufficient to fully cover the distributions on our common shares. We funded this shortfall primarily with a combination of proceeds from asset sales and joint ventures and borrowings under our credit facility. While we believe that cash flow from operations will be sufficient to cover our normal operating expenses, interest payments on our debt, distributions on our preferred shares, non-revenue enhancing capital expenditures and revenue enhancing capital expenditures (including property improvements, tenant improvements and leasing commissions) in 2007, if our Board of Trustees continues to declare distributions on our common shares at current levels, we expect that our cash flow from operations will continue to be insufficient to fully cover distributions to our common shareholders in 2007. We intend to use proceeds from asset sales and joint ventures pursuant to our Strategic Plan to cover this shortfall. In addition, as we implement our Strategic Plan, we intend to align our dividend with industry-accepted pay-out ranges to allow for retention of capital for growth.

The terms of some of our debt may prevent us from paying distributions on our shares.

Some of our debt limits the Operating Partnership's ability to make some types of payments on equity and other distributions to us, which would limit our ability to make some types of payments, including payment of distributions on our shares, unless we meet certain financial tests or are required to make the distributions to maintain our qualification as a REIT. As a result, if we are unable to meet the applicable financial tests, we may not be able to pay distributions on our shares in one or more periods.

Mezzanine loans involve greater risks of loss than senior loans secured by income producing properties.

We invest in mezzanine loans that typically take the form of limited recourse loans made to a special purpose entity which is the direct or indirect parent of another special purpose entity owning a commercial real estate property. These mezzanine loans are secured by a pledge of the ownership interest in the property owner (or in an entity that directly or indirectly owns the property owner) and are thus structurally subordinate to a conventional first mortgage loan made to the property owner. We also offer mezzanine financing by taking a junior participating interest in a first mortgage loan.

These types of investments involve more risk than conventional senior mortgage lending directly secured by real property because these investments are structurally or contractually subordinated to the senior loans (or senior participations) and may become unsecured as a result of foreclosure by a senior lender on its collateral. While we will typically have cure rights with respect to loans senior to ours and the right to purchase these senior loans if in default, an exercise of this right may require our investing substantial additional capital on short notice to avoid loss of our initial investment.

In addition, mezzanine loans usually have higher loan-to-value ratios than conventional mortgage loans, resulting in less equity in the property and increasing the risk of loss of principal. Reflecting the risk of these loans, mezzanine borrowers are generally required to pay significantly higher rates of interest than conventional mortgage loan borrowers, increasing borrowers' cash-flow vulnerability. In the event of a bankruptcy of the borrower, we may not have full recourse to the borrower's assets, or the assets of the borrower may not be sufficient to satisfy our mezzanine loan. Additionally, we have no right to participate in the bankruptcy proceedings of any senior borrower (including the property owner). While we normally obtain recourse guaranties to protect against a voluntary bankruptcy or uncontested involuntary bankruptcy of the mezzanine borrower and the senior borrowers, these guaranties may not fully cover our debt.

As a result of any or all of the foregoing, we may not recover some or all of our mezzanine loan investment.

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The use of repurchase agreements to fund our mezzanine notes exposes us to risks.

We finance certain of our mezzanine loans through the use of warehouse facilities governed by repurchase agreements. We sell those mezzanine loans financed through a warehouse facility to a counterparty and agree to repurchase the same loans at a price equal to the original sales price plus periodic interest payments. Our repurchase agreement counterparties are commercial and investment banks. During the term of the repurchase agreement, we receive the principal and interest payments on the related mezzanine loan and pay interest to the counterparty. The use of this type of leverage to finance our mezzanine investments involves a number of risks, including the following:

If we are unable to renew our borrowings at favorable rates, it may force us to sell assets or find other financing and our profitability may be adversely affected . If we are not able to renew or replace maturing borrowings, we would be forced to sell some of our assets under possibly adverse market conditions, which may adversely affect our profitability.

A decline in the market value of the pool of assets in the warehouse facility may result in margin calls that may force us to sell assets under adverse market conditions. The market value of a pool of assets in a warehouse facility is valued by the lender in order to determine the advance rate, and to ensure adequate collateral secures the advances under the repurchase agreement. Repurchase agreements involve the risk that the market value of the securities sold by us may decline and that we will be required to post additional collateral, reduce the amount borrowed or suffer forced sales of the collateral. If forced sales were made at prices lower than the carrying value of the collateral, we would experience additional losses.

If a mezzanine loan defaults, we may not be able to fund the repurchase of the loan from our warehouse facility or the stabilization of the property by drawings under our credit facility which could cause liquidity concerns. If a default occurs under one of our mezzanine loans and, if financed under our warehouse facilities, it may need to be repurchased from the warehouse lender on two business days notice. If we do not have sufficient liquidity under our credit facility for funds to repurchase these loans, the counterparty may foreclose on all of the pledged assets in the facility. Even if, following a default on a mezzanine loan, we are able to foreclose on the collateral, which is a direct or indirect equity interest in an entity owning real property, we may need to commit substantial additional capital to stabilize the property and prevent defaults on other loans outstanding on the real property.

Our use of repurchase agreements to borrow money may give our lenders greater rights in the event of bankruptcy. Borrowings made under repurchase agreements may qualify for special treatment under the U.S. Bankruptcy Code, which may make it difficult for us to recover our pledged assets if a lender files for bankruptcy. In addition, if we were to file for bankruptcy, lenders under our repurchase agreements may be able to avoid the automatic stay provisions of the U.S. Bankruptcy Code and take possession of, and liquidate, the assets we pledged under these agreements without the delay associated with the automatic stay.

Environmental problems are possible and may be costly.

Under various federal, state and local laws, ordinances and regulations, we may be required to investigate and clean up certain hazardous or toxic substances released on or in properties we own or operate, and also may be required to pay other costs relating to hazardous or toxic substances. This liability may be imposed without regard to whether we knew about the release of these types of substances or were responsible for their release. The presence of contamination or the failure to remediate properly contamination at any of our properties may adversely affect our ability to sell or lease those properties or to borrow using those properties as collateral. The costs or liabilities could exceed the value of the affected real estate. We have not been notified by any governmental authority, however, of any material environmental non-compliance, liability or other environmental claim in connection with any of our properties, and we are not aware of any other environmental condition with respect to any of our properties that management believes would have a material adverse effect on our business, assets or results of operations taken as a whole.

The uses of any of our properties prior to our acquisition of the property and the building materials used at the property are among the property-specific factors that will affect how the environmental laws are applied to our properties. In general, before we purchased each of our properties, independent environmental consultants conducted Phase I environmental assessments, which generally do not involve invasive techniques such as soil or ground water sampling, and where indicated, based on the Phase I results, conducted Phase II environmental assessments which do involve this type of sampling. None of these assessments revealed any materially adverse environmental condition relating to any particular property not previously known to us. We believe that all of those

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previously known conditions either have been remediated or are in the process of being remediated at this time. There can be no assurance, however, that environmental liabilities have not developed since these environmental assessments were prepared or that future uses or conditions (including changes in applicable environmental laws and regulations) or new information about previously unidentified historical conditions will not result in the imposition of environmental liabilities. If we are subject to any material environmental liabilities, the liabilities could adversely affect our results of operations and our ability to meet our obligations.

Compliance with the Americans with Disabilities Act could be costly.

Under the Americans with Disabilities Act of 1990, all public accommodations and commercial facilities must meet certain federal requirements related to access and use by disabled persons. Compliance with the ADA requirements could involve removal of structural barriers from certain disabled persons' entrances. Other federal, state and local laws may require modifications to or restrict further renovations of our properties with respect to such accesses. Although we believe that our properties are substantially in compliance with present requirements, noncompliance with the ADA or related laws or regulations could result in the United States government's imposition of fines or in the award to private litigants of damages against us. Costs such as these, as well as the general costs of compliance with these laws or regulations, may adversely affect our ability to meet our obligations.

Our insurance coverage on our properties may be inadequate or unavailable, which may have a material adverse effect on our business.

We currently carry insurance on all of our properties, including insurance for property damage and third-party liability. We believe this coverage is of the type and amount customarily obtained for or by an owner of real property assets. We intend to obtain similar insurance coverage on subsequently acquired properties. Our existing primary insurance policies expire on November 1 annually.

In the future, we may be unable to renew or duplicate our current insurance coverage in adequate amounts or at reasonable prices. In addition, due to events such as the September 11, 2001 terrorist attacks and the recent hurricanes in Louisiana, Mississippi and Florida, insurance companies may no longer offer coverage against certain types of losses, such as losses due to terrorist acts, environmental liabilities, or other catastrophic events including named storms and floods, or, if offered, the expense of obtaining these types of insurance may increase dramatically or may not be justifiable. We therefore may cease to have insurance coverage against certain types of losses and/or there may be decreases in the limits of insurance available. In 2006, insurance companies lowered the amount of named storm insurance offered substantially, or, where offered, the expense increased dramatically. As a result, the amount of named storm coverage we obtained is significantly lower than 2005. If an uninsured loss or a loss in excess of our insured limits occurs, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property, but still remain obligated for any mortgage debt or other financial obligations related to the property. We cannot guarantee that material losses in excess of insurance proceeds will not occur in the future. If any of our properties were to experience a catastrophic loss, it could seriously disrupt our operations, delay revenue and result in large expenses to repair or rebuild the property. Also, due to inflation, changes in codes and ordinances, environmental considerations and other factors, it may not be feasible to use insurance proceeds to replace a building after it has been damaged or destroyed. Events such as these could adversely affect our results of operations and our ability to meet our obligations.

In addition, the debt we use to finance our properties includes covenants that require us to maintain designated levels of insurance coverage with insurers having minimum credit ratings. For example, certain of our loans secured by our coastal properties include requirements that we maintain minimum levels of named storm insurance. If we are unable to maintain insurance that meets the requirements of our lenders and if we are unable to amend or obtain waivers of those requirements, we could be in default under these loan agreements, which could have a material adverse effect on our business.

Competition for acquisitions and dispositions could adversely affect us.

We may compete for available investment opportunities with entities that have greater liquidity or financial resources. Several real estate companies may compete with us in seeking properties for acquisition or land for development and prospective tenants, guests or purchasers. This competition may increase the costs of any acquisitions that we make and adversely affect our results of operations and our ability to meet our obligations by:

•

reducing the number of suitable investment opportunities offered to us; and

•

increasing the bargaining power of property owners.

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We face similar competition with other real estate companies in our efforts to dispose of properties, which may result in lower sales prices. In addition, if a competitor succeeds in making an acquisition in a market in which our properties compete, ownership of that investment by a competitor may adversely affect our results of operations and our ability to meet our obligations by:

•

interfering with our ability to attract and retain tenants, guests or purchasers; and

•

adversely affecting our ability to minimize expenses of operation.

Acquisitions may fail to perform as expected.

We focus our investment strategy on investment opportunities and markets that offer attractive returns on our invested capital, primarily within our Office Property Segment, with a strategy of acquiring properties at a cost significantly below that which would be required to develop a comparable property. Acquisition of properties entails risks that include the following, any of which could adversely affect our results of operations and our ability to meet our obligations:

	•		We may not be able to identify suitable properties to acquire or may be unable to complete the acquisition of the properties we select for acquisition;

	•		We may not be able to integrate new acquisitions into our existing operations successfully;

	•		Our estimate of the costs of improving, repositioning or redeveloping an acquired property may prove to be too low, and, as a result, the property may fail to meet our estimates of the profitability of the property, either temporarily or for a longer time;

	•		Office properties, resorts or hotels we acquire may fail to achieve the occupancy and rental or room rates we anticipate at the time we make the decision to invest in the properties, resulting in lower profitability than we expected in analyzing the properties;

	•		Our pre-acquisition evaluation of the physical condition of each new investment may not detect certain defects or necessary repairs until after the property is acquired, which could significantly increase our total acquisition costs; and

	•		Our investigation of a property or building prior to its acquisition, and any representations we may receive from the seller, may fail to reveal various liabilities, which could effectively reduce the cash flow from the property or building, or increase our acquisition cost.

We are dependent on our key personnel whose continued service is not guaranteed.

Our officers, particularly John Goff and Dennis H. Alberts, are critical to the management and direction of our business, and to our implementation of our Strategic Plan. Our future success depends, in large part, on our ability to retain these officers, our Trust Managers and other capable management personnel. We do not presently have employment agreements with any of our executive officers. Although we believe that we will be able to attract and retain talented personnel and replace key personnel should the need arise, including by making retention payments in connection with the Strategic Plan, our inability to do so could disrupt our operations, including implementation of our Strategic Plan. We do not have key-man life insurance for our executive officers.

Provisions of our declaration of trust and bylaws could inhibit changes in control or discourage takeover attempts beneficial to our shareholders.

There are certain provisions of our declaration of trust and bylaws that may have the effect of discouraging, delaying or making more difficult a change in control and preventing the removal of incumbent directors. The existence of these provisions may discourage third-party bids and reduce any premiums paid to you for common shares that you own. These include a staggered Board of Trust Managers, which makes it more difficult for a third party to gain control of our Board, and the ownership limit described below. In addition, any future series of preferred shares may have certain voting provisions that could delay or prevent a change of control or other transaction that might involve a premium price or otherwise be beneficial to our security holders. The declaration of trust also establishes special requirements with respect to "business combinations," including certain issuances of equity securities, between us and an "interested shareholder," and mandates procedures for obtaining voting rights with respect to "control shares" acquired in a control share acquisition.

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Your ownership of our shares is subject to limitation for REIT tax purposes.

To remain qualified as a REIT for federal income tax purposes, not more than 50% in value of our outstanding shares may be owned, directly or indirectly, by five or fewer individuals (as defined in the federal income tax laws applicable to REITs) at any time during the last half of any taxable year, and our outstanding shares must be beneficially owned by 100 or more persons at least 335 days of a taxable year. To facilitate maintenance of our REIT qualification, our declaration of trust, subject to certain exceptions, prohibits ownership by any single shareholder of more than 8.0% of our issued and outstanding common shares or such greater percentage as established by our Board of Trust Managers, but in no event greater than 9.9%, or more than 9.9% of any class of our issued and outstanding preferred shares. We refer to these limits together as the "ownership limit." In addition, the declaration of trust prohibits ownership by Richard E. Rainwater, the Chairman of our Board of Trust Managers, together with certain of his affiliates or relatives, initially, of more than 8.0% and subsequently, of more than 9.5% of our issued and outstanding common shares. We refer to this limit as the "Rainwater ownership limit." Any transfer of shares may be null and void if it causes a person to violate the ownership limit, or Mr. Rainwater, together with his affiliates and relatives, to violate the Rainwater ownership limit, and the intended transferee or holder will acquire no rights in the shares. Those shares will automatically convert into excess shares, and the shareholder's rights to distributions and to vote will terminate. The shareholder would have the right to receive payment of the purchase price for such excess shares and certain distributions upon our liquidation. Excess shares will be subject to repurchase by us at our election. While the ownership limit and the Rainwater ownership limit help preserve our status as a REIT, they could also delay or prevent any person or small group of persons from acquiring, or attempting to acquire, control of us and, therefore, could adversely affect our shareholders' ability to realize a premium over the then-prevailing market price for their shares.

The number of shares available for future sale could adversely affect the market price of our publicly traded securities.

We have entered into various private placement transactions whereby units of limited partnership interests in our Operating Partnership were issued in exchange for properties or interests in properties. These units and interests are currently exchangeable for our common shares on the basis of two shares for each one unit or, at our option, an equivalent amount of cash. Upon exchange for our common shares, those common shares may be sold in the public market pursuant to registration rights. As of December 31, 2006, approximately 11,320,798 units were outstanding, 8,551,173 of which were exchangeable for 17,102,346 of our common shares or, at our option, an equivalent amount of cash. In addition, as of December 31, 2006, the Operating Partnership had outstanding options to acquire approximately 3,159,560 units, of which 482,408 were exercisable and exchangeable for 964,816 of our common shares or, at our option, an equivalent amount of cash. These options were exercisable at a weighted average exercise price of $34 per unit, or $17 per common share, with a weighted average remaining contractual life of five years. We have also reserved a number of common shares for issuance pursuant to our employee benefit plans, and such common shares will be available for sale from time to time. As of December 31, 2006, we had outstanding options to acquire approximately 4,562,950 common shares, of which approximately 4,266,446 options were exercisable at a weighted average exercise price of $20, with a weighted average remaining contractual life of three years. We cannot predict the effect that future sales of common shares, or the perception that such sales could occur, will have on the market prices of our equity securities.

Failure to qualify as a REIT would cause us to be taxed as a corporation, which would substantially reduce funds available for payment of distributions.

We intend to continue to operate in a manner that allows us to meet the requirements for qualification as a REIT under the Internal Revenue Code of 1986, as amended, which we refer to as the Code. A REIT generally is not taxed at the corporate level on income it distributes to its shareholders, as long as it distributes at least 90 percent of its income to its shareholders annually and satisfies certain other highly technical and complex requirements. Unlike many REITs, which tend to make only one or two types of real estate investments, we invest in a broad range of real estate products. Several of our investments also are more complicated than those of other REITs. As a result, we are likely to encounter a greater number of interpretative issues under the REIT qualification rules, and more issues which lack clear guidance, than are other REITs. We, as a matter of policy, consult with outside tax counsel in structuring our new investments in an effort to satisfy the REIT qualification rules.

We must meet the requirements of the Code in order to qualify as a REIT now and in the future, so it is possible that we will not continue to qualify as a REIT in the future. The laws and regulations governing federal income taxation are the subject of frequent review and amendment, and proposed or contemplated changes in the laws or regulations may affect our ability to qualify as a REIT and the manner in which we conduct our business. If we fail to qualify as a REIT for federal income tax purposes, we would not be allowed a deduction for distributions

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to our shareholders in computing taxable income and would be subject to federal income tax at regular corporate rates. In addition to these taxes, we may be subject to the federal alternative minimum tax. Unless we are entitled to relief under certain statutory provisions, we could not elect to be taxed as a REIT for four taxable years following any year during which we were first disqualified. Therefore, if we lose our REIT status, we could be required to pay significant income taxes, which would reduce our funds available for investments or for distributions to our shareholders. This would likely adversely affect the value of your investment in us. In addition, we would no longer be required by law or our operating agreements to make any distributions to our shareholders.

The lower tax rate on dividends from regular corporations may cause investors to prefer to hold stock in regular corporations instead of REITs.

On May 28, 2003, the President signed into law the Jobs and Growth Tax Relief Reconciliation Act of 2003, which we refer to as the Act. Under the Act, the current maximum tax rate on the long-term capital gains of non-corporate taxpayers is reduced to 15% for the tax years beginning on or before December 31, 2008. The Act also reduced the tax rate on "qualified dividend income" to the maximum capital gains rate. Because, as a REIT, we are not generally subject to tax on the portion of our REIT taxable income or capital gains distributed to our shareholders, our distributions are not generally eligible for this new tax rate on dividends. As a result, the non-capital-gain portion of our REIT distributions generally continues to be taxed at the higher tax rates applicable to ordinary income. Without further legislation, the maximum tax rate on long-term capital gains will revert to 20% in 2009, and dividends will again be subject to tax at ordinary rates.

Our results of operations and financial condition may be affected by a recently enacted law, which subjects us to the revised Texas franchise tax .

On May 18, 2006, the Texas Governor signed into law HB 3, a franchise tax reform bill. The revised franchise tax, which will first be due in May 2008 based on 2007 financial results, will be a tax based on taxable margin (commonly referred to as the "Margin Tax"). Unlike the existing franchise tax, the Margin Tax will be imposed on substantially all businesses that have statutory liability protection, including Texas real estate investment trusts and limited partnerships, such as the Company and the Operating Partnership. Payment of the Margin Tax may adversely affect our results of operations and financial condition.

Item 1B. Unresolved Staff Comments.

We have received no written comments from the Commission staff regarding our periodic or current reports in the 180 days preceding December 31, 2006, that remain unresolved.

Item 2. Properties

We consider all of our Properties to be in good condition, well-maintained, suitable and adequate to carry on our business.

Office Properties

As of December 31, 2006, we owned or had an interest in 71 Office Properties, located in 26 metropolitan submarkets in eight states, with an aggregate of approximately 27.6 million net rentable square feet. Our Office Properties are located primarily in the Houston and Dallas, Texas, metropolitan areas. As of December 31, 2006, our Office Properties in Houston and Dallas represented an aggregate of approximately 66% of our office portfolio based on total net rentable square feet (39% for Houston and 27% for Dallas).

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Office Property Table (1)

The following table shows, as of December 31, 2006, certain information about our Office Properties. In the table, CBD means central business district.


										Weighted
										Average Full-
										Service
										Rental Rate
							Economic			Per		Our
	No. of				Net Rentable		Occupancy			Occupied		Ownership
State, City, Property	Properties		Submarket	Year Completed	Area (Sq. Ft.)		Percentage			Sq. Ft. (2)		Percentage (1)
*Texas*
Dallas
The Crescent		2	Uptown/Turtle Creek	1985		1,299,522		98.5			34.49		24	%
Fountain Place		1	CBD	1986		1,200,266		91.2			21.38		24	%
Trammell Crow Center		1	CBD	1984		1,128,331		90.1			24.20		24	%
Stemmons Place		1	Stemmons Freeway	1983		634,381		66.4			16.82		100	%
Spectrum Center		1	Quorum/Bent Tree	1983		598,250		92.1			20.60		100	%
125 E. John Carpenter Freeway		1	Las Colinas	1982		446,031		88.3			20.78		100	%
The Aberdeen		1	Quorum/Bent Tree	1986		319,758		95.5			16.80		100	%
MacArthur Center I & II		1	Las Colinas	1982/1986		298,161		81.0			19.01		100	%
Stanford Corporate Centre		1	Quorum/Bent Tree	1985		274,684		88.5	(3)		21.29		100	%
Palisades Central II		1	Richardson	1985		240,935		95.3			20.83		100	%
3333 Lee Parkway		1	Uptown/Turtle Creek	1983		233,543		98.3			19.47		100	%
The Addison		1	Quorum/Bent Tree	1981		215,016		100.0			23.09		100	%
Palisades Central I		1	Richardson	1980		180,503		76.3			18.16		100	%
Greenway II		1	Richardson	1985		154,329		99.9			18.03		100	%
Greenway I & IA		2	Richardson	1983		146,704		74.7			16.64		100	%

Subtotal/Weighted Average		17				7,370,414		89.9	%	$	23.38		63	%


Fort Worth
Carter Burgess Plaza		1	CBD	1982		954,895		96.4	%	$	19.88		100	%


Houston
Greenway Plaza		10	Greenway Plaza	1969-1982		4,348,052		86.5	%	$	19.67		100	%
Houston Center		4	CBD	1974-1983		2,960,544		91.5			19.96		24	%
Post Oak Central		3	West Loop/Galleria	1974-1981		1,279,759		96.7			20.90		24	%
Fulbright Tower		1	CBD	1982		1,247,061		73.4	(3)		20.37		24	%
Five Post Oak Park		1	West Loop/Galleria	1986		567,396		88.9			19.04		30	%
BriarLake Plaza		1	Westchase	2000		502,410		87.3	(3)		24.61		30	%

Subtotal/Weighted Average		20				10,905,222		87.7	%	$	20.17		55	%


Austin
816 Congress		1	CBD	1984		433,024		77.3	%	$	20.81		100	%
301 Congress Avenue		1	CBD	1986		418,338		82.1			23.03		50	%
Austin Centre		1	CBD	1986		343,664		97.2			18.95		100	%
The Avallon		3	Northwest	1993/1997		318,217		93.1			20.50		100	%

Subtotal/Weighted Average		6				1,513,243		86.5	%	$	20.84		86	%


*Colorado*
Denver Johns Manville Plaza		1	CBD	1978		675,400		91.5	%	$	19.84		100	%
707 17th Street		1	CBD	1982		550,805		91.9			20.42		100	%
Regency Plaza		1	Denver Technology Center	1985		309,862		86.5	(3)		18.76		100	%
Peakview Tower		1	Greenwood Village	2001		264,149		91.4			24.05		100	%
55 Madison		1	Cherry Creek	1982		137,176		93.8			19.03		100	%
The Citadel		1	Cherry Creek	1987		130,652		92.4			24.94		100	%
44 Cook		1	Cherry Creek	1984		124,174		81.2			18.87		100	%

Subtotal/Weighted Average		7				2,192,218		90.5	%	$	20.56		100	%


Colorado Springs
Briargate Office and Research Center		1	Northeast	1988		260,046		87.3	%	$	18.16		100	%

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Office Property Table - Continued (1)


										Weighted
										Average Full-
										Service
										Rental Rate
							Economic			Per			Our
	No. of				Net Rentable		Occupancy			Occupied			Ownership
State, City, Property	Properties		Submarket	Year Completed	Area (Sq. Ft.)		Percentage			Sq. Ft. (2)			Percentage (1)
*Florida*
Miami
Miami Center		1	CBD	1983		782,211		93.2	% (3)	$	32.44			40	%
Datran Center		2	Kendall/Dadeland	1986/1988		476,412		94.3			29.01			100	%
The Alhambra		2	Coral Gables	1961/1987		325,005		92.0			30.47			100	%
The BAC - Colonnade Building		1	Coral Gables	1989		218,170		89.6			33.40			100	%

Subtotal/Weighted Average		6				1,801,798		92.8	%	$	31.28			74	%


*California*
Orange County
Dupont Centre		1	Airport Office Area	1986		250,782		97.3	%	$	27.41			100	%


*Nevada*
Las Vegas
Hughes Center		8	Central East	1986 - 1999		1,111,388		97.5	%	$	33.60			100	%


*Georgia*
Atlanta
One Buckhead Plaza		1	Buckhead	1987		461,669		91.3	%	$	30.48			35	%
One Live Oak		1	Buckhead	1981		201,488		88.7			24.24			100	%

Subtotal/Weighted Average		2				663,157		90.5	%	$	28.62			55	%


*Washington*
Seattle
Exchange Building		1	CBD	1930/2001		295,515		99.0	%	$	24.57			100	%


Total Office Portfolio Excluding Properties Not Stabilized		70				27,318,678		89.8	% (3)	$	22.78	(4)		68	%


PROPERTIES NOT STABILIZED

*Arizona*
Phoenix
Financial Plaza (5)		1	Mesa	1986		309,983		80.6	%	$	25.06			100	%


Total Office Portfolio		71				27,628,661								69	%


(1)		Office Property Table data is presented without adjustments to reflect our actual ownership percentage in joint ventured properties. Our actual ownership percentage in each property has been included for informational purposes.

(2)		Calculated in accordance with GAAP based on base rent payable as of December 31, 2006, giving effect to free rent and scheduled rent increases and including adjustments for expenses payable by or reimbursable from customers. The weighted average full-service rental rate for the El Paso lease (Greenway Plaza, Houston, Texas) reflects weighted average full-service rental rate over the shortened term (due to lease termination effective as of December 31, 2007) and excludes the impact of the net lease termination fee being amortized into revenue through December 31, 2007.

(3)		Leases have been executed at certain Office Properties but had not commenced as of December 31, 2006. If such leases had commenced as of December 31, 2006, the percent leased for Office Properties would have been 92.6%. Properties whose percent leased exceeds economic occupancy by 5 percentage points or more are as follows: Stanford Corporate Centre - 94.1%, Fullbright Tower - 91.7%, BriarLake Plaza - 97.3, Regency Plaza - 93.8% and Miami Center - 98.8%.

(4)		The weighted average full-service cash rental rate per square foot calculated based on base rent payable for Office Properties as of December 31, 2006, without giving effect to free rent and scheduled rent increases that are taken into consideration under GAAP but including adjustments for expenses paid by or reimbursed from customers is $22.55.

(5)		Property statistics exclude Financial Plaza (acquired January 2006). This office property will be included in portfolio statistics once stabilized. Stabilization is deemed to occur upon the earlier of (a) achieving 90% occupancy, (b) one year following the acquisition date or date placed in service (related to developments), or (c) two years following the acquisition date for properties which are being repositioned.

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The following table shows, as of December 31, 2006, the principal businesses conducted by the tenants at our Office Properties, based on tenants' applicable 2-digit NAICS Code. Based on rental revenues from office leases in effect as of December 31, 2006, no single tenant accounted for more than 2.5% of our total Office Segment revenues for 2006.


	Percent of
Industry Sector	Leased Sq. Ft.
Professional and Business Services		32	%
Financial Activities		27
Natural Resources, Mining, Construction		18
Information		5
Trade, Transportation, Utilities		4
Public Administration		4
Manufacturing		4
Leisure and Hospitality		4
Education and Health Services		1
Other Services		1

Total Leased		100	%

Aggregate Lease Expirations of Office Properties

The following tables show schedules of lease expirations for leases in place as of December 31, 2006, for our total Office Properties and for Dallas, Houston and Austin, Texas; Denver, Colorado; Miami, Florida and Las Vegas, Nevada, individually, for each of the 10 years beginning 2007.

Table of Contents

Total Office Portfolio


	Square						Square						Crescent's				% of			Annual
	Footage of			Signed			Footage of						Share of		Annual		Annual			Expiring		Number of
	Expiring			Renewals			Expiring			% of			Expiring		Full-Service		Full-			PSF		Customers
	Leases			and Relets			Leases			Square			Square Footage		Rent Under		Service			Full-		With
Year of Lease	(Before Renewals			of Expiring			(After Renewals			Footage			(After Renewals		Expiring		Rent			Service		Expiring
Expiration	and Relets) (1)			Leases (2)			and Relets) (1)			Expiring			and Relets)		Leases (3)		Expiring			Rent (3)		Leases
Q1 2007		1,529,501			(1,008,685	)		520,816			2.2			356,887	$	9,271,512		1.7		$	17.80		192
Q2 2007		676,701			(250,959	)		425,742			1.8			262,548		9,644,046		1.8			22.65		76
Q3 2007		401,377			(109,255	)		292,122			1.2			238,632		6,654,607		1.2			22.78		65
Q4 2007		597,153			173,046			770,199			3.2			426,478		18,354,467		3.3			23.83		63

Total 2007		3,204,732	(4)		(1,195,853	)		2,008,879	(4)		8.4	%		1,284,545	$	43,924,632		8.0	%	$	21.87		396

Q1 2008		1,123,514			(43,782	)		1,079,732			4.5			927,689	$	24,763,642		4.5		$	22.93		64
Q2 2008		458,494			(15,598	)		442,896			1.8			366,677		10,610,394		1.9			23.96		73
Q3 2008		422,896			(48,346	)		374,550			1.6			234,722		8,845,813		1.6			23.62		73
Q4 2008		479,305			(55,774	)		423,531			1.8			337,022		10,120,853		1.8			23.90		80

Total 2008		2,484,209			(163,500	)		2,320,709			9.7	%		1,866,110	$	54,340,702		9.8	%	$	23.42		290

2009		2,581,216			(73,993	)		2,507,223			10.4			1,714,536	$	58,488,832		10.6		$	23.33		301
2010		2,111,239			169,775			2,281,014			9.5			1,462,189		55,193,305		10.0			24.20		250
2011		2,232,042			44,709			2,276,751			9.4			1,633,071		56,202,831		10.2			24.69		235
2012		1,498,307			317,784			1,816,091			7.5			1,410,079		41,972,305		7.6			23.11		111
2013		1,942,939			129,854			2,072,793			8.6			1,563,202		47,746,034		8.7			23.03		93
2014		3,273,247			187,140			3,460,387			14.3			2,172,475		72,301,983		13.1			20.89		48
2015		1,720,570			29,531			1,750,101			7.3			1,281,374		40,189,224		7.3			22.96		60
2016		1,213,952			11,713			1,225,665			5.1			539,239		29,272,813		5.3			23.88		59
2017 and thereafter		1,853,425			542,840			2,396,265			9.8			1,450,899		50,610,106		9.4			21.12		36

Total		24,115,878			-			24,115,878	(5)		100.0	%		16,377,719	$	550,242,767		100.0	%	$	22.82		1,879


(1)		Square footage is presented without adjustment to reflect our actual ownership percentage in joint ventured properties.

(2)		Signed renewals and relets extend the expiration dates of in-place leases to the end of the renewed or relet term.

(3)		Calculated based on base rent payable under the lease for net rentable square feet expiring (after renewals and relets), giving effect to free rent and scheduled rent increases taken into account under GAAP and including adjustments for expenses payable by or reimbursable from customers based on current expense levels.

(4)		As of December 31, 2006 leases totaling 1,825,691 square feet (including relets and renewals of 1,195,853 square feet and new leases of 629,838 square feet) have been signed and will commence during 2007. These signed leases represent approximately 57% of gross square footage expiring during 2007. Expiring square footage includes 247,361 square feet of month-to-month leases.

(5)		Reconciliation of Occupied SF to Net Rentable Area:


	Occupied SF Per Above:					24,115,878
	Non-revenue Generating Space:					405,938

	Total Occupied Office SF:					24,521,816
	Total Vacant SF:					2,796,862

	Total Stabilized Office NRA:					27,318,678

Dallas Office Properties (1)


	Square						Square								% of		Annual
	Footage of			Signed			Footage of						Annual		Annual		Expiring		Number of
	Expiring			Renewals			Expiring			% of			Full-Service		Full-		PSF		Customers
	Leases			and Relets			Leases			Square			Rent Under		Service		Full-		With
Year of Lease	(Before Renewals			of Expiring			(After Renewals			Footage			Expiring		Rent		Service		Expiring
Expiration	and Relets) (1)			Leases (2)			and Relets) (1)			Expiring			Leases (3)		Expiring		Rent (3)		Leases
Q1 2007		458,157			(403,976	)		54,181			0.8		$	1,265,432		0.8	$	23.36		33
Q2 2007		106,697			(15,259	)		91,438			1.4			1,743,619		1.1		19.07		16
Q3 2007		87,395			(39,350	)		48,045			0.7			844,161		0.5		17.57		11
Q4 2007		76,704			316,377			393,081			6.0			9,398,804		6.1		23.91		9

Total 2007		728,953	(4)		(142,208	)		586,745	(4)		8.9	%	$	13,252,016		8.5	$	22.59		69

Q1 2008		144,242			1,388			145,630			2.2		$	3,596,739		2.3	$	24.70		13
Q2 2008		90,001			1,579			91,580			1.4			2,158,883		1.4		23.57		17
Q3 2008		79,743			(9,650	)		70,093			1.1			1,493,525		1.0		21.31		20
Q4 2008		110,721			(17,109	)		93,612			1.4			1,967,611		1.3		21.02		22

Total 2008		424,707			(23,792	)		400,915			6.1	%	$	9,216,758		6.0	$	22.99		72

2009		459,179			(1,411	)		457,768			7.0		$	11,745,207		7.6	$	25.66		54
2010		640,621			12,222			652,843			10.0			16,302,254		10.6		24.97		59
2011		469,972			(65,847	)		404,125			6.2			10,331,270		6.7		25.56		38
2012		340,047			46,526			386,573			5.9			8,461,619		5.5		21.89		32
2013		503,065			80,544			583,609			8.9			14,362,393		9.3		24.61		26
2014		630,572			7,922			638,494			9.7			14,440,942		9.4		22.62		13
2015		936,483			17,599			954,082			14.6			22,054,983		14.3		23.12		22
2016		204,867			-			204,867			3.1			5,809,013		3.8		28.36		14
2017 and thereafter		1,214,468			68,445			1,282,913			19.6			27,753,961		18.3		21.63		13

Total		6,552,934			-			6,552,934			100.0	%	$	153,730,416		100.0	$	23.46		412


(1)		Square footage is presented without adjustment to reflect our actual ownership percentage in joint ventured properties.

(2)		Signed renewals and relets extend the expiration dates of in-place leases to the end of the renewed or relet term.

(3)		Calculated based on base rent payable under the lease for net rentable square feet expiring (after renewals and relets), giving effect to free rent and scheduled rent increases taken into account under GAAP and including adjustments for expenses payable by or reimbursable from customers based on current expense levels.

(4)		As of December 31, 2006 leases totaling 201,481 square feet (including relets and renewals of 142,208 square feet and new leases of 59,273 square feet) have been signed and will commence during 2007. These signed leases represent approximately 28% of gross square footage expiring during 2007. Expiring square footage includes 14,018 square feet of month-to-month leases.

Table of Contents

Houston Office Properties


	Square						Square								% of			Annual
	Footage of			Signed			Footage of						Annual		Annual			Expiring		Number of
	Expiring			Renewals			Expiring			% of			Full-Service		Full-			PSF		Customers
	Leases			and Relets			Leases			Square			Rent Under		Service			Full-		With
Year of Lease	(Before Renwals			of Expiring			(After Renewals			Footage			Expiring		Rent			Service		Expiring
Expiration	and Relets) (1)			Leases (2)			and Relets) (1)			Expiring			Leases (3)		Expiring			Rent (3)		Leases
Q1 2007		789,946			(502,076	)		287,870			3.1		$	4,428,987		2.4		$	15.39		95
Q2 2007		343,944			(163,389	)		180,555			1.9			3,577,680		1.9			19.81		21
Q3 2007		176,376			(65,187	)		111,189			1.2			2,197,816		1.2			19.77		21
Q4 2007		173,733			(27,070	)		146,663			1.6			2,969,467		1.6			20.25		24

Total 2007		1,483,999	(4)		(757,722	)		726,277	(4)		7.8	%	$	13,173,950		7.1	%	$	18.14		161

Q1 2008		816,224			(20,516	)		795,708			8.4		$	17,387,899		9.2		$	21.85		24
Q2 2008		110,715			4,779			115,494			1.2			2,270,779		1.2			19.66		20
Q3 2008		217,357			(33,057	)		184,300			2.0			3,995,546		2.1			21.68		25
Q4 2008		180,656			(7,927	)		172,729			1.8			3,602,549		1.9			20.86		26

Total 2008		1,324,952			(56,721	)		1,268,231			13.4	%	$	27,256,773		14.4	%	$	21.49		95

2009		965,859			103			965,962			10.3		$	18,567,268		9.9		$	19.22		100
2010		548,711			107,150			655,861			7.0			12,697,593		6.7			19.36		80
2011		750,787			21,350			772,137			8.2			15,434,732		8.2			19.99		78
2012		601,136			138,685			739,821			7.9			15,697,606		8.3			21.22		36
2013		449,801			24,078			473,879			5.0			9,845,448		5.2			20.78		15
2014		1,829,951			102,963			1,932,914			20.5			38,897,610		20.6			20.12		16
2015		372,354			-			372,354			4.0			6,963,821		3.7			18.70		14
2016		723,018			11,713			734,731			7.8			15,736,199		8.4			21.42		28
2017 and thereafter		372,754			408,401			781,155			8.1			14,175,940		7.5			18.15		9

Total		9,423,322			-			9,423,322			100.0	%	$	188,446,940		100.0	%	$	20.00		632


(1)		Square footage is presented without adjustment to reflect our actual ownership percentage in joint ventured properties.

(2)		Signed renewals and relets extend the expiration dates of in-place leases to the end of the renewed or relet term.

(3)		Calculated based on base rent payable under the lease for net rentable square feet expiring (after renewals and relets), giving effect to free rent and scheduled rent increases taken into account under GAAP and including adjustments for expenses payable by or reimbursable from customers based on current expense levels.

(4)		As of December 31, 2006 leases totaling 1,202,482 square feet (including relets and renewals of 757,722 square feet and new leases of 444,760 square feet) have been signed and will commence during 2007. These signed leases represent approximately 81% of gross square footage expiring during 2007. Expiring square footage includes 144,374 square feet of month-to-month leases.

Austin Office Properties


	Square						Square								% of			Annual
	Footage of			Signed			Footage of						Annual		Annual			Expiring		Number of
	Expiring			Renewals			Expiring			% of			Full-Service		Full-			PSF		Customers
	Leases			and Relets			Leases			Square			Rent Under		Service			Full-		With
Year of Lease	(Before Renewals			of Expiring			(After Renewals			Footage			Expiring		Rent			Service		Expiring
Expiration	and Relets) (1)			Leases (2)			and Relets) (1)			Expiring			Leases (3)		Expiring			Rent (3)		Leases
Q1 2007		72,878			(17,512	)		55,366			4.3		$	706,809		2.6		$	12.77		13
Q2 2007		9,904			1,484			11,388			0.9			204,182		0.8			17.93		3
Q3 2007		12,386			(1,824	)		10,562			0.8			196,659		0.7			18.62		5
Q4 2007		23,405			-			23,405			1.8			494,407		1.8			21.12		6

Total 2007		118,573	(4)		(17,852	)		100,721	(4)		7.8	%	$	1,602,057		5.9	%	$	15.91		27

Q1 2008		10,313			-			10,313			0.8		$	160,125		0.6		$	15.53		5
Q2 2008		4,788			-			4,788			0.4			104,876		0.4			21.90		3
Q3 2008		20,061			-			20,061			1.6			491,386		1.8			24.49		8
Q4 2008		32,708			-			32,708			2.5			877,009		3.2			26.81		4

Total 2008		67,870			-			67,870			5.3	%	$	1,633,396		6.0	%	$	24.07		20

2009		199,764			(48,767	)		150,997			11.8		$	3,371,645		12.5		$	22.33		26
2010		163,394			16,028			179,422			14.0			3,422,001		12.7			19.07		26
2011		102,375			50,591			152,966			11.9			3,589,116		13.3			23.46		15
2012		67,188			-			67,188			5.2			1,501,417		5.6			22.35		8
2013		105,228			-			105,228			8.2			2,220,392		8.2			21.10		9
2014		253,980			-			253,980			19.8			5,517,181		20.4			21.72		4
2015		129,488			-			129,488			10.1			2,610,609		9.7			20.16		10
2016		67,509			-			67,509			5.3			1,288,715		4.8			19.09		3
2017 and thereafter		9,434			-			9,434			0.6			247,413		0.9			26.23		1

Total		1,284,803			-			1,284,803			100.0	%	$	27,003,942		100.0	%	$	21.02		149


(1)		Square footage is presented without adjustment to reflect our actual ownership percentage in joint ventured properties.

(2)		Signed renewals and relets extend the expiration dates of in-place leases to the end of the renewed or relet term.

(3)		Calculated based on base rent payable under the lease for net rentable square feet expiring (after renewals and relets), giving effect to free rent and scheduled rent increases taken into account under GAAP and including adjustments for expenses payable by or reimbursable from customers based on current expense levels.

(4)		As of December 31, 2006 leases totaling 38,127 square feet (including relets and renewals of 17,852 square feet and new leases of 20,275 square feet) have been signed and will commence during 2007. These signed leases represent approximately 32% of gross square footage expiring during 2007. Expiring square footage includes 35,417 square feet of month-to-month leases.

Table of Contents

Denver Office Properties


	Square						Square								% of			Annual
	Footage of			Signed			Footage of						Annual		Annual			Expiring		Number of
	Expiring			Renewals			Expiring			% of			Full-Service		Full-			PSF		Customers
	Leases			and Relets			Leases			Square			Rent Under		Service			Full-		With
Year of Lease	(Before Renewals			of Expiring			(After Renewals			Footage			Expiring		Rent			Service		Expiring
Expiration	and Relets) (1)			Leases (2)			and Relets) (1)			Expiring			Leases (3)		Expiring			Rent (3)		Leases
Q1 2007		64,250			(34,159	)		30,091			1.5		$	507,542		1.2		$	16.87		13
Q2 2007		18,646			(5,993	)		12,653			0.6			300,929		0.7			23.78		4
Q3 2007		16,298			549			16,847			0.9			328,868		0.8			19.52		3
Q4 2007		14,214			(7,955	)		6,259			0.3			134,015		0.3			21.41		2

Total 2007		113,408	(4)		(47,558	)		65,850	(4)		3.3	%	$	1,271,354		3.0	%	$	19.31		22

Q1 2008		46,161			(23,079	)		23,082			1.2		$	528,713		1.3		$	22.91		6
Q2 2008		132,980			(3,877	)		129,103			6.6			2,956,407		7.2			22.90		6
Q3 2008		18,610			-			18,610			0.9			396,545		1.0			21.31		3
Q4 2008		12,700			(2,978	)		9,722			0.5			220,596		0.5			22.69		4

Total 2008		210,451			(29,934	)		180,517			9.2	%	$	4,102,261		10.0	%	$	22.73		19

2009		234,658			(52,720	)		181,938			9.2		$	3,729,509		9.1		$	20.50		26
2010		198,027			20,537			218,564			11.1			4,810,970		11.8			22.01		18
2011		200,877			7,615			208,492			10.6			4,562,349		11.1			21.88		22
2012		180,482			83,980			264,462			13.4			5,995,876		14.7			22.67		12
2013		160,969			(57,190	)		103,779			5.3			2,138,630		5.2			20.61		9
2014		444,840			73,210			518,050			26.3			10,368,492		25.3			20.01		5
2015		18,637			-			18,637			0.9			372,567		0.9			19.99		3
2016		64,075			-			64,075			3.3			1,073,124		2.6			16.75		3
2017 and thereafter		144,050			2,060			146,110			7.4			2,498,672		6.3			17.10		5

Total		1,970,474			-			1,970,474			100.0	%	$	40,923,804		100.0	%	$	20.77		144


(1)		Square footage is presented without adjustment to reflect our actual ownership percentage in joint ventured properties.

(2)		Signed renewals and relets extend the expiration dates of in-place leases to the end of the renewed or relet term.

(3)		Calculated based on base rent payable under the lease for net rentable square feet expiring (after renewals and relets), giving effect to free rent and scheduled rent increases taken into account under GAAP and including adjustments for expenses payable by or reimbursable from customers based on current expense levels.

(4)		As of December 31, 2006 new leases totaling 88,007 square feet (including relets and renewals of 47,558 square feet and new leases of 40,449 square feet) have been signed and will commence during 2007. These signed leases represent approximately 78% of gross square footage expiring during 2007. Expiring square footage includes 6,751 square feet of month-to-month leases.

Miami Office Properties


	Square						Square								% of			Annual
	Footage of			Signed			Footage of						Annual		Annual			Expiring		Number of
	Expiring			Renewals			Expiring			% of			Full-Service		Full-			PSF		Customers
	Leases			and Relets			Leases			Square			Rent Under		Service			Full-		With
Year of Lease	(Before Renewals			of Expiring			(After Renewals			Footage			Expiring		Rent			Service		Expiring
Expiration	and Relets) (1)			Leases (2)			and Relets) (1)			Expiring			Leases (3)		Expiring			Rent (3)		Leases
Q1 2007		71,586			(18,295	)		53,291			3.2		$	1,419,646		2.7		$	26.64		22
Q2 2007		86,478			(9,610	)		76,868			4.6			2,415,668		4.6			31.43		20
Q3 2007		23,791			-			23,791			1.4			678,535		1.3			28.52		8
Q4 2007		47,727			(22,905	)		24,822			1.5			643,332		1.2			25.92		3

Total 2007		229,582	(4)		(50,810	)		178,772	(4)		10.7	%	$	5,157,181		9.8	%	$	28.85		53

Q1 2008		18,764			(1,249	)		17,515			1.1		$	555,165		1.1		$	31.70		5
Q2 2008		29,853			5,995			35,848			2.2			1,120,978		2.1			31.27		9
Q3 2008		21,544			-			21,544			1.3			664,396		1.3			30.84		6
Q4 2008		61,354			(11,114	)		50,240			3.0			1,480,178		2.8			29.46		13

Total 2008		131,515			(6,368	)		125,147			7.6	%	$	3,820,717		7.3	%	$	30.53		33

2009		338,219			(6,043	)		332,176			20.0		$	9,882,868		18.8		$	29.75		40
2010		279,776			2,072			281,848			17.0			9,137,800		17.4			32.42		25
2011		147,857			16,049			163,906			9.9			5,298,991		10.1			32.33		23
2012		98,434			5,524			103,958			6.3			3,629,533		6.9			34.91		7
2013		85,113			2,000			87,113			5.3			2,774,422		5.3			31.85		11
2014		36,952			-			36,952			2.2			1,054,130		2.0			28.53		2
2015		110,242			11,932			122,174			7.4			3,995,035		7.6			32.70		4
2016		108,226			-			108,226			6.5			3,805,138		7.3			35.16		7
2017 and thereafter		92,440			25,644			118,084			7.1			3,909,838		7.5			33.11		6

Total		1,658,356			-			1,658,356			100.0	%	$	52,465,653		100.0	%	$	31.64		211


(1)		Square footage is presented without adjustment to reflect our actual ownership percentage in joint ventured properties.

(2)		Signed renewals and relets extend the expiration dates of in-place leases to the end of the renewed or relet term.

(3)		Calculated based on base rent payable under the lease for net rentable square feet expiring (after renewals and relets), giving effect to free rent and scheduled rent increases taken into account under GAAP and including adjustments for expenses payable by or reimbursable from customers based on current expense levels.

(4)		As of December 31, 2006 leases totaling 99,189 square feet (including relets and renewals of 50,810 square feet and new leases of 48,379 square feet) have been signed and will commence during 2007. These signed leases represent approximately 43% of gross square footage expiring during 2007. Expiring square footage includes 25,936 square feet of month-to-month leases.

Table of Contents

Las Vegas Office Properties


	Square						Square								%of			Annual
	Footage of			Signed			Footage of						Annual		Annual			Expiring		Number of
	Expiring			Renewals			Expiring			%of			Full-Service		Full-			PSF		Customers
	Leases			and Relets			Leases			Square			Rent Under		Service			Full-		With
Year of Lease	(Before Renewals			of Expiring			(After Renewals			Footage			Expiring		Rent			Service		Expiring
Expiration	and Relets) (1)			Leases (2)			and Relets) (1)			Expiring			Leases (3)		Expiring			Rent (3)		Leases
Q1 2007		33,578			(12,051	)		21,527			2.0		$	608,101		1.7		$	28.25		4
Q2 2007		38,769			(29,392	)		9,377			0.9			267,854		0.7			28.56		2
Q3 2007		55,483			-			55,483			5.2			1,695,604		4.7			30.56		9
Q4 2007		58,908			(10,426	)		48,482			4.5			1,580,136		4.3			32.59		10

Total 2007		186,738	(4)		(51,869	)		134,869	(4)		12.6	%	$	4,151,695		11.4	%	$	30.78		25

Q1 2008		56,474			1,659			58,133			5.4		$	1,821,333		5.0		$	31.33		3
Q2 2008		35,795			-			35,795			3.3			1,203,659		3.3			33.63		7
Q3 2008		15,505			-			15,505			1.4			487,676		1.3			31.45		4
Q4 2008		56,048			-			56,048			5.2			1,756,564		4.8			31.34		6

Total 2008		163,822			1,659			165,481			15.3	%	$	5,269,232		14.4	%	$	31.84		20

2009		165,447			977			166,424			15.5		$	5,469,670		15.0		$	32.87		21
2010		107,440			2,757			110,197			10.2			3,676,593		10.1			33.36		15
2011		259,486			-			259,486			24.1			9,350,976		25.7			36.04		27
2012		35,380			21,119			56,499			5.2			2,018,546		5.5			35.73		3
2013		62,581			-			62,581			5.8			2,207,007		6.1			35.27		7
2014		19,295			-			19,295			1.8			605,642		1.7			31.39		2
2015		43,116			-			43,116			4.0			1,373,599		3.8			31.86		1
2016		33,533			-			33,533			3.1			1,268,591		3.5			37.83		2
2017 and thereafter		-			25,357			25,357			2.4			1,029,356		2.8			40.59		-

Total		1,076,838			-			1,076,838			100.0	%	$	36,420,907		100.0	%	$	33.82		123


(1)		Square footage is presented without adjustment to reflect our actual ownership percentage in joint ventured properties.

(2)		Signed renewals and relets extend the expiration dates of in-place leases to the end of the renewed or relet term.

(3)		Calculated based on base rent payable under the lease for net rentable square feet expiring (after renewals and relets), giving effect to free rent and scheduled rent increases taken into account under GAAP and including adjustments for expenses payable by or reimbursable from customers based on current expense levels.

(4)		As of December 31, 2006 leases totaling 58,652 square feet (including relets and renewals of 51,869 square feet and new leases of 6,783 square feet) have been signed and will commence during 2007. These signed leases represent approximately 31% of gross square footage expiring during 2007. Expiring square footage includes 8,399 square feet of month-to-month leases.

Other Office Properties


	Square						Square								% of			Annual
	Footage of			Signed			Footage of						Annual		Annual			Expiring		Number of
	Expiring			Renewals			Expiring			% of			Full-Service		Full-			PSF		Customers
	Leases			and Relets			Leases			Square			Rent Under		Service			Full-		With
Year of Lease	(Before Renewals			of Expiring			(After Renewals			Footage			Expiring		Rent			Service		Expiring
Expiration	and Relets) (1)			Leases (2)			and Relets) (1)			Expiring			Leases (3)		Expiring			Rent (3)		Leases
Q1 2007		39,106			(20,616	)		18,490			0.9		$	334,995		0.7		$	18.12		12
Q2 2007		72,263			(28,800	)		43,463			2.0			1,134,114		2.2			26.09		10
Q3 2007		29,648			(3,443	)		26,205			1.2			712,964		1.4			27.21		8
Q4 2007		202,462			(74,975	)		127,487			5.9			3,134,306		6.1			24.59		9

Total 2007		343,479	(4)		(127,834	)		215,645	(4)		10.0	%	$	5,316,379		10.4	%	$	24.65		39

Q1 2008		31,336			(1,985	)		29,351			1.4		$	713,668		1.4		$	24.31		8
Q2 2008		54,362			(24,074	)		30,288			1.4			794,812		1.6			26.24		11
Q3 2008		50,076			(5,639	)		44,437			2.1			1,316,739		2.6			29.63		7
Q4 2008		25,118			(16,646	)		8,472			0.4			216,346		0.4			25.54		5

Total 2008		160,892			(48,344	)		112,548			5.3	%	$	3,041,565		6.0	%	$	27.02		31

2009		218,090			33,868			251,958			11.7		$	5,722,665		11.2		$	22.71		34
2010		173,270			9,009			182,279			8.5			5,146,094		10.0			28.23		27
2011		300,688			14,951			315,639			14.7			7,635,397		14.9			24.19		32
2012		175,640			21,950			197,590			9.2			4,667,708		9.1			23.62		13
2013		576,182			80,422			656,604			30.6			14,197,742		27.7			21.62		16
2014		57,657			3,045			60,702			2.8			1,417,986		2.8			23.36		6
2015		110,250			-			110,250			5.1			2,818,610		5.5			25.57		6
2016		12,724			-			12,724			0.6			292,033		0.6			22.95		2
2017 and thereafter		20,279			12,933			33,212			1.5			994,926		1.8			29.96		2

Total		2,149,151			-			2,149,151			100.0	%	$	51,251,105		100.0	%	$	23.85		208


(1)		Square footage is presented without adjustment to reflect our actual ownership percentage in joint ventured properties.

(2)		Signed renewals and relets extend the expiration dates of in-place leases to the end of the renewed or relet term.

(3)		Calculated based on base rent payable under the lease for net rentable square feet expiring (after renewals and relets), giving effect to free rent and scheduled rent increases taken into account under GAAP and including adjustments for expenses payable by or reimbursable from customers based on current expense levels.

(4)		As of December 31, 2006 leases totaling 137,753 square feet (including relets and renewals of 127,834 square feet and new leases of 9,919 square feet) have been signed and will commence during 2007. These signed leases represent approximately 40% of gross square footage expiring during 2007. Expiring square feet includes 12,466 square feet of month-to-month leases.

Table of Contents

Resort Residential Development Properties

The following table shows certain information as of December 31, 2006, relating to the Resort Residential Development Properties.


																			Proposed
																	Average		Average
		Our				Planned							Under		Physical		Sales Price		Sales Price
		Preferred				Sales		Closed		Remaining			Development		Inventory		on Closed		on Remaining
		Return/Economic			Product	Lots/Units/		Lots/Units/		Lots/Units/			Lots/Units/		Lots/Units/		Lots/Units/		Lots/Units/
Corporation / Project	Location	Ownership (1)			Type (2)	Acres		Acres		Acres			Acres		Acres		Acres (3)		Acres

*Desert Mountain Development Corporation*
Desert Mountain (4)	Scottsdale, AZ		93	%	SF, SH, TH B		2,489		2,415		74	(5)		-		42		749		2,781
Custom Lots
Homes

*Crescent Resort Development Inc.*
Tahoe Mountain Resorts
*Northstar Village*
Big Horn and Catamount	Lake Tahoe, CA		13%/57	%	CO S		113		21		92			92		-		1,862		1,331
Identified Future Projects	Lake Tahoe, CA		13%/23%-57	%	TH S , TS S		133		-		133			-		-		-		3,210
*Northstar Highlands*
Northstar Trailside Townhomes	Lake Tahoe, CA		13%/57	%	TH S		16		-		16			6		-		-		3,718
Northstar Ritz Condos	Lake Tahoe, CA		13%/23	%	CO S		84		-		84			23		-		-		4,189
Highlands Acreage	Lake Tahoe, CA		13%/23	%	ACR		4.8		-		4.8			-		4.8		-		4,688
Identified Future Projects	Lake Tahoe, CA		13%/57	%	CO, TH, TS S		1,272		-		1,272			-		-		-		2,680
*Old Greenwood*
Units	Lake Tahoe, CA		13%/71	%	TH B		19		15		4			-		4		1,428		938
Fractional Units (6)	Lake Tahoe, CA		13%/71	%	TS S		146.00		42.12		103.88			11.00		30.00		1,922		2,185
*Gray's Crossing*
Lots	Lake Tahoe, CA		13%/71	%	SF B		377		254		123			84		39		314		421
Units (8)	Lake Tahoe, CA		13%/71	%	CO B		170		-		170			-		-		-		412

Denver Development
Creekside Townhomes at Riverfront Park	Denver, CO		12%/64	%	TH P		23		21		2			-		2		737		1,107
Brownstones (Phase I)	Denver, CO		12%/64	%	TH P		16		14		2			-		2		1,634		1,582
Delgany	Denver, CO		12%/64	%	CO P		42		38		4			-		4		673		835
One Riverfront	Denver, CO		12%/56	%	CO P		50		-		50			50		-		-		843
Identified Future Projects	Denver, CO		12%/56%-64	%	TH, CO B		328		-		328			-		-		-		754
Downtown Acreage	Denver, CO		12%/64	%	ACR		6.76		-		6.76			-		6.76		-		4,350

Mountain and Other Development
Eagle Ranch	Eagle, CO		12%/76	%	SF P		1,398		1,198		200			65		135		89		168
Main Street Station Vacation Club (7)	Breckenridge, CO		12%/30	%	TS S		42.00		30.93		11.07			-		11.07		1,221		1,055
Riverbend	Charlotte, NC		12%/68	%	SF P		659		491		168			144		24		31		39
Three Peaks	Silverthorne, CO		12%/49	%	SF S		325		312		13			-		13		193		281
Village Walk	Beaver Creek, CO		12%/58	%	TH S		26		5		21			21		-		5,907		5,205
The Residences at Park Hyatt Beaver Creek (7)	Beaver Creek, CO		N/A/91	%	TS S		15.00		3.10		11.90			-		11.90		4,554		3,573
Beaver Creek Landing	Beaver Creek, CO		12%/59	%	CO B		52		-		52			52		-		-		1,250
Riverfront Village	Beaver Creek, CO		12%/27	%	CO, TH B		311		-		311			210		-		-		1,112
Identified Future Projects	Colorado		12%/30%-64	%	CO S		81		-		81			-		-		-		2,096

*Houston Area Development Corp.*
Spring Lakes	Houston, TX		98	%	SF P		497		477		20			-		20	$	35	$	44

*Crescent Plaza Residential*
The Residences at the Ritz-Carlton (Phase I)	Dallas, TX		100	%	CO		70		-		70			70		-	$	-	$	1,902
The Tower Residences and Regency Row (Phase II)	Dallas, TX		100	%	CO, TH P		100		-		100			-		-		-		1,548	(8)


(1)		We receive our invested capital plus a preferred return on our invested capital before profits are allocated to the partners based on ownership percentage. Some projects listed assume an equity partner will participate.

(2)		SF (Single-Family Lot); CO (Condominium); TH (Townhome); TS (Timeshare Equivalent Unit); ACR (Acreage); and SH (Single-Family Home). Superscript items represent P (Primary residence); S (Secondary residence); and B (Both Primary and Secondary residence)

(3)		Based on lots, units, and acres closed during our ownership period.

(4)		Average Sales Price includes golf membership, which as of December 31, 2006 is $0.3 million.

(5)		As of December 31, 2006 there were 57 units and 17 lots in inventory or planned for development.

(6)		Selling 17 shares per unit.

(7)		Selling 20 shares per unit.

(8)		Proposed Average Sales Price for The Tower Residences and Regency Row excludes the four Regency Row townhomes, which are expected to have a range in price of $7.0 million to $8.0 million.

Table of Contents

Resort/Hotel Properties (1)

The following table shows certain information for the years ended December 31, 2006 and 2005, with respect to our Resort/Hotel Properties. The information for the Resort/Hotel Properties is based on available rooms, except for the Canyon Ranch-Tucson and Canyon Ranch-Lenox, which measure their performance based on available guest nights.


								For the year ended December 31,
																		Revenue
								Average						Average				Per
			Year					Occupancy						Daily				Available
			Completed/					Rate						Rate				Room/Guest Night
PROPERTY	Location		Renovated		Rooms			2006			2005			2006		2005		2006		2005
*Canyon Ranch ®*	Tuscon, AZ /
Canyon Ranch - Tucson & Lenox (2)	Lenox, MA			1980/1989		471	(3)		83	%		82	%	$	769	$	739	$	598	$	567


*Luxury Resorts and Spas:*
Park Hyatt Beaver Creek Resort and Spa		Avon, CO		1989/2001/2006		190	(4)		54	%		57	%	$	365	$	303	$	197	$	172
Fairmont Sonoma Mission Inn & Spa	Sonoma, CA			1927/1987/1997/2004		228			77			71			306		292		235		207
Ventana Inn & Spa	Big Sur, CA			1975/1982/1988		60			72			73			520		480		375		349

Total/Weighted Average						478			66	%		64	%	$	354	$	319	$	235	$	206


*Upscale Business Class Hotels:*
Denver Marriott City Center	Denver, CO			1982/1994		613			72	%		73	%	$	138	$	130	$	100	$	95
Renaissance Houston Hotel	Houston, TX			1975/2000		388			68			70			128		105		87		74
Omni Austin Hotel (5)	Austin, TX			1986		375			79			77			150		128		119		99

Total/Weighted Average						1,376			73	%		73	%	$	139	$	123	$	101	$	90

Total/Weighted Average Luxury Resorts and Spas and Upscale Business Class Hotels						1,854			71	%		71	%	$	192	$	175	$	137	$	124


(1)		Property Table is presented at 100% without any adjustment to give effect to our actual ownership percentage in the properties.

(2)		We own 48% of the Canyon Ranch companies which own or manage: Canyon Ranch Tucson and Canyon Ranch Lenox Destination Resorts, Canyon Ranch SpaClub at the Venetian Resort in Las Vegas, the Canyon Ranch SpaClub on the Queen Mary 2 ocean liner, the Canyon Ranch Living Community in Miami, Fl., the Canyon Ranch SpaClub at The Gaylord Palms Resort in Kissimmee, Fl., Canyon Ranch Living Community in Chicago, IL., and all Canyon Ranch trade names and trademarks.

(3)		Represents available guest nights, which is the maximum number of guests the resort can accommodate per night.

(4)		In April 2006, 85 rooms were taken out of service at the Park Hyatt Beaver Creek Resort and Spa. The floor space occupied by 55 of these rooms is to be converted into time-share units for sale by CRDI. The remaining space was used to expand the Allegria Spa within the hotel.

(5)		The Omni Austin Hotel is leased pursuant to a lease to HCD Austin Corporation.

Table of Contents

Temperature-Controlled Logistics Properties

The following table shows the number and aggregate size of Temperature-Controlled Logistic Properties by state as of December 31, 2006:


			Total Cubic		Total
	Number of		Footage		Square feet
State	Properties (1)		(in millions)		(in millions)
Alabama		5		13.8		0.5
Arizona		1		2.9		0.1
Arkansas		6		33.1		1.0
California		7		29.5		1.0
Colorado		1		2.8		0.1
Florida		5		6.5		0.3
Georgia		9		61.8		2.1
Idaho		2		18.7		0.8
Illinois		3		21.7		0.6
Indiana		1		9.1		0.3
Iowa		2		12.5		0.5
Kansas		2		5.0		0.2
Kentucky		1		2.7		0.1
Maine		1		1.8		0.2
Massachusetts		4		10.2		0.5
Minnesota		1		3.0		0.1
Mississippi		1		4.7		0.2
Missouri		2		46.8		2.7
Nebraska		2		4.4		0.2
New York		1		11.8		0.4
North Carolina		4		15.1		0.5
Ohio		2		8.9		0.4
Oklahoma		1		1.4		0.1
Oregon		5		35.6		1.5
Pennsylvania		3		39.0		1.1
South Carolina		1		1.6		0.1
South Dakota		1		2.9		0.1
Tennessee		3		10.6		0.4
Texas		3		16.5		0.5
Utah		1		8.6		0.4
Virginia		2		8.7		0.3
Washington		6		28.7		1.1
Wisconsin		3		17.4		0.6

TOTAL		92		497.8		19.0


(1)		As of December 31, 2006 we held a 31.72% interest in AmeriCold Realty Trust which operates 104 facilities, of which 91 are wholly-owned or leased, one is partially owned and 12 are managed for outside owners.

Item 3. Legal Proceedings

We are not currently subject to any material legal proceeding nor, to our knowledge, is any material legal proceeding contemplated against us.

Item 4. Submission of Matters to a Vote of Security Holders

No matter was submitted to a vote of security holders during the fourth quarter of our fiscal year ended December 31, 2006.

Table of Contents

PART II

Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Common Equity

Our common shares have been traded on the New York Stock Exchange under the symbol CEI since the completion of our initial public offering in May 1994. For each calendar quarter indicated, the following table reflects the high and low sales prices during the quarter for the common shares and the distributions declared with respect to each quarter.


	Price
	High		Low		Distributions
2005
First Quarter	$	18.14	$	16.12	$	0.375
Second Quarter		18.99		16.02		0.375
Third Quarter		20.65		17.95		0.375
Fourth Quarter		21.06		19.23		0.375

2006
First Quarter	$	21.60	$	20.14	$	0.375
Second Quarter		20.64		17.61		0.375
Third Quarter		22.80		18.72		0.375
Fourth Quarter		22.42		19.28		0.375

As of March 5, 2007, there were approximately 652 holders of record of our common shares.

Our actual results of operations and the amounts actually available for distribution will be affected by a number of factors, including:

	•		the general condition of the United States economy;

	•		general leasing activity and rental rates in the markets in which the Office Properties are located;

	•		the ability of tenants to meet their rent obligations;

	•		our operating and interest expenses;

	•		consumer preferences relating to the Resort/Hotel Properties and the Resort Residential Development Properties;

	•		cash flows from unconsolidated and consolidated entities;

	•		the level of our property acquisitions and dispositions;

	•		capital expenditure requirements;

	•		federal, state and local taxes payable by us; and

	•		the adequacy of cash reserves.

Our future distributions will be at the discretion of our Board of Trust Managers. The Board of Trust Managers has indicated that it will review our distribution rate on a quarterly basis and, as part of the implementation of the Strategic Plan, we intend to align our dividend with industry-accepted pay-out ranges to allow for retention of capital for growth.

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Performance Graph

The following graph sets forth a comparison of the percentage change in the cumulative total shareholder return on the Common Shares compared to the cumulative total return of the NAREIT All Equity REIT Index and the S&P 500 Index for the period December 31, 2001 through December 31, 2006. The graph depicts the actual increase in the market value of the Common Shares relative to an initial investment of $100 on December 31, 2001, assuming a reinvestment of cash distributions.

Crescent Real Estate Equities Company


	Years Ending
Company / Index	12/31/01		12/31/02		12/31/03		12/31/04		12/31/05		12/31/06
Crescent Real Estate Equities Company		100.00		100.25		113.72		132.81		156.49		167.61
S&P 500		100.00		77.90		100.25		111.15		116.61		135.03
NAREIT All Equity REIT Index		100.00		103.82		142.37		187.33		210.12		283.78

We no longer use SNL as a provider of this performance graph, and therefore, the SNL Office REITs Index is excluded because it is not readily available. We believe the S&P 500 and the NAREIT All Equity REIT Index are sufficient indices for comparison of five year total return.

Table of Contents

Distributions

Under the Code, REITs are subject to numerous organizational and operational requirements, including the requirement to distribute at least 90% of REIT taxable income each year. Pursuant to this requirement, we were required to distribute $108.3 million and $128.0 million for 2006 and 2005, respectively. Our actual distributions to common and preferred shareholders were $185.1 million and $182.2 million for 2006 and 2005, respectively.

Distributions to the extent of our current and accumulated earnings and profits for federal income tax purposes generally will be taxable to a shareholder as ordinary dividend income. For tax years beginning after December 31, 2002, qualified dividends paid to shareholders are taxed at capital gains rates, as added by the Jobs and Growth Tax Relief Reconciliation Act of 2003. Distributions in excess of current and accumulated earnings and profits will be treated as a nontaxable reduction of the shareholder's basis in such shareholder's shares, to the extent thereof, and thereafter as taxable gain. Distributions that are treated as a reduction of the shareholder's basis in its shares will have the effect of deferring taxation until the sale of the shareholder's shares. No assurances can be given regarding what portion, if any, of distributions in 2007 or subsequent years will constitute a return of capital for federal income tax purposes.

Following is the income tax status of distributions paid during the years ended December 31, 2006 and 2005, to common shareholders:


	2006			2005
Ordinary dividend		27.1	%		6.3	%
Qualified dividend eligible for 15% tax rate		8.0			2.7
Capital gain		15.5			47.2
Return of capital		45.5			29.5
Unrecaptured Section 1250 gain		3.9			14.3

		100.0	%		100.0	%

Distributions on the 14,200,000 Series A Convertible Cumulative Preferred Shares issued by us in February 1998, April 2002 and January 2004 are payable at a rate of $1.6875 per annum per Series A Convertible Cumulative Preferred Share, prior to distributions on the common shares.

Distributions on the 3,400,000 Series B Cumulative Redeemable Preferred Shares issued by us in May and June 2002 are payable at a rate of $2.3750 per annum per Series B Cumulative Redeemable Preferred Share, prior to distributions on the common shares.

Following is the income tax status of distributions paid during the years ended December 31, 2006 and 2005, to preferred shareholders:


	Class A Preferred (1)						Class B Preferred (2)
	2006			2005			2006			2005
Ordinary dividend		49.8	%		8.9	%		49.8	%		8.9	%
Qualified dividend eligible for 15% tax rate		14.8			3.8			14.8			3.8
Capital gain		28.3			67.1			28.3			67.1
Unrecaptured Section 1250 Gain		7.1			20.2			7.1			20.2

		100.0	%		100.0	%		100.0	%		100.0	%


(1)		The Series A Preferred Shares are convertible at any time, in whole or in part, at the option of the holders into common shares at a conversion price of $40.86 per common share (equivalent to a conversion rate of 0.6119 common shares per Series A Preferred Share). We pay distributions on the Series A Preferred Shares in an amount totaling $1.6875 per share each year (equivalent to 6.75% of the $25.00 liquidation preference per share), payable on a quarterly basis. The Series A Preferred Shares are redeemable, on or after February 28, 2003, in whole or in part, at our option.

(2)		The Series B Preferred Shares are redeemable on or after May 17, 2007, in whole or in part, at our option. We pay distributions on the Series B Preferred Shares in an amount totaling $2.375 per share each year (equivalent to 9.50% of the $25.00 liquidation preference per share), payable on a quarterly basis.

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Item 6. Selected Financial Data

The following table includes certain of our financial information on a consolidated historical basis. You should read this section in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 8, "Financial Statements and Supplementary Data."

CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED HISTORICAL FINANCIAL DATA
(Dollars in thousands, except share data)


	For Years Ended December 31,

				2005			2004		2003		2002
	2006			(Restated)			(Restated)		(Restated)		(Restated)
Operating Data:
Total Property revenue	$	928,696		$	1,018,100		$	1,000,273	$	892,005	$	946,311

Income from Property Operations	$	270,672		$	278,839		$	314,977	$	304,333	$	339,319
Income from continuing operations before minority interests and income taxes	$	18,864		$	28,827		$	191,216	$	58,147	$	72,662

Net income (loss) available to common shareholders	$	1,395		$	69,547		$	147,061	$	4,732	$	67,445

Basic (loss) earnings per common share:
(Loss) income available to common shareholders before discontinued operations and cumulative effect of a change in accounting principle	$	(0.12	)	$	(0.23	)	$	1.40	$	0.02	$	0.12
Net income available to common shareholders-basic	$	0.01		$	0.69		$	1.49	$	0.05	$	0.65

Diluted earnings (loss) per common share:
(Loss) income available to common shareholders before discontinued operations and cumulative effect of a change in accounting principle	$	(0.12	)	$	(0.23	)	$	1.40	$	0.02	$	0.12

Net income available to common shareholders - diluted	$	0.01		$	0.69		$	1.48	$	0.05	$	0.65

Balance Sheet Data (at period end):

Total assets	$	4,046,971		$	4,163,256		$	4,060,325	$	4,335,875	$	4,309,325

Total debt	$	2,296,358		$	2,259,473		$	2,152,255	$	2,558,699	$	2,382,910

Total shareholders' equity	$	1,122,286		$	1,251,626		$	1,303,603	$	1,223,889	$	1,347,232

Other Data:

Cash distribution declared per common share	$	1.50		$	1.50		$	1.50	$	1.50	$	1.50
Weighted average
Common shares and units outstanding - basic		121,515,791			118,012,402			116,747,408		116,634,546		117,523,248
Weighted average
Common shares and units outstanding - diluted		122,979,783			118,836,421			116,965,897		116,676,242		117,725,984

Funds from operations available to common shareholders - diluted (1)	$	99,448		$	118,987		$	97,001	$	175,901	$	212,572


(1)		Funds from operations, or FFO, is a supplemental non-GAAP financial measurement used in the real estate industry to measure and compare the operating performance of real estate companies, although those companies may calculate funds from operations in different ways. The National Association of Real Estate Investment Trusts (NAREIT) defines funds from operations as Net Income (Loss) determined in accordance with generally accepted accounting principles (GAAP), excluding gains (or losses) from sales of depreciable operating property, excluding extraordinary items (determined by GAAP), plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. We calculate FFO available to common shareholders - diluted in the same manner, except that Net Income (Loss) is replaced by Net Income (Loss) Available to Common Shareholders and we include the effect of Operating Partnership unitholder minority interests. For a more detailed definition and description of FFO and a reconciliation to net income determined in accordance with GAAP, see "Funds from Operations" included in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."

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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


	Page
Overview		40
Recent Developments		41
Results of Operations
Years ended December 31, 2006 and 2005		47
Years ended December 31, 2005 and 2004		51
Liquidity and Capital Resources
Overview		55
Liquidity Requirements		58
Debt and Equity Financing		61
Unconsolidated Investments		64
Significant Accounting Policies		65
Funds from Operations		69

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Overview

First, we selectively invest in premier office properties in markets that offer attractive returns on invested capital. We may align ourselves with institutional partners to enhance our return on equity when compared to the returns we receive as a 100% owner. Where possible, we negotiate performance-based incentives on our joint ventures that allow for additional equity to be earned if return targets are exceeded. For example, we earned promoted interests on the sales of the Three Westlake and Four Westlake Office Properties in 2006. We also evaluate our existing portfolio for joint-venture opportunities that enable us to increase our return on equity and provide access to equity for reinvestment. We currently hold 43% of our office portfolio in joint ventures.

Second, we invest in real estate businesses that offer returns equal to or superior to what we are able to achieve in our office investments. We develop and sell residential properties in resort locations primarily through Harry Frampton and his East West Partners development team with the most significant project in terms of future cash flow being our investment in Tahoe Mountain Resorts in California. This development encompasses more than 2,500 total lots and units, of which 532 have been sold, 73 are currently in inventory and over 1,950 are scheduled for development over the next 14 years, and is expected to generate in excess of $5.0 billion in sales. We expect our investment in Tahoe to be a long-term source of earnings and cash flow growth as new projects are designed and developed. We view our resort residential developments as a business and believe that, beyond the net present value of existing projects, there is value in our strategic relationships with the development teams and our collective ability to identify and develop new projects. In addition, we sometimes serve as the primary developer, such as The Ritz-Carlton Phases I and II. Also, we provide mezzanine financing to other office, hotel and residential investors where we see attractive returns relative to owning the equity. We currently have approximately $124.3 million of mezzanine notes.

In 2005, we also completed the recapitalization of our Canyon Ranch investment. In addition to its wellness facilities in Tucson, Arizona and Lenox, Massachusetts and its Spa Club operation at the Venetian Resort in Las Vegas, Nevada, Canyon Ranch partners with developers to establish Canyon Ranch Living communities at which the focal point is a large, comprehensive wellness facility and earns fees for the licensing of the brand name to these communities, providing design and technical services, and the ongoing management of the facilities. One such development is under construction in Miami Beach and an agreement that will pave the way for the development of a Canyon Ranch Living community in Chicago, Illinois, and others, are under consideration or in negotiation.

During 2006, we conducted an extensive review of our strategic alternatives, and in late August received an offer to purchase certain assets. Our Board of Trust Managers established a special committee of independent trust managers to assist in its consideration of the strategic alternatives and to respond to the offer that was received. The Special Committee hired an independent investment banker and counsel to assist with its review. The Special Committee rejected the offer received, and on November 1, 2006, instituted a formal review of our strategic alternatives.

Key elements of the Strategic Plan include:

	•		Sale of all resort and hotel assets. Properties to be sold include the Fairmont Sonoma Mission Inn & Spa ® , Ventana Inn & Spa in Big Sur, California, the Park Hyatt Beaver Creek Resort & Spa, and three business-class hotels.

	•		Sale of resort residential developments. Properties and assets to be sold include Crescent Resort Development and Desert Mountain Development Corporation.

	•		Opportunistic sale of office properties. Properties to be sold include virtually all suburban Dallas properties and all Austin properties, as well as our single assets in Phoenix, Arizona, and in Seattle, Washington.

	•		Reduction of general and administrative expenses by more than $17.0 million, or $0.14 per share. Implementation of savings began immediately on March 1, 2007 and is expected to be fully phased in by the end of 2007. We expect to take a charge of approximately $5.0 million for severance costs.

	•		Use of sales proceeds to retire debt . We plan to first use the proceeds from asset sales to retire debt. We expect that our balance sheet will be significantly strengthened and our cost of capital lowered, giving us capacity for growth.

	•		Alignment of dividend . We intend to align our dividend with industry-accepted pay-out ranges to allow for retention of capital for growth.

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Recent Developments

Office Segment

Joint Ventures

Paseo Del Mar

On September 21, 2005, we entered into a joint venture arrangement, Crescent-JMIR Paseo Del Mar LLC, with JMI Realty. The joint venture committed to co-develop a 232,330 square-foot, three-building office complex in the Del Mar Heights submarket of San Diego, California. The development was completed in August 2006. The joint venture was structured such that we owned an 80% interest and JMI Realty owned the remaining 20% interest. On December 14, 2006, we completed the sale of our 80% interest in Crescent - JMIR Paseo Del Mar LLC. The sale generated proceeds, net of selling costs, of approximately $42.1 million and a gain of approximately $10.4 million, net of promoted interest due JMI Realty and income taxes. Proceeds from the sale were used to pay down our credit facility.

Bank One Center

On December 14, 2006, we completed the sale of Bank One Center on behalf of Main Street Partners, L.P., the joint venture which was owned 50% by an affiliate of The Blackstone Group and 50% by us. The sale generated proceeds to the joint venture, net of selling costs and after a $104.7 million loan repayment, of approximately $110.0 million and a net gain of approximately $4.4 million. Our share of the net gain was approximately $1.6 million inclusive of the write-off of unamortized deal costs from the original joint venture of the property. Our share of the proceeds was approximately $55.0 million, which was used to pay down our credit facility.

Three Westlake Park

On December 11, 2006, we completed the sale of Three Westlake Park on behalf of Houston PT Three Westlake Office Limited Partnership, the joint venture which was owned 80% by an affiliate of GE Asset Management, or GE and 20% by us. The sale generated proceeds to the joint venture, net of selling costs and after a $33.0 million loan repayment, of approximately $46.7 million and a net gain of approximately $33.4 million. Our share of the net gain, including a promoted interest of approximately $7.7 million, recognition of the unamortized deferred gain, and write-off of unamortized deal costs from the original joint venture of the property, was approximately $17.3 million. Our share of the proceeds was approximately $15.8 million, which was used to pay down our credit facility.

Four Westlake Park

On September 26, 2006, we completed the sale of Four Westlake Park on behalf of Houston PT Four Westlake Office Limited Partnership, the joint venture which was owned 80% by an affiliate of GE and 20% by us. The sale generated proceeds to the joint venture, net of selling costs and after a $46.1 million loan repayment, of approximately $73.0 million and a net gain of approximately $55.0 million. Our share of the net gain, including a promoted interest of approximately $14.7 million, was approximately $24.2 million. Our share of the proceeds was approximately $28.7 million, which was used to pay down our credit facility.

Chase Tower

On June 20, 2006, we completed the sale of Chase Tower on behalf of Austin PT BK One Tower Office Limited Partnership, the joint venture which was owned 80% by an affiliate of GE and 20% by us. The sale generated proceeds to the joint venture, net of selling costs and after a $36.0 million loan repayment, of approximately $28.0 million and a net gain of approximately $10.1 million. Our share of the net gain, including recognition of the unamortized deferred gain was approximately $4.3 million. Our share of the proceeds was approximately $5.6 million, which was used to pay down the credit facility.

Parkway at Oakhill

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underway, is scheduled for delivery in the third quarter of 2007.

Asset Purchase


(in millions)			Purchase
Date	Property	Location	Price
January 23, 2006	Financial Plaza - Class A Office Property	Phoenix, Arizona	$55.0 (1)


(1)		The acquisition was funded by the assumption of a $23.6 million loan from Allstate, a new $15.9 million loan from Allstate and a draw on our credit facility. This property is wholly-owned.

Asset Sale


(in millions)
Date	Property	Location	Proceeds
February 17, 2006	Waterside Commons - Class A Office Property	Dallas, Texas	$24.8 (2)


(2)		We previously recorded an impairment charge of approximately $1.0 million during the year ended December 31, 2005. The proceeds from the sale were used primarily to pay down the credit facility.

Significant Tenant Lease Termination

In June 2005, we entered into an agreement with our largest office tenant, El Paso Energy Services Company and certain of its subsidiaries, which terminated El Paso's leases totaling 888,000 square feet at Greenway Plaza in Houston, Texas, effective December 31, 2007. Under the agreement, El Paso is required to pay us $65.0 million in termination fees in periodic installments through December 31, 2007, and $62.0 million in rent according to the original lease terms from July 1, 2005 through December 31, 2007. As of December 31, 2006, we have collected $35.0 million of the lease termination fee. For the years ended December 31, 2006 and 2005, we recognized $38.8 million and $8.5 million, respectively, in net termination fees, which includes accelerated termination fees and contractual full-service rents resulting from the re-lease of approximately 463,000 square feet. As of December 31, 2006, El Paso was current on all rent obligations.

Resort Residential Development Segment

Joint Venture

Riverfront Village

On March 21, 2006, CRDI entered into a joint venture arrangement, East West Resort Development XIV, L.P., L.L.L.P. (Riverfront Village), with affiliates of Crow Holdings and our development partner. The joint venture was formed to co-develop a hotel and condominiums in Avon, Colorado. The development, which is currently underway, is scheduled for delivery in 2008. We provided 41.9% of the initial capitalization and the venture is structured such that we own a 26.8% interest after we receive a preferred return on our invested capital and return of our capital. Our initial equity commitment to the joint venture is $22.6 million, of which $17.2 million was funded as of December 31, 2006. In connection with construction financing obtained in November 2006 for the Riverfront Village project, the partners committed to contribute up to an additional $17.1 million in capital should certain financial covenants not be maintained. Our share of this capital commitment is $7.2 million, of which none was funded as of December 31, 2006.

Asset Sale

Jefferson Station Apartments

On October 21, 2004, we entered into a partnership agreement with affiliates of JPI Multi-Family Investments, L.P. to develop a multi-family luxury apartment project in Dedham, Massachusetts. The development was completed in November 2006. On December 8, 2006, the partnership, Jefferson Station, L.P., completed the sale of the apartment project. We consolidated the partnership which was owned 50% by JPI Multi-Family Investments, L.P. and 50% by us. The sale generated proceeds, net of selling costs and after the repayment of the $38.8 million loan with Bank of America, of approximately $35.9 million and a gain of approximately $20.3 million. Our share of the gain, net of minority interests and taxes, was approximately $5.4 million. Our share of the proceeds was approximately $24.1 million, which was used to pay down our credit facility.

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Resort/Hotel Segment

Park Hyatt Beaver Creek

In the second quarter of 2006, 85 rooms were taken out of service at the Park Hyatt Beaver Creek in Avon, Colorado. The area occupied by 55 of these rooms is being converted into 15 fractional units for sale in our Resort Residential Development Segment. Sales of fractional units commenced in 2006. The remaining space was used to expand the Allegria Spa within the hotel. In addition, the Resort is adding air conditioning and upgrading the common areas. The spa expansion and common area upgrade were completed in December 2006.

Temperature-Controlled Logistics Segment

In August 2006, AmeriCold entered into a definitive agreement to acquire from ConAgra Foods, Inc. or ConAgra, four refrigerated warehouse facilities and the lease on a fifth facility, with an option to purchase. These five warehouses contain a total of 1.7 million square feet and 48.9 million cubic feet. The aggregate purchase price is approximately $190.0 million, consisting of $152.0 million in cash to ConAgra and $38.0 million representing the recording of a capital lease obligation for the fifth facility. During the fourth quarter of 2006, AmeriCold completed the acquisition of two of these facilities and assumed the leasehold on the fifth facility and the related capital lease obligation. In January 2007, AmeriCold completed the acquisition of the third facility. The acquisition of the remaining facility is expected to be completed during the first half of 2007.

In December 2006, AmeriCold completed a 5.45% fixed-rate, interest-only financing in an aggregate principal amount of $1.05 billion which matures in approximately equal tranches in seven, nine and ten years. The proceeds were used to repay $449.0 million of fixed-rate mortgages with a rate of 6.89% and a $430.0 million variable rate mortgage. The mortgages that were repaid were collateralized by 84 temperature-controlled warehouses which were released upon repayment. Fifty of the warehouses are used to collateralize the new loan. A portion of the remaining proceeds were distributed to the owners, of which our portion was approximately $58.7 million.

Other Segment

Mezzanine Notes

We offer mezzanine financing in the form of limited recourse loans that are made to a special purpose entity which is the direct or indirect parent of another special purpose entity owning a commercial real estate property. These mezzanine loans are secured by a pledge of the ownership interest in the property owner (or in an entity that directly or indirectly owns the property owner) and are thus structurally subordinate to a conventional first mortgage loan made to the property owner. We also offer mezzanine financing by taking a junior participating interest in a first mortgage loan.

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The underlying real estate assets may be a single office, hotel or residential property, or a portfolio of cross-collateralized real estate assets. We typically require recourse guaranties from the ultimate owners of the property for such matters as voluntary bankruptcy filings, failure to contest involuntary bankruptcy filings, violation of special purpose entity covenants, environmental liability and other events such as misappropriation of rents or insurance. Although these types of loans generally have greater repayment risks than first mortgages due to the subordinated nature of the loans and the higher loan-to-value ratio, we have a disciplined approach in underwriting the value of the asset. The yield on these investments may be enhanced by front-end fees, prepayment fees, yield look-backs, participating interests and additional fees to allow prepayment during a prepayment black-out period.


									Interest
						Balance at			Rate at
(in millions)		Date of		Maturity		December			December
Note		Transaction		Date		31, 2006			31, 2006
Fixed Rate:
Three Dallas Office Properties	(1)		8/31/05		2010	$	7.6			11.04	%
21 California Condominiums	(2)		12/28/06		2008		9.8	(3)		17.00	%
Variable Rate:
Dallas Office Property	(4)		6/9/05		2007		12.0			13.85	%
Two Luxury Hotel Properties in California	(5)		11/16/05		2007		15.0			16.35	%
Office Portfolio in Southeastern U.S.	(6)		12/30/05		2007		20.7			12.23	%
Florida Hotel Portfolio Investment	(7)		1/20/06		2009		15.0			13.35	%
California Ski Resort	(8)		4/12/06		2009		20.0			9.85	%
New York City Residential	(9)		5/8/06		2007		24.2			18.18	%

Total Mezzanine Notes						$	124.3

Total Weighted Average Interest Rate										14.09	%


(1)		The loan has an interest-only term through September 2007. Beginning October 2007, the borrower must make principal payments based on a 30-year amortization schedule until maturity. We determined that the entity to which the loan was funded is a VIE under FIN 46R of which we are not the primary beneficiary; therefore, we do not consolidate the entity. Our maximum exposure to loss is limited to the amount of the loan.

(2)		The loan has an interest-only term until maturity, subject to the right of the borrower to extend the loan pursuant to one six-month extension.

(3)		The condominiums securing this note were sold by CRDI to a third party. Due to restrictions under SFAS No. 66, Accounting for Sales of Real Estate regarding seller financed transactions, the profit from the sale of $4.7 million was deferred and recorded under the cost recovery method and reflected as a reduction of the note such that the face value of the note is included in the table above.

(4)		The loan bears interest at LIBOR plus 850 basis points with an interest-only term until maturity, subject to the right of the borrower to extend the loan pursuant to three one-year extension options.

(5)		The loan bears interest at LIBOR plus 1,100 basis points with an interest-only term until maturity, subject to the right of the borrower to extend the loan pursuant to five one-year extension options.

(6)		The loan bears interest at LIBOR plus 685 basis points with an interest-only term until maturity, subject to the right of the borrower to extend the loan pursuant to three one-year extension options.

(7)		The loan bears interest at LIBOR plus 800 basis points with an interest-only term until maturity, subject to the right of the borrower to extend the loan pursuant to two one-year extension options.

(8)		The loan bears interest at LIBOR plus 450 basis points with an interest-only term until maturity, subject to the right of the borrower to extend the loan pursuant to two one-year extension options.

(9)		The loan bears interest at LIBOR plus 1,283 basis points with an interest-only term until maturity, subject to the right of the borrower to extend the loan pursuant to two one-year extension options. We determined that the entity to which the loan was funded is a VIE under FIN 46R of which we are not the primary beneficiary; therefore, we do not consolidate the entity. Our maximum exposure to loss is limited to the amount of the loan.

In 2006, we received approximately $110.2 million of net proceeds, after the repayment of debt, for the repayment of five of our mezzanine notes, which included $6.2 million of prepayment fees.

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2006 Operating Performance

Office Segment

The following table shows the performance factors on stabilized properties, excluding properties held for sale, used by management to assess the operating performance of the Office Segment:


	2006			2005
Economic Occupancy (1)		89.8	%		88.5	%
Leased Occupancy (2)		92.6	%		90.8	%
In-Place Weighted Average Full-Service Rental Rate (3)	$	22.78		$	22.48
Tenant Improvement and Leasing Costs per Sq. Ft. per year	$	3.56		$	3.55
Average Lease Term (4)	5.7		yrs	6.2		yrs
Same-Store NOI (5) Decline		(1.0	)%		(1.5	)%
Same-Store Average Occupancy		89.3	%		87.3	%


(1)		Economic occupancy reflects the occupancy of all tenants paying rent.

(2)		Leased occupancy reflects the amount of contractually obligated space, whether or not commencement has occurred.

(3)		Calculated based on base rent payable at December 31 giving effect to free rent and scheduled rent increases and including adjustments for expenses payable by or reimbursable from tenants. The weighted average full-service rental rate for the El Paso lease reflects weighted average full-service rental rate over the shortened term and excludes the impact of the net lease termination fee being recognized ratably to income through December 31, 2007.

(4)		Reflects leases executed during the period.

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

Resort Residential Development Segment

The following tables show the performance factors used by management to assess the operating performance of the Resort Residential Development Segment. Information is provided for the CRDI Resort Residential Development Properties and the Desert Mountain Resort Residential Development Properties, which represent our significant investments in this segment as of December 31, 2006.

CRDI


	For the years ended December 31,
(dollars in thousands)	2006		2005
Resort Residential Lot Sales		212		545
Resort Residential Unit Sales:
Townhome Sales		30		25
Condominium Sales		59		187
Equivalent Timeshare Sales		19.3		15.7
Average Sales Price per Resort Residential Lot	$	125	$	164
Average Sales Price per Resort Residential Unit	$	2,003	$	1,265

CRDI, which invests primarily in mountain residential real estate in Colorado and California and residential real estate in downtown Denver, Colorado, is highly dependent upon the national economy and customer demand.

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Desert Mountain


	For the years ended December 31,
(dollars in thousands)	2006		2005
Resort Residential Lot Sales		5		40
Average Sales Price per Lot (1)	$	1,837	$	1,082
Resort Residential Unit Sales		12		-
Average Sales Price per Unit (1)	$	1,485	$	-


(1)		Includes equity golf membership

Desert Mountain is in the latter stages of development and management anticipates minor additions to its decreasing available inventory.

Resort/Hotel Segment

The following table shows the performance factors used by management to assess the operating performance of our Resort/Hotel Properties.


	For the years ended December 31,
							Average						Average				Revenue Per
	Same-Store NOI (1)						Occupancy						Daily				Available
	% Change						Rate						Rate				Room/Guest Night
	2006			2005			2006			2005			2006		2005		2006		2005
Luxury Resorts and Spas (2)		15	%		127	% (3)		76	%		72	%	$	349	$	332	$	264	$	237
Upscale Business Class Hotels		23	%		26	%		73	%		73	%	$	139	$	123	$	101	$	90


(1)		Same-Store NOI (net operating income) represents net income excluding depreciation and amortization, interest expense and rent expense for Resort/Hotel Properties owned for the entirety of the comparable periods.

(2)		Excludes the Park Hyatt Beaver Creek Resort and Spa which had 85 rooms taken out of service in April 2006. The onsite construction and closure of the spa has impacted performance at the property. The floor space occupied by 55 of these rooms was converted into 15 fractional units for sale in our Resort Residential Development Segment. The remaining space was used to expand the Allegria Spa within the hotel.

(3)		In November 2003, the Fairmont Sonoma Mission Inn placed 97 historic inn rooms out of service for renovation. The renovation was completed in July 2004, resulting in an increase in 2005 Same-Store NOI as compared to 2004.

Our luxury and destination fitness resorts and spas are unique properties due to location, concept and high replacement cost, but do compete against business-class hotels or middle-market resorts in their geographic areas, as well as against luxury resorts nationwide and around the world. Our upscale Resort/Hotel Properties in Denver, Austin and Houston are business and convention center hotels that compete against other business and convention hotels.

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Results of Operations

The following table shows the variance in dollars for certain of our operating data between the years ended December 31, 2006 and 2005 and the years ended December 31, 2005 and 2004.


	Total variance in			Total variance in
	dollars between			dollars between
	the years ended			the years ended
	December 31,			December 31,
	2006 and 2005			2005 and 2004
(in millions)	(Restated)			(Restated)
REVENUE:
Office Property	$	41.5		$	(103.0	)
Resort Residential Development Property		(130.6	)		192.8
Resort/Hotel Property		(0.4	)		(71.9	)

Total Property Revenue	$	(89.5	)	$	17.9


EXPENSE:
Office Property real estate taxes	$	3.6		$	(19.3	)
Office Property operating expenses		7.3			(19.1	)
Resort Residential Development Property expense		(89.2	)		160.9
Resort/Hotel Property expense		(2.9	)		(68.5	)

Total Property Expense	$	(81.2	)	$	54.0


Income from Property Operations	$	(8.3	)	$	(36.1	)


OTHER INCOME (EXPENSE):
Income from sale of investment unconsolidated company	$	17.8		$	29.9
Income from investment land sales		(8.6	)		(10.3	)
(Loss) gain on joint venture of properties		2.7			(268.5	)
Interest and other income		18.2			11.3
Corporate general and administrative		5.4			(11.3	)
Interest expense		2.4			40.1
Amortization of deferred financing costs		0.5			5.0
Extinguishment of debt		2.2			40.4
Depreciation and amortization		(6.0	)		18.5
Impairment charges related to real estate assets		-			4.1
Other expenses		(9.0	)		(3.3	)
Equity in net income (loss) of unconsolidated companies:
Office Properties		(2.3	)		5.2
Resort Residential Development Properties		0.1			1.8
Resort/Hotel Properties		(3.6	)		(1.3	)
Temperature-Controlled Logistics Properties		(15.9	)		(6.0	)
Other		(5.7	)		18.2

Total other income (expense)	$	(1.8	)	$	(126.2	)


INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTERESTS AND INCOME TAXES	$	(10.1	)	$	(162.3	)

Minority interests		8.4			21.6
Income tax benefit (expense)		12.0			(20.7	)


INCOME BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE	$	10.3		$	(161.4	)

(Loss) income from discontinued operations, net of minority interests and taxes		(4.5	)		(6.4	)
Impairment charges related to real estate assets from discontinued operations, net of minority interests		0.9			2.0
Gain on sale of real estate from discontinued operations, net of minority interests and taxes		(74.8	)		88.1
Cumulative effect of a change in accounting principle, net of minority interests		-			0.4


NET INCOME	$	(68.1	)	$	(77.3	)

Series A Preferred Share distributions		-			(0.3	)
Series B Preferred Share distributions		-			-


NET (LOSS) INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	(68.1	)	$	(77.6	)

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Comparison of the year ended December 31, 2006, to the year ended December 31, 2005 (Restated)

Property Revenues

Total property revenues decreased $89.5 million, or 8.8%, to $928.7 million for the year ended December 31, 2006, as compared to $1,018.2 million for the year ended December 31, 2005. The primary components of the decrease in total property revenues are discussed below.

•

Office Property revenues increased $41.5 million, or 11.1%, to $414.3 million, primarily due to:

	•		an increase of $28.1 million in net lease termination fees (from $11.2 million to $39.3 million) primarily due to the El Paso lease termination and related re-leasing;

	•		an increase of $9.4 million from the 51 consolidated Office Properties (excluding properties acquired, disposed or stabilized during 2005 and 2006) that we owned or had an interest in, primarily due to a 1.6 percentage point increase in average occupancy (from 86.6% to 88.2%), increased expense recovery revenue related to the increase in occupancy and increased recoverable expenses, and increased parking revenue; partially offset by a decline in full service weighted average rental rates;

	•		an increase of $8.8 million due to the acquisition of Financial Plaza in January 2006 and increased occupancy at One Live Oak, the Exchange Building and Peakview Tower; and

	•		an increase of $1.0 million related to third party management and leasing services primarily due to increased reimbursement revenue as a result of increased reimbursable expenses; partially offset by

	•		a decrease of $5.8 million due to the joint ventures of Fulbright Tower in February 2005 and One Buckhead Plaza in June 2005.

•

Resort Residential Development Property revenues decreased $130.6 million, or 26.0%, to $372.1 million, primarily due to:

•

a decrease of $121.6 million in CRDI revenues primarily related to:

	o		a net decrease of $195.7 million primarily related to product mix in lots and units available for sale in 2005 versus 2006 at Hummingbird Lodge in Bachelor Gulch, Colorado, Northstar Ironhorse and Gray's Crossing in Lake Tahoe, California, Creekside Townhomes, Brownstones - Phase I, and Delgany, all in Denver, Colorado, and Eagle Ranch in Eagle, Colorado, which had sales in the twelve months ended December 31, 2005, but reduced sales in the same period 2006, partially offset by Old Greenwood Timeshares in Lake Tahoe, California, and Main Street Station in Breckenridge, Colorado, which had sales in the twelve months ended December 31, 2005, but increased sales in the same period 2006; and

	o		a decrease of $38.5 million primarily related to product mix in lots and units available for sale in 2005 versus 2006 at Horizon Pass Lodge in Bachelor Gulch, Colorado, Creekside - Phase II in Denver, Colorado, and Old Greenwood Lots in Lake Tahoe, California, which had sales in the twelve months ended December 31, 2005, but no sales in the same period 2006; partially offset by

	o		an increase of $112.0 million primarily related to product mix in lots and units available for sale in 2006 versus 2005 at Village Walk and EW Hotel Residences in Beaver Creek, Colorado, Northstar Big Horn, Northstar Village - Commercial and Old Greenwood Townhomes in Lake Tahoe, California and Union Center land in Denver, Colorado, which had sales in the twelve months ended December 31, 2006, but no sales in the same period 2005.


	•		a decrease of $10.5 million at Desert Mountain primarily related to reduced net revenue from lot sales due to a decrease in the number of lots sold partially offset by an increase in the average sales price per lot and lower membership transfer fee income, partially offset by increased unit sales revenue due to an increase in the number of units sold.

•

Resort/Hotel Property revenues decreased $0.4 million, or 0.3%, to $142.2 million, primarily due to:

	•		a decrease of $4.7 million in revenue at the Park Hyatt Beaver Creek related to a decrease in occupancy due to construction activity on the property and the closure of the Allegria Spa for expansion; and

	•		a decrease of $4.6 million due to the contribution in January 2005, of the Canyon Ranch ® Properties to a newly formed entity, CR Operating, LLC, in which we have a 48% member interest that is accounted for as an unconsolidated investment; partially offset by

	•		an increase of $4.9 million in revenue at the remaining Luxury Resort and Spa Properties primarily at the Fairmont Sonoma Mission Inn, which experienced an 14% increase in revenue per available room (from $207 to $235) resulting from an increase of 5% in average daily rate (from $292 to $306) and a six percentage point increase in occupancy (from 71% to 77%); and

	•		an increase of $4.0 million in room revenue at the Upscale Business Class Hotel Properties primarily related to a 12% increase in revenue per available room (from $90 to $101) resulting from a 13% increase in average daily rate (from $123 to $139) with occupancy remaining flat.

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Property Expenses

Total property expenses decreased $81.2 million, or 11.0%, to $658.0 million for the year ended December 31, 2006, as compared to $739.2 million for the year ended December 31, 2005. The primary components of the decrease in total property expenses are discussed below.

•

Office Property expenses increased $10.9 million, or 5.6%, to $206.6 million, primarily due to:

	•		an increase of $9.4 million in operating expenses of the 51 consolidated Office Properties (excluding properties acquired, disposed, or stabilized in 2005 and 2006) that we owned or had an interest in primarily due to increased property taxes, utilities, general building expenses, cleaning expenses, insurance expense and non-recoverable administrative expenses (primarily bad debt);

	•		an increase of $3.4 million from the acquisition of Financial Plaza in January 2006;

	•		an increase of $1.4 million related to lease termination expenses; and

	•		an increase of $1.1 million related to the cost of providing third-party management services primarily due to increased staffing and salary expenses and the joint venture of One Buckhead Plaza in June 2005, which are recouped by increased third party fee income and direct expense reimbursements; partially offset by

	•		a decrease of $3.1 million primarily due to the joint venturing of Fulbright Tower in February 2005 and One Buckhead Plaza in June 2005; and

	•		a decrease of $1.3 million related to decreased consulting and legal fees.

•

Resort Residential Development Property expenses decreased $89.2 million, or 20.6%, to $343.0 million, primarily due to:

•

a decrease of $86.2 million in CRDI expenses primarily related to:

	o		a net decrease of $151.4 million primarily related to product mix in lots and units available for sale in 2005 versus 2006 at Hummingbird Lodge in Bachelor Gulch, Colorado, Northstar Ironhorse and Gray's Crossing in Lake Tahoe, California, Creekside Townhomes, Brownstones - Phase I, and Delgany, all in Denver, Colorado, and Eagle Ranch in Eagle, Colorado, which had sales in the twelve months ended December 31, 2005, but reduced sales in the same period 2006, partially offset by Old Greenwood Timeshares in Lake Tahoe, California, and Main Street Station in Breckenridge, Colorado, which had sales in the twelve months ended December 31, 2005, but increased sales in the same period 2006; and

	o		a decrease of $30.4 million primarily related to product mix in lots and units available for sale in 2005 versus 2006 at Horizon Pass Lodge in Bachelor Gulch, Colorado, Creekside - Phase II in Denver, Colorado, and Old Greenwood Lots in Lake Tahoe, California, which had sales in the twelve months ended December 31, 2005, but no sales in the same period 2006; partially offset by

	o		an increase of $93.2 million primarily related to product mix in lots and units available for sale in 2006 versus 2005 at Village Walk and EW Hotel Residences in Beaver Creek, Colorado, Northstar Big Horn, Northstar Village - Commercial and Old Greenwood Townhomes in Lake Tahoe, California and Union Center land in Denver, Colorado, which had sales in the twelve months ended December 31, 2006, but no sales in the same period 2005.


	•		an increase of $1.1 million in at CRDI marketing expense at CRDI; and

	•		a decrease of $7.1 million at Desert Mountain, primarily related to a decrease of $9.8 million in cost of sales primarily due to decreased lot sales and product mix and a decrease of $4.1 million in general and administrative expenses; partially offset by an increase of $5.5 million in the development costs recognized using the percentage complete method, and an increase of $1.4 million in club operating expense; partially offset by

	•		an increase of $2.4 million primarily due to marketing expenses related to the Ritz-Carlton Tower Residences and Regency Row in Dallas, Texas.

•

Resort/Hotel Property expenses decreased $2.9 million, or 2.6%, to $108.4 million, primarily due to:

	•		a decrease of $4.1 million due to the contribution, in January 2005, of the Canyon Ranch Properties to a newly formed entity, CR Operating, LLC, in which we have a 48% member interest that is accounted for as an unconsolidated investment; and

	•		a decrease of $2.3 million at the Park Hyatt Beaver Creek related to a decrease in occupancy due to construction activity on the property and the closure of the Allegria Spa for expansion; partially offset by

	•		an increase of $2.8 million at the remaining Luxury Resort and Spa Properties, primarily at Sonoma Mission Inn, related to a 6 percentage point increase in occupancy (from 71% to 77%); and

	•		an increase of $0.6 million primarily due to pre-opening expenses at The Ritz-Carlton Dallas.

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Other Income/Expense

Total other expenses increased $1.8 million, or 0.7%, to $251.8 million for the year ended December 31, 2006, compared to $250.0 million for year ended December 31, 2005. The primary components of the increase in total other income and expenses are discussed below.

Other Income

Other income increased $2.7 million, or 2.8%, to $95.3 million for the year ended December 31, 2006, as compared to $92.6 million for the year ended December 31, 2005. The primary components of the increase in other income are discussed below.

	•		Income from sale of investment in unconsolidated company increased $17.8 million due primarily to the sale of the Four Westlake Park, Three Westlake Park and Chase Tower Office Properties in 2006, partially offset by the sale of our interests in the entity that owned the 5 Houston Center Office Property in 2005.

	•		Income from investment land sales decreased $8.6 million due primarily to the gain on the sale of two parcels of undeveloped investment land in Houston, Texas in 2005.

	•		Loss on joint venture of properties decreased $2.7 million, primarily due to the 2005 write-off of capitalized internal leasing costs related to prior year joint venture of properties.

	•		Interest and other income increased $18.2 million, or 62.1% to $47.4 million primarily due to:

	§		an increase of $13.0 million from mezzanine loans and other loans attributable to an increase of $86.6 million in the weighted average mezzanine loan balance (from $88.7 million to $175.3 million) and a 1.10 percentage point increase in the weighted average interest rate (from 11.92% to 13.02%);

	§		an increase of $6.2 million due to prepayment fees on two mezzanine loans that were paid off in first quarter 2006; and

	§		an increase of $2.6 million related to the amortization of imputed interest related to the El Paso lease termination and contractual full service rents to interest income; partially offset by

	§		a decrease of $2.3 million interest earned on U.S. Treasury and government sponsored agency securities purchased for debt defeasance in order to release the lien on properties securing the LaSalle Note I and Note II and Nomura Funding VI Note; and

	§		a decrease of $1.7 million in other income from legal settlement proceeds received in 2005 in connection with certain deed transfer taxes.

•

Equity in net income of unconsolidated companies decreased $27.4 million to $0.3 million primarily due to:

a decrease of $15.9 million in Temperature-Controlled Logistics equity in net income primarily attributable to:

an increase of $6.8 million in debt related expense due to

	Ø		a prepayment fee related to Goldman Sachs debt defeasance of $4.6 million;

	Ø		a write-off of $2.2 million of unamortized deferred financing costs associated with the Goldman Sachs and Morgan Stanley debt paid off in 2006; and

	°		an increase of $2.7 million related to adjustments for vacation accrual, workers' compensation and legal expenses; and

	°		a decrease of $5.7 million in operating margins, primarily in the transportation segment due to services with FEMA in 2005 in the wake of Hurricane Katrina.

	§		a decrease of $5.7 million in Other equity in net income primarily attributable to a decrease of income from the G2 and SunTx investments;

	§		a decrease of $3.6 million in Resort/Hotel equity in net income primarily attributable to a $3.0 million license fee from Canyon Ranch Living in Miami, Florida, of which our portion was $1.4 million, in the first quarter of 2005 and $2.2 million due to increased expenses in 2006 compared to 2005 associated with Canyon Ranch Operating, LLC; and

	§		a decrease of $2.3 million in Office equity in net income primarily due to a $0.8 million decline in operations at Bank One Center, a $0.7 million decrease in operations at Houston Center and a $0.5 million decrease related to the disposition of 5 Houston Center in December 2005.

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Other Expenses

Other expenses increased $4.5 million, or 1.3%, to $347.2 million for the year ended December 31, 2006, compared to $342.7 million for the year ended December 31, 2005. The primary components of the increase in other expenses are discussed below.

	•		Corporate general and administrative costs decreased $5.4 million, or 10.7%, to $44.9 million primarily due to changes in the short-term incentive compensation plans and lower compensation expense associated with restricted units granted under our long-term incentive compensation plans in December 2004 and May 2005.

	•		Interest expense decreased $2.4 million, or 1.8%, to $134.3 million due to an increase of $11.8 million in capitalized interest (from $21.9 million to $33.7 million); partially offset by an increase of $123.0 million in the weighted average debt balance (from $2.271 billion to $2.394 billion) and a 0.12 percentage point increase in the hedged weighted average interest rate (from 6.98% to 7.10%).

	•		Extinguishment of debt expense decreased $2.2 million due to the write off of deferred financing costs, of which $0.7 million related to the joint venture or sale of real estate assets in 2005.

	•		Depreciation and amortization expense increased $6.0 million, or 4.2%, primarily due to;

	§		an increase of $5.3 million related to additions to leasehold and building improvements and lease conversions; and

	§		an increase of $5.1 million due to the acquisition of Financial Plaza in January 2006; partially offset by

	§		a decrease of $2.3 million related to lease terminations in 2005; and

	§		a decrease of $2.0 million due to the joint venture of Fulbright Tower in February 2005 and One Buckhead Plaza in June 2005.

•

Other expense increased $9.0 million to $13.0 million due primarily to legal and advisory fees for certain contemplated strategic alternatives.

Income Tax Benefit/Expense

The $12.0 million increase in the income tax benefit for the year ended December 31, 2006, compared to the income tax expense of $8.5 million for the year ended December 31, 2005, is primarily due to a $10.8 million increased tax benefit due to decreases from 2005 to 2006 in taxable income of the Resort Residential Development Properties and a $2.1 million decrease in tax expense related to 2005 income from the G2 and SunTx investments.

Discontinued Operations

Income from discontinued operations on assets sold and held for sale, net of minority interests and taxes, decreased $78.4 million to $13.8 million primarily due to:

	•		a decrease of $74.8 million, net of minority interest and taxes due to an $89.2 million aggregate gain on the sale of four properties in 2005 compared to $14.4 million aggregate gain on sale of three properties in 2006; and

	•		a decrease of $4.5 million income, net of minority interest and taxes, due to the reduction of net income associated with properties held for sale in 2006 compared to 2005.

Comparison of the year ended December 31, 2005 (Restated), to the year ended December 31, 2004 (Restated)

Property Revenues

Total property revenues increased $17.9 million, or 1.8%, to $1,018.1 million for the year ended December 31, 2005, as compared to $1,000.2 million for the year ended December 31, 2004. The primary components of the increase in total property revenues are discussed below.

•

Office Property revenues decreased $103.0 million, or 21.6%, to $372.8 million, primarily due to:

a decrease of $154.9 million due to the joint ventures of The Crescent, Trammell Crow Center, Fountain Place, Houston Center and Post Oak Central in November 2004; partially offset by Fulbright Tower, which was acquired in December 2004 and joint ventured in February 2005, and One Buckhead Plaza which was acquired in April 2005 and joint ventured in June 2005; partially offset by

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	§		an increase of $26.9 million from the acquisition of Hughes Center in January through May 2004, Dupont Centre in March 2004, The Alhambra in August 2004, One Live Oak and Peakview Tower in December 2004 and the Exchange Building in February 2005;

	§		an increase of $17.3 million resulting from third party management and leasing services and related direct expense reimbursements due to the joint ventures of The Crescent, Trammell Crow Center, Fountain Place, Houston Center and Post Oak Central in November 2004, and Fulbright Tower in February 2005 and One Buckhead Plaza in June 2005;

	§		an increase of $6.2 million from the 42 consolidated Office Properties (excluding 2004 and 2005 acquisitions, dispositions and properties held for sale) that we owned or had an interest in, primarily due to a 2.6 percentage point increase in average occupancy (from 83.3% to 85.9%), increased expense recovery revenue related to the increase in occupancy and increased recoverable expenses, and increased parking revenue; partially offset by a decline in full service weighted average rental rates; and

	§		an increase of $2.2 million in net lease termination fees (from $9.0 million to $11.2 million) primarily due to the El Paso lease termination.

•

Resort Residential Development Property revenues increased $192.8 million, or 62.2%, to $502.7 million, primarily due to:

an increase of $189.7 million in CRDI revenues primarily related to:

	o		an increase of $239.5 million primarily related to product mix in lots and units available for sale in 2005 versus 2004 at Hummingbird Lodge in Bachelor Gulch, Colorado, Northstar Village in Lake Tahoe, California, and Creekside - Phase II, Creekside Townhomes, Brownstones - Phase I and Delgany, all in Denver, Colorado, which had sales in the twelve months ended December 31, 2005, but no sales in the same period 2004; partially offset by

	o		a decrease of $47.3 million primarily related to product mix in lots and units available for sale in 2004 versus 2005 at Horizon Pass Townhomes in Bachelor Gulch, Colorado, Park Place, Park Tower and Central Platte Valley, all in Denver, Colorado, and Cresta Run in Edwards, Colorado, which had sales in the twelve months ended December 31, 2004, but no sales in the same period 2005; and

	o		a net decrease of $4.0 million primarily related to product mix in lots and units available for sale in 2004 versus 2005 at Horizon Pass Lodge in Bachelor Gulch, Colorado, Old Greenwood Lots in Lake Tahoe, California, Creekside - Phase I in Denver, Colorado, and Main Street Station in Breckenridge, Colorado, which had sales in the twelve months ended December 31, 2004, but reduced sales in the same period 2005, partially offset by Gray's Crossing and Old Greenwood Timeshares in Lake Tahoe, California, and Eagle Ranch in Eagle, Colorado, which had sales in the twelve months ended December 31, 2004, but increased sales in the same period 2005.

•

Resort/Hotel Property revenues decreased $71.9 million, or 33.5%, to $142.6 million, primarily due to:

	§		a decrease of $88.8 million due to the contribution, in January 2005, of the Canyon Ranch Properties to a newly formed entity, CR Operating, LLC, in which we have a 48% member interest that is accounted for as an unconsolidated investment; partially offset by

	§		an increase of $6.9 million in room revenue at the Luxury Resort and Spa Properties related to a 20% increase in revenue per available room (from $171 to $206) resulting from a 12% increase in average daily rate (from $285 to $319) and a 4 percentage point increase in occupancy (from 60% to 64%);

	§		an increase of $4.5 million in food and beverage, spa and other revenue at the Luxury Resort and Spa Properties primarily due to a 12 percentage point increase in occupancy (from 59% to 71%) at the Sonoma Mission Inn primarily related to the renovation of the 97 historic inn rooms which were out of service during the first two quarters of 2004;

	§		an increase of $2.8 million in room revenue at the Upscale Business-Class Hotel Properties primarily due to a 13% increase in revenue per available room (from $80 to $90) resulting from an increase of 6% in average daily rate (from $116 to $123) and a 4 percentage point increase in occupancy (from 69% to 73%); and

	§		an increase of $2.6 million in food and beverage and other revenue at the Upscale Business-Class Hotel Properties primarily related to the 4 percentage point increase in occupancy (from 69% to 73%) in conjunction with increased group volume.

Property Expenses

Total property expenses increased $54.0 million, or 7.9%, to $739.3 million for the year ended December 31, 2005, as compared to $685.3 million for the year ended December 31, 2004. The primary components of the variances in property expenses are discussed below.

•

Office Property expenses decreased $38.4 million, or 16.4%, to $195.8 million, primarily due to:

	§		a decrease of $73.7 million due to the joint ventures of The Crescent, Trammell Crow Center, Fountain Place, Houston Center and Post Oak Central in November 2004, partially offset by Fulbright Tower, which was acquired in December 2004 and joint ventured in February 2005 and One Buckhead Plaza, which was acquired in April 2005 and joint ventured in June 2005; partially offset by

	§		an increase of $14.7 million related to the cost of providing third-party management services due to the joint venture of The Crescent, Trammell Crow Center, Fountain Place, Houston Center and Post Oak Central in November 2004, and Fulbright Tower in February 2005 and One Buckhead Plaza in June 2005, which are recouped by increased third party fee income and direct expense reimbursements;

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	§		an increase of $10.7 million from the acquisition of Hughes Center in January through May 2004, Dupont Centre in March 2004, The Alhambra in August 2004, One Live Oak and Peakview Tower in December 2004 and the Exchange Building in February 2005;

	§		an increase of $4.8 million in operating expenses of the 42 consolidated Office Properties (excluding 2004 and 2005 acquisitions, dispositions and properties held for sale) that we owned or had an interest in primarily due to increased administrative costs, utilities, general building and property taxes; and

	§		an increase of $4.5 million due to increased payroll and benefit costs and Sarbanes-Oxley compliance costs.

•

Resort Residential Development Property expenses increased $160.9 million, or 59.3%, to $432.2 million, primarily due to:

an increase of $160.5 million in CRDI expenses primarily related to:

	o		an increase of $207.3 million primarily related to product mix in lots and units available for sale in 2005 versus 2004 at Hummingbird Lodge in Bachelor Gulch, Colorado, Northstar Village in Lake Tahoe, California, and Creekside - Phase II, Creekside Townhomes, Brownstones - Phase I, and Delgany, all in Denver, Colorado, which had sales in the twelve months ended December 31, 2005, but no sales in the same period 2004; partially offset by

	o		a decrease of $41.8 million primarily related to product mix in lots and units available for sale in 2004 versus 2005 at Horizon Pass Townhomes in Bachelor Gulch, Colorado, Park Place, Park Tower, and Central Platte Valley, all in Denver, Colorado, and Cresta Run in Edwards, Colorado, which had sales in the twelve months ended December 31, 2004, but no sales in the same period 2005; and

	o		a net decrease of $5.5 million primarily related to product mix in lots and units available for sale in 2004 versus 2005 at Horizon Pass Lodge in Bachelor Gulch, Colorado, Old Greenwood Lots in Lake Tahoe, California, Creekside - Phase I in Denver, Colorado, and Main Street Station in Breckenridge, Colorado, which had sales in the twelve months ended December 31, 2004, but reduced sales in the same period 2005, partially offset by Gray's Crossing and Old Greenwood Timeshares in Lake Tahoe, California, and Eagle Ranch in Eagle, Colorado, which had sales in the twelve months ended December 31, 2004, but increased sales in the same period 2005.

•

Resort/Hotel Property expenses decreased $68.5 million, or 38.1%, to $111.3 million, primarily due to:

	§		a decrease of $76.5 million due to the contribution, in January 2005, of the Canyon Ranch Properties to a newly formed entity, CR Operating, LLC, in which we have a 48% member interest that is accounted for as an unconsolidated investment; partially offset by

	§		an increase of $5.2 million in operating expenses at the Luxury Resort and Spa Properties primarily due to a 12 percentage point increase in occupancy at Sonoma Mission Inn (from 59% to 71%) primarily related to the renovation of the 97 historic inn rooms which were out of service during the first two quarters of 2004; and

	§		an increase of $2.7 million in operating expenses at the Upscale Business-Class Hotel Properties primarily related to a 9 percentage point increase in occupancy at Houston Renaissance (from 61% to 70%).

Other Income/Expense

Total expenses increased $126.2 million, or 101.9%, to $250.0 million for the year ended December 31, 2005, compared to $123.8 million for year ended December 31, 2004. The primary components of the increase in total other income and expenses are discussed below.

Other Income

Other income decreased $219.7 million, or 70.3%, to $92.6 million for the year ended December 31, 2005, as compared to $312.3 million for the year ended December 31, 2004. The primary components of the decrease in other income are discussed below.

•

Gain on joint venture of properties decreased $268.5 million, due primarily to:

	§		$265.8 million decrease due to the gain on the joint venture of The Crescent, Fountain Place, Trammell Crow Center, Houston Center and Post Oak Central Office Properties in 2004; and

	§		$4.9 million decrease due to the write-off of capitalized internal leasing costs related to prior year joint venture of properties; partially offset by

	§		$1.9 million increase due to the gain on the joint venture of Fullbright Tower and One Buckhead in 2005.

	•		Income from investment land sales decreased $10.3 million due to the gain of $8.6 million on sales of two parcels of undeveloped investment land in 2005 compared to $18.8 million gain on sales of five parcels of undeveloped investment land in 2004.

	•		Income from sale of investment in unconsolidated company increased $29.9 million due to the sale of our interests in the entity that owned the 5 Houston Center Office Property in 2005.

	•		Interest and other income increased $11.3 million to $29.3 million primarily due to:

	§		$10.5 million interest from mezzanine loans;

	§		$3.7 million interest from U.S. Treasury and government sponsored agency securities purchased in December 2004 and January 2005 related to debt defeasance in order to release the lien on properties securing the LaSalle Note I and Nomura Funding VI Note; and

	§		$1.7 million increase in other income from legal settlement proceeds received in connection with certain deed transfer taxes; partially offset by

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$3.7 million received in 2004 from COPI pursuant to the COPI bankruptcy plan for notes receivable previously written off in 2001.

•

Equity in net income of unconsolidated companies increased $17.9 million to $27.6 million primarily due to:

	§		an increase of $18.2 million in Other equity in net income primarily attributable to an increase of $6.1 million of income from the G2 investment and an increase of $11.5 million of income from the SunTx investment; and

	§		an increase of $5.2 million in Office equity in net income primarily attributable to the joint ventures of The Crescent, Fountain Place, Trammell Crow Center, Houston Center and Post Oak Central Office Properties; partially offset by

	§		a decrease of $6.0 million in Temperature-Controlled Logistics equity in net income primarily attributable to the gain on the sale of a portion of our interests in AmeriCold to The Yucaipa Companies in 2004.

Other Expenses

Other expenses decreased $93.5 million, or 21.4%, to $342.6 million for the year ended December 31, 2005, compared to $436.0 million for the year ended December 31, 2004. The primary components of the decrease in other expenses are discussed below.

•

Extinguishment of debt expense decreased $40.4 million, or 94.8%, to $2.2 million due to:

	§		$17.5 million related to the securities purchased in excess of the debt balance to defease LaSalle Note I in connection with the joint venture of Office Properties in 2004;

	§		$17.5 million prepayment penalty associated with the payoff of the JP Morgan Chase Mortgage Loan in connection with the joint venture of Office Properties in 2004;

	§		$1.0 million mortgage prepayment fee associated with the payoff of the Lehman Brothers Holdings, Inc. Loan in connection with the joint venture of Office Properties in 2004; and

	§		$6.6 million write-off of deferred financing costs, of which $3.1 million related to the joint venture or sale of real estate assets in 2004; partially offset by

	§		$2.1 million write-off of deferred financing costs, of which $0.7 million related to the joint venture or sale of real estate assets in 2005.

	•		Interest expense decreased $40.1 million, or 22.7%, to $136.7 million due to a decrease of $392.0 million in the weighted average debt balance (from $2,664 billion to $2,272 billion), partially offset by a .03 percentage point increase in the hedged weighted average interest rate (from 6.95% to 6.98%) and $3.0 million cash flow payments recorded as interest expense related to the Fountain Place transaction in June 2004.

	•		Depreciation and amortization costs decreased $18.5 million, or 11.6%, to $141.4 million due to:

$19.0 million decrease in Office Property depreciation expense, primarily due to:

	°		$36.7 million decrease attributable to the joint ventures of The Crescent, Fountain Place, Trammell Crow Center, Houston Center and Post Oak Central in November 2004, partially offset by Fulbright Tower which was acquired in December 2004 and subsequently joint ventured in February 2005 and One Buckhead Plaza which was acquired in April 2005 and subsequently joint ventured in June 2005; partially offset by

	°		$13.2 million increase from the acquisitions of Hughes Center in January through May 2004, Dupont Centre in March 2004, The Alhambra in August 2004, One Live Oak, Fulbright Tower and Peakview Tower in December 2004 and the Exchange Building in February 2005; and

	°		$3.1 million increase primarily due to increased building and leasehold improvements; and

	§		$5.2 million decrease in Resort/Hotel Property depreciation expense primarily related to the joint venture of the Canyon Ranch Properties, partially offset by the reclassification of the Denver City Marriott Hotel Property from held for sale to held and used; partially offset by

	§		$6.6 million increase in Resort Residential Development Property depreciation expense primarily related to club amenities and golf course improvements at CRDI and Desert Mountain.

	•		Amortization of deferred financing costs decreased $5.0 million, or 38.2%, to $8.1 million primarily due to the refinancing and modification of the Credit Facility in February 2005 and December 2005, partially offset by the reduction of the Fleet Fund I and II Term Loan in January 2004 and the payoff of the Lehman Capital Note in November 2004.

	•		Impairment charges related to real estate assets decreased $4.1 million due to the impairment of $4.1 million related to the demolition of the old clubhouse at the Sonoma Club in the third quarter 2004 in order to construct a new clubhouse.

	•		Corporate general and administrative costs increased $11.3 million, or 29.0%, to $50.4 million due primarily to an increase in compensation expense associated with restricted units granted under our long-term incentive compensation plans in December 2004 and May 2005.

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Income Tax Expense/Benefit

The $20.7 million decrease in the income tax benefit to an $8.5 million income tax expense for the year ended December 31, 2005, as compared to the income tax benefit of $12.2 million for the year ended December 31, 2004, is primarily due to:

	•		$8.5 million decreased tax benefit on the Resort Residential Development Properties primarily attributable to the results of operations at CRDI;

	•		$5.8 million decreased tax benefit on the Resort/Hotel Properties due to the contribution of the Canyon Ranch Properties to a newly formed entity, CR Operating, LLC, in which we have a 48% member interest that is accounted for as an unconsolidated investment and reduced taxable losses at the other properties;

	•		$4.0 million tax expense related to income from our investment in SunTx; and

	•		$2.8 million tax expense related to income from our investment in G2.

Discontinued Operations

Income from discontinued operations on assets sold and held for sale, net of minority interests and taxes, increased $83.7 million to $92.3 million for the year ended December 31, 2005, due to:

	•		an increase of $88.1 million, net of minority interest, primarily due to the $89.2 million gain on the sale of four properties in 2005; and

	•		an increase of $2.0 million, net of minority interest, due to an aggregate $3.0 million impairment on three office properties in 2004 compared to $1.0 million impairment of Waterside Commons office property in 2005; partially offset by

	•		a decrease of $6.4 million, net of minority interest, due to the reduction of net income associated with properties held for sale in 2005 compared to 2004.

Liquidity and Capital Resources

Overview

Our primary sources of liquidity are cash flow from operations, our credit facility, construction loans and proceeds from asset sales and joint ventures. Our short-term liquidity requirements through December 31, 2007 consists primarily of our normal operating expenses, maturity of our 7.5% senior unsecured notes dues September 2007, the 2007 Notes, recurring principal and interest payments on our debt, Resort Residential Development capital expenditures, capital expenditures for operating properties, potential redemption of restricted units from our Operating Partnership and distributions to our shareholders. Our long-term liquidity requirements are substantially similar to our short-term liquidity requirements other than the level of debt obligations maturing after December 31, 2007.

We intend on using the proceeds from the substantial asset sales that we expect to make in accordance with our Strategic Plan which is discussed in the Overview to this Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" to address many of our long-term liquidity requirements early, including: retiring our 9.25% senior notes due April 2009, the 2009 Notes, selected mortgage debt, our Series B Preferred Shares and outstanding borrowings under our revolving credit facility. Additionally, if and when we sell our Resort Residential Development Properties, we expect to eliminate all related construction debt as well as future Resort Residential capital expenditures.

Short-Term Liquidity

We believe that cash flow from operations will be sufficient to cover our normal operating expenses, interest payments on our debt, distributions on our preferred shares, non-revenue enhancing capital expenditures and revenue enhancing capital expenditures (including property improvements, tenant improvements and leasing commissions) in 2007. The cash flow from our Resort Residential Development Segment is cyclical in nature and primarily realized in the last quarter of each year. While we expect to sell virtually all of the investments comprising this segment in 2007, we may meet temporary shortfalls in operating cash flow caused by this cyclicality through working capital draws under our credit facility, additional borrowings or asset sales in accordance with our Strategic Plan. As of December 31, 2006, we had up to $239.3 million of borrowing capacity available under our credit facility. If our Board of Trustees continues to declare distributions on our common shares at current levels, our cash flow from operations, after payments discussed above, is not expected to fully cover such distributions on our common shares in 2007. However, as part of our Strategic Plan, we intend to align our distributions with industry-accepted pay-out ranges to allow for retention of capital for growth. We will communicate our distribution plans as we execute asset sales. In the meantime, we intend to use proceeds from any asset sales and joint ventures and borrowings under our credit facility to cover any distribution shortfall.

In addition, through December 31, 2007, we may make capital expenditures that are not in the ordinary course of operations of our business of approximately $140.3 million, primarily relating to new developments of investment property. We anticipate funding these short-term liquidity requirements primarily through construction loans and borrowings under our credit facility and any asset sales. As of December 31, 2006, we also had maturing debt obligations of $750.0 million through December 31, 2007, made up primarily of the maturity of the 2007 Notes, the GACC Note (which has three one-year extension options), Funding I Defeasance (to be repaid from proceeds of defeasance investments), the Mass Mutual Note and the KeyBank II loan. The 2007 Notes are expected to be repaid using proceeds from asset sales in accordance with our Strategic Plan. We intend to refinance or pay off with asset sales the Mass Mutual and KeyBank II loans. In addition, $108.3 million of these maturing debt obligations relate to the Resort Residential Development Segment and are expected to be repaid with the sales of the corresponding land or units or are expected to be refinanced with additional debt facilities. The remaining maturities consist primarily of normal principal amortization and are expected to be met with cash flow from operations.

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Long-Term Liquidity

Our long-term liquidity requirements as of December 31, 2006, consist primarily of $1.5 billion of debt maturing after December 31, 2007, some of which we expect to repay in 2007 from asset sales as discussed above. We anticipate meeting these obligations, to the extent that these obligations remain outstanding after we have fully implemented our Strategic Plan, primarily through refinancing maturing debt with long-term secured and unsecured debt, construction loans and through other debt and equity financing alternatives, as well as cash proceeds from joint ventures.

We anticipate that long-term liquidity requirements will also include amounts required for future unidentified property acquisitions, mezzanine notes and capital expenditures. Property acquisitions and capital expenditures are expected to be funded with any cash reserves remaining from asset sales made in accordance with our Strategic Plan, available cash flow from operations, borrowings under our credit facility, construction and permanent secured financing, other debt and equity financing alternatives, as well as cash proceeds from future asset sales and joint ventures. Mezzanine notes are expected to be funded with borrowings under our credit facility and through the use of our warehouse facilities governed by repurchase agreements.

Cash Flows

Our cash flow from operations is primarily attributable to the operations of our Office, Resort Residential Development and Resort/Hotel Properties. The level of our cash flow depends on multiple factors, including rental rates and occupancy rates at our Office Properties, sales of lots and units at our Resort Residential Development Properties and room rates and occupancy rates at our Resort/Hotel Properties. Our net cash provided by operating activities is also affected by the level of our operating and other expenses, as well as Resort Residential capital expenditures for existing and committed projects.

During the year ended December 31, 2006, our cash flow from operations was insufficient to fully cover the distributions on our common shares. We funded this shortfall primarily with a combination of proceeds from asset sales and borrowings under our credit facility.


	For the year ended
(in millions)	December 31, 2006
Cash used in Operating Activities	$	(102.8	)
Cash provided by Investing Activities		216.8
Cash used in Financing Activities		(122.7	)

Decrease in Cash and Cash Equivalents	$	(8.7	)
Cash and Cash Equivalents, Beginning of Period		86.2

Cash and Cash Equivalents, End of Period	$	77.5

Operating Activities

Our cash used in operating activities of $102.8 million is attributable to Property operations.

Investing Activities

Our cash provided by investing activities of $216.8 million is primarily attributable to:

	•		$186.4 million proceeds from defeasance investment maturities and other securities, primarily due to the maturity of the securities securing the LaSalle Note II which was repaid in March 2006 and the sale of our available for sale marketable securities;

	•		$102.9 million proceeds from sale of investment in unconsolidated company due to our sale of the Four Westlake Park, Three Westlake Park, Bank One Center and Chase Tower Office Properties, on behalf of the joint ventures in which we had an interest;

	•		$103.9 million proceeds from property sales due to the sale of our interest in the Paseo Del Mar Office Property, the sale of the Waterside Commons Office Property, and the sale of the JPI Multi-Family Investments luxury apartment project;

	•		$81.3 million return of investment in unconsolidated companies, primarily due to the distributions received from AmeriCold Realty Trust, Main Street Partners, L.P., Blue River Land Company, LLC and Redtail Capital Partners, L.P.;

	•		$69.0 million decrease in notes receivable, primarily due to the repayment of five of our mezzanine loans, offset by four new mezzanine loans; and

	•		$9.6 million decrease in restricted cash.

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The cash provided by investing activities is partially offset by:

	•		$138.2 million for the development of investment properties, due to the development of the JPI Multi-Family Investments luxury apartment project, Paseo del Mar and Parkway at Oakhill office developments, Ritz-Carlton Hotel development and 3883 Hughes Parkway office development;

	•		$68.7 million for non-revenue enhancing tenant improvement and leasing costs for Office Properties;

	•		$47.6 million of property improvements for Office and Resort/Hotel Properties;

	•		$30.7 million for the acquisition of investment properties, primarily due to the acquisition of the Financial Plaza Office Property in January 2006;

	•		$27.6 million for development of amenities at the Resort Residential Development Properties; and

	•		$23.5 million additional investment in unconsolidated companies, primarily related to our investment in Riverfront Village and Redtail Capital Partners, L.P.

Financing Activities

Our cash used in financing activities of $122.7 million is primarily attributable to:

	•		$193.2 million payments under other borrowings, primarily due to the pay off of the LaSalle Note II funded by proceeds from the maturity of defeasance investments, the pay off of the FHI Finance loan, pay down of the Morgan Stanley note and principal payments related to other debt agreements;

	•		$184.1 million distributions to common shareholders and unitholders;

	•		$116.0 million net paydowns under our credit facility;

	•		$32.0 million distributions to preferred shareholders;

	•		$18.6 million capital distributions to joint venture partners, primarily due to distributions to JPI Multi-Family Investments, L.P., Desert Mountain and Fairmont Sonoma Mission Inn; and

	•		$4.1 million debt financing costs, primarily due to the Bank of America loan secured by the Fairmont Sonoma Mission Inn and the Goldman Sachs and Morgan Stanley repurchase agreements secured by mezzanine loans.

The cash used in financing activities is partially offset by:

	•		$282.4 million proceeds from other borrowings, primarily due to the Key Bank loan secured by distributions from Funding III, IV & V, the Bank of America loan secured by the Fairmont Sonoma Mission Inn, the Morgan Stanley and Goldman Sachs repurchase agreements secured by mezzanine loans and construction draws on our Office developments and The Ritz-Carlton hotel development;

	•		$111.2 million net proceeds from borrowings for construction costs at the Resort Residential Development Properties;

	•		$23.1 million proceeds from the exercise of share and unit options; and

	•		$8.6 million proceeds from capital contributions from our joint venture partners.

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Liquidity Requirements

Contractual Obligations

The table below presents, as of December 31, 2006, our future scheduled payments due under these contractual obligations.


	Payments Due by Period
(in millions)	Total		Less than 1 yr		1-3 years		3-5 years		More than 5 yrs

Long-term debt (1)(4)
Principal payments	$	2,296.4	$	750.0	$	1,008.4	$	321.5	$	216.5
Interest payments		511.3		152.0		155.9		47.6		155.8
Share of unconsolidated debt		705.6		38.6		61.8		185.1		420.1

Ground lease obligations		147.0		1.9		3.8		4.0		137.3

Operating lease obligations (2)		46.0		39.1		6.9		-		-
Share of unconsolidated operating lease obligations		13.4		11.4		2.0		-		-

Significant capital expenditure obligations (3)		145.3		140.3		5.0		-		-

Total contractual obligations	$	3,865.0	$	1,133.3	$	1,243.8	$	558.2	$	929.7


(1)		Amounts include scheduled principal and interest payments for consolidated debt. We estimate variable rate debt interest payments using the interest rate as of December 31, 2006. Additionally, we have letters of credit issued under our credit facility of $9.5 million which reduces our borrowing capacity. These letters of credit are excluded from the table above as management believes that this obligation is not reasonably likely to occur.

(2)		As part of our ongoing operations, we execute operating lease agreements which generally provide tenants with leasehold improvement allowances and other lease concessions. In addition, we generally pay lease commissions to cooperating third-party brokers. Total committed but unfunded operating lease obligations as of December 31, 2006 are reflected in the above table.

(3)		For further detail of significant capital expenditure obligations, see table under "Significant Capital Expenditures" in this Item 7.

(4)		We intend on using the proceeds from the substantial asset sales that we expect to make in accordance with our Strategic Plan which is discussed in the Overview section to this Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" to address many of our long-term liquidity requirements early, including: retiring our 9.25% senior notes due April 2009, the 2009 Notes, selected mortgage debt, our Series B Preferred Shares and outstanding borrowings under our revolving credit facility. Additionally, if and when we sell our Resort Residential Development Properties, we expect to eliminate all related construction debt as well as future Resort Residential capital expenditures.

We also pay preferred distributions to our Series A and Series B Preferred shareholders. The distributions per Series A Preferred share was $1.6875 per preferred share annualized, or $23.9 million for the year ended December 31, 2006. The distributions per Series B Preferred share was $2.3750 per preferred share annualized, or $8.1 million for the year ended December 31, 2006.

Debt Financing Summary

The following table shows summary information about our debt, including our pro rata share of unconsolidated debt, as of December 31, 2006. Listed below are the aggregate required principal payments by year as of December 31, 2006, excluding any extension options. Scheduled principal installments and amounts due at maturity are included.


										Share of
	Secured		Defeased		Unsecured			Consolidated		Unconsolidated
(in thousands)	Debt		Debt		Debt			Debt		Debt		Total
2007	$	399,719	$	100,279	$	250,000		$	749,998	$	38,613	$	788,611
2008		234,290		289		118,000	(1)		352,579		43,465		396,044
2009		280,489		320		375,000			655,809		18,279		674,088
2010		134,043		6,337		-			140,380		17,761		158,141
2011		181,120		-		-			181,120		167,303		348,423
Thereafter		139,151		-		77,321			216,472		420,177		636,649

	$	1,368,812	$	107,225	$	820,321		$	2,296,358	$	705,598	$	3,001,956


(1)		Borrowings under the credit facility.

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Significant Capital Expenditures

As of December 31, 2006, we had unfunded capital expenditures of approximately $145.3 million relating to capital investments that are not in the ordinary course of operations of our business segments. The table below specifies:

	•		our requirements for capital expenditures (not factoring in project level financing);

	•		the amounts funded as of December 31, 2006, on a cash basis; and

	•		amounts remaining to be funded (future funding classified between short-term and long-term capital requirements).


			Amount Spent					Capital Expenditures
	Total		as of		Amount			Short-Term		Long-Term
	Project		December 31,		Remaining To			(Next 12		(12+
(in millions) Project	Cost (1)		2006		Spend			Months) (2)		Months) (2)
Consolidated:
Office Segment
3883 Hughes Center (3)	$	73.0	$	56.6	$	16.4		$	16.4	$	-
Parkway at Oakhill (4)		24.6		13.1		11.5			6.5		5.0

Resort Residential Development Segment
Ritz-Carlton Highlands (5)		402.2		22.3		8.0	(6)		8.0		-
Tahoe Mountain Club (7)		107.2		92.2		15.0			15.0		-
The Ritz-Carlton – Phase I (8)		211.6		120.9		90.7			90.7		-
The Ritz-Carlton – Phase II (9)		136.8		14.2		-	(10)		-		-

Resort/Hotel Segment
Park Hyatt Beaver Creek (11)		26.6		22.9		3.7			3.7		-


Total	$	982.0	$	342.2	$	145.3		$	140.3	$	5.0


(1)		All amounts are approximate.

(2)		Reflects our estimate of the breakdown between short-term and long-term capital expenditures.

(3)		We have committed to a first phase office development of 239,000 square feet on land that we own within the Hughes Center complex. We expect to complete the building in the first quarter of 2007. We closed a $52.3 million construction loan in the third quarter of 2005.

(4)		In March 2006, we entered into a joint venture agreement with Champion Partners. The joint venture has committed to develop a 144,380 square-foot, two-building office complex in Austin, Texas. The joint venture has a $18.3 million construction loan to fund construction of this project. Amounts in the table represent our portion (90%) of total project costs. The development is scheduled to be completed in first quarter 2007.

(5)		We entered into agreements with Ritz-Carlton Hotel Company, L.L.C. for us to develop a 172 room luxury hotel in Lake Tahoe, California. The new luxury property will also include the Ritz-Carlton Residences.

(6)		The funding of future potential capital expenditures is dependent upon obtaining a certain level of unit pre-sales, construction financing and assumes we will obtain a joint venture partner for 60% of the equity. In the interim, we have committed up to an additional $8.0 million in development costs on the project.

(7)		As of December 31, 2006, we had invested $92.2 million in Tahoe Mountain Club, which includes the acquisition of land and development of golf courses and club amenities. This table includes the development planned for 2007 only. We anticipate collecting membership deposits which will be utilized to fund a portion of the development costs.

(8)		We entered into agreements with Ritz-Carlton Hotel Company, L.L.C. for us to develop the first Ritz-Carlton hotel and condominium project in Dallas, Texas. The development plans include a Ritz-Carlton with approximately 218 hotel rooms and 70 residences. Construction on the development is anticipated to be completed in the third quarter of 2007. We have a $169.0 million construction line of credit from KeyBank for the construction of this project.

(9)		We entered into agreements with Ritz-Carlton Hotel Company, L.L.C. for us to develop an additional 96 Ritz-Carlton residences and 4 townhomes adjacent to the Phase I development.

(10)		The funding of future potential capital expenditures is dependent upon obtaining a certain level of unit pre-sales and construction financing.

(11)		In April 2006, we began renovations at the Park Hyatt Beaver Creek in Avon, Colorado, which consist of the addition of air conditioning, upgrades to the common areas and taking 30 rooms out of service to expand the Allegria Spa within the hotel. The spa expansion and common area upgrade were completed in December 2006.

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Units Subject to Redemption

Restricted units granted under the 2004 and 2005 Unit Plans vest in 20% increments when the average closing price of Crescent common shares for the preceding 40 trading days achieves certain targets. Each vested restricted unit will be exchangeable, beginning on the second anniversary of the date of grant, for cash equal to the value of two Crescent common shares based on the closing price of the common shares on the date of exchange, and subject to a six-month hold period following vesting, unless, prior to the date of the exchange, Crescent requests and obtains shareholder approval authorizing it, at its discretion, to deliver instead two common shares in exchange for each such restricted unit. Regular quarterly distributions accrue on unvested restricted units and are payable upon vesting of the restricted units.

The following table presents the amount of restricted unit grants, vested restricted units and the redemption amount by year.


							Vested Unit
							Redemption Value			Redeemable at
(dollars in							at December 31,			December 31,		Redeemable in
thousands)	Granted (1)		Vested (1)		Redeemed		2006 (2)			2006		2007		2008

2004 Plan		3,568,500		2,147,500		206,750	$	38,329		$	35,278	$	3,051	$	-
2005 Plan		2,187,500		437,500		-		8,641	(3)		-		8,542		99

		5,756,000		2,585,000		206,750	$	46,970		$	35,278	$	11,593	$	99


(1)		Amounts listed in common share equivalents and are net of forfeitures.

(2)		Vested units may be exchanged for cash unless, prior to the date of exchange, Crescent obtains shareholder approval authorizing it, at its discretion, to deliver instead two common shares for each such restricted unit. Redemption value based on Crescent's closing stock price at December 31, 2006.

(3)		Amount is redeemable beginning May 16, 2007.

Off-Balance Sheet Arrangements - Guarantee Commitments

Our guarantees in place as of December 31, 2006, are listed in the table below. For the guarantees on indebtedness, no triggering events or conditions are anticipated to occur that would require payment under the guarantees and management believes the assets associated with the loans that are guaranteed are sufficient to cover the maximum potential amount of future payments and therefore, would not require us to provide additional collateral to support the guarantees.


	Guaranteed		Maximum
	Amount		Guaranteed
(in thousands)	Outstanding at		Amount at
Debtor	December 31, 2006		December 31, 2006
CRDI – U.S. Bank National Association (1)	$	14,346	$	20,393
CRDI – Eagle Ranch Metropolitan District – Letter of Credit (2)		7,840		7,840
Fresh Choice, LLC (3)		1,000		1,000

Total Guarantees	$	23,186	$	29,233


(1)		We entered into a Payment and Completion Guaranty with U.S. Bank National Association for the repayment of bonds that were issued by the Northstar Community Housing Corporation to fund construction of an employee housing project. The initial guaranty of $20.4 million decreases to $5.1 million once construction is complete and certain conditions are met and decreases further and is eventually released as certain debt service coverage ratios are achieved.

(2)		We provide a $7.8 million letter of credit to support the payment of interest and principal of the Eagle Ranch Metropolitan District Revenue Development Bonds.

(3)		We provide a guarantee of up to $1.0 million to GE Capital Franchise Financing Corporation as part of Fresh Choice's bankruptcy reorganization.

Other Commitments

In July 2005, we purchased comprehensive insurance that covers us, contractors and other parties involved in the construction of the Ritz-Carlton hotel and condominium project in Dallas, Texas. Our insurance carrier, which will pay the associated claims as they occur under this program and will be reimbursed by us within our deductibles, requires us to provide a $1.7 million letter of credit supporting payment of claims. We believe there is a remote likelihood that payment will be required under the letter of credit.

In connection with the Canyon Ranch transaction, we have agreed to indemnify the founders regarding the tax treatment of the transaction, not to exceed $2.5 million, and certain other matters. We believe there is a remote likelihood that payment will ever be required related to these indemnities.

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Debt and Equity Financing

The significant terms of our primary debt financing arrangements existing as of December 31, 2006, are shown below:


				Balance
				Outstanding at		Interest Rate at
	Secured	Maximum		December 31,		December 31,
Description (1)	Asset	Borrowings		2006		2006			Maturity Date
*Secured Fixed Rate Debt:*
AEGON Partnership Note	Greenway Plaza	$	242,290	$	242,290		7.53	%	July 2009
Prudential Note	707 17 th Street/Denver Marriott		70,000		70,000		5.22		June 2010
JP Morgan Chase III	Datran Center		65,000		65,000		4.88		October 2015
Bank of America Note I	Fairmont Sonoma Mission Inn		55,000		55,000		5.40		February 2011
Morgan Stanley I	The Alhambra		50,000		50,000		5.06		October 2011
Allstate Life Note	Financial Plaza		38,949		38,949		5.47		October 2010
Bank of America Note II	The BAC – Colonnade Building		37,439		37,439		5.53		May 2013
Metropolitan Life Note VII	Dupont Centre		35,500		35,500		4.31		May 2011
Column Financial	Peakview Tower		33,000		33,000		5.59		April 2015
Mass Mutual Note	3800 Hughes		32,203		32,203		7.75		July 2007
Northwestern Life Note	301 Congress		26,000		26,000		4.94		November 2008
JP Morgan Chase II	3773 Hughes		24,755		24,755		4.98		September 2011
Allstate Note (2)	3993 Hughes		24,025		24,025		6.65		September 2010
Metropolitan Life Note VI (2)	3960 Hughes		22,074		22,074		7.71		October 2009
Construction, Acquisition and other obligations	Various Office and Resort Residential Assets		40,690		40,690		2.90 to 13.75		July 2007 to Dec. 2016
*Secured Fixed Rate Defeased Debt* (3) :
LaSalle Note I	Funding I Defeasance		100,017		100,017		7.83		August 2007
Nomura Funding VI Note	Funding VI Defeasance		7,208		7,208		10.07		July 2010

Subtotal/Weighted Average		$	904,150	$	904,150		6.38	%

*Unsecured Fixed Rate Debt:*
The 2009 Notes		$	375,000	$	375,000		9.25	%	April 2009
The 2007 Notes			250,000		250,000		7.50		September 2007

Subtotal/Weighted Average		$	625,000	$	625,000		8.55	%

*Secured Variable Rate Debt:*
GACC Note (4)	Funding One Assets	$	165,000	$	165,000		6.82	%	June 2007
Morgan Stanley II (5)(6)	Mezzanine Investments		100,000		22,311		7.37		March 2009
Goldman Sachs (6)(7)	Mezzanine Investments		100,000		10,000		6.72		May 2009
KeyBank II	Distributions from Funding III, IV and V		75,000		75,000		7.35		June 2007
National Bank of Arizona	DMDC Assets		30,000		15,654		8.75		October 2007
Acquisition and other obligations	Various Office and Other Assets		13,416		13,416		6.60 to 6.63		February 2008 to December 2012
*Secured Variable Rate Construction Debt:*
KeyBank I (4)	Ritz-Carlton Dallas Construction		169,000		80,296		7.60		July 2008
JP Morgan Chase	Northstar Big Horn Construction		84,918		56,342		7.75		October 2007
Societe Generale I (8)	3883 Hughes Construction		52,250		30,587		7.22		September 2008
FirstBank of Vail	Village Walk Construction		41,782		14,041		7.75		February 2008
US Bank II	Northstar Trailside Construction		36,000		1,991		8.10		March 2009
US Bank I (9)	Beaver Creek Landing Construction		33,400		16,446		7.10		February 2008
California Bank & Trust (10)	One Riverfront Construction		27,500		13,861		8.38		March 2008
JP Morgan Chase Bank	Old Greenwood Construction		20,999		16,150		8.25		March 2007
Construction, Acquisition and other obligations	Various Office and Resort Residential Assets		73,077		40,792		7.45 to 9.25		June 2007 to December 2010

Subtotal/Weighted Average		$	1,022,342	$	571,887		7.39	%

*Unsecured Variable Rate Debt:*
Credit Facility (11)		$	366,759	$	118,000		6.95	%	February 2008
Junior Subordinated Notes			51,547		51,547		7.38		June 2035
Junior Subordinated Notes			25,774		25,774		7.38		July 2035

Subtotal/Weighted Average		$	444,080	$	195,321		7.12	%

Total/Weighted Average		$	2,995,572	$	2,296,358		7.29	% (12)

Average remaining term						3.1 years


(1)		For more information regarding the terms of our debt financing arrangements and the method of calculation of the interest rate for our variable rate debt, see Note 12, "Notes Payable and Borrowings under Credit Facility," included in Item 8, "Financial Statements and Supplementary Data."

(2)		Includes a portion of total premiums of $2.2 million reflecting market value of debt acquired with the purchase of Hughes Center portfolio.

(3)		We purchased U.S. Treasuries and government sponsored agency securities, or defeasance investments, to substitute as collateral for these loans. The cash flow from defeasance investments (principal and interest) matches the total debt service payment of the loans.

(4)		This loan has three one-year extension options.

(5)		The investments can be financed through March 2008, after which four equal payments are due quarterly. The loan has a provision for a one-year extension which is subject to Morgan Stanley's approval.

(6)		The loans supporting these facilities are subject to daily valuations by Morgan Stanley and Goldman Sachs, respectively. We are subject to a margin call if the overall leverage of the facility exceeds certain thresholds.

(7)		The investments can be financed through May 2009. The financing and maturity can be extended one year subject to Goldman Sachs' approval.

(8)		This loan has two one-year extension options.

(9)		This loan has one six-month extension option.

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

(11)		The Credit Facility has a maximum borrowing capacity of $366.8 million. The $118.0 million outstanding at December 31, 2006, excludes letters of credit issued under the facility of $9.5 million. We are also subject to financial covenants, which include minimum debt service ratios, maximum leverage ratios and, in the case of the Operating Partnership, a minimum tangible net worth limitation and a fixed charge coverage ratio.

(12)		The overall weighted average interest rate does not include the effect of our cash flow hedge agreements. Including the effect of these agreements, the overall weighted average interest rate would have been 7.27%.

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

Failure to comply with covenants generally will result in an event of default under that debt instrument. Any uncured or unwaived events of default under our loans can trigger an increase in interest rates, an acceleration of payment on the loan in default, and for our secured debt, foreclosure on the property securing the debt, and could cause the credit facility to become unavailable to us. In addition, an event of default by us or any of our subsidiaries with respect to any indebtedness in excess of $5.0 million generally will result in an event of default the Credit Facility, the 2007 Notes, 2009 Notes, KeyBank I Loan, Morgan Stanley II Loan, Goldman Sachs Loan, Societe Generale I Construction Loan and KeyBank II Loan, after the notice and cure periods for the other indebtedness have passed. As a result, any uncured or unwaived event of default could have an adverse effect on our business, financial condition, or liquidity.

As of December 31, 2006, no event of default had occurred. Our secured debt facilities generally prohibit loan prepayment for an initial period, allow prepayment with a penalty during a following specified period and allow prepayment without penalty after the expiration of that period. During the year ended December 31, 2006, there were no circumstances that required prepayment penalties or increased collateral related to our existing debt.

Warehouse Facilities

We finance certain of our mezzanine loans through the use of warehouse facilities governed by repurchase agreements. A repurchase agreement is a financing under which we pledge one or more of our mezzanine investments as collateral to secure a loan with the repurchase agreement counterparty (i.e. lender). The amount borrowed under a repurchase agreement is limited to a specified percentage, generally not more than 80%, of the estimated market value of the pledged collateral. Repurchase agreements take the form of a sale of the pledged collateral to a lender at an agreed upon price in return for such lender's simultaneous agreement to resell the same securities back to the borrower at a future date (i.e. the maturity of the borrowing), with periodic interest payments during the term of the sale. The cost of borrowings under repurchase agreements generally corresponds to LIBOR plus a margin. Under our repurchase agreements, we retain beneficial ownership of the pledged collateral, while the lender maintains custody of such collateral. At the maturity of a repurchase agreement, we are required to repay the loan, which may be due in installments over a one-year period, and receive back our pledged collateral from the lender or, at the sole discretion of the lender, we may renew such agreement. Under repurchase agreements, a lender may require us to pledge additional assets to such lender (i.e. a margin call) in the event that the lender determines the estimated fair value of our existing pledged collateral has declined below a specified percentage. Our pledged collateral fluctuates in value due to, among other things, market changes in interest rates and matters affecting the real estate underlying certain pledged collateral.

In order to reduce our exposure to counterparty-related risk, our goal is to enter into repurchase agreements with multiple financial institutions, all of whom have investment-grade long-term debt ratings. As of December 31, 2006, we had outstanding repurchase obligations under two repurchase agreements totaling $32.3 million with a weighted average borrowing rate of 7.17%.

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Derivative Instruments and Hedging Activities

We use derivative financial instruments to convert a portion of our variable rate debt to fixed rate debt and to manage the fixed to variable rate debt ratio. As of December 31, 2006, we had interest rate swaps and interest rate caps designated as cash flow hedges, which are accounted for in conformity with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities , as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities – an Amendment of FASB Statement No. 133 and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities.

The following table shows information regarding the fair value of our interest rate swaps and caps designated as cash flow hedge agreements, which are included in the "Other assets, net" and "Accounts payable, accrued expenses and other liabilities" line items in the Consolidated Balance Sheets, and additional interest expense and unrealized gains (losses) recorded in Accumulated other comprehensive income, or OCI, for the year ended December 31, 2006.


										Additional			Change in
										(Reduction)			Unrealized Gains
Effective Date	Notional Amount		Maturity Date		Reference Rate			Fair Market Value		Interest Expense			(Losses) in OCI
(in thousands)
*Interest rate swaps*
2/15/03	$	100,000		2/15/06		3.26	%	$	-	$	(147	)	$	(138	)
2/15/03		100,000		2/15/06		3.25	%		-		(148	)		(139	)
9/02/03		200,000		9/01/06		3.72	%		-		(1,603	)		(1,264	)
1/17/05		-		10/16/06		3.74	%		-		-	(1)		(205	)
4/25/06		79,761		12/26/07		5.20	%		3		-	(1)		3
9/29/06		200,000		9/4/07		5.20	%		56		(66	)		56

								$	59	$	(1,964	)	$	(1,687	)

*Interest rate caps*
1/07/05	$	7,800		2/01/08		6.00	%		-		4			(1	)

								$	59	$	(1,960	)	$	(1,688	)


(1)		A portion of the interest on the debt that this swap is hedging is capitalized.

In addition, three of our unconsolidated companies have interest rate caps and swaps designated as cash flow hedges of which our portion of change in unrealized losses reflected in OCI was $0.1 million for the year ended December 31, 2006.

Unconsolidated Debt Arrangements

As of December 31, 2006, the total debt of the unconsolidated joint ventures and investments in which we have ownership interests was $2.3 billion, of which our share was $705.6 million. We guaranteed $1.0 million of this debt as of December 31, 2006. Additional information relating to our unconsolidated debt financing arrangements is contained in Note 10, "Investments in Unconsolidated Companies," of Item 1, "Financial Statements and Supplementary Data."

Share Repurchase Program

We commenced our share repurchase program in March 2000. On October 15, 2001, our Board of Trust Managers increased from $500.0 million to $800.0 million the amount of outstanding common shares that can be repurchased from time to time in the open market or through privately negotiated transactions. There were no share repurchases under the program for the year ended December 31, 2006. As of December 31, 2006, we had repurchased 20,256,423 common shares under the share repurchase program, at an aggregate cost of approximately $386.9 million, resulting in an average repurchase price of $19.10 per common share. All repurchased shares were recorded as treasury shares.

Shelf Registration Statement

On October 29, 1997, we filed a shelf registration statement with the SEC relating to the future offering of up to an aggregate of $1.5 billion of common shares, preferred shares and warrants exercisable for common shares. Management believes the shelf registration statement will provide us with more efficient and immediate access to capital markets when considered appropriate. As of March 5, 2007, approximately $510.0 million was available under the shelf registration statement for the issuance of securities.

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Unconsolidated Investments

The following is a summary of our ownership in significant unconsolidated joint ventures and investments as of December 31, 2006.


		Our Ownership
		as of
Entity	Classification	December 31, 2006
Crescent Irvine, LLC	Office (2211 Michelson Office Development – Irvine)	40.0% (1)
Crescent Miami Center, LLC	Office (Miami Center – Miami)	40.0% (2) (3)
Crescent One Buckhead Plaza, L.P.	Office (One Buckhead Plaza – Atlanta)	35.0% (4) (3)
Crescent POC Investors, L.P.	Office (Post Oak Central – Houston)	23.9% (5) (3)
Crescent HC Investors, L.P.	Office (Houston Center – Houston)	23.9% (5) (3)
Crescent TC Investors, L.P.	Office (The Crescent – Dallas)	23.9% (5) (3)
Crescent Ross Avenue Mortgage Investors, L.P.	Office (Trammell Crow Center, Mortgage – Dallas)	23.9% (6) (3)
Crescent Ross Avenue Realty Investors, L.P.	Office (Trammell Crow Center, Ground Lessor – Dallas)	23.9% (6) (3)
Crescent Fountain Place, L.P.	Office (Fountain Place – Dallas)	23.9% (6) (3)
Crescent Five Post Oak Park L.P.	Office (Five Post Oak Park – Houston)	30.0% (7) (3)
Crescent One BriarLake Plaza, L.P.	Office (One BriarLake Plaza – Houston)	30.0% (8) (3)
Crescent 1301 McKinney, L.P.	Office (Fulbright Tower – Houston)	23.9% (9) (3)
AmeriCold Realty Trust	Temperature-Controlled Logistics	31.7% (10)
CR Operating, LLC	Resort/Hotel	48.0% (11)
CR Spa, LLC	Resort/Hotel	48.0% (11)
East West Resort Development XIV, L.P., L.L.L.P.	Resort Residential Development	26.8% (12)
Blue River Land Company, LLC	Resort Residential Development	33.2% (13)
EW Deer Valley, LLC	Resort Residential Development	35.7% (14)
SunTx Fulcrum Fund, L.P. (SunTx)	Other	26.5% (15)
Redtail Capital Partners, L.P. (Redtail)	Other	25.0% (16) (3)
Fresh Choice, LLC	Other	40.0% (17)
G2 Opportunity Fund, L.P. (G2)	Other	12.5% (18)


(1)		The remaining 60% interest is owned by an affiliate of Hines.

(2)		The remaining 60% interest is owned by an affiliate of a fund managed by JP Morgan Investment Management, Inc., or JPM.

(3)		We have negotiated performance based incentives, which we refer to as promoted interest, which allow for additional equity to be earned if return targets are exceeded.

(4)		The remaining 65% interest is owned by Metzler US Real Estate Fund, L.P.

(5)		Each limited partnership is owned by Crescent Big Tex I, L.P., which is owned 60% by a fund advised by JPM and 16.1% by affiliates of General Electric, or GE.

(6)		Each limited partnership is owned by Crescent Big Tex II, L.P., which is owned 76.1% by a fund advised by JPM.

(7)		The remaining 70% interest is owned by an affiliate of GE.

(8)		The remaining 70% interest is owned by affiliates of JPM.

(9)		The partnership is owned by Crescent Big Tex III, L.P., which is owned 60% by a fund advised by JPM and 16.1% by affiliates of GE.

(10)		Of the remaining 68.3% interest, 47.6% is owned by Vornado Realty, L.P. and 20.7% is owned by The Yucaipa Companies.

(11)		The remaining 52% interest is owned by the founders of Canyon Ranch and their affiliates. CR Spa, LLC operates three resort spas which offer guest programs and services and sells Canyon Ranch branded skin care products exclusively at the destination health resorts and the resort spas. CR Operating, LLC operates and manages the two Canyon Ranch destination health resorts, Tucson and Lenox, and collaborates with select real estate developers in developing residential lifestyle communities.

(12)		We provided 41.9% of the initial capitalization and the venture is structured such that we own a 26.8% interest after we receive a preferred return on our invested capital and return of our capital. The remaining 73.2% economic interest is owned by parties unrelated to us. East West Resort Development XIV, L.P., L.L.L.P. was formed to co-develop a hotel and condominiums in Avon, Colorado.

(13)		The remaining 66.8% interest is owned by parties unrelated to us. Blue River Land Company, LLC was formed to acquire, develop and sell certain real estate property in Summit County, Colorado.

(14)		The remaining 64.3% interest is owned by parties unrelated to us. EW Deer Valley, LLC was formed to acquire, hold and dispose of its 3.3% ownership interest in Empire Mountain Village, L.L.C. Empire Mountain Village, LLC was formed to acquire, develop and sell certain real estate property at Deer Valley Ski Resort next to Park City, Utah.

(15)		Of the remaining 73.5%, approximately 42.5% is owned by SunTx Capital Partners, L.P. and the remaining 31.0% is owned by a group of individuals unrelated to us. Of our limited partnership interest in SunTx, 6.3% is through an unconsolidated investment in SunTx Capital Partners, L.P., the general partner of SunTx. SunTx Fulcrum Fund, L.P.'s objective is to invest in a portfolio of entities that offer the potential for substantial capital appreciation.

(16)		The remaining 75% interest is owned by Capstead Mortgage Corporation. Redtail was formed to invest up to $100.0 million in equity in select mezzanine loans on commercial real estate over a two-year period.

(17)		The remaining 60% interest is owned by Cedarlane Natural Foods, Inc. Fresh Choice is a restaurant owner, operator and developer.

(18)		G2 was formed for the purpose of investing in commercial mortgage backed securities and other commercial real estate investments. The remaining 87.5% interest is owned by Goff-Moore Strategic Partners, L.P., or GMSPLP, and by parties unrelated to us. G2 is managed and controlled by an entity that is owned equally by GMSPLP and GMAC Commercial Mortgage Corporation, or GMACCM. The ownership structure of GMSPLP consists of an approximately 92% limited partnership interest owned directly and indirectly by Richard E. Rainwater, Chairman of our Board of Trust Managers, of which approximately 6% is owned by Darla Moore, who is married to Mr. Rainwater. Approximately 6% general partner interest is owned by John C. Goff, Vice-Chairman of our Board of Trust Managers and our Chief Executive Officer. The remaining approximately 2% general partnership interest is owned by unrelated parties.

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Significant Accounting Policies

Critical Accounting Policies

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

We believe that the most significant accounting policies that involve the use of estimates and assumptions as to future uncertainties and, therefore, may result in actual amounts that differ from estimates are the following:

	•		Impairments,

	•		Acquisition of operating properties,

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

	•		Gain recognition on sale of real estate assets,

	•		Consolidation of variable interest entities, and

	•		Allowance for doubtful accounts.

Impairments. Real estate, leasehold improvements and intangible assets are classified as long-lived assets held for sale or long-lived assets to be held and used. Assets classified as held and used are evaluated for impairment when events or circumstances indicate that the carrying amount may not be recoverable. When expected undiscounted cash flows are less than the carrying value of a Property and we do not expect to recover our carrying costs, an impairment loss is recognized. For Properties classified as held for use, we reduce carrying costs to fair value. For Properties held for disposition, we reduce carrying costs to the fair value less estimated selling costs in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets . Our estimates of cash flows of the Properties requires us to make assumptions related to future rental rates, occupancies, operating expenses, the ability of our tenants to perform pursuant to their lease obligations and proceeds to be generated from the eventual sale of our Properties. Any changes in estimated future cash flows due to changes in our plans or views of market and economic conditions could result in recognition of additional impairment losses.

Goodwill is reviewed for impairment at least annually, using the fair value based test prescribed by SFAS No. 142, Goodwill and Other Intangible Assets . Our impairment review is judgmental and involves the use of significant estimates and assumptions. Estimates of fair value are primarily determined using discounted cash flow methods and are dependent upon assumptions of future sales trends, market conditions, future cash flow and applicable discount rates. A change in these underlying assumptions could cause a change in the results of our analysis and, as such, could cause the fair value to be less than the respective carrying amount. Such an event would result in recognition of impairment losses.

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

Acquisition of operating properties. We allocate the purchase price of acquired properties to tangible and identified intangible assets acquired based on their fair values in accordance with SFAS No. 141, Business Combinations . We initially record the allocation based on a preliminary purchase price allocation with adjustments recorded during the allocation period, not to exceed one year from the acquisition.

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

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

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

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

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

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

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

Relative sales method and percentage of completion. We use the accrual method to recognize earnings from the sale of Resort Residential Development Properties after closing has taken place, title has been transferred, sufficient cash has been received to demonstrate the buyer's commitment to pay for the property and collection of the balance of the sales price, if any, is reasonably assured. If a sale does not qualify for the accrual method of recognition, deferral methods are used as appropriate including the percentage-of-completion method. In certain cases, when we receive an inadequate cash down payment and take a promissory note for the balance of the sales price, revenue recognition is deferred until such time as sufficient cash is received to meet minimum down payment requirements. The cost of resort residential property sold is defined based on the type of product being purchased. The cost of sales for resort residential lots is generally determined as a specific percentage of the sales revenues recognized for each Resort Residential Development project. The percentages are based on total estimated development costs and sales revenue for each Resort Residential Development project. These estimates are revised annually and are based on the then-current development strategy and operating assumptions utilizing internally developed projections for product type, revenue and related development costs. The cost of sales for resort residential units (such as townhomes and condominiums) is determined using the relative sales value method. If the resort residential unit has been sold prior to the completion of infrastructure cost, and those uncompleted costs are not significant in relation to total costs, the full accrual method is utilized. Under this method, 100% of the revenue is recognized, and a commitment liability is established to reflect the allocated estimated future costs to complete the resort residential unit. If our estimates of costs or the percentage of completion is incorrect, it could result in either an increase or decrease in cost of sales expense or revenue recognized and therefore, an increase or decrease in net income.

Gain recognition on sale of real estate assets. In accordance with SFAS No. 66, Accounting for Sales of Real Estate, we perform evaluations of each real estate sale to determine if full gain recognition is appropriate and of each sale or contribution of a property to a joint venture to determine if partial gain recognition is appropriate. The application of SFAS No. 66 can be complex and requires us to make assumptions including an assessment of whether the risks and rewards of ownership have been transferred, the extent of the purchaser's investment in the property being sold, whether our receivables, if any, related to the sale are collectible and are subject to subordination, and the degree of our continuing involvement with the real estate asset after the sale. If full gain recognition is not appropriate, we account for the sale under an appropriate deferral method.

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Quantifying the variability of VIEs is complex and subjective, requiring consideration and estimates of a significant number of possible future outcomes as well as the probability of each outcome occurring. The results of each possible outcome are allocated to the parties holding interests in the VIE and based on the allocation, a calculation is performed to determine which party, if any, has a majority of the potential negative outcomes (expected losses) or a majority of the potential positive outcomes (expected residual returns). That party, if any, is the VIE's primary beneficiary and is required to consolidate the VIE. Calculating expected losses and expected residual returns requires modeling potential future results of the entity, assigning probabilities to each potential outcome, and allocating those potential outcomes to the VIE's interest holders. If our estimates of possible outcomes and probabilities are incorrect, it could result in the inappropriate consolidation or deconsolidation of the VIE.

For entities that do not constitute VIE's, we consider other GAAP, as required, determining (i) consolidation of the entity if our ownership interests comprise a majority of its outstanding voting stock or otherwise control the entity, or (ii) application of the equity method of accounting if we do not have direct or indirect control of the entity, with the initial investment carried at cost and subsequently adjusted for our share of net income or loss and cash contributions and distributions to and from these entities. Further, we evaluate, under EITF 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights, entities for which we have a general partner interest to determine the nature of limited partners' rights in assessing whether those rights overcome the presumption that we control the limited partnership entity.

Allowance for doubtful accounts/credit losses. Our accounts receivable balance is reduced by an allowance for amounts that may become uncollectible in the future. Our receivable balance is composed primarily of rents and operating cost recoveries due from tenants, receivables associated with club memberships at our Resort Residential Development properties and guest receivables at our Resort/Hotel properties. We also maintain an allowance for deferred rent receivables which arise from the straight-lining of rents. The allowance for doubtful accounts is reviewed at least quarterly for adequacy by reviewing such factors as the credit quality of our tenants or members, any delinquency in payment, historical trends and current economic conditions. If the assumptions regarding the collectibility of accounts receivable prove incorrect, we could experience write-offs in excess of allowance for doubtful accounts, which would result in a decrease in net income.

Mezzanine notes are reviewed for potential impairment at each balance sheet date. A mezzanine note is considered impaired when it becomes probable, based on current information, that we will be unable to collect all amounts due according to the mezzanine note contractual terms. The amount of impairment, if any, is measured by comparing the recorded amount of the mezzanine note to the present value of the expected cash flows or the fair value of the collateral. If a mezzanine note was deemed to be impaired, we would record a reserve for loan losses through a charge to income for any shortfall. To date, no such impairment charges have been recognized.

Impact of New Accounting Standards

SFAS No. 123R. In December 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 123R (Revised 2004), Share-Based Payment . The new FASB rule requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. We were required to apply SFAS No. 123R beginning January 1, 2006. The scope of SFAS No. 123R includes a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS No. 123R replaces SFAS No. 123, Accounting for Stock-Based Compensation , and supersedes Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees . SFAS No. 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that statement permitted entities the option of continuing to apply the guidance in Opinion No. 25, as long as the footnotes to the financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Effective January 1, 2003, we adopted the fair value expense recognition provisions of SFAS No. 123 on a prospective basis. We adopted SFAS No. 123R using the modified prospective application method which requires, among other things, that we recognize compensation cost for all awards outstanding at January 1, 2006, for which the requisite service has not yet been rendered. Additionally, our prior interim periods and fiscal years do not reflect any restated amounts due to the adoption of SFAS No. 123R. We estimate an additional

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$0.2 million of expense will be recorded for the year ended December 31, 2007, for stock and unit options due to the adoption of SFAS No. 123R.

EITF 04-5. In June 2005, the EITF ratified the consensus in Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (EITF 04-5), which states that the general partner in a limited partnership is presumed to control that limited partnership. This presumption may be overcome if the limited partners have either (1) the substantive ability to dissolve the limited partnership or otherwise remove the general partner without cause or (2) substantive participating rights, which provide the limited partners with the ability to effectively participate in significant decisions that would be expected to be made in the ordinary course of business and thereby preclude the general partner from exercising unilateral control over the partnership. EITF 04-5 is effective June 30, 2005 for new or modified limited partnership arrangements and effective January 1, 2006 for existing limited partnership arrangements. There was no impact to our financial condition or results of operations from the adoption of EITF 04-5.

EITF 06-3. At its June 2006 meeting, the EITF ratified the consensus regarding Issue No. 06-3 (EITF 06-3), How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation) . EITF 06-3 is effective for interim and annual periods beginning after December 15, 2006, with earlier application permitted. The scope of EITF 06-3 includes any tax assessed by a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction between a seller and a customer, and may include, but is not limited to, sales, use, value added, and certain excise taxes. The consensus indicates that gross vs. net income statement classification of those taxes within its scope is an accounting policy decision. In addition, for taxes within its scope, the consensus requires the following disclosures: the accounting policy elected for these taxes and the amounts of the taxes reflected gross (as revenue) in the income statement on an interim and annual basis. We do not believe there will be an impact to our financial condition or results of operations from the adoption of EITF 06-3.

FASB Interpretation 48. In July 2006, the FASB issued Interpretation 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109, (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The standard also provides guidance on derecognizing, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, and are to be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet a more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. We expect to record less than $1.0 million as a cumulative effect adjustment to beginning "Accumulated Deficit" as of January 1, 2007 from the adoption of FIN 48.

SFAS No. 157. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements . The new FASB rule defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, or GAAP, and expands disclosures about fair value measurements. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact, if any, to our financial condition or results of operations from the adoption of SFAS No. 157.

SAB No. 108. In September 2006, the Securities and Exchange Commission, or SEC, issued Staff Accounting Bulletin No. 108, Financial Statements – Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements , (SAB 108), which is effective for fiscal years ending after November 15, 2006. SAB No. 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements. The adoption of SAB No. 108 did not have an impact to our financial condition or results of operations.

EITF 06-8. At its November 2006 meeting, the EITF ratified the consensus regarding Issue No. 06-8 (EITF 06-8), Applicability of the Assessment of a Buyer's Continuing Investment under FASB Statement No. 66 for Sales Of Condominiums . EITF 06-8 is effective for annual periods beginning after March 15, 2007. The scope of EITF 06-8 is limited to the sale of individual units in a condominium project and requires an entity to evaluate the adequacy of the buyer's initial and continuing investment for purposes of determining whether the sales price is collectible as required to recognize profit using the percentage-of-completion method under paragraph 37 of Statement 66. If the buyer does not meet the initial and continuing investment criteria, the guidance requires use of the deposit method to recognize profit. We do not believe there will be an impact to our financial condition or results of operations from the adoption of EITF 06-8.

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Funds from Operations

FFO, as used in this document, means:

	•		Net Income (Loss) – determined in accordance with GAAP;

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

	•		excluding extraordinary items (as defined by GAAP);

	•		plus depreciation and amortization of real estate assets; and

	•		after adjustments for unconsolidated partnerships and joint ventures.

We calculate FFO available to common shareholders – diluted in this manner, except that Net Income (Loss) is replaced by Net Income (Loss) Available to Common Shareholders and we include the effect of operating partnership unitholder minority interests.

The National Association of Real Estate Investment Trusts, or NAREIT, developed FFO as a relative measure of performance and liquidity of an equity REIT to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. We consider FFO available to common shareholders – diluted and FFO appropriate measures of performance for an equity REIT and for its investment segments. However, FFO available to common shareholders – diluted and FFO should not be considered an alternative to net income determined in accordance with GAAP as an indication of our operating performance.

Accordingly, we believe that to facilitate a clear understanding of our consolidated historical operating results, FFO available to common shareholders – diluted should be considered in conjunction with our net income and cash flows reported in the consolidated financial statements and notes to the financial statements. However, our measure of FFO available to common shareholders – diluted may not be comparable to similarly titled measures of other REITs because these REITs may apply the definition of FFO in a different manner than we apply it.

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Consolidated Statements of Funds from Operations


	For the years ended December 31,
	2006			2005
(dollars in thousands)				(Restated)
Net income	$	33,433		$	101,585
Adjustments to reconcile net income to funds from operations available to common shareholders - diluted:
Depreciation and amortization of real estate assets		132,139			131,392
Gain on property sales		(28,847	)		(102,803	)
Gain from sale of development operating property		(16,221	)		(13,369	)
Gain from promoted interest		(22,575	)		(13,579	)
Adjustment for investments in unconsolidated companies:
Office Properties		21,217			18,872
Resort Residential Development Properties		(10,616	)		(5,543	)
Resort/Hotel Properties		4,773			3,881
Temperature-Controlled Logistics Properties		17,917			18,210
Unitholder minority interest		266			12,379
Series A Preferred Share distributions		(23,963	)		(23,963	)
Series B Preferred Share distributions		(8,075	)		(8,075	)


Funds from operations available to common shareholders – diluted (1) (2)	$	99,448		$	118,987


Investment Segments:
Office Properties	$	231,248		$	209,715
Resort Residential Development Properties		12,422			45,486
Resort/Hotel Properties		36,150			34,440
Temperature-Controlled Logistics Properties		2,249			18,444
Other:
Corporate general and administrative		(44,918	)		(50,363	)
Interest expense		(135,457	)		(136,664	)
Series A Preferred Share distributions		(23,963	)		(23,963	)
Series B Preferred Share distributions		(8,075	)		(8,075	)
Income from mezzanine loans and other loans		29,674			10,618
Other (3)		118			19,349

Funds from operations available to common shareholders - diluted (1) (2)	$	99,448		$	118,987


Basic weighted average shares outstanding		102,055			100,179
Diluted weighted average shares and units outstanding (4)		122,980			118,836


(1)		To calculate basic funds from operations available to common shareholders, deduct unitholder minority interest.

(2)		In addition to presenting FFO in accordance with the NAREIT definition, we also disclose FFO available to common shareholders - as adjusted, which includes adjustments to exclude extinguishment of debt and impairment charges related to real estate assets and include the impact of gain on sale of developed properties and promoted interest. We provide this additional information because management utilizes it, in addition to FFO available to common shareholders – diluted, in making operating decisions and assessing performance, and because we believe that it also is useful to investors in assessing our operating performance.


	For the years ended December 31,
(dollars in thousands)	2006		2005
FFO available to common shareholders – diluted – NAREIT	$	99,448	$	118,987
Debt extinguishment charges related to the sale of real estate assets		-		729
Impairment charges related to real estate assets		125		1,047
Promoted interests related to the sale of investment in unconsolidated companies		22,575		13,579
Gain from sale of development operating property		16,221		13,369


FFO available to common shareholders – diluted – as adjusted	$	138,369	$	147,711


(3)		Includes income from investment land sales, interest and other income, extinguishment of debt, income/loss from other unconsolidated companies, other expenses, depreciation and amortization of non-real estate assets, and amortization of deferred financing costs.

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

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The following schedule reconciles our basic weighted average shares to the diluted weighted average shares/units in share equivalents presented above:


	For the years
	ended December 31,
(shares/units in share equivalents in thousands)	2006		2005
Basic weighted average shares:		102,055		100,179
Add: Weighted average units in share equivalents		19,461		17,833
Restricted shares and share and unit options in share equivalents		1,464		824

Diluted weighted average shares and units		122,980		118,836

The following table reconciles the "As Previously Reported" to the "As Restated" Consolidated Statement of Funds from Operations for the year ended December 31, 2005. This table reflects the impact of the restated financial data discussed in Item 8., "Financial Statements and Supplementary Data," Note 1, Organization and Basis of Presentation, associated with the Calculation of Minority Interest, the Redeemable Fees for Club Member Services and the Classification of Club Membership Intangible Asset matters.

Consolidated Statement of Funds from Operations


	For the year ended December 31, 2005
						As Reported with
	As Previously			Discontinued		Discontinued			Restatement
(in thousands)	Reported			Operations		Operations			Adjustments			As Restated

Net income	$	95,307		$	-	$	95,307		$	6,278		$	101,585
Adjustments to reconcile net income to funds from operations available to common shareholders - diluted:
Depreciation and amortization of real estate assets		131,392			-		131,392			-			131,392
Gain on property sales		(102,803	)		-		(102,803	)		-			(102,803	)
Gain from sale of development operating property		(13,369	)		-		(13,369	)		-			(13,369	)
Gain from promoted interest		(13,579	)		-		(13,579	)		-			(13,579	)

Office Properties		18,872			-		18,872			-			18,872
Resort Residential Development Properties		(5,468	)		-		(5,468	)		(75	)		(5,543	)
Resort/Hotel Properties		3,881			-		3,881			-			3,881
Temperature-Controlled Logistics Properties		18,210			-		18,210			-			18,210
Unitholder minority interest		16,964			-		16,964			(4,585	)		12,379
Series A Preferred Share distributions		(23,963	)		-		(23,963	)		-			(23,963	)
Series B Preferred Share distributions		(8,075	)		-		(8,075	)		-			(8,075	)

Funds from operations available to common shareholders – diluted	$	117,369	(1)	$	-	$	117,369		$	1,618		$	118,987


Investment Segments:
Office Properties	$	209,715		$	-	$	209,715		$	-		$	209,715
Resort Residential Development Properties		43,868			-		43,868			1,618			45,486
Resort/Hotel Properties		34,440			-		34,440			-			34,440
Temperature-Controlled Logistics Properties		18,444			-		18,444			-			18,444
Other:
Corporate general and administrative		(50,363	)		-		(50,363	)		-			(50,363	)
Interest expense		(136,664	)		-		(136,664	)		-			(136,664	)
Series A Preferred Share distributions		(23,963	)		-		(23,963	)		-			(23,963	)
Series B Preferred Share distributions		(8,075	)		-		(8,075	)		-			(8,075	)
Income from mezzanine loans and other loans		10,618			-		10,618			-			10,618
Other (3)		19,349			-		19,349			-			19,349

Funds from operations available to common shareholders - diluted	$	117,369	(1)	$	-	$	117,369		$	1,618		$	118,987


Basic weighted average shares outstanding		100,179			-		100,179			-			100,179
Diluted weighted average shares and units outstanding		118,836			-		118,836			-			118,836


(1)		Amount represents FFO available to common shareholders presented in accordance with the NAREIT definition. The 2005 Form 10-K amount reported of $144,317 represented FFO, as adjusted, and included $26,948 gain on sale of developed property (inclusive of $13,579 promoted interest).

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Our use of financial instruments, such as debt instruments and mezzanine notes receivable, subjects us to market risk which may affect our future earnings and cash flows as well as the fair value of its assets. Market risk generally refers to the risk of loss from changes in interest rates and market prices. We manage our market risk by attempting to match anticipated inflow of cash from our operating, investing and financing activities with anticipated outflow of cash to fund debt payments, distributions to shareholders, investments, capital expenditures and other cash requirements. We also enter into derivative financial instruments such as interest rate swaps to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate on a portion of our variable rate debt.

The following discussion of market risk is based solely on hypothetical changes in interest rates related to our variable rate debt and variable rate mezzanine notes receivable. This discussion does not purport to take into account all of the factors that may affect the financial instruments discussed in this section.

Interest Rate Risk

Debt

Our interest rate risk is most sensitive to fluctuations in interest rates on our short-term variable rate debt. We had total outstanding debt of approximately $2.3 billion at December 31, 2006, of which approximately $479.6 million, or approximately 21%, was unhedged variable rate debt. The variable rate debt is based on an index (LIBOR or Prime) plus a credit spread. The weighted average interest rate on such unhedged variable rate debt was 7.3% as of December 31, 2006. A 10% increase in the underlying index would cause an increase of 62.1 basis points to the weighted average interest rate on such variable rate debt, which would result in an annual decrease in net income and cash flows of approximately $3.0 million. Conversely, a 10% decrease in the underlying index would cause a decrease of 62.1 basis points to the weighted average interest rate on such unhedged variable rate debt, which would result in an annual increase in net income and cash flows of approximately $3.0 million based on the unhedged variable rate debt outstanding as of December 31, 2006.

Mezzanine Notes

Our mezzanine notes receivable are sensitive to fluctuations in interest rates on our variable loans. We had total outstanding mezzanine loans of approximately $124.3 million at December 31, 2006, of which approximately $106.8 million, or approximately 86%, were variable rate loans. The variable rate is based on an index (LIBOR) plus a credit spread. The weighted average interest rate on such variable rate loans was 14.0% as of December 31, 2006. A 10% increase in the underlying index would cause an increase of 53.6 basis points to the weighted average interest rate on such variable rate loans, which would result in an annual increase in net income and cash flows of approximately $0.6 million. Conversely, a 10% decrease in the underlying index would cause a decrease of 53.6 basis points to the weighted average interest rate on such variable rate loans, which would result in an annual decrease in net income and cash flows of approximately $0.6 million based on the variable rate loans outstanding as of December 31, 2006.

Cash Flow Hedges

We use derivative financial instruments to convert a portion of our variable rate debt to fixed rate debt and to manage the fixed to variable rate debt ratio. As of December 31, 2006, total variable rate debt was $767.2 million, of which $287.6 million was hedged. A description of these derivative financial instruments is contained in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations – Equity and Debt Financing – Derivative Instruments and Hedging Activities."

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Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


	Page
Report of Independent Registered Public Accounting Firm		74

Consolidated Balance Sheets at December 31, 2006 and 2005		75

Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004		76

Consolidated Statements of Shareholders' Equity for the years ended December 31, 2006, 2005, and 2004		77

Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004		78

Notes to Consolidated Financial Statements		79

Schedule III Consolidated Real Estate Investments and Accumulated Depreciation		144

Schedule IV Mortgage Loans on Real Estate Investments		146

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Trust Managers and Shareholders of
Crescent Real Estate Equities Company

We have audited the accompanying consolidated balance sheets of Crescent Real Estate Equities Company (the "Company") as of December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. The financial statements of AmeriCold Realty Trust (AmeriCold), a corporation in which the Company has a 31.7% interest for 2006, have been audited by other auditors whose report has been furnished to us, and our opinion on the consolidated financial statements, insofar as it relates to the amounts included for AmeriCold, is based solely on the report of the other auditors. In the consolidated financial statements, the Company's investment in AmeriCold is stated at $87,069,000 at December 31, 2006, and the Company's equity in the net loss of AmeriCold is stated at $15,669,000 for the year then ended.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 and the report of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and, for 2006, the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Crescent Real Estate Equities Company at December 31, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the 2005 and 2004 consolidated financial statements have been restated to correct errors in recording minority interests, membership deposits and intangible assets, including the related tax impact. Additionally, as discussed in Note 2 to the consolidated financial statements, in 2006 the Company changed its method of accounting for stock-based compensation.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Crescent Real Estate Equities Company's internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 13, 2007, expressed an unqualified opinion on management's assessment and an adverse opinion on the effectiveness of internal control over financial reporting.

ERNST & YOUNG LLP

Dallas, Texas
March 13, 2007

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CRESCENT REAL ESTATE EQUITIES COMPANY

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)


	December 31,
	2006			2005
				(As Restated See Note 1)
ASSETS:
Investments in real estate:
Land	$	186,779		$	183,228
Land improvements, net of accumulated depreciation of $36,421 and $29,784 at December 31, 2006 and 2005, respectively		70,630			70,494
Buildings and improvements, net of accumulated depreciation of $533,311 and $456,628 at December 31, 2006 and 2005, respectively		1,851,770			1,734,131
Furniture, fixtures and equipment, net of accumulated depreciation of $39,118 and $34,129 at December 31, 2006 and 2005, respectively		43,270			37,018
Land held for investment or development		750,970			513,040
Properties held for disposition, net		2,400			118,205

Net investment in real estate	$	2,905,819		$	2,656,116
Cash and cash equivalents		77,550			86,228
Restricted cash and cash equivalents		93,471			84,699
Defeasance investments		111,014			274,134
Accounts receivable, net		63,996			56,356
Deferred rent receivable		61,096			70,074
Investments in unconsolidated companies		280,870			393,535
Notes receivable, net		174,867			219,016
Income tax asset – current and deferred, net		3,274			10,732
Other assets, net		275,014			312,366

Total assets	$	4,046,971		$	4,163,256

LIABILITIES:
Borrowings under Credit Facility	$	118,000		$	234,000
Notes payable		2,101,037			1,933,546
Notes payable, accounts payable, accrued expenses and other liabilities, properties held for disposition		-			19,306
Junior subordinated notes		77,321			77,321
Accounts payable, accrued expenses and other liabilities		502,014			495,918
Current tax liability		610			-

Total liabilities	$	2,798,982		$	2,760,091

COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS:
Operating partnership, 11,320,798 and 11,416,173 units, at December 31, 2006 and 2005, respectively	$	75,865		$	98,659
Consolidated real estate partnerships		49,838			52,880

Total minority interests	$	125,703		$	151,539

SHAREHOLDERS' EQUITY:
Preferred shares, $0.01 par value, authorized 100,000,000 shares:
Series A Convertible Redeemable Cumulative Preferred Shares, liquidation preference of $25.00 per share, 14,200,000 shares issued and outstanding at December 31, 2006 and 2005 respectively	$	319,166		$	319,166
Series B Cumulative Redeemable Preferred Shares, liquidation preference of $25.00 per share, 3,400,000 shares issued and outstanding at December 31, 2006 and 2005		81,923			81,923
Common shares, $0.01 par value, authorized 250,000,000 shares, 127,875,571 and 126,562,980 shares issued and 102,754,654 and 101,442,063 shares outstanding at December 31, 2006 and 2005, respectively		1,279			1,266
Additional paid-in capital		2,294,827			2,271,888
Deferred compensation on restricted shares		-			(1,182	)
Accumulated deficit		(1,114,553	)		(962,688	)
Accumulated other comprehensive (loss) income		(224	)		1,385

	$	1,582,418		$	1,711,758
Less – shares held in treasury, at cost, 25,120,917 common shares at December 31, 2006 and 2005		(460,132	)		(460,132	)

Total shareholders' equity	$	1,122,286		$	1,251,626

Total liabilities and shareholders' equity	$	4,046,971		$	4,163,256

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

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CRESCENT REAL ESTATE EQUITIES COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share data)


	For the Years Ended December 31,
	2006			2005			2004
				(As Restated see Note 1)
REVENUE:
Office Property	$	414,343		$	372,759		$	475,797
Resort Residential Development Property		372,148			502,723			309,945
Resort/Hotel Property		142,205			142,618			214,531

Total Property Revenue	$	928,696		$	1,018,100		$	1,000,273

EXPENSE:
Office Property real estate taxes	$	41,674		$	38,062		$	57,393
Office Property operating expenses		164,965			157,719			176,768
Resort Residential Development Property expense		342,994			432,203			271,310
Resort/Hotel Property expense		108,391			111,277			179,825

Total Property Expense	$	658,024		$	739,261		$	685,296

Income from Property Operations	$	270,672		$	278,839		$	314,977

OTHER INCOME (EXPENSE):
Income from sale of investment in unconsolidated company	$	47,709		$	29,934		$	-
Income from investment land sales		-			8,622			18,879
(Loss) gain on joint venture of properties		-			(2,743	)		265,772
Interest and other income		47,428			29,250			18,005
Corporate general and administrative		(44,918	)		(50,363	)		(38,889	)
Interest expense		(134,273	)		(136,664	)		(176,771	)
Amortization of deferred financing costs		(7,605	)		(8,108	)		(13,056	)
Extinguishment of debt		-			(2,161	)		(42,608	)
Depreciation and amortization		(147,407	)		(141,366	)		(159,898	)
Impairment charges related to real estate assets		-			-			(4,094	)
Other expenses		(12,997	)		(3,964	)		(725	)
Equity in net income (loss) of unconsolidated companies:
Office Properties		9,231			11,464			6,262
Resort Residential Development Properties		(355	)		(491	)		(2,266	)
Resort/Hotel Properties		(5,109	)		(1,541	)		(245	)
Temperature-Controlled Logistics Properties		(15,669	)		234			6,153
Other		12,157			17,885			(280	)

Total other income (expense)	$	(251,808	)	$	(250,012	)	$	(123,761	)


INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTERESTS AND INCOME TAXES	$	18,864		$	28,827		$	191,216
Minority interests		(2,661	)		(11,067	)		(32,706	)
Income tax benefit (expense)		3,475			(8,462	)		12,231

INCOME BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE	$	19,678		$	9,298		$	170,741
(Loss) income from discontinued operations, net of minority interests and taxes		(502	)		4,006			10,407
Impairment charges related to real estate assets from discontinued operations, net of minority interests		(105	)		(953	)		(2,978	)
Gain on sale of real estate from discontinued operations, net of minority interest and taxes		14,362			89,234			1,052
Cumulative effect of a change in accounting principle, net of minority interests		-			-			(363	)

NET INCOME	$	33,433		$	101,585		$	178,859
Series A Preferred Share distributions		(23,963	)		(23,963	)		(23,723	)
Series B Preferred Share distributions		(8,075	)		(8,075	)		(8,075	)

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	1,395		$	69,547		$	147,061


BASIC EARNINGS PER SHARE DATA:
(Loss) income available to common shareholders before discontinued operations and cumulative effect of a change in accounting principle	$	(0.12	)	$	(0.23	)	$	1.40
(Loss) Income from discontinued operations, net of minority interests and taxes		(0.01	)		0.04			0.11
Impairment charges related to real estate assets from discontinued operations, net of minority interests		-			(0.01	)		(0.03	)
Gain on sale of real estate from discontinued operations, net of minority interests and taxes		0.14			0.89			0.01
Cumulative effect of a change in accounting principle, net of minority interests		-			-			-

Net income available to common shareholders – basic	$	0.01		$	0.69		$	1.49


DILUTED EARNINGS PER SHARE DATA:
(Loss) income available to common shareholders before discontinued operations and cumulative effect of a change in accounting principle	$	(0.12	)	$	(0.23	)	$	1.40
(Loss) Income from discontinued operations, net of minority interests and taxes		(0.01	)		0.04			0.10
Impairment charges related to real estate assets from discontinued operations, net of minority interests		-			(0.01	)		(0.03	)
Gain on sale of real estate from discontinued operations, net of minority interests and taxes		0.14			0.89			0.01
Cumulative effect of a change in accounting principle, net of minority interests		-			-			-

Net income available to common shareholders – diluted	$	0.01		$	0.69		$	1.48

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

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CRESCENT REAL ESTATE EQUITIES COMPANY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(dollars in thousands, except share data)


																						Deferred						Accumulated
	Series A				Series B														Additional			Compensation						Other
	Preferred Shares				Preferred Shares				Treasury Shares						Common Shares				Paid-in			on Restricted			Accumulated			Comprehensive
	Shares		Net Value		Shares		Net Value		Shares			Net Value			Shares		Par Value		Capital			Shares			(Deficit)			(Loss) Income			Total
SHAREHOLDERS' EQUITY, December 31, 2003		10,800,000	$	248,160		3,400,000	$	81,923		25,121,861		$	(460,148	)		124,396,168	$	1,237	$	2,245,683		$	(4,102	)	$	(877,120	)	$	(13,829	)	$	1,221,804
Cumulative effect of restatement on prior years		-		-		-		-		-			-			-		-		-			-			(2,570	)		-			(2,570	)

SHAREHOLDERS' EQUITY, December 31, 2003 (As Restated see Note 1)		10,800,000	$	248,160		3,400,000	$	81,923		25,121,861		$	(460,148	)		124,396,168	$	1,237	$	2,245,683		$	(4,102	)	$	(879,690	)	$	(13,829	)	$	1,219,234

Comprehensive Income
Net Income (As Restated see Note 1)		-		-		-		-		-			-			-		-		-			-			178,859			-			178,859
Change in Unrealized Net Gain on Marketable Securities		-		-		-		-		-			-			-		-		-			-			-			1,036			1,036
Change in Unrealized Net Gain on Cash Flow Hedges		-		-		-		-		-			-			-		-		-			-			-			11,771			11,771

Total Comprehensive Income																																191,666
Issuance of Common Shares		-		-		-		-		-			-			7,954		-		130			-			-			-			130
Exercise of Common Share Options		-		-		-		-		-			-			53,980		1		821			-			-			-			822
Accretion of Discount on Employee Stock Option Notes		-		-		-		-		-			-			-		-		(252	)		-			-			-			(252	)
Issuance of Shares in Exchange for Operating Partnership Units		-		-		-		-		-			-			83,916		7		(37	)		-			-			-			(30	)
Preferred Equity Issuance		3,400,000		71,006		-		-		-			-			-		-		-			-			-			-			71,006
Stock Option Grants		-		-		-		-		-			-			-		-		(10	)		-			-			-			(10	)
Amortization of Deferred Compensation on Restricted Shares		-		-		-		-		-			-			-		-		-			1,869			-			-			1,869
Dividends on Common Shares		-		-		-		-		-			-			-		-		-			-			(149,034	)		-			(149,034	)
Dividends on Preferred Shares		-		-		-		-		-			-			-		-		-			-			(31,798	)		-			(31,798	)

SHAREHOLDERS' EQUITY, December 31, 2004 (As Restated see Note 1)		14,200,000	$	319,166		3,400,000	$	81,923		25,121,861		$	(460,148	)		124,542,018	$	1,245	$	2,246,335		$	(2,233	)	$	(881,663	)	$	(1,022	)	$	1,303,603

Comprehensive Income
Net Income (As Restated see Note 1)		-		-		-		-		-			-			-		-		-			-			101,585			-			101,585
Change in Unrealized Net Gain on Marketable Securities		-		-		-		-		-			-			-		-		-			-			-			(468	)		(468	)
Change in Unrealized Net Gain on Cash Flow Hedges		-		-		-		-		-			-			-		-		-			-			-			3,730			3,730
Change in Pension Liability at Unconsolidated Company		-		-		-		-		-			-			-		-		-			-			-			(855	)		(855	)

Total Comprehensive Income																																103,992
Issuance of Common Shares		-		-		-		-		-			-			188,358		2		3,075			-			-			-			3,077
Exercise of Common Share Options		-		-		-		-		-			-			267,972		3		4,283			-			-			-			4,286
Accretion of Discount on Employee Stock Option Notes		-		-		-		-		-			-			-		-		(253	)		-			-			-			(253	)
Issuance of Shares in Exchange for Operating Partnership Units		-		-		-		-		-			-			1,564,632		16		18,384			-			-			-			18,400
Reissuance of Treasury Shares		-		-		-		-		(944	)		16			-		-		-			-			-			-			16
Stock Option Grants		-		-		-		-		-			-			-		-		64			-			-			-			64
Amortization of Deferred compensation on Restricted Shares		-		-		-		-		-			-			-		-		-			1,051			-			-			1,051
Dividends on Common Shares		-		-		-		-		-			-			-		-		-			-			(150,572	)		-			(150,572	)
Dividends on Preferred Shares		-		-		-		-		-			-			-		-		-			-			(32,038	)		-			(32,038	)

SHAREHOLDERS' EQUITY, December 31, 2005 (As Restated see Note 1)		14,200,000	$	319,166		3,400,000	$	81,923		25,120,917		$	(460,132	)		126,562,980	$	1,266	$	2,271,888		$	(1,182	)	$	(962,688	)	$	1,385		$	1,251,626

Comprehensive Income
Net Income		-		-		-		-		-			-			-		-		-			-			33,433			-			33,433
Change in Unrealized Net Gain on Marketable Securities		-		-		-		-		-			-			-		-		-			-			-			(568	)		(568	)
Change in Unrealized Net Gain on Cash Flow Hedges		-		-		-		-		-			-			-		-		-			-			-			(1,760	)		(1,760	)
Change in Pension Liability at Unconsolidated Company		-		-		-		-		-			-			-		-		-			-			-			719			719

Total Comprehensive Income																																31,824
Exercise of Common Share Options		-		-		-		-		-			-			393,005		4		6,931			-			-			-			6,935
Accretion of Discount on Employee Stock Option Notes		-		-		-		-		-			-			-		-		(253	)		-			-			-			(253	)
Issuance of Shares in Exchange for Operating Partnership Units		-		-		-		-		-			-			919,586		9		16,132			-			-			-			16,141
Amortization of Stock Options		-		-		-		-		-			-			-		-		260			-			-			-			260
Reclassification of Deferred Compensation on Restricted Shares		-		-		-		-		-			-			-		-		(1,182	)		1,182			-			-			-
Amortization of Restricted Shares		-		-		-		-		-			-			-		-		1,051			-			-			-			1,051
Dividends on Common Shares		-		-		-		-		-			-			-		-		-			-			(153,260	)		-			(153,260	)
Dividends on Preferred Shares		-		-		-		-		-			-			-		-		-			-			(32,038	)		-			(32,038	)

SHAREHOLDERS' EQUITY, December 31, 2006		14,200,000	$	319,166		3,400,000	$	81,923		25,120,917		$	(460,132	)		127,875,571	$	1,279	$	2,294,827		$	-		$	(1,114,553	)	$	(224	)	$	1,122,286

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

Table of Contents

CRESCENT REAL ESTATE EQUITIES COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)


	For the Years Ended December 31,
	2006			2005			2004
				(As Restated			(As Restated
				see Note 1)			see Note 1)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	33,433		$	101,585		$	178,859
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		156,014			153,452			180,799
Extinguishment of debt		-			2,271			6,459
Resort Residential Development cost of sales		220,910			311,050			161,853
Resort Residential Development capital expenditures		(425,860	)		(356,603	)		(202,767	)
Impairment charges related to real estate assets		125			1,122			7,605
Income from investment land sales		-			(8,622	)		(18,879	)
Loss (gain) on joint venture of properties, net		-			2,743			(265,772	)
Gain on property sales, net		(36,256	)		(105,258	)		(1,241	)
Income from sale of investment in unconsolidated company		(47,709	)		(29,934	)		-
Minority interests		13,178			27,494			34,217
Cumulative effect of a change in accounting principle, net of minority interests		-			-			363
Non-cash compensation		13,059			13,236			1,737
Amortization of debt premiums		(1,792	)		(2,452	)		(2,386	)
Equity in earnings from unconsolidated companies		(255	)		(27,551	)		(9,624	)
Ownership portion of management fees from unconsolidated companies		7,462			6,609			1,833
Distributions received from unconsolidated companies		9,083			30,992			7,982
Redemption of units under long-term incentive plans		(4,349	)		-			-
Change in assets and liabilities, net of effect of consolidations, acquisitions and dispositions:
Restricted cash and cash equivalents		(15,354	)		(1,626	)		54,889
Accounts receivable and notes receivable		(32,282	)		886			(17,924	)
Deferred rent receivable		8,538			(14,562	)		(16,246	)
Income tax asset -current and deferred, net		7,458			7,723			(20,830	)
Other assets		(17,720	)		(23,169	)		(22,885	)
Accounts payable, accrued expenses and other liabilities		9,534			50,243			34,525

Net cash (used in) provided by operating activities	$	(102,783	)	$	139,629		$	92,567


CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash impact of consolidation of previously unconsolidated entities	$	-		$	-		$	334
Proceeds from property sales		103,911			236,725			174,881
Proceeds from sale of investment in unconsolidated company and related property sales		102,871			32,237			3,229
Proceeds from joint venture partners		-			144,193			1,028,913
Acquisition of investment properties		(30,675	)		(192,154	)		(381,672	)
Development of investment properties		(138,161	)		(83,961	)		(7,089	)
Property improvements - Office Properties		(17,790	)		(20,131	)		(14,297	)
Property improvements - Resort/Hotel Properties		(29,842	)		(4,707	)		(27,739	)
Tenant improvement and leasing costs - Office Properties		(68,664	)		(65,540	)		(92,876	)
Resort Residential Development Properties investments		(27,610	)		(32,876	)		(35,428	)
Decrease (increase) in restricted cash and cash equivalents		9,584			(4,531	)		75,395
Purchases of defeasance investments and other securities		-			(115,710	)		(203,643	)
Proceeds from defeasance investment maturities and other securities		186,428			23,273			14,560
Return of investment in unconsolidated companies		81,288			18,785			129,693
Investment in unconsolidated companies		(23,506	)		(17,118	)		(19,047	)
Decrease (increase) in notes receivable		69,018			(116,843	)		(15,230	)

Net cash provided by (used in) investing activities	$	216,852		$	(198,358	)	$	629,984


CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs	$	(4,060	)	$	(15,659	)	$	(12,918	)
Borrowings under Credit Facility		390,000			758,300			530,000
Payments under Credit Facility		(506,000	)		(666,800	)		(626,500	)
Notes payable proceeds		282,370			387,200			577,146
Notes payable payments		(193,178	)		(346,968	)		(1,027,661	)
Junior subordinated notes		-			77,321			-
Resort Residential Development Properties note payable borrowings		276,064			257,411			111,672
Resort Residential Development Properties note payable payments		(164,863	)		(198,540	)		(118,495	)
Capital distributions to joint venture partner		(18,555	)		(18,516	)		(8,565	)
Capital contributions from joint venture partner		8,566			7,834			2,833
Proceeds from exercise of share and unit options		23,093			21,995			829
Reissuance of Treasury Shares		-			16			-
Issuance of preferred shares-Series A		-			-			71,006
Series A Preferred Share distributions		(23,963	)		(23,963	)		(23,963	)
Series B Preferred Share distributions		(8,075	)		(8,075	)		(8,075	)
Dividends and unitholder distributions		(184,146	)		(178,890	)		(175,621	)

Net cash (used in) provided by financing activities	$	(122,747	)	$	52,666		$	(708,312	)


(DECREASE ) INCREASE IN CASH AND CASH EQUIVALENTS	$	(8,678	)	$	(6,063	)	$	14,239

CASH AND CASH EQUIVALENTS, Beginning of period		86,228			92,291			78,052


CASH AND CASH EQUIVALENTS, End of period	$	77,550		$	86,228		$	92,291

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

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CRESCENT REAL ESTATE EQUITIES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

We operate as a real estate investment trust, or REIT, for federal income tax purposes and provide management, leasing and development services for some of our properties.

The following table shows our consolidated subsidiaries that owned or had an interest in real estate assets and the real estate assets that each subsidiary owned or had an interest in as of December 31, 2006.


Operating Partnership		Wholly-owned assets - The Avallon IV, Dupont Centre and Financial Plaza, included in our Office Segment.

		Non wholly-owned assets, consolidated - 301 Congress Avenue (50% interest), included in our Office Segment. Fairmont Sonoma Mission Inn (80.1% interest), included in our Resort/Hotel Segment.

		Non wholly-owned assets, unconsolidated - 2211 Michelson Office Development - Irvine (40% interest), Miami Center (40% interest), One BriarLake Plaza (30% interest), Five Post Oak Park (30% interest), Houston Center (23.85% interest in three office properties and the Houston Center Shops), The Crescent Atrium (23.85% interest), The Crescent Office Towers (23.85% interest), Trammell Crow Center (1) (23.85% interest), Post Oak Central (23.85% interest in three Office Properties), Fountain Place (23.85% interest), Fulbright Tower (23.85% interest) and One Buckhead Plaza (35% interest), included in our Office Segment. AmeriCold Realty Trust (31.7% interest in 92 properties), included in our Temperature-Controlled Logistics Segment. Canyon Ranch Tucson and Canyon Ranch Lenox (48% interest), included in our Resort/Hotel Segment.

Crescent Real Estate Funding One, L.P. (Funding One)		Wholly-owned assets - Carter Burgess Plaza, 125 E. John Carpenter Freeway, The Aberdeen, Regency Plaza One and The Citadel, included in our Office Segment.

Hughes Center Entities (2)		Wholly-owned assets - Hughes Center Properties (eight office properties each in a separate limited liability company), 3883 Hughes Parkway (Office Development), included in our Office Segment.

Crescent Real Estate Funding III, IV and V, L.P. (Funding III, IV and V) (3)		Non wholly-owned assets, consolidated - Greenway Plaza Office Properties (ten Office Properties, 99.9% interest), included in our Office Segment. Renaissance Houston Hotel (99.9% interest), included in our Resort/Hotel Segment.

Crescent Real Estate Funding VIII, L.P. (Funding VIII)		Wholly-owned assets - The Addison, Austin Centre, The Avallon I, II, III and V, Exchange Building, 816 Congress, Greenway I & IA (two office properties), Greenway II, Johns Manville Plaza, One Live Oak, Palisades Central I, Palisades Central II, Stemmons Place, 3333 Lee Parkway, 44 Cook and 55 Madison, included in our Office Segment. Omni Austin Hotel and Ventana Inn & Spa, included in our Resort/Hotel Segment.

Crescent Real Estate Funding XII, L.P. (Funding XII)		Wholly-owned assets - Briargate Office and Research Center, MacArthur Center I & II and Stanford Corporate Center, included in our Office Segment. Park Hyatt Beaver Creek Resort & Spa, included in our Resort/Hotel Segment.

Crescent 707 17 th Street, LLC		Wholly-owned assets - 707 17 th Street, included in our Office Segment and the Denver
		Marriott City Center, included in our Resort/Hotel Segment.

Crescent Peakview Tower, LLC		Wholly-owned asset - Peakview Tower, included in our Office Segment.

Crescent Alhambra, LLC		Wholly-owned asset - The Alhambra (two Office Properties), included in our Office Segment.

Crescent Datran Center, LLC		Wholly-owned asset - Datran Center (two Office Properties), included in our Office Segment.

Crescent Spectrum Center, L.P.		Non wholly-owned asset, consolidated - Spectrum Center (99.9% interest), included in our Office Segment.

C-C Parkway Austin, L.P.		Non wholly-owned asset, consolidated - Parkway at Oakhill Office Development (90% interest), included in our Office Segment.

Crescent Colonnade, LLC		Wholly-owned asset - The BAC-Colonnade Building, included in our Office Segment.

Table of Contents

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Mira Vista Development Corp. (MVDC)		Non wholly-owned asset, consolidated – Mira Vista (98% interest), included in our Resort Residential Development Segment.

Crescent Plaza Residential, L.P.		Wholly-owned asset – the Residences at the Ritz-Carlton Development, included in our Resort Residential Development Segment.

Crescent Tower Residential, L.P.		Wholly-owned asset – the Tower Residences and Regency Row at the Ritz-Carlton Development, included in our Resort Residential Development Segment.

Crescent Plaza Hotel Owner, L.P.		Wholly-owned asset – the Ritz-Carlton Hotel Development, included in our Resort/Hotel Segment.

Houston Area Development Corp. (HADC)		Non wholly-owned assets, consolidated – Spring Lakes (98% interest), included in our Resort Residential Development Segment.

Desert Mountain Development Corporation (DMDC)		Non wholly-owned asset, consolidated – Desert Mountain (93% interest), included in our Resort Residential Development Segment.

Crescent Resort Development Inc. (CRDI) (4)		Wholly-owned asset – The Residences at Park Hyatt Beaver Creek, included in our Resort Residential Development Segment.

		Non wholly-owned assets, consolidated – Brownstones (64% interest), Creekside Townhomes at Riverfront Park (64% interest), Delgany (64% interest), One Riverfront (64% interest), Beaver Creek Landing (59% interest), Eagle Ranch (76% interest), Gray's Crossing (71% interest), Main Street Vacation Club (30% interest), Northstar Highlands (57% interest), Northstar Village (57% interest), Old Greenwood (71% interest), Riverbend (68% interest), Village Walk (58% interest), Tahoe Mountain Club (71% interest) and Ritz-Carlton Highlands (71% interest), included in our Resort Residential Development Segment.

		Non wholly-owned assets, unconsolidated – Blue River Land Company, LLC – Three Peaks (33.2% interest), EW Deer Valley, LLC (35.7% interest) and East West Resort Development XIV, L.P., L.L.L.P. (26.8% interest), included in our Resort Residential Development Segment.


(1)		We own 23.85% of the economic interest in Trammell Crow Center through our ownership of a 23.85% interest in the joint venture that holds fee simple title to the Office Property (subject to a ground lease and a leasehold estate regarding the building) and two mortgage notes encumbering the leasehold interests in the land and the building.

(2)		In addition, we own nine retail parcels located in Hughes Center.

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

(4)		For non wholly-owned assets, we receive a preferred return on our invested capital and return of our capital before cash flows are allocated to the partners.

See Note 10, "Investments in Unconsolidated Companies," for a table that lists our ownership in significant unconsolidated joint ventures and investments as of December 31, 2006.

See Note 12, "Notes Payable and Borrowings Under Credit Facility," for a list of certain other subsidiaries, all of which are consolidated in our financial statements and were formed primarily for the purpose of obtaining secured debt or joint venture financing.

Segments

Our assets and operations consisted of four investment segments at December 31, 2006, as follows:

	•		Office Segment;

	•		Resort Residential Development Segment;

	•		Resort/Hotel Segment; and

	•		Temperature-Controlled Logistics Segment.

Table of Contents

Within these segments, we owned in whole or in part the following operating real estate assets, which we refer to as the Properties, as of December 31, 2006:

	•		Office Segment consisted of 71 office properties, which we refer to as the Office Properties, located in 26 metropolitan submarkets in eight states, with an aggregate of approximately 27.6 million net rentable square feet. Fifty-four of the Office Properties are wholly-owned and 17 are owned through joint ventures, one of which is consolidated and 16 of which are unconsolidated.

	•		Resort Residential Development Segment consisted of our ownership of common stock representing interests of 98% to 100% in four Resort Residential Development Corporations and two limited partnerships, which are consolidated. These Resort Residential Development Corporations, through partnership arrangements, owned in whole or in part, 30 active and planned upscale resort residential development properties, which we refer to as the Resort Residential Development Properties.

	•		Resort/Hotel Segment consisted of five luxury and destination fitness resorts and spas with a total of 949 rooms/guest nights and three upscale business-class hotel properties with a total of 1,376 rooms, which we refer to as the Resort/Hotel Properties. Five of the Resort/Hotel Properties are wholly-owned, one is owned through a joint venture that is consolidated and two are owned through joint ventures that are unconsolidated.

	•		Temperature-Controlled Logistics Segment consisted of our 31.7% interest in AmeriCold Realty Trust, or AmeriCold, a REIT. As of December 31, 2006, AmeriCold operated 104 facilities, of which 91 were wholly-owned or leased, one was partially-owned and 12 were managed for outside owners. The 92 owned or leased and partially-owned facilities, which we refer to as the Temperature-Controlled Logistics Properties, had an aggregate of approximately 497.8 million cubic feet (19.0 million square feet) of warehouse space. AmeriCold also owned one quarry and the related land.

Basis of Presentation

The accompanying consolidated financial statements include all of our direct and indirect subsidiary entities. The equity interests that we do not own in those direct and indirect subsidiaries are reflected as minority interests. All significant intercompany balances and transactions have been eliminated.

Restatement of Financial Data

In connection with the closing of our financial records for the year ended December 31, 2006, our management identified three accounting-related items discussed below that affected our financial statements. In light of these accounting items, on February 28, 2007, our Audit Committee of the Board of Trust Managers determined that readers should no longer rely on our previously filed financial statements and other financial information for the fiscal years 2005, 2004, 2003, 2002 and 2001, and component fiscal quarters, as well as for the first, second and third quarters of fiscal year 2006, and we filed a Form 8-K, Item 4.02, Non-Reliance on Previously Issued Financial Statements on a Related Audit Report or Completed Interim Review. We have reflected all required restatements in this Form 10-K as described below.

Calculation of Minority Interest

In February 1998, we completed our first offering of Series A Preferred Shares. In connection with this offering, the Operating Partnership issued Series A Preferred Units to us in exchange for the contribution of the proceeds from the offering. Subsequent Series A Preferred Share Offerings in April 2002 and January 2004 and the Series B Preferred Share Offering in May 2002 were recorded in the same manner as the February 1998 offering. In association with these offerings, the Limited Partnership Agreement of the Operating Partnership outlines terms of the allocation of distributions between us and the other limited partners of the Operating Partnership, whom we refer to as Unitholders. After reviewing the Limited Partnership Agreement of the Operating Partnership, we determined the distributions on the Preferred Units which we hold occurs prior to a distribution to the Unitholders. Therefore, net income would first be allocated to cover the dividend on the Preferred Shares and then an allocation should be made to the Unitholders.

Our calculation of minority interest has incorrectly allocated net income between us and Unitholders based on respective ownership percentages and then deducting the preferred dividend against the allocation to us. Additionally, income associated with a Share Repurchase Agreement in the years 2000 through 2002 was not allocated to the Unitholders, resulting in an incorrect allocation of minority interest. The cumulative impact of the restatement, whereby the calculation deducts the preferred dividend from net income and then allocates the remaining net income, including the income associated with the Share Repurchase Agreement, between us and Unitholders, resulted in a $14.6 million increase in Net Income for the years ending December 31, 1998 through 2005. We have reflected this impact as a cumulative adjustment to decrease Accumulated Deficit as of December 31, 2003 by $5.0 million and restated our Net Income, increasing the amounts by $4.8 million for each of the years ended December 31, 2005 and 2004, respectively.

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Refundable Fees for Club Member Services

One of our golf clubs has a limited number of non-equity club members who are entitled to repayment of a portion of their dues up to a fixed amount per member upon surrender of their memberships. We are required to deposit a fixed percentage of all dues collected from these members into a separate cash fund and then use this fund to make payments to members that choose to surrender their membership. Our obligation for payment to the members for surrendered memberships is funded by the amounts deposited into the separate cash fund.

In prior years, the liability associated with these memberships was recognized through a charge to expense equal to the amount funded at the balance sheet date in the separate cash fund. We have determined that the appropriate methodology associated with refundable fees for club member services is outlined in Staff Accounting Bulletin No. 104, Revenue Recognition , under which revenue related to refundable fees for services should not be recognized until the fee is fixed and determinable. For these memberships, member dues should not have been recognized as revenue until the dues paid exceeded the maximum refund amount available to the member. The impact of this adjustment before taxes and minority interests was to reduce revenue ($0.8 million and $1.3 million for the years ended December 31, 2005 and 2004, respectively) by the amount of refundable dues received during each period and reduce expense by the amounts recognized as a liability ($0.4 million and $0.5 million for the years ended December 31, 2005 and 2004, respectively). This results in a liability to members at each balance sheet date equal to the refundable amount (an increase in the liability of $11.0 million at December 31, 2005). Application of the guidance resulted in a $4.7 million decrease in Net Income for the years ended December 31, 1997 through 2005 ($9.3 million before taxes and minority interests). We have recognized this impact as a cumulative adjustment to increase Accumulated Deficit as of December 31, 2003 by $4.1 million ($8.1 million before taxes and minority interests) and restated our Net Income, decreasing the amounts by $0.2 million and $0.4 million for the years ended December 31, 2005 and 2004, respectively ($0.4 million and $0.8 million before taxes and minority interests, respectively).

Classification of Club Membership Intangible Asset

At the time of acquisition of one of our golf clubs, a portion of the purchase price was recorded as a membership intangible asset related to the acquired right to sell a predetermined number of equity memberships in the club. As memberships were sold, a pro rata amount of the membership intangible was charged to deferred revenue and amortized. We have determined that the right to sell a predetermined number of equity club memberships does not meet the criteria for the recording of an identifiable intangible asset. Instead the membership intangible asset should have been recorded as goodwill at the time of acquisition and amortized until our adoption of SFAS No. 142, Goodwill and Other Intangible Assets, then evaluated annually for impairment. This resulted in an understatement of goodwill ($19.0 million at December 31, 2005), an understatement of deferred revenue ($17.7 million at December 31, 2005) and an overstatement of amortization expense ($3.4 million and $3.1 million for the years ended December 31, 2005 and 2004, respectively). The cumulative impact of the restatement results in a $0.3 million decrease in Net Income for the years ended December 31, 1997 through 2005 ($0.4 million before taxes and minority interests). We have recognized this impact as a cumulative adjustment to increase Accumulated Deficit as of December 31, 2003 by $3.5 million ($6.9 million before taxes and minority interests) and restated our Net Income, increasing the amounts by $1.7 million and $1.5 million for the years ended December 31, 2005 and 2004, respectively ($3.4 million and $3.1 million before taxes and minority interests, respectively).

The following table reconciles the "As Previously Reported" to the "As Restated" Accumulated Deficit resulting from the cumulative impact of the restatement items on previously reporting financial statements.


(dollars in thousands)	Accumulated (Deficit)

Balance at December 31, 2003 (as previously reported)	$	(877,120	)
Effect of Calculation of Minority Interest		4,969
Effect of Refundable fees for Club Member Services		(4,063	)
Effect of Classification of Club Membership Intangible Asset		(3,476	)

Balance at December 31, 2003 (Restated)	$	(879,690	)

The following tables summarize the effect of the restatement items on the previously reported Consolidated Financial Statements line items presented in our Consolidated Financial Statements included in this Annual Report on Form 10-K as of December 31, 2006 and for the years ended December 31, 2005 and 2004, respectively (in thousands, except per share amounts).

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Consolidated Balance Sheet


	For year ended December 31, 2005
							As Reported
	As						with
	Previously			Discontinued			Discontinued			Restatement
	Reported			Operations			Operations			Adjustments			As Restated
ASSETS:
Investments in real estate:
Land	$	186,878		$	(3,650	)	$	183,228		$	-		$	183,228
Land improvements		100,278			-			100,278			-			100,278
Accumulated Depreciation		(29,784	)		-			(29,784	)		-			(29,784	)
Buildings and improvements		2,245,064			(54,305	)		2,190,759			-			2,190,759
Accumulated Depreciation		(464,049	)		7,421			(456,628	)		-			(456,628	)
Furniture, fixtures and equipment		71,365			(218	)		71,147			-			71,147
Accumulated Depreciation		(34,129	)		-			(34,129	)		-			(34,129	)
Land held for investment or development		574,527			(61,487	)		513,040			-			513,040
Properties held for disposition, net		4,137			114,068			118,205			-			118,205

Net investment in real estate	$	2,654,287		$	1,829		$	2,656,116		$	-			2,656,116

Cash and cash equivalents		86,228			-			86,228			-			86,228
Restricted cash and cash equivalents		84,699			-			84,699			-			84,699
Defeasance investments		274,134			-			274,134			-			274,134
Accounts receivable, net		56,356			-			56,356			-			56,356
Deferred rent receivable		70,201			(127	)		70,074			-			70,074
Investments in unconsolidated companies		393,535			-			393,535			-			393,535
Notes receivable, net		219,016			-			219,016			-			219,016
Income tax asset – current and deferred		8,291			-			8,291			2,441			10,732
Other assets, net		295,115			(1,702	)		293,413			18,953			312,366

Total assets	$	4,141,862		$	-		$	4,141,862		$	21,394			4,163,256

LIABILITIES:
Borrowings under Credit Facility	$	234,000		$	-		$	234,000		$	-		$	234,000
Notes payable		1,948,152			(14,606	)		1,933,546			-			1,933,546
Notes payable, accounts payable, accrued expenses and other liabilities, properties held for disposition		-			19,306			19,306			-			19,306
Junior subordinated notes		77,321			-			77,321			-			77,321
Accounts payable, accrued expenses and other liabilities		471,920			(4,700	)		467,220			28,698			495,918
Income tax liability – current and deferred		1,093			-			1,093			(1,093	)		-

Total liabilities	$	2,732,486		$	-		$	2,732,486		$	27,605			2,760,091

COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS:
Operating partnership units	$	113,819		$	-		$	113,819		$	(15,160	)	$	98,659
Consolidated real estate partnerships		53,562			-			53,562			(682	)		52,880

Total minority interests	$	167,381		$	-		$	167,381		$	(15,842	)		151,539

SHAREHOLDERS' EQUITY:
Preferred shares:
Series A Convertible Cumulative Preferred Shares	$	319,166		$	-		$	319,166		$	-		$	319,166
Series B Cumulative Redeemable Preferred Shares		81,923			-			81,923			-			81,923
Common shares		1,266			-			1,266			-			1,266
Additional paid-in capital		2,271,888			-			2,271,888			-			2,271,888
Deferred compensation on restricted shares		(1,182	)		-			(1,182	)		-			(1,182	)
Accumulated deficit		(972,319	)		-			(972,319	)		9,631			(962,688	)
Accumulated other comprehensive (loss) income		1,385			-			1,385			-			1,385

	$	1,702,127		$	-		$	1,702,127		$	9,631			1,711,758
Less – shares held in treasury		(460,132	)		-			(460,132	)		-			(460,132	)

Total shareholders' equity	$	1,241,995		$	-		$	1,241,995		$	9,631			1,251,626

Total liabilities and shareholders' equity	$	4,141,862		$	-		$	4,141,862		$	21,394			4,163,256

Table of Contents

Consolidated Statement of Operations


	For the year ended December 31, 2005
							As Reported
	As						with
	Previously			Discontinued			Discontinued			Restatement			As
	Reported			Operations			Operations			Adjustments			Restated
REVENUE:
Office Property	$	377,337		$	(4,578	)	$	372,759		$	-		$	372,759
Resort Residential Development Property		503,568			-			503,568			(845	)		502,723
Resort/Hotel Property		142,618			-			142,618			-			142,618

Total Property Revenue	$	1,023,523		$	(4,578	)	$	1,018,945		$	(845	)	$	1,018,100

EXPENSE:
Office Property real estate taxes	$	39,195		$	(1,133	)	$	38,062		$	-		$	38,062
Office Property operating expenses		160,077			(2,358	)		157,719			-			157,719
Resort Residential Development Property expense		432,620			(6	)		432,614			(411	)		432,203
Resort/Hotel Property expense		111,277			-			111,277			-			111,277

Total Property Expense	$	743,169		$	(3,497	)	$	739,672		$	(411	)	$	739,261

Income from Property Operations	$	280,354		$	(1,081	)	$	279,273		$	(434	)	$	278,839

OTHER INCOME (EXPENSE):
Income from sale of investment in unconsolidated company	$	29,934		$	-		$	29,934		$	-		$	29,934
Income from investment land sales		8,622			-			8,622			-			8,622
Loss on joint venture of properties		(2,743	)		-			(2,743	)		-			(2,743	)
Interest and other income		29,250			-			29,250			-			29,250
Corporate general and administrative		(50,363	)		-			(50,363	)		-			(50,363	)
Interest expense		(136,664	)		-			(136,664	)		-			(136,664	)
Amortization of deferred financing costs		(8,108	)		-			(8,108	)		-			(8,108	)
Extinguishment of debt		(2,161	)		-			(2,161	)		-			(2,161	)
Depreciation and amortization		(146,173	)		1,389			(144,784	)		3,418			(141,366	)
Impairment charges related to real estate assets		(1,047	)		1,047			-			-			-
Other expenses		(3,964	)		-			(3,964	)		-			(3,964	)
Equity in net income (loss) of unconsolidated companies:
Office Properties		11,464			-			11,464			-			11,464
Resort Residential Development Properties		(491	)		-			(491	)		-			(491	)
Resort/Hotel Properties		(1,541	)		-			(1,541	)		-			(1,541	)
Temperature-Controlled Logistics Properties		234			-			234			-			234
Other		17,885			-			17,885			-			17,885

Total other income (expense)	$	(255,866	)	$	2,436		$	(253,430	)	$	3,418		$	(250,012	)


INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTERESTS AND INCOME TAXES	$	24,488		$	1,355		$	25,843		$	2,984		$	28,827
Minority interests		(15,239	)		(204	)		(15,443	)		4,376			(11,067	)
Income tax expense		(7,378	)		(2	)		(7,380	)		(1,082	)		(8,462	)

INCOME BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE	$	1,871		$	1,149		$	3,020		$	6,278		$	9,298
Income from discontinued operations, net of minority interests and taxes		4,266			(260	)		4,006			-			4,006
Impairment charges related to real estate assets from discontinued operations, net of minority interests		(64	)		(889	)		(953	)		-			(953	)
Gain on sale of real estate from discontinued operations, net of minority interest		89,234			-			89,234			-			89,234

NET INCOME	$	95,307		$	-		$	95,307		$	6,278		$	101,585
Series A Preferred Share distributions		(23,963	)		-			(23,963	)		-			(23,963	)
Series B Preferred Share distributions		(8,075	)		-			(8,075	)		-			(8,075	)


NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	63,269		$	-		$	63,269		$	6,278		$	69,547

Table of Contents


	For the year ended December 31, 2005
							As Reported
	As						with
	Previously			Discontinued			Discontinued			Restatement		As
	Reported			Operations			Operations			Adjustments		Restated
BASIC EARNINGS PER SHARE DATA:
Loss available to common shareholders before discontinued operations and cumulative effect of a change in accounting principle	$	(0.30	)	$	0.01		$	(0.29	)	$	0.06	$	(0.23	)
Income from discontinued operations, net of minority interests		0.04			-			0.04			-		0.04
Impairment charges related to real estate assets from discontinued operations, net of minority interests		-			(0.01	)		(0.01	)		-		(0.01	)
Gain on sale of real estate from discontinued operations, net of minority interests		0.89			-			0.89			-		0.89

Net income available to common shareholders – basic	$	0.63		$	-		$	0.63		$	0.06	$	0.69


DILUTED EARNINGS PER SHARE DATA:
Loss available to common shareholders before discontinued operations and cumulative effect of a change in accounting principle	$	(0.30	)	$	0.01		$	(0.29	)	$	0.06	$	(0.23	)
Income from discontinued operations, net of minority interests		0.04			-			0.04			-		0.04
Impairment charges related to real estate assets from discontinued operations, net of minority interests		-			(0.01	)		(0.01	)		-		(0.01	)
Gain on sale of real estate from discontinued operations, net of minority interests		0.89			-			0.89			-		0.89

Net income available to common shareholders – diluted	$	0.63		$	-		$	0.63		$	0.06	$	0.69

Table of Contents

Consolidated Statements of Operations


	For year ended December 31, 2004
							As Reported
	As						with
	Previously			Discontinued			Discontinued			Restatement			As
	Reported			Operations			Operations			Adjustments			Restated
REVENUE:
Office Property	$	481,710		$	(5,913	)	$	475,797		$	-		$	475,797
Resort Residential Development Property		311,197			-			311,197			(1,252	)		309,945
Resort/Hotel Property		214,531			-			214,531			-			214,531

Total Property Revenue	$	1,007,438		$	(5,913	)	$	1,001,525		$	(1,252	)	$	1,000,273

EXPENSE:
Office Property real estate taxes	$	58,776		$	(1,383	)	$	57,393		$	-		$	57,393
Office Property operating expenses		179,413			(2,645	)		176,768			-			176,768
Resort Residential Development Property expense		271,819			(52	)		271,767			(457	)		271,310
Resort/Hotel Property expense		179,825			-			179,825			-			179,825

Total Property Expense	$	689,833		$	(4,080	)	$	685,753		$	(457)		$	685,296

Income from Property Operations	$	317,605		$	(1,833	)	$	315,772		$	(795)		$	314,977

OTHER INCOME (EXPENSE):
Income from investment land sales	$	18,879		$	-		$	18,879		$	-		$	18,879
Gain on joint venture of properties		265,772			-			265,772			-			265,772
Interest and other income		18,005			-			18,005			-			18,005
Corporate general and administrative		(38,889	)		-			(38,889	)		-			(38,889	)
Interest expense		(176,771	)		-			(176,771	)		-			(176,771	)
Amortization of deferred financing costs		(13,056	)		-			(13,056	)		-			(13,056	)
Extinguishment of debt		(42,608	)		-			(42,608	)		-			(42,608	)
Depreciation and amortization		(164,056	)		1,084			(162,972	)		3,074			(159,898	)
Impairment charges related to real estate assets		(4,094	)		-			(4,094	)		-			(4,094	)
Other expenses		(725	)		-			(725	)		-			(725	)
Equity in net income (loss) of unconsolidated companies:
Office Properties		6,262			-			6,262			-			6,262
Resort Residential Development Properties		(2,266	)		-			(2,266	)		-			(2,266	)
Resort/Hotel Properties		(245	)		-			(245	)		-			(245	)
Temperature-Controlled Logistics Properties		6,153			-			6,153			-			6,153
Other		(280	)		-			(280	)		-			(280	)

Total other income (expense)	$	(127,919	)	$	1,084		$	(126,835	)	$	3,074		$	(123,761	)


INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTERESTS AND INCOME TAXES	$	189,686		$	(749	)	$	188,937		$	2,279		$	191,216
Minority interests		(37,294	)		117			(37,177	)		4,471			(32,706	)
Income tax benefit (expense)		13,078			(20	)		13,058			(827	)		12,231

INCOME BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE	$	165,470		$	(652	)	$	164,818		$	5,923		$	170,741
Income from discontinued operations, net of minority interests and taxes		9,755			652			10,407			-			10,407
Impairment charges related to real estate assets from discontinued operations, net of minority interests		(2,978	)		-			(2,978	)		-			(2,978	)
Gain on sale of real estate from discontinued operations, net of minority interest and taxes		1,052			-			1,052			-			1,052
Cumulative effect of a change in accounting principle, net of minority interests		(363	)		-			(363	)		-			(363	)

NET INCOME	$	172,936		$	-		$	172,936		$	5,923		$	178,859
Series A Preferred Share distributions		(23,723	)		-			(23,723	)		-			(23,723	)
Series B Preferred Share distributions		(8,075	)		-			(8,075	)		-			(8,075	)

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	141,138		$	-		$	141,138		$	5,923		$	147,061

Table of Contents


	For the year ended December 31, 2004
							As Reported
	As						with
	Previously			Discontinued			Discontinued			Restatement		As
	Reported			Operations			Operations			Adjustments		Restated
BASIC EARNINGS PER SHARE DATA:
Income available to common shareholders before discontinued operations and cumulative effect of a change in accounting principle	$	1.35		$	(0.01	)	$	1.34		$	0.06	$	1.40
Income from discontinued operations, net of minority interests and taxes		0.10			0.01			0.11			-		0.11
Impairment charges related to real estate assets from discontinued operations, net of minority interests		(0.03	)		-			(0.03	)		-		(0.03	)
Gain on sale of real estate from discontinued operations, net of minority interests and taxes		0.01			-			0.01			-		0.01

Net income available to common shareholders - basic	$	1.43		$	-		$	1.43		$	0.06	$	1.49


DILUTED EARNINGS PER SHARE DATA:
Income available to common shareholders before discontinued operations and cumulative effect of a change in accounting principle	$	1.34		$	-		$	1.34		$	0.06	$	1.40
Income from discontinued operations, net of minority interests and taxes		0.10			-			0.10			-		0.10
Impairment charges related to real estate assets from discontinued operations, net of minority interests		(0.03	)		-			(0.03	)		-		(0.03	)
Gain on sale of real estate from discontinued operations, net of minority interests and taxes		0.01			-			0.01			-		0.01

Net income available to common shareholders - diluted	$	1.42		$	-		$	1.42		$	0.06	$	1.48

Table of Contents

Consolidated Statement of Cash Flows


	For year ended December 31, 2005
						As Reported
						with
	As Previously			Discontinued		Discontinued			Restatement			As
	Reported			Operations		Operations			Adjustments			Restated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	95,307		$	-	$	95,307		$	6,278		$	101,585
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		156,870			-		156,870			(3,418	)		153,452
Extinguishment of debt		2,271			-		2,271			-			2,271
Resort Residential Development cost of sales		311,050			-		311,050			-			311,050
Resort Residential Development capital expenditures		(356,603	)		-		(356,603	)		-			(356,603	)
Impairment charges related to real estate assets		1,122			-		1,122			-			1,122
Income from investment land sales		(8,622	)		-		(8,622	)		-			(8,622	)
Loss on joint venture of properties, net		2,743			-		2,743			-			2,743
Gain on property sales, net		(105,258	)		-		(105,258	)		-			(105,258	)
Income from sale of investment in unconsolidated company		(29,934	)		-		(29,934	)		-			(29,934	)
Minority interests		31,870			-		31,870			(4,376	)		27,494
Non-cash compensation		13,236			-		13,236			-			13,236
Amortization of debt premiums		(2,452	)		-		(2,452	)		-			(2,452	)
Equity in earnings from unconsolidated companies		(27,551	)		-		(27,551	)		-			(27,551	)
Ownership portion of management fees from unconsolidated companies		6,609			-		6,609			-			6,609
Distributions received from unconsolidated companies		30,992			-		30,992			-			30,992
Change in assets and liabilities, net of effect of consolidations, acquisitions and dispositions:
Restricted cash and cash equivalents		(1,626	)		-		(1,626	)		-			(1,626	)
Accounts receivable and notes receivable		886			-		886			-			886
Deferred rent receivable		(14,562	)		-		(14,562	)		-			(14,562	)
Income tax asset -current and deferred, net		5,548			-		5,548			2,175			7,723
Other assets		(25,580	)		-		(25,580	)		2,411			(23,169	)
Accounts payable, accrued expenses and other liabilities		53,313			-		53,313			(3,070	)		50,243

Net cash provided by operating activities	$	139,629		$	-	$	139,629		$	-		$	139,629

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from property sales	$	236,725		$	-	$	236,725		$	-		$	236,725
Proceeds from sale of investment in unconsolidated company and related property sales		32,237			-		32,237			-			32,237
Proceeds from joint venture partners		144,193			-		144,193			-			144,193
Acquisition of investment properties		(192,154	)		-		(192,154	)		-			(192,154	)
Development of investment properties		(83,961	)		-		(83,961	)		-			(83,961	)
Property improvements - Office Properties		(20,131	)		-		(20,131	)		-			(20,131	)
Property improvements - Resort/Hotel Properties		(4,707	)		-		(4,707	)		-			(4,707	)
Tenant improvement and leasing costs - Office Properties		(65,540	)		-		(65,540	)		-			(65,540	)
Resort Residential Development Properties investments		(32,876	)		-		(32,876	)		-			(32,876	)
Increase in restricted cash and cash equivalents		(4,531	)		-		(4,531	)		-			(4,531	)
Purchases of defeasance investments and other securities		(115,710	)		-		(115,710	)		-			(115,710	)
Proceeds from defeasance investment maturities and other securities		23,273			-		23,273			-			23,273
Return of investment in unconsolidated companies		18,785			-		18,785			-			18,785
Investment in unconsolidated companies		(17,118	)		-		(17,118	)		-			(17,118	)
Increase in notes receivable		(116,843	)		-		(116,843	)		-			(116,843	)

Net cash used in investing activities	$	(198,358	)	$	-	$	(198,358	)	$	-		$	(198,358	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs	$	(15,659	)	$	-	$	(15,659	)	$	-		$	(15,659	)
Borrowings under Credit Facility		758,300			-		758,300			-			758,300
Payments under Credit Facility		(666,800	)		-		(666,800	)		-			(666,800	)
Notes payable proceeds		387,200			-		387,200			-			387,200
Notes payable payments		(346,968	)		-		(346,968	)		-			(346,968	)
Junior subordinated notes		77,321			-		77,321			-			77,321
Resort Residential Development Properties note payable borrowings		257,411			-		257,411			-			257,411
Resort Residential Development Properties note payable payments		(198,540	)		-		(198,540	)		-			(198,540	)
Capital distributions to joint venture partner		(18,516	)		-		(18,516	)		-			(18,516	)
Capital contributions from joint venture partner		7,834			-		7,834			-			7,834
Proceeds from exercise of share and unit options		21,995			-		21,995			-			21,995
Reissuance of Treasury Shares		16			-		16			-			16
Series A Preferred Share distributions		(23,963	)		-		(23,963	)		-			(23,963	)
Series B Preferred Share distributions		(8,075	)		-		(8,075	)		-			(8,075	)
Dividends and unitholder distributions		(178,890	)		-		(178,890	)		-			(178,890	)

Net cash provided by financing activities	$	52,666		$	-	$	52,666		$	-		$	52,666


DECREASE IN CASH AND CASH EQUIVALENTS	$	(6,063	)	$	-	$	(6,063	)	$	-		$	(6,063	)

CASH AND CASH EQUIVALENTS, Beginning of period		92,291			-		92,291			-			92,291

CASH AND CASH EQUIVALENTS, End of period	$	86,228		$	-	$	86,228		$	-		$	86,228

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Consolidated Statements of Cash Flows


	For year ended December 31, 2004
						As Reported
	As					with
	Previously			Discontinued		Discontinued			Restatement			As
	Reported			Operations		Operations			Adjustments			Restated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	172,936		$	-	$	172,936		$	5,923		$	178,859
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		183,873			-		183,873			(3,074	)		180,799
Extinguishment of debt		6,459			-		6,459			-			6,459
Resort Residential Development cost of sales		161,853			-		161,853			-			161,853
Resort Residential Development capital expenditures		(202,767	)		-		(202,767	)		-			(202,767	)
Impairment charges related to real estate assets		7,605			-		7,605			-			7,605
Income from investment land sales		(18,879	)		-		(18,879	)		-			(18,879	)
Gain on joint venture of properties		(265,772	)		-		(265,772	)		-			(265,772	)
Gain on property sales, net		(1,241	)		-		(1,241	)		-			(1,241	)
Minority interests		38,688			-		38,688			(4,471	)		34,217
Cumulative effect of a change in accounting principle, net of minority interests		363			-		363			-			363
Non-cash compensation		1,737			-		1,737			-			1,737
Amortization of debt premiums		(2,386	)		-		(2,386	)		-			(2,386	)
Equity in earnings from unconsolidated companies		(9,624	)		-		(9,624	)		-			(9,624	)
Ownership portion of management fees from unconsolidated companies		1,833			-		1,833			-			1,833
Distributions received from unconsolidated companies		7,982			-		7,982			-			7,982
Change in assets and liabilities, net of effect of consolidations, acquisitions and dispositions:
Restricted cash and cash equivalents		54,889			-		54,889			-			54,889
Accounts receivable and notes receivable		(17,924	)		-		(17,924	)		-			(17,924	)
Deferred rent receivable		(16,246	)		-		(16,246	)		-			(16,246	)
Income tax asset -current and deferred, net		(21,657	)		-		(21,657	)		827			(20,830	)
Other assets		(23,983	)		-		(23,983	)		1,098			(22,885	)
Accounts payable, accrued expenses and other liabilities		34,828			-		34,828			(303	)		34,525

Net cash provided by operating activities	$	92,567		$	-	$	92,567		$	-		$	92,567

CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash impact of consolidation of previously unconsolidated entities	$	334		$	-	$	334		$	-		$	334
Proceeds from property sales		174,881			-		174,881			-			174,881
Proceeds from sale of investment in unconsolidated company and related property sales		3,229			-		3,229			-			3,229
Proceeds from joint venture partners		1,028,913			-		1,028,913			-			1,028,913
Acquisition of investment properties		(381,672	)		-		(381,672	)		-			(381,672	)
Development of investment properties		(7,089	)		-		(7,089	)		-			(7,089	)
Property improvements - Office Properties		(14,297	)		-		(14,297	)		-			(14,297	)
Property improvements - Resort/Hotel Properties		(27,739	)		-		(27,739	)		-			(27,739	)
Tenant improvement and leasing costs - Office Properties		(92,876	)		-		(92,876	)		-			(92,876	)
Resort Residential Development Properties investments		(35,428	)		-		(35,428	)		-			(35,428	)
Decrease in restricted cash and cash equivalents		75,395			-		75,395			-			75,395
Purchases of defeasance investments and other securities		(203,643	)		-		(203,643	)		-			(203,643	)
Proceeds from defeasance investment maturities and other securities		14,560			-		14,560			-			14,560
Return of investment in unconsolidated companies		129,693			-		129,693			-			129,693
Investment in unconsolidated companies		(19,047	)		-		(19,047	)		-			(19,047	)
Increase in notes receivable		(15,230	)		-		(15,230	)		-			(15,230	)

Net cash provided by investing activities	$	629,984		$	-	$	629,984		$	-		$	629,984

CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs	$	(12,918	)	$	-	$	(12,918	)	$	-		$	(12,918	)
Borrowings under Credit Facility		530,000			-		530,000			-			530,000
Payments under Credit Facility		(626,500	)		-		(626,500	)		-			(626,500	)
Notes payable proceeds		577,146			-		577,146			-			577,146
Notes payable payments		(1,027,661	)		-		(1,027,661	)		-			(1,027,661	)
Resort Residential Development Properties note payable borrowings		111,672			-		111,672			-			111,672
Resort Residential Development Properties note payable payments		(118,495	)		-		(118,495	)		-			(118,495	)
Capital distributions to joint venture partner		(8,565	)		-		(8,565	)		-			(8,565	)
Capital contributions from joint venture partner		2,833			-		2,833			-			2,833
Proceeds from exercise of share and unit options		829			-		829			-			829
Issuance of preferred shares-Series A		71,006			-		71,006			-			71,006
Series A Preferred Share distributions		(23,963	)		-		(23,963	)		-			(23,963	)
Series B Preferred Share distributions		(8,075	)		-		(8,075	)		-			(8,075	)
Dividends and unitholder distributions		(175,621	)		-		(175,621	)		-			(175,621	)

Net cash used in financing activities	$	(708,312	)	$	-	$	(708,312	)	$	-		$	(708,312	)


INCREASE IN CASH AND CASH EQUIVALENTS	$	14,239		$	-	$	14,239		$	-		$	14,239

CASH AND CASH EQUIVALENTS, Beginning of period		78,052			-		78,052			-			78,052

CASH AND CASH EQUIVALENTS, End of period	$	92,291		$	-	$	92,291		$	-		$	92,291

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Impact of New Accounting Standards

EITF 06-3. At its June 2006 meeting, the EITF ratified the consensus regarding Issue No. 06-3 (EITF 06-3), How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation) . EITF 06-3 is effective for interim and annual periods beginning after December 15, 2006, with earlier application permitted. The scope of EITF 06-3 includes any tax assessed by a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction between a seller and a customer, and may include, but is not limited to, sales, use, value added, and certain excise taxes. The consensus indicates that gross vs. net income statement classification of those taxes within its scope is an accounting policy decision. In addition, for taxes within its scope, the consensus requires the following disclosures: the accounting policy elected for these taxes and the amounts of the taxes reflected gross (as revenue) in the income statement on an interim and annual basis. There was no impact to our financial condition or results of operations from the adoption of EITF 06-3.

FASB Interpretation 48. In July 2006, the FASB issued Interpretation 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109, or FIN 48, which clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The standard also provides guidance on derecognizing, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, and are to be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet a more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. We expect to record less than $1.0 million as a cumulative effect adjustment to beginning Accumulated Deficit as of January 1, 2007 from the adoption of FIN 48. The impact of the adoption of FIN 48 has not been determined by AmeriCold, an equity investment in which we hold a 31.7% interest, as of December 31, 2006.

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SAB No. 108. In September 2006, the Securities and Exchange Commission, or SEC, issued Staff Accounting Bulletin No. 108, Financial Statements - Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements , (SAB 108), which is effective for fiscal years ending after November 15, 2006. SAB No. 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements. The adoption of SAB No. 108 did not have an impact to our financial condition or results of operations.

EITF 06-8. At its November 2006 meeting, the EITF ratified the consensus regarding Issue No. 06-8 (EITF 06-8), Applicability of the Assessment of a Buyer's Continuing Investment under FASB Statement No. 66 for Sales of Condominiums . EITF 06-8 is effective for annual periods beginning after March 15, 2007. The scope of EITF 06-8 is limited to the sale of individual units in a condominium project and requires an entity to evaluate the adequacy of the buyer's initial and continuing investment for purposes of determining whether the sales price is collectible as required to recognize profit using the percentage-of-completion method under paragraph 37 of Statement 66. If the buyer does not meet the initial and continuing investment criteria, the guidance requires use of the deposit method to recognize profit. We do not believe there will be an impact to our financial condition or results of operations from the adoption of EITF 06-8.

Significant Accounting Policies

Consolidation of Variable Interest Entities. We perform evaluations of each of our investments, investment partnerships, real estate partnerships, mezzanine investments and joint ventures to determine if the associated entities constitute a Variable Interest Entity, or VIE, as defined under Interpretations 46 and 46R, Consolidation of Variable Interest Entities , or FIN 46 and 46R, respectively. Due to the adoption of FIN 46, we consolidated Elijah Fulcrum Fund Partners, L.P., which we refer to as Elijah, as of January 1, 2004. Elijah is a limited partnership whose purpose is to invest in the SunTx Fulcrum Fund, L.P. The consolidation of Elijah resulted in an approximately $0.4 million charge to earnings which is reflected as a cumulative effect of a change in accounting principle, net of minority interests in our Consolidated Statements of Operations. In general, a VIE is an entity that has (i) an insufficient amount of equity for the entity to carry on its principal operations without additional subordinated financial support from other parties, (ii) a group of equity owners that are unable to make decisions about the entity's activities, or (iii) equity that does not absorb the entity's losses or receive the benefits of the entity. If any one of these characteristics is present, the entity is subject to FIN 46R's variable interests consolidation model.

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

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

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

Net Investments in Real Estate. Real estate, for operating properties, is carried at cost, net of accumulated depreciation. Betterments, major renovations, and certain costs directly related to the acquisition, improvements and leasing of real estate are capitalized. Operating leases for space in our Office Properties generally provide an allowance for the construction of tenant improvements. We capitalize the cost of tenant improvements up to the amount of the allowance granted in the lease. The cost of any improvements paid by the tenant in excess of the tenant improvement allowance is not reflected in our Consolidated Financial Statements. Expenditures for maintenance and repairs are charged to operations as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, as follows:

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Buildings and Improvements		2 to 46 years
Tenant Improvements		Terms of leases, which approximates the useful life of the asset
Furniture, Fixtures and Equipment		2 to 5 years

Real estate also includes land and capitalized project costs associated with the acquisition and the development of land, construction of resort residential units, amenities and facilities, interest and loan origination costs on land under development, and certain general and administrative expenses to the extent they benefit the development of land. We adhere to the accounting and reporting standards under SFAS No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects for costs associated with the acquisition, development, construction and sale of real estate projects. In addition, we capitalize interest costs as a part of the historical cost of acquiring certain assets that qualify for capitalization under SFAS No. 34, Capitalization of Interest Cost . Our assets that qualify for accounting treatment under this pronouncement must require a period of time to prepare for their intended use, such as our land development project assets that are intended for sale or lease and constructed as discrete projects. In accordance with the authoritative guidance, the interest cost capitalized by us is the interest cost recognized on borrowings and other obligations. The amount capitalized is an allocation of the interest cost incurred during the period required to complete the asset. The interest rate for capitalization purposes is based on the rates of our outstanding borrowings.

Assets classified as held and used are evaluated for impairment when events or circumstances indicate that the carrying amount may not be recoverable. When expected undiscounted cash flows are less than the carrying value of a Property and we do not expect to recover our carrying costs, an impairment loss is recognized. For Properties classified as held for use, we reduce carrying costs to fair value. For Properties held for disposition, we reduce carrying costs to the fair value less estimated selling costs in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets . Depreciation expense is not recognized on Properties classified as held for disposition.

Concentration of Real Estate Investments. Our Office Properties are located primarily in the Dallas and Houston, Texas, metropolitan areas. As a result of this geographic concentration, our operations could be adversely affected by a recession or general economic downturn in the areas where these Properties are located.

Cash and Cash Equivalents. We consider all highly liquid investments with an original maturity of 90 days or less to be cash and cash equivalents.

Restricted Cash and Cash Equivalents. Restricted cash includes escrows established pursuant to certain mortgage financing arrangements for real estate taxes, insurance, security deposits, ground lease expenditures, capital expenditures and capital requirements related to cash flow hedges. At December 31, 2005, restricted cash also included funds related to residential property closings at year end when the receipts are held in escrow and required to be used to pay down the project construction loan.

Allowance for Doubtful Accounts/Credit Losses. Our accounts receivable balance is reduced by an allowance for amounts that may become uncollectible in the future. Our receivable balance is composed primarily of rents and operating cost recoveries due from tenants, receivables associated with club memberships at our Resort Residential Development properties and guest receivables at our Resort/Hotel properties. We also maintain an allowance for deferred rent receivables which arise from the straight-lining of rents. The allowance for doubtful accounts is reviewed at least quarterly for adequacy by reviewing such factors as the credit quality of our tenants or members, any delinquency in payment, historical trends and current economic conditions. If the assumptions regarding the collectibility of accounts receivable prove incorrect, we could experience write-offs in excess of its allowance for doubtful accounts, which would result in a decrease in net income.

Mezzanine notes receivable are reviewed for potential impairment at each balance sheet date. A mezzanine note receivable is considered impaired when it becomes probable, based on current information, that we will be unable to collect all amounts due according to the mezzanine note's contractual terms. The amount of impairment, if any, is measured by comparing the recorded amount of the mezzanine note to the present value of the expected cash flows or the fair value of the collateral. If a mezzanine note was deemed to be impaired, we would record a reserve for loan losses through a charge to income for any shortfall. To date, no such impairment charges have been recognized.

Investments in Unconsolidated Companies. Investments in unconsolidated joint ventures and companies are recorded initially at cost and subsequently adjusted for equity in earnings and cash contributions and distributions. If events or circumstances indicate that the fair value of an investment accounted for using the equity method has declined below its carrying value and we consider the decline to be "other than temporary," the investment is written down to fair value and an impairment loss is recognized. The evaluation of impairment for an investment would be based on a number of factors, including financial condition and operating results for the investment, inability to remain in compliance with provisions of any related debt agreements, and recognition of impairments by other investors. Impairment recognition would negatively impact the recorded value of our investment and reduce net income.

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Certain of our unconsolidated entities, Sun TX Fulcrum Fund, L.P., or SunTx, and G2 Opportunity Fund, L.P., or G2, are subject to specialized industry accounting principles under the AICPA Audit and Accounting Guide: Investment Companies. Under those guidelines, SunTx and G2 record underlying investments, including investments in portfolio companies which are not publicly traded securities, at estimated fair value. Accordingly, various factors are considered in valuing such securities, including: their costs, current and projected operating performance, prices of recent significant placements of securities of the same issuer to unaffiliated third parties, if any, recent market transactions for similar companies, and other such factors. Because of the inherent uncertainty of such valuations, the fair value adjustments to non-public investments are estimates, and accordingly, such estimated values may differ from the values that would have been used had a ready market for the investments existed, and the differences could be material. SunTx and G2 update such estimates of fair value on an annual basis; as such, we record any unrealized gains or losses during the year in the fourth quarter as equity in earnings results associated with these investments.

See Note 10, "Investments in Unconsolidated Companies" for a table that lists our ownership in significant unconsolidated joint ventures and investments as of December 31, 2006.

Other Assets. Other assets consist principally of leasing costs, deferred financing costs, intangible assets, goodwill and marketable securities. Leasing costs are amortized on a straight-line basis during the terms of the respective leases, and unamortized leasing costs are written off upon early termination of lease agreements. Deferred financing costs are amortized on a straight-line basis (when it approximates the effective interest method) over the shorter of the expected lives or the terms of the respective loans. The effective interest method is used to amortize deferred financing costs on loans where the straight-line basis does not approximate the effective interest method, over the terms of the respective loans.

Goodwill and intangible assets are reviewed annually for impairment. Upon the conveyance of a water pipeline to the local government, we reclassified the fair value of the water pipeline from land improvements into an intangible asset, or water rights. The water rights in use are being amortized on a straight-line basis over 20 years.

Marketable securities are considered either available-for-sale, trading or held-to-maturity, in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities . Realized gains or losses on sale of securities are recorded based on specific identification. Available-for-sale securities are marked to market value on a monthly basis with the corresponding unrealized gains and losses included in accumulated other comprehensive income. Trading securities are marked to market on a monthly basis with the unrealized gains and losses included in earnings. Held-to-maturity securities are carried at amortized cost. Held-to-maturity securities consists of U.S. Treasury and government sponsored agency securities purchased to in-substance defease debt, and are included in the "Defeasance investments" line. When a decline in the fair value of marketable securities is determined to be other than temporary, the cost basis is written down to fair value and the amount of the write-down is included in earnings for the applicable period. Investments in equity securities with no readily determinable market value are reported at cost, as they are not considered marketable under SFAS No. 115.

Fair Value of Financial Instruments. The carrying values of cash and cash equivalents, restricted cash and cash equivalents, short-term investments, accounts receivable, deferred rent receivable, notes receivable, other assets, accounts payable and other liabilities are reasonable estimates of their fair values. Fair values of our notes receivable, primarily mezzanine notes, are influenced by changes in, and market expectations for changes in, interest rates and levels of repayments as well as other factors beyond the control of management. Because most of our investments that have variable interest rates adjust to more current rates monthly, declines in fair value caused by increases in interest rates can be largely recovered in a relatively short period of time. The fair value of mezzanine notes with fixed interest rates are based on current interest rates for similar investments with similar payment terms and maturities at the time of investment. The fair value of our defeasance investments was approximately $110.3 million as of December 31, 2006. The fair value of our notes payable and junior subordinated notes is most sensitive to fluctuations in interest rates. Since our $767.2 million in variable rate debt changes with these changes in interest rates, it also approximates the fair market value of the underlying debt. We reduce the variability in future cash flows by maintaining a sizable portion of debt with fixed payment characteristics. Although the cash flow to or from us does not change, the fair value of the $1.5 billion in fixed rate debt, based upon current interest rates for similar debt instruments with similar payment terms and expected payoff dates, would be approximately $1.5 billion as of December 31, 2006. The defeasance investments and defeased debt cannot legally be separated and, therefore, have a net fair value of $0.4 million. For defeasance investments, fair values are based on quoted market prices. For defeased debt, fair values are based on rates currently available from banks and other lenders for debt with similar terms and remaining maturities. Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 2006.

Derivative Financial Instruments. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities , as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Our objective in using derivatives is to add stability to interest expense and to manage our exposure to interest rate movements or other identified risks. Derivative financial instruments are used to convert a portion of our variable rate debt to fixed rate debt and to manage our fixed to variable rate debt ratio.

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To accomplish this objective, we primarily use interest rate swaps as part of our cash flow hedging strategy. Interest rate swaps designated as cash flow hedges are entered into to achieve a fixed interest rate on variable rate debt.

We measure our derivative instruments and hedging activities at fair value and record them as an asset or liability, depending on our rights or obligations under the applicable derivative contract. For derivatives designated as fair value hedges, the changes in the fair value of both the derivative instrument and the hedged items are recorded in earnings. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For derivatives designated as cash flow hedges, the effective portions of changes in fair value of the derivative are reported in other comprehensive income and are subsequently reclassified into earnings when the hedged item affects earnings. Changes in fair value of derivative instruments not designated as hedges and ineffective portions of hedges are recognized in earnings in the affected period. We assess 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.

As of December 31, 2006, there are no derivatives designated as fair value hedges or hedges of net investments in foreign operations nor are derivatives being used for trading or speculative purposes.

At December 31, 2006, derivatives with a fair value of $0.1 million were included in "Other assets, net." The change in net unrealized gains decreased $1.8 million in 2006 for derivatives designated as cash flow hedges is separately disclosed in the Consolidated Statements of Shareholders' Equity.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on our variable rate debt. The change in net unrealized gains/losses on cash flow hedges reflects the recognition of $1.9 million of net unrealized losses from other comprehensive income to interest expense during 2006. We estimate that during 2007 an additional $0.1 million of unrealized gains will be recognized as a reduction to interest expense.

Revenue Recognition - Office Properties. As a lessor, we have retained substantially all of the risks and benefits of ownership of the Office Properties and account for our leases as operating leases. Income on leases, which includes scheduled increases in rental rates during the lease term and/or abated rent payments for various periods following the tenant's lease commencement date, is recognized on a straight-line basis. Deferred rent receivable represents the excess of rental revenue recognized on a straight-line basis over cash received pursuant to the applicable lease provisions. Office Property leases generally provide for the reimbursement of annual increases in operating expenses above base year operating expenses (excess operating expenses), payable to us in equal installments throughout the year based on estimated increases. Any differences between the estimated increase and actual amounts incurred are adjusted at year end.

Revenue Recognition - Resort Residential Development Properties. We use the accrual method to recognize revenue from the sale of Resort Residential Development Properties after closing has taken place, title has been transferred, sufficient cash has been received to demonstrate the buyer's commitment to pay for the property and collection of the balance of the sales price, if any, is reasonably assured. If a sale does not qualify for the accrual method of recognition, deferral methods are used as appropriate. In certain cases, when we receive an inadequate cash down payment and take a promissory note for the balance of the sales price, revenue recognition is deferred until such time as sufficient cash has been received to meet minimum down payment requirements. The cost of resort residential property sold is defined based on the type of product being purchased. The cost of sales for resort residential lots is generally determined as a specific percentage of the sales revenue recognized for each Resort Residential Development project. The percentages are based on total estimated development costs and sales revenue for each Resort Residential Development project. These estimates are based on

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the then-current development strategy and operating assumptions utilizing internally developed projections for product type, revenue and related development costs. The cost of sales for resort residential units (such as townhomes and condominiums) is determined using the relative sales value method. If the resort residential unit has been sold prior to the completion of infrastructure cost, and those uncompleted costs are not significant in relation to total costs, the full accrual method is utilized. Under this method, 100% of the revenue is recognized, and a commitment liability is established to reflect the allocated estimated future costs to complete the resort residential unit. If our estimates of costs or the percentage of completion is incorrect, it could result in either an increase or decrease in cost of sales expense or revenue recognized and therefore, an increase or decrease in net income.

At our golf clubs, members are expected to pay an advance initiation fee or refundable deposit upon their acceptance as a member to the club. These initiation fees and deposits vary in amount based on a variety of factors such as the supply and demand for our services in each particular market, number of golf courses and breadth of amenities available to the members, and the prestige of having the right to membership of the club. A significant portion of our initiation fees are deferred equity memberships which are recorded as deferred revenue when sold and recognized as membership fee revenue on a straight-line basis over the number of months remaining until the turnover date of the club to the members. Refundable deposits relate to the non-equity membership portion of each membership sold which will be refunded upon resignation by the member and upon reissuance of the membership, or at the termination of the membership as provided by the membership agreement. Refundable deposits are not recorded as revenue but rather as a liability due to the refundable nature of the deposit. For certain refundable deposits, the difference between the amount paid by the member and the present value of the refund obligation is deferred and recognized as revenue over the average expected life of the membership and the present value of the refund obligation accretes to the refund amount over the nonrefundable term. A limited number of non-equity members may be entitled to repayment of a portion of their dues up to a fixed amount per member upon surrender of their memberships. Revenue associated with these refundable dues is deferred until we are relieved from this repayment obligation. The deferred revenue and refundable deposits, net of related deferred expenses, are presented in our Consolidated Balance Sheets in Accounts payable, accrued expenses, and other liabilities.

Revenue Recognition - Resort/Hotel Properties. We recognize revenue for room sales and guest nights and revenue from guest services whenever rooms were occupied and services had been rendered. Lease revenue is recognized for the Omni Austin Hotel. Also, we record taxes collected from customers and remitted to governmental authorities on a net basis in that they are excluded from revenues.

Revenue Recognition - Mezzanine Notes. We recognize interest income on mezzanine notes over the term of the note using the effective interest method and on an accrual basis. Fees received in connection with loan commitments and loan origination costs are deferred until the loan is funded and are then recognized over the term of the loan as an adjustment to yield.

Income Taxes . We have elected to be taxed as a REIT under Sections 856 through 860 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, and operate in a manner intended to enable us to continue to qualify as a REIT. As a REIT, we generally will not be subject to corporate federal income tax on net income that we currently distribute to our shareholders, provided that we satisfy certain organizational and operational requirements including the requirement to distribute at least 90% of our REIT taxable income to our shareholders each year. Accordingly, we do not believe we will be liable for federal income taxes on our REIT taxable income or state income taxes in most of the states in which we operate.

We have elected to treat certain of our corporate subsidiaries as taxable REIT subsidiaries, each of which we refer to as a TRS. In general, a TRS may perform additional services for tenants and generally may engage in any real estate or non-real estate business (except for the operation or management of health care facilities or lodging facilities or the provision to any person, under a franchise, license or otherwise, of rights to any brand name under which any lodging facility or health care facility is operated). A TRS is subject to corporate federal income tax, state and local taxes.

Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Earnings Per Share. SFAS No. 128, Earnings Per Share , specifies the computation, presentation and disclosure requirements for earnings per share or EPS.

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

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The following table presents a reconciliation for the years ended December 31, 2006, 2005 and 2004 of basic and diluted earnings per share from "Income before discontinued operations and cumulative effect of a change in accounting principle" to "Net income available to common shareholders." The table also includes weighted average shares on a basic and diluted basis.


	For the years ended December 31,
	2006								2005								2004
									(Restated)								(Restated)
				Wtd.		Per						Wtd.		Per						Wtd.		Per
	Income			Avg.		Share			Income			Avg.		Share			Income			Avg.		Share
(in thousands, except per share amounts)	(Loss)			Shares		Amount			(Loss)			Shares		Amount			(Loss)			Shares		Amount

Basic EPS -
Income before discontinued operations and cumulative effect of a change in accounting principle	$	19,678			102,055				$	9,298			100,179				$	170,741			99,025
Series A Preferred Share distributions		(23,963	)							(23,963	)							(23,723	)
Series B Preferred Share distributions		(8,075	)							(8,075	)							(8,075	)

(Loss) income available to common shareholders before discontinued operations and cumulative effect of a change in accounting principle	$	(12,360	)		102,055	$	(0.12	)	$	(22,740	)		100,179	$	(0.23	)		138,943			99,025	$	1.40
(Loss) income from discontinued operations, net of minority interests and taxes		(502	)				(0.01	)		4,006					0.04			10,407					0.11
Impairment charges related to real estate assets from discontinued operations, net of minority interests		(105	)				-			(953	)				(0.01	)		(2,978	)				(0.03	)
Gain on sale of real estate from discontinued operations, net of minority interests and taxes		14,362					0.14			89,234					0.89			1,052					0.01
Cumulative effect of a change in accounting principle, net of minority interests		-					-			-					-			(363	)				-

Net income available to common shareholders	$	1,395			102,055	$	0.01		$	69,547			100,179	$	0.69		$	147,061			99,025	$	1.49


	For the years ended December 31,
	2006									2005									2004
										(Restated)									(Restated)
				Wtd.			Per						Wtd.			Per								Per
	Income			Avg.			Share			Income			Avg.			Share			Income			Wtd. Avg.		Share
(in thousands, except per share amounts)	(Loss)			Shares			Amount			(Loss)			Shares			Amount			(Loss)			Shares		Amount

Diluted EPS -
Income before discontinued operations and cumulative effect of a change in accounting principle	$	19,678			102,055					$	9,298			100,179					$	170,741			99,025
Series A Preferred Share distributions		(23,963	)								(23,963	)								(23,723	)
Series B Preferred Share distributions		(8,075	)								(8,075	)								(8,075	)
Effect of dilutive securities:
Share and unit options					-	(1)								-	(1)								219

(Loss) income available to common shareholders before discontinued operations and cumulative effect of a change in accounting principle	$	(12,360	)		102,055		$	(0.12	)	$	(22,740	)		100,179		$	(0.23	)	$	138,943			99,244	$	1.40
(Loss) income from discontinued operations, net of minority interests and taxes		(502	)					(0.01	)		4,006						0.04			10,407					0.10
Impairment charges related to real estate assets from discontinued operations, net of minority interests		(105	)					-			(953	)					(0.01	)		(2,978	)				(0.03	)
Gain on sale of real estate from discontinued operations, net of minority interests and taxes		14,362						0.14			89,234						0.89			1,052					0.01
Cumulative effect of a change in accounting principle, net of minority interests		-						-			-						-			(363	)				-

Net income available to common shareholders	$	1,395			102,055		$	0.01		$	69,547			100,179		$	0.69		$	147,061			99,244	$	1.48


(1)		Share and unit options (in common share equivalents) of 1,463,992 and 824,019 for the years ended December 31, 2006 and 2005, respectively, are not included because the effect of their conversion would be antidilutive to loss available to common shareholders before discontinued operations and cumulative effect of a change in accounting principle.

The effect of the conversion of the Series A Convertible Cumulative Preferred Shares or the convertible Operating Partnership units are not included in the computation of Diluted EPS for the years ended December 31, 2006, 2005 and 2004, since the effect of the conversions are antidilutive.

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Supplemental Disclosure to Statements of Cash Flows


Supplemental disclosures of cash flow information:	For the years ended December 31,
(in thousands)	2006			2005		2004
Cash paid for interest	$	156,694		$	160,918	$	169,056


Cash (received) paid for income taxes	$	(853	)	$	738	$	8,364


Interest capitalized - Resort Residential Development	$	25,068		$	20,017	$	15,556
Interest capitalized - Resort/Hotel		3,195			898		294
Interest capitalized - Office		5,418			1,017		-

Total interest capitalized	$	33,681		$	21,932	$	15,850


Supplemental schedule of non cash activities:

Joint venture of Office Properties' debt	$	-		$	158,350	$	-
Assumption of debt in conjunction with acquisitions of Office Properties		23,605			-		139,807
Financed sale of land parcel		-			-		4,878
Financed purchase of land parcel		-			-		7,500
Satisfaction of debt in conjunction with disposition of properties		81,792			-		-
Interest accrued into construction loans		12,467			-		-

Supplemental schedule of 2004 consolidation of Elijah:

Accounts receivable, net						$	(848	)
Investments in unconsolidated companies							(2,478	)
Notes receivable, net							4,363
Income tax asset - current and deferred, net							(274	)
Minority interest - consolidated real estate partnerships							(140	)
Other comprehensive income, net of tax							139
Cumulative effect of a change in accounting principle							(428	)

Increase in cash						$	334

3. SEGMENT REPORTING

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

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

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

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

	•		excluding extraordinary items (as defined by GAAP);

	•		plus depreciation and amortization of real estate assets; and

	•		after adjustments for unconsolidated partnerships and joint ventures.

We calculate FFO available to common shareholders - diluted in this manner, except that Net Income (Loss) is replaced by Net Income (Loss) Available to Common Shareholders and we include the effect of Operating Partnership unitholder minority interests.

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NAREIT developed FFO as a relative measure of performance of an equity REIT to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. We consider FFO available to common shareholders - diluted and FFO appropriate measures of performance for an equity REIT and for its investment segments. However, FFO available to common shareholders - diluted and FFO should not be considered as alternatives to net income determined in accordance with GAAP as an indication of our operating performance.

Our measures of FFO available to common shareholders - diluted and FFO may not be comparable to similarly titled measures of other REITs if those REITs apply the definition of FFO in a different manner than we apply it. Selected financial information related to each segment for the three years ended December 31, 2006, 2005, and 2004, and total assets, consolidated property level financing, consolidated other liabilities and minority interests for each of the segments at December 31, 2006 and 2005, are presented in the following tables:


	For the year ended December 31, 2006
				Resort						Temperature-
				Residential						Controlled
	Office			Development			Resort/Hotel			Logistics			Corporate
(in thousands)	Segment (1)			Segment			Segment			Segment			and Other (2)			Total
Total Property revenue	$	414,343		$	372,148		$	142,205		$	-		$	-		$	928,696
Total Property expense		206,563			342,994			108,391			-			76			658,024


Income from Property Operations	$	207,780		$	29,154		$	33,814		$	-		$	(76	)	$	270,672
Total other income (expense)		(53,585	)		(15,100	)		(22,797	)		(15,668	)		(144,658	)		(251,808	)
Minority interests and income taxes		(3,072	)		1,967			4,048			-			(2,129	)		814
Discontinued operations -income, gain on real estate and impairment charges related to real estate assets, net of minority interests and taxes		10,830			6,552			-			-			(3,627	)		13,755

Net income (loss)	$	161,953		$	22,573		$	15,065		$	(15,668	)	$	(150,490	)	$	33,433


Depreciation and amortization of real estate assets	$	105,997		$	9,830		$	16,312		$	-		$	-		$	132,139
Gain on property sales		(25,206	)		(3,282	)		-			-			(359	)		(28,847	)
Gain from sale of development operating property		(10,138	)		(6,083	)		-			-			-			(16,221	)
Gain from promoted interest		(22,575	)		-			-			-			-			(22,575	)
Adjustments for investment in unconsolidated companies		21,217			(10,616	)		4,773			17,917			-			33,291
Unitholder minority interest and taxes		-			-			-			-			266			266
Series A Preferred share distributions		-			-			-			-			(23,963	)		(23,963	)
Series B Preferred share distributions		-			-			-			-			(8,075	)		(8,075	)

Adjustments to reconcile net income (loss) to funds from operations available to common shareholders - diluted	$	69,295		$	(10,151	)	$	21,085		$	17,917		$	(32,131	)	$	66,015

Funds from operations available to common shareholders-diluted	$	231,248		$	12,422		$	36,150		$	2,249		$	(182,621	)	$	99,448

See footnotes to the following table.


	For the year ended December 31, 2005 (Restated)
				Resort						Temperature-
				Residential						Controlled
	Office			Development			Resort/Hotel			Logistics		Corporate
(in thousands)	Segment (1)			Segment			Segment			Segment		and Other			Total
Total Property revenue	$	372,759		$	502,723		$	142,618		$	-	$	-		$	1,018,100
Total Property expense		195,781			432,203			111,277			-		-			739,261


Income from Property Operations	$	176,978		$	70,520		$	31,341		$	-	$	-		$	278,839
Total other income (expense)		(65,271	)		(14,208	)		(20,603	)		234		(150,164	)		(250,012	)
Minority interests and income taxes		(4,058	)		(14,692	)		1,941			-		(2,720	)		(19,529	)
Discontinued operations -income, gain on real estate and impairment charges related to real estate assets, net of minority interests and taxes		108,557			(4	)		-			-		(16,266	)		92,287

Net income (loss)	$	216,206		$	41,616		$	12,679		$	234	$	(169,150	)	$	101,585


Depreciation and amortization of real estate assets	$	103,958		$	9,413		$	18,021		$	-	$	-		$	131,392
Gain on property sales		(102,373	)		-			(141	)		-		(289	)		(102,803	)
Gain from sale of development operating property		(13,369	)		-			-			-		-			(13,369	)
Gain from promoted interest		(13,579	)		-			-			-		-			(13,579	)
Adjustments for investment in unconsolidated companies		18,872			(5,543	)		3,881			18,210		-			35,420
Unitholder minority interest		-			-			-			-		12,379			12,379
Series A Preferred share distributions		-			-			-			-		(23,963	)		(23,963	)
Series B Preferred share distributions		-			-			-			-		(8,075	)		(8,075	)

Adjustments to reconcile net income (loss) to funds from operations available to common shareholders - diluted	$	(6,491	)	$	3,870		$	21,761		$	18,210	$	(19,948	)	$	17,402

Funds from operations available to common shareholders-diluted	$	209,715		$	45,486		$	34,440		$	18,444	$	(189,098	)	$	118,987

See footnotes to the following table.

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	For the year ended December 31, 2004 (Restated)
				Resort						Temperature-
				Residential						Controlled
	Office			Development			Resort/Hotel			Logistics		Corporate
(in thousands)	Segment (1)			Segment			Segment			Segment		and Other (2)			Total
Total Property revenue	$	475,797		$	309,945		$	214,531		$	-	$	-		$	1,000,273
Total Property expense		234,161			271,310			179,825			-		-			685,296


Income from Property Operations	$	241,636		$	38,635		$	34,706		$	-	$	-		$	314,977

Total other income (expense)		149,072			(14,753	)		(24,777	)		6,153		(239,456	)		(123,761	)
Minority interests and income taxes		(1,789	)		(1,710	)		8,306			-		(25,282	)		(20,475	)
Discontinued operations –income, gain on real estate and impairment charges related to real estate assets, net of minority interests		3,908			(126	)		7,177			-		(2,478	)		8,481
Cumulative effect of a change in accounting principle, net of minority interests		-			-			-			-		(363	)		(363	)


Net income (loss)	$	392,827		$	22,046		$	25,412		$	6,153	$	(267,579	)	$	178,859


Depreciation and amortization of real estate assets	$	124,857		$	8,078		$	23,775		$	-	$	56		$	156,766
(Gain) loss on property sales		(263,308	)		115			(4,209	)		-		349			(267,053	)
Adjustments for investment in unconsolidated companies		11,601			(242	)		-			22,549		-			33,908
Unitholder minority interest		-			-			-			-		26,319			26,319
Series A Preferred share distributions		-			-			-			-		(23,723	)		(23,723	)
Series B Preferred share distributions		-			-			-			-		(8,075	)		(8,075	)

Adjustments to reconcile net (loss) income to funds from operations available to common shareholders - diluted	$	(126,850	)	$	7,951		$	19,566		$	22,549	$	(5,074	)	$	(81,858	)

Funds from operations available to common shareholders-diluted	$	265,977		$	29,997		$	44,978		$	28,702	$	(272,653	)	$	97,001

See footnotes to the following table.


				Resort						Temperature-
				Residential						Controlled		Corporate
	Office			Development			Resort/Hotel			Logistics		and
(in millions)	Segment			Segment			Segment			Segment		Other			Total
Total Assets by Segment: (3)
Balance at December 31, 2006 (4)	$	2,019		$	1,146		$	380		$	87	$	415	(5)	$	4,047
Balance at December 31, 2005 (4) (Restated)		2,024			985			340			162		652	(5)		4,163
Consolidated Property Level Financing:
Balance at December 31, 2006		(968	)		(220	)		(142	)		-		(966	) (6)		(2,296	)
Balance at December 31, 2005		(851	)		(143	)		(59	)		-		(1,206	) (6)		(2,259	)
Consolidated Other Liabilities:
Balance at December 31, 2006		(134	)		(308	)		(32	)		-		(29	)		(503	)
Balance at December 31, 2005 (Restated)		(116	)		(310	)		(30	)		-		(44	)		(500	)
Minority Interests:
Balance at December 31, 2006		(12	)		(32	)		(5	)		-		(77	)		(126	)
Balance at December 31, 2005 (Restated)		(15	)		(32	)		(6	)		-		(99	)		(152	)


(1)		The property revenue includes lease termination fees (net of the write-off of deferred rent receivables) of approximately $39.3 million, $11.2 million and $9.0 million for the years ended December 31, 2006, 2005 and 2004, respectively. The 2006 lease termination fees are primarily due to the El Paso lease termination and related re-leasing.

(2)		For purposes of this Note, Corporate and Other includes the total of: income from investment land sales, net, interest and other income, corporate general and administrative expense, interest expense, extinguishment of debt, other expenses and equity in net income of unconsolidated companies-other.

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

(4)		Non-income producing land held for investment or development of $75.6 million and $84.4 million at December 31, 2006 and 2005, respectively, by segment is as follows: Office $7.0 million and $24.3 million, Resort Residential Development $9.6 million and $9.6 million, Resort/Hotel $7.3 million and $7.3 million and Corporate $51.7 million and $43.2 million, respectively.

(5)		Includes mezzanine notes and defeasance investments.

(6)		Inclusive of Corporate bonds, Credit Facility, Junior Subordinated Notes, the Morgan Stanley and Goldman Sachs repurchase facilities, the Funding I defeased debt and Nomura Funding VI defeased debt. Balance at December 31, 2005 also includes Funding II defeased debt.

100

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4. ACQUISITIONS

Asset Acquisitions

The following table summarizes the office acquisitions that we made during the years ended December 31, 2006 and 2005:


Date			Purchase
(in millions)	Property	Location	Price
2006
January 23, 2006	Financial Plaza – Class A Office Property	Phoenix, Arizona	$	55.0	(1)
2005
February 7, 2005	Exchange Building – Class A Office Property	Seattle, Washington	$	52.5	(2)
April 8, 2005	One Buckhead Plaza – Class A Office Property	Atlanta, Georgia		130.5	(3)


(1)		The acquisition was funded by the assumption of a $23.6 million loan from Allstate, a new $15.9 million loan from Allstate and a draw on our credit facility. This property is wholly-owned.

(2)		The acquisition was funded by a draw on our credit facility.

(3)		The acquisition was funded by an $85.0 million loan from Morgan Stanley and a draw on our credit facility. In June 2005, we contributed One Buckhead Plaza to Crescent One Buckhead Plaza, L.P., a limited partnership in which we have a 35% interest and Metzler US Real Estate Fund L.P. has a 65% interest.

5. DISCONTINUED OPERATIONS

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the results of operations of the assets sold or held for sale have been presented as "(Loss) Income from discontinued operations, net of minority interests and taxes," gain or loss on the assets sold or held for sale have been presented as "Gain on real estate from discontinued operations, net of minority interests and taxes" and impairments on the assets sold or held for sale have been presented as "Impairment charges related to real estate assets from discontinued operations, net of minority interests" in the accompanying Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004. Minority interests for wholly-owned properties represent unitholders' share of related income, gains, losses and impairments. The carrying value of the assets held for sale has been reflected as "Properties held for disposition, net" in the accompanying Consolidated Balance Sheets as of December 31, 2006 and 2005. We consider a property as held for sale when we have met the criteria outlined in SFAS No. 144.

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Asset Dispositions

Office Segment

The following table presents the significant dispositions of Office Properties for the years ended December 31, 2006, 2005 and 2004:


									Net
			Net						Gain
(in millions) Date	Property	Location	Proceeds			Impairment			(Loss) (1)

2006
February 17, 2006	Waterside Commons	Dallas, Texas	$	24.8	(2)	$	1.0	(3)	$	0.1
2005
February 7, 2005	Albuquerque Plaza	Albuquerque, New Mexico	$	34.7	(4)	$	-		$	1.4
August 16, 2005	Barton Oaks Plaza One	Austin, Texas		14.4	(4)		-			4.5
September 19, 2005	Chancellor Park	San Diego, California		55.4	(4)		-			27.0
September 28, 2005	Two Renaissance Square	Phoenix, Arizona		116.8	(4)		-			57.2
2004
March 23, 2004	1800 West Loop South	Houston, Texas		28.2	(2)		13.9	(5)		0.2
April 13, 2004	Liberty Plaza	Dallas, Texas		10.8	(2)		3.6	(5)		(0.2	)
June 17, 2004	Ptarmigan Place	Denver, Colorado		25.3	(4)		0.5	(6)		(2.0	)
June 29, 2004	Addison Tower	Dallas, Texas		8.8	(2)		-			0.2
July 2, 2004	5050 Quorum	Dallas, Texas		8.9	(2)		0.8	(6)		(0.1	)
July 29, 2004	12404 Park Central	Dallas, Texas		9.3	(4)		4.0	(7)		-


(1)		Amounts are net of Operating Partnership minority interests.

(2)		Proceeds were used primarily to pay down our credit facility.

(3)		Impairment was recognized during the year ended December 31, 2005.

(4)		Proceeds were used to pay down a portion of the Bank of America Fund XII Term Loan.

(5)		Impairment was recognized during the year ended December 31, 2003.

(6)		Impairment was recognized during the year ended December 31, 2004.

(7)		Of the $4.0 million in impairment recorded, $2.9 million was recorded during the year ended December 31, 2003, and $1.1 million was recorded during the year ended December 31, 2004.

Joint Venture – Paseo Del Mar

On September 21, 2005, we entered into a joint venture arrangement, Crecent-JMIR Paseo Del Mar LLC, with JMI Realty. The joint venture committed to co-develop a 232,330 square-foot, three-building office complex in the Del Mar Heights submarket of San Diego, California. The development was completed in August 2006. The joint venture was structured such that we owned an 80% interest and JMI Realty owned the remaining 20% interest. On December 14, 2006, we completed the sale of our 80% interest in Crescent – JMIR Paseo Del Mar LLC. The sale generated proceeds, net of selling costs, of approximately $42.1 million and a net gain of approximately $10.4 million, net of promoted interest due JMI Realty and income taxes. Proceeds from the sale were used to pay down our credit facility.

Resort Residential Development Segment

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On September 14, 2004, we completed the sale of the Breckenridge Commercial Retail Center in Breckenridge, Colorado. The sale generated proceeds, net of selling costs and repayment of debt, of $1.5 million, and a net loss of $0.1 million, net of minority interests and income tax. We previously recorded an impairment charge of approximately $0.7 million, net of minority interests and income tax, during the year ended December 31, 2003. The proceeds from the sale were used primarily to pay down our credit facility.

Resort / Hotel Segment

On October 19, 2004, we completed the sale of the Hyatt Regency Hotel in Albuquerque, New Mexico. The sale generated proceeds, net of selling costs, of $32.2 million and a net gain of $3.6 million, net of minority interests. This property was wholly-owned. The proceeds were used to pay down $26.0 million of our Bank of America Fund XII Term Loan and the remainder was used to pay down our credit facility.

Properties Held for Disposition

Summary of Assets Held for Sale

The following tables indicate the major classes of assets and liabilities of the Properties held for sale as of the years ended December 31, 2006 and 2005.

Assets


(in thousands)	December 31, 2006			December 31, 2005
Land	$	-		$	24,650
Buildings and improvements		2,425			98,916
Furniture, fixtures and equipment		-			218
Accumulated depreciation		(25	)		(7,465	)
Other assets, net		-			1,886

Net investment in real estate	$	2,400		$	118,205

Liabilities


(in thousands)	December 31, 2006		December 31, 2005
Notes payable	$	-	$	14,606
Accounts payable, accrued expenses and other liabilities		-		4,700

Total liabilities		-		19,306

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The following tables present income, impairment charges and gain (loss) on sale for the years ended December 31, 2006, 2005 and 2004, for properties included in discontinued operations.


(in thousands)	2006			2005			2004
Total revenues	$	2,445		$	17,897		$	50,515
Operating and other expenses, net of non-unitholder minority interests		(2,683	)		(9,218	)		(30,678	)
Depreciation and amortization		(1,002	)		(3,873	)		(7,846	)
Income tax benefit (expense)		642			(86	)		279
Unitholder minority interests		96			(714	)		(1,863	)

(Loss) income from discontinued operations, net of minority interests and taxes	$	(502	)	$	4,006		$	10,407


(in thousands)	2006			2005			2004
Impairment charges related to real estate assets	$	(125	)	$	(1,122	)	$	(3,511	)
Unitholder minority interests		20			169			533

Impairment charges related to real estate assets from discontinued operations, net of minority interests	$	(105	)	$	(953	)	$	(2,978	)


(in thousands)	2006			2005			2004
Realized gain on sale of properties, net of non-unitholder minority interests	$	28,334		$	105,117		$	1,241
Income tax expense		(11,232	)		-			-
Unitholder minority interests		(2,740	)		(15,883	)		(189	)

Gain on real estate from discontinued operations, net of minority interests and taxes	$	14,362		$	89,234		$	1,052

6. JOINT VENTURES

2006 Transactions

Office

Parkway at Oakhill

On March 31, 2006, we entered into a joint venture arrangement, C-C Parkway Austin, L.P., or Parkway, with Champion Partners. The joint venture has committed to co-develop a 144,380 square-foot, two-building office complex in Austin, Texas. The venture is structured such that we own a 90% interest and Champion Partners owns the remaining 10% interest. In connection with the joint venture, Parkway entered into a maximum $18.3 million construction loan. Our equity commitment to the joint venture was $8.2 million, of which $7.0 million has been funded as of December 31, 2006. The development, which is currently underway, is scheduled for delivery in the third quarter of 2007. We consolidate Parkway in accordance with FIN 46R, as it was determined to be a VIE of which we are the primary beneficiary. The lender of the construction loan has no recourse to Crescent. The carrying value of the assets that secure the construction loan as of December 31, 2006, was $14.5 million.

Chase Tower

On June 20, 2006, we completed the sale of Chase Tower on behalf of Austin PT BK One Tower Office Limited Partnership, the joint venture which was owned 80% by an affiliate of GE Asset Management, or GE, and 20% by us. The sale generated proceeds to the joint venture, net of selling cost and after a $36.0 million loan repayment, of approximately $28.0 million and a net gain of approximately $10.1 million. Our share of the net gain, including recognition of the unamortized deferred gain was approximately $4.3 million. Our share of the proceeds was approximately $5.6 million, which was used to pay down the credit facility.

Four Westlake Park

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Three Westlake Park

On December 11, 2006, we completed the sale of Three Westlake Park on behalf of Houston PT Three Westlake Office Limited Partnership, the joint venture which was owned 80% by an affiliate of GE and 20% by us. The sale generated proceeds to the joint venture, net of selling costs and after a $33.0 million loan repayment, of approximately $46.7 million and a net gain of approximately $33.4 million. Our share of the net gain, including a promoted interest of approximately $7.7 million, recognition of the unamortized deferred gain and write-off of unamortized deal costs from the original joint venture of the property, was approximately $17.3 million. Our share of the proceeds was approximately $15.8 million, which was used to pay down our credit facility.

Bank One Center

On December 14, 2006, we completed the sale of Bank One Center on behalf of Main Street Partners, L.P., the joint venture which was owned 50% by an affiliate of The Blackstone Group and 50% by us. The sale generated proceeds to the joint venture, net of selling cost and after a $104.7 million loan repayment, of approximately $110.0 million and a net gain of approximately $4.4 million. Our share of the net gain was approximately $1.6 million inclusive of the write-off of unamortized deal costs from the original joint venture of the property. Our share of the proceeds was approximately $55.0 million, which was used to pay down our credit facility.

Resort Residential Development

Riverfront Village

2005 Transactions

Office

Fulbright Tower

On February 24, 2005, we contributed Fulbright Tower, subject to the Morgan Stanley Mortgage Capital Inc. Note of $73.4 million, and an adjacent parking garage, to Crescent 1301 McKinney, L.P., a limited partnership in which we have a 23.85% interest, a fund advised by JPMorgan Asset Management, or JPMorgan, has a 60% interest and GE has a 16.15% interest. The property was valued at $106.0 million and the transaction generated net proceeds to us of approximately $33.4 million which were used to pay down our credit facility. The joint venture was accounted for as a partial sale of the Office Property, resulting in a net gain of approximately $0.5 million. None of the mortgage financing at the joint venture level is guaranteed by us. We manage this property on behalf of the joint venture. We account for our interest in Crescent 1301 McKinney, L.P. under the equity method.

2211 Michelson

On June 9, 2005, we entered into a joint-venture arrangement, Crescent Irvine, LLC, with an affiliate of Hines. The joint venture purchased a land parcel located in the John Wayne submarket in Irvine, California, for $12.0 million. In addition, we have committed to co-develop a 267,000 square-foot Class A office property on the acquired site. Hines owns a 60% interest and we own a 40% interest in the joint venture. Our equity commitment

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to the joint venture is $5.6 million, all of which has been funded as of December 31, 2006. In 2006, Crescent Irvine, LLC entered into a maximum $85.6 million construction loan. In the event of default on the construction loan, the partners would be required to make a capital contribution. The development is scheduled for delivery in the second quarter of 2007. We account for our interest in Crescent Irvine, LLC under the equity method.

One Buckhead Plaza

On June 29, 2005, we contributed One Buckhead Plaza, subject to the Morgan Stanley Note of $85.0 million, to Crescent One Buckhead Plaza, L.P., a limited partnership in which we have a 35% interest and Metzler US Real Estate Fund L.P. has a 65% interest. The property was valued at $130.5 million and the transaction generated net proceeds to us of approximately $28.1 million, which were used to pay down our credit facility. The joint venture was accounted for as a partial sale of the Office Property, resulting in a net gain of approximately $0.4 million. None of the mortgage financing at the joint venture level is guaranteed by us. We manage the property on behalf of the joint venture. We account for our interest in Crescent One Buckhead Plaza, L.P. under the equity method.

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5 Houston Center

On December 20, 2005, we completed the sale of 5 Houston Center on behalf of Crescent 5 Houston Center, L.P., the joint venture which was owned 75% by a fund advised by JPM, and 25% by us. The sale generated proceeds, net of selling costs, of approximately $164.6 million and a net gain of approximately $68.0 million. Our share of the net gain, including a promoted interest of approximately $13.6 million, was approximately $29.9 million. Our share of the proceeds was approximately $32.3 million, which was used to pay down our credit facility.

Resort/Hotel Segment

Canyon Ranch

On January 18, 2005, we contributed Canyon Ranch Tucson, our 50% interest and our preferred interest in CR Las Vegas, LLC and our 30% interest in CR License, L.L.C., CR License II, L.L.C., CR Orlando LLC and CR Miami LLC, to two newly formed entities, CR Spa, LLC and CR Operating, LLC. In exchange, we received a 48% common equity interest in each new entity. The remaining 52% interest in these entities is held by the founders of Canyon Ranch, who contributed their interests in CR Las Vegas, LLC, CR License II, L.L.C., CR Orlando LLC and CR Miami LLC and the resort management contracts. In addition, we sold Canyon Ranch Lenox to a subsidiary of CR Operating, LLC. The founders of Canyon Ranch sold their interest in CR License, L.L.C. to a subsidiary of CR Operating, LLC. As a result of these transactions, the new entities own the following assets: Canyon Ranch Tucson, Canyon Ranch Lenox, Canyon Ranch SpaClub at the Venetian Resort in Las Vegas, Canyon Ranch SpaClub on the Queen Mary 2 ocean liner, Canyon Ranch Living Community in Miami, Florida, Canyon Ranch SpaClub at The Gaylord Palms Resort in Kissimmee, Florida, and the Canyon Ranch trade names and trademarks.

In addition, the newly formed entities completed a private placement of Mandatorily Redeemable Convertible Preferred Membership Units for aggregate gross proceeds of approximately $110.0 million. In this private placement, Richard E. Rainwater, Chairman of our Board of Trust Managers, and certain of his family members purchased approximately $27.1 million of these units on terms identical to those extended to all other investors. The units are convertible into a 25% common equity interest in CR Spa, LLC and CR Operating, LLC and pay distributions at the rate of 8.5% per year in years one through seven, and 11% in years eight through ten. At the end of ten years, or upon earlier redemption, the holders of the units are entitled to receive a premium in an amount sufficient to result in a cumulative return of 11% per year. The units are redeemable after seven years at the option of the issuer. Also on January 18, 2005, the new entities completed a $95.0 million financing with Bank of America. The loan has an interest-only term until maturity in February 2015, bears interest at 5.94% and is secured by the Canyon Ranch Tucson and Canyon Ranch Lenox Resort/Hotel Properties. As a result of these transactions, we received proceeds of approximately $91.9 million, which was used to pay down or defease debt related to our previous investment in the Properties and to pay down our credit facility. No gain or loss was recorded in connection with the above transactions. Following these transactions, we account for our interests in CR Spa, LLC and CR Operating, LLC under the equity method.

Other Segment

Redtail Capital Partners, L.P.

On May 10, 2005, we entered into an agreement with Capstead Mortgage Corporation pursuant to which we formed a joint venture, Redtail Capital Partners, L.P., to invest up to $100.0 million in select mezzanine loans on commercial real estate over a two-year period. The Redtail Capital Partners joint venture agreement also provides that we and Capstead may form a second joint venture to invest up to an additional $100.0 million in equity. Capstead is committed to 75% of the capital of the second joint venture, or up to $75.0 million, and we are committed to 25%, or up to $25.0 million. We will be responsible for identifying investment opportunities and managing the portfolios and will earn a management fee and incentives based on portfolio performance. A wholly-owned subsidiary of this joint venture has a $225.0 million warehouse borrowing facility in the form of a repurchase agreement. Borrowings under the warehouse facility are secured by the subsidiary's financed participation interests and mezzanine loans, and guaranteed by the joint venture. Total investments of the joint venture in mezzanine loans, assuming leverage, could be as much as $325.0 million. For the year ended December 31, 2006, we have made capital contributions of $7.4 million. We account for our interest in Redtail Capital Partners, L.P. under the equity method.

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2004 Transactions

Office

The Crescent, Houston Center and Post Oak Central

On November 10, 2004, we contributed nine of our Office Properties to a limited partnership in which we initially had a 40% interest and a fund advised by JPM has a 60% interest. The Office Properties contributed to the partnership are The Crescent (two Office Properties) in Dallas, Texas and Houston Center (four Office Properties) and Post Oak Central (three Office Properties), both in Houston, Texas. The Office Properties were valued at $897.0 million. This transaction generated net proceeds of approximately $290.0 million after the pay off of the JP Morgan Mortgage Note, pay down of a portion of the Fleet Fund I Term Loan and defeasance of a portion of LaSalle Note I. The joint venture was accounted for as a partial sale of the Office Properties, resulting in a net gain of approximately $194.1 million. On December 23, 2004, an affiliate of General Electric Pension Fund, which we refer to as GE Pension Fund, purchased a 16.15% interest in the partnership from us, reducing our ownership interest to 23.85%. This transaction generated net proceeds of approximately $49.0 million and a net gain of $56.7 million. The net proceeds from both transactions were used to pay off the remaining portion of the Fleet Fund I Term Loan and pay down our credit facility. We incurred debt pre-payment penalties of approximately $35.0 million relating to the early extinguishment of the JP Morgan Mortgage Note and the partial defeasance of LaSalle Note I, which is reflected in the "Extinguishment of debt" line item in the Consolidated Statements of Operations. For the year ended December 31, 2005, we recorded an adjustment in the "(Loss) gain on joint venture of properties" line item in the Consolidated Statements of Operations related to the write-off of capitalized internal leasing costs related to this joint venture.

Fountain Place and Trammell Crow Center

On November 23, 2004, we contributed two of our Office Properties to a limited partnership in which we have a 23.85% interest and a fund advised by JPM has a 76.15% interest. The two Office Properties contributed to the partnership are Fountain Place and Trammell Crow Center, both in Dallas, Texas. The Office Properties were valued at $320.5 million. This transaction generated net proceeds of approximately $71.5 million after the pay off of the Lehman Capital Note. The joint venture was accounted for as a partial sale of the Office Properties, resulting in a net gain of approximately $14.9 million. The net proceeds from this transaction were used to pay down a portion of our credit facility. For the year ended December 31, 2005, we recorded an adjustment in the "(Loss) gain on joint venture of properties" line item in the Consolidated Statements of Operations related to the write-off of capitalized internal leasing costs related to this joint venture.

As a result of GE Pension Fund's purchase of an interest in the first partnership, GE Pension Fund serves along with us as general partner, and we serve as the sole and managing general partner of the second partnership. Each of the Office Properties contributed to the partnerships is owned by a separate limited partnership. Each of those property partnerships (excluding Trammell Crow Center) has entered into a separate leasing and management agreement with us, and, in the case of Trammell Crow Center, the property partnership also has entered into a management oversight agreement and a mortgage servicing agreement with us. We have no commitment to reinvest the cash proceeds back into the joint ventures. None of the mortgage financing at the joint-venture level is guaranteed by us. We account for our interest in these partnerships as unconsolidated equity investments.

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7. OTHER TRANSACTIONS

Office Segment

Significant Tenant Lease Termination

Resort Residential Development Segment

During the year ended December 31, 2004, the Sonoma Club was demolished in order to begin construction on a new clubhouse. Accordingly, we recorded an impairment charge of approximately $2.5 million, net of income tax, included in the "Impairment charges related to real estate assets" line item in the accompanying Consolidated Statements of Operations.

Undeveloped Land Sales

The following table presents the significant dispositions of undeveloped land for the years ended December 31, 2006, 2005 and 2004 including location of the land, net proceeds received and net gain on sale included in the "Income from investment land sales" line item in the Consolidated Statements of Operations.


		Net
(dollars in millions) Date	Location	Proceeds			Net Gain
2005
March 31, 2005	Houston, Texas	$	5.8	(1)	$	3.5
June 30, 2005	Houston, Texas		6.1	(1)		4.1
2004
June 17, 2004	Denver, Colorado	$	2.9		$	0.9
August 16, 2004	Houston, Texas		6.4	(2)		7.6
November 12, 2004	Monterey, California		1.0			0.7
December 17, 2004	Houston, Texas		22.3			8.3
December 23, 2004	Houston, Texas		4.0			1.4


(1)		The proceeds were used primarily to pay down our credit facility.

(2)		In addition to the $6.4 million net cash proceeds, we also received a note receivable of $5.6 million. The note provides for payments of principal of $0.5 million due in December 2004, annual installments of $1.0 million each due August 2005 through August 2008 and $1.1 million due at maturity in August 2009 and does not bear interest.

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8. MEZZANINE NOTES

The following table presents our significant investments in mezzanine notes as of December 31, 2006. These notes are reflected in the "Notes receivable, net" line item in the consolidated financial statements. Mezzanine notes are loans that are subordinate to a conventional first mortgage loan and senior to the borrower's equity in a transaction. These loans may be in the form of a junior participating interest in the senior debt or in the form of loans to the direct or indirect parent of the property owner secured by pledges of ownership interests in entities that directly or indirectly control the real property or subordinated loans secured by second mortgage liens on the property.


(in millions)						Balance at December			Interest Rate at
Note		Date of Transaction		Maturity Date		31, 2006			December 31, 2006
Fixed Rate:
Three Dallas Office Properties	(1)		8/31/05		2010	$	7.6			11.04	%
21 California Condominiums	(2)		12/28/06		2008		9.8	(3)		17.00	%
Variable Rate:
Dallas Office Property	(4)		6/9/05		2007		12.0			13.85	%
Two Luxury Hotel Properties in California	(5)		11/16/05		2007		15.0			16.35	%
Office Portfolio in Southeastern U.S.	(6)		12/30/05		2007		20.7			12.23	%
Florida Hotel Portfolio Investment	(7)		1/20/06		2009		15.0			13.35	%
California Ski Resort	(8)		4/12/06		2009		20.0			9.85	%
New York City Residential	(9)		5/8/06		2007		24.2			18.18	%

Total Mezzanine Notes						$	124.3

Total Weighted Average Interest Rate										14.09	%


(1)		The loan has an interest-only term through September 2007. Beginning October 2007, the borrower must make principal payments based on a 30-year amortization schedule until maturity. We determined that the entity to which the loan was funded is a VIE under FIN 46R of which we are not the primary beneficiary; therefore, we do not consolidate the entity. Our maximum exposure to loss is limited to the amount of the loan.

(2)		The loan has an interest-only term until maturity, subject to the right of the borrower to extend the loan pursuant to one six-month extension.

(3)		The condominiums securing this note were sold by CRDI to a third party. Due to restrictions under SFAS No. 66 Accounting for Sales of Real Estate regarding seller financed transactions, the profit from the sale of $4.7 million was deferred and recorded under the cost recovery method and reflected as a reduction of the note such that the face value of the note is included in the table above.

(4)		The loan bears interest at LIBOR plus 850 basis points with an interest-only term until maturity, subject to the right of the borrower to extend the loan pursuant to three one-year extension options.

(5)		The loan bears interest at LIBOR plus 1,100 basis points with an interest-only term until maturity, subject to the right of the borrower to extend the loan pursuant to five one-year extension options.

(6)		The loan bears interest at LIBOR plus 685 basis points with an interest-only term until maturity, subject to the right of the borrower to extend the loan pursuant to three one-year extension options.

(7)		The loan bears interest at LIBOR plus 800 basis points with an interest-only term until maturity, subject to the right of the borrower to extend the loan pursuant to two one-year extension options.

(8)		The loan bears interest at LIBOR plus 450 basis points with an interest-only term until maturity, subject to the right of the borrower to extend the loan pursuant to two one-year extension options.

(9)		The loan bears interest at LIBOR plus 1,283 basis points with an interest-only term until maturity, subject to the right of the borrower to extend the loan pursuant to two one-year extension options. We determined that the entity to which the loan was funded is a VIE under FIN 46R of which we are not the primary beneficiary; therefore, we do not consolidate the entity. Our maximum exposure to loss is limited to the amount of the loan.

In 2006, we received approximately $110.2 million of net proceeds, after the repayment of debt, for the repayment of five of our mezzanine notes, which included $6.2 million of prepayment fees.

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9. TEMPERATURE-CONTROLLED LOGISTICS

As of December 31, 2006, the Temperature-Controlled Logistics Segment consisted of our 31.7% interest in AmeriCold. AmeriCold operates 104 facilities, of which 91 were wholly-owned or leased, one was partially-owned and twelve were managed for outside owners. We account for our interest in AmeriCold as an unconsolidated equity investment.

On November 18, 2004, Vornado Crescent Portland Partnership, or VCPP, the partnership through which we owned our 40% interest in AmeriCold, sold a 20.7% interest in AmeriCold to The Yucaipa Companies for $145.0 million, resulting in a gain of approximately $12.3 million, net of transaction costs, to us. Yucaipa may earn a promote of up to 20% of the increase in value of AmeriCold through December 31, 2007. Our portion of the promote is payable out of the proceeds from a future sale of our interest in AmeriCold subject to certain limitations.

Immediately following this transaction, VCPP dissolved and, after the payment of all of its liabilities, distributed its remaining assets to its partners. The assets distributed to us consisted of common shares, cash and a note receivable. In connection with the dissolution of the partnership, Vornado Realty L.P. or Vornado, agreed to terminate the preferential allocation payable to it under the partnership agreement. In consideration of this, we agreed to pay Vornado an annual management fee of $4.5 million, payable only out of dividends we receive from AmeriCold and proceeds from sales of the common shares of AmeriCold that we own. Unpaid annual management fees will accrue without interest. The amount of the annual management fee will be reduced in proportion to any sales by us of our interest in AmeriCold. We also agreed to pay Vornado, from the proceeds of any sales of the common shares of AmeriCold that we own, a termination fee equal to the product of $23.8 million and the percentage reduction in our ownership of AmeriCold, as of November 18, 2004, represented by the sale. Our obligation to pay the annual management fee and the termination fee will end on October 30, 2027, or, if earlier, the date on which we sell all of the common shares of AmeriCold that we own.

In August 2006, AmeriCold entered into a definitive agreement to acquire from ConAgra Foods, Inc. or ConAgra, four refrigerated warehouse facilities and the lease on a fifth facility, with an option to purchase. The aggregate purchase price is approximately $190.0 million, consisting of $152.0 million in cash to ConAgra and $38.0 million representing the recording of a capital lease obligation for the fifth facility. During the fourth quarter of 2006, AmeriCold completed the acquisition of two of these facilities and assumed the leasehold on the fifth facility and the related capital lease obligation. In January 2007, AmeriCold completed the acquisition of the third facility. The acquisition of the remaining facility is expected to be completed during the first half of 2007.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. INVESTMENTS IN UNCONSOLIDATED COMPANIES

The following is a summary of our ownership in significant unconsolidated joint ventures and investments as of December 31, 2006.


		Our Ownership
		as of
Entity	Classification	December 31, 2006
Crescent Irvine, LLC	Office (2211 Michelson Office Development – Irvine)		40.0	% (1)
Crescent Miami Center, LLC	Office (Miami Center – Miami)		40.0	% (2) (3)
Crescent One Buckhead Plaza, L.P.	Office (One Buckhead Plaza – Atlanta)		35.0	% (4) (3)
Crescent POC Investors, L.P.	Office (Post Oak Central – Houston)		23.9	% (5) (3)
Crescent HC Investors, L.P.	Office (Houston Center – Houston)		23.9	% (5) (3)
Crescent TC Investors, L.P.	Office (The Crescent – Dallas)		23.9	% (5) (3)
Crescent Ross Avenue Mortgage Investors, L.P.	Office (Trammell Crow Center, Mortgage – Dallas)		23.9	% (6) (3)
Crescent Ross Avenue Realty Investors, L.P.	Office (Trammell Crow Center, Ground Lessor – Dallas)		23.9	% (6) (3)
Crescent Fountain Place, L.P.	Office (Fountain Place – Dallas)		23.9	% (6) (3)
Crescent Five Post Oak Park L.P.	Office (Five Post Oak Park – Houston)		30.0	% (7) (3)
Crescent One BriarLake Plaza, L.P.	Office (One BriarLake Plaza – Houston)		30.0	% (8) (3)
Crescent 1301 McKinney, L.P.	Office (Fulbright Tower – Houston)		23.9	% (9) (3)
AmeriCold Realty Trust	Temperature-Controlled Logistics		31.7	% (10)
CR Operating, LLC	Resort/Hotel		48.0	% (11)
CR Spa, LLC	Resort/Hotel		48.0	% (11)
East West Resort Development XIV, L.P., L.L.L.P.	Resort Residential Development		26.8	% (12)
Blue River Land Company, LLC	Resort Residential Development		33.2	% (13)
EW Deer Valley, LLC	Resort Residential Development		35.7	% (14)
SunTx Fulcrum Fund, L.P. (SunTx)	Other		26.5	% (15)
Redtail Capital Partners, L.P. (Redtail)	Other		25.0	% (16) (3)
Fresh Choice, LLC	Other		40.0	% (17)
G2 Opportunity Fund, L.P. (G2)	Other		12.5	% (18)


(1)		The remaining 60% interest is owned by an affiliate of Hines.

(2)		The remaining 60% interest is owned by an affiliate of a fund managed by JP Morgan Investment Management, Inc., or JPM.

(3)		We have negotiated performance based incentives, which we refer to as promoted interest, which allow for additional equity to be earned if return targets are exceeded.

(4)		The remaining 65% interest is owned by Metzler US Real Estate Fund, L.P.

(5)		Each limited partnership is owned by Crescent Big Tex I, L.P., which is owned 60% by a fund advised by JPM and 16.1% by affiliates of GE.

(6)		Each limited partnership is owned by Crescent Big Tex II, L.P., which is owned 76.1% by a fund advised by JPM.

(7)		The remaining 70% interest is owned by an affiliate of GE.

(8)		The remaining 70% interest is owned by affiliates of JPM.

(9)		The partnership is owned by Crescent Big Tex III, L.P., which is owned 60% by a fund advised by JPM and 16.1% by affiliates of GE.

(10)		Of the remaining 68.3% interest, 47.6% is owned by Vornado and 20.7% is owned by The Yucaipa Companies.

(11)		The remaining 52% interest is owned by the founders of Canyon Ranch and their affiliates. CR Spa, LLC operates three resort spas which offer guest programs and services and sells Canyon Ranch branded skin care products exclusively at the destination health resorts and the resort spas. CR Operating, LLC operates and manages the two Canyon Ranch destination health resorts, Tucson and Lenox, and collaborates with select real estate developers in developing residential lifestyle communities.

(12)		We provided 41.9% of the initial capitalization and the venture is structured such that we own a 26.8% interest after we receive a preferred return on our invested capital and return of our capital. The remaining 73.2% economic interest is owned by parties unrelated to us. East West Resort Development XIV, L.P., L.L.L.P. was formed to co-develop a hotel and condominiums in Avon, Colorado.

(13)		The remaining 66.8% interest is owned by parties unrelated to us. Blue River Land Company, LLC was formed to acquire, develop and sell certain real estate property in Summit County, Colorado.

(14)		The remaining 64.3% interest is owned by parties unrelated to us. EW Deer Valley, LLC was formed to acquire, hold and dispose of its 3.3% ownership interest in Empire Mountain Village, L.L.C. Empire Mountain Village, LLC was formed to acquire, develop and sell certain real estate property at Deer Valley Ski Resort next to Park City, Utah.

(15)		Of the remaining 73.5%, approximately 42.5% is owned by SunTx Capital Partners, L.P. and the remaining 31.0% is owned by a group of individuals unrelated to us. Of our limited partnership interest in SunTx, 6.3% is through an unconsolidated investment in SunTx Capital Partners, L.P., the general partner of SunTx. SunTx Fulcrum Fund, L.P.'s objective is to invest in a portfolio of entities that offer the potential for substantial capital appreciation.

(16)		The remaining 75% interest is owned by Capstead Mortgage Corporation. Redtail was formed to invest up to $100.0 million in equity in select mezzanine loans on commercial real estate over a two-year period.

(17)		The remaining 60% interest is owned by Cedarlane Natural Foods, Inc. Fresh Choice is a restaurant owner, operator and developer.

(18)		G2 was formed for the purpose of investing in commercial mortgage backed securities and other commercial real estate investments. The remaining 87.5% interest is owned by Goff-Moore Strategic Partners, L.P., or GMSPLP, and by parties unrelated to us. G2 is managed and controlled by an entity that is owned equally by GMSPLP and GMAC Commercial Mortgage Corporation, or GMACCM. The ownership structure of GMSPLP consists of an approximately 92% limited partnership interest owned directly and indirectly by Richard E. Rainwater, Chairman of our Board of Trust Managers, of which approximately 6% is owned by Darla Moore, who is married to Mr. Rainwater. Approximately 6% general partner interest is owned by John C. Goff, Vice-Chairman of our Board of Trust Managers and our Chief Executive Officer. The remaining approximately 2% general partnership interest is owned by unrelated parties.

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Fresh Choice

On November 16, 2005, the Bankruptcy Court entered an order approving the First Amended Joint Plan of Reorganization of Fresh Choice, LLC, or Fresh Choice, jointly proposed by us, Cedarlane Natural Foods, Inc., or Cedarlane, and the Official Committee of Unsecured Creditors appointed in the bankruptcy filing. The Plan became effective on December 21, 2005. Pursuant to the Plan, we and Cedarlane acquired 100% of the new equity interest in Fresh Choice. Our portion of the new capital investment was 40% of $3.0 million, or $1.2 million. In addition, we and Cedarlane entered into a loan agreement for up to $3.0 million, of which $2.9 million has been funded as of December 31, 2006. The loan matures in January 2010. Also, as part of the Plan, Fresh Choice obtained new financing with GE Capital Franchise Financing Corporation of $5.0 million, of which 50% is guaranteed by us and Cedarlane in proportion to respective ownership interests. The unsecured creditors agreed to accept payment in the form of a two year non-interest bearing note of $2.5 million. Following these transactions, we account for our interests in Fresh Choice under the equity method.

On January 5, 2007, we entered into a recapitalization agreement whereby we sold a portion of our interests in Fresh Choice. The agreement calls for a two-part close transaction due to restrictions in place related to the debt of Fresh Choice. Upon the first closing in January 2007, the buyer acquired an interest in the entities that own Fresh Choice for cash of $3.0 million, of which we received approximately $1.6 million. The second closing is expected to occur in the second quarter of 2007.

Summary Financial Information

We report our share of income and losses based on our ownership interest in our respective equity investments, adjusted for any preference payments. The unconsolidated entities that are included under the headings on the following tables are summarized below.

Balance Sheets as of December 31, 2006:

	•		Office - This includes Crescent Big Tex I, L.P., Crescent Big Tex II, L.P., Crescent Irvine, LLC, Crescent Miami Center, LLC, Crescent Five Post Oak Park L.P., Crescent One BriarLake Plaza, L.P., Crescent Big Tex III, L.P. and Crescent One Buckhead Plaza, L.P.;

	•		Temperature-Controlled Logistics - This includes AmeriCold Realty Trust;

	•		Resort/Hotel - This includes CR Operating, LLC and CR Spa, LLC;

	•		Resort Residential Development - This includes East West Resort Development XIV, L.P., L.L.L.P., Blue River Land Company, LLC and EW Deer Valley, LLC; and

	•		Other - This includes SunTx, Redtail, Fresh Choice, LLC and G2.

Balance Sheets as of December 31, 2005:

	•		Office - This includes Crescent Big Tex I, L.P., Crescent Big Tex II, L.P., Main Street Partners, L.P., Crescent Irvine, LLC, Houston PT Three Westlake Office Limited Partnership, Houston PT Four Westlake Office Limited Partnership, Austin PT BK One Tower Office Limited Partnership, Crescent Miami Center, LLC, Crescent Five Post Oak Park L.P., Crescent One BriarLake Plaza, L.P., Crescent Big Tex III, L.P. and Crescent One Buckhead Plaza, L.P.;

	•		Temperature-Controlled Logistics - This includes AmeriCold Realty Trust;

	•		Resort/Hotel - This includes CR Operating, LLC and CR Spa, LLC ;

	•		Resort Residential Development - This includes Blue River Land Company, LLC and EW Deer Valley, LLC; and

	•		Other - This includes SunTx, Redtail, Fresh Choice, LLC and G2.

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Summary Statements of Operations for the year ended December 31, 2006:

	•		Office - This includes Crescent Big Tex I, L.P., Crescent Big Tex II, L.P., Main Street Partners, L.P., Crescent Irvine, LLC, Houston PT Three Westlake Office Limited Partnership, Houston PT Four Westlake Office Limited Partnership, Austin PT BK One Tower Office Limited Partnership, Crescent Miami Center, LLC, Crescent Five Post Oak Park L.P., Crescent One BriarLake Plaza, L.P., Crescent Big Tex III, L.P. and Crescent One Buckhead Plaza, L.P.;

	•		Temperature-Controlled Logistics - This includes AmeriCold Realty Trust;

	•		Resort/Hotel - This includes CR Operating, LLC and CR Spa, LLC;

	•		Resort Residential Development - This includes East West Resort Development XIV, L.P., L.L.L.P., Blue River Land Company, LLC, and EW Deer Valley, LLC; and

	•		Other - This includes SunTx, Redtail, Fresh Choice, LLC and G2.

Summary Statements of Operations for the year ended December 31, 2005:

	•		Office - This includes Crescent Big Tex I, L.P., Crescent Big Tex II, L.P., Main Street Partners, L.P., Crescent Irvine, LLC, Houston PT Three Westlake Office Limited Partnership, Houston PT Four Westlake Office Limited Partnership, Austin PT BK One Tower Office Limited Partnership, Crescent 5 Houston Center, L.P., Crescent Miami Center, LLC, Crescent Five Post Oak Park L.P., Crescent One BriarLake Plaza, L.P., Crescent Big Tex III, L.P. and Crescent One Buckhead Plaza, L.P.;

	•		Temperature-Controlled Logistics - This includes AmeriCold Realty Trust;

	•		Resort/Hotel - This includes CR Operating, LLC and CR Spa, LLC;

	•		Resort Residential Development - This includes Blue River Land Company, LLC and EW Deer Valley, LLC; and

	•		Other - This includes SunTx, Redtail, Fresh Choice, LLC and G2.

Summary Statements of Operations for the year ended December 31, 2004:

	•		Office - This includes Crescent Big Tex I, L.P., Crescent Big Tex II, L.P., Main Street Partners, L.P., Houston PT Three Westlake Office Limited Partnership, Houston PT Four Westlake Office Limited Partnership, Austin PT BK One Tower Office Limited Partnership, Crescent 5 Houston Center, L.P., Crescent Miami Center, LLC, Crescent Five Post Oak Park L.P. and Crescent One BriarLake Plaza, L.P.;

	•		Temperature-Controlled Logistics - This includes AmeriCold Reality Trust, Vornado Crescent Portland Partnership and Vornado Crescent and KC Quarry, L.L.C.;

	•		Resort/Hotel - This includes CR License, L.L.C., CR License II, L.L.C. and Canyon Ranch Las Vegas, L.L.C.;

	•		Resort Residential Development - This includes Blue River Land Company, LLC and EW Deer Valley, LLC; and

	•		Other - This includes SunTx and G2.

Balance Sheets:


	As of December 31, 2006
			Temperature-					Resort
			Controlled					Residential
(in thousands)	Office		Logistics		Resort/Hotel			Development		Other		Total
Real estate, net	$	1,628,384	$	1,211,120	$	113,367		$	39,349	$	12,238
Cash		71,167		92,672		32,986			9,183		2,649
Restricted cash		18,113		8,984		224			-		17,162
Other assets		241,747		166,589		12,921			21,948		224,653

Total assets	$	1,959,411	$	1,479,365	$	159,498		$	70,480	$	256,702


Notes payable	$	1,061,171	$	1,125,078	$	95,000		$	3,500	$	49,862
Notes payable to the Company		-		-		-			-		1,152
Other liabilities		182,960		91,952		29,036			19,166		6,027
Preferred membership units		-		-		109,006			-		-
Equity		715,280		262,335		(73,544	)		47,814		199,661

Total liabilities and equity	$	1,959,411	$	1,479,365	$	159,498		$	70,480	$	256,702


Our share of unconsolidated debt	$	287,911	$	356,875	$	45,600		$	1,467	$	13,745	$	705,598


Our investments in unconsolidated companies	$	115,990	$	87,069	$	1,036		$	20,202	$	56,573	$	280,870

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Balance Sheets:


	As of December 31, 2005
			Temperature-					Resort
			Controlled					Residential
(in thousands)	Office		Logistics		Resort/Hotel			Development		Other		Total
Real estate, net	$	1,944,942	$	1,122,155	$	108,943		$	11,789	$	13,077
Cash		71,361		25,418		52,100			920		5,875
Restricted cash		36,121		61,367		217			-		388
Other assets		279,437		163,925		12,258			4,787		165,478

Total assets	$	2,331,861	$	1,372,865	$	173,518		$	17,496	$	184,818


Notes payable	$	1,244,499	$	765,640	$	95,000		$	-	$	34,566
Notes payable to the Company		-		-		-			-		800
Other liabilities		196,100		109,161		28,523			101		9,216
Preferred membership units		-		-		104,231			-		-
Equity		891,262		498,064		(54,236	)		17,395		140,236

Total liabilities and equity	$	2,331,861	$	1,372,865	$	173,518		$	17,496	$	184,818


Our share of unconsolidated debt	$	348,663	$	242,708	$	45,600		$	-	$	10,021	$	646,992


Our investments in unconsolidated companies	$	178,440	$	162,438	$	6,200		$	6,657	$	39,800	$	393,535

Summary Statements of Operations:


	For the year ended December 31, 2006
				Temperature-						Resort
				Controlled						Residential
(in thousands)	Office			Logistics (1)			Resort/Hotel			Development			Other			Total
Total revenues	$	337,476		$	780,761		$	145,166		$	12,637		$	58,358
Operating expense		168,122			657,115			130,584			15,477			50,486

Net Operating Income	$	169,354		$	123,646		$	14,582		$	(2,840	)	$	7,872

Interest expense	$	68,005		$	81,890		$	5,981		$	-		$	3,011
Depreciation and amortization		97,574			73,254			10,585			-			2,102
Taxes and other (income) expense		(3,325	)		(4,588	)		2,139			(440	)		(46,165	)

Total expenses (income)	$	162,254		$	150,556		$	18,705		$	(440	)	$	(41,052	)

Gain on sale of assets		102,727			2,164			-			-			-
Preferred dividends		-			-			(12,503	)		-			-


Net income (loss) available to common interests	$	109,827		$	(24,746	)	$	(16,626	)	$	(2,400	)	$	48,924


Our equity in net income (loss) of unconsolidated companies	$	9,231		$	(15,669	)	$	(5,109	)	$	(355	)	$	12,157		$	255


(1)		In connection with the dissolution of Vornado Crescent Portland Partnership, we agreed to pay Vornado Realty, L.P. an annual management fee of $4.5 million, payable only out of dividends or sale proceeds on the shares of AmeriCold that we own, which is included in our share of equity in net income (loss) for Temperature-Controlled Logistics.

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Summary Statements of Operations:


	For the year ended December 31, 2005
				Temperature-					Resort
				Controlled					Residential
(in thousands)	Office			Logistics (1)		Resort/Hotel			Development			Other			Total
Total revenues	$	344,268		$	846,881	$	136,537		$	8,553		$	551
Operating expense		160,187			699,701		115,002			3,671			-

Net Operating Income	$	184,081		$	147,180	$	21,535		$	4,882		$	551

Interest expense	$	68,851		$	56,273	$	5,580		$	-		$	255
Depreciation and amortization		100,880			73,776		10,396			-			89
Taxes and other (income) expense		(899	)		243		22			(155	)		(99,089	)

Total expenses (income)	$	168,832		$	130,292	$	15,998		$	(155	)	$	(98,745	)


Preferred dividends	$	-		$	-	$	(12,043	)	$	-		$	-

Net income (loss) available to common interests	$	15,249		$	16,888	$	(6,506	)	$	5,037		$	99,296


Our equity in net income (loss) of unconsolidated companies	$	11,464		$	234	$	(1,541	)	$	(491	)	$	17,885	(2)	$	27,551


(1)		In connection with the dissolution of Vornado Crescent Portland Partnership, we agreed to pay Vornado Realty, L.P. an annual management fee of $4.5 million, payable only out of dividends or sale proceeds on the shares of AmeriCold that we own, which is included in our share of equity in net income (loss) for Temperature-Controlled Logistics.

(2)		Includes approximately $5.1 million of income recorded in the second quarter of 2005 resulting from an increase in 2004 actual results from previously estimated results related to SunTx.

Summary Statements of Operations:


	For the year ended December 31, 2004
			Temperature-						Resort
			Controlled						Residential
(in thousands)	Office		Logistics			Resort/Hotel			Development			Other			Total
Total revenues	$	156,670	$	223,990		$	34,249		$	3,981		$	-
Operating expense		77,684		121,935	(1)		29,748			5,331			-

Net Operating Income	$	78,986	$	102,055		$	4,501		$	(1,350	)	$	-

Interest expense	$	34,368	$	52,069		$	12		$	-		$	-
Depreciation and amortization		35,916		59,813			750			-			-
Taxes and other (income) expense		113		1,509			-			94			(23,904	)

Total expenses (income)	$	70,397	$	113,391		$	762		$	94		$	(23,904	)


Gain (loss) on sale of assets	$	-	$	32,975		$	-			-			-


Net income (loss) available to common interests	$	8,589	$	21,639		$	3,739		$	(1,444	)	$	23,904


Our equity in net income (loss) of unconsolidated companies	$	6,262	$	6,153		$	(245	)	$	(2,266	)	$	(280	) (2)	$	9,624


(1)		Inclusive of the preferred return paid to Vornado (1% per annum of the total combined assets through November 18, 2004).

(2)		Does not include approximately $5.1 million of income recorded in the second quarter 2005 resulting from an increase in 2004 actual results from previously estimated results related to SunTx.

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Unconsolidated Debt Analysis

The following table shows, as of December 31, 2006, information about our share of unconsolidated fixed and variable rate debt and does not take into account any extension options, hedge arrangements or the entities' anticipated pay-off dates.


		Balance		Our Share of
		Outstanding at		Balance at
	Our	December 31,		December 31,		Interest Rate at
Description	Ownership	2006		2006		December 31, 2006	Maturity Date	Fixed/Variable (1)
		(in thousands)		(in thousands)
Temperature-Controlled Logistics Segment:
AmeriCold Realty Trust	31.72%
Deutsche Bank/JPMorgan Chase (2)		$	350,000	$	111,020	5.40%	12/10/2015	Fixed
Citigroup (3)			325,000		103,090	5.46%	12/10/2013	Fixed
UBS 1A (4)			194,000		61,537	5.55%	12/10/2016	Fixed
UBS 1B, 1C (5)			181,000		57,413	5.43%	12/10/2016	Fixed
Other			75,078		23,815	3.48% to 22.53%	6/15/2007 to 4/1/2017	Fixed

		$	1,125,078	$	356,875


Office Segment:
Crescent HC Investors, L.P.	23.85%		269,705		64,325	5.03%	11/7/2011	Fixed
Crescent TC Investors, L.P.	23.85%		214,770		51,223	5.00%	11/1/2011	Fixed
Crescent Fountain Place, L.P.	23.85%		105,932		25,265	4.95%	12/1/2011	Fixed
Crescent POC Investors, L.P.	23.85%		97,504		23,255	4.98%	12/1/2011	Fixed
Crescent One Buckhead Plaza, L.P.	35.00%		85,000		29,750	5.47%	4/8/2015	Fixed
Crescent Miami Center, LLC	40.00%		81,000		32,400	5.04%	9/25/2007	Fixed
Crescent 1301 McKinney, L.P. (6)	23.85%		73,350		17,494	6.58%	1/9/2008	Variable
Crescent One BriarLake Plaza, L.P.	30.00%		50,000		15,000	5.40%	11/1/2010	Fixed
Crescent Five Post Oak Park, L.P.	30.00%		43,656		13,097	4.82%	1/1/2008	Fixed
Crescent Irvine, LLC (7)	40.00%		40,254		16,102	8.10%	3/7/2009	Variable

		$	1,061,171	$	287,911

Resort/Hotel Segment:
CR Resort, LLC	48.00%
Bank of America		$	95,000	$	45,600	5.94%	2/1/2015	Fixed

Resort Residential Development Segment:
East West Resort Development XIV, L.P., L.L.L.P. (8)	41.90%
The Vail Corporation		$	3,500	$	1,467	5.00%	4/28/2008	Fixed


Other Segment:
Redtail Capital Partners One, LLC	25.00%
Morgan Stanley Bank (9)		$	41,330	$	10,333	7.14%	8/9/2008	Variable
Fresh Choice, LLC	40.00%
GE Capital Franchise Finance Corporation (10)			4,276		1,710	10.07%	1/1/2011	Variable
Various Loans and Capital Leases			4,256		1,702	0.00% to 9.53%	3/1/2007 to 12/31/2029	Fixed

		$	49,862	$	13,745

Total Unconsolidated Debt		$	2,334,611	$	705,598

Fixed Rate/Weighted Average						5.41%	7.01 years
Variable Rate/Weighted Average						7.37%	1.70 years

Total Weighted Average						5.53%	6.67 years


(1)		All unconsolidated debt is secured.

(2)		The loan is a nine-year, interest-only financing that is collateralized by 20 of its Temperature-Controlled Logistics Properties.

(3)		The loan is a seven-year, interest-only financing that is collateralized by 15 of its Temperature-Controlled Logistics Properties.

(4)		The loan is a ten-year, interest-only financing that is collateralized by 4 of its Temperature-Controlled Logistics Properties.

(5)		The loan is a ten-year, interest-only financing that is collateralized by 11 of its Temperature-Controlled Logistics Properties.

(6)		On January 10, 2007, this loan was paid off and replaced with a new $89.0 million, five year, interest-only financing.

(7)		This loan has one two-year extension option. The loan bears interest at LIBOR plus 275 basis points. In May 2006, Crescent Irvine, LLC, entered into an interest rate swap agreement struck at 5.34%.

(8)		We provided 41.9% of the initial capitalization and the venture is structured such that we own a 26.8% interest after we receive a preferred return on our invested capital and return of our capital.

(9)		This loan has one one-year extension option. Redtail Capital Partners One, LLC is owned 100% by Redtail. The loans supporting this facility are subject to daily valuations by Morgan Stanley and we are subject to a margin call if the overall leverage exceeds certain thresholds. The loan bears interest as follows: $28.8 million at LIBOR plus 185 basis points and $12.5 million at LIBOR plus 170 basis points.

(10)		We guarantee $1.0 million of this loan. The loan bears interest at LIBOR plus 470 basis points.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. OTHER ASSETS AND OTHER LIABILITIES

Other Assets


	December 31,
				2005
(in thousands)	2006			(Restated)
Leasing costs	$	125,033		$	112,607
Goodwill		40,469			40,469
Other intangibles		51,417			50,147
Intangible office leases		80,317			77,239
Deferred financing costs		44,929			46,611
Prepaid expenses		20,669			20,860
Marketable securities		5,094			21,579
Other		9,377			22,781

	$	377,305		$	392,293
Less - accumulated amortization		(102,291	)		(79,927	)

	$	275,014		$	312,366

Goodwill and Identified Intangible Assets

The following summarizes our goodwill, identified intangible assets and identified intangible liabilities as of December 31, 2006 and 2005.


	December 31,
				2005
(in thousands)	2006			(Restated)
Goodwill (included in other assets):
Resort Residential Development Segment:
Goodwill	$	40,469		$	40,469

Identified intangible assets (included in other assets):
Resort Residential Development Segment:
Intangibles (1)	$	51,417		$	50,147
Accumulated amortization		(3,767	)		(2,852	)

Net intangibles	$	47,650		$	47,295

Office Segment:
Intangibles (2)	$	80,317		$	77,239
Accumulated amortization		(22,973	)		(15,520	)

Net intangibles	$	57,344		$	61,719

Identified intangible liabilities (included in accounts payable, accrued expenses and other liabilities):
Office Segment:
Intangibles (3)	$	10,938		$	9,876
Accumulated amortization		(3,443	)		(2,026	)

Net intangibles	$	7,495		$	7,850


(1)		Consists primarily of water rights.

(2)		Consists of acquired in-place leases and above market leases. Of these amounts, approximately $9.7 million and $8.5 million were acquired in the year ended December 31, 2006 and 2005, respectively.

(3)		Consists of acquired below market leases. Of these amounts, approximately $1.4 million and $4.5 million were acquired in the year ended December 31, 2006 and 2005, respectively.

Amortization of acquired above market leases net of acquired below market leases resulted in a decrease to rental income of $1.7 million, $2.9 million and $2.1 million for the years ended December 31, 2006, 2005, and 2004, respectively. The weighted average amortization period of acquired above and below market leases is approximately 6.5 years. The following table outlines the estimated annual amortization of acquired above market leases net of acquired below market leases for each of the five succeeding years which will result in a decrease (increase) to rental income:


	Estimated
(in thousands)	Annual Amortization
2007	$	1,028
2008		137
2009		(118	)
2010		(332	)
2011		(299	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The weighted average amortization periods of all other identified intangible assets in the Resort Residential Development and Office segments are 20.8 years and 11.3 years, respectively. The estimated annual amortization of all other identified intangible assets (a component of depreciation and amortization expense) including water rights and acquired in-place leases for each of the five succeeding years is as follows:


	Resort
	Residential
(in thousands)	Development		Office		Total
2007	$	936	$	6,234	$	7,170
2008		936		6,231		7,167
2009		922		6,230		7,152
2010		898		6,177		7,075
2011		898		5,690		6,588

Marketable Securities

The following tables present the cost, fair value and unrealized gains and losses as of December 31, 2006 and 2005, and the realized gains and change in Accumulated Other Comprehensive Income, or OCI, for the years ended December 31, 2006, 2005 and 2004 for our marketable securities.


	As of December 31, 2006							As of December 31, 2005
(in thousands)			Fair		Unrealized					Fair		Unrealized
Type of Security	Cost		Value		Gain/(Loss)			Cost		Value		Gain/(Loss)
Held to maturity (1)	$	115,371	$	114,657	$	(714	)	$	274,134	$	271,659	$	(2,475	)
Trading (2)		679		737		N/A			690		728		N/A
Available for sale		-		-		-			20,284		20,852		568

Total	$	116,050	$	115,394	$	(714	)	$	295,108	$	293,239	$	(1,907	)


	For the year ended						For the year ended						For the year ended
	December 31, 2006						December 31, 2005						December 31, 2004
(in thousands)	Realized			Change			Realized			Change			Realized		Change
Type of Security	Gain/(Loss)			In OCI			Gain/(Loss)			In OCI			Gain/(Loss)		In OCI
Held to maturity (1)	$	-			N/A		$	-			N/A		$	-	$	N/A
Trading (2)		53			N/A			139			N/A			1,149		N/A
Available for sale		65	(3)		(568	)		(19	)		(468	)		6		1,036

Total	$	118		$	(568	)	$	120		$	(468	)	$	1,155	$	1,036


(1)		Held to maturity securities are carried at amortized cost and consist of $111.0 million of defeasance investments, included in "Defeasance investments" in the accompanying Consolidated Balance Sheets, which consist of U.S. Treasury and government sponsored agency securities purchased for the sole purpose of funding debt service payments on LaSalle Note I and the Nomura Funding VI Note and $4.4 million of bonds. In March 2006, the LaSalle Note II was paid off with the proceeds from maturities of defeasance investment securities.

(2)		Trading securities primarily consist of marketable securities purchased in connection with our dividend incentive unit program. These securities are included in "Other assets, net" in the accompanying Consolidated Balance Sheets and are marked to market value on a monthly basis with the change in fair value recognized in earnings.

(3)		We received approximately $20.5 million, inclusive of $0.4 million interest, during the year ended December 31, 2006 from the sale of these marketable securities.

Accounts Payable, Accrued Expenses and Other Liabilities


	December 31,
			2005
(in thousands)	2006		(Restated)
Accounts payable and accrued expenses	$	236,305	$	207,584
Deferred revenue		138,680		147,988
Resort Residential contract deposits		53,189		70,491
Accrued property taxes		36,434		34,180
Accrued interest		21,862		21,109
Resort/Hotel deposits		8,625		8,621
Office security deposits		6,919		5,945

	$	502,014	$	495,918

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY

The significant terms of our primary debt financing arrangements existing as of December 31, 2006 and 2005, are shown below:


							Interest Rate at
							December 31,
	Secured											Maturity
Description	Asset	2006		2005		Interest Rate	2006		2005			Date
		(dollars in thousands)
*Secured Fixed Rate Debt:*
AEGON Partnership Note (1)	Greenway Plaza	$	242,290	$	248,678		7.53%					July 2009
Prudential Note	707 17 th Street/Denver Marriott		70,000		70,000		5.22					June 2010
JP Morgan Chase III	Datran Center		65,000		65,000		4.88					October 2015
Bank of America Note I (2)	Fairmont Sonoma Mission Inn		55,000		-		5.40					February 2011
Morgan Stanley I	The Alhambra		50,000		50,000		5.06					October 2011
Allstate Life Note	Financial Plaza		38,949		-		5.47					October 2010
Bank of America Note II (3)	The BAC - Colonnade Building		37,439		37,922		5.53					May 2013
Metropolitan Life Note VII	Dupont Centre		35,500		35,500		4.31					May 2011
Column Financial	Peakview Tower		33,000		33,000		5.59					April 2015
Mass Mutual Note	3800 Hughes		32,203		34,177		7.75					July 2007
Northwestern Life Note	301 Congress		26,000		26,000		4.94					November 2008
JP Morgan Chase II	3773 Hughes		24,755		24,755		4.98					September 2011
Allstate Note (4)	3993 Hughes		24,025		24,781		6.65					September 2010
Metropolitan Life Note VI (4)	3960 Hughes		22,074		23,011		7.71					October 2009
Construction, Acquisition and other obligations (4)	Various Office and Resort Residential Assets		40,690		36,526		2.90 to 13.75					July 2007 to Dec. 2016

*Secured Fixed Rate Defeased Debt* (5) :
LaSalle Note II	Funding II Defeasance		-		155,188
LaSalle Note I	Funding I Defeasance		100,017		101,723		7.83					August 2007
Nomura Funding VI Note	Funding VI Defeasance		7,208		7,445		10.07					July 2010

Subtotal/Weighted Average		$	904,150	$	973,706		6.38%			6.71	%


*Unsecured Fixed Rate Debt:*
The 2009 Notes (6) (7)		$	375,000	$	375,000		9.25%					April 2009
The 2007 Notes (6)			250,000		250,000		7.50					September 2007

Subtotal/Weighted Average		$	625,000	$	625,000		8.55%			8.55	%


*Secured Variable Rate Debt:*
GACC Note (8)	Funding One Assets	$	165,000	$	165,000	LIBOR + 147 bps	6.82%					June 2007
Morgan Stanley II (9)	Mezzanine Investments		22,311		-	LIBOR + 150 to 230 bps	7.37					March 2009
Goldman Sachs (9)	Mezzanine Investments		10,000		-	LIBOR + 140 bps	6.72					May 2009
KeyBank II	Distributions from Funding III, IV & V		75,000		-	LIBOR + 200 bps	7.35					June 2007
National Bank of Arizona (10)	DMDC Assets		15,654		6,157	Prime + 50 bps	8.75					October 2007
Acquisition and other obligations	Various Office and Other Assets		13,416		23,650	LIBOR + 128 to 131 bpsor Prime - 75 to 100 bps	6.60 to 6.63					Feb. 2008 to Dec. 2012

*Secured Variable Rate Construction Debt:*
KeyBank I (11)	Ritz-Carlton Dallas Construction		80,296		15,162	LIBOR + 225 bps	7.60%					July 2008
JP Morgan Chase (12)	Northstar Big Horn Construction		56,342		17,164	Prime - 50 bps	7.75					October 2007
Societe Generale I (13)	3883 Hughes Construction		30,587		314	LIBOR + 180 bps	7.22					September 2008
First Bank of Vail (14)	Village Walk Construction		14,041		-	Prime - 50 bps	7.75					February 2008
US Bank II (15)	Northstar Trailside Construction		1,991		-	LIBOR + 250 bps	8.10					March 2009
US Bank I (16)	Beaver Creek Landing Construction		16,446		-	Prime - 115 bps	7.10					February 2008
California Bank & Trust (17)	One Riverfront Construction		13,861		-	Prime + 12.5 bps	8.38					March 2008
JP Morgan Chase Bank (18)	Old Greenwood Construction		16,150		10,235	Prime	8.25					March 2007
Construction, acquisition and other obligations	Various Office and Resort Residential Assets		40,792		29,961	LIBOR + 213 to 393	7.45 to 9.25					June 2007 to Dec. 2010
Bank One	Northstar Ironhorse Construction		-		42,671
Bank One	Jefferson Station Apts. Construction		-		24,526
Guaranty Bank	Paseo Del Mar Construction		-		14,606

Subtotal/Weighted Average		$	571,887	$	349,446		7.39%			6.43	%

*Unsecured Variable Rate Debt:*
Credit Facility (19)		$	118,000	$	234,000	LIBOR + 160 bps	6.95%					February 2008
Junior Subordinated Notes (20)			51,547		51,547	LIBOR + 200 bps	7.38					June 2035
Junior Subordinated Notes (20)			25,774		25,774	LIBOR + 200 bps	7.38					July 2035

Subtotal/Weighted Average		$	195,321	$	311,321		7.12%			6.00	%


Total/Weighted Average		$	2,296,358	$	2,259,473		7.29%	(21)		7.08	%


Average remaining term							3.1 years

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)		The remaining outstanding balance of this note at maturity will be approximately $223.4 million.

(2)		Obtaining this loan was a reconsideration event under FIN 46R. We determined that the entity that operates Fairmont Sonoma Mission Inn is a VIE of which we are the primary beneficiary. This entity was previously consolidated under other GAAP; therefore there is no impact to our Consolidated Financial Statements.

(3)		The outstanding principal balance of this loan at maturity will be approximately $33.7 million.

(4)		We assumed these loans in connection with the Hughes Center properties acquisitions. The following table lists the unamortized premium associated with the assumption of above market interest rate debt which is included in the balance outstanding at December 31, 2006, the effective interest rate of the debt including the premium and the outstanding principal balance at maturity:


(dollars in thousands)	Unamortized					Balance at
Loan	Premium		Effective Rate			Maturity
Northwestern	$	173		3.80	%	$	8,663
Allstate Note		941		5.19	%		20,771
Metropolitan Life Note VI		1,098		5.68	%		19,239

Total	$	2,212				$	48,673


		The premium was recorded as an increase in the carrying amount of the underlying debt and is being amortized using the effective interest rate method as a reduction of interest expense through maturity of the underlying debt.

(5)		We purchased U.S. Treasuries and government sponsored agency securities, or defeasance investments, to substitute as collateral for these loans. The cash flow from defeasance investments (principal and interest) matches the debt service payment of the loans.

(6)		To incur any additional debt, the indenture requires us to meet thresholds for a number of customary financial and other covenants including maximum leverage ratios, minimum debt service coverage ratios, maximum secured debt as a percentage of total undepreciated assets, and ongoing maintenance of unencumbered assets. Additionally, as long as the 2009 Notes are not rated investment grade, there are restrictions on our ability to make certain payments, including distributions to shareholders and investments.

(7)		At our option, these notes can be called beginning in April 2007 for 102.3% and in April 2008 and thereafter for par.

(8)		This note consists of a $110.0 million senior loan at LIBOR plus 108 basis points, a $40.0 million first mezzanine loan at LIBOR plus 225 basis points and a $15.0 million second mezzanine loan at LIBOR plus 225 basis points. This note has three one-year extension options.

(9)		This loan has one one-year extension option. The loans supporting this facility are subject to daily valuations by Morgan Stanley and Goldman Sachs, respectively, and we are subject to a margin call if the overall leverage of the facility exceeds certain thresholds.

(10)		The maximum facility amount is $30.0 million.

(11)		The maximum facility amount is $169.0 million. This loan has three one-year extension options.

(12)		The maximum facility amount is $84.9 million.

(13)		The maximum facility amount is $52.3 million. This loan has two one-year extension options. The rate on this loan decreases to LIBOR plus 170 basis points when the following are met: 85% leased and 75% occupied.

(14)		The maximum facility amount is $41.8 million.

(15)		The maximum facility amount is $36.0 million.

(16)		The maximum facility amount is $33.4 million. This loan has one six-month extension option.

(17)		The maximum facility amount is $27.5 million. This loan has one one-year extension option. The partners have committed to contribute up to an additional $17.1 million in capital should certain financial covenants not be maintained.

(18)		The maximum facility amount is $21.0 million.

(19)		Availability under the line of credit is subject to certain covenants including limitations on total leverage, fixed charge ratio, debt service coverage ratio, minimum tangible net worth, and a specific mix of office and hotel assets and average occupancy of Office Properties. At December 31, 2006, the maximum borrowing capacity under the credit facility was $366.8 million. The outstanding balance excludes letters of credit issued under our credit facility of $9.5 million which reduces our maximum borrowing capacity. The spread to LIBOR on this loan decreases to 150 basis points if we reduce leverage below 45% and it increases to 175 basis points if we exceed 55% leverage.

(20)		In 2005, we completed private offerings of $75.0 million of trust preferred securities through our trust subsidiaries. The securities are callable at no premium after June and July 2010.

(21)		The overall weighted average interest rate does not include the effect of our cash flow hedge agreements. Including the effect of these agreements, the overall weighted average interest rate would have been 7.27%.

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


						Weighted
			Percentage			Average			Weighted Average
(in thousands)	Balance		of Debt (1)			Rate			Maturity
Fixed Rate Debt	$	1,529,150		66.6	%		7.27	%	2.8 years
Variable Rate Debt		767,208		33.4			7.32		3.7 years

Total Debt	$	2,296,358		100.0	%		7.29	% (2)	3.1 years


(1)		Balance excludes hedges. The percentages for fixed rate debt and variable rate debt, including the $287.6 million of hedged variable rate debt, are 79% and 21%, respectively.

(2)		Including the effect of hedge arrangements, the overall weighted average interest rate would have been 7.27%.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Listed below are the aggregate principal payments by year required as of December 31, 2006, under our indebtedness. Scheduled principal installments and amounts due at maturity are included.


	Secured		Defeased
(in thousands)	Debt		Debt		Unsecured Debt		Total (1)
2007	$	399,719	$	100,279	$	250,000	$	749,998
2008		234,290		289		118,000		352,579
2009		280,489		320		375,000		655,809
2010		134,043		6,337		-		140,380
2011		181,120		-		-		181,120
Thereafter		139,151		-		77,321		216,472

	$	1,368,812	$	107,225	$	820,321	$	2,296,358


(1)		Based on contractual maturity and does not include extension options on Wells Fargo Bank Loan, Societe Generale Loan, KeyBank I Construction Loan, California Bank & Trust Loan, US Bank I Loan, Morgan Stanley II Loan, GACC Note or Goldman Sachs Loan.

We are generally obligated by our debt agreements to comply with financial covenants, affirmative covenants and negative covenants, or some combination of these types of covenants. Failure to comply with covenants generally will result in an event of default under that debt instrument. Any uncured or unwaived events of default under our loans can trigger an increase in interest rates, an acceleration of payment on the loan in default, and for our secured debt, foreclosure on the property securing the debt. In addition, a default by us or any of our subsidiaries with respect to any indebtedness in excess of $5.0 million generally will result in a default under the Credit Facility, the 2007 Notes, 2009 Notes, KeyBank I Loan, Morgan Stanley II Loan, Goldman Sachs Loan, Societe Generale I Construction Loan and KeyBank II Loan after the notice and cure periods for the other indebtedness have passed. As of December 31, 2006, no event of default had occurred. Our secured debt facilities generally prohibit loan prepayment for an initial period, allow prepayment with a penalty during a following specified period and allow prepayment without penalty after the expiration of that period. During the year ended December 31, 2006, there were no circumstances that required prepayment penalties or increased collateral related to our existing debt.

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

Warehouse Facilities

On March 24, 2006, we entered into a Master Repurchase Agreement with Morgan Stanley Bank. Pursuant to the agreement, up to 70% of the value of the mezzanine loans that we make can be financed up to a maximum principal amount of $100.0 million. The investments can be financed through March 2008, after which four equal payments are due quarterly. The loan has a provision for a one-year extension which is subject to Morgan Stanley's approval. The interest rate and advance percentage associated with each draw is dependent on the loan-to-value ratio at the underlying property(ies) and the purchase rate as specified in the Master Repurchase Agreement. The loan bears interest ranging from LIBOR plus 140 basis points to 230 basis points and is secured by the note receivable associated with each advance. At December 31, 2006, approximately $22.3 million with a weighted average interest rate of 7.37% was outstanding under this agreement.

On May 5, 2006, we entered into a Master Repurchase Agreement with Goldman Sachs Mortgage Company. Pursuant to the agreement, up to 80% of the value of the loans that we make can be financed up to a maximum principal amount of $100.0 million. The investments can be financed through May 2009, at which time full payment is due. The financing and payment can be extended one year subject to Goldman Sachs' approval. If extended, payments will be made in twelve monthly installments during the extension period. The interest rate and advance percentage associated with each draw is dependent on the loan-to-value ratio at the underlying property(ies) and the purchase rate as specified in the Master Repurchase Agreement. The loan bears interest ranging from LIBOR plus 110 basis points to 250 basis points and is

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

secured by the note receivable associated with each advance. At December 31, 2006, approximately $10.0 million with an interest rate of 6.72% was outstanding under this agreement.

13. INTEREST RATE SWAPS AND CAPS

We use derivative financial instruments to convert a portion of our variable rate debt to fixed rate debt and to manage the fixed to variable rate debt ratio. As of December 31, 2006, we had interest rate swaps and interest rate caps designated as cash flow hedges, which are accounted for in conformity with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities , as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133 and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities.

The following table shows information regarding the fair value of our interest rate swaps and caps designated as cash flow hedge agreements, which are included in the "Other assets, net" and "Accounts payable, accrued expenses and other liabilities" line items in the Consolidated Balance Sheets, and additional interest expense and unrealized gains (losses) recorded in Accumulated other comprehensive (loss) income, or OCI, for the year ended December 31, 2006.


										Additional			Change in
	Notional		Maturity		Reference			Fair Market		(Reduction) Interest			Unrealized Gains
Effective Date	Amount		Date		Rate			Value		Expense			(Losses) in OCI
(in thousands)
*Interest rate swaps*
2/15/03	$	100,000		2/15/06		3.26	%	$	-	$	(147	)	$	(138	)
2/15/03		100,000		2/15/06		3.25	%		-		(148	)		(139	)
9/02/03		200,000		9/01/06		3.72	%		-		(1,603	)		(1,264	)
1/17/05		-		10/16/06		3.74	%		-		-	(1)		(205	)
4/25/06		79,761		12/26/07		5.20	%		3		-	(1)		3
9/29/06		200,000		9/4/07		5.20	%		56		(66	)		56

								$	59	$	(1,964	)	$	(1,687	)

*Interest rate caps*
1/07/05	$	7,800		2/01/08		6.00	%		-		4			(1	)

								$	59	$	(1,960	)	$	(1,688	)


(1)		A portion of the interest on the debt that this swap is hedging is capitalized.

We have designated our cash flow hedge agreements as cash flow hedges of LIBOR-based monthly interest payments on a designated pool of variable rate LIBOR indexed debt. The interest rate swaps have been and are expected to remain highly effective. Changes in the fair value of these highly effective hedging instruments are recorded in OCI. The effective portion that has been deferred in OCI will be recognized in earnings as interest expense when the hedged items impact earnings. If an interest rate swap falls outside 80%-125% effectiveness for a quarter, all changes in the fair value of the hedge for the quarter will be recognized in earnings during the current period. If it is determined based on prospective testing that it is no longer likely a hedge will be highly effective on a prospective basis, the hedge will no longer be designated as a cash flow hedge in conformity with SFAS No. 133, as amended. An immaterial amount of hedge ineffectiveness on the designated hedges, due to index and reset date mismatches between the hedges and hedged debt, was recognized in other income and expense during 2006.

Over the next 12 months, an estimated $0.1 million of Accumulated OCI will be recognized as a reduction to interest expense related to the effective portions of the cash flow hedge agreements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Undesignated Caps

In connection with the GACC Note, we entered into LIBOR interest rate caps struck at 6.00% on a notional amount corresponding to each loan, for a total of $165.0 million through June 2008. Simultaneously, we sold a LIBOR interest rate cap with the same terms. Since these instruments do not reduce our net interest rate exposure, they were not designated as hedges and changes to their respective fair values are charged to earnings as the charges occur. As the significant terms of these arrangements are the same, the effects of a revaluation of these instruments are expected to offset each other.

14. RENTALS UNDER OPERATING LEASES

As of December 31, 2006, we received rental income from the lessees of 55 consolidated Office Properties and one Resort/Hotel Property under operating leases.

We lease one Resort/Hotel Property for which we recognize rental income under an operating lease that provides for percentage rent. For the years ended December 31, 2006, 2005 and 2004, the percentage rent amounts for the one Resort/Hotel Property were $6.6 million, $5.5 million and $4.7 million, respectively.

In general, Office Property leases provide for the payment of fixed base rents and the reimbursement by the tenant to us of annual increases in operating expenses in excess of base year operating expenses. The excess operating expense amounts totaled $48.4 million, $46.9 million and $66.0 million, for the years ended December 31, 2006, 2005 and 2004, respectively. These excess operating expenses are generally payable in equal installments throughout the year, based on estimated increases, with any differences adjusted at year end based upon actual expenses.

For non-cancelable operating leases for consolidated Office Properties as of December 31, 2006, future minimum rentals (base rents) during the next five years and thereafter (excluding tenant reimbursements of operating expenses for Office Properties) are as follows:


	Future
	Minimum
(in millions)	Rentals
2007	$	304.5
2008		242.4
2009		218.0
2010		193.6
2011		166.3
Thereafter		432.3

	$	1,557.1

See Note 2, "Summary of Significant Accounting Policies," for discussion of revenue recognition.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. COMMITMENTS, CONTINGENCIES AND LITIGATION

Lease Commitments

We had 16 wholly-owned Office Properties at December 31, 2006, located on land that is subject to long-term ground leases, which expire between 2015 and 2080. Lease expense associated with ground leases during each of the three years ended December 31, 2006, 2005 and 2004 was $2.8 million, $2.7 million and $4.2 million, respectively, recognized on a straight-line basis. Future minimum lease payments due under such leases as of December 31, 2006, are as follows:


	Future Minimum
(in millions)	Lease Payments
2007	$	1.9
2008		1.9
2009		1.9
2010		2.0
2011		2.0
Thereafter		137.3

	$	147.0

Guarantee Commitments

The FASB issued Interpretation 45, Guarantors' Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45), requiring a guarantor to disclose its guarantees. For our guarantees on indebtedness, no triggering events or conditions are anticipated to occur that would require payment under the guarantees and management believes the assets associated with the loans that are guaranteed are sufficient to cover the maximum potential amount of future payments and therefore, would not require us to provide additional collateral to support the guarantees. We recorded a liability for the Fresh Choice and U.S. Bank National Association guarantees in an amount not significant to our operations. We have not recorded a liability associated with the other guarantees as they were entered into prior to the adoption of FIN 45. Our guarantees in place as of December 31, 2006, are listed in the table below.


	Guaranteed		Maximum
	Amount		Guaranteed
(in thousands)	Outstanding at		Amount at
Debtor	December 31, 2006		December 31, 2006
CRDI - U.S. Bank National Association (1)	$	14,346	$	20,393
CRDI - Eagle Ranch Metropolitan District - Letter of Credit (2)		7,840		7,840
Fresh Choice, LLC (3)		1,000		1,000

Total Guarantees	$	23,186	$	29,233


(1)		We entered into a Payment and Completion Guaranty with U.S. Bank National Association for the repayment of bonds that were issued by the Northstar Community Housing Corporation to fund construction of an employee housing project. The initial guaranty of $20.4 million decreases to $5.1 million once construction is complete and certain conditions are met and decreases further and is eventually released as certain debt service coverage ratios are achieved.

(2)		We provide a $7.8 million letter of credit to support the payment of interest and principal of the Eagle Ranch Metropolitan District Revenue Development Bonds.

(3)		We provide a guarantee of up to $1.0 million to GE Capital Franchise Financing Corporation as part of Fresh Choice's bankruptcy reorganization.

Other Commitments

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

See Note 9, "Temperature-Controlled Logistics," for a description of our commitments related to our ownership of common shares in AmeriCold and the termination of our partnership with Vornado.

Contingencies

Environmental Matters

All of the Properties have been subjected to Phase I environmental assessments, and some Properties have been subjected to Phase II soil and ground water sampling as part of the Phase I assessments. Such assessments have not revealed, nor is management aware of, any environmental liabilities that management believes would have a material adverse effect on our financial position or results of operations.

We own several Office Properties that contain asbestos. For certain of these Office Properties, we estimated the fair value of the conditional asset retirement obligation in accordance with FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations , or FIN 47, and determined a conditional asset retirement obligation was not required. With respect to certain other Office Properties, we have not recorded any related asset retirement obligation, as the fair value of the liability cannot be reasonably estimated, due to uncertainties in the timing and manner of settlement of these obligations.

Litigation

We are involved from time to time in various claims and legal actions in the ordinary course of business. Management does not believe that the impact of such matters will have a material adverse effect on our financial condition or results of operations when resolved.

16. STOCK AND UNIT BASED COMPENSATION

Stock and Unit Option Plans

Effective January 1, 2006, we adopted SFAS No. 123R using the modified prospective application method which requires, among other things, that we recognize compensation cost for all options outstanding at January 1, 2006, for which the requisite service has not yet been rendered. Effective January 1, 2003, we adopted the fair value expense recognition provisions of SFAS No. 123 on a prospective basis as permitted by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure , which requires that the fair value of stock options at the date of grant be amortized ratably into expense over the appropriate vesting period. The compensation expense recognized for stock and unit options for the year ended December 31, 2006, was approximately $1.7 million, of which $1.4 million relates to additional expense recognized as a result of the adoption of SFAS No. 123R. For the years ended December 31, 2005 and 2004, compensation expense recognized for stock and unit options was approximately $0.2 million and $0.1 million, respectively.

The weighted average grant-date fair value of options granted during the years ended December 31, 2006, 2005 and 2004 was $1.83, $1.12 and $1.05, respectively. The total intrinsic value of options exercised during the years ended December 31, 2006, 2005 and 2004, was $3.3 million, $2.4 million and $0.2 million, respectively. The fair value of each option is estimated at the date of grant using the Black-Scholes option-pricing model based on the expected weighted average assumptions in the following table. We estimated the expected term of options granted during the quarter by adding the vesting term plus the contractual term divided by two. We estimated stock price volatility using historical volatility data. The risk-free rate for the periods within the contractual life is based on the U.S. Treasury yield curve in effect at the time of grant.


	For the years ended
	December 31,
	2006			2005			2004
Expected term	6.5 years			10 years			10 years
Risk-free rate		4.6	%		4.2	%		4.3	%
Expected dividends		7.4	%		8.8	%		8.8	%
Expected volatility		22.2	%		25.0	%		24.9	%

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As of December 31, 2006, there was approximately $0.8 million of total unrecognized compensation cost related to nonvested stock and unit options. That cost is expected to be recognized over a weighted average period of 1.2 years.

With respect to our stock options which were granted prior to 2003 and prior to the adoption of SFAS No. 123, we accounted for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25, and related Interpretations. Had compensation cost been determined based on the fair value at the grant dates for awards under the plans consistent with SFAS No. 123R, our net loss and loss per share would have been:


	For the years ended December 31,
(in thousands, except per share amounts)	2005 (Restated)			2004 (Restated)
Net income available to common shareholders, as reported	$	69,547		$	147,061
Add: stock-based employee compensation expense included in reported net income		13,548			2,340
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of minority interest		(15,153	)		(4,270	)

Pro forma net income available to common shareholders	$	67,942		$	145,131
Earnings per share:
Basic - as reported	$	0.69		$	1.49
Basic - pro forma	$	0.68		$	1.47
Diluted - as reported	$	0.69		$	1.48
Diluted - pro forma	$	0.68		$	1.46

Crescent has two stock incentive plans, the 1995 Stock Incentive Plan and the 1994 Stock Incentive Plan. The 1995 Plan and the 1994 Plan expired on June 11, 2005, and March 31, 2004, respectively. The Operating Partnership has two unit incentive plans, the 1995 Unit Incentive Plan and the 1996 Unit Incentive Plan. The 1995 Unit Plan expired on June 30, 2005, and the 1996 Unit Plan expired on July 16, 2006. The Operating Partnership has also granted unit options under the Operating Partnership agreement. These plans are collectively referred to as The Plans. Under The Plans, options were granted at a price not less than the market value of the shares on the date of grant, generally vest over five years of continuous service and expire ten years from the date of grant. We have a policy of issuing new shares to satisfy share option exercises under shareholder approved plans.

On February 19, 2002, John Goff, Vice-Chairman of our Board of Trust Managers and our Chief Executive Officer, was granted the right to earn 300,000 restricted shares under the 1995 Plan. These shares vest at 100,000 shares per year on February 19, 2005, February 19, 2006, and February 19, 2007. Compensation expense is being recognized on a straight-line basis. For each of the years ended December 31, 2006, 2005 and 2004, approximately $1.1 million, $1.1 million and $1.9 million was recorded as compensation expense, respectively related to this grant. The grant-date fair value of the restricted shares which vested in each of the years ended December 31, 2006 and 2005 was $17.51 per restricted share for a total of $1.8 million.

A summary of the status of The Plans as of December 31, 2006, and changes during the year then ended is presented in the table below.


	Shares					Wtd. Avg.
	Underlying			Wtd. Avg.		Years
	Stock and			Exercise		Remaining		Aggregate
	Unit			Price Per		Contractual		Intrinsic
(in thousands, except per share amounts)	Options			Share		Term		Value
Outstanding at January 1, 2006		12,363		$	18
Granted		35			20
Exercised		(1,314	)		18
Forfeited		(17	)		17
Expired		(185	)		22

Outstanding at December 31, 2006		10,882		$	19		4.6	$	22,974


Exercisable at December 31, 2006		9,224		$	19		4.3	$	19,275

A summary of the status of nonvested stock and unit options (shown in common share equivalents) as of December 31, 2006, is presented in the table below:


	Shares Underlying			Weighted
	Stock and Unit			Average Grant-
(in thousands, except per share amounts)	Options			Date Fair Value
Nonvested at January 1, 2006		3,092		$	1.20
Granted		35			1.97
Vested		(1,452	)		1.27
Forfeited		(17	)		1.05

Nonvested at December 31, 2006		1,658		$	1.15

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2004 and 2005 Unit Plans

The 2004 Unit Plan provides for the issuance by the Operating Partnership of up to 1,802,500 restricted units (3,605,000 common share equivalents) to our officers. Restricted units granted under the 2004 Unit Plan vest in 20% increments when the average closing price of Crescent common shares on the New York Stock Exchange for the immediately preceding 40 trading days equals or exceeds $19.00, $20.00, $21.00, $22.50 and $24.00. The 2005 Unit Plan provides for the issuance by the Operating Partnership of up to 1,275,000 restricted units (2,550,000 common share equivalents). Restricted units granted under the 2005 Unit Plan vest in 20% increments when the average closing price of Crescent Common Shares on the New York Stock Exchange for the immediately preceding 40 trading days equals or exceeds $21.00, $22.50, $24.00, $25.50 and $27.00. Any restricted unit that is not vested on or prior to June 30, 2010, will be forfeited. Each vested restricted unit will be exchangeable, beginning on the second anniversary of the date of grant and subject to a six-month hold period following vesting, for cash equal to the value of two Crescent common shares based on the closing price of the common shares on the date of exchange, unless, prior to the date of the exchange, Crescent requests and obtains shareholder approval authorizing it, at its discretion, to deliver instead two common shares in exchange for each such restricted unit. Regular quarterly distributions accrue on unvested restricted units and are payable upon vesting of the restricted units.

We obtained a third-party valuation to determine the fair value of the restricted units issued under the 2004 and 2005 Unit Plans. The third-party used a lattice-based valuation model which incorporated a range of assumptions for inputs including the expected weighted average assumptions in the following table.


	For the years ended
	December 31,
	2006		2005		2004
Expected term		1.5 to 5.2 years		1.5 to 5.5 years		1.5 to 5.5 years
Risk-free rate		3.8%		3.8%		3.4%
Expected dividends		9.0%		9.0%		9.1%
Expected volatility		23.0%		23.1%		25.0%

The weighted average grant-date fair value of the restricted units granted during the years ended December 31, 2006, 2005 and 2004, was $7.31, $6.19 and $7.05, respectively, which is being amortized on a straight-line basis over the related service period, except for when performance targets are achieved. For the years ended December 31, 2006, 2005 and 2004, approximately $10.6 million, $12.3 million and $0.4 million was recorded as compensation costs related to the 2004 and 2005 Unit Plans, respectively, of which approximately $1.0 million and $1.2 million was capitalized in 2006 and 2005, respectively.

A summary of the status of nonvested restricted units (shown in common share equivalents) is presented below:


				Weighted-
	Shares			Average
(share amounts in thousands)	Underlying			Grant-Date
Nonvested Units	Units			Fair Value

Nonvested at January 1, 2006		4,294		$	6.54
Granted		25			7.31
Vested		(1,148	)		6.66
Forfeited		(10	)		7.52

Nonvested at December 31, 2006		3,161		$	6.49

As of December 31, 2006, there was approximately $14.7 million of total unrecognized compensation cost related to nonvested units. That cost is expected to be recognized over a weighted average period of 2.1 years.

As of December 31, 2006, the first three performance targets under the 2004 Unit Plan and the first performance target under the 2005 Unit Plan have been achieved. Upon achieving these targets, 1,292,500 units (2,585,000 common share equivalents) vested. Of this amount, 1,002,250 units (2,004,500 common share equivalents) were redeemable for cash in 2006, 287,750 units (575,500 common share equivalents) will be redeemable in 2007 and 2,500 units (5,000 common share equivalents) will be redeemable in 2008 unless, prior to the date of exchange, Crescent obtains shareholder approval authorizing it, in its discretion, to deliver instead two common shares for each such restricted unit. As of December 31, 2006, 98,875 units (197,750 common share equivalents) have been redeemed for cash. The total grant-date fair value of units vested during the years ended December 31, 2006 and 2005 was $7.6 million and $10.1 million, respectively.

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17. MINORITY INTERESTS

Minority interests in the Operating Partnership represent the proportionate share of the equity in the Operating Partnership of limited partners other than Crescent. The ownership share of limited partners other than Crescent is evidenced by Operating Partnership units. Of the total outstanding amount of Operating Partnership units, 1,189,125 vested restricted units (2,378,250 common share equivalents) are subject to redemption for cash as part of the 2004 Unit Plan. See Note 16, "Stock and Unit Based Compensation," for a description of the plan. The Operating Partnership pays a regular quarterly distribution to the holders of Operating Partnership units.

Each Operating Partnership unit generally may be exchanged for either two common shares of Crescent or, at the election of Crescent, cash equal to the fair market value of two common shares at the time of the exchange. When a unitholder exchanges a unit, Crescent's percentage interest in the Operating Partnership increases. During the year ended December 31, 2006, there were 459,793 units exchanged for 919,586 common shares of Crescent.

Minority interests in real estate partnerships represent joint venture or preferred equity partners' proportionate share of the equity in certain real estate partnerships. We hold a controlling interest in the real estate partnerships and consolidate the real estate partnerships into our financial statements. Income in the real estate partnerships is allocated to minority interests based on weighted average percentage ownership during the year.

The following table summarizes minority interests as of December 31, 2006 and 2005:


			2005
(in thousands)	2006		(Restated)
Limited partners in the Operating Partnership	$	23,461	$	70,178
Limited partners in the Operating Partnership - Units subject to redemption at fair market value		46,970		28,481
Limited partners in the Operating Partnership - Unvested units subject to redemption		5,434		-
Development joint venture partners - Resort Residential Development Segment		32,399		31,546
Joint venture partners - Office Segment		11,543		15,354
Joint venture partners - Resort/Hotel Segment		5,368		5,853
Other		528		127

	$	125,703	$	151,539

The following table summarizes the minority interests' share of income from continuing operations for the years ended December 31, 2006, 2005 and 2004:


				2005			2004
(in thousands)	2006			(Restated)			(Restated)
Limited partners in the Operating Partnership	$	(2,358	)	$	(4,048	)	$	24,866
Development joint venture partners - Resort Residential Development Segment		5,377			15,545			9,201
Joint venture partners - Office Segment		(632	)		(138	)		(163	)
Joint venture partners - Resort/Hotel Segment		(126	)		(661	)		(1,131	)
Other		400			369			(67	)

	$	2,661		$	11,067		$	32,706

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18. SHAREHOLDERS' EQUITY

Share Repurchase Program

We commenced our Share Repurchase Program in March 2000. On October 15, 2001, our Board of Trust Managers increased from $500.0 million to $800.0 million the amount of outstanding common shares that can be repurchased from time to time in the open market or through privately negotiated transactions. There were no share repurchases under the program for the years ended December 31, 2006 or 2005. As of December 31, 2006, we had repurchased 20,256,423 common shares under the share repurchase program, at an aggregate cost of approximately $386.9 million, resulting in an average repurchase price of $19.10 per common share. All repurchased shares were recorded as treasury shares.

Distributions

The distributions to common shareholders and unitholders paid during the years ended December 31, 2006, 2005 and 2004, were $184.1 million, $178.9 million, and $175.6 million, respectively. These distributions represented an annualized distribution of $1.50 per common share and equivalent unit for the years ended December 31, 2006, 2005, and 2004. On February 15, 2007, we distributed $45.8 million to common shareholders and unitholders.

Distributions to Series A Preferred shareholders for each of the years ended December 31, 2006, 2005 and 2004, was $24.0 million. The distributions per Series A Preferred share were $1.6875 per preferred share annualized for each of the three years. On February 15, 2007, we distributed $6.0 million to Series A Preferred shareholders. The Series A Preferred Shares are convertible at any time, in whole or in part, at the option of the holders into common shares at a conversion price of $40.86 per common share (equivalent to a conversion rate of 0.6119 common shares per Series A Preferred Share). The Series A Preferred Shares, on or after February 28, 2003, may be redeemed, in whole or in part, at our option. We pay distributions on the Series A Preferred Shares in an amount totaling $1.6875 per share each year (equivalent to 6.75% of the $25.00 liquidation preference per share), payable on a quarterly basis.

Distributions to Series B Preferred shareholders for each of the years ended December 31, 2006, 2005 and 2004, were $8.1 million. The distributions per Series B Preferred share were $2.3750 per preferred share annualized for each of the three years. On February 16, 2007, we distributed $2.0 million to Series B Preferred shareholders. The Series B Preferred Shares are redeemable on or after May 17, 2007, in whole or in part, at our option. We pay distributions on the Series B Preferred Shares in an amount totaling $2.375 per share each year (equivalent to 9.50% of the $25.00 liquidation preference per share), payable on a quarterly basis.

19. INCOME TAXES

Taxable Consolidated Entities

Deferred income taxes reflect the net tax effect of temporary differences between the financial reporting carrying amounts of assets and liabilities of the taxable consolidated entities and the income tax basis. For the year ended December 31, 2006, the taxable consolidated entities were comprised of our taxable REIT subsidiaries.

We intend to maintain our qualification as a REIT under the Code. As a REIT, we generally will not be subject to federal corporate income taxes as long as we satisfy certain technical requirements of the Code, including the requirement to distribute 90% of our REIT taxable income to our shareholders. Accordingly, we do not believe that we will be liable for current income taxes on our REIT taxable income at the federal level or in most of the states in which we operate. We consolidate certain taxable REIT subsidiaries, which are subject to federal and state income tax.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Significant components of our deferred tax liabilities and assets at December 31, 2006 and 2005 from continuing operations are as follows:


				December 31,
	December 31,			2005
(in thousands)	2006			(Restated)
Deferred tax liabilities:
Resort Residential Development costs	$	(7,108	)	$	(27,234	)
Minority interests		(4,661	)		(4,834	)
Land value adjustments		(10,604	)		(11,273	)
Depreciable and amortizable assets		(722	)		-
Other		(3,629	)		-

Total deferred tax liabilities:	$	(26,724	)	$	(43,341	)


Deferred tax assets:
Deferred revenue	$	23,754		$	29,871
Hotel lease acquisition costs		-			85
Depreciable and amortizable assets		-			1,650
Net operating loss carryforwards		7,515			10,784
Impairment of assets		1,464			1,464
Related party interest expense not currently deductible		6,107			8,999
Other		-			2,617

Total deferred tax assets	$	38,840		$	55,470

Valuation allowance for deferred tax assets		(8,842	)		(9,688	)

Deferred tax assets, net of valuation allowance	$	29,998		$	45,782


Net deferred tax assets	$	3,274		$	2,441

In addition to the net deferred tax assets of approximately $3.3 million and $2.4 million at December 31, 2006 and 2005, respectively, we had a current tax payable of $0.6 million on our Consolidated Balance Sheets at December 31, 2006. At December 31, 2005, we had a current income tax receivable of approximately $8.3 million.

SFAS No. 109, Accounting for Income Taxes , requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, management determined that an $8.8 million and a $9.7 million valuation allowance at December 31, 2006 and 2005, respectively were necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. When assessing the adequacy of the valuation allowance, management considered both anticipated reversals of deferred tax liabilities and other potential sources of taxable income in future years. We have available state and federal net operating loss carryforwards of approximately $7.5 million at December 31, 2006, arising from operations of the taxable REIT subsidiaries. The net operating loss carryforwards will expire between 2007 and 2026.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated (loss) income from continuing operations subject to tax was $(4.1) million, $22.7 million and $(31.4) million for the years ended December 31, 2006, 2005 and 2004, respectively. The reconciliation of (i) income tax attributable to consolidated (loss) income subject to tax computed at the U.S. statutory rate to (ii) income tax benefit (expense) is shown below:


							Year ended						Year ended
	Year ended						December 31, 2005						December 31, 2004
	December 31, 2006						(Restated)						(Restated)
(in thousands)	Amount			Percent			Amount			Percent			Amount			Percent
Tax at U.S. statutory rates on consolidated income (loss) subject to tax	$	1,439			35.0	%	$	(7,954	)		(35.0	)%	$	10,982			35.0	%
State income tax, net of federal income tax benefit		106			2.6			(980	)		(4.3	)		1,254			4.0
Disallowed expenses		(508	)		(12.4	)		-			-			-			-
Fair market value charitable contribution deduction		1,732			42.1			-			-			-			-
Other		(139	)		(3.4	)		41			0.2			701			2.2
Change in valuation allowance		845			20.6			431			1.9			(706	)		(2.2	)

	$	3,475			84.5	%	$	(8,462	)		(37.2	)%	$	12,231			39.0	%


			2005			2004
(in thousands)	2006		(Restated)			(Restated)
Current tax benefit (expense)	$	2,642	$	7,104		$	381
Deferred tax benefit (expense)		833		(15,566	)		11,850

Federal income tax benefit (expense)	$	3,475	$	(8,462	)	$	12,231

For the year ended December 31, 2006, our income tax benefit from continuing operations was $3.5 million. Our $3.5 million income tax benefit consists primarily of $7.4 million for the Resort Residential Development Segment and $3.9 million for the Resort/Hotel Segment; partially offset by income tax expense of $(4.1) million for the other taxable REIT subsidiaries and $(3.7) million for the Office Segment. Additionally, tax benefit (expense) amounts of $(10.6) million, $0 million and $0.3 million are included in the gain on sale of real estate from discontinued operations and (loss) income from discontinued operations, net of minority interest and taxes for the years ended December 31, 2006, 2005 and 2004, respectively.

20. RELATED PARTY TRANSACTIONS

Loans to Employees and Trust Managers of the Company for Exercise of Stock Options and Unit Options

As of December 31, 2006, we had approximately $37.9 million in loan balances outstanding reflected in the "Additional paid-in capital" line item in the Consolidated Balance Sheets, inclusive of current interest accrued of approximately $0.2 million, to certain of our employees and trust managers on a recourse basis under stock and unit incentive plans pursuant to an agreement approved by our Board of Trust Managers and its Executive Compensation Committee. The employees and the trust managers used the loan proceeds to acquire common shares of Crescent pursuant to the exercise of vested stock and unit options. The loans bear interest at 2.52% per year (based on the Applicable Federal Rate at the time the interest rates on the notes were fixed), payable quarterly, mature on July 28, 2012, and may be repaid in full or in part at any time without premium or penalty. Mr. Goff had a loan representing $26.4 million of the $37.9 million total outstanding loans at December 31, 2006. No conditions exist at December 31, 2006 which would cause any of the loans to be in default.

Other

We have a policy which allows employees to purchase our residential properties marketed and sold by our subsidiaries in the ordinary course of business. This policy requires the individual to purchase the property for personal use or investment and requires the property to be held for at least two years. In addition this policy requires, among other things, that the prices paid by affiliates must be equivalent to the prices paid by unaffiliated third parties for similar properties in the same development and that the other terms and conditions of the transaction must be at least as beneficial to us as the terms and conditions with respect to the other properties in the same development. In 2005, two executive

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

officers entered into binding contracts to purchase three condominium units and one lot at three of our resort residential development projects. The contracts for one of the condominiums and the lot closed in 2005.

21. QUARTERLY FINANCIAL INFORMATION (unaudited)


	For the 2006 Quarter Ended
	March 31,			June 30,			September 30,
(in thousands)	(Restated)			(Restated)			(Restated)			December 31,

Total Property revenues	$	238,603		$	195,004		$	204,218		$	290,871
Total Property expenses		172,197			123,687			139,921			222,219
(Loss) income from continuing operations before minority interests and income taxes		(4,493	)		(832	)		9,554			14,635
Minority interests		1,741	(1)		178	(1)		(1,823	) (1)		(2,757	) (1)
Income tax (expense) benefit		(1,143	)		5,291			3,124			(3,797	)
(Loss) income from discontinued operations, net of minority interests and taxes		(30	)		(37	)		(185	)		(250	)
Impairment charges related to real estate assets from discontinued operations, net of minority interests		-			-			(105	)		-
Gain (loss) on sale of real estate from discontinued operations, net of minority interests and taxes		96			(8	)		50			14,224
Net (loss) income	$	(3,829	)	$	4,592		$	10,615		$	22,055	(2)

Per share data:
Basic Earnings Per Common Share
-(Loss) income available to common shareholders before discontinued operations and cumulative effect of a change in accounting principle	$	(0.12	)	$	(0.03	)	$	0.03		$	-
- (Loss) income from discontinued operations, net of minority interests and taxes		-			-			-			-
- Impairment charges related to real estate assets from discontinued operations, net of minority interests		-			-			-			-
- Gain (loss) on sale of real estate from discontinued operations, net of minority interests and taxes		-			-			-			0.14
- Net (loss) income available to common shareholders - Basic	$	(0.12	)	$	(0.03	)	$	0.03		$	0.14

Diluted Earnings Per Common Share
-(Loss) income available to common shareholders before discontinued operations and cumulative effect of a change in accounting principle	$	(0.12	)	$	(0.03	)	$	0.03		$	-
- (Loss) income from discontinued operations, net of minority interests and taxes		-			-			-			-
- Impairment charges related to real estate assets from discontinued operations, net of minority interests		-			-			-			-
- Gain (loss) on sale of real estate from discontinued operations, net of minority interests and taxes		-			-			-			0.14
- Net (loss) income available to common shareholders - Diluted	$	(0.12	)	$	(0.03	)	$	0.03		$	0.14


(1)		Includes adjustments associated with the Calculation of Minority Interest restatement of $1.3 million for each of the first, second and third quarters of 2006, and $1.2 million for the fourth quarter of 2006. See Note 1, Organization and Basis of Presentation, for further description of this restatement.

(2)		Includes $2.7 million associated with prior year adjustments at AmeriCold, an equity investee in which we hold a 31.7% interest.

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	For the 2005 Quarter Ended
	March 31,			June 30,			September 30,			December 31,
(in thousands)	(Restated)			(Restated)			(Restated)			(Restated)

Total Property revenues	$	183,224		$	208,414		$	210,471		$	415,991
Total Property expenses		126,986			144,697			145,323			322,255
(Loss) income from continuing operations before minority interests and income taxes		(6,210	)		(6,567	)		(12,236	)		53,840	(1)
Minority interests		1,719	(2)		182	(2)		1,852	(2)		(14,820	) (2)
Income tax benefit (expense)		1,216			326			755			(10,759	)
Income (loss) from discontinued operations, net of minority interests		1,683			1,710			813			(200	)
Impairment charges related to real estate assets from discontinued operations, net of minority interests		-			-			(64	)		(889	)
Gain (loss) on real estate from discontinued operations, net of minority interests		1,504			-			89,735			(2,005	) (1)
Net (loss) income	$	(88	)	$	(4,349	)	$	80,855		$	25,167

Per share data:
Basic Earnings Per Common Share
-(Loss) income available to common shareholders before discontinued operations and cumulative effect of a change in accounting principle	$	(0.11	)	$	(0.14	)	$	(0.18	)	$	0.20
- Income (loss) from discontinued operations, net of minority interests		0.02			0.02			0.01			-
- Impairment charges related to real estate assets from discontinued operations, net of minority interests		-			-			-			(0.01	)
- Gain (loss) on real estate from discontinued operations, net of minority interests		0.01			-			0.89			(0.02	)
- Net (loss) income available to common shareholders - Basic	$	(0.08	)	$	(0.12	)	$	0.72		$	0.17

Diluted Earnings Per Common Share
-(Loss) income available to common shareholders before discontinued operations and cumulative effect of a change in accounting principle	$	(0.11	)	$	(0.14	)	$	(0.18	)	$	0.20
- Income (loss) from discontinued operations, net of minority interests		0.02			0.02			0.01			-
- Impairment charges related to real estate assets from discontinued operations, net of minority interests		-			-			-			(0.01	)
- Gain (loss) on real estate from discontinued operations, net of minority interests		0.01			-			0.89			(0.02	)
- Net (loss) income available to common shareholders - Diluted	$	(0.08	)	$	(0.12	)	$	0.72		$	0.17


(1)		Includes $4.9 million of expense related to the write-off of capitalized internal leasing costs related to prior year office dispositions and the joint venture of properties.

(2)		Includes adjustments associated with the Calculation of Minority Interest restatement of $1.2 million for each of the first, second and third quarter of 2005, and $1.0 million for the fourth quarter of 2005. See Note 1, Organization and Basis of Presentation, for further description of this restatement.

•		pertain to the maintenance of records that accurately and fairly reflect the transactions and dispositions of our assets in reasonable detail;

•		provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are made only in accordance with the authorization procedures we have established; and

•		provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of any of our assets in circumstances that could have a material adverse effect on our financial statements.


(a)(1)		Financial Statements

		Report of Independent Registered Public Accounting Firm

		Crescent Real Estate Equities Company Consolidated Balance Sheets at December 31, 2006 and 2005.

		Crescent Real Estate Equities Company Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004.

		Crescent Real Estate Equities Company Consolidated Statements of Shareholders' Equity for the years ended December 31, 2006, 2005 and 2004.

		Crescent Real Estate Equities Company Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004.

		Crescent Real Estate Equities Company Notes to Consolidated Financial Statements.

(a)(2)		Financial Statement Schedules and Financial Statements of Subsidiaries Not Consolidated and Fifty-Percent-or-Less-Owned Persons

		Financial Statement Schedules

		Schedule III - Crescent Real Estate Equities Company Consolidated Real Estate Investments and Accumulated Depreciation at December 31, 2006.

		Schedule IV - Crescent Real Estate Equities Company Mortgage Loans on Real Estate Investments at December 31, 2006.

		All other schedules have been omitted either because they are not applicable or because the required information has been disclosed in the Financial Statements and related notes included in the consolidated statements.

		The financial statement schedules and financial statements listed in this Item 15(a)(2) are contained in Item 8. Financial Statements and Supplementary Data.

(a)(3)		Exhibits

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

(b)		Exhibits

		See Item 15(a)(3) above.

(c)		Financial Statement Schedules and Financial Statements of Subsidiaries Not Consolidated and Fifty-Percent-or-Less-Owned Persons

		See Item 15(a)(2) above.


					Costs
					Capitalized			Impairment			Gross Amount Carried at
					Subsequent to			to Carrying			Close of Period
	Initial Costs (1)				Acquisition			Value			12/31/06
					Land, Buildings,			Buildings,					Buildings,											Life on Which
					Improvements,			Improvements,					Improvements,											Depreciation in
					Furniture,			Furniture,					Furniture,											Latest Income
			Buildings and		Fixtures and			Fixtures and					Fixtures and				Accumulated			Date of		Acquisition		Statement Is
Description	Land		Improvements		Equipment			Equipment			Land		Equipment		Total (2)		Depreciation			Construction		Date		Computed
The Citadel, Denver, CO	$	1,803	$	17,259	$	2,246		$	-		$	1,803	$	19,505	$	21,308	$	(14,387	)		1987		1987		(3	)
Carter Burgess Plaza, Fort Worth, TX		1,375		66,649		27,189			-			1,375		93,838		95,213		(47,255	)		1982		1990		(3	)
MacArthur Center I & II, Irving, TX		704		17,247		2,828			-			880		19,899		20,779		(7,402	)		1982/1986		1993		(3	)
125. E. John Carpenter Freeway, Irving, TX		2,200		48,744		9,876			-			2,200		58,620		60,820		(19,882	)		1982		1994		(3	)
Regency Plaza One, Denver, CO		950		31,797		5,932			-			950		37,729		38,679		(11,570	)		1985		1994		(3	)
The Avallon, Austin, TX		475		11,207		12,472			-			1,069		23,085		24,154		(6,254	)		1986		1994		(3	)
Waterside Commons, Irving, TX (4)		3,650		20,135		(22,738	)		(1,047	)		-		-		-		-			1986		1994		(3	)
Denver Marriott City Center, Denver, CO		-		50,364		8,376			-			-		58,740		58,740		(20,018	)		1982		1995		(3	)
707 17th Street, Denver, CO		-		56,593		20,414			-			-		77,007		77,007		(23,022	)		1982		1995		(3	)
Spectrum Center, Dallas, TX		2,000		41,096		20,400			-			2,000		61,496		63,496		(18,137	)		1983		1995		(3	)
Stanford Corporate Centre, Dallas, TX		-		16,493		9,465			(1,200	)		-		24,758		24,758		(9,132	)		1985		1995		(3	)
The Aberdeen, Dallas, TX		850		25,895		3,004			-			850		28,899		29,749		(7,705	)		1986		1995		(3	)
Briargate Office and Research Center, Colorado Springs, CO		2,000		18,044		5,892			-			2,000		23,936		25,936		(6,523	)		1988		1995		(3	)
Park Hyatt Beaver Creek, Avon, CO		10,882		40,789		31,415			-			10,882		72,204		83,086		(15,650	)		1989		1995		(3	)
Sonoma Mission Inn & Spa, Sonoma, CA		10,000		44,922		44,278			-			10,000		89,200		99,200		(22,327	)		1927		1996		(3	)
3333 Lee Parkway, Dallas, TX		1,450		13,177		6,853			-			1,450		20,030		21,480		(5,155	)		1983		1996		(3	)
Greenway I & IA, Richardson, TX		1,701		15,312		3,146			-			1,701		18,458		20,159		(4,748	)		1983		1996		(3	)
Frost Bank Plaza, Austin, TX		-		36,019		6,147			-			-		42,166		42,166		(10,842	)		1984		1996		(3	)
301 Congress Avenue, Austin, TX		2,000		41,735		15,050			-			2,000		56,785		58,785		(15,435	)		1986		1996		(3	)
Greenway Plaza Office Portfolio & Hotel, Houston, TX		29,232		184,765		144,890			-			27,228		331,659		358,887		(109,476	)		1969-1982		1996		(3	)
55 Madison, Denver, CO		1,451		13,253		2,636			-			1,451		15,889		17,340		(4,985	)		1982		1997		(3	)
44 Cook, Denver, CO		1,451		13,253		3,388			-			1,451		16,641		18,092		(4,912	)		1984		1997		(3	)
Greenway II, Richardson, TX		1,823		16,421		6,395			-			1,823		22,816		24,639		(5,742	)		1985		1997		(3	)
Ventana Country Inn, Big Sur, CA		2,782		26,744		7,687			-			2,064		35,149		37,213		(9,902	)		1975-1988		1997		(3	)
Palisades Central I, Dallas, TX		1,300		11,797		2,535			-			1,300		14,332		15,632		(3,812	)		1980/1986		1997		(3	)
Palisades Central II, Dallas, TX		2,100		19,176		5,030			-			2,100		24,206		26,306		(6,804	)		1980/1986		1997		(3	)
Stemmons Place, Dallas, TX		-		37,537		5,935			-			-		43,472		43,472		(11,434	)		1980/1986		1997		(3	)
The Addison, Dallas, TX		1,990		17,998		2,690			-			1,990		20,688		22,678		(5,305	)		1980/1986		1997		(3	)
Sonoma Golf Course, Sonoma, CA		14,956		-		21,595			(4,354	)		15,952		16,245		32,197		(1,715	)		1929		1998		(3	)
Austin Centre, Austin, TX		1,494		36,475		5,499			-			1,494		41,974		43,468		(10,241	)		1986		1998		(3	)
Omni Austin Hotel, Austin, TX		2,409		56,670		3,924			-			2,409		60,594		63,003		(15,821	)		1986		1998		(3	)
Datran Center, Miami, FL		-		71,091		11,765			-			-		82,856		82,856		(19,555	)		1986-1992		1998		(3	)
Avallon Phase II, Austin, TX		1,102		23,401		(11,339	)		-			640		12,524		13,164		(1,748	)		1997		-		(3	)
Plaza Park Garage, Fort Worth, TX		2,032		14,125		613			-			2,032		14,738		16,770		(3,482	)		1998		-		(3	)
Johns Manville Plaza, Denver, CO		9,128		74,937		4,957			-			9,128		79,894		89,022		(9,470	)		1978		2002		(3	)
The Colonnade, Coral Gables, FL		2,600		39,557		1,162			-			2,600		40,719		43,319		(3,738	)		1989		2003		(3	)
Hughes Center, Las Vegas, NV		29,802		178,705		11,009			-			29,822		189,694		219,516		(19,232	)		1986-1999		2003-2004		(3	)
Desert Mountain Development Corp. (7)		120,907		60,487		25,487			-			128,230		78,651		206,881		(53,238	)		-		2002		(3	)
Crescent Resort Development, Inc. (7)		367,647		23,357		288,731			-			604,747		74,988		679,735		(11,996	)		-		2002		(3	)
Mira Vista Development Company (7)		3,059		2,234		2,090			-			2,093		5,290		7,383		(2,173	)		-		2003		(3	)
Houston Area Development Corporation (7)		2,740		-		(1,977	)		-			763		-		763		-			-		2003		(3	)
Crescent Plaza Phase I & II, Dallas, TX (7)		10,997		-		114,848			-			65,233		60,612		125,845		-			-		2002		(3	)
JPI multi-family luxury apartment project Deedham, MA (7)		17,095		-		(17,095	)		-			-		-		-		-			-		2004		(3	)
Dupont Centre, Irvine, CA		10,000		34,668		1,735			-			10,000		36,403		46,403		(2,879	)		1986		2004		(3	)
The Alhambra, Miami, FL		5,500		52,276		4,649			-			5,500		56,925		62,425		(4,065	)		1961-1987		2004		(3	)
Paseo Del Mar, San Diego, CA (5)		21,000		-		(21,000	)		-			-		-		-		-			-		2005		(3	)
3883 Hughes Center, Las Vegas, NV		3,304		-		53,338			-			3,514		53,128		56,642		-			-		2005		(3	)
The Exchange Building, Seattle, WA		7,050		40,442		2,731			-			7,050		43,173		50,223		(3,523	)		1929		2005		(3	)
One Live Oak, Atlanta, GA		3,380		23,323		2,976			-			3,380		26,299		29,679		(1,793	)		1981		2004		(3	)
Peakview Tower, Denver, CO		2,724		36,411		1,513			-			2,724		37,924		40,648		(3,104	)		2001		2004		(3	)
Financial Plaza, Phoenix, AZ (6)		3,517		41,492		562			-			3,517		42,054		45,571		(1,615	)		1986		2006		(3	)
Parkway at Oakhill, Austin, TX (6)		3,500		-		11,328			-			3,500		11,328		14,828		-			2006		2006		(3	)
Land held for development or sale, Houston, TX		49,420		-		(30,786	)		-			18,634		-		18,634		-			-		-		(3	)
Land held for development or sale, Dallas, TX		27,288		-		(9,516	)		-			17,772		-		17,772		-			-		-		(3	)
Land held for development or sale, Las Vegas, NV		10,000		-		5,333			-			15,333		-		15,333		-			-		2004		(3	)
Crescent Real Estate Equities L.P.		-		-		23,913			(352	)		-		23,561		23,561		(7,228	)		-		-		(3	)
Other		18,588		11,351		9,340			-			10,166		29,113		39,279		(4,443	)		-		-		(3	)

Total	$	835,408	$	1,775,423	$	910,816		$	(6,953	)	$	1,044,800	$	2,469,894	$	3,514,694	$	(608,875	)


(1)		Initial costs include purchase price, excluding any purchase price adjustments related to SFAS 141 intangibles, and any costs associated with closing of the Property.

(2)		The aggregate cost for Federal income tax purposes as of December 31, 2005 was approximately $3.5 billion.

(3)		Depreciation of the real estate assets is calculated over the following estimated useful lives using the straight-line method:


	Building and improvements			2 to 46 years

	Tenant improvements			Terms of leases, which approximates the useful life of the asset

	Furniture, fixtures, and equipment			2 to 5 years


(4)		This Office Property was sold during the year ended December 31, 2006.

(5)		Our investment in this Office Property was sold during the year ended December 31, 2006.

(6)		This Office Property was acquired during the year ended December 31, 2006.

(7)		Land and cost capitalized subsequent to acquisition includes property under development and is net of residential development cost of sales.


																	Principal Amount
																	of Loans Subject
	Interest Rate			Original			Periodic				Face			Carrying			to Delinquent
	at December			Maturity		Loan	Payment	Prior			Amount of			Amount of			Principal or
Type of Investment	31, 2006			Date		Extensions	Term (1)(2)	Liens			Mortgages			Mortgages (3)			Interest (4)
Mezzanine Investments
Dallas Office Property		13.85	%		2007	Three 1-Year	Interest Only	$	65,750		$	12,000		$	11,989		$	-
Three Dallas Office Properties		11.04	%		2010	N/A	Principal and Interest (5)		80,000			7,660			7,601			-
Two California Luxury Hotel Properties		16.35	%		2007	Five 1-Year	Interest Only		250,000	(6)		15,000			14,947			-
Southeastern U.S. Office Portfolio		12.23	%		2007	Three 1-Year	Interest Only		290,000			20,700			20,630			-
Six Florida Hotel Properties		13.35	%		2009	Two 1-Year	Interest Only		95,000			15,000			14,891			-
California Ski Resort		9.85	%		2009	Two 1-Year	Interest Only		230,000			20,000			19,845			-
New York City Residential Property		18.18	%		2007	Two 1-Year	Interest Only		342,615			24,185			24,013			-
California Residential Property		17.00	%		2008	One 6-Month	Interest Only		34,000			9,775	(7)		9,581			-

								$	1,387,365		$	124,320		$	123,497	(8)	$	-


(1)		Interest only payments are due monthly, principal is due at maturity except as otherwise noted in footnote (5).

(2)		Prepayment of certain loans will trigger additional fees, such as prepayment fees, exit fees, spread maintenance premiums and breakage costs, due from the borrower at the time of prepayment.

(3)		The carrying amounts approximate the Federal income tax basis.

(4)		No mortgage loans are delinquent with respect to principal or interest.

(5)		Interest only payments are due monthly through September 2007. Beginning October 2007, principal payments are due monthly until maturity.

(6)		We have a 25% interest in Redtail Capital Partners, L.P., that has a $25.0 million mortgage loan secured by these properties.

(7)		The condominiums securing this note were sold by CRDI to a third party. Due to restrictions under SFAS No. 66, Accounting for Sales of Real Estate regarding seller financed transactions, the profit from the sale of $4.7 million was deferred and recorded under the cost recovery method and reflected as a reduction of the note such that the face value of the note is included in the table above.

(8)		The following is a summary of changes in the carrying amount of investments for the years ended December 31, 2006 and December 31, 2005:


	2006			2005
Balance at January 1, 2005	$	172,126		$	21,877
Additions during period:
Investments in mezzanine loans		73,575			150,582
Cost of acquiring mezzanine investments		-			402
Accretion of unearned revenue		778			303
Deductions during period:
Collection of principal		(121,837	)		-
Amortization of premium and cost to acquire mezzanine investments		(311	)		(152	)
Unearned revenue		(834	)		(886	)

Balance at December 31, 2006	$	123,497		$	172,126


		CRESCENT REAL ESTATE EQUITIES COMPANY
				(Registrant)

		By		/s/John C. Goff

				John C. Goff
				Trust Manager and Chief Executive Officer


Signature	Title	Date

/s/ Richard E. Rainwater	Trust Manager and Chairman of the Board	March 14, 2007

Richard E. Rainwater

/s/ John C. Goff	Trust Manager and Chief Executive Officer	March 14, 2007

John C. Goff	(Principal Executive Officer)

/s/ Jerry R. Crenshaw Jr.	Managing Director and Chief Financial Officer	March 14, 2007

Jerry R. Crenshaw Jr.	(Principal Financial and Accounting Officer)

/s/ Dennis H. Alberts	Trust Manager, President and Chief Operating Officer	March 14, 2007

Dennis H. Alberts

/s/ Anthony M. Frank	Trust Manager	March 14, 2007

Anthony M. Frank

/s/ William F. Quinn	Trust Manager	March 14, 2007

William F. Quinn

/s/ Paul E. Rowsey, III	Trust Manager	March 14, 2007

Paul E. Rowsey, III

/s/ Robert W. Stallings	Trust Manager	March 14, 2007

Robert W. Stallings

/s/ Terry N. Worrell	Trust Manager	March 14, 2007

Terry N. Worrell


EXHIBIT
NUMBER		DESCRIPTION OF EXHIBIT

3.01		Restated Declaration of Trust of Crescent Real Estate Equities Company, as amended (filed as Exhibit No. 3.1 to the Registrant's Current Report on Form 8-K filed April 25, 2002 (the April 2002 8-K) and incorporated herein by reference)

3.02		Fourth Amended and Restated Bylaws of Crescent Real Estate Equities Company (filed as Exhibit No. 3.02 to the Registrant's Annual Report of Form 10-K for the fiscal year ended December 31, 2005 (the 2005 10K) and incorporated herein by reference)

4.01		Form of Common Share Certificate (filed as Exhibit No. 4.03 to the Registrant's Registration Statement on Form S-3 (File No. 333-21905) and incorporated herein by reference)

4.02		Statement of Designation of 6-3/4% Series A Convertible Cumulative Preferred Shares of Crescent Real Estate Equities Company dated February 13, 1998 (filed as Exhibit No. 4.07 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the 1997 10-K) and incorporated herein by reference)

4.03		Form of Certificate of 6-3/4% Series A Convertible Cumulative Preferred Shares of Crescent Real Estate Equities Company (filed as Exhibit No. 4 to the Registrant's Registration Statement on Form 8-A/A filed on February 18, 1998 and incorporated by reference)

4.04		Statement of Designation of 6-3/4% Series A Convertible Cumulative Preferred Shares of Crescent Real Estate Equities Company dated April 25, 2002 (filed as Exhibit No. 4.1 to the April 2002 8-K and incorporated herein by reference)

4.05		Statement of Designation of 6-3/4% Series A Convertible Cumulative Preferred Shares of Crescent Real Estate Equities Company dated January 14, 2004 (filed as Exhibit No. 4.1 to the Registrant's Current Report on Form 8-K filed January 15, 2004 (the January 2004 8-K) and incorporated herein by reference)

4.06		Form of Global Certificate of 6-3/4% Series A Convertible Cumulative Preferred Shares of Crescent Real Estate Equities Company (filed as Exhibit No. 4.2 to the January 2004 8-K and incorporated herein by reference)

4.07		Statement of Designation of 9.50% Series B Cumulative Redeemable Preferred Shares of Crescent Real Estate Equities Company dated May 13, 2002 (filed as Exhibit No. 2 to the Registrant's Form 8-A dated May 14, 2002 (the Form 8-A) and incorporated herein by reference)

4.08		Form of Certificate of 9.50% Series B Cumulative Redeemable Preferred Shares of Crescent Real Estate Equities Company (filed as Exhibit No. 4 to the Form 8-A and incorporated herein by reference)

4*		Pursuant to Regulation S-K Item 601 (b) (4) (iii), the Registrant by this filing agrees, upon request, to furnish to the Securities and Exchange Commission a copy of instruments defining the rights of holders of long-term debt of the Registrant


†		This exhibit is attached to the copy of this report available through our website at www.crescent.com and to the copy of this report available at the SEC's website at www.sec.gov .