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                                                                  EXHIBIT 10.118


February 5, 2001

Richard P. Knight
Crescent Operating, Inc.
306 W. 7th Street, Suite 1000
Fort Worth, Texas 76102


                                   Re: Arrangement regarding Severance Payment

Dear Rick:

Because of your status as the Chief Financial Officer of Crescent Operating and
Crescent Machinery Company (collectively referred to as "Crescent"), you are
familiar with discussions between Crescent Operating and Crescent Real Estate
Equities Limited Partnership concerning a possible transaction opportunity which
was made possible by the REIT Modernization Act. The possibility of this
transaction has been disclosed in our periodic SEC filings, but since the matter
at this time remains completely in flux and unsettled, no details about the
discussions have been made public.

Companies, like Crescent, engaged in discussions about a transaction or series
of transactions which could materially alter the future direction of its
business, find it especially important to be able to rely upon the continued
efforts of key employees and officers. The risk to Crescent of losing valuable
officers and employees just when they are most needed becomes an issue that must
be addressed.

If you continue your current relationship with Crescent as an officer and
employee through May 1, 2001, then upon the termination of your employment at
any time after that date, whether voluntarily or involuntarily, Crescent
Operating or Crescent Machinery Company will pay you the following severance
fee: for the 12 month period ending on the first anniversary of the date of
termination, Crescent Operating (i) will continue to pay your salary (but not
bonus) at the higher of the annual rate in effect at the time of termination or
the annual rate in effect as of the date of this letter and (ii) will continue
your welfare benefits as in effect at the time of your termination.

Crescent's obligation to pay that severance fee is conditioned upon your
agreement that, from and after the date of your termination, you will:

o        refrain from making any disparaging statements or comments about
         Crescent

o        not attempt or encourage any person having a business or employment
         relationship with Crescent to discontinue or curtail that relationship


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o        except as may be required by law, not disclose to any person any
         confidential or proprietary information of Crescent acquired during the
         course of your employment

o        resign from all other offices at any subsidiary or affiliate of
         Crescent Operating

o        waive and release any and all claims you have or might have against
         Crescent arising out of or with respect to your employment with
         Crescent or the termination of your employment, except for the right to
         receive the severance payment described in this letter

o        not encourage or assist any other person in any action against
         Crescent, and

o        except as required by law, keep confidential the existence and contents
         of this letter and all instruments and documents relating to the
         subject matter of this letter.

To accept our offer, please sign and return this letter to us. If we have not
received your signed letter within five business days from the date of your
receipt of this letter, then we will assume that you have declined our offer and
our offer will automatically terminate.

                                             Very truly yours,


CRESCENT OPERATING, INC.                     CRESCENT MACHINERY COMPANY


By:                                          By:
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Its:                                         Its:
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ACCEPTED AND AGREED:


----------------------------
Richard P. Knight

Dated:
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