UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549











Form
10-KSB





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





For the fiscal year ended December 31,
2007





 ̈
            TRANSITION
      REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the transition period from
_________ to _________





Commission
file number:  000-52619








AmREIT
MONTHLY INCOME & GROWTH FUND III, LTD.


(Name
of Small Business Issuer in its charter)




Texas
            
            20-2964630(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)8
      Greenway Plaza, Suite 1000
              Houston, TX
            
            77046(address
      of principle executive offices)
            
            (Zip
      Code)




Issuer’s
telephone number


(713)
850-1400





Securities
registered under Section 12(b) of the Act: None





Securities
registered under Section 12(g) of the Act:





Limited
Partnership Interests











Check
whether the Issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act.


 ̈





Check
whether the Issuer (1) filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.


Yes x                      
No  ̈













Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the Issuer’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.


x





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


Yes  ̈                      
No x





Revenues
for the Issuer’s fiscal year ended December 31, 2007 totaled
$6,746,000.





The
aggregate market value of the Issuer’s voting and non-voting common equity held
by non-affiliates of the Issuer, computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days:
$71,090,290.






Yes o No x








TABLE
OF CONTENTS




CAUTIONARY NOTE REGARDING FORWARD LOOKING
      STATEMENTS
            1PART I
            1ITEM 1.
            DESCRIPTION OF BUSINESS
            1ITEM 2.
            DESCRIPTION OF PROPERTY
            24ITEM 3.
            LEGAL PROCEEDINGS
            29ITEM 4.
            SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
            29PART II
            29ITEM 5.
            MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
      BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
            29ITEM 6.
            MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION
            31ITEM 7.
            FINANCIAL STATEMENTS
            39ITEM 8.
            CHANGES IN AND DISAGREEMENTS WITH
    ACCOUNTANTS
            39ITEM 8A(T).
            CONTROLS AND PROCEDURES
            39ITEM 8B.
            OTHER INFORMATION
            39PART III
            39ITEM 9.
            DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND
      CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
      ACT
            39ITEM 10.
            EXECUTIVE COMPENSATION
            40ITEM 11.
            SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
      AND RELATED STOCKHOLDER MATTERS
            41ITEM 12.
            CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
            41ITEM 13.
            EXHIBITS
            44ITEM 14.
            PRINCIPAL ACCOUNTANT FEES AND SERVICES
            47SIGNATURES
            48PART F/S
            F-1ITEM 15.
            EXHIBITS AND FINANCIAL STATEMENT
    SCHEDULES
            S-1





Table of Contents





CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS





Certain
statements contained in this Annual Report on Form 10-KSB of AmREIT Monthly
Income & Growth Fund III, Ltd. other than historical facts may be considered
forward-looking statements. We refer to AmREIT Monthly Income & Growth Fund
III, Ltd. and, where required by the context in which the term is used, as the
“Partnership,” “we,” “us” and “our.” Such statements include, in particular,
statements about our plans, strategies, and prospects and are subject to certain
risks and uncertainties, as well as known and unknown risks, which could cause
actual results to differ materially from those projected or anticipated.
Therefore, such statements are not intended to be a guarantee of our performance
in future periods. Such forward-looking statements can generally be identified
by our use of forward-looking terminology such as “may,” “will,” “would,”
“could,” “should,” “expect,” “intend,” “plan,” “anticipate,” “estimate,”
“predict,” “believe,” “potential,” “continue” or other similar words. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date this Annual Report is filed with the Securities
and Exchange Commission, which we refer to as the SEC. We make no representation
or warranty, express or implied, about the accuracy of any such forward-looking
statements contained in this Annual Report, and we do not intend to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. See the section captioned “Item 1.
Description of Business — Risk Factors” of this Annual Report.





Any
forward-looking statements are subject to unknown risks, uncertainties and other
factors and are based on a number of assumptions involving judgments with
respect to, among other things, future economic, competitive and market
conditions, all of which are difficult or impossible to predict accurately. To
the extent that our assumptions differ from actual results, our ability to meet
such forward-looking statements, including our ability to generate positive cash
flow from operations, provide distributions to our partners and maintain the
value of our real estate properties, may be significantly hindered.





PART I





ITEM
      1.
            DESCRIPTION OF
      BUSINESS





Background





We are a
Texas limited partnership formed in April 2005 to acquire, develop and operate,
directly or indirectly through joint venture arrangements, commercial real
estate consisting primarily of single-tenant and multi-tenant retail properties.
Our investment strategy is to retain approximately 50% of our properties as
income-producing assets during our projected six-year operating period, and
opportunistically sell the remaining properties under attractive market
conditions and reinvest the net sales proceeds into additional property
investments. Our principal office is located at 8 Greenway Plaza, Suite 1000,
Houston, Texas 77046. Our telephone number is (713) 850-1400.





We
commenced our principal operations on June 30, 2005, when we raised the minimum
offering of $2.0 million pursuant to the terms of a private placement
memorandum dated April 19, 2005, which we refer to as the Offering Memorandum,
and issued the initial 80 limited partnership units, or Units. As of
October 31, 2006, we had received approximately $71.1 million for the sale of
2,844 Units and closed the Offering. We refer to the holders of our Units
as Limited Partners.





On April
30, 2007 we filed a Form 10-SB to register our Units pursuant to Section 12(g)
of the Securities Exchange Act of 1934, as amended, or the Exchange
Act.  We are subject to the registration requirements of Section 12(g)
of the Exchange Act because the aggregate value of our assets exceeds applicable
thresholds and the Units of record are held by 500 or more
persons.  As a result of our obligations to register our securities
with the SEC under the Exchange Act, we are subject to the requirements of the
Exchange Act rules, including the filing of this Annual Report on Form
10-KSB.





Table of Contents


Our
general partner is AmREIT Monthly Income & Growth III Corporation, a Texas
corporation and subsidiary of AmREIT, a Texas real estate investment trust
listed on the American Stock Exchange (AMEX: AMY). We refer to AmREIT Monthly
Income & Growth III Corporation as the General Partner. AmREIT and its
predecessors have sponsored and advised 17 partnerships formed for the purpose
of investing in properties during their 23 year history. Our General Partner has
the exclusive right to manage our business and affairs on a day-to-day basis
pursuant to our limited partnership agreement, which we refer to as the
Partnership Agreement. The Limited Partners have the right to remove and replace
our General Partner, with or without cause, by a vote of the Limited Partners
owning a majority of the outstanding Units.  Our General Partner is
responsible for all of our investment decisions, including decisions relating to
the properties to be developed, the method and timing of financing or
refinancing the properties, the selection of tenants, the terms of the leases,
the method and timing of the sale of the properties and the reinvestment of net
sales proceeds. Our General Partner utilizes the services of AmREIT and its
affiliates in performing its duties under the Partnership Agreement. Our General
Partner has invested $1,000 in us for its general partner interest and has
invested $800,000 in us for Limited Partner Units. We refer to our General
Partner and our Limited Partners collectively as the
Partners.


Our Units
were sold in reliance on an exemption from the registration requirements
of the Securities Act of 1933, as amended, or the Securities Act, and are
not currently listed on a national exchange.  No public market currently
exists for the Units.  The Units may not be sold or transferred unless we
register the Units under applicable laws or if the sale qualifies for exemption
from such laws.  We do not expect to register the Units; therefore, we do
not anticipate that any public market for the Units will develop.





We
directly own three properties and have investments in eight additional
properties, all of which are located in Texas, are primarily multi-tenant retail
properties and comprise in the aggregate approximately 1.5 million rentable
square feet. As of December 31, 2007, these properties were 81% leased. We
acquired all of these properties subsequent to our formation.





The
following is a summary of the eleven properties in which we owned an interest as
of December 31, 2007.




Property
            
            Location
            
            SquareFootage
            
            
            PercentOwned
            
            
            AnnualizedGross Base Rent(1)Westside
      Plaza
            
            Houston
            
            
            43,021
            
            
            
            100
            %
            
            $
            979,000The
      Market at Lake Houston(3)
            
            Houston
            
            
            101,799
            
            
            
            60
            
            
            
            1,535,0005433
      Westheimer(2)(4)
            
            Houston
            
            
            133,881
            
            
            
            50
            
            
            
            1,281,000Olmos
      Creek
            
            San
      Antonio
            
            
            102,178
            
            
            
            100
            
            
            
            983,000Lantern
      Lane
            
            Houston
            
            
            79,462
            
            
            
            100
            
            
            
            1,391,000Casa
      Linda Plaza(2)(4)
            
            Dallas
            
            
            324,638
            
            
            
            50
            
            
            
            3,207,000Preston
      Towne Crossing(2)(4)
            
            Plano
            
            
            169,844
            
            
            
            20
            
            
            
            3,031,000Preston
      Park Gold(4)
            
            Plano
            
            
            101,096
            
            
            
            20
            
            
            
            955,000Berkeley
      Square(2)(4)
            
            Plano
            
            
            124,987
            
            
            
            20
            
            
            
            1,916,000Woodlake
      Square(4)
            
            Houston
            
            
            205,522
            
            
            
            30
            
            
            
            1,985,000Westheimer
      Gessner(4)
            
            Houston
            
            
            82,120
            
            
            
            30
            
            
            
            627,000Total
            
            
            
            
            1,468,548
            
            
            
            
            
            
            $
            17,890,000





__________


(1)
            Annualized
      gross base rent represents base rents in place on leases with rent having
      commenced as of December 31, 2007 and does not reflect straight-line rent
      or other adjustments under generally accepted accounting
      principles.





(2)
            Property
      is under redevelopment.





(3)
            Property
      is 60% owned through a joint venture which is consolidated in our
      financial statements.





(4)
            Property
      is owned through a joint venture that is not consolidated in our financial
      statements.





See “Item
2. Description of Property” for a more detailed description of our investments
in properties.





2
 Table of Contents





Investment
Objectives





Our
investment objectives are:





·
            to
      preserve and protect our Limited Partners’ capital
      contributions;





·
            to
      provide cash distributions to our Partners through the operation of our
      properties; and





·
            to
      realize appreciation in the value of our
  properties.





Investment
Strategy





Equity
Allocation





As of
December 31, 2007, we have invested substantially all of the net proceeds of the
Offering in real properties.  We have approximately $5.2 million in
cash and cash equivalents that may be used for investment in new
properties, capital expenditures on existing properties or for working
capital.  We have invested approximately 40% to 50% of our capital in
existing commercial shopping centers, primarily multi-tenant properties,
mixed-use properties and, to a lesser degree, single-tenant properties.
Approximately 50% to 60% of our capital is invested in the development and
redevelopment of commercial shopping centers, consisting primarily of
multi-tenant and mixed-use developments and, to a lesser degree, single-tenant
developments. However, if our General Partner determines that the risk/return
dynamic of the development investment activities or the acquisition of existing
retail centers dramatically improves or declines, our capital will be
reallocated accordingly.





Investments
in Properties with Operating Histories





We have
invested approximately 40% to 50% of our portfolio in existing shopping
centers leased to high quality tenants, consisting primarily of multi-tenant
centers, mixed-use properties and, on a selective basis, free standing
single-tenant properties. These investments are primarily shopping centers that
are grocery-anchored, strip center, mixed-use or lifestyle properties whose
tenants consist of national, regional and local retailers. Our grocery-anchored
shopping centers are anchored by an established grocery store operator in the
region. Our other shopping centers are typically leased to national and regional
tenants, as well as a mix of local and value retailers. Our lifestyle centers
are typically anchored by a combination of national and regional tenants that
provide customer traffic and tenant draw for specialty and restaurant tenants
that support the local consumer. We also own shopping centers that are leased to
national drug stores, national restaurant chains, national value-oriented retail
stores and other regional and local retailers.





The
majority of our properties have leases that are either leased or guaranteed by
the lessee’s parent company, not just the operator of the individual location,
and are in areas of substantial retail shopping traffic. Our strategy is to
acquire properties that attract tenants that provide basic staples and
convenience items to local customers. We believe that sales of these items are
less sensitive to business cycle fluctuations than higher priced retail
items.





Development
and Redevelopment Properties





We have
invested approximately 50% to 60% of our portfolio in development and
redevelopment properties, either directly or indirectly through joint ventures.
Of the eleven properties in which we currently own an interest, 5433 Westheimer,
Casa Linda, Preston Towne Crossing and Berkeley Square are currently under
redevelopment and we have plans to redevelop Woodlake Square and Westheimer
Gessner.Theamount of equity committed to development
and redevelopment projects is generally 25% to 100% of the total cost of the
project, with the remaining costs being funded through lines of credit,
construction financing or other property level mortgage financing. We work
closely with local development partners in these transactions throughout the
development process.





3
 Table of Contents





5433
Westheimer is currently being redeveloped into a mixed-use
property.  The new development will have a retail, office and
hospitality component.  We may acquire additional properties that have
mixed-use characteristics or we may redevelop some of our exiting properties to
introduce mixed-use characteristics.  We anticipate that our future
investments in mixed-use developments will have a retail component and may
also include office, residential, entertainment and hospitality components. Our
General Partner will analyze the market surrounding each mixed-use development
to determine the optimal mix of retail to non-retail components. We will develop
in locations that provide limited competition, quality location and strong
market fundamentals. We intend to commence the leasing process before
construction.





Our
General Partner has hired a general contractor to provide construction and
construction management services for each of our development and redevelopment
projects. The general contractor is entitled to fees for providing these
services, and these fees may be paid on a fixed price basis or a cost plus
basis. AmREIT Construction Company, an affiliate of our General Partner,
provides construction and construction management services for our redevelopment
projects. We may or may not competitively bid the construction management
services for projects for which AmREIT Construction Company is selected. Where
AmREIT Construction Company is selected to provide construction and construction
management services, such services are provided on terms and conditions no less
favorable to us than can be obtained from independent third parties for
comparable services in the same location.





Each of
our development and redevelopment projects has and will have a project manager
assigned to ensure all necessary functions are performed. The project manager is
responsible for coordinating all phases of the project, including the
feasibility study of each project prior to the commencement of development and
much of the pre-development work. Each development also has a construction
manager who is responsible for coordinating all the outsourced trades including
architectural, engineering, environmental and construction contractors. The
construction manager will be an employee of AmREIT Construction Company in the
event that it serves as the general contractor of a development project. The
project and construction managers are jointly responsible for the preparation
and adherence to the development budgets. Capital inflows and outflows are
carefully tracked and compared against budgets. Actual cost versus budget
reports are prepared on a monthly basis for review by various parties including
the development team, management team and lenders. The project and construction
managers work in unison to ensure each project is built within budget and on a
timely basis.





We may
employ our capital in at-risk situations to tie up developable land sites using,
among other things, purchase agreements and options. Such commitments may not
necessarily result in the eventual acquisition of a land site, as we may elect
to forfeit funds after completing our due diligence.





Location
of Properties





We seek
investments in properties located throughout the United States, with a primary
focus on markets with increasing population growth and urban density. As a
result of our General Partner’s experience in developing, acquiring and managing
retail real estate in metropolitan Texas markets, each of the eleven properties
in which we currently own an interest is located in Texas. The economies of the
Texas metropolitan markets where we own investments will have a significant
impact on our cash flow and the value of our properties. Although a downturn in
the economies of these metropolitan areas could adversely affect our business,
general retail and grocery anchored shopping centers that provide necessity-type
items tend to be less sensitive to macroeconomic downturns.





Although
we intend to invest only in properties in the United States, we are not
prohibited from making investments in foreign countries that meet our investment
criteria.





Investment
Decisions





Our
General Partner uses commercially reasonable efforts to present to us suitable
investments consistent with our investment objectives and policies. In pursuing
our investment objectives and making investment decisions for us, our General
Partner considers relevant real estate property and financial factors, including
the location of the property, its suitability for any development contemplated
or in progress, its income-producing capacity, prospects for long-range
appreciation, liquidity and tax considerations. Moreover, to the extent
feasible, our General Partner strives to select a diversified portfolio of
properties in terms of geography, type of property and industry of the tenants,
although the number and mix of properties acquired will largely depend upon real
estate and market conditions and other circumstances existing at the time
properties are acquired.





4
 Table of Contents





Prior to
acquiring a property, our General Partner undertakes an extensive site review.
Our General Partner typically undertakes a long-term viability and market value
analysis, including an inspection of the property and surrounding area by an
acquisition specialist and an assessment of market area demographics, consumer
demand, traffic patterns, surrounding land use, accessibility, visibility,
competition and parking. Our General Partner may also take additional actions to
evaluate the property, including without limitation, the following:





·
            obtain
      an independent appraisal of the
property;





·
            obtain
      an independent engineering report of the property’s mechanical, electrical
      and structural integrity;





·
            conduct
      an investigation of title;





·
            evaluate
      both the current and potential alternative uses of the property;
      and





·
            obtain
      an independent Phase I environmental site
  assessment.





Our
General Partner is not required to obtain an appraisal in connection with an
acquisition, although it is anticipated that if third-party financing is being
provided by a commercial lender, such lender will obtain an independent
appraisal.





Real
Estate Fundamentals





Our
General Partner believes that sound real estate fundamentals will allow us to
attract the best tenants and produce the best results for our real estate
portfolio. Our General Partner believes that factors such as corner locations,
high automobile traffic counts, high populations, high household incomes and
limited opportunities for competition produce favorable conditions for the
success of the tenant and the retail property. Corner locations traditionally
offer favorable access because these locations can access traffic in all
directions. High traffic passing a retail property provides maximum exposure for
retail tenants. A high population base surrounding a retail property provides a
large consumer base for a tenant’s business. Areas that have high household
income have more disposable income that is affected less by economic cycles.
Locations that have few opportunities for new retail properties offer a limited
supply of space and thus have the best likelihood of growing rental rates.
Although a shopping center seldom offers all of these factors, our General
Partner will use these criteria to measure the quality and relative value of
opportunities relative to others in evaluating each proposed real estate
investment.





Our
General Partner also believes that its ability to obtain locations near national
commercial tenants such as Wal-Mart, Home Depot and Target, which are major
traffic generators for other commercial tenants, should enable us to attract
brand name, high quality tenants.





Tenant
Quality and Monitoring





We seek
to attract high quality tenants for our properties. A tenant will be considered
“high quality” if at the time of acquisition, the tenant has a regional or
national presence, operating history of 10 or more years and a net worth in
excess of $50 million. When available, our General Partner will rely on national
credit rating agencies such as Standard & Poor’s to assist in such
determination. If public data is not available, our General Partner will rely on
its experience, its own credit analysis and resources provided by its lenders to
qualify a prospective tenant.





5
 Table of Contents





If a
tenant has a public debt rating, we will seek tenants that have: a debt rating
by Moody’s of Baa3 or better or a credit rating by Standard & Poor’s of BBB-
or better; or a guaranty for its payments under the lease by a guarantor with a
debt rating by Moody’s of Baa3 or a credit rating by Standard & Poor’s of
BBB or better.





Moody’s
ratings are opinions of future relative creditworthiness incorporating an
evaluation of franchise value, financial statement analysis and management
quality. The rating given to a debt obligation describes the level of risk
associated with receiving full and timely payment of principal and interest on
that specific debt obligation and how that risk compares with that of all other
debt obligations. The rating therefore measures the ability of a company to
generate cash in the future. Standard & Poor’s assigns a credit rating both
to companies as a whole and to each issuance or class of a company’s debt. A
Standard & Poor’s credit rating of BBB-, which is the lowest investment
grade rating given by Standard & Poor’s, is assigned to companies or
issuances that exhibit adequate protection parameters. However, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity of the company to meet its financial commitments.





Net
Leases





We
typically enter into net leases with our tenants. “Net leases” are leases that
typically require that tenants pay all or a majority of the operating expenses,
including real estate taxes, special assessments and sales and use taxes,
utilities, insurance and building repairs related to the property, in addition
to the lease payments. There are various forms of net leases, typically
classified as triple net, double net and bondable. Triple net and bondable
leases typically require the tenant to pay all costs associated with a property
in addition to the base rent and percentage rent, if any. Double net leases
typically require the landlord to be responsible for the roof and structure of
the building while the tenant is responsible for all remaining expenses
associated with the real estate. Since each lease is an individually negotiated
contract between two or more parties, each contract will have different
obligations of both the landlord and tenant. Many large national tenants have
standard lease forms that generally do not vary from property to property, and
we will have limited ability to revise the terms of leases to those
tenants.





Our
leases have terms that vary. We have acquired and may in the future acquire
properties under which the lease terms have partially run. We evaluate the lease
term risk based on criteria such as whether the property is in an attractive
location, difficult to replace or has other significant favorable real estate
attributes. Our leases generally require our tenants to pay a predetermined
annual base rent. Some of our leases contain provisions that increase the amount
of base rent payable at points during the lease term and/or percentage rent that
can be calculated by a number of factors. In addition, our leases generally
require that each tenant pay the cost of the liability insurance covering the
property or provide such coverage. The third-party liability coverage will
insure, among others, us, our General Partner, and any entity formed by us to
hold the property. Our leases generally require that each tenant obtain, at its
own expense, property insurance naming the above parties as an insured party for
fire and other casualty losses in an amount that generally equals the full
replacement value of such property. Our tenants are generally required to obtain
our General Partner’s approval of all such insurance.





In
general, our leases may not be assigned or subleased without our General
Partner’s prior written consent. The original tenant generally remains fully
liable under the lease unless our General Partner expressly releases that
tenant.





Ownership
Structure





For our
investors where we are the sole owner, we generally acquire, directly
or indirectly, fee simple interests in the property. We may also acquire
leasehold interests in real property subject to long-term ground leases. Our
General Partner and its affiliates may purchase future investments in their own
names or in entities that they control, assume loans in connection with the
purchase of properties and temporarily hold title to properties for the purpose
of facilitating the acquisition of properties by us.





For our
future investments in development properties, we may enter into arrangements
with the seller or developer, provided that the property is pre-leased to a high
quality tenant. In these cases, we will be obligated to purchase the property at
the completion of construction, provided that the construction conforms to
definitive plans, specifications and costs approved in advance by our General
Partner. We will receive a certificate of an architect, engineer or other
appropriate party, stating that the property complies with all plans and
specifications. If renovation or remodeling is required prior to the purchase of
a property, our General Partner expects to pay a negotiated maximum amount upon
completion.





6
 Table of Contents





We may
enter into sale and leaseback transactions, under which we will purchase a
property and lease the property back to the seller.





Joint
Ventures





We
currently own interests in eight properties through joint ventures with
affiliates of our General Partner and non-affiliates. The joint ventures are
structured as limited partnerships or limited liability companies in which we
own interests. Each of these limited partnerships or limited liability companies
directly owns one or more of the eight underlying properties. Each general
partner or managing member is responsible for establishing policies and
operating procedures with respect to the business and affairs of the underlying
property. However, we and each of our joint venture partners must approve all
significant decisions involving the properties.





We may
invest in additional properties through joint ventures with third-party
developers and real estate investors, including our General Partner, its
affiliates and entities owned or managed by its affiliates. Such joint ventures
may include investments in limited liability companies or other co-ownership
arrangements whose purpose is the acquisition or improvement of the properties.
Our General Partner and its affiliates may provide services to the joint
venture, including, but not limited to, acquisition, development, management,
leasing and/or real estate disposition services. Our current joint venture
investments contain, and we will not enter in future joint venture investments
unless they contain, the following features:





·
            our
      right either to approve significant decisions of the joint venture or to
      control operations of the joint venture, subject to the right of the joint
      venture partner to approve sales or
refinancing;





·
            the
      total compensation paid by us and the joint venture to our General Partner
      and its affiliates in connection with a joint venture will not exceed the
      compensation which would be permissible under the Partnership Agreement if
      we owned 100% of the joint venture;





·
            no
      duplication of joint venture costs and expenses and our costs and expenses
      relating to the joint venture business, including organization and
      syndication expenses, acquisition and development costs;
    and





·
            any
      purchase, sale or financing transactions between the joint venture partner
      and our General Partner or its affiliates must be on terms which are
      commercially reasonable and comparable to those relating to transactions
      between unrelated parties.





Our
investments in Casa Linda Plaza, The Market at Lake Houston, Woodlake Square and
Westheimer Gessner were made through joint ventures with affiliates of our
General Partner. For any future investment with our General Partner, its
affiliate, or an entity owned or managed by an affiliate, our General Partner or
the managing member, largest shareholder, general partner or other controlling
or majority owner of the affiliate or such other entity may contribute capital
to the joint venture on the same terms and conditions as us. Allocable profits
in a joint venture will be calculated based on the sum of net sale proceeds from
the sale of a property (after repayment of debt) plus reserves less capital
contributions of each joint venture partner plus actual origination and carrying
costs of the additional financing incurred in connection with such property.
Distributions will be pro rata to the joint venture partners based on their
aggregate capital contributions.





Our
General Partner or its affiliate may form another partnership or other
investment vehicle with essentially the same investment objectives as us and
such entity may acquire properties through a joint venture. Such other entities
may have as investors controlling persons or other former and current investors
in programs sponsored by affiliates. The terms and conditions upon which persons
become investors in such other entities may differ from our terms and
conditions.





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Disposition
Policies





Operating
Period





During
our operating period, our General Partner intends to hold our properties until
such time as sale or other disposition appears to be advantageous to achieve our
investment objectives or until it appears that such objectives will not be met.
We have not yet sold any of our properties. We anticipate that we will hold 50%
of our properties as income-producing assets during our entire operating period.
We intend to sell the other 50% of our properties during favorable market
conditions and we will then reinvest the net proceeds in additional properties.
When deciding whether to sell properties during our operating period, our
General Partner will consider factors such as potential capital appreciation,
cash flow, the availability of other attractive investment opportunities and
federal income tax considerations.





If we
sell properties during our operating period, our General Partner anticipates
reinvesting the net sales proceeds generated from the sales. In making the
determination of whether to reinvest the net proceeds from a particular sale,
our General Partner will determine whether we have adequate cash flow and
reserves to pay our Limited Partners regular distributions and the special
year-end tax distribution.





Liquidation
Period





Our
General Partner will in good faith actively market for sale all of our
properties and commence an orderly liquidation on or before October 31, 2012. If
our General Partner does not take all commercially reasonable efforts to
diligently pursue the portfolio sale and liquidation as described above, our
General Partner shall forfeit its $800,000 investment in our Units. Once our
General Partner has marketed for sale our properties, it may take months or
years for our General Partner to sell all of our properties and wind up our
operations.





AmREIT’s
Rights of First Offer





We have
granted AmREIT a limited right of first offer to purchase our wholly-owned
properties that our General Partner determines are in our best interests to
sell. For properties we own through a joint venture, we will grant AmREIT this
right of first offer, subject to the approval of our joint venture
partners.  When our General Partner determines that one of our
properties should be sold, our General Partner will notify AmREIT and AmREIT
will then have 15 days to determine whether to provide us with a binding offer
to purchase the property at fair market value. Within three days after receiving
AmREIT’s offer to purchase the property, each of our General Partner and AmREIT
shall appoint an independent appraiser with at least five years commercial real
estate appraisal experience in the market where the property is located and who
is a member of the Appraisal Institute (MAI designation) to conduct an appraisal
of the property within 30 days from the date of our General Partner’s receipt of
AmREIT’s purchase offer. The mean of the two appraisals shall be deemed the fair
market value of the property. However, if the lower appraised value is more than
five percent lower than the higher appraised value, the existing appraisers
shall appoint a third independent appraiser with at least five years commercial
real estate appraisal experience in the market where the property is located and
who is a member of the Appraisal Institute (MAI designation). The third
appraiser shall complete its appraisal of the property within 30 days after its
selection. Upon completion of the third appraisal, the three appraisals will be
considered together. Any appraisal which is more than five percent lower or
higher than the median appraisal shall be disregarded. If only one appraisal is
disregarded, the mean of the two remaining appraisals shall be the fair market
value. If the low appraisal and the high appraisal are disregarded as stated
above, the median appraisal shall be the fair market value. After the fair
market value has been determined, AmREIT will be required to purchase the
property for cash in the amount of the fair market value as determined above
within 10 days after such board approval.





If AmREIT
does not timely provide us with a binding offer to purchase a property or fails
to timely purchase any property pursuant to a purchase offer, our General
Partner may market and sell the property to third parties for a period of 180
days following the expiration of AmREIT’s 15 day right of first offer period. At
the expiration of this 180 day period, our General Partner will either cease
marketing the property for resale, or, if it determines to continue to market
the property for resale, provide AmREIT another right to offer to purchase the
property at the then-current fair market value determined in the manner
described above by a new appraisal process.





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If we
receive an unsolicited offer from a third party to purchase one or more of our
properties, our General Partner will determine whether the sale is in our best
interest. If our General Partner determines that it is desirable to pursue the
potential sale, it will present AmREIT with a copy of the third-party offer and
provide AmREIT with 15 days to determine whether to provide us with a binding
offer to purchase the property on substantially the same terms and at the same
price set forth in the third-party offer. If AmREIT submits to our General
Partner such a binding purchase offer, then AmREIT will be required to purchase
the property within 10 days. If AmREIT does not exercise its right to submit a
purchase offer or fails to timely close the purchase of the property, we may
proceed with the sale of the property to the third party in accordance with the
terms of the initial offer.





We
anticipate that AmREIT will only exercise its right of first offer described
above with respect to a property that it deems to be an “Irreplaceable Corner”
at the time that it is offered the opportunity to purchase the property. Because
we intend to invest in properties, including development and redevelopment
properties, that AmREIT does not consider to be an “Irreplaceable Corner” at the
time of our investment, we anticipate that AmREIT will decline to exercise its
right of first offer with respect to a substantial portion of our
properties.





Leverage





We have
leveraged and intend to leverage our investments in properties with operating
histories using traditional, commercial real estate lending sources, as
underwritten by our General Partner and the lender. We have not leveraged and do
not intend to leverage equity contributed to joint venture developments,
anticipating that local developers will employ construction financing consistent
with that of traditional real estate projects and underwritten by the
development partner, our General Partner and the lender.





We
generally finance the acquisition of properties pursuant to new financing or
assumption of existing indebtedness. We may refinance one of our properties
after it has increased in value or when more favorable terms are available,
thereby allowing us to retain such property and at the same time, generate
distributions to our Partners, enable us to engage in renovation or remodeling
activities, or make further acquisitions. We may incur debt for expenditures
related to our properties, including expenses to facilitate the sale or pay of
capital expenditures. We may not incur indebtedness (or any refinancing thereof)
to acquire or improve properties in an amount greater than 75% of our cash and
cash equivalents plus the market value of our portfolio based on a cap rate
approach applied to the net operating income of the property, with a target of
60% of the value of our assets.





We may
borrow money from AmREIT or its affiliates if our General Partner, in the
exercise of its fiduciary duties, determines that the transaction is on terms
that are fair and reasonable and no less favorable to us than comparable loans
between unaffiliated parties.





Other
Investments





We
currently own interests in eight properties through joint ventures. We may
invest in other ownership interests in entities that own real estate, including
in connection with joint ventures. We make these investments when our General
Partner considers it more efficient to acquire an entity owning such real
property rather than to acquire the properties directly.





Our
General Partner invests our reserves and other available funds not committed to
investments in properties in United States government securities and money
market instrument funds.





Conflicts
of Interest





Our
General Partner is subject to various conflicts of interest arising out of its
relationship with us, the Limited Partners and AmREIT. Our General Partner and
its affiliates have and will continue to try to balance our interests with their
duties to other AmREIT-sponsored programs. However, to the extent that our
General Partner or its affiliates take actions that are more favorable to other
entities than to us, these actions could have a negative impact on our financial
performance and, consequently, on distributions to our Limited Partners. Some of
these conflicts are described below.





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Limited
Financial Resources





Our
General Partner has no assets other than its general partner interest in us and
its investment in our Units. In the event we have substantial capital needs, our
General Partner will not have sufficient financial resources to satisfy these
needs. In addition, AmREIT, the parent of our General Partner, has substantial
financial obligations related to its properties and its interest in other
programs and may not be able to provide us financial assistance in the event we
have capital needs.





Interests
in Other Real Estate Programs





AmREIT
sponsors and manages real estate programs and ventures and intends to sponsor
and manage more programs and ventures in the future. The only existing entities
that our General Partner’s management also manages which have similar investment
objectives and may compete with us are AmREIT Income & Growth Fund, Ltd.,
AmREIT Monthly Income & Growth Fund, Ltd., AmREIT Monthly Income and Growth
Fund II, Ltd., AmREIT Monthly Income and Growth Fund IV, L.P., REITPlus, Inc.
and AmREIT. In addition to identifying, originating and effecting property
acquisitions and development projects for us, our General Partner’s management
and its affiliates will continue to acquire and develop real estate for the
account of other affiliated and unaffiliated investors. Conflicts of interest of
our General Partner’s management may arise in its allocating opportunities
between us and other programs, particularly where our General Partner’s profit
or loss interest in such other investment is different than our General
Partner’s interest in the Partnership.





Conflicts
of interest may also arise in connection with our General Partner’s
responsibilities to us and the responsibilities of its affiliates to other
entities. For example, conflicts of interest could arise in management’s
allocation of its time and access to resources, such as financing, goods,
material or labor, or in connection with its access to the leasing or resale
markets, particularly during times these resources are scarce or in short
supply. Conflicts could also result in the selection and marketing of projects
if shortages of properties, materials or labor are insufficient causing market
demands to require our General Partner’s management to allocate project
opportunities between us and its affiliates.





Because
the management of our General Partner manages other investment funds and
entities with similar investment strategies, including AmREIT, competition for
properties will create a conflict of interest. Management expects to manage this
conflict by providing a pipeline of real estate projects and opportunities to
support all of its activities. All potential development and acquisition
opportunities will initially be presented to AmREIT. If AmREIT elects not to
make the investment, our General Partner’s management will determine which of
the entities that it advises, including us would be most appropriate to make the
proposed investment. To determine which entity should make the investment,
management will first evaluate the investment objectives of each investment fund
and determine if the opportunity is suitable for each fund. If the proposed
investment is appropriate for more than one fund, management will then evaluate
the portfolio of each fund, both in terms of geographic diversity and tenant
concentration, to determine if the investment is most suitable to one fund. If
the geographic diversity and tenant concentration analysis is not determinative,
management will allocate the property to the fund with uncommitted funds
available for the longest period of time. Our General Partner’s management may
also allow multiple investment funds to enter into joint ventures for the
purchase or acquisition of a property.





Competition
for Management Services





Our
General Partner’s management is engaged in substantial activities apart from our
business, including their duties to AmREIT and other real estate programs
sponsored by AmREIT. As such, they will devote only so much of their entire time
to our affairs as is reasonably required in their judgment and they could have
conflicts of interest in allocating their time between us and other entities.
Our General Partner believes that it has sufficient staff to fully discharge its
responsibilities to us.





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Leasing
Agents





Our
General Partner retains the services of affiliated leasing agents to lease the
properties in which we have invested. Because these leasing agents provide
similar services to affiliates of our General Partner, including AmREIT, they
face conflicts of interest if they are seeking to lease our properties and
similar properties of its affiliates at the same time. In such an event, the
affiliated leasing agent will seek to mitigate any potential conflict by
presenting a potential tenant with all of the available properties, so that the
potential tenant can select the property with the size, rent, location and other
characteristics most suitable to its needs.





Properties





We rely
on our General Partner and its affiliates in the selection, management and sale
of the properties and do not have independent representation in this regard.
Conflicts of interest could arise in connection with any interests affiliates of
our General Partner may have in a particular property, including interests it
may have as an affiliate of AmREIT in connection with any sale of a property to
AmREIT, and those of the Limited Partners in operating the Partnership. See
“Item 1. Description of Business – Risk Factors.”





Sale
of Properties





Our
General Partner actively manages our Actively Managed properties during the
operating period. During the operating period, our General Partner will sell our
properties from time to time to third-party real estate investors. Our General
Partner may receive compensation in the form of a brokerage commission for the
work performed in the sale of the properties. Because there is potential for our
General Partner to earn a brokerage commission on each property sale, there is a
conflict of interest in that our General Partner may sell a property simply to
earn a brokerage commission, even if it is not in our best interest or the best
interest of the Limited Partners.





No
Arm’s-Length Agreements





The
compensation payable to our General Partner and its affiliates has not been
determined by arm’s­-length negotiations. Also, a significant portion of
this compensation is payable irrespective of the quality of the services
provided or our success or profitability. There is no assurance that the amounts
or terms of such compensation will not exceed that which would be paid to
unrelated persons under similar circumstances in arm’s-length
transactions.





AmREIT’s
Interests in Other Programs





AmREIT,
our General Partner’s parent, engages for the account of others in other
business ventures involving real estate development and investment. Moreover,
AmREIT or its affiliates, including our General Partner, may in the future serve
as management for the general partner of other companies or ventures, and
acquire, develop and operate real estate related activities in the same areas as
ours for their own account. Neither we nor any Limited Partner will be entitled
to any interest in such other ventures.





Transactions
with Affiliates





We have
granted AmREIT a limited right of first offer to purchase our properties that
our General Partner determines are in our best interests to sell. If AmREIT
elects to purchase one of our properties, the purchase price will be at fair
market value, which will be determined by one or more independent appraisers.
AmREIT also has the right to match unsolicited offers we receive from third
parties for our properties. See “Description of Business — Disposition Policies
— AmREIT’s Rights of First Offer” above for a more detailed description of
AmREIT’s rights. As a result of the inherent conflict in such a sale, we will
only sell a property to AmREIT if they agree to pay the market value or the
amount of a bona fide final third-party offer for that property. In addition, we
may borrow money from AmREIT or its affiliates. Although our General Partner
will only approve an affiliated borrowing transaction if, in the exercise of its
fiduciary duties, it determines that the terms are fair and reasonable and no
less favorable to us than comparable loans between unaffiliated third parties,
our General Partner could face conflicts of interest in connection with such a
transaction that may not be resolved in the best interests of the Limited
Partners.





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See “Item
12. Certain Relationships and Related Transactions, and Director Independence”
for a description of the fees and expenses we pay our General Partner and its
affiliates.





Affiliated
Property Manager and Construction Manager





AmREIT
Realty Investment Corporation, or ARIC, an affiliate of our General Partner,
performs property management services for all of the properties in which we have
an interest, other than 5433 Westheimer, and may provide property
management services for properties in which we acquire an interest in the
future.  ARIC is a wholly-owned subsidiary of AmREIT and the officers
of our General Partner are also officers of ARIC. As a result, we might not
always have the benefit of independent property management to the same extent as
if our General Partner and the property manager were unaffiliated. In addition,
given that ARIC is an affiliate of our General Partner, any agreements with ARIC
are not negotiated at arm’s-length, as they would between unrelated
parties.





AmREIT
Construction Company, an affiliate of our General Partner, provides, and may in
the future provide, construction and construction management services for
certain of our development and redevelopment projects. AmREIT Construction
Company completed our Westside Plaza redevelopment project in 2007 and is under
contract to provide construction management services for the redevelopments of
Casa Linda, Preston Towne Crossing, and Berkeley Square. As a result, we do not
have the benefit of independent construction management to the same extent as if
AmREIT Construction Company was unaffiliated. Since AmREIT Construction Company
is an affiliate of our General Partner, we do not have the benefit of
arm’s-length negotiation of any contracts we enter into with AmREIT Construction
Company that would apply between unrelated parties.





Lack
of Separate Representation





Our legal
counsel acts and may in the future act as counsel to us, our General Partner,
AmREIT and certain of our respective affiliates. There is a possibility that in
the future, the interests of the various parties may become adverse, and under
the Code of Professional Responsibility of the legal profession, our counsel may
be precluded from representing any one or all of such parties. In the event that
a dispute were to arise between us, our General Partner, AmREIT or any of our
respective affiliates, separate counsel for such matters will be retained as and
when appropriate.





Tax
Matters Partner





In the
event of an audit of our federal income tax returns by the IRS, it is possible
that the interests of our General Partner in such an audit could become
inconsistent with or adverse to the interests of the Limited Partners. Our
expenses in contesting any such audit may reduce the amount of cash available
for distribution. Further, our General Partner, who is primarily responsible for
contesting federal income tax adjustments proposed by the IRS, may be subject to
various conflicts of interest in connection with the negotiation and settlement
of issues raised by the IRS in a federal income tax audit.





Employees





We have
no employees. Our affairs are managed by our General Partner and our General
Partner and its affiliates provide services to us related to acquisitions,
property management, accounting, investor relations and other administrative
services. We are dependent upon our General Partner and its affiliates for these
services.





Insurance





We
believe that our properties are adequately insured.





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Competition





As we
purchase properties for our portfolio, we are in competition with other
potential buyers, including our affiliates, for the same properties. As a
result, we may either have to pay more to purchase the property than we would if
there were no other potential acquirers or locate another property that meets
our investment criteria. Although our property portfolio is currently 81% leased
and we have acquired, and intend to continue to acquire, properties subject to
existing leases, the leasing of real estate is highly competitive, and we may
experience competition for tenants from owners and managers of competing
projects. As a result, we may have to provide free rent, incur charges for
tenant improvements, or offer other inducements, or we might not be able to
timely lease the space, all of which may have an adverse impact on our results
of operations. At the time we elect to dispose of our properties, we will also
be in competition with sellers of similar properties to locate suitable
purchasers for their properties.





Concentration
of Credit Risk





As of
December 31, 2007, we had $4.2 million invested in a government security money
market account. Such amounts are readily convertible into cash for use in our
operations.





We have
geographic concentration in our property holdings. In particular, as of December
31, 2007, all of our properties were located in Texas. We have tenant
concentration in our properties. Rental income generated from H-E-B Grocery and
Designer Shoe Warehouse represented 29% and 11% of our 2007 rental income,
respectively.





RISK
FACTORS





Risks
Related to an Investment in AmREIT Monthly Income & Growth Fund III,
Ltd.





There
is no public market for our Units; therefore, it is difficult for a Limited
Partner to sell his or her Units.





There
currently is no public market for our Units and we have no obligation or current
plans to apply for listing on any public securities market. A Limited Partner
may not sell, assign or otherwise transfer his or her Units without the prior
written consent of our General Partner, which may be withheld for any reason or
no reason. In addition, our Partnership Agreement restricts our Partners’
ability to participate in a public securities market or anything substantially
equivalent to one by providing that any transfer which may cause us to be
classified as a “publicly traded partnership” as defined in Section 7704 of the
Internal Revenue Code, or the Code, shall be deemed void and shall not be
recognized.





We
presently intend to effect a liquidity event within six years from the date we
closed the Offering and commenced formal operations; however, there can be no
assurance that we will effect a liquidity event within such time or at all. If
we do not effect a liquidity event, it will be very difficult for our Limited
Partners to obtain liquidity for their investment.





Under our
Partnership Agreement, our General Partner is required to use commercially
reasonable efforts to cause all property owned by us to be listed for sale on or
before October 31, 2012, which is the sixth year anniversary of the date we
closed the Offering and commenced formal operations. If, by such date, our
General Partner has not taken such action or is not diligently pursuing such
action, our General Partner shall forfeit its $800,000 investment in our Units.
If we do not effect a liquidity event, it will be very difficult for our Limited
Partners to have liquidity for their investment in our Units other than limited
liquidity through the sale or transfer of their Units with the prior written
consent of our General Partner.





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If
our investments do not perform as we expect, then we may not be able to achieve
our investment objectives or pay distributions to our Partners.





Our
ability to achieve our investment objectives and to pay distributions is
dependent upon the performance of our investments. Except for certain matters
regarding the basic structure of the Partnership, all management decisions are
made solely by our General Partner. Our Limited Partners must rely entirely on
the management ability of our General Partner, which ability may be affected by
the past experience of its management and our General Partner’s present and
future financial condition, among other factors. Our General Partner may not
have been or may not be successful in obtaining suitable investments on
financially attractive terms so that our objectives will be achieved by these
investments.





Our
properties face significant competition.





We face
significant competition from other owners, operators and developers of retail
properties. All or substantially all of our properties face competition from
similar properties in the same markets. Such competition may affect our ability
to attract and retain tenants and may reduce the rents we are able to charge.
These competing properties may have vacancy rates higher than our properties,
which may cause their owners to rent space at lower rental rates than those
charged by us or to provide greater tenant improvement allowances or other
leasing concessions. This combination of circumstances could adversely affect
our results of operations, liquidity and financial condition, which could reduce
distributions to our Partners.





There
may be significant fluctuations in our quarterly results.





Our
quarterly operating results fluctuate based on a number of factors, including,
among others, interest rate changes; the volume and timing of our property
acquisitions; the amount and timing of income generated by our real estate
investments; the recognitions of gains or losses on property sales; the level of
competition in our market; and general economic conditions, especially those
affecting the retail industries. As a result of these factors, results for any
quarter should not be relied upon as being indicative of performance in future
quarters.





The
economic performance and value of our properties depend on many factors, each of
which could have an adverse impact on our cash flows and operating
results.





The
economic performance and the value of our properties depends on many factors,
including, among others, the following:





·
            changes
      in the national, regional and local economic
  climate;





·
            local
      conditions such as an oversupply of space or a reduction in demand for
      retail real estate in the area;





·
            the
      attractiveness of the properties to
tenants;





·
            competition
      from other available space;





·
            our
      ability to provide adequate management services and to maintain our
      properties;





·
            increased
      operating costs, if these costs cannot be passed through to tenants;
      and





·
            the
      expense of periodically renovating, repairing and releasing
      spaces.





Our
properties consist primarily of multi-tenant retail centers and our performance
is linked to general economic conditions in the market for retail space. The
market for retail space has been and may continue to be adversely affected by
weakness in the national, regional and local economies where our properties are
located, the adverse financial condition of some large retailing companies, the
ongoing consolidation in the retail sector, the excess amount of retail space in
a number of markets and increasing consumer purchases through catalogues and the
Internet. To the extent that any of these conditions occur, they are likely to
affect market rents for retail space. In addition, we may face challenges in the
management and maintenance of the properties or encounter increased operating
costs, such as real estate taxes, insurance and utilities, which may make our
properties unattractive to tenants.





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Our
dependence on rental income may adversely affect our ability to meet our debt
obligations and make distributions to our Partners.





A
significant percentage of our income is derived from rental income from our
portfolio of properties. As a result, our performance depends on our ability to
collect rent from tenants. Our income and our ability to make distributions
would be negatively affected if a significant number of our tenants, or any of
our major tenants:





·
            delay
      lease commencements;





·
            decline
      to extend or renew leases upon
expiration;





·
            fail
      to make rental payments when due;
or





·
            close
      stores or declare bankruptcy.





Any of
these actions could result in the termination of the tenants’ leases and the
loss of rental income attributable to the terminated leases. Lease terminations
by an anchor tenant or a failure by that anchor tenant to occupy the premises
could also result in lease terminations or reductions in rent by other tenants
in the same shopping center under the terms of some leases. In addition, we
cannot be sure that any tenant whose lease expires will renew that lease or that
we will be able to re-lease space on economically advantageous terms. The loss
of rental revenues from a number of our tenants and our inability to replace
such tenants may adversely affect our profitability and our ability to meet debt
and other financial obligations and make distributions to our
Partners.





Risks
Related to Our Relationship to AmREIT and its Affiliates





We
depend on our General Partner and key personnel of AmREIT.





Our
ability to make distributions and achieve our investment objectives is dependent
upon the performance of our General Partner in the acquisition and sale of real
properties, the management of our portfolio, the selection of tenants for our
properties and the determination of any financing arrangements. If our General
Partner’s management is distracted by intense activity of affiliated programs
unrelated to us, our General Partner may be unable to allocate time and
resources to our operations. If our General Partner is unable to allocate
sufficient resources to oversee and perform our operations for any reason, we
may be unable to achieve our investment objectives or to pay distributions to
our Partners. In addition, because our General Partner does not have any
employees or financial resources of its own, our success is dependent upon the
continued contributions of certain of the key personnel of AmREIT, our General
Partner’s parent company, each of whom would be difficult to
replace.





If
AmREIT loses or is unable to obtain key personnel, our ability to implement our
investment strategies could be delayed or hindered, which could adversely affect
our ability to make distributions to our Partners and the value of our Limited
Partners’ investment.





Our
success depends to a significant degree upon the contributions of certain of our
General Partner’s executive officers and other key personnel of AmREIT, our
General Partner’s parent, including, among others, H. Kerr Taylor, Chad C. Braun
and Brett Treadwell, each of whom would be difficult to replace. We cannot
guarantee that all, or any particular one of these individuals, will remain
affiliated with us. We believe that our future success depends, in large part,
upon AmREIT’s ability to hire and retain highly skilled managerial, operational
and marketing personnel. Competition for such personnel is intense, and our
General Partner may not be successful in attracting and retaining such skilled
personnel. If AmREIT loses or is unable to obtain the services of key personnel
or does not establish or maintain appropriate strategic relationships, our
ability to implement our investment strategies could be delayed or hindered, and
the value of our Limited Partners’ investment may decline.





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We
compete with other AmREIT affiliated entities for opportunities to acquire or
sell certain real properties, which could adversely affect our investment
opportunities.





We
compete with other AmREIT affiliated entities for opportunities to acquire or
sell certain types of real properties. AmREIT, REITPlus, Inc. and another AmREIT
sponsored program, AmREIT Monthly Income & Growth Fund IV, L.P., or MIG IV,
are actively seeking investments substantially similar to those we seek to
acquire. All potential development and acquisition opportunities are first
presented to AmREIT. Only if AmREIT elects not to make a development project
investment does its management determine which of the other AmREIT sponsored
programs, including us, would be most appropriate to make the proposed
investment. There is a risk that our General Partner will select for us a
property investment that provides lower returns to us than a property purchased
by another AmREIT sponsored program, and we may not have the opportunity to
invest in certain investment opportunities that fit our investment
strategy.





In
addition, we may sell or seek tenants for our properties at the same time as
AmREIT and other AmREIT sponsored programs are selling and seeking tenants for
properties. Certain of our affiliates, including AmREIT, own and manage
properties in the same geographical areas in which we own properties. Therefore,
our properties may compete for tenants with other properties owned and managed
by other AmREIT affiliated entities. Our General Partner faces conflicts of
interest when evaluating tenant leasing opportunities for our properties and
real properties owned and managed by AmREIT affiliated entities and these
conflicts of interest may have a negative impact on our ability to attract and
retain tenants.





When
we determine to sell one of our properties, AmREIT has a right of first offer to
acquire such property at market value, which may limit the amount of proceeds we
would otherwise receive upon the sale of such property.





When we
determine to sell one of our properties, our General Partner is required to
provide AmREIT with notice and 15 days to provide us with a binding offer to
purchase the property. If AmREIT elects to purchase one of our properties, the
purchase price will be at fair market value, which will be determined by one or
more independent appraisers. Because a property purchased by AmREIT pursuant to
its right of first offer will never be marketed for sale to third parties, it is
possible that the appraised market value of the property paid by AmREIT would be
less than the price of the property we could receive from an unaffiliated third
party, thereby reducing the return on our investments.





Our
General Partner faces conflicts of interest in the incentive fee structure under
the Partnership Agreement, which could result in actions that are not in the
long-term best interests of our Limited Partners.





Under our
Partnership Agreement, our General Partner is entitled to fees that are
structured in a manner intended to provide incentives to our General Partner to
perform in our best interests and in the best interests of our Limited Partners.
However, because our General Partner is entitled to receive substantial
compensation regardless of our performance, our General Partner’s interests are
not wholly aligned with those of our Limited Partners. In that regard, our
General Partner could be motivated to recommend riskier or additional
speculative investments in order for us to generate the specified levels of
performance or sales proceeds that would entitle our General Partner to fees. In
addition, our General Partner’s entitlement to fees upon the sale of our assets
and to participate in sale proceeds could result in our General Partner
recommending sales of our investments at the earliest possible time at which
sales of investments would produce the level of return that would entitle our
General Partner to compensation relating to such sales, even if continued
ownership of those investments might be in our best long-term
interest.





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Risks
Related to Our Corporate Structure





Our
Limited Partners have limited control over changes in our policies and
operations.





Our
General Partner determines our major policies, including our policies regarding
our investment objectives, acquisitions, dispositions, financing, growth, debt
capitalization and distributions. Our General Partner may amend or revise these
and other policies without a vote of the Limited Partners. Our General Partner’s
broad discretion in setting policies and our Limited Partners’ inability to
exert control over those policies increases the uncertainty and risks a Limited
Partner has with an investment in us.





We
may not have sufficient cash available from operations to pay distributions,
and, therefore, distributions may include a return of capital.





Distributions
payable to our Partners may include a return of capital, rather than a return on
capital. The actual amount and timing of distributions are determined by our
General Partner in its discretion and typically will depend on the amount of
funds available for distribution, which will depend on items such as current and
projected cash requirements and tax considerations. As a result, our
distribution rate and payment frequency may vary from time to time. During the
early stages of our operations, we may not have sufficient cash available from
operations to pay distributions. Therefore, we may need to use proceeds from the
Offering to make cash distributions, which may reduce the amount of proceeds
available for investment and operations.





Our
Limited Partners’ investment return may be reduced if we are required to
register as an investment company under the Investment Company Act.





We are
not registered as an investment company under the Investment Company Act of
1940, as amended. If for any reason we were required to register as an
investment company, we would have to comply with a variety of substantive
requirements under the Investment Company Act imposing, among other
things:





·
            limitations
      on capital structure;





·
            restrictions
      on specified investments;





·
            prohibitions
      on transactions with affiliates;
and





·
            compliance
      with reporting, record keeping, voting, proxy disclosure and other rules
      and regulations that would significantly change our
      operations.





In order
to maintain our exemption from regulation as an investment company under the
Investment Company Act, we engage primarily in the business of investing in
interests in real estate and have invested a significant portion of the proceeds
of our Offering in properties within one year after the Offering ended. We have
invested the uninvested proceeds of our Offering in government securities with
low returns to avoid being required to register as an investment company under
the Investment Company Act.





To
maintain compliance with the Investment Company Act exemption, our General
Partner may be required to impose limitations on our investment activities. In
particular, our General Partner may limit the percentage of our assets that fall
into certain categories specified in the Investment Company Act, which could
result in us holding assets we otherwise might desire to sell and selling assets
we otherwise might wish to retain. In addition, we may have to acquire
additional assets that we might not otherwise have acquired or be forced to
forgo investment opportunities that we would otherwise want to acquire and that
could be important to our investment strategy. If we were required to register
as an investment company but failed to do so, we would be prohibited from
engaging in our business, and criminal and civil actions could be brought
against us. In addition, our contracts would be unenforceable unless a court
were to require enforcement, and a court could appoint a receiver to take
control of us and liquidate our business.





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Risks
Related to Investments in Properties





Our
future operating results will be affected by economic and regulatory changes
that impact the real estate market in general.





We are
subject to risks generally attributable to the ownership of property,
including:





·
            changes
      in national, regional or local economic, demographic, or real estate
      market conditions;





·
            changes
      in supply of or demand for similar properties in an
  area;





·
            increased
      competition for property investments targeted by our investment
      strategy;





·
            bankruptcies,
      financial difficulties or lease defaults by our
  tenants;





·
            changes
      in interest rates and availability of financing;
  and





·
            changes
      in government rules, regulations and fiscal policies, including changes in
      tax, real estate, environmental and zoning
laws.





All of
these factors are beyond our control. Any negative changes in these factors
could affect our ability to meet our obligations and make
distributions.





A
property that incurs a vacancy could be difficult to sell or
re-lease.





A
property may incur a vacancy either by the continued default of a tenant under
its lease or the expiration of one of our leases. In addition, certain of the
properties we acquire may have some level of vacancy at the time of closing.
Certain other properties may be specifically suited to the particular needs of a
tenant and may become vacant. Therefore, we may have difficulty obtaining a new
tenant for any vacant space we have in our properties. If the vacancy continues
for a long period of time, we may suffer reduced revenues resulting in lower
cash distributions. In addition, the resale value of the property could be
diminished because the market value may depend principally upon the value of the
leases of such property.





We
may not have funding for future tenant improvements.





When a
tenant at one of our properties does not renew its lease or otherwise vacates
its space in one of our properties, it is likely that, in order to attract one
or more new tenants, we will be required to expend substantial funds to
construct new tenant improvements in the vacated space. Substantially all of the
net proceeds from the Offering will be invested in properties and we do not
anticipate that we will maintain permanent working capital reserves. We do not
currently have an identified funding source to provide funds which may be
required in the future for tenant improvements and tenant refurbishments in
order to attract new tenants. If we do not establish sufficient reserves for
working capital or obtain adequate secured financing to supply necessary funds
for capital improvements or similar expenses, we may be required to defer
necessary or desirable improvements to our properties. If we defer such
improvements, the applicable properties may decline in value, and it may be more
difficult for us to attract or retain tenants to such properties or the amount
of rent we can charge at such properties may decrease. We cannot provide
assurance that we will have any sources of funding available to us for repair or
reconstruction of damaged property in the future.








18
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Our
investments in development and redevelopment properties are subject to certain
risks which could harm our operating results and reduce the amount of funds
available for distribution.
 
 As a
component of our strategy for realizing growth in the value of our investments,
we seek to develop new properties and redevelop existing properties. As we
develop and redevelop properties, such properties will be subject to a number of
risks, including, but not limited to:


·
            the
      inability to obtain or delays in obtaining required zoning, occupancy and
      other governmental approvals;





·
            a
      lack of operating and rental
history;





·
            inability
      to reach projected occupancy and rental
rates;





·
            higher
      than estimated construction costs and cost overruns;
  and





·
            inability
      to obtain financing or to obtain financing on terms favorable to
      us.





Our
properties are subject to property taxes that may increase in the future, which
could adversely affect our cash flow.





Our
properties are subject to real and personal property taxes that may increase as
tax rates change and as the properties are assessed or reassessed by taxing
authorities. Certain of our leases provide that the property taxes, or increases
therein, are charged to the lessees as an expense related to the properties that
they occupy while other leases will generally provide that we are responsible
for such taxes. In any case, as the owner of the properties, we are ultimately
responsible for payment of the taxes to the applicable government authorities.
If real property taxes increase, our tenants may be unable to make the required
tax payments, ultimately requiring us to pay the taxes even if otherwise stated
under the terms of the lease. If we fail to pay any such taxes, the applicable
taxing authority may place a lien on the property and the property may be
subject to a tax sale. In addition, we are generally responsible for real
property taxes related to any vacant space.





Uninsured
losses or premiums for insurance coverage relating to property may adversely
affect Limited Partners’ returns.





We
attempt to adequately insure all of our properties against casualty losses.
There are types of losses, generally catastrophic in nature, such as losses due
to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or
environmental matters that are uninsurable or not economically insurable, or may
be insured subject to limitations, such as large deductibles or co-payments.
Risks associated with potential terrorism acts could sharply increase the
premiums we pay for coverage against property and casualty claims. Additionally,
mortgage lenders sometimes require commercial property owners to purchase
specific coverage against terrorism as a condition for providing mortgage loans.
These policies may not be available at a reasonable cost, if at all, which could
inhibit our ability to finance or refinance our properties. In such instances,
we may be required to provide other financial support, either through financial
assurances or self-insurance, to cover potential losses. Changes in the cost or
availability of insurance could expose us to uninsured casualty losses. In the
event that any of our properties incurs a casualty loss which is not fully
covered by insurance, the value of our assets will be reduced by any such
uninsured loss. In addition, we cannot provide assurance that funding will be
available to us for repair or reconstruction of damaged property in the
future.





We
compete with numerous other parties or entities for property investments and
tenants.





We
compete with numerous other entities, including our affiliates, to buy
properties and to attract tenants. Some of these entities have greater
experience and financial strength. There is no assurance that we will be able to
acquire additional properties or attract additional tenants on favorable terms,
if at all. For example, our competitors may be willing to offer space at rental
rates below our rates, causing us to lose existing or potential tenants and
pressuring us to reduce our rental rates to retain existing tenants or convince
new tenants to lease space at our properties. All of these factors could
adversely affect our results of operations, financial condition, value of our
investments and ability to pay distributions.





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Delays
in the acquisition, development and redevelopment of properties may have adverse
effects on our Limited Partners’ investment.





Delays we
encounter in the selection, acquisition, development and redevelopment of
properties could adversely affect the returns of our Limited Partners. If we
acquire properties during the early stages of construction, it will typically
take several months to complete construction and rent available space.
Therefore, our Limited Partners could suffer delays in the distribution of
income attributable to those particular properties. Delays in completion of
construction could give tenants the right to terminate preconstruction leases
for space at a newly developed project. We may incur additional risks when we
make periodic progress payments or other advances to builders prior to
completion of construction. Each of those factors could result in increased
costs of a project or loss of our investment. In addition, we will be subject to
normal lease-up risks relating to newly constructed projects. Furthermore, the
price we agree to pay to acquire property will be based on our projections of
rental income and expenses and estimates of the fair market value of property
upon completion of construction. If our projections are inaccurate, we may pay
too much for a property.





The
terms of joint venture agreements or other joint ownership arrangements into
which we have entered or may enter could impair our operating flexibility and
our results of operations.





In
connection with the purchase of real estate, we may enter into joint ventures
with third parties, including affiliates of AmREIT. We may also purchase or
develop properties in co-ownership arrangements with the sellers of the
properties, developers or other persons. To date, we have entered into eight
joint venture arrangements. These structures involve participation in the
investment by other parties whose interests and rights may not be the same as
ours. Our joint venture partners may have rights to take some actions over which
we have no control and may take actions contrary to our interests. Joint
ownership of an investment in real estate involves risks not associated with
direct ownership of real estate, including the following:





·
            a
      venture partner may at any time have economic or other business interests
      or goals which become inconsistent with our business interests or goals,
      including inconsistent goals relating to the sale of properties held in a
      joint venture or the timing of the termination and liquidation of the
      venture;





·
            a
      venture partner might become bankrupt and such proceedings could have an
      adverse impact on the operation of the partnership or joint venture;
      and





·
            actions
      taken by a venture partner might have the result of subjecting the
      property to liabilities in excess of those
  contemplated.





Under
certain joint venture arrangements, neither venture partner may have the power
to control the venture, and an impasse could be reached, which might adversely
affect the joint venture and decrease potential returns to our Partners. If we
have a right of first refusal or buy/sell right to buy out a venture partner, we
may be unable to finance such a buy-out or we may be forced to exercise those
rights at a time when it would not otherwise be in our best interest to do so.
If our interest is subject to a buy/sell right, we may not have sufficient cash,
available borrowing capacity or other capital resources to allow us to purchase
an interest of a venture partner subject to the buy/sell right, in which case we
may be forced to sell our interest when we would otherwise prefer to retain our
interest. In addition, we may not be able to sell our interest in a joint
venture on a timely basis or on acceptable terms if we desire to exit the
venture for any reason, particularly if our interest is subject to a right of
first refusal of our venture partner.





Costs
of complying with governmental laws and regulations may adversely affect our
income and the cash available for distribution.





All
property investments and the operations conducted in connection with such
investments are subject to federal, state and local laws and regulations
relating to environmental protection and human health and safety. Some of these
laws and regulations may impose joint and several liability on customers, owners
or operators for the costs to investigate or remediate contaminated properties,
regardless of fault or whether the acts causing the contamination were
legal.





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Under
various federal, state and local environmental laws, a current or previous owner
or operator of real property may be liable for the cost of removing or
remediating hazardous or toxic substances on such property. Such laws often
impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. In
addition, the presence of hazardous substances, or the failure to properly
remediate these substances, may adversely affect our ability to sell, rent or
pledge such property as collateral for future borrowings. Environmental laws
also may impose restrictions on the manner in which property may be used or
businesses may be operated. Some of these laws and regulations have been amended
so as to require compliance with new or more stringent standards as of future
dates. Compliance with new or more stringent laws or regulations or stricter
interpretation of existing laws may require us to incur material expenditures.
Future laws, ordinances or regulations may impose material environmental
liability. Additionally, our tenants’ operations, the existing condition of land
when we buy it, operations in the vicinity of our properties, such as the
presence of underground storage tanks, or activities of unrelated third parties
may affect our properties. In addition, there are various local, state and
federal fire, health, life-safety and similar regulations with which we may be
required to comply, and which may subject us to liability in the form of fines
or damages for noncompliance. In connection with the acquisition and ownership
of our properties, we may be exposed to such costs in connection with these
regulations. The cost of defending against environmental claims, of any damages
or fines we must pay, of compliance with environmental regulatory requirements
or of remediating any contaminated property could materially adversely affect
our business, assets or results of operations and, consequently, amounts
available for distribution to our Partners.





If
a tenant declares bankruptcy, we may be unable to collect balances due under
relevant leases.





Any of
our tenants, or any guarantor of a tenant’s lease obligations, could be subject
to a bankruptcy proceeding pursuant to Title 11 of the bankruptcy laws of the
United States. Such a bankruptcy filing would bar all efforts by us to collect
pre-bankruptcy debts from these entities or their properties, unless we receive
an enabling order from the bankruptcy court. Post-bankruptcy debts would be paid
currently. If a lease is assumed, all pre-bankruptcy balances owing under it
must be paid in full. If a lease is rejected by a tenant in bankruptcy, we would
have a general unsecured claim for damages. If a lease is rejected, it is
unlikely we would receive any payments from the tenant because our claim is
capped at the rent reserved under the lease, without acceleration, for the
greater of one year or 15.0% of the remaining term of the lease, but not greater
than three years, plus rent already due but unpaid. This claim could be paid
only in the event funds were available, and then only in the same percentage as
that realized on other unsecured claims.





A tenant
or lease guarantor bankruptcy could delay efforts to collect past due balances
under the relevant leases, and could ultimately preclude full collection of
these sums. Such an event could cause a decrease or cessation of rental payments
that would mean a reduction in our cash flow and the amount available for
distributions to our Partners. In the event of a bankruptcy, we cannot provide
assurance that the tenant or its trustee will assume our lease. If a given
lease, or guaranty of a lease, is not assumed, our cash flow and the amounts
available for distributions to our Partners may be adversely
affected.





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Risks
Associated with Retail Properties





Our
properties primarily consist of retail properties. Our performance, therefore,
is linked to the market for retail space generally.





The
market for retail space has been and could be adversely affected by weaknesses
in the national regional and local economies, the adverse financial condition of
some large retailing companies, the ongoing consolidation in the retail sector,
the excess amount of retail space in a number of markets and competition for
tenants with other shopping centers in our markets. Because our properties
primarily consist of retail tenants, a downturn in the market for retail space
generally may hurt our performance.





In
addition, some of our leases provide for base rent plus contractual base rent
increases. Other leases include a percentage rent clause for additional rent
above the base amount based upon a specified percentage of the sales our tenants
generate. Under those leases which contain percentage rent clauses, our revenue
from tenants may increase as the sales of our tenants increase. Generally,
retailers face declining revenues during downturns in the economy. As a result,
the portion of our revenue which we may derive from percentage rent leases could
decline upon a general economic downturn.





Our
retail tenants will face competition from numerous retail channels, which may
reduce our profitability and ability to pay distributions.





Retailers
at our properties face continued competition from, discount or value retailers,
factory outlet centers, wholesale clubs, mail order catalogues and operators,
television shopping networks, and shopping via the Internet. Such competition
could adversely affect our tenants and, consequently, our revenues and funds
available for distribution.





Our
future revenue will be impacted by the success and economic viability of our
anchor retail tenants. Our reliance on single or significant tenants in certain
buildings may decrease our ability to lease vacated space and adversely affect
the returns on our Limited Partners’ investment.





In the
retail sector, a tenant occupying all or a large portion of the gross leasable
area of a retail center, commonly referred to as an anchor tenant, may become
insolvent, may suffer a downturn in business, or may decide not to renew its
lease. Any of these events would result in a reduction or cessation in rental
payments to us and would adversely affect our financial condition. A lease
termination by an anchor tenant could result in lease terminations or reductions
in rent by other tenants whose leases permit cancellation or rent reduction if
another tenant’s lease is terminated. We may own properties where the tenants
may have rights to terminate their leases if certain other tenants are no longer
open for business. These “co-tenancy” provisions may also exist in some leases
where we own a portion of a retail property and one or more of the anchor
tenants leases space in that portion of the center not owned or controlled by
us. If such tenants were to vacate their space, tenants with co-tenancy
provisions would have the right to terminate their leases with us or seek a rent
reduction from us. In such event, we may be unable to re-lease the vacated
space. Similarly, the leases of some anchor tenants may permit the anchor tenant
to transfer its lease to another retailer. The transfer to a new anchor tenant
could cause customer traffic in the retail center to decrease and thereby reduce
the income generated by that retail center. A lease transfer to a new anchor
tenant could also allow other tenants to make reduced rental payments or to
terminate their leases at the retail center. In the event that we are unable to
re-lease the vacated space to a new anchor tenant, we may incur additional
expenses in order to re-model the space to be able to re-lease the space to more
than one tenant.








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Risks
Associated with Debt Financing
 
 We
incur mortgage indebtedness and other borrowings, which increases our business
risks, potentially hinders our ability to make distributions and potentially
decreases the value of our Limited Partners’ investment.
  We
generally finance a portion of the purchase price of properties by borrowing
funds. High debt levels cause us to incur higher interest charges, which results
in higher debt service payments and could be accompanied by restrictive
covenants. If there is a shortfall between the cash flow from a property and the
cash flow needed to service mortgage debt on that property, then the amount
available for distributions to Limited Partners may be reduced. In addition,
incurring mortgage debt increases the risk of loss since defaults on
indebtedness secured by a property may result in lenders initiating foreclosure
actions. In that case, we could lose the property securing the loan that is in
default, thus reducing the value of our Limited Partners’ investment. For tax
purposes, a foreclosure on any of our properties will be treated as a sale of
the property for a purchase price equal to the outstanding balance of the debt
secured by the mortgage. If the outstanding balance of the debt secured by the
mortgage exceeds our tax basis in the property, we will recognize taxable income
on foreclosure, but we would not receive any cash proceeds. We may give full or
partial guarantees to lenders of mortgage debt to the entities that own our
properties. When we give a guaranty on behalf of an entity that owns one of our
properties, we will be responsible to the lender for satisfaction of the debt if
it is not paid by such entity. If any mortgage contains cross-collateralization
or cross-default provisions, a default on a single property could affect
multiple properties. If any of our properties are foreclosed upon due to a
default, our ability to pay cash distributions to our Partners will be adversely
affected.


Higher
mortgage rates may make it difficult for us to finance or refinance properties,
which could reduce the number of properties we can acquire and the amount of
cash distributions we can make to our Partners.





If
mortgage debt is unavailable at reasonable rates in the future, we may not be
able to finance the initial purchase of properties on terms we deem reasonable.
In addition, when we place mortgage debt on properties, we run the risk of being
unable to refinance such debt when the loans come due, or of being unable to
refinance on favorable terms. If interest rates are higher when we refinance
debt, our income could be reduced. We may be unable to refinance debt at
appropriate times, which may require us to sell properties on terms that are not
advantageous to us, or could result in the foreclosure of such properties. If
any of these events occur, our cash flow would be reduced. This, in turn, would
reduce cash available for distribution to our Partners and may hinder our
ability to raise additional capital by issuing securities or by borrowing
additional money.





Increases
in interest rates could increase the amount of our debt payments and adversely
affect our ability to make distributions to our Partners.





Interest
we pay on our debt obligations reduces cash available for distributions.
Variable rate debt causes increases in interest rates to increase our interest
costs, which would reduce our cash flows and our ability to make distributions
to our Partners. In addition, if we need to repay existing debt during periods
of rising interest rates, we could be required to liquidate one or more of our
investments in properties at times which may not permit realization of the
maximum return on such investments.





Lenders
may require us to enter into restrictive covenants relating to our operations,
which could limit our ability to make distributions to our
Partners.





When
providing financing, a lender may impose restrictions on us that affect our
distribution and operating policies and our ability to incur additional debt.
Loan documents we enter into may contain covenants that limit our ability to
further mortgage the property or discontinue insurance coverage. In addition,
loan documents may limit our ability to terminate certain operating or lease
agreements related to the property. These or other limitations may adversely
affect our flexibility and our ability to achieve our investment
objectives.





Federal
Income Tax Risks





Failure
to qualify as a partnership would eliminate the anticipated tax benefits
associated with an investment in us.





We are
organized and operated in a manner to maintain our status as a partnership for
federal income tax purposes. We have not sought, will not seek and probably
could not obtain, an advance ruling from the Internal Revenue Service, or IRS,
as to our status as a partnership for federal income tax purposes. If the IRS
were to successfully challenge our status as a partnership, we would be taxable
as a corporation. In such event, this would substantially reduce our cash
available to make distributions to the Partners.





23
 Table of Contents





The
IRS could challenge our and our Limited Partners’ ability to realize certain
favorable tax treatment.





We have
not requested, and do not expect to request, a ruling from the IRS with respect
to any tax aspect of an investment in us. The IRS could challenge the Limited
Partners’ ability to realize certain favorable tax treatment upon an audit of
us. Any adjustment resulting from an audit by the IRS could result in
adjustments to the Limited Partners’ tax returns and could lead to an
examination of other items in such returns unrelated to us or an examination of
prior tax returns. Moreover, the Limited Partners could incur substantial legal
and accounting costs should the IRS challenge a position taken by us on our tax
returns regardless of the outcome of such a challenge.





Additionally,
the IRS may contend that certain fees and payments which we deduct should in
fact be deductible over a longer period of time, or that such payments are
excessive and may not be deducted. Moreover, the IRS may contend that such
payments should be treated as non-deductible partnership distributions or
syndication fees. If the IRS was successful in any of these contentions, our
forecasted taxable income and our federal income tax liability could be
increased.





ITEM
      2.
            DESCRIPTION OF
      PROPERTY





Overview





During
the period from April 19, 2005 (inception) to December 31, 2007, we acquired
interests in eleven properties.  We directly own three properties and
have investments in eight properties through joint venture
arrangements.  We have included a description of the types of real
estate in which we have invested and will invest, and a summary of our
investment policies and limitations on investment and the competitive conditions
in which we operate under “Item 1.  Description of Business”
above.  We believe our properties are suitable for their intended use
and are adequately insured.





As of
December 31, 2007, we owned interests in the following properties, all of
which are located in Texas:




Property
            Location
            
            Square
      Footage
            
            Percentage
      Leased
            
            Annualized
      Gross Base Rent(1)
            
            Percentage
      of Total Annualized Gross Base RentWestside
      Plaza
            Houston
            
            
            43,021
            
            
            
            92
            %
            
            $
            979,000
            
            
            
            5
            %Market
      at Lake Houston(2)
            Houston
            
            
            101,799
            
            
            
            100
            
            
            
            1,535,000
            
            
            
            95433
      Westheimer(3)
            Houston
            
            
            133,881
            
            
            
            61
            
            
            
            1,281,000
            
            
            
            7Olmos
      Creek
            San
      Antonio
            
            
            102,178
            
            
            
            84
            
            
            
            983,000
            
            
            
            5Lantern
      Lane
            Houston
            
            
            79,462
            
            
            
            91
            
            
            
            1,391,000
            
            
            
            8Casa
      Linda Plaza(3)
            Dallas
            
            
            324,638
            
            
            
            82
            
            
            
            3,207,000
            
            
            
            18Preston
      Towne Crossing(3)
            Plano
            
            
            169,844
            
            
            
            96
            
            
            
            3,031,000
            
            
            
            17Preston
      Park Gold(3)
            Plano
            
            
            101,096
            
            
            
            77
            
            
            
            955,000
            
            
            
            5Berkeley
      Square(3)
            Plano
            
            
            124,987
            
            
            
            90
            
            
            
            1,916,000
            
            
            
            11Woodlake
      Square(3)
            Houston
            
            
            205,522
            
            
            
            73
            
            
            
            1,985,000
            
            
            
            11Westheimer
      Gessner(3)
            Houston
            
            
            82,120
            
            
            
            50
            
            
            
            627,000
            
            
            
            4Total
            
            
            
            1,468,548
            
            
            
            
            
            
            $
            17,890,000
            
            
            
            100
            %




(1)
            Annualized
      gross base rent represents base rents in place on leases with rent having
      commenced as of December 31, 2007 and does not reflect straight-line rent
      or other adjustments under generally accepted accounting
      principles.





(2)
            Property
      is 60% owned through a joint venture which is consolidated in our
      financial statements.





(3)
            Property
      is owned through a joint venture that is not consolidated in our financial
      statements.





24
 Table of Contents





Description
of Our Real Estate Investments





Westside
Plaza





On
September 30, 2005, we purchased a 100% interest in the Westside Plaza property,
a 43,021 square foot retail shopping center located in Houston, Texas. The
property was purchased from an unaffiliated third party. We used proceeds from
the Offering and assumed two 20-year mortgage loans to fund the acquisition of
the Westside Plaza property. The first loan in the amount of $10.2 million bears
an annual interest rate of 5.62% and had an outstanding principal balance of
$9.9 million as of December 31, 2007.  The second loan in the amount
of $640,000 bears an annual interest rate of 12.75% and had an outstanding
principal balance of $638,000 as of December 31, 2007.





The
Westside Plaza property is anchored by Designer Shoe Warehouse which occupies
24,500 square feet and has a lease scheduled to expire in July 2010. Fadi’s
restaurant is another major tenant and occupies 5,125 square feet with a lease
scheduled to expire in August 2011. We completed the redevelopment of the
property by adding aesthetic enhancements during 2007 and plan to resell it
under attractive market conditions.





The
Market at Lake Houston





On
December 12, 2005, through a joint venture arrangement with an affiliate of our
General Partner, AmREIT Monthly Income & Growth Fund, Ltd, we acquired a 60%
interest in The Market at Lake Houston property, a 101,799 square foot retail
shopping center located in Houston, Texas. Our joint venture partner owns the
other 40% interest in the joint venture. The property was purchased from an
unaffiliated third party. We used proceeds from the Offering and obtained a
30-year mortgage loan to fund the acquisition of The Market at Lake Houston
property. The loan was in the amount of $15.7 million, bears an annual interest
rate of 5.75% and is interest-only until maturity.





This
property is 100% leased. H-E-B Grocery is the largest tenant occupying 80,641
square feet with a lease scheduled to expire February 2017. We acquired this
property with the expectation that it would provide a stable stream of rental
income. We have no plans to renovate or redevelop The Market at Lake Houston
property.





5433
Westheimer





On March
31, 2006, through a special purpose entity, 5433 Westheimer, LP, we purchased a
50% interest in the 5433 Westheimer property, a 133,881 square foot, 11 story
office building located in Houston, Texas. Our joint venture partner, Songy
Partners, owns the other 50% interest in the joint venture. The property was
purchased from an unaffiliated third party. We acquired our interest in the 5433
Westheimer property with proceeds from the Offering and had not mortgaged our
interest in this property as of December 31, 2007. This property currently has
58 tenants, all of whom have short term leases. Prosperity Bank is the largest
tenant occupying 17,185 square feet with a lease scheduled to expire in May
2011. We acquired this property with the intent to redevelop the site into a
mixed use complex with retail shopping and potentially, an office, hotel or
condominium component. We made a loan in the amount of approximately $7.0
million in March 2006 in connection with our plans for redeveloping the site.
This loan has a LIBOR-based variable interest rate of LIBOR plus two percent.
The interest rate on the note was 6.82% as of December 31,
2007.  During 2008, the property was refinanced with a third party
lender.  In conjunction with that refinancing, the lender required an
additional equity contribution of $7.0 million.  This requirement was
satisfied through conversion of our $7.0 million loan to equity.  We
established a note receivable with our joint venture partner for their portion
of the additional equity contribution ($3.5 million), and we expect to be
reimbursed for these amounts during the second quarter of 2008.  We
are currently finalizing our redevelopment plan and expect to complete
construction and build out of the property by March 31, 2009.





Olmos
Creek





On June,
30, 2006, through our wholly-owned special purpose entity, AmREIT Olmos Creek,
LP, we purchased a 100% interest in the Olmos Creek property, a 102,178 square
foot retail shopping center located in San Antonio, Texas. The property was
purchased from an unaffiliated third party. We used proceeds from the Offering
to fund the acquisition of Olmos Creek. Subsequent to the acquisitions, we
obtained a 10-year interest-only mortgage loan in the amount of $11.2 million
that bears an annual interest rate of 6.02%. As of December 31, 2007, major
tenants of the Olmos Creek property include H-E-B Grocery as the largest tenant
occupying 55,513 square feet, Blockbuster, Subway, UPS Store and Edward Jones.
H-E-B Grocery has notified us of their intent to vacate the property in October
2008, and we are currently pursuing other tenants to take that space. H-E-B
Grocery’s lease expires in November 2020, and therefore, is obligated to pay
rent through that period.  Additionally, we have ground leases with
McDonald’s through June 2017 and Compass Bank through May 2017. We acquired this
property with the expectation that it would provide a stable stream of rental
income. We currently do not have plans to renovate or redevelop the Olmos Creek
property.





25
 Table of Contents





During
2006, we sold a parcel of the Olmos Creek property to an unaffiliated third
party for $775,000. We paid our General Partner $25,000 in real estate brokerage
commissions on the sale.





Lantern
Lane





On
September 29, 2006, through our wholly-owned special purpose entity, AmREIT
Lantern Lane, LP, we purchased a 100% interest in the Lantern Lane property, a
79,462 square foot retail shopping center located in Houston, Texas. The
property was purchased from an unaffiliated third party. We used proceeds from
the Offering and obtained a 5-year interest-only mortgage loan in the amount of
$13.4 million that bears an annual interest rate of 6% to fund the acquisition
of the Lantern Lane property.





Rice Food
Market, Inc. is the largest tenant occupying 21,450 square feet with a lease
scheduled to expire in January 2013. We acquired this property with the
expectation that it would provide a stable stream of rental income and have no
plans to redevelop the property.





Properties
in Plano, Texas Owned Through a Joint Venture with an Affiliate of
JPMorgan





Through
our investment in PTC/BSQ Holding Company LLC (“PTC/BSQ”), we purchased a 20%
interest in Preston Towne Crossing, Berkeley Square and Preston Park Gold. The
joint venture, 80% owned by JPMorgan Asset Management, acquired each of these
shopping centers from unrelated third parties. These retail centers, further
described below, are adjacent to one another in Plano, Texas, and total 394,742
square feet. Preston Park Gold was acquired by PTC/BSQ on November 15, 2006
while Preston Towne Crossing and Berkeley Square were both acquired on December
7, 2006.





Preston Park
Gold.The
101,096-square-foot Preston Park Gold, which is the former Target/Vineyard
Antique Mall building, is located between Preston Towne Crossing and Berkeley
Square and was retrofitted in 2007.





Major
tenants of the Preston Gold property include Gold’s Gym which occupies 49,672
square feet and Chair King which occupies 27,771 square feet.  Leases
for these tenants are scheduled to expire in October 2024 and September 2017,
respectively.  The property was redeveloped in order to increase value
and construction was completed in July 2007 and is currently
unencumbered.   The property is currently 77% leased as of
December 31, 2007.





Preston Towne
Crossing and Berkeley Square.The 169,844-square-foot Preston Towne
Crossing and the 124,987-square-foot Berkeley Square are 96% and 90% occupied,
respectively and are located on 35 acres at the northeast corner of Preston Road
and West Park Boulevard in Plano. PTC/BSQ assumed mortgage loans in the amount
of $22.4 million and $18.1 million encumbering Preston Towne Crossing and
Berkeley Square, respectively. Each of the loans matures in January 2012. The
Preston Towne Crossing loan bears interest at 5.83% and the Berkeley Square loan
bears interest at 5.87%. The Preston Towne Crossing loan has a balance of $21.7
million as of December 31, 2007, and the Berkeley Square loan has a balance of
$17.6 million as of December 31, 2007.





Major
tenants of the Preston Towne Crossing property include REI which occupies 27,000
square feet and Park Plaza Salon which occupies 20,000 square feet. Leases for
these tenants are scheduled to expire in April 2015 and December 2011,
respectively. Movie Grill Concepts, Ltd. is the largest tenant of Berkeley
Square occupying 30,977 square feet with a lease scheduled to expire in February
2010.





26
 Table of Contents





Developed
during 1986 and 1987, the shopping centers are expected to benefit from planned
expenditures to enhance the facades, complete store pop-ups, landscaping
upgrades and new signage. We expect these enhancements to be completed by June
2008. The properties also include undeveloped land behind Berkeley Square that
we believe can be sold to an office or residential developer.





Casa
Linda Plaza





On
December 8, 2006, through a joint venture arrangement with an affiliate of our
General Partner, AmREIT Monthly Income & Growth Fund IV, L.P., we acquired a
50% interest in the Casa Linda Plaza property, a 324,638 square foot retail
shopping center located in Dallas, Texas. Our joint venture partner owns the
remaining 50% interest in the joint venture. The property was purchased from an
unaffiliated third-party. We used proceeds from the Offering and obtained a
7-year mortgage loan from Morgan Stanley Mortgage Capital, Inc. to fund the
acquisition of the Casa Linda Plaza property. The loan was in the amount of
$38.0 million, bears an annual interest rate of 5.48% and is interest-only until
maturity.





Albertson’s
is the largest tenant occupying 59,561 square feet with a lease scheduled to
expire in July 2016. Additional tenants are Petco, 24-Hour Fitness, Starbucks,
Wachovia, Chili’s, Blockbuster, Washington Mutual, El Fenix and Guarantee
Federal Bank. The property was originally built between 1946 and 1949, and we
are in the initial stages of planning the center’s redevelopment.





Woodlake
Square





On August
31, 2007, through a joint venture arrangement with affiliates of our General
Partner, AmREIT Monthly Income & Growth Fund IV, L.P. and AmREIT Realty
Investment Company, we acquired a 30% interest in the Woodlake Square property,
a 205,522 square foot retail shopping center located in Houston,
Texas.  Our joint venture partners own the other 70% interest in the
joint venture.  The property was purchased from an unaffiliated third
party. We used proceeds from the Offering and obtained a 3-year mortgage loan
from Frost Bank to fund the acquisition of the Woodlake Square
property.  The loan was in the amount of $24.0 million and is
interest-only until maturity.  The interest related to this debt is at
a variable interest rate of LIBOR plus 1.35%.  At December 31, 2007,
the variable interest rate was 6.58%.





Randall’s
is the largest tenant occupying 56,430 square feet with a lease scheduled to
expire in July 2013.  Additional tenants are Walgreen’s, Hooters, Jos.
A. Bank Clothiers, Ragin Cajun, Woodlake Children’s Center and Amazon
Grill.





Westheimer
Gessner





On
November 21, 2007, through a joint venture arrangement with affiliates of our
General Partner, AmREIT Monthly Income & Growth Fund IV, L.P. and AmREIT
Realty Investment Company, we acquired a 30% interest in the Westheimer Gessner
property, a 82,120 square foot retail shopping center located in Houston,
Texas.  Our joint venture partners own the other 70% interest in the
joint venture.  The property was purchased from an unaffiliated third
party. We used proceeds from the Offering and paid cash for the
acquisition.





Border’s
is the largest tenant occupying 41,060 square feet with a lease scheduled to
expire in February 2010.





27
 Table of Contents





Portfolio
Information





The
following table shows our five highest tenant industry concentrations for all
properties in which we own an interest as of December 31, 2007.




Industry
            
            Total
      Number of Tenants
            
            
            Annualized
      Gross Base Rent
            
            
            Percentage
      of Total Annualized Gross Base RentDining
            
            
            48
            
            
            $
            3,652,862
            
            
            
            20.4%Specialty
      Retail
            
            
            45
            
            
            
            2,924,243
            
            
            
            16.3Grocery
            
            
            8
            
            
            
            2,667,669
            
            
            
            14.9Banking
            
            
            25
            
            
            
            1,492,163
            
            
            
            8.3Gym
            
            
            10
            
            
            
            1,281,789
            
            
            
            7.2





The
following table shows our tenants which occupy 10% or more of the rentable
square feet for each property in which we own an interest and the lease
expirations of such tenants as of December 31, 2007, assuming no exercise of
renewal option or termination rights.




Property
            Industry
            
            Rentable
      Square Feet
            
            
            Percentage
      of Total Rentable Square Feet for Property
            
            Year
      of Lease ExpirationWestside
      PlazaDesigner
      Shoe Warehouse
            Shoe
      Retail
            
            
            24,500
            
            
            
            57%
            
            2010Fadi’s
            Dining
            
            
            5,125
            
            
            
            12
            
            2011Market
      at Lake HoustonH-E-B
      Grocery
            Grocery
            
            
            80,641
            
            
            
            79
            
            2017Olmos
      CreekH-E-B
      Grocery
            Grocery
            
            
            55,513
            
            
            
            54
            
            2020Casa
      Linda PlazaAlbertson’s
            Grocery
            
            
            59,561
            
            
            
            18
            
            2009Lantern
      LaneRice
      Food Markets, Inc.
            Grocery
            
            
            21,450
            
            
            
            27
            
            2013Preston
      Towne CrossingREI
            Sporting
      Goods
            
            
            27,000
            
            
            
            16
            
            2015Park
      Plaza Salon
            Beauty
      Salons
            
            
            20,000
            
            
            
            12
            
            2012Berkeley
      SquareMovie
      Grill Concepts, Ltd
            Entertainment
            
            
            30,977
            
            
            
            25
            
            20105433
      WestheimerProsperity
      Bank
            Banking
            
            
            17,185
            
            
            
            13
            
            2011Preston
      GoldGold’s
      Gym
            Gym
            
            
            49,672
            
            
            
            49
            
            2024Chair
      King
            Specialty
      Retail
            
            
            27,438
            
            
            
            27
            
            2017Woodlake
      SquareRandall’s
      Food & Drug
            Grocery
            
            
            56,430
            
            
            
            27
            
            2013Westheimer
      GessnerBorders
            Book
      Retail
            
            
            41,060
            
            
            
            50
            
            2010




28
 Table of Contents





The following table
shows lease expirations for our four consolidated properties as of December 31,
2007, during each of the next ten years and thereafter, assuming no exercise of
renewal options or termination rights.




Year of Lease Expiration
            
            
            Total
      Number of Leases
            
            
            Rentable
      Square Feet
            
            
            Annualized
      Gross Base Rent
            
            
            Percentage
      of Total Annualized Gross Base Rent2008
            
            
            
            1
            
            
            
            1,750
            
            
            $
            31,501
            
            
            
            1
            %2009
            
            
            
            11
            
            
            
            24,288
            
            
            
            486,166
            
            
            
            102010
            
            
            
            10
            
            
            
            52,833
            
            
            
            1,167,430
            
            
            
            242011
            
            
            
            4
            
            
            
            6,484
            
            
            
            187,346
            
            
            
            42012
            
            
            
            13
            
            
            
            41,206
            
            
            
            835,511
            
            
            
            172013
            
            
            
            4
            
            
            
            30,558
            
            
            
            472,067
            
            
            
            102014
      – 2016
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Thereafter
            
            
            
            6
            
            
            
            140,675
            
            
            
            1,682,543
            
            
            
            3449
            
            
            
            297,794
            
            
            $
            4,862,564
            
            
            
            100
            %




As of
December 31, 2007, we have invested substantially all of the net proceeds of the
Offering in real properties.  We have approximately $5.2 million in
cash and cash equivalents to be used for investment in new properties, capital
expenditures on existing properties or for working capital.  As of
December 31, 2007, our dispositions were limited to the sale of a parcel of land
on our Olmos Creek property in San Antonio, Texas.  This sale
generated $775,000 in proceeds.





ITEM
      3.
            LEGAL PROCEEDINGS





In the
ordinary course of business, we may become subject to litigation or claims.
Neither we nor our properties are the subject of any non-routine pending legal
proceeding, nor are we aware of any proceeding that a governmental authority is
contemplating against us.





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





No
matters were submitted to a vote of our Partners during the fourth quarter of
2007.





PART II





ITEM
      5.
            MARKET FOR
      COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF
      EQUITY SECURITIES





On April
19, 2005, we commenced the Offering. We closed the Offering on October 31, 2006
after having raised aggregate gross proceeds of $71,090,290 through the sale of
2,844 Units to 1,231 Limited Partners.





There is
no established trading market for our Units. The Units, which are “restricted
securities” as defined in Rule 144 promulgated by the SEC under the Securities
Act, must be held indefinitely unless they are subsequently registered under the
Securities Act and any applicable state securities laws or unless, upon the
advice of counsel satisfactory to us, the Units are sold in a transaction that
is exempt from the registration requirements of such laws. As of December 31,
2007, no Units were eligible for sale under Rule 144 or that we have agreed to
register under the Securities Act for sale by Limited Partners and there were no
Units that are being, or have been publicly proposed to be, publicly offered by
us. No Units have been sold since we closed the Offering on October 31,
2006.





The
following table shows the distributions to our Limited Partners we have declared
(including the total amount paid and the amount paid on a per Unit basis) from
the last two fiscal years ended December 31, 2006 and December 31,
2007:





29
 Table of Contents




Period Declared
            
            Total
      Amount of Distributions Paid
            
            
            Distribution
      Per UnitJanuary
      2006
            
            $
            60,856
            
            
            $
            156.25February
      2006
            
            
            80,738
            
            
            
            156.25March
      2006
            
            
            110,309
            
            
            
            156.25April
      2006
            
            
            135,936
            
            
            
            156.25May
      2006
            
            
            156,490
            
            
            
            156.25June
      2006
            
            
            178,018
            
            
            
            156.25July
      2006
            
            
            204,049
            
            
            
            156.25August
      2006
            
            
            229,176
            
            
            
            156.25September
      2006
            
            
            232,032
            
            
            
            156.25October
      2006
            
            
            286,048
            
            
            
            156.25November
      2006
            
            
            344,703
            
            
            
            156.25December
      2006
            
            
            465,088
            
            
            
            156.25January
      2007
            
            
            435,231
            
            
            
            156.25February
      2007
            
            
            444,314
            
            
            
            156.25March
      2007
            
            
            444,314
            
            
            
            156.25April
      2007
            
            
            444,270
            
            
            
            156.25May
      2007
            
            
            444,270
            
            
            
            156.25June
      2007
            
            
            444,270
            
            
            
            156.25July
      2007
            
            
            444,314
            
            
            
            156.25August
      2007
            
            
            444,314
            
            
            
            156.25September
      2007
            
            
            469,314
            
            
            
            156.25October
      2007
            
            
            444,158
            
            
            
            156.25November
      2007
            
            
            444,158
            
            
            
            156.25December
      2007
            
            
            444,158
            
            
            
            156.25Total
            
            $
            7,830,528








We have
made monthly distributions to our Limited Partners at a rate of 7.5% per annum
from January 2006 through March 2008. All of the distributions we have paid
through December 31, 2007 constitute a return of capital to our Limited
Partners. One of our primary goals is to pay regular (monthly) distributions to
our Limited Partners. We expect to maintain the distribution rate of 7.5%,
unless our results of operations, our general financial condition, general
economic conditions or other factors prohibit us from doing so. The funds we
receive from operations that are available for distribution may be affected by a
number of factors, including the following:





·
            our
      operating and interest expenses;





·
            the
      ability of tenants to meet their obligations under the leases associated
      with our properties;





·
            our
      ability to keep our properties
occupied;





·
            our
      ability to maintain or increase rental rates when renewing or replacing
      current leases;





·
            capital
      expenditures and reserves for such
expenditures;





·
            the
      issuance of additional shares; and





·
            financings
      and refinancings.





We
qualified as a partnership for federal income tax purposes commencing with our
taxable year ended December 31, 2005. For income tax purposes, distributions to
our Limited Partners are characterized as ordinary income, capital gains, or as
a return of a Limited Partner’s invested capital.





30
 Table of Contents





Offering
and Use of Proceeds





We
commenced our principal operations on June 30, 2005, when we raised the minimum
offering of $2.0 million pursuant to the terms the Offering Memorandum and
issued the initial 80 Units. AmREIT Securities Company served as the dealer
manager for our Offering. As of October 31, 2006, we had received approximately
$71.1 million for the sale of 2,844 Units and closed the Offering. Our
Units were sold in reliance on an exemption from the registration
requirements of the Securities Act of 1933, as amended, or the Securities
Act, and are not currently listed on a national exchange.  No public market
currently exists for the Units.





On April
30, 2007 we filed a Form 10-SB to register our Units pursuant to Section 12(g)
of the Exchange Act.  We are subject to the registration requirements
of Section 12(g) of the Exchange Act because the aggregate value of our assets
exceeds applicable thresholds and the Units of record are held by 500 or more
persons.





From the
start of the Offering through December 31, 2007, we have incurred approximately
$8.1 million in organization and offering costs in connection with the
Offering.  Approximately $7.7 million of those costs represent
offering costs such as sales commissions and dealer manager fees paid for the
placement of the Units. Approximately $418,000 of those costs
represent organizational costs such as legal and accounting fees, printing
costs, filing fees and distribution costs.  Substantially all of these
organizational costs were direct or indirect payments to our General Partner and
its affiliates.  The remaining expenses were direct or indirect
payments to others. Our net offering proceeds from the Offering totaled $63.0
million.From the
start of the Offering through December 31, 2007, we invested substantially all
of the net proceeds of the Offering in real properties. See “Item 2. Description
of Property” for more information regarding real estate
purchases.  Additionally, see Note 9 to our consolidated financial
statements for a discussion of payments made to affiliated entities for
capital-raising and real estate services.





ITEM
      6.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF
  OPERATION





The
following discussion and analysis should be read in conjunction with the
accompanying consolidated financial statements and notes thereto. See also
“Cautionary Note Regarding Forward Looking Statements” preceding Part
I.





Overview





We are a
Texas limited partnership formed on April 19, 2005 to acquire, develop and
operate, directly or indirectly through joint venture or other arrangements,
commercial retail real estate consisting of single-tenant and multi-tenant
properties throughout the United States net leased to investment grade and other
creditworthy tenants. We focus on properties characterized by high automobile
traffic counts, high populations, high household incomes and limited
opportunities for competition.





We have
no employees and are managed by AmREIT Monthly & Income III Corporation, our
General Partner, pursuant to the Partnership Agreement. Our General Partner is a
subsidiary of AmREIT, a Texas real estate investment trust with shares of common
stock traded on the American Stock Exchange (AMEX: AMY). In addition to owning
its general partner interest in us for which it contributed $1,000, our General
Partner contributed $800,000 to us in exchange for limited partnership units, or
Units, which represent approximately 1% of the outstanding Units. The remaining
Units are held by other Limited Partners. We qualify as a partnership for
federal income tax purposes.





We derive
a substantial portion of our revenue from income from our properties. As a
result, our operating results and cash flows are primarily influenced by rental
income from our properties and interest expense on our property acquisition
indebtedness. Rental income accounted for 100% of our total revenue during the
years ended December 31, 2007 and December 31, 2006. As of December 31, 2007,
our properties were 81% leased, and the average debt leverage ratio of the
properties in which we have an investment was approximately 54%, with 85% of
such debt carrying a fixed rate of interest.





31
 Table of Contents





We
commenced our principal operations on June 30, 2005, when we raised the minimum
offering of $2.0 million pursuant to the terms of our Offering Memorandum and
issued 80 Units to the initial investors. As of October 31, 2006, we had
received $71.1 million from the sale of 2,844 Units to investors and closed the
Offering. We acquired our first interest in a property on September 30,
2005.





As of
December 31, 2007, we directly owned three properties comprising 225,000 square
feet of gross leasable area and owned an interest in eight additional properties
comprising 1,243,000 square feet of gross leasable area. As of December 31,
2007, we have invested substantially all of the net proceeds of the Offering in
real properties.  We have approximately $5.2 million in cash and cash
equivalents that may be used for investment in new properties, capital
expenditures on existing properties or for working capital. All of our
properties are located in highly populated, suburban communities in
Texas.





Our Units
were sold pursuant to exemptions from registration under the Securities Act and
are not currently listed on any securities exchange. The Units will be
transferable only if we register them under applicable securities laws, and such
registration is not expected. We do not anticipate that any public market for
the Units will develop.





Summary
of Critical Accounting Policies





Our
results of operations and financial condition, as reflected in the accompanying
consolidated financial statements and related footnotes, are subject to
management’s evaluation and interpretation of business conditions, retailer
performance, changing capital market conditions and other factors, which could
affect the ongoing viability of our tenants. Management believes the most
critical accounting policies in this regard are revenue recognition, regular
evaluation of whether the value of a real estate asset has been impaired,
allowance for uncollectible accounts and accounting for real estate
acquisitions. We evaluate our assumptions and estimates on an on-going basis. We
base our estimates on historical experience as well as various other assumptions
that we believe to be reasonable under the circumstances. Actual results could
vary from those estimates, perhaps in material adverse ways, and those estimates
could be different under different assumptions or conditions.





Revenue
Recognition





We lease
space to tenants under agreements with varying terms. The majority of the leases
are accounted for as operating leases with revenue being recognized on a
straight-line basis over the terms of the individual leases. When we acquire a
property, the term of existing leases is considered to commence as of the
acquisition date for the purposes of this calculation. Accrued rents are
included in tenant receivables. Revenue from tenant reimbursements of taxes,
maintenance expenses and insurance is recognized in the period the related
expense is recorded. Additionally, certain of the lease agreements contain
provisions that grant additional rents based on tenants’ sales volumes
(contingent or percentage rent). We defer the recognition of contingent or
percentage rental income until the specific targets as defined in lease
agreements that trigger the contingent or percentage rental income are achieved.
Cost recoveries from tenants are included in rental income in the period the
related costs are incurred.





Valuation
of Real Estate Assets





We
continually monitor events and changes in circumstances that could indicate that
the carrying amounts of our real estate assets, including accrued rental income,
may not be recoverable through operations. When indicators of potential
impairment are present that indicate that the carrying amounts of real estate
and related intangible assets may not be recoverable, we assess the
recoverability of the assets by determining whether the carrying value of the
assets will be recovered through the undiscounted future operating cash flows
expected from the use of the assets and their eventual disposition. If
impairment is indicated, a loss will be recorded for the amount by which the
carrying value of the asset exceeds its estimated fair value.





The
estimation of expected future cash flows is inherently uncertain and relies on
subjective assumptions about future and current market conditions and events
that affect the ultimate value of the property. It requires us to estimate
future market rental income amounts subsequent to the expiration of current
lease agreements, property operating expenses, discount rates, the number of
months it takes to re­lease the property and the number of years the
property is held for investment. The use of inappropriate assumptions in the
future cash flow analysis would result in an incorrect assessment of the
property’s future cash flow and fair value and could result in the overstatement
of the carrying value of our real estate and related intangible assets and net
income.




We have
not recorded any impairment losses for the years ended December 31, 2007 and
December 31, 2006.


32
 Table of Contents




Investment
in Real Estate Assets





Land,
buildings and improvements are recorded at cost. Expenditures related to the
development of real estate are carried at cost which includes capitalized
carrying charges, acquisition costs and development costs. Carrying charges,
primarily interest and loan acquisition costs, and direct and indirect
development costs related to buildings under construction are capitalized as
part of construction in progress. The capitalization of such costs ceases at the
earlier of one year from the date of completion of major construction or when
the property, or any completed portion, becomes available for occupancy. We
capitalize acquisition costs as incurred. Such costs are expensed if and when
the acquisition becomes no longer probable.





We are
required to make subjective assessments as to the useful lives of our
depreciable assets. We consider the period of future benefit of the asset to
determine the appropriate useful lives. These assessments, which are based on
estimates, have a direct impact on net income. Depreciation is computed using
the straight-line method over an estimated useful life of up to 50 years for
buildings, up to 20 years for site improvements and over the life of lease for
tenant improvements and intangible lease costs.





Valuation
of Receivables





We
determine an appropriate allowance for the uncollectible portion of tenant
receivables and accounts receivable based upon an analysis of balances
outstanding, historical payment history, tenant credit worthiness, additional
guarantees and other economic trends. Balances outstanding include base rents,
tenant reimbursements and receivables attributed to the accrual of straight line
rents. Additionally, we consider estimates of the expected recovery of
pre-petition and post-petition claims with respect to tenants in bankruptcy in
our assessment of the likelihood of collecting the related
receivables.





Real
Estate Acquisitions





We
account for real estate acquisitions pursuant to Statement of Financial
Accounting Standards No. 141, Business Combinations(“SFAS
141”). Accordingly, we allocate the purchase price of the acquired properties to
land, building and improvements, identifiable intangible assets and to the
acquired liabilities based on their respective fair values. Identifiable
intangibles include amounts allocated to acquired out-of-market leases, the
value of in-place leases and customer relationships, if any.





We
determine fair value based on estimated cash flow projections that utilize
appropriate discount and capitalization rates and available market information.
Estimates of future cash flows are based on a number of factors including the
historical operating results, known trends and specific market and economic
conditions that may affect the property.





Factors
considered by management in our analysis of determining the as-if-vacant
property value include an estimate of carrying costs during the expected
lease-up periods considering market conditions, and costs to execute similar
leases. In estimating carrying costs, management includes real estate taxes,
insurance and estimates of lost rentals at market rates during the expected
lease-up periods, tenant demand and other economic conditions. Management also
estimates costs to execute similar leases including leasing commissions, tenant
improvements, legal and other related expenses. Intangibles related to
out-of-market leases and in-place lease value are recorded as acquired lease
intangibles and are amortized as an adjustment to rental revenue or amortization
expense, as appropriate, over the remaining terms of the underlying leases. Any
premiums or discounts on acquired out-of-market debt are amortized to interest
expense over the remaining term of such debt.





33
 Table of Contents





The fair
values of above-market and below-market in-place lease values are recorded based
on the present value (using an interest rate which reflects the risks associated
with the leases acquired) of the difference between (1) the contractual amounts
to be paid pursuant to the in-place leases and (2) our 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. The above-market and
below-market lease values are capitalized as intangible lease assets or
liabilities and are amortized as an adjustment of rental income over the
remaining terms of the respective leases.





The fair
values of in-place leases include direct costs associated with obtaining a new
tenant, opportunity costs associated with lost rentals which are avoided by
acquiring an in-place lease, and tenant relationships. Direct costs associated
with obtaining a new tenant include commissions, tenant improvements, and other
direct costs and are estimated based on management’s consideration of current
market costs to execute a similar lease. These direct costs are included in
intangible lease assets in the accompanying consolidated balance sheet and are
amortized to expense over the remaining terms of the respective leases. The
value of opportunity costs is calculated using the contractual amounts to be
paid pursuant to the in-place leases over a market absorption period for a
similar lease. Customer relationships are valued based on expected renewal of a
lease or the likelihood of obtaining a particular tenant for other locations.
These intangibles are included in intangible lease assets in the accompanying
consolidated balance sheet and are amortized to expense over the remaining term
of the respective leases.





Recently
Issued Accounting Pronouncements





In
September 2006, The Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, Fair Value
Measurement(SFAS No. 157). SFAS No. 157 defines fair value, establishes
a framework for measuring fair value and requires enhanced disclosures about
fair value measurements. SFAS No. 157 requires companies to disclose the fair
value of its financial instruments according to a fair value hierarchy.
Additionally, companies are required to provide certain disclosures regarding
instruments within the hierarchy, including a reconciliation of the beginning
and ending balances for each major category of assets and liabilities. SFAS No.
157 is effective for our fiscal year beginning January 1, 2008. The adoption of
SFAS No. 157 is not expected to have a material effect on our results of
operations or financial position.
  In
February 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities(SFAS No. 159). SFAS No. 159 expands
opportunities to use fair value measurement in financial reporting and permits
entities to choose to measure many financial instruments and certain other items
at fair value. This Statement is effective for fiscal years beginning after
November 15, 2007. We currently do not plan to measure any eligible financial
assets and liabilities at fair value under the provisions of SFAS No.
159.
 
 In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),Business Combinations (SFAS
No. 141R).  SFAS
No. 141R will change the accounting for business combinations. Under SFAS No.
141R, an acquiring entity will be required to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions.  SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008.  We
are currently evaluating the potential impact of SFAS No. 141R on our financial
position and results of operations beginning for fiscal year 2009.
 
 In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB
No. 51 (SFAS No. 160). SFAS No. 160 establishes accounting
and reporting standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest
in a subsidiary is an ownership interest in the consolidated entity that should
be reported as equity in the consolidated financial statements. SFAS No.
160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. SFAS No. 160 requires
retroactive adoption of the presentation and disclosure requirements for
existing minority interests. All other requirements of SFAS No. 160 shall
be applied prospectively. We are currently evaluating the potential impact of
the adoption of SFAS No. 160 on our consolidated financial
statements.




34
 Table of Contents




Factors
Which May Influence Results of Operations
 
 Rental
Income


The
amount of rental income generated by our properties depends principally on our
ability to maintain the occupancy rates of currently leased space and to lease
currently available space and space available from unscheduled lease
terminations at levels not less than the existing rental rates. Negative trends
in one or more of these factors could adversely affect our rental income in
future periods.





Scheduled
Lease Expirations





During
2008, 0.6% of the leased square footage of our consolidated properties expires.
Our leasing strategy for 2008 focuses on negotiating renewals for leases
scheduled to expire during the year and identifying new tenants or existing
tenants seeking additional space to occupy the square footage for which we are
unable to negotiate such renewals.





Expenses





Our
expenses could increase due to the costs incurred in order to comply with the
requirements of being a public reporting company, among other
things.





Results
of Operations





We
commenced our principal operations on June 30, 2005, when we raised the minimum
offering of $2.0 million pursuant to the terms of our Offering Memorandum and
issued the initial 80 Units to investors. During 2005, we acquired one interest
in a property through a consolidated joint venture on September 30, 2005 and
acquired a direct interest in another property on December 12, 2005. During
2006, we acquired direct interests in two additional properties, one on June 30,
2006 and the other on September 29, 2006. In 2006, we also made investments in
three joint ventures through which we obtained an ownership interest in five
other properties. During 2007, we made investments in two other joint ventures
through which we obtained an ownership interest in two additional properties.
Our direct property acquisitions were accounted for as purchases and the results
of their operations are included in our consolidated financial statements from
their respective dates of acquisition. We report our investments in joint
ventures under the equity method of accounting given our ability to exercise
significant influence over them.





Revenue.Revenue increased
approximately $2.0 million to approximately $6.7 million during the year ended
December 31, 2007 compared to approximately $4.7 million for the year ended
December 31, 2006. This increase was primarily due to the Lantern Lane and
Olmos Creek 2006 acquisitions reflecting a full year of rental income in
2007.





General and Administrative.
General and administrative fees increased approximately $116,000 to
approximately $181,000 during the year ended December 31, 2007 compared to
approximately $65,000 for the year ended December 31, 2006.  This
increase is primarily due to accounting software costs.





General and Administrative – Related
Party. General and administrative – related party represents
reimbursements made to our General Partner for its costs incurred
in providing various services to us, including accounting, financial reporting
and investor service costs. These costs increased due to our increased financial
reporting requirements during 2007 as a result of becoming subject to rules and
regulations of the Securities and Exchange Commission.  Additionally,
these costs increased substantially during 2007 as a result of our
increased Limited Partner base due to our significant capital-raising
activity in 2007.





Asset Management Fees – Related
Party.Asset management fees – related party increased approximately
$265,000 to approximately $618,000 during the year ended December 31, 2007
compared to approximately $353,000 for the year ended December 31, 2006. Asset
management fees have increased commensurate with the increase in assets under
management as a result of our capital-raining efforts which continued through
October 31, 2006. The year ended December 31, 2007 was the first year that
incurred fees on the full amount of the $71.1 million in capital that we have
raised since our inception.





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 Table of Contents





Property Expenses.Property
operating expenses increased approximately $519,000 to approximately $1.6
million during the year ended December 31, 2007 compared to approximately $1.1
million for the year ended December 31, 2006. This increase was primarily due to
the Lantern Lane and Olmos Creek 2006 acquisitions reflecting a full year
of property expenses in 2007.





Property Management Fees — Related
Party.Property management fees — related party increased approximately
$85,000 to $245,000 during the year ended December 31, 2007 compared to
approximately $160,000 during the year ended December 31, 2006. This increase
was primarily due to the Lantern Lane and Olmos Creek 2006 acquisitions
reflecting a full year of property management fees in 2007.





Legal and Professional Fees.Legal and professional fees increased approximately $170,000 to
approximately $540,000 during the year ended December 31, 2007 compared to
approximately $370,000 for the year ended December 31, 2006.  This
increase was primarily due to the costs associated with our increased financial
reporting requirements, including incremental costs related to our 2006 Form
10-SB, which was the first of such required reporting.





Depreciation and Amortization
Expense.Depreciation and amortization expense increased approximately
$1.0 million to approximately $2.8 million during the year ended December 31,
2007 compared to approximately $1.8 million for the year ended December 31,
2006. This increase was primarily due to the Lantern Lane and Olmos Creek 2006
acquisitions reflecting a full year of depreciation and amortization in
2007.





Interest Income – Related
Party. Interest income – related party increased approximately $128,000
to approximately $521,000 during the year ended December 31, 2007 compared to
approximately $393,000 for the year ended December 31, 2006.  This
increase is due to interested earned on our note receivable from 5433
Westheimer, LP for a full year in 2007 versus nine months in 2006.





Interest and Other Income.Interest and other income increased approximately $329,000 to
approximately $867,000 during the year ended December 31, 2007 compared to
approximately $538,000 for the year ended December 31, 2006. We had a short term
note receivable that we invested in and were repaid on during 2007 that
generated interest income of $89,000. In addition, interest income is higher due
to a higher average cash balance in 2007.





Interest Expense.Interest
expense increased approximately $1.2 million to approximately $3.2 million
during the year ended December 31, 2007 compared to approximately $2.0 million
for the year ended December 31, 2006. This increase was primarily due to
the Lantern Lane and Olmos Creek 2006 acquisitions reflecting a full year
of interest expense in 2007.





Loss From Non-Consolidated Entities.Loss from non-consolidated entities was a loss of $2.0 million for the
year ended December 31, 2007, and represents our ownership portion of our joint
venture’s net income or loss for the period. Loss from non-consolidated entities
was a loss of $344,000 for the year ended December 31, 2006. The loss increased
by $1.7 million primarily due to our investments in the 5433 Westheimer property
as well as the Casa Linda property.  Both properties have been operating at
net losses as a result of their vacancies – 5433 Westheimer is 61% leased while
Casa Linda, our single largest property, is 82% leased.  To allow us
to begin executing on our plan to redevelop 5433 Westheimer, we have not been
seeking out new long-term leases nor have we been renewing existing tenants on a
long-term basis, resulting in the vacancies.  With respect to Casa Linda,
we are in the initial stages of the redevelopment and expect that the property
enhancements will allow us to drive occupancy and improve the operating results
of the property once the redevelopment is complete.





Minority Interest in Loss of
Consolidated Subsidiaries.Minority interest in loss of consolidated
subsidiaries decreased by $37,000 to $88,000 during the year ended December 31,
2007 compared to $125,000 for the year ended December 31, 2006. Minority
interest in loss of consolidated subsidiaries represents the 40% ownership
interest that one of our affiliated investment funds has in a real estate
partnership that we consolidate as a result of our controlling financial
interest in such partnership. The partnership investment was made in December
2005 concurrent with the acquisition of The Market at Lake Houston. This
decrease was primarily due to a decrease in intangible lease cost amortization
for The Market at Lake Houston as certain of such balances became fully
amortized during 2007.





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 Table of Contents





Income Tax Expense.In May
2006, the State of Texas adopted House Bill 3, which modified the state’s
franchise tax structure, replacing the previous tax based on capital or earned
surplus with one based on margin (often referred to as the “Texas Margin Tax”
effective with franchise tax reports filed on or after January 1, 2008. The
Texas Margin Tax is computed by applying the applicable tax rate (1% for the
Partnership) to the profit margin, which, generally, will be determined for us
as total revenue less a 30% standard deduction. Although House Bill 3 states
that the Texas Margin Tax is not an income tax, the Partnership believes that
SFAS No. 109, Accounting for
Income Taxes,applies to the Texas Margin Tax. The Texas Margin Tax was
$59,000 for the year ended December 31, 2007 compared to $0 for the year ended
December 31, 2006.





Loss From Discontinued Operations.We had no loss from discontinued operations during the year ended
December 31, 2007 as we had no disposition activity during 2007 nor did we have
any assets held for sale as of December 31, 2007.  Loss from
discontinued operations during the year ended December 31, 2006 was $19,000,
which represents the operating activity (up through the date of disposition)
related to a parcel of land that we sold during 2006.





Liquidity
and Capital Resources





We expect
to meet our short-term liquidity requirements through net cash provided by
property operations. We expect to meet our long-term liquidity requirements
through proceeds from secured or unsecured financings from banks and other
lenders, the selective and strategic sale of properties and net cash flows from
operations. We expect that our primary uses of capital will be for investment in
real estate properties and related improvements, the payment of operating
expenses, including interest expense on any outstanding indebtedness, and the
payment of distributions to our Partners. As we sell properties during our
operating period, we plan to strategically reinvest the proceeds from such sales
rather than distributing the proceeds to our Partners.





At
December 31, 2007 and 2006, our cash and cash equivalents totaled approximately
$5.2 million and approximately $23.1 million, respectively. Cash flows provided
by (used in) operating activities, investing activities and financing activities
for the years ended December 31, 2007 and 2006  are as follows (in
thousands):




2007
            
            
            2006Operating
      activities
            
            $
            387
            
            
            $
            1,620Investing
      activities
            
            $
            (11,393
            )
            
            $
            (43,099
            )Financing
      activities
            
            $
            (6,877
            )
            
            $
            61,659





Net cash
provided by operating activities was approximately $0.4 million for the year
ended December 31, 2007 as compared to net cash provided by operating activities
of approximately $1.6 million for the year ended December 31,
2006.  Income before the effect of depreciation and amortization and
of loss from non-consolidated affiliates stayed relatively constant at $1.5
million for the year ended December 31, 2007 versus $1.4 million for the year
ended December 31, 2006.  The primary driver of the reduction in operating
cash flows was a reduction in working capital cash flows of $1.4 million. 
This reduction was driven primarily by increased cash outflows on payables of
$1.7 million primarily as a result of our payment of property taxes prior to
year end 2007 versus accruing our 2006 property taxes at December 31, 2006 and
paying them in January 2007.





Net cash
used in investing activities decreased approximately $31.7 million to
approximately $11.4 million for the year ended December 31, 2007 compared to
approximately $43.1 million for the year ended December 31, 2006. This decrease
was primarily due to decreased acquisition activity in 2007 as compared to
2006.  In 2006, we acquired Lantern Lane (September 29, 2006) and Olmos
Creek (June 30, 2006) and made an investment in 5433 Westheimer (March 31,
2006).  In conjunction with the 2006 investment in 5433 Westheimer, we
also entered into a note receivable in the amount of $7.0 million to finance
that property acquisition.  During 2007, our investing activity was limited
to purchasing a 30% interest in Woodlake Square, LP and a 30% interest in
Westheimer Gessner, LP.





37
 Table of Contents





Net cash
used in financing activities were approximately $6.9 million for the year ended
December 31, 2007 as compared to net cash provided by financing activities of
approximately $61.7million for the year ended December 31, 2006. This decrease
was primarily attributable to us raising $53.1 million (net of issuance costs)
from the sales of our Units during 2006.  We closed the offering of
such Units in October 2006, and no amounts were raised during
2007.  Additionally, the decrease was attributable to the $11.2
million in proceeds from the Lantern Lane notes payable during September
2006.  We had no proceeds from notes payable during 2007.  We
also had an increase in distributions of approximately $2.9 million during the
2007 period, which represented a return of capital, as a result of the increase
in Units outstanding between the 2006 and 2007 periods.





Contractual
Obligations





As of
December 31, 2007, we had the following contractual debt obligations (see also
Note 2 of the Consolidated Financial Statements for further discussion regarding
the specific terms of our debt) (in thousands):




2008
            
            
            2009
            
            
            2010
            
            
            2011
            
            
            2012
            
            
            Thereafter
            
            
            TotalSecured
      debt
            
            
            146
            
            
            
            156
            
            
            
            166
            
            
            
            24,790
            
            
            
            184
            
            
            
            25,396
            
            
            
            50,838Interest
            
            
            3,041
            
            
            
            3,028
            
            
            
            3,019
            
            
            
            2,807
            
            
            
            1,524
            
            
            
            5,412
            
            
            
            18,831Construction
      commitments
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      obligations
            
            $
            3,187
            
            
            $
            3,184
            
            
            $
            3,185
            
            
            $
            27,597
            
            
            $
            1,708
            
            
            $
            30,808
            
            
            $
            69,669





We invest
any excess cash in short-term investments or overnight funds. This investment
strategy allows us to offset a portion of the interest costs from our fixed-rate
mortgage loans and provides us with the liquidity to acquire properties at such
time as those suitable for acquisition are located.





We
believe that inflation has a minimal effect on our income from operations. We
expect that increases in store sales volumes due to inflation, as well as
increases in the consumer price index, may contribute to capital appreciation of
our properties. These factors, however, also may have an adverse impact on the
operating margins of the tenants of the properties.





Indemnification
of General Partner





The
Partnership Agreement provides for indemnification of our General Partner for
liabilities incurred by or claims made against our General Partner or its
employees or agents in connection with business on our behalf, provided that our
General Partner determined in good faith that the conduct which gave rise to the
liabilities or claims was within the scope of our General Partner’s authority
and was taken to promote our best interests. Amounts to be indemnified include
judgments, fines, settlements, litigation expenses and reasonable attorneys’
fees, which may be paid as incurred. Only assets of the Partnership may be
reached to indemnify our General Partner, its employees or agents. To the extent
that this indemnification applies to liabilities under the Securities Act, such
indemnification is contrary to public policy and therefore
unenforceable.





Conflicts
of Interest





Our
General Partner is subsidiary of AmREIT, a Texas real estate investment trust.
Affiliates of AmREIT act as sponsor, general partner or advisor to various
private real estate programs. As such, there are conflicts of interest where
AmREIT or its affiliates, while serving in the capacity as sponsor, general
partner or advisor for another AmREIT-sponsored program, may be in competition
with us in connection with property acquisitions, property dispositions and
property management. The compensation arrangements between affiliates of AmREIT
and these other AmREIT real estate programs could influence our General
Partner’s management of us. See “Item 1. Description of Business – Conflicts of
Interest” above.





Off
Balance Sheet Arrangements





We had no
off balance sheet arrangements as of December 31, 2007.





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 Table of Contents


ITEM
      7.
              FINANCIAL
      STATEMENTS


The
consolidated financial statements of the Issuer, including notes thereto, and
the report of independent auditors are included in this Annual Report on Form
10-KSB beginning at page F-1 and are incorporated herein by
reference.





ITEM
      8.
            CHANGES IN AND
      DISAGREEMENTS WITH
ACCOUNTANTS





There
were no changes in or disagreements with our independent registered public
accountants during the years ended December 31, 2007 and December 31, 2006, or
the period from April 19, 2005 (inception) through December 31,
2005.





ITEM
      8A(T).
            CONTROLS AND
      PROCEDURES





Evaluation
of Disclosure Controls and Procedures.





Under the
supervision and with the participation of our General Partner’s Chief Executive
Officer and Chief Financial Officer, our General Partner’s management has
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the
Securities Exchange Act of 1934) as of December 31, 2007.  Based on
that evaluation, our General Partner’s CEO and CFO concluded that our disclosure
controls and procedures were effective as of December 31, 2007.





This
annual report does not include a report of management’s assessment regarding
internal control over financial reporting or an attestation report of the
company’s registered public accounting firm due to a transition period
established by the rules of the SEC for newly public companies.





Changes
in Internal Controls





There has
been no change to our internal control over financial reporting during the
quarter ended December 31, 2007 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting





ITEM
      8B.
              OTHER
      INFORMATION





None.





PART III





ITEM
      9.
            DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
      COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
  ACT





We have no
directors or executive officers. We are managed by our General Partner, AmREIT
Monthly Income & Growth III Corporation. Our General Partner does not have
any employees and relies upon the personnel of AmREIT and its affiliates to
perform services for us. Our Partnership Agreement provides that the Partnership
will continue until December 31, 2025, unless sooner
terminated.





The following
table sets forth certain information regarding the officers and director of our
General Partner, all of whom are officers of AmREIT and expected to make a
significant contribution to us.





Name
            
            Age
            
            PositionH.
      Kerr Taylor
            
            57
            
            President,
      Chief Executive Officer and DirectorChad
      C. Braun
            
            35
            
            Executive
      Vice President, Chief Financial Officer, Treasurer and
      SecretaryBrett
      P. Treadwell
            
            38
            
            Vice
      President – Finance




39
 Table of Contents





H. Kerr Taylorserves as our
General Partner’s President, Chief Executive Officer and Director.  He
has served as the sole director of our General Partner since its formation. He
is the founder of AmREIT and serves as its Chairman of the Board, Chief
Executive Officer and President. Mr. Taylor has guided the growth of AmREIT and
its predecessors for over 23 years. His primary responsibilities include
overseeing strategic initiatives as well as building, coaching and leading
AmREIT’s team of professionals. Mr. Taylor has over 30 years of experience
within the real estate industry. He received a Bachelor of Arts degree from
Trinity University, a Masters Degree in Business Administration from Southern
Methodist University and his law degree from South Texas College of Law. Mr.
Taylor is chairman of the board of Pathways for Little Feet and serves as a
board member of Life House, Inc., Uptown District and as an Elder of First
Presbyterian Church. Mr. Taylor is a lifetime member of the International
Council of Shopping Centers and Urban Land Institute and is a member of the
Texas Bar Association.





Chad C. Braunserves as our
General Partner’s Executive Vice President, Chief Financial Officer, Treasurer
and Secretary. He also serves in this same position for AmREIT. Mr. Braun is
responsible for corporate finance, equity capital markets, debt structuring and
placement, investor relations, accounting and SEC reporting, and he oversees
investment sponsorship and product creation. Mr. Braun has over 14 years of
accounting, financial and real estate experience. Prior to joining AmREIT in
1999, he served as a manager in the real estate advisory services group at Ernst
& Young, LLP. He has provided extensive consulting and audit services to a
number of REITs and private real estate companies, including financial statement
audits, portfolio acquisition and disposition, portfolio management, merger
integration and process improvement, financial analysis and capital markets and
restructuring transactions. Mr. Braun received a Bachelor of Business
Administration degree in Accounting and Finance from Hardin Simmons University
and subsequently earned the CPA designation and his Series 63, 7, 24 and 27
securities licenses. He is a member of the National Association of Real Estate
Investment Trusts and the Texas Society of Certified Public
Accountants.





Brett P. Treadwellserves as
our General Partner’s Vice President — Finance and he also serves in this
position for AmREIT. Within AmREIT he is responsible for its financial reporting
function as well as for assisting in the establishment and execution of AmREIT’s
strategic financial initiatives. Mr. Treadwell’s responsibilities also include
overall risk management and treasury management functions and SEC reporting as
well as periodic internal reporting to management. Mr. Treadwell has over 17
years of accounting, financial and SEC reporting experience, and, prior to
joining AmREIT in August 2004, served as a senior manager with Arthur Andersen
LLP and then with PricewaterhouseCoopers LLP. Mr. Treadwell received a Bachelor
of Business Administration degree from Baylor University and is a Certified
Public Accountant.





Section
16(a) Beneficial Ownership Reporting Compliance





Based on
a review of Forms 3 furnished to us under Rule 16a-3(e) of the Exchange Act
during the fiscal year ended December 31, 2007, we know of no reporting person
that has failed to file on a timely basis, as disclosed in the above forms,
report required by Section 16(a) of the Exchange act during the fiscal year
ended December 31, 2007





Code
of Ethics





We are
managed by our General Partner, and we have no officers to whom a code of ethics
would apply.





ITEM
      10.
            EXECUTIVE
      COMPENSATION





We are
managed by our General Partner, and we have no directors or executive officers
to whom we pay compensation.





See “Item
12. Certain Relationships and Related Transactions, and Director Independence”
below for the fees and expenses we pay to our General Partner and its
affiliates.




40
 Table of Contents




ITEM
      11.
              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS


Securities
Authorized for Issuance Under Equity Compensation Plans





We do not
have any compensation plans under which we are authorized to issue equity
securities.





Security
Ownership of Certain Beneficial Owners and Management





We know
of no person (including a “group” as that term is used in Section 13(d)(3) of
the Exchange Act) who is the beneficial owner of more than five percent of our
Units.





We have
no officers or directors. Our General Partner owns our sole general partner
interest and also owns limited partner Units in us. No person who is an officer
of our General Partner as of the date of this filing owns any direct interest in
us. None of the officers of our General Partner own any of our Units. AmREIT,
the sole shareholder of our General Partner, has assigned the economic interest
in 28.5% of our General Partner to certain of its management team. The address
of the officers of our General Partner is 8 Greenway Plaza, Suite 1000, Houston,
Texas 77046.





As of
December 31, 2007, there were 2,843 Units owned by 1,231 investors.





ITEM
      12.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE





Compensation
Arrangements





Our
General Partner and its affiliates received the payments and fees from us
described below. These payments and fees were not negotiated and may be higher
than payments and fees that would have resulted from an arm’s-length transaction
with an unrelated entity.




Type and Recipient
            
            Determination of Amount
            
            For  the
      fiscal year endedDecember 31, 2007Organization
      StageOrganizational
      and Offering Cost Reimbursements
            
            Reimbursement
      of the Partnership’s organizational and offering costs, including legal
      and accounting fees, printing costs, filing fees and distribution
      costs.
            
            $97,460Operating
      StageAsset
      Management Fee – General Partner
            
            A
      monthly fee of one-twelfth of 1.0% of net invested capital under
      management for accounting related services, investor relations,
      facilitating the deployment of capital, and other services provided by our
      General Partner to us.
            
            $617,753Development
      and Acquisition Fees – General Partner
            
            Between
      4.0% and 6.0% of project costs depending on the size and the scope of the
      development.
            
            $90,000Property
      Management and Leasing Fees – AmREIT Realty Investment
      Corporation
            
            Property
      management fees not to exceed 4.0% of the gross rentals for providing
      management, operating, maintenance and other services.  Leasing
      fees not to exceed 2.0% of base rent on a lease renewal and 6.0% of base
      rent on an initial lease for procuring tenants and negotiating the terms
      of the tenant leases.
            
            $381,076




41
 Table of Contents




Type and Recipient
            
            Determination of Amount
            
            For  the
      fiscal year endedDecember 31, 2007Reimbursement
      of Operating Expenses – General Partner
            
            We
      reimburse the actual expenses incurred by our General Partner in
      connection with its provision of administrative services, including
      related personnel costs.
            
            $191,674Financing
      Fees – General Partner
            
            1.0%
      of the loan proceeds for procuring debt financing for us.
            
            No
      amount to reportDistributions
      During Operating Stage – General Partner
            
            Our
      General Partner is entitled to monthly distributions during our operating
      period, in an amount equal to 1.0% of the each distribution made to the
      Partners.
            
            $53,000Real
      Estate Brokerage Commissions – General Partner or its
      affiliate(1)
            
            Up
      to 6.0% of the sales price on co-brokered transactions and not to exceed
      4.0% of the sales price on individually brokered
      transactions.  Additionally, our General Partner and its
      affiliates will not be paid real estate brokerage commissions on the sale
      of a property if the property being sold has not generated an annual
      return of at least 10.0% per annum on the equity contributed to such
      property and if, in the aggregate, all of our properties that we have sold
      have not generated a property level return of at least 10.0% per annum on
      the equity contributed.  No brokerage commission will be payable
      on sales of properties to AmREIT or its affiliates.
            
            No
      amount to reportLiquidating
      StageDistributions
      of Net Cash Flow – General Partner
            
            Our
      General Partner is entitled to distributions after our operating
      period.  Distributions of net cash after our operating period
      will be distributed 1% to our General Partner and 99% to our Limited
      Partners until our Limited Partners have received cumulative distributions
      equal to 100% of their invested capital plus an amount equal to 10% per
      annum uncompounded on their adjusted capital.  At such time, our
      General Partner will receive 100% of distributions made until our General
      Partner has received cumulative distributions in an amount equal to 40% of
      net cash flow paid to date of our Limited Partners in excess of their
      invested capital.  Thereafter, our General Partner will receive
      40% of distributions and our Limited Partners will receive 60% of
      distributions.
            
            No
      amount to report




(1)
            Although
      we are most likely to pay real estate brokerage commissions in the event
      of our liquidation, these fees may also be earned during our operational
      stage.





42
 Table of Contents





Joint
Ventures with Affiliates





As of
December 31, 2007, we had entered into four joint ventures with our affiliates.
In December 2005, we acquired a 60% interest in AmREIT Lake Houston, LP, which
owns the multi-tenant retail property The Market at Lake Houston. The remaining
40% is owned by AmREIT Monthly Income & Growth Fund, Ltd., our
affiliate.





In
December 2006, we acquired a 50% interest in AmREIT Casa Linda, LP, which owns
Casa Linda Plaza, the multi-tenant retail property in Dallas, Texas. The
remaining 50% is owned by AmREIT Monthly Income & Growth Fund IV, L.P., our
affiliate.





In August
2007, we acquired a 30% interest in AmREIT Woodlake, LP, which owns Woodlake
Square, the multi-tenant retail property in Houston, Texas. The remaining 70% is
40% owned by AmREIT Monthly Income & Growth Fund IV, L.P., our affiliate,
and 30% owned by AmREIT Realty Investment Corporation, our
affiliate.





In
November 2007, we acquired a 30% interest in AmREIT Westheimer Gessner, LP,
which owns the multi-tenant retail property occupied by Border’s in Houston,
Texas. The remaining 70% is 40% owned by AmREIT Monthly Income & Growth Fund
IV, L.P., our affiliate, and 30% owned by AmREIT Realty Investment Corporation,
our affiliate.





Directors





We have
no directors and are managed by our General Partner. H. Kerr Taylor is the sole
director of our General Partner.





Loan
to an Affiliate





We have
loaned $7.0 million to 5433 Westheimer, LP, a joint venture entity in which we
own a 50% interest. During 2008, the Property was refinanced with a thrid
party lender in connection with the planned redevelopment.  In conjunction
with that refinancing, the $7.0
million note payable due to MIG III was converted to equity in order to meet the
lender's equity contribution requirement of approximately $10.0
million.We established a note receivable with our joint
venture partner for their portion of the additional equity contribution ($3.5
million), and we expect to be reimbursed for these amounts during the second
quarter of 2008.





AmREIT
Realty Investment Corporation





AmREIT
Realty Investment Corporation, which we refer to as ARIC, is a fully integrated
real estate development and operating business which is wholly owned by AmREIT,
the parent of our General Partner. ARIC employs a full complement of brokers and
real estate professionals that provide development, acquisition, brokerage,
leasing, construction, asset and property management services to AmREIT
affiliated entities and to third parties. ARIC serves as one of our property
managers, and is responsible for managing and leasing some of our properties. We
pay ARIC property management and leasing fees as described above. ARIC hires,
directs and establishes policies for employees who will have direct
responsibility for the operations of each property it manages, which may include
but is not limited to on-site managers and building and maintenance personnel.
Certain employees of the property manager may be employed on a part-time basis
and may also be employed by our General Partner or its affiliates. ARIC also
directs the purchase of equipment and supplies and supervises all maintenance
activity. The management fees paid to ARIC includes, without additional expense
to us, all of its general overhead costs.





We have
engaged, and may in the future engage, AmREIT Construction Company, a
wholly-owned subsidiary of ARIC, to provide construction and construction
management services for our development and redevelopment projects. Where AmREIT
Construction Company is selected to provide construction and construction
management services, such services will only be provided on terms and conditions
no less favorable to us than can be obtained from independent third parties for
comparable services in the same location.





43
 Table of Contents





AmREIT
Securities Company





AmREIT
Securities Company is a member firm of the NASD and a wholly-owned subsidiary of
AmREIT. AmREIT Securities Company was organized in 1999 for the purpose of
participating in and facilitating the distribution of securities of AmREIT
affiliated entities. As the dealer manager for our Offering of Units, AmREIT
Securities Company provided certain sales, promotional and marketing services to
us in connection with the distribution of the Units. We paid selling commission
and marketing reimbursements to AmREIT Securities Company in connection with our
offering, a portion of which was reallowed to participating broker-dealers. Chad
C. Braun is the President, Secretary and Treasurer of AmREIT Securities Company
and H. Kerr Taylor serves as its Chairman and as the sole member of its board of
directors.





ITEM
      13.
            EXHIBITS





INDEX
TO EXHIBITS





It is
inappropriate for readers to assume the accuracy of, or rely upon any covenants,
representations or warranties that may be contained in agreements or other
documents filed as Exhibits to, or incorporated by reference in, this report.
Any such covenants, representations or warranties may have been qualified or
superseded by disclosures contained in separate schedules or exhibits not filed
with or incorporated by reference in this report, may reflect the parties’
negotiated risk allocation in the particular transaction, may be qualified by
materiality standards that differ from those applicable for securities law
purposes, and may not be true as of the date of this report or any other date
and may be subject to waivers by any or all of the parties. Where exhibits and
schedules to agreements filed or incorporated by reference as Exhibits hereto
are not included in these exhibits, such exhibits and schedules to agreements
are not included or incorporated by reference herein.





The
following exhibits are filed as part of or incorporated by reference in this
Annual Report on Form 10-KSB:





Incorporated
      by ReferenceExhibit
      Number
            
            Description
            Form
            
            File
      Number
            
            
            Exhibit
            
            Filing
      Date
            Filed
      Herewith3.1
            
            Certificate
      of Limited Partnership of AmREIT Monthly Income & Growth Fund III,
      Ltd., dated April 19, 2005.
            10-SB
            
            
            000-52619
            
            
            
            3.1
            
            4/30/20073.2
            
            Agreement
      of Limited Partnership of AmREIT Monthly & Income Growth Fund III,
      Ltd., dated April 19, 2005, between AmREIT Income & Growth III
      Corporation and the limited partners thereto.
            10-SB
            
            
            000-52619
            
            
            
            3.1
            
            4/30/200710.1
            
            Fixed
      Rate Note (A Loan), dated May 2, 2005, between Shafer Plaza I, Ltd and
      JPMorgan Chase Bank, N.A.
            10-SB
            
            
            000-52619
            
            
            
            10.1
            
            4/30/200710.2
            
            Fixed
      Rate Note (B Loan), dated May 2, 2005, between Shafer Plaza I, Ltd and
      JPMorgan Chase Bank, N.A.
            10-SB
            
            
            000-52619
            
            
            
            10.2
            
            4/30/2007





44
 Table of Contents




Incorporated
      by ReferenceExhibit
      Number
              
              Description
              Form
              
              File
      Number
              
              
              Exhibit
              
              Filing
      Date
              Filed
      Herewith10.3
              
              Loan
      and Assumption Agreement, dated September 30, 2005, among AmREIT Westside
      Plaza, LP, AmREIT Monthly Income & Growth Fund III, Ltd., AmREIT,
      Shafer Plaza I, Ltd., Steven G. Shafer, Wells Fargo Bank, N.A., and
      CBA-Mezzanine Capital Finance, LLC.
              10-SB
              
              
              000-52619
              
              
              
              10.3
              
              4/30/200710.4
              
              Second
      Amended and Restated Property Management and Leasing Agreement, dated
      December 28, 2005, between AmREIT Westside Plaza, LP and AmREIT Realty
      Investment Corporation.
              10-SB
              
              
              000-52619
              
              
              
              10.4
              
              4/30/200710.5
              
              Management
      and Leasing Agreement, dated November 22, 2005, between AmREIT Lake
      Houston, LP and AmREIT Realty Investment Corporation.
              10-SB
              
              
              000-52619
              
              
              
              10.5
              
              4/30/200710.6
              
              Promissory
      Note, dated December 12, 2005, between AmREIT Lake Houston, LP and Morgan
      Stanley Mortgage Capital, Inc.
              10-SB
              
              
              000-52619
              
              
              
              10.6
              
              4/30/200710.7
              
              Commercial
      Property Management and Leasing Agreement, dated March 30, 2006, between
      5433 Westheimer, LP and Songy Partners Limited.
              10-SB
              
              
              000-52619
              
              
              
              10.7
              
              4/30/200710.8
              
              Promissory
      Note, dated September 28, 2006, between AmREIT Lantern Lane, LP and
      Differential Development — 1994, Ltd.
              10-SB
              
              
              000-52619
              
              
              
              10.8
              
              4/30/200710.9
              
              Management
      and Leasing Agreement, dated September 28, 2006, between AmREIT Lantern
      Lane, LP and AmREIT Realty Investment Corporation.
              10-SB
              
              
              000-52619
              
              
              
              10.9
              
              4/30/200710.10
              
              Promissory
      Note, dated December 8, 2006, between AmREIT Casa Linda, LP and Morgan
      Stanley Mortgage Capital, Inc.
              10-SB
              
              
              000-52619
              
              
              
              10.10
              
              4/30/200710.11
              
              Secured
      Promissory Note, dated September 29, 2006, between AmREIT Olmos Creek, LP
      and NLI Commercial Mortgage Fund, LLC.
              10-SB
              
              
              000-52619
              
              
              
              10.11
              
              4/30/2007
  45
 Table of Contents
  Incorporated
      by ReferenceExhibit
      Number
              
              Description
              Form
              
              File
      Number
              
              
              Exhibit
              
              Filing
      Date
              
              Filed
      Herewith10.12
              
              Management
      and Leasing Agreement, dated January 26, 2007, between AmREIT Olmos Creek,
      LP and AmREIT Realty Investment Corporation.
              10-SB
              
              
              000-52619
              
              
              
              10.12
              
              4/30/200710.13
              
              Management
      and Leasing Agreement, dated December 7, 2006, between AmREIT SSPF Preston
      Towne Crossing, LP and AmREIT Realty Investment
    Corporation.
              10-SB
              
              
              000-52619
              
              
              
              10.13
              
              4/30/200710.14
              
              Management
      and Leasing Agreement, dated December 7, 2006, between AmREIT SSPF
      Berkeley, LP and AmREIT Realty Investment Corporation.
              10-SB
              
              
              000-52619
              
              
              
              10.14
              
              4/30/200710.15
              
              Loan
      Assumption Agreement, dated December 7, 2006, among Berkeley Center, Ltd.,
      William Hutchinson, AmREIT SSPF Berkeley, LP, AmREIT Monthly Income &
      Growth Fund III, Ltd. and LaSalle Bank National
    Association.
              10-SB
              
              
              000-52619
              
              
              
              10.15
              
              4/30/200710.16
              
              Loan
      Assumption Agreement, dated December 7, 2006, among PTC Dunhill Holdings,
      Ltd., William Hutchinson, AmREIT SSPF Preston Towne Crossing, LP, AmREIT
      Monthly Income & Growth Fund III, Ltd. and LaSalle Bank National
      Association.
              10-SB
              
              
              000-52619
              
              
              
              10.16
              
              4/30/200731.1
              
              Certification
      of H. Kerr Taylor pursuant to 18 U.S.C. Section 1350 as adopted pursuant
      to Section 302 of the Sarbanes-Oxley Act of 2002.
              
              
              
              
              
              
              
              
              
              
              
              X31.2
              
              Certification
      of Chad C. Braun pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.
              
              
              
              
              
              
              
              
              
              
              
              X32.1
              
              Certification
      of H. Kerr Taylor pursuant to 18 U.S.C. Section 1350 as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002.
              
              
              
              
              
              
              
              
              
              
              
              X32.2
              
              Certification
      of Chad C. Braun pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.
              
              
              
              
              
              
              
              
              
              
              
              X




46
 Table of Contents





ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES





KPMG,
LLP, independent registered public accounting firm and certified public
accountants, served as our independent accountants for the fiscal year ended
December 31, 2007.  The following is an explanation of the fees billed
to us by Accountants for professional services rendered for the fiscal years
ended December 31, 2007 and December 31, 2006.





Audit
Fees





The
aggregate fees billed to us for professional services related to the audit of
our annual financial statements, review of financial statements included in our
Forms 10-QSB, or other services normally provided by KPMG, LLP in connection
with statutory and regulatory filings or engagements for the fiscal years ended
December 31, 2007 and December 31, 2006 totaled $286,500 and $123,500,
respectively.





Audit-Related
Fees, Tax Fees and All Other Fees





The
services that have been performed by KPMG have been limited to audit
services.  Accordingly, we have paid no audit-related fees, tax fees
or other fees to KPMG for the fiscal years ended December 31, 2007 and
2006.





Audit
Committee’s Pre-Approval Policies and Procedures





The
Company does not have an independent audit committee.Our General Partner must
approve any services to be performed by our independent auditors.





47
 Table of Contents




PART F/S




AmREIT
MONTHLY INCOME AND GROWTH FUND III, LTD. AND SUBSIDIARIES


INDEX
TO FINANCIAL STATEMENTS




FINANCIAL
      STATEMENTS:
            PageReport
      of Independent Registered Public Accounting Firm
            F-2Consolidated
      Balance Sheets as of December 31, 2007 and 2006
            F-3Consolidated
      Statements of Operations for the years ended December 31, 2007
      and  2006
            F-4Consolidated
      Statements of Partners’ Capital for the years ended December 31, 2007 and
      2006
            F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2007 and
      2006
            F-6Notes
      to Consolidated Financial Statements
            F-7FINANCIAL
      STATEMENT SCHEDULES:Schedule
      III – Consolidated Real Estate Owned and AccumulatedDepreciation
      for the year ended December 31, 2007
            S-1Schedule
      IV – Financial Statements and Notes for AmREIT Casa Linda,
      LP
            S-2Schedule
      V – Financial Statements and Notes for 5433 Westheimer, LP
            S-14







All other
financial statement schedules are omitted as the required information is either
inapplicable or is included in the financial statements or related
notes.




F-1
 Table of Contents




Report
of Independent Registered Public Accounting Firm




The
Partners


AmREIT
Monthly Income and Growth Fund III, Ltd.:




We have
audited the accompanying consolidated balance sheets of AmREIT Monthly Income
and Growth Fund III, Ltd. and subsidiaries (the “Partnership”) as of December
31, 2007 and 2006, and the related consolidated statements of operations,
partners’ capital and cash flows for the years ended December 31, 2007 and 2006.
These consolidated financial statements are the responsibility of the
Partnership’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.




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 provide a reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of AmREIT Monthly Income and
Growth Fund III, Ltd. and subsidiaries as of December 31, 2007 and 2006, and the
results of their operations and their cash flows for the years ended December
31, 2007 and 2006, in conformity with U.S. generally accepted accounting
principles.




(signed)
KPMG LLP




Houston,
Texas


March 31,
2008




F-2
 Table of Contents




PART I -
FINANCIAL INFORMATION
 Item
1. Financial Statements
  AmREIT
MONTHLY INCOME & GROWTH FUND III, LTD.  AND
SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 December
31, 2007 and December 31, 2006
 (in
thousands)
 December
      31,
                  
                  
                  December
      31,2007
                  
                  
                  2006ASSETSReal
      estate investments at cost:Land
                  
                  $
                  18,446
                  
                  
                  $
                  18,446Buildings
                  
                  
                  47,105
                  
                  
                  
                  46,452Tenant
      improvements
                  
                  
                  884
                  
                  
                  
                  78466,435
                  
                  
                  
                  65,682Less
      accumulated depreciation and amortization
                  
                  
                  (3,115
                  )
                  
                  
                  (1,184
                  )63,320
                  
                  
                  
                  64,498Investment
      in non-consolidated entities
                  
                  
                  22,449
                  
                  
                  
                  15,382Intangible
      lease cost, net
                  
                  
                  3,246
                  
                  
                  
                  4,226Net
      real estate investments
                  
                  
                  89,015
                  
                  
                  
                  84,106Cash
      and cash equivalents
                  
                  
                  5,245
                  
                  
                  
                  23,128Tenant
      receivables, net
                  
                  
                  630
                  
                  
                  
                  526Accounts
      receivable
                  
                  
                  7
                  
                  
                  
                  6Accounts
      receivable - related party
                  
                  
                  1,307
                  
                  
                  
                  742Notes
      receivable - related party
                  
                  
                  8,710
                  
                  
                  
                  7,035Deferred
      costs, net
                  
                  
                  594
                  
                  
                  
                  545Other
      assets
                  
                  
                  621
                  
                  
                  
                  886TOTAL
      ASSETS
                  
                  $
                  106,129
                  
                  
                  $
                  116,974LIABILITIES
      AND PARTNERS' CAPITALLiabilities:Notes
      payable
                  
                  $
                  50,838
                  
                  
                  $
                  50,977Notes
      payable - related party
                  
                  
                  -
                  
                  
                  
                  1,144Accounts
      payable
                  
                  
                  1,278
                  
                  
                  
                  1,648Accounts
      payable - related party
                  
                  
                  77
                  
                  
                  
                  160Below
      market leases, net
                  
                  
                  706
                  
                  
                  
                  949Security
      deposits
                  
                  
                  123
                  
                  
                  
                  119TOTAL
      LIABILITIES
                  
                  $
                  53,022
                  
                  
                  $
                  54,997Minority
      interest
                  
                  
                  2,146
                  
                  
                  
                  2,235Partners'
      capital:General
      partner
                  
                  
                  -
                  
                  
                  
                  -Limited
      partners, 2,843 units outstanding
                  
                  
                  50,961
                  
                  
                  
                  59,742TOTAL
      PARTNERS' CAPITAL
                  
                  $
                  50,961
                  
                  
                  $
                  59,742TOTAL
      LIABILITIES AND PARTNERS' CAPITAL
                  
                  $
                  106,129
                  
                  
                  $
                  116,974
 See Notes
to Financial Statements.
  F-3
 Table of Contents
  AmREIT
MONTHLY INCOME & GROWTH FUND III, LTD.  AND
SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 For
the years ended December 31, 2007 and December 31, 2006
 (in
thousands)
  2007
                
                
                2006Revenues:Rental
      income from operating leases
                
                $
                6,746
                
                
                $
                4,709Total
      revenues
                
                
                6,746
                
                
                
                4,709Expenses:General
      and administrative
                
                
                181
                
                
                
                65General
      and administrative - related party
                
                
                192
                
                
                
                -Asset
      management fees - related party
                
                
                618
                
                
                
                353Property
      expense
                
                
                1,639
                
                
                
                1,120Property
      management fees - related party
                
                
                245
                
                
                
                160Legal
      and professional
                
                
                540
                
                
                
                370Depreciation
      and amortization
                
                
                2,847
                
                
                
                1,839Total
      expenses
                
                
                6,262
                
                
                
                3,907Operating
      income
                
                
                484
                
                
                
                802Other
      income (expense):Interest
      income - related party
                
                
                521
                
                
                
                393Interest
      and other income
                
                
                867
                
                
                
                538Interest
      expense
                
                
                (3,187
                )
                
                
                (1,993
                )Loss
      from non-consolidated entities
                
                
                (1,997
                )
                
                
                (344
                )Minority
      interest in loss of consolidated subsidiaries
                
                
                88
                
                
                
                125Income
      tax expense
                
                
                (59
                )
                
                
                -Total
      other income (expense)
                
                
                (3,767
                )
                
                
                (1,281
                )Loss
      before discontinued operations
                
                
                (3,283
                )
                
                
                (479
                )Loss
      from discontinued operations:Loss
      from real estate operations
                
                
                -
                
                
                
                (19
                )Loss
      from discontinued operations
                
                
                -
                
                
                
                (19
                )Net
      loss
                
                $
                (3,283
                )
                
                $
                (498
                )
   See Notes
to Financial Statements.
  F-4
 Table of Contents
  AmREIT
MONTHLY INCOME & GROWTH FUND III, LTD.  AND
SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF PARTNERS' CAPITAL
 For
the years ended December 31, 2007 and December 31, 2006
 (in
thousands)
 GP
                
                
                LP
                
                
                TotalBalance
      at December 31, 2005
                
                $
                -
                
                
                $
                9,693
                
                
                $
                9,693Contributions,
      net of offering costs
                
                
                -
                
                
                
                53,055
                
                
                
                53,055Net
      loss (1)
                
                
                25
                
                
                
                (523
                )
                
                
                (498
                )Distributions
                
                
                (25
                )
                
                
                (2,483
                )
                
                
                (2,508
                )Balance
      at December 31, 2006
                
                $
                -
                
                
                $
                59,742
                
                
                $
                59,742Contributions,
      net of offering costs
                
                
                -
                
                
                
                (97
                )
                
                
                (97
                )Net
      loss (1)
                
                
                53
                
                
                
                (3,336
                )
                
                
                (3,283
                )Distributions
                
                
                (53
                )
                
                
                (5,348
                )
                
                
                (5,401
                )Balance
      at December 31, 2007
                
                $
                -
                
                
                $
                50,961
                
                
                $
                50,961
  (1)
                The
      allocation of net loss includes a curative allocation to increase the GP
      capital account
      by $86,000 and $30,000 for the 2007 and 2006 periods,
      respectively.  The cumulative
      curative allocation since inception is $118,000.  The
      partnership agreement provides
      that no partner shall be required to fund a deficit balance in their
      capital
account.
  
  F-5
 Table of Contents
  AmREIT
MONTHLY INCOME & GROWTH FUND III,
LTD.  AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 For the years ended
December 31, 2007 and December 31, 2006
 (in
thousands)
  2007
                
                
                2006Cash
      flows from operating activities:Net
      loss
                
                $
                (3,283
                )
                
                $
                (498
                )Adjustments
      to reconcile net loss to net cashprovided
      by operating activities:Loss
      from non-consolidated entities
                
                
                1,997
                
                
                
                344Depreciation
      and amortization
                
                
                2,850
                
                
                
                1,630Minority
      interest in loss of consolidated subsidiaries
                
                
                (88
                )
                
                
                (125
                )Increase
      in tenant receivables
                
                
                (105
                )
                
                
                (230
                )(Increase)
      decrease in accounts receivable
                
                
                (1
                )
                
                
                161Increase
      in accounts receivable - related party
                
                
                (665
                )
                
                
                (307
                )Increase
      in deferred costs
                
                
                (136
                )
                
                
                (22
                )Decrease
      (increase) in other assets
                
                
                265
                
                
                
                (484
                )(Decrease)
      increase in accounts payable
                
                
                (369
                )
                
                
                1,358Decrease
      in accounts payable - related party
                
                
                (83
                )
                
                
                (305
                )Increase
      in security deposits
                
                
                5
                
                
                
                98Net
      cash provided by operating activities
                
                
                387
                
                
                
                1,620Cash
      flows from investing activities:Improvements
      to real estate
                
                
                (753
                )
                
                
                (528
                )Acquisition
      of investment properties
                
                
                -
                
                
                
                (21,298
                )Increase
      in notes receivable - related party
                
                
                (1,675
                )
                
                
                (7,035
                )Investment
      in non-consolidated entities
                
                
                (9,164
                )
                
                
                (14,981
                )Distributions
      from non-consolidated entities
                
                
                199
                
                
                
                -Net
      proceeds from sale of investment property
                
                
                -
                
                
                
                740Decrease
      in preacquisition costs
                
                
                -
                
                
                
                3Net
      cash used in investing activities
                
                
                (11,393
                )
                
                
                (43,099
                )Cash
      flows from financing activities:Proceeds
      from notes payable
                
                
                -
                
                
                
                11,175Payments
      on notes payable
                
                
                (139
                )
                
                
                (131
                )Proceeds
      from notes payable - related party
                
                
                -
                
                
                
                2,448Payments
      on notes payable - related party
                
                
                (1,144
                )
                
                
                (2,049
                )Contributions
                
                
                -
                
                
                
                59,789Issuance
      costs
                
                
                (97
                )
                
                
                (6,734
                )Loan
      acquisition costs
                
                
                (96
                )
                
                
                (211
                )Distributions
                
                
                (5,401
                )
                
                
                (2,508
                )Distributions
      to minority interests
                
                
                -
                
                
                
                (120
                )Net
      cash (used in) provided by financing activities
                
                
                (6,877
                )
                
                
                61,659Net
      (decrease) increase in cash and cash equivalents
                
                
                (17,883
                )
                
                
                20,180Cash
      and cash equivalents, beginning of period
                
                
                23,128
                
                
                
                2,948Cash
      and cash equivalents, end of period
                
                $
                5,245
                
                
                $
                23,128Supplemental
      schedule of cash flow information:Cash
      paid during the year for interest
                
                $
                3,179
                
                
                $
                1,660Supplemental schedule of
      noncash investing and financing activities:In
      2007, we incurred reimbursable transaction costs of $99,000 related to our
      5433 Westheimer project.  Such costs had not been reimbursed by
      our affiliate as of year-end and were recorded as an increase to our
      investment in non-consolidated entities.
    See Notes
to Financial Statements.


F-6
 Table of Contents




AmREIT
MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2007 and 2006




1.
            DESCRIPTION
      OF BUSINESS AND NATURE OF
OPERATIONS




AmREIT
Monthly Income & Growth Fund III, Ltd., a Texas limited partnership (the
“Partnership”), was formed on April 19, 2005 to directly or indirectly acquire,
develop and hold for lease primarily commercial retail real estate net leased to
high quality tenants. The General Partner of the Partnership is AmREIT Monthly
Income & Growth III Corporation, a Texas Corporation (the “General
Partner”), which is a subsidiary of AmREIT, a Texas real estate investment
trust. The General Partner maintains its principal place of business in Houston,
Texas.




We
commenced our principal operations on June 30, 2005 when we raised the minimum
offering of $2.0 million pursuant to the terms of our Offering Memorandum dated
April 19, 2005 (the “Offering Memorandum”) and issued the initial 80 Units. As
of October 31, 2006, we had received $71.1 million for the sale of 2,844 Units
and closed the Offering. At December 31, 2007, we directly owned three
properties comprising 225,000 square feet of gross leasable area and owned an
investment interest in eight other properties comprising 1,243,000 square feet
of gross leasable area.




Our
limited partnership units were sold pursuant to exemptions from registration
under the Securities Act of 1933 and are not currently listed on a national
exchange. These units will be transferable only if we register them under such
laws, and such registration is not expected. We do not anticipate that any
public market for the limited partnership units will develop.




2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES




BASIS
OF PRESENTATION




Our
financial records are maintained on the accrual basis of accounting whereby
revenues are recognized when earned and expenses are recorded when incurred. The
consolidated financial statements include our accounts as well as the accounts
of any wholly- or majority-owned subsidiaries in which we have a controlling
financial interest. Investments in joint ventures and partnerships where we have
the ability to exercise significant influence but do not exercise financial and
operating control, are accounted for using the equity method. All significant
inter-company accounts and transactions have been eliminated in
consolidation.




REVENUE
RECOGNITION




We lease
space to tenants under agreements with varying terms. Our leases are accounted
for as operating leases with revenue being recognized on a straight-line basis
over the terms of the individual leases. Accrued rents are included in tenant
receivables. Revenue from tenant reimbursements of taxes, maintenance expenses
and insurance is recognized in the period the related expense is recorded.
Additionally, certain of the lease agreements contain provisions that provide
for additional rents based on tenants’ sales volumes (contingent or percentage
rent). Percentage rents are recognized when the tenants achieve the specified
targets as defined in their lease agreements. During the periods ended December
31, 2007 and 2006, there were no percentage rents recognized. We recognize lease
termination fees in the period that the lease is terminated and collection of
the fees is reasonably assured. During the years ended December 31, 2007 and
2006, we recognized lease termination fees of $0 and $150,000, respectively,
which have been included in rental income from operating leases.




REAL
ESTATE INVESTMENTS




Development
Properties-Land, buildings and improvements are recorded at cost. Expenditures
related to the development of real estate are carried at cost which includes
capitalized carrying charges, acquisition costs and development costs. Carrying
charges, primarily interest, real estate taxes and loan acquisition costs, and
direct and indirect development costs related to buildings under construction,
are capitalized as part of construction in progress. The capitalization of such
costs ceases at the earlier of one year from the date of completion of major
construction or when the property, or any completed portion, becomes available
for occupancy. We capitalize acquisition costs as incurred. Such costs are
expensed if and when the acquisition becomes no longer probable. During the
years ended December 31, 2007 and 2006, we did not capitalize any interest or
taxes on properties under development.




F-7
 Table of Contents





Acquired
Properties and Acquired Lease Intangibles — We account for real estate
acquisitions pursuant to Statement of Financial Accounting Standards No. 141,
Business Combinations(“SFAS No.
141”). Accordingly, we allocate the purchase price of the acquired properties to
land, building and improvements, identifiable intangible assets and to the
acquired liabilities based on their respective fair values. Identifiable
intangibles include amounts allocated to acquired out-of-market leases, the
value of in-placeleases and customer relationship value, if any. We
determine fair value based on estimated cash flow projections that utilize
appropriate discount and capitalization rates and available market information.
Estimates of future cash flows are based on a number of factors including the
historical operating results, known trends and specific market and economic
conditions that may affect the property. Factors considered by management in our
analysis of determining the as-if-vacant property value include an estimate of
carrying costs during the expected lease-up periods considering market
conditions, and costs to execute similar leases. In estimating carrying costs,
management includes real estate taxes, insurance and estimates of lost rentals
at market rates during the expected lease-up periods, tenant demand and other
economic conditions. Management also estimates costs to execute similar leases
including leasing commissions, tenant improvements, legal and other related
expenses. Intangibles related to out-of-market leases and in-place lease value
are recorded as acquired lease intangibles and are amortized as an adjustment to
rental revenue or amortization expense, as appropriate, over the remaining terms
of the underlying leases. Premiums or discounts on acquired out-of-market debt
are amortized to interest expense over the remaining term of such
debt.




Depreciation-Depreciation is computed
using the straight-line method over an estimated useful life of up to 50 years
for buildings, up to 20 years for site improvements and over the term of lease
for tenant improvements.




Properties
Held for Sale-Properties are classified as held for sale if we have decided to market
the property for immediate sale in its present condition with the belief that
the sale will be completed within one year. Operating properties held for sale
are carried at the lower of cost or fair value less cost to sell. Depreciation
and amortization are suspended during the held for sale period. At December 31,
2007 and 2006, we had no properties held for sale.




Our
properties generally have operations and cash flows that can be clearly
distinguished from the rest of the Partnership. The operations and gains on
sales reported in discontinued operations include those properties that have
been sold or are held for sale and for which operations and cash flows have been
clearly distinguished. The operations of these properties have been eliminated
from ongoing operations, and we will not have continuing involvement after
disposition. Prior period operating activity related to such properties has been
reclassified as discontinued operations in the accompanying statements of
operations.




Impairment-We review our properties
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets, including accrued rental income, may not be
recoverable through operations. We determine whether an impairment in value
occurred by comparing the estimated future cash flows (undiscounted and without
interest charges), including the residual value of the property, with the
carrying value of the individual property. If impairment is indicated, a loss
will be recorded for the amount by which the carrying value of the asset exceeds
its fair value. No impairment charges were recognized during the 2007 or 2006
periods.




ENVIRONMENTAL
EXPOSURES




We are
subject to numerous environmental laws and regulations as they apply to real
estate pertaining to chemicals used by the dry cleaning industry, the existence
of asbestos in older shopping centers, and underground petroleum storage tanks.
We believe that the tenants who currently operate dry cleaning plants or gas
stations do so in accordance with current laws and regulations. We believe that
the ultimate disposition of currently known environmental matters will not have
a material affect on our financial position, liquidity, or operations (See Note
12). However, we can give no assurance that existing environmental studies with
respect to the shopping centers have revealed all potential environmental
liabilities; that any previous owner, occupant or tenant did not create any
material environmental condition not known to it; that the current environmental
condition of the shopping centers will not be affected by tenants and occupants,
by the condition of nearby properties, or by unrelated third parties; or that
changes in applicable environmental laws and regulations or their interpretation
will not result in additional environmental liability to the
Partnership.




F-8
 Table of Contents





RECEIVABLES
AND ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS




Tenant
Receivables-Included in tenant receivables are base rents, tenant reimbursements and
receivables attributable to recording rents on a straight-line basis. An
allowance for the uncollectible portion of accrued rents and accounts receivable
is determined based upon customer credit-worthiness (including expected recovery
of our claim with respect to any tenants in bankruptcy), historical bad debt
levels, and current economic trends. Bad debt expenses and any related
recoveries are included in general and administrative expense. As of December
31, 2007 and 2006, our allowance for uncollectible accounts related to our
tenant receivables was $34,000 and $0, respectively.




Accounts
Receivable Related Party- included in accounts
receivable related party are short-term cash advances provided to certain of our
affiliated investment entities primarily for their development needs. These cash
advances are due upon demand.




Notes
Receivable Related Party- included in notes
receivable related party is a loan made to 5433 Westheimer, LP of which we own a
50% interest (See Note 4.) The note is uncollateralized and carries a
LIBOR-based variable interest rate (LIBOR plus two percent). The interest rate
on the note was 7.4% as of December 31, 2007. During 2008, the property was
refinanced with a third party lender.  In conjunction with that
refinancing, the lender required an additional equity contribution of $7.0
million.  This requirement was satisfied through conversion of our $7.0
million loan to equity.  We established a note receivable with our joint
venture partner for their portion of the additional equity contribution ($3.5
million), and we expect to be reimbursed for these amounts during the second
quarter of 2008.




DEFERRED
COSTS




Deferred
costs include deferred leasing costs and loan acquisition costs, net of
amortization. Loan acquisition costs are incurred in obtaining financing and are
amortized to interest expense over the term of the debt agreements. Deferred
leasing costs consist of external commissions associated with leasing our
properties and are amortized to expense over the lease term. Accumulated
amortization related to loan acquisition costs as of December 31, 2007 and 2006
totaled $211,000 and $46,000, respectively. Accumulated amortization related to
leasing costs as of December 31, 2007 and 2006, totaled $18,000 and $1,000,
respectively.




INCOME
TAXES




Federal-No provision for U.S.
federal income taxes is included in the accompanying consolidated financial
statements. As a partnership, we are not subject to federal income tax, and the
federal tax effect of our activities is passed through to our
partners.




State-In May 2006, the State of
Texas adopted House Bill 3, which modified the state’s franchise tax structure,
replacing the previous tax based on capital or earned surplus with one based on
margin (often referred to as the “Texas Margin Tax” effective with franchise tax
reports filed on or after January 1, 2008. The Texas Margin Tax is computed by
applying the applicable tax rate (1% for the Partnership) to the profit margin,
which, generally, will be determined for us as total revenue less a 30% standard
deduction. Although House Bill 3 states that the Texas Margin Tax is not an
income tax, the Partnership believes that SFAS No. 109, Accounting for Income Taxes,applies to the Texas Margin Tax. The Texas Margin Tax accrued as of
December 31, 2007 and 2006 totaled $59,000 and $0, respectively.




F-9
 Table of Contents





USE
OF ESTIMATES




The
preparation of consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.




FAIR
VALUE OF FINANCIAL INSTRUMENTS




Our
consolidated financial instruments consist primarily of cash and cash
equivalents, tenant receivables, accounts receivable, accounts receivable
related party, notes receivable related party, accounts payable, accounts
payablerelated party, notes payable and notes payable related party. The
carrying value of cash, cash equivalents, tenant receivables, accounts
receivable,, accounts receivable related party, notes receivable related party,
accounts payable, accounts payable related party, notes payable and notes
payable related party are representative of their respective fair values due to
the short-term nature of these instruments. As of December 31, 2007 and 2006,
the carrying value of our total debt obligations was $50.8 and $51.0 million,
respectively, all of which represent fixed-rate obligations with an estimated
fair value of $53.6 million and $50.6 million, respectively, based on a
discounted cash flow analysis using current market rates of
interest.




NEWACCOUNTING
STANDARDS
 
 In
September 2006, The Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, Fair Value Measurement(SFAS No. 157).
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value and requires enhanced disclosures about fair value measurements. SFAS No.
157 requires companies to disclose the fair value of its financial instruments
according to a fair value hierarchy. Additionally, companies are required to
provide certain disclosures regarding instruments within the hierarchy,
including a reconciliation of the beginning and ending balances for each major
category of assets and liabilities. SFAS No. 157 is effective for our fiscal
year beginning January 1, 2008. The adoption of SFAS No. 157 is not expected to
have a material effect on our results of operations or financial
position.
  In February 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS No.
159). SFAS No. 159 expands opportunities to use fair
value measurement in financial reporting and permits entities to choose to
measure many financial instruments and certain other items at fair value. This
Statement is effective for fiscal years beginning after November 15, 2007. We
currently do not plan to measure any eligible financial assets and liabilities
at fair value under the provisions of SFAS No. 159.
  In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),Business
Combinations (SFAS No. 141R).
 SFAS No. 141R will change the accounting for business combinations. Under
SFAS No. 141R, an acquiring entity will be required to recognize all the assets
acquired and liabilities assumed in a transaction at the acquisition-date fair
value with limited exceptions.  SFAS No. 141R applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008.  We are currently evaluating the potential impact of SFAS No.
141R on our financial position and results of operations beginning for fiscal
year 2009.
  In
December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements—an
amendment of ARB No. 51 (SFAS No. 160). SFAS No.
160 establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS No. 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. SFAS No. 160 requires retroactive adoption of the
presentation and disclosure requirements for existing minority interests.
All other requirements of SFAS No. 160 shall be applied prospectively. We
are currently evaluating the potential impact of the adoption of SFAS No.
160 on our consolidated financial
statements.




F-10
 Table of Contents





DISCONTINUED
OPERATIONS




The
following is a summary of our discontinued operations (in
thousands):




2007
            
            
            2006Rental
      income from operating leases
            
            $
            --
            
            
            $
            13Gain
      on sale of real estate
            
            
            --
            
            
            
            --Total
      expenses
            
            
            --
            
            
            
            13General
      and administrative
            
            
            --
            
            
            
            (2
            )Property
      expense
            
            
            --
            
            
            
            (1
            )Depreciation
      and amortization
            
            
            --
            
            
            
            (29
            )Total
      expenses
            
            
            --
            
            
            
            (32
            )Loss
      from discontinued operations
            
            $
            --
            
            
            $
            (19
            )





OFFERING
COSTS





The
General Partner funded all of the organization and offering costs on the
Partnership’s behalf. As of December 31, 2007, we had reimbursed the General
Partner for approximately $418,000 of organization and offering costs. The
offering costs, which include items such as legal and accounting fees,
marketing, and promotional printing costs are treated as a reduction of
partners’ capital along with sales commissions and dealer manager fees of 7.75%
and 2.5%, respectively. (See Note 10.)




CASH
AND CASH EQUIVALENTS




For
purposes of the consolidated statements of cash flows, we consider all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents. Cash and cash equivalents consist of demand
deposits at commercial banks and money market funds.




INTEREST




Interest
is charged to interest expense as it accrues. No interest was capitalized during
the 2007 or 2006 periods.




SEGMENT
REPORTING




The FASB
issued SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information,”which establishes standards for
reporting financial and descriptive information about an enterprise’s reportable
segments. We determined that we have one reportable segment, with activities
related to investing in real estate. Our investments in real estate generate
rental revenue and other income through the leasing of multi-tenant retail
properties, which comprised 100% of our total consolidated revenues for the 2007
and 2006 periods. We evaluate operating performance on an individual property
level. However, as each of our properties have similar economic characteristics,
tenants and products and services, our properties have been aggregated into one
reportable segment.




F-11
 Table of Contents





3.
            OPERATING
      LEASES




Our
operating leases generally range from two to twenty-five years and generally
include one or more five year renewal options. A summary of minimum future base
rentals to be received, exclusive of any renewals, under non-cancelable
operating leases in existence at December 31, 2007 is as follows (in
thousands):




2008
            
            $
            4,9902009
            
            
            4,8752010
            
            
            4,0872011
            
            
            3,1992012
            
            
            2,516Thereafter
            
            
            8,545$
            28,212





Future
minimum rental revenue excludes amounts that may be received from tenants for
reimbursements of operating costs, real estate taxes and insurance. Expense
reimbursements recognized as revenue totaled $1.7 and $1.0 million during the
2007 and 2006 periods, respectively.





4.
            INVESTMENTS
      IN NON-CONSOLIDATED ENTITIES




During
2007, we made the following investments in two entities through which we own an
interest in two properties:




•
            In
      August 2007, we acquired a 30% interest in AmREIT Woodlake Square, LP
      which owns a multi-tenant retail property located in Houston, Texas with a
      combined gross leasable area of 206,000 square feet. The remaining 70% is
      owned by affiliated AmREIT entites, AmREIT Monthly Income and Growth Fund
      IV, Ltd., and AmREIT Realty Investment
Company.




•
            In
      November 2007, we acquired a 30% interest in AmREIT Westheimer Gessner, LP
      which owns a multi-tenant retail property located in Houston, Texas with a
      combined gross leasable area of 82,120 square feet. The remaining 70% is
      owned by affiliated AmREIT entites, AmREIT Monthly Income and Growth Fund
      IV, Ltd., and AmREIT Realty Investment
Company.




During
2006, we made the following investments in three entities through which we own
an interest in five properties:




•
            In
      March 2006, we acquired a 50% interest in 5433 Westheimer, LP which owns
      an office building in Houston, Texas with a gross leasable area of 134,000
      square feet.  The remaining 50% is owned by a third
      party.




•
            In
      December 2006, we acquired a 20% interest in PTC/BSQ Holding Company, LLC
      which owns three multi-tenant retail properties located in Plano, Texas
      with a combined gross leasable area of 395,000 square
      feet.   The remaining 80% is owned by a third
      party.




•
            Also
      in December 2006, we acquired a 50% interest in AmREIT Casa Linda, LP
      which owns a multi-tenant retail property located in Dallas, Texas with a
      combined gross leasable area of 325,000 square feet.  The
      remaining 50% is owned by AmREIT Monthly Income and Growth Fund IV, Ltd.,
      an affiliated merchant development
fund.




We report
our investments in these entities using the equity method of accounting due to
our ability to exercise significant influence over them. Combined condensed
financial information for our non-consolidated entities (at 100%) is summarized
as of and for the years ended December 31, 2007 and 2006 as
follows:




F-12
 Table of Contents




Combined
      Balance Sheets
            
            As
      of
              December
      31,
              2007
            
            
            As
      of
              December
      31,
              2006(In
      thousands)
            
            
            (In
      thousands)AssetsProperty,
      net
            
            $
            177,647
            
            
            $
            127,527Cash
            
            
            1,806
            
            
            
            192Other
      assets
            
            
            25,233
            
            
            
            20,492Total
      Assets
            
            $
            204,686
            
            
            $
            148,211Liabilities
      and partners’ capital:Notes
      payable*
            
            
            108,086
            
            
            
            84,806Other
      liabilities
            
            
            18,735
            
            
            
            10,763Partners
      capital
            
            
            77,865
            
            
            
            52,642Total
      Liabilities and Partners’ Capital
            
            $
            204,686
            
            
            $
            148,211MIG
      III share of net assets
            
            $
            22,449
            
            
            $
            15,382







Combined
      Statement of Operations
            
            Year
      Ended
              December
      31,
              2007
            
            
            Year
      Ended
              December
      31,
              2006(In
      thousands)
            
            
            (In
      thousands)RevenueTotal
      Revenue
            
            $
            16,211
            
            
            $
            2,123ExpenseInterest
            
            
            5,592
            
            
            
            696Depreciation
      and amortization
            
            
            8,693
            
            
            
            1,073Other
            
            
            6,173
            
            
            
            1,056Total
      expense
            
            
            20,458
            
            
            
            2,825Net
      loss
            
            $
            (4,247
            )
            
            $
            (702
            )MIG
      III share of net loss
            
            $
            (1,997
            )
            
            $
            (344
            )






*
Includes notes payable to the Partnership of $7.0 million




5.
            ACQUIRED
      LEASE INTANGIBLES




In
accordance with SFAS No. 141, we have identified and recorded the value of
intangibles at the property acquisition date. Such intangibles include the value
of in-place leases and out-of-market leases. Acquired lease intangible assets
(in-place leases and above-market leases) are amortized over the leases’
remaining terms, which range from 2 years to 25 years. The amortization of
above-market leases is recorded as a reduction of rental income and the
amortization of in-place leases is recorded to amortization expense. The
amortization expense related to in-place leases was approximately $911,000 and
$763,000 for the 2007 and 2006 periods, respectively. The amortization of
above-market leases, which was recorded as a reduction of rental income, was
approximately $68,000 and $19,000 during the 2007 and 2006 periods,
respectively.




F-13
 Table of Contents





In-place
and above-market lease amounts and their respective accumulated amortization are
as follows (in thousands):




December
      31, 2007
            
            
            December
      31, 2006In-Place
      leases
            
            Above-market
      leases
            
            In-Place
      leases
            
            Above-market
      leasesCost
            
            $
            4,635
            
            
            $
            293
            
            
            $
            4,656
            
            
            $
            293Accumulated
      amortization
            
            
            (1,595
            )
            
            
            (87
            )
            
            
            (704
            )
            
            
            (19
            )Intangible
      lease cost, net
            
            $
            3,040
            
            
            $
            206
            
            
            $
            3,952
            
            
            $
            274







Acquired
lease intangible liabilities (below-market leases) are net of previously
accreted minimum rent of approximately $455,000 and $216,000 at December 31,
2007 and 2006, respectively, and are accreted over the leases’ remaining terms,
which range from 2 to 25 years. Accretion of below market leases was
approximately $243,000 and $246,000 during the 2007 and 2006 periods,
respectively.  Such accretion is recorded as an increase to rental
income.




The
estimated aggregate amortization amounts from acquired lease intangibles for
each of the next five years are as follows (in thousands):




Year Ending December 31,
            
            Amortization
      Expense (In-Place Lease Value)
            
            
            Rental
      Income (Out-of-Market Leases)2008
            
            $
            667
            
            
            $
            2552009
            
            
            622
            
            
            
            2442010
            
            
            452
            
            
            
            1882011
            
            
            323
            
            
            
            1112012
            
            
            271
            
            
            
            63$
            2,335
            
            
            $
            861





6.
            NOTES
      PAYABLE





Our
outstanding debt at December 31, 2007 and 2006 consisted entirely of fixed-rate
mortgage loans of approximately $50.8 million and $51 million, respectively. Our
mortgage loans are secured by certain real estate properties and may be prepaid,
but could be subject to a yield-maintenance premium or prepayment penalty.
Mortgage loans are generally due in monthly installments of interest and
principal and mature over various terms ranging from September 2011 through
January 2036.




As of
December 31, 2007, the weighted-average interest rate on our fixed-rate debt is
5.9%, and the weighted average remaining life of such debt is 13.1 years. As of
December 31, 2007, scheduled principal repayments on notes payable were as
follows (in thousands):




Scheduled Payments by Year
            
            Scheduled
      Principal Payments
            
            
            Term-Loan
      Maturities
            
            
            Total
      Payments2008
            
            $
            146
            
            
            $
            --
            
            
            $
            1462009
            
            
            156
            
            
            
            --
            
            
            
            1562010
            
            
            166
            
            
            
            --
            
            
            
            1662011
            
            
            175
            
            
            
            24,615
            
            
            
            24,7902012
            
            
            184
            
            
            
            --
            
            
            
            184Thereafter
            
            
            491
            
            
            
            24,905
            
            
            
            25,396Total
            
            $
            1,318
            
            
            $
            49,520
            
            
            $
            50,838




F-14
 Table of Contents





7.
            CONCENTRATIONS





As of
December 31, 2007, each of our four consolidated properties individually
comprises greater than 12% of our consolidated total assets. Consistent with our
strategy of investing in areas that we know well, three of our four properties
are located in the Houston metropolitan area. These Houston properties represent
81% of our rental income for the year ended December 31, 2007. Houston is Texas’
largest city and the fourth largest city in the United States.




Following
are the revenues generated by our top tenants during the periods ended December
31 ($ in thousands):




Tenant
            
            2007
            
            
            2006H-E-B
      Grocery
            
            $
            1,949
            
            
            $
            1,488Designer
      Shoe Warehouse
            
            
            778
            
            
            
            782Rice
      Food Markets, Inc.
            
            
            423
            
            
            
            75Blockbuster
      Video
            
            
            287
            
            
            
            101Fidelity
      Investments
            
            
            274
            
            
            
            72$
            3,711
            
            
            $
            2,518







8.
            PARTNERS’
      CAPITAL AND MINORITY INTEREST




The
General Partner invested $800,000 as a limited partner and $1,000 as a general
partner. We began raising capital in June 2005 and had raised approximately $71
million at the time of the offering’s closing in October 2006. The General
Partner’s $800,000 investment represents a 1.1% limited partner interest in the
Partnership.




Limited
Optional Redemption— Our limited
partnership units were sold pursuant to exemptions from registration under the
Securities Act of 1933 and are not currently listed on a national exchange.
These units will be transferable only if we register them under such laws, and
such registration is not expected. We do not anticipate that any public market
for the limited partnership units will develop. In order to provide limited
partners with the possibility of liquidity, limited partners who have held their
shares for at least three years may receive the benefit of interim liquidity by
presenting all of those units to the Partnership for redemption. At that time,
we may, at our sole election and subject to the conditions and limitations
described below, redeem the shares presented for cash to the extent that we have
sufficient funds available to us to fund such redemption. The redemption price
to be paid will be 92% of the limited partner’s unreturned invested capital. At
no time during a 12-month period, however, may the number of limited partner
units redeemed by us exceed 2% of the number of units outstanding at the
beginning of that 12-month period. We had no redemptions during the 2007 or 2006
periods.




Distributions— During the operating
stage of the Partnership, net cash flow, as defined, will be distributed 99% to
the limited partners and 1% to the General Partner. A current distribution of
7.5% per annum on invested capital has been paid to date during the operating
stage. During the liquidation stage of the Partnership (commencing in October
2012) net cash flow, as defined, will be distributed among the limited partners
and the General Partner in the following manner:




·
            First
      - 99% to the limited partners and 1% to the General Partner until such
      time as the limited partners have received cumulative distributions from
      all sources (including monthly cash distributions during the operating
      stage of the Partnership) equal to 100% of their unreturned invested
      capital plus an amount equal to 10% per annum uncompounded on their
      invested capital.




·
            Second
      - 100% to the General Partner until it has received cumulative
      distributions from all sources (other than with respect to its limited
      partner units it purchased) in an amount equal to 40% of the net cash flow
      paid to date to the limited partners in excess of their adjusted
      capital.




·
            Thereafter
      - 60% to the limited partners and 40% to the General
    Partner.




F-15
 Table of Contents





Minority
Interest-Minority interest represents a 40% ownership interest that one of our
affiliate investment funds has in a real estate partnership that we consolidate
as a result of our 60% controlling financial interest in such
partnership.




9.
            RELATED
      PARTY TRANSACTIONS




Certain
of our affiliates received fees and compensation during the organizational stage
of the Partnership, including securities commissions and due diligence
reimbursements, marketing reimbursements and reimbursement of organizational and
offering expenses. In the event that these companies are unable to provide us
with the respective services, we would be required to find alternative providers
of these services. The following table summarizes the amount of such
compensation paid to our affiliates during the 2007 and 2006
periods:


Type of Service
              
              Service Description &
      Compensation
              
              2007
              
              
              2006Securities
      Commissions, Due Diligence and Marketing Reimbursements
              
              Sales
      commissions (7.25%) and dealer manager fees (2.5%) paid for placement of
      the limited partnership units through unaffiliated broker/dealers and
      reimbursement of bona fide due diligence efforts (0.5%)
              
              $
              --
              
              
              $
              6,520,669Organizational
      and Offering Cost Reimbursements
              
              Reimbursement
      of the Partnership’s organizational and offering costs, including legal
      and accounting fees, printing costs, filing fees and distribution
      costs.
              
              
              97,460
              
              
              
              212,720Total
              
              $
              97,460
              
              
              $
              6,733,389
 
 We have
no employees or offices.  Additionally, certain of our affiliates
receive fees and compensation during the operating stage of the Partnership,
including compensation for providing services to us in the areas of asset
management, development and acquisitions, property management and leasing,
financing, brokerage and administration. We reimburse our General Partner for an
allocation of salary and other overhead costs. The following table summarizes
the amount of such compensation paid to our affiliates during the 2007 and 2006
periods:
 
 Type of Service
              
              Service Description &
      Compensation
              
              2007
              
              
              2006Asset
      Management
              
              1%
      of the net invested capital under management for accounting-related
      services, investor relations, facilitating the deployment of capital and
      other services provided by the General Partner in operating the
      Partnership
              
              $
              617,753
              
              
              $
              353,251Development
      and Acquisitions
              
              Between
      3% and 6% of project costs for services provided by the affiliate in
      identifying, evaluating, procuring and, if applicable, developing
      properties (capitalized as part of real estate assets)
              
              
              90,000
              
              
              
              1,042,268Property
      Management and Leasing
              
              Property
      management fees are not to exceed 4% of gross rentals for providing
      property management, operating, maintenance and other services required to
      maintain a quality property. Leasing fees are not to exceed 2% of base
      rent on a lease renewal and 6% of based rent on an initial lease or
      procuring tenants and negotiating the terms of the tenant leases ($136,000
      in leasing costs capitalized to deferred costs)
              
              
              381,076
              
              
              
              226,237Additional
      Services
              
              Financing
      coordination fee equal to 1% of the loan proceeds for procuring debt
      financing for Partnership
              
              
              --
              
              
              
              123,075Brokerage
              
              Brokerage
      fees are not to exceed 6% of the sales price for the sale of the property
      to an unaffiliated thirty party
              
              
              --
              
              
              
              23,250Administration
      Costs Reimbursements
              
              These
      costs represent actual expenses incurred by the General Partner in
      connection with its provision of administrative services, including
      personnel costs
              
              
              191,674
              
              
              
              --Total
              
              $
              1,280,503
              
              
              $
              1,768,081








F-16
 Table of Contents




10.
            REAL
      ESTATE ACQUISITIONS AND
DISPOSITIONS




During
2006, we invested approximately $33.5 million through the acquisition of two
properties. On June 30, 2006, we acquired Olmos Creek, a multi-tenant retail
property in San Antonio, Texas with a gross leasable area of 102,000 square
feet. On September 29, 2006, we acquired Lantern Lane, a shopping center in
Houston, Texas anchored by Rice Food Markets. The center has a gross leasable
area of 79,000 square feet. These acquisitions were accounted for as purchases
and the results of their operations are included in the accompanying
consolidated financial statements from the respective dates of
acquisition.




Additionally,
during 2006, we generated proceeds of $775,000 from the sale to a third party of
a ground-leased parcel of land on Olmos Creek property.




See Note
4 for a discussion of our 2007 investment activity with respect to our
non-consolidated subsidiaries.




11.
            COMMITMENTS
      AND CONTINGENCIES




Litigation
- In the ordinary course of business, we may become subject to litigation or
claims. There




are no
material pending legal proceedings known to be contemplated against
us.




Environmental
matters - In connection with the ownership and operation of real estate,
we may be potentially liable for costs and damages related to environmental
matters. We have not been notified by any governmental authority of any
non-compliance, liability or other claim.




In
conjunction with our acquisition of the Lantern Lane Shopping Center in
September 2006, we identified an environmental exposure caused by a dry cleaning
business that operated on the property prior to our ownership. Our agreement
with the seller provides that, if the seller cannot satisfactorily evidence that
they have performed such remediation, we can reduce our note payable to them by
the lesser of the actual costs to remediate or $1.0 million. We believe that the
remediation costs will not exceed $1.0 million based on our environmental
investigation. We have not recorded a separate liability for this exposure as we
believe that we are fully indemnified by the seller pursuant to this
arrangement. To the extent that we are required to fund a portion of the
remediation, such amount will be financed through the reduction of the note
payable to the seller. We believe that this matter will not have an adverse
effect on our consolidated financial position or results of operations, and we
are aware of no other environmental exposures.




F-17
 Table of Contents




AmREIT
      MONTHLY INCOME & GROWTH FUND III, LTD.  AND
      SUBSIDIARIESSCHEDULE
      III - Consolidated Real Estate Owned and Accumulated
      Depreciation
                For
      the year ended December 31, 2007Initial
      Cost
              
              
              
              
              
              Total
      CostProperty
      Description
              
              Building
      and Improvements
              
              
              Land
              
              
              Cost
      Capitalized Subsequent to Acquisition (Note A)
              
              
              Building
      and Improvements
              
              
              Land
              
              
              Total
              
              
              Accumulated
      Depreciation
              
              Date
      Acquired
              
              EncumbrancesWestside
      Plaza
              
              
              8,631,610
              
              
              
              4,750,000
              
              
              
              1,225,705
              
              
              
              9,847,712
              
              
              
              4,759,603
              
              
              
              14,607,315
              
              
              
              (635,149
              )
              9/30/2005
              
              
              10,548,224Olmos
      Creek
              
              
              9,829,663
              
              
              
              4,261,553
              
              
              
              (663,582
              )
              
              
              9,879,040
              
              
              
              3,548,594
              
              
              
              13,427,634
              
              
              
              (619,288
              )
              6/30/2006
              
              
              11,175,000Lantern
      Lane
              
              
              11,386,338
              
              
              
              6,308,354
              
              
              
              751,353
              
              
              
              12,116,699
              
              
              
              6,329,346
              
              
              
              18,446,045
              
              
              
              (747,073
              )
              9/29/2006
              
              
              13,440,000Lake
      Houston
              
              
              15,968,495
              
              
              
              3,800,000
              
              
              
              185,851
              
              
              
              16,145,833
              
              
              
              3,808,513
              
              
              
              19,954,346
              
              
              
              (1,113,531
              )
              12/12/2005
              
              
              15,675,000Total
              
              $
              45,816,106
              
              
              $
              19,119,907
              
              
              $
              1,499,326
              
              
              $
              47,989,283
              
              
              $
              18,446,056
              
              
              $
              66,435,339
              
              
              $
              (3,115,040
              )
              
              
              $
              50,838,224
 
 Note A -
The negative balance for costs capitalized subsequent to acquisition could be
the result of out-parcels sold or tenant activity.
 
 Activity
within real estate and accumulated depreciation during the three years in the
period ended December 31, 2007 is as follows:
  AccumulatedCost
                
                
                DepreciationBalance
      at December 31, 2004
                
                
                -
                
                
                $
                -Acquisitions
      / additions
                
                
                33,437,701
                
                
                
                -Disposals
                
                
                -
                
                
                
                -Depreciation
      expense
                
                
                -
                
                
                
                92,275Balance
      at December 31, 2005
                
                
                33,437,701
                
                
                $
                92,275Acquisitions
      / additions
                
                
                33,001,921
                
                
                
                -Disposals
                
                
                (757,140
                )
                
                
                (3,251
                )Depreciation
      expense
                
                
                -
                
                
                
                1,094,529Balance
      at December 31, 2006
                
                $
                65,682,482
                
                
                $
                1,183,554Acquisitions
      / additions
                
                
                1,034,879
                
                
                
                -Disposals
                
                
                (282,520
                )
                
                
                (9,844
                )Depreciation
      expense
                
                
                -
                
                
                
                1,941,330Balance
      at December 31, 2007
                
                $
                66,434,841
                
                
                $
                3,115,040


S-1
 Table of Contents




Report
of Independent Registered Public Accounting Firm




The
Partners


AmREIT
Casa Linda, L.P.:




We have
audited the accompanying balance sheets of AmREIT
Casa Linda, L.P. (the “Partnership”) as of December 31, 2007 and 2006, and the
related statements of operations, partners’ capital and cash flows for the year
ended December 31, 2007 and for the period from December 8, 2006 (inception)
through December 31, 2006. These financial statements are theresponsibility of the Partnership’s management. Our responsibility is to
express an opinion on these financial statements based on our
audits.




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 provide a reasonable basis for our opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of AmREIT Casa Linda, L.P. as of
December 31, 2007 and 2006, and the results of its operations and its cash flows
for the year ended December 31, 2007 and for the period from December 8, 2006
(inception) through December 31, 2006, in conformity with U.S. generally
accepted accounting principles.




(signed)
KPMG LLP




Houston,
Texas




March 31,
2008




S-2
 Table of Contents




AmREIT
      Casa Linda, L.P.BALANCE
      SHEETSDecember
      31, 2007 and December 31, 2006(in
      thousands)December
      31,
            
            
            December
      31,2007
            
            
            2006ASSETSReal
      estate investments at cost:Land
            
            $
            11,420
            
            
            $
            11,420Buildings
            
            
            29,834
            
            
            
            29,645Tenant
      improvements
            
            
            530
            
            
            
            44241,784
            
            
            
            41,507Less
      accumulated depreciation and amortization
            
            
            (1,510
            )
            
            
            (96
            )40,274
            
            
            
            41,411Intangible
      lease cost, net
            
            
            3,152
            
            
            
            4,403Net
      real estate investments
            
            
            43,426
            
            
            
            45,814Cash
      and cash equivalents
            
            
            250
            
            
            
            -Tenant
      receivables
            
            
            519
            
            
            
            113Deferred
      costs, net
            
            
            401
            
            
            
            428Other
      assets
            
            
            5,655
            
            
            
            4,883TOTAL
      ASSETS
            
            $
            50,251
            
            
            $
            51,238LIABILITIES
      AND PARTNERS' CAPITALLiabilities:Notes
      payable
            
            $
            37,950
            
            
            $
            37,950Accounts
      payable and accrued liabilities
            
            
            1,558
            
            
            
            75Accounts
      payable - related party
            
            
            117
            
            
            
            262Asset
      retirement obligations
            
            
            800
            
            
            
            800Below
      market leases, net
            
            
            945
            
            
            
            1,599Security
      deposits
            
            
            108
            
            
            
            120TOTAL
      LIABILITIES
            
            $
            41,478
            
            
            $
            40,806Partners'
      capital:General
      partner
            
            
            -
            
            
            
            -Limited
      partner
            
            
            8,733
            
            
            
            10,432TOTAL
      PARTNERS' CAPITAL
            
            $
            8,773
            
            
            $
            10,432TOTAL
      LIABILITIES AND PARTNERS' CAPITAL
            
            $
            50,251
            
            
            $
            51,238





See Notes
to Financial Statements.





S-3
 Table of Contents





AmREIT
      Casa Linda, L.P.STATEMENTS OFOPERATIONSFor
      the year ended December 31, 2007 and for the period fromDecember
      8, 2006 (inception) through December 31, 2006(in
      thousands)2007
            
            
            2006Revenues:Rental
      income from operating leases
            
            $
            5,004
            
            
            $
            391Total
      revenues
            
            
            5,004
            
            
            
            391Expenses:General
      and administrative
            
            
            54
            
            
            
            -Property
      expense
            
            
            1,670
            
            
            
            80Property
      management fees - related party
            
            
            163
            
            
            
            8Legal
      and professional
            
            
            113
            
            
            
            1Depreciation
      and amortization
            
            
            2,497
            
            
            
            221Total
      expenses
            
            
            4,497
            
            
            
            310Operating
      income
            
            
            507
            
            
            
            81Other
      income (expense):Interest
      and other income
            
            
            42
            
            
            
            5Interest
      expense
            
            
            (2,172
            )
            
            
            (142
            )Income
      tax expense
            
            
            (36
            )
            
            
            -Total
      other income (expense)
            
            
            (2,166
            )
            
            
            (137
            )Net
      loss
            
            $
            (1,659
            )
            
            $
            (56
            )





See Notes
to Financial Statements.





S-4
 Table of Contents





AmREIT
      Casa Linda, L.P.STATEMENTS OF
      PARTNERS'CAPITALFor
      the year ended December 31, 2007 and for the period fromDecember
      8, 2006 (inception) through December 31, 2006(in
      thousands)GP
            
            
            LP
            
            
            TotalBalance
      at December 8, 2006 (inception)
            
            $
            -
            
            
            $
            -
            
            
            $
            -Contributions
            
            
            -
            
            
            
            10,488
            
            
            
            10,488Net
      loss (1)
            
            
            (1
            )
            
            
            (55
            )
            
            
            (56
            )Curative
      allocation
            
            
            1
            
            
            
            (1
            )
            
            
            -Balance
      at December 31, 2006
            
            $
            -
            
            
            $
            10,432
            
            
            $
            10,432Net
      loss (1)
            
            
            (17
            )
            
            
            (1,642
            )
            
            
            (1,659
            )Curative
      allocation
            
            
            17
            
            
            
            (17
            )
            
            
            -Balance
      at December 31, 2007
            
            $
            -
            
            
            $
            8,773
            
            
            $
            8,773








(1)
            The
      allocation of net loss includes a curative allocation to increase the GP
      capital account by $17,000 and $1,000 for the 2007 and 2006 periods,
      respectively.  The partnership agreement provides that no
      partner shall be required to fund a deficit balance in their capital
      account.





See Notes
to Financial Statements.





S-5
 Table of Contents




AmREIT
Casa Linda, L.P.
 STATEMENTS OFCASH
FLOWS
 For
the year ended December 31, 2007 and for the period from
 December
8, 2006 (inception) through December 31, 2006
 (in
thousands)


2007
              
              
              2006Cash
      flows from operating activities:Net
      loss
              
              $
              (1,659
              )
              
              $
              (56
              )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
              
              
              2,081
              
              
              
              134Increase
      in tenant receivables
              
              
              (405
              )
              
              
              (113
              )Increase
      in deferred costs
              
              
              (44
              )
              
              
              -Increase
      in other assets
              
              
              (772
              )
              
              
              (4,308
              )Increase
      in accounts payable and accrued liabilities
              
              
              1,483
              
              
              
              75(Decrease)
      increase in accounts payable - related party
              
              
              (145
              )
              
              
              262(Decrease)
      increase in security deposits
              
              
              (12
              )
              
              
              120Net
      cash provided by (used in) operating activities
              
              
              527
              
              
              
              (3,886
              )Cash
      flows from investing activities:Improvements
      to real estate
              
              
              (277
              )
              
              
              -Acquisition
      of investment properties
              
              
              -
              
              
              
              (6,172
              )Net
      cash used in investing activities
              
              
              (277
              )
              
              
              (6,172
              )Cash
      flows from financing activities:Contributions
              
              
              -
              
              
              
              10,488Loan
      acquisition costs
              
              
              -
              
              
              
              (430
              )Net
      cash provided by financing activities
              
              
              -
              
              
              
              10,058Net
      increase in cash and cash equivalents
              
              
              250
              
              
              
              -Cash
      and cash equivalents, beginning of period
              
              
              -
              
              
              
              -Cash
      and cash equivalents, end of period
              
              $
              250
              
              
              $
              -Supplemental
      schedule of cash flow information:Cash
      paid during the year for interest
              
              $
              1,929
              
              
              $
              139Supplemental schedule of
      non-cash transactions:In
      conjunction with our acquisition of the Property in December 2006, we
      placed $37,950,000 in debt that was funded directly to the
      seller.  Additionally, we incurred a liability in the amount of
      $800,000 related to an asset retirement obligation. Included in other
      assets is $575,000 which was previously placed in an escrow account by the
      seller and was assigned to us as part of the
  acquisition.
  
  See Notes
to Financial Statements.




S-6
 Table of Contents





AmREIT
Casa Linda, L.P.




Notes to
Financial Statements




December
31, 2007 and 2006





1.
            DESCRIPTION
      OF BUSINESS





AmREIT
Casa Linda, L.P., a Texas limited partnership (the “Partnership”), was formed on
December 8, 2006 to acquire Casa Linda, (the “Property”) a multi-tenant retail
property located in Dallas, Texas with a combined gross leasable area of 324,638
square feet. The property is in the planning stages of a significant
redevelopment project that is expected to be completed during 2008. The General
Partner of the Partnership is AmREIT Casa Linda GP, Inc.  The General
Partner maintains its principal place of business in Houston,
Texas.




The
limited partners of the Partnership are AmREIT Monthly Income & Growth Fund
III, Ltd. (MIG III) and AmREIT Monthly Income & Growth Fund IV, Ltd. (MIG
IV). We have contracted with AmREIT Realty Investment Corporation (“ARIC”) to
provide property management and leasing services. ARIC is a wholly-owned
subsidiary of AmREIT (AMEX: AMY), a Texas real estate investment trust, and is
an affiliate of MIG III and MIG IV.




2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





BASIS
OF PRESENTATION




Our
financial records are maintained on the accrual basis of accounting whereby
revenues are recognized when earned and expenses are recorded when incurred. We
were formed on December 8, 2006. Accordingly, the accompanying statements of
operations, changes in partners’ capital and cash flows related to 2006
represent activity for the period from December 8, 2006 (inception) through
December 31, 2006. Unless otherwise noted, all references to the “2006 period”
or “the period ended December 31, 2006” refer to the short period of operations
from December 8, 2006 through December 31, 2006.




REVENUE
RECOGNITION




We lease
space to tenants under agreements with varying terms. Our leases are accounted
for as operating leases with revenue being recognized on a straight-line basis
over the terms of the individual leases. Accrued rents are included in tenant
receivables. Revenue from tenant reimbursements of taxes, maintenance expenses
and insurance is recognized in the period the related expense is recorded.
Additionally, certain of the lease agreements contain provisions that provide
for additional rents based on tenants’ sales volumes (contingent or percentage
rent). Percentage rents are recognized when the tenants achieve the specified
targets as defined in their lease agreements. During the periods ended December
31, 2007 and 2006, we recognized percentage rents of $26,000 and $0,
respectively. We recognize lease termination fees in the period that the lease
is terminated and collection of the fees is reasonably assured. During the
periods ended December 31, 2007 and 2006, we recognized no lease termination
fees.




S-7
 Table of Contents





REAL
ESTATE INVESTMENTS




Acquired
Properties and Acquired Lease Intangibles — We account for real estate
acquisitions pursuant to Statement of Financial Accounting Standards No. 141,
Business Combinations(“SFAS No.
141”). Accordingly, we allocate the purchase price of the acquired
properties to land, building and improvements, identifiable intangible assets
and to the acquired liabilities based on their respective fair values.
Identifiable intangibles include amounts allocated to acquired out-of-market
leases, the value of in-place leases and customer relationship value, if any. We
determine fair value based on estimated cash flow projections that utilize
appropriate discount and capitalization rates and available market information.
Estimates of future cash flows are based on a number of factors including the
historical operating results, known trends and specific market and economic
conditions that may affect the property. Factors considered by management in our
analysis of determining the as-if-vacant property value include an estimate of
carrying costs during the expected lease-up periods considering market
conditions, and costs to execute similar leases. In estimating carrying costs,
management includes real estate taxes, insurance and estimates of lost rentals
at market rates during the expected lease-up periods, tenant demand and other
economic conditions. Management also estimates costs to execute similar leases
including leasing commissions, tenant improvements, legal and other related
expenses. Intangibles related to out-of-market leases and in-place lease value
are recorded as acquired lease intangibles and are amortized as an adjustment to
rental revenue or amortization expense, as appropriate, over the remaining terms
of the underlying leases.




Depreciation-Depreciation is computed
using the straight-line method over an estimated useful life of up to 30 years
for buildings, up to 6 years for site improvements and over the term of lease
for tenant improvements.




Impairment-We review the property for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets, including accrued rental income, may not be
recoverable through operations. We determine whether an impairment in value
occurred by comparing the estimated future cash flows (undiscounted and without
interest charges), including the residual value of the property, with the
carrying value of the individual property. If impairment is indicated, a loss
will be recorded for the amount by which the carrying value of the asset exceeds
its fair value. No impairment charges were recognized during the 2007 and 2006
periods.




ENVIRONMENTAL
EXPOSURES




We are
subject to numerous environmental laws and regulations as they apply to real
estate pertaining to chemicals used by the dry cleaning industry, the existence
of asbestos in older shopping centers, and underground petroleum storage tanks.
We believe that the tenants who currently operate dry cleaning plants or gas
stations do so in accordance with current laws and regulations. We believe that
the ultimate disposition of currently known environmental matters will not have
a material affect on our financial position, liquidity, or operations. However,
we can give no assurance that existing environmental studies with respect to the
shopping centers have revealed all potential environmental liabilities; that any
previous owner, occupant or tenant did not create any material environmental
condition not known to it; that the current environmental condition of the
shopping center will not be affected by tenants and occupants, by the condition
of nearby properties, or by unrelated third parties; or that changes in
applicable environmental laws and regulations or their interpretation will not
result in additional environmental liability to the Partnership.




S-8
 Table of Contents





RECEIVABLES
AND ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS




Tenant
Receivables-Included in tenant receivables are base rents, tenant reimbursements and
receivables attributable to recording rents on a straight-line basis. An
allowance for the uncollectible portion of accrued rents and accounts receivable
is determined based upon customer credit-worthiness (including expected recovery
of our claim with respect to any tenants in bankruptcy), historical bad debt
levels, and current economic trends. Bad debt expenses and any related
recoveries are included in general and administrative expense. As of December
31, 2007 and 2006, we did not have an allowance for uncollectible accounts
related to our tenant receivables.




DEFERRED
COSTS




Deferred
costs include deferred leasing costs and loan acquisition costs, net of
amortization. Loan acquisition costs are incurred in obtaining financing and are
amortized to interest expense over the term of the debt agreements. Deferred
leasing costs consist of external commissions associated with leasing our
properties and are amortized to expense over the lease term. Accumulated
amortization related to loan acquisition costs as of December 31, 2007 and 2006
totaled $67,000 and $3,000, respectively. Accumulated amortization related to
leasing costs as of December 31, 2007 and 2006 totaled $6,000 and $0,
respectively.




INCOME
TAXES




Federal-No provision for U.S.
federal income taxes is included in the accompanying financial statements. As a
partnership, we are not subject to federal income tax, and the federal tax
effect of our activities is passed through to our partners.




State-In May 2006, the State of
Texas adopted House Bill 3, which modified the state’s franchise tax structure,
replacing the previous tax based on capital or earned surplus with one based on
margin (often referred to as the “Texas Margin Tax”) effective with franchise
tax reports filed on or after January 1, 2008. The Texas Margin Tax is computed
by applying the applicable tax rate (1% for the Partnership) to the profit
margin. The Texas Margin Tax accrued as of December 31, 2007 and 2006 totaled
$36,000 and $0, respectively.




USE
OF ESTIMATES




The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.




FAIR
VALUE OF FINANCIAL INSTRUMENTS




Our
financial instruments consist primarily of cash and cash equivalents, tenant
receivables, note
payable, accounts payable and accrued liabilities, and accounts payable-related
party. The carrying value of cash, cash equivalents, tenant receivables,
accounts payable and accrued liabilities, and accounts payable-related party are
representative of their respective fair values due to the short-term nature
ofthese instruments. As of December 31, 2007 and 2006, the carrying
value of our total debt obligations was $38.0 and $38.0 million, respectively;
all of which represents fixed-rate obligations with an estimated fair value of
$38.2 and $36.7 million, respectively, based on a discounted cash flow analysis
using current market rates of interest.




NEWACCOUNTING
STANDARDS
  In
September 2006, The Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, Fair Value
Measurement(SFAS No. 157). SFAS No. 157 defines fair value, establishes
a framework for measuring fair value and requires enhanced disclosures about
fair value measurements. SFAS No. 157 requires companies to disclose the fair
value of its financial instruments according to a fair value hierarchy.
Additionally, companies are required to provide certain disclosures regarding
instruments within the hierarchy, including a reconciliation of the beginning
and ending balances for each major category of assets and liabilities. SFAS No.
157 is effective for our fiscal year beginning January 1, 2008. The adoption of
SFAS No. 157 is not expected to have a material effect on our results of
operations or financial position.


S-9
 Table of Contents




In
February 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No.
159).SFAS No. 159
expands opportunities to use fair value measurement in financial reporting and
permits entities to choose to measure many financial instruments and certain
other items at fair value. This Statement is effective for fiscal years
beginning after November 15, 2007. We currently do not plan to measure any
eligible financial assets and liabilities at fair value under the provisions of
SFAS No. 159.
  In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),Business Combinations (SFAS
No. 141R).  SFAS
No. 141R will change the accounting for business combinations. Under SFAS No.
141R, an acquiring entity will be required to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions.  SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008.  We
are currently evaluating the potential impact of SFAS No. 141R on our financial
position and results of operations beginning for fiscal year 2009.
 
 In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB
No. 51 (SFAS No. 160). SFAS No. 160 establishes accounting
and reporting standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest
in a subsidiary is an ownership interest in the consolidated entity that should
be reported as equity in the consolidated financial statements. SFAS No.
160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. SFAS No. 160 requires
retroactive adoption of the presentation and disclosure requirements for
existing minority interests. All other requirements of SFAS No. 160 shall
be applied prospectively. We are currently evaluating the potential impact of
the adoption of SFAS No. 160 on our consolidated financial
statements.


CASH
AND CASH EQUIVALENTS




For
purposes of the statements of cash flows, we consider all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents. Cash and cash equivalents consist of demand deposits at
commercial banks and money market funds.




INTEREST




Interest
is charged to interest expense as it accrues. No interest was capitalized during
the 2007 or 2006 period.




3.
            OPERATING
      LEASES





Our
operating leases generally range from one month to thirteen years and generally
include one or more five year renewal options. A summary of minimum future base
rentals to be received, exclusive of any renewals, under non-cancelable
operating leases in existence at December 31, 2007 is as follows (in
thousands):




2008
            
            $
            3,0772009
            
            
            2,1192010
            
            
            1,5222011
            
            
            9652012
            
            
            638Thereafter
            
            
            4,374$
            12,695




S-10
 Table of Contents




Future
minimum rental revenue excludes amounts that may be received from tenants for
reimbursements of operating costs, real estate taxes and insurance. Expense
reimbursements recognized as revenue totaled $1.3 million and $0.1
million during the 2007 and 2006 periods, respectively.





4.
            ACQUIRED
      LEASE INTANGIBLES





In
accordance with SFAS No. 141, we haveidentified and recorded the value of intangibles at the property
acquisition date. Such intangibles include the value of in-place leases and
out-of-market leases.  Acquired lease intangible assets (in-place
leases and above-market leases) are amortized over the leases’ remaining terms,
which range from 1 month to 13 years. The amortization of above-market leases is
recorded as a reduction of rental income and the amortization of in-place leases
is recorded to amortization expense.  The amortization expense related
to in-place leases was $1,077,000 and $81,000 during 2007 and 2006,
respectively.  The amortization of above-market leases, which was
recorded as a reduction of rental income, was $173,000 and $14,000 during 2007
and 2006, respectively.





In-place
and above-market lease amounts and their respective accumulated amortization are
as follows (in thousands):





December
      31, 2007
            
            
            December
      31, 2006In-Place
      leases
            
            
            Above-market
      leases
            
            
            In-Place
      leases
            
            Above-market
      leasesCost
            
            $
            2,757
            
            
            $
            1,718
            
            
            $
            2,776
            
            
            $
            1,722Accumulated
      amortization
            
            
            (1,140
            )
            
            
            (183
            )
            
            
            (81
            )
            
            
            (14
            )Intangible
      lease cost, net
            
            $
            1,617
            
            
            $
            1,535
            
            
            $
            2,695
            
            
            $
            1,708





Acquired
lease intangible liabilities (below-market leases) are net of previously
accreted minimum rent of $702,000 and $58,000 at December 31, 2007 and 2006,
respectively and are accreted over the leases’ remaining terms, which range from
1 month to 13 years. Accretion of below market leases was approximately $653,000
and $58,000 during the 2007 and 2006 periods, respectively.  Such
accretion is recorded as an increase to rental income.




The
estimated aggregate amortization amounts from acquired lease intangibles for
each of the next five years are as follows (in thousands):




Year
      Ending December 31,
            
            Amortization
      Expense (in-place lease value)
            
            
            Rental
      Income (out-of-market leases)2008
            
            $
            695
            
            
            $
            (357
            )2009
            
            
            376
            
            
            
            (112
            )2010
            
            
            199
            
            
            
            582011
            
            
            83
            
            
            
            1222012
            
            
            45
            
            
            
            134$
            1,398
            
            
            $
            (155
            )




S-11
 Table of Contents




5.
            NOTES
      PAYABLE





Our
outstanding debt at December 31, 2007 and 2006 consisted entirely of a $38.0
million fixed-rate mortgage loan, which requires monthly interest-only payments
and matures in January 2014. Our mortgage loan is secured by certain real estate
properties and may be prepaid, but is subject to a yield-maintenance premium or
prepayment penalty.




As of
December 31, 2007, the interest rate on our fixed-rate debt is 5.5%, and the
remaining life is 6 years. As of December 31, 2007, scheduled principal
repayments on our note payable were as follows (in thousands):




ScheduledPaymentsby Year
            
            Scheduled
      Principal Payments
            
            
            Term-Loan
      Maturities
            
            
            Total
      Payments2008
            
            
            --
            
            
            
            --
            
            
            
            --2009
            
            
            --
            
            
            
            --
            
            
            
            --2010
            
            
            --
            
            
            
            --
            
            
            
            --2011
            
            
            --
            
            
            
            --
            
            
            
            --2012
            
            
            --
            
            
            
            --
            
            
            
            --Beyond
      five years
            
            
            --
            
            
            
            37,950
            
            
            
            37,950Total
            
            $
            --
            
            
            $
            37,950
            
            
            $
            37,950




S-12
 Table of Contents





6.
            CONCENTRATIONS





As of
December 31, 2007, Casa Linda consisted of 63 tenants; none of which comprised
more than 10% of our total base rent.  Following are the rental income
generated by our top tenants during the period ended December 31 ($ in
thousands):





Tenant
            
            2007
            
            
            2006Albertson’s
            
            $
            287
            
            
            $
            1924
      Hour Fitness
            
            
            229
            
            
            
            23El
      Fenix Restaurant
            
            
            181
            
            
            
            12PETCO
            
            
            178
            
            
            
            11Chili’s
      Restaurant
            
            
            144
            
            
            
            12$
            1,019
            
            
            $
            77





7.
            RELATED
      PARTY TRANSACTIONS





We have
no employees or offices. We rely on our General Partner to manage our business
and affairs. Our General Partner utilizes the services of AmREIT and its
affiliates in performing its duties to us. These services primarily include the
supervision of the management and leasing of the Property. As a result, we are
dependent upon AmREIT and its affiliates. In the event that these companies are
unable to provide us with the respective services, we would be required to find
alternative providers of these services. During 2007 and 2006 we incurred
property management and leasing fees of $207,000 and $8,000,
respectively.





8.
            COMMITMENTS
      AND CONTINGENCIES





Litigation
- In the ordinary course of business, we may become subject to litigation or
claims. There are no
material pending legal proceedings known to be contemplated against
us.





Environmental
matters - In connection with the ownership and operation of real estate,
we may be potentially liable for costs and damages related to environmental
matters. We have not been notified by any governmental authority of any
non-compliance, liability or other claim.





In
conjunction with our acquisition of Casa Linda in December 2006, we identified
an environmental exposure caused by a dry cleaning business that operated on the
property prior to our ownership. We estimate that our obligation related to
remediation of this exposure will be approximately $800 thousand.  Such
amount has been placed in escrow and represents the deductible amount under an
environmental insurance policy that we placed on the property upon
acquisition.  We have recorded an asset retirement obligation for $800
thousand and capitalized those estimated costs to Land in our accompanying
balance sheet.  We believe that this matter will not have an adverse effect
on our financial position or results of operations, and we are aware of no other
environmental exposures





S-13
 Table of Contents





Report
of Independent Registered Public Accounting Firm




The
Partners


5433
Westheimer, L.P.:





We have
audited the accompanying balance sheets of 5433 Westheimer, L.P. (the
“Partnership”) as of December 31, 2007 and 2006, and the related statements of
operations, partners’ capital and cash flows for the year ended December 31,
2007 and for the period from March 31, 2006 (inception) through December 31,
2006. These financial statements are the responsibility of the Partnership’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.




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 theaccounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of 5433 Westheimer, L.P. as of
December 31, 2007 and 2006, and the results of its operations and its cash flows
for the year ended December 31, 2007 and for the period from March 31, 2006
(inception) through December 31, 2006, in conformity with U.S. generally
accepted accounting principles.




(signed)
KPMG LLP




Houston,
Texas




March 31,
2008







S-14
 Table of Contents





PART
      I - FINANCIAL INFORMATIONItem
      1. Financial Statements5433
      WESTHEIMER, L.P.BALANCE
      SHEETSDecember
      31, 2007 and December 31, 2006(in
      thousands)December
      31,
            
            
            December
      31,2007
            
            
            2006ASSETSReal
      estate investments at cost:Land
            
            $
            3,483
            
            
            $
            3,483Buildings
            
            
            7,696
            
            
            
            7,527Tenant
      improvements
            
            
            377
            
            
            
            47411,556
            
            
            
            11,484Less
      accumulated depreciation and amortization
            
            
            (842
            )
            
            
            (406
            )10,714
            
            
            
            11,078Intangible
      lease cost, net
            
            
            745
            
            
            
            1,390Net
      real estate investments
            
            
            11,459
            
            
            
            12,468Cash
      and cash equivalents
            
            
            164
            
            
            
            194Tenant
      receivables
            
            
            159
            
            
            
            188Accounts
      receivable
            
            
            9
            
            
            
            6Accounts
      receivable - related party
            
            
            173
            
            
            
            -Deferred
      costs
            
            
            23
            
            
            
            12Other
      assets
            
            
            837
            
            
            
            98TOTAL
      ASSETS
            
            $
            12,824
            
            
            $
            12,966LIABILITIES
      AND PARTNERS' CAPITALLiabilities:Notes
      payable - related party
            
            $
            7,035
            
            
            $
            7,035Accounts
      payable and accrued liabilities
            
            
            484
            
            
            
            317Accounts
      payable - related party
            
            
            107
            
            
            
            43Asset
      retirement obligations
            
            
            2,800
            
            
            
            2,800Below
      market leases, net
            
            
            20
            
            
            
            88Prepaid
      rent
            
            
            9
            
            
            
            5Security
      deposits
            
            
            86
            
            
            
            89TOTAL
      LIABILITIES
            
            $
            10,541
            
            
            $
            10,377Partners'
      capital:General
      partner
            
            
            -
            
            
            
            -Limited
      partner
            
            
            2,283
            
            
            
            2,589TOTAL
      PARTNERS' CAPITAL
            
            $
            2,283
            
            
            $
            2,589TOTAL
      LIABILITIES AND PARTNERS' CAPITAL
            
            $
            12,824
            
            
            $
            12,966





See Notes
to Financial Statements.





S-15
 Table of Contents





5433
      WESTHEIMER, L.P.STATEMENTS
      OF OPERATIONSFor
      the year ended December 31, 2007 and for the period fromMarch
      31, 2006 (inception) through December 31, 2006(in
      thousands)2007
            
            
            2006Revenues:Rental
      income from operating leases
            
            $
            1,531
            
            
            $
            1,240Total
      revenues
            
            
            1,531
            
            
            
            1,240Expenses:General
      and administrative
            
            
            126
            
            
            
            86Property
      expense
            
            
            1,221
            
            
            
            780Legal
      and professional
            
            
            139
            
            
            
            14Depreciation
      and amortization
            
            
            1,170
            
            
            
            788Total
      expenses
            
            
            2,656
            
            
            
            1,668Operating
      loss
            
            
            (1,125
            )
            
            
            (428
            )Other
      income (expense):Interest
      expense - related party
            
            
            (520
            )
            
            
            (393
            )Interest
      and other income
            
            
            77
            
            
            
            1Income
      tax expense
            
            
            (12
            )
            
            
            -Total
      other income (expense)
            
            
            (455
            )
            
            
            (392
            )Net
      loss
            
            $
            (1,580
            )
            
            $
            (820
            )





See Notes
to Financial Statements.





S-16
 Table of Contents





5433
      WESTHEIMER, L.P.STATEMENTS
      OF PARTNERS' CAPITALFor
      the year ended December 31, 2007 and for the period fromMarch
      31, 2006 (inception) through December 31, 2006(in
      thousands)GP
            
            
            LP
            
            
            TotalBalance
      at March 31, 2006 (inception)
            
            $
            -
            
            
            $
            -
            
            
            $
            -Contributions
            
            
            -
            
            
            
            3,409
            
            
            
            3,409Net
      loss (1)
            
            
            (8
            )
            
            
            (812
            )
            
            
            (820
            )Curative
      allocation
            
            
            8
            
            
            
            (8
            )
            
            
            -Balance
      at December 31, 2006
            
            $
            -
            
            
            $
            2,589
            
            
            $
            2,589Contributions
            
            
            
            
            
            
            1,274
            
            
            
            1,274Net
      loss (1)
            
            
            (16
            )
            
            
            (1,564
            )
            
            
            (1,580
            )Curative
      allocation
            
            
            16
            
            
            
            (16
            )
            
            
            -Balance
      at December 31, 2007
            
            $
            -
            
            
            $
            2,283
            
            
            $
            2,283





(1)
            The
      allocation of net loss includes a curative allocation to increase the GP
      capital account by $8,000 and $16,000 for the 2007 and 2006 periods,
      respectively. The partnership agreement provides that no partner
      shall be required to fund a deficit balance in their capital
      account.





See Notes
to Financial Statements.





S-17
 Table of Contents





5433
      WESTHEIMER, L.P.STATEMENTS
      OF CASH FLOWSFor
      the year ended December 31, 2007 and for the period fromMarch
      31, 2006 (inception) through December 31, 2006(in
      thousands)2007
            
            
            2006Cash
      flows from operating activities:Net
      loss
            
            $
            (1,580
            )
            
            $
            (820
            )Adjustments
      to reconcile net loss to net cash (used in) provided by operating
      activities:Depreciation
      and amortization
            
            
            1,119
            
            
            
            842(Increase)
      decrease in tenant receivables
            
            
            18
            
            
            
            (155
            )(Increase)
      in accounts receivable
            
            
            (3
            )
            
            
            (6
            )(Increase)
      in accounts receivable - related party
            
            
            (173
            )
            
            
            -Decrease
      (increase) in accrued rental income
            
            
            11
            
            
            
            (33
            )Increase
      in deferred costs
            
            
            -
            
            
            
            (15
            )Increase
      in other assets
            
            
            (739
            )
            
            
            (84
            )Increase
      in accounts payable and other liabilities
            
            
            167
            
            
            
            317Increase
      in prepaid rent
            
            
            4
            
            
            
            5Increase
      in accounts payable - related party
            
            
            64
            
            
            
            43(Decrease)
      increase in security deposits
            
            
            (3
            )
            
            
            89Net
      cash (used in) provided by operating activities
            
            
            (1,115
            )
            
            
            183Cash
      flows from investing activities:Improvements
      to real estate
            
            
            (189
            )
            
            
            -Acquisition
      of investment properties
            
            
            -
            
            
            
            (10,433
            )Net
      cash used in investing activities
            
            
            (189
            )
            
            
            (10,433
            )Cash
      flows from financing activities:Proceeds
      from notes payable - related party
            
            
            -
            
            
            
            7,035Contributions
            
            
            1,274
            
            
            
            3,409Net
      cash provided by financing activities
            
            
            1,274
            
            
            
            10,444Net
      (decrease) increase in cash and cash equivalents
            
            
            (30
            )
            
            
            194Cash
      and cash equivalents, beginning of period
            
            
            194
            
            
            
            -Cash
      and cash equivalents, end of period
            
            $
            164
            
            
            $
            194Supplemental
      schedule of cash flow information:Cash
      paid during the year for interest
            
            $
            522
            
            
            $
            350Supplemental
      schedule of non-cash transactions:In conjunction with
      our acquisition of the Property in March 2006, we incurred a
      liabilityin
      the amount of $2.8 million related to an asset retirement
      obligation.




See Notes
to Financial Statements.





S-18
 Table of Contents




5433 Westheimer, L.P.


Notes to FinancialStatements





December
31,2007 and 2006





1.
            DESCRIPTION
      OF BUSINESS





5433
Westheimer, L.P., a Texas limited partnership (the “Partnership”), was formed on
March 31, 2006 to acquire 5433 Westheimer (the “Property” an office building
located in Houston, Texas with a gross leasable area of 134,000 square feet.) We
commenced redevelopment of the Property during 2008 and expect it to be complete
in 2009 or early 2010. The General Partner of the Partnership is AmREIT 5433
Westheimer GP, LLC.  The General Partner maintains its principal place
of business in Houston, Texas.  The limited partners of the
Partnership are AmREIT Monthly Income & Growth Fund III, Ltd. (MIG III), and
Westheimer SPL Associates, LTD.





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





BASIS
OF PRESENTATION




Our
financial records are maintained on the accrual basis of accounting whereby
revenues are recognized when earned and expenses are recorded when incurred. We
were formed on March 31, 2006. Accordingly, the accompanying statements of
operations, changes in partners’ capital and cash flows related to 2007 and 2006
represent activity for the year ended December 31, 2007 and for the period from
March 31, 2006 (inception) through December 31, 2006. Unless otherwise noted,
all references to the “2006 period” or “the period ended December 31, 2006”
refer to the short period of operations from March 31, 2006 through December 31,
2006.




REVENUE
RECOGNITION




We lease
space to tenants under agreements with varying terms. Our leases are accounted
for as operating leases with revenue being recognized on a straight-line basis
over the terms of the individual leases. Accrued rents are included in tenant
receivables. Revenue from tenant reimbursements of taxes, maintenance expenses
and insurance is recognized in the period the related expense is recorded. We
recognize lease termination fees in the period that the lease is terminated and
collection of the fees is reasonably assured. During the periods ended December
31, 2007 and December 31, 2006 we recognized no lease termination
fees.




REAL
ESTATE INVESTMENTS




Acquired
Properties and Acquired Lease Intangibles — We account for real estate
acquisitions pursuant to Statement of Financial Accounting Standards No. 141,
Business Combinations(“SFAS No. 141”). Accordingly, we allocate the purchase price of the
acquired properties to land, building and improvements, identifiable intangible
assets and to the acquired liabilities based on their respective fair values.
Identifiable intangibles include amounts allocated to acquired out-of-market
leases, the value of in-place leases and customer relationship value, if any. We
determine fair value based on estimated cash flow projections that utilize
appropriate discount and capitalization rates and available market information.
Estimates of future cash flows are based on a number of factors including the
historical operating results, known trends and specific market and economic
conditions that may affect the property. Factors considered by management in our
analysis of determining the as-if-vacant property value include an estimate of
carrying costs during the expected lease-up periods considering market
conditions, and costs to execute similar leases. In estimating carrying costs,
management includes real estate taxes, insurance and estimates of lost rentals
at market rates during the expected lease-up periods, tenant demand and other
economic conditions. Management also estimates costs to execute similar leases
including leasing commissions, tenant improvements, legal and other related
expenses. Intangibles related to out-of-market leases and in-place lease value
are recorded as acquired lease intangibles and are amortized as an adjustment to
rental revenue or amortization expense, as appropriate, over the remaining terms
of the underlying leases.




S-19
 Table of Contents





Depreciation-Depreciation is computed
using the straight-line method over an estimated useful life of up to 20 years
for buildings, up to 4 years for site improvements and over the term of lease
for tenant improvements.





Impairment-We review the property for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets, including accrued rental income, may not be
recoverable through operations. We determine whether an impairment in value
occurred by comparing the estimated future cash flows (undiscounted and without
interest charges), including the residual value of the property, with the
carrying value of the individual property. If impairment is indicated, a loss
will be recorded for the amount by which the carrying value of the asset exceeds
its fair value. No impairment charges were recorded during the 2007 or 2006
periods.




ENVIRONMENTAL
EXPOSURES




We are
subject to numerous environmental laws and regulations as they apply to real
estate pertaining to chemicals used by the dry cleaning industry, the existence
of asbestos in older shopping centers, and underground petroleum storage tanks.
We believe that the tenants who currently operate dry cleaning plants or gas
stations do so in accordance with current laws and regulations. We believe that
the ultimate disposition of currently known environmental matters will not have
a material affect on our financial position, liquidity, or operations .However,
we can give no assurance that existing environmental studies with respect to the
shopping center have revealed all potential environmental liabilities; that any
previous owner, occupant or tenant did not create any material environmental
condition not known to it; that the current environmental condition of the
shopping center will not be affected by tenants and occupants, by the condition
of nearby properties, or by unrelated third parties; or that changes in
applicable environmental laws and regulations or their interpretation will not
result in additional environmental liability to the Partnership.




RECEIVABLES
AND ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS




Tenant
Receivables-Included in tenant receivables are base rents, tenant reimbursements and
receivables attributable to recording rents on a straight-line basis. An
allowance for the uncollectible portion of accrued rents and accounts receivable
is determined based upon customer credit-worthiness (including expected recovery
of our claim with respect to any tenants in bankruptcy), historical bad debt
levels, and current economic trends. Bad debt expenses and any related
recoveries are included in general and administrative expense. As of December
31, 2007 and 2006, we did not have an allowance for uncollectible accounts
related to our tenant receivables.




Accounts
Receivable-Related Party- Accounts
receivable-related party represents amounts due from affiliates for their
portion of earnest money on the acquisition of the property.




DEFERRED
COSTS




Deferred
costs include deferred leasing costs, net of amortization. Deferred leasing
costs consist of external commissions associated with leasing our properties and
are amortized to expense over the lease term. Accumulated amortization related
to leasing costs as of December 31, 2007, and December 31, 2006 totaled $11,000
and $3,000, respectively.




S-20
 Table of Contents





INCOME
TAXES




Federal-No provision for U.S.
federal income taxes is included in the accompanying financial statements. As a
partnership, we are not subject to federal income tax, and the federal tax
effect of our activities is passed through to our partners.




State-In May 2006, the State of
Texas adopted House Bill 3, which modified the state’s franchise tax structure,
replacing the previous tax based on capital or earned surplus with one based on
margin (often referred to as the “Texas Margin Tax”) effective with franchise
tax reports filed on or after January 1, 2008. The Texas Margin Tax is computed
by applying the applicable tax rate (1% for the Partnership) to the profit
margin. At December 31, 2007, we had accrued State Taxes related to the Margin
Tax of $12,000.




USE
OF ESTIMATES




The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.




FAIR
VALUE OF FINANCIAL INSTRUMENTS




Our
financial instruments consist primarily of cash and cash equivalents, tenant
receivables, accounts receivable, accounts receivable-related party, note
payable-related party, accounts payable, and accounts payable-related party. The
carrying value of cash, cash equivalents, tenant receivables, accounts
receivable, accounts receivable-related party, accounts payable, and accounts
payable-related party are representative of their respective fair values due to
the short-term nature of these instruments. As of December 31, 2007, the
carrying value of our total debt obligations was $7.0 million, all of which
represents variable-rate obligations.  At December 31, 2007 the
variable interest rate was 6.82%.




NEWACCOUNTING
STANDARDS




In
September 2006, The Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, Fair Value
Measurement(SFAS No. 157). SFAS No. 157 defines fair value, establishes
a framework for measuring fair value and requires enhanced disclosures about
fair value measurements. SFAS No. 157 requires companies to disclose the fair
value of its financial instruments according to a fair value hierarchy.
Additionally, companies are required to provide certain disclosures regarding
instruments within the hierarchy, including a reconciliation of the beginning
and ending balances for each major category of assets and liabilities. SFAS No.
157 is effective for our fiscal year beginning January 1, 2008. The adoption of
SFAS No. 157 is not expected to have a material effect on our results of
operations or financial position.


In
February 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No.
159).SFAS No. 159
expands opportunities to use fair value measurement in financial reporting and
permits entities to choose to measure many financial instruments and certain
other items at fair value. This Statement is effective for fiscal years
beginning after November 15, 2007. We currently do not plan to measure any
eligible financial assets and liabilities at fair value under the provisions of
SFAS No. 159.


In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),Business Combinations (SFAS
No. 141R).  SFAS
No. 141R will change the accounting for business combinations. Under SFAS No.
141R, an acquiring entity will be required to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions.  SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008.  We
are currently evaluating the potential impact of SFAS No. 141R on our financial
position and results of operations beginning for fiscal year 2009.





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB
No. 51 (SFAS No. 160). SFAS No. 160 establishes accounting
and reporting standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest
in a subsidiary is an ownership interest in the consolidated entity that should
be reported as equity in the consolidated financial statements. SFAS No.
160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. SFAS No. 160 requires
retroactive adoption of the presentation and disclosure requirements for
existing minority interests. All other requirements of SFAS No. 160 shall
be applied prospectively. We are currently evaluating the potential impact of
the adoption of SFAS No. 160 on our consolidated financial
statements.





S-21
 Table of Contents




CASH
AND CASH EQUIVALENTS




For
purposes of the statements of cash flows, we consider all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents. Cash and cash equivalents consist of demand deposits at
commercial banks and money market funds.




INTEREST




Interest
is charged to interest expense as it accrues. No interest was capitalized during
the 2007 and 2006 period, as redevelopment did not commence until
2008.




3.
            OPERATING
      LEASES





Our
operating leases range from one year to six years and generally include one or
more five year renewal options. A summary of minimum future base rentals to be
received, exclusive of any renewals, under non-cancelable operating leases in
existence at December 31, 2007 is as follows (in thousands):




2008
            
            $
            1,1672009
            
            
            7992010
            
            
            6242011
            
            
            2482012
            
            
            26Thereafter
            
            
            2$
            2,866







Future
minimum rental revenue excludes amounts that may be received from tenants for
reimbursements of operating costs, real estate taxes and insurance. Expense
reimbursements totaled $147,000 and $ 152,000 during the 2007 and 2006 periods,
respectively.





4.
            ACQUIRED
      LEASE INTANGIBLES





In
accordance with SFAS No. 141, we have identified and recorded the value of
intangibles at the property acquisition date.  Such intangibles
include the value of in-place leases and out-of-market
leases.  Acquired lease intangible assets (in-place leases and
above-market leases) are amortized over the leases’ remaining terms, which range
from 2 months to 6 years. The amortization of above-market leases is recorded as
a reduction of rental income and the amortization of in-place leases is recorded
to amortization expense.  The amortization expense related to in-place
leases was $557,000 and $381,000 during 2007, and 2006,
respectively.  The amortization of above-market leases, which was
recorded as a reduction of rental income, was $88,000 and $74,000 during 2007
and  2006, respectively.




S-22
 Table of Contents





In-place
and above-market lease amounts and their respective accumulated amortization are
as follows (in thousands):




December 31, 2007
            
            
            December 31, 2006In-Place leases
            
            
            Above-market leases
            
            
            In-Place leases
            
            Above-market leasesCost
            
            $
            1,081
            
            
            $
            309
            
            
            $
            1,491
            
            
            $
            354Accumulated
      amortization
            
            
            (529
            )
            
            
            (116
            )
            
            
            (381
            )
            
            
            (74
            )Intangible
      lease cost, net
            
            $
            552
            
            
            $
            193
            
            
            $
            1,110
            
            
            $
            280







Acquired
lease intangible liabilities (below-market leases) are net of previously
accreted minimum rent of $23,000 and $23,000 at December 31, 2007 and 2006,
respectively and are accreted over the leases’ remaining terms, which range from
2 month to 6 years.  Accretion of below-market leases was $68,000 and
$23,000 during 2007 and 2006, respectively.  Such accretion is
recorded as an increase to rental income.




The
estimated aggregate amortization amounts from acquired lease intangibles for
each of the next five years are as follows (in thousands):









Year
      Ending December 31,
            
            Amortization
      Expense (in-place lease value)
            
            
            Rental
      Income (out-of-market leases)2008
            
            $
            153
            
            
            $
            42009
            
            
            122
            
            
            
            42010
            
            
            53
            
            
            
            22011
            
            
            49
            
            
            
            -2012
            
            
            37
            
            
            
            -$
            414
            
            
            $
            10





5.
            NOTE
      PAYABLE - RELATED PARTY




Our
outstanding debt at December 31, 2007 consists entirely of a $7.0 million
variable rate mortgage loan payable to MIG III.  This note requires
monthly interest-only payments and is secured by the
Property.  Interest-only loans are generally due in full at maturity.
The interest related to this debt is at a variable interest rate of LIBOR plus
2.0%. At December 31, 2007, the variable interest rate was 6.82%.  See
Note 9 for discussion of a subsequent event related to this note
payable.




S-23
 Table of Contents





6.
            CONCENTRATIONS





As of
December 31, 2007, 5433 Westheimer consisted of 52 tenants. At December 31,
2007, one tenant comprised 10% or more of our total base rent- Prosperity Bank
(27%).  Following are the base rents generated by our top tenants
during the 2007 and 2006 periods ($ in thousands):








Tenant
            
            2007
            
            
            2006Prosperity
      Bank
            
            $
            386
            
            
            $
            309Parkstone
      Development
            
            
            92
            
            
            
            66Model’s
      Network
            
            
            88
            
            
            
            68Ionex
      Communications
            
            
            67
            
            
            
            58World
      Trade Network
            
            
            52
            
            
            
            72$
            685
            
            
            $
            573





7.
            RELATED
      PARTY TRANSACTIONS





We have
no employees or offices. We rely on certain of our affiliates to manage our
business and affairs. We utilize the services of an affiliate of Westheimer SPL
Associates, LTD. These services include the supervision of the management and
leasing of the Property, and other administrative responsibilities such as
accounting. As a result, we are dependent upon Westheimer SPL Associates, LTD.
and its affiliates. In the event that these companies are unable to provide us
with the respective services, we would be required to find alternative providers
of these services.  Our affiliates receive fees primarily for
providing services to us in the areas of property management and
leasing.  During 2007 and 2006 we incurred property management and
leasing fees of $52,000 and $38,000, respectively.





8.
            COMMITMENT
      AND CONTINGENCIES





Litigation
- In the ordinary course of business, we may become subject to litigation or
claims. There are no
material pending legal proceedings known to be contemplated against
us.





Environmental
matters - In connection with the ownership and operation of real estate,
we may be potentially liable for costs and damages related to environmental
matters. We have not been notified by any governmental authority of any
non-compliance, liability or other claim.





In
conjunction with our acquisition of the Property in March 2006, we identified
that the office building has asbestos-containing material.  The
asbestos will be remediated as part of our redevelopment of the office
building.  We estimate that our obligation related to remediation of
this exposure will be approximately $2.8 million. We
considered this liability in determining the appropriate allocation of the
Property’s purchase price and haverecorded an asset retirement
obligation for $2.8 million. We capitalized these estimated costs to
Buildings in our accompanying balance sheet.  We believe that this matter
will not have an adverse effect on our financial position or results of
operations, and we are aware of no other environmental exposures.




9.
              SUBSEQUENT
      EVENT
  During
2008, the Property was refinanced with a third party lender in connection with
the planned redevelopment.  In conjunction with that refinancing, the $7.0
million note payable due to MIG III was converted to equity in order to meet the
lender’s equity contribution requirement of approximately $10.0
million.


S-24
 Table of Contents
 PART
III
  ITEM
1. INDEX TO
EXHIBITS
  INDEX
TO EXHIBITS
  The
following exhibits are filed as part of this Form 10-SB Registration Statement
and numbered in accordance with Part III of Form 10-SB.
  Exhibit No.
              
              Description3.1
              
              Certificate
      of Limited Partnership of AmREIT Monthly Income & Growth Fund III,
      Ltd., dated April 19, 2005.3.2
              
              Agreement
      of Limited Partnership of AmREIT Monthly & Income Growth Fund III,
      Ltd., dated April 19, 2005, between AmREIT Income & Growth III
      Corporation and the limited partners thereto.10.1
              
              Fixed
      Rate Note (A Loan), dated May 2, 2005, between Shafer Plaza I, Ltd and
      JPMorgan Chase Bank, N.A.10.2
              
              Fixed
      Rate Note (B Loan), dated May 2, 2005, between Shafer Plaza I, Ltd and
      JPMorgan Chase Bank, N.A.10.3
              
              Loan
      and Assumption Agreement, dated September 30, 2005, among AmREIT Westside
      Plaza, LP, AmREIT Monthly Income & Growth Fund III, Ltd., AmREIT,
      Shafer Plaza I, Ltd., Steven G. Shafer, Wells Fargo Bank, N.A., and
      CBA-Mezzanine Capital Finance, LLC.10.4
              
              Second
      Amended and Restated Property Management and Leasing Agreement, dated
      December 28, 2005, between AmREIT Westside Plaza, LP and AmREIT Realty
      Investment Corporation.10.5
              
              Management
      and Leasing Agreement, dated November 22, 2005, between AmREIT Lake
      Houston, LP and AmREIT Realty Investment Corporation.10.6
              
              Promissory
      Note, dated December 12, 2005, between AmREIT Lake Houston, LP and Morgan
      Stanley Mortgage Capital, Inc.10.7
              
              Commercial
      Property Management and Leasing Agreement, dated March 30, 2006, between
      5433 Westheimer, LP and Songy Partners Limited.10.8
              
              Promissory
      Note, dated September 28, 2006, between AmREIT Lantern Lane, LP and
      Differential Development — 1994, Ltd.10.9
              
              Management
      and Leasing Agreement, dated September 28, 2006, between AmREIT Lantern
      Lane, LP and AmREIT Realty Investment Corporation.10.10
              
              Promissory
      Note, dated December 8, 2006, between AmREIT Casa Linda, LP and Morgan
      Stanley Mortgage Capital, Inc.10.11
              
              Secured
      Promissory Note, dated September 29, 2006, between AmREIT Olmos Creek, LP
      and NLI Commercial Mortgage Fund, LLC.10.12
              
              Management
      and Leasing Agreement, dated January 26, 2007, between AmREIT Olmos Creek,
      LP and AmREIT Realty Investment Corporation.10.13
              
              Management
      and Leasing Agreement, dated December 7, 2006, between AmREIT SSPF Preston
      Towne Crossing, LP and AmREIT Realty Investment
    Corporation.10.14
              
              Management
      and Leasing Agreement, dated December 7, 2006, between AmREIT SSPF
      Berkeley, LP and AmREIT Realty Investment Corporation.10.15
              
              Loan
      Assumption Agreement, dated December 7, 2006, among Berkeley Center, Ltd.,
      William Hutchinson, AmREIT SSPF Berkeley, LP, AmREIT Monthly Income &
      Growth Fund III, Ltd. and LaSalle Bank National
    Association.10.16
              
              Loan
      Assumption Agreement, dated December 7, 2006, among PTC Dunhill Holdings,
      Ltd., William Hutchinson, AmREIT SSPF Preston Towne Crossing, LP, AmREIT
      Monthly Income & Growth Fund III, Ltd. and LaSalle Bank National
      Association.
  S-25
 Table of Contents
  SIGNATURES
 
 In
accordance with Section 13 or 15(d) of the Exchange Act, the Issuer caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
  AmREIT
      Monthly Income & Growth Fund III, LtdBy:
                    AmREIT
      Monthly Income & Growth IIICorporation,
      its General PartnerDate:
      March ­­­31, 2008By:
                    /s/ H. Kerr TaylorH.
      Kerr TaylorPresident,
      Chief Executive Officer, and DirectorBy:
                    /s/ Chad C. BraunChad
      C. BraunExecutive
      Vice President, Chief Financial OfficerTreasurer
      and Secretary