<PAGE>
________________________________________________________________________________

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                              -------------------

                                   FORM 10-K

             [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                         THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
                                       OR

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

    FOR THE TRANSITION PERIOD FROM                    TO

                        COMMISSION FILE NUMBER: 1-14167
                              -------------------

                       CLARION COMMERCIAL HOLDINGS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
                              -------------------

<TABLE>
<S>                                            <C>
                  MARYLAND                                      13-3988895
       (STATE OR OTHER JURISDICTION OF               (IRS EMPLOYER IDENTIFICATION NO.)
       INCORPORATION OR ORGANIZATION)

             335 MADISON AVENUE,                                   10017
             NEW YORK, NEW YORK                                 (ZIP CODE)
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>

       REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (212) 883-2500
                              -------------------

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

<TABLE>
<CAPTION>
            TITLE OF EACH CLASS:                NAME OF EACH EXCHANGE ON WHICH REGISTERED:
            --------------------                ------------------------------------------
<S>                                            <C>
            Class A Common Stock                          New York Stock Exchange
</TABLE>

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

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

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

    At March 15, 2000, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $20,558,909 based upon the
closing sale price of the Class A Common Stock ($.001 par value) on the New York
Stock Exchange on that date. As of March 15, 2000, 4,061,019 shares of Class A
Common Stock ($.001 par value) were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

    Portions of the Registrant's definitive Proxy Statement to be issued in
connection with the 2000 Annual Meeting of Stockholders are incorporated by
reference into Part III hereof.

________________________________________________________________________________






<PAGE>
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                              PAGE
                                                                              ----
<S>             <C>                                                           <C>
PART I......................................................................    3
    ITEM 1.     Business....................................................    3
    ITEM 2.     Properties..................................................   17
    ITEM 3.     Legal Proceedings...........................................   17
    ITEM 4.     Submission of Matters to a Vote of Security Holders.........   17
PART II.....................................................................   17
    ITEM 5.     Market for the Registrant's Common Equity and Related
                Shareholder Matters.........................................   17
    ITEM 6.     Selected Financial Data.....................................   19
    ITEM 7.     Management's Discussion and Analysis of Financial Condition
                and Results of Operations...................................   19
    ITEM 7A.    Quantitative and Qualitative Disclosures about Market
                Risk........................................................   24
    ITEM 8.     Financial Statements and Supplementary Data.................   26
    ITEM 9.     Changes in and Disagreements with Accountants on Accounting
                and Financial Disclosure....................................   26
PART III....................................................................   26
    ITEM 10.    Directors and Executive Officers of the Registrant..........   26
    ITEM 11.    Executive Compensation......................................   26
    ITEM 12.    Security Ownership of Certain Beneficial Owners and
                Management..................................................   26
    ITEM 13.    Certain Relationships and Related Transactions..............   26
PART IV.....................................................................   26
    ITEM 14.    Exhibits, Financial Statement Schedules and Reports on Form
                8-K.........................................................   26
</TABLE>

                                       2





<PAGE>
                                     PART I

ITEM 1. BUSINESS

GENERAL

    Clarion Commercial Holdings, Inc. (the 'Company'), a Maryland corporation,
was organized in February 1998 as a specialty finance company and has elected to
be a real estate investment trust (a 'REIT') for U.S. Federal income tax
purposes. The Company's objective is to build a diverse portfolio of commercial
real estate investments ('Real Estate Investments') in an attempt to provide a
high rate of return to its stockholders, without incurring risk deemed
unacceptable by the Company's investment manager or that would compromise the
Company's REIT qualification. The Company focuses primarily on the following
types of Real Estate Investments:

    CMBS. The Company may acquire various classes (primarily subordinate,
including 'first loss') of commercial mortgage-backed securities ('CMBS'). CMBS
are generally multiclass debt or pass-through securities backed by a commercial
mortgage loan or a pool of commercial mortgage loans. Subordinate classes of
CMBS offer a higher expected rate of return than more senior classes of CMBS,
but are subject to greater risk of loss of principal and nonpayment of interest.

    Commercial Mortgage Loans; Securitization. The Company may acquire
commercial mortgage loans for investment and possible securitization. Upon
securitization, the Company may sell the more senior classes of the new
securities and retain the more subordinate classes.

    The Company may also make other investments in commercial real estate
assets, including mezzanine investments, real property investments and
investments in companies that have substantial holdings of real estate related
assets.

    The following table sets forth the composition of the Company's principal
assets as of December 31, 1999:

                      TABLE 1.1 -- PRINCIPAL ASSETS AS OF

<TABLE>
<CAPTION>
                                                                   DECEMBER 31, 1999              DECEMBER 31, 1998
                                                              ----------------------------   ----------------------------
                                                                                VALUE AS %                     VALUE AS %
                                                                   VALUE         OF TOTAL         VALUE         OF TOTAL
                                                              ($ IN MILLION)      ASSETS     ($ IN MILLION)      ASSETS
                                                              --------------      ------     --------------      ------
<S>                                                           <C>               <C>          <C>               <C>
                           ASSET
CMBS........................................................      $100.9           76.4%         $ 80.7           54.5%
Deposits with brokers as collateral for securities sold
 short......................................................        25.2           19.1            46.8           31.6
Commercial mortgage loan....................................         --             --             12.9            8.8
Mezzanine investment........................................         3.9            2.9             3.9            2.6
                                                                  ------          -----          ------          -----
   Total....................................................      $130.0           98.4%         $144.3           97.5%
                                                                  ------          -----          ------          -----
                                                                  ------          -----          ------          -----
</TABLE>

THE MANAGER

    The Company has no employees. The Company's day-to-day operations are
managed by Clarion Capital, LLC (the 'Manager'), subject to the direction and
oversight of the Company's Board of Directors and the terms of a Management
Agreement (the 'Management Agreement') between the Manager and the Company. The
Manager was formed in December 1997 and has registered with the SEC as an
investment adviser.

    The Manager is responsible for the investments and day-to-day operations of
the Company and performs (or causes to be performed) services and activities
relating to the assets and operations of the Company, including:

         1. serving as the Company's consultant with respect to formulation of
    investment criteria and preparation of policy guidelines by the Board of
    Directors;

         2. representing the Company in connection with the purchase and sale of
    assets, the commitment to purchase and sell assets, and the maintenance and
    administration of its portfolio of assets.

                                       3





<PAGE>
         3. furnishing reports and statistical and economic research to the
    Company regarding the Company's activities and the services performed for
    the Company by the Manager;

         4. monitoring and providing to the Board of Directors on an ongoing
    basis price information and other data obtained from certain nationally
    recognized dealers that maintain markets in assets identified by the Board
    of Directors, and providing data and advice to the Board of Directors in
    connection with the identification of such dealers;

         5. providing executive and administrative personnel, office space and
    office services required in rendering services to the Company;

         6. administering the day-to-day operations of the Company and
    performing and supervising the performance of other administrative functions
    agreed upon by the Manager and the Board of Directors as necessary in the
    management of the Company, including the collection of revenues and the
    payment of the Company's debts and obligations, the submission of required
    public filings by the Company and maintenance of appropriate computer
    services to perform such administrative functions;

         7. communicating on behalf of the Company with the holders of the
    Company's equity or debt securities as required to satisfy the reporting and
    other requirements of any governmental bodies or agencies or trading markets
    and to maintain effective relations with those holders;

         8. designating originators, servicers, property managers, developers,
    asset managers and other servicers with respect to the investments made by
    the Company and arranging for the monitoring and administering of those
    service providers;

         9. counseling the Company in connection with policy decisions to be
    made by the Board of Directors;

        10. engaging in hedging and financing activities on behalf of the
    Company, consistent with the Company's status as a REIT;

        11. counseling the Company regarding the maintenance of its status as a
    REIT and monitoring compliance with the various REIT qualification tests and
    other rules set out in the Code and Treasury Regulations thereunder.

During the term of the Management Agreement, the Manager has agreed not to
provide any of the foregoing services to any public REIT with investment
objectives similar to those of the Company.

MANAGEMENT FEES

    For performing its services under the Management Agreement, the Manager
receives an annual base management fee, payable monthly, and an annual incentive
fee, payable quarterly, as described below. (Capitalized terms used and not
defined in this section have the meanings assigned to them in the Management
Agreement.)

    Base Management Fee -- 1% of the average stockholders' equity in the
Company, excluding any mark-to-market adjustments to the Company's assets.
Stockholders' equity will be determined in accordance with generally accepted
accounting principals.

    Incentive Fee -- The product of (A) 25% of the dollar amount by which
(1) Adjusted Net Income of the Company per share of common stock (based on the
weighted average number of shares outstanding) exceeds (2) an amount equal to
(a) the weighted average of the price per share of the common stock at the
initial offering and the prices per share at any secondary offerings of common
stock by the Company multiplied by (b) the Ten-Year U.S. Treasury Rate plus 2.5%
per annum multiplied by (B) the weighted average number of shares of common
stock outstanding, calculated as a quarterly average over the prior four
quarters.

    In accordance with the terms of the Management Agreement, the Company paid
the Manager $575,928 and $495,596 in base management fees for the year ended
December 31, 1999 and for the period June 2, 1998 (commencement of operations)
to December 31, 1998, respectively. The Company has neither accrued for, nor
paid the Manager any incentive compensation since commencement of operations.

                                       4





<PAGE>
INVESTMENT OBJECTIVES AND POLICIES

    The Company pursues policies and strategies for acquiring Real Estate
Investments in an attempt to provide a high rate of return to its stockholders
without incurring risk deemed unacceptable by the Manager or compromising the
Company's REIT qualification. The Company's income results primarily from the
spread between the interest generated by the Company's assets and the cost of
financing and hedging these assets. The Company also realizes gains or losses
upon the disposition of its assets. The Company leverages its investments in
such assets primarily through repurchase agreements. The Company also engages in
a variety of interest rate risk management techniques for the purpose of
managing the interest rate risk of its assets and liabilities. All of these
transactions are subject to risks and may limit the potential earnings from the
Company's investments.

INVESTMENTS

    The Company invests principally in the following types of assets:

CMBS

    The Company acquires various classes (primarily subordinate, including
'first loss') of CMBS. CMBS are generally multiclass debt or pass-through
securities backed by a commercial mortgage loan or a pool of commercial mortgage
loans. CMBS include, but are not limited to, regular and residual interests in
REMICs (the term 'REMIC' means a real estate mortgage investment conduit) and
regular interests in certain FASITs (the term 'FASIT' means a financial asset
securitization investment trust) and may be issued in public (registered) or
private transactions by either governmental or private entities. Private issuers
include investment banks, commercial banks, insurance companies and property
owners.

    Of the interests in CMBS that the Company acquires, most are in subordinate
classes; however, the Company may also purchase more senior classes or combined
classes of subordinate and more senior classes. Subordinate CMBS are generally
not registered under the Securities Act of 1933, as amended, and are traded in
the private market. However, a significant number of U.S. investment banks are
active dealers in this market and act as principal underwriters of new CMBS
issues.

    Generally, investors in senior securities are protected against potential
losses on underlying mortgage collateral through priorities as to payment of
principal and interest. Although protections against loss to investors in
subordinate securities may include investor guarantees, reserve funds, excess
interest, cross-collateralization and over-collateralization, subordinate
securities may lack sufficient credit protection and are thus more sensitive to
the default of underlying mortgage collateral than senior securities of the same
issuer.

    The yield-to-maturity on subordinate CMBS may be extremely sensitive to the
default and loss experience of the underlying mortgage collateral and the timing
of any such defaults or losses. Because the subordinate classes generally have
little or no credit support, to the extent there are realized losses on the
mortgage collateral, the Company will experience a concurrent loss and as a
result may not recover the full amount, or any, of its investment in such
subordinate CMBS.

    Ratings may be assigned to CMBS by the rating agencies such as Duff & Phelps
Credit Rating Co. ('D&P'), Fitch IBCA Investors Service L.P. ('Fitch'), Moody's
Investors Service, Inc. ('Moody's') and Standard & Poor's Ratings Group ('S&P').
These ratings are substantially determined by the debt service coverage and
loan-to-value ratios of the pool and are relative, representing the subjective
opinions of the agencies. It is possible that an agency may change its rating,
after its initial evaluation, to reflect subsequent events, both negative and
positive. Therefore, although these ratings will be used by the Manager as an
important factor in its selection process, the Manager will rely principally
upon its own credit analysis.

                                       5





<PAGE>
    The following tables present information on the Company's investments in
CMBS as of December 31, 1999 and 1998. Included in the tables are the following
terms:

        Delinquencies -- Represents the total unpaid principal balance of the
    loans underlying the CMBS more than 60 days delinquent at the indicated date
    as a percentage of the unpaid principal balance of the collateral at that
    date.

        Issue Date -- Represents the date on which the indicated security was
    issued.

        Rating -- For any individual security, represents the lowest rating of
    all ratings issued by D&P, Fitch, Moody's and S&P. Ratings by Moody's are
    reported as follows: Baa2 reported as BBB, Baa3 as BBB-, Ba1 as BB+, Ba2 as
    BB, Ba3 as BB-, B1 as B+, B2 as B, and B3 as B-.

        Subordination Percentage -- Represents the principal amount of
    securities and the reserve fund (if any) that are subordinate in right of
    payment to the indicated class of CMBS, expressed as a percentage of the
    entire outstanding amount of securities and the reserve fund.

        Value -- Represents the fair market value of the CMBS as of the date
    indicated.

        Weighted Average DSCR -- Represents the weighted average of the debt
    service coverage ratios of the loans underlying the CMBS, which is
    calculated by dividing cash flow available for debt service by debt service
    as reported in the offering memorandum for each issue.

        Weighted Average LTV -- Represents the weighted average of the ratio of
    the loan amount to the value of the underlying collateral as reported in the
    offering memorandum for each issue.

TABLE 1.2 -- CMBS INVESTMENTS AS OF DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                 RATING    WTD.AVG    WTD. AVG    SUBORDINATION
                                      VALUE AS                   AS OF     DSCR AT     LTV AT       PERCENTAGE     DELINQUENCIES
    SECURITIES AS OF 12/31/99       OF 12/31/99    ISSUE DATE   12/31/99  ISSUANCE    ISSUANCE    AS OF 12/31/99   AS OF 12/31/99
    -------------------------       -----------    ----------   --------  --------    --------    --------------   --------------
<S>                                 <C>            <C>          <C>       <C>         <C>         <C>              <C>
BTR 1998-SIA, Class F.............  $ 21,842,942     2/13/98      BBB       1.65        73.91%        54.34%            0.00%
CDCSC 1999-FL1, Class A...........    14,991,435    12/16/99      AAA       1.47        57.60         47.00             0.00
DLJCM 1998-CF1, Class B4..........     3,513,475      3/2/98       BB       1.35        65.40          6.45             0.32
DLJCM 1998-CF1, Class B6..........     5,490,492      3/2/98       B        1.35        65.40          2.81             0.32
DLJCM 1998-CF1, Class B7..........     2,461,145      3/2/98       B-       1.35        65.40          2.04             0.32
DLJCM 1998-CF1, Class C...........     3,987,849      3/2/98       NR       1.35        65.40          0.00             0.32
DLJCM 1999-STF1, Class A-1........    10,001,860     11/5/99      AAA       1.16        69.20         50.00             0.00
GMAC 1997-C1, Class G.............    10,382,355     9/30/97       BB       1.33        71.00          6.98             0.44
MART 1999-1, Class G..............    15,695,449    11/25/97      BBB-      1.46        57.67          0.00             0.00
MSC 1998-XL1, Class H.............     3,652,102     6/11/98       BB       1.90        58.40          1.52             0.00
MSC 1998-XL1, Class J.............     8,874,681     6/11/98       B        1.90        58.40          0.00             0.00
                                    ------------                            ----        -----         -----             ----
   Total/Wtd. Avg.................  $100,893,785                            1.50        64.97%        24.91%            0.09%
                                    ------------                            ----        -----         -----             ----
                                    ------------                            ----        -----         -----             ----
</TABLE>

<TABLE>
<CAPTION>
                                                                 RATING    WTD.AVG    WTD. AVG    SUBORDINATION
                                      VALUE AS                   AS OF     DSCR AT     LTV AT       PERCENTAGE     DELINQUENCIES
    SECURITIES AS OF 12/31/98       OF 12/31/98    ISSUE DATE   12/31/98  ISSUANCE    ISSUANCE    AS OF 12/31/98   AS OF 12/31/98
    -------------------------       -----------    ----------   --------  --------    --------    --------------   --------------
<S>                                 <C>            <C>          <C>       <C>         <C>         <C>              <C>
BTR 1998-SIA, Class F.............  $ 17,422,240     2/13/98       BB       1.65        73.90%        32.87%            0.00%
DLJCM 1998-CF1, Class B6..........     6,184,688      3/2/98       B        1.35        65.40          2.77             0.32
DLJCM 1998-CF1, Class B7..........     2,819,988      3/2/98       B-       1.35        65.40          2.02             0.32
DLJCM 1998-CF1, Class C...........     3,963,783      3/2/98       NR       1.35        65.40          0.00             0.32
GMAC 1997-C1, Class G.............    11,091,794     9/30/97       BB       1.33        71.04          6.72             0.25
MCF 1997-MC2, Class F.............     7,995,700    11/25/97       BB       1.50        70.60          6.57             0.26
MSC 1997-HF1, Class F.............     4,302,049     6/30/97       BB       1.40        68.20          4.89             0.88
MSC 1997-XL1, Class G.............     2,024,063    10/17/97       BB       2.00        52.70          3.03             0.00
MSC 1998-XL1, Class H.............    11,775,202     6/11/98       BB       1.90        58.40          1.51             0.00
MSC 1998-XL1, Class J.............     9,510,671     6/11/98       B        1.90        58.40          0.00             0.00
NB 1996-FSI, Class E..............     3,641,610     8/15/96       BB       1.37          n/a         31.32             6.25
                                    ------------                            ----        -----         -----             ----
   Total/Wtd. Avg.................  $ 80,731,788                            1.59        66.56%        10.92%            0.44%
                                    ------------                            ----        -----         -----             ----
                                    ------------                            ----        -----         -----             ----
</TABLE>

                                       6





<PAGE>
TABLE 1.3 -- DISTRIBUTION OF LOANS UNDERLYING THE CMBS INVESTMENTS BY PROPERTY
TYPE AND STATE

<TABLE>
<CAPTION>
PROPERTY TYPE  PERCENTAGE(1)       STATE      PERCENTAGE(1)
-------------  -------------       -----      -------------
<S>            <C>             <C>            <C>
Retail             32.5%            CA            21.9%
Multifamily        22.3             NY            13.5
Hotel              19.6             TX            10.6
Office             18.8             NJ             7.2
Industrial          3.7             MO             5.8
Other               3.1        All others(2)      41.0
</TABLE>

---------

(1) Based on a percentage of the total unpaid principal balance to the
    underlying loans.

(2) No other state comprises more than 5% of the total.

TABLE 1.4 -- DISTRIBUTION OF CMBS INVESTMENTS BY RATING CLASS

<TABLE>
<CAPTION>
                                                               DISTRIBUTION
                                                                  AS OF
                           RATING                                12/31/99
                           ------                                --------
<S>                                                           <C>
AAA.........................................................        24.8%
BBB.........................................................        37.2
BB..........................................................        17.4
B...........................................................        16.6
NR..........................................................         4.0
                                                                  ------
    Total...................................................      100.00%
                                                                  ------
                                                                  ------
</TABLE>

COMMERCIAL MORTGAGE LOANS

    The Company may originate or acquire commercial mortgage loans. In
considering whether to originate or acquire a mortgage loan, the Company will
request that the Manager underwrite, and perform certain due diligence tasks
with respect to that mortgage loan in order to ascertain material information as
to the value of that mortgage loan. The Manager will review and analyze many
factors, including market conditions (market interest rates, the availability of
mortgage credit and economic, demographic, geographic, tax, legal and other
factors), the yield to maturity of the mortgage loan, the liquidity of the
mortgage loan, in the case of an acquisition of a mortgage loan the limitations
on the obligations of the seller with respect to the mortgage loan, the rate and
timing of payments to be made with respect to the mortgage loan, the value and
quality of the mortgaged property underlying the mortgage loan, the risk of
adverse fluctuations in the market values of that mortgaged property as a result
of economic events or governmental regulations, the historical performance and
other attributes of the property manager responsible for managing the mortgaged
property, relevant laws limiting actions that may be taken with respect to loans
secured by real property and limitations on recourse against the obligors
following realization on the collateral through various means, risks associated
with geographic concentration of underlying assets constituting the mortgaged
property for the relevant mortgage loan, environmental risks, pending and
threatened litigation, junior liens and other issues relating to title and a
prior history of default by affiliated parties on their similar obligations.

    During 1999, the Company disposed of its investment in a commercial mortgage
loan for proceeds of $11.9 million. The Company realized a loss of approximately
$1.0 million on the disposition. The investment was a first mortgage loan
secured by The OMNI Hotel in Newport News, Virginia. The mortgage loan was made
on December 18, 1997 at a 70% loan-to-value ratio, and had an original principal
amount of $12.6 million.

    As of December 31, 1999, the Company did not own any commercial mortgage
loan investments.

                                       7





<PAGE>
MEZZANINE INVESTMENTS

    The Company may make mezzanine investments, primarily in the form of
preferred equity, leveraged joint venture equity and subordinate and
participating mortgage loans. These investments may involve development,
rehabilitation or renovation projects. A preferred equity investment is an
ownership interest in real property that is generally entitled to receive
preferential treatment with respect to distributions of income generated by that
property. Leveraged joint venture equity involves an equity investment in real
property that is encumbered by mortgage debt, which will generally provide the
investor with preferential returns and/or conversion rights into equity of
another partner in the venture. A subordinate mortgage loan is a loan secured by
a subordinated lien on real property. A participating mortgage may be a senior
or junior lien and will entitle the mortgagee to mortgage interest plus a
participation in the property's operating cash flows or residual value. To the
extent the Company invests in participating mortgages, it will attempt to ensure
that the participating income satisfies the income tests for REIT qualification.

    Mezzanine investments generally provide the Company with interest at a
higher rate than typically paid on the senior mortgage plus, in most cases, a
percentage of gross revenues or, to the extent consistent with REIT
qualification, net operating income from the underlying property, payable to the
Company on an ongoing basis, and a percentage of any increase in value of the
property, payable upon maturity or refinancing. In other instances, the Company
may receive an interest rate that provides an attractive risk-adjusted return.
Alternatively, the mezzanine investments could take the form of a nonvoting
preferred equity investment in a single purpose entity borrower with the terms
of the preferred equity substantially the same as described above. As a result
of REIT qualification requirements, such a preferred equity investment in a
taxable corporation would be limited to not more than 5%, measured by fair
market value, of the total assets of the Company.

    As an example of a mezzanine investment, the Company may lend to, or invest
as preferred equity in, the owner of a commercial property that is subject to a
first mortgage lien equal to 70% of its value an additional 20% to 25% of the
value of the property. Typically, in the case of a loan, either the owner would
pledge to the Company, as security for its debt to the Company, the property
subject to the first lien (giving the Company a second lien position), or,
subject to REIT qualification requirements, partners (or members) of the owner
would pledge a partnership or limited liability company ('LLC') interest in the
owner (with, in either case, covenants by the partnership or LLC in favor of the
Company). If a partnership or LLC interest is pledged, then the Company may be
in a position to make decisions with respect to the operations of the property
in the event of a default on the loan.

    The Company may also create mezzanine debt investments by originating first
mortgage loans and mezzanine investments using warehouse lines of credit and
securitizing such loans and issuing and selling senior securities while
retaining subordinate securities and mezzanine investments.

    As of December 31, 1999, the Company had one mezzanine investment with a
carrying value of $3.9 million. The investment is a preferred limited
partnership interest in the owner of The Allwood Brighton Office Center in
Clifton, Passaic County, New Jersey. This investment is entitled to an annual
return of 11% per annum and a $20,000 return of capital per annum, plus an
accrual of an additional 3% per annum, payable on the redemption date for this
investment or earlier to the extent of available net cash flow from the
property. Such redemption date is August 1, 2002, subject to certain
acceleration and extension options. With respect to this investment, 'available
net cash flow' means cash flow after the payment of operating expenses, tenant
improvements, mortgage payments, the 11% annual return on this investment, the
$20,000 return of capital per annum and agreed upon reserves. In addition to
such fixed returns, the Company will be entitled to receive (1) 20% of
'available net cash flow' after payment of the 3% accrual described above and
(2) 20% of the 'residual.' With respect to this investment, 'residual' means net
proceeds from the disposition or refinancing of the property less the remaining
balance of the senior mortgage, less the principal amount of this investment and
any unpaid or accrued interest thereon, less any capital contributions made by
the property owner, these contributions not to exceed $300,000. In the case of a
refinancing, an independent appraisal will be used to determine the disposition
of proceeds.

    The senior mortgage loan on the property is in an original principal amount
of $9.6 million and bears interest at a fixed rate of 7.85% per annum, which
rate can be reset by the mortgagee on August

                                       8





<PAGE>
1, 2002. In the event the property owner accepts a rate reset, the senior loan
will be extended for an additional five years. If the property owner does not
accept a rate reset, the loan will mature on August 1, 2002. The senior mortgage
amortizes over a 25-year period, was originated on July 16, 1997 and prepayment
was prohibited until July 16, 1999. No prepayment was made during 1999. A yield
maintenance premium will be due in the case where a prepayment is made after
July 16, 1999 and more than 120 days before maturity.

    The property consists of three suburban office buildings totaling 164,036
square feet of net rentable area. The first building contains four floors,
52,445 rentable square feet and is 100% occupied by eight tenants. The second
building contains four floors, 52,591 rentable square feet and is 100% occupied
by 14 tenants. The third building contains two floors, 59,000 rentable square
feet and is occupied 100% by one tenant. The effective rent for all three
buildings as of March 2000 was $16.72 per square foot.

    The two four story buildings were built in 1986. Each building lobby has a
four-story atrium featuring circular interior stairwells and rooftop skylights.
Two elevators in each building provide access from the lobby. The third building
was constructed in the 1950's and was completely renovated in 1992. There are
currently no plans to further renovate or improve the property.

    The third building is 100% leased to a national retailer, pursuant to a
lease that expires on September 30, 2008 and has an annual rent of $860,810. The
same retailer also occupies 17,560 square feet in the first building under a
separate lease that expires on December 31, 2005 and has an annual rent of
$298,520. The same retailer also occupies 10,442 square feet in the second
building under a third lease that expires on December 31, 2005 and has an annual
rent of $184,372. The businesses carried on by the other tenants include an
employment agency, a trade association, a construction company and a publishing
company. The retailer is the only tenant occupying more than 10% of the rentable
square footage of the property.

    The following table details the schedule of lease expirations for the next
five years:

TABLE 1.5 -- LEASE EXPIRATIONS FOR MEZZANINE INVESTMENT

<TABLE>
<CAPTION>
                                                                       % OF GROSS
                                        SQUARE FOOTAGE   ANNUAL RENT   ANNUAL RENT
                                           EXPIRING       EXPIRING      EXPIRING
                                           --------       --------      --------
<S>                                     <C>              <C>           <C>
2000..................................      19,151        $350,307        13.20%
2001..................................       7,144         129,243         4.86
2002..................................      14,325         269,671        10.14
2003..................................      29,254         540,707        20.34
2004..................................           0               0         0.00
</TABLE>

    As of December 31, 1999, the borrower was current on all obligations to the
Company under the terms of this mezzanine investment.

OTHER ELIGIBLE INVESTMENTS

    The Company may invest in real property, including under-performing real
property and development and rehabilitation projects. Under-performing real
property and development and rehabilitation projects can be risky investments
because they generally do not generate sufficient cash flow to provide a current
cash return on the investment after meeting operating expenses and debt service.
The Company, however, will seek opportunities to purchase such real property at
attractive prices. The Company's general goal with respect to each real property
will be to purchase it at a favorably low price and to reposition or convert the
use of the property if required to improve its cash flow by proper management.

    The Company may also invest in companies that have substantial holdings of
Real Estate Investments. In the case of an investment in a taxable corporation,
the investment generally may represent neither (1) more than 5%, measured by
fair market value, of the total assets of the Company nor (2) more than 10% of
the voting securities of the taxable corporation.

                                       9





<PAGE>
    As of December 31, 1999, the Company had made no investments in real
property, development or rehabilitation projects, foreign real estate or real
estate companies.

    The Company may also make investments in U.S. Government securities
(including U.S. Treasury securities and securities issued by agencies or
instrumentalities of the U.S. Government), asset-backed securities including,
but not limited to, securities backed by consumer receivables, business
receivables, corporate obligations, insurance premiums, etc.), mortgage-backed
securities (agency and non-agency), corporate debt securities, commercial paper,
money market instruments, non-contingent interest bearing deposits in banks
chartered by or within the U.S. and money market mutual funds.

    As of December 31, 1999 and 1998, the Company had sold short U.S. Treasury
securities with a face amount of $25.3 million and $39.8 million as part of the
Company's strategy of hedging the Company's portfolio against interest rate
changes.

REQUIREMENTS FOR QUALIFICATION

    The Company has elected to be taxed as a REIT under sections 856 through 860
of the Code (the 'Code' means the Internal Revenue Code of 1986, as amended)
commencing with its short taxable year ending on December 31, 1998. The Company
currently expects that it will operate in a manner that will permit the Company
to qualify as a REIT. This treatment will permit the Company to deduct dividend
distributions to its stockholders for federal income tax purposes, thus,
effectively eliminating the 'double taxation' that generally results when a
corporation earns income and distributes that income to its stockholders.

    There can be no assurance, however, that the Company will qualify as a REIT
in any particular taxable year, given the highly complex nature of the rules
governing REITs, the ongoing importance of factual determinations and the
possibility of future changes in the circumstances of the Company.

FAILURE TO QUALIFY

    If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company may be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the Company's stockholders in any year
in which the Company fails to qualify may not be deductible by the Company nor
will they be required to be made. In such event, to the extent of the Company's
current and accumulated earnings and profits, all distributions to stockholders
will be taxable as ordinary income and, subject to certain limitations of the
Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions, the
Company also will be disqualified from taxation as a REIT for the four taxable
years following the year during which the Company ceased to qualify as a REIT.
It is not possible to state whether in all circumstances the Company would be
entitled to statutory relief.

    The Code defines a REIT as a corporation, trust, or association (1) that is
managed by one or more trustees or directors; (2) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (3) that would be taxable as a domestic corporation, but
for sections 856 through 860 of the Code; (4) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(5) the beneficial ownership of which is held by 100 or more persons; (6) not
more than 50% in value of the outstanding shares of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the '5/50 Rule');
(7) that makes an election to be a REIT (or has made such a REIT election
for a previous taxable year) and satisfies all relevant filing and other
administrative requirements established by the Service that must be met in order
to elect and maintain REIT status; (8) that uses a calendar year for federal
income tax purposes and complies with the record-keeping requirements of the
Code and Treasury Regulations promulgated thereunder; and (9) that meets certain
other tests, described below, regarding the nature of its income and assets. The
Code provides that conditions (1) to (4), inclusive, must be met during the
entire taxable year and that condition (5) must be met during at least 335 days
of a taxable year of 12 months, or during a proportionate part of a taxable year
of less than 12 months. Conditions (5) and (6) do not apply until after the
first taxable year for which an election is made by the Company to be taxed as a
REIT.

                                       10





<PAGE>

    For purposes of determining stock ownership under the 5/50 Rule, a
supplemental unemployment compensation benefits plan, a private foundation, or a
portion of a trust permanently set aside or used exclusively for charitable
purposes generally is considered an individual. A trust that is a qualified
trust under Code Section 401(a), however, generally is not considered an
individual and beneficiaries of a Section 401(a) trust are treated as holding
shares of a REIT in proportion to their actuarial interests in the trust for
purposes of the 5/50 Rule.

INCOME TESTS

    In order to qualify and to maintain its qualification as a REIT, the Company
must satisfy annually two requirements relating to its gross income. First, at
least 75% of the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must consist of any combination of defined
types of income derived directly or indirectly from investments relating to real
property or mortgages on real property (including 'rents from real property' and
interest on obligations secured by mortgages on real property or on interests in
real property) or qualified temporary investment income. Second, at least 95% of
the Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived from transactions involving real property,
mortgages on real property, or temporary investments, and from dividends, other
types of interest, and gain from the sale or disposition of stock or securities,
or from any combination of the foregoing. The specific application of these
tests to the Company is discussed below.

    The term 'interest,' as defined for purposes of the 75% and 95% gross income
tests, generally does not include any amount received or accrued (directly or
indirectly) if the determination of such amount depends in whole or in part on
the income or profits of any person. However, an amount received or accrued
generally will not be excluded from the term 'interest' solely by reason of
being based on a fixed percentage or percentages of receipts or sales. In
addition, an amount received or accrued generally will not be excluded from the
term 'interest' solely by reason of being based on the income or profits of a
debtor if the debtor derives substantially all of its gross income from the
related property through the leasing of substantially all of its interests in
the property, to the extent the amounts received by the debtor would be
characterized as rents from real property if received by a REIT. Subject to this
exception, the Company generally will not be able to derive qualifying income
from a loan, the interest on which is based in whole or in part on the net
income of the obligor or any other person.

    Interest on obligations secured by mortgages on real property or on
interests in real property is qualifying income for purposes of the 75% gross
income test. Any amount included in gross income with respect to a regular or
residual interest in a REMIC or regular interest in a FASIT generally is treated
as interest on an obligation secured by a mortgage on real property. If,
however, less than 95% of the assets of the REMIC or FASIT consists of real
estate assets (determined as if the Company held such assets), the Company will
be treated as receiving directly its proportionate share of the income of the
REMIC or FASIT. In addition, if the Company receives interest income with
respect to a mortgage loan that is secured by both real property and other
property and the highest principal amount of the loan outstanding during a
taxable year exceeds the fair market value of the real property on the date the
Company purchased the mortgage loan, the interest income will be apportioned
between the real property and the other property. This apportionment may cause
the Company to recognize income that is not qualifying income for purposes of
the 75% gross income test.

    The Company expects to structure its investments so that the interest,
original issue discount, and market discount income that the Company derives
from CMBS and mezzanine debt investments generally will be qualifying interest
income for purposes of both the 75% and the 95% gross income tests, except to
the extent that less than 95% of the assets of a REMIC in which the Company
holds an interest consists of real estate assets (determined as if the Company
held such assets), and the Company's proportionate share of the income of the
REMIC includes income that is not qualifying income for purposes of the 75% and
95% gross income tests. In some cases, however, the loan amount of a mortgage
loan may exceed the value of the real property securing the loan, which will
result in a portion of the income from the loan being classified as qualifying
income for purposes of the 95% gross income test, but not for purposes of the
75% gross income test. Further, in the event that the interest income from a
mortgage loan would be based in part on the borrower's profits or net income,
the

                                       11





<PAGE>
income from the loan generally would be disqualified for purposes of both the
75% and the 95% gross income tests.

    The Company may originate or acquire mezzanine investments that provide for
interest based in part on shared appreciation. To the extent that interest from
a loan that is based on the cash proceeds from the sale of the property securing
the loan constitutes a 'shared appreciation provision' (as defined in the Code),
income attributable to that participation feature will be treated as gain from
the sale of the secured property, which generally is qualifying income for
purposes of the 75% and 95% gross income tests but which also must be tested
under the 'prohibited transaction' rules. In addition, the Company may be
required to recognize income from a shared appreciation provision over the term
of the related loan using the constant yield method pursuant to certain Treasury
Regulations.

    The rent received by the Company from the tenants of its real property
('Rent') will qualify as 'rents from real property' in satisfying the gross
income tests for a REIT described above only if several conditions are met.
First, the amount of Rent must not be based, in whole or in part, on the income
or profits of any person. However, an amount received or accrued generally will
not be excluded from the term 'rents from real property' solely by reason of
being based on a fixed percentage or percentages of receipts or sales. Second,
the Code provides that the Rent received from a tenant will not qualify as
'rents from real property' in satisfying the gross income tests if the Company,
or a direct or indirect owner of 10% or more of the Company, owns 10% or more of
that tenant, taking into account both direct and constructive ownership (a
'Related Party Tenant'). For this purpose, a partnership is deemed to
constructively own stock owned by its partner if that partner owns 25% or more
of the capital or profits interest in the partnership. Third, if Rent
attributable to personal property, leased in connection with a lease of real
property, is greater than 15% of the total Rent received under the lease, then
the portion of Rent attributable to that personal property will not qualify as
'rents from real property.' Finally, for the Rent to qualify as 'rents from real
property', the Company generally must not operate or manage the real property or
furnish or render services to the tenants of that real property, other than
through an 'independent contractor' who is adequately compensated and from whom
the Company derives no revenue. The 'independent contractor' requirement,
however, does not apply to the extent the services provided by the Company are
'usually or customarily rendered' in connection with the rental of space for
occupancy only and are not otherwise considered 'rendered to the occupant'.
However, all of the rental income derived by the Company with respect to a
property will not cease to qualify as 'rents from real property' if any
impermissible tenant services income from that property (which is deemed to be
an amount that is no less than 150% of the Company's direct costs of furnishing
or rendering the service or providing the management or operation) does not
exceed 1% of all amounts received or accrued during the taxable year directly or
indirectly by the Company with respect to that property.

    REITs generally are subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income for purposes of the 75% gross income test), less expenses directly
connected with the production of that income. 'Foreclosure property' is defined
as any real property (including interests in real property) and any personal
property incident to such real property (1) that is acquired by a REIT as the
result of that REIT having bid in such property at foreclosure, or having
otherwise reduced that property to ownership or possession by agreement or
process of law, after there was a default (or default was imminent) on a lease
of that property or on an indebtedness owed to the REIT that such property
secured, (2) for which the related loan was acquired by the REIT at a time when
default was not imminent or anticipated, and (3) for which the REIT makes a
proper election to treat that property as foreclosure property. The Company does
not anticipate that it will receive significant income from foreclosure property
that is not qualifying income for purposes of the 75% gross income test, but, if
the Company does receive any income from foreclosure property, the Company
expects to make an election to treat the related property as foreclosure
property.

    If property is not eligible for the election to be treated as foreclosure
property ('Ineligible Property') because the related loan was acquired by the
REIT at a time when default was imminent or anticipated, income received with
respect to such Ineligible Property may not be qualifying income for purposes of
the 75% or 95% gross income tests. The Company anticipates that any income it
receives

                                       12





<PAGE>
with respect to Ineligible Property will be qualifying income for purposes of
the 75% and 95% gross income tests.

    It is possible that, from time to time, the Company will enter into hedging
transactions with respect to one or more of its assets or liabilities. Any such
hedging transactions could take a variety of forms, including short sales of
U.S. Treasuries, interest rate swap contracts, interest rate cap or floor
contracts, futures or forward contracts, and options. To the extent that the
Company enters into an interest rate swap or cap contract, option, futures
contract, forward rate agreement, or any similar financial instrument to reduce
interest rate risk with respect to indebtedness incurred to acquire or carry
real estate assets, any periodic income and any gain from the disposition of
that contract would be qualifying income for purposes of the 95% gross income
test, but generally not the 75% gross income test. To the extent that the
Company hedges with other types of financial instruments or in other situations,
it may not be entirely clear how the income from those transactions will be
treated for purposes of the various income tests that apply to REITs under the
Code. The Company intends to structure any hedging transactions in a manner that
does not jeopardize its status as a REIT. Accordingly, the Company may conduct
some or all of its hedging activities through a corporation that is fully
subject to federal corporate income tax and in which it owns solely nonvoting
stock.

    During the one-year period beginning June 2, 1998, income received or
accrued from the temporary investment of new capital in stock or debt
instruments is treated as 'qualified temporary investment income' that counts
favorably towards the 75% income test.

    The Company may originate or acquire mortgage loans and securitize those
loans through the issuance of senior debt securities secured by those mortgage
loans. As a result of these types of transactions, the Company will retain an
equity ownership interest in the mortgage loans that has economic
characteristics similar to those of a CMBS. In addition, the Company may
resecuritize CMBS through the issuance of senior debt securities secured by
those CMBS, retaining an equity interest in the CMBS used as collateral for the
resecuritization. These transactions, which effectively are borrowings, will not
cause the Company to fail to satisfy the 75% and 95% gross income tests or the
asset tests (described below) and, as presently intended to be structured by the
Company, should not result in application of the taxable mortgage pool.

    The Company may receive income not described above that is not qualifying
income for purposes of the 75% and 95% gross income tests. For example, certain
fees for services will not be qualifying income for purposes of the gross income
tests, nor will foreign currency gains from non-dollar denominated loans or from
hedges of non-dollar denominated assets. Further, dividends or interest received
from an entity taxable as a regular 'C' corporation would be qualifying income
for purposes of the 95% test but not the 75% test. The Company will monitor the
amount of non-qualifying income produced by its assets and has represented that
it will manage its portfolio in order to comply at all times with the gross
income tests.

    If the Company fails to satisfy one or both of the 75% and 95% gross income
tests for any taxable year, it nevertheless may qualify as a REIT for that year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions generally will be available if the Company's failure to meet these
tests is due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of those relief provisions. Even if
those relief provisions apply, a 100% tax would be imposed on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% gross income test.

    Although not an income test for REIT qualification, the 'prohibited
transaction' penalty tax is imposed on certain types of REIT income. Any gain
realized by the Company on the sale of any property held as inventory or other
property held primarily for sale to customers in the ordinary course of its
trade or business will be treated as income from a prohibited transaction that
is subject to a 100% penalty tax.

                                       13





<PAGE>
ASSET TESTS

    In order to qualify and maintain its qualification as a REIT, the Company,
at the close of each quarter of each taxable year, also must satisfy two tests
relating to the nature of its assets. First, at least 75% of the value of the
Company's total assets must be represented by cash or cash items (including
certain receivables), government securities, 'real estate assets,' or, in cases
where the Company raises new capital through stock (other than pursuant to a
dividend reinvestment plan) or long-term (at least five-year) public debt
offerings, temporary investments in stock or debt instruments during the
one-year period following the Company's receipt of such capital (i.e., during
the one-year period beginning June 2, 1998). The term 'real estate assets'
includes interests in real property, interests in mortgages on real property to
the extent the principal balance of a mortgage does not exceed the fair market
value of the associated real property, regular or residual interests in a REMIC
or regular interests in a FASIT (except that, if less than 95% of the assets of
the REMIC or FASIT consists of 'real estate assets' (determined as if the
Company held those assets), the Company will be treated as holding directly its
proportionate share of the assets of that REMIC or FASIT), and shares of other
REITs.

    For purposes of the 75% asset test, the term 'interest in real property'
includes an interest in mortgage loans or land and improvements thereon, such as
buildings or other inherently permanent structures (including items that are
structural components of those buildings or structures), a leasehold of real
property, and an option to acquire real property (or a leasehold of real
property). An 'interest in real property' also generally includes an interest in
mortgage loans secured by controlling equity interests in entities treated as
partnerships for federal income tax purposes that own real property, to the
extent that the principal balance of the mortgage does not exceed the fair
market value of the real property that is allocable to the equity interest.

    The second asset test requires that, of the investments not included in the
75% asset class, the value of any one issuer's securities owned by the Company
may not exceed 5% of the value of the Company's total assets, and the Company
may not own more than 10% of any one issuer's outstanding voting securities
(except for interests in qualified REIT subsidiaries and any entity that is
disregarded as a separate entity under Treasury Regulations dealing with entity
classification).

    In general, the Company intends to structure any real property, CMBS, and,
in general, mezzanine investments that it acquires so as to be qualifying assets
for purposes of the 75% asset test, except to the extent that less than 95% of
the assets of a REMIC or FASIT in which the Company owns an interest consists of
'real estate assets' and the Company's proportionate share of those assets
includes assets that are non-qualifying assets for purposes of the 75% asset
test. CMBS and mezzanine investments that are debt obligations will be
qualifying assets for purposes of the 75% asset test to the extent that the
principal balance of each such loan does not exceed the value of the associated
real property. The Company will monitor the status of the assets that it
acquires for purposes of the various asset tests and has represented that it
will manage its portfolio in order to comply at all times with the asset tests.

    If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, that failure would not cause it to lose its REIT status if (1)
it satisfied the asset tests at the close of the preceding calendar quarter and
(2) the discrepancy between the value of the Company's assets and the asset test
requirements arose from changes in the market values of its assets and was not
wholly or partly caused by the acquisition of one or more non-qualifying assets.
If the condition described in clause (2) of the preceding sentence were not
satisfied, the Company still could avoid disqualification by eliminating any
discrepancy within 30 days after the close of the calendar quarter in which it
arose.

DISTRIBUTION REQUIREMENTS

    The Company, in order to avoid corporate income taxation of the earnings
that it distributes, is required to distribute with respect to each taxable year
dividends (other than capital gain dividends) to its stockholders in an
aggregate amount at least equal to (1) the sum of (A) 95% of its 'REIT taxable
income' (computed without regard to the dividends paid deduction and its net
capital gain) and (B) 95% of the net income (after tax), if any, from
foreclosure property, minus (2) the sum of certain items of non-cash income.
Distributions must be paid in the taxable year to which they relate, or in the

                                       14





<PAGE>
following taxable year if declared before the Company timely files its federal
income tax return for that year and if paid on or before the first regular
dividend payment date after declaration.

    To the extent that the Company does not distribute all of its 'REIT taxable
income,' as adjusted, it will be subject to tax thereon at regular corporate tax
rates. To the extent that the Company does not distribute all of its net capital
gain, it will be subject to tax on the undistributed amount of such gain. The
Company may elect, however, to pay the tax on its undistributed long-term
capital gains on behalf of its stockholders, in which case the stockholders
would include in income their proportionate share of the undistributed long-term
capital gains and receive a credit or refund for their share of the tax paid by
the Company.

    Furthermore, if the Company should fail to distribute during each calendar
year (or, in the case of distributions with declaration and record dates falling
in the last three months of the calendar year, by the end of the January
immediately following that year) at least the sum of (1) 85% of its REIT
ordinary income for that year, (2) 95% of its REIT capital gain income for that
year, and (3) any undistributed taxable income from prior periods, the Company
would be subject to a 4% nondeductible excise tax on the excess of that required
distribution over the amounts actually distributed (apparently regardless of
whether the Company elects (as described above) to pay the capital gains tax on
undistributed capital gains). The Company intends to make timely distributions
sufficient to satisfy the annual distribution requirements.

    It is possible that, from time to time, the Company may experience timing
differences between (1) the actual receipt of income and actual payment of
deductible expenses and (2) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. For example, the Company will
recognize taxable income in excess of its cash receipts when, as generally
happens, OID (the term 'OID' means original issue discount with respect to debt
obligations) accrues with respect to its CMBS. Furthermore, some mortgage loans
may be deemed to have OID, in which case the Company will be required to
recognize taxable income in advance of the related cash flow. OID generally will
be accrued using a methodology that does not allow credit losses to be reflected
until they are actually incurred. The Company will attempt to structure its
investments so as not to recognize excess inclusion or other 'phantom' taxable
income from REMIC residual interests; however, there can be no assurance that
excess inclusion or other 'phantom' income can be avoided. While neither the
amount (if any) by which OID on a debt instrument exceeds cash receipts from
such instrument nor the amount (if any) of excess inclusion is generally subject
to the 95% distribution requirement relating to maintenance of REIT status,
those amounts would have to be distributed to avoid corporate income taxation
thereof at the REIT level.

    In addition, the Company may recognize taxable market discount income upon
the receipt of proceeds from the disposition of, or principal payments on, CMBS
and mortgage loans that are 'market discount bonds' (i.e., obligations with a
stated redemption price at maturity that is greater than the Company's tax basis
in such obligations), although such proceeds often will be used to make
nondeductible principal payments on related borrowings. Market discount income
is treated as ordinary income that is subject to the 95% distribution
requirement. It also is possible that, from time to time, the Company may
recognize net capital gain attributable to the sale of depreciated property that
exceeds its cash receipts from the sale. In addition, pursuant to certain
Treasury Regulations, the Company may be required to recognize the amount of any
payment to be made pursuant to a shared appreciation provision over the term of
the related loan using the constant yield method. Finally, the Company may
recognize taxable income without receiving a corresponding cash distribution if
it forecloses on or makes a 'significant modification' (as defined in Treasury
Regulations Section 1.1001-3(e)) to a loan, to the extent that the fair market
value of the underlying property or the principal amount of the modified loan,
as applicable, exceeds the Company's basis in the original loan. Therefore, the
Company may have less cash than is necessary to meet its annual 95% distribution
requirement or to avoid corporate income tax or the excise tax imposed on
certain undistributed income. In such a situation, the Company may find it
necessary to arrange for short-term (or possibly long-term) borrowings or to
raise funds through the issuance of preferred stock or additional Common Stock
(the term 'Common Stock' means the class A common stock, $.001 par value per
share, of the company).

                                       15





<PAGE>
    Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirements for a year by paying 'deficiency dividends'
to its stockholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Although the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends, it
will be required to pay to the Service interest based upon the amount of any
deduction taken for deficiency dividends.

RECORD-KEEPING REQUIREMENTS

    Pursuant to applicable Treasury Regulations, in order to be able to elect to
be taxed as a REIT, the Company must maintain certain records and request on an
annual basis certain information from its stockholders designed to disclose the
actual ownership of its outstanding stock. The Company intends to comply with
such requirements. A REIT's failure to comply with such requirements would
result in a monetary fine imposed on such REIT. However, no penalty would be
imposed if such failure is due to reasonable cause and not to willful neglect.

RECENT CHANGES TO THE TAX LAW AFFECTING REITS

    The Company may conduct certain hedging and other activities (which include
certain activities likely to be conducted by the Company and might include, in
certain circumstances, the creation of mortgage securities through
securitization) through non-controlled taxable preferred stock subsidiaries of
the Company.

    The 1999 Congress enacted a law that provides an exception to the
five-percent and 10-percent asset tests (discussed above) for 'taxable REIT
subsidiaries.' A taxable REIT subsidiary would be allowed to undertake
non-tenant related activities that currently generate non-qualifying income for
a REIT, such as third-party management and development.

    The tax law changes impose a number of constraints on a taxable REIT
subsidiary to ensure that the REIT could not, through a taxable REIT subsidiary,
engage in substantial non-real estate activities, and also to ensure that the
taxable REIT subsidiary pays a corporate level tax on its earnings. The
following provisions of the new laws may curtail the Company's ability to
conduct these types of transactions:

    (1) the value of all taxable REIT subsidiaries owned by a REIT cannot
represent more than 20 percent of the value of the REIT's total assets;

    (2) a taxable REIT subsidiary is not entitled to deduct any interest
incurred on debt funded directly or indirectly by the REIT;

    (3) a 100-percent excise tax will be imposed on excess payments to ensure
arm's length pricing for services provided to REIT tenants (i.e., REIT tenants
could not pay for services provided by the taxable REIT subsidiary through
increased rental payments to the REIT) and allocation of shared expenses between
the REIT and the taxable REIT subsidiary. Certain additional limitations may
apply.

    The taxable REIT subsidiary rules are effective for taxable years beginning
after December 31, 2000. REITs would be allowed to convert preferred stock
subsidiaries into taxable REIT subsidiaries tax-free. There would be a
transition period to allow for conversion of preferred stock subsidiaries before
the 10-percent vote or value test would become effective. Persons other than the
REIT who hold stock in a preferred stock subsidiary may recognize gain to the
extent that they received consideration other than REIT stock for their interest
in the subsidiary.

INVESTMENT ACTIVITY

ACQUISITIONS AND DISPOSITIONS

    During 1999, the Company acquired 6 classes of CMBS in open market
transactions for $50.9 million. The Company disposed of 5 classes of CMBS, all
of which had been acquired in 1998, in open market transactions for
approximately $29.0 million. The sale of these securities resulted in realized
losses of $5.9 million. Concurrent with the sale of the CMBS, the Company closed
related hedge (short) positions in government securities, resulting in
offsetting realized gain of $2.5 million.

                                       16





<PAGE>
    The Company also disposed of its investment in a commercial mortgage loan in
an open market transaction for of $11.9 million. The Company realized a loss of
$1.0 million on the disposition.

    The proceeds from the sales of CMBS and the commercial loan were used by the
Company to reduce its borrowings under repurchase agreements. The following
chart shows the outstanding principal amount of borrowings by the Company under
repurchase agreements, and shareholder's equity of the Company as of the end of
the last seven fiscal quarters:

TABLE 1.6 -- BORROWINGS UNDER REPURCHASE AGREEMENTS

<TABLE>
<CAPTION>
                                               BORROWINGS
                                                  UNDER
                                               REPURCHASE    STOCKHOLDERS'
DATE                                           AGREEMENTS       EQUITY
----                                           ---------------------------
                                                  (DOLLARS IN MILLIONS)
<S>                                              <C>           <C>
June 30, 1998................................     147.7           96.5
September 30, 1998...........................     159.9           42.6
December 31, 1998............................      58.9           39.9
March 31, 1999...............................      58.7           40.6
June 30, 1999................................      71.7           41.1
September 30, 1999...........................      32.2           42.0
December 31, 1999............................      64.7           40.6
</TABLE>

ITEM 2. PROPERTIES

    The Company utilizes office space of the Manager at 335 Madison Avenue, New
York, NY 10017 as its executive office.

ITEM 3. LEGAL PROCEEDINGS

    None.

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

    None.

                                    PART II

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

    The Company was initially capitalized with the sale of 750 shares of Class A
common stock, par value $0.001 per share (the 'Common Stock'), on February 18,
1998, for a total of $15,000. The Company received commitments on March 11, 1998
for the purchase, in private placements, of 1,000,000 shares of Class A common
stock at $20 per share for a total of $20,000,000. The sale of these shares was
consummated at the time of the closing of the Company's initial public offering.

    On June 2, 1998, the Company completed its initial public offering of Common
Stock. The Company issued 4,000,000 shares of Common Stock at a price of $20 per
share and received proceeds of $76,025,000, net of underwriting discounts and
commissions. Offering costs in connection with the public offering amounting to
$1,337,485 were charged against the proceeds of the offering.

    Concurrent with the initial public offering, the Company issued 175,000
shares of Class B stock in exchange for a 10% interest in the Manager and an
option to purchase the remaining 90% interest in (or all of the assets of) the
Manager for 90% of fair market value. The option may be exercised between
January 2, 2000 and March 31, 2001 only with the approval of the Company's
independent directors. The option has not been exercised.

    The Common Stock of the Company began trading on the New York Stock Exchange
on June 2, 1998 under the symbol 'CLR'. Prior to such date, no public market for
the Common Stock of the Company existed. As of March 15, 2000, the Company had
4,061,019 shares of Common Stock

                                       17





<PAGE>
outstanding, which were held by 36 holders of record and approximately 1,600
beneficial owners. The following table sets forth the high, low and closing
share price as reported on the New York Stock Exchange and the cash
distributions declared per share of Common Stock.

TABLE 5.1 -- SHARE PRICE AND DISTRIBUTIONS DECLARED

<TABLE>
<CAPTION>
                                                                     CASH
                                         (PRICE PER SHARE)       DISTRIBUTIONS
                                      ------------------------   DECLARED PER
PERIOD BEGINNING    PERIOD ENDING      HIGH     LOW     CLOSE        SHARE
----------------    -------------      ----     ---     -----        -----
<S>               <C>                 <C>      <C>      <C>      <C>
May 28, 1998      June 30, 1998       $19.06   $15.13   $15.38       $0.14
July 1, 1998      September 30, 1998   16.69    10.19    11.56        0.45
October 1, 1998   December 31, 1998    11.56     1.88     4.25        0.15
January 1, 1999   March 31, 1999        6.56     4.38     5.75        0.20
April 1, 1999     June 30, 1999         7.38     5.81     6.75        0.20
July 1, 1999      September 30, 1999    7.63     6.38     7.25        0.20
October 1, 1999   December 31, 1999     8.00     6.56     7.75        0.20
</TABLE>

                                       18





<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

    The following table presents selected consolidated financial data of the
Company and its subsidiaries for the periods indicated. Additional financial
information is set forth in the audited financial statements and notes thereto
and in 'Management's Discussion and Analysis of Financial Condition and Results
of Operations' included herein.

<TABLE>
<CAPTION>
                                                                           FOR THE PERIOD
                                                                            JUNE 2, 1998
                                                          FOR THE YEAR     (COMMENCEMENT
                                                             ENDED       OF OPERATIONS) TO
                                                          DECEMBER 31,      DECEMBER 31,
                                                              1999              1998
                                                              ----              ----
<S>                                                       <C>            <C>
OPERATIONS DATA
Income
    Interest income from securities -- trading..........  $10,817,837       $ 12,580,589
    Other investment income.............................    1,307,694            919,876
                                                          -----------       ------------
                                                           12,125,531         13,500,465
                                                          -----------       ------------
Expense
    Interest............................................    6,046,282          8,571,422
    Other expenses......................................    1,341,739          1,683,411
                                                          -----------       ------------
                                                            7,388,021         10,254,833
                                                          -----------       ------------
Other operating gains (losses)..........................    1,295,162        (51,969,592)
                                                          -----------       ------------
Net income (loss).......................................  $ 6,032,672       $(48,723,960)
                                                          -----------       ------------
                                                          -----------       ------------
Net income (loss) per share (basic and diluted).........  $      1.33       $      (9.93)
                                                          -----------       ------------
                                                          -----------       ------------
Distributions per share.................................  $      0.80       $       0.74
                                                          -----------       ------------
                                                          -----------       ------------
</TABLE>

<TABLE>
<CAPTION>
                                                           DECEMBER 31,   DECEMBER 31,
                                                               1999           1998
                                                               ----           ----
<S>                                                        <C>            <C>
SELECTED BALANCE SHEET DATA
Total assets.............................................  $132,070,051   $148,022,878
Total liabilities........................................    91,475,252    108,106,054
Stockholders' equity.....................................    40,594,799     39,916,824
</TABLE>

    The 1998 results of operations reflect realized and unrealized losses from
securities-trading totaling $49,469,592, and the loss on other investments of
$2,500,000. The 1999 results of operations reflect realized and unrealized gains
from securities-trading totaling $2,997,828 offset by a realized loss of
$952,666 from the sale of the commercial mortgage loan and loss on other
investments of $750,000.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

    The Company was organized in February 1998 to invest in commercial
mortgage-backed securities (primarily subordinate securities), commercial
mortgage loans, mezzanine investments, equity investments, and other real estate
related investments. Substantially all of the $94.7 million of net proceeds
received from the sale of 5,000,000 shares of its Class A Common Stock in
June 1998 together with the net proceeds of other financing arrangements were
used to acquire the Company's original portfolio of investments.

    The following discussion of the Company's financial condition, results of
operations, and capital resources and liquidity should be read in conjunction
with the Company's consolidated financial statements and related notes.

                                       19





<PAGE>
MARKET CONDITIONS

    The year 1999 was a relatively stable year for the Company, compared to
1998, which was a difficult year. In 1998, following the initial public offering
of the Common Stock on June 2, the Company immediately deployed its capital
through a series of investments in CMBS, a commercial whole loan and a mezzanine
investment.

    In September and October 1998, the dislocation of global fixed income
markets and the restructuring of several competitors led to extensive spread
widening in CMBS and other fixed income markets as well as a rally in the market
for government securities. The price of a fixed income security (such as a CMBS)
or a commercial loan is often determined by adding an interest rate spread to a
benchmark interest rate, such as the U.S. Treasury rate. As the spread on a
security tightens (or decreases), the price (or value) of the security rises. At
the same time, liquidity in the CMBS market diminished significantly, with much
of the diminution occurring in the month of September. This lack of liquidity
continued through the end of the year.

    In October and November 1998, the Company disposed of 14 classes of CMBS to
reduce leverage and the Company's exposure to continued spread widening. The
sale of these securities resulted in realized losses of approximately $17.9
million. In conjunction with the sale of the CMBS, the Company closed related
short positions in U.S. Government securities. The closing of these positions
resulted in realized losses of approximately $9.5 million.

    The month of December 1998 offered some small signs of improvement in the
CMBS market as limited liquidity returned, primarily for investments in
investment grade securities.

    The improvement in the CMBS market continued in 1999 as new issues returned
to the market, the secondary market continued to recover and spreads on
subordinate CMBS tightened slightly.

    While spreads on the subordinate classes of CMBS tightened a little during
the year, interest rates increased. The ten-year U.S Treasury rate rose
approximately 180 basis points in 1999. In the same way that a widening
(increasing) spread for CMBS causes their value to fall, increasing interest
rates also causes their value to decline. In order to offset this potential loss
in CMBS and commercial loan value due to increasing interest rates, the Company
'sells short' U.S. Treasury securities that increase in value as interest rates
rise. During the year ended December 31, 1999, the Company's short positions in
U.S. Treasury securities effectively offset the decline in value of the
Company's CMBS positions due to the increase in interest rates.

RESULTS OF OPERATIONS

GENERAL

    Net income (loss) for the year ended December 31, 1999 and for the period
June 2, 1998 (commencement of operations) to December 31, 1998 amounted to $6.0
million or $1.33 per share and ($48.7 million) or ($9.93) per share,
respectively. The income for the year ended December 31, 1999 consisted
primarily of income from investments of $12.1 million and gains from the short
positions in government securities of $5.4 million. This was offset by losses on
CMBS of $2.4 million, loss on the sale of the commercial mortgage loan of $1.0
million and interest expense of $6.0 million. The net loss for the period
June 2, 1998 (commencement of operations) to December 31, 1998 was attributable
primarily to realized and unrealized losses on CMBS of $36.9 million, loss from
the short positions in government securities of $12.6 million and interest
expense of $8.6 million. This was offset by income from investments of $13.5
million.

    The results of operations during the year ended December 31, 1999 and the
period June 2, 1998 to December 31, 1998 are not necessarily indicative of the
results that may be expected for future periods.

INVESTMENT INCOME

    For the year ended December 31, 1999 and for the period June 2, 1998
(commencement of operations) to December 31, 1998, the Company earned income of
$12,125,531 and $13,500,465 from investments, respectively, as follows:

                                       20





<PAGE>
TABLE 7.1 -- INVESTMENT INCOME

<TABLE>
<CAPTION>
                                                                   INCOME EARNED
                                                           ------------------------------
                                                           FOR THE YEAR   FOR THE PERIOD
                                                              ENDED        JUNE 2, 1998
                                                           DECEMBER 31,   TO DECEMBER 31,
                       INVESTMENT                              1999            1998
                       ----------                              ----            ----
<S>                                                        <C>            <C>
CMBS.....................................................  $ 8,813,736      $ 8,894,931
Deposits with brokers as collateral for securities sold
  short..................................................    2,004,101        3,685,658
Commercial mortgage loan.................................      702,699          560,452
Mezzanine investment.....................................      540,812          316,903
Cash and cash equivalents................................       64,183           42,521
                                                           -----------      -----------
        Total............................................  $12,125,531      $13,500,465
                                                           -----------      -----------
                                                           -----------      -----------
</TABLE>

    In 1999, the Company sold 5 classes of CMBS and the commercial mortgage
loan, and purchased 6 classes of CMBS in open market transactions. The interest
income earned on the securities that were sold was approximately $1.69 million
for the year ended December 31, 1999.

    In the months of October and November 1998, the Company sold 14 classes of
CMBS in open market transactions. The interest income earned on the securities
that were sold was approximately $3.72 million for the period June 2, 1998 to
December 31, 1998.

INTEREST EXPENSE

    For the year ended December 31, 1999, and for the period June 2, 1998 to
December 31, 1998, the Company incurred interest expense from repurchase
agreements and government securities sold short of $6,046,282 and $8,571,422,
respectively, as follows:

TABLE 7.2 -- INTEREST EXPENSE

<TABLE>
<CAPTION>
                                                                  INTEREST EXPENSE
                                                           ------------------------------
                                                           FOR THE YEAR   FOR THE PERIOD
                                                              ENDED        JUNE 2, 1998
                                                           DECEMBER 31,   TO DECEMBER 31,
                                                               1999            1998
                                                               ----            ----
<S>                                                        <C>            <C>
Repurchase agreements....................................  $ 3,356,791      $ 4,383,251
Government securities sold short.........................    2,689,491        4,188,171
                                                           -----------      -----------
                                                           $ 6,046,282      $ 8,571,422
                                                           -----------      -----------
                                                           -----------      -----------
</TABLE>

    As of December 31, 1999 and 1998, the Company had entered into repurchase
agreements in the amount of $64,691,000 and $58,924,000, respectively. The
weighted average interest rates were 6.98% and 6.44%, respectively, and are
based on a variable rate, one-month LIBOR plus a weighted average spread of
0.60% and 0.89%, respectively.

    As of December 31, 1999, the Company had the following open short positions
in U.S. Treasury securities: $291,000 (face) of U.S. Treasury 5.25%, 02/15/2029,
$21,151,000 (face) of U.S. Treasury 6.00% 08/15/2009 and $3,881,000 of U.S.
Treasury 6.50% 11/15/2026. As of December 31, 1998 the Company had the following
open short positions in U.S. Treasury securities: $36,320,000 (face) of U.S.
Treasury 7.00%, 07/15/2006 and $3,493,000 (face) of U.S. Treasury 6.50%,
11/15/2026.

OTHER EXPENSES

    In 1999, other expenses consisted primarily of miscellaneous general and
administrative expenses. In 1998, other expenses consisted primarily of due
diligence costs of $548,284 incurred relating to transactions that were
ultimately abandoned and miscellaneous general and administrative expenses.

    In accordance with the terms of the Management Agreement, $575,928 and
$495,596 in base management fees were paid for the year ended December 31, 1999
and for the period June 2, 1998 (commencement of operations) to December 31,
1998, respectively. The Company has not accrued for or paid any incentive
compensation to the Manager since inception.

                                       21





<PAGE>
    During 1999 and 1998, the Company recorded impairment losses on other
investments of $750,000 and $2,500,000, respectively.

CHANGES IN FINANCIAL CONDITION

    General: Total assets as of December 31, 1999 and 1998 amounted to $132.1
million and $148.0 million, respectively. They were comprised primarily of
$100.9 million and $80.7 million of CMBS and $25.2 million and $46.8 million of
deposits with brokers as collateral for securities sold short, respectively.

    Total liabilities of the Company as of December 31, 1999 and 1998 amounted
to $91.5 million and $108.1 million, respectively. They were comprised primarily
of repurchase agreements in the amount of $64.7 million and $58.9 million and
government securities sold short in the amount of $24.5 million and $45.6
million, respectively.

CAPITAL RESOURCES AND LIQUIDITY

    Liquidity is a measurement of the Company's ability to meet potential cash
requirements, including ongoing commitments to repay borrowings, fund
investments, loan acquisition and lending activities, make distributions to
shareholders in amounts adequate to maintain its REIT status and for other
general business purposes. The Company's primary sources of funds for liquidity
consist of repurchase agreements and maturities and principal payments on
securities and loans, and proceeds from sales thereof.

    In 1999, the Company sold 5 classes of CMBS for $29.0 million and the
commercial mortgage loan for $11.9 million. It used the proceeds to reduce its
exposure to short term repurchase agreement financing on the subordinate classes
of CMBS in its portfolio.

    In 1998, the tightening of credit markets and the widening of yield spreads
on CMBS in the third and fourth quarters adversely affected the liquidity
position of the Company. While the Company met all obligations under its
financing agreements, it was required to post additional collateral in order to
meet margin calls from its lenders. In addition, in October and November 1998,
the Company sold 14 classes of CMBS for $105.3 million in order to improve its
liquidity.

    The proceeds from the sales of CMBS were used by the Company to reduce its
borrowings under repurchase agreements. The following chart shows the
outstanding principal amount of borrowings by the Company under repurchase
agreements:

TABLE 7.3 -- BORROWINGS UNDER REPURCHASE AGREEMENTS

<TABLE>
<CAPTION>
                                                    BORROWINGS UNDER
                                                  REPURCHASE AGREEMENTS
DATE                                                      ($MM)
----                                                      -----
<S>                                               <C>
6/30/98.........................................         $147.7
9/30/98.........................................          159.9
12/31/98........................................           58.9
3/31/99.........................................           58.7
6/30/99.........................................           71.7
9/30/99.........................................           32.2
12/31/99........................................           64.7
</TABLE>

    The weighted average maturity of the repurchase agreements at December 31,
1999 was 19.4 days. All of the Company's repurchase agreements are with Bear
Stearns.

    The Company's operating activities used cash flows of $11.5 million and
$127.9 million during the year ended December 31, 1999 and for the period
June 2, 1998 to December 31, 1998, respectively. In 1999, the cash flow used was
primarily for net purchases of securities -- trading. In 1998, the cash flow
used was primarily for net purchases of securities -- trading and deposits with
brokers as collateral for short sales.

                                       22





<PAGE>
    The Company's investing activities generated cash flows of $12.0 million for
the year ended December 31, 1999 from the sale of and principal payments on the
commercial mortgage loan. The Company's investing activities used cash flows
totaling $16.8 million during the period June 2, 1998 to December 31, 1998 to
purchase the commercial mortgage loan and mezzanine investment.

    The Company's financing activities provided $0.1 million during the year
ended December 31, 1999 and consisted primarily of borrowings under repurchase
agreements of $5.8 million offset by dividends paid of $3.3 million and purchase
of treasury stock of $2.3 million. The Company's financing activities provided
$145.3 million during the period June 2, 1998 to December 31, 1998 and consisted
primarily of proceeds from the issuance of common stock of $94.7 million and
borrowings under repurchase agreements of $58.9 million.

    The Manager regularly evaluates investment opportunities on behalf of the
Company. In the event that the Manager identifies an investment opportunity
consistent with the Company's investment objectives, the Company may seek
sources of additional capital, including various third-party borrowings or the
issuance of preferred equity. The Company may also elect to increase its
borrowings under repurchase agreements.

    The Company can avoid corporate income taxation on its earnings by
distributing annually to its stockholders an amount equal to its taxable income.
It is possible that the Company may experience timing differences between the
actual receipt of income and the inclusion of that income in the calculation of
taxable income. In the event that the cash generated by the Company's
investments is insufficient to fund the distributions to stockholders that are
required to maintain the Company status as a REIT, the Company may access cash
reserves or seek sources of additional capital in order to fund the
distributions.

    The Company has elected mark-to-market valuation treatment for its
investment portfolio under Internal Revenue Code Section 475. Under this
election the Company must treat all unrealized trading gains and losses as
realized for income tax purposes as well as treating all trading transactions as
operating gains and losses. In 1998, the operations of the Company resulted in a
net operating loss of $48.1 million for income tax purposes. This net operating
loss is included in the Company's calculation of 'REIT taxable income,' which
significantly reduces the Company's dividend requirements for REIT distribution
requirement purposes.

    Except as discussed herein, management is not aware of any other trends,
events, commitments or uncertainties that may have a significant effect on
liquidity.

STOCKHOLDERS' EQUITY:

    Stockholders' equity as of December 31, 1999 and 1998 was $40,594,799 and
$39,916,824, respectively. The stockholders' equity balance as of these dates
was attributable primarily to the proceeds of the initial public offering in
1998, gain (loss) on securities trading of $2,997,828 and ($49,469,592), and a
decrease of $1,907,689 and $5,982,490 due to the repurchase of stock,
respectively. During the year ended December 31, 1999 and the period June 2,
1998 (commencement of operations) to December 31, 1998, the Company declared
distributions of $0.80 and $0.74 per share for a total of $3,447,008 and
$3,579,242, respectively.

FORWARD-LOOKING STATEMENTS:

    Certain statements contained herein are not, and certain statements
contained in future filings by the Company with the SEC, in the Company's press
releases or in the Company's other public or shareholder communications may not
be, based on historical facts and are 'forward-looking statements' within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements which are based on various assumptions (some of which are beyond the
Company's control), may be identified by reference to a future period or
periods, or by the use of forward-looking terminology, such as 'may,' 'will,'
'believe,' 'expect,' 'anticipate,' 'continue,' or similar terms or variations on
those terms, or the negative of those terms. Actual results could differ
materially from those set forth in forward-looking statements due to a variety
of factors, including, but not limited to, those related to the economic
environment, particularly in the market areas in which the Company operates,
competitive

                                       23





<PAGE>
products and pricing, fiscal and monetary policies of the U.S. Government,
changes in prevailing interest rates, acquisitions and the integration of
acquired businesses, credit risk management, asset/liability management, the
financial and securities markets and the availability of and costs associated
with sources of liquidity. The Company does not undertake, and specifically
disclaims any obligation, to publicly release the result of any revisions, which
may be made to any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    Market risk is the exposure to loss resulting from changes in interest
rates, changes in spreads on CMBS, foreign currency exchange rates, commodity
prices and equity prices. The primary market risks to which the investments of
the Company are exposed are interest rate risk and CMBS spread risk, which are
highly sensitive to many factors, including market financing levels, market
supply and demand, governmental monetary and tax policies, domestic and
international economic and political considerations and other factors beyond the
control of the Company.

    Changes in the general level of interest rates can affect the net interest
income of the Company. The following table demonstrates the estimated effect
that changes in interest rates would have on the operating performance of the
Company and the value of the Company's investments in CMBS and short positions
in government securities. All changes in income and value are measured as
percentage changes from the projected income and portfolio value if no change in
interest rates were to occur.

    The Company's analysis of risks is based on management's experience,
estimates and assumptions. These analyses rely on models of financial
information, which utilize estimates of fair value and interest rate
sensitivity. Actual economic conditions or implementation of investment
decisions by the Manager may produce results that differ significantly from the
estimates and assumptions used in the Company's models and the projected results
shown in the following tables and in this report.

     TABLE 7.4 -- PERCENTAGE CHANGE IN EXPECTED INCOME AND PORTFOLIO VALUE
         AT DECEMBER 31, 1999 AND 1998, FROM CHANGES IN INTEREST RATES

<TABLE>
<S>                                               <C>           <C>           <C>           <C>
-250 Basis Points............................      25.8%         2.9%         23.8%          2.6%
-200 Basis Points............................      22.4          2.5          18.7           2.0
-150 Basis Points............................      18.0          2.0          13.8           1.5
-100 Basis Points............................      12.8          1.4           9.1           1.0
-50 Basis Points.............................       6.8          0.7           4.5           0.5
No change....................................       0.0          0.0           0.0           0.0
+50 Basis Points.............................      -7.0         -0.7          -4.3          -0.5
+100 Basis Points............................     -14.7         -1.5          -8.4          -0.9
+150 Basis Points............................     -23.0         -2.4         -12.3          -1.3
+200 Basis Points............................     -31.7         -3.2         -16.1          -1.7
+250 Basis Points............................     -41.0         -4.1         -19.7          -2.1
</TABLE>

---------

*  Income includes expected interest income from CMBS, amortization of market
   discount on CMBS, net interest income on short positions in government
   securities and mark to market adjustments to CMBS and government securities
   from changes in interest rates.

** Portfolio value includes fair value estimate of CMBS and net short position
   in government securities.

                              -------------------
    The Company is further exposed to interest rate risk through its short term
financing through repurchase agreements at rates that are based on 30-day LIBOR.
The repurchase agreements into which the Company has entered are for terms of
less than, or equal to 30 days. Changes in interest rates may increase the
Company's cost of financing its investments. The following table demonstrates
the estimated effect that changes in interest rates would have on the interest
expense of the Company, based on borrowings outstanding at December 31, 1999 and
1998:

                                       24





<PAGE>
               TABLE 7.5 -- PERCENTAGE CHANGE IN INTEREST EXPENSE
               UNDER REPURCHASE AGREEMENTS FROM CHANGES IN LIBOR

<TABLE>
<CAPTION>
                                                          1999 CHANGE IN     1998 CHANGE IN
                    CHANGE IN LIBOR                      INTEREST EXPENSE   INTEREST EXPENSE
                    ---------------                      ----------------   ----------------
<S>                                                      <C>                <C>
-250 Basis Points......................................       -35.8%             -38.8%
-200 Basis Points......................................       -28.7              -31.1
-150 Basis Points......................................       -21.5              -23.3
-100 Basis Points......................................       -14.3              -15.5
-50 Basis Points.......................................        -7.2               -7.8
No change in LIBOR.....................................         0.0                0.0
+50 Basis Points.......................................         7.2               -7.8
+100 Basis Points......................................        14.3              -15.5
+150 Basis Points......................................        21.5              -23.3
+200 Basis Points......................................        28.7              -31.1
+250 Basis Points......................................        35.8              -38.8
</TABLE>

    The investments of the Company are also exposed to spread risk. The price of
a fixed income security is generally determined by adding an interest rate
spread to a benchmark interest rate, such as the U.S. Treasury rate. As the
spread on a security widens (or increases), the price (or value) of the security
falls. As spreads on CMBS widen, the fair value of the Company's portfolio
falls. Spread widening in the market for CMBS can occur as a result of market
concerns over the stability of the commercial real estate market, excess supply
of CMBS, or general credit concerns in other markets. The following table
demonstrates the estimated effect that changes in CMBS spreads would have on the
value of the Company's CMBS portfolio at December 31, 1999 and 1998:

          TABLE 7.6 -- PERCENTAGE CHANGE IN CMBS PORTFOLIO VALUE FROM
                            CHANGES IN CMBS SPREADS

<TABLE>
<CAPTION>
                                                        DECEMBER 31,     DECEMBER 31,
                                                       1999 CHANGE IN   1998 CHANGE IN
                                                       CMBS PORTFOLIO   CMBS PORTFOLIO
               CHANGE IN CMBS SPREADS                      VALUE            VALUE
               ----------------------                      -----            -----
<S>                                                    <C>              <C>
-250 Basis Points....................................        8.6%            14.7%
-200 Basis Points....................................        6.9             11.5
-150 Basis Points....................................        5.2              8.4
-100 Basis Points....................................        3.4              5.5
-50 Basis Points.....................................        1.7              2.7
No change in CMBS Spreads............................        0.0              0.0
+50 Basis Points.....................................       -1.7             -2.6
+100 Basis Points....................................       -3.4             -5.1
+150 Basis Points....................................       -5.1             -7.4
+200 Basis Points....................................       -6.7             -9.7
+250 Basis Points....................................       -8.4            -11.9
</TABLE>

    The Company enters into contracts to sell securities that it does not own at
the time of the sale, at a specified price at a specified time (short sales).
The Company utilizes these contracts as a means of mitigating ('hedging') the
potential financial statement impact of changes in the fair value of its
portfolio of CMBS due to changes in interest rates. As the value of the
Company's CMBS declines (increases) with increases (decreases) in interest
rates, the value of the contract increases (decreases). There can be no
guarantee, however, that the change in value of the contract will completely
offset the change in value of the fixed-rate interest earning asset. These
contracts involve the short sale of U.S. Treasury securities. Risks in these
contracts arise from the possible inability of counterparties to meet the terms
of their contracts and from movements in securities values and interest rates.
If the market value of the securities involved in the short sale increases, the
Company may be required to meet a 'margin call'.

                                       25





<PAGE>
    In the future the Company may utilize alternative methods of hedging such as
interest swaps or futures contracts. There is no guarantee that these methods
will be successful in hedging the value of the Company's portfolio and in
addition these methods may increase the cost of hedging.

    At December 31, 1999 and 1998, the Company had open contracts to sell U.S.
Treasury securities with face amounts totaling $25.3 million $39.8 million,
respectively. Although the Company generally does not settle these contracts at
expiration, but instead rolls them over into new contracts, if the Company had
settled its open contracts at December 31, 1999 and 1998, the counterparty would
have been required to pay the Company $198,347 and $175,343, respectively.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The financial statements of the Company and the related notes, together with
the Independent Auditors' Report thereon are set forth on pages F-1 through F-13
of this Form 10-K.

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

    Not applicable.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The information required by Item 10 as to the directors and executive
officers of the Company is incorporated herein by reference to the definitive
Proxy Statement to be filed pursuant to Regulation 14A under the headings
'Election of Directors' and 'Management of the Company.'

ITEM 11. EXECUTIVE COMPENSATION

    The information required by Item 11 is incorporated herein by reference to
the definitive Proxy Statement to be filed pursuant to Regulation 14A under the
headings 'Executive Compensation.'

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The information required by Item 12 is incorporated herein by reference to
the definitive Proxy Statement to be filed pursuant to Regulation 14A under the
headings 'Security Ownership of Certain Beneficial Owners and Management.'

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The information required by Item 13 is incorporated herein by reference to
the definitive Proxy Statement to be filed pursuant to Regulation 14A under the
headings 'Certain Relationships and Related Transactions.'

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

    Exhibits

21.1 -- Subsidiaries of the Company as of March 16, 2000
27.1 -- Financial Data Schedule -- For the period ended
        December 31, 1999*

    (a) Reports on Form 8-K filed during the quarter ended December 31, 1999

(1)  -- Form 8-K filed on November 24, 1999, announcing the
        authorization to extend and repurchase additional shares
        of treasury stock.

---------

*  Filed herewith

                                       26





<PAGE>
                       CLARION COMMERCIAL HOLDINGS, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                                           <C>
Independent Auditors' Report.                                  F-2
Consolidated Financial Statements:

    Consolidated Statements of Financial Condition at
     December 31, 1999 and 1998.............................   F-3

    Consolidated Statements of Operations for the year ended
     December 31, 1999 and for the period June 2, 1998
     (Commencement of Operations) to December 31, 1998......   F-4

    Consolidated Statements of Changes in Stockholders'
     Equity for the year ended December 31, 1999 and for the
     period June 2, 1998 (Commencement of Operations) to
     December 31, 1998......................................   F-5

    Consolidated Statements of Cash Flows for the year ended
     December 31, 1999 and for the period June 2, 1998
     (Commencement of Operations) to December 31, 1998......   F-6

    Notes to Consolidated Financial Statements..............   F-7
</TABLE>

    All schedules have been omitted because either the required information is
not applicable or the information is shown in the consolidated financial
statements or notes thereto.

                                      F-1





<PAGE>
                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Clarion Commercial Holdings, Inc.
New York, New York

    We have audited the accompanying consolidated statements of financial
condition of Clarion Commercial Holdings, Inc. and Subsidiaries (together, the
'Company') as of December 31, 1999 and 1998, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
year ended December 31, 1999 and for the period June 2, 1998 (commencement of
operations) to December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

    We conducted our audits in accordance with generally accepted auditing
standards. 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 test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principals used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

    In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial condition of Clarion Commercial Holdings,
Inc. and Subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for the year ended December 31, 1999 and the
period June 2, 1998 (commencement of operations) to December 31, 1998 in
conformity with generally accepted accounting principles.

Deloitte & Touche LLP


New York, New York
March 15, 2000

                                      F-2





<PAGE>
                CLARION COMMERCIAL HOLDINGS, INC. & SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                              DECEMBER 31,   DECEMBER 31,
                                                                  1999           1998
                                                                  ----           ----
<S>                                                           <C>            <C>
                           ASSETS
Cash and cash equivalents...................................  $  1,143,182   $    565,684
Securities -- trading, at fair value........................   100,893,785     80,731,788
Commercial mortgage loan receivable.........................       --          12,949,224
Other investments...........................................     4,106,250      4,856,250
Deposits with brokers as collateral for securities sold
  short.....................................................    25,191,059     46,830,041
Accrued interest receivable and other assets................       735,775      2,089,891
                                                              ------------   ------------
    Total assets............................................  $132,070,051   $148,022,878
                                                              ------------   ------------
                                                              ------------   ------------
                        LIABILITIES
Repurchase agreements.......................................  $ 64,691,000   $ 58,924,000
Government securities sold short............................    24,518,159     45,578,695
Dividends payable...........................................       839,356        689,348
Treasury stock payable......................................       184,123        577,851
Other liabilities...........................................     1,242,614      2,336,160
                                                              ------------   ------------
    Total liabilities.......................................    91,475,252    108,106,054
                                                              ------------   ------------
                    STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share, 25,000,000 shares
  authorized; no shares issued..............................       --             --
Class A common stock, par value $.001 per share 74,000,000
  shares authorized; 5,000,750 issued; 4,173,380 and
  4,451,050 shares outstanding in 1999 and 1998,
  respectively..............................................         5,001          5,001
Class B common stock, par value $.001 per share 1,000,000
  shares authorized; 175,000 issued and outstanding.........           175            175
Additional paid-in capital..................................    98,197,339     98,197,339
Net loss and distributions..................................   (49,717,537)   (52,303,201)
Treasury stock -- (827,370 and 549,700 shares in 1999 and
  1998, respectively), at cost..............................    (7,890,179)    (5,982,490)
                                                              ------------   ------------
Total stockholders' equity..................................    40,594,799     39,916,824
                                                              ------------   ------------
    Total liabilities and stockholders' equity..............  $132,070,051   $148,022,878
                                                              ------------   ------------
                                                              ------------   ------------
</TABLE>

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

                                      F-3





<PAGE>
                CLARION COMMERCIAL HOLDINGS, INC. & SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                              FOR THE PERIOD
                                                                               JUNE 2, 1998
                                                              FOR THE YEAR   (COMMENCEMENT OF
                                                                 ENDED        OPERATIONS) TO
                                                              DECEMBER 31,     DECEMBER 31,
                                                                  1999             1998
                                                              ------------   ----------------
<S>                                                           <C>            <C>
Income:
    Interest income from securities -- trading..............  $10,817,837      $ 12,580,589
    Interest income from commercial mortgage loan...........      702,699           560,452
    Income from other investments...........................      540,812           316,903
    Interest income from cash and cash equivalents..........       64,183            42,521
                                                              -----------      ------------
        Total income........................................   12,125,531        13,500,465
                                                              -----------      ------------
Expenses:
    Interest................................................    6,046,282         8,571,422
    Management fee..........................................      575,928           495,596
    Other expenses..........................................      765,811         1,187,815
                                                              -----------      ------------
        Total expenses......................................    7,388,021        10,254,833
                                                              -----------      ------------
Other operating gains and losses:
    Gain (loss) from securities -- trading..................    2,997,828       (49,469,592)
    Loss on commercial mortgage loan receivable.............     (952,666)         --
    Loss on other investments...............................     (750,000)       (2,500,000)
                                                              -----------      ------------
        Total other operating gains (losses)................    1,295,162       (51,969,592)
                                                              -----------      ------------
Net income (loss)...........................................  $ 6,032,672      $(48,723,960)
                                                              -----------      ------------
                                                              -----------      ------------
Net income (loss) per share:
    Basic...................................................        $1.33            $(9.93)
                                                              -----------      ------------
                                                              -----------      ------------
    Diluted.................................................        $1.33            $(9.93)
                                                              -----------      ------------
                                                              -----------      ------------
Weighted average shares:
    Basic...................................................    4,520,004         4,905,778
                                                              -----------      ------------
                                                              -----------      ------------
    Diluted.................................................    4,520,004         4,905,778
                                                              -----------      ------------
                                                              -----------      ------------
</TABLE>

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

                                      F-4





<PAGE>
               CLARION COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
      FOR THE YEAR ENDED DECEMBER 31, 1999 AND FOR THE PERIOD JUNE 2, 1998
               (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1998

<TABLE>
<CAPTION>
                                  COMMON STOCK
                                -----------------     ADDITIONAL      NET INCOME AND    TREASURY
                                CLASS A   CLASS B   PAID-IN CAPITAL   DISTRIBUTIONS       STOCK         TOTAL
                                -------   -------   ---------------   -------------       -----         -----
<S>                             <C>       <C>       <C>               <C>              <C>           <C>
Balance at June 2, 1998.......  $    1     $--        $    14,999      $    --         $    --       $     15,000
Issuance of common stock:
    Class A...................   5,000      --         94,682,515           --              --         94,687,515
    Class B...................    --        175         3,499,825           --              --          3,500,000
Dividends declared:
    Class A common stock......    --        --            --             (3,475,991)        --         (3,475,991)
    Class B common stock......    --        --            --               (103,250)        --           (103,250)
Net loss......................    --        --            --            (48,723,960)        --        (48,723,960)
Treasury stock purchases......    --        --            --                --          (5,982,490)    (5,982,490)
                                ------     ----       -----------      ------------    -----------   ------------
Balance at December 31,
  1998........................   5,001      175        98,197,339       (52,303,201)    (5,982,490)    39,916,824
Dividends declared:
    Class A common stock......    --        --            --             (3,447,008)        --         (3,447,008)
    Class B common stock......    --        --            --                --              --             --
Net income....................    --        --            --              6,032,672         --          6,032,672
Treasury stock purchases......    --        --            --                --          (1,950,189)    (1,950,189)
Issuance of stock from
  treasury....................    --        --            --                --              42,500         42,500
                                ------     ----       -----------      ------------    -----------   ------------
Balance at December 31,
  1999........................  $5,001     $175       $98,197,339      $(49,717,537)   $(7,890,179)  $ 40,594,799
                                ------     ----       -----------      ------------    -----------   ------------
                                ------     ----       -----------      ------------    -----------   ------------
</TABLE>

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

                                      F-5





<PAGE>
                CLARION COMMERCIAL HOLDINGS, INC. & SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                              FOR THE PERIOD
                                                                               JUNE 2, 1998
                                                              FOR THE YEAR     (COMMENCEMENT
                                                                 ENDED       OF OPERATIONS) TO
                                                              DECEMBER 31,     DECEMBER 31,
                                                                  1999             1998
                                                                  ----             ----
<S>                                                           <C>            <C>
Cash flows from operating activities:
    Net income (loss).......................................  $  6,032,672     $ (48,723,960)
Adjustments to reconcile net income (loss) to net cash used
  by Operating activities:
    Discount accretion, net.................................      (580,936)         (276,391)
    Issuance of shares from treasury for directors' fees....        42,500            --
    Change in unrealized (gain) loss on
      securities-trading....................................    (3,672,396)       18,937,803
    Change in unrealized (gain) loss on government
      securities sold short.................................    (2,867,417)        1,821,042
    Loss on other investments...............................       750,000         2,500,000
    Decrease (increase) in accrued interest receivable &
      other assets..........................................     1,354,116        (2,089,891)
    (Decrease) increase in other liabilities................    (1,093,546)        2,336,160
    Loss on commercial mortgage loan receivable.............       952,666            --
    Purchase of securities-trading..........................   (50,941,888)     (222,588,765)
    Sale of securities-trading..............................    35,033,223       123,218,096
    Decrease (increase) in deposits with broker as
      collateral for securities sold short..................    21,638,982       (46,830,041)
    (Decrease) increase in government securities sold
      short.................................................   (18,193,119)       43,757,652
                                                              ------------     -------------
Net cash used by operating activities.......................   (11,545,143)     (127,938,295)
                                                              ------------     -------------
Cash flows from investing activities:
    Investment in commercial mortgage loan receivable.......        --           (12,971,754)
    Principal payments received on commercial mortgage
      loan..................................................       152,282           --
    Proceeds from sale of commercial mortgage loan
      receivable............................................    11,844,276           --
    Investment in other assets..............................        --            (3,856,250)
                                                              ------------     -------------
Net cash provided (used) by investing activities............    11,996,558       (16,828,004)
                                                              ------------     -------------
Cash flows from financing activities:
    Borrowings under reverse repurchase agreements, net.....     5,767,000        58,924,000
    Dividends paid..........................................    (3,297,000)       (2,889,893)
    Purchases of treasury stock.............................    (2,343,917)       (5,404,639)
    Proceeds from issuance of common stock, net of offering
      costs.................................................        --            94,687,515
                                                              ------------     -------------
Net cash provided by financing activities...................       126,083       145,316,983
                                                              ------------     -------------
Net increase in cash and cash equivalents...................       577,498           550,684
    Cash and cash equivalents at beginning of period........       565,684            15,000
                                                              ------------     -------------
    Cash and cash equivalents at end of period..............  $  1,143,182     $     565,684
                                                              ------------     -------------
                                                              ------------     -------------
Supplemental information:
    Interest paid...........................................  $  6,742,427     $   7,141,976
                                                              ------------     -------------
                                                              ------------     -------------
</TABLE>

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

                                      F-6





<PAGE>
                CLARION COMMERCIAL HOLDINGS, INC. & SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION

    The consolidated financial statements include the accounts of Clarion
Commercial Holdings, Inc. ('Clarion') and its consolidated subsidiaries
(together with Clarion, the 'Company'). Clarion directly owns two subsidiaries,
CCHI General, Inc. ('General Partner') and CLARCOMM Limited, Inc. ('Limited
Partner'). General Partner and Limited Partner own 1% and 99% respectively of
CLARCOMM Holdings, L.P. ('Operating Partnership'). All intercompany transactions
and balances are eliminated in consolidation.

    Clarion was incorporated in Maryland in February 1998 and commenced its
operations on June 2, 1998. The Company is a specialty finance company organized
to invest in commercial mortgage-backed securities (primarily subordinate
securities), commercial mortgage loans, mezzanine investments, equity
investments and other real estate related investments. The Company is organized
and managed as a single business segment.

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

    In preparing the consolidated financial statements, management is required
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 statement of financial condition and the reported amounts of
revenues and expenses for the period covered. Actual results could differ from
those estimates and assumptions. Significant estimates in the financial
statements include the valuation of the Company's investments in mortgage-backed
securities and other investments.

    A summary of the Company's significant accounting policies follows:

SECURITIES -- TRADING

    At the date of acquisition, the Company elected to designate its government
securities and commercial mortgage-backed securities ('CMBS') as trading assets.
Such securities are carried at their estimated fair value, with the net
unrealized gains or losses included in earnings. For a description of the
methodology used in determining fair value of the Company's CMBS investments,
refer to Note 3. Interest income is recognized as it becomes receivable, and
includes amortization of premiums and accretion of discounts, computed using the
effective yield method, after considering estimated prepayments and credit
losses. Actual credit loss and prepayment experience is reviewed periodically
and effective yields adjusted if necessary.

SHORT SALES

    The Company enters into contracts to sell securities that it does not own at
the time of the sale, at a specified price at a specified time (short sales).
The Company utilizes these contracts as a means of mitigating ('hedging') the
potential financial statement impact of changes in the fair value of its
portfolio of CMBS due to changes in interest rates. These contracts involve the
sale of U.S. Treasury securities borrowed from a broker. The broker retains the
proceeds from the sale until the Company replaces the borrowed securities. Risks
in these contracts arise from the possible inability of counterparties to meet
the terms of their contracts and from movements in securities values and
interest rates; the Company does not anticipate nonperformance by any
counterparty. If the market value of the securities involved in the short sale
increases, the Company may be required to meet a 'margin call'. The Company
accounts for its liability to return the borrowed securities under short sales
contracts at their market values, with unrealized gains or losses recorded in
earnings. Income earned on the proceeds on deposit with brokers is included in
interest income from securities -- trading and interest due under the short
sales is included in interest expense.

                                      F-7





<PAGE>
                CLARION COMMERCIAL HOLDINGS, INC. & SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COMMERCIAL MORTGAGE LOAN

    The Company's investment in a commercial mortgage loan was carried at
amortized cost until March 1999 when the loan was deemed 'held for sale' and
marked to the lower of cost or market. Interest income was recognized as it
became receivable. Prior to the loan being deemed 'held for sale', the Company
periodically evaluated the collectibility of both interest and principal on the
loan to determine whether such loan was impaired. A loan is considered to be
impaired when, based on current information and events, it is probable that the
Company will be unable to collect all amounts due according to the existing
contractual terms. If a loan is determined to be impaired, a loss accrual is
recorded through income, determined by discounting the expected future cash
flows at the loan's effective interest rate or, for practical purposes, from the
estimated fair value of the collateral. The loan was sold in 1999 (See Note 4).

OTHER INVESTMENTS

    The Company's 10% interest in Clarion Capital, LLC (the 'Manager') and the
preferred interest in a limited partnership are accounted for at cost, with
income from distributions recognized as distributions are declared. The Company
periodically reviews these investments for other-than-temporary impairment. Any
such impairment is recognized in income by reducing the investment to its
estimated fair value.

COMPREHENSIVE INCOME

    SFAS No. 130, 'Reporting Comprehensive Income' defines comprehensive income
as the change in equity of a business enterprise during a period from
transactions and other events and circumstances, excluding those resulting from
investments by and distributions to owners. The Company had no items of other
comprehensive income during 1999 or 1998, so its net income (loss) was the same
as its comprehensive income (loss).

NEW ACCOUNTING PRONOUNCEMENT

    Statement of Financial Accounting Standards No. 133, 'Accounting for
Derivative Instruments and Hedging Activities' ('SFAS 133') establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that the Company recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge of the exposure to changes in the fair value
of a recognized asset or liability or a hedge exposure to variable cash flows of
a forecasted transaction. The accounting for changes in the fair value of a
derivative (e.g. through earnings or outside earnings, through comprehensive
income) depends on the intended use of the derivative and the resulting
designation.

    The Company is required to implement SFAS 133 on January 1, 2001. Company
management is evaluating the impact that this statement will have on its hedging
strategies. Based on the company's current hedging strategies, management
believes that implementation of SFAS 133 would have no impact on the Company's
financial statements.

NET INCOME (LOSS) PER SHARE

    Net income (loss) per share is computed in accordance with Statement of
Financial Accounting Standards ('SFAS') No. 128, 'Earnings Per Share', and is
calculated on the basis of the weighted average number of common shares
outstanding during the period plus the additional dilutive effect of common
stock equivalents. The dilutive effect of outstanding stock options is
calculated using the treasury stock method.

                                      F-8





<PAGE>
                CLARION COMMERCIAL HOLDINGS, INC. & SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

    For the year ended December 31, 1999 and for the period June 2, 1998
(commencement of operations) to December 31, 1998, diluted net income (loss) per
share were the same as basic net income (loss) per share, because all
outstanding stock options were antidilutive.

DIVIDENDS

    On January 15, 1999, the Company made a distribution of $0.15 per share to
stockholders of record at the close of business on December 31, 1998. On April
15, 1999, the Company made a distribution of $0.20 per share to stockholders of
record at the close of business on March 31, 1999. On July 15, 1999, the Company
made a distribution of $0.20 per share to stockholders of record at the close of
business on June 30, 1999. On October 15, 1999, the Company made a distribution
of $0.20 per share to stockholders of record at the close of business on
September 30, 1999. On January 18, 2000, the Company made a distribution of
$0.20 per share to stockholders of record at the close of business on December
31, 1999. No portion of these distributions is expected to be either a return of
capital or a capital gain for income tax purposes.

    The Company distributed $0.59 per share during the period June 2, 1998 to
December 31, 1998. These distributions were deemed to be a return of capital by
the Company to its shareholders.

INCOME TAXES

    The Company has elected to be taxed as a Real Estate Investment Trust
('REIT') and complies with the provisions of the Internal Revenue Code of 1986,
as amended (the 'Code'), with respect thereto. Accordingly, the Company will not
be subjected to federal income tax to the extent of its distributions to
stockholders and as long as certain asset, income and stock ownership tests are
met.

    The Company has elected mark-to-market valuation treatment for its
investment portfolio under Code Section 475. Under this election, the Company
must treat all unrealized trading gains and losses as realized for income tax
purposes as well as treating all trading transactions as operating gains and
losses. In 1998, the operations of the Company resulted in a net operating loss
of $48.1 million for income tax purposes. This net operating loss is included in
the Company's calculation of 'REIT taxable income', which significantly reduces
the Company's dividend requirements for REIT distribution requirement purposes.

RECLASSIFICATIONS

    Certain 1998 amounts have been reclassified to conform to the 1999
presentation.

NOTE 3: SECURITIES -- TRADING AND SHORT SALES

    The Company's securities-trading consist of CMBS with an estimated fair
market value of $100,893,786 and $80,731,788 and an amortized cost of
$116,159,193 and $99,669,591 at December 31, 1999 and 1998, respectively,
resulting in an unrealized loss of $15,265,407 and $18,937,803 at those dates,
respectively. The Company's CMBS are pledged as collateral for borrowings under
repurchase agreements (See Note 8).

                                      F-9





<PAGE>
                CLARION COMMERCIAL HOLDINGS, INC. & SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

    The aggregate estimated fair value by underlying credit rating of the
Company's CMBS at December 31, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                       DECEMBER 31, 1999       DECEMBER 31, 1998
                                     ----------------------   -------------------
                                     ESTIMATED FAIR   % OF     ESTIMATED    % OF
SECURITY RATING                          VALUE        TOTAL   FAIR VALUE    TOTAL
---------------                          -----        -----   ----------    -----
<S>                                  <C>              <C>     <C>           <C>
AAA................................   $ 24,993,295     24.8%  $   --         --%
BBB................................     37,538,397     37.2       --         --
BB.................................     17,547,932     17.4    58,252,658    72.2
B..................................     14,365,174     14.2    15,695,359    19.4
B-.................................      2,461,145      2.4     2,819,988     3.5
NR.................................      3.987,849      4.0     3,963,783     4.9
                                      ------------    -----   -----------   -----
                                      $100,893,792    100.0%  $80,731,788   100.0%
                                      ------------    -----   -----------   -----
                                      ------------    -----   -----------   -----
</TABLE>

    As of December 31, 1999 and 1998, the mortgage loans underlying the CMBS
interests held by the Company were secured by properties of the types and in the
states identified below:

<TABLE>
<CAPTION>
                      DECEMBER 31, 1999
                -----------------------------
PROPERTY TYPE   PERCENTAGE(1)       STATE      PERCENTAGE(1)
-------------   -------------       -----      -------------
<S>             <C>             <C>            <C>
Retail              32.5%            CA            21.9%
Multifamily         22.3             NY            13.5
Hotel               19.6             TX            10.6
Office              18.8             NJ             7.2
Industrial           3.7             MO             5.8
Other                3.1        All others(2)      41.0
</TABLE>

<TABLE>
<CAPTION>
                      DECEMBER 31, 1998
                -----------------------------
PROPERTY TYPE   PERCENTAGE(1)       STATE      PERCENTAGE(1)
-------------   -------------       -----      -------------
<S>             <C>             <C>            <C>
Retail              25.7%            CA            23.9%
Office              22.6             TX            13.0
Multifamily         21.2             FL             6.8
Hotel               18.7             NY             6.0
Other               11.8        All others(2)      50.3
</TABLE>

---------

(1) Based on a percentage of the total unpaid principal balance of the
    underlying loans.

(2) No other state comprises more than 5% of the total.

                              -------------------
    The weighted average unpaid principal balance of loans underlying the CMBS
investments of the Company that are more than 60 days delinquent is 0.09% and
0.44% of the unpaid principal balance of the collateral as December 31, 1999 and
1998, respectively.

    The fair value of the Company's portfolio of CMBS is generally estimated by
management based on market prices provided by certain dealers who make a market
in these financial instruments. The market for the Company's CMBS periodically
suffers from a lack of liquidity, accordingly, the fair values reported reflect
estimates and may not necessarily be indicative of the amounts the Company could
realize in a current market exchange.

    At December 31, 1999 and 1998, the un-leveraged, un-hedged, weighted average
yield to maturity of the Company's CMBS portfolio was 10.56% and 12.34%,
respectively. If losses on loans underlying the Company's CMBS investments
exceed the Company's original loss estimates, the Company may be required to
reduce the projected yields it uses to estimate interest income. The Company
currently believes that its loss estimates and yields are appropriate.

                                      F-10





<PAGE>
                CLARION COMMERCIAL HOLDINGS, INC. & SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

    The yield to maturity on the Company's CMBS interests depends on, among
other things, the rate and timing of principal payments, the pass-through rate
and interest rate fluctuations. The subordinated CMBS interests owned by the
Company provide credit support to the more senior interests of the related
securitization. Cash flow from the mortgages underlying the CMBS interests
generally is allocated first to the senior interests, with the most senior
interest having a priority entitlement to cash flow. Remaining cash flow is
allocated generally among the other CMBS interests in order of their relative
seniority. To the extent that there are defaults and unrecoverable losses on the
underlying mortgages, resulting in reduced cash flows, the most subordinate CMBS
interest will bear this loss first. To the extent there are losses in excess of
the most subordinated interest's stated entitlement to principal and interest,
then the remaining CMBS interests will bear such losses in order of their
relative subordination. There is, therefore no assurance that the yield to
maturity discussed above will be achieved.

    At December 31, 1999 and 1998, the Company had open contracts to sell U.S.
Treasury securities with face amounts totaling $25.3 million and $39.8 million
and a fair value of $24.5 million and $45.6 million, respectively. Although the
Company generally does not settle these contracts at expiration, but instead
rolls them over into new contracts, if the Company had settled its open
contracts at December 31, 1999 and 1998, the counterparty would have been
required to pay the Company $198,347 and $175,343, respectively.

    The unrealized gain (loss) on these contracts at December 31, 1999 and 1998
was $2,867,415 and ($1,821,042), respectively, which is included in gain (loss)
from securities-trading in the statement of operations. During the year ended
December 31, 1999 and the period June 2, 1998 to December 31, 1998, the Company
recorded realized gains (losses) of $2,532,581 and ($10,774,778) from settled
contracts, respectively. The Company earned interest of $2,004,101 and
$3,685,658 on short sale contracts and incurred interest expense of $2,689,491
and $4,188,171 on the short sales proceeds held by brokers for the year ended
December 31, 1999 and for the period June 2, 1998 to December 31, 1998,
respectively.

    The composition of the portfolio of securities shown above should not be
considered indicative of the composition of the portfolio that might be expected
in the future.

NOTE 4: COMMERCIAL MORTGAGE LOAN

    The commercial mortgage loan was deemed 'held for sale' in March of 1999 and
therefore the Company recorded a provision to adjust the loan to market value as
of March 31, 1999 and again at June 30, 1999. The provisions reduced the
carrying value of the loan by $1.0 million at March 31, 1999 and by an
additional $0.6 million at June 30, 1999. Subsequently in 1999, the Company
disposed of the loan for proceeds of $11.9 million, which was $0.6 million in
excess of its carrying value at that time. The Company therefore realized a net
loss of $1.0 million on the provisions and disposition in 1999. The investment
was a first mortgage loan secured by The OMNI Hotel in Newport News, Virginia.

NOTE 5: COMMON STOCK

    Clarion common stock was sold through several transactions as follows:

    Clarion was initially capitalized with the sale of 750 shares of Class A
Common Stock, par value $0.001 per share (the 'Class A Common Stock') on
February 18, 1998, for a total of $15,000. Clarion received commitments on March
11, 1998 for the purchase, in private placements, of 1,000,000 shares of Class A
Common Stock at $20 per share for a total of $20,000,000. The sale of these
shares was consummated at the time of the closing of Clarion's initial public
offering on June 2, 1998 (the 'IPO').

    In the IPO, Clarion issued 4,000,000 shares of Class A Common Stock at a
price of $20 per share and received proceeds of $76,025,000, net of underwriting
discounts and commissions. Offering costs in connection with the IPO amounting
to approximately $1,337,485 have been charged against the

                                      F-11





<PAGE>
                CLARION COMMERCIAL HOLDINGS, INC. & SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

proceeds of the IPO. Concurrent with the IPO, Clarion issued 175,000 shares of
Class B common stock, par value $0.001 per share (the 'Class B Common Stock') in
exchange for a 10% interest in the Manager and an option to purchase the
remaining 90% interest (or all of the assets of) the Manager for 90% of fair
market value. The option may be exercised between January 2, 2000 and March 31,
2001 only with the approval of the Independent Directors, as defined in the
Company's prospectus.

    On June 30, 1998, the Board of Directors of Clarion authorized a program to
repurchase up to 400,000 shares of Class A Common Stock (the 'Stock Repurchase
Program'). Pursuant to the Stock Repurchase Program, purchases of Class A Common
Stock have been and will be made at the sole discretion of management in the
open market or in privately negotiated transactions until the earlier to occur
of (i) the date on which the Company acquires, in the aggregate, 400,000 shares
of Class A Common Stock, or (ii) June 30, 1999. On September 8, 1998, the Board
of Directors authorized management to repurchase an additional 400,000 shares
prior to September 30, 1999, at a price not to exceed $13.60. On November 17,
1999, the Board of Directors authorized management to repurchase an additional
400,000 shares and extended the program to September 30, 2000, at a price not to
exceed $8.75. Through December 31, 1999, the Company acquired a total of 831,900
shares in the open market at a cost of $7,932,679.

NOTE 6: TRANSACTIONS WITH AFFILIATES

    Clarion has entered into a Management Agreement (the 'Management Agreement')
with the Manager, under which the Manager manages the Company's day-to-day
operations, subject to the direction and oversight of Clarion's Board of
Directors. The Company pays the Manager an annual base management fee equal to
1% of the Company's average stockholders' equity.

    The Company will also pay the Manager, as incentive compensation, an amount
equal to 25% of the Adjusted Net Income of the Company, before incentive
compensation, in excess of the amount that would produce an annualized return on
equity equal to 2.5% over the Ten-Year U.S. Treasury.

    In accordance with the terms of the Management Agreement, the Company paid
$575,928 and $495,596 in base management fees for the year ended December 31,
1999 and for the period June 2, 1998 (commencement of operations) to
December 31, 1998, respectively. The Company has not accrued for, or paid, the
Manager any incentive compensation since inception.

    During 1998, the Company determined that its investment in the Manager was
impaired and, accordingly, reduced the carrying amount of its investment in the
Manager to its estimated fair value, $1,000,000. During 1999, the Company
further reduced the carrying amount of its investment to $250,000.

NOTE 7: STOCK INCENTIVE PLAN

    Clarion has adopted a stock incentive plan (the '1998 Stock Incentive Plan')
that provides for the grant of both non-qualified stock options, incentive stock
options that meet the requirements of Section 422 of the Code, stock awards,
deferred stock awards, dividend equivalents or other awards. Stock incentive
awards may be granted to the directors, officers, consultants and key employees
of Clarion, the Manager or affiliates of the Manager. Subject to anti-dilution
provisions for stock splits, stock dividends and similar events, the 1998 Stock
Incentive Plan authorizes the grant of awards in the aggregate of up to 590,900
shares of Class A Common Stock.

    The exercise price for any stock option granted under the 1998 Stock
Incentive Plan may not be less than 100% of the fair market value of the shares
of Class A Common Stock at the time the option is granted. Each option must
terminate no more than ten years from the date it is granted.

    On June 2, 1998, pursuant to the 1998 Stock Incentive Plan, options to
purchase 350,000 shares of Class A Common Stock were granted. 178,250 options
were granted to certain officers and directors of the Company, and 171,750
options were granted to certain officers and employees of the Manager and

                                      F-12





<PAGE>
                CLARION COMMERCIAL HOLDINGS, INC. & SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

its affiliates who are not officers and directors of the Company. The exercise
price of these options is $20 per share. The remaining contractual life of each
option is approximately nine years as of December 31, 1999. One third of the
options vested on June 30, 1998, one third on June 30, 1999. The remaining
options vest on June 30, 2000. No options were exercised or expired during 1999
and 1998.

    The Company considers its officers and directors to be employees for the
purpose of stock option accounting. The Company adopted the disclosure-only
provisions of SFAS No. 123, 'Accounting for Stock-Based Compensation' for stock
issued to employees. Accordingly, no compensation cost for the estimated fair
value of the 178,250 options ($0.75 per option grant, or a total of $133,210)
issued to employees under the 1998 Stock Incentive Plan has been recorded,
consistent with the provisions of SFAS No. 123. For the Company's pro forma net
earnings, the compensation cost will be amortized over the vesting period of the
options. The Company's 1999 and 1998 net income (loss) per share would have been
changed to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                       DECEMBER 31, 1999            DECEMBER 31, 1998
                                    ------------------------   ---------------------------
                                    AS REPORTED   PRO FORMA    AS REPORTED     PRO FORMA
                                    -----------   ---------    -----------     ---------
<S>                                 <C>           <C>          <C>            <C>
Net income (loss).................  $6,032,672    $5,999,370   $(48,723,960)  $(48,801,666)
Income(loss) per share............       $1.33         $1.33         $(9.93)        $(9.95)
</TABLE>

    For the 171,750 options issued to non-employees under the 1998 Stock Option
Plan, compensation cost is accrued based on the estimated fair value of the
options issued, and amortized over the vesting period. Because vesting of the
options is contingent upon the recipient continuing to provide services to the
Company to the vesting date, the Company estimates the fair value of the
non-employee options at each period end up to the vesting date, and adjusts
expensed amounts accordingly. The 57,250 options that vested on June 30, 1998
had an estimated fair value at that date of $0.10 per option grant, or a total
of $5,725. The remaining 114,500 non-employee options, which vest in 1999 and
2000, were deemed to have nominal value as of December 31, 1999 and 1998.

    The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
grants in 1998: dividend yield of 12% at June 2, 1998 and 15.6% at June 30,
1998, expected volatility of 25%, risk-free interest rate of 5.79% at June 2,
1998 and 5.63% at June 30, 1998, and expected lives of ten years.

    During the year ended December 31, 1999, the Company issued 4,530 shares of
Class A Common Stock, with a value of $42,500, to the three independent members
of the Board of Directors as partial compensation for their services. These
shares were issued out of treasury stock at a cost that approximated their fair
value at the time of issuance. This cost is based on the average cost of the
treasury stock repurchased by the Company through December 31, 1999.

    On January 2, 2000, 919 shares of Class A Common Stock, with a value of
$7,500, were issued to the three independent members of the Board of Directors
as partial compensation for their services during 1999. In addition, on January
2, 2000, 3,250 shares of Class A Common Stock, with a value of $25,188, were
issued to certain officers of the Company and 4,750 shares of Class A Common
Stock, with a value of $36,812 were issued to certain officers and employees of
the Manager who are not officers and directors of the Company for their services
during 1999. The accrual of the fair value of the shares issued in 2000 is
reflected in other liabilities at December 31, 1999.

NOTE 8: REPURCHASE AGREEMENTS

    The Company has entered into repurchase agreements with Bear Stearns to
finance a portion of its investments. As of December 31, 1999 and 1998, the
Company had entered into repurchase agreements in the amounts of $64,691,000 and
$58,924,000, respectively. The weighted average maturity of the agreements as of
December 31, 1999 and 1998, were 19.4 days and 12.2 days, respectively, with no
agreement having a maturity greater than 28 days and 14 days, respectively. The
weighted average interest rate of the agreements as of December 31, 1999 and
1998, was 6.98% and 6.44%, respectively

                                      F-13





<PAGE>
                CLARION COMMERCIAL HOLDINGS, INC. & SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and is a variable rate based on one-month LIBOR plus a weighted average spread
of 0.60% and 0.89%, respectively. At the maturity of each repurchase agreement,
the agreement is reset to reflect any changes in the 30-day LIBOR rate. The
repurchase agreements are collateralized by the Company's portfolio of CMBS
investments.

NOTE 9: FAIR VALUE OF FINANCIAL INSTRUMENTS

    As discussed above, the Company's portfolio of CMBS securities and its
liabilities under short sales contracts are carried at estimated fair value.
Company management believes that the fair value of its government securities,
deposits with brokers as collateral for securities sold short, commercial
mortgage loan in 1998, cash and cash equivalents, and repurchase agreements
approximates their carrying values, due to the short-term nature of the
instruments or the fact that their terms approximate current market terms.

                                      F-14





<PAGE>
                CLARION COMMERCIAL HOLDINGS, INC. & SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10: SUMMARIZED QUARTERLY RESULTS (UNAUDITED)

    The following is a summarized presentation of quarterly results of
operations:
<TABLE>
<CAPTION>
                               FOR THE PERIOD
                                JUNE 2, 1998
                               (COMMENCEMENT       FOR THE          FOR THE         FOR THE         FOR THE         FOR THE
                               OF OPERATIONS)   QUARTER ENDED    QUARTER ENDED   QUARTER ENDED   QUARTER ENDED   QUARTER ENDED
                                TO JUNE 30,     SEPTEMBER 30,    DECEMBER 31,      MARCH 31,       JUNE 30,      SEPTEMBER 30,
                                    1998             1998            1998            1999            1999             1999
                                    ----             ----            ----            ----            ----             ----
<S>                            <C>              <C>              <C>             <C>             <C>             <C>
Income:
   Interest income from
  securities -- trading(1)...    $1,634,769      $  7,358,168     $ 3,587,652     $2,715,042      $2,978,661       $2,855,674
   Income from commercial
    mortgage loan............        72,790           231,599         256,063        235,240         236,810          230,649
   Income from other
    investments..............        30,858           150,776         135,269        133,683         134,937          136,185
   Interest income from cash
    and cash equivalents.....        14,454            16,372          11,695         13,374          14,701           28,961
                                 ----------      ------------     -----------     ----------      ----------       ----------
Total income.................     1,752,871         7,756,915       3,990,679      3,097,339       3,365,109        3,251,469
                                 ----------      ------------     -----------     ----------      ----------       ----------
Expenses:
   Interest(1)...............       820,724         5,544,220       2,206,478      1,588,128       1,818,148        1,700,119
   Management fee............        79,360           241,326         174,910        144,892         150,570          144,329
Other expenses...............        20,295         1,001,661         165,859        177,943         216,344          139,939
                                 ----------      ------------     -----------     ----------      ----------       ----------
   Total expenses............       920,379         6,787,207       2,547,247      1,910,963       2,185,062        1,984,387
                                 ----------      ------------     -----------     ----------      ----------       ----------
Other operating gains and
 losses:
   Gain (loss) from
    securities -- trading(1).       (75,795)      (49,140,545)       (253,252)     1,519,984       1,306,807          210,004
   Gain (loss) from
    commercial loan(2).......             0                 0               0       (925,000)       (575,633)         549,467
   Loss on other
    investments(3)...........             0                 0      (2,500,000)             0               0                0
                                 ----------      ------------     -----------     ----------      ----------       ----------
Total other operating gains
 (losses)....................       (75,795)      (49,140,545)     (2,753,252)       594,984         731,174          759,471
                                 ----------      ------------     -----------     ----------      ----------       ----------
Net income (loss)............    $  756,697      $(48,170,837)    $(1,309,820)    $1,781,360      $1,911,221       $2,026,553
                                 ----------      ------------     -----------     ----------      ----------       ----------
                                 ----------      ------------     -----------     ----------      ----------       ----------
Net income (loss) per share:
   Basic.....................         $0.15            $(9.80)         $(0.27)         $0.39           $0.42            $0.45
                                      -----            ------          ------          -----           -----            -----
                                      -----            ------          ------          -----           -----            -----
   Diluted...................         $0.15            $(9.80)         $(0.27)         $0.39           $0.42            $0.45
                                      -----            ------          ------          -----           -----            -----
                                      -----            ------          ------          -----           -----            -----
Weighted average shares
   Basic.....................     5,172,109         4,916,584       4,808,751      4,620,069       4,548,694        4,497,649
                                 ----------      ------------     -----------     ----------      ----------       ----------
                                 ----------      ------------     -----------     ----------      ----------       ----------
   Diluted...................     5,172,109         4,916,584       4,808,751      4,620,069       4,548,694        4,497,649
                                 ----------      ------------     -----------     ----------      ----------       ----------
                                 ----------      ------------     -----------     ----------      ----------       ----------

<CAPTION>

                                  FOR THE
                               QUARTER ENDED
                               DECEMBER 31,
                                   1999
                                   ----
<S>                            <C>
Income:
   Interest income from
  securities -- trading(1)...   $2,268,460
   Income from commercial
    mortgage loan............            0
   Income from other
    investments..............      136,007
   Interest income from cash
    and cash equivalents.....        7,147
                                ----------
Total income.................    2,411,614
                                ----------
Expenses:
   Interest(1)...............      939,887
   Management fee............      136,137
Other expenses...............      231,585
                                ----------
   Total expenses............    1,307,609
                                ----------
Other operating gains and
 losses:
   Gain (loss) from
    securities -- trading(1).      (38,967)
   Gain (loss) from
    commercial loan(2).......       (1,500)
   Loss on other
    investments(3)...........     (750,000)
                                ----------
Total other operating gains
 (losses)....................     (790,467)
                                ----------
Net income (loss)............   $  313,538
                                ----------
                                ----------
Net income (loss) per share:
   Basic.....................        $0.07
                                     -----
                                     -----
   Diluted...................        $0.07
                                     -----
                                     -----
Weighted average shares
   Basic.....................    4,438,720
                                ----------
                                ----------
   Diluted...................    4,438,720
                                ----------
                                ----------
</TABLE>

---------

(1) Results for the quarter ended September 30, 1998 reflect unrealized losses
    on the CMBS portfolio due to declines in market values during the period. A
    substantial portion of the CMBS portfolio was sold in the fourth quarter of
    1998, resulting in decreases in interest income and interest expense from
    the related financing.

(2) The commercial mortgage loan was deemed to be held for sale in the first
    quarter of 1999, and its carrying value reduced to estimated fair value. An
    additional reduction was recorded in the second quarter of 1999. The loan
    was sold in the third quarter of 1999 for an amount in excess of its then
    carrying value.

(3) The Company wrote down its investment in the Manager to its estimated fair
    value in the quarter ended December 31, 1998. An additional write-down was
    recorded in the fourth quarter of 1999.

                                      F-15





<PAGE>
                                   SIGNATURES

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

                                          CLARION COMMERCIAL HOLDINGS, INC.

                                          By:      /S/ FREDRICK D. ARENSTEIN
                                               .................................

                                                    FREDRICK D. ARENSTEIN
                                               TREASURER AND CHIEF ACCOUNTING
                                                           OFFICER

Dated: March 25, 1999

    Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons in the
capacities and on the date indicated.

<TABLE>
<CAPTION>
                SIGNATURE                                  TITLE                         DATE
                ---------                                  -----                         ----
<C>                                         <S>                                   <C>
           /s/ DANIEL S. HEFLIN             Chief Executive Officer and Director    March 29, 2000
 .........................................    (principal executive officer)
            (DANIEL S. HEFLIN)

        /s/ FRANK L. SULLIVAN, JR.          Chairman of the Board and Director      March 29, 2000
 .........................................
         (FRANK L. SULLIVAN, JR.)

         /s/ STEPHEN C. ASHEROFF            Director                                March 29, 2000
 .........................................
          (STEPHEN C. ASHEROFF)

           /s/ STEVEN N. FAYNE              Director                                March 29, 2000
 .........................................
            (STEVEN N. FAYNE)

           /s/ HAROLD E. ROSEN              Director                                March 29, 2000
 .........................................
            (HAROLD E. ROSEN)





</TABLE>