**UNITED
                  STATES**
                **SECURITIES
                  AND EXCHANGE COMMISSION**
                
                Washington,
                  D.C. 20549
                
                **FORM
                  10-K**
  [Mark
                    One]ý
                ANNUAL
                      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                    SECURITIES
                      EXCHANGE ACT OF 1934For
                    the fiscal year ended December 31, 2005
                  OR ̈
                TRANSITION
                    REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                  SECURITIES
                    EXCHANGE ACT OF 1934
 For
          the transition period from ______________ to
          ______________
 **Commission
                  File Number: 000-50256**
                **___________________________****Hartman
                  Commercial Properties REIT**(Exact
                  Name of Registrant as Specified in Its
                  Charter)
 
 **Maryland**
                (State
                  or Other Jurisdiction of
                Incorporation
                  or Organization)
              
              **76-0594970**
                (I.R.S.
                  Employer
                Identification
                  No.)
   **1450
                  West Sam Houston Parkway North,
                  Suite 100, Houston, Texas**
              **77043-3124**(Address
                  of Principal Executive Offices)
              (Zip
                  Code)
  Registrant's
                  telephone number, including area code:**(713)
                  467-2222**Securities
                  registered pursuant to section 12(b) of the Act:
                **None**
 
 Securities
                  registered pursuant to section 12(g) of the Act:
                **Common
                  Shares of Beneficial Interest, par value $0.001 per
                  share**Indicate
                  by check mark if the Registrant is a well-known seasoned issuer,
                  as
                  defined in Rule 405 of the Securities Act. Yes ̈NoýIndicate
                  by check mark if the Registrant is not required to file reports
                  pursuant
                  to Section 13 or 15(d) of the Act. Yes ̈NoýIndicate
                  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. YesýNo ̈Indicate
                  by check mark if disclosure of delinquent filers pursuant to Item
                  405 of
                  Regulation S-K (§229.405 of this chapter) is not contained herein, and
                  will not be contained, to the best or Registrant's knowledge, in
                  definitive proxy or information statements incorporated by reference
                  in
                  Part III of this Form 10-K or any amendment to this Form 10-K. ̈Indicate
                  by check mark whether the Registrant is a large accelerated filer,
                  an
                  accelerated filer, or a non-accelerated filer. See definition of
                  "accelerated filer and large accelerated filer" in Rule 12b-2 of
                  the
                  Exchange Act. (Check one)
                Large
                  accelerated filer ̈Accelerated
                  filer ̈Non-accelerated
                  filerýIndicate
                  by check mark whether the Registrant is a shell company (as defined
                  in
                  Rule 12b-2 of the Exchange Act). Yes ̈NoýThe
                  aggregate market value of the voting stock held by nonaffiliates
                  of the
                  Registrant as of June 30, 2005 (the last business day of the Registrant's
                  most recently completed second fiscal quarter) was $72,048,630
                  assuming a
                  market value of $10 per share.As
                  of March 30, 2006, the Registrant had 9,346,614 common shares of
                  beneficial interest outstanding.**DOCUMENTS
                  INCORPORATED BY REFERENCE**
                
                The
                  Registrant incorporates by reference portions of its Definitive
                  Proxy
                  Statement for the 2006 Annual Meeting of Shareholders, which shall
                  be
                  filed no later than April 30, 2006, into Part III of this Form
                  10-K to the
                  extent stated herein.


**HARTMAN
      COMMERCIAL PROPERTIES REIT**


**FORM
      10-K**


**Year
      Ended December 31, 2005**





**TABLE
      OF CONTENTS**





PagePART
                I
            1Item
                1.
            Business.
            1Item
                1A.
            Risk
                Factors.
            9Item
                2.
            Properties.
            14Item
                3.
            Legal
                Proceedings.
            17Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders.
            17PART
                II
            18Item
                5.
            Market
                for Registrant’s Common Equity, Related Shareholder
                Matters and Issuer Purchases of Equity Securities.
            18Item
                6.
            Selected
                Financial Data.
            21Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations.
            21Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market
                Risk.
            32Item
                8.
            Financial
                Statements and Supplementary
                Data.
            32Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting
                and Financial Disclosure.
            32Item
                9A.
            Controls
                and Procedures.
            32Item
                9B.
            Other
                Information.
            32PART
                III
            33Item
                10.
            Directors
                and Executive Officers of the
                Registrant.
            33Item
                11.
            Executive
                Compensation.
            33Item
                12.
            Security
                Ownership of Certain Beneficial Owners and
                Management and Related Shareholder Matters.
            33Item
                13.
            Certain
                Relationships and Related
                Transactions.
            33Item
                14.
            Principal
                Accounting Fees and Services.
            33PART
                IV
            33Item
                15.
            Exhibits
                and Financial Statement
                Schedules.
            33SIGNATURES
            35








**Forward-Looking
      Statements**




This
      annual report contains forward-looking statements, including discussion and
      analysis of the Company’s financial condition, anticipated capital expenditures
      required to complete projects, amounts of anticipated cash distributions to
      its
      shareholders in the future and other matters. These forward-looking statements
      are not historical facts but are the intent, belief or current expectations
      of
      the Company’s management based on its knowledge and understanding of the
      Company’s business and industry. Forward-looking statements are typically
      identified by the use of terms such as “may,” “will,” “should,” “potential,”
“predicts,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,”
“estimates” or the negative of such terms and variations of these words and
      similar expressions. These statements are not guarantees of future performance
      and are subject to risks, uncertainties and other factors, some of which are
      beyond the Company’s control, are difficult to predict and could cause actual
      results to differ materially from those expressed or forecasted in the
      forward-looking statements.




Forward-looking
      statements that were true at the time made may ultimately prove to be incorrect
      or false. You are cautioned to not place undue reliance on forward-looking
      statements, which reflect management’s view only as of the date of this Form
      10-K. The Company undertakes no obligation to update or revise forward-looking
      statements to reflect changed assumptions, the occurrence of unanticipated
      events or changes to future operating results. Factors that could cause actual
      results to differ materially from any forward-looking statements made in this
      Form 10-K include changes in general economic conditions, changes in real estate
      conditions, construction costs that may exceed estimates, construction delays,
      increases in interest rates, lease-up risks, inability to obtain new tenants
      upon the expiration of existing leases, and the potential need to fund tenant
      improvements or other capital expenditures out of operating cash flow. The
      forward-looking statements should be read in light of these factors and the
      factors identified in the “Risk Factors” sections of this Form 10-K and the
      Company’s Registration Statement on Form S-11, as amended, as previously filed
      with the Securities and Exchange Commission.




**PARTI**




**Item1.**
              **Business.**




***General
      Development of Business***




Hartman
      Commercial Properties REIT (the “Company”) is a Maryland real estate investment
      trust (“REIT”) organized in December 2003 for the purpose of merging with
      Hartman Commercial Properties REIT, a Texas real estate investment trust
      organized in August 1998. We are the surviving entity resulting from the merger,
      which was consummated on July 28, 2004. We have elected to be taxed as a real
      estate investment trust under federal income tax laws. The Company invests
      in
      and operates retail, office-warehouse, and office properties located primarily
      in the Houston, Dallas and San Antonio metropolitan areas, and plans to expand
      its investments to retail, office and office-warehouse properties located in
      major metropolitan cities in the United States, principally in the southern
      United States. The Company leases each respective property to one or more
      tenants.




Substantially
      all of our business is conducted through Hartman REIT Operating Partnership,
      L.P., a Delaware limited partnership organized in 1998 (the “Operating
      Partnership”). As of December 31, 2005 we were the owner of a 59.55% interest in
      the Operating Partnership, and we are the sole general partner of the Operating
      Partnership.




Our
      external advisor is Hartman Management, L.P. (the “Management Company”), a Texas
      limited partnership formed in 1990. The Management Company is an affiliate
      of
      the Company and is wholly owned by Allen R. Hartman, our president, chief
      executive officer and chairman of our board of trustees. The Management Company
      is responsible for managing our affairs on a day-to-day basis and for
      identifying and making acquisitions and investments on our behalf.




On
      December 31, 2005, we owned 37 properties. All of our properties are located
      in
      the Houston, Dallas and San Antonio, Texas metropolitan areas. The properties
      consist of retail, office-warehouse and office properties, and each is designed
      to meet the needs of surrounding local communities. In the aggregate, at
      December 31, 2005 the properties contained approximately 3,121,000 square feet
      of gross leasable area.




1


As
      of
      December 31, 2005, the properties were approximately 82.3% leased. Substantially
      all of our revenues consist of base rents and percentage rents received under
      long-term leases. For the year ended December 31, 2005, total rents and other
      income were $24,888,214 and percentage rents were $-0-. Approximately 67.9%
      of
      all existing leases provide for annual increases in the base rental payments
      with a “step up” rental clause.




*Our
      Strategy*




With
      the
      help of the Management Company, we seek to maximize shareholder returns through
      a balanced strategy of aggressive leasing and property management, conservative
      expense controls and opportunistic portfolio management, with a goal of
      continuously increasing both current cash available for distribution to
      shareholders and the value of our properties. The key elements of this strategy
      include:




·
            *Exploit
                Our Value-Added Acquisition Strategy*.
                We invest in a mixture of (i) properties that we perceive are undervalued
                due to low occupancy, poor management, market inefficiencies and/or
                inadequate capitalization where we can create value through improved
                earnings by implementing our aggressive marketing, leasing and property
                management programs, and (ii) stabilized properties that are relatively
                well occupied and managed and provide steady current net operating
                income
                with lower growth potential.




·
            *Leverage
                Our Local Market Knowledge*.
                We leverage our Houston market expertise and business relationships
                with
                both tenants and brokers to increase occupancy and rental rates through
                aggressive marketing and leasing, value-added management of and strategic
                improvements to our Houston
                properties.




·
            *Take
                Advantage of Economic Cycles*.
                We diversify our property and tenant mixes in order to take advantage
                of
                opportunities in, and manage the risks resulting from, different
                economic
                cycles that occur among various property
                types.




·
            *Expand
                Into Target Markets*.
                We seek to acquire properties in other Texas markets that we can
                effectively manage from our centralized Houston base and which have
                similar market demographics and characteristics to our Houston
                properties.




·
            *Selectively
                Develop Properties*.
                We intend to selectively develop properties, principally in the retail
                and
                office-warehouse sectors, in our existing markets where land prices
                and
                economic trends indicate higher potential future returns from development
                than from acquisitions.




·
            *Recycle
                Capital for Greater Returns*.
                We seek to recycle capital through opportunistic property dispositions
                where demographic, economic and/or growth trends with respect to
                a
                property or its sub-market indicate decreasing returns, followed
                by
                redeployment of the sale proceeds into properties having the potential
                for
                greater returns.




***Recent
      Developments***




*Initial
      Public Offering*




On
      September 15, 2004, our Registration Statement on Form S-11, with respect to
      a
      public offering (the “Public Offering”) of up to 10,000,000 common shares of
      beneficial interest to be offered at a price of $10.00 per share, was declared
      effective under the Securities Act of 1933, as amended. The Registration
      Statement also covers up to 1,000,000 shares available for sale pursuant to
      our
      dividend reinvestment plan, to be offered at a price of $9.50 per share. The
      shares are being offered to investors on a best efforts basis, which means
      that
      the broker-dealers participating in the offering are only required to use their
      best efforts to sell the shares and have no firm commitment or obligation to
      purchase any of the shares. Post-Effective Amendment No.1 to the Registration
      Statement was declared effective by the SEC on June 27, 2005 and Post-Effective
      Amendment No. 2 to the Registration Statement was declared effective by the
      SEC
      on March 9, 2006.




2


As
      of
      March 30, 2006, we had accepted subscriptions for and issued 2,336,468 shares
      in
      the Public Offering for gross offering proceeds of $23,335,291. We pay a dealer
      manager fee of up to 2.5% of the gross offering proceeds to D.H. Hill
      Securities, LLP, our dealer manager for the Public Offering, and also selling
      commissions of up to 7.0% of the gross offering proceeds for any sales through
      participating broker-dealers and the dealer manager, other than sales by
      employees of the Management Company sponsored by the dealer manager.
      Additionally, in connection with the Public Offering, we have agreed to pay
      the
      Management Company, in its capacity as our advisor (i) up to 2.5% of the gross
      offering proceeds as reimbursement for the Management Company’s payment of
      organization and offering expenses on behalf of the Company and (ii) an
      acquisition fee equal to 2.0% of the gross offering proceeds for its services
      in
      connection with the selection, purchase, development or construction of real
      property (payable upon receipt by the Company of such proceeds, rather than
      when
      a property is acquired). We accrued an aggregate of $1,888,762 in dealer manager
      fees, discounts and selling commissions for the subscriptions accepted through
      March 30, 2006, resulting in net proceeds to the Company (after the payment
      of
      such fees, discounts and commissions) of $21,446,529. Out of such net proceeds,
      we accrued amounts payable to the Management Company of $569,423 as a
      reimbursement of organization and offering expenses and $455,538 pursuant to
      the
      acquisition fee described above.




Additional
      subscription proceeds will be held in escrow until investors are admitted as
      shareholders. We close new subscriptions for shares monthly pursuant to the
      Public Offering. At each closing we receive proceeds from subscriptions out
      of
      escrow and use such funds to make investments and pay the dealer manager fee,
      selling commissions and other organization and offering expenses. Until required
      for such purposes, net offering proceeds are held in short-term, liquid
      investments.




Subscriptions
      were received for an aggregate of 11,840 shares from three of our independent
      trustees. These subscriptions were at a discounted price of $9.05 per share,
      reflecting the fact that selling commissions in the amount of $0.70 per share
      and dealer manager fees in the amount of $0.25 per share were not payable in
      connection with such sales. Accordingly, the net proceeds to us from such sales
      made net of commissions were substantially the same as the net proceeds we
      receive from sales of shares at the $10.00 per share offering price. The
      subscription price for these shares was paid through the trustees’ assignment to
      the Company of their right to receive accrued and unpaid trustee fees in the
      aggregate amount of $107,150. For a further discussion of discounted sales
      of
      shares to our trustees, see the “Plan of Distribution” section of our
      Registration Statement for the Public Offering.




*Recent
      Acquisitions*




On
      March
      14, 2005, we purchased Woodlake Plaza, an office building containing
      approximately 106,000 rentable square feet located on an approximately
      3.4963-acre tract of land in Houston, Texas. The total purchase price of
      Woodlake Plaza was $5.5 million, plus closing costs. We funded $3.3 million
      of
      the purchase price with borrowings under our line of credit at Union Planters
      Bank and used working capital to fund the balance. We negotiated the purchase
      price with, and acquired the property from, CSFB 1998-P1 Gessner Office Limited
      Partnership. CSFB 1998-P1 Gessner Office Limited Partnership is not affiliated
      with us, the Operating Partnership or the Management Company. Woodlake Plaza,
      which was built in 1975, includes among its major tenants Hibernia Corporation,
      Management Alliance Group and Rock Solid Images. At the time of the acquisition,
      aggregate annual base rent for all tenants in Woodlake Plaza was approximately
      $1,370,403.




On
      August
      10, 2005, we purchased 9101 LBJ Freeway (formerly know as The Interchange),
      an
      office building containing approximately 126,000 rentable square feet located
      on
      an approximately 5.8-acre tract of land in Dallas, Texas (“9101 LBJ Freeway”).
      The total purchase price of 9101 LBJ Freeway was $7.98 million, plus closing
      costs. We funded $7.6 million of the purchase price with borrowings under our
      line of credit at KeyBank and used working capital to fund the balance. We
      negotiated the purchase price with, and acquired the property from, CMD Realty
      Investment Fund II, L.P. 9101 LBJ Freeway, which was built in 1985, includes
      among its major tenants Compass Insurance and Air Liquide. At the time of the
      acquisition, the aggregate annual base rent for all tenants in 9101 LBJ Freeway
      was approximately $1,314,790.




3


On
      November 22, 2005, we purchased Uptown Tower (formerly know as Amberton Tower),
      an office building containing approximately 254,000 rentable square feet located
      on an approximately 2.98-acre tract of land in Dallas, Texas. The total purchase
      price of Uptown Tower was $16.95 million, plus closing costs. We funded $15.95
      million of the purchase price with borrowings under our line of credit at
      KeyBank and used working capital to fund the balance. We negotiated the purchase
      price with, and acquired the property from, Transwestern Amberton Tower, L.P.
      Uptown Tower, which was built in 1982, includes among its major tenants
      Brockette/Davis/Drake and US Oncology. At the time of the acquisition, the
      aggregate annual base rent for all tenants in Uptown Tower was approximately
      $3,012,959.




***Investment
      Objectives and Criteria***




The
      following is an overview of our current policies with respect to investments,
      borrowing, affiliate transactions, equity capital and certain other activities.
      All of these policies have been established in our governance documents or
      by
      our management and may be amended or revised from time to time (and at any
      time)
      by our management or trustees without a vote or the approval of our
      shareholders. We cannot assure you that our policies or investment objectives
      will be attained or that the value of our common shares will not
      decrease.




*General*




We
      invest
      in commercial real estate properties, primarily community retail centers and
      office-warehouse properties. Our primary business and investment objectives
      are:




·
            to
                maximize cash dividends paid to our
                shareholders;




·
            to
                obtain and preserve long-term capital appreciation in the value of
                our
                properties to be realized upon our ultimate sale of such properties;
                and




·
            to
                provide our shareholders with liquidity for their investment in us
                by
                listing our shares on the New York Stock Exchange, the American Stock
                Exchange, the Nasdaq National Market or another national exchange
                within
                twelve years after the completion of the Public
                Offering.




In
      addition, to the extent that our advisor determines that it is advantageous
      to
      make or invest in mortgage loans, we will also seek to obtain fixed income
      through the receipt of payments on mortgage loans. Our management intends to
      limit such mortgage investments to 15% of our total investment portfolio unless
      prevailing economic or portfolio circumstances require otherwise. We cannot
      assure you that we will attain these objectives or that our capital will not
      decrease. Pursuant to our advisory agreement, the Management Company will be
      indemnified for claims relating to any failure to succeed in achieving these
      objectives.




We
      may
      not materially change our investment objectives, except upon approval of
      shareholders holding a majority of our common shares of beneficial interest.
      Our
      independent trustees will review our investment objectives at least annually
      to
      determine that our policies are in the best interests of our shareholders.
      Decisions relating to the purchase or sale of our investments will be made
      by
      the Management Company, as our advisor, subject to approval by our board of
      trustees, including a majority of our independent trustees.




*Acquisition
      and Investment Policies*




We
      intend
      to continue to acquire community retail centers, office-warehouse and office
      properties for long-term ownership and for the purpose of producing income.
      We
      seek to acquire and own properties that generally have premier business
      addresses in especially desirable locations. Such properties generally are
      of
      high quality construction, offer personalized tenant amenities and attract
      higher quality tenants. We generally intend to hold our properties for an
      extended period of time, which we believe is optimal to enable us to capitalize
      on the potential for increased income and capital appreciation of our
      properties. However, economic or market conditions may influence us to hold
      our
      investments for different periods of time. Also, management believes that
      targeting this type of property for investment will enhance our ability to
      enter
      into joint ventures with other institutional real property investors (such
      as
      pension funds, public REITs and other large institutional real estate
      investors), thus allowing
      greater diversity of investment by increasing the number of properties in which
      we invest. Our management also believes that by owning a portfolio consisting
      largely of the diverse types of properties described above we enhance our
      liquidity opportunities for investors by making the sale of individual
      properties, multiple properties or our investment portfolio as a whole
      attractive to institutional investors and by making a possible listing of our
      shares attractive to the public investment community.




4




We
      acquire properties primarily for income. Although we have historically invested
      in properties that have been constructed and have operating histories, we may
      in
      the future become more active in investing in raw land or in properties that
      are
      under development or construction where we see such properties having the
      potential for greater returns than those attainable from acquired properties.
      To
      the extent feasible, we will invest in a portfolio of properties that will
      satisfy our investment objectives of maximizing cash available for payment
      of
      dividends, preserving our capital and realizing capital appreciation upon the
      ultimate sale of our properties.




Our
      policy is to continue to acquire properties in the Houston, Dallas and San
      Antonio, Texas metropolitan areas where we believe opportunities exist for
      acceptable investment returns. We anticipate that we will continue to focus
      on
      properties in the $1 million to $10 million-value range. We typically lease
      our
      properties to a wide variety of tenants on a “triple-net” basis, which means
      that the tenant is responsible for paying the cost of all maintenance and minor
      repairs, property taxes and insurance relating to its leased space. Our
      management believes that its extensive experience, market knowledge and network
      of industry contacts in the Houston, Dallas and San Antonio metropolitan areas,
      and the limitation of our investments to this area, gives us a competitive
      advantage and enhances our ability to identify and capitalize on
      acquisitions.




Although
      we currently intend to invest in or develop community retail centers and other
      office-warehouse and office properties in the Houston, Dallas and San Antonio
      metropolitan areas, our future investment or redevelopment activities are not
      limited to any geographic area or to a specified property type or use. We may
      invest in any geographic area and we may invest in other commercial properties
      such as manufacturing facilities, and warehouse and distribution facilities
      in
      order to reduce overall portfolio risk, enhance overall portfolio returns,
      or
      respond to changes in the real estate market if our advisor determines that
      it
      would be advantageous to do so.




Although
      we are not limited as to the form our investments may take, all of our
      properties are owned by the Operating Partnership or by a wholly owned
      subsidiary of the Operating Partnership in fee simple title. We expect to
      continue to pursue our investment objectives through the direct ownership of
      properties. However, in the future, we may also participate with other entities
      (including non-affiliated entities) in property ownership, through joint
      ventures, limited liability companies, partnership, co-tenancies or other types
      of common ownership. We presently have no plans to own any property jointly
      with
      another entity or entities. In addition, we may purchase properties and lease
      them back to the sellers of such properties. While we will use our best efforts
      to structure any such sale-leaseback transaction such that the lease will be
      characterized as a “true lease” so that we will be treated as the owner of the
      property for federal income tax purposes, we cannot assure you that the Internal
      Revenue Service will not challenge such characterization. In the event that
      any
      such sale-leaseback transaction is recharacterized as a financing transaction
      for federal income tax purposes, deductions for depreciation and cost recovery
      relating to such property would be disallowed.




*Terms
      of Leases and Tenant Credit Worthiness*




While
      the
      terms and conditions of any lease that we enter into with our tenants may vary
      substantially from those described herein, we expect that a majority of our
      leases will be a form of lease customarily used between landlords and tenants
      in
      the geographic area where the property is located. Such leases generally provide
      for terms of three to five years and require the tenant to pay a pro rata share
      of building expenses. Under such typical leases, the landlord is directly
      responsible for all real estate taxes, sales and use taxes, special assessments,
      utilities, insurance and building repairs, and other building operation and
      management costs.




5


*Borrowing
      Policies*




Our
      organizational and governance documents generally limit the maximum amount
      of
      indebtedness that we may incur to 300% of our net assets as of the date of
      any
      borrowing. Notwithstanding the foregoing, we may exceed such borrowing limits
      if
      any excess in borrowing over such 300% level is approved by a majority of our
      independent trustees and disclosed to our shareholders in a subsequent quarterly
      report. Further, we do not have a policy limiting the amount of indebtedness
      we
      may incur or the amount of mortgages which may be placed on any one piece of
      property. As a general policy, however, we intend to maintain a ratio of total
      liabilities to total assets that is less than 50%. As of December 31, 2005,
      we
      had a ratio of total liabilities to total assets of 48.7%. However, we may
      not
      be able to continue to achieve this objective.




The
      Management Company will cause us to refinance properties during the term of
      a
      loan only in limited circumstances, such as when a decline in interest rates
      makes it beneficial to prepay an existing mortgage, when an existing mortgage
      matures or if an attractive investment becomes available and the proceeds from
      the refinancing can be used to purchase such investment. The benefits of the
      refinancing may include an increased cash flow resulting from reduced debt
      service requirements, an increase in dividend distributions from proceeds of
      the
      refinancing, and an increase in property ownership if refinancing proceeds
      are
      reinvested in real estate.




We
      may
      not borrow money from any of our trustees or from the Management Company and
      its
      affiliates unless such loan is approved by a majority of the trustees, including
      a majority of the independent trustees, not otherwise interested in the
      transaction, as fair, competitive and commercially reasonable and no less
      favorable to us than a comparable loan between unaffiliated
      parties.




*Disposition
      Policies*




We
      intend
      to hold each property that we acquire for an extended period, and we have no
      current intention to dispose of any of our properties. However, circumstances
      may arise that might compel us to sell certain properties. We might sell
      property if, in the judgment of the Management Company, the value of the
      property is expected to decline substantially, an opportunity has arisen to
      improve other properties that have better long-term prospects for appreciation,
      we can increase cash flow through the disposition of the property and
      reinvestment of the net proceeds, or the sale of the property is otherwise
      in
      our best interests. We generally intend to hold our investments long-term;
      however, economic or market conditions may influence us to hold our investments
      for different periods of time. The determination of whether a particular
      property should be sold or otherwise disposed of will be made after
      consideration of relevant factors, including prevailing economic conditions,
      with a view to achieving maximum capital appreciation. The selling price of
      a
      leased property will be determined in large part by the amount of rent payable
      by the tenants.




Pursuant
      to our Declaration of Trust, if our shares are not listed for trading on the
      New
      York Stock Exchange, the American Stock Exchange, the Nasdaq National Market
      or
      another national exchange within twelve years of the termination of the Public
      Offering, unless such date is extended by the majority vote of both our board
      of
      trustees and our independent trustees, we will be required to begin the sale
      of
      all of our properties and to distribute to our shareholders the net sale
      proceeds resulting from our liquidation. If at any time after twelve years
      of
      the termination of the Public Offering we are not in the process of either
      (i)
      listing our shares for trading on a national securities exchange or including
      such shares for quotation on the Nasdaq Stock Market or (ii) liquidating our
      assets, investors holding a majority of our shares may vote to require our
      liquidation. Depending upon then prevailing market conditions, it is our
      intention to begin to consider the process of listing or liquidation prior
      to
      the twelfth anniversary of the termination of the Public Offering. In making
      the
      decision to apply for listing of our shares, the trustees will try to determine
      whether listing our shares or liquidating our assets will result in greater
      value for our shareholders. The circumstances, if any, under which the trustees
      will agree to list our shares cannot be determined at this time. Even if our
      shares are not listed or included for quotation, we are under no obligation
      to
      actually sell our portfolio within this period since the precise timing will
      depend on real estate and financial markets, economic conditions of the areas
      in
      which the properties are located and federal income tax effects on shareholders
      that may prevail in the future. We may not be able to liquidate our assets.
      We
      will continue in existence until all properties are sold and our other assets
      are liquidated.




6


*Securities
      of or Interests in Persons Primarily Engaged in Real Estate Activities and
      Other
      Issuers*




Consistent
      with the requirements necessary to maintain our qualification as a REIT, we
      may
      acquire securities of entities engaged in real estate activities or securities
      of other issuers, including for the purpose of exercising control over such
      entities. We may acquire all or substantially all of the securities or assets
      of
      REITs or similar entities where such investments would be consistent with our
      investment policies. We anticipate that we will only acquire securities or
      other
      interests in issuers engaged in commercial real estate activities involving
      retail, office or office-warehouse properties. We may also invest in entities
      owning undeveloped acreage. Neither our Declaration of Trust nor our bylaws
      place any limit or restriction on the percentage of our assets that may be
      invested in securities of or interests in other issuers. The governance
      documents of the Operating Partnership also do not contain any such
      restrictions.




We
      may
      also invest in limited partnership and other ownership interests in entities
      that own real property. We expect that we may make such investments when we
      consider it more efficient to acquire an entity owning such real property rather
      than to acquire the properties directly. We also may acquire less than all
      of
      the ownership interests of such entities if we determine that such interests
      are
      undervalued and that a liquidation event in respect of such interests are
      expected within the investment holding periods consistent with that for our
      direct property investments.




Other
      than our interest in the Operating Partnership, we currently do not own any
      securities of other entities. We do not presently intend to acquire securities
      of any non-affiliated entities.




*Equity
      Capital*




If
      our
      trustees determine that it is advisable and in our best interests to raise
      additional equity capital, they have the authority, without shareholder
      approval, to authorize us to issue additional common shares or preferred shares
      of beneficial interests. Additionally, our trustees could cause the Operating
      Partnership to issue units, which are convertible into our common shares (“OP
      Units”). Subject to limitations contained in the organizational and governance
      documents of the Operating Partnership and us, the trustees could issue, or
      cause to be issued, such securities in any manner (and on such terms and for
      such consideration) they deem appropriate, including in exchange for real
      estate. We have issued securities in exchange for real estate and we expect
      to
      continue to do so in the future. Existing shareholders have no preemptive right
      to purchase such shares in any offering, and any such offering might cause
      dilution of an existing shareholder’s investment in the Company.




***Environmental
      Matters***




All
      real
      property and the operations conducted on real property are subject to federal,
      state and local laws and regulations relating to environmental protection and
      human health and safety. These laws and regulations generally govern wastewater
      discharges, air emissions, the operation and removal of underground and
      above-ground storage tanks, the use, storage, treatment, transportation and
      disposal of solid and hazardous materials, and the remediation of contamination
      associated with disposals. Under these laws and regulations, a current or
      previous owner or operator of real property may be liable for the cost of
      removal or remediation of hazardous or toxic substances on, under or in such
      property. Some of these laws and regulations may impose joint and several
      liability on tenants, owners or operators for the costs of investigation or
      remediation of contaminated properties, regardless of fault or the legality
      of
      the original disposal and whether or not the owner or operator knew of, or
      was
      responsible for, the presence of such hazardous or toxic substances.




Environmental
      laws also may impose restrictions on the manner in which property may be used
      or
      businesses may be operated, and complying with these restrictions may require
      substantial expenditures. Environmental laws provide for sanctions in the event
      of noncompliance and may be enforced by governmental agencies or, in certain
      circumstances, by private parties. Certain environmental laws and common law
      principles could be used to impose liability for release of and exposure to
      hazardous substances, including asbestos-containing materials into the air,
      and
      third parties may seek recovery from owners or operators of real properties
      for
      personal injury or property damage associated with exposure to released
      hazardous substances. Additionally, concern about indoor exposure to mold has
      been increasing as exposure to mold may cause a variety of adverse health
      effects and




7


symptoms,
      including allergic or other reactions. As a result, the presence of significant
      mold at any of our properties could require us to undertake a costly remediation
      program to contain or remove the mold from the affected property, and could
      expose us to liability to our tenants, their employees and others. The cost
      of
      defending against claims of liability, of compliance with environmental
      regulatory requirements, of remediating any contaminated property, or of paying
      personal injury claims could materially adversely affect our business, assets
      or
      results of operations and, consequently, amounts available for payments of
      dividends to the Company’s shareholders. In addition, the presence of these
      substances, or the failure to properly remediate these substances, may adversely
      affect our ability to sell or rent such property or to use the property as
      collateral for future borrowing.




Some
      of
      these laws and regulations have been amended so as to require compliance with
      new or more stringent standards as of future dates. Compliance with new or
      more
      stringent laws or regulations or stricter interpretation of existing laws may
      require material expenditures by us. We cannot assure you that future laws,
      ordinances or regulations will not impose any material environmental liability,
      or that the current environmental condition of our properties will not be
      affected by the operations of the tenants, by the existing condition of the
      land, by operations in the vicinity of the properties, such as the presence
      of
      underground storage tanks, or by the activities of unrelated third parties.
      In
      addition, there are various local, state and federal fire, health, life-safety
      and similar regulations that we may be required to comply with, and which may
      subject us to liability in the form of fines or damages for
      noncompliance.




We
      will
      not purchase any property unless and until we obtain what is generally referred
      to as a “Phase I” environmental site assessment and are generally satisfied with
      the environmental status of the property. A Phase I environmental site
      assessment basically consists of a visual survey of the building and the
      property in an attempt to identify areas of potential environmental concerns,
      visually observing neighboring properties to assess surface conditions or
      activities that may have an adverse environmental impact on the property, and
      contacting local governmental agency personnel and performing a regulatory
      agency file search in an attempt to determine any known environmental concerns
      in the immediate vicinity of the property. A Phase I environmental site
      assessment does not generally include any sampling or testing of soil,
      groundwater or building materials from the property. Certain properties that
      we
      have acquired contain, or contained, dry-cleaning establishments utilizing
      solvents. Where believed to be warranted, samplings of building materials or
      subsurface investigations were undertaken with respect to these and other
      properties. To date, the costs associated with these investigations and any
      subsequent remedial measures taken have not been material to the
      Company.




We
      believe that our properties are in compliance in all material respects with
      all
      federal, state and local ordinances and regulations regarding the handling,
      discharge and emission of hazardous or toxic substances. We have not been
      notified by any governmental authority, and are not otherwise aware, of any
      material noncompliance, liability or claim relating to hazardous or toxic
      substances in connection with any of our present or former properties. We have
      not recorded in our financial statements any material liability in connection
      with environmental matters. Nevertheless, it is possible that the environmental
      assessments we have obtained and/or reviewed have not revealed all potential
      environmental liabilities. It is also possible that subsequent environmental
      assessments or investigations will identify material contamination, that adverse
      environmental conditions have arisen subsequent to the performance of the
      environmental assessments, or that there are material environmental liabilities
      of which management is unaware.




***Competition***




We
      may
      experience competition for tenants from owners and managers of similar projects,
      which may include partnerships or other entities managed by the Management
      Company. We will experience competition in the acquisition of real estate and
      the making of mortgages from similar companies with access to greater resources
      than those available to us. At the time we elect to dispose of our properties,
      we will also be in competition with sellers of similar properties.




8


***Employees***




Although
      we have executive officers who have management responsibilities with respect
      to
      the Company, we do not have any direct employees. The employees of the
      Management Company and other affiliates of the Company perform a full range
      of
      real estate services for the Company, including acquisitions, property
      management, accounting, asset management, wholesale brokerage and investor
      relations. As of December 31, 2005, the Management Company had 95 full time
      and
      one part time employees, none of whom was represented by a union.




***Economic
      Dependency***




We
      are
      dependent on our affiliates, including the Management Company, for services
      that
      are essential to the Company, including the sale of our common shares, asset
      acquisition decisions, property management and other general administrative
      responsibilities. In the event that these companies were unable to provide
      these
      services to us, or if we were to terminate management or other agreements with
      these companies, we would be required to obtain such services from other
      sources.




***Financial
      Information About Segments***




Management
      does not differentiate by property types and because no individual property
      is
      so significant as to be a separate segment, the Company does not present segment
      information.




***Web
      Site Address***




The
      Company electronically files its Annual Report on Form 10-K, quarterly reports
      on Form 10-Q, current reports on Form 8-K and all amendments to those reports
      with the Securities and Exchange Commission (“SEC”). Copies of the Company’s
      filings with the SEC may be obtained from the Company’s website at
      www.hartmanmgmt.com or at the SEC’s website, at http://www.sec.gov. Access to
      these filings is free of charge. The Company’s code of ethics and certain other
      corporate governance documentation may also be obtained from the Company’s
      website at www.hartmanmgmt.com. The information on our web site is not, and
      should not be considered to be, a part of this report.




**Item1A.**
              **Risk
                  Factors.**




Some
      or
      all of the following factors may affect our properties, which could adversely
      affect our operations and ability to pay dividends to shareholders. The Company
      and its performance will be subject to additional risks as have been listed
      in
      the Company’s Registration Statement on Form S-11, as amended, as previously
      filed with the Securities and Exchange Commission.




***There
      can be no assurance that we will be able to pay or maintain cash dividends
      or
      that dividends will increase over time.***




There
      are
      many factors that can affect the availability and timing of cash dividends
      we
      pay to shareholders. Such factors, include general economic conditions, real
      estate market conditions, rental and occupancy rates at our properties, our
      ability to buy properties as offering proceeds become available, the yields
      on
      securities of other real estate programs that we invest in, and our operating
      expense levels, as well as many other variables. We can give no assurance that
      we will be able to pay or maintain dividends or that dividends will increase
      over time. We also can give no assurance that rents from our properties will
      increase, that the securities we buy will increase in value or provide constant
      or increased dividends over time, or that future acquisitions of real
      properties, mortgage loans or our investments in securities will increase our
      cash available for dividends to shareholders. Our actual results may differ
      significantly from the assumptions used by our board of trustees in establishing
      the dividend rate to shareholders.




9


***If
      we experience decreased cash flows, we may need to use other sources of cash
      to
      fund dividends or we may be unable to pay dividends.***




Actual
      cash available for dividends may vary substantially from estimates. If our
      cash
      dividends exceed the amount of cash available for dividends, we may need to
      fund
      the shortage out of working capital, borrowings under our lines of credit or
      out
      of proceeds of our Public Offering, which would reduce the amount of proceeds
      available for real estate investments. For the year ended December 31, 2005,
      our
      total distributions exceeded our net cash flow from operating activities by
      $605,263. We funded this shortage with cash from borrowings under our KeyBank
      credit facility. Should cash flows continue not to cover our total
      distributions, our ability to pay dividends at the current rate, or at all,
      may
      be adversely affected.




***We
      may need to incur additional borrowings to meet REIT minimum distribution
      requirements.***




In
      order
      to maintain our qualification as a REIT, we are required to distribute to our
      shareholders at least 90% of our annual net taxable income (excluding any net
      capital gain). In addition, the Internal Revenue Code will subject us to a
      4%
      nondeductible excise tax on the amount, if any, by which certain distributions
      paid by us with respect to any calendar year are less than the sum of (i) 85%
      of
      our ordinary income for that year, (ii) 95% of our capital gain net income
      for
      that year and (iii) 100% of our undistributed taxable income from prior years.
      Although we intend to pay dividends to our shareholders in a manner that allows
      us to meet the foregoing distribution requirement and avoid this 4% excise
      tax,
      we cannot assure you that we will always be able to do so.




Our
      income consists almost solely of our share of the Operating Partnership’s
      income, and the cash available for distribution by us to our shareholders
      consists of our share of cash distributions made by the Operating Partnership.
      Because we are the sole general partner of the Operating Partnership, our
      trustees determine the amount of any distributions made by it. The trustees
      may
      consider a number of factors in making such distributions,
      including:




·
            the
                amount of the cash available for
                distribution;




·
            the
                Operating Partnership’s
                financial
                condition;




·
            the
                Operating Partnership’s capital expenditure requirements;
                and




·
            our
                annual distribution requirements necessary to maintain our qualification
                as a REIT.




Differences
      in timing between the actual receipt of income and actual payment of deductible
      expenses and the inclusion of such income and deduction of such expenses when
      determining our taxable income, as well as the effect of nondeductible capital
      expenditures and the creation of reserves or required debt amortization
      payments, could require us to borrow funds on a short-term or long-term basis
      to
      meet the REIT distribution requirements and to avoid the 4% excise tax described
      above. In such circumstances, we might need to borrow funds to avoid adverse
      tax
      consequences even if our management believes that the then prevailing market
      conditions generally are not favorable for such borrowings or that such
      borrowings would not be advisable in the absence of such tax
      consideration.




***We
      may incur mortgage indebtedness and other borrowings, which may increase our
      business risks.***




If
      it is
      determined to be in our best interests, we may, in some instances, acquire
      real
      properties by using either existing financing or borrowing new funds. In
      addition, we may incur or increase our mortgage debt by obtaining loans secured
      by some or all of our real properties to obtain funds to acquire additional
      real
      properties. We may also borrow funds if necessary to satisfy the requirement
      that we distribute to shareholders as dividends at least 90% of our annual
      REIT
      taxable income, or otherwise as is necessary or advisable to assure that we
      maintain our qualification as a REIT for federal income tax purposes.




10


We
      may
      incur mortgage debt on a particular real property if we believe the property’s
      projected cash flow is sufficient to service the mortgage debt. However, if
      there is a shortfall in cash flow, then the amount available for dividends
      to
      shareholders may be affected. In addition, incurring mortgage debt increases
      the
      risk of loss because defaults on indebtedness secured by a property may result
      in foreclosure actions initiated by lenders and our loss of the property
      securing the loan that is in default. For tax purposes, a foreclosure of any
      of
      our properties would be treated as a sale of the property for a purchase price
      equal to the outstanding balance of the debt secured by the mortgage. If the
      outstanding balance of the debt secured by the mortgage exceeds our tax basis
      in
      the property, we would recognize taxable income on foreclosure, but would not
      receive any cash proceeds. We may give full or partial guarantees to lenders
      of
      mortgage debt to the entities that own our properties. When we give a guaranty
      on behalf of an entity that owns one of our properties, we will be responsible
      to the lender for satisfaction of the debt if it is not paid by such entity.
      If
      any mortgages contain cross-collateralization or cross-default provisions,
      there
      is a risk that more than one real property may be affected by a default. If
      any
      of our properties are foreclosed upon due to a default, our ability to pay
      cash
      dividends to our shareholders will be adversely affected.




***If
      we failed to qualify as a REIT, our operations and dividends to shareholders
      would be adversely impacted.***




We
      intend
      to continue to operate so as to qualify as a REIT under the Internal Revenue
      Code. A REIT generally is not taxed at the corporate level on income it
      currently distributes to its shareholders. Qualification as a REIT involves
      the
      application of highly technical and complex rules for which there are only
      limited judicial or administrative interpretations. The determination of various
      factual matters and circumstances not entirely within our control may affect
      our
      ability to continue to qualify as a REIT. In addition, new legislation, new
      regulations, administrative interpretations or court decisions could
      significantly change the tax laws with respect to qualification as a REIT or
      the
      federal income tax consequences of such qualification.




If
      we
      were to fail to qualify as a REIT in any taxable year:




·
            we
                would not be allowed to deduct our distributions to shareholders
                when
                computing our taxable income;




·
            we
                would be subject to federal income tax (including any applicable
                alternative minimum tax) on our taxable income at regular corporate
                rates;




·
            we
                would be disqualified from being taxed as a REIT for the four taxable
                years following the year during which qualification was lost, unless
                entitled to relief under certain statutory provisions;




·
            our
                cash available for dividends would be reduced and we would have less
                cash
                to pay dividends to shareholders;
                and




·
            we
                may be required to borrow additional funds or sell some of our assets
                in
                order to pay corporate tax obligations we may incur as a result of
                our
                disqualification.




***Our
      debt agreements impose limits on our operations and our ability to make
      distributions to our shareholders.***





The
      agreements relating to the debt we incur contain financial and operating
      covenants that may limit our ability to make distributions or other payments
      to
      our shareholders. Our existing credit facilities contain financial and operating
      covenants, including:





·
            net
                worth requirements;




·
            debt
                service coverage of at least 1.5 to
                1.0;




·
            loan-to-value
                ratio of the borrowing base pool to total funded loan balance of
                at least
                1.67 to 1.00;




·
            total
                debt not to exceed 60% of fair market value of the real estate
                assets;




11







·
            the
                ratio of secured debt to fair market value of real estate assets
                not to
                exceed 40%;




·
            interest
                coverage ratio of at least 2.0 to
                1.0;




·
            we
                must hedge certain amounts of variable interest rate
                debt;




·
            maintenance
                of specific levels of insurance;
                and




·
            limitations
                on our ability to make distributions or other payments to our
                shareholders, sell assets or engage in mergers, consolidation or
                make
                certain acquisitions.




Failure
      to comply with these covenants could result from, among other things, changes
      in
      our results of operations, incurrence of debt or changes in general economic
      conditions. These covenants may restrict our ability to fund our operations
      and
      conduct our business. Failure to comply with any of these covenants could result
      in a default under our credit agreement or other debt agreements we may enter
      into in the future. A default could cause one or more of our lenders to
      accelerate the timing of payments which could force us to dispose of one or
      more
      of our properties, possibly on disadvantageous terms.  As of December 31,
      2005, we were in violation of one such covenant.  While we are currently in
      discussions with the lenders to obtain a waiver, there can be no assurance
      that
      we will be successful in obtaining such waiver.  As this violation
      constitutes an event of default, our lenders have the right to accelerate
      payment.  For more discussion, see *Management’s
      Discussion and
      Analysis of Financial Condition and Results of Operations - Liquidity and
      Capital Resources*.  Similar violations of our loan covenants may occur
      in the future.





***Because
      of the lack of geographic diversification of our portfolio, an economic downturn
      in the Houston, Dallas or San Antonio, Texas metropolitan areas could adversely
      impact our operations and ability to pay dividends to our
      shareholders.***




All
      of
      our assets and revenues are currently derived from properties located in the
      Houston, Dallas and San Antonio, Texas metropolitan areas. Our results of
      operation are directly contingent on our ability to attract financially sound
      commercial tenants. If Houston, Dallas or San Antonio experiences a significant
      economic downturn, our ability to locate and/or retain financially sound tenants
      may decrease. Likewise, we may be required to lower our rental rates to attract
      desirable tenants in such an environment. Consequently, because of the lack
      of
      geographic diversity among our current assets, if Houston, Dallas or San Antonio
      experiences an economic downturn, our operations and ability to pay dividends
      to
      our shareholders could be adversely impacted.




***There
      is no public trading market for our shares of common stock; therefore, it will
      be difficult for shareholders to sell their shares.***




There
      is
      no current public market for our shares of common stock. Our charter also
      imposes restrictions on the ownership of common shares that will apply to
      potential transferees that may inhibit shareholders’ ability to sell their
      shares. Moreover, except for requests for redemptions by the estate, heir or
      beneficiary of a deceased shareholder, our board of trustees may reject any
      request for redemption of shares or amend, suspend or terminate our share
      redemption program at any time. Therefore, it will be difficult to sell our
      shares promptly or at all, and the seller may have to sell them at a substantial
      discount.




***We
      have acquired a majority of our properties from entities controlled by
      Mr. Hartman.***




We
      acquired 28 of the 37 properties we owned as of December 31, 2005 from entities
      controlled by Mr. Hartman. We acquired these properties by either paying cash,
      issuing our shares or issuing OP Units. No third parties were retained to
      represent or advise these selling entities or us, and the transactions were
      not
      conducted on an “arm’s-length” basis.




Mr.
      Hartman had interests that differed from, and in certain cases conflicted with,
      his co-investors in these entities. Mr. Hartman received the following as a
      result of such transactions:




·
            897,117.19
                OP Units, as adjusted to reflect the recapitalization, in consideration
                of
                Mr. Hartman’s general partner interest in the selling
                entities;




12







·
            the
                ability to limit his future exposure to general partner liability
                as a
                result of Mr. Hartman no longer serving as the general partner to
                certain
                of the selling entities; and




·
            the
                repayment of debt encumbering various of our properties that was
                personally guaranteed by Mr.
                Hartman.




As
      of
      December 31, 2005, an affiliate of Mr. Hartman owed us approximately $3.6
      million in connection with properties contributed to the Operating Partnership
      by such affiliate.




Mr.
      Hartman might not have been able to negotiate all of these benefits if the
      transactions were negotiated at arm’s length. Further, Mr. Hartman (neither
      personally nor in his capacity as a general partner) did not make any
      representations or warranties in regard to the properties or the selling
      entities in the operative documents executed in order to consummate the
      transactions. Consequently, we essentially acquired the properties on an “as is”
basis. Therefore, we will bear the risk associated with any characteristics
      or
      deficiencies of our properties unknown at the closing of the acquisitions that
      may affect the valuation or revenue potential of the properties.




***Approximately
      29.2% of our gross leasable area is subject to leases that expire during the
      two
      years ended December 31, 2007.***




As
      of
      December 31, 2005, 29.2% of the aggregate gross leasable area of our properties
      is subject to leases that expire prior to December 31, 2007. We are subject
      to
      the risk that:




·
            tenants
                will not renew such leases;




·
            we
                will not be able to re-lease the space subject to such leases;
                and




·
            the
                terms of any renewal or re-lease will not be as favorable as current
                leases.




If
      any of
      these risks materialize, our cash flow and ability to pay dividends could be
      adversely affected.




***The
      value of investments in our common shares will be directly affected by general
      economic and regulatory factors we cannot control or
      predict.***




We
      only
      own commercial real estate. Investments in real estate typically involve a
      high
      level of risk as the result of factors we cannot control or predict. One of
      the
      risks of investing in real estate is the possibility that our properties will
      not generate income sufficient to meet operating expenses or will generate
      income and capital appreciation, if any, at rates lower than those anticipated
      or available through investments in comparable real estate or other investments.
      The following factors may affect income from properties and yields from
      investments in properties and are generally outside of our control:




·
            conditions
                in financial markets;




·
            over-building
                in our markets;




·
            a
                reduction in rental income as the result of the inability to maintain
                occupancy levels;




·
            adverse
                changes in applicable tax, real estate, environmental or zoning
                laws;




·
            changes
                in general economic conditions;




·
            a
                taking of any of our properties by eminent
                domain;




·
            adverse
                local conditions (such as changes in real estate zoning laws that
                may
                reduce the desirability of real estate in the area);




13







·
            acts
                of God, such as earthquakes or floods and other uninsured
                losses;




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




·
            changes
                in interest rates and availability of permanent mortgage funds, which
                may
                render the sale of a property difficult or unattractive; and




·
            periods
                of high interest rates and tight money
                supply.




Some
      or
      all of the foregoing factors may affect our properties, which could adversely
      affect our operations and ability to pay dividends to shareholders.




***Discovery
      of previously undetected environmentally hazardous conditions may adversely
      affect our operating results.***




Under
      various federal, state and local environmental laws, ordinances and regulations,
      a current or previous owner or operator of real property may be liable for
      the
      cost of removal or remediation of hazardous or toxic substances on, under or
      in
      such property. The costs of removal or remediation could be substantial. Such
      laws often impose liability whether or not the owner or operator knew of, or
      was
      responsible for, the presence of such hazardous or toxic substances.
      Environmental laws also may impose restrictions on the manner in which property
      may be used or businesses may be operated, and these restrictions may require
      substantial expenditures. Environmental laws provide for sanctions in the event
      of noncompliance and may be enforced by governmental agencies or, in certain
      circumstances, by private parties. Certain environmental laws and common law
      principles could be used to impose liability for release of and exposure to
      hazardous substances, including asbestos containing materials into the air,
      and
      third parties may seek recovery from owners or operators of real properties
      for
      personal injury or property damage associated with exposure to released
      hazardous substances. The cost of defending against claims of liability, of
      compliance with environmental regulatory requirements, of remediating any
      contaminated property, or of paying personal injury claims could materially
      adversely affect our business, assets or results of operations and,
      consequently, amounts available for payments of dividends to you.




**Item2.**
              **Properties.**




On
      December 31, 2005, the Company owned the 37 properties discussed below. All
      of
      the Company’s properties are located in the Houston, Dallas and San Antonio,
      Texas metropolitan areas. The Company’s properties primarily consist of retail
      centers and each is designed to meet the needs of surrounding local communities.
      A nationally and/or regionally recognized tenant typically anchors each of
      the
      Company’s properties. In the aggregate, the Company’s properties contain
      approximately 3,121,000 square feet of gross leasable area. No individual
      property in the Company’s portfolio currently accounts for more than 10% of the
      Company’s aggregate leasable area.




As
      of
      December 31, 2005, the Company’s properties were approximately 82.3% leased.
      Anchor space at the properties, representing approximately 7.4% of total
      leasable area, was 100.0% leased, while non-anchor space, accounting for the
      remaining 92.6% balance, was approximately 80.8% leased. A substantial number
      of
      the Company’s tenants are local tenants. Indeed, 73.4% of the Company’s tenants
      are local tenants and 15.1% and 11.5% of the Company’s tenants are national and
      regional tenants, respectively. The Company defines:




·
            national
                tenants as any tenant that operates in at least four metropolitan
                areas
                located in more than one region (i.e. Northwest, Midwest, Southwest
                or
                Southeast);




·
            regional
                tenants as any tenant that operates in two or more metropolitan areas
                located within the same region; and




·
            local
                tenants as any tenant that operates stores only within the metropolitan
                Houston, Dallas or San Antonio, Texas
                area.




14


Substantially
      all of the Company’s revenues consist of base rents and percentage rents
      received under long-term leases. For the year ended December 31, 2005, total
      rents and other income were $24,888,214 and percentage rents were $-0-.
      Approximately 67.9% of all existing leases provide for annual increases in
      the
      base rental payments with a “step up” rental clause.




The
      following table lists the five properties that generated the most rents during
      the year 2005.




**Property**
            
            **Total
                Rents**
              **Received
                in 2005**
            
            **Percent
                of**
              **Company’s**
              **Total****Rents**
              **Received
                in 2005**Windsor
                Park
            
            $
            2,113,291
            
            
            8.49
            %Corporate
                Park West
            
            
            1,621,269
            
            
            6.51Corporate
                Park Northwest
            
            
            1,523,195
            
            
            6.12Lion
                Square
            
            
            1,379,145
            
            
            5.54SugarPark
                Plaza
            
            
            1,248,845
            
            
            5.01**Total**
            
            $
            7,885,745
            
            
            31.67
            %





As
      of
      December 31, 2005, the Company had no property that accounted for over 10%
      of
      total gross revenue. Uptown Tower, an office building acquired during 2005
      accounts for 10% of the Company’s total fixed assets.




***General
      Physical Attributes***




The
      following table lists, for all properties the Company owned on December 31,
      2005, the year each property was developed or significantly renovated, the
      total
      leasable area of each property, the purchase price the Company paid for such
      property and the anchor or largest tenant at such property.




**Property**
            
            **Year
                Developed/**
              **Renovated**
            
            **Total
                Leasable Area (Sq. Ft.)**
            
            **Purchase
                Price**Bissonnet/Beltway
            
            
            1978
            
            
            29,205
            
            $
            2,361,323Webster
                Point
            
            
            1984
            
            
            26,060
            
            
            1,870,365Centre
                South
            
            
            1974
            
            
            44,543
            
            
            2,077,198Torrey
                Square
            
            
            1983
            
            
            105,766
            
            
            4,952,317Providence
            
            
            1980
            
            
            90,327
            
            
            4,593,668Holly
                Knight
            
            
            1984
            
            
            20,015
            
            
            1,612,801Plaza
                Park
            
            
            1982
            
            
            105,530
            
            
            4,195,116Northwest
                Place II
            
            
            1984
            
            
            27,974
            
            
            1,089,344Lion
                Square
            
            
            1980
            
            
            119,621
            
            
            5,835,108Zeta
                Building
            
            
            1982
            
            
            37,740
            
            
            2,456,589Royal
                Crest
            
            
            1984
            
            
            24,900
            
            
            1,864,065Featherwood
            
            
            1983
            
            
            49,670
            
            
            2,959,309Interstate
                10
            
            
            1980
            
            
            151,000
            
            
            3,908,072Westbelt
                Plaza
            
            
            1978
            
            
            65,619
            
            
            2,733,009Greens
                Road
            
            
            1979
            
            
            20,507
            
            
            1,637,217Town
                Park
            
            
            1978
            
            
            43,526
            
            
            3,760,735Northeast
                Square
            
            
            1984
            
            
            40,525
            
            
            2,572,512Main
                Park
            
            
            1982
            
            
            113,410
            
            
            4,048,837Dairy
                Ashford
            
            
            1981
            
            
            42,902
            
            
            1,437,020South
                Richey
            
            
            1980
            
            
            69,928
            
            
            3,361,887Corporate
                Park Woodland
            
            
            2000
            
            
            99,937
            
            
            6,028,362South
                Shaver
            
            
            1978
            
            
            21,926
            
            
            817,003Kempwood
                Plaza
            
            
            1974
            
            
            112,359
            
            
            2,531,876Bellnott
                Square
            
            
            1982
            
            
            73,930
            
            
            5,792,294Corporate
                Park Northwest
            
            
            1981
            
            
            185,627
            
            
            7,839,539Westgate
            
            
            1984
            
            
            97,225
            
            
            3,448,182Garden
                Oaks
            
            
            1954
            
            
            95,046
            
            
            6,577,782Westchase
            
            
            1978
            
            
            42,924
            
            
            2,173,300Sunridge
            
            
            1979
            
            
            49,359
            
            
            1,461,571Holly
                Hall
            
            
            1980
            
            
            90,000
            
            
            3,123,400Brookhill
            
            
            1979
            
            
            74,757
            
            
            973,264Corporate
                Park West
            
            
            1999
            
            
            175,665
            
            
            13,062,980Windsor
                Park
            
            
            1992
            
            
            192,458
            
            
            13,102,500SugarPark
                Plaza
            
            
            1974
            
            
            95,032
            
            
            8,906,057Woodlake
                Plaza
            
            
            1974
            
            
            106,169
            
            
            5,532,7109101
                LBJ Freeway
            
            
            1985
            
            
            125,874
            
            
            8,093,296Uptown
                Tower
            
            
            1982
            
            
            253,981
            
            
            17,171,486**Total**
            
            
            
            
            
            3,121,037
            
            $
            165,962,094


15


*General
      Economic Attributes*





The
      following table lists certain information that relates to the rents generated
      by
      each property. All of the information listed in this table is as of December
      31,
      2005.




**Property**
            
            **Percent**
              **Leased**
            
            **Total**
              **Annualized**
              **Rents
                Based**
              **on
                Occupancy**
            
            **Effective**
              **Net
                Rent**
              **Per Sq. Ft.**
            
            **Anchor
                or Largest Tenant**
            
            **Lease**
              **Expiration**
              **Date**Bissonnet/Beltway
            
            
            81.9
            %
            $
            423,626
            
            $
            14.51
            
            Lydia
              & Ajibade Owoyemi
            
            9/30/09Webster
                Point
            
            
            72.7
            %
            
            305,098
            
            
            11.71
            
            Houston
              Learning Academy
            
            12/31/06Centre
                South
            
            
            66.8
            %
            
            316,665
            
            
            7.10
            
            Carlos
              Alvarez
            
            10/31/10Torrey
                Square
            
            
            80.2
            %
            
            805,536
            
            
            7.62
            
            99
              Cents Only Stores Texas
            
            9/14/08Providence
            
            
            93.5
            %
            
            938,504
            
            
            10.39
            
            99
              Cents Only Stores Texas
            
            9/9/08Holly
                Knight
            
            
            92.5
            %
            
            315,594
            
            
            15.77
            
            Quick
              Wash Laundry
            
            9/30/09Plaza
                Park
            
            
            67.4
            %
            
            700,331
            
            
            6.64
            
            Pharmedium
              Services
            
            5/31/11Northwest
                Place II
            
            
            61.7
            %
            
            150,494
            
            
            5.38
            
            Terra
              Mar, Inc.
            
            7/31/08Lion
                Square
            
            
            100.0
            %
            
            1,375,471
            
            
            11.50
            
            Bellaire
              Marketplace
            
            9/30/20Zeta
                Building
            
            
            88.1
            %
            
            493,167
            
            
            13.07
            
            Tx
              Retirement & Tax Advisors
            
            5/30/11Royal
                Crest
            
            
            74.9
            %
            
            260,195
            
            
            10.45
            
            Emerald
              Environmental Service
            
            12/31/07Featherwood
            
            
            94.7
            %
            
            839,319
            
            
            16.90
            
            Transwestern
              Publishing
            
            11/30/07Interstate
                10
            
            
            80.3
            %
            
            707,315
            
            
            4.68
            
            River
              Oaks L-M, Inc.
            
            12/31/06Westbelt
                Plaza
            
            
            66.7
            %
            
            396,546
            
            
            6.04
            
            Hartman
              Management, L.P.
            
            M-to-MGreens
                Road
            
            
            72.1
            %
            
            297,327
            
            
            14.50
            
            Celaya
              Meat Market
            
            1/31/12Town
                Park
            
            
            91.3
            %
            
            753,576
            
            
            17.31
            
            Omar's
              Meat Market
            
            12/31/07Northeast
                Square
            
            
            93.7
            %
            
            567,755
            
            
            14.01
            
            Sultan
              Allana/99 Ct Store
            
            11/30/08Main
                Park
            
            
            70.3
            %
            
            510,031
            
            
            4.50
            
            Transport
              Sales Associates
            
            8/31/08Dairy
                Ashford
            
            
            32.1
            %
            
            91,597
            
            
            2.14
            
            Foster
              Wheeler USA Corp
            
            1/31/09South
                Richey
            
            
            68.3
            %
            
            386,061
            
            
            5.52
            
            Kroger
            
            2/28/06Corporate
                Park Woodland
            
            
            86.2
            %
            
            986,915
            
            
            9.88
            
            Carrier
              Sales & Distribution
            
            7/31/08South
                Shaver
            
            
            84.1
            %
            
            263,266
            
            
            12.01
            
            EZ
              Pawn
            
            11/30/07Kempwood
                Plaza
            
            
            73.5
            %
            
            899,397
            
            
            8.00
            
            Dollar
              General
            
            1/31/08Bellnott
                Square
            
            
            95.9
            %
            
            794,649
            
            
            10.75
            
            Kroger
              Food Store #277
            
            7/31/07Corporate
                Park Northwest
            
            
            82.7
            %
            
            1,564,226
            
            
            8.53
            
            Air
              Consulting & Engineering
            
            5/31/08Westgate
            
            
            92.9
            %
            
            683,172
            
            
            7.03
            
            Postmark
              DMS, LLC
            
            2/28/09Garden
                Oaks
            
            
            75.7
            %
            
            877,349
            
            
            9.23
            
            Bally
              Total Fitness
            
            12/31/12Westchase
            
            
            81.9
            %
            
            485,265
            
            
            11.31
            
            Jesus
              Corral
            
            2/28/07Sunridge
            
            
            89.6
            %
            
            488,000
            
            
            9.89
            
            Puro
              Latino, Inc.
            
            5/31/10Holly
                Hall
            
            
            100.0
            %
            
            512,668
            
            
            5.70
            
            The
              Methodist Hospital
            
            12/31/11Brookhill
            
            
            80.7
            %
            
            272,818
            
            
            3.65
            
            T.S.
              Moly-Lubricants
            
            9/30/07Corporate
                Park West
            
            
            74.7
            %
            
            1,573,820
            
            
            8.96
            
            LTC
              Pharmacy Services
            
            5/31/09Windsor
                Park
            
            
            82.3
            %
            
            1,564,945
            
            
            8.13
            
            Sports
              Authority/Home Depot
            
            8/31/15SugarPark
                Plaza
            
            
            100.0
            %
            
            1,238,605
            
            
            13.03
            
            Marshall's
            
            1/31/08Woodlake
                Plaza
            
            
            82.5
            %
            
            1,306,670
            
            
            12.31
            
            Rock
              Solid Images
            
            7/31/099101
                LBJ Freeway
            
            
            90.4
            %
            
            1,463,084
            
            
            11.62
            
            Compass
              Insurance
            
            5/31/07Uptown
                Tower
            
            
            83.3
            %
            
            3,211,264
            
            
            12.64
            
            Brockett
              Davis Drake, Inc.
            
            4/30/11**Total/Average**
            
            
            **82.3**
            **%**
            **$**
            **28,820,321**
            
            **$**
            **9.23**





16





***Lease
      Expirations***




The
      following table lists, on an aggregate basis, all of the scheduled lease
      expirations over the next 10 years.




**Gross
                Leasable Area**
            
            **Annual
                Rental Income****Year**
            
            **Number
                of**
              **Leases**
            
            **Approximate**
              **Square
                Feet**
            
            **Percent
                of Total**
              **Leasable
                Area**
            
            **Amount**
            
            **Percent
                of the**
              **Company’s
                Total**
              **Rental
                Income**2006
            
            
            167
            
            
            472,364
            
            
            15.14
            %
            $
            4,520,536
            
            
            15.69
            %2007
            
            
            138
            
            
            438,984
            
            
            14.07
            
            
            5,061,562
            
            
            17.562008
            
            
            147
            
            
            510,982
            
            
            16.37
            
            
            5,615,586
            
            
            19.482009
            
            
            111
            
            
            360,258
            
            
            11.54
            
            
            4,422,203
            
            
            15.342010
            
            
            67
            
            
            227,590
            
            
            7.29
            
            
            2,716,267
            
            
            9.422011
            
            
            50
            
            
            206,266
            
            
            6.61
            
            
            2,494,173
            
            
            8.652012
            
            
            17
            
            
            75,939
            
            
            2.43
            
            
            933,414
            
            
            3.242013
            
            
            13
            
            
            61,170
            
            
            1.96
            
            
            714,646
            
            
            2.482014
            
            
            10
            
            
            39,968
            
            
            1.28
            
            
            545,526
            
            
            1.892015
            
            
            16
            
            
            99,177
            
            
            3.18
            
            
            1,000,808
            
            
            3.47**Total**
            
            
            **736**
            
            
            **2,492,698**
            
            
            **79.87**
            **%**
            **$**
            **28,024,721**
            
            
            **97.22**
            **%**





***Insurance***




The
      Company believes that it has property and liability insurance with reputable,
      commercially rated companies. The Company also believes that its insurance
      policies contain commercially reasonable deductibles and limits, adequate to
      cover its properties. The Company expects to maintain such insurance coverage
      and to obtain similar coverage with respect to any additional properties the
      Company acquires in the near future. Further, the Company has title insurance
      relating to its properties in an aggregate amount that the Company believes
      to
      be adequate.




***Regulations***




The
      Company’s properties, as well as any other properties that the Company may
      acquire in the future, are subject to various federal, state and local laws,
      ordinances and regulations, including, among other things, zoning regulations,
      land use controls, environmental controls relating to air and water quality,
      noise pollution and indirect environmental impacts such as increased motor
      vehicle activity. The Company believes that it has all permits and approvals
      necessary under current law to operate its properties.




**Item3.**
              **Legal
                  Proceedings.**




The
      nature of the Company’s business exposes it to the risk of lawsuits for damages
      or penalties relating to, among other things, breach of contract and employment
      disputes. The Company is not currently a party to any pending material
      litigation.




**Item4.**
              **Submission
                  of Matters to a Vote of Security
                  Holders.**




None.








17


**PARTII**




**Item5.**
            **Market
                for Registrant’s Common Equity, Related Shareholder Matters and Issuer
                Purchases of Equity
                Securities.**




***Market
      Information***




There
      is
      no established trading market for the Company’s common stock. As of March 30,
      2006, the Company had 9,346,614 shares of common stock outstanding held by
      a
      total of approximately 1,143 shareholders.




***Public
      Offering Proceeds***




The
      Company’s Registration Statement on Form S-11 (SEC File No. 333-111674) was
      declared effective by the SEC on September 15, 2004 with respect to the Public
      Offering described in Item 1 above of up to 10,000,000 shares of the Company’s
      common stock to the public at a price of $10 per share, plus up to 1,000,000
      shares available for sale pursuant to our dividend reinvestment plan, to be
      offered at a price of $9.50 per share, and the Company commenced the Public
      Offering on such date. Post-Effective Amendment No. 1 to the Registration
      Statement was declared effective by the SEC on June 27, 2005 and Post-Effective
      Amendment No. 2 to the Registration Statement was declared effective by the
      SEC
      on March 9, 2006.




The
      10,000,000 shares offered to the public in the Public Offering are being offered
      to investors on a best efforts basis by the dealer manager D.H. Hill Securities,
      LLP, which means that the broker-dealers participating in the offering are
      only
      required to use their best efforts to sell the shares and have no firm
      commitment or obligation to purchase any of the shares.




As
      of
      March 30, 2006, 2,336,468 shares had been issued pursuant to the Public Offering
      with gross offering proceeds received of $23,335,291.




The
      Company’s application of such gross offering proceeds has been as
      follows:




Description
                of Use of Offering Proceeds
            
            Amount
              of
                Proceeds
              So
                UtilizedSelling
                Commissions paid to broker/ dealers not affiliated with D.H. Hill
                Securities , LLP
            
            $
            1,265,955Selling
                Discounts
            
            $
            56,344Dealer
                Manager Fee paid to D.H. Hill Securities , LLP
            
            $
            566,463Offering
                expense reimbursements paid to the Management Company
            
            $
            569,423Acquisition
                Fees paid to the Management Company
            
            $
            455,538Subtotal
            
            $
            2,913,723Net
                Offering Proceeds
            
            $
            20,421,568Repayment
                of Lines of Credit
            
            $
            11,800,000Used
                for Working Capital
            
            $
            8,621,568





Although
      the immediate use of $11,800,000 of proceeds of the offering was the repayment
      of the Company’s lines of credit, and the immediate use of $8,621,568 was for
      working capital, subsequent purchases of real estate assets were accomplished
      by
      re-drawing on the lines of credit and using working capital. Therefore, the
      ultimate use of $11,800,000 and $8,621,568 of offering proceeds may be regarded
      as being the acquisition of real estate assets.


18


***Issuer
      Repurchases***




The
      Company did not repurchase any of its equity securities during the fourth
      quarter of the period covered by this Annual Report on Form 10-K. Our board
      of
      trustees has approved (but delayed the implementation of) a share redemption
      program that would enable shareholders to sell shares to the Company after
      holding them for at least one year under limited circumstances. We will not
      adopt the program until the earlier of (i) the completion of our Public
      Offering, which may last until September 15, 2006 or (ii) receipt by us of
      SEC
      exemptive relief from rules restricting issuer purchases during distributions,
      which relief we may never obtain. Our board of trustees could choose not to
      implement the share redemption program or to amend its provisions without
      shareholder approval.




***Dividends***




In
      order
      to remain qualified as a REIT, the Company is required to distribute at least
      90% of its annual taxable income to the Company’s shareholders. The Company
      currently accrues dividends quarterly and pays such dividends in three monthly
      installments following the end of the quarter and intends to continue doing
      so.
      For a discussion of the Company’s cash flow as compared to dividends, see *Management’s
      Discussion and Analysis of Financial Condition and Results of Operations -
      Liquidity and Capital Resources.*




The
      following table shows the dividends the Company has paid (including the total
      amount paid and the amount paid on a per share basis) for the past two fiscal
      years. The amounts provided in the table give effect to our reorganization
      as a
      Maryland real estate investment trust and the concurrent recapitalization of
      our
      common shares on July 28, 2004.




**Month
                Paid**
            
            **Total
                Amount of**
              **Dividends
                Paid**
            
            **Dividends**
              **Per
                Share**January
                2004
            
            $408,762
            
            $0.0583February
                2004
            
            408,762
            
            0.0583March
                2004
            
            409,253
            
            0.0584April
                2004
            
            408,762
            
            0.0583May
                2004
            
            408,762
            
            0.0583June
                2004
            
            409,253
            
            0.0584July
                2004
            
            408,762
            
            0.0583August
                2004
            
            408,762
            
            0.0583September
                2004
            
            409,253
            
            0.0584October
                2004
            
            408,692
            
            0.0583November
                2004
            
            408,692
            
            0.0583December
                2004
            
            409,392
            
            0.0584January
                2005
            
            408,692
            
            0.0583February
                2005
            
            408,692
            
            0.0583March
                2005
            
            412,897
            
            0.0589April
                2005
            
            412,931
            
            0.0589May
                2005
            
            429,416
            
            0.0589June
                2005
            
            439,453
            
            0.0590July
                2005
            
            445,621
            
            0.0589August
                2005
            
            452,396
            
            0.0589September
                2005
            
            460,581
            
            0.0590October
                2005
            
            467,260
            
            0.0589November
                2005
            
            470,627
            
            0.0589December
                2005
            
            480,737
            
            0.0590January
                2006
            
            489,019
            
            0.0589February
                2006
            
            509,475
            
            0.0589March
                2006
            
            526,966
            
            0.0590Average
                Per Quarter
            
            
            
            0.1648





19


***Dividend
      Reinvestment Plan***




We
      have a
      dividend reinvestment plan, pursuant to which shareholders may elect to have
      dividends from our common shares reinvested in additional common shares. The
      purchase price per share under our dividend reinvestment plan is $9.50.
      Participants are taxed on income attributable to the reinvested dividends.
      We
      may terminate the dividend reinvestment plan in our discretion at any time
      upon
      ten days notice to plan participants.




***Incentive
      Share Plan***




The
      Company has adopted an Employee and Trust Manager Incentive Share Plan (the
      “Incentive Share Plan”) **** to
      (i)
      furnish incentives to individuals chosen to receive share-based awards because
      they are considered capable of improving operations and increasing profits;
      (ii)
      encourage selected persons to accept or continue employment with the Company;
      and (iii) increase the interest of employees and Trustees in the Company’s
      welfare through their participation and influence on the growth in value of
      the
      common shares. The class of eligible persons that can receive grants of
      incentive awards under the Incentive Share Plan consists of key employees,
      directors, non-employee trustees, members of the Management Company and
      consultants as determined by the compensation committee of the Board of
      Trustees. The total number of common shares that may be issued under the
      Incentive Share Plan is an amount of shares equal to 5% of the outstanding
      shares on a fully diluted basis, not to exceed 5,000,000 shares. As of December
      31, 2005, no options or awards to purchase common shares have been granted
      under
      the Incentive Share Plan.




The
      following shares have been authorized for issuance under Incentive Share
      Plan:




**Plan
                Category**
            
            **Number
                of securities to**
              **be
                issued upon exercise**
              **of
                outstanding options,**
              **warrants
                and rights**
            
            **Weighted-average**
              **exercise
                price of**
              **outstanding
                options,**
              **warrants
                and rights**
            
            **Number
                of securities**
              **remaining
                available for**
              **future
                issuance under**
              **equity
                compensation**
              **plans
                (excluding**
              **securities
                reflected in**
              **column
                (a))****(a)**
            
            **(b)**
            
            **(c)****Equity
                compensation**
              **plans
                approved by**
              **security
                holders**
            
            ─
            
            ─
            
            ─**Equity
                compensation**
              **plans
                not approved by**
              **security
                holders**
            
            ─
            
            ─
            
            445,682***Total**
            
            ─
            
            ─
            
            445,682




*****
            **Equals
                5% of the outstanding shares on a fully diluted basis as of December
                31,
                2005, subject to a maximum of 5,000,000
                shares**





20


**Item6.**
            **Selected
                Financial Data.**




The
      following table sets forth selected consolidated financial information for
      the
      Company and should be read in conjunction with “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations” and the Company’s
      audited consolidated financial statements and the notes thereto, both of which
      appear elsewhere in this annual report.




Year
                Ended December 31,(in
                thousands, except per share data)2005
            
            2004
            
            2003
            
            2002
            
            2001**Income
                Statement Data:**Revenues
            
            $
            25,219
            
            $
            23,484
            
            $
            20,973
            
            $
            20,755
            
            $
            11,704Operating
                expenses
            
            
            11,011
            
            
            9,183
            
            
            8,383
            
            
            8,242
            
            
            5,068Interest
            
            
            3,770
            
            
            2,664
            
            
            1,323
            
            
            1,573
            
            
            812Depreciation
                and amortization
            
            
            6,099
            
            
            5,223
            
            
            4,758
            
            
            4,042
            
            
            2,151Total
                expenses
            
            
            20,880
            
            
            17,070
            
            
            14,464
            
            
            13,857
            
            
            8,031Income
                before minority interests
            
            
            4,339
            
            
            6,414
            
            
            6,509
            
            
            6,898
            
            
            3,673Minority
                interest in income
            
            
            (1,891
            )
            
            (2,990
            )
            
            (3,035
            )
            
            (3,193
            )
            
            (1,932
            )Net
                income
            
            $
            2,448
            
            $
            3,424
            
            $
            3,474
            
            $
            3,705
            
            $
            1,741Net
                income per common share
            
            $
            0.310
            
            $
            0.488
            
            $
            0.496
            
            $
            0.529
            
            $
            0.401Weighted
                average shares outstanding
            
            
            7,888
            
            
            7,010
            
            
            7,010
            
            
            7,007
            
            
            4,336**Balance
                Sheet Data:**Real
                estate
            
            $
            153,965
            
            $
            126,547
            
            $
            120,256
            
            $
            109,294
            
            $
            66,269Other
                assets
            
            
            17,497
            
            
            16,070
            
            
            13,810
            
            
            17,670
            
            
            4,409Total
                assets
            
            $
            171,462
            
            $
            142,617
            
            $
            134,066
            
            $
            126,964
            
            $
            70,678Liabilities
            
            $
            83,462
            
            $
            66,299
            
            $
            55,183
            
            $
            45,617
            
            $
            16,311Minority
                interests in Operating Partnership
            
            
            34,272
            
            
            36,489
            
            
            37,567
            
            
            38,598
            
            
            27,264Shareholders’
                equity
            
            
            53,728
            
            
            39,829
            
            
            41,316
            
            
            42,749
            
            
            27,103$
            171,462
            
            $
            142,617
            
            $
            134,066
            
            $
            126,964
            
            $
            70,678**Cash
                Flow Data:**Proceeds
                from issuance of common shares
            
            $
            17,035
            
            $
            —
            
            $
            —
            
            $
            155
            
            $
            6,748Additions
                to real estate
            
            
            31,792
            
            
            10,277
            
            
            8,242
            
            
            1,983
            
            
            5,028**Other
                Financial Data:**Distributions
                per share
            
            $
            0.7072
            
            $
            0.7005
            
            $
            0.7000
            
            $
            0.6738
            
            $
            0.5688





The
      distributions per share represent payments from cash flow rather than from
      the
      Company’s net income.




**Item7.**
            **Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations.**




You
      should read the following discussion of our financial condition and results
      of
      operations in conjunction with our audited consolidated financial statements
      and
      the notes thereto included in this annual report. For more detailed information
      regarding the basis of presentation for the following information, you should
      read the notes to the audited consolidated financial statements included in
      this
      annual report.




***Overview***




We
      own 37
      commercial properties, consisting of 19 retail centers, 12 office-warehouse
      properties and 6 office buildings. All of our properties are located in the
      Houston, Dallas and San Antonio, Texas metropolitan areas. As of December 31,
      2005, we had 754 total tenants. No individual lease or tenant is material to
      our
      business. Revenues from our largest lease constituted 1.97% of our total
      revenues for the year ended December 31, 2005. Leases for our properties range
      from one year for our smaller spaces to over ten years for larger tenants.
      Our
      leases generally include minimum monthly lease payments and tenant
      reimbursements for payment of taxes, insurance and maintenance.




We
      have
      no employees and we do not manage our properties. Our properties and day-to-day
      operations are managed by the Management Company under a property management
      agreement.




21







Under
      the
      agreement in effect after September 1, 2004, we pay the Management Company
      the
      following amounts:




·
            property
                management fees in an amount not to exceed the fees customarily charged
                in
                arm’s length transactions by others rendering similar services in the
                same
                geographic area for similar properties as determined by a survey
                of
                brokers and agents in such area. Generally, we expect these fees
                to be
                between approximately two and four percent (2.0%-4.0%) of gross revenues
                for the management of commercial office buildings and approximately
                five
                percent (5.0%) of gross revenues for the management of retail and
                office-warehouse properties;




·
            for
                the leasing of the properties, a separate fee for the leases of new
                tenants and renewals of leases with existing tenants in an amount
                not to
                exceed the fee customarily charged in arm’s length transactions by others
                rendering similar services in the same geographic area for similar
                properties as determined by a survey of brokers and agents in such
                area;
                and




·
            except
                as otherwise specifically provided, all costs and expenses incurred
                by the
                Management Company in fulfilling its duties for the account of and
                on
                behalf of us. Such costs and expenses shall include the wages and
                salaries
                and other employee-related expenses of all on-site and off-site employees
                of the Management Company who are engaged in the operation, management,
                maintenance and leasing or access control of our properties, including
                taxes, insurance and benefits relating to such employees, and legal,
                travel and other out-of-pocket expenses that are directly related
                to the
                management of specific properties.




Gross
      revenues are defined as all amounts actually collected as rents or other charges
      for the use and occupancy of our properties, but excludes interest and other
      investment income and proceeds received for a sale, exchange, condemnation,
      eminent domain taking, casualty or other disposition of assets.




Under
      an
      advisory agreement effective September 1, 2004, we pay the Management Company
      for asset management services a quarterly fee in an amount equal to one-fourth
      of 0.25% of the gross asset value calculated on the last day of each preceding
      quarter.




Gross
      asset value is defined as the amount equal to the aggregate book value of our
      assets (other than investments in bank accounts, money market funds or other
      current assets), before depreciation, bad debts or other similar non-cash
      reserves and without reduction for any debt relating to such assets, at the
      date
      of measurement, except that during such periods in which we are obtaining
      regular independent valuations of the current value of our net assets for
      purposes of enabling fiduciaries of employee benefit plan shareholders to comply
      with applicable Department of Labor reporting requirements. Gross asset value
      is
      the greater of (i) the amount determined pursuant to the foregoing or (ii)
      our
      assets’ aggregate valuation established by the most recent such valuation report
      without reduction for depreciation, bad debts or other similar non-cash reserves
      and without reduction for any debt relating to such assets.  The fees
      payable to the Management Company under the new agreements effective September
      1, 2004 were not intended to be significantly different from those that would
      have been payable under the previous agreement.  Upon actual calculation,
      the asset management fee under the new agreement was significantly higher. 
The Management Company waived the excess of the fee for the period September
      1,
      2004 through December 31, 2005, in perpetuity.




***Critical
      Accounting Policies***




Our
      discussion and analysis of our financial condition and results of operations
      are
      based on our consolidated financial statements. We prepared these financial
      statements in conformity with U.S. generally accepted accounting principles.
      The
      preparation of these financial statements required us to make estimates and
      assumptions that affect the reported amounts of assets and liabilities at the
      dates of the financial statements and the reported amounts of revenues and
      expenses during the reporting periods. We based our estimates on historical
      experience and on various other assumptions we believe to be reasonable under
      the circumstances. Our results may differ from these estimates. Currently,
      we
      believe that our accounting policies do not require us to make estimates using
      assumptions about matters that are highly uncertain. You should read Note 1,
      Summary of Significant Accounting Policies, to our financial statements in
      conjunction with this *Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations* .




We
      have
      described below the critical accounting policies that we believe could impact
      our consolidated financial statements most significantly.




22


*Basis
      of Consolidation* .
      We are
      the sole general partner of the Operating Partnership and possess full legal
      control and authority over its operations. As of December 31, 2005, we owned
      a
      majority of the partnership interests in the Operating Partnership.
      Consequently, our consolidated financial statements include the accounts of
      the
      Operating Partnership. All significant intercompany balances have been
      eliminated. Minority interest in the accompanying consolidated financial
      statements represents the share of equity and earnings of the Operating
      Partnership allocable to holders of partnership interests other than us. Net
      income is allocated to minority interests based on the weighted-average
      percentage ownership of the Operating Partnership during the year. Issuance
      of
      additional common shares and OP Units changes our ownership interests as well
      as
      those of minority interests.




*Real
      Estate* .
      We
      record real estate properties at cost, net of accumulated depreciation. We
      capitalize improvements, major renovations and certain costs directly related
      to
      the acquisition, improvement and leasing of real estate. We charge expenditures
      for repairs and maintenance to operations as they are incurred. We calculate
      depreciation using the straight-line method over the estimated useful lives
      of 5
      to 39 years of our buildings and improvements. We depreciate tenant improvements
      using the straight-line method over the life of the lease.




We
      review
      our properties for impairment whenever events or changes in circumstances
      indicate that the carrying amount of the assets, including accrued rental
      income, may not be recoverable through our operations. We determine whether
      an
      impairment in value has occurred by comparing the estimated future cash flows
      (undiscounted and without interest charges), including the estimated residual
      value of the property, with the carrying cost of the property. If impairment
      is
      indicated, we record a loss for the amount by which the carrying value of the
      property exceeds its fair value. We have determined that there has been no
      impairment in the carrying value of our real estate assets as of December 31,
      2005.




*Purchase
      Price Allocation* .
      We
      record above-market and below-market in-place lease values for owned properties
      based on the present value (using an interest rate which reflects the risks
      associated with the leases acquired) of the difference between (i) the
      contractual amounts to be paid pursuant to the in-place leases and
      (ii) management’s estimate of fair market lease rates for the corresponding
      in-place leases, measured over a period equal to the remaining non-cancelable
      term of the lease. We amortize the capitalized above-market lease values as
      a
      reduction of rental income over the remaining non-cancelable terms of the
      respective leases. We amortize the capitalized below-market lease values as
      an
      increase to rental income over the initial term and any fixed-rate renewal
      periods in the respective leases. Because most of our leases are relatively
      short term, have inflation or other scheduled rent escalations, and cover
      periods during which there have been few, and generally insignificant, pricing
      changes in the specific properties’ markets, the properties we have acquired
      have not been subject to leases with terms materially different than
      then-existing market-level terms.




We
      measure the aggregate value of other intangible assets acquired based on the
      difference between (i) the property valued with existing in-place leases
      adjusted to market rental rates and (ii) the property valued as if vacant.
      Our
      management’s estimates of value are made using methods similar to those used by
      independent appraisers, primarily discounted cash flow analysis. Factors
      considered by management in its analysis include an estimate of carrying costs
      during hypothetical expected lease-up periods considering current market
      conditions, and costs to execute similar leases. We also consider information
      obtained about each property as a result of our pre-acquisition due diligence,
      marketing and leasing activities in estimating the fair value of the tangible
      and intangible assets acquired. In estimating carrying costs, management will
      also include real estate taxes, insurance and other operating expenses and
      estimates of lost rentals at market rates during the expected lease-up periods,
      which we expect to primarily range from 4 to 18 months, depending on specific
      local market conditions. Our management also estimates costs to execute similar
      leases including leasing commissions, legal and other related expenses to the
      extent that such costs are not already incurred in connection with a new lease
      origination as part of the transaction.




The
      total
      amount of other intangible assets acquired is further allocated to in-place
      lease values and customer relationship intangible values based on our
      management’s evaluation of the specific characteristics of each tenant’s lease
      and our overall relationship with that respective tenant. Characteristics
      considered by our management in allocating these values include the nature
      and
      extent of our existing business relationships with the tenant, growth prospects
      for developing new business with the tenant, the tenant’s credit quality and
      expectations of lease renewals (including those existing under the terms of
      the
      lease agreement), among other factors.




23


We
      amortize the value of in-place leases, if any, to expense over the remaining
      initial terms of the respective leases, which, for leases with allocated
      intangible value, we expect to range generally from five to ten years. The
      value
      of customer relationship intangibles is amortized to expense over the remaining
      initial terms and any renewal periods in the respective leases, but in no event
      does the amortization period for intangible assets exceed the remaining
      depreciable life of the building. Should a tenant terminate its lease, the
      unamortized portion of the in-place lease value and customer relationship
      intangibles are charged to expense.




*Revenue
      Recognition* .
      All
      leases on properties we hold are classified as operating leases, and we
      recognize the related rental income on a straight-line basis over the terms
      of
      the related leases. We capitalize or charge to accrued rent receivable, as
      applicable, differences between rental income earned and amounts due per the
      respective lease agreements. Percentage rents are recognized as rental income
      when the thresholds upon which they are based have been met. Recoveries from
      tenants for taxes, insurance, and other operating expenses are recognized as
      revenues in the period the corresponding costs are incurred. We provide an
      allowance for doubtful accounts against the portion of tenant accounts
      receivable which we estimate to be uncollectible.




***Liquidity
      and Capital Resources***




*General* .
      We
      generally lease our properties on a triple-net basis or on bases which provide
      for tenants to pay for increases in operating expenses over a base year or
      set
      amount, which means that tenants are required to pay for all repairs and
      maintenance, property taxes, insurance and utilities, or increases thereof,
      applicable to their space. During the year ended December 31, 2005, our
      properties generated sufficient cash flow to cover our operating expenses.
      However, our total distributions for 2005 exceeded our net cash flow from
      operating activities by $605,263. We funded this shortage with cash from
      borrowings under our KeyBank credit facility. This shortage resulted from
      decreased revenues during the third and fourth quarters of 2005 caused by a
      drop
      in the occupancy for the overall portfolio, as well as increased interest
      expenses due to rising interest rates and increased borrowings and higher real
      estate taxes associated with increased property value assessments. These factors
      are expected to be transitory, and management has implemented a series of new
      initiatives which are aimed at increasing occupancy. Therefore, we anticipate
      that cash flows from operating activities and our borrowing capacity will
      provide adequate capital for our working capital requirements, anticipated
      capital expenditures and scheduled debt payments during the next 12 months.
      We
      also believe that cash flows from operating activities and our borrowing
      capacity will allow us to make all distributions required for us to continue
      to
      qualify to be taxed as a REIT.




*Cash
      and Cash Equivalents* .
      We had
      cash and cash equivalents of $848,998 on December 31, 2005 as compared to
      $631,978 on December 31, 2004. The increase was relatively insignificant because
      we try to keep cash balances to a minimum by either buying properties, improving
      properties, reducing debt or making distributions to shareholders. We place
      all
      cash in short-term, highly liquid investments that we believe provide
      appropriate safety of principal.




*Our
      Debt for Borrowed Money* .
      In
      December 2002, we refinanced most of our debt with a credit facility from GMAC
      Commercial Mortgage Corporation. We used the loan proceeds to repay debt and
      the
      remainder to pay accrued real estate taxes and other operating expenses. The
      loan is secured by, among other things, 18 of our properties, which are held
      by
      Hartman REIT Operating Partnership II, L.P., a wholly owned subsidiary formed
      for the purpose of this credit facility, and the improvements, personal property
      and fixtures on the properties, all reserves, escrows and deposit accounts
      held
      by Hartman REIT Operating Partnership II, L.P., all intangible assets specific
      to or used in connection with the properties, and an assignment of rents related
      to such properties. We believe the fair market value of these properties was
      approximately $62,000,000 at the time the loan was put in place. We may prepay
      the loan after July 1, 2005 without penalty. As of December 31, 2005, the
      outstanding principal balance under this facility was $34,440,000.




We
      are
      required to make monthly interest payments under this credit facility. During
      the initial term of the note, indebtedness under the credit facility bears
      interest at LIBOR plus 2.5% computed on the basis of a 360 day year, adjusted
      monthly. The interest rate was 6.79% as of December 31, 2005. We are not
      required to make any principal payments prior to the loan’s maturity. The credit
      facility matured on January 1, 2006, and we elected the option, subject to
      certain conditions, of extending the facility for an additional two-year period.
      We entered into a Modification
      Agreement on February 28, 2006 which extended the term of the credit facility
      to
      January 1, 2008. During the extension term, indebtedness under the credit
      facility will bear interest at LIBOR plus 3.0%, computed on the basis of a
      360
      day year, adjusted monthly. In no event shall the interest rate be lower than
      4.32% during the extension term.


24




In
      addition, Hartman REIT Operating Partnership II, L.P. agreed to certain
      covenants pursuant to the credit facility which, among other things, require
      it
      to maintain specified levels of insurance and use the properties securing the
      note only for retail, light industrial, office, warehouse and commercial office
      uses. The facility also limits, without the approval of the lender, this wholly
      owned subsidiary’s ability to:




·
            acquire
                additional material assets;




·
            merge
                or consolidate with any other
                entity;




·
            engage
                in any other business or activity other than the ownership, operation
                and
                maintenance of the properties securing the
                note;




·
            make
                certain investments;




·
            incur,
                assume or guarantee additional
                indebtedness;




·
            grant
                certain liens; and




·
            loan
                money to others.




The
      security documents related to the note contain a covenant which requires Hartman
      REIT Operating Partnership II, L.P. to maintain adequate capital in light of
      its
      contemplated business operations. We believe that this covenant and the other
      restrictions provided for in our credit facility will not affect or limit
      Hartman REIT Operating Partnership II, L.P.’s ability to make distributions to
      us. The note and the security documents related thereto also contain customary
      events of default, including, without limitation, payment defaults,
      bankruptcy-related defaults and breach of covenant defaults. These covenants
      only apply to Hartman REIT Operating Partnership II, L.P. and do not impact
      the
      other operations of the Operating Partnership, including the operation of
      our properties which do not secure this debt.




In
      connection with the purchase of the Windsor Park property in December 2003,
      we
      assumed a note payable in the amount of $6,550,000 secured by the property.
      The
      balance at December 31, 2005 was $5,610,441. The note is payable in equal
      monthly installments of principal and interest of $80,445, with interest at
      the
      rate of 8.34% per annum. The balance of the note is payable in full on December
      1, 2006.




On
      June
      2, 2005, the Operating Partnership finalized a new revolving line of credit
      facility with a consortium of banks led by KeyBank National Association
      (“KeyBank”). The credit facility became retroactively effective as of March 11,
      2005, the date certain documents for the facility were placed into escrow,
      pending the completion of the transaction. The credit facility is secured by
      a
      pledge of the partnership interests in Hartman REIT Operating Partnership III
      LP
      (“HROP III”), a new wholly owned subsidiary of the Operating Partnership that
      was formed to hold title to the properties comprising the borrowing base pool
      for the credit facility. Presently there are 18 properties owned by HROP
      III.




The
      current limit of the credit facility is $50,000,000 and it may be increased
      to
      $100,000,000 as the borrowing base pool expands. The purpose of the credit
      facility was to refinance the Operating Partnership’s previous loan with Regions
      Bank (formerly Union Planter’s Bank, N.A.), to finance property acquisitions and
      for general corporate purposes. Simultaneously with the finalization of the
      new
      credit facility, the Operating Partnership drew $18,975,094, of which
      $18,650,000 was used to pay off the principal balance owing under the Regions
      Bank loan. Based upon the required ratios explained below, the remaining
      availability under the facility as of December 31, 2005 was
      $17,024,906.




25


Outstanding
      amounts under the facility will accrue interest, at the Company’s option, at
      either the LIBOR Rate or the Alternative Base Rate, plus the applicable margin
      as determined from the following grid:




Total
                Leverage Ratio
            
            LIBOR
                Margin
            
            Alternative
                Base
              Rate
                MarginLess
                than 60% but greater than or equal to 50%
            
            2.40%
            
            1.150%Less
                than 50% but greater than or equal to 45%
            
            2.15%
            
            1.025%Less
                than 45%
            
            1.90%
            
            1.000%





The
      Alternative Base Rate equals a floating rate equal to the higher of KeyBank’s
      Base Rate or Federal Funds Rate plus 0.5%. Interest is due monthly in arrears,
      computed on the actual number of days elapsed over a 360-day year. LIBOR Rate
      loans will be available in one, two, three or six month periods, with a maximum
      of six contracts at any time. In the event of default, interest will be
      calculated as above plus 2%. The effective interest rate as of December 31,
      2005
      was 5.68% per annum.




Interest
      only is payable monthly under the loan with the total amount of principal due
      at
      maturity on March 11, 2008. The loan may be prepaid at any time in part or
      in
      whole, provided that the facility is not in default. If LIBOR Rate pricing
      is
      elected, there is a prepayment penalty based on a “make-whole” calculation for
      all costs associated with prepaying a LIBOR borrowing.




The
      revolving line of credit is supported by a pool of eligible properties referred
      to as the borrowing base pool. The borrowing base pool must meet the following
      criteria:




·
            The
                Company will provide a negative pledge on the borrowing base pool
                and may
                not provide a negative pledge of the borrowing base pool to any other
                lender.




·
            The
                properties must be free of all liens, unless otherwise
                permitted.




·
            All
                eligible properties must be retail, office-warehouse, or office
                properties, must be free and clear of material environmental concerns
                and
                must be in good repair.




·
            The
                aggregate physical occupancy of the borrowing base pool must remain
                above
                80% at all times.




·
            No
                property may comprise more than 15% of the value of the borrowing
                base
                pool with the exception of Corporate Park Northwest, which is allowed
                into
                the borrowing base pool.




·
            The
                borrowing base pool must at all times be comprised of at least 10
                properties.




·
            The
                borrowing base pool properties may not contain development or
                redevelopment projects.




Properties
      can be added to and removed from the borrowing base pool at any time provided
      no
      defaults would occur as a result of the removal. If a property does not meet
      the
      criteria of an eligible property and the Company wants to include it in the
      borrowing base pool, a majority vote of the bank consortium is required for
      inclusion in the borrowing base pool.




Covenants,
      tested quarterly, relative to the borrowing base pool are as
      follows:




·
            The
                Company will not permit any liens on the properties in the borrowing
                base
                pool unless otherwise permitted.




·
            The
                ratio of aggregate net operating income from the borrowing base pool
                to
                debt service shall at all times exceed 1.5 to 1.0. For any quarter,
                debt
                service shall be equal to the average loan balance for the past quarter
                times an interest rate which is the greater of (a) the then current
                annual
                yield on 10 year United States Treasury notes over 25 years plus
                2%; (b) a
                6.5% constant; or (c) the actual interest rate for the
                facility.




26







·
            The
                ratio of the value of the borrowing base pool to total funded loan
                balance
                must always exceed 1.67 to 1.00. The value of the borrowing base
                pool is
                defined as aggregate net operating income for the preceding four
                quarters,
                less a $0.15 per square foot per annum capital expenditure reserve,
                divided by a 9.25% capitalization
                rate.




Covenants,
      tested quarterly, relative to the Company are as follows:




·
            The
                Company will not permit its total indebtedness to exceed 60% of the
                fair
                market value of its real estate assets at the end of any quarter.
                Total
                indebtedness is defined as all liabilities of the Company, including
                this
                facility and all other secured and unsecured debt of the Company,
                including letters of credit and guarantees. Fair market value of
                real
                estate assets is defined as aggregate net operating income for the
                preceding four quarters, less a $0.15 per square foot per annum capital
                expenditure reserve, divided by a 9.25% capitalization
                rate.




·
            The
                ratio of consolidated rolling four-quarter earnings before interest,
                income tax, deprecation and amortization expenses for such quarter
                to
                total interest expense, including capitalized interest, shall not
                be less
                than 2.0 to 1.0.




·
            The
                ratio of consolidated earnings before interest, income tax, deprecation
                and amortization expenses for such quarter to total interest, including
                capitalized interest, principal amortization, capital expenditures
                and
                preferred stock dividends shall not be less than 1.5 to 1.0. Capital
                expenditures shall be deemed to be $0.15 per square foot per
                annum.




·
            The
                ratio of secured debt to fair market value of real estate assets
                shall not
                be greater than 40%.




·
            The
                ratio of declared dividends to funds from operations shall not be
                greater
                than 95%.




·
            The
                ratio of development assets to fair market value of real estate assets
                shall not be greater than 20%.




·
            The
                Company must maintain its status as a real estate investment trust
                for
                income tax purposes.




·
            Total
                other investments shall not exceed 30% of total asset value. Other
                investments shall include investments in joint ventures, unimproved
                land,
                marketable securities and mortgage notes receivable. Additionally,
                the
                preceding investment categories shall not comprise greater than 30%,
                15%,
                10% and 20%, respectively, of total other
                investments.




Within
      six months of closing, the Company must hedge all variable rate debt above
      $40
      million until the point in which the ratio of variable rate debt to fixed rate
      debt is 50% of total debt. Thereafter, the Company must maintain such hedges
      during any period in which variable rate debt exceeds 50% of total debt. On
      March 27, 2006 the Company executed an interest rate swap dated as of March
      16,
      2006 for the purpose of hedging variable interest rate exposure, in compliance
      with the requirements of the loan agreement. The lender waived default for
      the
      fact that the hedge was not executed within six months of closing, as required
      by the loan agreement.




As
      of December 31, 2005, we were in violation of the
      covenant which provides that the ratio of declared dividends to funds from
      operations (as defined in the loan agreement) shall not be greater than
      95%.  As this violation constitutes an event of default, our lenders have
      the right to accelerate payment of the credit facility.  As of December 31,
      2005, and continuing through March 31, 2006 we had not received a waiver from
      the required majority of the consortium of banks in the facility led by
      KeyBank.  We are currently in discussions to receive such waiver, and as
      our violation constitutes less than 0.4%, we believe that we will receive such
      waiver.  However, there can be no assurance that we will be successful in
      our negotiations to obtain a waiver.




*Capital
      Expenditures* .
      We
      currently do not expect to make significant capital expenditures or any
      significant improvements to any of our currently owned properties during the
      next 12 months. However, we may have unexpected capital expenditures or
      improvements on our existing assets. Additionally, we intend to continue our
      ongoing acquisition strategy of acquiring properties in the Houston, Dallas
      and
      San Antonio, Texas metropolitan areas where we believe opportunities exist
      for
      acceptable investment returns (generally in the $1 million to $10 million value
      range), and we may incur significant capital expenditures or make significant
      improvements in connection with any properties we may acquire.




27


*Total
      Contractual Cash Obligations* .
      A
      summary of our contractual cash obligations is as follows:




**Payment
                due by period****Contractual
                Obligations**
            
            **Total**
            
            **Less
                than**
              **One
                Year**
            
            **One
                to**
              **Three
                Years**
            
            **Three
                to**
              **Five
                Years**
            
            **More
                than**
              **Five
                Years**Long-Term
                Debt Obligations
            $73,025,535
            
            $5,610,441
            
            $67,415,094
            
            —
            
            —Capital
                Lease Obligations
            —
            
            —
            
            —
            
            —
            
            —Operating
                Lease Obligations
            —
            
            —
            
            —
            
            —
            
            —Purchase
                Obligations
            —
            
            —
            
            —
            
            —
            
            —Other
                Long-Term Liabilities
              Reflected
                on the Registrant’s
              Balance
                Sheet under GAAP
            —
            
            —
            
            —
            
            —
            
            —Total
            $73,025,535
            
            $5,610,441
            
            $67,415,094
            
            —
            
            —





We
      have
      no commercial commitments such as lines of credit or guarantees that might
      result from a contingent event that would require our performance pursuant
      to a
      funding commitment.




*Property
      Acquisitions* .
      During
      2005, we acquired from unrelated parties three multi-tenant office buildings
      comprising approximately 486,024 square feet of gross leasable area (GLA).
      The
      properties were acquired for cash in the amount of approximately
      $30,430,000.




During
      2004, we acquired from an unrelated party one multi-tenant retail center
      comprising approximately 95,032 square feet of gross leasable area (GLA). The
      property was acquired for cash in the amount of approximately
      $8,900,000.




***Results
      of Operations***




**Year
      Ended December 31, 2005 Compared to Year Ended December 31,
      2004**




*General*




The
      following table provides a general comparison of our results of operations
      for
      the years ended December 31, 2004 and December 31, 2005:




**December
                31, 2004**
            
            **December
                31, 2005**Number
                of properties owned and operated
            
            
            34
            
            
            37Aggregate
                gross leasable area (sq. ft.)
            
            
            2,635,063
            
            
            3,121,037Occupancy
                rate
            
            
            86%
            
            
            82%Total
                Revenues
            
            $
            23,483,657
            
            $
            25,219,233Total
                Operating Expenses
            
            $
            17,069,628
            
            $
            20,880,435Income
                before Minority Interest
            
            $
            6,414,029
            
            $
            4,338,798Minority
                Interest in the Operating Partnership
            
            $
            (2,990,410
            )
            $
            (1,890,616
            )Net
                Income
            
            $
            3,423,619
            
            $
            2,448,182





*Revenues*




We
      had
      rental income and tenant reimbursements of $24,707,312 for the year ended
      December 31, 2005, as compared to revenues of $23,038,966 for the year ended
      December 31, 2004, an increase of $1,668,346, or 7%. Substantially all of our
      revenues are derived from rents received from the use of our properties. The
      increase in our revenues during 2005 as compared to 2004 was due to an increase
      in the amount of rent charged at some locations and the purchase of additional
      properties. Our average occupancy rate in 2005 was 85%, as compared to 87%
      in 2004,
      and
      our average annualized revenue was $9.09 per square foot in 2005, as compared
      to
      an average annualized revenue of $9.14 per square foot in 2004.


28




We
      had
      interest and other income of $511,921 for the year ended December 31, 2005,
      as
      compared to $444,691 for the year ended December 31, 2004, an increase of
      $67,230, or 15%. At December 31, 2005, we held all revenues and escrowed funds
      we received from our Public Offering through such date in money market accounts
      and other short-term, highly liquid investments. We expect the percentage of
      our
      total revenues from interest income from investments in money market accounts
      or
      other short-term, highly liquid investments to decrease as we invest cash
      holdings in properties. The increase in interest and other income during 2005
      as
      compared to 2004 resulted primarily from an increase in non-rent income such
      as
      sale of rights-of-way and parking fees.




*Expenses*




Our
      total
      operating expenses, including interest expense and depreciation and amortization
      expense, were $20,880,435 for the year ended December 31, 2005, as compared
      to
      $17,069,628 for the year ended December 31, 2004, an increase of $3,810,807,
      or
      22%. We expect that the dollar amount of operating expenses will increase as
      we
      acquire additional properties and expand our operations. However, we expect
      that
      general and administrative expenses as a percentage of total revenues will
      decline as we acquire additional properties. The increase in our operating
      expenses during 2005 was primarily the result of increased maintenance, real
      estate taxes, utilities and depreciation and amortization expenses.




The
      amount we pay Hartman Management under our management agreement is based on
      our
      revenues. As a result of our increased revenues in 2005, management fees were
      $1,405,587 in 2005, as compared to $1,339,822 in 2004, an increase of $65,765,
      or 5%.




Our
      interest expense increased by $1,105,501, or 41%, in 2005 as compared to 2004.
      Our average outstanding debt increased from $53,705,399 in 2004 to $61,848,873
      in 2005 and the average interest rate associated with this debt increased from
      4.54% in 2004 to 6.19% in 2005 because our debt is predominantly subject to
      floating interest rates.




Finally,
      general and administrative expenses increased $85,886, or 8%, in 2005 as
      compared to 2004, primarily as the result of an increase in office
      expense.




*Net*  *Income*




Income
      provided by operating activities before minority interest was $4,338,798 for
      the
      year ended December 31, 2005, as compared to $6,414,029 for the year ended
      December 31, 2004, a decrease of $2,075,231, or 32%. Net income provided by
      operating activities for the year ended December 31, 2005 was $2,448,182, as
      compared to $3,423,619 for the year ended December 31, 2004, a decrease of
      $975,437, or 28%. These decreases are a result of the increase in expenses,
      discussed above.




**Year
      Ended December 31, 2004 Compared to Year Ended December 31,
      2003**




*General*




The
      following table provides a general comparison of our results of operations
      for
      the years ended December 31, 2003 and December 31, 2004:






29




**December
                31, 2003**
            
            **December
                31, 2004**Number
                of properties owned and operated
            
            
            33
            
            
            34Aggregate
                gross leasable area (sq. ft.)
            
            
            2,540,031
            
            
            2,635,063Occupancy
                rate
            
            
            88%
            
            
            86%Total
                Revenues
            
            $
            20,972,951
            
            $
            23,483,657Total
                Operating Expenses
            
            $
            14,463,982
            
            $
            17,069,628Income
                before Minority Interest
            
            $
            6,508,969
            
            $
            6,414,029Minority
                Interest in the Operating Partnership
            
            $
            (3,034,795
            )
            $
            (2,990,410
            )Net
                Income
            
            $
            3,474,174
            
            $
            3,423,619





*Revenues*




We
      had
      rental income and tenant reimbursements of $23,038,966 for the year ended
      December 31, 2004, as compared to revenues of $20,605,161 for the year ended
      December 31, 2003, an increase of $2,433,805, or 12%. Substantially all of
      our
      revenues are derived from rents received from the use of our properties. The
      increase in our revenues during 2004 as compared to 2003 was due to an increase
      in the amount of rent charged at some locations and the purchase of additional
      properties. Our average occupancy rate in 2004 was 87%, as compared to 90%
      in
      2003, and our average annualized revenue was $9.14 per square foot in 2004,
      as
      compared to an average annualized revenue of $8.93 per square foot in
      2003.




We
      had
      interest and other income of $444,691 for the year ended December 31, 2004,
      as
      compared to $367,790 for the year ended December 31, 2003, an increase of
      $76,901, or 21%. At December 31, 2004, we held all revenues and escrowed funds
      we received from our Public Offering through such date in money market accounts
      and other short-term, highly liquid investments. The increase in interest and
      other income during 2004 as compared to 2003 resulted primarily from an increase
      in non-rent income such as late fees and deposit forfeitures.




*Expenses*




Our
      total
      operating expenses, including interest expense and depreciation and amortization
      expense, were $17,069,628 for the year ended December 31, 2004, as compared
      to
      $14,463,982 for the year ended December 31, 2003, an increase of $2,605,646,
      or
      18%.  T he
      increase in our operating expenses during 2004 was primarily the result of
      increased maintenance, real estate taxes, utilities and depreciation and
      amortization expenses, predominantly due to the addition of properties acquired
      during the year.




The
      amount we pay Hartman Management under our management agreement is based on
      our
      revenues and the book value of our assets. As a result of our increased revenues
      and assets in 2004, management fees were $1,339,822 in 2004, as compared to
      $1,232,127 in 2003, an increase of $107,695, or 9%.




Our
      interest expense increased by $1,340,757, or 101%, in 2004 as compared to 2003.
      Our average outstanding debt increased from $37,264,685 in 2003 to $53,705,399
      in 2004 and the average interest rate associated with this debt increased from
      3.90% in 2003 to 4.54% in 2004.




Finally,
      general and administrative expenses increased $73,644, or 7%, in 2004 as
      compared to 2003, primarily as the result of an increase in professional
      fees.




*Net
      Income*




Income
      provided by operating activities before minority interest was $6,414,029 for
      the
      year ended December 31, 2004, as compared to $6,508,969 for the year ended
      December 31, 2003, a decrease of $94,940, or 1%. Net income provided by
      operating activities for the year ended December 31, 2004 was $3,423,619, as
      compared to $3,474,174 for the year ended December 31, 2003, a decrease of
      $50,555, or 1%.




30


***Taxes***




We
      elected to be taxed as a REIT under the Internal Revenue Code beginning with
      our
      taxable year ended December 31, 1999. As a REIT, we generally are not subject
      to
      federal income tax on income that we distribute to our shareholders. If we
      fail
      to qualify as a REIT in any taxable year, we will be subject to federal income
      tax on our taxable income at regular corporate rates. We believe that we are
      organized and operate in such a manner as to qualify to be taxed as a REIT,
      and
      we intend to operate so as to remain qualified as a REIT for federal income
      tax
      purposes.




***Inflation***




We
      anticipate that our leases will continue to be triple-net leases or otherwise
      provide that tenants pay for increases in operating expenses and will contain
      provisions that we believe will mitigate the effect of inflation. In addition,
      many of our leases are for terms of less than five years, which allows us to
      adjust rental rates to reflect inflation and other changing market conditions
      when the leases expire. Consequently, increases due to inflation, as well as
      ad
      valorem tax rate increases, generally do not have a significant adverse effect
      upon our operating results.




***Off-Balance
      Sheet Arrangements***




The
      Company has no significant off-balance sheet arrangements as of December 31,
      2005.




***Recent
      Accounting Pronouncements***




In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 123R, *“Share
      Based Payment.”* This
      statement requires companies to categorize share based payment as either
      liability or equity awards. For liability awards, companies will remeasure
      the
      award at fair value at each balance sheet date until the award is settled.
      Equity classified awards are measured at the grant-date fair value and are
      not
      remeasured. SFAS No. 123R is effective for interim or annual periods beginning
      after June 15, 2005. Awards issued, modified or settled after the effective
      date
      will be measured and recorded in accordance with SFAS No. 123R.   On
      April 14, 2005, the SEC adopted a new rule that defers the effective date of
      SFAS No. 123R and allows companies to implement the provisions of SFAS 123R
      at
      the beginning of their next fiscal year.  Management believes that the
      implementation of this standard will not have a material effect on the Company’s
      consolidated financial position or results of operations.




In
      December 2004, the FASB issued SFAS No. 153, “ *Accounting
      for Non-monetary Transactions* .”
This
      standard requires that non-monetary exchanges be accounted for at fair value,
      recognizing any gain or loss, if the transactions meet a commercial-substance
      criteria and fair value is determinable. SFAS No. 153 is effective for
      non-monetary transactions occurring in fiscal years beginning after June 15,
      2005. Management believes that the implementation of this standard will not
      have
      a material effect on the Company’s consolidated financial position or results of
      operations.




In
      May
      2005, the FASB issued Statement of Financial Accounting Standards No. 154 (“SFAS
      154”), *“Accounting
      Changes and Error Corrections - A Replacement of APB Opinion No. 2 and FASB
      Statement No. 3.”* This
      statement changes the requirements for the accounting for and reporting of
      a
      change in accounting principle. This statement applies to all voluntary changes
      in accounting principle. It also applies to changes required by an accounting
      pronouncement in the unusual instance that the pronouncement does not include
      specific transition provisions. When a pronouncement includes specific
      transition provisions, those provisions should be followed. This statement
      is
      effective for fiscal years beginning after December 15, 2005 and is not expected
      to have a material impact on the Company’s consolidated financial
      statements.




31







**Item7A.**
            **Quantitative
                and Qualitative Disclosures About Market
                Risk.**




Market
      risk is the risk of loss arising from adverse changes in market rates and
      prices. The principal market risk to which the Company is exposed is the risk
      related to interest rate fluctuations. Based upon the nature of the Company’s operations,
      the Company
      is not subject to foreign exchange or commodity risk.The Company
      will be exposed to changes in interest rates as a result of the Company’s credit
      facilities that have floating interest rates. As of December 31, 2005, the
      Company had $67,415,000 of indebtedness outstanding under such facilities.
      The
      impact of a 1% increase in interest rates on the Company’s debt would result in
      an increase in interest expense and a decrease in income before minority
      interests of approximately $690,000 annually. Pursuant to loan covenants in
      our
      KeyBank credit facility, on March 27, 2006 the Company executed an interest
      rate
      swap agreement with KeyBank National Association with a notional amount
      of $30,000,000 of its variable rate debt to help mitigate the risk. 
The swap agreement is utilized to effectively fix the interest rate on this
      debt
      at 6.99%.




**Item8.**
            **Financial
                Statements and Supplementary
                Data.**




The
      information required by this Item 8 is hereby incorporated by reference to
      the
      Company’s Financial Statements beginning on page F-1 of this Annual Report on
      Form 10-K.




**Item9.**
            **Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure.**




None.




**Item9A.**
            **Controls
                and Procedures.**




The
      Company maintains disclosure controls and procedures that are designed to ensure
      that information required to be disclosed in its Exchange Act reports is
      recorded, processed, summarized and reported within the time periods specified
      in the SEC’s rules and forms, and that such information is accumulated and
      communicated to the Company’s management, including its Chief Executive Officer
      and Chief Financial Officer, as appropriate, to allow timely decisions regarding
      required disclosure. Management necessarily applied its judgment in assessing
      the costs and benefits of such controls and procedures which, by their nature,
      can provide only reasonable assurance regarding management’s control
      objectives.




Because,
      as of December 31, 2005, we did not meet the
      definition of  “accelerated
      filer,” as defined
      by Rule 12b-2 of the Exchange Act, we were not required to comply with Section
      404 of the Sabanes-Oxley Act of 2002.  Accordingly, we did not engage our
      independent registered public accounting firm to perform an audit of our
      internal controls over financial reporting.  However, our independent
      registered public accounting firm, in the course of the audit of our financial
      statements, brought to management’s attention
      two
      material weaknesses in our internal controls:  (1) Inadequate controls and
      procedures in place to effectively identify and monitor amendments to lease
      agreements and (2) Inadequate controls and procedures in place to effectively
      identify and monitor tenant defaults where a lease commission has been
      recorded.  As a result of these deficiencies, our accounting personnel may
      not be made aware of changes to lease agreements and tenant defaults that
      require recognition in our financial accounting records.  Accordingly,
      errors in our accounting for revenue and amortization expense may occur and
      may
      not be detected.  A material weakness (within the meaning of the Public
      Accounting Oversight Board Accounting Standard No. 2) is a control deficiency,
      or aggregation of control deficiencies, that result in more than a remote risk
      that a material mistatement in the Company’s annual
      or
      interim financial statements will not be prevented or
      detected.




As
      of the
      end of the period covered by this report, an evaluation was carried out under
      the supervision and with the participation of the Company’s management,
      including the Chief Executive Officer and Chief Financial Officer, of the
      effectiveness of the design and operation of the Company’s disclosure controls
      and procedures pursuant to Rule 13a-15(e) and 15d-15(e) of the Securities
      Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation and the
      material weakness described above, the Chief Executive Officer and Chief
      Financial Officer concluded that the Company’s disclosure controls and
      procedures are not effective in timely alerting them to material information
      relating to the Company (including its consolidated subsidiaries) that is
      required to be included in the Company’s Exchange Act filings.  The Company
      is in the process of remediating the material weaknesses and intends to engage
      an external consultant to assist management in establishing and maintaining
      adequate controls and remediating the identified material
      weaknesses.




No
      change
      in our internal control over financial reporting occurred during the fourth
      fiscal quarter of the period covered by this annual report that materially
      affected, or is reasonably likely to materially affect, our internal control
      over financial reporting.




**Item9B.**
            **Other
                Information.**




None.




32


**PARTIII**




**Item10.**
            **Directors
                and Executive Officers of the
                Registrant.**




We
      have
      adopted a Code of Business Conduct that applies to all of our executive officers
      and trustees, including but not limited to, our principal executive officer
      and
      principal financial officer. Our Code of Business Conduct may be found at our
      website, www.hartmanmanagement.com .




The
      other
      information required by this Item is incorporated by reference to the Company’s
      definitive proxy statement to be filed with the Securities and Exchange
      Commission no later than April 30, 2006.




**Item11.**
            **Executive
                Compensation.**




The
      information required by this Item is incorporated by reference to the Company’s
      definitive proxy statement to be filed with the Securities and Exchange
      Commission no later than April 30, 2006.




**Item12.**
            **Security
                Ownership of Certain Beneficial Owners and Management and Related
                Shareholder Matters.**




The
      information required by this Item is incorporated by reference to the Company’s
      definitive proxy statement to be filed with the Securities and Exchange
      Commission no later than April 30, 2006.




**Item13.**
            **Certain
                Relationships and Related
                Transactions.**




The
      information required by this Item is incorporated by reference to the Company’s
      definitive proxy statement to be filed with the Securities and Exchange
      Commission no later than April 30, 2006.




**Item14.**
            **Principal
                Accounting Fees and
                Services.**




The
      information required by this Item is incorporated by reference to the Company’s
      definitive proxy statement to be filed with the Securities and Exchange
      Commission no later than April 30, 2006.









**PARTIV**




**Item15.**
            **Exhibits
                and Financial Statement
                Schedules.**




(a) *List
      of Documents Filed* .




1.
            Financial
                Statements. The list of the Company’s financial statements filed as part
                of this Annual Report on Form 10-K is set forth on page F-1
                herein.




2.
            Financial
                Statement Schedules. See (c) below.




a. Schedule
      II - Valuation and Qualifying Amounts




b. Schedule
      III - Real Estate and Accumulated Depreciation




3.
            Exhibits.
                The list of exhibits filed as part of this Annual Report on Form
                10-K in
                response to Item 601 of Regulation S-K is submitted on the Exhibit
                Index
                attached hereto.




33







(b) *Exhibits* .




The
      exhibits filed in response to Item 601 of Regulation S-K are listed on the
      Exhibit Index attached hereto.




(c) *Financial
      Statement Schedules* .




1.
            Schedule
                II - Valuation and Qualifying
                Amounts




2.
            Schedule
                III - Real Estate and Accumulated
                Depreciation




All
      other
      financial statement schedules have been omitted because the required information
      of such schedules is not present, is not present in amounts sufficient to
      require a schedule or is included in the consolidated financial
      statements.





















34


**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.




**HARTMAN
                COMMERCIAL PROPERTIES REIT**Dated:
                March 31, 2006
            /s/
                Allen R.
                HartmanAllen
                R. Hartman, President and Trustee








**POWER
      OF ATTORNEY**




KNOW
      ALL
      PERSONS BY THESE PRESENT, that each person whose signature appears below
      constitutes and appoints Allen R. Hartman and Terry L. Henderson, and each
      of
      them, acting individually, as his attorney-in-fact, each with full power of
      substitution and resubstitution, for him or her and in his or her name, place
      and stead, in any and all capacities, to sign any and all amendments to this
      Annual Report on Form 10-K, and to file the same, with all exhibits thereto,
      and
      other documents in connection therewith, with the Securities and Exchange
      Commission, granting unto said attorneys-in-fact and agents, and each of them,
      full power and authority to do and perform each and every act and thing
      requisite and necessary to be done in connection therewith and about the
      premises, as fully to all intents and purposes as he or she might or could
      do in
      person, hereby ratifying and confirming all that said attorneys-in-fact and
      agents, or any of them, or their or his or her substitute or substitutes, may
      lawfully do or cause to be done by virtue hereof.




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




March
                31, 2006
            /s/
                Allen R. HartmanAllen
                R. Hartman, President and Trustee(Principal
                Executive Officer)March
                31, 2006
            /s/
                Terry HendersonTerry
                Henderson, Chief Financial Officer and Trustee(Principal
                Financial and Principal Accounting Officer)March
                31, 2006
            /s/
                Chris A. MintonChris
                A. Minton, TrusteeMarch
                31, 2006
            /s/
                Jack L. MahaffeyJack
                L. Mahaffey, TrusteeMarch
                31, 2006
            /s/
                Chand VyasChand
                Vyas, Trustee




35


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**








**Page**Report
                of Independent Registered Public Accounting Firm
            F-1Consolidated
                Balance Sheets as of December 31, 2005 and 2004
            F-2Consolidated
                Statements of Income for the Years Ended December 31, 2005, 2004
                and
                2003
            F-4Consolidated
                  Statements of Changes in Shareholders’ Equity for the Years EndedDecember
                  31, 2005, 2004 and 2003
            F-5Consolidated
                  Statements of Cash Flows for the Years Ended December 31, 2005,2004
                  and 2003
            F-6Notes
                to Consolidated Financial Statements
            F-7Schedule
                II - Valuation and Qualifying Accounts
            F-28Schedule
                III - Real Estate and Accumulated Depreciation
            F-29




All
      other
      schedules for which provision is made in the applicable accounting regulations
      of the Securities and Exchange Commission are not required under the related
      instructions or are inapplicable, and therefore have been omitted.











**Report
      of Independent Registered Public Accounting Firm**




To
      the
      Board of Trustees and Shareholders of


Hartman
      Commercial Properties REIT




We
      have
      audited the accompanying consolidated balance sheets of Hartman Commercial
      Properties REIT and subsidiary (the “Company”) as of December 31, 2005 and 2004,
      and the related consolidated statements of income, shareholders’ equity and cash
      flows, for each of the three years in the period ended December 31, 2005. In
      connection with our audits of the consolidated financial statements, we have
      also audited the financial statement schedules as listed in the accompanying
      index. These consolidated financial statements and financial statement schedules
      are the responsibility of the Company’s management. Our responsibility is to
      express an opinion on these financial statements and financial statement
      schedules based on our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audits included consideration of internal control
      over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purposes of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, assessing the accounting principles used and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.




In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated financial position of Hartman Commercial
      Properties REIT and subsidiary as of December 31, 2005 and 2004, and the
      consolidated results of their operations and their cash flows for each of the
      three years in the period ended December 31, 2005 in conformity with U.S.
      generally accepted accounting principles. Also, in our opinion, the related
      financial statement schedules, when considered in relation to the basic
      consolidated financial statements taken as a whole, present fairly, in all
      material respects, the information set forth therein.




As
      discussed in Note 7 to the consolidated financial
      statements, the Company is in default of the declared dividends covenant in
      its
      revolving credit facility.  Management is currently negotiating a waiver of
      this event of default, however, there is no assurance that a waiver will be
      obtained.




/s/
      PANNELL KERR FORSTER OF TEXAS, P.C.




Houston,
      Texas


February
      17, 2006, except for Note 11, the date of which is


March
      9, 2006, and Note 7, the date of which
      is


March
      31, 2006








F-1


Hartman
      Commercial Properties REIT and Subsidiary




Consolidated
      Balance Sheets




December
                31,2005
            
            2004AssetsReal
                estateLand
            
            $
            32,770,566
            
            $
            28,446,210Buildings
                and improvements
            
            
            141,018,810
            
            
            113,551,420173,789,376
            
            
            141,997,630Less
                accumulated depreciation
            
            
            (19,824,386
            )
            
            (15,450,416
            )Real
                estate, net
            
            
            153,964,990
            
            
            126,547,214Cash
                and cash equivalents
            
            
            848,998
            
            
            631,978Escrows
                and acquisition deposits
            
            
            5,307,663
            
            
            4,978,362Note
                receivable
            
            
            628,936
            
            
            655,035ReceivablesAccounts
                receivable, net of allowance for doubtful accounts of $472,875 and
                $342,690 in 2005 and 2004, respectively
            
            
            1,248,985
            
            
            1,008,621Accrued
                rent receivable
            
            
            2,593,060
            
            
            2,594,933Due
                from affiliates
            
            
            3,180,663
            
            
            3,300,202Receivables,
                net
            
            
            7,022,708
            
            
            6,903,756Deferred
                costs, net
            
            
            3,004,218
            
            
            2,797,294Prepaid
                expenses and other assets
            
            
            684,536
            
            
            103,301Total
                assets
            
            $
            171,462,049
            
            $
            142,616,940







**See
      notes to consolidated financial statements.**


F-2


Hartman
      Commercial Properties REIT and Subsidiary




Consolidated
      Balance Sheets (continued)




December
                31,2005
            
            2004Liabilities
                and Shareholders’ EquityLiabilitiesNotes
                payable
            
            $
            73,025,535
            
            $
            57,226,111Accounts
                payable and accrued expenses
            
            
            4,063,126
            
            
            3,354,610Due
                to affiliates
            
            
            350,865
            
            
            675,861Tenants’
                security deposits
            
            
            1,440,864
            
            
            1,066,147Prepaid
                rent
            
            
            470,248
            
            
            254,765Offering
                proceeds escrowed
            
            
            1,559,439
            
            
            1,471,696Dividends
                payable
            
            
            1,525,460
            
            
            1,230,281Other
                liabilities
            
            
            1,026,914
            
            
            1,019,363Total
                liabilities
            
            
            83,462,451
            
            
            66,298,834Minority
                interests of unit holders in Operating Partnership, 5,808,337 units
                at
                December 31, 2005 and 2004
            
            
            34,272,074
            
            
            36,489,114Commitments
                and contingencies
            
            
            —
            
            
            —Shareholders’
                equityPreferred
                shares, $0.001 par value per share; 50,000,000 shares authorized;
                none
                issued and outstanding at December 31, 2005 and 2004
            
            
            —
            
            
            —Common
                shares, $0.001 par value per share; 400,000,000 shares authorized;
                8,913,654 and 7,010,146 issued and outstanding at December 31, 2005
                and
                2004, respectively
            
            
            8,914
            
            
            7,010Additional
                paid-in capital
            
            
            62,560,077
            
            
            45,527,152Accumulated
                deficit
            
            
            (8,841,467
            )
            
            (5,705,170
            )Total
                shareholders’ equity
            
            
            53,727,524
            
            
            39,828,992Total
                liabilities and shareholders’ equity
            
            $
            171,462,049
            
            $
            142,616,940





**See
        notes to consolidated financial statements.**


F-3


Hartman
      Commercial Properties REIT and Subsidiary




Consolidated
      Statements of Income







Year
                Ended December 31,2005
            
            2004
            
            2003RevenuesRental
                income
            
            $
            20,072,597
            
            $
            18,426,558
            
            $
            16,656,340Tenants’
                reimbursements
            
            
            4,634,715
            
            
            4,612,408
            
            
            3,948,821Interest
                and other income
            
            
            511,921
            
            
            444,691
            
            
            367,790Total
                revenues
            
            
            25,219,233
            
            
            23,483,657
            
            
            20,972,951ExpensesOperation
                and maintenance
            
            
            3,227,481
            
            
            2,838,618
            
            
            2,505,756Interest
                expense
            
            
            3,769,636
            
            
            2,664,135
            
            
            1,323,378Real
                estate taxes
            
            
            2,980,709
            
            
            2,595,346
            
            
            2,050,738Insurance
            
            
            455,577
            
            
            459,801
            
            
            509,498Electricity,
                water and gas utilities
            
            
            1,587,439
            
            
            817,484
            
            
            805,772Management
                  and partnership andasset
                  management fees to an affiliate
            
            
            1,405,587
            
            
            1,339,822
            
            
            1,232,127General
                and administrative
            
            
            1,224,946
            
            
            1,139,060
            
            
            1,065,416Depreciation
            
            
            4,373,970
            
            
            3,986,136
            
            
            3,728,925Amortization
            
            
            1,724,905
            
            
            1,237,286
            
            
            1,029,122Bad
                debt expense (recoveries)
            
            
            130,185
            
            
            (8,060
            )
            
            213,250Total
                operating expenses
            
            
            20,880,435
            
            
            17,069,628
            
            
            14,463,982Income
                before minority interests
            
            
            4,338,798
            
            
            6,414,029
            
            
            6,508,969Minority
                interests in Operating Partnership
            
            
            (1,890,616
            )
            
            (2,990,410
            )
            
            (3,034,795
            )Net
                income
            
            $
            2,448,182
            
            $
            3,423,619
            
            $
            3,474,174Net
                income per common share
            
            $
            0.310
            
            $
            0.488
            
            $
            0.496Weighted-average
                shares outstanding
            
            
            7,887,749
            
            
            7,010,146
            
            
            7,010,146




**See
        notes to consolidated financial statements.**


F-4


Hartman
      Commercial Properties REIT and Subsidiary




Consolidated
      Statements of Changes in Shareholders’ Equity






Common
                StockShares
            
            Amount
            
            Additional
              Paid-in
                Capital
            
            Accumulated
              Deficit
            
            TotalBalance,
                December 31, 2002
            
            
            7,010,146
            
            $
            7,010
            
            $
            45,527,152
            
            $
            (2,785,244
            )
            $
            42,748,918Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            3,474,174
            
            
            3,474,174Dividends
            
            
            —
            
            
            —
            
            
            —
            
            
            (4,907,108
            )
            
            (4,907,108
            )Balance,
                December 31, 2003
            
            
            7,010,146
            
            
            7,010
            
            
            45,527,152
            
            
            (4,218,178
            )
            
            41,315,984Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            3,423,619
            
            
            3,423,619Dividends
            
            
            —
            
            
            —
            
            
            —
            
            
            (4,910,611
            )
            
            (4,910,611
            )Balance,
                December 31, 2004
            
            
            7,010,146
            
            
            7,010
            
            
            45,527,152
            
            
            (5,705,170
            )
            
            39,828,992Issuance
                  of common stock for cash, net of $1,981,276 offering
                  costs
            
            
            1,865,557
            
            
            1,866
            
            
            16,672,428
            
            
            —
            
            
            16,674,294Issuance
                  of shares under dividend reinvestment plan at $9.50 per
                  share
            
            
            37,951
            
            
            38
            
            
            360,497
            
            
            —
            
            
            360,535Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            2,448,182
            
            
            2,448,182Dividends
            
            
            —
            
            
            —
            
            
            —
            
            
            (5,584,479
            )
            
            (5,584,479
            )Balance,
                December 31, 2005
            
            
            8,913,654
            
            $
            8,914
            
            $
            62,560,077
            
            $
            (8,841,467
            )
            $
            53,727,524





**See
      notes to consolidated financial statements.**


F-5


Hartman
      Commercial Properties REIT and Subsidiary




Consolidated
      Statements of Cash Flows





Year
                Ended December 31,2005
            
            2004
            
            2003Cash
                flows from operating activities:Net
                income
            
            $
            2,448,182
            
            $
            3,423,619
            
            $
            3,474,174Adjustments
                to reconcile net income to net cash provided by operating
                activitiesDepreciation
            
            
            4,373,970
            
            
            3,986,136
            
            
            3,728,925Amortization
            
            
            1,724,905
            
            
            1,237,286
            
            
            1,029,122Minority
                interests in Operating Partnership
            
            
            1,890,616
            
            
            2,990,410
            
            
            3,034,795Equity
                in income of real estate partnership
            
            
            —
            
            
            (209,737
            )
            
            —Bad
                debt expense (recoveries)
            
            
            130,185
            
            
            (8,060
            )
            
            213,250Changes
                in operating assets and liabilities:Escrows
                and acquisition deposits
            
            
            (329,301
            )
            
            (317,739
            )
            
            (223,663
            )Receivables
            
            
            (368,676
            )
            
            (1,105,425
            )
            
            (387,143
            )Due
                from affiliates
            
            
            (205,457
            )
            
            297,810
            
            
            (939,038
            )Deferred
                costs
            
            
            (1,588,018
            )
            
            (952,756
            )
            
            (978,398
            )Prepaid
                expenses and other assets
            
            
            (590,978
            )
            
            352,586
            
            
            (15,336
            )Accounts
                payable and accrued expenses
            
            
            708,514
            
            
            30,149
            
            
            23,215Tenants’
                security deposits
            
            
            374,717
            
            
            4,938
            
            
            (60,295
            )Prepaid
                rent
            
            
            215,483
            
            
            (198,656
            )
            
            88,828Net
                cash provided by operating activities
            
            
            8,784,142
            
            
            9,530,561
            
            
            8,988,436Cash
                flows used in investing activities:Additions
                to real estate
            
            
            (31,791,746
            )
            
            (10,276,996
            )
            
            (8,242,179
            )Investment
                in real estate partnership
            
            
            —
            
            
            (9,033,561
            )
            
            —Distributions
                received from real estate partnership
            
            
            9,743
            
            
            9,233,555
            
            
            —Issuance
                of note receivable
            
            
            —
            
            
            —
            
            
            (290,000
            )Collections of
                note receivable
            
            
            26,099
            
            
            31,968
            
            
            22,997Net
                cash used in investing activities
            
            
            (31,755,904
            )
            
            (10,045,034
            )
            
            (8,509,182
            )Cash
                flows from financing activities:Dividends
                paid
            
            
            (5,289,300
            )
            
            (4,907,107
            )
            
            (4,907,108
            )Distributions
                paid to OP unit holders
            
            
            (4,100,105
            )
            
            (4,065,839
            )
            
            (4,065,840
            )Proceeds
                from stock offering
            
            
            17,034,829
            
            
            1,471,696
            
            
            —Proceeds
                from stock offering escrowed
            
            
            87,743
            
            
            (1,471,974
            )
            
            —Proceeds
                from notes payable
            
            
            46,725,322
            
            
            19,013,180
            
            
            6,353,182Proceeds
                from payment of note payable to affiliate
            
            
            —
            
            
            —
            
            
            (3,278,000
            )Repayments
                of notes payable
            
            
            (30,925,898
            )
            
            (9,430,029
            )
            
            —Payments
                of loan origination costs
            
            
            (343,809
            )
            
            (42,163
            )
            
            (94,500
            )Net
                cash provided by (used in) financing activities
            
            
            23,188,782
            
            
            567,764
            
            
            (5,992,266
            )Net
                increase (decrease) in cash
            
            
            217,020
            
            
            53,291
            
            
            (5,513,012
            )Cash
                and cash equivalents at beginning of year
            
            
            631,978
            
            
            578,687
            
            
            6,091,699Cash
                and cash equivalents at end of year
            
            $
            848,998
            
            $
            631,978
            
            $
            578,687




Supplemental
                disclosure of cash flow informationDebt
                assumed in connection with acquisition of properties
            
            $
            —
            
            $
            —
            
            $
            6,550,000


**See
      notes to consolidated financial statements.**  F-6
 Hartman
              Commercial Properties REIT and Subsidiary
 Notes
              to Consolidated Financial Statements
 December
            31, 2005


**Note
      1 - Summary of Significant Accounting Policies**




Description
      of business and nature of operations




Hartman
      Commercial Properties REIT (“HCP”) was formed as a real estate investment trust,
      pursuant to the Texas Real Estate Investment Trust Act on August 20, 1998 to
      consolidate and expand the real estate investment strategy of Allen R. Hartman
      (“Hartman”) in acquiring and managing office and retail properties. In July
      2004, HCP changed its state of organization from Texas to Maryland pursuant
      to a
      merger of HCP directly with and into a Maryland real estate investment trust
      formed for the sole purpose of the reorganization and the conversion of each
      outstanding common share of beneficial interest of the Texas entity into 1.42857
      common shares of beneficial interest of the Maryland entity (see Note 11).
      Hartman, HCP’s Chairman of the Board of Trustees, has been engaged in the
      ownership, acquisition, and management of commercial properties in the Houston,
      Texas, metropolitan area for over 20 years. HCP serves as the general partner
      of
      Hartman REIT Operating Partnership, L.P. (the “Operating Partnership” or “HROP”
or “OP”), which was formed on December 31, 1998 as a Delaware limited
      partnership. HCP and the Operating Partnership are collectively referred to
      herein as the “Company.” HCP currently conducts substantially all of its
      operations and activities through the Operating Partnership. As the general
      partner of the Operating Partnership, HCP has the exclusive power to manage
      and
      conduct the business of the Operating Partnership, subject to certain customary
      exceptions. Hartman Management, L.P. (the “Management Company”), a company
      wholly owned by Hartman, provides a full range of real estate services for
      the
      Company, including leasing and property management, accounting, asset management
      and investor relations. As of December 31, 2005, 2004 and 2003, the Company
      owned and operated 37, 34 and 33 office and retail properties in and around
      Houston, Dallas and San Antonio, Texas.




Basis
      of consolidation




HCP
      is
      the sole general partner of the Operating Partnership and possesses full legal
      control and authority over the operations of the Operating Partnership. As
      of
      December 31, 2005, HCP owned a majority of the partnership interests in the
      Operating Partnership. Consequently, the accompanying consolidated financial
      statements of HCP include the accounts of the Operating Partnership. All
      significant intercompany balances have been eliminated. Minority interest in
      the
      accompanying consolidated financial statements represents the share of equity
      and earnings of the Operating Partnership allocable to holders of partnership
      interests other than the Company. Net income is allocated to minority interests
      based on the weighted-average percentage ownership of the Operating Partnership
      during the year. Issuance of additional common shares of beneficial interest
      in
      HCP (“common shares”) and units of limited partnership interest in the Operating
      Partnership (“OP Units”) changes the ownership interests of both the minority
      interests and HCP.




Basis
      of accounting




The
      financial records of the Company are maintained on the accrual basis of
      accounting whereby revenues are recognized when earned and expenses are recorded
      when incurred.




Cash
      and cash equivalents




The
      Company considers all highly liquid debt instruments purchased with an original
      maturity of three months or less to be cash equivalents. Cash and cash
      equivalents at December 31, 2005 and 2004 consist of demand deposits at
      commercial banks and money market funds.




F-7
 Hartman
            Commercial Properties REIT and Subsidiary
 Notes
            to Consolidated Financial Statements
 December
          31, 2005


**Note
      1 - Summary of Significant Accounting Policies (Continued)**




Due
      from affiliates




Due
      from
      affiliates include amounts owed to the Company from Hartman operated limited
      partnerships and other entities.




Escrows
      and acquisition deposits




Escrow
      deposits include escrows established pursuant to certain mortgage financing
      arrangements for real estate taxes, insurance, maintenance and capital
      expenditures. Escrow deposits also include the proceeds of the Public Offering
      until investors are admitted as shareholders as described in Note 11. The
      balance in the Public Offering escrow account was $1,559,439 at December 31,
      2005 as follows:




Gross
                offering proceeds
            
            $
            1,560,100Less
                discounts
            
            
            (661
            )Balance
                in escrow account at December 31, 2005
            
            $
            1,559,439




Acquisition
      deposits include earnest money deposits on future acquisitions.




Real
      estate




Real
      estate properties are recorded at cost, net of accumulated depreciation.
      Improvements, major renovations, and certain costs directly related to the
      acquisition, improvement, and leasing of real estate are capitalized.
      Expenditures for repairs and maintenance are charged to operations as incurred.
      Depreciation is computed using the straight-line method over the estimated
      useful lives of 5 to 39 years for the buildings and improvements. Tenant
      improvements are depreciated using the straight-line method over the life of
      the
      lease.




Management
      reviews its properties for impairment whenever events or changes in
      circumstances indicate that the carrying amount of the assets, including accrued
      rental income, may not be recoverable through operations. Management determines
      whether an impairment in value has occurred by comparing the estimated future
      cash flows (undiscounted and without interest charges), including the estimated
      residual value of the property, with the carrying cost of the property. If
      impairment is indicated, a loss will be recorded for the amount by which the
      carrying value of the property exceeds its fair value. Management has determined
      that there has been no impairment in the carrying value of the Company’s real
      estate assets as of December 31, 2005.




Deferred
      costs




Deferred
      costs consist primarily of leasing commissions paid to the Management Company
      and deferred financing costs. Leasing commissions are amortized using the
      straight-line method over the terms of the related lease agreements. Deferred
      financing costs are amortized on the straight-line method over the terms of
      the
      loans, which approximates the interest method. Costs allocated to in-place
      leases whose terms differ from market terms related to acquired properties
      are
      amortized over the remaining life of the respective leases.




F-8
 Hartman
            Commercial Properties REIT and Subsidiary
 Notes
            to Consolidated Financial Statements
 December
          31, 2005


**Note
      1 - Summary of Significant Accounting Policies (Continued)**




Offering
      costs




Offering
      costs include selling commissions, issuance costs, investor relations fees
      and
      unit purchase discounts. These costs were incurred in the raising of capital
      through the sale of common shares and are treated as a reduction of
      shareholders’ equity.




Revenue
      recognition




All
      leases on properties held by the Company are classified as operating leases,
      and
      the related rental income is recognized on a straight-line basis over the terms
      of the related leases. Differences between rental income earned and amounts
      due
      per the respective lease agreements are capitalized or charged, as applicable,
      to accrued rent receivable. Percentage rents are recognized as rental income
      when the thresholds upon which they are based have been met. Recoveries from
      tenants for taxes, insurance, and other operating expenses are recognized as
      revenues in the period the corresponding costs are incurred. The Company
      provides an allowance for doubtful accounts against the portion of tenant
      accounts receivable which is estimated to be uncollectible.




Federal
      income taxes




HCP
      is
      qualified as a real estate investment trust (“REIT”) under the Internal Revenue
      Code of 1986 and is therefore not subject to Federal income taxes provided
      it
      meets all conditions specified by the Internal Revenue Code for retaining its
      REIT status. HCP believes it has continuously met these conditions since
      reaching 100 shareholders in 1999 (see Note 9).




Use
      of
      estimates




The
      preparation of financial statements in conformity with U.S. generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and disclosure of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of revenues and expenses during the reporting period.
      Significant estimates used by the Company include the estimated useful lives
      for
      depreciable and amortizable assets and costs, and the estimated allowance for
      doubtful accounts receivable. Actual results could differ from those
      estimates.




Fair
      value of financial instruments




The
      Company’s financial instruments consist primarily of cash, cash equivalents,
      accounts receivable and accounts and notes payable. The carrying value of cash,
      cash equivalents, accounts receivable and accounts payable are representative
      of
      their respective fair values due to the short-term nature of these instruments.
      The fair value of the Company’s debt obligations is representative of its
      carrying value based upon current rates offered for similar types of borrowing
      arrangements.




F-9
 Hartman
            Commercial Properties REIT and Subsidiary
 Notes
            to Consolidated Financial Statements
 December
          31, 2005


**Note
      1 - Summary of Significant Accounting Policies (Continued)**




Concentration
      of risk




Substantially
      all of the Company’s revenues are obtained from office, office-warehouse and
      retail locations in the Houston, Dallas and San Antonio, Texas metropolitan
      areas. The Company maintains cash accounts in major U.S. financial institutions.
      The terms of these deposits are on demand to minimize risk. The balances of
      these accounts occasionally exceed the federally insured limits, although no
      losses have been incurred in connection with such cash balances.




Comprehensive
      income




The
      Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 130,
“Reporting Comprehensive Income” in 1999. For the years presented, the Company
      did not have significant amounts of comprehensive income.




New
      accounting pronouncements




In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      123R, “Share Based Payment.” This statement requires companies to categorize
      share based payment as either liability or equity awards. For liability awards,
      companies will remeasure the award at fair value at each balance sheet date
      until the award is settled. Equity classified awards are measured at the
      grant-date fair value and are not remeasured. SFAS No. 123R is effective for
      interim or annual periods beginning after June 15, 2005. Awards issued, modified
      or settled after the effective date will be measured and recorded in accordance
      with SFAS No. 123R. On April 14, 2005, the SEC adopted a new rule that defers
      the effective date of SFAS No. 123R and allows companies to implement the
      provisions of SFAS 123R at the beginning of their next fiscal year. 
Management believes that the implementation of this standard will not have
      a
      material effect on the Company’s consolidated financial position or results of
      operations.




In
      December 2004, the FASB issued SFAS No. 153, “Accounting for Non-monetary
      Transactions.” This standard requires that non-monetary exchanges be accounted
      for at fair value, recognizing any gain or loss, if the transactions meet a
      commercial-substance criteria and fair value is determinable. SFAS No. 153
      is
      effective for non-monetary transactions occurring in fiscal years beginning
      after June 15, 2005. Management believes that the implementation of this
      standard will not have a material effect on the Company’s consolidated financial
      position or results of operations.




In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections -
      A Replacement of APB Opinion No. 2 and FASB Statement No. 3.” This statement
      changes the requirements for the accounting for and reporting of a change in
      accounting principle. This statement applies to all voluntary changes in
      accounting principle. It also applies to changes required by an accounting
      pronouncement in the unusual instance that the pronouncement does not include
      specific transition provisions. When a pronouncement includes specific
      transition provisions, those provisions should be followed. This statement
      is
      effective for fiscal years beginning after December 15, 2005 and is not expected
      to have a material impact on the Company’s consolidated financial
      statements.




F-10
 Hartman
            Commercial Properties REIT and Subsidiary
 Notes
            to Consolidated Financial Statements
 December
          31, 2005


**Note
      2 - Real Estate**




During
      2003, the Company acquired from an unrelated party one multi-tenant retail
      center comprising approximately 192,458 square feet of GLA. The property was
      acquired for cash and assumption of debt of $6,550,000 for a total consideration
      of approximately $13,100,000.




During
      2004, the Company acquired from an unrelated party one multi-tenant retail
      center comprising approximately 95,032 square feet of GLA. The property was
      acquired for cash in the amount of approximately $8,900,000.




On
      March
      14, 2005, the Company acquired from an unrelated party one multi-tenant office
      building comprising approximately 106,169 square feet of GLA. The property
      was
      acquired for cash in the amount of approximately $5,500,000 plus closing
      costs.




On
      August
      10, 2005, the Company acquired from an unrelated party one multi-tenant office
      building comprising approximately 125,874 square feet of GLA. The property
      was
      acquired for cash in the amount of approximately $7,980,000 plus closing
      costs.




On
      November 22, 2005, the Company acquired from an unrelated party one multi-tenant
      office building comprising approximately 253,981 square feet of GLA. The
      property was acquired for cash in the amount of approximately $16,950,000 plus
      closing costs.




The
      purchase prices the Company paid for the properties were determined by, among
      other procedures, estimating the amount and timing of expected cash flows from
      the acquired properties, discounted at market rates. This process in general
      also results in the assessment of fair value for each property.




The
      Company allocates the purchase price of real estate to the acquired tangible
      assets, consisting of land, building and tenant improvements, and identified
      intangible assets and liabilities, generally consisting of the value of
      above-market and below-market leases, other value of in-place leases and value
      of tenant relationships, based in each case on management’s estimates of their
      fair values.




F-11
 Hartman
            Commercial Properties REIT and Subsidiary
 Notes
            to Consolidated Financial Statements
 December
          31, 2005


**Note
      2 - Real Estate (Continued)**




Management
      estimates the fair value of acquired tangible assets by valuing the acquired
      property as if it were vacant. The “as-if-vacant” value (limited to the purchase
      price) is allocated to land, building, and tenant improvements based on
      management’s determination of the relative fair values of these assets.




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




The
      aggregate value of other intangible assets acquired is measured based on the
      difference between (i) the property valued with existing in-place leases
      adjusted to market rental rates and (ii) the property valued as if vacant.
      Management’s estimates of value are made using methods similar to those used by
      independent appraisers, primarily discounted cash flow analysis. Factors
      considered by management in its analysis include an estimate of carrying costs
      during hypothetical expected lease-up periods considering current market
      conditions, and costs to execute similar leases. The Company also considers
      information obtained about each property as a result of its pre-acquisition
      due
      diligence, marketing and leasing activities in estimating the fair value of
      the
      tangible and intangible assets acquired. In estimating carrying costs,
      management also includes real estate taxes, insurance and other operating
      expenses and estimates of lost rentals at market rates during the expected
      lease-up periods, which generally range from four to 18 months, depending on
      specific local market conditions. Management also estimates costs to execute
      similar leases including leasing commissions, legal and other related expenses
      to the extent that such costs are not already incurred in connection with a
      new
      lease origination as part of the transaction.




The
      total
      amount of other intangible assets acquired is further allocated to in-place
      lease values and customer relationship intangible values based on management’s
      evaluation of the specific characteristics of each tenant’s lease and the
      Company’s overall relationship with that respective tenant. Characteristics
      considered by management in allocating these values include the nature and
      extent of the Company’s existing business relationships with the tenant, growth
      prospects for developing new business with the tenant, the tenant’s credit
      quality, and expectations of lease renewals (including those existing under
      the
      terms of the lease agreement), among other factors.




The
      value
      of in-place leases, if any, is amortized to expense over the remaining initial
      term of the respective leases, which, for leases with allocated intangible
      value, are expected to range generally from five to 10 years. The value of
      customer relationship intangibles is amortized to expense over the remaining
      initial term and any renewal periods in the respective leases, but in no event
      does the amortization period for intangible assets exceed the remaining
      depreciable life of the building. Should a tenant terminate its lease, the
      unamortized portion of the in-place lease value and customer relationship
      intangibles are charged to expense.




F-12
 Hartman
            Commercial Properties REIT and Subsidiary
 Notes
            to Consolidated Financial Statements
 December
          31, 2005


**Note
      2 - Real Estate (Continued)**




At
      December 31, 2005, the Company owned 37 commercial properties in the Houston,
      Dallas and San Antonio, Texas areas comprising approximately 3,121,000 square
      feet of GLA.




**Note
      3 - Investment in Real Estate Partnership**




During
      January 2004, the Company contributed approximately $9,000,000 to Hartman Gulf
      Plaza Acquisitions LP, a Texas limited partnership, in which it is a limited
      partner with a 73.11% percentage interest. On January 30, 2004, the partnership
      purchased Gulf Plaza, a 120,651 square foot office building located in Houston,
      Texas. The purpose of the partnership is to acquire and sell tenant-in-common
      interests in the building. The Company had received approximately $9,200,000
      in
      distributions from the partnership for the year ended December 31,
      2004.




The
      Company’s equity in income of the partnership of $0 and $209,737 for the years
      ended December 31, 2005 and 2004 respectively, is included in other income
      on
      the consolidated statement of income. The partnership owns a one-percent
      tenant-in-common interest in the building.




**Note
      4 - Note Receivable**




In
      January 2003, the Company partially financed the sale of a property it had
      previously sold and for which it had taken a note receivable of $420,000 as
      part
      of the consideration. The Company advanced $290,000 and renewed and extended
      the
      balance of $420,000 still due from the original sale.




The
      original principal amount of the note receivable, dated January 10, 2003, is
      $710,000. The note is payable in monthly installments of $6,382, including
      interest at 7% per annum, for the first two years of the note. Thereafter,
      monthly installments of $7,489 are due with interest at 10% per annum. The
      note
      is fully amortizing with the final payment due January 10, 2018.









F-13
 Hartman
            Commercial Properties REIT and Subsidiary
 Notes
            to Consolidated Financial Statements
 December
          31, 2005


**Note
      5 - Deferred Costs**




Deferred
      costs consist of the following:




December
                31,2005
            
            2004Leasing
                commissions
            
            $
            5,921,323
            
            $
            4,333,305Deferred
                financing costs
            
            
            1,829,191
            
            
            1,485,3817,750,514
            
            
            5,818,686Less:
                accumulated amortization
            
            
            (4,746,296
            )
            
            (3,021,392
            )$
            3,004,218
            
            $
            2,797,294





A
      summary
      of expected future amortization of deferred costs is as
      follows:




Years
                  Ended
                December
                  31,2006
              
              $
              776,0832007
              
              
              675,9702008
              
              
              458,7032009
              
              
              313,2392010
              
              
              213,928Thereafter
              
              
              566,295$
              3,004,218




**Note
      6 - Future Minimum Lease Income**




The
      Company leases the majority of its office and retail properties under
      noncancelable operating leases which provide for minimum base rentals plus,
      in
      some instances, contingent rentals based upon a percentage of the tenants’ gross
      receipts.




A
      summary
      of minimum future rentals to be received (exclusive of renewals, tenant
      reimbursements, and contingent rentals) under noncancelable operating leases
      in
      existence at December 31, 2005 is as follows:




Years
                Ended
              December
                31,2006
            
            $
            19,518,5732007
            
            
            16,775,3092008
            
            
            13,219,8482009
            
            
            9,536,5692010
            
            
            6,513,033Thereafter
            
            
            17,240,829$
            82,804,161







F-14
 Hartman
            Commercial Properties REIT and Subsidiary
 Notes
            to Consolidated Financial Statements
 December
          31, 2005


**Note
      7 - Debt**




Notes
      payable




Mortgages
      and other notes payable consist of the following:




December
                31,2005
            
            2004Mortgages
                and other notes payable
            
            $
            40,050,441
            
            $
            40,526,111Revolving
                loan secured by ownership in properties
            
            
            32,975,094
            
            
            16,700,000Total
            
            $
            73,025,535
            
            $
            57,226,111







In
      December 2002, the Company refinanced substantially all of its mortgage debt
      with a $34,440,000 three-year floating rate mortgage loan collateralized by
      18
      of the Company’s properties and a maturity date of January 1, 2006, extendable
      for an additional two years. Effective as of February 28, 2006 we extended
      the
      loan to January 1, 2008. During the initial term, the loan bore interest at
      2.5%
      over a 30-day LIBOR (6.79% and 4.79% at December 31, 2005 and 2004,
      respectively) computed on the basis of a 360-day year. During the extension
      term
      the interest rate will be 3.0% over 30-day LIBOR. Interest only payments are
      due
      monthly and the loan may be repaid in full or in $100,000 increments, with
      a
      final balloon payment due upon maturity. The Company capitalized loan costs
      of
      $1,271,043 financed from the proceeds of the refinancing and amortized the
      costs
      fully over the initial term of the loan. The security documents related to
      the
      mortgage loan contain a covenant that requires Hartman REIT Operating
      Partnership II, L.P., a wholly owned subsidiary formed for the purpose of this
      credit facility, to maintain adequate capital in light of its contemplated
      operations. This covenant and the other restrictions provided for in the credit
      facility do not affect Hartman REIT Operating Partnership II, L.P.’s ability to
      make distributions to the Company.




On
      June
      30, 2003, the Company entered into a $25,000,000 loan agreement with a bank
      pursuant to which the Company could, subject to the satisfaction of certain
      conditions, borrow funds to acquire additional income producing properties.
      The
      revolving loan agreement matured in June, 2005 and provided for interest
      payments at a rate, adjusted monthly, of either (at the Company’s option) 30-day
      LIBOR plus 225 basis points, or the bank’s prime rate less 50 basis points, with
      either rate subject to a floor of 3.75% per annum. The loan was secured by
      then
      owned and otherwise unencumbered properties and could also be secured by
      properties acquired with the proceeds drawn from the facility. The Company
      was
      required to make monthly payments of interest only, with the principal and
      all
      accrued unpaid interest being due at maturity of the loan. The loan could be
      prepaid at any time without penalty. The Company paid off and closed this credit
      facility during June 2005.




F-15
 Hartman
            Commercial Properties REIT and Subsidiary
 Notes
            to Consolidated Financial Statements
 December
          31, 2005


**Note
      7 - Debt (Continued)**




On
      June
      2, 2005, the Company finalized a new revolving credit facility with a consortium
      of banks. The facility became retroactively effective as of March 11, 2005,
      the
      date certain documents for the facility were placed into escrow, pending the
      completion of the transaction. The credit facility is secured by a pledge of
      the
      partnership interests in Hartman REIT Operating Partnership III LP (“HROP III”),
      a new wholly owned subsidiary of the Operating Partnership that was formed
      to
      hold title to the properties comprising the borrowing base pool for the
      facility. Presently there are 18 properties owned by HROP III.




The
      current limit of the credit facility is $50,000,000 and it may be increased
      to
      $100,000,000 as the borrowing base pool expands. The Company entered into this
      credit facility to refinance the $25,000,000 loan described above, to finance
      property acquisitions and for general corporate purposes.




As
      of
      December 31, 2005 the balance outstanding under the facility was $32,975,094
      and
      the availability to draw was $17,024,906.




Outstanding
      amounts under the credit facility accrue interest computed (at the
      Company’s option) at either the LIBOR or the Alternative Base Rate on the
      basis of a 360 day year, plus the applicable margin as determined from the
      following table:




Total
                Leverage Ratio
            
            LIBOR
                Margin
            
            Alternative
                Base Rate MarginLess
                than 60% but greater than or equal to 50%
            
            2.40%
            
            1.15%Less
                than 50% but greater than or equal to 45%
            
            2.15%
            
            1.025%Less
                than 45%
            
            1.90%
            
            1.00%







The
      Alternative Base Rate is a floating rate equal to the higher of the bank’s base
      rate or the Federal Funds Rate plus .5%. LIBOR loans will be available in one,
      two, three or six month periods, with a maximum of six contracts at any time.
      The effective interest rate as of December 31, 2005 was 5.68% per
      annum.




Interest
      only is payable monthly under the loan with the total amount of principal due
      at
      maturity on March 11, 2008. The loan may be prepaid at any time in part or
      in
      whole, provided that the credit facility is not in default. If LIBOR pricing
      is
      elected, there is a prepayment penalty based on a “make-whole” calculation for
      all costs associated with prepaying a LIBOR borrowing.




On
      March
      27, 2006 the Company executed an interest rate swap, dated as of March 16,
      2006,
      for the purpose of hedging variable interest rate exposure, in compliance with
      the requirements of the loan agreement. The lender waived default for the fact
      that the hedge was not executed within six months of closing, as required by
      the
      loan agreement.




As
      of December 31, 2005, the Company was in
      violation of a loan covenant which provides that the ratio of declared
      dividends to funds from operations (as defined in the loan agreement) shall
      not
      be greater than 95%.  As this violation constitutes an event of
      default, the lenders have the right to accelerate payment of this credit
      facility.  As of December 31, 2005, and continuing through March 31,
      2006 the Company had not received a waiver from the required majority
      of the consortium of banks in the credit facility.  The Company
      is currently in discussions to receive such waiver, and as the
      violation constitutes less than 0.4%, management believes that the
      Company will receive such waiver.  However, there can be no assurance
      that management will be successful in its negotiations to obtain a
      waiver.




In
      connection with the purchase of the Windsor Park property in December 2003,
      the
      Company assumed a note payable in the amount of $6,550,000 secured by the
      property. The balance at December 31, 2005 was $5,610,441. The note is payable
      in equal monthly installments of principal and interest of $80,445, with
      interest at the rate of 8.34% per annum. The balance of the note is payable
      in
      full on December 1, 2006.




F-16
 Hartman
            Commercial Properties REIT and Subsidiary
 Notes
            to Consolidated Financial Statements
 December
          31, 2005


**Note
      7 - Debt (Continued)**




Anual
      maturities of notes payable, including the revolving loan, are as
      follows:




Year
                Ended
              December
                31,2006
            
            $
            5,610,4412007
            
            
            —2008
            
            
            67,415,094$
            73,025,535





Note
      payable to affiliate




In
      November 2002, the Company issued a $3,278,000 note payable bearing interest
      at
      4.25% per annum to Houston R.E. Income Properties XVI, Ltd., a related party
      operated by Hartman. The note was secured by property and was due upon demand
      with interest only payments due monthly. The note was repaid in the second
      quarter of 2003.




Supplemental
      cash flow information




The
      Company made cash payments for interest on debt of $3,788,471, $2,728,985 and
      $1,321,758 for the years ended December 31, 2005, 2004 and 2003,
      respectively.









F-17
 Hartman
            Commercial Properties REIT and Subsidiary
 Notes
            to Consolidated Financial Statements
 December
          31, 2005


**Note
      8 - Earnings Per Share**




Basic
      earnings per share is computed using net income to common shareholders and
      the
      weighted average number of common shares outstanding. Diluted earnings per
      share
      reflects common shares issuable from the assumed conversion of OP Units
      convertible into common shares. Only those items that have a dilutive impact
      on
      basic earnings per share are included in the diluted earnings per share.
      Accordingly, excluded from the earnings per share calculation for each of the
      years ended December 31, 2005, 2004 and 2003 are 5,808,337 OP units as their
      inclusion would be antidilutive.




Year
                Ended December 31,2005
            
            2004
            
            2003Basic and
              diluted
              earnings per shareWeighted
                average common shares outstanding
            
            
            7,887,749
            
            
            7,010,146
            
            
            7,010,146Basic
                and diluted earnings per share
            
            $
            0.310
            
            $
            0.488
            
            $
            0.496Net
                income
            
            $
            2,448,182
            
            $
            3,423,619
            
            $
            3,474,174







**Note
      9 - Federal Income Taxes**




Federal
      income taxes are not provided because the Company intends to and believes it
      qualifies as a REIT under the provisions of the Internal Revenue Code.
      Shareholders of the Company include their proportionate taxable income in their
      individual tax returns. As a REIT, the Company must distribute at least 90%
      of
      its ordinary taxable income to its shareholders and meet certain income sources
      and investment restriction requirements. In addition, REITs are subject to
      a
      number of organizational and operational requirements. If the Company fails
      to
      qualify as a REIT in any taxable year, the Company will be subject to federal
      income tax (including any applicable alternative minimum tax) on its taxable
      income at regular corporate tax rates.




Taxable
      income differs from net income for financial reporting purposes principally
      due
      to differences in the timing of recognition of interest, real estate taxes,
      depreciation and rental revenue.




For
      Federal income tax purposes, the cash dividends distributed to shareholders
      are
      characterized as follows for the years ended December 31:




2005
            
            2004
            
            2003Ordinary
                income (unaudited)
            
            62.6%
            
            67.7%
            
            24.8%Return
                of capital (unaudited)
            
            37.4%
            
            32.3%
            
            75.2%Capital
                gain distributions (unaudited)
            
            0.0%
            
            0.0%
            
            0.0%Total
            
            100.0%
            
            100.0%
            
            100.0%





F-18
 Hartman
            Commercial Properties REIT and Subsidiary
 Notes
            to Consolidated Financial Statements
 December
          31, 2005


**Note
      10 - Related-Party Transactions**




In
      January 1999, the Company entered into a property management agreement with
      the
      Management Company. Effective September 1, 2004, this agreement was amended
      and
      restated. Prior to September 1, 2004, in consideration for supervising the
      management and performing various day-to-day affairs, the Company paid the
      Management Company a management fee of 5% and a partnership management fee
      of 1%
      based on Effective Gross Revenues from the properties, as defined. After
      September 1, 2004, the Company pays the Management Company management fees
      in an
      amount not to exceed the fees customarily charged in arm’s length transactions
      by others rendering similar services in the same geographic area, as determined
      by a survey of brokers and agents in such area. The Company expects these fees
      to be between approximately 2% and 4% of Gross Revenues, as such term is defined
      in the amended and restated property management agreement, for the management
      of
      commercial office buildings and approximately 5% of Gross Revenues for the
      management of retail and office-warehouse properties. Effective September 1,
      2004, the Company entered into an advisory agreement with the Management Company
      which provides that the Company pay the Management Company a fee of one-fourth
      of .25% of Gross Asset Value, as such term is defined in the advisory agreement,
      per quarter for asset management services. The Company incurred total
      management, partnership and asset management fees of $1,405,587, $1,339,822
      and
      $1,232,127 for the years ended December 31, 2005, 2004 and 2003, respectively,
      of which $111,286 and $54,331 were payable at December 31, 2005 and 2004,
      respectively.




During
      July 2004, the Company amended certain terms of its Declaration of Trust. Under
      the amended terms, the Management Company may be required to reimburse the
      Company for operating expenses exceeding certain limitations determined at
      the
      end of each fiscal quarter. Reimbursements, if any, from the Management Company
      are recorded on a quarterly basis as a reduction in management
      fees.




Under
      the
      provisions of the property management agreements, costs incurred by the
      Management Company for the management and maintenance of the properties are
      reimbursable to the Management Company. At December 31, 2005 and 2004, $51,675
      and $188,772, respectively, was payable to the Management Company related to
      these reimbursable costs.




In
      consideration of leasing the properties, the Company also pays the Management
      Company leasing commissions of 6% for leases originated by the Management
      Company and 4% for expansions and renewals of existing leases based on Effective
      Gross Revenues from the properties. The Company incurred total leasing
      commissions to the Management Company of $1,588,018, $952,756 and $978,398
      for
      the years ended December 31, 2005, 2004 and 2003, respectively, of which $78,744
      and $232,343 were payable at December 31, 2005 and 2004,
      respectively.




The
      fees
      payable to the Management Company under the new agreements effective September
      1, 2004 were not intended to be significantly different from those that would
      have been payable under the previous agreement. Upon actual calculation, the
      asset management fee under the new agreement was significantly higher. The
      Management Company waived the excess of the fee for the period September 1,
      2004 through December 31, 2005 in perpetuity.




F-19
 Hartman
            Commercial Properties REIT and Subsidiary
 Notes
            to Consolidated Financial Statements
 December
          31, 2005


**Note
      10 - Related-Party Transactions (Continued)**




In
      connection with the Public Offering described in Note 11, the Company reimburses
      the Management Company up to 2.5% of the gross selling price of all common
      shares sold for organization and offering expenses (excluding selling
      commissions and a dealer manager fee) incurred by the Management Company on
      behalf of the Company.   The Company pays its dealer manager, through
      the Management Company by agreement between them, a fee of up to 2.5% of the
      gross selling price of all common shares sold in the offering.  The Company
      incurred total fees of $929,819 for the year ended December 31, 2005. Such
      fees
      have been treated as offering costs and netted against the proceeds from the
      sale of common shares.




Also
      in
      connection with the Public Offering described in Note 11, the Management Company
      also receives an acquisition fee equal to 2% of the gross selling price of
      all
      common shares sold for services in connection with the selection, purchase,
      development or construction of properties for the Company. The Company will
      capitalize this acquisition fee and allocate it to the purchase price of
      properties acquired with offering proceeds. The Company incurred total fees
      of
      $373,111 for the year ended December 31, 2005. At December 31, 2005 and 2004,
      $109,160 and $200,415, respectively, were payable to the Management Company
      relating to organization and offering expenses, dealer manager fees and
      acquisition fees.




The
      Management Company paid the Company $110,042, $106,824 and $106,789 for office
      space in 2005, 2004 and 2003, respectively. Such amounts are included in rental
      income in the consolidated statements of income.




HCP’s
      day-to-day operations are strategically directed by the Board of Trustees and
      implemented through the Management Company. Hartman is HCP’s Board Chairman and
      sole owner of the Management Company. Hartman was owed $47,478 and $47,386
      in
      dividends payable on his common shares at December 31, 2005 and 2004,
      respectively. Hartman owned 3.0%, 3.9% and 3.4% of the issued and outstanding
      common shares of the Company as of December 31, 2005, 2004 and 2003,
      respectively.




The
      Company was a party to various other transactions with related parties which
      are
      reflected in due to/from affiliates in the accompanying consolidated balance
      sheets and also disclosed in Notes 7 and 11.




F-20
 Hartman
            Commercial Properties REIT and Subsidiary
 Notes
            to Consolidated Financial Statements
 December
          31, 2005


**Note
      11 - Shareholders’ Equity**




In
      July
      2004, HCP changed its state of organization from Texas to Maryland pursuant
      to a
      merger of HCP directly with and into a Maryland real estate investment trust
      formed for the sole purpose of the reorganization and the conversion of each
      outstanding common share of beneficial interest of the Texas entity into 1.42857
      common shares of beneficial interest of the Maryland entity. Under its Articles
      of Amendment and Restatement in effect, HCP has authority to issue 400,000,000
      common shares of beneficial interest, $0.001 par value per share, and 50,000,000
      preferred shares of beneficial interest, $0.001 par value per share. All capital
      stock amounts, share and per share information in the accompanying consolidated
      financial statements and the related notes to consolidated financial statements
      reflect this recapitalization.




On
      September 15, 2004, HCP’s Registration Statement on Form S-11, with respect to a
      public offering (the “Public Offering”) of up to 10,000,000 common shares of
      beneficial interest to be offered at a price of $10 per share was declared
      effective under the Securities Act of 1933. The Registration Statement also
      covers up to 1,000,000 shares available pursuant to HCP’s dividend reinvestment
      plan to be offered at a price of $9.50 per share. The shares are offered to
      investors on a best efforts basis. Post-Effective Amendment No. 1 to the
      Registration Statement was declared effective by the SEC on June 27, 2005 and
      Post-Effective Amendment No. 2 to the Registration Statement was declared
      effective by the SEC on March 9, 2006.




F-21
 Hartman
            Commercial Properties REIT and Subsidiary
 Notes
            to Consolidated Financial Statements
 December
          31, 2005


**Note
      11 - Shareholders’ Equity (Continued)**




As
      of
      December 31, 2005, 1,865,557 shares had been issued pursuant to the Public
      Offering with offering proceeds received of $16,674,294, net of offering
      costs of $1,981,276. An additional 37,951 shares had been issued pursuant to
      the
      dividend reinvestment plan in lieu of dividends totalling $360,535.  An
      additional 156,010 shares, with gross offering proceeds of $1,559,439, were
      issued during 2006 related to subscriptions received in December
      2005.




All
      net
      proceeds of the Public Offering are contributed by HCP to the Operating
      Partnership in exchange for OP Units. The Operating Partnership uses the
      proceeds to acquire additional properties and for general working capital
      purposes. In accordance with the Operating Partnership’s Agreement of Limited
      Partnership, in exchange for the contribution of net proceeds from sales of
      stock, HCP received an equivalent number of HROP Units as shares of stock that
      are sold.




At
      December 31, 2005 and 2004, Hartman and the Board of Trustees collectively
      owned
      5.95% and 8.22%, respectively of HCP’s outstanding shares.




Operating
      Partnership units




Limited
      partners in the Operating Partnership holding OP Units have the right to convert
      their OP Units into common shares at a ratio of one OP Unit for one common
      share. In connection with the reorganization discussed above, OP Unit holders
      received 1.42857 OP Units for each OP Unit previously held. Subject to certain
      restrictions, OP Units are not convertible into common shares until the later
      of
      one year after acquisition or an initial public offering of the common shares.
      As of December 31, 2005 and 2004 there were 14,360,503 and 12,456,995,
      respectively, OP Units outstanding. HCP owned 8,552,166 and 6,648,658 Units
      as
      of December 31, 2005 and 2004. HCP’s weighted-average share ownership in the
      Operating Partnership was approximately 56.44%, 53.37% and 53.37% during the
      years ended December 31, 2005, 2004 and 2003, respectively. At December 31,
      2005
      and 2004, Hartman and the Board of Trustees collectively owned 7.82% and 9.50%,
      respectively, of the Operating Partnership’s outstanding units.




F-22
 Hartman
            Commercial Properties REIT and Subsidiary
 Notes
            to Consolidated Financial Statements
 December
          31, 2005


**Note
      11 - Shareholders’ Equity (Continued)**




Dividends
      and distributions




The
      following tables summarize the cash dividends/distributions payable to holders
      of common shares and holders of OP Units (after giving effect to the
      recapitalization) related to the years ended December 31, 2005 and
      2004.




HCP
                ShareholdersDividend/Distribution
                per
              Common
                Share
            
            Date
                Dividend Payable
            
            Total
                Amount Payable0.0583
            
            4/15/04
            
            $408,7620.0583
            
            5/15/04
            
            408,7620.0584
            
            6/15/04
            
            409,2530.0583
            
            7/15/04
            
            408,7620.0583
            
            8/15/04
            
            408,7620.0584
            
            9/15/04
            
            409,2530.0583
            
            10/15/04
            
            408,6920.0583
            
            11/15/04
            
            408,6920.0584
            
            12/15/04
            
            409,3920.0583
            
            1/15/05
            
            408,6920.0583
            
            2/15/05
            
            408,6920.0589
            
            3/15/05
            
            412,8970.0589
            
            4/15/05
            
            412,9310.0589
            
            5/15/05
            
            429,4160.0590
            
            6/15/05
            
            439,4530.0589
            
            7/15/05
            
            445,6210.0589
            
            8/15/05
            
            452,3960.0590
            
            9/15/05
            
            460,5810.0589
            
            10/15/05
            
            467,2600.0589
            
            11/15/05
            
            470,6270.0590
            
            12/15/05
            
            480,7370.0589
            
            1/15/06
            
            489,0190.0589
            
            2/15/06
            
            509,4750.0590
            
            3/15/06
            
            526,966







F-23
 Hartman
            Commercial Properties REIT and Subsidiary
 Notes
            to Consolidated Financial Statements
 December
          31, 2005


**Note
      11 - Shareholders’ Equity (Continued)**




OP
                Unit Holders Including Minority Unit
                HoldersDividend/Distribution
                per
              OP
                Unit
            
            Date
                Dividend Payable
            
            Total
                Amount Payable0.0583
            
            1/15/04
            
            $726,3680.0583
            
            2/15/04
            
            726,3680.0584
            
            3/15/04
            
            727,2400.0583
            
            4/15/04
            
            726,3680.0583
            
            5/15/04
            
            726,3680.0584
            
            6/15/04
            
            727,2400.0583
            
            7/15/04
            
            726,3680.0583
            
            8/15/04
            
            726,3680.0584
            
            9/15/04
            
            727,2400.0583
            
            10/15/04
            
            726,2430.0583
            
            11/15/04
            
            726,2430.0584
            
            12/15/04
            
            727,4880.0583
            
            1/15/05
            
            726,2430.0583
            
            2/15/05
            
            726,2430.0589
            
            3/15/05
            
            733,7170.0589
            
            4/15/05
            
            733,7480.0589
            
            5/15/05
            
            748,4980.0590
            
            6/15/05
            
            758,1540.0589
            
            7/15/05
            
            762,9960.0589
            
            8/15/05
            
            768,9760.0590
            
            9/15/05
            
            776,3450.0589
            
            10/15/05
            
            782,1360.0589
            
            11/15/05
            
            785,3880.0590
            
            12/15/05
            
            802,1010.0589
            
            01/15/06
            
            809,8380.0589
            
            02/15/06
            
            830,2940.0590
            
            03/15/06
            
            848,042


F-24
 Hartman
            Commercial Properties REIT and Subsidiary
 Notes
            to Consolidated Financial Statements
 December
          31, 2005


**Note
      12 - Incentive Share Plan**




The
      Company has adopted an Employee and Trust Manager Incentive Share Plan (the
      “Incentive Share Plan”) to (i) furnish incentives to individuals chosen to
      receive share-based awards because they are considered capable of improving
      operations and increasing profits; (ii) encourage selected persons to accept
      or
      continue employment with the Company; and (iii) increase the interest of
      employees and Trustees in the Company’s welfare through their participation and
      influence on the growth in value of the common shares. The class of eligible
      persons that can receive grants of incentive awards under the Incentive Share
      Plan consists of key employees, directors, non-employee trustees, members of
      the
      Management Company and consultants as determined by the compensation committee
      of the Board of Trustees. The total number of common shares that may be issued
      under the Incentive Share Plan is an amount of shares equal to 5% of the
      outstanding shares on a fully diluted basis. As of December 31, 2005, no options
      or awards to purchase common shares have been granted under the Incentive Share
      Plan.




Under
      SFAS No. 123, “Accounting for Stock Based Compensation”, and SFAS No. 148,
“Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment
      of FASB Statement No. 123”, the Company is permitted to either record
      compensation expense for incentive awards granted to employees and directors
      based on their fair value on the date of grant or to apply the intrinsic value
      method prescribed in Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees”, and recognize compensation expense,
      if any, to the extent that the fair market value of the underlying stock on
      the
      grant date exceeds the exercise price of the award granted. Compensation expense
      for awards granted to employees and directors is currently based on the
      intrinsic value method. For awards granted to non-employees, such as Trustees,
      employees of the Management Company, and consultants, the Company currently
      records expense based on the award’s fair value on its date of grant as required
      by SFAS 123 and SFAS 148. Pursuant to SFAS 123R, discussed in Note 1, the
      Company will determine upon the award of any shared-based payments whether
      the
      award should be categorized as an equity award or a liability award, and account
      for each accordingly.




**Note
      13 - Commitments and Contingencies**




The
      Company is a participant in various legal proceedings and claims that arise
      in
      the ordinary course of business. These matters are generally covered by
      insurance. While the resolution of these matters cannot be predicted with
      certainty, the Company believes that the final outcome of such matters will
      not
      have a material effect on the financial position, results of operations, or
      cash
      flows of the Company.









F-25
 Hartman
            Commercial Properties REIT and Subsidiary
 Notes
            to Consolidated Financial Statements
 December
          31, 2005


**Note
      14 - Segment Information**




Management
      does not differentiate by property types and because no individual property
      is
      so significant as to be a separate segment, the Company does not present segment
      information.




**Note
      15 - Pro Forma Financial Information (Unaudited)**




During
      2005 the Company acquired two office buildings for $24,930,000 that the Company
      considers to be material. The pro forma financial information for the years
      ended December 31, 2005 and 2004 is based on the historical statements of
      the Company after giving effect to the acquisitions as if such acquisitions
      took
      place on January 1, 2004.




The
      pro
      forma financial information shown below is presented for informational purposes
      only and may not be indicative of results that would have actually occurred
      if
      the acquisition had been in effect at the date indicated, nor does it purport
      to
      be indicative of the results that may be achieved in the future.




Year
                    Ended
                    December
                      31, 2005
                
                Year
                    Ended
                  December
                    31, 2004Pro
                    forma revenues
                
                $
                27,518,098
                
                $
                27,500,345Pro
                    forma net income available tocommon
                    shareholders
                
                $
                2,240,150
                
                $
                3,307,715Pro
                    forma basic and diluted earnings percommon
                    share
                
                $
                0.284
                
                $
                0.471







F-26
 Hartman
            Commercial Properties REIT and Subsidiary
 Notes
            to Consolidated Financial Statements
 December
          31, 2005


**Note
      16 - Selected Quarterly Financial Data (Unaudited)**




The
      following is a summary of the unaudited quarterly financial information for
      the
      years ended December 31, 2005 and 2004:




**First**
              **Quarter**
            
            **Second**
              **Quarter**
            
            **Third**
              **Quarter**
            
            **Fourth**
              **Quarter****2005**Revenues
            
            $
            6,312,640
            
            $
            6,270,409
            
            $
            6,204,629
            
            $
            6,431,555Income
                before minority interests
            
            
            1,521,681
            
            
            1,339,869
            
            
            894,172
            
            
            583,076Minority
                interest in income
            
            
            (697,237
            )
            
            (593,383
            )
            
            (382,662
            )
            
            (217,334
            )Net
                income
            
            
            824,444
            
            
            746,486
            
            
            511,510
            
            
            365,742Basic
                and diluted earnings per share
            
            $
            0.114
            
            $
            0.097
            
            $
            0.064
            
            $
            0.035**2004**Revenues
            
            $
            5,486,426
            
            $
            6,095,742
            
            $
            5,922,856
            
            $
            5,978,633Income
                before minority interests
            
            
            1,384,807
            
            
            1,792,127
            
            
            1,493,760
            
            
            1,743,335Minority
                interest in income
            
            
            (645,689
            )
            
            (835,606
            )
            
            (696,464
            )
            
            (812,651
            )Net
                income
            
            
            739,118
            
            
            956,521
            
            
            797,296
            
            
            930,684Basic
                and diluted earnings per share
            
            $
            0.105
            
            $
            0.136
            
            $
            0.114
            
            $
            0.133







F-27


**Hartman
      Commercial Properties REIT and Subsidiary**




**Schedule
      II - Valuation and Qualifying Accounts**




Description
            
            Balance
                at
              Beginning
                of
              Period
            
            Additions
              Charged
              (Recoveries
              Credited)
                to
              Expense
            
            Deductions
            
            Balance
                  at
                End
                  of PeriodAllowance
                for doubtful accounts:Year
                ended December 31, 2005
            
            $
            342,690
            
            $
            130,185
            
            $
            -
            
            $
            472,875Year
                ended December 31, 2004
            
            $
            350,750
            
            $
            (8,060
            )
            $
            -
            
            $
            342,690Year
                ended December 31, 2003
            
            $
            391,500
            
            $
            213,250
            
            $
            (254,000
            )
            $
            350,750







F-28


**Hartman
      Commercial Properties REIT and Subsidiary**




**Schedule
      III - Real Estate and Accumulated Depreciation**




**December
      31, 2005**




Initial
                Cost
            
            Costs
                Capitalized
              Subsequent
                to Acquisition
            
            Gross
                Amount
              at
                which Carried
              at
                End of Period (1) (2)Name
            
            Description
            
            Land
            
            Building
                and
              Improvements
            
            Improvements
            
            Carrying
              Costs
            
            Land
            
            Building
                and
              Improvements
            
            TotalHolly
                Knight
            
            Retail
            
            $
            319,981
            
            $
            1,292,820
            
            $
            38,226
            
            
            -
            
            $
            319,981
            
            $
            1,331,046
            
            $
            1,651,027Kempwood
                Plaza
            
            Retail
            
            
            733,443
            
            
            1,798,433
            
            
            941,766
            
            
            -
            
            
            733,443
            
            
            2,740,199
            
            
            3,473,642Bissonnet
                Beltway
            
            Retail
            
            
            414,515
            
            
            1,946,808
            
            
            162,650
            
            
            -
            
            
            414,515
            
            
            2,109,458
            
            
            2,523,973Interstate
                10
            
            Office-warehouse
            
            
            207,903
            
            
            3,700,169
            
            
            258,711
            
            
            -
            
            
            207,903
            
            
            3,958,880
            
            
            4,166,783West
                Belt Plaza
            
            Office-warehouse
            
            
            567,805
            
            
            2,165,204
            
            
            318,666
            
            
            -
            
            
            567,805
            
            
            2,483,870
            
            
            3,051,675Greens
                Road
            
            Retail
            
            
            353,604
            
            
            1,283,613
            
            
            97,778
            
            
            -
            
            
            353,604
            
            
            1,381,391
            
            
            1,734,995Town
                Park
            
            Retail
            
            
            849,529
            
            
            2,911,206
            
            
            198,963
            
            
            -
            
            
            849,529
            
            
            3,110,169
            
            
            3,959,698Webster
                Point
            
            Retail
            
            
            720,336
            
            
            1,150,029
            
            
            75,253
            
            
            -
            
            
            720,336
            
            
            1,225,282
            
            
            1,945,618Centre
                South
            
            Retail
            
            
            481,201
            
            
            1,595,997
            
            
            386,964
            
            
            -
            
            
            481,201
            
            
            1,982,961
            
            
            2,464,162Torrey
                Square
            
            Retail
            
            
            1,981,406
            
            
            2,970,911
            
            
            378,109
            
            
            -
            
            
            1,981,406
            
            
            3,349,020
            
            
            5,330,426Dairy
                Ashford
            
            Office-warehouse
            
            
            225,544
            
            
            1,211,476
            
            
            90,854
            
            
            -
            
            
            225,544
            
            
            1,302,330
            
            
            1,527,874Main
                Park
            
            Office-warehouse
            
            
            1,327,762
            
            
            2,721,075
            
            
            496,123
            
            
            -
            
            
            1,327,762
            
            
            3,217,198
            
            
            4,544,960Northeast
                Square
            
            Retail
            
            
            564,927
            
            
            2,007,585
            
            
            283,436
            
            
            -
            
            
            564,927
            
            
            2,291,021
            
            
            2,855,948Plaza
                Park
            
            Office-warehouse
            
            
            901,602
            
            
            3,293,514
            
            
            247,948
            
            
            -
            
            
            901,602
            
            
            3,541,462
            
            
            4,443,064Northwest
                Place
            
            Office-warehouse
            
            
            110,790
            
            
            978,554
            
            
            27,365
            
            
            -
            
            
            110,790
            
            
            1,005,919
            
            
            1,116,709Lion
                Square
            
            Retail
            
            
            1,546,010
            
            
            4,289,098
            
            
            281,567
            
            
            -
            
            
            1,546,010
            
            
            4,570,665
            
            
            6,116,675Zeta
                Building
            
            Office
            
            
            637,180
            
            
            1,819,409
            
            
            152,200
            
            
            -
            
            
            637,180
            
            
            1,971,609
            
            
            2,608,789Royal
                Crest
            
            Office
            
            
            508,850
            
            
            1,355,215
            
            
            129,852
            
            
            -
            
            
            508,850
            
            
            1,485,067
            
            
            1,993,917Featherwood
            
            Office
            
            
            368,283
            
            
            2,591,026
            
            
            479,721
            
            
            -
            
            
            368,283
            
            
            3,070,747
            
            
            3,439,030South
                Richey
            
            Retail
            
            
            777,720
            
            
            2,584,167
            
            
            231,926
            
            
            -
            
            
            777,720
            
            
            2,816,093
            
            
            3,593,813Corporate
                Park Woodland
            
            Office-warehouse
            
            
            651,549
            
            
            5,376,813
            
            
            516,690
            
            
            -
            
            
            651,549
            
            
            5,893,503
            
            
            6,545,052South
                Shaver
            
            Retail
            
            
            184,368
            
            
            632,635
            
            
            192,875
            
            
            -
            
            
            184,368
            
            
            825,510
            
            
            1,009,878Providence
            
            Retail
            
            
            917,936
            
            
            3,674,732
            
            
            476,520
            
            
            -
            
            
            917,936
            
            
            4,151,252
            
            
            5,069,188Corporate
                Park Northwest
            
            Office-warehouse
            
            1,533,940
            
            
            6,305,599
            
            
            453,026
            
            
            -
            
            
            1,533,940
            
            
            6,758,625
            
            
            8,292,565Bellnot
                Square
            
            Retail
            
            
            1,154,239
            
            
            4,638,055
            
            
            53,643
            
            
            -
            
            
            1,154,239
            
            
            4,691,698
            
            
            5,845,937Corporate
                Park West
            
            Office-warehouse
            
            
            2,555,289
            
            
            10,507,691
            
            
            338,354
            
            
            -
            
            
            2,555,289
            
            
            10,846,045
            
            
            13,401,334Westgate
            
            Office-warehouse
            
            
            672,303
            
            
            2,775,879
            
            
            137,630
            
            
            -
            
            
            672,303
            
            
            2,913,509
            
            
            3,585,812Garden
                Oaks
            
            Retail
            
            
            1,285,027
            
            
            5,292,755
            
            
            185,828
            
            
            -
            
            
            1,285,027
            
            
            5,478,583
            
            
            6,763,610Westchase
            
            Retail
            
            
            422,745
            
            
            1,750,555
            
            
            240,132
            
            
            -
            
            
            422,745
            
            
            1,990,687
            
            
            2,413,432Sunridge
            
            Retail
            
            
            275,534
            
            
            1,186,037
            
            
            58,295
            
            
            -
            
            
            275,534
            
            
            1,244,332
            
            
            1,519,866Holly
                Hall
            
            Office-warehouse
            
            
            607,519
            
            
            2,515,881
            
            
            20,803
            
            
            -
            
            
            607,519
            
            
            2,536,684
            
            
            3,144,203Brookhill
            
            Office-warehouse
            
            
            185,659
            
            
            787,605
            
            
            166,014
            
            
            -
            
            
            185,659
            
            
            953,619
            
            
            1,139,278Windsor
                Park
            
            Retail
            
            
            2,620,500
            
            
            10,482,000
            
            
            -
            
            
            -
            
            
            2,620,500
            
            
            10,482,000
            
            
            13,102,500SugarPark
                Plaza
            
            Retail
            
            
            1,781,211
            
            
            7,124,846
            
            
            20,098
            
            
            -
            
            
            1,781,211
            
            
            7,144,944
            
            
            8,926,155Woodlake
                Plaza
            
            Office
            
            
            1,106,541
            
            
            4,426,169
            
            
            108,582
            
            
            -
            
            
            1,106,541
            
            
            4,534,751
            
            
            5,641,2929101
                LBJ Freeway
            
            Office
            
            
            1,597,190
            
            
            6,077,820
            
            
            -
            
            
            -
            
            
            1,597,190
            
            
            6,077,820
            
            
            7,675,010Uptown
                Tower
            
            Office
            
            
            1,620,625
            
            
            15,550,861
            
            
            -
            
            
            -
            
            
            1,620,625
            
            
            15,550,861
            
            
            17,171,486TOTAL
            
            
            
            
            $
            32,770,566
            
            $
            132,772,242
            
            $
            8,246,568
            
            $
            -
            
            $
            32,770,566
            
            $
            141,018,810
            
            $
            173,789,376







F-29


**Hartman
      Commercial Properties REIT and Subsidiary**




**Schedule
      III - Real Estate and Accumulated Depreciation**




**December
      31, 2005**




**(Continued)**




Name
            
            Description
            
            Accumulated
              Depreciation
            
            Date
                ofConstruction
            
            Date
                Acquired
            
            Depreciation
                LifeHolly
                Knight
            
            Retail
            
            $
            338,536
            
            
            
            
            8/1/00
            
            5-39
                yearsKempwood
                Plaza
            
            Retail
            
            
            834,002
            
            
            
            
            2/2/99
            
            5-39
                yearsBissonnet
                Beltway
            
            Retail
            
            
            616,715
            
            
            
            
            1/1/99
            
            5-39
                yearsInterstate
                10
            
            Office-warehouse
            
            
            1,184,715
            
            
            
            
            1/1/99
            
            5-39
                yearsWest
                Belt Plaza
            
            Office-warehouse
            
            
            768,161
            
            
            
            
            1/1/99
            
            5-39
                yearsGreens
                Road
            
            Retail
            
            
            356,008
            
            
            
            
            1/1/99
            
            5-39
                yearsTown
                Park
            
            Retail
            
            
            818,353
            
            
            
            
            1/1/99
            
            5-39
                yearsWebster
                Point
            
            Retail
            
            
            256,690
            
            
            
            
            1/1/00
            
            5-39
                yearsCentre
                South
            
            Retail
            
            
            512,427
            
            
            
            
            1/1/00
            
            5-39
                yearsTorrey
                Square
            
            Retail
            
            
            618,091
            
            
            
            
            1/1/00
            
            5-39
                yearsDairy
                Ashford
            
            Office-warehouse
            
            
            335,129
            
            
            
            
            1/1/99
            
            5-39
                yearsMain
                Park
            
            Office-warehouse
            
            
            902,119
            
            
            
            
            1/1/99
            
            5-39
                yearsNortheast
                Square
            
            Retail
            
            
            541,413
            
            
            
            
            1/1/99
            
            5-39
                yearsPlaza
                Park
            
            Office-warehouse
            
            
            762,163
            
            
            
            
            1/1/00
            
            5-39
                yearsNorthwest
                Place
            
            Office-warehouse
            
            
            198,531
            
            
            
            
            1/1/00
            
            5-39
                yearsLion
                Square
            
            Retail
            
            
            911,889
            
            
            
            
            1/1/00
            
            5-39
                yearsZeta
                Building
            
            Office
            
            
            394,162
            
            
            
            
            1/1/00
            
            5-39
                yearsRoyal
                Crest
            
            Office
            
            
            346,036
            
            
            
            
            1/1/00
            
            5-39
                yearsFeatherwood
            
            Office
            
            
            779,583
            
            
            
            
            1/1/00
            
            5-39
                yearsSouth
                Richey
            
            Retail
            
            
            575,481
            
            
            
            
            8/25/99
            
            5-39
                yearsCorporate
                Park Woodland
            
            Office-warehouse
            
            
            1,257,607
            
            
            11/1/00
            
            
            
            5-39
                yearsSouth
                Shaver
            
            Retail
            
            
            239,183
            
            
            
            
            12/17/99
            
            5-39
                yearsProvidence
            
            Retail
            
            
            584,646
            
            
            
            
            3/30/01
            
            5-39
                yearsCorporate
                Park Northwest
            
            Office-warehouse
            
            
            832,896
            
            
            
            
            1/1/02
            
            5-39
                yearsBellnot
                Square
            
            Retail
            
            
            537,795
            
            
            
            
            1/1/02
            
            5-39
                yearsCorporate
                Park West
            
            Office-warehouse
            
            
            1,276,672
            
            
            
            
            1/1/02
            
            5-39
                yearsWestgate
            
            Office-warehouse
            
            
            367,747
            
            
            
            
            1/1/02
            
            5-39
                yearsGarden
                Oaks
            
            Retail
            
            
            680,428
            
            
            
            
            1/1/02
            
            5-39
                yearsWestchase
            
            Retail
            
            
            298,180
            
            
            
            
            1/1/02
            
            5-39
                yearsSunridge
            
            Retail
            
            
            138,815
            
            
            
            
            1/1/02
            
            5-39
                yearsHolly
                Hall
            
            Office-warehouse
            
            
            291,896
            
            
            
            
            1/1/02
            
            5-39
                yearsBrookhill
            
            Office-warehouse
            
            
            191,030
            
            
            
            
            1/1/02
            
            5-39
                yearsWindsor
                Park
            
            Retail
            
            
            509,792
            
            
            
            
            12/16/03
            
            5-39
                yearsSugarPark
                Plaza
            
            Retail
            
            
            266,500
            
            
            
            
            9/8/04
            
            5-39
                yearsWoodlake
                Plaza
            
            Office
            
            
            102,958
            
            
            
            
            3/14/05
            
            5-39
                years9101
                LBJ Freeway
            
            Office
            
            
            89,990
            
            
            
            
            8/10/05
            
            5-39
                yearsUptown
                Tower
            
            Office
            
            
            108,047
            
            
            
            
            11/22/05
            
            5-39
                yearsTOTAL
            
            
            
            
            $
            19,824,386




(1)
            Reconciliations
                of total real estate carrying value for the three years ended December
                31,
                2005 follows:





**2005**
            
            **2004**
            
            **2003**Balance
                at beginning of period
            
            $
            141,997,630
            
            $
            131,720,634
            
            $
            117,029,136Additions
                during the periodAcquisitions
            
            
            30,379,206
            
            
            8,906,057
            
            
            13,102,500Improvements
            
            
            1,412,540
            
            
            1,370,939
            
            
            1,588,99831,791,746
            
            
            10,276,996
            
            
            14,691,498Deductions
                - cost of real estate sold
            
            
            —
            
            
            —
            
            
            —Balance
                at close of period
            
            $
            173,789,376
            
            $
            141,997,630
            
            $
            131,720,634





(2)
            The
                aggregate cost of real estate for federal income tax purposes is
                $142,764,149.


F-30


**Hartman
      Commercial Properties REIT and Subsidiary**




**Index
      to Exhibits**




**Exhibit
                No.**
            **Description**3.1
            Declaration
                of Trust of Hartman Commercial Properties REIT, a Maryland real estate
                investment trust (previously filed as and incorporated by reference
                to
                Exhibit 3.1 to the Registrant’s Registration Statement on Form S-11/A,
                Commission File No. 333-111674, filed on May 24, 2004)3.2
            Articles
                of Amendment and Restatement of Declaration of Trust of Hartman Commercial
                Properties REIT (previously filed as and incorporated by reference
                to
                Exhibit 3.2 to the Registrant’s Registration Statement on Form S-11/A,
                Commission File No. 333-111674, filed on July 29, 2004)3.3
            Bylaws
                (previously filed as and incorporated by reference to Exhibit 3.2
                to the
                Registrant’s Registration Statement on Form S-11, Commission File No.
                333-111674, filed on December 31, 2003)4.1
            Specimen
                certificate for common shares of beneficial interest, par value $.001
                (previously filed as and incorporated by reference to Exhibit 4.2
                to the
                Registrant’s Registration Statement on Form S-11, Commission File No.
                333-111674, filed on December 31, 2003)10.1
            Agreement
                of Limited Partnership of Hartman REIT Operating Partnership, L.P.
                (previously filed as and incorporated by reference to Exhibit 10.1
                to the
                Registrant’s General Form for Registration of Securities on Form 10, filed
                on April 30, 2003)10.2
            Amended
                and Restated Property Management Agreement (previously filed and
                incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-K
                Annual Report for the year ended December 31, 2004, filed on March
                31,
                2005)10.3
            Advisory
                Agreement (previously filed and incorporated by reference to Exhibit
                10.3
                to the Registrant’s Annual Report on Form 10-K for the year ended December
                31, 2004, filed on March 31, 2005)10.4
            Certificate
                of Formation of Hartman REIT Operating Partnership II GP, LLC (previously
                filed as and incorporated by reference to Exhibit 10.3 to the Registrant’s
                General Form for Registration of Securities on Form 10, filed on
                April 30,
                2003)10.5
            Limited
                Liability Company Agreement of Hartman REIT Operating Partnership
                II GP,
                LLC (previously filed as and incorporated by reference to Exhibit
                10.4 to
                the Registrant’s General Form for Registration of Securities on Form 10,
                filed on April 30, 2003)10.6
            Agreement
                of Limited Partnership of Hartman REIT Operating Partnership II,
                L.P.
                (previously filed as and incorporated by reference to Exhibit 10.6
                to the
                Registrant’s General Form for Registration of Securities on Form 10, filed
                on April 30, 2003)10.7
            Promissory
                Note, dated December 20, 2002, between Hartman REIT Operating Partnership
                II, L.P. and GMAC Commercial Mortgage Corporation (previously filed
                as and
                incorporated by reference to Exhibit 10.7 to the Registrant’s General Form
                for Registration of Securities on Form 10, filed on April 30,
                2003)










**Exhibit
                No.**
            **Description**10.8
            Deed
                of Trust and Security Agreement, dated December 20, 2002, between
                Hartman
                REIT Operating Partnership II, L.P. and GMAC Commercial Mortgage
                Corporation (previously filed as and incorporated by reference to
                Exhibit
                10.8 to the Registrant’s General Form for Registration of Securities on
                Form 10, filed on April 30, 2003)10.9
            Loan
                Agreement between Hartman REIT Operating Partnership, L.P. and Union
                Planter’s Bank, N.A. (previously filed as and incorporated by reference to
                Exhibit 10.10 to Amendment No. 2 to the Registrant’s General Form for
                Registration of Securities on Form 10, filed on August 6,
                2003)10.10+
            Employee
                and Trust Manager Incentive Plan (previously filed and incorporated
                by
                reference to Exhibit 10.9 to the Registrant’s General Form for
                Registration of Securities on Form 10, filed on April 30,
                2003)10.11+
            Summary
                Description of Hartman Commercial Properties REIT Trustee Compensation
                Arrangements (previously filed and incorporated by reference to Exhibit
                10.11 of the Registrant’s Annual Report on Form 10-K for the year ended
                December 31, 2004, filed on March 31, 2005)10.12
            Form
                of Agreement and Plan of Merger and Reorganization (previously filed
                as
                and incorporated by reference to the Registrant’s Proxy Statement, filed
                on April 29, 2004)10.13
            Dealer
                Manager Agreement (previously filed and as incorporated by reference
                to
                Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K for the year
                ended December 31, 2004, Commission File No. 000-50256, Central Index
                Key
                No. 0001175535, filed on March 31, 2005)10.14
            Escrow
                Agreement (previously filed as and incorporated by reference to Exhibit
                10.14 to the Registrant’s Annual Report on Form 10-K for the year ended
                December 31, 2004, filed on March 31, 2005)10.15
            Form
                of Amendment to the Agreement of Limited Partnership of Hartman REIT
                Operating Partnership, L.P. (previously filed in and incorporated
                by
                reference to the Registrant’s Registration Statement on Form S-11,
                Commission File No. 333-111674, filed on December 31,
                2003)10.16
            Revolving
                Credit Agreement among Hartman REIT Operating Partnership, L.P.,
                Hartman
                REIT Operating Partnership III LP, and KeyBank National Association
                (together with other participating lenders), dated June 2, 2005
                (previously filed as and incorporated by reference to Exhibit 10.13
                to
                Post-Effective Amendment No. 1 to the Registrant’s Registration Statement
                on Form S-11, Commission File No. 333-111674, filed on June 17,
                2005)10.17
            Form
                of Revolving Credit Note under Revolving Credit Agreement among Hartman
                REIT Operating Partnership, L.P., Hartman REIT Operating Partnership
                III
                LP, and KeyBank National Association (together with other participating
                lenders) (previously filed as and incorporated by reference to Exhibit
                10.14 to Post-Effective Amendment No. 1 to the Registrant’s Registration
                Statement on Form S-11, Commission File No. 333-111674, filed on
                June 17,
                2005)10.18
            Guaranty
                under Revolving Credit Agreement among Hartman REIT Operating Partnership,
                L.P., Hartman REIT Operating Partnership III LP, and KeyBank National
                Association (together with other participating lenders) (previously
                filed
                as and incorporated by reference to Exhibit 10.15 to Post-Effective
                Amendment No. 1 to the Registrant’s Registration Statement on Form S-11,
                Commission File No. 333-111674, filed on June 17,
                2005)










**Exhibit
                No.**
            **Description**10.19
            Form
                of Negative Pledge Agreement under Revolving Credit Agreement among
                Hartman REIT Operating Partnership, L.P., Hartman REIT Operating
                Partnership III LP, and KeyBank National Association (together with
                other
                participating lenders) (previously filed as and incorporated by reference
                to Exhibit 10.16 to Post-Effective Amendment No. 1 to the Registrant’s
                Registration Statement on Form S-11, Commission File No. 333-111674,
                filed
                on June 17, 2005)10.20
            Form
                of Collateral Assignment of Partnership Interests under Revolving
                Credit
                Agreement among Hartman REIT Operating Partnership, L.P., Hartman
                REIT
                Operating Partnership III LP, and KeyBank National Association (together
                with other participating lenders) (previously filed as and incorporated
                by
                reference to Exhibit 10.17 to Post-Effective Amendment No. 1 to the
                Registrant’s Registration Statement on Form S-11, Commission File No.
                333-111674, filed on June 17, 2005)10.21
            Modification
                Agreement, dated as of February 28, 2006, between Hartman REIT Operating
                Partnership II, L.P. and GMAC Commercial Mortgage Corporation (previously
                filed and incorporated by reference to Exhibit 10.1 to the Registrant’s
                Current Report on Form 8-K, filed March 3, 2006)10.22*
            Interest Rate
              Swap
              Agreement dated as of March 16, 2006, between Hartman REIT Operating
              Partnership, L.P. Hartman REIT Operating Partnership III LP, and KeyBank
              National Association.14.1*
            Code
                of Business Conduct21.1
            List
                of subsidiaries of Hartman Commercial Properties REIT (previously
                filed as
                and incorporated by reference to Exhibit 21.1 to the Registrant’s Annual
                Report on Form 10-K for the year ended December 31, 2004, filed on
                March
                31, 2005)24.1
            Power
                of Attorney (included on the Signatures page hereto)31.1*
            Certification
                of Principal Executive Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200231.2*
            Certification
                of Principal Financial Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200232.1*
            Certificate
                of Chief Executive and Financial Officers


________________________




* 
      Filed herewith.




+ 
      Denotes management contract or compensatory plan or arrangement.