**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549







**FORM
      10-K**




[Mark
      One]


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




For
      the
      fiscal year ended December 31, 2006




OR




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




For
      the
      transition period from ______________ to ______________




**Commission
      File Number: 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 111, Houston, Texas**
                (Address
                  of Principal Executive Offices)
              
              **77043-3124**
                (Zip
                  Code)


Registrant’s
      telephone number, including area code: **(713)
      827-9595**




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  ̈
      No
ý




Indicate
      by check mark if the
      Registrant is not required to file reports pursuant to Section 13 or 15(d)
      of
      the Act. Yes  ̈
      No
ý




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




Indicate
      by check mark if disclosure of
      delinquent filers pursuant to Item 405 of Regulation S-K is not contained
      herein, and will not be contained, to the best 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 filer ý




Indicate
      by check mark whether the
      Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
      Yes  ̈
      No
ý




The
      aggregate market value of the
      voting stock held by nonaffiliates of the Registrant as of June 30, 2006 (the
      last business day of the Registrant’s most recently completed second fiscal
      quarter) was $91,796,082 assuming a market value of $10 per share.




As
      of March 30, 2007, the Registrant
      had 10,001,269 common shares of beneficial interest outstanding.




DOCUMENTS
      INCORPORATED BY REFERENCE: We incorporate by reference into Part III portions
      of
      our proxy statement for the 2007 annual meeting of shareholders.












**HARTMAN
      COMMERCIAL PROPERTIES REIT**


**FORM
      10-K**


**Year
      Ended December 31, 2006**





**TABLE
      OF CONTENTS**





PagePART
                I
            
            1Item
                1.
            Business
            1Item
                1A.
            Risk
                Factors
            9Item
                2.
            Properties
            16Item
                3.
            Legal
                Proceedings
            20Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            21PART
                II
            
            22Item
                5.
            Market
                for Registrant’s Common Equity, Related Shareholder Matters and Issuer
                Purchases of Equity Securities
            22Item
                6.
            Selected
                Financial Data
            25Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            26Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market Risk
            39Item
                8.
            Financial
                Statements and Supplementary Data
            39Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            39Item
                9A.
            Controls
                and Procedures
            39Item
                9B.
            Other
                Information
            39PART
                III
            
            40Item
                10.
            Directors,
                Executive Officers and Corporate Governance
            40Item
                11.
            Executive
                Compensation
            40Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Shareholder Matters
            40Item
                13.
            Certain
                Relationships and Related Transactions, and Director
                Independence
            40Item
                14.
            Principal
                Accounting Fees and Services
            40PART
                IV
            
            41Item
                15.
            Exhibits
                and Financial Statement Schedules
            41SIGNATURES
            42









***Unless
      the context otherwise requires, all references in this report to “HCP,” “we,”
“us” or “our” are to Hartman Commercial Properties REIT and its
      subsidiaries.***




**Forward-Looking
      Statements**




This
      annual report contains forward-looking statements, including discussion and
      analysis of our financial condition, anticipated capital expenditures required
      to complete projects, amounts of anticipated cash distributions to our
      shareholders in the future and other matters. These forward-looking statements
      are not historical facts but are the intent, belief or current expectations
      of
      our management based on its knowledge and understanding of our 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 our 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 our management’s view only as of the date of this Form
      10-K. We undertake 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;




·
            litigation
                risks;




·
            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 our
      Registration Statement on Form S-11, as amended, as previously filed with the
      Securities and Exchange Commission.









**PART
      I**




**Item
              1.**
            **Business.**




***General
      Description of Business***




We
      are 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 REIT trust under federal income tax laws. We invest
      in
      and operate retail, office and warehouse properties located primarily in the
      Houston, Dallas and San Antonio, Texas metropolitan areas. In the future, we
      plan to expand our investments to similar properties in major metropolitan
      cities in the United States. Each of our properties is leased 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”). We are the sole general partner of the Operating Partnership. As
      of December 31, 2006, we owned a 62.34% interest in the Operating
      Partnership.




On
      December 31, 2006, we owned 36 properties. All of our properties are located
      in
      the Houston, Dallas and San Antonio, Texas metropolitan areas. The properties
      consist of 19 retail, 6 office and 11 warehouse properties, and each is designed
      to meet the needs of surrounding local communities. As of December 31, 2006,
      our
      properties contained approximately 3,093,000 square feet of gross leasable
      area
      in the aggregate.




As
      of
      December 31, 2006, our properties were approximately 83.3% leased. Substantially
      all of our revenues consist of base rents received under long-term leases.
      For
      the year ended December 31, 2006, our total revenues were approximately $29.8
      million. Approximately 84.7% of our existing leases contain “step up” rental
      clauses that provide for increases in the base rental payments.




*Business
      Objectives and Strategy*




Our
      strategy is to remain focused on being a value-added commercial property REIT
      that acquires and expands its ownership of primarily C-class retail, office
      and
      warehouse properties. We will look for properties that are under leased and/or
      under managed in markets with potential upside, and add-value through our
      management and leasing expertise. The key elements of our strategy
      include:




·
            *Capitalize
                on 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 by using our
                leasing
                and property management expertise, and (ii) stabilized properties
                that are
                relatively well occupied and managed and provide steady current net
                operating income with lower growth
                potential.




·
            *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.




·
            *Investment
                Outside of Texas Market.*We
                seek to invest in similar properties outside of Texas**in
                cities with exceptional demographics to diversify market risk.




·
            *Selectively
                Develop Properties*.
                We intend to selectively develop properties where land prices and
                economic
                trends indicate higher potential future returns from development
                than from
                acquisitions.




·
            *Strengthen
                Our Balance Sheet.*We
                intend to selectively dispose of assets that have little or no growth
                potential and recycle the capital into assets having potential for
                greater
                returns.




1


***Recent
      Developments***




*Property
      Management and Advisory Agreements*




On
      October 2, 2006, our Board of Trustees (our “Board”) terminated for cause our
      amended and restated property management agreement, dated September 1, 2004,
      with Hartman Management, L.P. (“Hartman Management”). Our Board determined that
      it was in the best interests of HCP and our shareholders to terminate this
      agreement because of numerous unresolved issues and conflicts of interest
      between Allen R. Hartman, Hartman Management and HCP. In addition, our Board
      believed that it was in the best interests of HCP and our shareholders to move
      forward as a self-managed, self-administered REIT with a new, fully integrated
      management team.





In
      addition, our Board elected not to renew our advisory agreement, dated August
      31, 2004, with Hartman Management. This agreement had been extended on a
      month-to-month basis and ultimately expired on September 30, 2006.





Pursuant
      to these agreements, Hartman Management had acted as our advisor and manager
      of
      our day-to-day operations and portfolio of properties. Mr. Hartman, our former
      President, Secretary, Chief Executive Officer, and Chairman of the Board, is
      the
      sole limited partner of Hartman Management, as well as the president, secretary,
      sole trustee and sole shareholder of the general partner of Hartman Management.
      As described below, Mr. Hartman was removed by our Board as our President,
      Secretary, and Chief Executive Officer on October 2, 2006, and he resigned
      from
      our Board on October 27, 2006.





*Departure
      of Directors or Principal Officers; Election of Directors; Appointment of
      Principal Officer*




On
      October 2, 2006, our Board voted to terminate Mr. Hartman from his positions
      as
      our President, Secretary and Chief Executive Officer and appointed James C.
      Mastandrea to serve as our interim Chief Executive Officer and Chairman of
      our
      Board. Mr. Mastandrea had served as an independent member of our Board since
      July 5, 2006. There are no arrangements or understandings between Mr. Mastandrea
      and any other person pursuant to which Mr. Mastandrea was selected as an
      officer. Since the beginning of our last fiscal year, Mr. Mastandrea has had
      no
      direct or indirect interest in any transaction to which we were a party. On
      October 27, 2006, Mr. Hartman resigned from our Board.





*Litigation
      between HCP and Allen R. Hartman and Hartman Management*




In
      October 2006, we initiated an action in the 333 rd Judicial
      District Court of Harris County, Texas against Mr. Hartman and Hartman
      Management. We are seeking damages for breach of contract, fraudulent inducement
      and breach of fiduciary duties.




In
      November 2006, Mr. Hartman and Hartman Management filed a counterclaim against
      us, the members of our Board, and our Chief Operating Officer, John J. Dee.
      The
      counterclaim has since been amended to drop the claims against the individual
      defendants with the exception of Messrs. Mastandrea and Dee. The amended
      counterclaim asserts claims against us for alleged breach of contract and
      alleges that we owe Mr. Hartman and Hartman Management fees for the termination
      of an advisory agreement. The amended counterclaim asserts claims against
      Messrs. Mastandrea and Dee for tortious interference with the advisory agreement
      and a management agreement and conspiracy to seize control of us for their
      own
      financial gains. We have indemnified Messrs. Mastandrea and Dee to the extent
      allowed by our governing documents and Maryland law. The amended counterclaim
      also asserts claims against our prior outside law firm and one of its
      partners.




Limited
      discovery has been conducted in this case as of the date of this filing. The
      case is set for trial in July 2007.




It
      is too
      early to express an opinion concerning the likelihood of an adverse outcome
      on
      the counterclaim, although we intend to vigorously defend against those claims
      and vigorously prosecute our affirmative claims.




2


In
      December 2006, we also initiated an action ****** in
      the
      United States District Court for the Southern District of Texas complaining
      of
      the attempts by Mr. Hartman and Hartman Management to solicit written consents
      from shareholders to replace our Board.




Mr.
      Hartman and Hartman Management have filed a counterclaim claiming that changes
      to our bylaws and declaration of trust are invalid and that their enactment
      is a
      breach of fiduciary duty. They are seeking a declaration that the changes to
      our
      bylaws and declaration of trust are invalid and an injunction barring their
      enforcement. These changes, among other things, stagger the terms of our Board
      members over three years, require two-thirds vote of the outstanding common
      shares to remove a Board member and provide that our secretary may call a
      special meeting of shareholders only upon the written request of a majority
      of
      outstanding common shares. We believe the changes to our bylaws and declaration
      of trust are valid under Maryland law and in the best interest of our
      shareholders. We have filed a motion to dismiss the counterclaims. A group
      of
      shareholders has filed a request to intervene in this action to assert claims
      similar to those asserted by Mr. Hartman and Hartman Management. We have opposed
      the intervention.




There
      has
      been limited discovery in this case as of the date of this report. Documents
      have been produced and interrogatory responses exchanged. We have produced
      the
      members of our Board for deposition as well as Mr. Dee. The Court has conducted
      a hearing on the parties’ cross request for preliminary injunction, but has not
      yet ruled on that request.




It
      is too
      early to express an opinion concerning the likelihood of an adverse outcome
      on
      the counterclaim, although we intend to vigorously defend against those claims
      and vigorously prosecute our affirmative claim.




*Public
      Offering*




On
      September 15, 2004, our Registration Statement on Form S-11, with respect to
      a
      public offering of up to 10,000,000 common shares of beneficial interest offered
      at a price of $10 per share was declared effective under the Securities Act
      of
      1933. The Registration Statement also covered up to 1,000,000 shares available
      pursuant to our dividend reinvestment plan offered at a price of $9.50 per
      share. The shares were offered to investors on a best efforts basis.
      Post-Effective Amendments No. 1, 2 and 3 to the Registration Statement were
      declared effective by the SEC on June 27, 2005, March 9, 2006 and May 3, 2006,
      respectively.




On
      October 2, 2006, our Board terminated the public offering. On March 27, 2006,
      we
      gave the required ten days notice to our participants informing them that we
      intend to terminate our dividend reinvestment plan. As a result our dividend
      reinvestment program will terminate on April 6, 2007.




As
      of
      December 31, 2006, 2,831,184 shares had been issued pursuant to our public
      offering with net offering proceeds received of approximately $24.6 million.
      An
      additional 138,033 shares had been issued pursuant to the dividend reinvestment
      plan in lieu of dividends totaling approximately $1.3 million. Shareholders
      that
      received shares pursuant to our dividend reinvestment plan on or after October
      2, 2006 may have recission rights. See “ *Dividend
      Reinvestment Plan* ” ** in
      Item 5
      of this report.




***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.




3


*General*




We
      invest
      in commercial real estate properties, primarily retail centers, office buildings
      and 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 our properties;
                and




·
            to
                provide our shareholders with liquidity for their investment in us
                by
                listing our shares on a national exchange.




In
      addition, to the extent we determine 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 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. We currently
      have
      no investment in mortgage loans.




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
      our management, subject to approval by our Board, including a majority of our
      independent trustees.




*Acquisition
      and Investment Policies*




Although
      the Company acquired no properties in 2006, we intend to continue to acquire
      community retail centers, office and warehouse properties for long-term
      ownership and for the purpose of producing income and generating value growth.
      We seek to acquire and own properties that generally have business addresses
      in
      desirable locations. These 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 our 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), allowing us 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 or multiple properties attractive to purchasers.




We
      acquire properties primarily for income. Historically we have invested in
      properties that have been constructed and have operating histories. We may
      in
      the future, however, become more active in investing in land for development
      or
      in properties that are under development or construction where we see the
      properties having the potential for greater returns than those attainable from
      completed 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 acquire properties that are under leased and/or under managed,
      in
      markets with potential upside, and add-value through our management and leasing
      expertise. We anticipate that we will focus on properties in the $1 million
      to
      $15 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.




4


Although
      we currently intend to invest in or develop retail, office and warehouse
      properties, our future investment or redevelopment activities are not limited
      to
      any specified property type or use. 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 we believe 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
      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
      these
      properties. While we will use our best efforts to structure any sale-leaseback
      transaction so that the lease will be characterized as a “true lease” and 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 this
      characterization. In the event that a sale-leaseback transaction is
      re-characterized as a financing transaction for federal income tax purposes,
      deductions for depreciation and cost recovery relating to that 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. These leases generally
      provide for terms of three to five years and require the tenant to pay a pro
      rata share of building expenses. In typical leases, the landlord is directly
      responsible for all real estate taxes, certain sales and use taxes, special
      assessments, utilities, insurance and building repairs, and other building
      operation and management costs.




*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 this borrowing limit
      if
      any excess in borrowing over the 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 60%. As of December 31, 2006,
      we
      had a ratio of total liabilities to total assets of 45.8%. However, we may
      not
      be able to continue to achieve this objective.




We
      will
      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 that 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 unless the loan is approved by a
      majority of the trustees, including a majority of the independent trustees
      not
      otherwise interested. The trustees must determine that such loan is fair,
      competitive and commercially reasonable and no less favorable to us than a
      comparable loan between unaffiliated parties.




*Disposition
      Policies*




Currently
      we are evaluating all of our properties to determine the best long term course
      of action for each property. We may determine it is best to sell certain
      properties and reinvest the proceeds in properties that we believe have greater
      upside. We might sell a property if we believe 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. Economic or market
      conditions may, however, 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 is
      determined in large part by the amount of rent payable by the tenants.




5


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 by October 2, 2018, unless this date is extended
      by
      the majority vote of both our Board 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 that date, we are not in the process of either (i) listing our shares
      for trading on a national securities exchange or including our 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. It is
      our
      intention to consider the process of listing or liquidation prior to October
      2,
      2018. In making the decision to apply for listing, our Board 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
      our
      Board would 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 our 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 of our properties are sold and our other
      assets are liquidated.




*Dispositions*




We
      sold
      one property in 2006. On December 1, 2006, we sold Northwest Place II, a 27,974
      square foot office/warehouse building located in Houston, Texas for a sales
      price of $1,175,000. A gain of $197,000 was generated from this sale, which
      is
      reflected in our consolidated financial statements for the year ended December
      31, 2006. It is anticipated that the funds received from this sale will be
      used
      for future acquisitions and/or capital improvements to properties we believe
      have upside.




*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 those
      entities. We may acquire all or substantially all of the securities or assets
      of
      REITs or similar entities where the 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 partnerships and other ownership interests in entities
      that own real property. We expect that we may make these investments when we
      consider it more efficient to acquire an entity owning real property rather
      than
      to acquire the properties directly. We also may acquire less than all of the
      ownership interests of these entities if we determine that their interests
      are
      undervalued and that a liquidation event in respect of their interests are
      expected within the investment holding periods consistent with that of 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 entities.




6


*Equity
      Capital*




If
      our
      Board determines that it is advisable and in our best interests to raise
      additional equity capital, it has the authority, without shareholder approval,
      to authorize us to issue additional common shares or preferred shares of
      beneficial interests up to the 400,000,000 authorized shares. Additionally,
      our
      Board could cause the Operating Partnership to issue units that are convertible
      into our common shares. Subject to limitations contained in the organizational
      and governance documents of the Operating Partnership, our Board could issue,
      or
      cause to be issued, securities in any manner (and on terms and for
      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
      shares in any offering, and any offering might cause dilution of an existing
      shareholder’s investment in our 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 its
      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 any 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 property for
      personal injury or property damage associated with exposure to released
      hazardous substances. Additionally, concern about indoor exposure to mold has
      been increasing as it may cause a variety of adverse health effects and
      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 our 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 a 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.




7


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 us.




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 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 our management is unaware.




***Competition***




All
      of
      our properties are located in areas that include competing properties. The
      amount of competition in a particular area could impact our ability to acquire
      additional real estate, sell current real estate, lease space and the amount
      of
      rent we are able to charge. We may be competing with owners, including but
      not
      limited to, other REITs, insurance companies and pension funds with access
      to
      greater resources than those available to us.




***Employees***




As
      of
      December 31, 2006, we had 41 employees, one of whom was part-time.




***Financial
      Information About Segments***




Our
      management historically has not differentiated by property types and therefore
      does not presented segment information.




***Web
      Site Address***




We
      electronically file our 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 (the “SEC”). Copies of our filings with the
      SEC may be obtained at the SEC’s website, at *http://www.sec.gov* .
      Access
      to these filings is free of charge. We are currently in the process of reviewing
      and updating our business code of ethics. Once finalized, it may be viewed
      at *http://www.hcpreit.com* .
      We are
      also in the process of posting other corporate governance documentation to
      our
      website. The information on our website is not, and should not be considered,
      a
      part of this report.




8


**Item
              1A.**
            **Risk
                Factors.**




***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
      to
      shareholders. Dividends will be based principally on cash available from our
      properties, real estate securities, mortgage loans and other investments. The
      amount of cash available for dividends will be affected by many factors, such
      as
      our ability to buy properties, the yields on securities of other real estate
      programs that we invest in, and our operating expense levels, as well as many
      other variables. In 2006, our Board voted to decrease our dividend rate for
      the
      second quarter of 2006 to $0.15 per common share, as compared to $0.1768 per
      common share for the first quarter of 2006. This quarterly dividend rate
      continued for the third and fourth quarters of 2006. We can give no assurance
      that we will be able to pay or maintain dividends or that dividends will
      increase over time. In addition, we can give no assurance that rents from the
      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 in establishing
      the dividend rate to shareholders.




***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
      by
      obtaining other debt, which would reduce the amount of proceeds available for
      real estate investments.




***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 net capital gain 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 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 Board
      determines the amount of any distributions made by it. Our Board may consider
      a
      number of factors in making 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.




9


Differences
      in timing between the actual receipt of income and actual payment of deductible
      expenses and the inclusion of income and deduction of 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 requirement and to avoid the 4% excise tax described above. In
      these circumstances, we may 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 borrowings or that borrowings would
      not be advisable in the absence of the 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 current mortgage debt to obtain funds
      to
      acquire additional real properties. We may also borrow funds if necessary to
      satisfy the REIT distribution requirement described above, or otherwise as
      may
      be necessary or advisable to assure that we maintain our qualification as a
      REIT
      for federal income tax purposes.




We
      may
      incur mortgage debt on a particular piece of real property if we believe the
      property’s projected cash flow is sufficient to service the mortgage debt. If
      there is a shortfall in cash flow, however, the amount available for dividends
      to shareholders may be affected. In addition, incurring mortgage debt increases
      the risk of loss because defaults on such indebtedness may result in loss of
      property in foreclosure actions initiated by lenders. 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 lenders full or partial
      guarantees for mortgage debt incurred by 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 that 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 fail 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 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




10




·
            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:





·
            debt
                service coverage of at least 1.5 to
                1.0;




·
            loan-to-value
                ratio of a 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 our real estate
                assets;




·
            the
                ratio of secured debt to fair market value of our 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. For more discussion,
      see *Management’s
      Discussion and Analysis of Financial Condition* and *Results of Operations - Liquidity and Capital Resources.*





***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
      operations 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 retain financially sound tenants
      may be adversely impacted. 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.




11


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




There
      is
      no current public market for our common shares of beneficial interest. If you
      are able to find a buyer for your shares, you may not sell your shares to that
      buyer unless the buyer meets the suitability standards applicable to him or
      her,
      including any suitability standards imposed by the potential purchaser’s state
      of residence. Our declaration of trust also imposes restrictions on the
      ownership of common shares that will apply to potential transferees that may
      restrict your ability to sell your shares. **** In
      addition, our Board has delayed the implementation of our share redemption
      program. Even if this program is implemented in the future, our Board may reject
      any request for redemption of shares or amend, suspend or terminate the program
      at any time. Therefore, it will be difficult for you to sell your shares
      promptly or at all. You may not be able to sell your shares in the event of
      an
      emergency, and, if you are able to sell your shares, you may have to sell them
      at a substantial discount.




***We
      have acquired a majority of our properties, on a non “arms-length” basis, from
      entities controlled by the previous advisor and CEO, Allen
      R. Hartman.***




We
      acquired 27 of the 36 properties we owned as of December 31, 2006, from entities
      controlled by Mr. Hartman. We acquired these properties by paying cash or
      issuing our commons shares of beneficial interest or units of the Operating
      Partnership that are convertible into our common shares. 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 these transactions:




·
            897,117.19
                units of the Operating Partnership that are convertible into our
                common
                shares, as adjusted to reflect the recapitalization, in consideration
                of
                Mr. Hartman’s general partner interest in the selling
                entities;




·
            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 several of our properties that was
                personally guaranteed by Mr.
                Hartman.




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 did not make
      any representations or warranties in regard to the properties or the selling
      entities (neither personally nor in his capacity as a general partner) in the
      documents evidencing the transactions. Consequently, we essentially acquired
      the
      properties on an “as is” basis. Therefore, we will bear the risk associated with
      any characteristics of or deficiencies in these properties unknown at the
      closing of the acquisitions that may affect their valuation or revenue
      potential.




***Approximately
      43.6% of our gross leasable area is subject to leases that expire prior to
      December 31, 2009.***




As
      of
      December 31, 2006, approximately 43.6% of the aggregate gross leasable area
      of
      our properties is subject to leases that expire prior to December 31, 2009.
      We
      are subject to the risk that:




·
            tenants
                may choose not to renew these
                leases;




·
            we
                may not be able to re-lease the space subject to these leases;
                and




·
            the
                terms of any renewal or re-lease may be less favorable than the terms
                of
                the current leases.




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




12


***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);




·
            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 these factors may affect our properties, which could adversely affect
      our
      operations and ability to pay dividends to shareholders.




***We
      operate in a competitive business and many of our competitors have greater
      resources and operating flexibility than we do.***




Numerous
      real estate companies that operate in the Houston, Dallas and San Antonio,
      Texas
      metropolitan areas compete with us in developing and acquiring office, retail
      and warehouse properties and seeking tenants to occupy their properties.
      Moreover, as we seek to expand our investments and operations into other
      geographic locations and other asset types, we will encounter significantly
      more
      competition from entities that have more financial and other resources, and
      more
      operating experience, than we do. This competition could adversely affect our
      business. In addition, the number of entities and the amount of funds competing
      for suitable investments may increase. Such an increase would result in a
      heightened demand for these assets that would increase their selling prices.
      If
      we pay higher prices for properties and other investments our profitability
      will
      be reduced.




13




***We
      depend on tenants for our revenue and on anchor tenants to attract non-anchor
      tenants.*** ******




As
      rental
      income from real property comprises substantially all of our income, the
      inability of a single major tenant or a number of smaller tenants to meet their
      obligations to us would adversely affect our income. Tenants may have the right
      to terminate their leases upon the occurrence of certain customary events of
      default. In addition, in some cases, tenants may have the right to terminate
      if
      the lease held by an anchor tenant or other principal tenant expires, is
      terminated or the property subject to the lease is vacated, even if rent
      continues to be paid under the lease. The weakening of a significant tenant’s
      financial condition or the loss of an anchor tenant may adversely affect our
      cash flow and amounts available for distribution to our
      shareholders.




***The
      bankruptcy or insolvency of major tenants would adversely impact our
      operations*** .




As
      of
      December 31, 2006, our five largest tenants generated approximately 9.3% of
      the
      combined rent of our properties. The bankruptcy or insolvency of a major tenant
      or a number of small tenants would have an adverse impact on our income and
      dividends. Generally, under bankruptcy law, a tenant has the option of
      continuing or terminating any unexpired lease. If the tenant continues its
      current lease, the tenant must cure all defaults under the lease and provide
      adequate assurance of its future performance under the lease. If the tenant
      terminates the lease, our claim for breach of the lease (absent collateral
      securing the claim) will be treated as a general unsecured claim. General
      unsecured claims are the last claims paid in a bankruptcy, and funds may not
      be
      available to pay these claims. As of December 31, 2006, none of our major
      tenants were in bankruptcy or had materially defaulted on their lease. However,
      any of our tenants could become insolvent or declare bankruptcy in the
      future.




***We
      may have difficulty selling our real estate investments, which may have an
      adverse impact on our ability to pay dividends.*** ******




Equity
      real estate investments are relatively illiquid. We have a limited ability
      to
      vary our portfolio in response to changes in economic or other conditions.
      The
      real estate market is affected by many factors, such as general economic
      conditions, availability of financing, interest rates, supply and demand and
      other factors, all of which are beyond our control. We cannot predict whether
      we
      will be able to sell any property for the price or on the terms set by us,
      or
      whether any price or other terms offered by a prospective purchaser would be
      acceptable to us. We cannot predict the length of time needed to find a willing
      purchaser and to close the sale of a property. We are especially vulnerable
      to
      these risks because all but three of our current properties are located in
      Houston, Texas. In addition, mortgage payments and, to the extent a property
      is
      not occupied entirely by tenants subject to triple net leases, certain
      significant expenditures such as real estate taxes and maintenance costs
      generally are not reduced when circumstances cause a reduction in income from
      the investment. The occurrence of these events would adversely affect our income
      and ability to pay dividends to our shareholders.




***Uninsured
      losses relating to real property or excessively expensive premiums for insurance
      coverage may adversely affect our returns.*** ******




We
      will
      attempt to ensure that all of our properties are adequately insured to cover
      casualty losses. However, there are types of losses, generally catastrophic
      in
      nature, such as losses due to wars, acts of terrorism, earthquakes, floods,
      hurricanes, pollution or environmental matters, which are uninsurable or not
      economically insurable, or may be insured subject to limitations, such as large
      deductibles or co-payments. Insurance risks associated with potential terrorism
      acts could sharply increase the premiums we pay for coverage against property
      and casualty claims. In some instances, we may be required to provide other
      financial support, either through financial assurances or self-insurance, to
      cover potential losses. We cannot assure you that we will have adequate coverage
      for these losses. In the event that any of our properties incurs a casualty
      loss
      that is not fully covered by insurance, the value of our assets will be reduced
      by these uninsured losses. In addition, other than any reserves we may
      establish, we have no source of funding to repair or reconstruct any uninsured
      damaged property, and we cannot assure you that any sources of funding will
      be
      available to us for this purpose in the future. Also, to the extent we must
      pay
      unexpectedly large insurance premiums, we could suffer reduced earnings that
      would result in less cash dividends to be distributed to
      shareholders.





14


***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
      its property. The costs of removal or remediation could be substantial. These
      laws often impose liability whether or not the owner or operator knew of, or
      was
      responsible for, the presence of any 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.
      In
      addition, 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 our shareholders.




***Litigation
      with Allen R. Hartman and Hartman Management.***




We
      are
      currently involved in litigation with our former Chief Executive Officer, Allen
      R. Hartman, and manager and advisor, Hartman Management, L.P. While we intend
      to
      vigorously defend against claims brought by Mr. Hartman and Hartman Management
      and vigorously prosecute our claims against Mr. Hartman and Hartman Management,
      there can be no assurances that we will ultimately prevail. Even if we do
      ultimately prevail in these lawsuits, we may continue to incur significant
      legal
      costs to do so. For more discussion, see *Legal
      Proceedings and*  *Management’s
      Discussion and Analysis of Financial Condition* and *Results of Operations - Commitments and Contingencies.* ******




***Inability
      to retain key personnel may adversely impact our ability to implement our
      strategic plan.***




Our
      success depends to a significant degree upon the continued contributions of
      certain executive officers and other key personnel, including James C.
      Mastandrea and John J. Dee. We do not have employment agreements with Messrs.
      Mastandrea or Dee, and we cannot guarantee that they will remain employed by
      us.
      We have not purchased “key person” life insurance for Messrs. Mastandrea or Dee.
      If Messrs. Mastandrea or Dee or any of our other key personnel were to cease
      their employment with us, our operating results could suffer. We believe that
      our future success depends, in large part, upon our ability to retain and hire
      highly skilled managerial, operational and marketing personnel. Competition
      for
      skilled personnel is intense, and we cannot assure you that we will be
      successful in attracting and retaining skilled personnel. If we lose or are
      unable to obtain the services of key personnel, our ability to implement our
      business strategies could be delayed or hindered.




***Shareholders
      that received shares under our dividend reinvestment plan on or after October
      2,
      2006, could be entitled to recission rights.***




Our
      dividend reinvestment plan allowed our shareholders to elect to have dividends
      from our common shares reinvested in additional common shares at a purchase
      price per share of $9.50. Our dividend reinvestment plan will terminate on
      April
      6, 2007. Shares issued under our dividend reinvestment plan were registered
      on
      our Registration Statement on Form S-11. We did not amend or supplement our
      Registration Statement following our change in management on October 2, 2006,
      and the events that occurred thereafter. As a result, shareholders that received
      approximately 64,000 shares issued under our dividend reinvestment plan, on
      or
      after that date could be entitled to recission rights. These rights would
      entitle these holders to recovery of their purchase price less any income
      received on their shares. If these rights are successfully exercised, the
      repayment of the purchase price and associated expenses could adversely affect
      our cash flow and ability to pay dividends to our shareholders.




15


**Item
              2.**
            **Properties.**




On
      December 31, 2006, we owned the 36 properties discussed below. We own 33
      properties located in the Houston, Texas, 2 properties located in Dallas, Texas
      and 1 property located in San Antonio, Texas. Our properties consist of 19
      retail centers with approximately 1,293,000 square feet of gross leasable area,
      11 warehouse properties with approximately 1,202,000 square feet of gross
      leasable area and 6 office buildings with approximately 598,000 square feet
      of
      gross leasable area. Each property is designed to meet the needs of surrounding
      local communities. A nationally or regionally recognized tenant typically
      anchors each of our retail properties. As of December 31, 2006, our properties
      contain approximately 3,093,000 square feet of gross leasable area.




As
      of
      December 31, 2006, our retail, warehouse and office properties were
      approximately 82.0%, 85.5% and 81.5% leased, respectively.




Anchor
      space at our retail properties, representing approximately 7.5% of total
      leasable area, was approximately 81.8% leased, while non-anchor space,
      accounting for the remaining 92.5% balance, was approximately 83.4% leased.
      Approximately 75.5% of our tenants are local tenants and 14.0% and 10.5% of
      our
      tenants are national and regional tenants, respectively. We define:




·
            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) of the United States;




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




·
            local
                tenants as any tenant that operates stores only in one metropolitan
                area.




Substantially
      all of our revenues consist of base rents received under long-term leases.
      For
      the year ended December 31, 2006, our total revenues were approximately $29.8
      million. Approximately 84.7% of our existing leases contain “step up” rental
      clauses that provide for increases in base rental payments.




The
      following table lists the five properties that generated the most rents during
      the year 2006.


**Property
                  Name**
              
              **Total
                  Rents Received**
                **in
                  2006**
                **(in
                  thousands)**
              
              **Percent
                  of Company’s Total Rents Received**
                **in
                  2006**Uptown
                  Tower
              
              $
              3,375
              
              
              11.4
              %Windsor
                  Park Centre
              
              
              1,742
              
              
              5.9
              %Corporate
                  Park Northwest
              
              
              1,577
              
              
              5.3
              %Corporate
                  Park West
              
              
              1,495
              
              
              5.0
              %9101
                  LBJ Freeway
              
              
              1,471
              
              
              5.0
              %**Total**
              
              **$**
              **9,660**
              
              
              **32.6**
              **%**





As
      of
      December 31, 2006, we had one property that accounted for more than 10% of
      total
      gross revenue. Uptown Tower is an office building located in Dallas, Texas
      that
      was acquired during 2005 and accounts for 11.4% of our total revenue and 11.2%
      of real estate, net.




16




***General
      Physical Attributes***




The
      following table lists, for all properties owned by us on December 31, 2006,
      the
      year each property was developed or significantly renovated, the total leasable
      area of each property and the purchase price we paid for each
      property.




**Property
                Name**
            
            **Location**
            
            **Year
                  Developed/**
                  **Renovated**
            
            **Total
                Leasable**
              **Area
                (Sq. Ft.)**
            
            **Purchase**
              **Price****Retail
                Properties:**Bellnott
                Square
            
            
            Houston
            
            
            1982
            
            
            73,930
            
            $
            5,792,294Bissonnet/Beltway
            
            
            Houston
            
            
            1978
            
            
            29,205
            
            
            2,361,323Centre
                South
            
            
            Houston
            
            
            1974
            
            
            44,543
            
            
            2,077,198Garden
                Oaks
            
            
            Houston
            
            
            1954
            
            
            95,046
            
            
            6,577,782Greens
                Road
            
            
            Houston
            
            
            1979
            
            
            20,507
            
            
            1,637,217Holly
                Knight
            
            
            Houston
            
            
            1984
            
            
            20,015
            
            
            1,612,801Kempwood
                Plaza
            
            
            Houston
            
            
            1974
            
            
            112,359
            
            
            2,531,876Lion
                Square
            
            
            Houston
            
            
            1980
            
            
            119,621
            
            
            5,835,108Northeast
                Square
            
            
            Houston
            
            
            1984
            
            
            40,525
            
            
            2,572,512Providence
            
            
            Houston
            
            
            1980
            
            
            90,327
            
            
            4,593,668South
                Richey
            
            
            Houston
            
            
            1980
            
            
            69,928
            
            
            3,361,887South
                Shaver
            
            
            Houston
            
            
            1978
            
            
            21,926
            
            
            817,003SugarPark
                Plaza
            
            
            Houston
            
            
            1974
            
            
            95,032
            
            
            8,906,057Sunridge
            
            
            Houston
            
            
            1979
            
            
            49,359
            
            
            1,461,571Torrey
                Square
            
            
            Houston
            
            
            1983
            
            
            105,766
            
            
            4,952,317Town
                Park
            
            
            Houston
            
            
            1978
            
            
            43,526
            
            
            3,760,735Webster
                Point
            
            
            Houston
            
            
            1984
            
            
            26,060
            
            
            1,870,365Westchase
            
            
            Houston
            
            
            1978
            
            
            42,924
            
            
            2,173,300Windsor
                Park
            
            
            San
                Antonio
            
            
            1992
            
            
            192,458
            
            
            13,102,500**1,293,057**
            
            **$**
            **75,997,514****Warehouse
                Properties:**Brookhill
            
            
            Houston
            
            
            1979
            
            
            74,757
            
            $
            973,264Corporate
                Park Northwest
            
            
            Houston
            
            
            1981
            
            
            185,627
            
            
            7,839,539Corporate
                Park West
            
            
            Houston
            
            
            1999
            
            
            175,665
            
            
            13,062,980Corporate
                Park Woodland
            
            
            Houston
            
            
            2000
            
            
            99,937
            
            
            6,028,362Dairy
                Ashford
            
            
            Houston
            
            
            1981
            
            
            42,902
            
            
            1,437,020Holly
                Hall
            
            
            Houston
            
            
            1980
            
            
            90,000
            
            
            3,123,400Interstate
                10
            
            
            Houston
            
            
            1980
            
            
            151,000
            
            
            3,908,072Main
                Park
            
            
            Houston
            
            
            1982
            
            
            113,410
            
            
            4,048,837Plaza
                Park
            
            
            Houston
            
            
            1982
            
            
            105,530
            
            
            4,195,116Westbelt
                Plaza
            
            
            Houston
            
            
            1978
            
            
            65,619
            
            
            2,733,009Westgate
            
            
            Houston
            
            
            1984
            
            
            97,225
            
            
            3,448,182**1,201,672**
            
            **$**
            **50,797,781****Office
                Properties:**9101
                LBJ Freeway
            
            
            Dallas
            
            
            1985
            
            
            125,874
            
            $
            8,093,296Featherwood
            
            
            Houston
            
            
            1983
            
            
            49,670
            
            
            2,959,309Royal
                Crest
            
            
            Houston
            
            
            1984
            
            
            24,900
            
            
            1,864,065Uptown
                Tower
            
            
            Dallas
            
            
            1982
            
            
            253,981
            
            
            17,171,486Woodlake
                Plaza
            
            
            Houston
            
            
            1974
            
            
            106,169
            
            
            5,532,710Zeta
                Building
            
            
            Houston
            
            
            1982
            
            
            37,740
            
            
            2,456,589**598,334**
            
            **$**
            **38,077,455****Grand
                Totals**
            
            
            
            
            
            
            
            
            **3,093,063**
            
            **$**
            **164,872,750**





17


***General
      Economic Attributes***





The
      following table lists certain information that relates to the rents generated
      by
      each property, the anchor or largest tenant at the property and the date their
      leases expire. All of the information listed in this table is as of December
      31,
      2006.




**Property
                  Name**
              
              **Percent****Leased**
              
              **Total
                  Annualized Rents Based on Occupancy**
                **(in
                  thousands)**
              
              **Effective
                  Net Rent****Per Sq. Ft.**
              
              **Anchor
                  or Largest Tenant**
              
              **Lease
                  Expiration Date****Retail
                  Properties:**Bellnott
                  Square
              
              
              98.1
              %
              $
              806
              
              $
              10.91
              
              
              Kroger
                  Food Store # 277
              
              
              07/31/07Bissonnet/Beltway
              
              
              75.7
              %
              
              453
              
              
              15.51
              
              
              Lydia
                  & Ajibade Owoyemi
              
              
              09/30/09Centre
                  South
              
              
              75.1
              %
              
              385
              
              
              8.63
              
              
              Carlos
                  Alvarez
              
              
              10/31/10Garden
                  Oaks
              
              
              78.0
              %
              
              932
              
              
              9.81
              
              
              Bally
                  Total Fitness
              
              
              12/31/12Greens
                  Road
              
              
              85.4
              %
              
              335
              
              
              16.34
              
              
              Celaya
                  Meat Market
              
              
              01/31/12Holly
                  Knight
              
              
              100.0
              %
              
              384
              
              
              19.20
              
              
              Quick
                  Wash Laundry
              
              
              09/30/09Kempwood
                  Plaza
              
              
              69.3
              %
              
              775
              
              
              6.90
              
              
              Dollar
                  General
              
              
              01/31/08Lion
                  Square
              
              
              63.5
              %
              
              971
              
              
              8.12
              
              
              Family
                  Dollar Stores
              
              
              12/31/07Northeast
                  Square
              
              
              82.3
              %
              
              431
              
              
              10.65
              
              
              Sultan
                  Allana / 99 Cent Store
              
              
              11/30/08Providence
              
              
              93.5
              %
              
              936
              
              
              10.36
              
              
              99
                  Cents Only Stores Texas
              
              
              09/09/08South
                  Richey
              
              
              78.3
              %
              
              487
              
              
              6.96
              
              
              Kroger
                  Food Store # 303
              
              
              02/28/11South
                  Shaver
              
              
              98.1
              %
              
              304
              
              
              13.87
              
              
              EZ
                  Pawn
              
              
              11/30/07SugarPark
                  Plaza
              
              
              100.0
              %
              
              1,234
              
              
              12.99
              
              
              Marshall's
              
              
              01/31/08Sunridge
              
              
              80.0
              %
              
              481
              
              
              9.74
              
              
              Puro
                  Latino, Inc.
              
              
              05/31/10Torrey
                  Square
              
              
              73.9
              %
              
              912
              
              
              8.65
              
              
              99
                  Cents Only Stores Texas
              
              
              09/14/08Town
                  Park
              
              
              100.0
              %
              
              821
              
              
              18.85
              
              
              Raphael
                  & Elvira Ortega
              
              
              12/31/13Webster
                  Point
              
              
              84.6
              %
              
              340
              
              
              13.06
              
              
              Houston
                  Learning Academy
              
              
              12/31/09Westchase
              
              
              84.9
              %
              
              440
              
              
              10.26
              
              
              Apolinar
                  & Leticia
              
              
              11/30/11Windsor
                  Park
              
              
              82.3
              %
              
              1,550
              
              
              8.05
              
              
              Sports
                  Authority
              
              
              08/31/15**82.0**
              **%**
              **$**
              **12,977**
              
              **$**
              **10.04****Warehouse
                  Properties:**Brookhill
              
              
              100.0
              %
              
              354
              
              
              4.74
              
              
              T.S.
                  Moly-Lubricants
              
              
              09/30/07Corporate
                  Park Northwest
              
              
              83.5
              %
              
              1,595
              
              
              8.59
              
              
              Region
                  IV Education
              
              
              02/28/09Corporate
                  Park West
              
              
              81.2
              %
              
              1,481
              
              
              8.43
              
              
              LTC
                  Pharmacy Services
              
              
              05/31/09Corporate
                  Park Woodland
              
              
              100.0
              %
              
              1,166
              
              
              11.67
              
              
              Carrier
                  Sales & Distribution
              
              
              07/31/08Dairy
                  Ashford
              
              
              47.8
              %
              
              175
              
              
              4.08
              
              
              Foster
                  Wheeler USA Corp
              
              
              01/31/09Holly
                  Hall
              
              
              80.4
              %
              
              455
              
              
              5.05
              
              
              The
                  Methodist Hospital
              
              
              12/31/11Interstate
                  10
              
              
              100.0
              %
              
              921
              
              
              6.10
              
              
              River
                  Oaks L-M, Inc.
              
              
              12/31/09Main
                  Park
              
              
              84.1
              %
              
              561
              
              
              4.95
              
              
              Transport
                  Sales Associates
              
              
              08/31/08Plaza
                  Park
              
              
              68.5
              %
              
              807
              
              
              7.65
              
              
              American
                  Medical
              
              
              05/31/11Westbelt
                  Plaza
              
              
              76.9
              %
              
              418
              
              
              6.37
              
              
              Hartman
                  Management, L.P.
              
              
              M-to-MWestgate
              
              
              96.3
              %
              
              792
              
              
              8.14
              
              
              Postmark
                  DMS, LLC
              
              
              02/28/09**85.5**
              **%**
              **$**
              **8,725**
              
              **$**
              **7.26****Office
                  Properties:**9101
                  LBJ Freeway
              
              
              72.7
              %
              
              1,451
              
              
              11.51
              
              
              Compass
                  Insurance
              
              
              01/31/11Featherwood
              
              
              96.1
              %
              
              927
              
              
              18.66
              
              
              Transwestern
                  Publishing
              
              
              11/30/07Royal
                  Crest
              
              
              90.0
              %
              
              311
              
              
              12.49
              
              
              Emerald
                  Environmental Service
              
              
              12/31/07Uptown
                  Tower
              
              
              80.5
              %
              
              3,230
              
              
              12.72
              
              
              Brockett
                  Davis Drake, Inc.
              
              
              04/30/11Woodlake
                  Plaza
              
              
              79.7
              %
              
              1,321
              
              
              12.44
              
              
              Rock
                  Solid Images
              
              
              07/31/09Zeta
                  Building
              
              
              97.5
              %
              
              592
              
              
              15.70
              
              
              Texas
                  Retirement & Tax Advisors
              
              
              05/30/11**81.5**
              **%**
              **$**
              **7,832**
              
              **$**
              **13.09****Grand
                  Totals/Averages**
              
              
              **83.3**
              **%**
              **$**
              **29,534**
              
              **$**
              **9.55**




18




***Lease
      Expirations***




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




**Gross
                  Leasable Area**
              
              **Annualized
                  Base Rent**
                **as
                  of December 31, 2006****Year**
              
              **Number
                  of Leases**
              
              **Approximate
                  Square**
                **Feet**
              
              **Percent
                  of Total**
                **Leasable
                  Area**
              
              **Amount**
                **(in
                  thousands)**
              
              **Percent
                  of the Total Annualized Base Rent**2007
              
              
              133
              
              
              395,968
              
              
              12.8
              %
              $
              4,075
              
              
              16.6
              %2008
              
              
              144
              
              
              463,693
              
              
              15.0
              
              
              4,174
              
              
              17.02009
              
              
              167
              
              
              487,518
              
              
              15.8
              
              
              4,991
              
              
              20.32010
              
              
              73
              
              
              229,998
              
              
              7.4
              
              
              2,558
              
              
              10.42011
              
              
              117
              
              
              435,266
              
              
              14.1
              
              
              4,492
              
              
              18.32012
              
              
              42
              
              
              160,806
              
              
              5.2
              
              
              1,253
              
              
              5.12013
              
              
              24
              
              
              116,613
              
              
              3.8
              
              
              1,415
              
              
              5.82014
              
              
              10
              
              
              43,512
              
              
              1.4
              
              
              496
              
              
              2.02015
              
              
              15
              
              
              98,710
              
              
              3.2
              
              
              837
              
              
              3.42016
              
              
              3
              
              
              27,870
              
              
              0.9
              
              
              218
              
              
              0.9**Total**
              
              
              **728**
              
              
              **2,459,954**
              
              
              **79.6**
              **%**
              **$**
              **24,509**
              
              
              **99.8**
              **%**




***Insurance***




We
      believe that we have property and liability insurance with reputable,
      commercially rated companies. We also believe that our insurance policies
      contain commercially reasonable deductibles and limits, adequate to cover our
      properties. We expect to maintain this type of insurance coverage and to obtain
      similar coverage with respect to any additional properties we acquire in the
      near future. Further, we have title insurance relating to our properties in
      an
      aggregate amount that we believe to be adequate.




***Regulations***




Our
      properties, as well as any other properties that we may acquire in the future,
      are subject to various federal, state and local laws, ordinances and
      regulations. They include, 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. We believe that we have all permits and approvals necessary under
      current law to operate our properties.




19


**Item
              3.**
            **Legal
                Proceedings.**




The
      nature of our business exposes us to the risk of lawsuits for damages or
      penalties relating to, among other things, breach of contract and employment
      disputes. We are currently involved in the following litigation:




***Hartman
      Commercial Properties REIT and Hartman REIT Operating Partnership, L.P. v.
      Allen
      R. Hartman and Hartman Management, L.P., in the 333*** ***rd*** ***Judicial District Court of Harris County, Texas***




On
      October 2, 2006, we initiated this action against our former Chief Executive
      Officer, Allen R. Hartman, and our former manager and advisor, Hartman
      Management, L.P. We are seeking damages for breach of contract, fraudulent
      inducement and breach of fiduciary duties.




In
      November 2006, Mr. Hartman and Hartman Management filed a counterclaim against
      us, the members of our Board and our Chief Operating Officer, John J. Dee.
      The
      counterclaim has since been amended to drop the claims against the individual
      defendants with the exception of our current interim Chief Executive Officer,
      James C. Mastandrea, and Mr. Dee. The amended counterclaim asserts claims
      against us for alleged breach of contract and alleges that we owe Mr. Hartman
      and Hartman Management fees for the termination of an advisory agreement. The
      amended counterclaim asserts claims against Messrs. Mastandrea and Dee for
      tortious interference with the advisory agreement and a management agreement
      and
      conspiracy to seize control of us for their own financial gains. We have
      indemnified Messrs. Mastandrea and Dee to the extent allowed by our governing
      documents and Maryland law. The amended counterclaim also asserts claims against
      our prior outside law firm and one of its partners.




Limited
      discovery has been conducted in this case as of the date of this report. The
      case is set for trial in July 2007.




It
      is too
      early to express an opinion concerning the likelihood of an adverse outcome
      on
      the counterclaim, although we intend to vigorously defend against those claims
      and vigorously prosecute our affirmative claims.




***Hartman
      Commercial Properties REIT v. Allen R. Hartman, et al; in the United States
      District Court for the Southern District of Texas***




On
      December 8, 2006, we initiated this action complaining of the attempt by Mr.
      Hartman and Hartman Management to solicit written consents from shareholders
      to
      replace our Board.




Mr.
      Hartman and Hartman Management have filed a counterclaim claiming that certain
      changes to our bylaws and declaration of trust are invalid and that their
      enactment is a breach of fiduciary duties. They are seeking a declaration that
      the changes to our bylaws and declaration of trust are invalid and an injunction
      barring their enforcement. Theses changes, among other things, stagger the
      terms
      of our Board members over three years, require two-thirds vote of the
      outstanding common shares to remove a Board member and provide that our
      secretary may call a special meeting of shareholders only on the written request
      of a majority of outstanding common shares. We believe the changes to our bylaws
      and declaration of trust are valid under Maryland law and in the best interest
      of our shareholders. We have filed a motion to dismiss the counterclaims. A
      group of shareholders has filed a request to intervene in this action to assert
      claims similar to those asserted by Mr. Hartman and Hartman Management. We
      have
      opposed the intervention.




There
      has
      been limited discovery in this case as of the date of this report. Documents
      have been produced and interrogatory responses exchanged. We have produced
      the
      members of our Board for deposition as well as Mr. Dee. The Court has conducted
      a hearing on the parties’ cross request for preliminary injunction, but has not
      yet ruled on that request.




It
      is too
      early to express an opinion concerning the likelihood of an adverse outcome
      on
      the counterclaim, although we intend to vigorously defend against those claims
      and vigorously prosecute our affirmative claim.




20


***Other***




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




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




None.




21




**PART
      II**




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




***Market
      Information***




There
      is
      no established trading market for our common shares of beneficial interest.
      As
      of March 31, 2007, we had 10,001,269 common shares of beneficial interest
      outstanding held by a total of approximately 1,423 shareholders.




***Public
      Offering Proceeds***




On
      September 15, 2004, our Registration Statement on Form S-11, with respect our
      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 our 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 Amendments No. 1, 2 and 3 to the Registration Statement were
      declared effective by the SEC on June 27, 2005, March 9, 2006 and May 3, 2006,
      respectively.




As
      of
      December 31, 2006, 2,831,184 shares had been issued pursuant to our public
      offering with gross offering proceeds received of $28.3 million. An additional
      138,033 shares had been issued pursuant to the dividend reinvestment plan in
      lieu of dividends totaling $1.3 million. Shareholders that received shares
      pursuant to our dividend reinvestment plan on or after October 2, 2006, may
      have
      recission rights as described in “ *Dividend
      Reinvestment Plan* ”
      below.




The
      application of our gross offering proceeds from the offering are as follows
      (in
      thousands):


**Description
                  of Use of Offering Proceeds**
              
              **Amount
                  of Proceeds Utilized**Selling
                  Commissions paid to broker/ dealers not affiliated withD.H.
                  Hill Securities , LLP
              
              $
              1,644Selling
                  Discounts
              
              
              71Dealer
                  Manager Fee paid to Hartman Management
              
              
              705Offering
                  expense reimbursements paid to the Hartman Management
              
              
              708Acquisition
                  Fees paid to Hartman Management
              
              
              566Total
                  Offering Expenses
              
              $
              3,694Net
                  Offering Proceeds
              
              $
              25,930Repayment
                  of Lines of Credit
              
              $
              18,300Used
                  for Working Capital
              
              $
              7,630


We
      initially used approximately $18,300,000 and $7,630,000 of our net proceeds
      from
      the offering to repay our lines of credit and for working capital, respectively.
      We subsequently purchased real estate assets by re-drawing on our lines of
      credit and using working capital. Therefore, the ultimate use of our net
      offering proceeds was the acquisition of real estate assets.




On
      October 2, 2006, our Board terminated the public offering. On March 27, 2006,
      we
      gave the required ten day notice to plan participants informing them that we
      intend to terminate our dividend reinvestment plan. As a result, our dividend
      reinvestment plan will terminate on April 6, 2007.




22


***Issuer
      Repurchases***




We
      did
      not repurchase any of our equity securities during 2006. Our Board has approved
      (but delayed the implementation of) a share redemption program that would enable
      shareholders to sell shares to us after holding them for at least one year
      under
      limited circumstances. Our Board could choose to amend the provisions of the
      share redemption program without shareholder approval. Our Board has chosen
      not
      to implement the share redemption program at this time.




***Dividends***




In
      order
      to remain qualified as a REIT, we are required to distribute at least 90% of
      our
      annual taxable income to our shareholders. We currently accrue dividends
      quarterly and pay dividends in three monthly installments following the end
      of
      the quarter. We intend to continue paying dividends in this manner. For a
      discussion of our 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 reflects the total dividends we have paid (including the total
      amount paid and the amount paid per share) in each indicated quarter. The
      amounts provided give effect to our reorganization as a Maryland real estate
      investment trust and the concurrent recapitalization of our common shares on
      July 28, 2004.


**Quarter
                  Paid**
              
              **Total
                  Amount of**
                **Dividends
                  Paid**
                **(in
                  thousands)**
              
              **Dividends
                  per Share**03/31/2005
              
              $
              1,230
              
              $
              0.175506/30/2005
              
              
              1,282
              
              
              0.176809/30/2005
              
              
              1,351
              
              
              0.176812/31/2005
              
              
              1,412
              
              
              0.176803/31/2006
              
              
              1,525
              
              
              0.176806/30/2006
              
              
              1,631
              
              
              0.176809/30/2006
              
              
              1,443
              
              
              0.150012/31/2006
              
              
              1,477
              
              
              0.150003/31/2007
              
              $
              1,495
              
              $
              0.1500**Average
                  Per Quarter**
              
              
              
              
              **$**
              **0.1677**


***Dividend
      Reinvestment Plan***




Our
      dividend reinvestment plan allowed our shareholders to elect to have dividends
      from our common shares reinvested in additional common shares. The purchase
      price per share under our dividend reinvestment plan was $9.50. On March 27,
      2007, we gave the required ten day notice to participants informing them that
      we
      intend to terminate our dividend reinvestment plan. As a result, our dividend
      reinvestment plan will terminate on April 6, 2007. Shares issued under our
      dividend reinvestment plan were registered on our Registration Statement on
      Form
      S-11. We did not amend or supplement our Registration Statement following our
      change in management on October 2, 2006, and the events that occurred
      thereafter. As a result, shareholders that received approximately 64,000 shares
      issued under our dividend reinvestment plan on or after that date could be
      entitled to recission rights. These rights would entitle these shareholders
      to
      recovery of their purchase price less any income received on their
      shares.




23


***Equity
      Compensation Plan Information***




Please
      refer to Item 12 of this report on Form 10-K for information concerning
      securities authorized under our incentive share plan.




24


**Item
              6.**
            **Selected
                Financial Data.**




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


**Year
                  Ended December 31,****(in
                  thousands, except per share data)**2006
              
              2005
              
              2004
              
              2003
              
              2002**Income
                  Statement Data:**Revenues
              
              $
              29,840
              
              $
              24,919
              
              $
              23,279
              
              $
              20,897
              
              $
              20,739Operating
                  expenses (excluding depreciation and amortization)
              
              
              15,832
              
              
              11,012
              
              
              9,183
              
              
              8,383
              
              
              8,242Depreciation
                  and amortization
              
              
              6,476
              
              
              6,099
              
              
              5,223
              
              
              4,758
              
              
              4,042Operating
                  income
              
              
              7,532
              
              
              7,808
              
              
              8,873
              
              
              7,756
              
              
              8,455Interest
                  expense
              
              
              (5,296
              )
              
              (3,770
              )
              
              (2,664
              )
              
              (1,323
              )
              
              (1,573
              )Interest
                  income and other
              
              
              613
              
              
              301
              
              
              205
              
              
              76
              
              
              16Income
                  before minority interests
              
              
              2,849
              
              
              4,339
              
              
              6,414
              
              
              6,509
              
              
              6,898Minority
                  interest in income
              
              
              (1,068
              )
              
              (1,891
              )
              
              (2,990
              )
              
              (3,035
              )
              
              (3,193
              )Net
                  income
              
              $
              1,781
              
              $
              2,448
              
              $
              3,424
              
              $
              3,474
              
              $
              3,705Net
                  income per common share
              
              $
              0.185
              
              $
              0.310
              
              $
              0.488
              
              $
              0.496
              
              $
              0.529Weighted
                  average shares outstanding
              
              
              9,652
              
              
              7,888
              
              
              7,010
              
              
              7,010
              
              
              7,007**Balance
                  Sheet Data:**Real
                  estate (net)
              
              $
              149,599
              
              $
              153,965
              
              $
              126,547
              
              $
              120,256
              
              $
              109,294Other
                  assets
              
              
              17,488
              
              
              17,497
              
              
              16,070
              
              
              13,810
              
              
              17,670Total
                  assets
              
              $
              167,087
              
              $
              171,462
              
              $
              142,617
              
              $
              134,066
              
              $
              126,964Liabilities
              
              $
              76,464
              
              $
              83,462
              
              $
              66,299
              
              $
              55,183
              
              $
              45,617Minority
                  interests in Operating Partnership
              
              
              31,709
              
              
              34,272
              
              
              36,489
              
              
              37,567
              
              
              38,598Shareholders’
                  equity
              
              
              58,914
              
              
              53,728
              
              
              39,829
              
              
              41,316
              
              
              42,749$
              167,087
              
              $
              171,462
              
              $
              142,617
              
              $
              134,066
              
              $
              126,964**Cash
                  Flow Data:**Proceeds
                  from issuance of common shares
              
              $
              9,453
              
              $
              17,035
              
              $
              1,472
              
              $
              —
              
              $
              155Additions
                  to real estate
              
              $
              2,055
              
              $
              31,792
              
              $
              10,277
              
              $
              8,242
              
              $
              1,983**Other
                  Financial Data:**Dividends
                  per share
              
              $
              0.625
              
              $
              0.707
              
              $
              0.701
              
              $
              0.700
              
              $
              0.674


The
      dividends per share represent total cash payments divided by weighted average
      shares.




25


**Item
              7.**
            **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 our audited consolidated financial statements included in
      this
      annual report.




***Overview***




We
      own 36
      commercial properties, consisting of 19 retail centers, 11 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, 2006, we had
      728
      total tenants. No individual lease or tenant is material to our business.
      Revenues from our largest lease constituted 2.98% of our total revenues for
      2006. Lease terms for our properties range from one year for our smaller tenants
      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.




Since
      November 14, 2006, we have operated as a self-managed and self-administered
      REIT. As of December 31, 2006, we had 41 employees, one of whom was part-time.
      We believe that our current staffing level is sufficient to effectively manage
      our property portfolio for the foreseeable future. As a self-managed REIT,
      we
      will bear our own expenses of operations, including the salaries, benefits
      and
      other compensation of our employees, office expenses, legal, accounting and
      investor relations expenses and other overhead. In the short term, we believe
      expenses will be higher than normal due to legal expenses associated with the
      litigation with Mr. Hartman and Hartman Management. In the future, we believe
      that our operations will be more effective and efficient than they were when
      we
      were externally managed and our operating margins will improve as a
      result.




Prior
      to
      November 14, 2006, our properties and day-to-day operations were managed by
      Hartman Management, our former advisor and manager under an advisory agreement
      and a management agreement. Our advisory agreement expired at the end of
      September 2006 and our Board terminated our property management agreement for
      cause in October 2006. Hartman Management turned over all property management
      functions to us on November 14, 2006.




Under
      our
      management agreement in effect until November 14, 2006, we paid Hartman
      Management the following:




·
            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 that area. Generally, these fees were between
                approximately two percent (2.0%) and four percent (4.0%) of gross
                revenues
                for the management of office buildings and approximately five percent
                (5.0%) of gross revenues for the management of retail and 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 that
                area
                (with these fees, being equal to 6% of the effective gross revenues
                from
                leases originated by Hartman Management and 4% of the effective gross
                revenues from expansions or
                renewals).




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




26




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




Under
      our
      advisory agreement in effect until September 30, 2006, we paid Hartman
      Management a quarterly fee for asset management services 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
      our assets, at the date of measurement, except that during these 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 plans
      to
      comply with applicable Department of Labor reporting requirements, gross asset
      value was the greater of (i) the amount determined pursuant to the foregoing
      or
      (ii) our assets’ aggregate valuation established by the most recent valuation
      report without reduction for depreciation, bad debts or other similar non-cash
      reserves and without reduction for any debt relating to our assets.




The
      aggregate fees and reimbursements payable to Hartman Management under our
      advisory agreement was not intended to be significantly different from the
      fees
      and reimbursements that would have been payable under our previous agreement
      with Hartman Management. The asset management fee under our advisory agreement,
      however, was significantly higher. Hartman Management waived the excess of
      the
      fee for the period September 1, 2004 through March 31, 2006 in perpetuity.
      The
      asset management fee payable under our advisory agreement was charged by Hartman
      Management in the second and third quarters of 2006 and has been reflected
      in
      our consolidated financial statements as of December 31, 2006. The asset
      management fee was not charged in the fourth quarter of 2006 as the advisory
      agreement expired on September 30, 2006.





The
      advisory agreement provided for the payment of a deferred performance fee,
      payable upon certain events, including termination of the agreement. This fee
      is
      based upon appreciation in the value of certain of our real estate assets.
      We
      have not accrued any deferred performance fees, as we believe the amount of
      these fees, if any are owing, cannot be determined with reasonable certainty
      at
      this time. Hartman Management has asserted that approximately $11 million is
      owed in deferred performance fees under our advisory agreement. We believe
      that
      there is no reasonable basis for this assertion. Although we currently estimate
      that no deferred performance fee is owed, there can be no assurance that our
      view will ultimately prevail. If Hartman Management is awarded a deferred
      performance fee it may have a material adverse effect on our financial condition
      and results of operations.





***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 consolidated 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.




27


*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, 2006, 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 inter-company 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 Operating Partnership 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 annually or 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, 2006.




*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. Most of the properties we have acquired have
      not been subject to leases with terms materially different than then-existing
      market-level terms. Most of our acquired 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.




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 four to eighteen 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 these costs are not already incurred in connection with
      a new
      lease origination as part of the transaction.




28




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.




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 a basis that provides
      for tenants to pay for increases in operating expenses over a base year or
      set
      amount. During the year ended December 31, 2006, our cash provided by operating
      activities was sufficient to cover our operating expenses. During the fourth
      quarter of 2006, we incurred approximately $1.0 million in legal costs as a
      result of the termination of the management and advisory agreements, the
      termination of Mr. Hartman as President, Secretary and Chief Executive Officer
      and the litigation with Mr. Hartman and Hartman Management. We do not know
      when
      this litigation will be resolved and the continued legal cost associated with
      this litigation will have a significant impact on our cash flow. We anticipate
      that cash flows from operating activities and our borrowing capacity will
      provide adequate capital for our working capital requirements, anticipated
      capital expenditures, litigation costs and scheduled debt payments during the
      next twelve 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 $8.3 million at December 31, 2006, as compared
      to
      $0.8 million on December 31, 2005. The increase was primarily the result of
      the
      following:




·
            Repayment
                of approximately $3.5 million loan from a partnership managed by
                our
                former advisor Hartman Management;




·
            Proceeds
                of approximately $1.1 million from the sale of our NW Place II property
                in
                December 2006; and




·
            Receipt
                of $3.2 million cash from the release of escrow upon the payoff of
                the
                GMAC loan in June 2006.




We
      place
      all cash in short-term, highly liquid investments that we believe provide
      appropriate safety of principal.




29


*Our
      Debt for Borrowed Money* .
      As of
      December 31, 2006 we had two active loans which are described
      below:





**Revolving
      Credit Facility**





We
      have a
      revolving credit facility with a consortium of banks. The credit facility is
      secured by a pledge of the partnership interests in Hartman REIT Operating
      Partnership III LP (“HROP III”), a wholly owned subsidiary of the Operating
      Partnership that was formed to hold title to the properties comprising the
      borrowing base pool for the facility. At December 31, 2006, 35 properties are
      owned by HROP III.





In
      2006,
      the credit facility was increased to $75 million from $50 million, and may
      be
      increased to $100 million as the borrowing base pool expands. We entered into
      this credit facility to refinance our then existing debt, to finance property
      acquisitions and for general corporate purposes.





As
      of
      December 31, 2006 and 2005, the balance outstanding under the credit facility
      was $61.2 million and $33.0 million, respectively, and the availability for
      additional borrowings was $13.8 million and $17.0 million,
      respectively.





Outstanding
      amounts under the credit facility accrue interest computed (at our 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 Margin**Less
                  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 is a floating rate equal to the higher of the bank’s base
      rate or the Federal Funds Rate plus 0.5%. LIBOR Rate loans are available in
      one,
      two, three or nine month periods, with a maximum of nine contracts at any time.
      The effective interest rate as of December 31, 2006 was 7.28% 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.




As
      of
      December 31, 2005, we were 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 had the right to accelerate payment of amounts
      outstanding under this credit facility. However, on May 8, 2006, we received
      a
      waiver from the required majority of the consortium banks in the credit facility
      and also entered into a modification of the loan agreement whereby the covenant
      was amended though December 31, 2006. As amended, the ratio of declared
      dividends to funds from operations (as defined in the loan agreement) shall
      not
      exceed 107% for the three months ended March 31, 2006 and June 30, 2006, 104%
      for the three months ended September 30, 2006 and 100% for the three months
      ended December 31, 2006. At December 31, 2006, we are in compliance with the
      covenant, as amended.




30


In
      October 2006, our Board (i) elected not to renew our advisory agreement with
      Hartman Management, (ii) terminated our property management agreement with
      Hartman Management; and (iii) removed Mr. Hartman from his positions as our
      President, Secretary and Chief Executive Officer. These actions violated certain
      covenants in the loan agreement and were events of default thereunder. These
      events of default have been waived by the lenders.





On
      January 8, 2007, we requested that legal fees incurred in connection with the
      litigation with Mr. Hartman and Hartman Management be excluded from the
      definition of funds from operations in testing the covenant requiring the ratio
      of declared and paid dividends to funds from operations not be in excess of
      95%.
      On January 23, 2007, the lenders granted the exclusion as requested. On
      March
      26, 2007, we formalized this agreement in Amendment No. 3 to our Revolving
      Credit Agreement which is filed as exhibit 10.26 to this
      document.







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




·
            We
                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 will be free of all liens, unless otherwise
                permitted.




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




·
            The
                aggregate physical occupancy of the borrowing base pool will 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 will 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 a removal. If a property does not meet
      the
      criteria of an eligible property and we want to include it in the borrowing
      base
      pool, a majority vote of the bank consortium is required.




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




·
            We
                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.




·
            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.




31


Covenants,
      tested quarterly, relative to us are as follows:




·
            We
                will not permit our total indebtedness to exceed 60% of the fair
                market
                value of our real estate assets at the end of any quarter. Total
                indebtedness is defined as all our liabilities, including this facility
                and all other secured and unsecured debt, 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 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 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%.




·
            We
                must maintain our status as a REIT 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, we must hedge all variable rate debt above $40 million
      until the point at which the ratio of variable rate debt to fixed rate debt
      is
      50% of total debt. Thereafter, we must maintain this type of hedge during any
      period in which variable rate debt exceeds 50% of total debt. On March 27,
      2006,
      we 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 lenders waived the default for not executing the hedge
      within six months of closing, as required by the loan agreement.




On
      June
      30, 2006, we borrowed $34.8 million on the revolving credit facility to
      extinguish the three year floating rate mortgage loan described in the following
      paragraph and pay related legal and banking fees.





In
      December 2002, we refinanced substantially all of our mortgage debt with a
      $34.4
      million three-year floating rate mortgage loan collateralized by 18 of our
      then
      existing properties. The loan had 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 30-day LIBOR (6.79% at December 31, 2005). During the extension term,
      the
      interest rate was 3.0% over 30-day LIBOR. Interest only payments were due
      monthly, and the loan could be repaid in full or in $100,000 increments, with
      a
      final balloon payment due upon maturity.





32


**Mortgage
      Loan on Windsor Park Centre**





In
      connection with the purchase of the Windsor Park Centre property in December
      2003, we assumed a note payable in the amount of $6.6 million, secured by the
      property. The balance at December 31, 2006, was $5.1 million. The note was
      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 was payable
      in
      full on December 1, 2006. We obtained an extension through March 2, 2007 and
      paid off this note in full with the proceeds from a $10.0 million loan described
      in the following paragraph.





On
      March
      1, 2007, we obtained a $10.0 million loan to pay off the loan obtained upon
      the
      acquisition of the Windsor Park Centre property and to provide funds for future
      acquisitions and improvements to existing properties. The mortgage loan is
      secured by Windsor Park Centre, which is owned by HCP REIT Operating Company
      IV
      LLC (“HROC IV”), a wholly owned subsidiary of the Operating Partnership that was
      formed to hold title to Windsor Park Centre. On March 1, 2007, we conveyed
      ownership of Windsor Park Centre from the Operating Partnership to HROC IV
      in
      order to secure the $10.0 million loan. The note is payable in equal monthly
      installments of principal and interest of $60,212, with interest at the rate
      of
      6.04% per annum. The balance of the note is payable in full on March 1,
      2014.





*Capital
      Expenditures* .
      Currently, we are evaluating all of our properties to determine a strategy
      for
      each property. We may determine it is best to invest capital in properties
      we
      believe have potential for increasing value. We also may have unexpected capital
      expenditures or improvements for our existing assets. Additionally, we intend
      to
      invest in similar properties outside of Texas in cities with exceptional
      demographics to diversify market risk, and we may incur significant capital
      expenditures or make improvements in connection with any properties we may
      acquire.




*Total
      Contractual Cash Obligations* .
      A
      summary of our contractual cash obligations as of December 31, 2006, is as
      follows (in thousands): ****


**Payment
                  due by period****Contractual
                  Obligations**
              
              **Total**
              
              **Less
                  than**
                **1
                  Year**
              
              **1
                  to 3 Years**
              
              **3
                  to 5 Years**
              
              **More
                  than 5 Years**Long-Term
                  Debt Obligations
              
              $
              66,363
              
              $
              5,138
              
              $
              61,225
              
              $
              —
              
              $
              —Capital
                  Lease Obligations
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Operating
                  Lease Obligations
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Purchase
                  Obligations
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Other
                  Long-Term LiabilitiesReflected
                  on the Registrant’sBalance
                  Sheet under GAAP
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —**Total**
              
              **$**
              **66,363**
              
              **$**
              **5,138**
              
              **$**
              **61,225**
              
              **$**
              **—**
              
              **$**
              **—**


On
      March
      1, 2007 we obtained a $10.0 million loan which is payable in full in 2014.
      The
      proceeds from the loan were used to pay off the balance of a $5.1 million loan
      which was due in 2007 and provide funds for future acquisitions and improvements
      to existing properties. We have no commercial commitments, such as lines of
      credit or guarantees, that might result from a contingent event and would
      require our performance pursuant to a funding commitment.




33


*Property
      Acquisitions* .
      During
      2006, we acquired no properties.




During
      2005, we acquired from unrelated parties three multi-tenant office buildings
      comprising approximately 486,024 square feet of gross leasable area. The
      properties were acquired for cash for approximately $30.4 million.




During
      2004, we acquired from an unrelated party one multi-tenant retail center
      comprising approximately 95,032 square feet of gross leasable area. The property
      was acquired for cash for approximately $8.9 million.




34




***Results
      of Operations***




**Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005**




*General.* The
      following table provides a general comparison of our results of operations
      for
      the years ended December 31, 2006 and December 31, 2005 (dollars in
      thousands):




**December
                  31, 2006**
              
              **December
                  31, 2005**Number
                  of properties owned and operated
              
              
              36
              
              
              37Aggregate
                  gross leasable area (sq. ft.)
              
              
              3,093,063
              
              
              3,121,037Occupancy
                  rate
              
              
              83
              %
              
              82
              %Total
                  revenues
              
              $
              29,840
              
              $
              24,919Total
                  operating expenses
              
              
              22,308
              
              
              17,111Operating
                  income
              
              
              7,532
              
              
              7,808Other
                  income (expense), net
              
              
              (4,683
              )
              
              (3,469
              )Income
                  before minority interests
              
              
              2,849
              
              
              4,339Minority
                  interests in the Operating Partnership
              
              
              (1,068
              )
              
              (1,891
              )Net
                  income
              
              $
              1,781
              
              $
              2,448




*Revenues.* Substantially
      all of our revenue is derived from rents received for the use of our
      properties *.* We
      had
      rental income and tenant reimbursements of approximately $29.8 million for
      the
      year ended December 31, 2006, as compared to $24.9 million for the year ended
      December 31, 2005, an increase of $4.9 million or 20%. Of this increase, $4.4
      million or 90% was from receiving a full year of revenue on the three properties
      acquired during 2005. The remaining increase resulted from an increase in rental
      rates charged. Our average occupancy rate in 2006 was 83%, as compared to 85%
      in
      2005, and our average annualized revenue was $9.58 per square foot in 2006,
      as
      compared to our average annualized revenue of $9.09 per square foot in
      2005.




*Operating
      Expenses.* Our
      total
      operating expenses were $22.3 million for the year ended December 31, 2006,
      as
      compared to $17.1 million for the year ended December 31, 2005, an increase
      of
      $5.2 million, or 30%. Of this increase, $2.9 million or 56% was from having
      a
      full year of operating expenses on the three properties acquired during 2005.The
      primary components of operating expense are detailed in the table below (in
      thousands):




**Year
                  Ended December 31,****2006**
              
              **2005**Properties
                  acquired in 2005
              
              $
              4,379
              
              $
              1,461Other
                  PropertiesProperty
                  operations and maintanence
              
              
              3,093
              
              
              2,906Real
                  estate taxes
              
              
              2,993
              
              
              2,774Insurance
              
              
              473
              
              
              429Electricity,
                  water and gas utilities
              
              
              1,194
              
              
              1,164Property
                  management and asset managementfees
                  to an affiliate
              
              
              1,266
              
              
              1,354G
                  & A - professional fees
              
              
              2,217
              
              
              1,128G
                  & A - employee compensation and office expenses
              
              
              585
              
              
              —Depreciation
              
              
              4,526
              
              
              4,096Amortization
              
              
              1,167
              
              
              1,714Bad
                  Debt
              
              
              415
              
              
              85$
              17,929
              
              $
              15,650Total
                  Operating Expenses
              
              $
              22,308
              
              $
              17,111




35




*Properties
      acquired in 2005.* During
      2005, we acquired from unrelated parties three multi-tenant office buildings
      comprising approximately 486,024 square feet of gross leasable area. The
      properties were acquired for cash for approximately $30.4 million. As these
      properties were acquired during the year only a partial year of operating
      expense is included in 2005. The increase is primarily a result of a full year
      of operating expense in 2006 compared to a partial year in 2005.




*Real
      Estate Taxes.* The
      increase in taxes of $0.2 million is primarily a result of an approximate 8%
      increase in overall property values by local appraisal districts. **




*Property
      management and asset management fees paid to an affiliate.* On
      September 30, 2006, our advisory agreement with Hartman Management expired.
      On
      November 14, 2006, all property management functions were transferred to us
      from
      Hartman Management. As such, no fees were charged by Hartman Management after
      November 13, 2006. The property management and asset management fees charged
      by
      Hartman Management through November 13, 2006 and September 30, 2006,
      respectively, were $0.3 million or 24% higher than the same period in
      2005.




*G
      & A - professional fees.* The
      increase in our professional fees of $1.2 million is primarily due to an
      increase in legal fees in the fourth quarter resulting from the termination
      of
      the management and advisory agreements, the termination of Mr. Hartman as our
      President, Secretary and Chief Executive Officer and the litigation with Mr.
      Hartman and Hartman Management.




*G
      & A - employee compensation and office expenses.* The
      increase in employee compensation and office expense of $0.6 million is a result
      of our property management and advisory functions being transferred to us from
      Hartman Management during the fourth quarter of 2006.




*Depreciation.* The
      increase of $0.5 million is due primarily to the addition of approximately
      of
      $2.1 million in capitalized improvements to properties in 2006.




*Amortization.* The
      decrease of $0.5 million is due to the loan fees related to the GMAC loan
      becoming fully amortized in 2005.




*Bad
      Debt.* The
      increase in bad debt of $0.3 million is primarily a result of (1) higher tenant
      revenues, and (2) additional bad debt reserve recorded by us due to an increase
      in the accounts receivable balance of $0.5 million at December 31, 2006 as
      compared to December 31, 2005.




*Operating
      Income.* Operating
      income was $7.5 million for the year ended December 31, 2006, as compared to
      $7.8 million for the year ended December 31, 2005, a decrease of $0.3 million
      or
      4%. The primary reasons for the decrease are detailed above in *Revenues* and *Operating
      Expenses* .




*Other
      Expense, net.* Other
      expense was $4.7 million for the year ended December 31, 2006, as compared
      to
      $3.5 million for the year ended December 31, 2005, an increase of $1.2 million
      or 34%. The primary reason for the increase was a $1.5 million increase in
      interest expense as a result of higher variable interest rates in 2006, as
      compared to 2005, offset by a gain of $0.2 million recorded in 2006 from the
      sale of Northwest Place II.




*Net*  *Income.* Income
      before minority interest was $2.8 million for the year ended December 31, 2006,
      as compared to $4.3 million for the year ended December 31, 2005, a decrease
      of
      $1.5 million or 35%. Net income for the year ended December 31, 2006, was $1.8
      million, as compared to $2.4 million for the year ended December 31, 2005,
      a
      decrease of $0.6 million, or 25%. These decreases are a result of the items
      discussed above.




36


**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, 2005 and December 31, 2004 (dollars in
      thousands):




**December
                  31, 2005**
              
              **December
                  31, 2004**Number
                  of properties owned and operated
              
              
              37
              
              
              34Aggregate
                  gross leasable area (sq. ft.)
              
              
              3,121,037
              
              
              2,635,063Occupancy
                  rate
              
              
              82
              %
              
              86
              %Total
                  revenues
              
              $
              24,919
              
              $
              23,279Total
                  operating expenses
              
              
              17,111
              
              
              14,406Operating
                  income
              
              
              7,808
              
              
              8,873Other
                  income (expense)
              
              
              (3,469
              )
              
              (2,459
              )Income
                  before minority interests
              
              
              4,339
              
              
              6,414Minority
                  interests in the Operating Partnership
              
              
              (1,891
              )
              
              (2,990
              )Net
                  income
              
              $
              2,448
              
              $
              3,424


*Revenues.* We
      had
      rental income and tenant reimbursements of $24.9 million for the year ended
      December 31, 2005, as compared to revenues of $23.3 million for the year ended
      December 31, 2004, an increase of $1.6 million 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 our average annualized revenue of $9.14 per square foot in
      2004.




*Operating
      Expenses.* Our
      total
      operating expenses were $17.1 million for the year ended December 31, 2005, as
      compared to $14.4 for the year ended December 31, 2004, an increase of $2.7
      million, or 19%. The increase in our operating expenses during 2005 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 paid Hartman Management under our previous management agreements
      was
      based on our revenues and the book value of our assets. As a result of our
      increased revenues and assets in 2005, management fees were $1.4 million in
      2005, as compared to $1.3 million in 2004, an increase of $0.1 million, or
      8%.




*Operating
      Income.* Operating
      income was $7.8 million for the year ended December 31, 2005, as compared to
      $8.9 million for the year ended December 31, 2004, a decrease of $1.1 million,
      or 12%. The primary reasons for the decrease are detailed above in *Revenues* and *Operating
      Expenses* .




*Other
      Expense.* Other
      expense was $3.5 million for the year ended December 31, 2005, as compared
      to
      $2.5 million for the year ended December 31, 2004, and increase of $1.0 million
      or 40%. The primary reason for the increase was a $1.1 million increase in
      interest expense as a result of higher average debt outstanding and variable
      interest rates in 2005, as compared to 2004.




*Net*  *Income.* Income
      before minority interest was $4.3 million for the year ended December 31, 2005,
      as compared to $6.4 million for the year ended December 31, 2004, a decrease
      of
      $2.1 million or 33%. Net income for the year ended December 31, 2005 was $2.4
      million, as compared to $3.4 million for the year ended December 31, 2004,
      a
      decrease of $1.0 million, or 29%. These decreases are a result of the items
      discussed above.




37




***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***




We
      have
      no significant off-balance sheet arrangements as of December 31,
      2006.




***Recent
      Accounting Pronouncements***




In
      May
      2005, the Financial Accounting Standards Board (“FASB”) issued Statement of
      Financial Accounting Standards (“SFAS”) No. 154, “ *Accounting
      Changes and Error Corrections – A Replacement
      of
      APB Opinion No. 2 and FASB Statement No. 3.”* (“SFAS
      154”). 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 principles.  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 did not have a material impact on our consolidated
      financial statements.




In
      February 2006, the FASB issued SFAS No. 155, “ *Accounting
      for Certain Hybrid Financial*  *Instruments
      an-amendment of FASB Statements No. 133 and 140* ”
(“SFAS
      155”). This statement will be effective beginning the first quarter of 2007.
      Earlier adoption is permitted. The statement permits interests in hybrid
      financial assets that contain an embedded derivative that would require
      bifurcation to be accounted for as a single financial instrument at fair value
      with changes in fair value recognized in earnings. This election is permitted
      on
      an instrument-by-instrument basis for all hybrid financial instruments held,
      obtained, or issued as of the adoption date. We are currently assessing the
      impact of adoption of SFAS 155.




In
      March
      2006, the FASB issued SFAS No. 156, “ *Accounting
      for Servicing of Financial Assets - an*  *amendment
      of FASB Statement No. 140,* ”
(“SFAS
      156”), which permits entities to elect to measure servicing assets and servicing
      liabilities at fair value and report changes in fair value in earnings. Adoption
      of SFAS 156 is required for financial periods beginning after September 15,
      2006. We are currently assessing the impact and timing of adoption of SFAS
      156
      but do not expect the standard to have a material impact on our consolidated
      financial statements.




In
      September 2006, the FASB issued SFAS No. 157, “ *Fair
      Value Measurements* ”
(“SFAS
      157”).   SFAS 157 defines fair value, establishes a framework for
      measuring fair value under U.S. generally accepted accounting principles
      and requires enhanced disclosures about fair value measurements. It does not
      require any new fair value measurements. SFAS 157 is effective for financial
      statements issued for fiscal years beginning after November 15, 2007, and
      interim periods within those fiscal years. We are currently assessing
      whether to early adopt SFAS 157 as of the first quarter of fiscal 2007 as
      permitted, and are currently evaluating the impact adoption may have on our
      consolidated financial statements.




38




In
      February 2007, the FASB issued SFAS No. 159, ‘ *The
      Fair Value Option for Financial Assets and Financial Liabilities—Including an
      amendment of FASB Statement No. 115”* (“SFAS
      159”). SFAS 159 permits entities to choose to measure many financial instruments
      and certain other items at fair value. The objective is to improve financial
      reporting by providing entities with the opportunity to mitigate volatility
      in
      reported earnings caused by measuring related assets and liabilities differently
      without having to apply complex hedge accounting provisions. SFAS 159 is
      effective for financial statements issued for fiscal years beginning after
      November 15, 2007 and interim periods within those fiscal years. We are
      currently assessing whether to early adopt SFAS 157 as of the first quarter
      of fiscal 2007 as permitted, and are currently evaluating the impact adoption
      may have on our consolidated financial statements.




**Item
              7A.**
            **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 we are exposed is the risk related
      to
      interest rate fluctuations. Based upon the nature of our operations, we are
      not
      subject to foreign exchange or commodity risk. We will be exposed to changes
      in
      interest rates as a result of our credit facilities that have floating interest
      rates. As of December 31, 2006, we had $31.2 million of indebtedness outstanding
      under these types of facilities. The impact of a 1% increase in interest rates
      on our debt would result in an increase in interest expense and a decrease
      in
      income before minority interests of approximately $0.3 million annually.




**Item
              8.**
            **Financial
                Statements and Supplementary
                Data.**




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




**Item
              9.**
            **Changes
                in and Disagreements with Accountants on Accounting and
                Financial Disclosure.**




None.




**Item
              9A.**
            **Controls
                and
                Procedures.**




***Evaluation
      of Disclosure 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, 2006, 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 monitor and record non-routine transactions and (2)
        Inadequate controls and procedures in place to effectively manage certain
        spreadsheets that support the financial reporting process.  Controls over
        completeness, accuracy, validity, and review of, certain spreadsheet information
        that supports the financial reporting process were either not designed
        appropriately or did not operate as designed.  As a result of these
        deficiencies, our accounting personnel may not process and record transactions
        or compile data appropriately that requires recognition in our financial
        accounting records.  Accordingly, errors in our accounting for certain
        revenues and other profit and loss items 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.




***Changes
      in Internal Controls***




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.


**Item
              9B.**
            **Other
                Information.**




None.




39


**PART
      III**




**Item
      10.      Directors and Executive
      Officers of the Registrant.**




The
      information required by Item 10 of Form 10-K is incorporated herein by reference
      to such information as set forth in the proxy statement for our 2007 annual
      meeting.




**Item
      11.      Executive
      Compensation.**




The
      information required by Item 11 of Form 10-K is incorporated herein by reference
      to such information as set forth in the proxy statement for our 2007 annual
      meeting.




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




The
      information required by Item 12 of Form 10-K is incorporated herein by reference
      to such information as set forth in the proxy statement for our 2007 annual
      meeting.





**Item
      13.      Certain Relationships and
      Related Transactions.**




The
      information required by Item 13 of Form 10-K is incorporated herein by reference
      to such information as set forth in the proxy statement for our 2007 annual
      meeting.




**Item
      14.      Principal Accounting Fees and
      Services.**




The
      information required by Item 14 of Form 10-K is incorporated herein by reference
      to such information as set forth in the proxy statement for our 2007 annual
      meeting.




40


**PART
      IV**




**Item
      15.      Exhibits and Financial
      Statement Schedules.**




1.
            **Financial
                Statements**.
                The list of our 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**.




a. Schedule
      II –
      Valuation and Qualifying Amounts




b. 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.




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.




41


**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 30, 2007
            
            /s/
                James C. MastandreaJames
                C. Mastandrea, Interim CEO and
                Trustee




**POWER
      OF ATTORNEY**




KNOW
      ALL
      PERSONS BY THESE PRESENT, that each person whose signature appears below
      constitutes and appoints James C. Mastandrea and David K. Holeman, 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
                  30, 2007
              
              /s/
                  James C. Mastandrea
                
                James
                  C. Mastandrea, Interim CEO and Trustee
                (Principal
                  Executive Officer)March
                  30, 2007
              
              /s/
                  David K. Holeman
                
                David
                  K. Holeman, Chief Financial Officer
                (Principal
                  Financial and Principal Accounting Officer)March
                  30, 2007
              
              /s/
                  Chris A. Minton
                Chris
                    A. Minton, TrusteeMarch
                  30, 2007
              
              /s/
                  Jack L. Mahaffey
                Jack
                    L. Mahaffey, TrusteeMarch
                  30, 2007
              
              /s/
                  Chand Vyas
                
                Chand
                  Vyas, Trustee




42




**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**Page**Report
                    of Independent Registered Public Accounting
                    Firm
                F-2Consolidated
                    Balance Sheets as of December 31, 2006 and
                    2005
                F-3Consolidated
                    Statements of Income for the Years Ended
                    December 31, 2006, 2005 and 2004
                F-5Consolidated
                    Statements of Changes in Shareholders’ Equity
                    for the Years Ended December 31, 2006, 2005 and 2004
                F-6Consolidated
                    Statements of Cash Flows for the Years Ended
                    December 31, 2006, 2005 and 2004
                F-7Notes
                    to Consolidated Financial
                    Statements
                F-8Schedule
                    II –
                    Valuation
                    and Qualifying Accounts
                F-32Schedule
                    III – Real Estate and Accumulated
                    Depreciation
                F-33




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.




F-1


**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, 2006 and 2005,
      and the related consolidated statements of income, shareholders’ equity and cash
      flows, for each of the three years in the period ended December 31, 2006. 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 audits 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, 2006 and 2005, and the
      consolidated results of their operations and their cash flows for each of the
      three years in the period ended December 31, 2006 in conformity with U.S.
      generally accepted accounting principles. Also, in our opinion, the related
      financial statement schedules, when considered in relation to the basic
      consolidated financial statements taken as a whole, present fairly, in all
      material respects, the information set forth therein.






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




Houston,
      Texas


March
      27,
      2007




F-2




HartmanCommercial
      Properties REIT and Subsidiary


CONSOLIDATED
      BALANCE SHEETS


(
      in
      thousands)




**December
                  31,****2006**
              
              **2005**AssetsReal
                  estateLand
              
              $
              32,662
              
              $
              32,770Buildings
                  and improvements
              
              
              141,196
              
              
              141,019173,858
              
              
              173,789Less
                  accumulated depreciation
              
              
              (24,259
              )
              
              (19,824
              )Real
                  estate, net
              
              
              149,599
              
              
              153,965Cash
                  and cash equivalents
              
              
              8,298
              
              
              849Escrows
                  and acquisition deposits
              
              
              382
              
              
              5,308Note
                  receivable
              
              
              604
              
              
              629ReceivablesAccounts
                  receivable, net of allowance for doubtful accounts
              
              
              1,727
              
              
              1,249Accrued
                  rent receivable
              
              
              3,035
              
              
              2,593Due
                  from affiliates
              
              
              —
              
              
              3,181Receivables,
                  net
              
              
              4,762
              
              
              7,023Deferred
                  costs, net
              
              
              2,890
              
              
              3,004Prepaid
                  expenses and other assets
              
              
              552
              
              
              684Total
                  assets
              
              $
              167,087
              
              $
              171,462


See
        notes
        to consolidated financial statements.


F-3


Hartman
      Commercial Properties REIT and Subsidiary


CONSOLIDATED
      BALANCE SHEETS


(
      in
      thousands except share data)


**December
                31,****2006**
            
            **2005**Liabilities
                and Shareholders’ EquityLiabilitiesNotes
                payable
            
            $
            66,363
            
            $
            73,025Accounts
                payable and accrued expenses
            
            
            5,398
            
            
            4,063Due
                to affiliates
            
            
            103
            
            
            351Tenants’
                security deposits
            
            
            1,455
            
            
            1,441Prepaid
                rent
            
            
            745
            
            
            470Offering
                proceeds escrowed
            
            
            —
            
            
            1,560Dividends
                payable
            
            
            1,495
            
            
            1,525Distributions
                payable
            
            
            905
            
            
            1,027Total
                liabilities
            
            
            76,464
            
            
            83,462Minority
                interests of unit holders in Operating Partnership;5,808,337
                units at December 31, 2006 and 2005
            
            
            31,709
            
            
            34,272Shareholders’
                equityPreferred
                shares, $0.001 par value per share; 50,000,000shares
                authorized; none issued and outstandingat
                December 31, 2006 and 2005
            
            
            —
            
            
            —Common
                shares, $0.001 par value per share; 400,000,000shares
                authorized; 9,974,362 and 8,913,654 issued andoustanding
                at December 31, 2006 and 2005, respectively
            
            
            10
            
            
            9Additional
                paid-in-capital
            
            
            72,012
            
            
            62,560Accumulated
                deficit
            
            
            (13,108
            )
            
            (8,841
            )Total
                shareholders’ equity
            
            
            58,914
            
            
            53,728Total
                liabilities and shareholders’ equity
            
            $
            167,087
            
            $
            171,462




See
      notes
      to consolidated financial statements.




F-4


HartmanCommercial
      Properties REIT and Subsidiary


CONSOLIDATED
      STATEMENTS OF INCOME


(in
      thousands, except per share data)


**Year
                  Ended December 31,**
              ********
              ****
              **2006**
              
              **2005**
              
              **2004**RevenuesRental
                  income
              
              $
              24,644
              
              $
              20,073
              
              $
              18,427Tenants’
                  reimbursements
              
              
              4,944
              
              
              4,635
              
              
              4,612Other
                  income
              
              
              252
              
              
              211
              
              
              240Total
                  revenues
              
              
              29,840
              
              
              24,919
              
              
              23,279Operating
                  expensesProperty
                  operation and maintenance
              
              
              4,258
              
              
              3,227
              
              
              2,839Real
                  estate taxes
              
              
              3,775
              
              
              2,981
              
              
              2,595Insurance
              
              
              589
              
              
              456
              
              
              460Electricity,
                  water and gas utilities
              
              
              2,305
              
              
              1,587
              
              
              818Property
                  management and assetmanagement
                  fees to an affiliate
              
              
              1,482
              
              
              1,406
              
              
              1,340General
                  and administrative
              
              
              3,035
              
              
              1,225
              
              
              1,139Depreciation
              
              
              5,265
              
              
              4,374
              
              
              3,986Amortization
              
              
              1,211
              
              
              1,725
              
              
              1,237Bad
                  debt expense
              
              
              388
              
              
              130
              
              
              (8
              )Total
                  operating expenses
              
              
              22,308
              
              
              17,111
              
              
              14,406Operating
                  income
              
              
              7,532
              
              
              7,808
              
              
              8,873Other
                  income (expense)Interest
                  income
              
              
              386
              
              
              301
              
              
              205Interest
                  expense
              
              
              (5,296
              )
              
              (3,770
              )
              
              (2,664
              )Gain
                  on sale of real estate
              
              
              197
              
              
              —
              
              
              —Change
                  in fair value of derivative instrument
              
              
              30
              
              
              —
              
              
              —Income
                  before minority interests
              
              
              2,849
              
              
              4,339
              
              
              6,414Minority
                  interests in Operating Partnership
              
              
              (1,068
              )
              
              (1,891
              )
              
              (2,990
              )Net
                  income
              
              $
              1,781
              
              $
              2,448
              
              $
              3,424Net
                  income per common share
              
              $
              0.185
              
              $
              0.310
              
              $
              0.488Weighted-average
                  shares outstanding
              
              
              9,652
              
              
              7,888
              
              
              7,010




See
      notes to consolidated financial
      statements.




F-5




HartmanCommercial
        Properties REIT and Subsidiary
 CONSOLIDATED
        STATEMENTS OF CHANGES IN SHARHOLDERS’ EQUITY
 (in
        thousands except per share data)


****
              ****
              ****
              **Additional**
              ****
              ****
              ****
              ****
              ********
              ****
              **Common
                  Shares**
              ****
              **Paid-in**
              ****
              **Accumulated**
              ****
              ****
              ********
              ****
              **Shares**
              ****
              **Amount**
              ****
              **Capital**
              ****
              **Deficit**
              ****
              **Total**Balance,
                  December 31, 2003
              
              
              7,010
              
              $
              7
              
              $
              45,527
              
              $
              (4,218
              )
              $
              41,316Net
                  income
              
              
              —
              
              
              —
              
              
              —
              
              
              3,424
              
              
              3,424Dividends
              
              
              —
              
              
              —
              
              
              —
              
              
              (4,911
              )
              
              (4,911
              )Balance,
                  December 31, 2004
              
              
              7,010
              
              
              7
              
              
              45,527
              
              
              (5,705
              )
              
              39,829Issuance
                  of common stock forcash,
                  net of offering costs
              
              
              1,866
              
              
              2
              
              
              16,672
              
              
              —
              
              
              16,674Issuance
                  of shares under dividendreinvestment
                  plan at $9.50 per share
              
              
              38
              
              
              —
              
              
              361
              
              
              —
              
              
              361Net
                  income
              
              
              —
              
              
              —
              
              
              —
              
              
              2,448
              
              
              2,448Dividends
              
              
              —
              
              
              —
              
              
              —
              
              
              (5,584
              )
              
              (5,584
              )Balance,
                  December 31, 2005
              
              
              8,914
              
              
              9
              
              
              62,560
              
              
              (8,841
              )
              
              53,728Issuance
                  of common stock forcash,
                  net of offering costs
              
              
              960
              
              
              1
              
              
              8,501
              
              
              —
              
              
              8,502Issuance
                  of shares under dividendreinvestment
                  plan at $9.50 per share
              
              
              100
              
              
              —
              
              
              951
              
              
              —
              
              
              951Net
                  income
              
              
              —
              
              
              —
              
              
              —
              
              
              1,781
              
              
              1,781Dividends
              
              
              —
              
              
              —
              
              
              —
              
              
              (6,048
              )
              
              (6,048
              )Balance,
                  December 31, 2006
              
              
              9,974
              
              $
              10
              
              $
              72,012
              
              $
              (13,108
              )
              $
              58,914




See
        notes
        to consolidated financial statements.
  F-6
  HartmanCommercial
          Properties REIT and Subsidiary
 CONSOLIDATED
          STATEMENTS OF CASH FLOWS
 (in
          thousands)
  **Year
                    Ended December 31,****2006**
                
                **2005**
                
                **2004**Cash
                    flows from operating activities:Net
                    income
                
                $
                1,781
                
                $
                2,448
                
                $
                3,424Adjustments
                    to reconcile net income tonet
                    cash provided by operating activities:Depreciation
                
                
                5,265
                
                
                4,374
                
                
                3,986Amortization
                
                
                1,211
                
                
                1,725
                
                
                1,237Minority
                    interests in Operating Partnership
                
                
                1,068
                
                
                1,891
                
                
                2,990Equity
                    in income of real estate partnership
                
                
                —
                
                
                —
                
                
                (210
                )Gain
                    on sale of real estate
                
                
                (197
                )
                
                —
                
                
                —Bad
                    debt expense (recoveries)
                
                
                388
                
                
                130
                
                
                (8
                )Change
                    in fair value of derivative instrument
                
                
                30
                
                
                —
                
                
                —Changes
                    in operating assets and liabilities:Escrows
                    and acquisition deposits
                
                
                4,896
                
                
                (329
                )
                
                (318
                )Receivables
                
                
                (1,308
                )
                
                (369
                )
                
                (1,105
                )Due
                    from affiliates
                
                
                2,933
                
                
                (205
                )
                
                298Deferred
                    costs
                
                
                (977
                )
                
                (1,588
                )
                
                (953
                )Prepaid
                    expenses and other assets
                
                
                132
                
                
                (591
                )
                
                353Accounts
                    payable and accrued expenses
                
                
                1,335
                
                
                709
                
                
                30Tenants’
                    security deposits
                
                
                14
                
                
                374
                
                
                5Prepaid
                    rent
                
                
                275
                
                
                215
                
                
                (199
                )Net
                    cash provided by operating activities
                
                
                16,846
                
                
                8,784
                
                
                9,530Cash
                    flows from investing activities:Additions
                    to real estate
                
                
                (2,055
                )
                
                (31,792
                )
                
                (10,277
                )Proceeds
                    from sale of real estate
                
                
                1,065
                
                
                —
                
                
                —Proceeds
                    from legal settlement
                
                
                288
                
                
                —
                
                
                —Investment
                    in real estate partnership
                
                
                —
                
                
                —
                
                
                (9,034
                )Distributions
                    received from real estate partnership
                
                
                —
                
                
                10
                
                
                9,234Repayment
                    of note receivable
                
                
                25
                
                
                26
                
                
                32Net
                    cash used in investing activities
                
                
                (677
                )
                
                (31,756
                )
                
                (10,045
                )Cash
                    flows from financing activities:Dividends
                    paid
                
                
                (6,078
                )
                
                (5,289
                )
                
                (4,907
                )Distributions
                    paid to OP unit holders
                
                
                (3,753
                )
                
                (4,100
                )
                
                (4,066
                )Proceeds
                    from issuance of common shares
                
                
                9,453
                
                
                17,035
                
                
                1,472Increase
                    (decrease) in stock offering proceeds escrowed
                
                
                (1,560
                )
                
                88
                
                
                (1,472
                )Proceeds
                    from notes payable
                
                
                35,281
                
                
                46,725
                
                
                19,013Repayments
                    of notes payable
                
                
                (41,943
                )
                
                (30,926
                )
                
                (9,430
                )Payments
                    of loan origination costs
                
                
                (120
                )
                
                (344
                )
                
                (42
                )Net
                    cash provided by (used in) financing activities
                
                
                (8,720
                )
                
                23,189
                
                
                568Net
                    increase in cash and cash equivalents
                
                
                7,449
                
                
                217
                
                
                53Cash
                    and cash equivalents at beginning of period
                
                
                849
                
                
                632
                
                
                579Cash
                    and cash equivalents at end of period
                
                $
                8,298
                
                $
                849
                
                $
                632Supplemental
                    disclosure of cash flow informationDisposal
                    of fully depreciated real estate
                
                $
                570
                
                $
                —
                
                $
                —Cash
                    paid for interest
                
                $
                4,981
                
                $
                3,788
                
                $
                2,729


See
        notes
        to consolidated financial statements.




F-7




Hartman
      Commercial Properties REIT and Subsidiary




Notes
      to
      Consolidated Financial Statements




December
      31, 2006


**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.
      In
      July 2004, we changed our 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. We serve
      as
      the general partner of Hartman REIT Operating Partnership, L.P. (the “Operating
      Partnership”), which was formed on December 31, 1998 as a Delaware limited
      partnership. We currently conduct substantially all of our operations and
      activities through the Operating Partnership. As the general partner of the
      Operating Partnership, we have the exclusive power to manage and conduct the
      business of the Operating Partnership, subject to certain customary exceptions.
      As of December 31, 2006, 2005 and 2004, we owned and operated 36, 37 and 34
      retail, warehouse and office properties, respectively, in and around Houston,
      Dallas and San Antonio, Texas metropolitan areas.




Basis
      of consolidation




We
      are
      the sole general partner of the Operating Partnership and possess full legal
      control and authority over the operations of the Operating Partnership. As
      of
      December 31, 2006 and 2005, we owned a majority of the partnership interests
      in
      the Operating Partnership. Consequently, the accompanying consolidated financial
      statements include the accounts of the Operating Partnership. All significant
      inter-company 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 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




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




Reclassifications




We
      have
      reclassified certain prior fiscal year amounts in the accompanying consolidated
      financial statements in order to be consistent with the current fiscal year
      presentation. These reclassifications had no effect on net income or
      shareholders equity.




Cash
      and cash equivalents




We
      consider all highly liquid debt instruments purchased with an original maturity
      of three months or less to be cash equivalents. Cash and cash equivalents at
      December 31, 2006 and 2005 consist of demand deposits at commercial banks and
      money market funds.




F-8


Hartman
      Commercial Properties REIT and Subsidiary




Notes
      to
      Consolidated Financial Statements




December
      31, 2006


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




Due
      from affiliates




Due
      from
      affiliates at December 31, 2005, includes amounts owed to us from limited
      partnerships and other entities affiliated with Hartman Management, L.P.
      (“Hartman Management”) our former manager and adviser. In December 2006, a note
      receivable of approximately $3.5 million was paid in full by a limited
      partnership affiliated with Hartman Management.




Escrows
      and acquisition deposits




Escrow
      deposits include escrows established pursuant to certain mortgage financing
      arrangements for real estate taxes, insurance, maintenance and capital
      expenditures and escrow of proceeds of our public offering described in Note
      12
      prior to shares being issued for those proceeds. 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 our properties for impairment annually or 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 our real estate
      assets as of December 31, 2006.




Deferred
      costs




Deferred
      costs consist primarily of leasing commissions paid to Hartman Management,
      our
      former investment adviser, external brokers and in-house leasing agents. 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.




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.




F-9
 
 Hartman
          Commercial Properties REIT and Subsidiary
  Notes
          to
          Consolidated Financial Statements
  December
          31, 2006


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




Revenue
      recognition




All
      leases on our properties 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. We have established an
      allowance for doubtful accounts against the portion of tenant accounts
      receivable which is estimated to be uncollectible.




Federal
      income taxes




We
      are
      qualified as a real estate investment trust (“REIT”) under the Internal Revenue
      Code of 1986 and are therefore not subject to Federal income taxes provided
      we
      meet all conditions specified by the Internal Revenue Code for retaining our
      REIT status. We believe we have continuously met these conditions since reaching
      100 shareholders in 1999 (see Note 10).




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 us 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.




Derivative
      instruments




We
      have
      initiated a program designed to manage exposure to interest rate fluctuations
      by
      entering into financial derivative instruments. The primary objective of this
      program is to comply with debt covenants on a credit facility. We entered into
      an interest rate swap agreement with respect to amounts borrowed under certain
      of our credit facilities, which effectively exchanges existing obligations
      to
      pay interest based on floating rates for obligations to pay interest based
      on
      fixed LIBOR rates.




Changes
      in the market value of the derivative instruments and in the market value of
      the
      hedged items are recorded in earnings each reporting period. For items that
      are
      appropriately classified as cash flow hedges in accordance with Statement of
      Financial Accounting Standards, (“SFAS”) No. 133, “ *Accounting
      for*  *Derivative
      Instruments and Hedging Activities* ,”
      changes in the market value of the instrument and in the market value of the
      hedged item are recorded as other comprehensive income with the exception of
      the
      portion of the hedged items that are considered ineffective. The derivative
      instruments are reported at fair value as other assets or other liabilities
      as
      applicable. As of December 31, 2006, the fair value of this instrument is
      approximately $30,000 and is included in prepaid expenses and other assets
      in
      the consolidated balance sheet.




F-10


Hartman
      Commercial Properties REIT and Subsidiary




Notes
      to
      Consolidated Financial Statements




December
      31, 2006


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




Additionally,
      approximately $30,000 is included in other income on the consolidated statement
      of income for the year ended December 31, 2006.




Fair
      value of financial instruments




Our
      financial instruments consist primarily of cash, cash equivalents, accounts
      receivable, 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 our debt obligations is representative of its carrying value
      based upon current rates offered for similar types of borrowing arrangements.
      The fair value of interest rate swaps (used for hedging purposes) is the
      estimated amount that the financial institution would receive or pay to
      terminate the swap agreements at the reporting date, taking into account current
      interest rates and the current credit worthiness of the swap
      counterparties.




Concentration
      of risk




Substantially
      all of our revenues are obtained from office, warehouse and retail locations
      in
      the Houston, Dallas and San Antonio, Texas metropolitan areas. We maintain
      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 these deposits.




Comprehensive
      income




We
      follow
      SFAS No. 130, “ *Reporting
      Comprehensive Income,* ”
which
      establishes standards for reporting and display of comprehensive income and
      its
      components. For the periods presented, we did not have significant amounts
      of
      other comprehensive income.




New
      accounting pronouncements




In
      May
      2005, the Financial Accounting Standards Board (“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 principles.  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
      did not have a material impact on our consolidated financial
      statements.




In
      February 2006, the FASB issued SFAS No. 155, “ *Accounting
      for Certain Hybrid Financial*  *Instruments-
      an amendment of FASB Statements No. 133 and 140* ”
(“SFAS
      155”). This statement will be effective beginning the first quarter of 2007.
      Earlier adoption is permitted. The statement permits interests in hybrid
      financial assets that contain an embedded derivative that would require
      bifurcation to be accounted for as a single financial instrument at fair value
      with changes in fair value recognized in earnings. This election is permitted
      on
      an instrument-by-instrument basis for all hybrid financial instruments held,
      obtained, or issued as of the adoption date. We are currently assessing the
      impact of adoption of SFAS 155.




F-11


Hartman
      Commercial Properties REIT and Subsidiary




Notes
      to
      Consolidated Financial Statements




December
      31, 2006


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




New
      accounting pronouncements (continued)




In
      March
      2006, the FASB issued SFAS No. 156, “ *Accounting
      for Servicing of Financial Assets - an*  *amendment
      of FASB Statement No. 140,* ”
(“SFAS
      156”), which permits entities to elect to measure servicing assets and servicing
      liabilities at fair value and report changes in fair value in earnings. Adoption
      of SFAS 156 is required for financial periods beginning after September 15,
      2006. We are currently assessing the impact and timing of adoption of SFAS
      156
      but do not expect the standard to have a material impact on our consolidated
      financial statements.




In
      September 2006, the FASB issued SFAS No. 157, “ *Fair
      Value Measurements* ”
(“SFAS
      157”).  SFAS 157 defines fair value, establishes a framework for measuring
      fair value under U.S. generally accepted accounting principles and requires
      enhanced disclosures about fair value measurements. It does not require any
      new
      fair value measurements. SFAS 157 is effective for financial statements issued
      for fiscal years beginning after November 15, 2007 and interim periods within
      those fiscal years. We are currently assessing whether to early adopt
      SFAS 157 as of the first quarter of fiscal 2007 as permitted, and are currently
      evaluating the impact adoption may have on our consolidated financial
      statements.




In
      February 2007, the FASB issued SFAS No. 159, “ *The
      Fair Value Option for Financial Assets and Financial Liabilities—Including an
      amendment of FASB Statement No. 115”* (“SFAS
      159”). SFAS 159 permits entities to choose to measure many financial instruments
      and certain other items at fair value. The objective is to improve financial
      reporting by providing entities with the opportunity to mitigate volatility
      in
      reported earnings caused by measuring related assets and liabilities differently
      without having to apply complex hedge accounting provisions. SFAS 159 is
      effective for financial statements issued for fiscal years beginning after
      November 15, 2007 and interim periods within those fiscal years. We are
      currently assessing whether to early adopt SFAS 159 as of the first quarter
      of fiscal 2007 as permitted, and are currently evaluating the impact adoption
      may have on our consolidated financial statements.




**Note
      2 – Interest Rate Swap**




Effective
      March 16, 2006, we executed an interest rate swap used to mitigate the risks
      associated with adverse movements in interest rates which might affect
      expenditures. We have not designated this derivative contract as a hedge, and
      as
      such, the change in the fair value of the derivative is recognized currently
      in
      earnings. This derivative instrument has a total notional amount of $30 million,
      is at a fixed rate of 5.09% plus the LIBOR margin (see Note 8), and matures
      monthly through March, 2008. As of December 31, 2006, the fair value of this
      instrument is approximately $30,000 and is included in prepaid expenses and
      other assets in our consolidated balance sheet and other income in our
      consolidated statement of income.




**Note
      3 – Real Estate**




During
      2004, we acquired from an unrelated party one multi-tenant retail center
      comprising approximately 95,032 square feet of gross leasable area. The property
      was acquired for cash in the amount of approximately $8.9 million.




F-12


Hartman
      Commercial Properties REIT and Subsidiary




Notes
      to
      Consolidated Financial Statements




December
      31, 2006


**Note
      3 – Real Estate (Continued)**




During
      2005, we acquired from an unrelated party one multi-tenant office building
      comprising approximately 106,169 square feet of gross leasable area. The
      property was acquired for cash in the amount of approximately $5.5 million
      plus
      closing costs.




During
      2005, we acquired from an unrelated party one multi-tenant office building
      comprising approximately 125,874 square feet of gross leasable area. The
      property was acquired for cash in the amount of approximately $8.0 million
      plus
      closing costs.




During
      2005, we acquired from an unrelated party one multi-tenant office building
      comprising approximately 253,981 square feet of gross leasable area. The
      property was acquired for cash in the amount of approximately $17.0 million
      plus
      closing costs.




The
      purchase prices we 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.




We
      allocate 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 our management’s estimates of their fair
      values.




Our
      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.




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. 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.




F-13


Hartman
      Commercial Properties REIT and Subsidiary




Notes
      to
      Consolidated Financial Statements




December
      31, 2006


**Note
      3 – Real Estate (Continued)**




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 our 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, our 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 eighteen 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 these 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.




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 ten 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.




On
      December 1, 2006, we sold Northwest Place II, a 27,974 square foot
      office/warehouse building located in Houston, Texas for a sales price of
      $1,175,000. A gain of $197,000 was generated from this sale, which is reflected
      in our consolidated financial statements for the year ended December 31, 2006.
      It is anticipated that the funds received from this sale will be used for future
      acquisitions and/or capital improvements to existing properties. It was
      determined that “discontinued operations” classification was not required due to
      the immateriality of this property to our overall results.




At
      December 31, 2006, we owned 36 commercial properties in the Houston, Dallas
      and
      San Antonio, Texas areas comprising approximately 3,093,000 square feet of
      gross
      leasable area.




F-14


Hartman
      Commercial Properties REIT and Subsidiary




Notes
      to
      Consolidated Financial Statements




December
      31, 2006


**Note
      4 – Note Receivable**




In
      January 2003, we partially financed the sale of a property we had previously
      sold and for which we had taken a note receivable of $0.4 million as part of
      the
      consideration. We advanced $0.3 million and renewed and extended the balance
      of
      $0.4 million still due from the original sale.




The
      original principal amount of the note receivable, dated January 10, 2003, is
      $0.7 million. 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.




**Note
      5 – Accounts Receivable, net**




Accounts
      receivable consists of amounts billed and due from tenants, amounts due from
      insurance claims and allowance for doubtful accounts as follows (in
      thousands):


**December
                  31,****2006**
              
              **2005**Tenant
                  receivables
              
              $
              1,941
              
              $
              1,458Allowance
                  for doubtful accounts
              
              
              (641
              )
              
              (473
              )Insurance
                  claim receivables
              
              
              427
              
              
              264Totals
              
              $
              1,727
              
              $
              1,249




F-15


Hartman
      Commercial Properties REIT and Subsidiary




Notes
      to
      Consolidated Financial Statements




December
      31, 2006


**Note
      6 - Deferred Costs**




Deferred
      costs consist of the following (in thousands):


**December
                  31,****2006**
              
              **2005**Leasing
                  commissions
              
              $
              6,904
              
              $
              5,921Deferred
                  financing costs
              
              
              1,949
              
              
              1,8298,853
              
              
              7,750Less:
                  accumulated amortization
              
              
              (5,963
              )
              
              (4,746
              )**Totals**
              
              $
              2,890
              
              $
              3,004


A
      summary
      of expected future amortization of deferred costs is as follows (in
      thousands):


**Years
                  Ended December 31,**2007
              
              
              $
              9872008
              
              
              
              6652009
              
              
              
              4472010
              
              
              
              3012011
              
              
              
              208Thereafter
              
              
              
              282Total
              
              
              $
              2,890




F-16


Hartman
      Commercial Properties REIT and Subsidiary




Notes
      to
      Consolidated Financial Statements




December
      31, 2006


**Note
      7 – Future Minimum Lease Income**




We
      lease
      the majority of our 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, 2006 is as follows (in thousands):




**Years
                Ended December 31,**2007
            
            
            $
            22,4832008
            
            
            
            18,7102009
            
            
            
            14,3342010
            
            
            
            10,4792011
            
            
            
            6,706Thereafter
            
            
            
            10,584Total
            
            
            $
            83,296


**Note
      8 – Debt**




Notes
      payable




Mortgages
      and other notes payable consist of the following (in thousands):




**December
                31,****2006**
            
            **2005**Mortgages
                and other notes payable
            
            $
            5,138
            
            $
            40,050Revolving
                loan secured by properties
            
            
            61,225
            
            
            32,975Totals
            
            $
            66,363
            
            $
            73,025




F-17




Hartman
      Commercial Properties REIT and Subsidiary




Notes
      to
      Consolidated Financial Statements




December
      31, 2006




**Note
      8 – Debt
      (Continued)**





As
      of
      December 31, 2006, we two active loans which are described below:





***Revolving
      Credit Facility***





We
      have a
      revolving credit facility with a consortium of banks. The credit facility is
      secured by a pledge of the partnership interests in Hartman REIT Operating
      Partnership III LP (“HROP III”), a wholly owned subsidiary of the Operating
      Partnership that was formed to hold title to the properties comprising the
      borrowing base pool for the facility. At December 31, 2006, 35 properties are
      owned by HROP III.





In
      2006,
      the credit facility was increased to $75 million from $50 million and may be
      increased to $100 million as the borrowing base pool expands. We entered into
      this credit facility to refinance our then existing debt, to finance property
      acquisitions and for general corporate purposes.





As
      of
      December 31, 2006 and 2005, the balance outstanding under the credit facility
      was $61.2 million and $33.0 million, respectively, and the availability to
      draw
      was $13.8 million and $17.0 million, respectively.





Outstanding
      amounts under the credit facility accrue interest computed (at our 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
                      Margin**Less
                    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 is a floating rate equal to the higher of the bank’s base
      rate or the Federal Funds Rate plus 0.5%. LIBOR Rate loans will be available
      in
      one, two, three or six month periods, with a maximum of nine contracts at any
      time. The effective interest rate as of December 31, 2006 was 7.28% 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.





As
      of
      December 31, 2005, we were 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 had the right to accelerate payment of amounts
      outstanding under this credit facility. However, on May 8, 2006, we received
      a
      waiver from the required majority of the consortium banks in the credit facility
      and also entered into a modification of the loan agreement whereby the covenant
      was amended though December 31, 2006.





F-18




Hartman
        Commercial Properties REIT and Subsidiary
  Notes
        to
        Consolidated Financial Statements
  December
        31, 2006


**Note
      8 – Debt (Continued)**





As
      amended, the ratio of declared dividends to funds from operations (as defined
      in
      the loan agreement) shall not exceed 107% for the three months ended March
      31,
      2006 and June 30,2006, 104% for the three months ended September 30, 2006 and
      100% for the three months ended December 31, 2006. As of December 31, 2006,
      we
      are in compliance with the covenant, as amended.




On
      October 2, 2006, our Board (i) elected not to renew our advisory agreement
      with
      Hartman Management; (ii) terminated a certain management agreement with Hartman
      Management; and (iii) removed Mr. Hartman from his positions as our President,
      Secretary and Chief Executive Officer. These actions violated certain covenants
      in the loan agreement and were events of default thereunder. These events of
      default have been waived by the lenders.





On
      January 8, 2007, we requested that legal fees incurred in connection with the
      litigation with Mr. Hartman and Hartman Management be excluded from the
      definition of funds from operations in testing the covenant requiring the ratio
      of declared and paid dividends to funds from operations not be in excess of
      95%.
      On January 23, 2007, the lenders granted the exclusion as requested. On March 26, 2007, we formalized this agreement in Amendment
      No. 3 to our Revolving Credit Agreement which is filed as exhibit 10.26 to
      this
      document.





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





·
            We
                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 we want 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:





·
            We
                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.****




F-19


Hartman
        Commercial Properties REIT and Subsidiary
  Notes
        to
        Consolidated Financial Statements
  December
        31, 2006




**Note
      8 – Debt (Continued)**





·
            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 us are as follows:





·
            We
                will not permit our total indebtedness to exceed 60% of the fair
                market
                value of our real estate assets at the end of any quarter. Total
                indebtedness is defined as all our liabilities, including this facility
                and all other secured and unsecured debt, 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, depreciation and amortization expenses 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, depreciation
                and amortization expenses to total interest expense, 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%.


·
            We
                must maintain our status as a REIT 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, we must hedge all variable rate debt above $40 million
      until the point at which the ratio of variable rate debt to fixed rate debt
      is
      50% of total debt. Thereafter, we must maintain this type of hedge during any
      period in which variable rate debt exceeds 50% of total debt. On March 27,
      2006,
      we 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 lenders waived the default for not executing the hedge
      within six months of closing, as required by the loan agreement.





On
      June
      30, 2006, we drew down $34.8 million on the revolving credit facility to
      extinguish the three year floating rate mortgage loan described in the following
      paragraph and pay related legal and banking fees.





F-20




Hartman
        Commercial Properties REIT and Subsidiary
  Notes
        to
        Consolidated Financial Statements
  December
        31, 2006




**Note
      8 – Debt (Continued)**





In
      December 2002, we refinanced substantially all of our mortgage debt with a
      $34.4
      million three-year floating rate mortgage loan collateralized by 18 of our
      then
      existing properties. The loan had 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% at December 31, 2005) 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 were due monthly, and the loan could be
      repaid in full or in $100,000 increments, with a final balloon payment due
      upon
      maturity.





***Mortgage
      Loan on Windsor Park Centre***





In
      connection with the purchase of the Windsor Park property in December 2003,
      we
      assumed a note payable in the amount of $6.6 million, secured by the property.
      The balance at December 31, 2006, was $5.1 million. The note was 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 was payable in full
      on
      December 1, 2006. We obtained an extension through March 2, 2007 and paid off
      this note in full with the proceeds from a $10.0 million loan described in
      the
      following paragraph.





On
      March
      1, 2007, we obtained a $10.0 million loan to pay off the loan obtained upon
      the
      acquisition of the Windsor Park property and to provide funds for future
      acquisitions. The mortgage loan is secured by the Windsor Park property which
      is
      owned by HCP REIT Operating Company IV LLC (“HROC IV”), a wholly owned
      subsidiary of the Operating Partnership that was formed to hold title to the
      Windsor Park property. On March 1, 2007, we conveyed ownership of the Windsor
      Park property from the Operating Partnership to HROC IV in order to secure
      the
      $10 million mortgage loan. The note is payable in equal monthly installments
      of
      principal and interest of $60,212, with interest at the rate of 6.04% per annum.
      The balance of the note is payable in full on March 1, 2014.





Annual
      maturities of notes payable as of December 31, 2006, including the revolving
      loan, are as follows (in thousands):




**Year
                    Ended**
                  **December
                    31,**2007
              
              $
              5,1382008
              
              
              61,225Total
              
              $
              66,363




F-21




Hartman
        Commercial Properties REIT and Subsidiary
  Notes
        to
        Consolidated Financial Statements
  December
        31, 2006




**Note
      9 – 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, 2006, 2005 and 2004, are 5,808,337 OP units as their
      inclusion would be antidilutive.


**Year
                  Ended December 31,****2006**
              
              **2005**
              
              **2004**Basic
                  and diluted earnings per share:Weighted
                  average commonshares
                  outstanding
              
              
              9,652
              
              
              7,888
              
              
              7,010Basic
                  and diluted earnings per share
              
              $
              0.185
              
              $
              0.310
              
              $
              0.488Net
                  income
              
              $
              1,781
              
              $
              2,448
              
              $
              3,424




F-22




Hartman
      Commercial Properties REIT and Subsidiary




Notes
      to
      Consolidated Financial Statements




December
      31, 2006


**Note
      10 – Federal Income Taxes**




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




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:




**2006**
              
              **2005**
              
              **2004**Ordinary
                  income (unaudited)
              
              
              36.2
              %
              
              62.6
              %
              
              67.7
              %Return
                  of capital (unaudited)
              
              
              59.9
              %
              
              37.4
              %
              
              32.3
              %Capital
                  gain distributions (unaudited)
              
              
              3.9
              %
              
              0.0
              %
              
              0.0
              %**Total**
              
              
              **100.0**
              **%**
              
              **100.0**
              **%**
              
              **100.0**
              **%**




F-23




Hartman
      Commercial Properties REIT and Subsidiary




Notes
      to
      Consolidated Financial Statements




December
      31, 2006


**Note
      11 – Related-Party Transactions**




In
      January 1999, we entered into a property management agreement with Hartman
      Management. 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, we paid Hartman Management
      a management fee of 5% and a partnership management fee of 1% based on effective
      gross revenues from the properties, as defined in the agreement. After September
      1, 2004, we paid Hartman Management 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, as determined by a
      survey of brokers and agents in that area. These fees have ranged between
      approximately 2% and 4% of gross revenues (as defined in the amended and
      restated agreement) for the management of office buildings and approximately
      5%
      of gross revenues for the management of retail and warehouse
      properties.




In
      October 2006, our Board terminated for cause our property management agreement
      with Hartman Management. Hartman Management turned over all property management
      functions to us on November 14, 2006.




Effective
      September 1, 2004, we entered into an advisory agreement with Hartman
      Management which provided that we pay Hartman Management a quarterly fee of
      one-fourth of .25% of gross asset value (as defined in the advisory agreement)
      for asset management services. In addition, the advisory agreement provided
      for
      the payment of a deferred performance fee, payable in certain events, including
      termination of the advisory agreement, based upon appreciation in the value
      of
      certain of our real estate assets. The advisory agreement expired by its terms
      on September 30, 2006.




We
      incurred total management, partnership and asset management fees of $1.5
      million, $1.4 million and $1.3 million, under the advisory and management
      agreements for the years ended December 31, 2006, 2005 and 2004, respectively.
      Management fees of $0.1 million were payable at December 31, 2005. No management
      fees were payable at December 31, 2006. We have not accrued any deferred
      performance fees, as we believe the amount of these fees, if any are owing,
      cannot be determined with reasonable certainty at this time.




The
      aggregate fees and reimbursements payable to Hartman Management under the
      advisory agreement was not intended to be significantly different from the
      fees
      that would have been payable under our previous agreement with Hartman
      Management. The asset management fee under the advisory agreement, however,
      was
      significantly higher. Hartman Management waived the excess of the fee for the
      period September 1, 2004 through March 31, 2006 in perpetuity. The asset
      management fee under the advisory agreement was charged by Hartman Management
      in
      the second and third quarters of 2006 and has been reflected in our consolidated
      financial statements as of December 31, 2006.




F-24




Hartman
      Commercial Properties REIT and Subsidiary




Notes
      to
      Consolidated Financial Statements




December
      31, 2006


**Note
      11 – Related-Party Transactions (Continued)**




During
      July 2004, we amended certain terms of our declaration of trust. Under the
      amended terms, Hartman Management was required to reimburse us for operating
      expenses exceeding certain limitations determined at the end of each fiscal
      quarter. Reimbursements, if any, from
      Hartman Management were recorded
      on a quarterly basis as a reduction in property management fees.





Under
      the
      provisions of the management agreement, costs incurred by Hartman Management
      for
      the management and maintenance of the properties were reimbursable to Hartman
      Management. At December 31, 2005, $0.05 million was payable to Hartman
      Management related to these reimbursable costs. No such amounts were payable
      at
      December 31, 2006.




In
      consideration of leasing the properties, we historically paid Hartman Management
      leasing commissions for leases originated by Hartman Management and for
      expansions and renewals of existing leases. We incurred total leasing
      commissions to Hartman Management of $0.9 million, $1.6 million and $1.0 million
      for the years ended December 31, 2006, 2005 and 2004, respectively, of which
      $0.08 million was payable at December 31, 2005. No such amounts were payable
      at
      December 31, 2006.





In
      connection with our public offering described in Note 12, we have reimbursed
      Hartman Management 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 Hartman Management on our behalf. We have paid
      our dealer manager, through Hartman Management by agreement between them, a
      fee
      of up to 2.5% of the gross selling price of all common shares sold in the
      offering. We incurred total fees of $0.5 million and $0.9 million for the years
      ended December 31, 2006 and 2005, respectively. These fees have been treated
      as
      offering costs and netted against the proceeds from the sale of common shares.
      On October 2, 2006, our Board elected to terminate the public offering described
      in Note 12.




Also
      in
      connection with our public offering described in Note 12, Hartman Management
      has
      historically received 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 us. The advisory
      agreement expired by its terms on September 30, 2006. On September 30, 2006,
      $0.2 million of acquisition fees paid to Hartman Management had been capitalized
      and not yet allocated to the purchase price of a property. In accordance with
      advisory agreement, Hartman Management is obligated to reimburse us for any
      acquisition fee that has not been allocated to the purchase price of our
      properties as provided for in our declaration of trust. A letter demanding
      payment was sent to Hartman Management on December 21, 2006, and $0.2 million
      is
      netted against other payables to Hartman Management and included in due to
      affiliates in our consolidated balance sheet at December 31, 2006.





F-25




Hartman
      Commercial Properties REIT and Subsidiary




Notes
      to
      Consolidated Financial Statements




December
      31, 2006


**Note
      11 – Related-Party Transactions (Continued)**





We
      incurred total acquisition fees to Hartman Management of $0.2 million and $0.4
      million for the years ended December 31, 2006 and 2005. At December 31, 2005,
      $0.1 million was payable to Hartman Management relating to organization and
      offering expenses, dealer manager fees and acquisition fees. No such amounts
      were payable at December 31, 2006.





Hartman
      Management was billed $0.2 million, $0.1 million and $0.1 million for office
      space for the years ended December 31, 2006, 2005 and 2004, respectively. These
      amounts are included in rental income in our consolidated statements of
      income.




Our
      day-to-day operations are strategically directed by our Board. We own
      substantially all of our real estate properties through the Operating
      Partnership. Mr. Hartman was our President, Secretary and Chief Executive
      Officer through October 2, 2006, and he resigned as our Chairman on October
      27,
      2006. He is also the sole owner of Hartman Management. Mr. Hartman was owed
      $44,094 and $47,478 in dividends payable on his common shares at December 31,
      2006 and 2005, respectively. Mr. Hartman owned 2.9% and 3.0% of our issued
      and
      outstanding common shares as of December 31, 2006 and 2005,
      respectively.





We
      were 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 8 and 12.




**Note
      12 – Shareholders’ Equity**




Under
      our
      declaration of trust, we have authority to issue 400 million common shares
      of
      beneficial interest, $0.001 par value per share, and 50 million preferred shares
      of beneficial interest, $0.001 par value per share.




On
      September 15, 2004, our Registration Statement on Form S-11, with respect to
      our
      public offering of up to 10 million common shares of beneficial interest offered
      at a price of $10 per share was declared effective under the Securities Act
      of
      1933. The Registration Statement also covered up to 1 million shares available
      pursuant to our dividend reinvestment plan offered at a price of $9.50 per
      share. The shares were offered to investors on a best efforts basis.
      Post-Effective Amendments No. 1, 2 and 3 to the Registration Statement were
      declared effective by the SEC on June 27, 2005, March 9, 2006 and May 3, 2006,
      respectively.




As
      of
      December 31, 2006, 2.8 million shares had been issued pursuant to our public
      offering with net offering proceeds received of $24.6 million. An additional
      138,000 shares had been issued pursuant to the dividend reinvestment plan in
      lieu of dividends totaling $1.3 million. Shareholders that received shares
      pursuant to our dividend reinvestment plan on or after October 2, 2006 may
      have
      recission rights. See “ *Dividend
      Reinvestment Plan* ”
in
      Item
      5 of this report.




On
      October 2, 2006, our Board terminated the public offering. On March 27, 2007,
      we
      gave the required ten day notice to participants informing them that we intend
      to terminate our dividend reinvestment plan. As a result, our dividend
      reinvestment plan will terminate on April 6, 2007.




F-26




Hartman
      Commercial Properties REIT and Subsidiary




Notes
      to
      Consolidated Financial Statements




December
      31, 2006


**Note
      12 – Shareholders’ Equity (Continued)**




At
      December 31, 2006 and 2005, Mr. Hartman owned 2.9% and 3.0%, respectively,
      of
      our outstanding shares. At December 31, 2006 and 2005, our Board collectively
      owned 2.6% and 2.9%, respectively, of our outstanding shares.




All
      net
      proceeds of our public offering were contributed to the Operating Partnership
      in
      exchange for OP Units. The Operating Partnership used 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, we received an
      equivalent number of OP Units as shares of stock that are sold.




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. Distributions to OP Unit holders are paid at the same rate per unit
      as
      dividends per share of HCP. 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, 2006 and
      2005, there were 15,421,212 and 14,360,503 OP Units outstanding,
      respectively. We owned
      9,612,875 and 8,552,166 OP Units as of December 31, 2006 and 2005, respectively.
      The balance of the OP Units is owned by third parties, including Mr. Hartman
      and
      certain trustees. Our weighted-average share ownership in the Operating
      Partnership was approximately 62.43%, 56.44% and 53.37% during the years ended
      December 31, 2006, 2005 and 2004, respectively. At December 31, 2006 and 2005,
      Mr. Hartman owned 6.9% and 7.4%, respectively, of the Operating Partnership’s
      outstanding units. At December 31, 2006 and 2005, our Board collectively owned
      0.4% of the Operating Partnership’s outstanding units.




F-27




Hartman
      Commercial Properties REIT and Subsidiary




Notes
      to
      Consolidated Financial Statements




December
      31, 2006




**Note
      12 –
      Shareholders’ Equity (Continued)** ****




Dividends
      and distributions




The
      following tables summarize the cash dividends/distributions paid to holders
      of
      common shares and holders of OP Units (after giving effect to the
      recapitalization) during the years ended December 31, 2006 and 2005 and the
      quarter ended March 31, 2007.




**HCP
                    Shareholders****Dividend**
                  **per
                    Common Share**
                ****
                **Date
                    Dividend**
                  **Paid**
                ****
                **Total
                    Amount**
                  **Paid
                    (in thousands)**$
                    0.1755
                
                Qtr
                    ended 03/31/05
                
                $
                    1,2300.1768
                
                Qtr
                    ended 06/30/05
                
                1,2820.1768
                
                Qtr
                    ended 09/30/05
                
                1,3510.1768
                
                Qtr
                    ended 12/31/05
                
                1,4120.1768
                
                Qtr
                    ended 03/31/06
                
                1,5260.1768
                
                Qtr
                    ended 06/30/06
                
                1,6320.1500
                
                Qtr
                    ended 09/30/06
                
                1,4430.1500
                
                Qtr
                    ended 12/31/06
                
                1,4770.1500
                
                Qtr
                    ended 03/31/07
                
                1,495




**OP
                      Unit Holders Including Minority Unit Holders****Distribution**
                    **per
                      OP Unit**
                  ****
                  **Date
                      Distribution**
                    **Paid**
                  ****
                  **Total
                      Amount**
                    **Paid
                      (in thousands)**$
                      0.1755
                  
                  Qtr
                      ended 03/31/05
                  
                  $
                      2,1860.1768
                  
                  Qtr
                      ended 06/30/05
                  
                  2,2400.1768
                  
                  Qtr
                      ended 09/30/05
                  
                  2,3080.1768
                  
                  Qtr
                      ended 12/31/05
                  
                  2,3700.1768
                  
                  Qtr
                      ended 03/31/06
                  
                  2,4880.1768
                  
                  Qtr
                      ended 06/30/06
                  
                  2,5940.1500
                  
                  Qtr
                      ended 09/30/06
                  
                  2,2600.1500
                  
                  Qtr
                      ended 12/31/06
                  
                  2,2940.1500
                  
                  Qtr
                      ended 03/31/07
                  
                  2,314




F-28




Hartman
        Commercial Properties REIT and Subsidiary
  Notes
        to
        Consolidated Financial Statements
  December
        31, 2006





**Note
      13 – Incentive Share Plan**




In
      1999,
      we 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 us; and (iii) increase the interest of our employees and
      trustees in our welfare through their participation and influence on the growth
      in value of our 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, and consultants as determined
      by
      the compensation committee of our Board. The maximum number of common shares
      that may be issued under the Incentive Share Plan is the lesser of 5% of the
      outstanding shares on a fully diluted basis or 5,000,000. As of December 31,
      2006, no options or awards to purchase common shares have been granted under
      the
      Incentive Share Plan.




In
      December 2004 the FASB issued SFAS No. 123R, “ *Share-Based
      Payment* ,”
which
      establishes accounting standards for all transactions in which an entity
      exchanges its equity instruments for goods and services. This accounting
      standard focuses primarily on equity transactions with employees and requires
      share-based payments to be assigned a fair value and expensed over the requisite
      service period of each award.  As of December 31, 2006, no awards have been
      granted under the Incentive Share Plan and thus, no amounts have been expensed
      during the year then ended.




**Note
      14 – Commitments and Contingencies**




The
      nature of our business exposes us to the risk of lawsuits for damages or
      penalties relating to, among other things, breach of contract and employment
      disputes. We are currently involved in the following litigation.




***Hartman
      Commercial Properties REIT and Hartman REIT Operating Partnership, L.P. v.***


***Allen
      R. Hartman and Hartman Management, L.P., in the 333*** ***rd*** ***Judicial District Court of Harris County, Texas***




In
      October 2006, we initiated this action against our former Chief Executive
      Officer, Allen R. Hartman, and our former manager and advisor Hartman
      Management. L.P. We are seeking damages for breach of contract, fraudulent
      inducement and breach of fiduciary duties.




In
      November 2006, Mr. Hartman and Hartman Management filed a counterclaim against
      us, the members of our Board, and our Chief Operating Officer, John J. Dee.
      The
      counterclaim has since been amended to drop the claims against the individual
      defendants with the exception our current interim Chief Executive Officer,
      James
      C. Mastandrea, and Mr. Dee. The amended counterclaim asserts claims against
      us
      for alleged breach of contract and alleges that we owe Mr. Hartman and Hartman
      Management fees for the termination of an advisory agreement. The amended
      counterclaim asserts claims against Messrs. Mastandrea and Dee for tortious
      interference with the advisory agreement and a management agreement and
      conspiracy to seize control of us for their own financial gains. We have
      indemnified Messrs. Mastandrea and Dee to the extent allowed by our governing
      documents and Maryland law. The amended counterclaim also asserts claims against
      our prior outside law firm and one of its partners.




F-29




Hartman
          Commercial Properties REIT and Subsidiary
  Notes
          to
          Consolidated Financial Statements
  December
          31, 2006





**Note
      14 – Commitments and Contingencies (Continued)**




Limited
      discovery has been conducted in this case as of the date of this report. The
      case is set for trial in July 2007.




It
      is too
      early to express an opinion respecting the likelihood of an adverse outcome
      on
      the counterclaim, although we intend to vigorously defend against those claims
      and vigorously prosecute our affirmative claims.




***Hartman
      Commercial Properties REIT v. Allen R. Hartman, et al; in the United States***


***District
      Court for the Southern District of Texas***




In
      December 2006, we initiated this action complaining of the attempt by Mr.
      Hartman and Hartman Management to solicit written consents from shareholders
      to
      replace our Board.




Mr.
      Hartman and Hartman Management have filed a counterclaim claiming that certain
      changes to our bylaws and declaration of trust are invalid and that their
      enactment is a breach of fiduciary duty. They are seeking a declaration that
      the
      changes to our bylaws and declaration of trust are invalid and an injunction
      barring their enforcement. These changes, among other things, will stagger
      the
      terms of our Board members over three years, require two-thirds vote of the
      outstanding common shares to remove a Board member and provide that our
      secretary may call a special meeting of shareholders only on the written request
      of a majority of outstanding common shares. We believe the changes in our bylaws
      and declaration of trust are valid under Maryland law and in the best interest
      of our shareholders. We have filed a motion to dismiss the counterclaims. A
      group of shareholders has filed a request to intervene in this action to assert
      claims similar to those asserted by Mr. Hartman and Hartman Management. We
      have
      opposed the intervention.




There
      has
      been limited discovery in this case as of the date of this report. Documents
      have been produced and interrogatory responses exchanged. We have produced
      the
      members of our Board for deposition as well as our Chief Operating Officer,
      John
      J. Dee. The Court has conducted a hearing on the parties’ cross request for
      preliminary injunction, but has not yet ruled on that request.




It
      is too
      early to express an opinion respecting the likelihood of an adverse outcome
      on
      the counterclaim, although we intend to vigorously defend against those claims
      and vigorously prosecute our affirmative claim.




***Other***




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




F-30




Hartman
          Commercial Properties REIT and Subsidiary
  Notes
          to
          Consolidated Financial Statements
  December
          31, 2006




**Note
      15 – Segment Information**




Our
      management historically has not differentiated by property types and therefore
      does not present segment information.




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




The
      following is a summary of our unaudited quarterly financial information for
      the
      years ended December 31, 2006 and 2005 (in thousands, except per share
      data):




**First**
                  **Quarter**
              
              **Second**
                  **Quarter**
              
              **Third**
                  **Quarter**
              
              **Fourth**
                  **Quarter****2006**Revenues
              
              $
              7,414
              
              $
              7,689
              
              $
              7,416
              
              $
              7,321Income
                  before minority interests
              
              
              937
              
              
              1,403
              
              
              974
              
              
              (465
              )Minority
                  interest in income
              
              
              (372
              )
              
              (545
              )
              
              (371
              )
              
              220Net
                  income
              
              
              565
              
              
              858
              
              
              603
              
              
              (245
              )Basic
                  and diluted earnings per share
              
              $
              0.061
              
              $
              0.089
              
              $
              0.061
              
              $
              (0.025
              )**2005**Revenues
              
              $
              6,244
              
              $
              6,246
              
              $
              6,081
              
              $
              6,348Income
                  before minority interests
              
              
              1,522
              
              
              1,340
              
              
              894
              
              
              583Minority
                  interest in income
              
              
              (697
              )
              
              (593
              )
              
              (383
              )
              
              (218
              )Net
                  income
              
              
              824
              
              
              746
              
              
              512
              
              
              366Basic
                  and diluted earnings per share
              
              $
              0.114
              
              $
              0.097
              
              $
              0.064
              
              $
              0.035




F-31


**HartmanCommercial
      Properties REIT and
      Subsidiary**




**Schedule
      II - Valuation and Qualifying Accounts**




**(in
                    thousands)****Description**
                
                **Balance
                    at**
                  **Beginning**
                  **of
                    Period**
                
                **Charged**
                  **(credited)**
                  **to
                    Income**
                
                **Deductions**
                  **from**
                  **Reserves**
                
                **Balance
                    at**
                  **End
                    of**
                  **Period**Allowance
                    for doubtful accounts:Year
                    ended December 31, 2006
                
                $
                473
                
                $
                388
                
                $
                (220
                )
                $
                641Year
                    ended December 31, 2005
                
                
                343
                
                
                130
                
                
                —
                
                
                473Year
                    ended December 31, 2004
                
                
                351
                
                
                (8
                )
                
                —
                
                
                343
 
 F-32




**HartmanCommercial
        Properties REIT and
        Subsidiary**
  **Schedule
        III - Real Estate and Accumulated Depreciation**
  **December
        31, 2006**


**Initial
                  Cost**
              
              **Costs
                  Capitalized Subsequent** **to
                  Acquisition**
              
              **Gross
                  Amount at which Carried at End of Period****(1) (2)****Building
                  and**
              
              
              
              **Carrying**
              
              
              
              **Building
                  and****Property
                  Name**
              
              **Land**
              
              **Improvements**
              
              **Improvements**
              
              **Costs**
              
              **Land**
              
              **Improvements**
              
              **Total****Retail
                  Properties:**Bellnot
                  Square
              
              $
              1,154
              
              $
              4,638
              
              $
              69
              
              $
              —
              
              $
              1,154
              
              $
              4,707
              
              $
              5,861Bissonnet
                  Beltway
              
              
              415
              
              
              1,947
              
              
              184
              
              
              —
              
              
              415
              
              
              2,131
              
              
              2,546Centre
                  South
              
              
              481
              
              
              1,596
              
              
              429
              
              
              —
              
              
              481
              
              
              2,025
              
              
              2,506Garden
                  Oaks
              
              
              1,285
              
              
              5,293
              
              
              293
              
              
              —
              
              
              1,285
              
              
              5,586
              
              
              6,871Greens
                  Road
              
              
              354
              
              
              1,284
              
              
              111
              
              
              —
              
              
              354
              
              
              1,395
              
              
              1,749Holly
                  Knight
              
              
              320
              
              
              1,293
              
              
              66
              
              
              —
              
              
              320
              
              
              1,359
              
              
              1,679Kempwood
                  Plaza
              
              
              733
              
              
              1,798
              
              
              903
              
              
              —
              
              
              733
              
              
              2,701
              
              
              3,434Lion
                  Square
              
              
              1,546
              
              
              4,289
              
              
              317
              
              
              —
              
              
              1,546
              
              
              4,606
              
              
              6,152Northeast
                  Square
              
              
              565
              
              
              2,008
              
              
              286
              
              
              —
              
              
              565
              
              
              2,294
              
              
              2,859Providence
              
              
              918
              
              
              3,675
              
              
              486
              
              
              —
              
              
              918
              
              
              4,161
              
              
              5,079South
                  Richey
              
              
              778
              
              
              2,584
              
              
              191
              
              
              —
              
              
              778
              
              
              2,775
              
              
              3,553South
                  Shaver
              
              
              184
              
              
              633
              
              
              173
              
              
              —
              
              
              184
              
              
              806
              
              
              990SugarPark
                  Plaza
              
              
              1,781
              
              
              7,125
              
              
              20
              
              
              —
              
              
              1,781
              
              
              7,145
              
              
              8,926Sunridge
              
              
              276
              
              
              1,186
              
              
              41
              
              
              —
              
              
              276
              
              
              1,227
              
              
              1,503Torrey
                  Square
              
              
              1,981
              
              
              2,971
              
              
              435
              
              
              —
              
              
              1,981
              
              
              3,406
              
              
              5,387Town
                  Park
              
              
              850
              
              
              2,911
              
              
              214
              
              
              —
              
              
              850
              
              
              3,125
              
              
              3,975Webster
                  Point
              
              
              720
              
              
              1,150
              
              
              76
              
              
              —
              
              
              720
              
              
              1,226
              
              
              1,946Westchase
              
              
              423
              
              
              1,751
              
              
              242
              
              
              —
              
              
              423
              
              
              1,993
              
              
              2,416Windsor
                  Park
              
              
              2,621
              
              
              10,482
              
              
              —
              
              
              —
              
              
              2,621
              
              
              10,482
              
              
              13,103**$**
              **17,385**
              
              **$**
              **58,614**
              
              **$**
              **4,536**
              
              **$**
              **—**
              
              **$**
              **17,385**
              
              **$**
              **63,150**
              
              **$**
              **80,535****Warehouse
                  Properties:**Brookhill
              
              
              186
              
              
              788
              
              
              156
              
              $
              —
              
              
              186
              
              
              944
              
              
              1,130Corporate
                  Park Northwest
              
              
              1,534
              
              
              6,306
              
              
              554
              
              
              —
              
              
              1,534
              
              
              6,860
              
              
              8,394Corporate
                  Park West
              
              
              2,555
              
              
              10,267
              
              
              456
              
              
              —
              
              
              2,555
              
              
              10,723
              
              
              13,278Corporate
                  Park Woodland
              
              
              652
              
              
              5,330
              
              
              742
              
              
              —
              
              
              652
              
              
              6,072
              
              
              6,724Dairy
                  Ashford
              
              
              226
              
              
              1,211
              
              
              78
              
              
              —
              
              
              226
              
              
              1,289
              
              
              1,515Holly
                  Hall
              
              
              608
              
              
              2,516
              
              
              6
              
              
              —
              
              
              608
              
              
              2,522
              
              
              3,130Interstate
                  10
              
              
              208
              
              
              3,700
              
              
              282
              
              
              —
              
              
              208
              
              
              3,982
              
              
              4,190Main
                  Park
              
              
              1,328
              
              
              2,721
              
              
              530
              
              
              —
              
              
              1,328
              
              
              3,251
              
              
              4,579Plaza
                  Park
              
              
              902
              
              
              3,294
              
              
              341
              
              
              —
              
              
              902
              
              
              3,635
              
              
              4,537West
                  Belt Plaza
              
              
              568
              
              
              2,165
              
              
              293
              
              
              —
              
              
              568
              
              
              2,458
              
              
              3,026Westgate
              
              
              672
              
              
              2,776
              
              
              143
              
              
              —
              
              
              672
              
              
              2,919
              
              
              3,591**$**
              **9,439**
              
              **$**
              **41,074**
              
              **$**
              **3,581**
              
              **$**
              **—**
              
              **$**
              **9,439**
              
              **$**
              **44,655**
              
              **$**
              **54,094****Office
                  Properties:**9101
                  LBJ Freeway
              
              $
              1,597
              
              $
              6,078
              
              $
              267
              
              $
              —
              
              $
              1,597
              
              $
              6,345
              
              $
              7,942Featherwood
              
              
              368
              
              
              2,591
              
              
              535
              
              
              —
              
              
              368
              
              
              3,126
              
              
              3,494Royal
                  Crest
              
              
              509
              
              
              1,355
              
              
              100
              
              
              —
              
              
              509
              
              
              1,455
              
              
              1,964Uptown
                  Tower
              
              
              1,621
              
              
              15,551
              
              
              103
              
              
              —
              
              
              1,621
              
              
              15,654
              
              
              17,275Woodlake
                  Plaza
              
              
              1,107
              
              
              4,426
              
              
              360
              
              
              —
              
              
              1,107
              
              
              4,786
              
              
              5,893Zeta
                  Building
              
              
              636
              
              
              1,819
              
              
              206
              
              
              —
              
              
              636
              
              
              2,025
              
              
              2,661**$**
              **5,838**
              
              **$**
              **31,820**
              
              **$**
              **1,571**
              
              **$**
              **—**
              
              **$**
              **5,838**
              
              **$**
              **33,391**
              
              **$**
              **39,229****Grand
                  Totals**
              
              **$**
              **32,662**
              
              **$**
              **131,508**
              
              **$**
              **9,688**
              
              **$**
              **—**
              
              **$**
              **32,662**
              
              **$**
              **141,196**
              
              **$**
              **173,858**




F-33


**Hartman
      Commercial Properties REIT and Subsidiary**


**Schedule
        III - Real Estate and Accumulated Depreciation**
 **December
        31, 2006**
 **(Continued)**
  **Property
                    Name**
                
                **Accumulated****Depreciation**
                  **(in
                    thousands)**
                
                **Date
                    of**
                  **Construction**
                
                **Date
                    Acquired**
                
                **Depreciation
                    Life****Retail
                    Properties:**Bellnot
                    Square
                
                $
                674
                
                
                
                1/1/2002
                
                5-39
                    yearsBissonnet
                    Beltway
                
                
                710
                
                
                
                1/1/1999
                
                5-39
                    yearsCentre
                    South
                
                
                612
                
                
                
                1/1/2000
                
                5-39
                    yearsGarden
                    Oaks
                
                
                850
                
                
                
                1/1/2002
                
                5-39
                    yearsGreens
                    Road
                
                
                411
                
                
                
                1/1/1999
                
                5-39
                    yearsHolly
                    Knight
                
                
                402
                
                
                
                8/1/2000
                
                5-39
                    yearsKempwood
                    Plaza
                
                
                970
                
                
                
                2/2/1999
                
                5-39
                    yearsLion
                    Square
                
                
                1,073
                
                
                
                1/1/2000
                
                5-39
                    yearsNortheast
                    Square
                
                
                617
                
                
                
                1/1/1999
                
                5-39
                    yearsProvidence
                
                
                727
                
                
                
                3/30/2001
                
                5-39
                    yearsSouth
                    Richey
                
                
                675
                
                
                
                8/25/1999
                
                5-39
                    yearsSouth
                    Shaver
                
                
                289
                
                
                
                12/17/1999
                
                5-39
                    yearsSugarPark
                    Plaza
                
                
                464
                
                
                
                9/8/2004
                
                5-39
                    yearsSunridge
                
                
                176
                
                
                
                1/1/2002
                
                5-39
                    yearsTorrey
                    Square
                
                
                756
                
                
                
                1/1/2000
                
                5-39
                    yearsTown
                    Park
                
                
                921
                
                
                
                1/1/1999
                
                5-39
                    yearsWebster
                    Point
                
                
                297
                
                
                
                1/1/2000
                
                5-39
                    yearsWestchase
                
                
                357
                
                
                
                1/1/2002
                
                5-39
                    yearsWindsor
                    Park
                
                
                867
                
                
                
                12/16/2003
                
                5-39
                    years**$**
                **11,848****Warehouse
                    Properties:**Brookhill
                
                $
                226
                
                
                
                1/1/2002
                
                5-39
                    yearsCorporate
                    Park Northwest
                
                
                1,059
                
                
                
                1/1/2002
                
                5-39
                    yearsCorporate
                    Park West
                
                
                1,578
                
                
                
                1/1/2002
                
                5-39
                    yearsCorporate
                    Park Woodlands
                
                
                1,544
                
                11/1/2000
                
                
                
                5-39
                    yearsDairy
                    Ashford
                
                
                368
                
                
                
                1/1/1999
                
                5-39
                    yearsHolly
                    Hall
                
                
                343
                
                
                
                1/1/2002
                
                5-39
                    yearsInterstate
                    10
                
                
                1,334
                
                
                
                1/1/1999
                
                5-39
                    yearsMain
                    Park
                
                
                1,007
                
                
                
                1/1/1999
                
                5-39
                    yearsPlaza
                    Park
                
                
                891
                
                
                
                1/1/2000
                
                5-39
                    yearsWest
                    Belt Plaza
                
                
                804
                
                
                
                1/1/1999
                
                5-39
                    yearsWestgate
                
                
                441
                
                
                
                1/1/2002
                
                5-39
                    years**$**
                **9,595****Office
                    Properties:**9101
                    LBJ Freeway
                
                $
                281
                
                
                
                8/10/2005
                
                5-39
                    yearsFeatherwood
                
                
                898
                
                
                
                1/1/2000
                
                5-39
                    yearsRoyal
                    Crest
                
                
                354
                
                
                
                1/1/2000
                
                5-39
                    yearsUptown
                    Tower
                
                
                551
                
                
                
                11/22/2005
                
                5-39
                    yearsWoodlake
                    Plaza
                
                
                261
                
                
                
                3/14/2005
                
                5-39
                    yearsZeta
                    Building
                
                
                471
                
                
                
                1/1/2000
                
                5-39
                    years**$**
                **2,816****Grand
                    Total**
                
                **$**
                **24,259**


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


**(
                  In thousands)****2006**
              
              **2005**
              
              **2004**Balance
                  at beginning of period
              
              $
              173,789
              
              $
              141,997
              
              $
              131,721Additions
                  during the period:Acquisitions
              
              
              —
              
              
              30,379
              
              
              8,906Improvements
              
              
              2,055
              
              
              1,413
              
              
              1,3702,055
              
              
              31,792
              
              
              10,276Deductions
                  - cost of real estate sold or retired
              
              
              (1,986
              )
              
              —
              
              
              —**Balance
                  at close of period**
              
              **$**
              **173,858**
              
              **$**
              **173,789**
              
              **$**
              **141,997**


**(2)** **The aggregate cost of real estate (in thousands) for federal income tax purposes
      is $143,892**




F-34




**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
            
            Articles
                Supplementary (previously filed as and incorporated by reference
                to
                Exhibit 3(i).1 to the Registrant’s Current Report on Form 8-K, Commission
                File No. 000-50256, filed on December 6, 2006)3.4
            
            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)3.5
            
            First
                Amendment to Bylaws (previously filed as and incorporated by reference
                to
                Exhibit 3(ii).1 to the Registrant’s Current Report on Form 8-K, Commission
                File No. 000-50256, filed on December 6, 2006)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) (terminated on October 2, 2006)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) (terminated on September 30,
                2006)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)









**Exhibit
                No.**
            
            **Description**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)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)









**Exhibit
                No.**
            
            **Description**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)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 (previously filed as and incorporated
                by
                reference to Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K
                for the year ended December 31, 2005, filed on March 31,
                2006)10.23
            
            Waiver
                and Amendment No. 1, dated May 8, 2006, between Hartman REIT Operating
                Partnership, L.P., Hartman REIT Operating Partnership III, L.P.,
                and
                KeyBank National Association, as agent for the consortium of lenders
                (previously filed and incorporated by reference to Exhibit 10.23
                to the
                Registrant’s Quarterly Report on Form 10-Q, filed on May 12,
                2006)10.24*
            
            Amendment
                No 2, dated May 19, 2006, between Hartman REIT Operating Partnership,
                L.P., Hartman REIT Operating Partnership III, L.P., and KeyBank National
                Association, as agent for the consortium of lenders10.25*
            
            Promissory
                Note between HCP REIT Operating Company IV LLC and MidFirst Bank,
                dated
                March 1, 200710.26*
            
            Amendment
                No 3, dated March 26, 2007, between Hartman REIT Operating Partnership,
                L.P., Hartman REIT Operating Partnership III, L.P., and KeyBank National
                Association, as agent for the consortium of lenders14.1
            
            Code
                of Business Conduct (previously filed as and incorporated by reference
                to
                Exhibit 14.1 to the Registrant’s Annual Report on Form 10-K for the year
                ended December 31, 2005, filed on March 31, 2006)21.1
            
            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 2002









**Exhibit
                No.**
            
            **Description**32.1*
            
            Certificate
                of Chief Executive and Financial
                Officers


*
              Filed
                  herewith.
  +
              Denotes
                  management contract or compensatory plan or arrangement.