<PAGE>   1
 
                            STATEMENT OF DESIGNATION
                                       OF
                     SERIES B CONVERTIBLE PREFERRED SHARES
                                       OF
                     CRESCENT REAL ESTATE EQUITIES COMPANY
 
     The undersigned, the President and Chief Executive Officer of Crescent Real
Estate Equities Company, a real estate investment trust organized and existing
under the Texas Real Estate Investment Trust Act, as amended (the "Company"),
certifies that pursuant to the authority granted to and vested in the Board of
Trust Managers of the Company by the provisions of the Restated Declaration of
Trust of the Company, the Board of Trust Managers, acting through an authorized
committee thereof, has adopted the following resolution designating a new series
of preferred shares of the Company.
 
     RESOLVED, that pursuant to the authority expressly granted to and vested in
the Board of Trust Managers of the Company by the provisions of the Restated
Declaration of Trust of the Company, the Board of Trust Managers hereby
establishes a series of preferred shares of beneficial interest designated
Series B Convertible Preferred Shares of beneficial interest, par value $.01 per
share (the "Series B Preferred Shares"), and authorizes the issuance thereof,
and hereby fixes the designation and number thereof and the voting powers,
preferences and relative, participating, optional and other special rights of
such shares, and the qualifications, limitations or restrictions thereof as
follows:
 
A. CERTAIN DEFINITIONS.
 
     Unless the context otherwise requires, the terms defined in this Paragraph
A shall have, for all purposes of this Statement of Designation, the meanings
herein specified (with terms defined in the singular having comparable meanings
when used in the plural).
 
          (1) "Average Share Price" shall mean the average of the Closing Prices
     of the Common Shares for each day in the 20 consecutive trading day period
     ending on the date that is two days prior to the date with respect to which
     the Average Share Price must be determined, after excluding from such
     calculation the two highest Closing Prices and the two lowest Closing
     Prices; provided, however, that if the Common Shares begin to trade
     ex-dividend at any point within such period, then the Average Share Price
     shall equal the amount determined pursuant to the preceding formula after
     deducting the value of such distributions per Common Share from the closing
     price of the Common Shares for each day in such period on which the Common
     Shares did not trade ex-dividend.
 
          (2) "Average Preferred Share Price" shall mean the average of the
     Preferred Share Closing Prices for each day in the 20 consecutive trading
     day period ending on the date that is two days prior to the date with
     respect to which the Average Preferred Share Price must be determined,
     after excluding from such calculation the two highest closing prices and
     the two lowest closing prices; provided, however, that if the Preferred
     Shares begin to trade ex-dividend at any point within such period, then the
     Average Preferred Share Price shall equal the amount determined pursuant to
     the preceding formula after deducting the value of such distributions per
     Preferred Share from the closing price of the Preferred Shares for each day
     in such period on which the Preferred Shares did not trade ex-dividend.
 
          (3) "Cash Value" shall mean, except as provided in subparagraph (3) of
     paragraph B, (i) as to any non-cash Extraordinary Distribution made in the
     form of Company securities or other securities that are listed or admitted
     to trading on a national securities exchange on the payment date for such
     distribution, the Cash Value shall equal the closing price of such
     securities on such exchange (with the closing price of such securities
     computed as the last sales price, regular way, of a share of such
     securities on such payment date or, in the event no such sale takes place
     on such day, the average of the closing bid and asked prices, regular way,
     on such payment date); provided, however, that if any holder of Series B
     Preferred Shares shall sell all or substantially all (which, for purposes
     hereof, shall mean eighty percent (80%) or more) of such securities
     distributed to such holder within ten (10) business days following such
     distribution, then all such securities distributed to such holder shall be
     valued for all purposes at the lesser
 
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<PAGE>   2
 
     of (x) the closing price of such securities (computed as described above)
     on the payment date for such distribution and (y) such holder's actual
     average per share "at market" sale price for such securities; (ii) as to
     all other non-cash Extraordinary Distributions, the Cash Value shall equal
     the actual net proceeds realized by such holder of Series B Preferred
     Shares upon a sale of the property constituting such non-cash Extraordinary
     Distribution; provided, further, that as to any non-cash Extraordinary
     Distribution that is neither made in the form of securities listed or
     admitted to trading on a national securities exchange on the payment date
     for such distribution nor sold by a holder of Series B Preferred Shares
     within ten (10) business days following such distribution, the Cash Value
     shall be the value at the time of such Extraordinary Distribution as
     determined in good faith by the Board of Trust Managers of the Company with
     respect to all holders of Common Shares, Series B Preferred Shares and
     other securities of the Company entitled to receive such Extraordinary
     Distribution and (iii) as to any non-cash distribution which is not an
     Extraordinary Distribution, the Cash Value shall be the value at the time
     of such distribution determined in good faith by the Board of Trust
     Managers of the Company with respect to all holders of Common Shares,
     Series B Preferred Shares and other securities of the Company entitled to
     receive such distribution. In the case of a sale of the distributed
     securities or other property constituting a non-cash Extraordinary
     Distribution that occurs within ten (10) business days following an
     Extraordinary Distribution, the holder of such securities or the holder of
     such property shall certify to the Company in writing, within two (2)
     business days following such sale, (i) the date on which such sale of
     securities or property occurred, (ii) the amount or portion of such
     securities sold, and (iii) the average per share "at market" sale price for
     any such securities sold or the net proceeds realized by the holders for
     any such other property sold. Notwithstanding anything herein to the
     contrary, the Company shall have the option to determine the Cash Value of
     a non-cash Extraordinary Distribution in accordance with the foregoing, but
     without reference to any sale of the distributed securities or other
     property constituting a non-cash Extraordinary Distribution, unless the
     holder shall have provided to the Company, in accordance with the
     provisions of the preceding sentence, the notice specified therein on or
     prior to the date on which the Cash Value of such non-cash Extraordinary
     Distribution is required to be calculated under the terms of this Statement
     of Designation. Notwithstanding anything herein to the contrary, if at any
     time there are twenty (20) or more holders of record of the Series B
     Preferred Shares, then, thereafter, all references in this definition to a
     holder shall be deemed to be a reference to all record holders, in the
     aggregate.
 
          (4) "Change in Control" shall mean each occurrence of any of the
     following: (i) the acquisition, directly or indirectly, by any individual
     or entity or group (as such term is used in Section 13(d)(3) of the
     Exchange Act) of beneficial ownership (as defined in Rule 13d-3 under the
     Exchange Act, except that such individual or entity shall be deemed to have
     beneficial ownership of all shares that any such individual or entity has
     the right to acquire, whether such right is exercisable immediately or only
     after the passage of time) of more than 25% of the Company's outstanding
     capital stock with voting power, under ordinary circumstances, to elect
     trust managers of the Company; (ii) during any period of two consecutive
     years, those individuals who at the beginning of such period constituted
     the Board of Trust Managers of the Company (together with any new trust
     managers whose election by such Board of Trust Managers or whose nomination
     for election by the shareholders of the Company was approved by a vote of
     66 2/3% of the Board of Trust Managers of the Company then in office who
     were either trust managers at the beginning of such period, or whose
     election or nomination for election was previously so approved) cease for
     any reason to constitute a majority of the Board of Trust Managers then in
     office; or (iii) (A) the Company consolidates with or merges into another
     entity or conveys, transfers or leases outside the ordinary course of the
     Company's business all or substantially all of its assets (including, but
     not limited to, real property investments) to any individual or entity, or
     (B) any corporation consolidates with or merges into the Company, which in
     the case of a merger or consolidation under either (A) or (B) above is
     pursuant to a transaction in which the outstanding voting capital stock of
     the Company is reclassified or changed into or exchanged for cash,
     securities (unless the holders of the exchanged securities of the Company
     immediately after such transaction beneficially own at least a majority of
     the securities into which such exchange was made) or other property;
     provided, however, that the events described in clause (iii) above shall
     not be deemed to be a Change in Control if the sole purpose of such
 
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<PAGE>   3
 
     event is that the Company is seeking to change its domicile or to change
     its form of organization from a statutory real estate investment trust to a
     corporation.
 
          (5) "Closing Price" shall mean the last sale price, regular way, of a
     Common Share on a particular day or, in the event no such sale takes place
     on such day, the average of the closing bid and asked prices, regular way,
     in either case on the New York Stock Exchange, or, if the Common Shares are
     not listed or admitted to trading on such Exchange, on the principal
     national securities exchange on which the Common Shares are listed or
     admitted to trading or, if the Common Shares are not listed or admitted to
     trading on any national securities exchange, the average of the closing bid
     and asked prices as furnished by Prudential Securities Incorporated or, if
     approved by the holders of a majority of the Series B Preferred Shares
     (which approval shall not be unreasonably withheld), as furnished by any
     other member of the National Association of Securities Dealers, Inc.,
     selected from time to time by the Company for that purpose.
 
          (6) "Code" shall mean the Internal Revenue Code of 1986, as amended.
 
          (7) "Common Shares" shall mean the currently existing class of common
     shares of beneficial interest of the Company, par value $.01 per share.
 
          (8) "Company" shall mean Crescent Real Estate Equities Company, a real
     estate investment trust organized and existing under the Texas Real Estate
     Investment Trust Act, as amended.
 
          (9) "Company Compound Annual Return" shall mean the compound annual
     return that an investor would have received if such investor had owned a
     Common Share (as such Common Share is adjusted for stock splits, reverse
     stock splits, subdivisions of Common Shares, or any combinations,
     reclassifications or distributions of Common Shares) during the period
     commencing on the Issue Date and ending on the effective date of a
     conversion or a Series B Preferred Shares Redemption Date, as applicable,
     and such investor had reinvested all cash distributions, and the Cash Value
     of all non-cash distributions (other than distributions of Common Shares),
     paid (including distributions deemed to have been paid in accordance with
     subparagraph 3(a) of Paragraph B) during such time in respect of such
     Common Share (and in respect of all Common Shares into which such
     distributions are deemed reinvested in accordance herewith) in Common
     Shares at a price equal to the Closing Price on the date such distributions
     were paid (or deemed to have been paid). The return will be calculated
     based on the Average Share Price on the Issue Date and on the date of
     conversion or redemption, as applicable, of Series B Preferred Shares. An
     example of the calculation of the Company Compound Annual Return is set
     forth in Exhibit A.
 
          (10) "Conversion Rate" shall mean the number of Common Shares issuable
     upon conversion of each of the Series B Preferred Shares, as set forth in
     subparagraph (3) of paragraph (C) below. An example of the calculation of
     the Conversion Rate is set forth in Exhibit A.
 
          (11) "Dividend Shares" shall mean, except as provided to the contrary
     in subparagraph (3) of paragraph B, the number of Common Shares which would
     have been acquired if (i) the Cash Value of any Extraordinary Distributions
     actually received (or deemed to have been received in accordance with
     subparagraph 3(a) of paragraph B) by the holders of the Series B Preferred
     Shares had been reinvested in Common Shares at a price equal to the Closing
     Price on the date on which such Extraordinary Distributions were paid (or
     deemed to have been paid in accordance with subparagraph 3(a) of paragraph
     B), and (ii) all cash distributions paid in respect of all Common Shares
     into which distributions are deemed reinvested in accordance herewith,
     during the period commencing on the record date for such Extraordinary
     Distribution and ending on the effective date of a conversion of Series B
     Preferred Shares or a Series B Preferred Shares Redemption Date, as
     applicable, had been reinvested in Common Shares at a price equal to the
     Closing Price on the date such distributions were paid (or deemed to have
     been paid in accordance with subparagraph 3(a) of paragraph B), with such
     number of shares computed under (i) and (ii) adjusted from time to time to
     reflect any stock splits, reverse stock splits, or subdivisions of Common
     Shares, or any combinations, reclassifications or distributions of Common
     Shares.
 
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<PAGE>   4
 
          (12) "ERISA" shall mean the Employees Retirement Income Security Act
     of 1974, as amended.
 
          (13) "Event of Default" shall mean any of the events specified in
     Exhibit C hereto.
 
          (14) "Extraordinary Distributions" shall mean any extraordinary cash
     distribution (excluding any regular quarterly cash distribution), stock
     distribution (other than distributions of Common Shares) and other non-cash
     distributions (including distributions of preemptive or subscription rights
     for securities, other than (i) rights relating to Common Shares and (ii)
     the rights referenced in Exhibit D hereto) that may be made from time to
     time to the holders of the Common Shares; provided, however, that any
     distribution paid in order to preserve the status of the Company as a REIT
     for federal income tax purposes that is accompanied or preceded by an
     opinion of legal counsel, as described below, shall not be considered an
     Extraordinary Distribution regardless of the time of payment of any such
     distribution unless the Company elects to treat such distribution as an
     Extraordinary Distribution by complying with the provisions of subparagraph
     (3) of paragraph B hereof. Notwithstanding the foregoing, a distribution
     shall not be deemed to have been paid in order to preserve the Company's
     status as a REIT unless the distribution is accompanied or preceded by an
     opinion of legal counsel selected and employed by the Company (and
     acceptable to the holders of the Series B Preferred Shares as provided in
     the following sentence) for the purpose of rendering an opinion confirming
     the necessity or advisability of such distribution in order to preserve the
     status of the Company as a REIT for federal income tax purposes. For
     purposes of this subparagraph (14), the opinion of Shaw, Pittman, Potts &
     Trowbridge or of any other legal counsel selected and employed by the
     Company for the purpose of rendering such opinion and approved (which
     approval shall not be unreasonably withheld) by the holders of a majority
     of the Series B Preferred Shares shall be acceptable.
 
          (15) "Initial Investment" shall mean $225,000,006.92.
 
          (16) "Initial Investors" shall mean The Prudential Insurance Company
     of America, a New Jersey corporation, Strategic Value Investors, L.L.C., a
     Delaware limited liability company, Strategic Value Investors
     International, L.L.C., a Delaware limited liability company and Strategic
     Value Investors II, L.L.C., a Delaware limited liability company.
 
          (17) "Investment Return" as of any date shall mean an amount equal to
     the aggregate of the following amounts:
 
<TABLE>
<CAPTION>
TIER                   INVESTMENT RETURN COMPONENT
----                   ---------------------------
<S>    <C>
I      The NAREIT Return; plus
II     75% of the Company Compound Annual Return in excess of the
       NAREIT Return, up to and including the NAREIT Return plus
       500 basis points; plus
III    50% of the Company Compound Annual Return in excess of the
       NAREIT Return plus 500 basis points up to and including the
       NAREIT Return plus 1,000 basis points; plus
IV     25% of the Company Compound Annual Return in excess of the
       NAREIT Return plus 1000 basis points up to and including the
       NAREIT Return plus 2,000 basis points; plus
V      10% of the Company Compound Annual Return in excess of the
       NAREIT Return plus 2,000 basis points.
</TABLE>
 
          An example of the calculation of the Investment Return is set forth in
     Exhibit A.
 
          (18) "Issue Date" shall mean the first date on which Series B
     Preferred Shares are issued and sold to one or more of the Initial
     Investors.
 
          (19) "Junior Shares" shall have the meaning set forth in subparagraph
     (2) of paragraph (B) hereof.
 
          (20) "NAREIT" shall mean the National Association of Real Estate
     Investment Trusts.
 
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<PAGE>   5
 
          (21) "NAREIT Return" shall mean the compound annual return calculated
     by using the total return (calculated in accordance with Exhibit B) for a
     portfolio of equity real estate investment trust stocks, excluding health
     care stocks, as computed by NAREIT in its NAREIT Total Return Series for
     Equity REITs Excluding Health Care REITs. The NAREIT Return shall be
     calculated for the period commencing on the Issue Date and ending on the
     effective date of a conversion or the Series B Preferred Shares Redemption
     Date, as applicable, of Series B Preferred Shares. If the NAREIT Return is
     not available for any reason for all or any portion of the period of
     calculation, then the index for determining the NAREIT Return for such
     period or portion of the period shall be the Standard & Poor's Equity REIT
     Index ) and if the Standard & Poor's Equity REIT Index is not available for
     any such period, the reference index shall be a reasonably equivalent
     alternative real estate investment trust equity index (excluding health
     care stocks) selected or compiled in good faith by the Company and approved
     by the holders of a majority of the Series B Preferred Shares (which
     approval shall not be unreasonably withheld). If the calculation of the
     NAREIT Return is modified then (i) the Company and those persons who or
     which are holders of the Preferred Shares at the time of the modification,
     will promptly (and in any event within thirty (30 days) negotiate a
     mutually acceptable amendment hereto modifying the calculation of the terms
     "Company Compound Annual Return," "Dividend Shares" and "NAREIT Return" and
     any other term the calculation or application of which is required to be
     modified in order for the calculation of the Conversion Rate to remain
     consistent with the modification of the NAREIT Return and (ii) if the
     Company and such holders shall have failed to execute and deliver a
     mutually acceptable amendment on or before the effective date of the
     conversion or redemption, the NAREIT Return shall be calculated by a "Big
     4" accounting firm chosen by the Company and approved by the holders of a
     majority of the Series B Preferred Shares (which approval shall not be
     unreasonably withheld). Such accounting firm shall calculate the NAREIT
     Return in accordance with Exhibit B. The costs associated with employment
     of such accounting firm shall be borne one-half ( 1/2) by the Company and
     one-half ( 1/2) by the holders of the Series B Preferred Shares.
 
          (22) "Parity Shares" shall have the meaning set forth in subparagraph
     (2) of paragraph B hereof.
 
          (23) "Preferred Share Closing Price" shall mean the last sale price,
     regular way, of the preferred shares of beneficial interest of a class or
     series on a particular day or, in the event no such sale takes place on
     such day, the average of the closing bid and asked prices, regular way, in
     either case on the New York Stock Exchange, or, if the preferred shares of
     beneficial interest of such class or series are not listed or admitted to
     trading on such Exchange, on the principal national securities exchange on
     which the preferred shares of beneficial interest of such class or series
     are listed or admitted to trading or, if the preferred shares of beneficial
     interest of such class or series are not listed or admitted to trading on
     any national securities exchange, the average of the closing bid and asked
     prices as furnished by Prudential Securities Incorporated or, if approved
     by the holders of a majority of the Series B Preferred Shares (which
     approval shall not be unreasonably withheld), as furnished by any other
     member of the National Association of Securities Dealers, Inc., selected
     from time to time by the Company for that purpose.
 
          (24) "Redemption Price" shall have the meaning set forth in
     subparagraph (1) of paragraph (D).
 
          (25) "REIT" shall mean a real estate investment trust under Section
     856 of the Code.
 
          (26) "Series B Preferred Shares" shall mean the Series B Convertible
     Preferred Shares of beneficial interest, par value $.01 per share.
 
          (27) "Series B Preferred Shares Redemption Date" shall have the
     meaning set forth in subparagraph (4) of paragraph (D).
 
          (28) "Securities Act" shall mean the Securities Act of 1933, as
     amended.
 
          (29) "Transfer Agent" shall mean BankBoston, N.A., or such other agent
     or agents of the Company as may be designated by the Board of Trust
     Managers or their designee as the transfer agent for the Series B Preferred
     Shares.
 
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<PAGE>   6
 
B. SERIES B PREFERRED SHARES.
 
     (1) Designation and Number of Shares. The number of shares which shall
constitute the Series B Preferred Shares shall be 6,948,734.
 
     (2) Relative Seniority. In respect of rights to receive distributions and
to participate in distributions or payments in the event of any liquidation,
dissolution or winding up of the Company, the Series B Preferred Shares shall
rank (i) pari passu with all other preferred shares of beneficial interest of
the Company, whether in existence as of the date hereof or subsequently created
(the "Parity Shares"), and (ii) senior to the Common Shares and any other class
or series of shares of beneficial interest of the Company ranking, as to
distributions and upon liquidation, junior (collectively, the "Junior Shares")
to the Parity Shares, whether in existence as of the date hereof or subsequently
created.
 
     (3) Distributions.
 
          (a) The holders of the Series B Preferred Shares shall receive,
     payable and calculated as described in this subparagraph (3) and in
     subparagraph (3) of paragraph A, all Extraordinary Distributions; provided,
     however, that (i) if the record date for any such Extraordinary
     Distribution does not occur with respect to a Series B Preferred Share
     prior to the effective date of the conversion or redemption of such Series
     B Preferred Share, then the Company shall have no obligation to pay such
     Extraordinary Distribution, and (ii) if the record date for any such
     Extraordinary Distribution with respect to a Series B Preferred Share
     occurs prior to the effective date of the conversion or redemption of such
     Series B Preferred Share, then the Company shall be obligated, subject to
     the following sentence, to pay such Extraordinary Distribution to the
     holder of record of such Series B Preferred Share, who is the holder on the
     record date for such Extraordinary Distribution; and provided, further,
     that if the payment date for such Extraordinary Distribution occurs with
     respect to such Series B Preferred Share either after the effective date of
     such conversion or redemption or less than ten (10) business days prior
     thereto, the Cash Value of the Extraordinary Distribution shall be the
     value determined in good faith by the Board of Trust Managers of the
     Company. If the record date for any Extraordinary Distribution occurs prior
     to the effective date of any conversion of a Series B Preferred Share (i)
     pursuant to subparagraph (1) of paragraph C hereof or (ii) pursuant to
     subparagraph (2) of paragraph C (but, in the case of a conversion pursuant
     to subparagraph (2) of paragraph C, only if such Extraordinary Distribution
     is declared following receipt of notice from the record holder of such
     Series B Preferred Share of such holder's intention to convert such
     Preferred Share) or of any redemption pursuant to paragraph D hereof, and
     the payment date for such Extraordinary Distribution occurs either after,
     or less than ten (10) business days prior to, such conversion or
     redemption, then the record holder of such Series B Preferred Share shall
     have the right, at the option of such holder and in satisfaction of the
     Company's obligation with respect to such Extraordinary Distribution, to
     receive either (A) cash in an amount equal to the Cash Value of such
     Extraordinary Distribution (as determined in good faith by the Board of
     Trust Managers of the Company with respect to all holders of Common Shares
     entitled to receive such distributions) or (B) such Extraordinary
     Distribution. Any Extraordinary Distribution described in the preceding
     sentence shall be deemed to have been actually received on the earlier to
     occur of the conversion date or the Series B Preferred Shares Redemption
     Date and the payment date, by the record holder of such Series B Preferred
     Share and reinvested at (i) the Closing Price, if such distribution is
     actually received on or prior to the conversion date or Series B Preferred
     Shares Redemption Date or (ii) the Average Share Price, if deemed received
     on the conversion date or Series B Preferred Shares Redemption Date for
     purposes of the calculation of Dividend Shares. The holders of the Series B
     Preferred Shares shall receive any cash distribution payable to the holders
     of Common Shares (including any regular quarterly cash distribution) with
     respect to which the record date occurs prior to the effective date of a
     conversion of a Series B Preferred Share (i) pursuant to subparagraph (1)
     of paragraph C hereof or (ii) pursuant to subparagraph (2) of paragraph C
     (but, in the case of a conversion pursuant to subparagraph (2) of paragraph
     C, only if such Extraordinary Distribution is declared following receipt of
     notice from the record holder of such Series B Preferred Share of such
     holder's intention to convert such Preferred Share) or a redemption and the
     payment date occurs after such effective date, provided that the amount of
     such cash distribution shall be included in the calculation of Dividend
     Shares and deemed reinvested at
                                        6
<PAGE>   7
 
     the Average Share Price on the conversion date or the Series B Preferred
     Shares Redemption Date. Extraordinary Distributions required to be paid
     pursuant hereto shall be payable, on the date on which the Common Shares
     distribution is payable to the holders of the Common Shares, to Persons who
     are holders of record of the Series B Preferred Shares on the date for
     determining the holders of record of Common Shares entitled to receive the
     Common Shares distribution to which the Extraordinary Distribution relates.
 
          (b) The amount of a distribution and any cash distribution any holder
     is entitled to receive under subparagraph 3(a) above, if any, payable on
     each Series B Preferred Share shall equal the amount of such distribution
     that would have been paid on a single Common Share that was issued and
     outstanding on the Issue Date, assuming such Common Share had been properly
     adjusted for stock splits, reverse stock splits, or subdivisions of Common
     Shares, or any combinations, reclassifications or distributions of Common
     Shares.
 
          (c) If any Series B Preferred Shares are outstanding, no full
     distributions shall be declared or paid or set apart for payment on any
     other class or series of Parity Shares or Junior Shares for any period for
     which Extraordinary Distributions are required to be paid on the Series B
     Preferred Shares in accordance with the provisions of this subparagraph (3)
     unless the required distributions have been declared and paid or declared
     and a sum sufficient for the payment thereof has been set apart for such
     payment on the Series B Preferred Shares. If such distributions are not
     paid in full, or not declared in full and a sum sufficient for such full
     payment is not set apart for the payment thereof, upon the Series B
     Preferred Shares and if distributions are not paid in full, or not declared
     in full and a sum sufficient for such full payment is not set apart for the
     payment thereof, upon any class or series of Parity Shares, then all such
     distributions declared upon Series B Preferred Shares and upon any other
     class or series of Parity Shares shall be paid or declared pro rata so that
     in all cases the amount of distributions paid or declared per share on the
     Series B Preferred Shares and Parity Shares shall bear to each other the
     same ratio that accumulated distributions per share, including
     distributions accrued or in arrears, if any, on the Series B Preferred
     Shares and Parity Shares bear to each other. Except as provided in the
     preceding sentence, unless all distributions required to be paid on the
     Series B Preferred Shares in accordance with the provisions of this
     subparagraph (3) have been paid or declared and a sum sufficient for such
     full payment set apart for payment for all applicable distribution periods,
     no distributions (other than distributions consisting of Common Shares or
     any other Junior Shares) shall be declared or paid or set apart for payment
     or other distribution upon the Common Shares, or, except as provided above,
     on any other Junior Shares or Parity Shares, nor shall any Common Shares or
     any other Junior Shares or Parity Shares be redeemed, purchased or
     otherwise acquired for any consideration (or any payment made to or
     available for a sinking fund for the redemption of any such shares by the
     Company or any subsidiary of the Company (except by conversion into or
     exchange for Junior Shares). Holders of the Series B Preferred Shares shall
     not be entitled to any distributions, whether payable in cash, property or
     shares of beneficial interest, in excess of distributions as herein
     provided. No interest or sum of money in lieu of interest shall be payable
     in respect of any distribution payment or payments on the Series B
     Preferred Shares that may be in arrears.
 
          Except as provided in this Statement of Designation, the Series B
     Preferred Shares shall not be entitled to participate in the earnings or
     assets of the Company.
 
C. CONVERSION.
 
     Holders of Series B Preferred Shares shall have the right to convert all or
a portion of such shares into Common Shares, as follows.
 
     (1) Automatic Conversion of Series B Preferred Shares. On the third
anniversary of the Issue Date, each share of Series B Preferred Shares shall
automatically convert into fully paid and nonassessable Common Shares at the
Conversion Rate (as defined below). Each holder of shares of Series B Preferred
Shares thereupon (i) shall surrender all certificates evidencing Series B
Preferred Shares, duly endorsed for cancellation (or, if the Series B Preferred
Shares are book entry securities, deliver written notice of
 
                                        7
<PAGE>   8
 
cancellation in a form reasonably acceptable to the Transfer Agent), at the
offices of the Transfer Agent, or such other place or places, if any, as the
Board of Trust Managers shall designate and (ii) shall state in writing the name
or names in which such holder wishes the certificate or certificates of Common
Shares to be issued and the address(es) to which such certificate or
certificates shall be delivered or, at each holder's option, the name or names
in which such shares shall be registered in the Transfer Agent's books and
records for book entry securities of the Company. The Company, as soon as
practicable thereafter, shall issue and deliver to such holder of the Series B
Preferred Shares, or to its nominee or nominees, at the address provided to the
Company by the holder thereof, certificates for the number of full Common Shares
to which such holder or such holder's nominee or nominees shall be entitled, and
any fractional interest in respect of a Common Share arising upon such
conversion shall be settled as provided in subparagraph (4). The Series B
Preferred Shares shall be deemed to have been converted as of the close of
business on the third anniversary of the Issue Date, at the Conversion Rate then
in effect, and the person(s) or entity(ies) entitled to receive the Common
Shares issuable upon conversion shall be treated for all purposes as the record
holder or holders of such Common Shares as of the close of business on such
date. Such conversion shall be deemed to have occurred on the third anniversary
of the Issue Date unless the share transfer books of the Company shall be closed
on that date, in which event such person or persons shall be deemed to have
become such holder or holders of record at the close of business on the next
succeeding day on which such share transfer books are open, but such conversion
shall be at the Conversion Rate in effect on the third anniversary of the Issue
Date. Except as otherwise expressly provided herein in connection with
subparagraph (3) of paragraph B and the calculation of the Conversion Rate, no
payment or adjustment shall be made in respect of cash distributions on the
Common Shares or the Series B Preferred Shares upon conversion of the Series B
Preferred Shares.
 
     (2) Conversion of Series B Preferred Shares at Holder's Option. Each holder
of the Series B Preferred Shares shall have the right, at the option of such
holder, to convert each Series B Preferred Share, in whole, but not in part,
into fully paid and nonassessable Common Shares, at the Conversion Rate, at any
time from and after the occurrence of any one of the following events: (i) the
second anniversary of the Issue Date; (ii) the reduction to less than $4.0
billion of the Company's total equity market capitalization for a period of 20
consecutive trading days (calculated as (A) the Average Share Price on the
calculation date multiplied by the total number of Common Shares outstanding,
plus (B) for each series or class of preferred shares of beneficial interest for
which there is an established trading market, the Average Preferred Share Price
multiplied by the total number of all preferred shares of beneficial interest of
such series or class, plus (C) the Initial Investment for the Series B Preferred
Shares, plus (D) the price paid for all outstanding shares of any other series
of preferred shares of beneficial interest for which there is no established
trading market, plus (E) the Average Share Price on the calculation date
multiplied by the actual number of Common Shares issuable upon an exchange of
all Units (excluding any Units held by the Company or its subsidiaries) in
Crescent Real Estate Equities Limited Partnership, a Delaware limited
partnership); (iii) a Change in Control of the Company; (iv) the Company's
failure to qualify as a "real estate operating company" for purposes of ERISA;
or (v) the occurrence of an Event of Default. The Company shall, upon request of
any holder of Series B Preferred Shares, provide such holder with copies of such
financial statements, compliance certificates and other materials as the Company
is required to deliver to the Trustee of its 6 5/8% Notes Due 2002 and 7 1/8%
Notes Due 2007 (the "Trustee"), in each case with such certifications as are
required to be delivered to the Trustee, and in each case to the extent
reasonably necessary to determine if an Event of Default has occurred.
 
     Before any holder of shares of the Preferred Shares shall be entitled to
convert Series B Preferred Shares into Common Shares, such holder (i) shall
surrender the certificate or certificates therefor, duly endorsed to the Company
or in blank (or, if the Series B Preferred Shares are book entry securities,
deliver written notice of such endorsement in a form reasonably acceptable to
the Transfer Agent), at the offices of the Transfer Agent, or such other place
or places, if any, as the Board of Trust Managers shall designate, (ii) shall
give written notice to the Company of such holder's election to convert the
Series B Preferred Shares and (iii) shall state in writing the name or names in
which such holder wishes the Common Shares to be issued and registered. The
Company, as soon as practicable thereafter, shall issue and deliver to such
holder of Series B Preferred Shares, or to its nominee or nominees, at the
address provided to the Company by the holder thereof, certificates or
confirmation of book entry registration by the Company's transfer agent for the
                                        8
<PAGE>   9
 
number of full Common Shares to which such holder or such holder's nominee or
nominees shall be entitled, and any fractional interest in respect of a Common
Share arising upon such conversion shall be settled as provided in subparagraph
(4). The Series B Preferred Shares shall be deemed to have been converted as of
the close of business on the date of the surrender of such shares for conversion
as provided above, and the person(s) or entity(ies) entitled to receive the
Common Shares issuable upon conversion shall be treated for all purposes as the
record holder or holders of such Common Shares as of the close of business on
such date, and such conversion shall be at the Conversion Rate in effect at such
time and on such date on which such shares have been surrendered and such notice
received by the Company. Except as otherwise expressly provided herein in
connection with the calculation of the Conversion Rate, no payment or adjustment
shall be made in respect of cash distributions on the Common Shares or the
Series B Preferred Shares upon conversion of Series B Preferred Shares.
 
     (3) Conversion Rate. The number of Common Shares issuable upon conversion
of each of the Series B Preferred Shares (the "Conversion Rate") shall be
determined according to the following formula:
 
          (a) (1 plus the Investment Return as of the date of conversion)(N),
     multiplied by the Initial Investment (where N is an exponent that equals
     the number of years from the Issue Date to the effective date of a
     conversion), minus
 
          (b) (the Average Share Price at conversion multiplied by the Dividend
     Shares), divided by
 
          (c) the Average Share Price at conversion, divided by
 
          (d) the aggregate number of Series B Preferred Shares issued to the
     Initial Investors;
 
     provided, however, that if the application of the Conversion Rate
     calculated as described above would result, upon conversion of the Series B
     Preferred Shares into Common Shares, in the issuance of Common Shares at a
     conversion price that is less than the then-applicable per share par value
     of the Common Shares, then the Conversion Rate shall be adjusted such that
     the conversion price of the Common Shares issuable upon such conversion
     shall equal at least the then-applicable per share par value of the Common
     Shares.
 
     (4) Cash in Lieu of Fractional Shares. No fractional shares or scrip
representing fractions of Common Shares shall be issued upon conversion of the
Series B Preferred Shares. Instead of any fractional interest in a Common Share
that would otherwise be deliverable upon the conversion of a Series B Preferred
Share, the Company shall pay to the holder of such share an amount in cash based
upon the Closing Price on the trading day immediately preceding the date of
conversion. If more than one Series B Preferred Share shall be surrendered for
conversion at one time by the same holder, the number of full Common Shares
issuable upon conversion thereof shall be computed on the basis of the aggregate
number of Series B Preferred Shares so surrendered.
 
     (5) Certain Covenants Relating to Conversion.
 
          (a) The Company covenants that it will at all times reserve and keep
     available, free from preemptive rights, out of the aggregate of its
     authorized but unissued Common Shares, for the purpose of effecting
     conversion of the Series B Preferred Shares, the full number of Common
     Shares deliverable upon the conversion of all outstanding Series B
     Preferred Shares not theretofore converted. For purposes of this subsection
     (a), the number of Common Shares that shall be deliverable upon the
     conversion of all outstanding Series B Preferred Shares shall be computed
     as if at the time of computation all such outstanding shares were held by a
     single holder.
 
          (b) The Company covenants that any Common Shares issued upon
     conversion of the Series B Preferred Shares shall be validly issued, fully
     paid and nonassessable and shall not be subject to restrictions on transfer
     except as required under applicable law or the Company's Restated
     Declaration of Trust, and such issuance shall not require further
     registration or exemption under the Securities Act.
 
          (c) The Company shall use its reasonable best efforts to list the
     Common Shares required to be delivered upon conversion of the Series B
     Preferred Shares, prior to such delivery, upon each national securities
     exchange, if any, upon which the outstanding Common Shares are listed at
     the time of such delivery.
 
                                        9
<PAGE>   10
 
          (d) Prior to the delivery of any securities that the Company shall be
     obligated to deliver upon conversion of the Series B Preferred Shares, the
     Company shall use its reasonable best efforts to comply with all federal
     and state laws and regulations thereunder requiring the registration of
     such securities with, or any approval of or consent to the delivery thereof
     by, any governmental authority.
 
          (e) The Company will pay any and all documentary stamp or similar
     issue or transfer taxes payable in respect of the issue or delivery of
     Common Shares or other securities or property on conversion of the Series B
     Preferred Shares pursuant hereto; provided, however, that the Company shall
     not be required to pay any tax that may be payable in respect of any
     transfer involved in the issue or delivery of Common Shares or other
     securities or property in a name other than that of the holder of the
     Series B Preferred Shares to be converted, and no such issue or delivery
     shall be made unless and until the person requesting such issue or delivery
     has paid to the Company the amount of any such tax or has established, to
     the reasonable satisfaction of the Company, that such tax has been paid.
 
          (f) Except as otherwise provided herein, each holder of Series B
     Preferred Shares called for redemption by the Company or otherwise
     converted into Common Shares shall be the record holder of the Common
     Shares which such holder is entitled to receive on account of such
     redemption or conversion as of the date such redemption or conversion is
     deemed to have occurred under the terms of this Statement of Designation.
 
D. REDEMPTION OF SERIES B PREFERRED SHARES.
 
     (1) Redemption by the Company. In addition to the Company's right to redeem
the Series B Preferred Shares under the circumstances specified in subparagraphs
(2) and (7) below, the Series B Preferred Shares shall be redeemable by the
Company at its option, in whole but not in part, if the Company Compound Annual
Return at the close of business on the first or second anniversary of the Issue
Date, as the case may be, is 1,000 basis points or more below the NAREIT Return.
The redemption price (the "Redemption Price") for each Series B Preferred Share
shall be calculated as of the Series B Preferred Shares Redemption Date (as
defined in subparagraph (4) below) and shall equal:
 
          (a) (1 plus the NAREIT Return as of the Series B Preferred Shares
     Redemption Date(N), multiplied by the Initial Investment (where N is an
     exponent that equals the number of years from the Issue Date to the Series
     B Preferred Shares Redemption Date), plus
 
          (b) 5% multiplied by the Initial Investment, minus
 
          (c) the Average Share Price of the Common Shares on the Series B
     Preferred Shares Redemption Date, multiplied by the Dividend Shares,
     divided by
 
          (d) the aggregate number of Series B Preferred Shares outstanding on
     the Issue Date.
 
     Each holder of Series B Preferred Shares on the Series B Preferred Shares
Redemption Date shall be entitled, at such holder's election, to receive the
Redemption Price in cash or Common Shares, subject to subparagraphs (2) and (7).
The number of Common Shares to be delivered in payment of the Redemption Price
shall equal the Redemption Price divided by the Average Share Price on the
Series B Preferred Shares Redemption Date.
 
     (2) Redemption Relating to REIT Status. The Series B Preferred Shares may
be redeemed at any time at the option of the Company, in whole or from time to
time in part, at a price per Series B Preferred Share equal to the greater of
(i) the price per Series B Preferred Share equal to the Conversion Rate
multiplied by the Average Share Price at the close of business on the Series B
Preferred Shares Redemption Date or (ii) the Redemption Price, if the Board of
Trust Managers reasonably determines in good faith that such a redemption is
necessary or advisable to preserve the status of the Company as a REIT for
federal income tax purposes, subject to the provisions below. Any redemption
made pursuant to this subparagraph (2) will be accompanied or preceded by an
opinion of legal counsel selected and employed by the Company (subject to the
last sentence of this subparagraph (2)) for the purpose of rendering an opinion
confirming the necessity or advisability of such redemption (and, if applicable,
the necessity or advisability of making any required
 
                                       10
<PAGE>   11
 
redemption payment in cash, in which case the Company may make such redemption
payment in accordance with such opinion notwithstanding any contrary election by
the holder whose Series B Preferred Shares are the subject of the redemption) in
order to preserve the status of the Company as a REIT for federal income tax
purposes. For purposes of this subparagraph (2), the opinion of Shaw, Pittman,
Potts & Trowbridge or of any other legal counsel selected and employed by the
Company for the purpose of rendering such opinion and approved (which approval
shall not be unreasonably withheld) by the holders of a majority of the Series B
Preferred Shares shall be acceptable.
 
     (3) Partial Redemption. If fewer than all of the outstanding Series B
Preferred Shares are to be redeemed pursuant to subparagraph (2) above, the
Series B Preferred Shares to be redeemed will be determined pro rata or in such
other manner determined by the Company's Board of Trust Managers in its sole
discretion to be reasonable and equitable to all of the holders of Series B
Preferred Shares, provided that such method satisfies any applicable
requirements of any securities exchange on which the Series B Preferred Shares
are listed.
 
     (4) Notice of Redemption. Notice of redemption must be sent within five (5)
business days of the date giving rise to the Company's right to redeem and
provide for redemption on the date that is no more than ten (10) business days
after the date giving rise to the Company's right to redeem (the "Series B
Preferred Shares Redemption Date"), to each holder of record of Series B
Preferred Shares to be redeemed, notifying such holder of the Company's election
to redeem such shares, stating the Series B Preferred Shares Redemption Date,
the number of shares to be redeemed (and, if fewer than all the Series B
Preferred Shares are to be redeemed, the number of shares to be redeemed from
such holder), the place(s) where the Series B Preferred Share certificates are
to be surrendered for payment, and the date on which such holder's conversion
rights, if any, as to the Series B Preferred Shares shall terminate.
Distributions on the Series B Preferred Shares will cease to accrue on the
Series B Preferred Shares Redemption Date; provided, however, that, persons who
were holders of record of Series B Preferred Shares on the record date for any
distribution(s) that are accrued and unpaid shall be entitled to receive all
such distributions.
 
     For purposes of this paragraph D, the dates that give rise to the Company's
right to redeem the Series B Preferred Shares are as follows: (i) for purposes
of a redemption pursuant to subparagraph (1) above, the first or second
anniversary of the Issue Date, as the case may be, (ii) for purposes of a
redemption pursuant to subparagraph (2) above, the date on which the Board of
Trust Managers first determines, in good faith, that the redemption of all or a
portion of the Series B Preferred Shares is necessary or advisable to preserve
the status of the Company as a REIT for federal income tax purposes, and (iii)
for purposes of a redemption pursuant to subparagraph (7) below, the earlier of
the date that is thirty (30) days after the Company's notice to a record or
beneficial owner in accordance with subparagraph (7)(i) or the date that is
prescribed by a Gaming Authority (as defined below).
 
     (5) Procedures for Redemption. On or after the Series B Preferred Shares
Redemption Date, each holder of Series B Preferred Shares to be redeemed must
present and surrender his Series B Preferred Share certificates, if any, to the
Company at the place designated in such notice and thereupon the redemption
price of such Series B Preferred Shares will be paid to or on the order of the
Person whose name appears on such Series B Preferred Share certificates, if any,
as the owner thereof (or, if the Series B Preferred Shares are book entry
securities, the redemption price of such Series B Preferred Shares will be paid
to the Person whose name appears as the holder thereof in the records of the
Transfer Agent), and each such Series B Preferred Share certificate surrendered
will be canceled. From and after the Series B Preferred Shares Redemption Date,
all distributions on the Series B Preferred Shares designated for redemption in
such notice will cease to accrue and all rights of the holders thereof
(including conversion rights), except the right to receive the redemption price
thereof (including any accrued and unpaid distributions up to the Series B
Preferred Shares Redemption Date), will cease and terminate and such shares will
not thereafter be transferred (except with the consent of the Company) on the
Company's books, and such Series B Preferred Shares shall not be deemed to be
outstanding for any purpose whatsoever. At its election, the Company, prior to
the date of payment of the Redemption Price pursuant to this subparagraph (5),
may irrevocably deposit the Redemption Price (including any accrued and unpaid
distributions) of the Series B Preferred Shares so called for redemption in
trust for the holders thereof with a bank or trust company, in which case such
notice to holders of the Series B
                                       11
<PAGE>   12
 
Preferred Shares to be redeemed will (i) state the date of such deposit, (ii)
specify the office of such bank or trust company as the place of payment of the
Redemption Price and (iii) call upon such holders to surrender the Series B
Preferred Share certificates, if any, representing such shares at such place on
or about the date fixed in such redemption notice against payment of the
Redemption Price (including all accrued and unpaid distributions up to the
Series B Preferred Shares Redemption Date). Any moneys so deposited which remain
unclaimed by the holders of the Series B Preferred Shares at the end of two
years after the Series B Preferred Shares Redemption Date will be returned by
such bank or trust company to the Company. In the event any holder elects to be
redeemed in cash rather than Common Shares, the Company shall pay the required
amount of cash to the holder within three (3) business days after the Series B
Preferred Shares Redemption Date, without interest. If the Company fails to pay
the Redemption Price on or before the third (3rd) business day following the
Series B Preferred Shares Redemption Date, such amount thereafter shall bear
interest at the annual rate of LIBOR plus 1.25%, compounded monthly, up to and
including the fifth (5th) business day following the Series B Preferred Shares
Redemption Date. If the Company fails to pay the Redemption Price on or before
the fifth (5th) business day following the Series B Preferred Shares Redemption
Date, such amount thereafter shall continue to bear interest at the annual rate
of LIBOR plus 4.00%, compounded monthly, until the date of payment.
Notwithstanding the foregoing, nothing contained in this paragraph (D) shall
permit the Company to delay making any required payment to the holders of the
Series B Preferred Shares beyond three (3) business days after the Series B
Preferred Shares Redemption Date.
 
     (6) Payment of Distributions. Notwithstanding the foregoing, unless all
Extraordinary Distributions payable with respect to the Series B Preferred
Shares have been paid to the holders thereof, or declared and a sum sufficient
for the payment thereof set apart for payment to the holders thereof, no Series
B Preferred Shares shall be redeemed (except pursuant to subparagraph (2)
above), which redemption shall not affect or limit the Company's obligation to
pay such Extraordinary Distributions after such redemption; provided, however,
that the foregoing shall not prevent the purchase or acquisition of Series B
Preferred Shares pursuant to a purchase or exchange offer made on the same terms
to holders of all outstanding Series B Preferred Shares, which purchase or
acquisition shall not affect the Company's obligation to pay all Extraordinary
Distributions payable prior to the date of such purchase or acquisition.
 
     (7) Redemption Attributable to Certain Regulatory Requirements. If at any
time the Company is subject to the jurisdiction of an agency or other authority
of any state, county, city or other political subdivision with respect to any
activities of the Company or any of its subsidiaries related to gaming (a
"Gaming Authority"), and such Gaming Authority either finds a holder or a record
or beneficial owner of a holder to be unsuitable or is unable to make a
determination because a holder or any such record or beneficial owner is unable
or unwilling to provide the requisite information, then notwithstanding any
other provision of this Statement of Designation, the Company shall have the
right, by written notice to such record or beneficial owner, (i) to require such
record or beneficial owner of Series B Preferred Shares to dispose of such
owner's Series B Preferred Shares within thirty (30) days or, if applicable,
within the time prescribed by such Gaming Authority, whichever is earlier, and
(ii) if such disposition is not made in accordance with clause (i), to redeem
each Series B Preferred Share of such owner at the greater of (A) the price per
Series B Preferred Share equal to the Conversion Rate multiplied by the Average
Share Price on the Series B Preferred Shares Redemption Date or (B) the
Redemption Price, on the terms set forth above (other than subparagraphs (3) and
(6) of this paragraph (D), which subparagraphs shall not apply to any such
redemption). Notwithstanding anything to the contrary set forth in subparagraph
(1), the Company shall have the right and obligation to pay the Redemption Price
for any redemption pursuant to this subparagraph (7) in cash.
 
     (8) No Maturity Date or Sinking Fund Provisions. The Series B Preferred
Shares have no stated maturity date and will not be subject to any sinking fund
or, except as provided above, to mandatory redemption.
 
E. VOTING RIGHTS.
 
     (1) General. Except as required by law or as provided below, the holders of
the Series B Preferred Shares shall not be entitled to vote at any meeting of
the shareholders for election of Trust Managers or for
 
                                       12
<PAGE>   13
 
any other purposes or otherwise to participate in any action taken by the
Company or the shareholders thereof, or to receive notice of any meeting of
shareholders.
 
     (2) Method of Voting. In any matter in which the Series B Preferred Shares
are entitled to vote (as expressly provided herein or as may be required by
law), including any action by written consent, each Series B Preferred Share
shall be entitled to one vote.
 
     (3) Right to Elect Trust Managers. In the event that at any time or from
time to time, the Company is in arrears in the payment of Extraordinary
Distributions on the Series B Preferred Shares or the Company failed to honor
its conversion or redemption obligations, the holders of the Series B Preferred
Shares, voting separately as a class with all other series of Preferred Shares
upon which rights to elect trust managers upon arrearages in distributions have
been conferred and are exercisable, will be entitled to vote for the election of
two additional trust managers of the Company at a special meeting called by the
holders of record of at least ten percent (10%) of any series of Preferred
Shares so in arrears (unless such request is received less than 90 days before
the date fixed for the next annual or special meeting of the shareholders) or at
the next annual meeting of shareholders, and all other trust managers of the
Company shall be elected by the holders of the Company's Common Shares. In such
case, the entire Board of Trust Managers of the Company will be increased by two
trust managers. Voting rights of the holders of the Series B Preferred Shares
shall continue at each subsequent annual meeting until all Extraordinary
Distributions in arrears on such Series B Preferred Shares shall have been fully
paid or declared and a sum sufficient for the payment thereof set aside for
payment. At such time, the term of office of the trust managers so elected by
the holders of Preferred Shares shall terminate forthwith and the number of
members of the Board of Trust Managers automatically shall be decreased by two.
 
     (4) Certain Additional Voting Rights. As long as any Series B Preferred
Shares remain outstanding, the Company will not, without the affirmative vote or
consent of the holders of at least two-thirds of the Series B Preferred Shares
outstanding at the time, given in person or by proxy, either in writing or at a
meeting (such series voting separately as a class) (i) authorize or create, or
increase the authorized or issued amount of, any class or series of shares of
beneficial interest ranking prior to the Series B Preferred Shares with respect
to the payment of distributions to which the Series B Preferred Shares would be
entitled or prior to the distribution of assets upon liquidation, dissolution or
winding up or reclassify any authorized shares of beneficial interest of the
Company into such shares, or create, authorize or issue any obligation or
security convertible into or evidencing the right to purchase any such shares;
(ii) authorize or undertake a share exchange that would affect the Series B
Preferred Shares (unless the Series B Preferred Shares shall be converted into
or exchanged for convertible preferred shares having preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms or conditions of redemption thereof identical (except
for changes that do not materially and adversely affect the holders of the
Series B Preferred Shares) to that of a Series B Preferred Share); or (iii)
amend, alter or repeal the provisions of the Declaration of Trust or this
Statement of Designation or By-Laws, whether by merger, consolidation or
otherwise (an "Event"), so as to materially and adversely affect any right,
preference, privilege or voting power of the Series B Preferred Shares or the
holders thereof; provided, however, with respect to the occurrence of any of the
Events set forth in (ii) above, so long as the Series B Preferred Shares (or
shares into which the Series B Preferred Shares have been converted in any
successor entity to the Company) remain outstanding with the terms thereof
materially unchanged, taking into account that upon the occurrence of an Event,
the Company may not be the surviving entity, the occurrence of any such Event
shall not be deemed to materially and adversely affect such rights, preferences,
privileges or voting power of holders of Series B Preferred Shares; and
provided, further, that (x) any increase in the amount of the authorized
Preferred Shares or the creation or issuance of any other Series B Preferred
Shares, or (y) any increase in the amount of authorized Series B Preferred
Shares, in each case ranking on a parity with or junior to the Series B
Preferred Shares with respect to payment of distributions or the distribution of
assets upon liquidation, dissolution or winding up, shall not be deemed to
materially and adversely affect such rights, preferences, privileges or voting
power.
 
     The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding Series B Preferred Shares shall have
 
                                       13
<PAGE>   14
 
been redeemed or called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
 
F. LIQUIDATION PREFERENCE.
 
     (1) Preference. Upon the voluntary or involuntary dissolution, liquidation
or winding up of the Company, the holders of the Series B Preferred Shares then
outstanding shall be entitled to receive and to be paid out of the assets of the
Company legally available for distribution to its shareholders, before any
payment or distribution shall be made on any Junior Shares, the amount of $32.38
per Series B Preferred Share, plus an amount equal to distributions accrued and
unpaid thereon to the date fixed for such dissolution, liquidation or winding up
of the Company.
 
     (2) Limitation on Rights. After the payment to the holders of the Series B
Preferred Shares of the full preferential amounts provided for in this paragraph
(F), the holders of the Series B Preferred Shares as such shall have no right or
claim to any of the remaining assets of the Company.
 
     (3) Rights Upon Company's Failure to Pay Liquidation Preference. If, upon
any voluntary or involuntary dissolution, liquidation, or winding up of the
Company, the amounts payable with respect to the preference value of the Series
B Preferred Shares and any Parity Shares are not paid in full, the holders of
the Series B Preferred Shares and of such Parity Shares shall share ratably in
any such distribution of assets of the Company in proportion to the full
respective preferential amounts to which they are entitled.
 
     (4) Sale of Assets, Merger, and Consolidation Not a Liquidation. Neither
the sale, lease or conveyance of all or substantially all the property or
business of the Company, nor the merger or consolidation of the Company into or
with any other entity, or the merger or consolidation of any other entity into
or with the Company or a statutory share exchange, shall be deemed to be a
dissolution, liquidation or winding up, voluntary or involuntary, of the Company
for the purposes of this paragraph (F).
 
     (5) Shares to be Retired. All Series B Preferred Shares which shall have
been issued and reacquired in any manner by the Company shall be restored to the
status of authorized but unissued Preferred Shares, without designation as to
series.
 
G. COVENANT OF COMPANY.
 
     During the 20 consecutive trading days used for the determination of the
Average Share Price preceding the first, second and third anniversary of the
Issue Date, the Company will not announce, implement or conduct any share
buy-back or repurchase program or increase distributions if such act could
reasonably be expected to have the effect of increasing the Average Share Price.
 
H. EXCLUSION OF OTHER RIGHTS.
 
     Except as may otherwise be required by law, the Series B Preferred Shares
shall not have any voting powers, preferences and relative, participating,
optional or other special rights, other than those specifically set forth in
this Statement of Designation (as such Statement of Designation may be amended
from time to time) and in the Declaration of Trust. The Series B Preferred
Shares shall have no preemptive or subscription rights.
 
I. HEADINGS OF SUBDIVISIONS.
 
     The headings of the various subdivisions hereof are for convenience of
reference only and shall not affect the interpretation of any of the provisions
hereof.
 
J. SEVERABILITY OF PROVISIONS.
 
     If any one or more of the voting powers, preferences and relative,
participating, optional and other special rights of the Series B Preferred
Shares and qualifications, limitations and restrictions thereof set forth in
this Statement of Designation (as such Statement of Designation may be amended
from time to time) are invalid, unlawful or incapable of being enforced by
reason of any rule of law or public policy, all other voting powers,
 
                                       14
<PAGE>   15
 
preferences and relative, participating, optional and other special rights of
Series B Preferred Shares and qualifications, limitations and restrictions
thereof set forth in this Statement of Designation (as so amended) which can be
given effect without the invalid, unlawful or unenforceable voting powers,
preferences and relative, participating, optional or other special rights of
Series B Preferred Shares and qualifications, limitations and restrictions
thereof herein set forth shall be deemed dependent upon any other such voting
powers, preferences and relative, participating, optional or other special right
of Series B Preferred Shares and qualifications, limitations and restrictions
thereof unless so expressed herein.
 
K. ADOPTION.
 
     This Statement of Designation was duly adopted by the Board of Trust
Managers of the Company. Shareholder action was not required.
 
                                    *  *  *
 
     IN WITNESS WHEREOF, I hereby certify that I, Gerald W. Haddock, am the
President and Chief Executive Officer of Crescent Real Estates Equities Company
(the "Company") and that as such, I am authorized to execute and file with the
County Clerk of Tarrant County, Texas this Statement of Designation (the
"Statement of Designation") on behalf of the Company and I further certify on
behalf of the Company that this Statement of Designation was authorized by the
Board of Trust Managers by unanimous written consent dated as of June 26, 1998
and is still in full force and effect as of the date hereof. I further certify
that my signature to this document is my free act and deed, that to the best of
my knowledge, information and belief, the matters and facts set forth herein are
true in all material respects and that this statement is made under penalty of
perjury.
 
Dated: June 29, 1998
 
                                            CRESCENT REAL ESTATE EQUITIES
                                            COMPANY
 
                                                  /s/ GERALD W. HADDOCK
 
                                            ------------------------------------
                                            Name: Gerald W. Haddock
                                            Title:  President and Chief
                                            Executive Officer
 
     The undersigned, David M. Dean, the Senior Vice President, Law and
Secretary of the Company, hereby certifies that Gerald W. Haddock is the
President and Chief Executive Officer of the Company and that the signature set
forth above is his genuine signature.
 
     IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 29th day
of June, 1998.
 
                                                    /s/ DAVID M. DEAN
 
                                            ------------------------------------
                                            Name: David M. Dean
                                            Title:  Senior Vice President, Law
                                            and Secretary
 
                                       15
<PAGE>   16
 
STATE OF TEXAS
COUNTY OF TARRANT
 
     This instrument was acknowledged before me on June 29, 1998, by Gerald W.
Haddock, President and Chief Executive Officer of Crescent Real Estate Equities
Company, a Texas real estate investment trust, on behalf of said real estate
investment trust.
 
                                                 /s/ ELIZABETH ANN HAYS
 
                                            ------------------------------------
                                            Notary Public -- State of Texas
 
                                                     ELIZABETH ANN HAYS
 
                                            ------------------------------------
                                            Printed Name of Notary Public
 
My Commission expires:
 
            July 30, 2000
------------------------------------------------------
 
STATE OF TEXAS
COUNTY OF TARRANT
 
     This instrument was acknowledged before me on June 29, 1998, by David M.
Dean.
 
                                                 /s/ ELIZABETH ANN HAYS
 
                                            ------------------------------------
                                            Notary Public -- State of Texas
 
                                                     ELIZABETH ANN HAYS
 
                                            ------------------------------------
                                            Printed Name of Notary Public
 
My Commission expires:
 
            July 30, 2000
------------------------------------------------------
 
                                       16
<PAGE>   17
 
                                   EXHIBIT A
 
                           EXAMPLE OF CALCULATION OF
                        COMPANY COMPOUND ANNUAL RETURN,
                     CONVERSION RATE, AND INVESTMENT RETURN
 
RETURN AND CONVERSION ANALYSIS
 
CEI COMPOUND ANNUAL RETURN CALCULATION - AS DEFINED BY SECTION A(8)
 
<TABLE>
<CAPTION>
                                                        YEAR 1         YEAR 2         YEAR 3
                                                     ------------   ------------   ------------
<S>                                                  <C>            <C>            <C>
Initial shares.....................................     6,428,571      6,685,864      6,935,833
Shares purchased with dividend dollars.............       257,293        249,969        242,296
                                                     ------------   ------------   ------------
Total shares.......................................     6,685,864      6,935,833      7,178,129
Share price at year end............................  $      43.36   $      53.71   $      66.54
                                                     ------------   ------------   ------------
Share value at year end............................  $289,899,063   $372,523,590   $477,632,704
Share value at beginning of year...................  $225,000,000   $289,899,063   $372,523,590
                                                     ------------   ------------   ------------
Annual gain........................................  $ 64,899,063   $ 82,624,527   $105,109,114
Annual return......................................          28.8%          28.5%          28.2%
          COMPOUND ANNUAL RETURN...................          28.5%
</TABLE>
 
INVESTMENT RETURN -- AS DEFINED BY SECTION A(15)
 
<TABLE>
<S>                                                            <C>
NAREIT Compound Annual Return...............................   12.00%
0-500 bps - 75%.............................................    3.75%
501-1000 bps - 50%..........................................    2.50%
1001-2000 bps - 25%.........................................    1.63%
2001+bps - 10%..............................................    0.00%
                                                               -----
          Investment Return.................................   19.88%
</TABLE>
 
CONVERSION RATE -- AS DEFINED BY SECTION C(2)
 
<TABLE>
<S>                                                       <C>
(1 plus the Investment Return)(3 years)................        172.3%
Multiplied by the Initial Investment...................   225,000,000
                                                          -----------
                                                          387,675,000
Minus the Avg. share price at conversion multiplied by
  the dividend shares..................................            --
                                                          -----------
                                                          387,675,000
Divided by Average Share Price.........................         66.54
                                                          -----------
                                                            5,826,195
Divided by the aggregate number of Series B
  Preferred shares issued..............................     6,428,571
                                                          -----------
          Conversion Rate..............................        0.9063
</TABLE>
 
Note:  All sections references refer to the Statement of Designation of Series B
Convertible Preferred Shares of Crescent Real Estate Equities Company
 
                                       A-1
<PAGE>   18
 
ASSUMPTIONS*
 
<TABLE>
<S>                                                           <C>
Value of offering...........................................   225,000,000
CEI Average Share Price at Issuance.........................  $      35.00
Equivalent common shares issued.............................     6,428,571
CEI Current Quarterly Dividend..............................  $       0.38
CEI annual dividend growth rate (increase occurs for 4Q
  dividend).................................................         15.00%
Extraordinary dividends.....................................  $         --
Year 1 stock price growth rate -- quarterly.................          5.50%
Year 2 stock price growth rate -- quarterly.................          5.50%
Year 3 stock price growth rate -- quarterly.................          5.50%
NAREIT Return...............................................         12.00%
</TABLE>
 
CEI HYPOTHETICAL RETURN DETAIL
 
CEI STOCK PRICE TABLE
 
<TABLE>
<CAPTION>
                       YEAR                            1Q       2Q       3Q       4Q
                       ----                          ------   ------   ------   ------
<S>                                                  <C>      <C>      <C>      <C>
1..................................................  $36.93   $38.96   $41.10   $43.36
2..................................................   45.74    48.26    50.91    53.71
3..................................................   56.66    59.78    63.07    66.54
</TABLE>
 
CEI DIVIDEND PER SHARE TABLE
 
<TABLE>
<CAPTION>
                     YEAR                         1Q      2Q      3Q      4Q     TOTAL
                     ----                        -----   -----   -----   -----   -----
<S>                                              <C>     <C>     <C>     <C>     <C>
1..............................................  $0.38   $0.38   $0.38   $0.44   $1.58
2..............................................   0.44    0.44    0.44    0.51    1.83
3..............................................   0.51    0.51    0.51    0.59    2.12
</TABLE>
 
CASH DIVIDENDS PAID
 
<TABLE>
<CAPTION>
          YEAR                1Q           2Q           3Q           4Q          TOTAL
          ----            ----------   ----------   ----------   ----------   -----------
<S>                       <C>          <C>          <C>          <C>          <C>
1.......................  $2,442,857   $2,467,993   $2,492,065   $2,912,228   $10,315,143
2.......................   2,941,780    2,970,079    2,997,158    3,504,003    12,413,020
3.......................   3,537,275    3,569,114    3,599,564    4,197,874    14,903,827
                                                                              -----------
                                                                               37,631,990
</TABLE>
 
---------------
 
* The prices, amounts, dividends, growth rates, holding periods and other facts
  specified herein are used in this exhibit solely for purposes of illustration
  and are not intended and do not purport to include, predict or limit the
  actual performance of the Series B Preferred Shares, and fail to, among other
  things, assume facts in which Extraordinary Distributions have been made to
  the holders.
 
                                       A-2
<PAGE>   19
 
                                   EXHIBIT B
 
                          CALCULATION OF NAREIT RETURN
 
     The NAREIT indices are market weighted performance measures that represent
all tax-qualified REITs on the New York Stock Exchange, American Stock Exchange
and NASDAQ National Market System. The NAREIT performance indices have been the
industry standard for over 25 years.
 
     The Dividend Yield calculation is a follows:
 
  YLD(t) = the sum of [S(t)*(D*f)/r+S(t)*D(s)/r(s)]
                                    --------------
                                    the sum of [S(t)*P(t)]
 
Where:
 
<TABLE>
<S> <C>
t   =  time or current period
S   =  Common Shares outstanding
D   =  last ex-date ordinary cash dividend amount
f   =  frequency of regular dividend (most REITs pay regular
       dividends quarterly or 4 times a year)
P   =  Price of stock
D(s) = Special cash dividend distributions made over the previous
       12 months. For REITs these are typically called deficiency
       or special dividends and are related to the 95% pay
       requirement. Liquidating distributions, special capital
       gain distributions, rights offerings, spinoffs or stock
       distributions are not included for dividend yield
       purposes.
r   =  ratio of new shares to old when stock distribution or
       split has been made effective since the last ex-date
       dividend event
r(s) = ratio of new shares to old when stock distribution or
       split has been made effective since the last ex-date of
       special cash distribution event
</TABLE>
 
     The Price Return calculation is as follows:
 
  PR = the sum of [S(t-1)*(P(t)+D(x))*r(t)]- the sum of [S(t-1)*P(t-1)]
                                 -------------------
                                 the sum of [S(t-1)*P(t-1)]
 
Where:
 
<TABLE>
<S> <C>
t   =  time or current period
t-1 =  previous period
P   =  Price of stock
S   =  Common Shares outstanding
D(x) = Any special distributions not considered in the dividend
       yield calculation included on the ex-date of the
       distribution. The value of spinoff distributions is based
       upon either first day trading close of the stock if
       available or management's estimate of value which is
       usually identified in a proxy/prospectus.
r(t) = the ratio of new stock to old when stock distribution or
       split has been made effective
</TABLE>
 
     The calculation for the Share Price index is as follows:
 
                        PRindex = PRindex(t-1)*(1+PR(t))
 
Where:
 
<TABLE>
<S>      <C>
t        = time or current period
t-1      = previous period
PRindex  = index value for Share Price index
PR       = share price return
</TABLE>
 
     All references to ex-date distributions should be references to payable
date distributions.
 
                                       B-1
<PAGE>   20
 
     The Total Return calculation is as follows:
 
  TR = the sum of [S(t-1)*(P(t)+D)*r(t)]- the sum of [S(t-1)*P(t-1)]
                                 -------------------
                                 the sum of [S(t-1)*P(t-1)]
 
Where:
 
<TABLE>
<S> <C>
t   =  time or current period
t-1 =  previous period
P   =  Price of stock
S   =  Common Shares outstanding
D   =  All ex-date distributions. The value of spinoff
       distributions is based upon either first day trading close
       of the stock if available or management's estimate of
       value, which is usually identified in a proxy/ prospectus.
r(t) = the ratio of new stock to old when stock distribution or
       split has been made effective
</TABLE>
 
     The Total Return Index calculation is as follows:
 
                        TRIndex = TRIndex(t-1)-(1+TR(t))
 
Where:
 
<TABLE>
<S>      <C>
t        = time or current period
t-1      = previous period
TRIndex  = Total Return index value
TR       = Total Return
</TABLE>
 
     Specific rates of return are calculated as follows:
 
  Monthly = (TRIndex(yymmdd)-TRIndex(yymm-1dd))
                                 -----------------------
                                    TRIndex(yymm-1dd)
 
Where:
 
<TABLE>
<S>          <C>
TRIndex(yymmdd)   = current total return index value as defined by date where
               YY = year, mm = month and dd = day
TRIndex(yymm-1dd) = total return index value one month previous
</TABLE>
 
  Year to date = (TRIndex(yymmdd)-TRIndex(yy1231))
                                   ----------------------
                                     TRIndex(yy-11231)
 
Where:
 
<TABLE>
<S>           <C>
TRIndex(yymmdd) = current total return index value as defined by date where
                YY = year, mm = month and dd = day
TRIndex(yy-11231) = total return index value on December 31 of previous year
</TABLE>
 
  One year return = (TRIndex(yymmdd)-TRIndex([(yy-1)(mmdd]))
                                  ---------------------------
                                    TRIndex([(yy-1)(mmdd]))
 
Where:
 
<TABLE>
<S>           <C>
TRIndex(yymmdd) = current total return index value as defined by date where
                YY = year, mm = month and dd = day
TRIndex(yy-1)mmdd]) = total return index value one year prior
</TABLE>
 
                                       B-2
<PAGE>   21
 
X year annualized rate of return = [1+
                          (TRIndex(yymmdd) - TRIndex([(yy-X)mmdd]))()(+)(1/X)-1]
 
                                     -----------------------------
                                        TRIndex([(yy-x)mmdd)])
 
Where:
 
<TABLE>
<S>                   <C>
TRIndex(yymmdd)        = current total return index value as defined by date where
                        YY=year, mm=month and dd=day
TRIndex([(yy-X)mmdd)]) = total return index value x years prior
</TABLE>
 
     In addition, the following are calculation examples of r, the stock split
ratio:
 
          When there is a 2 for 1 stock split the r value is 2
 
          When there is a 10% stock dividend the r value is 1.1
 
          When there is a reverse 1 for 2 stock split the r value is .5
 
                                       B-3
<PAGE>   22
 
                                   EXHIBIT C
 
                               EVENTS OF DEFAULT
 
     Each of the events listed in paragraphs (a), (b), (c) and (d) below shall
constitute an "Event of Default" 60 days following written notice of such a
default from the record holders of a majority of the Series B Preferred Shares
provided that the events listed in paragraphs (a), (b), (c) and (d) below shall
not constitute an "Event of Default" if (i) such default is cured prior to the
end of such 60-day period or (ii) the corresponding default is waived prior to
the end of such 60-day period under the Company's 6 5/8% Notes Due 2002 or
7 1/8% Notes Due 2007 (the "Notes") in accordance with the provisions of such
Notes and the related Indenture. In addition, a declaration of acceleration
under the Notes as a result of any of the events listed in paragraphs (a), (b),
(c) and (d) below shall constitute an "Event of Default."
 
          (a) The incurrence by the Company or any Subsidiary of any Debt other
     than intercompany Debt (representing Debt to which the only parties are the
     Company and any of its Subsidiaries, but only so long as such Debt is held
     solely by the Company and any Subsidiary) that is subordinate in right of
     payment to the Securities, if, immediately after giving effect to the
     incurrence of such additional Debt, the aggregate principal amount of all
     outstanding Debt of the Company and its Subsidiaries on a consolidated
     basis determined in accordance with GAAP is greater than 60% of the sum of
     (i) Total Assets as of the end of the fiscal quarter covered in the
     Company's most recent quarterly or annual financial statements, as the case
     may be, most recently required to be filed with the Securities and Exchange
     Commission, prior to the incurrence of such additional Debt and (ii) the
     increase or decrease in Total Assets from the end of such quarter
     including, without limitation, any increase in Total Assets resulting from
     the incurrence of such additional Debt (such increase or decrease, together
     with the Total Assets, is referred to as the "Adjusted Total Assets"); and
 
          (b) The incurrence by the Company or any Subsidiary of any Secured
     Debt of the Company or any Subsidiary if, immediately after giving effect
     to the incurrence of such additional Secured Debt, the aggregate principal
     amount of all outstanding Secured Debt of the Company and its Subsidiaries
     on a consolidated basis is greater than 40% of the Adjusted Total Assets;
     and
 
          (c) The incurrence by the Company or any Subsidiary of any Debt, other
     than intercompany Debt, if the ratio of the Consolidated Income Available
     for Debt Service to the Annual Debt Service Charge for the period
     consisting of the four consecutive fiscal quarters most recently ended
     prior to the date on which such additional Debt is to be incurred shall
     have been less than 1.5 to 1 on a pro forma basis after giving effect to
     the incurrence of such Debt and to the application of the proceeds
     therefrom, and calculated on the assumption that (i) such Debt and any
     other Debt incurred by the Company or its Subsidiaries since the first day
     of such four-quarter period, which was outstanding at the end of such
     period, had been incurred at the beginning of such period and continued to
     be outstanding throughout such period, and the application of the proceeds
     of such Debt, including to refinance other Debt, had occurred at the
     beginning of such period, (ii) the repayment or retirement of any other
     Debt by the Company or its Subsidiaries since the first day of such
     four-quarter period had been repaid or retired at the beginning of such
     period (except that, in determining the amount of Debt so repaid or
     retired, the amount of Debt under any revolving credit facility shall be
     computed based upon the average daily balance of such Debt during such
     period), (iii) in the case of Acquired Indebtedness or Debt incurred in
     connection with any acquisition since the first day of the four-quarter
     period, the related acquisition had occurred as of the first day of the
     period with the appropriate adjustments with respect to the acquisition
     being included in the pro forma calculation, and (iv) in the case of any
     increase or decrease in Total Assets, or any other acquisition or
     disposition by the Company or any Subsidiary of any asset or group of
     assets, since the first day of such four-quarter period, including, without
     limitation, by merger, stock purchase or sale, or asset purchase or sale,
     such increase, decrease, or other acquisition or disposition or any related
     repayment of Debt had occurred as of the first day of such period with the
     appropriate adjustments to revenues, expenses and Debt levels with respect
     to such increase, decrease or other acquisition or disposition being
     included in such pro forma calculation; and
 
                                       C-1
<PAGE>   23
 
          (d) The failure of the Company to maintain Total Unencumbered Assets
     of not less than 150% of the aggregate outstanding principal amount of all
     outstanding Unsecured Debt of the Company and its Subsidiaries on a
     consolidated basis.
 
                                  * * * * * *
 
     The capitalized terms set forth above shall have the following respective
meanings:
 
          "Acquired Indebtedness" means Debt of a person (i) existing at the
     time the person becomes a Subsidiary or (ii) assumed in connection with the
     acquisition of assets from the person, in each case, other than Debt
     incurred in connection with, or in contemplation of, the person becoming a
     Subsidiary or that acquisition. Acquired Indebtedness shall be deemed to be
     incurred on the date of the related acquisition of assets from any person
     or the date the acquired person becomes a Subsidiary.
 
          "Adjusted Total Assets" has the meaning set forth in subparagraph (a)
     above.
 
          "Annual Debt Service Charge," as of any date, means the amount which
     is expensed in any 12-month period for Consolidated Interest Expense of the
     Company and its Subsidiaries.
 
          "Consolidated Income Available for Debt Service" for any period means
     Consolidated Net Income plus amounts which have been deducted in
     determining Consolidated Net Income during such period for (i) Consolidated
     Interest Expense, (ii) provision for taxes of the Company and its
     Subsidiaries based on income, (iii) amortization (other than amortization
     of debt discount) and depreciation, (iv) provisions for losses from sales
     or joint ventures, (v) increases in deferred taxes and other non-cash
     items, (vi) changes resulting from a change in accounting principles and
     (vii) charges for early extinguishment of debt, and less amounts which have
     been added in determining Consolidated Net Income during such period for
     (a) provisions for gains from sales or joint ventures and (b) decreases in
     deferred taxes and other non-cash items.
 
          "Consolidated Interest Expense" means, for any period, and without
     duplication, all interest (including the interest component of rentals on
     leases reflected in accordance with GAAP as capitalized leases on the
     Company's consolidated balance sheet, letter of credit fees, commitment
     fees and other like financial charges) and all amortization of debt
     discount on all Debt (including, without limitation, payment-in-kind, zero
     coupon and other securities) of the Company and its Subsidiaries, but
     excluding legal fees, title insurance charges and other out-of-pocket fees
     and expenses incurred in connection with the issuance of Debt, all
     determined in accordance with GAAP.
 
          "Consolidated Net Income" for any period means the amount of net
     income (or loss) of the Company and its Subsidiaries for such period
     determined on a consolidated basis in accordance with GAAP.
 
          "Debt" of any person means, without duplication, any indebtedness of
     such person, whether or not contingent, in respect of (i) borrowed money
     evidenced by bonds, notes, debentures or similar instruments, (ii)
     indebtedness secured by any mortgage, pledge, lien, charge, encumbrance or
     any security interest existing on property owned by such person, (iii) the
     reimbursement obligations, contingent or otherwise, in connection with any
     letters of credit actually issued or amounts representing the balance
     deferred and unpaid of the purchase price of any property except any such
     balance that constitutes an accrued expense or trade payable or (iv) any
     lease of property by such person as lessee which is reflected on such
     person's consolidated balance sheet as a capitalized lease in accordance
     with GAAP; in the case of items of indebtedness under (i) through (iii)
     above to the extent that any such items (other than letters of credit)
     would appear as a liability on such person's consolidated balance sheet in
     accordance with GAAP, and also includes, to the extent not otherwise
     included, any obligation by such person to be liable for, or to pay, as
     obligor, guarantor or otherwise (other than for purposes of collection in
     the ordinary course of business), indebtedness of another person (other
     than such person and its Subsidiaries) (it being understood that "Debt"
     shall be deemed to be incurred by the Company and its Subsidiaries on a
     consolidated basis whenever the Company and its Subsidiaries on a
     consolidated basis
 
                                       C-2
<PAGE>   24
 
     shall create, assume, guarantee or otherwise become liable in respect
     thereof; Debt of a Subsidiary of the Company existing prior to the time it
     became a Subsidiary of the Company shall be deemed to be incurred upon such
     Subsidiary's becoming a Subsidiary of the Company, and Debt of a person
     existing prior to a merger or consolidation of such person with the Company
     or any Subsidiary of the Company in which such person is the successor of
     the Company or such Subsidiary shall be deemed to be incurred upon the
     consummation of such merger or consolidation); provided, however, that the
     term Debt shall not include any such indebtedness that has been the subject
     of an "in substance" defeasance in accordance with GAAP.
 
          "GAAP" means generally accepted accounting principles consistently
     applied.
 
          "Secured Debt" means, without duplication, Debt secured by any
     mortgage, trust deed, deed of trust, deed to secure Debt, security
     agreement, pledge, conditional sale or other title retention agreement,
     capitalized lease, or other like agreement granting or conveying security
     title to or a security interest in real property or other tangible assets.
     Secured Debt shall be deemed to be incurred (i) on the date the Company or
     any Subsidiary creates, assumes, guarantees or otherwise becomes liable in
     respect thereof if it is secured in the manner described in the preceding
     sentence on such date or (ii) on the date the Company or any Subsidiary
     first secures such Debt in the manner described in the preceding sentence
     if such Debt was not so secured on the date it was incurred.
 
          "Significant Subsidiary" means any Subsidiary which is a "significant
     subsidiary" (as defined in Article 1, Rule 1-02 of Regulation S-X,
     promulgated under the Securities Act of 1933, as amended) of the Company.
 
          "Subsidiary" means (i) a corporation, partnership, limited liability
     company, trust, real estate investment trust or other entity 50% or more of
     the voting power of the voting equity securities of which are owned,
     directly or indirectly, by the Company or by one or more Subsidiaries of
     the Company, (ii) a partnership, limited liability company, trust, real
     estate investment trust, or other entity not treated as a corporation for
     federal income tax purposes 50% or more of the value of the equity
     interests of which are owned, directly or indirectly, by the Company or by
     one or more other Subsidiaries of the Company and (iii) one or more
     corporations which, either individually or in the aggregate, would be
     Significant Subsidiaries (as defined above, except that the investment,
     asset and equity thresholds for purposes of this definition shall be 5%),
     50% or more of the value of the equity interests of which are owned,
     directly or indirectly, by the Company or by one or more Subsidiaries.
 
          "Total Assets" as of any date means the sum of (i) Undepreciated Real
     Estate Assets and (ii) all other assets of the Company and its Subsidiaries
     on a consolidated basis determined in accordance with GAAP (but excluding
     intangibles and accounts receivable).
 
          "Total Unencumbered Assets" as of any date means the sum of (i) those
     Undepreciated Real Estate Assets not securing any portion of Secured Debt
     and (ii) all other assets of the Company and its Subsidiaries on a
     consolidated basis not securing any portion of Secured Debt determined in
     accordance with GAAP (but excluding intangibles and accounts receivable).
 
          "Undepreciated Real Estate Assets" as of any date means the cost
     (original cost plus capital improvements) of real estate assets of the
     Company and its Subsidiaries on such date, before depreciation and
     amortization, determined on a consolidated basis in accordance with GAAP.
 
          "Unsecured Debt" means Debt of the Company or any Subsidiary that is
     not Secured Debt.
 
                                       C-3
<PAGE>   25
 
                                   EXHIBIT D
 
                    PROPOSED FORMATION OF CASINO PARTNERSHIP
                          AND RELATED RIGHTS OFFERING
 
     Following the completion of the merger (the "Merger") of Station Casinos,
Inc. ("Station") with and into the Company, the Company intends to contribute
substantially all of the real estate assets acquired from Station to a new
partnership (the "Casino Partnership") that will invest principally in casinos,
other gaming properties and other real estate properties in Las Vegas, Nevada.
The Company initially would own all of the Casino Partnership, but expects to
offer holders of its Common Shares and holders of units in the Operating
Partnership rights to acquire common or preferred equity interests in the Casino
Partnership, or in a real estate investment trust which would hold interests in
the Casino Partnership. The record date for any such offering would follow the
closing of the Merger. It is expected that any proceeds raised through such an
offering would be used to prepay indebtedness assumed in connection with the
Merger or to fund new acquisitions or developments. At this time, the terms of
any such offering and the type of securities that may be offered have not been
determined. Each of the proposed transactions is contingent upon the completion
of the Merger.
 
                                       D-1