UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

For the fiscal year ended December 31, 2005
                          -----------------

                                       OR

[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from               to               .
                               -------------    --------------


                          Commission File Number 1-9496

                        BNP RESIDENTIAL PROPERTIES, INC.
             (Exact name of registrant as specified in its charter)

              Maryland                      56-1574675
     -------------------------------        -----------------------------------
     (State or other jurisdiction of        (I.R.S. Employer Identification No.)
      incorporation or organization)

301 S. College St., Suite 3850,  Charlotte, NC                28202-6024
------------------------------------------------              ----------
    (Address of principal executive offices)                  (Zip Code)

Registrant's telephone number, including area code  704/944-0100
                                                    ------------

Securities registered pursuant to Section 12(b) of the Act:

                                                  Name of each exchange
       Title of each class                         on which registered:
--------------------------------------           -----------------------
Common Stock, par value $.01 per share           American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.                          _ Yes  X No

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer:

Large accelerated filer _       Accelerated filer X      Non-accelerated filer _

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

                                                Index to exhibits at page 103


<PAGE>

The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of June
30, 2005 (the last business day of the registrant's most recently completed
second fiscal quarter) was approximately $145.2 million.

The number of shares of the registrant's common stock outstanding on February
28, 2006 (the latest practicable date) was 10,402,448.

<PAGE>






                        BNP RESIDENTIAL PROPERTIES, INC.
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>

      Item No.                                      FINANCIAL INFORMATION                                   Page No.
       <S>             <C>                                                                                      <C>
                        Caution Regarding Forward-Looking Statements                                               4

                        PART I
          1             Business                                                                                   5
          1A            Risk Factors                                                                               7
          1B            Unresolved Staff Comments                                                                 14
          2             Properties                                                                                14
          3             Legal Proceedings                                                                         20
          4             Submission of Matters to a Vote of Security Holders                                       20

                        PART II
          5             Market for Registrant's Common Equity, Related Stockholder Matters and Issuer             20
                             Purchases of Equity Securities
          6             Selected Financial Data                                                                   21
          7             Management's Discussion and Analysis of Financial Condition and Results of                25
                             Operations
          7A            Quantitative and Qualitative Disclosures About Market Risk                                46
          8             Financial Statements and Supplementary Data                                               47
          9             Changes in and Disagreements With Accountants on Accounting and Financial                 47
                             Disclosure
          9A            Controls and Procedures                                                                   48
          9B            Other Information                                                                         50

                        PART III
         10             Directors and Executive Officers of the Registrant                                        50
         11             Executive Compensation                                                                    53
         12             Security Ownership of Certain Beneficial Owners and Management and Related                56
                             Stockholder Matters
         13             Certain Relationships and Related Transactions                                            57
         14             Principal Accounting Fees and Services                                                    58

                        PART IV
         15             Exhibits, Financial Statement Schedules                                                   59

                        Signatures                                                                                62

</TABLE>
<PAGE>


                  CAUTION REGARDING FORWARD-LOOKING STATEMENTS

         This Annual Report contains forward-looking statements. You can
identify such statements by the use of forward-looking terminology, such as
"may," "will," "expect," "anticipate," "estimate," "continue" or other similar
words. These statements discuss future expectations, contain projections of
results of operations or of financial condition or state other "forward-looking"
information.

         Although we believe that our plans, intentions and expectations
reflected in or suggested by these forward-looking statements are reasonable, we
cannot assure you that we will achieve our plans, intentions or expectations.
When you consider such forward-looking statements, you should keep in mind the
following important factors that could cause our actual results to differ
materially from those contained in any forward-looking statement:

     o    our markets could suffer  unexpected  increases in the  development of
          apartments or other rental or competitive housing alternatives;
     o    our markets could suffer unexpected  declines in economic growth or an
          increase in unemployment rates;
     o    general economic  conditions could cause the financial  condition of a
          large number of our tenants to deteriorate;
     o    we may be  unable to lease or  re-lease  apartments  quickly  or on as
          favorable terms as under existing leases;
     o    a decline in revenues  from, or a sale of, our  restaurant  properties
          could  adversely  affect  our  financial   condition  and  results  of
          operations;
     o    we may have incorrectly  assessed the  environmental  condition of our
          properties;
     o    an unexpected  increase in interest rates could cause our debt service
          costs to exceed our expectations;
     o    we may be  unable  to meet our  long-term  liquidity  requirements  on
          favorable terms; and
     o    we could lose key executive officers.

         Given these uncertainties, we caution you not to place undue reliance
on forward-looking statements. We undertake no obligation to revise these
forward-looking statements if future events or circumstances render them
inaccurate.


                                       4
<PAGE>


                                     PART I

ITEM 1.  BUSINESS

Company Profile

         BNP Residential Properties, Inc. is a self-administered and
self-managed real estate investment trust ("REIT") with operations in North
Carolina, South Carolina and Virginia. Our primary activity is the ownership and
operation of apartment communities. We currently own and manage 30 apartment
communities containing 7,946 apartment units. We also serve as general partner
of limited partnerships that own three properties with 713 apartment units,
which we also manage. In addition to our apartment communities, we own 40
properties that we lease on a triple-net basis to a restaurant operator under a
master lease.

         BNP Residential Properties, Inc. is structured as an UpREIT, or
"umbrella partnership real estate investment trust." We are the sole general
partner and own a controlling interest in BNP Residential Properties Limited
Partnership, through which we conduct all of our operations. We refer to this
partnership as the operating partnership. We refer to the limited partners of
the operating partnership as "minority common unitholders" or "minority
interest." We currently own 80% of the outstanding operating partnership common
units.

         As of February 28, 2006, we have 10,402,448 shares of common stock
outstanding. We have 1,230 shareholders of record, and we estimate that there
are approximately 2,900 beneficial owners of our common stock. Our shares are
listed on the American Stock Exchange, trading under the symbol "BNP." The
operating partnership has an additional 2,534,619 operating partnership minority
common units outstanding.

         We have 240 employees, including management, accounting, legal,
acquisitions, development, property management, leasing, maintenance and
administrative personnel. Our executive offices are located at 301 South College
Street, Suite 3850, Charlotte, North Carolina 28202-6024, and our telephone
number is 704/944-0100.

         In addition to this Annual Report, we file quarterly and special
reports, proxy statements and other information with the SEC. All documents that
we file with the SEC are available free of charge on our corporate website,
which is www.bnp-residential.com. You may also read and copy any document that
we file at the public reference facilities of the SEC at 450 Fifth Street NW,
Washington, D.C. 20549. Please call the SEC at (800) SEC-0330 for further
information about the public reference facilities. These documents also may be
accessed through the SEC's electronic data gathering, analysis and retrieval
system ("EDGAR") via electronic means, including the SEC's home page on the
Internet (http://www.sec.gov). In addition, since some of our securities are
listed on the American Stock Exchange, you can read our SEC filings at the
offices of the American Stock Exchange, 86 Trinity Place, New York, New York
10006.

History and Development of BNP Residential Properties, Inc.

         The company was originally incorporated in the state of Delaware in
1987. Beginning in 1987, we elected to be taxed as a REIT under the Internal
Revenue Code. As such, we generally are not, and will not be, subject to federal
or state income taxes on net income. As a REIT, we are subject to a number of
organizational and operational requirements, including a requirement that we
currently distribute at least 90% of our REIT taxable income as dividends.

         In 1987, we purchased 47 existing restaurant properties located in
North Carolina and Virginia for an aggregate purchase price of $43.2 million.
From 1987 through 1992, our assets consisted primarily of these 47 restaurant
properties. During this period we operated as an externally administered and

                                       5
<PAGE>

externally managed REIT. We leased the restaurants on a triple-net basis to
Boddie-Noell Enterprises, Inc., a restaurant operator, under a master lease. A
master lease is a single lease that covers multiple properties, while a
triple-net lease is one where the lessee pays all operating expenses,
maintenance, property insurance and real estate taxes.

         In 1993, we began to change our focus from restaurant properties to
apartment communities, with the objective of increasing funds from operations
and enhancing shareholder value. In 1994 we acquired BT Venture Corporation, an
integrated real estate company specializing in the management, development and
acquisition of apartment properties, and we began operating as a
self-administered and self-managed REIT.

         In 1997, we reincorporated in the state of Maryland and reorganized to
our present UpREIT structure. Through our UpREIT structure, we can acquire
properties in exchange for operating partnership units and trigger no immediate
tax obligation for certain sellers. We believe that our conversion to an UpREIT
enables us to acquire properties not otherwise available or at lower prices
because of the tax advantages to certain property sellers of receiving limited
partnership interests instead of cash as consideration. Minority unitholders
will generally be able to redeem their units for cash or, at our option as
general partner, for shares of common stock of the company on a one-for-one
basis. Distributions of cash from the operating partnership are allocated
between the REIT and the minority unitholders based on their respective unit
ownership.

         In December 2001, our Board of Directors authorized the issuance of
Series B Cumulative Convertible Preferred Stock. Between 2001 and 2003, we
issued a total of 909,090 shares of this preferred stock for proceeds of $10
million. During 2004, we raised $30 million of new equity through the issuance
of 2.6 million shares of common stock to a number of institutional investors and
mutual funds.

         From 1993 through 2004, we acquired 26 apartment properties through a
combination of cash purchases, assumption of long-term debt, and issuance of
operating partnership units. In several cases, we combined two properties to
operate as single apartment communities.

         To date we have sold seven restaurant properties to Boddie-Noell
Enterprises, the lessee, under an agreement that allowed the lessee to close up
to seven restaurants and buy them back for no less than net carrying value.

Recent Developments

         In January 2005, we acquired Boddie Investment Company through a
merger. As a result of this acquisition, we have assumed the role of general
partner and acquired certain economic interests in three limited partnerships (a
50% interest in Marina Shores Associates One, Limited Partnership, 1% interest
in The Villages of Chapel Hill Limited Partnership, and 1% interest in The
Villages of Chapel Hill - Phase 5 Limited Partnership). Prior to this
acquisition, we managed the apartment communities owned by these partnerships on
a contract basis; we will continue to manage these properties. We now include
these limited partnerships in our consolidated financial statements.

         During 2005, we continued to add to and improve our portfolio of
apartment properties with eight acquisitions. We made four of these acquisitions
through issuance of operating partnership units, and another four acquisitions
through direct purchases. Also during 2005 and for the first time in our
history, we sold one apartment community.

         In November 2005, the company redeemed all 909,090 shares of our Series
B Cumulative Convertible Preferred Stock on a one-for-one basis through issuance
of 909,090 shares of our common stock.

                                       6
<PAGE>

Business Strategy

         Our principal investment objective is to provide our shareholders with
a combination of current income and long-term appreciation in the value of the
company's common stock. We focus on increasing long-term growth in funds from
operations and funds available for distribution per share, and on increasing the
value of our portfolio through effective management, growth, financing and
investment strategies. We expect to implement our strategies primarily through
the acquisition, operation, leasing and management of apartment communities.

         We seek to acquire apartment properties in the southeastern United
States. We focus on markets that exhibit substantial economic growth and an
expanding job base that provide opportunities for us to quickly build a
significant market presence. Through our UpREIT structure, we have the ability
to acquire apartment communities by issuing operating partnership units in
tax-deferred exchanges with owners of such properties. We expect that we will
finance future acquisitions of apartment communities with operating partnership
units as well as loans and funds from additional offerings of common stock,
preferred stock or joint venture arrangements.

         We will selectively consider opportunities to add additional units to
existing communities, to acquire and rehabilitate older apartment communities,
and to develop new apartment communities. Members of our management team have
directed over $116 million of development or redevelopment projects, including
15 apartment communities containing over 2,900 apartment units. This development
and redevelopment experience will enable us to build additional apartment
communities and to rehabilitate existing communities when economic conditions
and available capital make such opportunities attractive.

         We strongly emphasize on-site property management. We seek
opportunities and have developed internal programs to increase average occupancy
rates, reduce resident turnover, raise rents and control costs. On-site
community managers report directly to regional managers who are locally based.
This flat organization provides for efficient staffing levels, reduces overhead
expenses, and enables us to respond to the needs of residents and on-site
employees. In an effort to reduce long-term operating costs, we regularly review
each apartment community and promptly attend to maintenance and recurring
capital needs. Our employees supervise all renovation and repair activities,
which are generally completed by outside contractors.

         We continue to seek additional sources of revenue at our existing
apartment communities. These include water submetering and marketing of cable
television, high-speed Internet service and telephone services.

ITEM 1A.  RISK FACTORS

       An investment in our securities involves various risks, including those
described below. You should consider carefully these risk factors together with
all of the other information included in this Annual Report before deciding to
purchase or sell our securities.

       Some of the information in this discussion of risk factors may contain
forward-looking statements. Please review our Caution Regarding Forward-Looking
Statements at the beginning of this Annual Report. When considering such
forward-looking statements, you should keep in mind the risk factors and other
cautionary statements in this Annual Report. The risk factors noted in this
section and other factors noted throughout this Annual Report, including certain
risks and uncertainties, could cause our actual results to differ materially
from those contained in any forward-looking statement.

                                       7
<PAGE>

Geographic  concentration  of our  properties  makes our business  vulnerable to
economic downturns in North Carolina, South Carolina or Virginia.

       All of our properties are located in North Carolina, South Carolina and
Virginia. Adverse economic developments in these states could adversely impact
the operations of our properties and therefore our profitability. The
concentration of properties in a limited number of markets may expose us to
risks of adverse economic developments that are greater than the risks of owning
properties in many markets. Our revenues and the value of our properties may be
affected by a number of factors, including the local economic climate (which may
be adversely impacted by business layoffs, downsizing or industry slow downs),
changing demographics and other factors.

Our apartment communities are subject to multiple operating risks.

         Our apartment communities are subject to operating risks common to
apartment communities in general. Such risks include:

          o    competition from other apartment communities;

          o    alternative housing, including home ownership, especially during
               times of low mortgage interest rates;

          o    new construction of comparable properties or adverse economic
               conditions in the areas in which our apartment communities are
               located, either of which might adversely affect apartment
               occupancy or rental rates;

          o    increases in operating costs (including insurance and real estate
               taxes), which may not necessarily be offset by increased rents;
               and

          o    the inability or unwillingness of residents to pay rent
               increases.

         The local rental market may limit the extent to which we may increase
rents in response to operating expense increases without decreasing occupancy
rates. Any of the above events could adversely affect our ability to make
distributions.

A decline in  revenues  from,  or a sale of,  our  restaurant  properties  could
adversely affect our financial condition and results of operations.

       We own 40 restaurant properties that we lease on a triple-net basis to
Boddie-Noell Enterprises, Inc. The master lease for our restaurant properties
requires Boddie-Noell Enterprises to pay us annual rent equal to the greater of
a specified minimum rent or 9.875% of food sales. If Boddie-Noell Enterprises
renews the master lease, after December 2007, it has the right to terminate the
lease on up to five restaurants per year by offering to purchase them under
specified terms.

       The original lease was for 47 restaurant properties. Since 1999, we have
sold seven restaurant properties deemed non-economic to Boddie-Noell Enterprises
under an agreement that allowed the lessee to close up to seven restaurants and
buy them back for no less than net carrying value. As a result of these sales,
we received total proceeds of $4.4 million, which equaled the net carrying value
of the properties.

       Of the 40 restaurant properties we currently own, 39 are operated as
Hardee's and one is operated as a B-B-Q & Ribs. The minimum rent on the 40
restaurants is $3.8 million per year.

       As a result of favorable sales, our restaurant rental income peaked in
1992 at $5.3 million, which was substantially above the then-current minimum
rent. However, from 1992 through 2002, restaurant sales declined each year. In
2003, Hardee's, the concept at the majority of our restaurant properties,


                                       8
<PAGE>

introduced the "Thick-Burger" product line and began seeing significant sales
increases; and same-store sales at our restaurant properties increased by 2.4%.
These increases continued into 2004, with same-store sales for 2004 improving by
8.5% over 2003 levels; however, in 2005 same-store sales declined by 5.9%
compared to 2004. Even with the recent same-store sales increases, from 1996
through 2005 the revenues of our restaurant properties were below the level
requiring payments in excess of the minimum rent. For us to receive percentage
rent in 2006, same-store sales would have to increase by 7.1% from 2005 levels.
Given the current state of flux in the fast-food industry, we are uncomfortable
making a prediction or relying on the forecasts of others as to future sales
trends for our restaurant properties. For this reason, we have based our plans
and expectations on continuing to receive the minimum rent in 2006.

         In order to protect our stockholders from declining restaurant revenues
from 1992 through 2002, we began to acquire apartment communities in 1993. We
believe that we can more effectively enhance the value of our common stock by
acquiring and operating apartment communities. Accordingly, we focused our
business primarily on the ownership and operation of apartment communities.

         As a consequence of this refocused strategy, we may elect to sell our
restaurant properties and reinvest the proceeds in additional apartment
communities. No sale of the restaurants is pending, nor are we actively
marketing the restaurants. We will only divest the restaurants if we believe
doing so will enhance stockholder value.

         If we do dispose of the restaurant properties, it is possible that we
may incur a loss on the disposition of the properties. It is also possible that
we may invest such sale proceeds in properties that yield significantly less
than the $3.8 million we currently receive from Boddie-Noell Enterprises.

         Further, in the event we were to find a buyer, Boddie-Noell Enterprises
has the right to purchase the restaurants from us on the same terms as that
offer. This right may make it more difficult to find a suitable buyer or could
adversely affect the price we might realize on any such sale.

         For the year ended December 31, 2005, the restaurant properties
accounted for 5.3% of our total revenues. All of the restaurant property revenue
comes from Boddie-Noell Enterprises. The inability of Boddie-Noell Enterprises
to pay us rent would adversely affect funds from operations and funds available
for distribution.

Boddie-Noell  Enterprises,  Inc.,  our  restaurant  operator,  may not renew the
restaurant lease at the expiration of its initial term.

         We lease our 40 restaurant properties to Boddie-Noell Enterprises, Inc.
under a master lease that provides for annual rent equal to the greater of a
specified minimum rent, currently $3.8 million per year, or 9.875% of food
sales. The initial term of this lease expires on December 31, 2007. Boddie-Noell
Enterprises, at its sole option, has the right to renew the master lease for up
to three five-year periods. Under the lease, Boddie-Noell Enterprises is
required to give us notice of its intention to terminate at least 180 days prior
to the expiration of the initial term; otherwise, the lease will automatically
renew.

         There is no assurance that Boddie-Noell Enterprises will renew the
master lease. In the event Boddie-Noell Enterprises elects to terminate the
lease, we would cease to receive rental payments from Boddie-Noell Enterprises
and would be forced to seek alternative tenants for the properties, find
alternate uses for the properties, or sell the properties.

         In the event Boddie-Noell Enterprises does not renew the lease, there
is no assurance that we will be able to fully replace the $3.8 million in
revenue that we currently receive from Boddie-Noell Enterprises.

                                       9
<PAGE>

We have substantial debt obligations, which may reduce our operating performance
and adversely affect our ability to pay distributions.

         At December 31, 2005, on a consolidated basis, we had $436.7 million in
long-term debt, of which $388.6 million is related to properties owned in fee by
BNP Residential Properties and $48.1 million is related to properties in which
we have a partial ownership interest. Payments of principal and interest on
borrowings may leave us with insufficient cash resources to operate the
apartment communities or to pay the distributions we must pay to maintain our
qualification as a REIT. Further, a high debt level creates an increased risk
that we may default on our obligations. If we default, the banks that lent us
funds could foreclose on the properties securing their loans.

Because we have a  substantial  amount of debt that bears  interest  at variable
rates, increases in interest rates would reduce our net income.

       At December 31, 2005, we had $53.7 million in long-term debt at variable
interest rates. In addition, we may incur additional debt in the future that
also bears interest at variable rates. Variable-rate debt creates higher debt
service requirements if market interest rates increase. Such an increase would
adversely affect our cash flow and the amounts available to pay dividends.

If our debt cannot be paid, refinanced or extended at maturity, in addition to
our failure to repay our debt, we may not be able to make distributions to
stockholders at expected levels or at all.

         We may obtain financing with "due-on-encumbrance" or "due-on-sale"
clauses in which future refinancing or property sales could cause the maturity
dates of the mortgages to accelerate and the financing to become due
immediately. Thus, we could be required to sell properties on an all-cash basis,
or the purchaser might be required to obtain new financing in connection with a
sale. Alternatively or additionally, we may obtain mortgages that have balloon
payments. Such mortgages involve greater risks than mortgages with principal
amounts amortized over the term of the loan since our ability to repay the
outstanding principal amount at maturity may depend on obtaining adequate
refinancing or selling the property. The efficacy of either option would depend
on economic conditions in general and the value of the underlying properties in
particular. We cannot guarantee that we could refinance or repay any such
mortgages at maturity. Further, a significant decline in the value of the
underlying property could result in a loss of the property through foreclosure.

We may be  liable  for  environmental  contamination  for  which  we do not have
insurance  and which  might  have a  material  adverse  effect on our  financial
condition and results of operations.

         Various federal, state and local laws subject property owners or
operators to liability for the costs of removal or remediation of certain
hazardous substances released on a property. Such laws often impose liability
without regard to whether the owner or operator knew of, or was responsible for,
the release of the hazardous substances. The presence of, or the failure to
remediate properly, hazardous substances may adversely affect occupancy of any
contaminated apartment communities, the ability of Boddie-Noell Enterprises to
operate restaurants and our ability to sell or borrow against contaminated
properties. In addition to the costs associated with investigation and
remediation actions brought by governmental agencies, the presence of hazardous
wastes on a property could result in personal injury or similar claims by
private plaintiffs.

         Various laws also impose, on persons who arrange for the disposal or
treatment of hazardous or toxic substances, liability for the cost of removal or
remediation of hazardous substances at the disposal or treatment facility. These
laws often impose liability whether or not the person arranging for the disposal
ever owned or operated the disposal facility.

         Boddie-Noell Enterprises has agreed to pay for the costs of complying
with applicable environmental laws, ordinances and regulations on the restaurant
properties. However, the obligation to

                                       10
<PAGE>


pay for such  costs  with  respect  to our  other  properties,  or  Boddie-Noell
Enterprises' inability to pay for such costs on the restaurant  properties,  may
adversely affect our operating costs and the value of our properties.

         Phase I environmental site assessments have been obtained on all of our
owned apartment communities. The purpose of Phase I environmental site
assessments is to identify potential sources of contamination for which an owner
may be responsible and to assess the status of environmental regulatory
compliance. All of the restaurant properties were subjected to transaction
screens in December 1995. A transaction screen involves a review of a property
for the purpose of recommending whether we should perform a Phase I
environmental site assessment. A transaction screen is significantly less
thorough in scope than a Phase I environmental site assessment.

         Neither the transaction screens nor the environmental site assessments
revealed any environmental condition, liability or compliance concern that we
believe would have a material adverse affect on our business, assets or results
of operations. Nor are we aware of any such condition, liability or concern by
any other means. However, it is possible that the transaction screens and the
environmental site assessments relating to any one of the properties did not
reveal all environmental conditions, liabilities, or compliance concerns. It is
also possible that there are material environmental conditions, liabilities or
compliance concerns that arose at a property after the related review was
completed.

Unexpected costs associated with compliance with the Americans with Disabilities
Act and other laws would impair our operating performance.

         Under the Americans with Disabilities Act of 1990 (the "ADA"), all
public accommodations and commercial facilities must meet certain federal
requirements related to access and use by disabled persons. Compliance with the
ADA requirements could require removal of access barriers. Additional federal,
state and local laws exist that are related to access by disabled persons. These
laws also may require modifications to our properties or restrict renovations of
our properties. For example, the Fair Housing Amendments Act of 1988 (the
"FHAA") requires apartment communities first occupied after March 13, 1991 to be
designed and constructed so as to be accessible to the handicapped.
Non-compliance with the ADA, FHAA and similar laws could result in the
imposition of fines or an award of damages to private litigants.

         Boddie-Noell Enterprises is financially responsible for upgrading the
restaurant properties should such properties not be in compliance with the ADA.
However, in the event Boddie-Noell Enterprises fails to upgrade properly the
restaurants and there is a determination that the restaurant properties are not
in compliance with the ADA, we could still face the imposition of fines or an
award of damages to private litigants. If we were required to make unanticipated
expenditures to comply with the ADA or other laws, our cash flow and the amounts
available for distributions to you may be adversely affected.

         The Federal Fair Housing Act and state fair housing laws prohibit
discrimination on the basis of certain protected classes. We have a policy
against these kinds of discriminatory behaviors and train our employees to avoid
discrimination and the appearance of discrimination. We cannot assure you that
an employee will not violate our policy against discrimination and violate the
fair housing laws. Such a violation could subject us to legal action and awards
of damages.

Because  most of our  directors  have  personal  interests  that could  create a
conflict with the interests of our stockholders,  we may make decisions that are
not in your best interest.

         Of our six directors, four have personal interests that could create a
conflict between what is in the best interest of our security holders and what
is in the best interest of each such director.

          o    Messrs. Payne and Wilkerson are executive officers of the
               company;
          o    Messrs. Chrysson and Gilley own significant stakes in the
               operating partnership.

                                       11
<PAGE>

         Such conflicts of interests could influence board members to take
action that is not in the best interest of our security holders.

If we do not qualify as a REIT, we will be subject to tax as a regular
corporation and face substantial tax liability.

         Beginning with our taxable year ended December 31, 1987, we have
elected to be taxed as a REIT under Sections 856 through 860 of the Internal
Revenue Code. We believe that beginning with that taxable year we have been
organized and have operated in a manner that enables us to qualify for taxation
as a REIT, and we intend to continue to operate in such a manner. We can provide
no assurance, however, that we have operated or will operate in a manner so as
to qualify or remain qualified as a REIT. We have not requested, and do not plan
to request, a ruling from the Internal Revenue Service that we qualify as a
REIT.

         If we fail to qualify as a REIT, we would not be allowed a deduction
for distributions to stockholders in computing our taxable income and would be
subject to federal income tax at regular corporate rates. We also could be
subject to the federal alternative minimum tax. Unless we are entitled to relief
under specific statutory provisions, we could not elect to be taxed as a REIT
for four taxable years following the year during which we were disqualified.
Therefore, if we lose our REIT status, the funds available for distribution to
you would be reduced substantially for each of the years involved.

         At any time, the federal income tax laws governing REITs or the
administrative interpretations of those laws may be amended. Any of those new
laws or interpretations may take effect retroactively and could adversely affect
us or you as a shareholder.

Complying with REIT  requirements  may cause us to forego  otherwise  attractive
opportunities.

         As a REIT, we are subject to annual distribution requirements,
including a requirement that we currently distribute at least 90% of our "REIT
taxable income" to our common shareholders. These requirements limit the amount
of cash we have available for other business purposes, including amounts to fund
our growth.

         We expect that our cash flow will exceed our REIT taxable income, due
to the allowance for depreciation and other non-cash charges in computing REIT
taxable income. We anticipate that we generally will have sufficient cash or
liquid assets to enable us to satisfy the distribution requirement. It is
possible, however, that we may not have sufficient cash or other liquid assets
to meet the 90% distribution requirement or to distribute such greater amount as
may be necessary to avoid income and excise taxation. In such event, we may find
it necessary to borrow funds to pay the required distribution or, if possible,
pay taxable stock dividends in order to meet the distribution requirement or
avoid such income or excise taxation.

Even if we remain  qualified as a REIT, we may face other tax  liabilities  that
reduce our cash flow.

         Even if we qualify as a REIT, we and our subsidiaries will be subject
to certain federal, state and local taxes on our income and property that could
reduce operating cash flow.

Our charter does not permit  ownership  in excess of 9.8% of our capital  stock,
and  attempts to acquire our capital  stock in excess of the 9.8% limit are void
without prior approval from our board of directors.

         Our charter limits ownership of our capital stock by any single
stockholder to 9.8% of the outstanding shares. The charter also prohibits anyone
from buying shares if the purchase would cause us to lose our REIT status. This
could happen if a share transaction results in fewer than 100 persons owning

                                       12
<PAGE>

all of our shares or five or fewer persons,  applying certain broad  attribution
rules of the Internal Revenue Code,  owning 50% or more of our shares. If you or
anyone else acquires  shares in excess of the ownership limit or in violation of
the ownership requirements of the Internal Revenue Code for REITs, we:

     o    will consider the transfer to be null and void;

     o    will not reflect the transaction on our books;

     o    may institute legal action to enjoin the transaction;

     o    will not pay  dividends or other  distributions  with respect to those
          shares;

     o    will not recognize any voting rights for those shares;

     o    will consider the shares held in trust for the benefit of the company;
          and

     o    will  either  direct the  affected  person to sell the shares and turn
          over any profit to us, or we will redeem the shares.  If we redeem the
          shares, it will be at a price equal to the lesser of:

               (a)  the price paid by the transferee of the shares or

               (b)  the average  of  the  last  reported  sales  prices  on the
                    American Stock  Exchange on the 10 trading days  immediately
                    preceding  the date  fixed  for  redemption  by our board of
                    directors.

An individual who acquires shares that violate the above rules bears the risk
that (1) he may lose control over the power to dispose of the shares, (2) he may
not recognize profit from the sale of such shares if the market price of the
shares increases and (3) he may be required to recognize a loss from the sale of
such shares if the market price decreases.

Because  provisions  contained  in  Maryland  law  and our  governing  documents
discourage hostile takeover attempts,  investors may be prevented from receiving
a "control premium" for their shares.

         Provisions contained in our charter and bylaws, as well as Maryland
general corporation law and the partnership agreement of the operating
partnership, discourage hostile takeovers, which may prevent stockholders from
receiving a "control premium" for their shares. These provisions include the
following:

     o    Ownership Limit. The 9.8% ownership limit discussed above may have the
          effect of  precluding  acquisition  of control of us by a third  party
          without the consent of our board of directors.

     o    Required   Consent  of  the  Operating   Partnership  for  Significant
          Corporate Action. A provision in the operating  partnership  agreement
          prohibits us from engaging in certain  transactions  that could result
          in a change of  control  without  the  approval  of the  holders  of a
          majority of the outstanding units,  including units that we own. While
          we expect  that we will  always  hold a  majority  of the  outstanding
          units, we cannot  guarantee that this will be the case. If we ever own
          less than a majority of the outstanding units, this voting requirement
          might limit the possibility for an acquisition or change in control of
          the company, even if such acquisition or change in control would be in
          your (the stockholders')  best interests.  As of December 31, 2005, we
          owned 80% of the operating partnership common units.

     o    Anti-Takeover  Protections  of Operating  Partnership  Agreement.  The
          operating   partnership  agreement  contains  provisions  relating  to
          limited partners' redemption rights in the event of certain changes of
          control  of the  company.  These  provisions  require an  acquiror  to
          maintain the


                                       13
<PAGE>

          operating partnership structure and to maintain a limited
          partner's  right to  continue  to hold  units with  future  redemption
          rights.  Such provision  could have the effect of discouraging a third
          party from making an acquisition proposal,  even if such proposal were
          in our stockholders' best interests.

     o    Poison  Pill.  We  adopted a  preferred  share  purchase  rights  plan
          (sometimes  referred to as a "poison  pill") in March  1999.  The plan
          involves  the  issuance  of  preferred  share  purchase  rights to all
          stockholders.  The rights  entitle  stockholders  to purchase  capital
          stock at a discount if a person or group  purchases  or makes a tender
          offer for 15% or more of our common stock.  Our board of directors may
          redeem the rights at $.01 per right  until the  acquisition  of 15% or
          more of our  common  stock by a person or group.  The  purpose  of the
          poison pill is to ensure that any  potential  purchaser of the company
          must negotiate with our board before an  acquisition.  The poison pill
          may discourage offers for the company, even those in the best interest
          of the stockholders.

     o    Maryland's  Unsolicited  Takeovers Act. In 1999, the State of Maryland
          enacted  legislation that enhances the power of Maryland  corporations
          to protect themselves from unsolicited takeovers.  Among other things,
          the legislation permits our board,  without stockholder  approval,  to
          amend our charter to:

               o    stagger our board of directors into three classes;
               o    provide that only remaining  directors may fill a vacancy on
                    the board;
               o    provide  that only the board can fix the size of the  board;
                    and
               o    require that special stockholder meetings may only be called
                    by holders of a majority of the voting shares entitled to be
                    cast at the meeting.

If we lose any of our executive officers, our operating performance could
suffer.

         We are dependent on the efforts of our executive officers, particularly
Philip S. Payne, D. Scott Wilkerson, Pamela B. Bruno and Eric S. Rohm. While we
believe that we could find replacements for these key personnel, if necessary,
the loss of their services could have an adverse effect on our operations.
Messrs. Payne, Wilkerson and Rohm and Ms. Bruno have entered into employment
contracts with us.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

         None.

ITEM 2.  PROPERTIES

Apartment Communities

         Through the operating partnership, we own and operate 30 apartment
communities consisting of 7,946 apartment units. We also serve as general
partner of limited partnerships that own three apartment properties with 713
apartment units, which we also manage. For the fourth quarter of 2005, our
average economic occupancy rate was 94.1%, and our average monthly revenue per
occupied unit was $746. The average age of the apartment communities is 14
years. Our apartment communities are generally wood framed, two- and three-story
buildings, with exterior entrances, individually metered gas and electric
service, submetered water service, and individual heating and cooling systems.

         Our apartment units are comprised of 38% one-bedroom units, 54%
two-bedroom units, and 8% three-bedroom units. The units average 980 square feet
in area and are well equipped with modern appliances and other conveniences. Our
communities generally include swimming pools, tennis courts and clubrooms, and
most have exercise facilities.

                                       14
<PAGE>

         As of December 31, 2005, our total investment, on a historical cost
basis, in our 30 owned apartment communities was $509.8 million, and the net
carrying value of our 30 apartment communities was $442.4 million (an average of
$14.7 million per community). In addition, we include three apartment properties
owned by limited partnerships that we consolidate, with a cost basis of $49.8
million and net carrying value of $42.1 million. The apartment properties are
held subject to loans, discussed in the notes to the financial statements.

         The table at page 17 summarizes information about each of our apartment
communities.

Restaurant Properties

         We lease the restaurant properties on a triple-net basis to
Boddie-Noell Enterprises, Inc. under a master lease. The master lease, as
amended in 1995, has a primary term expiring in December 2007, but grants
Boddie-Noell Enterprises three five-year renewal options. Boddie-Noell
Enterprises pays annual rent equal to the greater of the specified minimum rent
or 9.875% of food sales from the restaurants. Under certain conditions, and
subject to our approval, Boddie-Noell Enterprises has the right to substitute
another restaurant property for a property covered by the lease. Assuming
renewal of the lease, after December 31, 2007, Enterprises has the right to
terminate the lease on up to five restaurant properties per year by offering to
purchase them under specified terms.

       The original lease was for 47 restaurant properties. Since 1999, we have
sold seven restaurant properties deemed non-economic to Boddie-Noell Enterprises
under an agreement that allowed the lessee to close up to seven restaurants and
buy them back for no less than net carrying value. As a result of these sales,
we received total proceeds of $4.4 million, which equaled the net carrying value
of the properties.

         The minimum rent on the remaining 40 restaurants is $3.8 million per
year.

         The average acquisition cost of the original 47 restaurant properties
was $920,000 per property. The net carrying value of the 40 restaurant
properties held at December 31, 2005, was $24.8 million (an average of $620,000
per property). The restaurant properties are held subject to a line of credit
loan, discussed in the notes to the financial statements.

         The restaurant properties are operated by Boddie-Noell Enterprises,
which is responsible for all aspects of the operation, maintenance and upkeep of
the properties. In addition, Boddie-Noell Enterprises is responsible for the
cost of any improvement, expansion, remodeling or replacement required to keep
the properties competitive or in conformity with applicable codes and standards.

         Thirty-nine of the restaurant properties are operated as Hardee's
restaurants pursuant to franchise agreements with Hardee's Food Systems, Inc.
One property is operated as a "B-B-Q & Ribs" restaurant. Boddie-Noell
Enterprises converted this property to the B-B-Q & Ribs concept in 2002 and paid
for the entire cost of the conversion, approximately $500,000. There is no
applicable franchise agreement for the converted restaurant, as Boddie-Noell
Enterprises owns the B-B-Q & Ribs concept.

         Each of the restaurant properties consists of a one-story brick, stucco
or wood building that embodies a contemporary style with substantial plate glass
areas. The buildings average 3,400 square feet and are located on sites
averaging 1.2 acres. The buildings are suitable for conversion to a number of
uses, but the exteriors would have to be substantially modified prior to their
use as restaurants of another concept or for non-restaurant applications.

         The locations of our restaurant properties are listed on page 19 of
this Annual Report.

                                       15
<PAGE>

Property Insurance

         We carry insurance coverage on our properties of types and in amounts
that we believe are in line with coverage customarily obtained by owners of
similar properties. In addition, properties that we manage but do not own are
covered by insurance policies under which we are a named insured. Our restaurant
properties are subject to an indemnification agreement whereby Boddie-Noell
Enterprises, the lessee, is responsible for all claims, including those relating
to environmental matters, arising from a restaurant property. Boddie-Noell
Enterprises is required to provide insurance, which identifies the company as a
named insured, on each restaurant property.

         We believe all of our properties are adequately insured, including
insurance for acts of terrorism at all of our apartment properties. There are
types of losses, however, such as from wars or catastrophic acts of nature, for
which we cannot obtain insurance at all or at a reasonable cost. In the event of
an uninsured loss or a loss in excess of our insurance limits, we could lose
both the revenues generated from the affected property and the capital we have
invested in the affected property. It is possible, depending on the specific
circumstances of the affected property, that we could be liable for any mortgage
indebtedness or other obligations related to the property. Any such loss could
materially and adversely affect our business and financial condition and results
of operations.


                                       16
<PAGE>


                     INFORMATION ABOUT APARTMENT COMMUNITIES
<TABLE>
<CAPTION>

                                                                              Total       Apartment
                                       No. of                               Rentable      Unit Type
                                       Apt.    Year      Date      Total      Area      1     2     3
    Community           Location       Units   Compl   Acquired   Acreage   (Sq. Ft.)   BR    BR    BR
------------------- ------------------ ------ -------- ---------- --------- ---------- ----- ----- -----
<S>                <C>                  <C>      <C>      <C>        <C>     <C>       <C>   <C>    <C>
Owned communities:
Abbington Place     Greensboro, NC       360      1997     12/97      37.4    400,728    96   216    48
Allerton Place      Greensboro, NC       228      1998      9/98      19.2    241,842    54   126    48
Barrington Place    Charlotte, NC        348      1999      5/02      29.3    386,964   132   192    24
Brookford Place     Winston-Salem, NC    108      1998      5/02       6.3    103,392    36    72     -
Carriage Club       Mooresville, NC      268      2000      6/04      22.5    253,114   110   136    22
Chason Ridge        Fayetteville, NC     252      1994      1/99      29.1    246,886    56   164    32
Fairington          Charlotte, NC        250      1981      8/04      32.0    267,300   108   106    36
Hamptons            Charlotte, NC        232      1986     10/05      33.1    245,338    28   184    20
Laurel Springs 1    High Point, NC       240      2003      3/05      19.0    228,000   120   120     -
Laurel Springs 2    High Point, NC        96      2004      3/05       7.9    122,808     -    24    72
Madison Hall        Clemmons, NC         128      1997      8/98      10.5    110,352    42    86     -
Mallard Creek 1     Charlotte, NC        184      1988     12/94      18.4    167,920    67   117     -
Mallard Creek 2     Charlotte, NC        288      1997      8/03      25.0    321,190   103   140    45
Marina Waterfront   Cornelius, NC        290      1994      9/02      33.6    254,356   128   126    36
Oak Hollow 1        Cary, NC             222      1983      7/98      30.0    215,960    56   165     -
Oak Hollow 2        Cary, NC             240      1986     12/00      26.8    220,840   160    80     -
Oakbrook            Charlotte, NC        162      1985      6/94      16.4    178,668    32   120    10
Paces Commons       Charlotte, NC        336      1988      6/93      24.8    322,046   154   142    40
Paces Village       Greensboro, NC       198      1988      4/96      15.5    167,886    88   110     -
Pelham              Greenville, SC       144      1985      3/03      10.1    158,264    40   104     -
Pepperstone         Greensboro, NC       108      1992     12/97      10.1    113,076     -   108     -
Salem Ridge         Winston-Salem, NC    120      1984      3/05       6.8     87,784    40    80     -
Savannah Place      Winston-Salem, NC    172      1991     12/97      15.4    182,196    44   128     -
Southpoint          Durham, NC           192      1987      9/04      14.5    176,352   132    60     -
Summerlyn Place     Burlington, NC       140      1998      9/98      12.1    156,756    48    84     8
Waterford Place     Greensboro, NC       240      1997     12/97      20.6    277,296    72   120    48
Woods Edge          Durham, NC           264      1985      6/98      32.4    268,620    66   198     -
Wind River          Durham, NC           346      2000      5/04      29.4    391,120   128   153    65

Canterbury          Myrtle Beach, SC     630      1999      3/05      41.1    518,400   274   356     -
Paces Watch         Mt. Pleasant, SC     232      1987      5/05      19.7    201,068   132   100     -
Waverly Place       N. Charleston, SC    240      1986      4/05      21.3    194,994   114   126     -

Latitudes           Virginia Beach, VA   448      1989     10/94      24.9    358,700   269   159    20
Timbers             Richmond, VA         240      1989     10/05      27.7    232,973    58   146    36
</TABLE>


<TABLE>
<CAPTION>

                                        Weighted                               Average
                                         Average     Average Economic      Monthly Revenue
                                        Apt. Size   Occupancy Percent(1)  per Occupied Unit
    Community           Location        (Sq. Ft.)  2005    2004   2003   2005    2004   2003
------------------- ------------------- ---------- ------ ------- ------ ------ ------- ------
<S>                <C>                     <C>     <C>     <C>    <C>    <C>     <C>    <C>
Owned communities:
Abbington Place     Greensboro, NC          1,113   93.8    94.2   90.9   $779    $760   $764
Allerton Place      Greensboro, NC          1,061   95.1    94.8   91.4    806     790    745
Barrington Place    Charlotte, NC           1,112   94.6    94.4   94.3    771     756    748
Brookford Place     Winston-Salem, NC         961   96.0    97.0   95.1    683     679    667
Carriage Club       Mooresville, NC           944   96.0    95.3      -    757     743      -
Chason Ridge        Fayetteville, NC          980   93.8    96.4   96.6    781     797    753
Fairington          Charlotte, NC           1,069   94.7    93.7      -    733     708      -
Hamptons            Charlotte, NC           1,057   96.0       -      -    711       -      -
Laurel Springs 1    High Point, NC            950   94.0       -      -    634       -      -
Laurel Springs 2    High Point, NC          1,279   89.6       -      -    846       -      -
Madison Hall        Clemmons, NC              862   95.4    94.0   94.2    602     600    578
Mallard Creek 1     Charlotte, NC             912   94.5    95.0   93.3    643     635    663
Mallard Creek 2     Charlotte, NC           1,115   93.5    93.8   92.0    783     747    739
Marina Waterfront   Cornelius, NC             877   95.3    94.6   91.0    837     772    750
Oak Hollow 1        Cary, NC                  982   96.5    93.9   90.0    614     616    617
Oak Hollow 2        Cary, NC                  920   91.9    92.0   89.1    605     604    599
Oakbrook            Charlotte, NC           1,100   94.3    94.6   91.9    729     698    709
Paces Commons       Charlotte, NC             958   94.5    95.2   92.2    667     632    660
Paces Village       Greensboro, NC            848   96.0    94.9   94.3    678     675    654
Pelham              Greenville, SC          1,106   94.7    95.6   91.1    570     559    569
Pepperstone         Greensboro, NC          1,047   96.7    96.3   93.8    696     668    655
Salem Ridge         Winston-Salem, NC         732   97.3       -      -    531       -      -
Savannah Place      Winston-Salem, NC       1,059   93.1    93.0   93.4    727     716    699
Southpoint          Durham, NC                919   96.1    91.3      -    702     690      -
Summerlyn Place     Burlington, NC          1,120   95.6    94.3   93.5    827     826    832
Waterford Place     Greensboro, NC          1,155   94.5    95.1   91.8    904     883    852
Woods Edge          Durham, NC              1,018   94.0    93.6   92.7    694     705    722
Wind River          Durham, NC              1,130   94.4    86.1      -    800     820      -

Canterbury          Myrtle Beach, SC          822   96.6       -      -    621       -      -
Paces Watch         Mt. Pleasant, SC          867   96.2       -      -    856       -      -
Waverly Place       N. Charleston, SC         812   93.9       -      -    658       -      -

Latitudes           Virginia Beach, VA        800   96.3    97.5   96.5    978     919    873
Timbers             Richmond, VA              971   88.3       -      -    871       -      -

<FN>
(1) Average  economic  occupancy  is  calculated  as gross  potential  rent less
vacancy, divided by gross potential rent.
</FN>


</TABLE>

                                                                   (continued)

                                       17
<PAGE>

<TABLE>
<CAPTION>

                                                                              Total       Apartment
                                       No. of                               Rentable      Unit Type
                                       Apt.    Year      Date      Total      Area      1     2     3
    Community           Location       Units   Compl   Acquired   Acreage   (Sq. Ft.)   BR    BR    BR
------------------- ------------------ ------ -------- ---------- --------- ---------- ----- ----- -----
<S>                <C>                  <C>      <C>      <C>        <C>     <C>       <C>   <C>    <C>

Consolidated communities:
Marina Shores       Virginia Beach, VA   392      1991      1/05      16.3    379,030   126   187    79
Villages            Carrboro, NC         264      1975      1/05      19.7    252,766   139   125     -
Villages Phase 5    Carrboro, NC          57      1987      1/05       5.3     54,177    25    24     8
</TABLE>



<TABLE>
<CAPTION>

                                         Weighted                               Average
                                          Average     Average Economic      Monthly Revenue
                                         Apt. Size   Occupancy Percent(1)  per Occupied Unit
    Community           Location         (Sq. Ft.)  2005    2004   2003   2005    2004   2003
------------------- ------------------ - ---------- ------ ------- ------ ------ ------- ------
<S>                <C>                      <C>     <C>     <C>    <C>    <C>     <C>    <C>

Consolidated communities:
Marina Shores       Virginia Beach, VA         967   96.7       -      -  1,173       -      -
Villages            Carrboro, NC               957   89.8       -      -    666       -      -
Villages Phase 5    Carrboro, NC               950   94.5       -      -    779       -      -

<FN>
(1) Average  economic  occupancy  is  calculated  as gross  potential  rent less
vacancy, divided by gross potential rent.
</FN>
</TABLE>

                                       18
<PAGE>

                         RESTAURANT PROPERTIES LOCATIONS




Virginia
(27 properties)

Ashland
  106 North Washington

Blackstone
  North Main Street

Bluefield
  701 South College Street

Chester
  12401 Jefferson Davis Hwy.

Clarksville
  916 Virginia Avenue

Clintwood
  U.S. Highway 83

Dublin
  208 College Avenue

Franklin
  105 North Mechanic Street

Galax
  425 Main Street

Hopewell
  East City Point Road

Lebanon
  Route 1

Lynchburg
  8411 Timberlake Road
  2231 Langhorne road

Norfolk
  3908 Princess Anne Road

Orange
  200 Madison Road

Petersburg
  1865 Crater Road, South

Richmond
  921 Myers Street
  6850 Forest Hill Avenue
  7917 Midlothian Pike

Roanoke
  4407 Abenham Avenue SW
  3401 Hollins Road

Rocky Mount
  322 Tanyard Road, NE

Smithfield
  Smithfield Shopping Center

Verona
  160 East Route 612

Virginia Beach
  4261 Holland Road
  1951 Lynnhaven Parkway

Wise
  US Highway 23, Business


North Carolina
(13 properties)

Burlington
  2712 Alamance Road

Denver
  Route 16

Eden
  202 West Kings Highway

Fayetteville
  3505 Ramsey Street
  360 North Eastern Blvd.

Hillsborough
  380 S. Churton Street

Kinston
  200 West Vernon Street
  1404 Richlands Street

Newton
  South Ashe & North "D"

Siler City*
  Chatham Shopping Center

Spring Lake
  400 South Main Street

Thomasville
  1116 East Main Street
  Randolph Street

*operated as a "B-B-Q & Ribs."  All other sites are operated as "Hardee's."


                                       19
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

         We are a party to a variety of legal proceedings arising in the
ordinary course of business. We do not expect any of these matters, individually
or in aggregate, to have a material adverse impact on the company.

         In the event a claim was successful, we believe that we are adequately
covered by insurance and indemnification agreements. We have insurance coverage
on each of our apartment communities. Our restaurant properties are subject to
an indemnification agreement whereby Enterprises, the lessee, is responsible for
all claims arising from a restaurant property. In addition, Enterprises is
required to provide insurance, which identifies the company as a named insured,
on each restaurant property. Each apartment property that we manage but do not
own is covered by an insurance policy under which we are a named insured.

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

         No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 2005.

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S  COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

Market Information, Holders and Dividends

         Our common stock is traded on the American Stock Exchange under the
symbol "BNP." There were 1,230 common shareholders of record on February 28,
2006. The table below shows, for the periods indicated, the range of high, low,
and closing sale prices of our common stock as reported by the American Stock
Exchange and the dividends paid per share. As of February 28, 2006, the closing
price of the company's common stock was $17.15 per share.

<TABLE>
<CAPTION>
                                                                                               Dividends
                                                          Stock Price                             Paid
                                            High              Low              Close           Per Share
                                      ----------------- ----------------- ----------------- -----------------
<S>                                      <C>               <C>               <C>                <C>
2005:
   Fourth quarter                         $ 16.05           $ 13.53           $ 16.00            $ 0.25
   Third quarter                            16.04             13.75             14.35              0.25
   Second quarter                           16.10             15.45             16.00              0.25
   First quarter                            16.29             15.65             16.00              0.25

2004:
   Fourth quarter                         $ 16.20           $ 13.62           $ 16.10            $ 0.25
   Third quarter                            13.90             12.80             13.68              0.25
   Second quarter                           13.24             12.35             13.14              0.25
   First quarter                            13.35             11.50             13.17              0.25
</TABLE>

         We have paid regular quarterly dividends to holders of our common stock
since our inception, and we intend to continue to do so. In January 2006, the
Board of Directors declared a regular quarterly dividend of $0.26 per common
share, payable February 15, 2006, to shareholders of record on February 1, 2006.

                                       20
<PAGE>

         We anticipate that we will pay all dividends from current funds from
operations. We expect distributions to substantially exceed the 90% annual
distribution requirement for a REIT.

         We have a dividend reinvestment plan that is available to all
shareholders of record. Under this plan, as amended in February 2004, the plan
administrator, Wachovia Bank, N. A., reinvests dividends on behalf of plan
participants in our common stock. We will either issue new shares or direct
Wachovia to purchase shares on the open market. In addition, shareholders who
participate in the plan may elect to make direct cash investments or supplement
their reinvestment program with additional cash investments of any amount from
$25 to $25,000 per quarter. Participants do not pay any commissions on stock
purchased under the plan.

         We have included information regarding securities authorized for
issuance under equity compensation plans in Part III, Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters of this Annual Report.

Sales of Unregistered Securities

         On January 26, 2005, we acquired Boddie Investment Company ("BIC")
through a merger. Because of this merger, we succeeded BIC as the general
partner of, and acquired an economic interest in, three limited partnerships. As
consideration in the merger, we privately issued 508,578 shares of common stock
pursuant to the exemption provided by Section 4(2) of the Securities Act. We
issued those shares, which had a value on that date of $16.10 per share, to B.
Mayo Boddie and Nicholas B. Boddie. Upon closing the merger, we canceled 72,399
shares of our common stock that BIC held immediately before the merger. The
value of the transaction, before the impact of the cancelled shares, was $8.2
million based on the $16.10 per share value.

         In 2001, 2002 and 2003, we issued a total of 909,090 shares of our
Series B Cumulative Convertible Preferred Stock ("preferred stock") to a single
investor for total proceeds of $10.0 million in cash. These shares were issued
pursuant to the exemption from the registration requirements of the Securities
Act of 1933 set forth in Section 4(2) of the Act. The purchaser was Preferred
Investment I, LLC, an accredited investor, and offers were not accompanied by
any form of general solicitation. The managing member of the purchaser became
one of our directors in 2001.

         In October 2005, we notified the holder of our preferred stock that the
company was exercising its option to redeem all 909,090 shares of the preferred
stock. In accordance with the certificate of designation governing the preferred
stock, the holder elected to convert all of the shares of preferred stock to
shares of the company's common stock. Accordingly, on November 14, 2005, the
company issued 909,090 shares of its common stock and cancelled 909,090 shares
of preferred stock. The transaction was accomplished pursuant to the exemption
from registration under Sections 3(a)(9) and 4(2) of the Securities Act of 1933.

ITEM 6.  SELECTED FINANCIAL DATA

         We present below selected financial information. We encourage you to
read the financial statements and the notes accompanying the financial
statements in this Annual Report. This information is not intended to be a
replacement for the financial statements.

         This financial information includes all apartment communities and
restaurant properties that we owned or included in our consolidation for each
period shown.

                                       21
<PAGE>
<TABLE>
<CAPTION>

                                                              Year ended December 31
                                          2005          2004           2003          2002           2001
                                      ------------- -------------- ------------- -------------- -------------
                                                (in thousands, except per share and property data)
<S>                                   <C>           <C>            <C>           <C>            <C>
Operating data: (1)
Revenue:
   Apartment rental income             $  67,029     $  44,929      $  37,475     $  32,890      $  30,867
   Restaurant rental income                3,830         3,830          3,908         4,021          4,053
   Other income                            1,154         1,227          1,277         1,253          1,342
                                      ------------- -------------- ------------- -------------- -------------
Total revenue                             72,012        49,986         42,660        38,164         36,262
Expenses:
   Apartment operations                   26,243        18,119         15,458        12,682         11,182
   Administrative costs                    6,255         4,520          3,907         3,358          2,956
   Interest and penalties paid at
     debt refinance                       24,701        14,445         13,000        11,452         11,100
   Depreciation                           16,602        11,491         10,040         8,794          7,828
   Amortization and write-off
     of loan costs                           726           450            322           351            725
   Deficit distributions to
     minority partners,
     consolidated LPs                      7,861             -              -             -              -
                                      ------------- -------------- ------------- -------------- -------------
Total expenses                            82,389        49,025         42,727        36,637         33,792
                                      ------------- -------------- ------------- -------------- -------------
                                         (10,377)          961            (66)        1,527          2,470
Loss (income) attributed to
   minority interests -
   - Consolidated limited
     partnerships                            350             -              -             -              -
   - Operating partnership                 1,975             1            174          (279)          (567)
                                      ------------- -------------- ------------- -------------- -------------
(Loss) income from
   continuing operations                  (8,052)          962            107         1,248          1,902
Income from
   discontinued operations, net            6,563            77              -             -              -
                                      ------------- -------------- ------------- -------------- -------------
Net (loss) income                         (1,488)        1,039            107         1,248          1,902
Cumulative preferred dividend               (833)       (1,000)          (661)         (323)            (3)
                                      ------------- -------------- ------------- -------------- -------------
Income (loss) attributed to common
   shareholders                        $  (2,322)    $      39    $      (553)    $    925     $     1,900
                                      ============= ============== ============= ============== =============
Earnings per share, basic and
   diluted -
   (loss) income attributed to
   common shareholders                 $   (0.25)    $    0.01     $    (0.09)   $    0.16     $      0.33
                                      ============= ============== ============= ============== =============
Dividends per common share             $    1.00     $    1.00     $     1.00    $    1.24     $      1.24
                                      ============= ============== ============= ============== =============
Balance Sheet data:
Real estate assets (before
   accumulated depreciation)
   - Apartment communities             $ 559,560     $ 389,119      $ 299,661     $ 275,713      $ 221,589
   - Restaurant properties                37,405        37,405         37,405        39,159         39,159
Real estate assets, net                  509,297       360,071        281,014       265,423        219,997
Total assets                             524,063       367,764        287,200       271,723        225,385
Total debt                               436,712       286,425        229,714       211,585        162,330
Minority interests                        21,207        14,394         15,895        17,947         18,174
Shareholders' equity                      60,429        62,996         38,733        39,271         42,034
</TABLE>

                                       22
<PAGE>
<TABLE>
<CAPTION>

                                                              Year ended December 31
                                          2005          2004           2003          2002           2001
                                      ------------- -------------- ------------- -------------- -------------
                                                (in thousands, except per share and property data)
<S>                                   <C>           <C>            <C>           <C>            <C>
Apartment Properties data:
Apartment communities owned at year
   end                                        30            24             19            18             15
Apartment units owned
   at year end                             7,945         6,113          4,859         4,427          3,681
Average apartment
   economic occupancy                      94.7%         94.4%          92.8%         92.8%          93.9%
Average monthly revenue
   per occupied unit                   $     742     $     737      $     725     $     733      $     744

Other data:
Earnings before interest, taxes,
   depreciation and
   amortization (2)                    $  39,514     $  27,347      $  23,295     $  22,124      $  22,123
Funds from operations (2)                 13,133        11,447          9,313         9,998         10,702
Funds available
  for distribution (2)                    19,014         9,988          7,904         8,865          9,696
Net cash provided by
  (used in):
  Operating activities (3)             $  12,793     $  12,677      $   9,594     $  10,118      $  10,729
  Investing activities (3)               (61,444)      (52,848)       (25,275)      (32,669)        (2,401)
  Financing activities                    51,245        40,123         15,361        22,018         (7,966)
Weighted average number of shares and units outstanding:
    Preferred B shares                       790           909            601           293              2
    Common shares                          9,389         7,617          5,868         5,787          5,717
    Operating partnership
      minority units                       2,301         1,856          1,843         1,786          1,706
</TABLE>


(1)   We sold an apartment community in October 2005 that we originally acquired
      in July 2004. 2004 amounts have been reclassified to present the
      operations of this community as "discontinued operations."

(2)   Earnings before interest, taxes, depreciation and amortization, funds from
      operations, and funds available for distribution amounts reflect
      measurements for the operating partnership (before deduction for minority
      interest).

      Earnings before interest, taxes, depreciation and amortization is
      frequently referred to as "EBITDA." This measurement is derived directly
      from amounts included in the Statement of Operations. We consider EBITDA
      to be a useful measurement of operations performance before the impact of
      financial structure and significant non-cash charges.

      We calculated EBITDA as follows:

                                       23
<PAGE>
<TABLE>
<CAPTION>

                                                              Year ended December 31
                                          2005          2004           2003          2002           2001
                                      ------------- -------------- ------------- -------------- -------------
                                                                  (in thousands)
     <S>                               <C>           <C>           <C>           <C>            <C>
      Net (loss) income                 $ (1,488)     $  1,039      $     107     $   1,248      $   1,902
      Interest and
        refinance penalties               24,701        14,445         13,000        11,452         11,100
      Depreciation                        16,602        11,491         10,040         8,794          7,828
      Deficit distributions to
        minority partners (a)              7,861             -              -             -              -
      Amortization and write-off of
        unamortized loan costs
                                             726           450            322           351            725
      Minority interests                    (668)           16           (174)          279            567
      Discontinued operations and
        gain on sale of real estate
        assets                            (8,220)          (95)             -             -              -
                                      ------------- -------------- ------------- -------------- -------------
      Earnings before interest,
        taxes, depreciation (and
        deficit distributions) and
        amortization                    $ 39,514      $ 27,347      $  23,295     $  22,124      $  22,123
                                      ============= ============== ============= ============== =============
</TABLE>

      (a)Deficit distributions to minority partners are charges recognized in
         our statement of operations when a consolidated limited partnership
         distributes cash to a minority partner in excess of the positive
         balance in such partner's capital account. Deficit distributions to
         minority partners may occur when the fair value of the underlying real
         estate exceeds its depreciated net book value because the underlying
         real estate has appreciated or maintained its value. As a result,
         deficit distributions to minority partners represent, in substance,
         either our recognition of depreciation previously allocated to that
         partner or a cost related to the minority partner's share of real
         estate appreciation.

      Funds from operations is frequently referred to as "FFO." FFO is defined
      by the National Association of Real Estate Investment Trusts ("NAREIT") as
      "net income (computed in accordance with generally accepted accounting
      principles), excluding gains (losses) from sales of property, plus
      depreciation and amortization, and after adjustments for unconsolidated
      partnerships and joint ventures." Our calculation of FFO is consistent
      with FFO as defined by NAREIT. Because we hold all of our assets in and
      conduct all of our operations through the operating partnership, we
      measure FFO at the operating partnership level (i.e., after deducting the
      minority interests in FFO of the consolidated limited partnerships, but
      before deducting the minority interest in the operating partnership).

      Historical cost accounting for real estate assets implicitly assumes that
      the value of real estate assets diminishes predictably over time. In fact,
      real estate values have historically risen or fallen with market
      conditions. FFO is intended to be a standard supplemental measure of
      operating performance that excludes historical cost depreciation from - or
      "adds it back" to - GAAP net income. We consider FFO to be useful in
      evaluating potential property acquisitions and measuring operating
      performance.

      Funds available for distribution is frequently referred to as "FAD." We
      calculate FAD as FFO plus non-cash expenses, plus (less) gains (losses)
      from sale of property, less recurring capital expenditures. We believe
      that, together with net income and cash flows from operating activities,
      FAD provides investors with an additional measure to evaluate the ability
      of the operating partnership to incur and service debt, to fund
      acquisitions and other capital expenditures, and to

                                       24
<PAGE>


      fund distributions to shareholders and minority unitholders.

      Funds from operations and funds available for distribution do not
      represent net income or cash flows from operations as defined by generally
      accepted accounting principles. You should not consider FFO or FAD to be
      alternatives to net income as reliable measures of the company's operating
      performance; nor should you consider FFO or FAD to be alternatives to cash
      flows from operating, investing or financing activities (as defined by
      generally accepted accounting principals) as measures of liquidity.

      Funds from operations and funds available for distribution do not measure
      whether cash flow is sufficient to fund all of our cash needs, including
      principal amortization, capital improvements and distributions to
      shareholders. FFO and FAD do not represent cash flows from operating,
      investing or financing activities as defined by generally accepted
      accounting principles. Further, FFO and FAD as disclosed by other REITs
      might not be comparable to our calculation of FFO or FAD.

      We provide a reconciliation of net income to FFO, along with a
      reconciliation of net cash provided by operating activities to FAD, under
      the caption "Management's Discussion and Analysis of Financial Condition
      and Results of Operations - Funds From Operations" in this Annual Report.

(3)   Beginning in 2004, we have presented operating activities in our
      consolidated statements of cash flows using the direct method, which
      provides cash flow amounts corresponding directly to lines in our
      statements of operations. We have adjusted the 2003 and 2002 comparative
      amounts in our consolidated statements of cash flows to conform to the
      2004 presentation by reclassifying the net cash flows related to funding
      of lender reserves for apartment property replacements from operating
      activities to investing activities. This reclassification has no impact on
      the net change in cash and cash equivalents for 2003 and 2002, only in the
      subtotals for net cash provided by operating activities and net cash used
      in investing activities. The net effect on net cash provided by operating
      activities is a decrease of $213,000 in 2003, and an increase of $133,000
      in 2002, from amounts previously reported.

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

         Some of the information in this discussion and analysis of financial
condition and results of operations may contain forward-looking statements.
Please review our Caution Regarding Forward-Looking Statements at the beginning
of this Annual Report. In addition, you should read this discussion in
conjunction with the financial statements and notes thereto included in this
Annual Report.

Overview

         2005 was by far the most active year in our history.

         During the year we continued to expand and improve our portfolio with
the acquisition of eight apartment properties and the general partner interest
in partnerships owning three apartment communities. As a result of these
acquisitions the number of apartments we own increased by 30% and the number of
units under our control increased by 42%. These new properties are consistent
with our strategy of focusing on middle-market properties, in good to excellent
locations, with good "bone structure". What is most interesting about the 2005
acquisitions is how they were acquired. Four of the properties were acquired in
cash transactions; four were acquired using UpREIT units, and the three general
partner interests were acquired through a corporate merger. We have emphasized
in the past that we would be flexible in how we approached acquisitions, and the
2005 acquisitions illustrate that flexibility. Going forward we will continue to
seek acquisitions similar to these. You should be aware, however, that in recent
months pricing for apartment communities has become very competitive. While

                                       25
<PAGE>


we intend to continue to expand the  portfolio,  we will be very  judicious  and
will only purchase where we believe it to be in our best long-term interest.

         An essential part of our strategy of providing high quality middle
market housing is maintaining our properties to very high standards. Integral to
this is our rehabilitation program. We believe that we can create value by
updating older properties that are otherwise structurally sound and have solid
market locations. During the year we completed rehabilitation projects at two of
our apartment properties. We will continue to seek properties that present this
type of opportunity.

         In 2005 we began a major effort to improve the efficiency of our
corporate operations and to better position ourselves for future growth. To this
end, we added a Vice President of Operations in 2005 and began a ground-up
review of our operating systems. By year end we had implemented a number of
significant changes and anticipate more to come. While there have been
significant costs associated with this project, we believe that the long-term
benefits warrant the expenditures.

         One of our primary concerns entering 2005 was our exposure to rising
interest rates. In this report last year we said that we intended to monitor the
situation and that we might take steps to reduce our exposure if we felt it was
warranted. Shortly before year end we decided to replace $47.8 million of fixed
rate loans carrying interest rates of 6.97% with $73.8 million of fixed rate
loans carrying interest rates of approximately 5.53%. We used approximately
$22.3 million of the net proceeds of the refinance to pay down our variable-rate
line of credit. At year end the interest rate on that line of credit was
approximately 6.12%. As part of the refinancing of these loans we incurred
approximately $1.6 million in one-time prepayment fees that are a charge against
net income, funds from operations and funds available for distribution. While
the year-end refinance transactions had an immediate negative impact on our
reported results for 2005, we believe the long-term impact of these transactions
will be quite beneficial. As a result of these transactions, we have
substantially reduced our exposure to increases in interest rates and the low
fixed rates obtained on the replacement loans will result in substantial
interest savings over the next few years.

         A highlight of 2005 was the sale of Savannah Shores Apartments. This
was the first time in our history that we have sold an apartment community. When
we buy a property we generally expect to own and operate the property for ten
years or more. Savannah Shores was no exception, but dynamic market conditions
led to our receiving unsolicited offers for the property at prices we felt
warranted an immediate sale. You should not view the sale of Savannah Shores as
a change in our business strategy. We still believe that holding properties for
long periods of time is generally in our best interest. However, we are open to
shorter holding periods when the situation warrants.

         From an operational point of view, 2005 was a good year for us. We saw
continued improvement in apartment operating results with "same-units" NOI
growth of 4.7% in 2005. This was primarily the result of a 2.4% increase in
"same-units" apartment revenue. We entered 2005 with high occupancy and
anticipated that any increase in rental revenue would, by necessity, come from
increasing rental rates. While maximizing apartment revenue is always a
balancing act between occupancy and rental rate, we were relatively pleased with
our ability to increase rental rates in 2005 without having to sacrifice
occupancy.

         Overall, we were pleased with our operating results for 2005. Total
funds from operations showed good improvement, 14.7%, despite the fact that we
incurred approximately $1.6 million in one-time prepayment charges related to
our year-end refinancing transactions. Funds from operations per share for the
year declined to $1.13, but again this was net of the one-time refinancing
charges that equated to approximately $0.14 per share.

         We are quite optimistic about 2006. We have a solid portfolio of
extremely well maintained apartment properties in excellent locations. We are
confident that given our properties, our markets, our strategy, and the current
economic environment, we will be able to achieve reasonable growth in

                                       26
<PAGE>

apartment rental income in 2006. We believe that the key to success in 2006 will
be basic apartment operations - marketing,  leasing, and maintenance - something
with which we are particularly comfortable and adept.

Capital Resources and Liquidity

Capital Resources

         We completed a number of significant investing and financing
transactions in 2005. In addition, and for the first time in our history, we
entered into and completed a contract for sale of an apartment community.

         Our balance sheet at December 31, 2005, compared to December 31, 2004,
reflects significant growth and complexity in our financial reporting. We
provide the following supplemental consolidating summary information, in
response to requests from members of the investment community, for use in
understanding the changes in our structure:
<TABLE>
<CAPTION>

                                                              2005                                 2004
                                      -----------------------------------------------------    -------------
                                                                Consolidated     Owned            (Owned
                                      Consolidated     Elim       LPs (1)      Properties      Properties)
                                      ------------- ----------- ------------- -------------    -------------
                                        (000's)       (000's)      (000's)       (000's)         (000's)

Balance Sheet at December 31, 2005, compared to December 31, 2004:
<S>                                   <C>          <C>           <C>          <C>              <C>
Real estate investments, net
   of depreciation                     $ 509,297    $       -     $ 42,044     $ 467,253        $ 360,071
Cash and cash equivalents                  3,111            -          805         2,306              517
Prepaid expenses and
   other assets                            8,034       (3,586)         696        10,924            4,516
Deferred financing costs, net              2,380         (154)         604         1,930            1,545
Intangible assets, net                     1,240            -            -         1,240            1,115
                                      ------------- ----------- ------------- -------------    -------------
                                       $ 524,063      $(3,740)    $ 44,149     $ 483,653        $ 367,764
                                      ============= =========== ============= =============    =============

Notes payable                          $ 436,712      $(2,282)    $ 50,419     $ 388,576        $ 286,425
Accounts payable and
   accrued expenses                        1,419          (52)         139         1,332              897
Accrued interest                           1,345            -          204         1,141            1,264
Consideration due for acquisitions         1,000            -            -         1,000                -
Deferred revenue and
   security deposits                       1,950         (154)         122         1,982            1,787
                                      ------------- ----------- ------------- -------------    -------------
                                         442,426       (2,489)      50,884       394,031          290,373
Minority interests -
- Consolidated limited partnerships            -            -            -             -                -
- Operating partnership                   21,207            -            -        21,207           14,394
Shareholders' equity                      60,429       (1,251)      (6,735)       68,414           62,997
                                      ------------- ----------- ------------- -------------    -------------
                                       $ 524,063      $(3,740)    $ 44,149     $ 483,653        $ 367,764
                                      ============= =========== ============= =============    =============
<FN>
(1)  Effective January 26, 2005, we include the accounts of three real estate
     limited partnerships in our consolidated financial statements.
</FN>
</TABLE>

                                       27
<PAGE>

Acquisition of Boddie Investment Company; consolidated limited partnerships

         In January 2005, we acquired Boddie Investment Company ("BIC") through
a merger. We issued 509,000 shares of our common stock valued at $8.2 million,
and cancelled 72,000 shares of common stock that BIC held immediately before the
merger. As a result of this acquisition, we assumed the role of general partner
and acquired economic interests in three limited partnerships. Prior to this
acquisition, we managed the apartment communities owned by these partnerships on
a contract basis; we will continue to manage these properties.

         A summary of assets acquired in the BIC acquisition, along with our
allocation of costs assigned to those assets, follows (all amounts in
thousands):
<TABLE>

  <S>                                                                              <C>
   Investments in limited partnerships:
     Marina Shores Associates One, Limited Partnership (50% interest)               $  5,940
     The Villages of Chapel Hill Limited Partnership (1% interest)                         2
     The Villages of Chapel Hill - Phase 5 Limited Partnership (1% interest)               7
   BNP common stock held by BIC (which we immediately retired) 1,166
   Receivables from the Villages Partnership for general partners'
   advances and accrued interest thereon                                               1,220
                                                                                -------------
                                                                                    $  8,335
                                                                                =============
</TABLE>

         Although the amounts related to this acquisition seem relatively
insignificant at first glance, the accounting for the investments in limited
partnerships is complex, and the impact on presentation of our consolidated
financial statements is rather significant. We have included a detailed
discussion of our accounting treatment for each of the investments in limited
partnerships in Notes 1 and 2 of our financial statements included in this
Annual Report on Form 10-K

         We acquired a 50% general partner interest in Marina Shores Associates
One, Limited Partnership ("Marina Shores Partnership"). Under the terms of the
partnership agreement, the general partner controls the activities of the
partnership. We therefore included the accounts of this partnership in our
consolidated financial statements effective January 26, 2005, by applying
traditional purchase accounting methods. We recorded our prorata interest in the
partnership's assets and liabilities at the lower of our cost or fair value. We
reflected the noncontrolling, or "minority," partner's 50% interest in the
partnership's assets and liabilities at historical cost, except to adjust the
minority partner's capital account (which was previously in a deficit balance)
to $-0-. Very shortly before our acquisition of the 50% general partner
interest, the Marina Shores real estate assets appraised for approximately $45
million, compared to net carrying value of approximately $11 million. The
initial inclusion of the Marina Shores Partnership in our consolidation resulted
in (amounts in thousands):

   Increase in real estate investments - 392 apartment units           $ 26,254
   Increase in net operating assets                                         950
   Increase in long term debt - first deed of trust                     (21,264)
   Minority interest in consolidated limited partnerships                     -
                                                                      ----------
     Increase in net assets                                            $  5,940
                                                                      ==========

         Very shortly after our acquisition of BIC, the Marina Shores
Partnership refinanced its long-term debt and issued a $33.9 million fixed-rate
first deed of trust note payable. This 10-year loan provides for interest at an
effective rate of 5.1%. We have included a more detailed description of this
note payable in Note 5 of our financial statements included in this Annual
Report.

         The Marina Shores Partnership first applied proceeds of this loan to
retire the existing debt, then distributed $6.8 million to its limited partner
and $3.7 million to our operating partnership. In 2005, the Marina Shores
Partnership made distributions totaling $7.9 million to its limited partner and
$4.7 million

                                       28
<PAGE>


to our operating  partnership.  The Marina Shores Partnership generates positive
cash flows,  and we currently  expect that the Marina  Shores  Partnership  will
continue to make regular  distributions of approximately  $360,000 per year each
to the limited partner and our operating partnership.

         Prior to consolidation in our financial statements, the fair value of
the real estate held by the Marina Shores Partnership significantly exceeded its
depreciated net book value because the underlying real estate had appreciated
significantly since the Marina Shores Partnership's original formation in the
late 1980s. In our initial consolidation of this partnership, we reset the
minority limited partner's capital account to $-0-.

         Distributions to the limited partner subsequent to inclusion of the
Marina Shores Partnership in our consolidated financial statements are, and will
generally be, reflected as charges against income in our consolidated financial
statements as "deficit distributions to minority partners." In accordance with
GAAP, deficit distributions to minority partners are charges recognized in our
income statement when a consolidated limited partnership makes distributions to
a minority partner in excess of the positive balance in such partner's capital
account. Deficit distributions represent, in substance, either our recognition
of the depreciation previously allocated to the minority partner or a cost
related to the minority partner's share of real estate appreciation. The cash
outlay is, in fact, made by the consolidated limited partnership, and there is
no economic effect to the operating partnership.

         We acquired a 1% general partner interest in The Villages of Chapel
Hill Limited Partnership ("Villages Partnership"). We determined that the
Villages Partnership is a variable interest entity, or "VIE," as defined by
GAAP, because the limited partnership does not have sufficient equity to carry
out its principal activities without additional subordinated financial support
from the general partner. We also concluded that we are the "primary
beneficiary" of the Villages Partnership. Because the Villages Partnership is a
VIE and we are the primary beneficiary, we included the accounts of this
partnership in our consolidated financial statements effective January 26, 2005,
by recording all of the partnership's assets, liabilities and noncontrolling
interests at fair value. In our initial consolidation of the Villages
Partnership, we recorded the minority partners' capital accounts at $350,000.
The initial inclusion of the Villages Partnership in our consolidation resulted
in (amounts in thousands):

  Increase in real estate investments - 264 apartment units          $ 14,188
  Increase in net operating assets                                        145
  Increase in long-term debt - first deed of trust                    (12,094)
  Subordinated long-term debt to BNP*                                  (1,888)
  Minority interest in consolidated limited partnerships                 (350)
                                                                    ----------
    Increase in net assets                                           $      2
                                                                    ==========
         * The subordinated long-term debt to BNP is eliminated in consolidation
           against related receivable balances.

         We acquired a 1% general partner interest in The Villages of Chapel
Hill - Phase 5 Limited Partnership ("Villages - Phase 5 Partnership"). Under the
terms of the partnership agreement, the general partner controls the activities
of the partnership; we therefore included the accounts of this partnership in
our consolidated financial statements effective January 26, 2005, by applying
traditional purchase accounting methods. The initial inclusion of the Villages -
Phase 5 Partnership in our consolidation resulted in (amounts in thousands):

  Increase in real estate investments - 57 apartment units           $   2,596
  Increase in net operating assets                                         239
  Increase in long term debt - first deed of trust                      (2,828)
  Minority interest in consolidated limited partnerships                     -
                                                                     ----------
    Increase in net assets                                           $       7
                                                                     ==========

                                       29
<PAGE>

         We allocate proportional income and losses of the consolidated limited
partnerships to minority partners; however, we may allocate losses to a minority
partner only to the extent of the carrying amount of the interest of that
minority partner. When losses attributable to the minority limited partners of a
consolidated limited partnership exceed their positive capital balances, we
record a charge to our earnings, even though there is no cash outlay by the
operating partnership. During 2005, after losses of the Villages Partnership
reduced the minority limited partners' capital accounts to $-0-, we recorded
charges for losses (resulting primarily from depreciation) of the consolidated
limited partnerships totaling $126,000.

Acquisition of Shugart properties

         In March 2005, we completed the acquisition of a portfolio of four
apartment properties from entities that we call the "Shugart Parties." The
aggregate purchase price for the properties totaled $52.1 million, including
approximately $0.3 million in net operating assets, paid through assumption or
refinancing of $42.8 million of debt on the properties and $9.3 million paid in
operating partnership units with an imputed value of $13.50 per unit. Under the
terms of the exchange agreements, we issued 689,000 operating partnership units
at closing, and will issue an additional 74,000 deferred units in March 2006.
The allocation of the purchase price includes the following significant
components:
<TABLE>
<CAPTION>


                                                                                              Value of
                                       Apt.                                                  Operating
              Property                 Units      Contract Price       Debt Assumed       Partnership Units
------------------------------------- --------- ------------------- -------------------- -------------------
                                                     (000's)              (000's)              (000's)
<S>                                     <C>         <C>                  <C>                  <C>
Canterbury Apartments                    630         $ 25,750             $ 22,992             $ 3,070
Laurel Springs Apartments                240           14,610               11,320               3,329
Laurel Springs II Apartments              96            7,090                5,850               1,209
Salem Ridge Apartments                   120            4,360                2,610               1,706
</TABLE>

The assets and liabilities of these apartment properties are included in our
consolidated financial statements as of March 31, 2005. We operate Laurel
Springs and Laurel Springs II Apartments as one community.

         Immediately upon completion of this acquisition, we retired a $1.5
million variable rate note related to Canterbury Apartments. The remaining
assumed debt includes three fixed-rate notes totaling $35.4 million at effective
interest rates ranging from 5.0% to 6.8% and a $5.9 million variable-rate note
with interest at 30-day LIBOR plus 1.9%. We have included a more detailed
description of these notes payable in Note 5 of our financial statements
included in this Annual Report.

Other acquisitions

         During 2005, we completed four additional apartment property
acquisitions with combined contract prices totaling $73.5 million:

                                     Apt.
           Property                 Units      Contract Price      Date Acquired
---------------------------------- --------- ------------------- ---------------
                                                   (000's)

Waverly Place Apartments               240          $13,100       April 2005
Paces Watch Apartments                 232           20,450       May 2005
Hamptons Apartments                    232           17,500       October 2005
Timbers Apartments                     240           22,450       October 2005

                                       30
<PAGE>

         We made these acquisitions in separate transactions from unaffiliated
third parties. For tax purposes, the acquisitions of Hamptons and Timbers were
structured as a tax-deferred exchange under Section 1031 of the Internal Revenue
Code in conjunction with the sale of Savannah Shores Apartments discussed below.

         In conjunction with these acquisitions, we issued three fixed-rate
notes payable totaling $42.4 million and a variable-rate note payable with
interest at 30-day LIBOR plus 1.65%. A more detailed description of these notes
payable is included in Note 5 of our financial statements included in this
Annual Report.

Sale of Savannah Shores Apartments

         During the third quarter of 2005, we received and accepted an
unsolicited offer for Savannah Shores Apartments. Our business strategy is to
purchase apartment properties with the expectation of holding and operating them
for the long term. This was our intention with Savannah Shores; however, in view
of the extraordinary pricing offered, we believe that completing this sale was
in the best interest of our shareholders.

         We acquired Savannah Shores Apartments in July 2004 for an initial
purchase price of $12.5 million, paid through issuance of operating partnership
units with total imputed value of $0.1 million, assumption of $12.2 million in
debt obligations, and assumption of $0.2 million net operating liabilities. The
acquisition agreement provided for potential earn-out of additional purchase
consideration of up to $1.7 million, which we paid through issuance of
additional operating partnership units in October 2005.

         In October 2005, we sold Savannah Shores Apartments for a contract
price of $22.75 million to an unaffiliated party. Net proceeds of the sale were
$22.2 million, and we recorded a gain on the sale of real estate assets of $8.1
million. We applied the sale proceeds to retire a $9.0 million variable-rate
note, then reinvested the remaining proceeds to acquire Hamptons and Timbers
Apartments, discussed above.

Debt refinancing transactions

         During the second quarter of 2005, in refinance transactions, we issued
two fixed-rate notes payable totaling $22.6 million. The new notes provide for
interest at a 5.28% effective rate, interest-only payments through mid-2008,
with amortizing payments thereafter through maturity in mid-2015. We applied
proceeds of these notes to retire an $11.5 million variable-rate note payable,
to retire a $5.5 million 8.55% fixed-rate note payable, and to reduce the
outstanding balance on our revolving line of credit.

         In late December 2005, in conjunction with refinancing of existing
debt, we issued five fixed-rate notes payable totaling $73.8 million. The new
notes provide for interest at 5.57% and 5.66% effective rates, interest-only
payments through 2013 and 2012, respectively, with amortizing payments
thereafter through maturity in January 2016. We applied proceeds of these notes
to retire $47.8 million in 6.97% fixed-rate, interest-only notes that were
scheduled to mature in 2007, pay prepayment penalties of $1.6 million, and to
reduce the outstanding balance on our revolving line of credit to $-0-.

         Short-term interest rates increased steadily throughout 2005, with
expectations that both short- and long-term rates will rise in 2006. To reduce
our exposure to the risk of rising interest rates, we elected to refinance a
number of loans during 2005. While this decision did cause us to incur a
substantial one-time charge of approximately $2.1 million associated with the
prepayment of the refinanced loans, it also provides significant offsetting
benefits.

     o    As a result of the refinancing  transactions,  only 12.3% of our debt,
          on a consolidated basis, is floating (variable) rate;

                                       31
<PAGE>

     o    The refinancing  transactions  allowed us to substantially  reduce the
          interest  rate on the loans that were  replaced  and to lock the rates
          for ten years. To a large extent,  the interest savings from this rate
          reduction over the next two years will offset the prepayment penalties
          incurred; and

     o    The  refinancing  freed up  working  capital  that was  trapped in the
          properties  secured  by the  refinanced  loans.  Over the  years,  the
          properties  secured by refinanced  loans had  appreciated in value. By
          refinancing,  we were able to capture some of this appreciation in the
          form of additional  loan proceeds.  We used these proceeds to pay down
          our operating line of credit. As a result, we entered 2006 with a $-0-
          balance on our $40 million line of credit.

         A more detailed description of these transactions is included in Note 5
of our financial statements included in this Annual Report.

Line of credit facilities

         In conjunction with the various acquisition and financing transactions
described above, during 2005 we made net draws on our revolving line of credit
secured by Latitudes Apartments totaling $18.8 million, and made net payments of
$29.0 million to reduce the outstanding balance to $-0- at December 31, 2005. In
November 2005, we modified this line of credit to increase our maximum loan
amount to $40.0 million and extend the term of the loan through January 2009. As
of December 31, 2005, the full $40.0 million was available for future draw.

         In June 2005, we modified our line of credit secured by 40 restaurant
properties to extend the maturity date to January 2008. We will be required to
reduce the current $14.7 million balance of this loan by $833,000 in January
2007.

Equity transactions

         In November 2005, the company exercised its option to redeem all
909,000 shares of Series B Cumulative Convertible Preferred Stock ("preferred
stock"), and the holder elected to convert all of the shares of preferred stock
to shares of the company's common stock on a one-for-one basis.

         In August 2005, the Board of Directors granted and issued 200,000
restricted shares of the company's common stock to four of our executive
officers. We refer to these shares as "nonvested shares" in our consolidated
financial statements. All of the shares were unvested on the date of grant, and
will vest 10% per year beginning July 1, 2006, and on each July 1 thereafter
until fully vested. Because grantees fully participate in dividends, the fair
value of the nonvested shares is equal to the market value on the grant date
$15.70 per share, or a total of $3.1 million.

         In addition to the transactions described above, during 2005, we also:

     o    Issued  57,500  shares of our common stock upon exercise of options by
          two employees for proceeds of $682,000;

     o    Issued  52,000  shares  of  our  common  stock  through  our  Dividend
          Reinvestment and Stock Purchase Plan for proceeds of $810,000; and

     o    Issued  78,000 shares of our common stock to redeem the same number of
          operating partnership units from minority unitholders.

Capital structure at the end of 2005

         All of our properties are encumbered by or serve as collateral for
debt. As of December 31, 2005, on a consolidated basis, long-term debt totaled
$436.7 million, including $383.0 million of notes payable

                                       32
<PAGE>

at  effective  fixed  interest  rates  ranging  from 5.0% to 7.4% (the  weighted
average rate for fixed-rate notes was 5.8%), and $53.7 million at variable rates
indexed  primarily on 30-day LIBOR rates.  Of the $436.7 million in consolidated
debt, $388.6 million is related to properties  wholly owned by the company,  and
$48.1  million is  related to  properties  in which the  company  owns a partial
interest.

         A summary of scheduled principal payments on long-term debt is included
in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, and in
the notes to the financial statements included in this Annual Report.
Significant scheduled balloon payments include maturities of:

          o    $7.9 million due in 2006 for two loans;

          o    $8.2 million due in 2007 for one loan;

          o    $63.2 million due in 2008, for eight loans;

          o    $41.5 million due in 2009, for three loans; and

          o    $18.3 million due in 2010, for one loan.

All of these loans are secured by real estate assets. The two loans maturing in
2006 are variable rate loans. At our option, we may extend one of these loans,
with a balance of $5.8 million, to 2008. We are reasonably certain that we can
extend or refinance these loans at rates at or below those currently in place.

         At December 31, 2005, we had 10.4 million common shares outstanding. In
addition, there were 2.5 million operating partnership minority common units
outstanding.

         We intend to pursue our growth strategy through the utilization of our
flexible capital structure. This may include the issuance of operating
partnership units, common stock and/or preferred stock, additional debt, and
joint venture investments. We may use our lines of credit or variable- and
fixed-rate, long-term debt to acquire and refinance apartment communities.

Cash Flows and Liquidity

         Net cash provided by operating activities totaled $12.8 million in
2005, compared to $12.7 million in 2004 and $9.6 million in 2003. The 2005
amount for cash flows from operating activities is net of $2.1 million in
penalties paid in refinance activities. The increase in cash flows from
operating activities reflects the positive impact of new apartment communities
and improvements in apartments operating results.

         Investing and financing activities focused primarily on apartment
acquisitions and capital expenditures at apartment communities, along with
payments of dividends and distributions. During the three-year period, we
acquired a total of 15 apartment properties, disposed of one apartment property
and added three additional apartment properties in consolidation.

         We paid dividends to common shareholders of $0.25 per share per quarter
in each quarter of 2005, 2004, and 2003. Our payout ratio (the ratio of common
dividends plus distributions paid, divided by operating partnership funds from
operations) was 87.0% in 2005, 82.1% in 2004, and 82.5% in 2003. Our 2005 payout
ratio based on funds from operations adjusted to add back the one-time $2.1
million in penalties paid in refinance transactions would be 74.8%.

         In January 2006, we announced an increase in our regular quarterly
dividend from $0.25 per share per quarter to $0.26 per share. We intend to pay
dividends quarterly, expect that these dividends will substantially exceed the
90% distribution requirements for REITs, and anticipate that all dividends will
be paid from current funds from operations.

         We generally expect to meet our short-term liquidity requirements
through net cash provided by operations and utilization of credit facilities. We
believe that net cash provided by operations is, and will continue to be,
adequate to meet the REIT operating requirements in both the short- and the long
term.

                                       33
<PAGE>

We anticipate funding our future acquisition activities primarily by using
short-term credit facilities as an interim measure, to be replaced by funds from
equity offerings, long-term debt, or joint venture investments. We expect to
meet our long-term liquidity requirements, such as scheduled debt maturities and
repayment of short-term financing of possible property acquisitions, through
long-term secured and unsecured borrowings and the issuance of debt securities
or additional equity securities. We believe we have sufficient resources to meet
our short-term liquidity requirements.

         We received 5.3% of our revenue from continuing operations from rent
received from Boddie-Noell Enterprises for use of our restaurant properties in
2005, compared to 7.7% in 2004 and 9.2% in 2003. Over time, we expect that
restaurant rental income will continue to represent a decreasing percentage of
our total revenue.

         Boddie-Noell Enterprises is a privately owned company with total assets
exceeding $260 million and net equity exceeding $90 million. Its principal line
of business is the operation of over 300 Hardee's restaurants. In addition to
its Hardee's operations, Boddie-Noell Enterprises is the owner of Texas
Steakhouse and Saloon, a casual dining concept; Cafe Carolina, a cafe
bakery/fast casual dining concept; and B-B-Q & Ribs, a fast-food barbeque
concept. Boddie-Noell Enterprises also operates a number of Moe's Southwestern
Grills, a fast-food Mexican concept. In addition to its restaurant operations,
Boddie-Noell Enterprises conducts extensive real estate investment and
development activities through BNE Land and Development. These activities
involve a full range of property types, including land, commercial, retail,
office, apartment and single-family properties. Based on discussions with
management and review of their financial statements, we believe that
Boddie-Noell Enterprises will have sufficient liquidity and capital resources to
meet its obligations under the master lease as well as its general corporate
operating needs.

         There is no assurance that Boddie-Noell Enterprises will renew the
master lease that currently expires in December 2007. In the event Boddie-Noell
Enterprises elects to terminate the lease, we would cease to receive rental
payments from Boddie-Noell Enterprises and would be forced to seek alternative
tenants for the properties, find alternate uses for the properties, or sell the
properties. In the event Boddie-Noell Enterprises does not renew the lease,
there is no assurance that we will be able to fully replace the $3.8 million in
revenue that we currently receive from Boddie-Noell Enterprises.

Results of Operations

Discontinued operations

         In October 2005, we sold Savannah Shores Apartments, an apartment
community that we acquired in July 2004. In accordance with GAAP, we present the
results of operations of this apartment community as discontinued operations in
our statements of operations, for both 2005 and 2004. The change in presentation
for the now discontinued operation does not have any impact on our financial
condition or overall results of operations as previously presented.

         Unless specifically noted, the following discussion relates to results
of continuing operations for both 2005 and 2004. Amounts for 2004 in these
comparisons will differ from the amounts we provided in our 2004 Annual Report.
Presentation of results of operations for 2003 is not affected by the
classification of Savannah Shores Apartments as discontinued operations.

2005 compared to 2004

         Results of operations for 2005, compared to 2004, reflect significant
growth in our company and increased complexity in our financial reporting. We
provide the following supplemental consolidating information, in response to
requests from members of the investment community, for use in comparing our
operating results for 2005 and 2004:

                                       34
<PAGE>
<TABLE>
<CAPTION>

                                                              2005                                 2004
                                      -----------------------------------------------------    -------------
                                                                Consolidated     Owned            (Owned
                                      Consolidated     Elim       LPs (1)      Properties      Properties)
                                      ------------- ----------- ------------- -------------    -------------
                                        (000's)       (000's)      (000's)       (000's)          (000's)
<S>                                   <C>          <C>         <C>           <C>              <C>
Operating Results - 12 months ended December 31:
Revenues:
Apartment rental income                $  67,029    $           $    7,126    $   59,903       $   44,929
                                                            -
Restaurant rental income                   3,830            -            -         3,830            3,830
Management fee income                        131         (357)           -           488              761
Casualty gains                               668            -            -           668              269
Interest and other income                    355         (144)          31           467              197
                                      ------------- ----------- ------------- -------------    -------------
                                          72,012         (501)       7,157        65,356           49,986
Expenses:
Apartment operations                      26,243         (357)       3,018        23,582           18,119
Administration expenses                    6,255            -            -         6,255            4,520
Interest                                  22,555         (128)       2,473        20,211           14,445
Penalties paid at debt refinance           2,146            -          519         1,628                -
Depreciation                              16,602            -        1,392        15,211           11,491
Amortization, loan costs                     432          (16)          70           377              365
Write-off of unamortized loan costs
   at debt refinance                         294            -          160           134               85
Deficit distributions to minority
   partners of consolidated limited
   partnerships(2)                         7,861            -        7,861             -                -
                                      ------------- ----------- ------------- -------------    -------------
                                          82,389         (501)      15,492        67,398           49,025
                                      ------------- ----------- ------------- -------------    -------------
(Loss) income from
   continuing operations                 (10,377)           -       (8,335)       (2,042)             961
Income from
   discontinued operations                    88            -            -            88               95
Gain on sale of real estate assets         8,132            -            -         8,132                -
                                      ------------- ----------- ------------- -------------    -------------
(Loss) income before
   minority interests                     (2,156)   $       -   $   (8,335)   $    6,179            1,055
                                                    =========== ============= =============
Minority interests -
 - Consolidated limited partnerships
                                             350                                                        -
 - Operating partnership                     318                                                      (16)
                                      -------------                                            -------------
Net (loss) income                      $  (1,488)                                              $     1,039
                                      =============                                            =============

 (Loss) income before
   minority interest                   $  (2,156)   $       -   $   (8,335)   $    6,179       $     1,055
Casualty gains                              (668)           -            -          (668)             (269)
Gain on sale of real estate assets        (8,132)           -            -        (8,132)                -
Cumulative preferred dividend               (833)           -            -          (833)           (1,000)
Amortization, lease intangible               193            -            -           193                 -
Depreciation -
 - Continuing operations                  16,602            -        1,392        15,211            11,491
 - Discontinued operations                   259            -            -           259               170
</TABLE>

                                       35
<PAGE>

<TABLE>
<CAPTION>

                                                              2005                                 2004
                                      -----------------------------------------------------    -------------
                                                                Consolidated     Owned            (Owned
                                      Consolidated     Elim       LPs (1)      Properties      Properties)
                                      ------------- ----------- ------------- -------------    -------------
                                        (000's)       (000's)      (000's)       (000's)          (000's)
<S>                                   <C>          <C>         <C>           <C>              <C>
Deficit distributions                      7,861            -        7,861             -                -
                                      ------------- ----------- ------------- -------------    -------------
                                          13,125            -          917        12,208           11,447
Minority interest in FFO of
   consolidated limited partnerships
                                               8            -            8             -                -
                                      ------------- ----------- ------------- -------------    -------------
Funds from operations(3)               $  13,133    $       -   $      925    $   12,208       $   11,447
                                      ============= =========== ============= =============    =============


<FN>
(1)  Effective January 26, 2005, we include the accounts of three real estate
     limited partnerships in our consolidated financial statements.
(2)  In accordance with generally accepted accounting principles ("GAAP"),
     deficit distributions to minority partners are charges recognized in our
     statement of operations when cash is distributed to a minority partner in a
     consolidated limited partnership in excess of the positive balance in such
     partner's capital account (which is classified as minority interest in our
     consolidated balance sheet). We are required to record these charges for
     GAAP purposes even though there is no economic effect or cost to the
     company or the operating partnership.
(3)  See discussion of funds from operations in footnote 2 at page 23.
</FN>
</TABLE>

Revenues

          Revenues in 2005 totaled $72.0 million, an increase of 44.1% compared
to 2004. This increase is primarily attributable to increases in apartment
revenues, our primary business activity. Apartment related income (apartment
rental income plus income from management and investment activities) accounted
for 94.7% of our total revenue in 2005, compared to 92.3% in 2004.

         Apartment rental income in 2005 totaled $67.0 million, an increase of
49.2%, or $22.1 million, compared to 2004. This increase is attributable to:

     o    Apartment  acquisitions in 2004 and 2005 - these 11 owned  communities
          contributed  $18.4 million in 2005,  compared to $4.3 million in 2004.
          The first of these communities was acquired in May 2004;

     o    Apartment  communities  that we consolidate  effective  January 2005 -
          these three partial-interest  communities  contributed $7.1 million in
          2005; and

     o    Increased  revenues at  "same-units"  communities  - the 19  apartment
          communities  that we owned as of January 1,  2004,  contributed  $41.5
          million in 2005, compared to $40.6 million in 2004.

         On a same-units basis, average economic occupancy was 94.6% in 2005
compared to 94.8% in 2004, and average monthly revenue per occupied unit was
$753 in 2005 compared to $734 in 2004. In 2005, for all owned apartment
communities, average economic occupancy was 94.7%, and average revenue per
occupied unit was $742.

         Apartments NOI (apartment rental income less apartment operating
expenses) totaled $40.8 million in 2005, an increase of 52.1%, or $14.0 million,
compared to 2004. On a same-units basis, apartments NOI increased by 4.7% in
2005 compared to 2004.

         Restaurant rental income totaled $3.8 million in both 2005 and 2004. We
received the minimum rent specified in the lease agreement in both years. Under
our master lease with Boddie-Noell

                                       36
<PAGE>


Enterprises,  restaurant  rental  income  payments  are the greater of specified
minimum  rent or  9.875% of food  sales.  Minimum  rent is set at  approximately
$8,000 per month,  or $96,000 per year,  per restaurant  property.  We currently
hold 40 restaurant  properties  under this lease,  and minimum rent is currently
set at $319,000 per month, or $3.8 million per year.

          Same-store sales (all 40 of the restaurant properties were open
throughout all of 2005 and 2004) declined by 5.9% in 2005 compared to 2004.
Sales at these restaurants would have to increase by 7.1% before we would
receive percentage rent in excess of the minimum.

         Management fee income totaled $131,000 in 2005, compared to $761,000 in
2004. This decrease is consistent with expectations, and is attributable to the
elimination of management fees for consolidated limited partnerships and our
acquisition of four managed properties in the first quarter of 2005. Going
forward, we expect that management fees will be insignificant.

         We recorded casualty gains of $668,000 in 2005 and $269,000 in 2004,
related to fires that occurred at apartment properties - in each case, one
building incurred significant damage. We received, or expect to receive,
insurance proceeds for the casualties, against which we identified and wrote off
the net carrying values of the assets destroyed. GAAP require us to recognize
the difference between the insurance proceeds and the net carrying value of the
destroyed assets as a gain. However, we intend to reinvest all of the insurance
proceeds in replacement assets. We are insured for the losses, including rent
continuation insurance that covers 100% of lost rental income.

Expenses

         Total expenses, including non-cash charges for depreciation,
amortization and write-off of unamortized loan costs, totaled $82.4 million in
2005, an increase of 68.1% compared to 2004. This increase is primarily
attributable to growth in the size of our apartment operations, along with
charges for deficit distributions to a minority partner in a consolidated
limited partnership.

         We reflect the unaffiliated partners' share of the underlying net
assets of the three consolidated limited partnerships as "minority interest in
consolidated limited partnerships." When these consolidated limited partnerships
make cash distributions to partners in excess of the carrying amount of the
minority interest as measured by GAAP, we record a charge equal to the amount of
such excess distributions, even though there is no economic effect or cost to
the operating partnership. We report this charge in our consolidated financial
statements of operations as deficit distributions to minority partners. We
recorded charges for deficit distributions to the minority partner in the Marina
Shores Partnership totaling $7.9 million in 2005.

         Apartment operations expense totaled $26.2 million in 2005, an increase
of 44.8%, or $8.1 million, compared to 2004. This line item includes only direct
costs of on-site apartment operations. The increase is attributable to:

     o    Apartment acquisitions in 2004 and 2005 - apartment operations expense
          for these 11 owned communities  totaled $7.3 million in 2005, compared
          to $1.8 million in 2004; and

     o    Apartment  communities  that we consolidate  effective  January 2005 -
          apartment   operations   expense  for  these  three   partial-interest
          communities totaled $2.7 million in 2005.

On a same-units basis, apartment operations expense declined by 1.0% in 2005
compared to 2004.

         Operating expenses for restaurant properties are insignificant because
the triple-net lease arrangement requires the lessee to pay virtually all of the
expenses associated with the restaurant properties.

                                       37
<PAGE>

         Apartment administration costs (the costs associated with oversight,
accounting and support of our apartment management activities) totaled $3.2
million in 2005, an increase of 45.5%, or $1.0 million, compared to 2004. This
increase is primarily attributable to additional corporate support and
operations staff. In 2005 we began a major effort to improve our systems and
operations - including adding a vice president of operations position,
substantial upgrades to our computer systems, adding certain operational
personnel and expanding our operating facility. Our objective in undertaking
this effort is to increase the efficiency of our operations and to allow us to
continue to grow without disruption. While this effort entails considerable
up-front costs, we believe that it will yield significant long-term cost
benefits.

         Corporate administration expense totaled $3.0 million in 2005, an
increase of 31.6%, or $0.7 million, compared to 2004. This increase is primarily
attributable to a $284,000 increase in professional fees associated with
requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and late audit fee
billings, along with increases in executive compensation.

         Effective August 1, 2005, the Board of Directors granted and caused the
company to issue 200,000 restricted shares of the company's common stock to four
of our executive officers. We refer to these shares as "nonvested shares" in our
consolidated financial statements. All of the shares were unvested on the date
of grant, and will vest 10% per year beginning July 1, 2006, and on each July 1
thereafter until fully vested. During 2005, we recorded $143,000 in service cost
related to nonvested common stock, included in corporate administration expense
in our financial statements. We will continue to recognize the cost of these
awards on a straight-line basis for each annual vesting period ending June 30
through 2015.

         Interest expense totaled $22.6 million in 2005, an increase of 56.1%,
or $8.1 million, compared to 2004. This increase is primarily attributable to
new debt issued or assumed in conjunction with acquisitions of apartment
communities during 2004 and 2005, along with the impact of consolidating three
limited partnerships in 2005. Overall, weighted average interest rates were 5.8%
in 2005, compared to 5.7% in 2004, reflecting the impact of steady increases in
variable interest rates over the last 12 months, mitigated somewhat by the
favorable impact of our refinancing activities during 2005.

         During 2005 we recorded $2.1 million in charges for penalties paid at
refinance of debt, including $519,000 paid by the Marina Shores Partnership in
January 2005 and $1.6 million paid by the operating partnership in conjunction
with refinance transactions in late December 2005.

         Depreciation expense totaled $16.6 million in 2005, an increase of
44.5%, or $5.1 million, compared to 2004. This increase is primarily
attributable to acquisitions of apartment communities, along with depreciation
expense for the apartment communities that we consolidate effective January
2005.

Net income

           Consolidated earnings from continuing operations before non-cash
charges (for depreciation, amortization and write-off of unamortized loan costs
at refinance) and before the $7.9 million charge for deficit distributions to a
minority partner totaled $14.8 million, an increase of 14.8%, or $1.9 million,
compared to 2004. This increase reflects the positive impact of new apartment
communities and improvements in apartment revenues, offset by $2.1 million in
charges for prepayment penalties paid in loan refinance transactions.

         The net loss from continuing operations, before minority interests,
totaled $10.4 million, compared to $1.0 million income before minority interests
in 2004. The 2005 losses again reflect the impact of $2.1 million in prepayment
penalties paid in loan refinance transactions, $0.3 million in charges to write
off unamortized loan costs at refinance and $7.9 million in charges for deficit
distributions to a minority partner (which involved no cash outlay or economic
effect to the operating partnership).

                                       38
<PAGE>

         We allocate proportional income and losses of the consolidated limited
partnerships, measured on a year-to-date basis, to minority partners. However,
we may allocate losses to a minority partner only to the extent of the carrying
amount of the interest of that minority partner. When losses attributable to the
minority limited partners of a consolidated limited partnership exceed their
positive capital balances, we record a charge, even though there is no cash
outlay by the operating partnership. During 2005, we recorded charges of
$126,000 to absorb losses that could not be allocated to minority partners'
accounts. As of the end of 2005, all of the capital accounts of minority
partners in the consolidated limited partnerships have been depleted, and we
expect to continue to record charges for these losses going forward.

         Minority interests in the consolidated limited partnerships and the
operating partnership absorbed $2.3 million of the consolidated losses from
continuing operations in 2005. The comparable allocation to the minority
interest in the operating partnership in 2004 was only $1,000. After allocating
these losses to minority interests, the net loss from continuing operations was
$8.1 million in 2005, compared to $1.0 million net income from continuing
operations in 2004.

         Amounts for discontinued operations reflect the operating results of
Savannah Shores Apartments from July 2004 through October 2005. Savannah Shores
generated $88,000 in operating income in 2005, compared to $95,000 in operating
income in 2004. In October 2005, we sold Savannah Shores Apartments for a
contract price of $22.75 million to an unaffiliated third party. Net proceeds of
the sale were $22.2 million, and we recorded a gain on the sale of real estate
assets of $8.1 million. After allocating $1.7 million of the income from
discontinued operations to operating partnership minority unitholders, income
from discontinued operations totaled $6.6 million in 2005, compared to $77,000
in 2004. The net loss was $1.5 million in 2005, compared to net income of $1.0
million in 2004.

         In November 2005, we redeemed all of the outstanding shares of
preferred stock in exchange for shares of our common stock. Because the
preferred shareholder had priority over common shareholders for receipt of
dividends prior to this conversion, we deduct the amount of net income to be
paid to the preferred shareholder in calculating net income available to common
shareholders - $833,000 in 2005 and $1.0 million in 2004.

         The net loss attributed to common shareholders in 2005 was $2.3
million, or $0.25 on a diluted per share basis, compared to net income in 2004
of $39,000, or $0.01 on a diluted per share basis.

2004 compared to 2003

Revenues

         Revenues in 2004 totaled $50.0 million, an increase of 17.2% compared
to 2003. Apartment related income accounted for 92.3% of our total revenue in
2004, compared to 90.8% in 2003.

         Apartment rental income in 2004 totaled $44.9 million, an increase of
19.9%, or $7.5 million, compared to 2003. $6.0 million of this increase is
attributable to rental income at six apartment communities that we acquired
during 2004 and 2003. On a same-units basis (for the 4,427 units that we owned
throughout all of both 2004 and 2003), apartment rental income increased by $1.4
million, or 4.0%, compared to 2003.

         On a same-units basis, average economic occupancy was 94.8% in 2004
compared to 92.9% in 2003, and average monthly revenue per occupied unit was
$739 in 2004 compared to $728 in 2003. In 2004, for all apartment units, average
economic occupancy was 94.4%, and average revenue per occupied unit was $737.

                                       39
<PAGE>

         Restaurant rental income in 2004 totaled $3.8 million, a decline of
2.0% compared to 2003. The decrease in restaurant rental income is due to the
sale of two restaurant properties in 2003. We received the minimum rent
specified in the lease agreement throughout both years.

         Same-store sales (for the 40 restaurants that were open throughout all
of both 2004 and 2003) increased by 8.5% in 2004 compared to 2003. For the first
time in almost nine years, during the second and third quarters of 2004, sales
at our restaurant properties exceeded the threshold for percentage rent;
however, for the full 12-month period, sales fell 1.3% short of the threshold
for rent exceeding the minimum rent.

         Management fee income in 2004 totaled $0.8 million, a decline of 12.8%
compared to 2003. This decrease is primarily attributable to our acquisitions of
two previously managed properties (one in August 2003, and one in July 2004).

Expenses

         Total expenses, including non-cash charges for depreciation,
amortization and write-off of unamortized loan costs, totaled $49.0 million in
2004, an increase of 14.7% compared to 2003.

         Apartment operations expense totaled $18.1 million in 2004, an increase
of 17.2%, or $2.6 million, compared to 2003. This increase is primarily
attributable to operating expenses at six apartment communities that we acquired
during 2004 and 2003. On a same-units basis, apartment operations expense
increased by only 0.3% in 2004 compared to 2003.

         Apartment administration expense totaled $2.2 million in 2004, an
increase of 29.2% compared to 2003. Corporate administration expense totaled
$2.3 million in 2004, an increase of 5.2% compared to 2003. These increases are
attributable to additional corporate support staff, software and insurance
costs, as well as approximately $100,000 spent in 2004 for development of
compliance documentation required by Section 404 of the Sarbanes-Oxley Act of
2002.

         Interest expense totaled $14.4 million in 2004, an increase of 11.1%,
or $1.4 million, compared to 2003. This increase reflects the impact of a net
increase in outstanding debt, primarily at fixed rates, in 2004, related to
apartment acquisitions. Overall, weighted average interest rates were 5.7% in
2004 and 5.9% in 2003.

         Depreciation expense totaled $11.5 million in 2004, an increase of
14.5%, or $1.5 million, compared to 2003. This increase is attributable to the
addition of six apartment communities during 2004 and 2003 and the impact of
additions and replacements at other apartment communities. We generally assign
those additions and replacements shorter lives than the composite lives we
assigned at the acquisition of the assets to which the additions and
replacements relate.

Net income

         Earnings from continuing operations before non-cash charges for
depreciation, amortization and write-off of unamortized loan costs totaled $12.9
million in 2004, an increase of $2.6 million, or 25.3%, compared to 2003. Net
income from continuing operations, before minority interests, totaled $961,000
in 2004, compared to a loss of $66,000 in 2003.

         Net income (after the minority interest in the operating partnership
net income or loss, and before deduction for cumulative preferred dividend) was
$1.0 million in 2004, compared to $107,000 in 2003.

                                       40
<PAGE>

         Income attributed to common shareholders in 2004 was $39,000, or $0.01
on a diluted per share basis, compared to loss attributed to common shareholders
in 2003 of $553,000, or $0.09 on a diluted per share basis.

         These favorable comparisons are primarily attributable to the positive
impact of new apartment communities and improvements in apartment operating
results.

Funds from Operations - 2005, 2004 and 2003

         Funds from operations and funds available for distribution are defined
in footnote 2 at page 23. Both of these measures are made at the operating
partnership level. You should read and understand that footnote before reviewing
the following discussion.

         We calculated FFO of the operating partnership as follows:
<TABLE>
<CAPTION>

                                                                     2005           2004           2003
                                                                --------------- -------------- --------------
                                                                   (000's)         (000's)        (000's)
<S>                                                            <C>               <C>          <C>
Net (loss) income                                               $    (1,488)      $   1,039    $       107
Add income (loss) attributed to minority interests                     (668)             16           (174)
Less cumulative preferred dividend                                     (833)         (1,000)          (661)
Less gain on sale of real estate investments                         (8,132)              -              -
Less casualty gains                                                    (668)           (269)             -
Add amortization of in-place lease intangible                           193               -              -
Add depreciation -
 - continuing operations                                             16,602          11,491         10,040
 - discontinued operations                                              259             170              -
Add deficit distributions to minority partners of
   consolidated limited partnerships (1)                              7,861               -              -
Add minority interest in FFO of consolidated limited
   partnerships                                                           8               -              -
                                                                --------------- -------------- --------------
Funds from operations                                           $    13,133       $  11,447    $     9,313
                                                                =============== ============== ==============
<FN>
(1)  In accordance with GAAP, deficit distributions to minority partners are
     charges recognized in our statement of operations when a consolidated
     limited partnership distributes cash to a minority partner in excess of the
     positive balance in such partner's capital account (which is classified as
     minority interest in our consolidated balance sheet). We are required to
     record these charges for GAAP purposes even though there is no cash outlay
     by the operating partnership. The economic cost of these distributions is
     borne by the limited partnership making the distributions.

     Deficit distributions to minority partners may occur when the fair value of
     the underlying real estate exceeds its depreciated net book value because
     the underlying real estate has appreciated or maintained its value. As a
     result, deficit distributions to minority partners represent, in substance,
     either our recognition of depreciation previously allocated to that partner
     or a cost related to the minority partner's share of real estate
     appreciation. Based on NAREIT guidance that requires that real estate
     depreciation and gains be excluded from FFO, we add back deficit
     distributions in our reconciliation of net income to FFO.
</FN>
</TABLE>

         Funds from operations in 2005 totaled $13.1 million, an increase of
14.7% compared to 2004, in spite of $1.6 million in charges for prepayment
penalties ($2.1 million in prepayment penalties paid in debt refinance
transactions in 2005 on a consolidated basis, less $0.5 million charge absorbed
by the minority partner interest in the Marina Shores Partnership). Funds from
operations in 2004 totaled $11.5 million, an increase of 22.9% compared to 2003.
These comparisons reflect the positive impact of new apartment communities and
improved margins in apartment operations in 2004 and 2005.

                                       41
<PAGE>

         Funds available for distribution in 2005 (which also includes the $1.6
million charge for prepayment penalties) totaled $19.0 million, an increase of
90.4% compared to 2004 - if not for the 2005 gain on sale of real estate assets
and charge for prepayment penalties, this increase would be 25.2%. Funds
available for distribution in 2004 totaled $10.0 million, an increase of 26.4%
compared to 2003. The disparity between comparisons of FFO and FAD against prior
year periods generally arises from the impact of recurring capital expenditures,
which we deduct in our measurement of FAD. Recurring capital expenditures
include operating replacements such as floor coverings, appliances and HVAC, as
well as expenditures for capital replacements such as roofs and exterior paint.
Recurring capital expenditures at owned apartment properties averaged $368 per
apartment unit in 2005, $354 per apartment unit in 2004, and $374 per apartment
unit in 2003.

         A reconciliation of net cash provided by operating activities (as
defined by GAAP and reflected in our consolidated statements of cash flows) to
FAD follows:
<TABLE>
<CAPTION>

                                                                     2005           2004           2003
                                                                --------------- -------------- --------------
                                                                   (000's)         (000's)        (000's)
<S>                                                              <C>             <C>            <C>
Net cash provided by operating activities                         $  12,793       $  12,677      $   9,594
Less cumulative preferred dividend                                     (833)         (1,000)          (661)
Add gain on sale of real estate investments                           8,132               -              -
Less casualty losses                                                      -             (14)             -
Less recurring capital expenditures                                  (3,018)         (1,918)        (1,731)
Add amortization of interest defeasance                                   -             105            228
Add change in operating assets and liabilities, net                   1,912             138            472
Add minority interest in reconciling items arising from
   consolidated limited partnerships                                     28               -              -
                                                                --------------- -------------- --------------
Funds available for distribution                                  $  19,014       $   9,988      $   7,904
                                                                =============== ============== ==============
</TABLE>

         Other information about our historical cash flows follows:
<TABLE>
<CAPTION>

                                                                     2005           2004           2003
                                                                --------------- -------------- --------------
                                                                   (000's)         (000's)        (000's)
<S>                                                             <C>              <C>            <C>
Net cash provided by (used in)
   Operating activities                                          $   12,793       $  12,677      $   9,594
   Investing activities                                             (61,444)        (52,848)       (25,275)
   Financing activities                                              51,245          40,123         15,361

Dividends and distributions paid to
   Preferred shareholder                                         $    1,083       $   1,000      $     537
   Common shareholders                                                9,306           7,551          5,859
   Minority unitholders in operating partnership                      2,121           1,847          1,845

Scheduled debt principal payments, exclusive of
   financing transactions                                        $    2,379       $   1,378      $   1,172

Non-recurring capital expenditures
   Acquisition improvements and replacements                     $    2,117       $   1,104      $   1,053
   Apartment property additions and betterments                       1,935           1,613            565
   Reconstruction and replacement of casualty losses                  1,227             526              -
</TABLE>

                                       42
<PAGE>

<TABLE>
<CAPTION>

                                                                     2005           2004           2003
                                                                --------------- -------------- --------------
                                                                   (000's)         (000's)        (000's)
<S>                                                             <C>              <C>            <C>
Weighted average Preferred B shares outstanding                         790             909            601
Weighted average common shares outstanding                            9,389           7,617          5,868
Weighted average operating partnership
   minority units outstanding                                         2,301           1,856          1,843
</TABLE>

Inflation

         We do not believe that inflation poses a material risk to the company.
The leases at our apartment properties are short term in nature. None are longer
than two years. The restaurant properties are leased on a triple-net basis,
which places the risk of rising operating and maintenance costs on the lessee.

Off balance sheet arrangements

         We received $3.8 million in rent from Boddie-Noell Enterprises for use
of our restaurant properties in 2005. In addition to rental payments to us,
Boddie-Noell Enterprises is responsible for all of the costs associated with the
maintenance and operations of these properties, including property taxes,
property insurance and capital replacements and betterments to the real estate
assets.

Contractual obligations

         Our contractual obligations as of December 31, 2005, are summarized as
follows (all amounts in thousands):
<TABLE>
<CAPTION>

                                                                Payments due by period
                                                            Less                                  More than
                                              Total     than 1 year   1 - 3 years  3 - 5 years     5 years
                                           ------------ ------------- ------------ ------------- ------------
<S>                                        <C>          <C>           <C>          <C>           <C>
Long-term debt obligations
 - owned properties                         $ 388,576    $  10,167     $  76,732    $  65,223     $ 236,454
 - consolidated limited partnerships           48,136          811         1,728        1,897        43,700
Operating lease - corporate office                545          225           320            -             -
Purchase obligations for improvements
   and replacements to real estate assets
                                                2,532        2,532             -            -             -
                                           ------------ ------------- ------------ ------------- ------------
   Total                                    $ 439,789    $  13,735     $  78,780    $  67,120     $ 280,154
                                           ============ ============= ============ ============= ============
</TABLE>

Environmental matters

         Phase I environmental studies performed on the apartment communities
when we acquired each of them did not identify any problems that we believe
would have a material adverse effect on our results of operations, liquidity or
capital resources. Environmental transaction screens for each of the restaurant
properties in 1995 did not indicate existence of any environmental problems that
warranted further investigation. Boddie-Noell Enterprises has indemnified us
under the master lease for environmental problems associated with the restaurant
properties.

                                       43
<PAGE>

Critical accounting policies

         We identify and discuss our significant accounting policies that
directly impact our financial statements in the notes to those financial
statements included in this Annual Report. Those policies that may be of
particular interest to readers of this Annual Report are further discussed
below.

Accounting for general partner interests in limited partnerships

         As managing general partner in three real estate limited partnerships,
we have the ability to exercise significant influence over operating and
financial policies and activities. The appropriate accounting treatment for our
interests in these partnerships varies.

         If the partnership is considered a variable interest entity ("VIE") and
we are the "primary beneficiary," as defined by GAAP, we include the accounts of
the partnership in our consolidated financial statements. We initially record
all of the VIE's assets, liabilities and minority interests at fair value. If
we, as general partner, control a partnership that is not a VIE, we also include
the accounts of the partnership in our consolidated financial statements. We
initially record our prorata interest in the partnership's assets and
liabilities at the lower of our cost or fair value; we reflect the minority
partners' interest in the partnership's assets and liabilities at historical
cost, except to adjust an existing deficit capital account balance to $-0-.

         If a consolidated limited partnership makes distributions to a minority
partner in excess of the positive balance in such partner's capital account, we
record a charge to our earnings for "deficit distributions to minority
partners," even though the cash outlay is made by the consolidated limited
partnership, and not by our operating partnership.

         We allocate proportional income and losses of the consolidated limited
partnerships to minority partners; however, we may allocate losses to a minority
partner only to the extent of his positive capital account balance. If losses
attributable to a minority partner exceed his capital account balance, we record
a charge to our earnings to absorb those losses, even though our operating
partnership suffers no adverse economic effect.

Purchase price allocation for apartment community acquisitions

         In connection with the acquisition of an apartment community, we
perform a valuation and allocation to each significant asset and liability in
such transaction, based on their estimated fair values at the date of
acquisition. Significant tangible asset values generally include real estate
investments, which we subsequently depreciate over their estimated useful lives.
We include an estimate of intangible asset values, generally consisting of
at-market, in-place leases, and amortize these amounts over the remaining lease
terms as a reduction in reported rental income. In general, we have found that
the average remaining life of in-place leases at acquisition date ranged from
five to nine months, and such intangible assets represented approximately 0.1%
to 0.3% of contract prices.

Capital expenditures and depreciation

         In general, for the 16 apartment properties acquired before 2002, we
compute depreciation using the straight-line method over composite estimated
useful lives of the related assets, generally 40 years for buildings, 20 years
for land improvements, 10 years for fixtures and equipment, and five years for
floor coverings.

         For apartment properties acquired after 2001, we performed detailed
analyses of components of the real estate assets acquired. For these properties,
we assigned estimated useful lives, based on age and

                                       44
<PAGE>

condition at acquisition, as follows: base building structure, 43-60 years; land
improvements,  7-20 years;  short-lived  building  components,  5-20 years;  and
fixtures, equipment and floor coverings, 5-10 years.

         We generally complete and capitalize acquisition improvements (planned
expenditures we identify when we acquire the property and that are intended to
position the property consistent with our physical standards) within one to two
years of acquisition of the related apartment property. We capitalize
non-recurring expenditures for additions and betterments to buildings and land
improvements. In addition, we generally capitalize recurring capital
expenditures for exterior painting, roofing, and other major maintenance
projects that substantially extend the useful life of existing assets. For
financial reporting purposes, we depreciate these additions and replacements on
a straight-line basis over estimated useful lives of 5-20 years. We retire
replaced assets with a charge to depreciation for any remaining carrying value.
We capitalize all floor covering, appliance, and HVAC replacements, and
depreciate them using a straight-line, group method over estimated useful lives
of 5-10 years.

         Capital expenditures at our owned apartment communities during 2005
totaled $7.9 million, including $2.1 million for acquisition improvements, $1.9
million for additions and betterments, $1.2 million for reconstruction and
replacement of casualty losses, and $2.7 million in recurring capital
expenditures.

         We expense ordinary repairs and maintenance costs at apartment
communities. Repairs and maintenance at our owned apartment communities during
2005 totaled $8.7 million, including $3.2 million in compensation of service
staff and $5.5 million in payments for materials and contracted services.

         Costs of repairs, maintenance, and capital replacements and
improvements at restaurant properties are borne by the lessee.

Impairment of long-lived assets

         We evaluate our real estate assets when significant adverse changes in
operations or economic conditions occur in order to assess whether any
impairment indicators are present that affect the recovery of the recorded
values. If we considered any real estate assets to be impaired as defined by
GAAP, we would record a loss to reduce the carrying value of the property to its
estimated fair value. Through December 31, 2005, there have been no such
circumstances, and we considered none of our assets impaired.

Revenue recognition

         We record rental and other income monthly as it is earned. We record
rental payments that we receive prior to the first of a given month as prepaid
rent. We hold tenant security deposits in trust in bank accounts separate from
operating cash (these amounts are included in other current assets on our
balance sheet), and we record a corresponding liability for security deposits on
our balance sheet.

         We amortize any cash concessions given at the inception of an apartment
lease over the approximate life of the lease, which is generally one year or
less. In general, cash concessions range from $100 to $300 and are taken by
residents during the first two months of the lease.

Stock-based compensation

         The company has one employee Stock Option and Incentive Plan in place,
which we describe in more detail in the notes to our financial statements in
this Annual Report. Prior to July 1, 2005, we accounted for options granted
under this plan using the intrinsic value method; no stock-based employee
compensation expense was reflected in our earnings, as all outstanding options
had been granted at

                                       45
<PAGE>

exercise  prices equal to market value of the  underlying  stock on the dates of
grant. All outstanding options were fully vested by the end of 2004.

           Effective July 1, 2005, we adopted the fair value recognition
provisions of Statement No. 123, as revised in 2004 ("FAS 123(R)"), using the
modified-prospective transition method. Under this transition method,
compensation cost recognized in the second half of 2005 includes compensation
cost for all share-based payments granted subsequent to July 1, 2005, based on
the grant-date fair value estimated in accordance with the provisions of FAS
123(R). Under the modified-prospective transition method, there is no
compensation cost recognized for previously granted options that were fully
vested prior to July 1, 2005.

Additional Information

         We provide the following information to analysts and other members of
the financial community for use in their detailed analysis. This information has
not been included in our Annual Report to Shareholders.

         A summary of capital expenditures for owned apartment properties, in
aggregate and per apartment unit, follows:
<TABLE>
<CAPTION>

                                               2005                   2004                   2003
                                        Total     Per unit      Total    Per unit      Total    Per unit
                                      ----------- ----------- ---------- ----------- ---------- -----------
                                       (000's)                 (000's)                (000's)
<S>                                     <C>          <C>        <C>         <C>       <C>         <C>
Recurring capital expenditures:
  Floor coverings                        $1,255       $173       $  775      $143      $  772      $167
  Appliances/HVAC                           464         64          385        71         256        55
  Exterior paint                             11          2            -         -         183        39
  Computer/support equipment                107         15            4         1          85        18
  Other                                     832        115          754       139         436        94
                                      ----------- ----------- ---------- ----------- ---------- -----------
                                         $2,669       $368       $1,918      $354      $1,731      $374
                                      =========== =========== ========== =========== ========== ===========

Non-recurring capital
  expenditures:
  Acquisition improvements               $2,117                  $1,104                $1,053
  Additions and betterments               1,621                   1,541                   508
  Replacements of casualty losses         1,227                     526                     -
  Computer/support equipment                314                      72                    57
                                      -----------             ----------             ----------
                                         $5,279                  $3,243                $1,619
                                      ===========             ==========             ==========
</TABLE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         All of our long-term debt is collateralized by real estate investments.
A summary of long-term debt as of December 31, 2005 and 2004 is included in the
notes to the financial statements included in this Annual Report. At December
31, 2005, on a consolidated basis, long-term debt totaled $436.7 million,
including $383.0 million of notes payable at effective fixed interest rates
ranging from 5.0% to 7.4% (the weighted average rate for fixed-rate notes was
5.8%), and $53.7 million at variable rates indexed on 30-day LIBOR rates. Of the
$436.7 million in consolidated debt, $388.6 million is related to properties
wholly owned by the company, and $48.1 million is related to properties in which
the company has a partial interest.

                                       46
<PAGE>

         The weighted-average interest rate on debt outstanding at year end was
5.8% in 2005, 5.9% in 2004, and 5.8% in 2003. At our current level of
variable-rate debt, a 1% change in variable interest rates would increase or
decrease our annual interest expense by approximately $550,000.

         The table below provides information about our long-term debt
instruments and presents expected principal maturities and related weighted
average interest rates on those instruments:
<TABLE>
<CAPTION>

                             Expected maturity dates
                             2006        2007        2008        2009        2010       Later       Total
                          ----------- ----------- ----------- ----------- ----------- ----------- -----------
                             (all dollar amounts in thousands)
<S>                       <C>         <C>         <C>         <C>         <C>        <C>         <C>
For owned properties:

Fixed rate notes           $ 2,103     $ 2,254     $41,946     $31,247     $20,914    $236,454    $334,916
   Average interest rate       5.9%        5.9%        6.5%        5.3%        6.8%        5.7%        5.8%

Variable rate notes        $ 8,064     $ 8,237     $24,296     $13,062     $     -    $      -    $ 53,660
   Average interest rate       6.4%        6.3%        6.2%        6.2%                                6.3%

For consolidated limited partnerships:

Fixed rate notes (1)       $   627     $   664     $   698     $   743     $   786    $ 43,594    $ 47,112
   Average interest rate       5.7%        5.7%        5.7%        5.7%        5.7%        5.8%        5.7%
<FN>
(1) Amounts do not include $1.0 million debt premium to adjust one loan to fair
value in consolidation.
</FN>
</TABLE>

         We estimate the fair value of fixed-rate and variable-rate notes using
discounted cash flow analyses, based on our current incremental borrowing rates
for similar types of borrowing arrangements. On a consolidated basis, the
carrying value of our notes payable at December 31, 2005, approximated fair
value.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The financial statements and supplementary data are listed under Item
15(a) and filed as part of this Annual Report on the pages indicated.

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

         In September 2005, we announced that we had dismissed Ernst & Young LLP
and engaged Grant Thornton LLP as the new principal accountant to audit the
company's consolidated financial statements. The Audit Committee of the Board of
Directors approved the decision to change accountants.

         Ernst & Young LLP's reports on the company's consolidated financial
statements for the years ended December 31, 2004 and 2003 did not contain an
adverse opinion or a disclaimer of opinion, nor were such reports qualified or
modified as to uncertainty, audit scope, or accounting principles.

         In connection with Ernst & Young LLP's audits of the company's
consolidated financial statements for the years ended December 31, 2004 and
2003, and through September 16, 2005, there had been no disagreements between
the company and Ernst & Young LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Ernst & Young LLP, would
have caused Ernst & Young LLP to make reference to the subject matter of such
disagreement in its reports. No "reportable events" (as defined by Item
304(a)(1)(v) of Regulation S-K) occurred during the two most recent fiscal years
and through September 16, 2005.

                                       47
<PAGE>

ITEM 9A.  CONTROLS AND PROCEDURES

Management's  Conclusions Regarding the Effectiveness of Disclosure Controls and
Procedures

         We have performed a review and evaluation, under the supervision and
with the participation of management, including the Chairman, Chief Executive
Officer and the Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period
covered by this annual report on Form 10-K. Based on our review and evaluation,
the Chairman, Chief Executive Officer and Chief Financial Officer have concluded
that, as of December 31, 2005, our disclosure controls and procedures, as
designed and implemented, were effective to provide reasonable assurance that
information required to be disclosed in the reports we file and submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
as and when required, including reasonable assurance that information required
to be disclosed by us in such reports is accumulated and communicated to our
management, including our Chairman, Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosures.

Management Report on Internal Control Over Financial Reporting

         Management of the company is responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control
over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated
under the Exchange Act as a process designed by, or under the supervision of,
the company's principal executive and principal financial officers and effected
by the company's Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles, and includes those policies and
procedures that:

     o    pertain  to the  maintenance  of  records  that in  reasonable  detail
          accurately and fairly reflect the transactions and dispositions of the
          company's assets;

     o    provide  reasonable   assurance  that  transactions  are  recorded  as
          necessary to permit preparation of financial  statements in accordance
          with generally accepted accounting  principles,  and that receipts and
          expenditures  of the  company are being made only in  accordance  with
          authorizations of management and the company's Board of Directors; and

     o    provide reasonable  assurance regarding prevention or timely detection
          of  unauthorized  acquisition,  use or  disposition  of the  company's
          assets that could have a material effect on the financial statements.

         There are inherent limitations to the effectiveness of any system of
internal controls, including the possibility of human error and the
circumvention or overriding of controls and procedures. Accordingly, even
effective internal control over financial reporting may not prevent or detect
misstatements. Further, projections of any evaluation of effectiveness to future
periods are subject to the risks that controls may become inadequate because of
changes in conditions or that the degree of compliance with policies or
procedures may deteriorate.

         Management has assessed the effectiveness of our internal control over
financial reporting as of December 31, 2005. In making this assessment,
management used criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on our assessment, the company's management believes that, as of December
31, 2005, the company's internal control over financial reporting was effective
based on those criteria. There were no material weaknesses identified in the
course of our review and evaluation.

                                       48
<PAGE>

         Our independent registered public accounting firm, Grant Thornton LLP,
has issued an audit report on management's assessment of the company's internal
control over financial reporting, a copy of which is included herein.

Changes in Internal Control Over Financial Reporting

         There were no changes in our internal control over financial reporting
identified in connection with our fourth quarter 2005 evaluation of such
internal control that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

             Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
BNP Residential Properties, Inc.

We have audited management's assessment, included in the accompanying Management
Report on Internal Control Over Financial Reporting, that BNP Residential
Properties, Inc. (a Maryland corporation) maintained effective internal control
over financial reporting as of December 31, 2005, based on criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organization of the Treadway Commission (COSO). BNP Residential Properties,
Inc.'s management is responsible for maintaining effective control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial
reporting, evaluating management's assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorization of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projection of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, management's assessment that BNP Residential Properties, Inc.
maintained effective internal control over financial reporting as of December
31, 2005, is fairly stated, in all material respects, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of

                                       49
<PAGE>

Sponsoring Organizations of the Treadway Commission (COSO). Also in our
opinion, BNP Residential Properties, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
BNP Residential Properties, Inc. as of December 31, 2005, and the related
consolidated statements of operations, shareholder's equity, and cash flows for
the year then ended and our report dated March 6, 2006 expressed an unqualified
opinion on those statements.

   /s/Grant Thornton LLP

Charlotte, North Carolina
March 6, 2006

ITEM 9B.  OTHER INFORMATION

         None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The current directors hold office for the terms described below or
until their successors are elected and qualified. The current members of our
Board of Directors are identified in the following table, followed by
biographical information on each member.

           Name              Age        Position                 Director Since
---------------------------- ---------- ------------------------ ---------------

Directors serving until the 2006 annual meeting:
W. Michael Gilley                50     Director                 December 1997
Peter J. Weidhorn                58     Director                 December 2001

Directors serving until the 2007 annual meeting:
Philip S. Payne                  54     Chairman                 December 1997
Stephen R. Blank                 60     Director                 May 1999

Directors serving until the 2008 annual meeting:
D. Scott Wilkerson               48     Director, President,     December 1997
                                        Chief Executive Officer
Paul G. Chrysson                 51     Director                 December 1997

Philip S. Payne - Chairman of the Board of Directors. Mr. Payne joined BT
Venture Corporation, which was subsequently purchased by the company, in 1990 as
Vice President of Capital Markets Activities and became Executive Vice President
and Chief Financial Officer in January 1993. He was named Treasurer in April
1995 and a Director in December 1997. In January 2004, Mr. Payne was named
Chairman of the Board of Directors. From 1987 to 1990, he was a principal in
Payne Knowles Investment Group, a financial planning firm. From 1983 to 1987, he
was a registered representative with Legg Mason Wood Walker. From 1978 to 1983,
Mr. Payne practiced law, and he currently maintains his license to practice law
in Virginia. He received a BS degree from the College of William and Mary in
1973 and a JD degree in 1978 from the same institution. He is a member of the
board of directors of the National Multi Housing Council and is a member of the
Urban Land Institute (Multi Family Council - Gold). In addition, he is a

                                       50
<PAGE>

member of the board of directors of Ashford Hospitality Trust, a REIT focused on
the hospitality industry, and serves as chairman of its audit committee.

D. Scott Wilkerson - Director, President, Chief Executive Officer. Mr. Wilkerson
joined BT Venture Corporation, which was subsequently purchased by the company,
in 1987 and served in various officer-level positions, including Vice President
of Administration and Finance and Vice President for Acquisitions and
Development before becoming President in January 1994. He was named Chief
Executive Officer in April 1995 and a Director in December 1997. From 1980 to
1986, Mr. Wilkerson was with Arthur Andersen LLP in Charlotte, North Carolina,
serving as tax manager from 1985 to 1986. His specialization was in the
representation of real estate investors, developers and management companies.
Mr. Wilkerson received a BS degree in accounting from the University of North
Carolina at Charlotte in 1980. He is a certified public accountant and licensed
real estate broker. He serves on the boards of directors of the National Multi
Housing Council and the National Apartment Association. He is President of the
Apartment Association of North Carolina and is a past president of the Charlotte
Apartment Association. He is active in various professional, civic and
charitable activities.

Stephen R. Blank - Director. Mr. Blank is a Senior Fellow, Finance, with the
Urban Land Institute, and an Adjunct Professor at the Columbia University
Graduate School of Business. From 1993 to 1998, he was the Managing Director for
Real Estate Investment Banking with CIBC Oppenheimer Corp. He is an independent
trustee of Ramco-Gershenson Properties Trust and Atlantic Realty Trust, and
serves on the board of directors of MFA Mortgage Investments, Inc. In addition,
he serves as a member of the board of advisors of Paloma, LLC, the principal
investor in a private multifamily real estate investment trust. Mr. Blank serves
as the chair of the audit committees for both Ramco-Gershenson Properties Trust
and MFA Mortgage Investments, Inc. He has over 20 years experience as a senior
real estate investment banking officer, advising and evaluating a wide array of
real estate companies, including publicly reporting companies.

Paul G. Chrysson - Director. Mr. Chrysson is President of C.B. Development
Company, Inc., a developer of single-family and multi-family residential
properties. Mr. Chrysson is a member of the Board of Advisors of Wachovia Bank
(Forsyth County). He is a former director of Triad Bank and United Carolina Bank
(North Carolina) and has served on the boards of various charitable
organizations. He has been a licensed real estate broker since 1974 and has been
actively involved in construction since 1978.

W. Michael Gilley - Director. Mr. Gilley is a private real estate investor and
developer of single-family and multi-family residential properties. From January
1995 to January 1997, he was Executive Vice President of Greenbriar Corporation.
He also served on their board of directors from September 1994 to September
1996. He has been a licensed real estate broker since 1984.

Peter J. Weidhorn - Director. Mr. Weidhorn is a consultant and private real
estate investor in the multi-family housing market. From 1998 to 2000, he was
Chairman of the Board, President and Director of WNY Group, Inc., a real estate
investment trust that owned and operated 8,000 apartment units throughout New
Jersey, Pennsylvania, Delaware and Maryland prior to its sale to the Kushner
Companies. From 1981 to 1998, he was President of WNY Management Corp. Mr.
Weidhorn serves on the boards of directors of Monmouth Real Estate Investment
Corporation and The Community Development Trust, and is a past president of the
New Jersey Apartment Association. Mr. Weidhorn currently serves as the chair of
the audit committees of both Monmouth Real Estate Investment Corporation and The
Community Development Trust. He has over 30 years of experience in the
management, acquisition, and financing of commercial real estate. Mr. Weidhorn
is a certified public accountant (inactive). He is active in various
professional, civic and charitable activities.

         We have set forth below a listing and brief biography of each of the
executive officers of the company.

                                       51
<PAGE>
<TABLE>
<CAPTION>


            Name                Age                         Position                       Officer Since
------------------------------ ------- --------------------------------------------------- ------------------
<S>                             <C>       <C>                                              <C>
Philip S. Payne                  54        Chairman of the Board of Directors               October 1994
D. Scott Wilkerson               48        Director, President, Chief Executive Officer     October 1994
Eric S. Rohm                     36        Vice President, Secretary, General Counsel       December 2002
Pamela B. Bruno                  52        Vice President, Treasurer, Chief                 October 1994
                                           Financial Officer, Assistant Secretary
</TABLE>

         Messrs. Payne and Wilkerson are also members of our Board of Directors.
Brief biographies of Messrs. Payne and Wilkerson are included above.
Biographical information for our other executive officers follows.

Eric S. Rohm - Vice President, Secretary, General Counsel. Mr. Rohm joined the
company in December 2002 as Vice President and General Counsel, and was named
Secretary in May 2004. Prior to joining the company, Mr. Rohm was a partner in
the Real Estate Department of Kennedy Covington Lobdell & Hickman, LLP in
Charlotte, North Carolina, where he practiced law from 1994 to 2002. Mr. Rohm
received an AB degree in government from Georgetown University in 1991, and his
JD degree from The Ohio State University College of Law in 1994. Mr. Rohm is
licensed to practice law in the State of North Carolina and is a member of the
North Carolina State Bar, the North Carolina Bar Association, and the
Association of Corporate Counsel.

Pamela B. Bruno - Vice President, Treasurer, Chief Financial Officer, Assistant
Secretary. Ms. Bruno joined BT Venture Corporation in 1993 as Controller and
became our Vice President and Chief Accounting Officer in October 1994. She was
named Treasurer in May 2004, and named Chief Financial Officer in August 2005.
From 1984 to 1993, Ms. Bruno was with Ernst & Young LLP, in Charlotte, North
Carolina, and Anchorage, Alaska, serving as audit manager from 1987 through
1993. She received a BS degree in accounting from the University of North
Carolina at Charlotte in 1984. She is a licensed certified public accountant and
is a member of the North Carolina Association of Certified Public Accountants.

         Other operating officers, along with brief biographical information,
follow.
<TABLE>
<CAPTION>

            Name                Age                         Position                       Officer Since
------------------------------ ------- --------------------------------------------------- ------------------
<S>                             <C>       <C>                                              <C>
Alex S. Burris                   37        Vice President, Operations                       June 2005
Teresa M. Sandman                36        Vice President, Property Management              May 2004
</TABLE>

Alex S. Burris - Vice  President,  Operations.  Mr. Burris joined the company in
June 2005 as Vice  President of  Operations.  Prior to joining the company,  Mr.
Burris was vice president of information technology at Summit Properties,  Inc.,
from  November  1994 to May 2005.  He  received  BS  degrees in  accounting  and
business  administration  from the  University of North Carolina at Charlotte in
1991 and his MBA degree from the Fuqua School of Business at Duke  University in
2004. Mr. Burris is a certified public accountant.

Teresa M. Sandman - Vice President,  Property Management. Ms. Sandman joined the
company in January 1991 and has served in various property management positions.
She was named vice  president in May 2004.  She is a licensed real estate broker
and holds  designations as certified  apartment manager and certified  apartment
property supervisor. She is a member of the Institute of Real Estate Management.

Audit committee financial experts

         The members of our Audit Committee are Messrs. Blank, Gilley, and
Weidhorn. Our Board of Directors has determined that Messrs. Blank and Weidhorn
qualify as "audit committee financial experts"

                                       52
<PAGE>

as defined by SEC regulations. All three members are considered "independent" as
defined  by SEC  regulations  and  rules of the  American  Stock  Exchange,  and
"financially  literate" under the rules of the American Stock Exchange.  Messrs.
Blank's  and  Weidhorn's   relevant   experience  is  described   above  in  the
biographical information for each.

Section 16(a) Beneficial Ownership Reporting Compliance

         Based solely on a review of the copies of the forms in its possession,
and on written representations from certain reporting persons, the company
believes that during 2005 all of its executive officers and directors filed the
reports required under Section 16(a) on a timely basis.

Code of Ethics

         Our Board of Directors has adopted a Code of Conduct and Business
Ethics that is applicable to all directors, officers and employees of the
company. You may view this document at our Internet website at
www.bnp-residential.com. You may obtain a copy of this document free of charge
by mailing a written request to: Investor Relations, BNP Residential Properties,
Inc., 301 South College Street, Suite 3850, Charlotte, NC 28202, or by sending
an email request to: investor.relations@bnp-residential.com.

ITEM 11.  EXECUTIVE COMPENSATION

Executive Compensation

         The following tables provide information regarding the annual and
long-term compensation of our chief executive officer, and the four other most
highly paid officers of the company. We refer to them as the "named executive
officers."
<TABLE>
<CAPTION>

                                                                                            Long-term
                                                             Annual compensation           Compensation
                                                     ------------------------------------------------------
                                                                                         Restricted Stock
       Name and Principal Position           Year      Salary      Bonus      Other (1)     Awards (2)
-----------------------------------------------------------------------------------------------------------
<S>                                         <C>       <C>          <C>       <C>            <C>
D. Scott Wilkerson, President,               2005      $270,000     $     -   $184,500       $1,099,000
   Chief Executive Officer                   2004       228,750      11,250     59,189                -
                                             2003       225,000           -          -                -

Philip S. Payne, Chairman of the             2005       270,000           -          -        1,099,000
   Board of Directors                        2004       228,750      11,250     67,500                -
                                             2003       225,000           -          -                -

Eric S. Rohm, Vice President,                2005       180,000           -          -          471,000
   Secretary, General Counsel                2004       145,000      15,000          -
                                             2003       140,000           -          -

Pamela B. Bruno, Vice President,             2005       180,000           -          -          471,000
   Treasurer, Chief Financial Officer,       2004       145,000      15,000      8,100                -
   Assistant Secretary                       2003       136,250      18,750          -                -

Alex S. Burris, Vice President -             2005        80,770           -          -                -
   Operations
</TABLE>

(1)  Amounts reflect the value realized in exercise of stock options.



                                       53
<PAGE>

(2)  All restricted stock awards were nonvested at the date of grant, August 1,
     2005, and will vest 10% per year beginning July 1, 2006, and on each July 1
     thereafter until fully vested. All shares carry dividend and voting rights.
     As of December 31, 2005, all such shares were nonvested, and amounts and
     values of such restricted shares were 70,000 shares valued at $1,120,000
     for each of Messrs. Wilkerson and Payne, and 30,000 shares valued at
     $480,000 for each of Mr. Rohm and Ms. Bruno.

         The following table provides information regarding exercises of stock
options by named executive officers during 2005 as well as the value of
unexercised stock options held by named executive officers as of December 31,
2005. No options were granted during the year ended December 31, 2005.
<TABLE>
<CAPTION>

                                                      Number of Securities
                        Number of                    Underlying Unexercised       Value of Unexercised
                          Shares        Value              Options at           In-the-Money Options at
                       Acquired in   Realized in        Fiscal Year End             Fiscal Year End
         Name            Exercise      Exercise    Exercisable/Unexercisable   Exercisable/Unexercisable
-----------------------------------------------------------------------------------------------------------
<S>                       <C>         <C>            <C>              <C>        <C>                <C>
D. Scott Wilkerson         50,000      $184,500        50,000             -       $143,750             -

Philip S. Payne                 -             -       100,000             -        331,250             -

Pamela B. Bruno                 -             -        30,000             -         95,000             -
</TABLE>

         We do not have a long-term incentive plan in place other than our Stock
Option and Incentive Plan described in Item 12 below.

Compensation of Directors

         During 2005, we paid directors' fees to each director who is not an
executive officer of the company. During the year ended December 31, 2005,
Messrs. Blank, Chrysson, Gilley, and Weidhorn were each paid annual retainers of
$12,000 plus fees totaling $9,250 each for participation in board meetings.
Messrs. Payne and Wilkerson did not receive any compensation for their service
as directors.

Employment  Contracts  and  Termination  of  Employment  and   Change-in-Control
Arrangements

         In November 2005, the company executed definitive employment agreements
and related restricted stock grants, effective August 1, 2005, with each of
Philip S. Payne, Chairman of the Board of Directors, D. Scott Wilkerson,
President and Chief Executive Officer, Pamela B. Bruno, Vice President,
Treasurer and Chief Financial Officer, and Eric S. Rohm, Vice President,
Secretary and General Counsel.

         The term of each agreement for Messrs. Payne and Wilkerson is three
years. For each of Ms. Bruno and Mr. Rohm, the term is one year. Each agreement
automatically renews daily for the applicable term unless prior written notice
is given. Messrs. Payne and Wilkerson will each be paid a base salary of
$300,000 per year. Ms. Bruno and Mr. Rohm will each be paid a base salary of
$200,000 per year. The Board of Directors may grant an annual bonus to each
executive at its discretion. The executives are also entitled to other customary
employment benefits including health, life and supplemental insurance and paid
time off.

         The Board also granted restricted stock awards as of August 1, 2005, to
the executives discussed above. Messrs. Payne and Wilkerson each received 70,000
shares, and Ms. Bruno and Mr. Rohm each received 30,000 shares. The shares vest
annually at the rate of 10% per year, subject to applicable change-of-control
provisions discussed below. The restricted stock carries all rights of
ownership, including the receipt of dividends. The full terms of the restricted
stock grants are included in the employment agreements.

                                       54
<PAGE>

         Upon termination by the company without cause or by the executive for
good reason (as those terms are defined in the respective employment
agreements), not in connection with a change in control, each executive will
receive:

     o    a lump sum equal to the remaining employment term times the sum of the
          executive's current base salary and average annual bonuses earned over
          the  three  years  prior to the  effective  date of  termination;  the
          executive  also  will  be  entitled  to  continued  health,  life  and
          disability  coverage for the  remainder of the contract  term or until
          securing other employment,  subject to limitations imposed by tax laws
          and the company's plans;

     o    any unvested  company stock options and unvested  shares of restricted
          stock that would have vested during the  remainder of the  executive's
          employment terms will vest; and

     o    the  executive  will  receive  cash  payments  during  the  applicable
          remaining  employment term equal to any dividend  declared during that
          period on any shares of restricted stock that the executive  forfeited
          as a result of his or her termination.

         Upon a change in control, or if the executive is terminated without
cause in contemplation of a change in control, each executive will receive:

     o    a lump sum equal to his/her  current  base  salary  for the  remaining
          employment   term  (unless  the   executive  is  offered  and  accepts
          employment with the acquiror);

     o    a lump sum  equal to the fair  market  value  of  150,000  shares  for
          Messrs.  Payne and Wilkerson,  and 25,000 shares for Ms. Bruno and Mr.
          Rohm;

     o    a lump  sum  equal to the sum of each  Special  Dividend  Amount  with
          respect to any Special  Dividend  paid while the executive is employed
          under the agreement and before a change in control; and

     o    full and immediate  vesting of all company stock options and shares of
          restricted stock issued to the executive.

A Special Dividend is any dividend that exceeds previous customary amounts,
exceeds cash flow from operations for the period, and follows a significant
asset disposition or refinancing. The Special Dividend Amount is the product of
the per share amount of a Special Dividend and 150,000 shares for Messrs. Payne
and Wilkerson, and 25,000 shares for Ms. Bruno and Mr. Rohm.

Compensation Committee Interlocks and Insider Participation

         The members of our Compensation Committee are Messrs. Weidhorn, Blank
and Chrysson. All three members are considered "independent" as defined by rules
of the American Stock Exchange. Mr. Weidhorn is identified in Item 13. Certain
Relationships and Related Transactions in our discussion of "BNP Residential
Properties, Inc. and Preferred Investment I, LLC." Mr. Chrysson is identified in
Item 13 in our discussion of "BNP Residential Properties, Inc. and the Chrysson
Parties."

                                       55
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

Equity Compensation Plan

         We have reserved 903,000 shares of the company's common stock for
issuance under our employee Stock Option and Incentive Plan. Options and
nonvested stock have been granted to employees at prices equal to the fair
market value of the stock on the dates of grant. Options are generally
exercisable in four annual installments beginning one year after the date of
grant, and expire ten years after the date of grant.

         The following table provides summary information, as of December 31,
2005, about securities to be issued under our equity compensation plan. More
detailed information is provided in the notes to our financial statements
included in this Annual Report.
<TABLE>
<CAPTION>

                                                                                      Number of securities
                              Number of securities to       Weighted average        remaining available for
                              be issued upon exercise       exercise price of           future issuance
                              of outstanding options,     outstanding options,            under equity
       Plan category            warrants and rights        warrants and rights         compensation plans
---------------------------- -------------------------- -------------------------- --------------------------
<S>                                      <C>                         <C>                       <C>
Equity compensation plans
approved by security
holders                                   270,000                     $12.08                    633,000

Equity compensation plans
not approved by security
holders                                         -                       -                             -
                             -------------------------- -------------------------- --------------------------

         Total                            270,000                     $12.08                    633,000
                             ========================== ========================== ==========================
</TABLE>

Security Ownership of Certain Beneficial Owners and Management - Common Stock

         The following table provides certain information regarding beneficial
ownership of common stock as of February 28, 2006, by each person or group known
to be the beneficial owner of more than 5% of the company's common stock.
<TABLE>
<CAPTION>

                                                                                    Common Shares
                                                                                  Beneficially Owned
                 Name and address of beneficial owner                         Number            Percent
----------------------------------------------------------------------- ------------------- -------------------
<S>                                                                          <C>                  <C>
Cliffwood Partners LLC and affiliates                                         552,900              5.3%
   11726 San Vicente Blvd., #600, Los Angeles CA 90049
</TABLE>

         The following table provides certain information regarding beneficial
ownership of common stock as of February 28, 2006, by each of the directors and
named executive officers, and by all directors and officers as a group.

                                       56
<PAGE>


                                                         Common Shares
                                                       Beneficially Owned
        Directors and Officers (1)                  Number            Percent
-------------------------------------------- ------------------- ---------------

Philip S. Payne (2)                                259,570              2.5%
D. Scott Wilkerson (3)                             163,343              1.6%
Stephen R. Blank                                     1,000                 *
Paul G. Chrysson (4)                               293,766              2.8%
W. Michael Gilley (5)                              292,145              2.7%
Peter J. Weidhorn                                  469,817              4.5%
Pamela B. Bruno (6)                                 70,621                 *
Eric S. Rohm                                        30,000                 *
All directors and executive officers
   as a group (8 persons) (7)                    1,580,262             14.2%
* Less than 1 percent.
(1)  Address for each person listed herein is 301 South College Street, Suite
     3850, Charlotte NC 28202.
(2)  Includes exercisable options for 100,000 shares of common stock.
(3)  Includes exercisable options for 50,000 shares of common stock.
(4)  Includes 276,766 shares issuable (at the company's option) in satisfaction
     of the right to redeem the same number of units owned by Mr. Chrysson in
     the operating partnership.
(5)  Includes 292,145 shares issuable (at the company's option) in satisfaction
     of the right to redeem the same number of units owned by Mr. Gilley in the
     operating partnership.
(6)  Includes exercisable options for 28,000 shares of common stock.
(7)  Includes exercisable options for 178,000 shares and 568,911 shares issuable
     (at the company's option) in satisfaction of the right to redeem the same
     number of units in the operating partnership.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

BNP Residential Properties, Inc. and Preferred Investment I, LLC

         During 2001 through 2003, we issued a total of 909,090 shares of our
Series B Cumulative Convertible Preferred Stock to Preferred Investment I, LLC
for net proceeds of $9.6 million. We redeemed these preferred shares in November
2005 on a one-for-one basis through issuance of 909,090 shares of our common
stock to Preferred Investment I, LLC, of which 454,545 were registered to
Weidhorn Enterprises, a partnership between Peter J. Weidhorn and his wife.

         Peter J. Weidhorn, the managing member of Preferred Investment I, LLC,
ceased serving as the Series B Director on our Board of Directors upon
redemption and was named as a regular director by our Board of Directors, to
serve until our next annual meeting.

BNP Residential Properties, Inc. and the Chrysson Parties

         In July 2004, we acquired Savannah Shores Apartments from members of a
group that we refer to as the Chrysson Parties. We subsequently sold this
property in October 2005. The initial purchase price was $12.5 million,
including assumption of $12.2 million in debt obligations and $0.2 million net
operating liabilities in excess of operating assets acquired, and issuance of
7,695 operating partnership units with an imputed value of $0.1 million. The
acquisition agreement provided for potential earn-out of additional purchase
consideration of up to $1.7 million, which we paid through issuance of 130,770
operating partnership units in October 2005. In previous years during 1997
through 2002, we issued 1.5 million operating partnership common units to
acquire eight apartment communities from this group.

         Messrs. Chrysson and Gilley, who serve on our Board of Directors, are
members of the Chrysson Parties.

                                       57
<PAGE>

Notes Receivable from Management

         In 1996 through 1999, Messrs. Payne and Wilkerson each borrowed $70,000
on an interest-free basis from the company. The loans are secured by shares of
the company's common stock and are payable in full six months after termination
of employment.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

         Grant Thornton LLP has served as our principal accountant and
independent auditor since September 2005. Ernst & Young LLP served as our
principal accountant and independent auditor from October 1996 until September
2005.

         The Board of Directors, upon the recommendation of the Audit Committee,
engaged Grant Thornton LLP to serve as our independent auditors for the fiscal
year ending December 31, 2005. The Audit Committee also approves in advance all
engagements of Grant Thornton LLP for audit-related, tax and other services.

         The Board of Directors, upon the recommendation of the Audit Committee,
engaged Ernst & Young LLP to serve as our independent auditors for the fiscal
years ending December 31, 2004, and through September 2005. Ernst & Young LLP
continues to provide tax compliance services. The Audit Committee also approves
in advance all engagements of Ernst & Young LLP for audit-related, tax and other
services.

         The following table reflects fees from Grant Thornton LLP, and Ernst &
Young LLP for services rendered to the company and its subsidiaries in 2005 and
2004:
<TABLE>
<CAPTION>

                          Nature of Services                                   2005                 2004
----------------------------------------------------------------------- ------------------- -------------------
<S>                                                                          <C>               <C>
Grant Thornton LLP:

Audit fees -                                                                  $ 242,000         $         -
     For audit of our 2005 annual financial statements , audit of
     internal control over financial reporting (in 2005), and review
     of financial statements included in our Forms 10-Q for the
     periods ended March 31, June 30 and September 30, 2005

Audit-related fees -                                                             16,000                   -
     For services related to business acquisitions in 2005

All other fees - (none in 2005 or 2004)                                               -                   -

Ernst & Young LLP:

Audit fees -                                                                    140,000             224,000
     For review of financial statements included in our Forms 10-Q
     for the periods ended March 31 and June 30, 2005, and
     late/additional billings for audit services provided in 2004;
     and for audit of our 2004 annual financial statements and audit
     of internal control over financial reporting (in 2004)
</TABLE>


                                       58
<PAGE>
<TABLE>
<CAPTION>

                          Nature of Services                                   2005                 2004
----------------------------------------------------------------------- ------------------- -------------------
<S>                                                                          <C>               <C>
Audit-related fees -                                                             40,000             174,000
     For services related to business acquisitions, accounting
     consultations, SEC registration statements, and audit of the
     company's 401(k) plan (in 2004)

Tax fees -                                                                      130,000             115,000
     For tax compliance, tax advice, and tax planning

All other fees - (none in 2005 or 2004)                                               -                   -
</TABLE>

         In addition, the Board of Directors, upon the recommendation of the
Audit Committee, engaged Reznick Group and its affiliate, Reznick Fedder &
Silverman PC, to provide additional audit- and accounting-related services. Fees
from Reznick Group for assistance to management in our review and evaluation of
internal control over financial reporting were $104,000 in 2005 and $137,000 in
2004.

                                     PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) 1. and 2. Financial Statements and Schedules

         The financial statements and schedules listed below are filed as part
of this Annual Report on the pages indicated.

                   Index to Financial Statements and Schedules
<TABLE>
<CAPTION>

                                                                                                  Page
<S>                                                                                               <C>
BNP Residential Properties, Inc. Consolidated Financial Statements
   Reports of Independent Registered Public Accounting Firms -
   - Grant Thornton LLP                                                                            63
   - Ernst & Young LLP                                                                             64
   Consolidated Balance Sheets as of December 31, 2005 and 2004                                    65
   Consolidated Statements of Operations for the Years Ended                                       66
      December 31, 2005, 2004, and 2003
   Consolidated Statements of Shareholders' Equity for the Years Ended                             68
      December 31, 2005, 2004, and 2003
   Consolidated Statements of Cash Flows for the Years Ended                                       69
      December 31, 2005, 2004, and 2003
   Notes to Consolidated Financial Statements                                                      71

Statements of Revenue and Certain Operating Expenses of Acquired Properties
   Hamptons Apartments - For the year ended December 31, 2004, and 93 for the
     nine months ended September 30, 2005 (unaudited)
   Timbers Apartments - For the year ended December 31, 2004, and 96 for the
     nine months ended September 30, 2005 (unaudited)

Schedules:
   Schedule III - Real Estate and Accumulated Depreciation                                         99
</TABLE>

                                       59
<PAGE>

         The financial statements and schedules are filed as part of this
report. All other schedules are omitted because they are not applicable or the
required information is included in the financial statements or notes thereto.

(a) 3.  Exhibits

         The Registrant agrees to furnish a copy of all agreements related to
long-term debt upon request of the Commission.

 Exhibit No.

     2.1*       Master Agreement of Merger and Acquisition by and among BNP
                Residential Properties, Inc., BNP Residential Properties Limited
                Partnership, Paul G. Chrysson, James G. Chrysson, W. Michael
                Gilley, Matthew G. Gallins, James D. Yopp, and the partnerships
                and limited liability companies listed therein, dated September
                22, 1997 (filed as Exhibit 2.1 to Registration Statement No.
                333-39803 on Form S-2, December 16, 1997, and incorporated
                herein by reference)
     2.2*       Amendment to Master Agreement of Merger and Acquisition dated
                September 22, 1997, by and among BNP Residential Properties,
                Inc., BNP Residential Properties Limited Partnership,
                Paul G. Chrysson, James G. Chrysson, W. Michael Gilley, Matthew
                G. Gallins, James D. Yopp, and the partnerships and limited
                liability companies listed therein, dated November 3,
                1997 (filed as Exhibit 2.3 to BNP Residential Properties, Inc.
                Current Report on Form 8-K dated December 1, 1997, and
                incorporated herein by reference)
     3.1*       Articles of Incorporation (filed as Exhibit 3.1 to BNP
                Residential Properties, Inc., Current Report on Form 8-K dated
                March 17, 1999, and incorporated herein by reference)
     3.2*       Articles Supplementary, Classifying and Designating 909,090
                Shares of Series B Cumulative Convertible Preferred Stock, dated
                December 28, 2001 (filed as Exhibit 3.1 to BNP Residential
                Properties, Inc. Current Report on Form 8-K dated December 28,
                2001, and incorporated herein by reference)
     3.3*       Amended and Restated By-Laws adopted May 20, 2004 (filed as
                Exhibit 3.1 to BNP Residential Properties, Inc., Current Report
                on Form 8-K dated July 14, 2004, and incorporated herein by
                reference)
     4.1*       Rights Agreement, dated March 18, 1999, between the Company and
                First Union National Bank (filed as Exhibit 4 to BNP Residential
                Properties, Inc. Current Report on Form 8-K dated March 17,
                1999, and incorporated herein by reference)
     4.2*       Registration Rights Agreement By and Among BNP Residential
                Properties, Inc. and Preferred Investment I, LLC, dated December
                28, 2001 (filed as Exhibit 4 to BNP Residential Properties, Inc.
                Current Report on Form 8-K dated December 28, 2001, and
                incorporated herein by reference)
    10.1        Employment Agreement dated August 1, 2005, between BNP
                Residential Properties, Inc. and Philip S. Payne
    10.2        Employment Agreement dated August 1, 2005, between BNP
                Residential Properties, Inc. and D. Scott Wilkerson
    10.3        Employment Agreement dated August 1, 2005, between BNP
                Residential Properties, Inc. and Pamela B. Bruno
    10.4        Employment Agreement dated August 1, 2005, between BNP
                Residential Properties, Inc. and Eric S. Rohm
    10.5*       Second Amended and Restated Agreement of Limited Partnership of
                BNP Residential Properties Limited Partnership dated as of March
                17, 1999 (filed as Exhibit 10.1 to the company's Annual Report
                on Form 10-K for the year ended December 31, 1998, and
                incorporated herein by reference)


                                       60
<PAGE>

    10.6*       Amendment to Second Amended and Restated Agreement of Limited
                Partnership of BNP Residential Properties Limited Partnership,
                dated December 28, 2001 (filed as Exhibit 10.1 to BNP
                Residential Properties, Inc. Current Report on Form 8-K dated
                December 28, 2001, and incorporated herein by reference)
    10.7*       Investment Agreement By and Between BNP Residential Properties,
                Inc. and Preferred Investment I, LLC, dated December 28, 2001
                (filed as Exhibit 10.2 to BNP Residential Properties, Inc.
                Current Report on Form 8-K dated December 28, 2001, and
                incorporated herein by reference)
    10.8*       Amended and Restated Master Lease Agreement dated December 21,
                1995, between BNP Residential Properties, Inc. and Boddie-Noell
                Enterprises, Inc. (filed as Exhibit 10.1 to BNP Residential
                Properties, Inc. Annual Report on Form 10-K dated December 31,
                1995, and incorporated herein by reference)
    10.9*       Amended and Restated 1994 Stock Option and Incentive Plan (filed
                as Exhibit 10.1 to BNP Residential Properties, Inc. Current
                Report on Form 8-K dated May 19, 2005, and incorporated by
                reference herein)
    10.10*      Purchase Agreement by and among BNP Residential Properties, Inc.
                and Purchasers for 1,175,519 shares of common stock, dated as of
                February 17, 2004 (filed as Exhibit 10.1 to BNP Residential
                Properties, Inc. Current Report on Form 8-K dated February 23,
                2004, and incorporated herein by reference)
    10.11*      Purchase Agreement by and among BNP Residential Properties, Inc.
                and Purchasers for 1,420,000 shares of common stock, dated as of
                July 14, 2004 (filed as Exhibit 10.1 to BNP Residential
                Properties, Inc. Current Report on Form 8-K dated July 14, 2004,
                and incorporated herein by reference)
    10.12*      Exchange Agreement among BNP Residential Properties, Inc., BNP
                Residential Properties Limited Partnership, and Beach Investment
                Properties, LLC and members thereof, dated as of December 7,
                2004 (filed as Exhibit 10.9 to BNP Residential Properties, Inc.
                Annual Report on Form 10-K for the year ended December 31, 2004,
                and incorporated herein by reference)
    10.13*      Exchange Agreement among BNP Residential Properties, Inc., BNP
                Residential Properties Limited Partnership, and Timberline
                Ventures, LLC and members thereof, dated as of December 7, 2004
                (filed as Exhibit 10.10 to BNP Residential Properties, Inc.
                Annual Report on Form 10-K for the year ended December 31, 2004,
                and incorporated herein by reference)
    10.14*      Exchange Agreement among BNP Residential Properties, Inc., BNP
                Residential Properties Limited Partnership, and Laurel Springs
                II, LLC and members thereof, dated as December 7, 2004 (filed as
                Exhibit 10.11 to BNP Residential Properties, Inc. Annual Report
                on Form 10-K for the year ended December 31, 2004, and
                incorporated herein by reference)
    10.15*      Exchange Agreement among BNP Residential Properties, Inc., BNP
                Residential Properties Limited Partnership, and Salem
                Ridge/Shugart, LLC and members thereof, dated as of December 7,
                2004 (filed as Exhibit 10.12 to BNP Residential Properties, Inc.
                Annual Report on Form 10-K for the year ended December 31, 2004,
                and incorporated herein by reference)
    21          Subsidiaries of the Registrant
    23.1        Consent of Grant Thornton LLP
    23.2        Consent of Ernst & Young LLP
    31.1        Rule 13a-14(a)/15d-14(a) Certification by Chairman
    31.2        Rule 13a-14(a)/15d-14(a) Certification by Chief Executive
                Officer
    31.3        Rule 13a-14(a)/15d-14(a) Certification by Chief Financial
                Officer
    32.1        Section 1350 Certification by Chairman, Chief Executive Officer,
                and Chief Financial Officer
* Incorporated herein by reference

                                       61
<PAGE>

                                   SIGNATURES

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

                                        BNP RESIDENTIAL PROPERTIES, INC.
                                        (Registrant)



Date:  March 6, 2006                      /s/ Philip S. Payne
                                        -------------------------------------
                                        Philip S. Payne
                                        Chairman



Date:  March 6, 2006                      /s/ D. Scott Wilkerson
                                        -------------------------------------
                                        D. Scott Wilkerson
                                        President, Chief Executive Officer



Date:  March 6, 2006                      /s/ Pamela B. Bruno
                                        -------------------------------------
                                        Pamela B. Bruno
                                        Vice President, Chief Financial Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>

Signature:                          Title:                                      Date:

<S>                                <C>                                         <C>
  /s/ Philip S. Payne               Chairman of the Board of Directors          March 6, 2006
-------------------------------
Philip S. Payne

  /s/ D. Scott Wilkerson            President, Chief Executive                  March 6, 2006
-------------------------------
D. Scott Wilkerson                  Officer, Director

  /s/ Pamela B. Bruno               Vice President, Treasurer,                  March 6, 2006
-------------------------------
Pamela B. Bruno                     Chief Financial Officer

  /s/ Stephen R. Blank              Director                                    March 6, 2006
-------------------------------
Stephen R. Blank

  /s/ Paul G. Chrysson              Director                                    March 6, 2006
-------------------------------
Paul G. Chrysson

 /s/ W. Michael Gilley              Director                                    March 6, 2006
-------------------------------
W. Michael Gilley

  /s/ Peter J. Weidhorn             Director                                    March 6, 2006
-------------------------------
Peter J. Weidhorn
</TABLE>

                                       62
<PAGE>


             Report of Independent Registered Public Accounting Firm


Board of Directors and Shareholders
BNP Residential Properties, Inc.

We have audited the accompanying consolidated balance sheet of BNP Residential
Properties, Inc. (a Maryland corporation) as of December 31, 2005, and the
related consolidated statements of operations, shareholder's equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of BNP Residential
Properties, Inc. as of December 31, 2005, and the results of its operations and
its cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.

Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule titled "Schedule III - Real
Estate and Accumulated Depreciation" is presented for the purposes for
additional analysis and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of BNP Residential
Properties, Inc.'s internal control over financial reporting as of December 31,
2005, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated March 6, 2006 expressed an unqualified opinion
thereon.

   /s/Grant Thornton LLP

Charlotte, North Carolina
March 6, 2006



                                       63
<PAGE>

             Report of Independent Registered Public Accounting Firm


Board of Directors and Shareholders
BNP Residential Properties, Inc.

We have audited the accompanying consolidated balance sheet of BNP Residential
Properties, Inc. as of December 31, 2004 and the related consolidated statements
of operations, shareholders' equity, and cash flows for each of the two years in
the period ended December 31, 2004. Our audits also included the 2004 and 2003
information in the financial statement schedule listed in the Index at Item
15(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BNP Residential
Properties, Inc. at December 31, 2004 and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 2004, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the 2004 and 2003 information in the financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

   /s/ Ernst & Young LLP

Greenville, South Carolina
March 2, 2005


                                       64
<PAGE>


BNP RESIDENTIAL PROPERTIES, INC.
Consolidated Balance Sheets
(all amounts in thousands except share data)
<TABLE>
<CAPTION>


                                                                                   December 31
                                                                             2005               2004
                                                                       ------------------ ------------------
<S>                                                                          <C>                <C>
Assets
Real estate investments at cost:
   Apartment properties                                                       $ 559,560          $ 389,119
   Restaurant properties                                                         37,405             37,405
                                                                       ------------------ ------------------
                                                                                596,965            426,525
   Less accumulated depreciation                                                (87,668)           (66,454)
                                                                       ------------------ ------------------
                                                                                509,297            360,071
Cash and cash equivalents                                                         3,111                517
Prepaid expenses and other assets                                                 8,034              4,516
Deferred financing costs, net                                                     2,380              1,545
Intangible assets, net                                                            1,240              1,115
                                                                       ------------------ ------------------
Total assets                                                                  $ 524,063          $ 367,764
                                                                       ================== ==================

Liabilities and Shareholders' Equity
Deed of trust and other notes payable                                         $ 436,712          $ 286,425
Accounts payable and accrued expenses                                             1,419                897
Accrued interest on notes payable                                                 1,345              1,264
Consideration due for completed acquisitions                                      1,000                  -
Deferred revenue and security deposits                                            1,950              1,787
                                                                       ------------------ ------------------
                                                                                442,426            290,373

Minority interest in consolidated limited partnerships                                -                  -
Minority interest in operating partnership                                       21,207             14,394
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
   909,090 shares issued and outstanding at December 31, 2004                         -             10,000
Common stock, $.01 par value, 100,000,000 shares authorized,
   10,385,890 shares issued and outstanding at
   December 31, 2005 (including 200,000 nonvested shares), and
   8,652,740 shares issued and outstanding at December 31, 2004                     102                 87
Additional paid-in capital                                                      122,516            103,221
Dividend distributions in excess of net income                                  (62,189)           (50,311)
                                                                       ------------------ ------------------
Total shareholders' equity                                                       60,429             62,996
                                                                       ------------------ ------------------
Total liabilities and shareholders' equity                                    $ 524,063          $ 367,764
                                                                       ================== ==================

</TABLE>

See accompanying notes.

                                       65
<PAGE>


BNP RESIDENTIAL PROPERTIES, INC.
Consolidated Statements of Operations
(all amounts in thousands except per share amounts)
<TABLE>
<CAPTION>

                                                                           Years ended December 31
                                                                       2005          2004          2003
                                                                   ------------- ------------- -------------
<S>                                                                  <C>           <C>           <C>
Revenues
Apartment rental income                                               $ 67,029      $ 44,929      $ 37,475
Restaurant rental income                                                 3,830         3,830         3,908
Management fee income                                                      131           761           873
Casualty gains                                                             668           269             -
Interest and other income                                                  355           197           404
                                                                   ------------- ------------- -------------
                                                                        72,012        49,986        42,660

Expenses
Apartment operations                                                    26,243        18,119        15,458
Apartment administration                                                 3,216         2,210         1,711
Corporate administration                                                 3,039         2,309         2,196
Interest                                                                22,555        14,445        13,000
Penalties paid at debt refinance                                         2,146             -             -
Depreciation                                                            16,602        11,491        10,040
Amortization of deferred loan costs                                        432           365           322
Write-off of unamortized loan costs at debt refinance                      294            85             -
Deficit distributions to minority partners                               7,861             -             -
                                                                   ------------- ------------- -------------
                                                                        82,389        49,025        42,727
                                                                   ------------- ------------- -------------
(Loss) income from continuing operations
    before minority interests                                          (10,377)          961           (66)
Loss (income) attributed to minority interests
- Consolidated limited partnerships                                        350             -             -
- Operating partnership                                                  1,975             1           174
                                                                   ------------- ------------- -------------
(Loss) income from continuing operations                                (8,052)          962           107

Discontinued operations:
Income from discontinued operations                                         88            95             -
Gain on sale of real estate assets                                       8,132             -             -
(Income) loss attributed to minority interests                          (1,657)          (17)            -
                                                                    ------------- ------------- -------------
Income from discontinued operations, net                                 6,563            77             -

                                                                   ------------- ------------- -------------
Net (loss) income                                                       (1,488)        1,039           107
Cumulative preferred dividend                                             (833)       (1,000)         (661)
                                                                   ------------- ------------- -------------
(Loss) income attributed to common shareholders                       $ (2,322)     $     39      $   (553)
                                                                   ============= ============= =============
</TABLE>


                                                                   (continued)

                                       66
<PAGE>

BNP RESIDENTIAL PROPERTIES, INC.
Consolidated Statements of Operations - continued
(all amounts in thousands except per share amounts)
<TABLE>
<CAPTION>

                                                                           Years ended December 31
                                                                       2005          2004          2003
                                                                   ------------- ------------- -------------
<S>                                                                   <C>           <C>           <C>
Weighted average common shares outstanding                               9,389         7,617         5,868


Per common share amounts:

Earnings per common share - basic
(Loss) income from
- Continuing operations                                                 $(0.87)       $ 0.13        $ 0.02
- Discontinued operations                                                 0.71          0.01          -
                                                                   ------------- ------------- -------------
Net (loss) income                                                        (0.16)         0.14          0.02
(Loss) income attributed to common shareholders                          (0.25)         0.01         (0.09)
Earnings per common share - diluted
(Loss) income from
- Continuing operations                                                 $(0.87)       $ 0.10        $(0.01)
- Discontinued operations                                                 0.71          0.01          -
                                                                   ------------- ------------- -------------
Net (loss) income                                                        (0.16)         0.11         (0.01)
(Loss) income attributed to common shareholders                          (0.25)         0.01         (0.09)

Dividends declared per common share                                     $ 1.00        $ 1.00        $ 1.00

</TABLE>

See accompanying notes.

                                       67
<PAGE>


BNP RESIDENTIAL PROPERTIES, INC.
Consolidated Statements of Shareholders' Equity
(all amounts in thousands)
<TABLE>
<CAPTION>

                                                                                      Dividend
                                                                       Additional   distributions
                               Preferred Stock       Common Stock        paid-in    in excess of
                              Shares    Amount     Shares    Amount      capital     net income      Total
                             --------- ---------- --------- ---------- ------------ -------------- ----------
<S>                           <C>     <C>         <C>       <C>       <C>            <C>          <C>
Balance December 31, 2002       454    $  5,000     5,831    $   58    $  70,725      $ (36,512)   $ 39,271
Preferred stock issued          455       5,000         -         -          (54)             -       4,947
Common stock issued               -           -        76         1          803              -         803
Dividends paid - preferred        -           -         -         -            -           (537)       (537)
Dividends paid - common           -           -         -         -            -         (5,859)     (5,859)
Net income                        -           -         -         -            -            107         107
                             --------- ---------- --------- ---------- ------------ -------------- ----------
Balance December 31, 2003       909      10,000     5,907        59       71,473        (42,800)     38,733
Common stock issued               -           -     2,746        27       31,747              -      31,775
Dividends paid - preferred        -           -         -         -            -         (1,000)     (1,000)
Dividends paid - common           -           -         -         -            -         (7,551)     (7,551)
Net income                        -           -         -         -            -          1,039       1,039
                             --------- ---------- --------- ---------- ------------ -------------- ----------
Balance December 31, 2004       909      10,000     8,653        87      103,221        (50,311)     62,996
Common stock issued               -           -       824         6        9,162              -       9,168
Preferred stock conversion     (909)    (10,000)      909         9        9,991              -           -
Service cost related to
   nonvested common stock         -           -         -         -          143              -         143
Dividends paid - preferred        -           -         -         -            -         (1,083)     (1,083)
Dividends paid - common           -           -         -         -            -         (9,306)     (9,306)
Net loss                          -           -         -         -            -         (1,488)     (1,488)
                             --------- ---------- --------- ---------- ------------ -------------- ----------
Balance December 31, 2005         -    $      -    10,386     $ 102    $ 122,516      $ (62,189)   $ 60,429
                             ========= ========== ========= ========== ============ ============== ==========

</TABLE>

See accompanying notes.


                                       68
<PAGE>


BNP RESIDENTIAL PROPERTIES, INC.
Consolidated Statements of Cash Flows
(all amounts in thousands)
<TABLE>
<CAPTION>

                                                                           Years ended December 31
                                                                      2005           2004          2003
                                                                  -------------- ------------- --------------
<S>                                                                <C>            <C>            <C>
Operating activities
Apartment rental receipts, net                                      $ 68,175       $ 45,717       $ 37,491
Restaurant rental receipts                                             3,830          3,920          3,908
Management fee receipts                                                  131            762            826
Interest and other income receipts                                       372            185            404
Operating and administrative expense payments                        (34,186)       (23,402)       (19,843)
Interest payments                                                    (23,382)       (14,504)       (13,192)
Penalties paid at debt refinance                                      (2,146)             -              -
                                                                  -------------- ------------- --------------
  Net cash provided by operating activities                           12,793         12,677          9,594

Investing activities
Acquisitions of apartment properties                                 (75,439)       (48,148)       (23,382)
Acquisition of Boddie Investment Company, net of cash included
   in accounts of consolidated limited partnerships                      368              -              -
Additions to apartment communities                                    (8,370)        (5,161)        (3,349)
Net (funding of) release from lender reserves for replacements          (616)          (457)           213
Net proceeds, sale of real estate investments                         22,082              -          1,244
Casualty proceeds                                                        533            918              -
                                                                  -------------- ------------- --------------
  Net cash used in investing activities                              (61,444)       (52,848)       (25,275)

Financing activities
Net proceeds from issuance of preferred stock                              -              -          4,946
Net proceeds from issuance of common stock                             1,383         31,462            770
Distributions to minority partners in
   consolidated limited partnerships                                  (7,861)             -              -
Distributions to operating partnership minority unitholders           (2,121)        (1,847)        (1,845)
Payment of dividends to preferred shareholder                         (1,083)        (1,000)          (537)
Payment of dividends to common shareholders                           (9,306)        (7,551)        (5,859)
Proceeds from notes payable                                          200,913        111,906         25,986
Principal payments on notes payable                                 (129,390)       (91,941)        (7,856)
Payment of deferred financing costs                                   (1,291)          (906)          (244)
                                                                  -------------- ------------- --------------
  Net cash provided by financing activities                           51,245         40,123         15,361
                                                                  -------------- ------------- --------------

Net increase (decrease) in cash and cash equivalents                   2,594            (47)          (320)
Cash and cash equivalents at beginning of year                           517            564            884
                                                                  -------------- ------------- --------------
Cash and cash equivalents at end of year                            $  3,111       $    517       $    564
                                                                  ============== ============= ==============
</TABLE>

                                                                (continued)

                                       69
<PAGE>

BNP RESIDENTIAL PROPERTIES, INC.
Consolidated Statements of Cash Flows - continued
(all amounts in thousands)
<TABLE>
<CAPTION>

                                                                           Years ended December 31
                                                                      2005           2004          2003
                                                                  -------------- ------------- --------------
<S>                                                               <C>            <C>           <C>
Reconciliation of net income to
  net cash provided by operating activities:
Net (loss) income                                                  $  (1,488)     $   1,039     $      107
Amortization of intangible for in-place leases at acquisitions           193              -              -
Casualty gains, net of losses                                           (668)          (255)             -
Amortization of debt premium                                            (168)          (105)          (228)
Write-off of unamortized loan costs at debt refinance                    327             85              -
Depreciation and amortization of deferred loan costs                  17,034         11,856         10,361
Depreciation and amortization from discontinued operations               273            179              -
Deficit distributions to minority partners in
   consolidated limited partnerships                                   7,861              -              -
Gain on sale or real estate assets                                    (8,132)             -              -
Minority interest in consolidated limited partnerships                  (350)             -              -
Minority interest in operating partnership                              (318)            16           (174)
Compensation cost related to nonvested common stock                      143              -              -
Changes in operating assets and liabilities:
  Prepaid expenses and other assets                                   (1,125)          (336)          (297)
  Accounts payable and accrued expenses                                 (707)           119            (97)
  Deferred revenue, prepaid rent and security deposits                   (80)            79            (79)
                                                                  -------------- ------------- --------------
    Net cash provided by operating activities                      $  12,793      $  12,677     $    9,594
                                                                  ============== ============= ==============
</TABLE>


See accompanying notes.

                                       70
<PAGE>


BNP RESIDENTIAL PROPERTIES, INC.
Notes to Consolidated Financial Statements
December 31, 2005


Note 1.  Summary of significant accounting policies

Basis of presentation
The consolidated financial statements include the accounts of BNP Residential
Properties, Inc. (the "company") and BNP Residential Properties Limited
Partnership (the "operating partnership"). We prepared the accompanying
consolidated financial statements in accordance with accounting principles
generally accepted in the United States ("GAAP").

Effective January 26, 2005, in connection with an acquisition on that date, the
consolidated financial statements also include the accounts of three real estate
limited partnerships (the "consolidated limited partnerships") in which we have
general partner interests. The assets of consolidated limited partnerships
controlled by the operating partnership generally are not available to pay
creditors of the company or the operating partnership.

All significant intercompany balances and transactions have been eliminated in
these consolidated financial statements.

We are a self-administered and self-managed real estate investment trust
("REIT") with operations in North Carolina, South Carolina and Virginia. Our
primary activity is the ownership and operation of apartment communities. As of
December 31, 2005, we owned and managed 30 apartment communities containing
7,945 units, and served as general partner of limited partnerships that owned
three apartment communities containing 713 units. In addition to our apartment
communities, at December 31, 2005, we owned 40 properties that we lease on a
triple-net basis to a restaurant operator. The lessee operates these properties
as restaurants and, under the terms of the lease, is totally responsible for the
operation and maintenance of the properties.

UpREIT structure
We are structured as an UpREIT, or umbrella partnership real estate investment
trust. The company is the general partner and owns a majority interest in the
operating partnership, through which we conduct all of our operations. At
December 31, 2005, we owned 80% of the common ownership units of the operating
partnership. We refer to the limited partners of the operating partnership as
minority common unitholders or as the operating partnership minority interest.
Limited partners will generally be able to redeem their units for cash or, at
our option as general partner, for shares of common stock of the company on a
one-for-one basis. UpREITs are generally structured so that distributions of
cash from the operating partnership are allocated between the REIT and the
limited partners based on their respective unit ownership.

Reclassifications

We have reclassified certain 2004 and 2003 amounts to conform to the current
year presentation in the accompanying financial statements.

Segment reporting
Operating segments are revenue-producing components of the company for which
separate financial information is produced internally for our management. Under
this definition, we operated, for all periods presented, as a single segment
(apartment operations). Our apartment operating activities are located within a
relatively small geographic area, and our chief operating decision maker does
not receive or utilize financial information on the basis of geographic areas.
We evaluate each community's

                                       71
<PAGE>

performance individually; however, all of these communities are garden-style
construction, operate in the mid-market price range, share similar economic
characteristics, and provide similar services. We do not conduct any operating
activities with regard to restaurant rental income; the triple-net lease
arrangement for these properties requires the lessee to pay virtually all of the
costs associated with these properties.

Accounting for general partner interests in limited partnerships
As managing general partner in three real estate limited partnerships, we have
the ability to exercise significant influence over operating and financial
policies. This influence is evident in the terms of the respective partnership
agreements. In acting as general partner in these limited partnerships, we are
committed to providing additional levels of funding to meet partnership
operating deficits as may be needed. The appropriate accounting treatment for
our interests in these partnerships varies, depending on whether or not the
partnership is considered a variable interest entity ("VIE").

In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation 46, "Consolidation of Variable Interest Entities" ("FIN46"). In
December 2003, the FASB modified FIN 46 to make certain technical corrections
and address certain implementation issues that had arisen. FIN 46 provided a new
framework for identifying VIEs and determining when a company should include the
assets, liabilities, noncontrolling interests and results of activities of a VIE
in its consolidated financial statements. In general, a VIE is an entity or
other legal structure used to conduct activities or hold assets that either (1)
has an insufficient amount of equity to carry out its principal activities
without additional subordinated financial support, (2) has equity owners that,
as a group, are unable to make significant decisions about its activities, or
(3) has equity owners that, as a group, do not have the obligation to absorb
losses or the right to receive returns generated by its operations.

FIN 46, as modified, requires that a VIE be consolidated if a party with an
ownership, contractual or other financial interest in the VIE (a "variable
interest holder") is obligated to absorb a majority of the risk of loss from the
VIE's activities, is entitled to receive a majority of the VIE's residual
returns (if no party absorbs a majority of the VIE's losses), or both. A
variable interest holder that consolidates the VIE is called the "primary
beneficiary." Upon consolidation, the primary beneficiary generally must
initially record all of the VIE's assets, liabilities and noncontrolling
interests at fair value, and must subsequently account for the VIE as if it were
consolidated based on majority voting interest.

If we, as general partner, control a partnership that is not a VIE, generally
accepted accounting principles require that we consolidate the partnership in
our financial statements. Upon consolidation, we record our prorata interest in
the partnership's assets and liabilities at the lower of our cost or fair value,
and we subsequently account for the partnership based on our prorata interest;
the noncontrolling interests are reflected in our financial statements at their
historical costs.

Accounting for discontinued operations
FASB Statement 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," requires that the assets and liabilities and the results of operations
of any properties that have been sold, or otherwise qualify as held for sale, be
presented as discontinued operations in our consolidated financial statements,
for both current and prior periods presented. In addition, the net gain or loss
on the disposal of properties held for sale is presented as discontinued
operations. A change in presentation for discontinued operations does not have
any impact on our financial condition or results of operations. We record no
depreciation for the community assets once the community is classified as held
for sale.

Real estate investments
Real estate investments are stated at the lower of cost, less accumulated
depreciation, or fair value. In general, for properties acquired prior to 2002,
we compute depreciation using the straight-line method over composite estimated
useful lives of the related assets, generally 40 years for buildings, 20 years
for land improvements, 10 years for fixtures and equipment, and five years for
floor coverings. For properties acquired in 2002 and later years, we performed
detailed analyses of components of the real estate assets acquired. For these
properties, we assigned estimated useful lives as follows: base building
structure,


                                       72
<PAGE>

40-60 years; land improvements, 5-20 years; short-lived building components,
5-20 years; and fixtures, equipment and floor coverings, 5-10 years.

We generally complete and capitalize acquisition improvements (expenditures that
have been identified at the time the property is acquired and which are intended
to position the property consistent with our physical standards) within one to
two years of acquisition of the related apartment property. We capitalize
non-recurring expenditures for additions and betterments to buildings and land
improvements. In addition, we generally capitalize recurring capital
expenditures for exterior painting, roofing, and other major maintenance
projects that substantially extend the useful life of existing assets. For
financial reporting purposes, we depreciate these additions and replacements on
a straight-line basis over estimated useful lives of 5-20 years. We capitalize
all floor covering, appliance and HVAC replacements, and depreciate them using a
straight-line, group method over estimated useful lives of 5-10 years. We retire
replaced assets with a charge to depreciation for any remaining carrying value.
We expense ordinary repairs and maintenance costs at apartment communities.
Costs of repairs and maintenance and capital improvements at restaurant
properties are borne by the lessee.

We evaluate our real estate assets upon occurrence of significant adverse
changes in operations, to assess whether any impairment indicators are present
that affect the recovery of the recorded values. If we considered any real
estate assets to be impaired, we would record a loss to reduce the carrying
value of the property to its estimated fair value. At December 31, 2005 and
2004, none of our assets were considered impaired.

Cash and cash equivalents
We consider all highly liquid investments with maturities of three months or
less when purchased to be cash equivalents.

Deferred costs and intangible assets
We defer financing costs and amortize them using the straight-line method over
the terms of the related notes. If we pay down or retire notes prior to their
maturity, we write off the related unamortized financing costs, reflected as a
charge to operations. Accumulated amortization on these assets totaled $1.0
million at December 31, 2005, and $1.2 million at December 31, 2004.

As of December 31, 2005, we estimate future amortization of deferred financing
costs will be as follows (in thousands):

      2006             $ 482                 2009                 $ 246
      2007               461                 2010                   222
      2008               344                 Thereafter             625

Goodwill and intangible assets deemed to have indefinite lives are no longer
amortized after December 31, 2001, but are subject to annual impairment tests.
We perform these annual tests as of October 1 of each year. Based on our tests
through October 1, 2005, we determined that the intangible related to our 1994
acquisition of management operations, net of accumulated amortization, is not
impaired. The historical cost of this intangible asset is $3.7 million, with
accumulated amortization of $2.6 million.

In conjunction with the acquisition of an apartment community, we estimate the
fair value of at-market, in-place leases. We record these amounts as intangible
assets and amortize them over the remaining lease terms with a charge to
apartment rental income. In general, the average remaining life of in-place
leases at acquisition dates in 2005 ranged from five to nine months, and
intangible assets represented approximately 0.3% of contract prices. At December
31, 2005, the historical cost of these intangible assets is $0.3 million, with
accumulated amortization of $0.2 million.

We defer costs incurred in connection with proposed investing and financing
transactions until the proposed transactions are consummated. We include such
costs in prepaid expenses and other assets on

                                       73
<PAGE>

our balance sheet. If we determine that a proposed transaction is not probable,
we charge these costs to expense.

Fair values of financial instruments
The carrying amount reported on the balance sheet for cash and cash equivalents
approximates fair value.
We estimate the fair value of fixed-rate notes and variable-rate notes payable
using discounted cash flow analysis, based on our current incremental borrowing
rates for similar types of borrowing arrangements. The aggregate fair value of
our deed of trust and other notes payable was approximately $437 million at
December 31, 2005, and $296 million at December 31, 2004.

Use of estimates
We are required to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes in order to prepare
them in accordance with accounting principles generally accepted in the United
States. Depreciation amounts included in these financial statements reflect our
estimate of the life and related depreciation rates for rental properties. In
addition, the carrying amount of the intangible asset related to acquisition of
management operations reflects our assessment of the continuing value of this
asset. Actual results could differ from these significant estimates.

Revenue recognition, deferred revenue and security deposits
We record rental and other revenue as it is earned, net of our provision for
estimated uncollectible revenues. We amortize any cash concessions given at the
inception of an apartment lease over the approximate life of the lease, which is
generally one year or less. We record rental payments received prior to the
first of a given month as prepaid rent.

We hold tenant security deposits in trust in bank accounts separate from
operating cash; related trust account balances are included in the balance sheet
in other current assets.

In December 2000, we received an $800,000 advance payment under a contract for
use of our cable equipment at five apartment communities. This receipt, net of
$20,000 of related costs, was recorded as deferred revenue, and we are
recognizing this rental revenue over the ten-year contract term beginning in
2001.

Deferred revenue and security deposits include the following amounts:

<TABLE>
<CAPTION>
                                                                                     December 31
                                                                                2005              2004
                                                                          ----------------- -----------------
                                                                               (000's)           (000's)
<S>                                                                          <C>               <C>
Liability for tenant security deposits                                        $    987          $    556
Prepaid apartment rents                                                            583               494
Deferred cable revenue                                                             380               460
Prepaid restaurant rents                                                             -                91
Insurance proceeds held pending reconstruction of apartment building                 -               186
                                                                          ----------------- -----------------
                                                                              $  1,950          $  1,787
                                                                          ================= =================
</TABLE>

Advertising costs
We expense advertising costs as they are incurred. Advertising expense totaled
$758,000 in 2005, $530,000 in 2004, and $500,000 in 2003.

Earnings per share
We calculate earnings per share based on the weighted average number of shares
outstanding during each year.

                                       74
<PAGE>

Comprehensive income
Comprehensive income is defined as changes in shareholders' equity exclusive of
transactions with owners (such as capital contributions and dividends). We did
not have any comprehensive income items in 2005, 2004, or 2003, other than net
income as reported.

Stock-based compensation
The company has one employee Stock Option and Incentive Plan in place, which is
described more fully in Note 7.

Prior to July 1, 2005, as allowed by FASB Statement 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," and FASB Statement 123,
"Accounting for Stock-Based Compensation," we accounted for this plan using the
intrinsic value method; no stock-based employee compensation cost was reflected
in net income, as all options granted under this plan had an exercise price
equal to the market value of the underlying common stock on the date of grant.
All outstanding options were fully vested prior to the end of 2004. If we had
applied the fair value recognition provisions of Statement 123 to stock-based
employee compensation, the effect would have been to reduce net income as
reported by $200 in 2004, with no impact on net income as reported in 2005 or on
basic and diluted earnings per share amounts as reported.

In December 2004 the FASB issued Statement No. 123 (revised 2004), "Share Based
Payment," ("FAS 123(R)") which is a revision of Statement 123, and requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the statement of operations based on their fair values.
Effective July 1, 2005, we adopted the fair value recognition provisions of FAS
123(R) using the modified-prospective transition method. Under this transition
method, compensation cost recognized in the second half of 2005 includes
compensation cost for all share-based payments granted subsequent to July 1,
2005, based on the grant-date fair value estimated in accordance with the
provisions of FAS 123(R).

In August 2005, the Board of Directors granted and the company issued 200,000
restricted nonvested shares of the company's common stock to four of our
executive officers. During 2005, we recorded $143,000 in service cost related to
nonvested common stock.

Note 2.  Consolidated limited partnerships

Effective January 26, 2005, we acquired Boddie Investment Company ("BIC") in
exchange for shares of our common stock. As a result of this acquisition, in
addition to other assets, we acquired certain economic interests in the
following limited partnerships:

     o    Marina Shores Associates One, Limited Partnership - 50% interest as
          general partner

     o    The Villages of Chapel Hill Limited Partnership - 1% interest as
          general partner

     o    The Villages of Chapel Hill - Phase 5 Limited Partnership - 1%
          interest as general partner

Prior to this acquisition, we managed, on a fee basis, the properties owned by
these limited partnerships. Following our acquisition of BIC, a wholly owned
subsidiary of the operating partnership acts as the managing general partner of
these limited partnerships and continues to manage the properties. These limited
partnerships are primarily funded with financing from third party lenders, which
is secured by first deed of trust loans on the rental properties of the
partnerships. The creditors of the limited partnerships generally do not have
recourse to the operating partnership.

We determined that The Villages of Chapel Hill Limited Partnership ("Villages
Partnership") is a VIE because the limited partnership does not have sufficient
equity to carry out its principal activities without additional subordinated
financial support from the general partner. We also determined that we are the
primary beneficiary of the Villages Partnership. Our initial net investment in
this general partnership

                                       75
<PAGE>

interest was $2,000. We included the accounts of this partnership in our
consolidated financial statements effective January 26, 2005, by recording all
of the Villages Partnership assets, liabilities and noncontrolling interests at
fair value. In our initial consolidation of the Villages Partnership, we
recorded the noncontrolling limited partners' capital accounts at $350,000.

We determined that the Marina Shores Associates One, Limited Partnership
("Marina Shores Partnership") and The Villages of Chapel Hill - Phase 5 Limited
Partnership ("Villages - Phase 5 Partnership") are not VIEs. However, under the
terms of the partnership agreements for these partnerships, the general partner
controls the activities of the partnership. Our initial investments in these
general partnership interests were $5.9 million for the Marina Shores
Partnership interest and $7,000 for the Villages - Phase 5 Partnership interest.
We included the accounts of these partnerships in our consolidated financial
statements effective January 26, 2005, by recording our prorata interest in the
partnerships' assets and liabilities at the lower of our cost or fair value,
including the noncontrolling interests in the partnerships' assets and
liabilities at their historical costs, and by resetting the noncontrolling
limited partners' capital accounts (which were previously in deficit balances)
to $-0-.

The initial inclusion of these partnerships in our consolidated financial
statements resulted in increases to our balance sheet amounts as follows:
<TABLE>
<CAPTION>

                                                          Real estate      Net operating     Deed of trust
                                                          investments          assets        notes payable
                                                        ----------------- ----------------- -----------------
                                                            (000's)            (000's)          (000's)
<S>                                                         <C>               <C>              <C>
Marina Shores Partnership                                    $ 26,254          $   950          $ 21,264
Villages Partnership                                           14,188              145            12,094
Villages - Phase 5 Partnership                                  2,596              239             2,828
                                                        ----------------- ----------------- -----------------
                                                             $ 43,039          $ 1,334          $ 36,186
                                                        ================= ================= =================
</TABLE>

In addition, in consolidation we eliminated approximately $1.9 million in notes
and other receivables from The Villages Partnership that we acquired in the
transaction with BIC.

We reflect the unaffiliated partners' interests in the Marina Shores
Partnership, the Villages Partnership and the Villages - Phase 5 Partnership as
minority interest in consolidated limited partnerships. Minority interest in
consolidated limited partnerships represents the minority partners' share of the
underlying net assets of these consolidated limited partnerships. When these
consolidated limited partnerships make cash distributions to partners in excess
of the positive carrying amounts of their minority interests, we record a charge
equal to the amount of such excess distributions to minority partners. These
charges decrease our net income (or increase our net loss); however, the cash
outlay is, in fact, made by the consolidated limited partnership, and there is
no cost to the operating partnership. During 2005, we recorded charges for
deficit distributions to the minority partner in the Marina Shores Partnership
totaling $7.9 million.

We allocate proportional income and losses of the consolidated limited
partnerships, measured on a year-to-date basis, to minority partners. However,
we may allocate losses to a minority partner only to the extent of the positive
carrying amount of the interest of that minority partner. When losses
attributable to the minority limited partners of a consolidated limited
partnership exceed the carrying amount of the minority interest, we record a
charge, even though there is no cash outlay by the operating partnership. During
2005, we recorded charges for consolidated limited partnership losses, resulting
primarily from depreciation, along with costs related to refinance of the Marina
Shores Partnership's first deed of trust loan, as follows (in thousands):

                                       76
<PAGE>

Marina Shores Partnership                                      $   99
Villages Partnership*                                              10
Villages - Phase 5 Partnership                                     17
                                                        -----------------
                                                               $  126
                                                        =================

*After charges for net losses of $350,000 to reduce minority limited partners'
capital accounts to $-0-.

Note 3.  Discontinued operations
In October 2005, we sold Savannah Shores Apartments for a contract price of
$22.75 million to an unaffiliated third party. Net proceeds of the sale were
$22.2 million, and we recorded a gain on the sale of real estate assets of $8.1
million.

We acquired Savannah Shores Apartments in July 2004 for an initial purchase
price of $12.5 million, paid through issuance of operating partnership units
with total imputed value of $0.1 million, assumption of $12.2 million in debt
obligations, and assumption of $0.2 million net operating liabilities. The
acquisition agreement provided for potential earn-out of additional purchase
consideration of up to $1.7 million, which we paid through issuance of
additional operating partnership units in October 2005.

We have presented the operations of this community as discontinued operations in
our statements of operations for 2005 and 2004. Operating results of this
community were as follows:
<TABLE>
<CAPTION>

                                                                               2005              2004
                                                                            (10 months)       (6 months)
                                                                          ----------------- -----------------
                                                                               (000's)           (000's)
<S>                                                                           <C>               <C>
Apartment rental income                                                        $ 1,493           $   879
Apartment operations expense                                                      (740)             (443)
Interest                                                                          (360)             (162)
Depreciation                                                                      (259)             (170)
Amortization of deferred loan costs                                                (14)               (9)
Write-off of deferred loan costs at debt retirement                                (33)                -
                                                                          ----------------- -----------------
                                                                               $    88           $    95
                                                                          ================= =================
</TABLE>

Note 4.  Real estate investments

Real estate investments consist of the following:
<TABLE>
<CAPTION>

                                                                                     December 31
                                                                                2005              2004
                                                                          ----------------- -----------------
                                                                               (000's)           (000's)
<S>                                                                          <C>               <C>
Apartment properties - owned
   Land                                                                       $  59,089         $  43,684
   Buildings and improvements                                                   449,274           344,395
   Computer and support equipment                                                 1,416             1,041
   Less accumulated depreciation                                                (67,341)          (54,514)
                                                                          ----------------- -----------------
                                                                                442,437           334,605

Apartment properties - consolidated limited partnerships
   Land                                                                           3,214                 -
   Buildings and improvements                                                    46,567                 -
   Less accumulated depreciation                                                 (7,712)                -
                                                                          ----------------- -----------------
                                                                                 42,069                 -

</TABLE>

                                       77
<PAGE>
<TABLE>
<CAPTION>

                                                                                     December 31
                                                                                2005              2004
                                                                          ----------------- -----------------
                                                                               (000's)           (000's)
<S>                                                                          <C>               <C>

Restaurant properties
   Land                                                                          10,445            10,445
   Buildings and improvements                                                    26,961            26,961
   Less accumulated depreciation                                                (12,615)          (11,940)
                                                                          ----------------- -----------------
                                                                                 24,791            25,466
                                                                          ----------------- -----------------
                                                                              $ 509,297         $ 360,071
                                                                          ================= =================
</TABLE>

For federal and state income tax purposes, we will report real estate
investments with a total cost basis of $512 million and accumulated depreciation
of $112 million as of December 31, 2005.

During the three years ended December 31, 2005, we acquired the apartment
communities listed below. The results of operations of these apartment
communities are included in the financial statements from the dates of
acquisition.

2005 acquisitions:

     o    Timbers Apartments, acquired October 2005, for a total cost of $22.5
          million, paid in cash.

     o    Hamptons Apartments, acquired October 2005, for a total cost of $17.5
          million, paid in cash.

     o    Paces Watch Apartments, acquired May 2005, for a total cost of $20.5
          million, paid in cash.

     o    Waverly Place Apartments, acquired April 2005, for a total cost of
          $13.2 million, paid in cash.

     o    Portfolio of four apartment communities (Canterbury Apartments, Laurel
          Springs Apartments, Laurel Springs II Apartments, and Salem Ridge
          Apartments), acquired March 2005, for an aggregate purchase price of
          $52.1 million (including $0.3 million in net operating assets
          acquired), paid by assumption or refinancing of $42.8 million in debt
          obligations and issuance of operating partnership units with an
          imputed value of $9.3 million. Under the terms of the exchange
          agreements, we issued 689,000 operating partnership units at closing,
          and we will issue an additional 74,000 units in March 2006. We operate
          Laurel Springs and Laurel Springs II Apartments as one community.

2004 acquisitions:

     o    Bridges at Southpoint Apartments, acquired September 2004, for a total
          cost of $10.2 million, paid in cash.

     o    Savannah Shores Apartments, acquired July 2004 - see discussion at
          Note 3.

     o    The Fairington Apartments, acquired August 2004, for a total cost of
          $18.6 million, paid in cash.

     o    Carriage Club Apartments, acquired June 2004, for a total cost of
          $19.7 million, paid in cash.

     o    Bridges at Wind River Apartments, acquired May 2004, for a total cost
          of $25.1 million (including $0.2 million in net operating assets
          acquired), including assumption of $24.6 million in debt obligations
          and issuance of 42,000 operating partnership units with an imputed
          value of $0.5 million.

                                       78
<PAGE>

2003 acquisitions:


     o    The Harrington Apartments, acquired August 2003, for a total cost of
          $17.9 million, paid in cash.

     o    The Place Apartments, acquired March 2003, for a total cost of $5.6
          million, paid in cash.

We present the following unaudited pro forma summary information as if we had
owned the properties acquired in 2005 and 2004 throughout all of both years.
These pro forma amounts may not represent how we would have performed if these
acquisitions had really occurred prior to 2004. In addition, they do not purport
to project our results of operations for any future period.

                                                       2005            2004
                                                  --------------  --------------

(000's) (000's)

Total revenue                                         $79,197           $75,723
(Loss) income from
- Continuing operations                                (8,456)             (586)
- Discontinued operations                               6,482                72
Net loss                                               (1,974)             (514)
Loss attributed to common shareholders                 (2,807)           (1,514)

Basic and diluted earnings per share:
   (Loss) income from
   - Continuing operations                             $(0.91)           $(0.07)
   - Discontinued operations                             0.70              0.01
   Net loss                                             (0.21)            (0.06)
   Loss attributed to common shareholders               (0.30)            (0.19)

During 2003, we sold two restaurant properties to the lessee for their net
carrying values, totaling $1.2 million. We applied the proceeds from these sales
to improvements at apartment communities and to reduce our line of credit
secured by the restaurant properties.

Note 5.  Notes Payable

Notes payable consist of the following:

                                                            December 31
                                                        2005           2004
                                                  --------------- --------------
                                                      (000's)         (000's)

Owned properties - Lines of credit with a bank:

Principal sum of up to $14.6 million through
January 2007, then $13.8 million, due January
2008 (as modified June 2005), secured by
deeds of trust and assignments of rents of 40
restaurant properties. Interest-only payments
on the outstanding balance due monthly at a
variable interest rate of 30-day LIBOR plus
1.80% (6.27% at December 31, 2005).                 $  14,650         $   16,316

Revolving line of credit for principal sum of
up to $40.0 million, due January 2009 (as
modified November 2005), secured by a deed of
trust and assignment of rents of Latitudes
Apartments. Interest-only payments on the
outstanding balance due monthly at a

                                       79
<PAGE>
                                                            December 31
                                                        2005           2004
                                                  --------------- --------------
                                                      (000's)         (000's)

variable interest rate of 30-day LIBOR plus
1.65 % (6.12% at December 31, 2005).                       -0-            10,166

Owned properties - Variable rate notes payable:

Notes payable to banks, assumed in
conjunction with 2005 acquisitions of one
apartment community and a parcel of land
adjacent to another community. Payments of
$7,000 principal plus interest due monthly at
interest rates of 30-day LIBOR plus 1.90% and
1.98% (6.45% at December 31, 2005).
Maturities in 2006 with balloon payments
totaling $7.9 million.                                  7,923                  -

Note payable to a bank in the principal
amount of $10.5 million (as modified December
2004), secured by a deed of trust and
assignment of rents of an apartment
community. Payable in monthly installments of
$56,000 including principal and interest at
30-day LIBOR plus 1.85% (6.32% at December
31, 2005). Maturity in December 2007, with an
estimated balloon payment of $8.0 million.              8,294             10,453

Note payable to a bank, secured by a deed of
trust and assignment of rents of an apartment
community, with available balance up to $13.0
million. Interest-only payments due monthly
at 30-day LIBOR plus 1.65% (6.12% at December
31, 2005), with maturity in November 2008.              9,392                  -

Note payable to a bank, secured by a deed of
trust and assignment of rents of one
apartment property. (Two additional notes
payable were outstanding at December 31,
2004, and were retired in 2005.)
Interest-only payments on the outstanding
principal balance due monthly at an interest
rate of 30-day LIBOR plus 1.75% (6.22% at
December 31, 2005); beginning September 2007,
monthly payments of principal estimated at
$25,000 plus interest. Maturity in August
2009, with an estimated balloon payment of
$12.9 million.                                         13,400             33,900

Owned properties - Fixed rate notes payable:

Notes payable comprised of 21 loans (11 loans
in 2004), payable in monthly installments
totaling $1,564,000 including principal and
interest at rates ranging from 4.98% to 7.09%
with maturities in 2009 through 2016. Secured
by deeds of trust and assignments of rents of
apartment communities.                                278,461            131,225

                                       80
<PAGE>
                                                            December 31
                                                        2005           2004
                                                  --------------- --------------
                                                      (000's)         (000's)

Notes payable comprised of 7 loans (10 loans
in 2004), interest rates ranging from 5.53%
to 6.76%, payable in interest-only monthly
installments totaling $296,000, with
maturities totaling $39.1 million in 2008 and
$17.3 million in 2015. Secured by deeds of
trust and assignments of rents of apartment
communities.                                           56,455             84,366
                                                ---------------- ---------------
                                                      388,576            286,425

Consolidated limited partnerships - Fixed rate notes payable:

Notes payable comprised of three loans,
payable in monthly installments totaling
$279,000 including principal and interest at
rates ranging from 5.15% to 7.39% with
maturities totaling $12.7 million in 2011 and
$28.0 million in 2015. Secured by deeds of
trust and assignments of rents of apartment
communities. The carrying amount at December
31, 2005, includes $1.0 million premium
recorded in consolidation to reduce the
effective interest rates of above-market
loans from 7.39% to approximately 5.3%.                48,136                  -
                                                ---------------- ---------------

                                                     $436,712           $286,425
                                                ================ ===============

During the three years ended December 31, 2005, we executed or assumed the
following notes payable in conjunction with acquisitions of apartment
communities:

o    $17.3 million fixed-rate note payable, October 2005, secured by a deed of
     trust and assignment of rents of Timbers Apartments. This loan provides for
     interest at 5.45% (5.53% effective rate), payable in interest-only monthly
     installments of $80,000, with a balloon payment of $17.3 million at
     maturity in November 2015. We paid and recorded deferred loan costs of
     $120,000 related to this loan.

o    $13.0 million variable-rate note payable, initial draw of $9.4 million
     October 2005, secured by a deed of trust and assignment of rents of
     Hamptons Apartments. This loan provides for interest at 30-day LIBOR plus
     1.65%, payable monthly, with principal due November 2008. We paid and
     recorded deferred loan costs of $78,000 related to this loan.

o    $14.9 million fixed-rate note payable, May 2005, secured by a mortgage and
     assignment of rents of Paces Watch Apartments. This loan provides for
     interest at 5.31% (5.38% effective rate), with interest-only payments of
     $67,000 through June 2008. Beginning July 2008, scheduled monthly
     installments of principal and interest will be $83,000, with a balloon
     payment of $13.3 million at maturity in June 2015. We paid and recorded
     deferred loan costs of $90,000 related to this loan.

o    $10.2 million fixed-rate note payable, April 2005, secured by a mortgage
     and assignment of rents of Waverly Place Apartments. This loan provides for
     interest at 5.31% (5.38% effective rate), with interest-only monthly
     payments of $46,000 through May 2008. Beginning June 2008, scheduled
     monthly installments of principal and interest will be $56,000 with a
     balloon payment of $9.1 million at maturity in June 2015. We paid and
     recorded deferred loan costs of $66,000 related to this loan.

o    $21.5 million balance, fixed-rate note payable assumed March 2005, secured
     by a mortgage and assignment of rents of Canterbury Apartments. This loan
     provides for interest at 5.40% (5.48% effective rate), payable in monthly
     installments of principal and interest of $124,000 through July 2013, with
     a balloon payment of $18.4 million at maturity in August 2013. We paid and
     recorded

                                       81
<PAGE>

     deferred loan costs of $26,000 related to this loan.

o    $1.5 million variable-rate unsecured note related to Canterbury Apartments,
     assumed March 2005 and immediately retired.

o    $11.3 million balance, fixed-rate note payable assumed March 2005, secured
     by a deed of trust and assignment of rents of Laurel Springs Apartments.
     This loan provides for interest at 4.91% (4.98% effective rate), payable in
     monthly installments of principal and interest of $62,000 through June
     2013, with a balloon payment of $9.6 million at maturity in July 2013. We
     paid and recorded deferred loan costs of $28,000 related to this loan.

o    $5.9 million variable-rate note payable assumed March 2005, secured by a
     deed of trust and assignment of rents of Laurel Springs II Apartments. This
     loan provides for interest at 30-day LIBOR plus 1.90%, payable monthly.
     Beginning July 2005, principal payments of $7,000 are due monthly in
     addition to interest, with a balloon payment of $5.8 million at maturity in
     June 2006. At our option, we may extend the loan maturity to June 2008. We
     paid and recorded deferred loan costs of $2,000 related to this loan.

o    $2.6 million fixed-rate note payable assumed March 2005, secured by a deed
     of trust and assignment of rents of Salem Ridge Apartments. This loan
     provides for interest at 6.76%, with interest-only monthly payments of
     $15,000, and principal due September 2008. We paid and recorded deferred
     loan costs of $12,000 related to this loan.

o    $8.2 million fixed-rate note payable, September 2004, secured by a deed of
     trust and assignment of rents of Bridges at Southpoint Apartments. This
     loan provides for interest at 4.93% (5.00% effective rate), payable in
     monthly installments of $34,000 through October 2007, then principal and
     interest payable in monthly installments of $44,000 through September 2014,
     with a balloon payment of $7.3 million at maturity in October 2014. We paid
     and recorded deferred loan costs of $61,000 related to this loan.

o    $13.4 million variable-rate note payable, August 2004, secured by a deed of
     trust and assignment of rents of Fairington Apartments. This loan provides
     for interest at 30-day LIBOR plus 1.75%, payable monthly, with principal
     due August 2007, subject to an optional 24-month extension. If the loan is
     extended, principal payments of $31,000 will be payable monthly beginning
     September 2007, with the remaining principal balance of $12.7 million due
     August 2009. We paid and recorded deferred loan costs of $76,000 related to
     this loan.

o    $9.0 million variable-rate note payable, July 2004, secured by a deed of
     trust and assignment of rents of Savannah Shores Apartments. We
     subsequently retired this loan in conjunction with the sale of Savannah
     Shores Apartments in October 2005. We paid and recorded deferred loan costs
     of $56,000 related to this loan in 2004; we wrote off unamortized loan
     costs of $33,000 related to this loan in 2005. .

o    $14.9 million fixed-rate note payable, June 2004, secured by a deed of
     trust and assignment of rents of Carriage Club Apartments. This loan
     provides for interest at 5.15% (5.22% effective rate), payable in monthly
     installments of $65,000 through July 2005, then principal and interest
     payable in monthly installments of $81,000 through June 2009, with a
     balloon payment of $14.0 million at maturity in July 2009. We paid and
     recorded deferred loan costs of $90,000 related to this loan.

o    $19.7 million fixed-rate note payable, May 2004, secured by a deed of trust
     and assignment of rents of Bridges at Wind River Apartments. This loan
     provides for interest at 5.57% (5.65% effective rate) and monthly payments
     of principal and interest of $113,000, with a balloon payment of $16.5
     million at maturity in June 2014, subject to an optional extension for one
     year with interest at a variable rate. We applied the proceeds of this
     note, along with additional funds drawn on our revolving line of


                                       82
<PAGE>

     credit, to retire the existing $24.6 million loan obligations related to
     Bridges at Wind River. We paid and recorded deferred loan costs of $157,000
     related to this loan.

o    $14.4 million variable-rate note payable, August 2003, secured by a deed of
     trust and assignment of rents of Mallard Creek Phase 2 Apartments (formerly
     Harrington Apartments). This loan provided for interest at 30-day LIBOR
     plus 1.75%, payable monthly. We subsequently retired this loan in July 2004
     (see refinancing transactions below).

o    $4.6 million fixed-rate note payable, March 2003, secured by a deed of
     trust and assignment of rents of Bridges at Pelham Apartments (formerly The
     Place Apartments). This loan provides for interest at 5.06% (5.13%
     effective rate) and monthly payments including principal and interest of
     $25,000, with a balloon payment of $3.8 million at maturity in March 2013.
     We paid and recorded deferred loan costs of $63,000 related to this loan.

During this three-year period, we executed the following notes payable in
refinancing transactions:

o    $5.7 million fixed-rate note payable, December 2005, secured by a deed of
     trust and assignment of rents of Pepperstone Apartments. This loan provides
     for interest at 5.58% (5.66% effective rate), with interest-only monthly
     payments of $27,000 through January 2012. Beginning February 2012,
     scheduled monthly installments of principal and interest will be $33,000,
     with a balloon payment of $5.4 million at maturity in January 2016. We
     applied the proceeds to retire an existing 6.97% fixed-rate note payable
     with a balance of $3.9 million, along with $133,000 in prepayment
     penalties, and reduce the outstanding balance of our line of credit secured
     by Latitudes Apartments. Through December 31, 2005, we paid and recorded
     deferred loan costs of $25,000 related to this loan. In addition, we wrote
     off unamortized loan costs of $9,000 related to the debt retired.

o    $20.3 million fixed-rate note payable, December 2005, secured by a deed of
     trust and assignment of rents of Waterford Place Apartments. This loan
     provides for interest at 5.58% (5.66% effective rate), with interest-only
     monthly payments of $96,000 through January 2012. Beginning February 2012,
     scheduled monthly installments of principal and interest will be $116,000,
     with a balloon payment of $19.2 million at maturity in January 2016. We
     applied the proceeds to retire an existing 6.97% fixed-rate note payable
     with a balance of $11.1 million, along with $379,000 in prepayment
     penalties, and reduce the outstanding balance of our line of credit secured
     by Latitudes Apartments. Through December 31, 2005, we paid and recorded
     deferred loan costs of $32,000 related to this loan. In addition, we wrote
     off unamortized loan costs of $20,000 related to the debt retired.

o    $23.7 million fixed-rate note payable, December 2005, secured by a deed of
     trust and assignment of rents of Abbington Place Apartments. This loan
     provides for interest at 5.50% (5.57% effective rate), with interest-only
     monthly payments of $110,000 through January 2013. Beginning February 2013,
     scheduled monthly installments of principal and interest will be $135,000,
     with a balloon payment of $22.8 million at maturity in January 2016. We
     applied the proceeds to retire an existing 6.97% fixed-rate note payable
     with a balance of $15.8 million, along with $539,000 in prepayment
     penalties, and reduce the outstanding balance of our line of credit secured
     by the Latitudes Apartments. Through December 31, 2005, we paid and
     recorded deferred loan costs of $48,000 related to this loan. In addition,
     we wrote off unamortized loan costs of $28,000 related to the debt retired.

o    $10.2 million fixed-rate note payable, December 2005, secured by a deed of
     trust and assignment of rents of Savannah Place Apartments. This loan
     provides for interest at 5.50% (5.57% effective rate), with interest-only
     monthly payments of $47,000 through January 2013. Beginning February 2013,
     scheduled monthly installments of principal and interest will be $58,000,
     with a balloon payment of $9.8 million at maturity in January 2016. We
     applied the proceeds to retire an existing 6.97% fixed-rate note payable
     with a balance of $7.3 million, along with $250,000 in prepayment
     penalties, and reduce the outstanding balance of our line of credit secured
     by Latitudes Apartments. Through December 31, 2005, we paid and recorded
     deferred loan costs of $41,000 related to this loan. In

                                       83
<PAGE>

     addition, we wrote off unamortized loan costs of $14,000 related to the
     debt retired.

o    $14.0 million fixed-rate note payable, December 2005, secured by a deed of
     trust and assignment of rents of Woods Edge Apartments. This loan provides
     for interest at 5.50% (5.57% effective rate), with interest-only monthly
     payments of $65,000 through January 2013. Beginning February 2013, schedule
     monthly installments of principal and interest will be $79,000, with a
     balloon payment of $13.4 million at maturity in January 2016. We applied
     the proceeds to retire an existing 6.95% fixed-rate note payable with a
     balance of $9.8 million, along with $326,000 in prepayment penalties, and
     reduce the outstanding balance of our line of credit secured by Latitudes
     Apartments. Through December 31, 2005, we paid and recorded deferred loan
     costs of $44,000 related to this loan.

o    $15.5 million fixed-rate note payable, May 2005, secured by a deed of trust
     and assignment of rents of Chason Ridge Apartments. This loan provides for
     interest at 5.21% (5.28% effective rate), with interest-only monthly
     payments of $68,000 through June 2008. Beginning July 2008, scheduled
     monthly installments of principal and interest will be $85,000, with a
     balloon payment of $13.9 million at maturity in June 2015. We applied the
     proceeds to retire an existing $11.5 million variable-rate note payable and
     reduce the outstanding balance of our line of credit secured by Latitudes
     Apartments. We paid and recorded deferred loan costs of $124,000 related to
     this loan. In addition, we wrote off unamortized loan costs of $63,000
     related to the debt retired.

o    $7.1 million fixed-rate note payable, June 2005, secured by a deed of trust
     and assignment of rents of Mallard Creek Phase 1 Apartments (formerly
     Harris Hill Apartments). This loan provides for interest at 5.21% (5.28%
     effective rate), with interest-only monthly payments of $31,000 through
     June 2008. Beginning July 2008, scheduled monthly installments of principal
     and interest will be $39,000, with a balloon payment of $6.4 million at
     maturity in June 2015. We applied the proceeds to retire an existing 8.55%
     fixed-rate note payable with a balance of $5.5 million and reduce our line
     of credit secured by Latitudes Apartments. We paid and recorded deferred
     loan costs of $76,000 related to this loan.

o    $33.9 million fixed-rate note payable, February 2005, secured by a deed of
     trust and assignment of rents of Marina Shores Apartments (in which we have
     a 50% interest through our general partner interest in the Marina Shores
     Partnership, which we include in our consolidated financial statements).
     This loan provides for interest at 5.08% (5.15% effective rate), payable in
     monthly installments of principal and interest of $184,000, with a balloon
     payment of $28.2 million in February 2015. The Marina Shores Partnership
     first applied proceeds of this loan to retire the existing $20.7 million
     deed of trust loan balance along with $1.2 million in interest and
     prepayment penalties, then distributed $6.8 million to the minority limited
     partner and $3.7 million to the operating partnership.

o    $15.0 million fixed-rate note payable, July 2004, secured by a deed of
     trust and assignment of rents of Mallard Creek Phase 2 Apartments (formerly
     Harrington Apartments). This loan provides for interest at 5.15% (5.22%
     effective rate), payable in monthly installments of $65,000 through August
     2005, then principal and interest payable in monthly installments of
     $82,000, with a balloon payment of $14.1 million at maturity in August
     2009. We applied the proceeds to retire a $14.4 million variable-rate note
     payable. We paid and recorded deferred loan costs of $92,000 related to
     this loan. In addition, we wrote off unamortized loan costs of $85,000
     related to the debt retired.

o    $11.5 million variable-rate note payable, April 2004, secured by a deed of
     trust and assignment of rents of Chason Ridge Apartments. This loan
     provided for interest at 30-day LIBOR plus 1.75%, payable monthly. We
     subsequently retired this loan in May 2005 (discussed above).

In November 2005, we modified our revolving line of credit with a bank secured
by Latitudes Apartments to increase our maximum loan amount to $40.0 million and
extend the term of the loan through January 2009 (previously November 2007). In
conjunction with this modification we paid and recorded deferred loan costs of
$110,000. We also paid and recorded deferred loan costs of $184,000 in 2004 and
$32,000

                                       84
<PAGE>

in 2003 in conjunction with previous modifications. As of December 31, 2005,
$40.0 million was available for draw under our Latitudes line of credit.

In June 2005, we modified and extended our line of credit with a bank secured by
our restaurant properties to extend the maturity date of this loan to January
2008 (previously January 2006). In conjunction with this modification, we paid
and recorded deferred loan costs of $21,000. We also paid and recorded deferred
loan costs of $41,000 in 2004 in conjunction with a previous modification.

Interest payments totaled $23.4 million (including $2.5 million paid by
consolidated limited partnerships) in 2005, $14.5 million in 2004, and $13.2
million in 2003.

The loan agreements related to the lines of credit include covenants and
restrictions relating to, among other things, specified levels of debt service
coverage, leverage and net worth. To date, we have met all applicable
requirements.

As of December 31, 2005, we estimate future scheduled principal payments will be
as follows (in thousands):

       2006         $ 10,978               2009               $ 45,235
       2007           11,338               2010                 21,884
       2008           67,122               Thereafter          280,155

Note 6.  Shareholders' equity

Authorized capital stock
Our bylaws and certificate of incorporation allow the Board of Directors to
authorize the issuance of up to 100 million shares of common stock and 10
million shares of preferred stock, issuable in series whose characteristics
would be set by the Board of Directors.

Approximately 4.3 million authorized shares of common stock are reserved for
future issuance under the company's Stock Option and Incentive Plan, Dividend
Reinvestment and Stock Purchase Plan, and for conversion of Operating
Partnership units.

Issue of common stock for acquisition of BIC
In conjunction with the January 2005 acquisition by merger of BIC, we issued
509,000 shares of our common stock valued at $8.2 million, and cancelled 72,000
shares of common stock that BIC held immediately before the merger.

Conversion of preferred shares to common shares
We issued 909,000 shares of the Company's Series B Cumulative Convertible
Preferred stock with total liquidation value of $10.0 million to a single
accredited investor during 2001 through 2003, for total net proceeds of $9.6
million. We redeemed these preferred shares in November 2005 on a one-for-one
basis through issuance of 909,000 shares of our common stock.

Dividend Reinvestment and Stock Purchase Plan
Our Dividend Reinvestment and Stock Purchase Plan ("DRIP Plan") allows the
company, at its option, to issue shares directly to Plan participants. We issued
52,000 shares in 2005, 66,000 shares in 2004, and 73,000 shares in 2003 through
the Plan.

Redemption of operating partnership units
We redeemed operating partnership units from former minority unitholders by
issuing shares of the company's common stock on a one-for-one basis in the
following amounts: 78,000 shares in 2005, 25,000 shares in 2004, and 3,000
shares in 2003.

                                       85
<PAGE>

Earnings per common share
We calculated basic and diluted earnings per share using the following amounts:
<TABLE>
<CAPTION>

                                                              2005              2004              2003
                                                        ----------------- ----------------- -----------------
                                                             (000's)           (000's)           (000's)
<S>                                                        <C>             <C>                <C>
Numerators:
Numerator for basic earnings per share -
   (Loss) income from
   - Continuing operations                                  $ (8,052)       $      962         $     107
   - Discontinued operations                                   6,563                77                 -
                                                        ----------------- ----------------- -----------------
   Net (loss) income                                          (1,488)            1,039         $     107
   Cumulative preferred dividend                                (833)           (1,000)             (661)
                                                        ----------------- ----------------- -----------------
   (Loss) income attributed to common shareholders          $ (2,322)       $       39         $    (553)
                                                        ================= ================= =================
Numerator for diluted earnings per share (1) -
   (Loss) income from
   - Continuing operations                                  $ (8,052)       $      960         $     (66)
   - Discontinued operations                                   6,563                95                 -
                                                        ----------------- ----------------- -----------------
   Net (loss) income                                          (1,488)       $    1,055         $     (66)
   Cumulative preferred dividend                                (833)           (1,000)             (661)
                                                        ----------------- ----------------- -----------------
   (Loss) income attributed to common shareholders          $ (2,322)       $       55         $    (727)
                                                        ================= ================= =================
Denominators:
Denominator for basic earnings per share -
   Weighted average common shares outstanding                  9,389             7,617             5,868
   Less weighted average
     nonvested common shares outstanding                         (84)                -                 -
                                                        ----------------- ----------------- -----------------
   Weighted average common shares - basic                      9,305             7,617             5,868
Effect of dilutive securities:
   Convertible operating partnership units (1)                     -             1,856             1,843
   Weighted average nonvested common shares (2)                    -                 -                 -
   Stock options (3)                                               -                31                 6
                                                        ----------------- ----------------- -----------------
   Dilutive potential common stock                                 -             1,887             1,849
                                                        ----------------- ----------------- -----------------
Denominator for diluted earnings per share -
   Adjusted weighted average common shares and
   assumed conversions                                         9,305             9,504             7,717
                                                        ================= ================= =================

<FN>
(1)  We excluded 2.3 million operating partnership units from the calculation of
     diluted earnings per share for 2005; including these units would serve to
     reduce the net loss per share. For 2004 and 2003 calculations, assumes
     conversion of operating partnership units to common shares.
(2)  We excluded 84,000 nonvested common shares from the calculation of diluted
     earnings per share for 2005; including these shares would serve to reduce
     the net loss per share, and they have been excluded from the calculation.
     The nonvested common shares were issued in August 2005.
(3)  We excluded options to purchase 60,000 shares of common stock at $12.25,
     120,000 shares of common stock at $13.125, 60,000 shares of common stock at
     $11.25, and 30,000 shares of common stock at $9.25 from the calculation of
     diluted earnings per share for 2005; including these options would serve to
     reduce the net loss per share.
     We excluded options to purchase 140,000 shares of common stock at $12.50,
     110,000 shares at $12.25, 120,000 shares at $13.125, and 60,000 shares at
     $11.25 from the calculation of diluted earnings per share for 2003. The
     exercise price of these options was greater than the average market price
     of the common shares for these periods, and the effect would be
     anti-dilutive.
</FN>
</TABLE>

                                       86
<PAGE>

Note 7.  Stock-based compensation

The company has one employee Stock Option and Incentive Plan in place. The plan,
as amended May 2005, provides for issuance of up to 1,260,000 shares, with a
630,000-share limit on restricted stock, phantom stock and other full-value
stock-based awards combined. At December 31, 2005, we have reserved 903,000
shares of common stock for issuance under this plan.

Nonvested common stock
Effective August 1, 2005, the Board of Directors granted and the company issued
200,000 restricted shares of the company's common stock to four of our executive
officers. All of the shares were nonvested at the date of grant, and will vest
10% per year beginning on July 1, 2006, and on each July 1 thereafter until
fully vested. Once vested, the shares will be fully transferable without
restriction. All shares carry dividend and voting rights.

Because grantees fully participate in dividends, the fair value of the nonvested
shares is equal to the market value at the grant date, $15.70 per share, or a
total of $3,140,000. Because the grantee group is limited to four key
executives, we estimate that 100% of these shares will vest. We will recognize
the cost of these awards on a straight-line basis for each annual vesting period
ending June 30 through 2015.

During 2005, we recorded $143,000 in service cost related to nonvested common
stock, included in corporate administration expense in our statement of
operations and as an increase to additional paid-in capital. As of December 31,
2005, unrecognized service cost related to nonvested common stock totaled $3.0
million.

Options
Options have been granted to employees at prices equal to the fair market value
of the stock on the dates the options were granted or repriced. We calculated
the fair value of each option grant on the date of grant using the Black-Scholes
option-pricing model. Options are generally exercisable in four annual
installments beginning one year after the date of grant, and expire ten years
after the date of grant.

The following table summarizes information about stock options outstanding at
December 31, 2005.

<TABLE>
<CAPTION>

                                                        Weighted Average
                                                           Remaining         Number of         Number of
                                                          Contractual         Options           Options
                                                          Life (Years)      Outstanding       Exercisable
                                                        ----------------- ----------------- -----------------
<S>                                                             <C>            <C>               <C>
Exercise price $9.25 per share                                   4.15            30,000            30,000
Exercise price $11.25 per share                                  2.83            60,000            60,000
Exercise price $13.125 per share                                 2.50           120,000           120,000
Exercise price $12.25 per share                                  1.33            60,000            60,000
                                                                          ----------------- -----------------
   All options outstanding                                       2.50           270,000           270,000
                                                                          ================= =================
</TABLE>

There were no grants of options during 2005, 2004, or 2003. As of December 31,
2005, all outstanding options were fully vested. Changes in outstanding stock
options were as follows:

                                       87
<PAGE>
<TABLE>
<CAPTION>

                                       2005                       2004                       2003
                             -------------------------- -------------------------- --------------------------
                                            Weighted                   Weighted                   Weighted
                                             Average                    Average                    Average
                                            Exercise                   Exercise                   Exercise
                                Shares        Price        Shares        Price        Shares        Price
                             ------------ ------------- ------------ ------------- ------------ -------------
<S>                            <C>            <C>         <C>            <C>         <C>            <C>
Beginning balance               327,500        $12.04      477,500        $12.12      477,500        $12.12
Granted                               -             -            -             -            -             -
Exercised                       (57,500)        11.86      (99,844)        12.50            -             -
Repurchased                           -             -            -             -            -             -
Forfeited                             -             -      (50,156)        11.85            -             -
                             ------------- ------------ ------------- ------------ ------------- ------------
Ending balance                  270,000        $12.08      327,500        $12.04      477,500        $12.12
                             ============= ============ ============= ============ ============= ============
Exercisable at the end of
the year                        270,000        $12.08      327,500        $12.04      465,625        $12.19
                             ============= ============ ============= ============ ============= ============
</TABLE>

During 2005, we issued 57,500 shares of our common stock upon exercise of
options by two employees for cash proceeds totaling $682,000. During 2004, we
issued 99,844 shares of our common stock, net of 40,071 shares exchanged, upon
exercise of options by three employees, for cash proceeds of $700,000.

Note 8.  Rental operations

Apartment properties
We lease our residential apartments under operating leases with monthly payments
due in advance. Terms of the apartment leases are generally one year or less,
with none longer than two years.

Restaurant properties - master lease agreement
The lease agreement with Boddie-Noell Enterprises ("Enterprises") has a primary
term expiring in December 2007, but grants Enterprises three five-year renewal
options. Enterprises pays annual rent equal to the greater of the specified
minimum rent or 9.875% of food sales from the restaurants. Under certain
conditions as defined in the agreement, both Enterprises and the company have
the right to substitute another restaurant property for a property covered by
the lease. Assuming renewal of the lease, after December 31, 2007, Enterprises
has the right to terminate the lease on up to five restaurant properties per
year by offering to purchase them under specified terms.

In addition, we entered into a separate agreement with Enterprises that, after
December 31, 1997, allowed Enterprises to purchase, under specified terms, up to
seven restaurant properties deemed non-economic. During 2003 we sold two
restaurants to Enterprises, the lessee, under this agreement. We sold five
restaurants in previous years to Enterprises under this clause.

The lease requires Enterprises to pay monthly installments of minimum rent and
quarterly payments calculated based on the percentage rent, subject to an annual
calculation of the greater of minimum or percentage rent. We received the
minimum rent in 2005, 2004, and 2003. We expect annual minimum rent will be $3.8
million in years 2006 and 2007.

Casualty gains
During 2005, we recorded casualty gains totaling $668,000 related to fires that
resulted in substantial damages to one building each at two of our apartment
communities. We received insurance proceeds totaling $533,000 for a fire that
occurred in April 2005, against which we identified and wrote off $365,000 net
carrying value of assets destroyed. We expect to receive insurance proceeds
totaling approximately $1.0 million in early 2006 for a fire that occurred in
September 2005, against which we have tentatively identified and written off
$530,000 net carrying value of assets destroyed.

                                       88
<PAGE>

During 2004, we recorded casualty gains totaling $269,000 related to fires that
resulted in substantial damage to one building each at two of our apartment
communities. We received insurance proceeds totaling $895,000, against which we
identified and wrote off $626,000 net carrying value of assets destroyed.

We are insured for these losses, including rent continuation insurance covering
100% of lost rental income. We recorded $150,000 in 2005 and $131,000 in 2004 in
recovery of lost rents, included in apartment rental income in our statements of
operations.

Note 9.  Income taxes

We operate as, and elect to be taxed as, a REIT under the Internal Revenue Code.
To qualify as a REIT, we must meet a number of organizational and operational
requirements, including a requirement that we currently distribute at least 90%
of our adjusted taxable income to our common shareholders. We intend to adhere
to these requirements and maintain the company's REIT status. As a REIT, we
generally will not be subject to corporate level federal or state income tax on
taxable income we distribute currently to our shareholders. If we fail to
qualify as a REIT in any taxable year, we will be subject to federal and state
income taxes at regular corporate rates (including any applicable alternative
minimum tax) and may not be able to qualify as a REIT for four subsequent
taxable years. Even if we qualify for taxation as a REIT, we may be subject to
certain state and local taxes on income and property, and to federal income and
excise taxes on undistributed taxable income. In addition, taxable income from
non-REIT activities managed through taxable REIT subsidiaries would be subject
to federal, state and local income taxes.

The following table reconciles our income as reflected in our financial
statements to REIT taxable income. Taxable income differs from income for
financial statement purposes, primarily due to differences for tax purposes in
the estimated useful lives and methods used to compute depreciation and the
carrying value (basis) of the investment in properties.
<TABLE>
<CAPTION>

                                                              2005              2004              2003
                                                            Estimate           Actual            Actual
                                                        ----------------- ----------------- -----------------
                                                            (000's)            (000's)           (000's)
<S>                                                         <C>               <C>               <C>
(Loss) income before minority interests                      $(2,155)          $ 1,055           $   (66)
(Income) loss attributed to
   consolidated limited partnerships                           8,335                 -                 -
                                                        ----------------- ----------------- -----------------
Income (loss) subject to income tax -
   owned properties                                            6,180             1,055               (66)
Reconciling items:
Depreciation differences                                       1,225               375               129
GAAP gain on sale of apartment community
   in tax-free exchange                                       (8,130)                -                 -
One-time deduction allocated to
   Wind River Apartments contributor                               -             (1746)                -
Other book/tax differences, net                                  270               (70)             (163)
                                                        ----------------- ----------------- -----------------
Adjusted taxable (loss) income -
   Operating Partnership                                        (455)             (386)             (100)
Minority share of taxable (income) loss                          255             1,010               124
                                                        ----------------- ----------------- -----------------
Taxable income (loss) subject to
   dividend requirement                                      $  (200)          $   624           $    24
                                                        ================= ================= =================
Minimum dividend required
   (90% of taxable income)                                   $     -           $   561           $    21
                                                        ================= ================= =================
</TABLE>

                                       89
<PAGE>

The actual tax deduction for dividends that we take, and the taxability of
dividends to shareholders, is based on a measurement of "earnings and profits"
as defined by the Internal Revenue Code. Earnings and profits differ from
regular taxable income, primarily due to further differences in the estimated
useful lives and methods used to compute depreciation. The following table
reconciles the dividends paid deduction taken by the company (the portion of
dividends paid that are taxable as ordinary income to shareholders) on its tax
returns to cash dividends paid.
<TABLE>
<CAPTION>

                                                              2005              2004              2003
                                                            Estimate           Actual            Actual
                                                        ----------------- ----------------- -----------------
                                                            (000's)            (000's)           (000's)
<S>                                                        <C>                <C>               <C>
Dividends paid deduction for
   Preferred dividends paid                                 $    300           $ 1,000           $   537
   Common dividends paid                                           -               742                 -
                                                        ----------------- ----------------- -----------------
                                                                 300             1,742               537
Dividends on nonvested common stock, treated
   as compensation expense for tax purposes                      100                 -                 -
Portion of dividends
   designated as return of capital                             9,990             6,809             5,859
                                                        ----------------- ----------------- -----------------
Total dividends paid                                        $ 10,390           $ 8,551           $ 6,396
                                                        ================= ================= =================
</TABLE>

We paid dividend distributions totaling $1.00 per share to common shareholders
in 2005, 2004 and 2003. In early January following each year end, we must make
an estimate of earnings and profits, and publish an allocation between ordinary
dividend income and non-taxable return of capital to common shareholders. The
allocation between ordinary dividend income and non-taxable return of capital to
common shareholders was as follows:
<TABLE>
<CAPTION>

                                              2005                     2004                    2003
                                         $            %           $           %           $           %
                                     ----------- ------------ ----------- ----------- ----------- -----------
<S>                                     <C>        <C>           <C>        <C>          <C>        <C>
Ordinary income                          $0.00       00.0%        $0.12       12.0%       $0.17       17.0%
Return of capital                         1.00      100.0%         0.88       88.0%        0.83       83.0%
                                     ----------- ------------ ----------- ----------- ----------- -----------
                                         $1.00      100.0%        $1.00      100.0%       $1.00      100.0%
                                     =========== ============ =========== =========== =========== ===========
</TABLE>

Note 10.  Related party transactions

In 2005 and 2004, we issued 138,000 operating partnership units to acquire
Savannah Shores Apartments from a group of investors to whom we refer as the
"Chrysson Parties." Previously, between 1997 and 2002, we issued 1.5 million
operating partnership units to acquire eight apartment communities from this
group. Certain current directors of the company were shareholders and officers
in the Chrysson Parties.

In February 1997, we entered into a participating loan agreement with The
Villages Partnership, which we now include in our consolidated financial
statements effective January 2005. We record minimum interest on a $100,000 note
payable at the greater of 12.5% or the 30-day LIBOR rate plus 6.125%, and we are
entitled to 25% participation in increased rental revenue and 25% participation
in the increase in value of the property. In July 2001, we modified the
participating loan agreement to establish a $950,000 "fixed portion" of our
participation in the increase in value of the property and extend the period for
our 25% participation in increased rental revenue and increase in value of the
property to the earlier of July 2011 or sale or refinance of the property. We
received $383,000 of the fixed portion during 2002 and 2001. Required payment of
the fixed portion is subject to cash flow from the Villages property, as defined
in the agreement. Interest on the outstanding fixed portion accrues at the
greater of a prime rate or 8%, payable monthly.

                                       90
<PAGE>

During 2005, the operating partnership recorded interest income related to the
participating loan agreement of $59,000, along with interest income related to
notes and other receivables acquired in our acquisition of BIC of $70,000, which
have been eliminated in consolidation. At December 31, 2005, we have eliminated
amounts receivable for loans and advances to the Villages Partnership totaling
$2.3 million in consolidation. We received interest and participation income of
$59,000, along with guarantee fees of $12,000, in each of 2004 and 2003 related
to the participating loan agreement.

In 1996 through 1999, we made loans totaling $140,000, on an interest-free
basis, to certain officers of the company. The loans are secured by shares of
the company's common stock and are payable in full six months after termination
of employment. These loans are included in our balance sheets in other assets.

Note 11.  Profit sharing plan

The employees of the company are participants in a profit sharing plan pursuant
to Section 401 of the Internal Revenue Code. We make limited matching
contributions based on the level of employee participation as defined in the
plan. We made contributions to the plan totaling $107,000 in 2005, $82,000 in
2004, and $57,000 in 2003.

Note 12.  Commitments and contingencies

We expect to spend approximately $1.3 million in early 2006 for reconstruction
of an apartment building damaged by fire and $1.2 million for other significant
improvements projects at our apartment communities. (We expect to receive
insurance proceeds of approximately $1.1 million in early 2006, which we plan to
apply toward the cost of the reconstruction.)

We currently lease 10,000 square feet of office space in downtown Charlotte,
North Carolina, for our corporate and administrative offices. Rent expense
totaled $178,000 in 2005, and $163,000 in 2004 and 2003. The lease agreements
for the office space provide for monthly rental of $19,000 and expire in January
and June 2008.

We have agreements with four of our executive officers that provide for cash
compensation and other benefits if we terminate them without cause or if a
change in control of the company occurs.

The company is a party to a variety of legal proceedings arising in the ordinary
course of its business. We believe that such matters will not have a material
effect on the financial position or results of operations of the company.

Note 13.  Quarterly financial data (unaudited)

We present below selected financial data (unaudited) for the years ended
December 31, 2005 and 2004.
<TABLE>
<CAPTION>

                                                        Net Income (Loss)                Income (Loss)
                                               -------------------------------------     Attributed to
                             Revenues from                         Per Share                 Common
                              Continuine                     -----------------------     Shareholders-
                              Operations          Total        Basic      Diluted      Per Share, Diluted
                          -------------------- ------------- ----------- ----------- -----------------------
                               (000's)           (000's)
<S>                           <C>               <C>            <C>         <C>              <C>
2005
First quarter                  $ 15,035          $(5,970)       $(0.66)     $(0.66)          $(0.69)
Second quarter                   18,166             (409)        (0.04)      (0.04)           (0.06)
</TABLE>

                                       91
<PAGE>


<TABLE>
<CAPTION>

                                                        Net Income (Loss)                Income (Loss)
                                               -------------------------------------     Attributed to
                             Revenues from                         Per Share                 Common
                              Continuine                     -----------------------     Shareholders-
                              Operations          Total        Basic      Diluted      Per Share, Diluted
                          -------------------- ------------- ----------- ----------- -----------------------
                               (000's)           (000's)
<S>                           <C>               <C>            <C>         <C>              <C>
Third quarter                    18,892             (150)        (0.01)      (0.01)           (0.04)
Fourth quarter                   19,919            5,040          0.55        0.55             0.54
                          -------------------- ------------- ----------- ----------- -----------------------
                               $ 72,012          $(1,488)       $(0.16)     $(0.16)          $(0.25)
                          ==================== ============= =========== =========== =======================

2004
First quarter                  $ 11,231          $   373        $ 0.06      $ 0.05           $ 0.02
Second quarter                   11,858              217          0.03        0.02            (0.01)
Third quarter                    13,268              299          0.03        0.03             0.01
Fourth quarter                   13,630              150          0.02        0.01            (0.01)
                          -------------------- ------------- ----------- ----------- -----------------------
                               $ 49,986          $ 1,039        $ 0.14      $ 0.11           $ 0.01
                          ==================== ============= =========== =========== =======================

</TABLE>

Note 14.  Subsequent events

The Board of Directors declared a regular quarterly dividend of $0.26 per common
share on January 19, 2006, payable on February 15, 2006, to shareholders of
record on February 1, 2006.


                                       92
<PAGE>



                         Report of Independent Auditors





Board of Directors and Stockholders
BNP Residential Properties, Inc.




We have audited the accompanying statement of revenues and certain operating
expenses of the Hamptons Apartments ("the Apartments") for the year ended
December 31, 2004. This statement is the responsibility of Company management.
Our responsibility is to express an opinion on this financial statement based on
our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statement is free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Apartments' internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statement, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

The accompanying statement of revenues and certain operating expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission, as described in Note 1, and is not intended
to be a complete presentation of the Hamptons Apartments' revenues and expenses.

In our opinion, the statement of revenues and certain operating expenses
referred to above presents fairly, in all material respects, the revenues and
certain operating expenses described in Note 1 of the Hamptons Apartments for
the year ended December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America.


   /s/ Grant Thornton LLP

Charlotte, North Carolina
March 6, 2006


                                       93
<PAGE>

Hamptons Apartments
Statements of Revenue and Certain Operating Expenses

<TABLE>
<CAPTION>


                                                                        Year ended
                                                                       December 31,          Nine months ended
                                                                           2004              September 30, 2005
                                                                   ---------------------    ---------------------
                                                                                                (Unaudited)
<S>                                                                     <C>                     <C>
Rental income                                                            $ 1,852,940             $ 1,408,991

Certain operating expenses:
   Property operations expense                                               604,066                 457,232
   Property insurance                                                         62,847                  44,946
   Property taxes                                                            155,241                 136,849
                                                                   ---------------------    ---------------------
                                                                             822,154                 639,027
                                                                   ---------------------    ---------------------

Revenue in excess of certain operating expenses                          $ 1,030,786               $ 769,964
                                                                   =====================    =====================
</TABLE>

See accompanying notes.



                                       94
<PAGE>



Hamptons Apartments
Notes to Statements of Revenue and Certain Operating Expenses
For the year ended December 31, 2004, and
For the nine months ended September 30, 2005 (Unaudited)

1.       Summary of Significant Accounting Policies

Basis of presentation
These statements of revenue and certain operating expenses reflect the
operations of an apartment property located in Charlotte, North Carolina.
Hamptons Apartments is not a legal entity; it is an apartment property acquired
by BNP Residential Properties, Inc. in October 2005. The 232-unit apartment
property was built in 1986.

We prepared these statements in accordance with Rule 3-14 of Regulation S-X.
Accordingly, these statements exclude items such as interest, depreciation and
amortization, and general and administrative expenses that are not comparable to
the anticipated future on-site operations of the apartment property.

Revenue recognition
Hamptons Apartments leased its residential apartments under operating leases
with monthly payments due in advance. The majority of the apartment leases were
for terms of one year or less. Rental and other revenues were recorded as
earned.

Advertising expense
Hamptons Apartments charged advertising costs to property operations expense as
incurred. Advertising expense included in property operations expense totaled
approximately $45,000 for the year ended December 31, 2004 and approximately
$29,000 for the nine months ended September 30, 2005.

Use of estimates
We are required to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes in order to prepare
them in accordance with generally accepted accounting principles. Actual results
could differ from those amounts.

Interim financial data
The financial statements for the period ended September 30, 2005, include all
adjustments that are, in management's opinion, necessary for a fair presentation
of the revenues and certain operating expenses for this interim period.
Operating results for the period ended September30, 2005, are not necessarily
indicative of the results to be expected for the entire year ending December 31,
2005.

2.       Environmental matters

Hamptons Apartments has been subjected to Phase I environmental reviews. These
reviews did not reveal, nor is management aware of, any environmental liability
that management believes would have a material adverse effect on the
accompanying financial statements.

                                       95
<PAGE>




                         Report of Independent Auditors





Board of Directors and Stockholders
BNP Residential Properties, Inc.




We have audited the accompanying statement of revenues and certain operating
expenses of the Timbers Apartments ("the Apartments") for the year ended
December 31, 2004. This statement is the responsibility of Company management.
Our responsibility is to express an opinion on this financial statement based on
our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statement is free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Apartments' internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statement, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

The accompanying statement of revenues and certain operating expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission, as described in Note 1, and is not intended
to be a complete presentation of the Timbers Apartments' revenues and expenses.

In our opinion, the statement of revenues and certain operating expenses
referred to above presents fairly, in all material respects, the revenues and
certain operating expenses described in Note 1 of the Timbers Apartments for
the year ended December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America.


   /s/ Grant Thornton LLP

Charlotte, North Carolina
March 6, 2006


                                       96
<PAGE>


Timbers Apartments
Statements of Revenue and Certain Operating Expenses

<TABLE>
<CAPTION>


                                                                        Year ended
                                                                       December 31,          Nine months ended
                                                                           2004              September 30, 2005
                                                                   ---------------------    ---------------------
                                                                                                (Unaudited)
<S>                                                                     <C>                     <C>
Rental income                                                            $ 2,122,183             $ 1,707,250

Certain operating expenses:
   Property operations expense                                               521,399                 394,625
   Property insurance                                                         51,178                  37,097
   Property taxes                                                            161,482                 132,727
                                                                   ---------------------    ---------------------
                                                                             734,059                 564,449
                                                                   ---------------------    ---------------------

Revenue in excess of certain operating expenses                          $ 1,388,124             $ 1,142,801
                                                                   =====================    =====================
</TABLE>

See accompanying notes.
                                       97
<PAGE>



Timbers Apartments
Notes to Statements of Revenue and Certain Operating Expenses
For the year ended December 31, 2004 and
For the nine months ended September 30, 2005 (Unaudited)

3.       Summary of Significant Accounting Policies

Basis of presentation
These statements of revenue and certain operating expenses reflect the
operations of an apartment property located in Richmond, Virginia. Timbers
Apartments is not a legal entity; it is an apartment property acquired by BNP
Residential Properties, Inc. in October 2005. The 240-unit apartment property
was built in 1989.

We prepared these statements in accordance with Rule 3-14 of Regulation S-X.
Accordingly, these statements exclude items such as interest, depreciation and
amortization, and general and administrative expenses that are not comparable to
the anticipated future on-site operations of the apartment property.

Revenue recognition
Timbers Apartments leased its residential apartments under operating leases with
monthly payments due in advance. The majority of the apartment leases were for
terms of one year or less. Rental and other revenues were recorded as earned.

Advertising expense
Timbers Apartments charged advertising costs to property operations expense as
incurred. Advertising expense included in property operations expense totaled
approximately $41,700 for the year ended December, 2004 and approximately
$31,000 for the nine months ended September, 2005.

Use of estimates
We are required to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes in order to prepare
them in accordance with generally accepted accounting principles. Actual results
could differ from those amounts.

Interim financial data
The financial statements for the period ended September 30, 2005, include all
adjustments that are, in management's opinion, necessary for a fair presentation
of the revenues and certain operating expenses for this interim period.
Operating results for the period ended September 30, 2005, are not necessarily
indicative of the results to be expected for the entire year ending December 31,
2005.

4.       Environmental matters

Timbers Apartments has been subjected to Phase I environmental reviews. These
reviews did not reveal, nor is management aware of, any environmental liability
that management believes would have a material adverse effect on the
accompanying financial statements.

                                       98
<PAGE>
BNP RESIDENTIAL PROPERTIES, INC.
------------------------------------------------------------------------------
Schedule III - Real Estate and Accumulated Depreciation
Year ended December 31, 2005
<TABLE>
<CAPTION>
                                                                                             Gross Amount at Which
         Description             Encumb.          Initial Costs           Costs          Carried at Close of Period (2)
         -----------             -------          -------------        Capitalized       ------------------------------
                                                         Buildings &    Subsequent                Buildings &
                                               Land      Improvem'ts   to Acquisition   Land      Improvem'ts     Total
<S>                          <C>            <C>          <C>            <C>         <C>           <C>          <C>
Owned apartment properties:
North Carolina:
Abbington Place, Greensboro    $ 23,700,000 $ 2,302,000  $ 23,598,676       292,265  $ 2,302,000  $ 23,890,941 $ 26,192,941
Allerton Place, Greensboro       10,270,000   1,384,000    14,650,428       276,737    1,384,000    14,927,165   16,311,165
Barrington Place, Charlotte      19,509,835   2,604,000    24,002,687       357,253    2,604,000    24,359,940   26,963,940
Brookford Place, Greensboro       4,689,887     465,000     5,157,507       108,891      465,000     5,266,398    5,731,398
Carriage Club, Mooresville       14,818,648   1,984,000    17,714,261       150,158    1,984,000    17,864,419   19,848,419
Chason Ridge, Fayetteville       15,500,000     624,000    11,790,472     1,003,908      994,606    12,423,774   13,418,380
Fairington, Charlotte            13,400,000   4,257,200    14,322,231       751,069    4,257,200    15,073,300   19,330,500
Hamptons, Charlotte               9,392,418   3,561,700    13,945,831        32,229    3,561,700    13,978,060   17,539,760
Laurel Springs, High Point       11,187,808   1,303,800    13,256,894        80,981    1,303,800    13,337,876   14,641,676
Laurel Springs - Ph 2, High Point 5,808,720     455,000     6,663,904         8,693      455,000     6,672,598    7,127,598
Mallard Creek 1, Charlotte        7,120,000   1,003,298     7,867,857     1,837,691    1,003,298     9,705,548   10,708,846
Mallard Creek 2, Charlotte       14,933,759   1,790,000    16,113,942       635,634    1,790,000    16,749,576   18,539,576
Madison Hall, Clemmons            4,245,000     303,000     6,054,307       288,039      303,000     6,342,346    6,645,346
Marina Sh. Waterfront, Cornelius 15,271,926   4,144,000    15,062,322     1,097,464    4,144,000    16,159,786   20,303,786
Oak Hollow, Cary                  8,385,000   1,480,000    10,808,689     2,212,183    1,480,000    13,020,872   14,500,872
Oak Hollow - Phase 2, Cary        8,294,088   1,914,000    10,485,239     2,242,013    1,914,000    12,727,252   14,641,252
Oakbrook, Charlotte               7,562,276     848,835     8,523,384     1,218,969      848,835     9,742,353   10,591,188
Paces Commons, Charlotte         15,728,414   1,430,158    12,871,424     1,831,588    1,448,184    14,684,986   16,133,170
Paces Village, Greensboro         7,000,000   1,250,000     9,416,580       714,422    1,250,000    10,131,002   11,381,002
Pepperstone, Greensboro           5,720,000     552,000     5,015,153       380,652      552,000     5,395,805    5,947,805
Salem Ridge, Winston-Salem        2,610,000     402,000     3,952,533       267,864      402,000     4,220,397    4,622,397
Savannah Place, Winston-Salem    10,150,000     790,000    10,032,721       491,797      790,000    10,524,518   11,314,518
Southpoint, Durham                8,200,000   1,610,500     8,620,734       257,330    1,610,500     8,878,064   10,488,564
Summerlyn Place, Burlington       6,645,000     837,000     9,559,115       211,317      837,000     9,770,432   10,607,432
Waterford Place, Greensboro      20,293,000   1,686,000    16,745,972        64,809    1,686,000    16,810,781   18,496,781
Wind River, Morrisville          19,341,343   3,170,000    21,922,771       684,230    3,170,000    22,607,001   25,777,001
Woods Edge, Durham               13,950,000     994,000    13,061,195     1,837,678      994,000    14,898,872   15,892,872
Computer and support equipment            -           -             -     1,415,716            -     1,415,716    1,415,716
                               --------------------------------------------------------------------------------------------
                                303,727,122  43,145,491   331,216,829    20,751,580   43,534,123   351,579,777  395,113,900

South Carolina:
Canterbury, Myrtle Beach         23,429,077   2,000,000    23,755,561     2,848,703    4,705,838    23,898,427   28,604,265
Paces Watch, Charleston          14,925,000   2,848,000    17,621,918       263,057    2,848,000    17,884,976   20,732,976
Pelham, Greenville                4,384,899     630,000     4,991,397       416,505      630,000     5,407,902    6,037,902
Waverly, Charleston              10,160,000   1,800,000    11,304,741       392,402    1,800,000    11,697,142   13,497,142
                               --------------------------------------------------------------------------------------------
                                 52,898,976   7,278,000    57,673,617     3,920,667    9,983,838    58,888,446   68,872,284
</TABLE>

<TABLE>
<CAPTION>

         Description
         -----------
                                   Accumulated  Date of Date   Life
                                  Depreciation  Constr.Acquired(Years)
<S>                                 <C>          <C>   <C>       <C>
Owned apartment properties:
North Carolina:
Abbington Place, Greensboro         $ 6,677,691   1997  Dec-97    40
Allerton Place, Greensboro            3,594,146   1998  Sep-98    40
Barrington Place, Charlotte           2,509,399   1999  May-02    60
Brookford Place, Greensboro             641,715   1998  May-02    60
Carriage Club, Mooresville              914,213   2000  Jun-04    60
Chason Ridge, Fayetteville            2,679,879   1994  Jan-99    40
Fairington, Charlotte                   854,052   1981  Aug-04    40
Hamptons, Charlotte                      79,723   1986  Oct-05    40
Laurel Springs, High Point              363,194   2002  Mar-05    60
Laurel Springs - Ph 2, High Point       155,876   2004  Mar-05    60
Mallard Creek 1, Charlotte            2,854,625   1988  Dec-94    40
Mallard Creek 2, Charlotte            1,072,575   1997  Aug-03    60
Madison Hall, Clemmons                1,468,026   1997  Aug-98    40
Marina Sh. Waterfront, Cornelius      1,724,002   1994  Sep-02    60
Oak Hollow, Cary                      2,679,297   1983  Jul-98    40
Oak Hollow - Phase 2, Cary            2,410,682   1986  Dec-00    40
Oakbrook, Charlotte                   3,063,997   1985  Jun-94    40
Paces Commons, Charlotte              5,043,085   1988  Jun-93    40
Paces Village, Greensboro             2,990,135   1988  Apr-96    40
Pepperstone, Greensboro               1,468,994   1992  Dec-97    40
Salem Ridge, Winston-Salem              151,582   1984  Mar-05    40
Savannah Place, Winston-Salem         2,875,932   1991  Dec-97    40
Southpoint, Durham                      468,286   1987  Sep-04    43
Summerlyn Place, Burlington           2,148,524   1998  Sep-98    40
Waterford Place, Greensboro           4,715,414   1997  Dec-97    40
Wind River, Morrisville               1,187,485   2000  May-04    60
Woods Edge, Durham                    3,450,534   1985  Jun-98    40
Computer and support equipment          794,634
                                  --------------
                                     59,037,698

South Carolina:
Canterbury, Myrtle Beach                668,551   1999  Mar-05    60
Paces Watch, Charleston                 413,641   1987  May-05    55
Pelham, Greenville                      634,078   1985  Mar-03    45
Waverly, Charleston                     354,893   1986  Apr-05    45
                                  --------------
                                      2,071,164

</TABLE>

                                       99
<PAGE>

<TABLE>
<CAPTION>
                                                                                             Gross Amount at Which
         Description             Encumb.          Initial Costs           Costs          Carried at Close of Period (2)
         -----------             -------          -------------        Capitalized       ------------------------------
                                                         Buildings &    Subsequent                Buildings &
                                               Land      Improvem'ts   to Acquisition   Land      Improvem'ts     Total
<S>                          <C>            <C>          <C>            <C>         <C>           <C>          <C>
Virginia:
Latitudes, Virginia Beach                 -   3,360,000    18,606,667     1,343,214    3,358,558    19,951,323   23,309,881
Timbers, Richmond                17,300,000   2,212,000    20,231,558        38,982    2,212,000    20,270,540   22,482,540
                               ---------------------------------------------------------------------------------------------
                                 17,300,000   5,572,000    38,838,225     1,382,196    5,570,558    40,221,863   45,792,421

                               ---------------------------------------------------------------------------------------------
Total owned apartment properties373,926,098  55,995,491   427,728,671    26,054,443   59,088,518   450,690,087  509,778,605

Owned restaurant properties:
North Carolina:
Burlington                         (1)          162,411       417,629             -      162,411       417,629      580,040
Denver                             (1)          275,484       708,387             -      275,484       708,387      983,871
Eden                               (1)          253,282       651,296             -      253,282       651,296      904,578
Fayetteville (Ramsey)              (1)          260,135       668,919             -      260,135       668,919      929,054
Fayetteville (N.Eastern)           (1)          308,271       792,696             -      308,271       792,696    1,100,967
Hillsborough                       (1)          290,868       747,948             -      290,868       747,948    1,038,816
Kinston (W. Vernon)                (1)          237,135       609,777             -      237,135       609,777      846,912
Kinston (Richlands)                (1)          231,678       595,743             -      231,678       595,743      827,421
Newton                             (1)          223,453       574,594             -      223,453       574,594      798,047
Siler City                         (1)          268,312       689,945             -      268,312       689,945      958,257
Spring Lake                        (1)          218,925       562,949             -      218,925       562,949      781,874
Thomasville (E. Main)              (1)          253,716       652,411             -      253,716       652,411      906,127
Thomasville (Randolph)             (1)          327,727       842,726             -      327,727       842,726    1,170,453
                                            --------------------------------------------------------------------------------
                                              3,311,397     8,515,020             -    3,311,397     8,515,020   11,826,417

Virginia:
Ashland                            (1)          296,509       762,452             -      296,509       762,452    1,058,961
Blackstone                         (1)          275,565       708,596             -      275,565       708,596      984,161
Bluefield                          (1)          205,700       528,947             -      205,700       528,947      734,647
Chester                            (1)          300,165       771,852             -      300,165       771,852    1,072,017
Clarksville                        (1)          211,545       543,972             -      211,545       543,972      755,517
Clintwood                          (1)          222,673       572,588             -      222,673       572,588      795,261
Dublin                             (1)          364,065       936,168             -      364,065       936,168    1,300,233
Franklin                           (1)          287,867       740,230             -      287,867       740,230    1,028,097
Galax                              (1)          309,578       796,057             -      309,578       796,057    1,105,635
Hopewell                           (1)          263,939       678,701             -      263,939       678,701      942,640
Lebanon                            (1)          266,340       684,876             -      266,340       684,876      951,216
Lynchburg (Langhorne)              (1)          249,865       642,509             -      249,865       642,509      892,374
Lynchburg (Timberlake)             (1)          276,153       710,107             -      276,153       710,107      986,260
Norfolk                            (1)          325,822       837,829             -      325,822       837,829    1,163,651

</TABLE>


<TABLE>
<CAPTION>

         Description
         -----------
                                   Accumulated  Date of Date   Life
                                  Depreciation  Constr.Acquired(Years)
<S>                                 <C>          <C>   <C>       <C>
Virginia:
Latitudes, Virginia Beach             6,130,764   1989  Oct-94    38
Timbers, Richmond                       101,698 Jun-05  Oct-05    50
                                   -------------
                                      6,232,463

                                   -------------
Total owned apartment properties3    67,341,324

Owned restaurant properties:
North Carolina:
Burlington                              195,404 Oct-85  Apr-87    40
Denver                                  331,447 Jul-83  Apr-87    40
Eden                                    304,734 Jun-73  Apr-87    40
Fayetteville (Ramsey)                   312,980 Oct-73  Apr-87    40
Fayetteville (N.Eastern)                370,894 Sep-83  Apr-87    40
Hillsborough                            349,957 Mar-78  Apr-87    40
Kinston (W. Vernon)                     285,308 Jul-62  Apr-87    40
Kinston (Richlands)                     278,742 Dec-81  Apr-87    40
Newton                                  268,847 Mar-76  Apr-87    40
Siler City                              322,818 May-79  Apr-87    40
Spring Lake                             263,398 Mar-76  Apr-87    40
Thomasville (E. Main)                   305,256 Feb-66  Apr-87    40
Thomasville (Randolph)                  394,302 Apr-74  Apr-87    40
                                     -----------
                                      3,984,087

Virginia:
Ashland                                 356,744 Apr-87  Apr-87    40
Blackstone                              331,545 Sep-79  Apr-87    40
Bluefield                               247,489 Feb-85  Apr-87    40
Chester                                 361,141 May-73  Apr-87    40
Clarksville                             254,519 Oct-85  Apr-87    40
Clintwood                               267,908 Jan-81  Apr-87    40
Dublin                                  438,023 Jul-83  Apr-87    40
Franklin                                346,346 Feb-75  Apr-87    40
Galax                                   372,466 Jun-74  Apr-87    40
Hopewell                                317,557 Jun-78  Apr-87    40
Lebanon                                 320,447 Jun-83  Apr-87    40
Lynchburg (Langhorne)                   300,623 Sep-82  Apr-87    40
Lynchburg (Timberlake)                  332,251 Aug-83  Apr-87    40
Norfolk                                 392,011 Aug-84  Apr-87    40

</TABLE>



                                      100
<PAGE>






<TABLE>
<CAPTION>
                                                                                             Gross Amount at Which
         Description             Encumb.          Initial Costs           Costs          Carried at Close of Period (2)
         -----------             -------          -------------        Capitalized       ------------------------------
                                                         Buildings &    Subsequent                Buildings &
                                               Land      Improvem'ts   to Acquisition   Land      Improvem'ts     Total
<S>                          <C>            <C>          <C>            <C>         <C>           <C>          <C>
Orange                             (1)          244,883       629,699             -      244,883       629,699      874,582
Petersburg                         (1)          357,984       920,531             -      357,984       920,531    1,278,515
Richmond (Forest Hill)             (1)          196,084       504,216             -      196,084       504,216      700,300
Richmond (Midlothian)              (1)          270,736       696,179             -      270,736       696,179      966,915
Richmond (Myers)                   (1)          321,946       827,861             -      321,946       827,861    1,149,807
Roanoke (Hollins)                  (1)          257,863       663,076             -      257,863       663,076      920,939
Roanoke (Abenham)                  (1)          235,864       606,507             -      235,864       606,507      842,371
Rocky Mount                        (1)          248,434       638,829             -      248,434       638,829      887,263
Smithfield                         (1)          223,070       573,608             -      223,070       573,608      796,678
Verona                             (1)          191,631       492,765             -      191,631       492,765      684,396
Virginia Beach (Lynnhaven)         (1)          271,570       698,322             -      231,731       698,322      930,053
Virginia Beach (Holland)           (1)          277,943       714,710             -      277,943       714,710      992,653
Wise                               (1)          219,471       564,355             -      219,471       564,355      783,826
                               ---------------------------------------------------------------------------------------------
                                              7,173,265    18,445,542             -    7,133,426    18,445,542   25,578,968

                               ---------------------------------------------------------------------------------------------
Total owned restaurant properties14,649,857  10,484,662    26,960,562             -   10,444,823    26,960,562   37,405,385
                               ---------------------------------------------------------------------------------------------

Total owned real estate         388,575,955  66,480,153   454,689,233    26,054,443   69,533,341   477,650,649  547,183,990

Equity interests in consolidated limited partnership properties:
Marina Shores, Virginia Beach VA 33,504,843   2,440,000    29,991,385       195,315    2,440,000    30,186,700   32,626,700
Villages of Ch. Hill, Carrboro NC11,828,541     547,000    13,643,468        26,816      547,000    13,670,284   14,217,284
Villages - Phase 5, Carrboro NC   2,802,772     226,950     2,712,761        (2,270)     226,950     2,710,491    2,937,441
                               ---------------------------------------------------------------------------------------------
                                 48,136,156   3,213,950    46,347,614       219,861    3,213,950    46,567,475   49,781,425
                               ---------------------------------------------------------------------------------------------

                               ---------------------------------------------------------------------------------------------
Total real estate, consolidated$ 436,712,111$ 69,694,103$ 501,036,847  $ 26,274,304 $ 72,747,291 $ 524,218,124 $ 596,965,415
                               =============================================================================================

</TABLE>



<TABLE>
<CAPTION>

         Description
         -----------
                                  Accumulated  Date of Date   Life
                                 Depreciation  Constr.Acquired(Years)
<S>                                <C>          <C>   <C>       <C>
Orange                                 294,629 Aug-74  Apr-87    40
Petersburg                             430,707 Mar-74  Apr-87    40
Richmond (Forest Hill)                 235,917 Nov-74  Apr-87    40
Richmond (Midlothian)                  325,734 Jan-74  Apr-87    40
Richmond (Myers)                       387,348 Apr-83  Apr-87    40
Roanoke (Hollins)                      310,247 Feb-73  Apr-87    40
Roanoke (Abenham)                      283,779 Nov-82  Apr-87    40
Rocky Mount                            298,901 May-80  Apr-87    40
Smithfield                             268,385 Apr-77  Apr-87    40
Verona                                 230,559 Jan-85  Apr-87    40
Virginia Beach (Lynnhaven)             326,738 Jun-80  Apr-87    40
Virginia Beach (Holland)               334,405 Aug-83  Apr-87    40
Wise                                   264,055 Jun-80  Apr-87    40
                                  -------------
                                     8,630,474

                                  -------------
Total owned restaurant properties   12,614,561
                                  -------------

Total owned real estate             79,955,885

Equity interests in consolidated limited partnership properties:
Marina Shores, Virginia Beach VA     6,796,894   1981  Jan-05    35
Villages of Ch. Hill, Carrboro NC      500,254   1975  Jan-05    25
Villages - Phase 5, Carrboro NC        415,079   1987  Jan-05    30
                                  -------------
                                     7,712,227
                                  -------------

                                  -------------
Total real estate, consolidated$  $ 87,668,112
                                  =============

</TABLE>


(1) Indicates the restaurants encumbered by a line of credit with a bank for up
to $14,649,857 outstanding at 12/31/05.

(2) Aggregate  cost basis at December 31, 2005,  for federal income tax purposes
was approximately $512 million.


                                      101
<PAGE>


 BNP RESIDENTIAL PROPERTIES, INC.
-------------------------------------------------------------------------------
 Schedule III - Real Estate and Accumulated Depreciation

<TABLE>
<CAPTION>



                                                 2005                  2004                 2003
                                          -------------------  --------------------  -------------------
<S>                                         <C>                   <C>                  <C>
 Real estate investments:
      Balance at beginning of year           $   426,524,525       $   337,066,609      $   314,871,784
      Additions during year
         Limited partnership properties
           consolidated effective Jan05           49,561,564
         Acquisitions                            129,721,278            86,148,336           23,525,339
         Improvements, etc.                        8,299,159             5,231,775            3,350,919
      Deductions during year
         Apartment property sold                 (14,500,619)                    -                    -
         Other deductions                         (2,640,492)           (1,922,195)          (4,681,433)
                                          -------------------  --------------------  -------------------
      Balance at close of year               $   596,965,415       $   426,524,525      $   337,066,609
                                          ===================  ====================  ===================


 Accumulated depreciation:
      Balance at beginning of year           $    66,453,731       $    56,052,569      $    49,448,825
      Limited partnership properties
         consolidated effective Jan05              6,404,930
      Provision for depreciation                  16,978,664            11,660,219           10,039,615
      Deductions during year
         Apartment property sold                    (425,819)                    -                    -
         Other deductions                         (1,743,394)           (1,259,057)          (3,435,871)
                                          -------------------  --------------------  -------------------
      Balance at close of year               $    87,668,112       $    66,453,731      $    56,052,569
                                          ===================  ====================  ===================
</TABLE>


                                      102
<PAGE>

                              INDEX TO EXHIBITS
<TABLE>
<CAPTION>

 Exhibit No.
                                                                                                     Page
  <S>          <C>                                                                                   <C>
     2.1*       Master Agreement of Merger and Acquisition by and among BNP Residential                  -
                Properties, Inc., BNP Residential Properties Limited Partnership, Paul G.
                Chrysson, James G. Chrysson, W. Michael Gilley, Matthew G. Gallins, James D. Yopp,
                and the partnerships and limited liability companies listed therein, dated
                September 22, 1997 (filed as Exhibit 2.1 to Registration Statement No. 333-39803
                on Form S-2, December 16, 1997, and incorporated herein by reference)
     2.2*       Amendment to Master Agreement of Merger and Acquisition dated September 22, 1997,        -
                by and among BNP Residential Properties, Inc., BNP Residential Properties Limited
                Partnership, Paul G. Chrysson, James G. Chrysson, W. Michael Gilley, Matthew G.
                Gallins, James D. Yopp, and the partnerships and limited liability companies
                listed therein, dated November 3, 1997 (filed as Exhibit 2.3 to BNP Residential
                Properties, Inc. Current Report on Form 8-K dated December 1, 1997, and
                incorporated herein by reference)
     3.1*       Articles of Incorporation (filed as Exhibit 3.1 to BNP Residential Properties,           -
                Inc., Current Report on Form 8-K dated March 17, 1999, and incorporated herein by
                reference)
     3.2*       Articles Supplementary, Classifying and Designating 909,090 Shares of Series B           -
                Cumulative Convertible Preferred Stock, dated December 28, 2001 (filed as Exhibit
                3.1 to BNP Residential Properties, Inc. Current Report on Form 8-K dated December
                28, 2001, and incorporated herein by reference)
     3.3*       Amended and Restated By-Laws adopted May 20, 2004 (filed as Exhibit 3.1 to BNP           -
                Residential Properties, Inc., Current Report on Form 8-K dated July 14, 2004, and
                incorporated herein by reference)
     4.1*       Rights Agreement, dated March 18, 1999, between the Company and First Union              -
                National Bank (filed as Exhibit 4 to BNP Residential Properties, Inc. Current
                Report on Form 8-K dated March 17, 1999, and incorporated herein by reference)
     4.2*       Registration Rights Agreement By and Among BNP Residential Properties, Inc. and          -
                Preferred Investment I, LLC, dated December 28, 2001 (filed as Exhibit 4 to BNP
                Residential Properties, Inc. Current Report on Form 8-K dated December 28, 2001,
                and incorporated herein by reference)
    10.1        Employment Agreement dated August 1, 2005, between BNP Residential Properties,         105
                Inc. and Philip S. Payne
    10.2        Employment Agreement dated August 1, 2005, between BNP Residential Properties,         123
                Inc. and D. Scott Wilkerson
    10.3        Employment Agreement dated August 1, 2005, between BNP Residential Properties,         141
                Inc. and Pamela B. Bruno
    10.4        Employment Agreement dated August 1, 2005, between BNP Residential Properties,         159
                Inc. and Eric S. Rohm
    10.5*       Second Amended and Restated Agreement of Limited Partnership of BNP Residential          -
                Properties Limited Partnership dated as of March 17, 1999 (filed as Exhibit 10.1
                to the company's Annual Report on Form 10-K for the year ended December 31, 1998,
                and incorporated herein by reference)
    10.6*       Amendment to Second Amended and Restated Agreement of Limited Partnership of BNP         -
                Residential Properties Limited Partnership, dated December 28, 2001 (filed as
                Exhibit 10.1 to BNP Residential Properties, Inc. Current Report on Form 8-K dated
                December 28, 2001, and incorporated herein by reference)
    10.7*       Investment Agreement By and Between BNP Residential Properties, Inc. and Preferred       -
                Investment I, LLC, dated December 28,
</TABLE>

                                      103
<PAGE>
<TABLE>
<CAPTION>

 Exhibit No.
                                                                                                     Page
  <S>          <C>                                                                                   <C>
                2001 (filed as Exhibit 10.2 to BNP Residential Properties, Inc. Current Report
                on Form 8-K dated December 28, 2001, and incorporated herein by reference)
    10.8*       Amended and Restated Master Lease Agreement dated December 21, 1995, between BNP         -
                Residential Properties, Inc. and Boddie-Noell Enterprises, Inc. (filed as Exhibit
                10.1 to BNP Residential Properties, Inc. Annual Report on Form 10-K dated December
                31, 1995, and incorporated herein by reference)
    10.9*       Amended and Restated 1994 Stock Option and Incentive Plan (filed as Exhibit 10.1         -
                to BNP Residential Properties, Inc. Current Report on Form 8-K dated May 19, 2005,
                and incorporated by reference herein)
    10.10*      Purchase Agreement by and among BNP Residential Properties, Inc. and Purchasers          -
                for 1,175,519 shares of common stock, dated as of February 17, 2004 (filed as
                Exhibit 10.1 to BNP Residential Properties, Inc. Current Report on Form 8-K dated
                February 23, 2004, and incorporated herein by reference)
    10.11*      Purchase Agreement by and among BNP Residential Properties, Inc. and Purchasers          -
                for 1,420,000 shares of common stock, dated as of July 14, 2004 (filed as Exhibit
                10.1 to BNP Residential Properties, Inc. Current Report on Form 8-K dated July 14,
                2004, and incorporated herein by reference)
    10.12*      Exchange Agreement among BNP Residential Properties, Inc., BNP Residential               -
                Properties Limited Partnership, and Beach Investment Properties, LLC and members
                thereof, dated as of December 7, 2004 (filed as Exhibit 10.9 to BNP Residential
                Properties, Inc. Annual Report on Form 10-K for the year ended December 31, 2004,
                and incorporated herein by reference)
    10.13*      Exchange Agreement among BNP Residential Properties, Inc., BNP Residential               -
                Properties Limited Partnership, and Timberline Ventures, LLC and members thereof,
                dated as of December 7, 2004 (filed as Exhibit 10.10 to BNP Residential
                Properties, Inc. Annual Report on Form 10-K for the year ended December 31, 2004,
                and incorporated herein by reference)
    10.14*      Exchange Agreement among BNP Residential Properties, Inc., BNP Residential               -
                Properties Limited Partnership, and Laurel Springs II, LLC and members thereof,
                dated as December 7, 2004 (filed as Exhibit 10.11 to BNP Residential Properties,
                Inc. Annual Report on Form 10-K for the year ended December 31, 2004, and
                incorporated herein by reference)
    10.15*      Exchange Agreement among BNP Residential Properties, Inc., BNP Residential               -
                Properties Limited Partnership, and Salem Ridge/Shugart, LLC and members thereof,
                dated as of December 7, 2004 (filed as Exhibit 10.12 to BNP Residential
                Properties, Inc. Annual Report on Form 10-K for the year ended December 31, 2004,
                and incorporated herein by reference)
    21          Subsidiaries of the Registrant                                                         177
    23.1        Consent of Grant Thornton LLP                                                          179
    23.2        Consent of Ernst & Young LLP                                                           180
    31.1        Rule 13a-14(a)/15d-14(a) Certification by Chairman                                     181
    31.2        Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer                      182
    31.3        Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer                      183
    32.1        Section 1350 Certification by Chairman, Chief Executive Officer, and Chief             184
                Financial Officer
</TABLE>

* Incorporated herein by reference


                                      104
<PAGE>