10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[Mark One]

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2004
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to               

Commission File Number: 000-50256

Hartman Commercial Properties REIT(Exact Name of Registrant as Specified in Its Charter)

Maryland	76-0594970
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

1450 West Sam Houston Parkway North, Suite 100, Houston, Texas 77043-3124
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code:  (713) 467-2222

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

None

Securities registered pursuant to section 12(g) of the Act:

Common Shares of Beneficial Interest, par value $0.001 per share

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  ý

The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of June 30, 2004 (the last business day of the Registrant’s most recently completed second fiscal quarter) was $64,337,462 assuming a market value of $10 per share.

As of  March 22, 2005, the Registrant had 7,443,420 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant incorporates by reference portions of its Definitive Proxy Statement for the 2005 Annual Meeting of Shareholders, which shall be filed no later than April 30, 2005, into Part III of this Form 10-K to the extent stated herein.

HARTMAN COMMERCIAL PROPERTIES REIT
FORM 10-K
Year Ended December 31, 2004

TABLE OF CONTENTS

	Page
PART I	1
Item 1. Business	1
Item 2. Description of Real Estate and Operating Data	16
Item 3. Legal Proceedings	21
Item 4. Submission of Matters to a Vote of Security Holders	21
PART II	22
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	22
Item 6. Selected Financial Data	25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	37
Item 8. Financial Statements and Supplementary Data	37
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	37
Item 9A. Controls and Procedures	37
Item 9B. Other Information	37
PART III	38
Item 10. Directors and Executive Officers of the Registrant	38
Item 11. Executive Compensation	38
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	38
Item 13. Certain Relationships and Related Transactions	38
Item 14. Principal Accounting Fees and Services	38
PART IV	39
Item 15. Exhibits and Financial Statement Schedules	39
SIGNATURES	40

Forward-Looking Statements

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

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

PART I

Item 1.  Business.

General Development of Business

Hartman Commercial Properties REIT (the “Company”) is a Maryland real estate investment trust organized in December 2003 for the purpose of merging with Hartman Commercial Properties REIT, a Texas real estate investment trust organized in August 1998. On June 4, 2004, the shareholders of the Texas entity approved the merger, and on July 28, 2004, the reorganization was completed. We are the surviving entity as a result of the merger. The sole purpose of the reorganization was to change our state of domicile to Maryland by the conversion of each outstanding common share of beneficial interest of the Texas entity into 1.42857 common shares of beneficial interest of the Maryland entity. The Company has made an election to be taxed as a real estate investment trust (“REIT”).  The Company invests in and operates retail, industrial and office properties located primarily in the Houston and San Antonio metropolitan areas, and plans to expand its investments to retail, office and industrial properties located in major metropolitan cities in the United States, principally in the Southern United States.  The Company intends to lease each respective property to one or more tenants.  In addition, the Company may make or invest in mortgage loans consistent with its REIT status.

Substantially all of the Company’s business is conducted through Hartman REIT Operating Partnership, L.P., a Delaware limited partnership organized in 1998 (the “Operating Partnership”).  The Company is the owner of a 53.37% interest in the Operating Partnership and is the sole general partner of the Operating Partnership.

The Company’s advisor is Hartman Management, L.P. (the “Management Company”), a Texas limited partnership formed in 1990.  The Management Company is an affiliate of the Company.  The Management Company is responsible for managing the Company’s affairs on a day-to-day basis and for identifying and making acquisitions and investments on behalf of the Company.

As of March 22, 2005, the Company had 7,443,420 common shares of beneficial interest (common stock) outstanding.  As of such date, the Company had no shares of preferred stock issued and outstanding and no common stock equivalents outstanding.  No stock options had been issued as of March 22, 2005.

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On December 31, 2004, the Company owned 34 properties.  One additional property, containing approximately 106,169 feet of gross leasable area, was acquired on March 14, 2005.  All of the Company’s properties are located in the metropolitan Houston, Texas and San Antonio, Texas areas.  The properties primarily consist of retail centers and each is designed to meet the needs of surrounding local communities.  A supermarket or one or more nationally and/or regionally recognized tenants typically anchors each of the properties.  In the aggregate, at December 31, 2004 the properties contained approximately 2,635,000 square feet of gross leasable area.

As of December 31, 2004, the properties were approximately 86.2% leased.  As of such date, anchor space at the properties, representing approximately 10.0% of total leasable area, was 91.4% leased, while non-anchor space, accounting for the remaining 90.0% balance, was approximately 85.6% leased.  A substantial number of the tenants of the properties are local tenants.  Indeed, 74.5% of the tenants are local tenants and 12.2% and 13.3% of the tenants are national and regional tenants, respectively.

Substantially all of the Company’s revenues consist of base rents and percentage rents received under long-term leases.  For the year ended December 31, 2004, total rents and other income were $23,106,301 and percentage rents were $-0-.  Approximately 66.5% of all existing leases provide for annual increases in the base rental payments with a “step up” rental clause.

Recent Developments

Initial Public Offering

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

As of December 31, 2004, no shares had been issued pursuant to the Public Offering, because its terms provided that the Company would not admit new shareholders pursuant to the Public Offering, or receive any proceeds therefrom, until subscriptions aggregating at least $2,000,000 (200,000 shares) were received and accepted by the Company, not including shares sold to residents of either New York or Pennsylvania.  As of December 31, 2004, the Company had received and accepted subscriptions for a total of 147,432 shares for gross offering proceeds of $1,474,320 held in escrow as of such date.

As of February 11, 2005, the Company had accepted subscriptions for 277,775 shares (not including shares sold to residents of either New York or Pennsylvania) and, accordingly, 277,775 shares had been issued pursuant to the Public Offering as of such date with gross offering proceeds received of $2,777,750.  The terms of the Public Offering provide that we will pay a dealer manager fee of up to 2.5% of the gross offering proceeds to D.H. Hill Securities, LLP, our dealer manager for the Public Offering, and also that we will pay selling commissions of up to 7.0% of the gross offering proceeds for any sales through participating broker-dealers and the dealer manager, other than sales by employees of the Management Company sponsored by the dealer manager.  Additionally, in connection with the Public Offering, we have agreed to pay the Management Company, in its capacity as our advisor (i) up to 2.5% of the gross offering proceeds as reimbursement for the Management Company’s payment of organization and offering expenses on behalf of the Company and (ii) an acquisition fee equal to 2.0% of the gross offering proceeds for its services in connection with the selection, purchase, development or construction of real property (payable upon receipt by the Company of such proceeds, rather than when a property is acquired).  We accrued an aggregate of $218,260 in dealer manager fees and selling commissions for the subscriptions accepted through February 11, 2005, resulting in net proceeds to the Company (after the payment of such fees and commissions) of $2,559,490.  Out of such net proceeds, we accrued amounts payable to the Management Company of $69,444 as a reimbursement of organization and offering expenses and $55,555 pursuant to the acquisition fee described above.

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Additional subscription proceeds will be held in escrow until investors are admitted as shareholders.  We intend to admit new stockholders at least monthly pursuant to the Public Offering.  At that time, subscription proceeds may be released to the Company from escrow and applied to the making of investments and the payment or reimbursement of the dealer manager fee, selling commissions and other organization and offering expenses.  Until required for such purposes, net offering proceeds will be held in short-term, liquid investments.

Recent Acquisitions

On September 8, 2004, the Company purchased Stafford Plaza, a retail shopping center containing approximately 95,032 rentable square feet located on an approximately 8.66-acre tract of land in Houston, Texas.  The total purchase price of Stafford Plaza was $8.9 million, plus closing costs, and was paid through cash drawn on the Company’s line of credit.  The purchase price for the transaction was determined through negotiations between STPL Associates LP, the seller, and the Company.  STPL Associates LP is not affiliated with the Company, Hartman REIT Operating Partnership, L.P., Hartman REIT Operating Partnership II, L.P., or Hartman Management, L.P.  Stafford Plaza, which was built in 1974, includes among its major tenants The TJX Companies, Inc., Blockbuster, Inc. and Exxon Mobil Corporation.  The current aggregate annual base rent for all tenants in Stafford Plaza is approximately $856,029.

On March 14, 2005, the Company purchased Woodlake Plaza, an office building containing approximately 106,169 rentable square feet located on an approximately 3.4963-acre tract of land in Houston, Texas.  The total purchase price of Woodlake Plaza was $5.5 million, plus closing costs, and was paid through cash drawn on the Company’s line of credit.  The purchase price for the transaction was determined through negotiations between CSFB 1998-P1 Gessner Office Limited Partnership, the seller, and the Company.  CSFB 1998-P1 Gessner Office Limited Partnership is not affiliated with the Company, Hartman REIT Operating Partnership, L.P., Hartman REIT Operating Partnership II, L.P., or Hartman Management, L.P.  Woodlake Plaza, which was built in 1975, includes among its major tenants Hibernia Corporation, Management Alliance Group and Rock Solid Images.  The current aggregate annual base rent for all tenants in Woodlake Plaza is approximately $1,370,403.

Investment Objectives and Criteria

The following is an overview of our current policies with respect to investments, borrowing, affiliate transactions, equity capital and certain other activities.  All of these policies have been established in our governance documents or by our management and may be amended or revised from time to time (and at any time) by our management or trustees without a vote or the approval of our shareholders.  Any change to these policies would be made, however, only after a review and analysis of such change, in light of then existing business and other circumstances, and then only if we believe that it is advisable to do so in the best interest of our shareholders.  We cannot assure you that our policies or investment objectives will be attained or that the value of our common shares will not decrease.

General

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

•      to maximize cash dividends paid to our shareholders;

•      to continue to qualify as a REIT for federal income tax purposes;

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

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

In addition, to the extent that our advisor determines that it is advantageous to make or invest in mortgage loans, we will also seek to obtain fixed income through the receipt of payments on mortgage loans.  Our management intends to limit such mortgage investments to 15.0% of our total investment portfolio unless our management determines that prevailing economic or portfolio circumstances require otherwise.  We cannot assure

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you that we will attain these objectives or that our capital will not decrease.  Pursuant to our advisory agreement, our advisor will be indemnified for claims relating to any failure to succeed in achieving these objectives.

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

Acquisition and Investment Policies

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

We acquire assets primarily for income.  Although we have historically invested in properties that have been constructed and have operating histories, we anticipate that we may become more active in investing in raw land or in properties that are under development or construction.  To the extent feasible, we will invest in a portfolio of properties that will satisfy our investment objectives of maximizing cash available for payment of dividends, preserving our capital and realizing capital appreciation upon the ultimate sale of our properties.

Our policy is to continue to acquire properties in the Houston and San Antonio, Texas metropolitan areas where we believe opportunities exist for acceptable investment returns.  We anticipate that we will continue to focus on properties in the $1,000,000 to $10,000,000 value range.  We typically lease our properties to a wide variety of tenants on a “triple-net” basis which means that the tenant is responsible for paying the cost of all maintenance and minor repairs, property taxes and insurance relating to its leased space.  Our management believes that its extensive experience, market knowledge and network of industry contacts in the Houston and San Antonio metropolitan areas, and the limitation of our investments to this area, gives us a competitive advantage and enhances our ability to identify and capitalize on acquisitions.  Although we anticipate that we will continue to focus primarily on acquisition opportunities in Houston and San Antonio, Texas, we are also exploring opportunities in Texas outside of Houston and San Antonio.  Specifically, we are exploring the feasibility of acquiring commercial real estate in Dallas, Texas.

Although, we currently intend to invest in or develop community retail centers and other office and industrial properties in the Houston and San Antonio metropolitan areas, our future investment or redevelopment activities are not limited to any geographic area or to a specified property use.  We may invest in any geographic area and we may invest in other commercial properties such as manufacturing facilities, and warehouse and distribution facilities in order to reduce overall portfolio risk, enhance overall portfolio returns, or respond to changes in the real estate market if our advisor determines that it would be advantageous to do so.  Further, to the extent that our advisor determines it is in our best interest, due to the state of the real estate market or in order to diversify our investment portfolio or otherwise, we may make or invest in mortgage loans secured by the same types of commercial properties in which we intend to invest.  Our management intends to limit such mortgage investments to 15.0% of our total investment portfolio unless our management determines that prevailing economic or portfolio circumstances require otherwise.

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

We may also enter into arrangements with the seller or developer of a property whereby the seller or developer agrees that, if during a stated period the property does not generate a specified cash flow, the seller or developer will pay in cash to us a sum necessary to reach the specified cash flow level, subject in some cases to negotiated dollar limitations.

In determining whether to purchase a particular property, we may, in accordance with customary practices, obtain an option on such property.  The amount paid for an option, if any, is normally surrendered if the property is not purchased and is normally credited against the purchase price if the property is purchased.

In purchasing, leasing and developing properties, the Company will be subject to risks generally incident to the ownership of real estate, including:

•changes in general or local economic conditions;

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

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

•adverse changes in tax, real estate, environmental and zoning laws;

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

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

•periods of high interest rates and tight money supply that may make the sale of properties more difficult;

•a reduction in rental income as a result of the inability to maintain occupancy levels due to tenant turnover or tenant bankruptcies; and

•general overbuilding or excess supply in the market area.

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

Terms of Leases and Tenant Credit Worthiness

While the terms and conditions of any lease that we enter into with our tenants may vary substantially from those described herein, we expect that a majority of our leases will be office leases customarily used between landlords and tenants in the geographic area where the property is located.  Such leases generally provide for terms of three to five years and require the tenant to pay a pro rata share of building expenses.  Under such typical leases,

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the landlord is directly responsible for all real estate taxes, sales and use taxes, special assessments, utilities, insurance and building repairs, and other building operation and management costs.

We will execute new tenant leases and tenant lease renewals, expansions and extensions with terms that are dictated by the current submarket conditions and the verifiable creditworthiness of each particular tenant.  We will use a number of industry credit rating services to determine the creditworthiness of potential tenants and any personal guarantor or corporate guarantor of each potential tenant.  The reports produced by these services will be compared to the relevant financial data collected from these parties before consummating a lease transaction.  Our advisor will promulgate leasing guidelines for use by the Management Company in evaluating prospective tenants and proposed lease terms and conditions.

Borrowing Policies

Most of our current properties are subject to mortgages.  If we acquire a property for cash in the future, we will most likely fund a portion of the purchase price with debt.  By operating and acquiring on a leveraged basis, we will have more funds available for investment in properties.  This will allow us to make more investments than would otherwise be possible, resulting in a more diversified portfolio of assets.  When interest rates on mortgage loans are high or financing is otherwise unavailable on a timely basis, we may purchase certain properties for cash with the intention of obtaining a mortgage loan for a portion of the purchase price at a later time.

Our organizational and governance documents generally limit the maximum amount of indebtedness that we may incur to 300% of our net assets as of the date of any borrowing.  Notwithstanding the foregoing, we may exceed such borrowing limits if any excess in borrowing over such 300% level is approved by a majority of our independent trustees and disclosed to our shareholders in a subsequent quarterly report.  Further, we do not have a policy limiting the amount of indebtedness we may incur or the amount of mortgages which may be placed on any one piece of property.  As a general policy, however, we intend to maintain a ratio of total liabilities to total assets that is less than 50%.  As of December 31, 2004, we had a ratio of total liabilities to total assets of 46.5%.  However, we may not be able to continue to achieve this objective.

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

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

Disposition Policies

We intend to hold each property that we acquire for an extended period, and we have no current intention to dispose of any of our properties.  However, a property may be sold before the end of the expected holding period if, in the judgment of the Management Company, the value of the property might decline substantially, an opportunity has arisen to improve other properties, we can increase cash flow through the disposition of the property, or the sale of the property is in our best interests.  The determination of whether a particular property should be sold or otherwise disposed of will be made after consideration of relevant factors, including prevailing economic conditions, with a view to achieving maximum capital appreciation.  The selling price of a leased property will be determined in large part by the amount of rent payable by the tenants.  The terms of payment will be affected by custom in the area in which the property being sold is located and the then-prevailing economic conditions.

If our shares are not listed for trading on the New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market or another national exchange within twelve years of the termination of the Public Offering, unless such date is extended by the majority vote of both our board of trustees and our independent trustees, our Declaration of Trust requires us to begin the sale of all of our properties and distribution to our shareholders of the

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

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

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

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

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

Equity Capital

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

Environmental Matters

All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety.  These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals.  Under these laws and regulations, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in such property.  Some of these laws and regulations may impose joint and several liability

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on tenants, owners or operators for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality of the original disposal and whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances.

Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures.  Environmental laws provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties.  Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials into the air, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances.  Additionally, concern about indoor exposure to mold has been increasing as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions.  As a result, the presence of significant mold at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property, and could expose us to liability from our tenants, their employees and others.  The cost of defending against claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could materially adversely affect our business, assets or results of operations and, consequently, amounts available for payments of dividends to the Company’s shareholders.  In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent such property or to use the property as collateral for future borrowing.

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

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

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

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Competition

The Company may experience competition for tenants from owners and managers of similar projects, which may include the Company’s affiliates.  The Company will experience competition in the acquisition of real estate and the making of mortgages from similar companies with access to greater resources than those available to the Company.  At the time the Company elects to dispose of its properties, the Company will also be in competition with sellers of similar properties to locate suitable purchasers for its properties.

Employees

Although we have executive officers who have management responsibilities with respect to the Company, we do not have any direct employees.  The employees of the Management Company and other affiliates of the Company perform a full range of real estate services for the Company, including acquisitions, property management, accounting, asset management, wholesale brokerage and investor relations.  As of December 31, 2004, the Management Company had 81 full time and one part time employees, none of whom was represented by a union.

Economic Dependency

The Company is dependent on its affiliates for services that are essential to the Company, including the sale of the Company’s shares of common stock, asset acquisition decisions, property management and other general administrative responsibilities.  In the event that these companies were unable to provide these services to the Company, the Company would be required to obtain such services from other sources.

Relationship with the Management Company and Allen R. Hartman

The Management Company is primarily responsible for managing our day-to-day business affairs and assets and carrying out the directives of our board of trustees.  The Management Company is wholly owned by Allen R. Hartman, who is our President and a member of our board of trustees.  Mr. Hartman is primarily responsible for the management decisions of the Management Company and its affiliates, including the selection of investment properties to be recommended to our board of trustees, the negotiation for these investments, and the property management and leasing of these investment properties.  The Management Company seeks to invest in commercial properties that satisfy our investment objectives, typically retail, industrial and office properties.  Our board of trustees, including a majority of our independent trustees, must approve all acquisitions of real estate properties.

Before the commencement of the Company’s Public Offering described above, Mr. Hartman received 126,000 of our common shares of beneficial interest for services he provided in connection with our formation and initial capitalization.  As of December 31, 2004, we had acquired a total of 34 properties.  We acquired 28 of those 34 properties from entities controlled by Mr. Hartman.  We acquired these properties by either paying cash, issuing our shares or issuing units of limited partnership interest in the Operating Partnership (“OP Units”).  In total, Mr. Hartman received the following as a result of such transactions:

•      897,117.19 OP Units, as adjusted to reflect the Company’s July 2004 reorganization, in consideration of Mr. Hartman’s general partner interest in the selling entities;

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

•      The repayment of debt encumbering various of our properties which was personally guaranteed by Mr. Hartman.

We owed $47,386 and $41,306 in dividends payable to Mr. Hartman on his common shares at December 31, 2004 and December 31, 2003, respectively.  Mr. Hartman owned 3.9% and 3.4% of our issued and outstanding common shares as of December 31, 2004 and December 31, 2003, respectively.

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Property Management and Advisory Agreements

In January 1999, we entered into a property management agreement with the Management Company.  Effective September 1, 2004, this agreement was amended and restated.    Prior to September 1, 2004, in consideration for supervising the management and performing various day-to-day affairs, we paid the Management Company a management fee of 5% and a partnership management fee of 1% based on Effective Gross Revenues from the properties, as defined.  After September 1, 2004, we pay the Management Company management fees in an amount not to exceed the fees customarily charged in arm’s length transactions by others rendering similar services in the same geographic area, as determined by a survey of brokers and agents in such area.  We expect these fees to be between approximately 2% and 4% of Gross Revenues, as such term is defined in the amended and restated property management agreement, for the management of commercial office buildings and approximately 5% of Gross Revenues for the management of retail and industrial properties.  Effective September 1, 2004, we entered into an advisory agreement with the Management Company which provides that we pay the Management Company a fee of one-fourth of .25% of Gross Asset Value, as such term is defined in the advisory agreement, per quarter for asset management services.  We incurred total management, partnership and asset management fees of $1,339,822 and $1,232,127 for the years ended December 31, 2004 and 2003, respectively, of which $54,331 and $93,006 were payable at December 31, 2004 and 2003, respectively.

During July 2004, we amended certain terms of its Declaration of Trust.  Under the amended terms, the Management Company may be required to reimburse us for operating expenses exceeding certain limitations determined at the end of each fiscal quarter.  Expenses did not exceed the limitations in 2004.

Under the provisions of the property management agreements, costs incurred by the Management Company for the management and maintenance of the properties are reimbursable to the Management Company.  At December 31, 2004 and 2003, $188,772 and $288,305, respectively, was payable to the Management Company related to these reimbursable costs.

In consideration of leasing the properties, we also pay the Management Company leasing commissions of 6% for leases originated by the Management Company and 4% for expansions and renewals of existing leases based on Effective Gross Revenues from the properties.  We incurred total leasing commissions to the Management Company of $952,756 and $978,398 for the years ended December 31, 2004 and 2003, respectively, of which $232,343 and $175,725 were payable at December 31, 2004 and 2003, respectively.

The fees payable to the Management Company under the new agreements effective September 1, 2004 were not significantly different from those that would have been payable under the former agreement.

In connection with the Public Offering, we reimburse the Management Company up to 2.5% of the gross selling price of all common shares sold for organization and offering expenses (excluding selling commissions and a dealer manager fee) incurred by the Management Company on behalf of us.  No such reimbursable expenses were incurred for the year ended December 31, 2004 because we had not received the minimum subscription proceeds required to break escrow.  As of February 11, 2005, we had incurred reimburseable organization and offering expenses of $69,444.

Also in connection with the Public Offering , the Management Company receives an acquisition fee equal to 2% of the gross selling price of all common shares sold for services in connection with the selection, purchase, development or construction of properties for us.  No such fees were incurred for the year ended December 31, 2004 because we had not received the minimum subscription proceeds required to break escrow.  As of February 11, 2005, we had incurred acquisition fees payable to the Management Company of $55,555.

Pursuant to the requirements of our Declaration of Trust, we have undertaken that, if our shares are not listed for trading on the New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market or another national exchange within twelve years of the termination of the Public Offering, unless such date is extended by the majority vote of both our board of trustees and our independent trustees, we will begin the sale of all of our properties and distribution to our shareholders of the net sale proceeds resulting from our liquidation.  The  advisory agreement  provides for two alternative forms of additional, subordinated incentive compensation to the Management Company related to this contingency, the first of which will take effect if we are required to liquidate our properties and distribute the proceeds, and the second of which will take effect if our common shares become listed on a national securities exchange or the Nasdaq National Market:

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Type of Compensation	Amount of Compensation
Subordinated Participation in Net Sale Proceeds (payable only if our shares are not listed on an exchange and the Company is liquidated)	15.0% of remaining amounts of net sale proceeds after return of investors’ capital plus payment to investors of a 7.0% annual, cumulative, noncompounded return on capital. 20.0% of any such Subordinate Participation in Net Sale Proceeds (up to 1.0% of gross proceeds from the Public Offering) will be distributed by the Management Company to the dealer manager, which in turn will redistribute such amount to certain broker-dealers participating in the Public Offering.
Subordinated Incentive Listing Fee (payable only if our shares are listed on an exchange)	15.0% of the amount (if any) by which (i) our adjusted market value plus dividends paid by us prior to listing with respect to the shares sold in the Public Offering exceeds (ii) investors’ aggregate capital contributions plus payment to investors of a 7.0% annual, cumulative, noncompounded return on capital. 20.0% of any such Subordinated Incentive Listing Fee (up to 1.0% of gross proceeds from the Public Offering) will be distributed by the Management Company to the dealer manager, which in turn will redistribute such amount to certain broker-dealers participating in the Public Offering.

Payments from the Management Company

The Management Company paid the Company $106,824, $106,789 and $79,168 for office space in 2004, 2003 and 2002, respectively.  Such amounts are included in rental income in our consolidated statements of income.

Relationship to the Dealer Manager for the Public Offering

Certain employees of D.H. Hill Securities, the dealer manager for our Public Offering, are also employees of the Management Company.  Two of such persons who will have a significant amount of influence on D.H. Hill Securities’ day-to-day operations in its capacity as dealer manager for us are Robert W. Engel, our Chief Financial Officer and the Controller of the Management Company, and Richard A. Vaughan, Vice President and Director of Investor Services for the Management Company.

Conflicts of Interest

We are subject to various conflicts of interest arising out of our relationship with the Management Company and its affiliates, including conflicts related to the arrangements described above pursuant to which the Management Company and its affiliates will be compensated by us.  Some of the conflicts of interest in our transactions with the Management Company and its affiliates, and the corporate governance measures we adopted to address these conflicts, are described below.

Interests in Other Real Estate Programs

The Management Company and its partners, officers, employees or affiliates are advisors or general partners of other Hartman programs, including partnerships that have investment objectives similar to ours, and we expect that they will organize other such programs in the future.  The Management Company and such officers, employees or affiliates have legal and financial obligations with respect to these programs that are similar to their obligations to us.

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Allen R. Hartman and his affiliates have sponsored other privately offered real estate programs with substantially similar investment objectives as ours, and which are still operating and may acquire additional properties in the future.  Conflicts of interest may arise between these entities and us.

Mr. Hartman or his affiliates may acquire, for their own account or for private placement, properties that Mr. Hartman deems not suitable for purchase by us, whether because of the greater degree of risk, the complexity of structuring inherent in such transactions, financing considerations or for other reasons, including properties with potential for attractive investment returns.

Competition in Acquiring Properties

Conflicts of interest will exist to the extent that we may acquire properties in the same geographic areas where properties owned by other Hartman programs are located.  In such a case, a conflict could arise in the leasing of properties in the event that we and another Hartman program were to compete for the same tenants in negotiating leases, or a conflict could arise in connection with the resale of properties in the event that we and another Hartman program were to attempt to sell similar properties at the same time.  Conflicts of interest may also exist at such time as we or our affiliates managing property on our behalf seek to employ developers, contractors or building managers as well as under other circumstances.  The Management Company will seek to reduce conflicts relating to the employment of developers, contractors or building managers by making prospective employees aware of all such properties seeking to employ such persons.  In addition, the Management Company will seek to reduce conflicts that may arise with respect to properties available for sale or rent by making prospective purchasers or tenants aware of all such properties.  However, these conflicts cannot be fully avoided in that there may be established differing compensation arrangements for employees at different properties or differing terms for resales or leasing of the various properties.

Affiliated Property Manager

We anticipate that properties we acquire will be managed and leased by the Management Company as our affiliated property manager, pursuant to the Management Agreement described above.  The Management Agreement has a three-year term, which we can terminate only in the event of gross negligence or willful misconduct on the part of the Management Company.  We expect the Management Company to also serve as property manager for properties owned by affiliated real estate programs, some of which may be in competition with our properties.  As described above, management fees to be paid to the Management Company are based on a percentage of the rental income received by the managed properties.

Joint Ventures with Affiliates of the Management Company

We may determine to enter into joint ventures with other Hartman programs (as well as other parties) for the acquisition, development or improvement of properties.  The Management Company and its affiliates may have conflicts of interest in determining which Hartman program should enter into any particular joint venture agreement.  The co-venturer may have economic or business interests or goals which are or which may become inconsistent with our business interests or goals.  In addition, should any such joint venture be consummated, the Management Company may face a conflict in structuring the terms of the relationship between our interests and the interest of the co-venturer and in managing the joint venture.  Since the Management Company and its affiliates will control both us and any affiliated co-venturer, agreements and transactions between the co-venturers with respect to any such joint venture will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers.

Receipt of Fees and Other Compensation by the Management Company and its Affiliates

A transaction involving the purchase and sale of properties may result in the receipt of commissions, fees and other compensation by the Management Company and its affiliates, including acquisition fees, the dealer manager fee, property management and leasing fees, real estate brokerage commissions, and participation in nonliquidating net sale proceeds.  However, the fees and compensation payable to the Management Company and its affiliates relating to the sale of properties are only payable after the return to the shareholders of their capital contributions plus cumulative returns on such capital.  Subject to oversight by our board of trustees, the Management Company has considerable discretion with respect to all decisions relating to the terms and timing of

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all transactions.  Therefore, the Management Company may have conflicts of interest concerning certain actions taken on our behalf, particularly due to the fact that such fees will generally be payable to the Management Company and its affiliates regardless of the quality of the properties acquired or the services provided to us.

No Arm’s-Length Agreements

All agreements, contracts or arrangements between or among Mr. Hartman and his affiliates, including the Management Company, and us were not negotiated at arm’s-length.  Such agreements include the Management Agreement, our Declaration of Trust, the Operating Partnership’s partnership agreement, and various agreements involved in our acquisition of properties acquired from Mr. Hartman or his affiliates.  The policies with respect to conflicts of interest described herein were designed to lessen the potential conflicts that arise from such relationships.  As described below, all conflict of interest transactions must also be approved by the conflicts committee of our board of trustees in the future.

Additional Conflicts of Interest

We will potentially be in conflict of interest positions with Mr. Hartman and the Management Company as to various other matters in our day-to-day operations, including matters related to the:

•      computation of fees and/or reimbursements under the Operating Partnership’s partnership agreement and the Management Agreement;

•      enforcement of the Management Agreement;

•      termination of the Management Agreement;

•      order and priority in which we pay the obligations of the Operating Partnership, including amounts guaranteed by or due to Mr. Hartman or his affiliates;

•      order and priority in which we pay amounts owed to third parties as opposed to amounts owed to the Management Company;

•      timing, amount and manner in which we refinance any indebtedness; and

•      extent to which we repay or refinance the indebtedness which is recourse to Mr. Hartman prior to nonrecourse indebtedness and the terms of any such refinancing.

Certain Conflict Resolution Procedures

Conflicts Committee

In order to reduce or eliminate certain potential conflicts of interest, we have created a conflicts committee of our board of trustees comprised of all of our independent trustees.  Serving on the board or, or owning an interest in, the Company will not, by itself, preclude a trustee from serving on the conflicts committee.  The conflicts committee is empowered to act on any matter permitted under Maryland law, provided that it first determine that the matter at issue is such that the exercise of independent judgment by affiliates of the Management Company could reasonably be compromised.  Those conflict of interest matters that we cannot delegate to a committee under Maryland law must be acted upon by both the board of trustees and the conflicts committee.  Among the matters we expect the conflicts committee to act upon are:

•      the continuation, renewal or enforcement of our agreements with the Management Company and its affiliates, including the Advisory Agreement and the dealer manager agreement;

•      public offerings of securities;

•      property sales;

•      property acquisitions;

•      transactions with affiliates;

•      compensation of our officers and trustees who are affiliated with our advisors;

•      whether and when we seek to list our common shares on the New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market or another national exchange; and

•      whether and when we seek to sell the company or its assets.

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Other Declaration of Trust Provisions Relating to Conflicts of Interest

In addition to the creation of the conflicts committee, our Declaration of Trust contains many other restrictions relating to (1) transactions we enter into with the Management Company and its affiliates, (2) certain future offerings, and (3) allocation of investment opportunities among affiliated entities.  These restrictions include, among others, the following:

•      We will not purchase or lease properties in which the Management Company, any of our trustees or any of their respective affiliates has an interest without a determination by a majority of the trustees, including a majority of the independent trustees, not otherwise interested in such transaction, that such transaction is fair and reasonable to us and at a price to us no greater than the cost of the property to the seller or lessor unless there is substantial justification for any amount that exceeds such cost and such excess amount is determined to be reasonable.  In no event will we acquire any such property at an amount in excess of its appraised value.  We will not sell or lease properties to the Management Company, any of our trustees or any of their respective affiliates unless a majority of the trustees, including a majority of the independent trustees, not otherwise interested in the transaction, determines the transaction is fair and reasonable to us.

•      We will not make any loans to the Management Company, any of our trustees or any of their respective affiliates, except that we may make or invest in mortgage loans involving the Management Company, our trustees or their respective affiliates, provided that an appraisal of the underlying property is obtained from an independent appraiser and the transaction is approved as fair and reasonable to us and on terms no less favorable to us than those available from third parties.  In addition, the Management Company, any of our trustees and any of their respective affiliates will not make loans to us or to joint ventures in which we are a joint venture partner unless approved by a majority of the trustees, including a majority of the independent trustees, not otherwise interested in the transaction as fair, competitive and commercially reasonable, and no less favorable to us than comparable loans between unaffiliated parties.

•      The Management Company and its affiliates shall be entitled to reimbursement, at cost, for actual expenses incurred by them on behalf of us or joint ventures in which we are a joint venture partner, subject to the limitation that for any year in which we qualify as a REIT, the Management Company must reimburse us for the amount, if any, by which our total operating expenses, including the asset management fee, paid during the previous fiscal year exceeds the greater of: (i) 2.0% of our average invested assets for that fiscal year, or (ii) 25.0% of our net income, before any additions to reserves for depreciation, bad debts or other similar non-cash reserves and before any gain from the sale of our assets, for that fiscal year.

•      In the event that an investment opportunity becomes available that is suitable, under all of the factors considered by the Management Company, for both us and one or more other entities affiliated with the Management Company and its affiliates, and for which more than one of such entities has sufficient uninvested funds, then the entity that has had the longest period of time elapse since it was offered an investment opportunity will first be offered such investment opportunity.  It shall be the duty of our board of trustees, including the independent trustees, to insure that this method is applied fairly to us.  In determining whether or not an investment opportunity is suitable for more than one program, the Management Company, subject to approval by our board of trustees, shall examine, among others, the following factors:

•      the anticipated cash flow of the property to be acquired and the cash requirements of each program;

•      the effect of the acquisition both on diversification of each program’s investments by type of property and geographic area and on diversification of the tenants of its properties;

•      the policy of each program relating to leverage of properties;

•      the income tax effects of the purchase to each program;

•      the size of the investment; and

•      the amount of funds available to each program and the length of time such funds have been available for investment.

•      If a subsequent development, such as a delay in the closing of a property or a delay in the construction of a property, causes any such investment, in the opinion of our board of trustees and the Management Company, to be more appropriate for a program other than the program that committed to make the investment, the Management Company may determine that another program affiliated with the Management Company or its affiliates will make the investment.  Our board of trustees has a duty to ensure that the method used by the Management Company for the allocation of the acquisition of properties by two or more affiliated programs seeking to acquire similar types of properties is applied fairly to us.

•      We will not accept goods or services from the Management Company or its affiliates or enter into any other transaction with the Management Company or its affiliates unless a majority of our trustees, including a majority of the independent trustees, not otherwise interested in the transaction approve such transaction as fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties.

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Financial Information About Segments

See Note 14 to the consolidated financial statements for information about our reportable segments.

Web Site Address

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

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Item 2.  Description of Real Estate and Operating Data.

On December 31, 2004, the Company owned the 34 properties discussed below.  All of the Company’s properties are located in the metropolitan Houston, Texas and San Antonio, Texas areas.  The Company’s properties primarily consist of retail centers and each is designed to meet the needs of surrounding local communities.  A supermarket or one or more nationally and/or regionally recognized tenants typically anchors each of the Company’s properties.  In the aggregate, the Company’s properties contain approximately 2,635,000 square feet of gross leasable area.  No individual property in the Company’s portfolio currently accounts for more than 10% of the Company’s aggregate leasable area.

As of December 31, 2004, the Company’s properties were approximately 86.2% leased.  Anchor space at the properties, representing approximately 10.0% of total leasable area, was 91.4% leased, while non-anchor space, accounting for the remaining 90.0% balance, was approximately 85.6% leased.  A substantial number of the Company’s tenants are local tenants.  Indeed, 74.5% of the Company’s tenants are local tenants and 12.2% and 13.3% of the Company’s tenants are national and regional tenants, respectively.  The Company defines:

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

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

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

Substantially all of the Company’s revenues consist of base rents and percentage rents received under long-term leases.  For the year ended December 31, 2004, total rents and other income were $23,106,301 and percentage rents were $-0-.  Approximately 66.5% of all existing leases provide for annual increases in the base rental payments with a “step up” rental clause.

The following table lists the five properties that generated the most rents during the year 2004.

Property	Total Rents Received in 2004		Percent of Company’s Total Rents Received in 2004
Windsor Park	$	2,210,247	9.57	%
Corporate Park West	1,700,224		7.36
Corporate Park Northwest	1,547,294		6.70
Lion Square	1,256,219		5.44
Plaza Park	1,016,687		4.40
Total	$	7,730,671	33.47	%

The Company currently does not have any individual properties that are material to its operations.  As of December 31, 2004, the Company had no property that accounted for over 10% of either the Company’s total assets or total gross revenue.

The next several pages contain summary information for the properties the Company owned on December 31, 2004.

General Physical Attributes

The following table lists, for all properties the Company owned on December 31, 2004, the year each property was developed or significantly renovated, the total leasable area of each property, the purchase price the Company paid for such property and the anchor or largest tenant at such property.

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Property	Year Developed/ Renovated	Total Leasable Area (Sq. Ft.)	Purchase Price		Anchor or Largest Tenant
Bissonnet/Beltway	1978	29,205	$	2,361,323	Cash America International
Webster Point	1984	26,060	1,870,365		Houston Learning Academy
Centre South	1974	44,593	2,077,198		Carlos Alvarez
Torrey Square	1983	105,766	4,952,317		99 Cents Only Stores
Providence	1980	90,327	4,592,668		99 Cents Only Stores
Holly Knight	1984	20,015	1,612,801		Quick Wash Laundry
Plaza Park	1982	105,530	4,195,116		American Medical Response
Northwest Place II	1984	27,974	1,089,344		Terra Mar, Inc.
Lion Square	1980	119,621	5,835,108		Kroger Food Stores, Inc.
Zeta Building	1982	37,740	2,456,589		American Title Co.
Royal Crest	1984	24,900	1,864,065		Paragon Benefits, Inc.
Featherwood	1983	49,670	2,959,309		Transwestern Publishing
Interstate 10	1980	151,000	3,908,072		River Oaks, L-M, Inc.
Westbelt Plaza	1978	65,619	2,733,009		National Oilwell
Greens Road	1979	20,507	1,637,217		Juan Gailegos
Town Park	1978	43,526	3,760,735		Omar’s Meat Market
Northeast Square	1984	40,525	2,572,512		99 Cent Store
Main Park	1982	113,410	4,048,837		Transport Sales
Dairy Ashford	1981	42,902	1,437,020		Foster Wheeler USA Corp.
South Richey	1980	69,928	3,361,887		Kroger Food Stores, Inc.
Corporate Park Woodland	2000	99,937	6,028,362		Carrier Sales and Distribution
South Shaver	1978	21,926	817,003		EZ Pawn
Kempwood Plaza	1974	112,359	2,531,876		Auto Zone
Bellnot Square	1982	73,930	5,792,294		Kroger Food Stores, Inc.
Corporate Park Northwest	1981	185,627	7,839,539		Air Consulting & Engineering
Westgate	1984	97,225	3,448,182		Postmark DMS, LLC
Garden Oaks	1954	95,046	6,577,782		Bally Total Fitness
Westchase	1978	42,924	2,173,300		Jesus Corral
Sunridge	1979	49,359	1,461,571		Puro Latino, Inc.
Holly Hall	1980	90,000	3,123,400		The Methodist Hospital
Brookhill	1979	74,757	973,264		T.S. Moly-Lubricants
Corporate Park West	1999	175,665	13,062,980		Accurate Restoration, Inc.
Windsor Park	1992	192,458	13,102,500		The Sports Authority
Stafford Plaza	1974	95,032	8,906,057		Marshall’s
Total		2,635,063	$	135,163,602

General Economic Attributes

The following table lists certain information that relates to the rents generated by each property.  All of the information listed in this table is as of December 31, 2004.

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Property	Percent Leased		Total Leasable Area (Sq. Ft.)	Total Annualized Rents Based on Occupancy		Effective Net Rent Per Sq. Ft.		Annual Percentage Rents
Bissonnet/Beltway	100.0	%	29,205	$	513,012	$	17.57	—
Webster Point	87.0		26,060	354,396		13.60		—
Centre South	83.6		44,593	423,721		9.50		—
Torrey Square	85.8		105,766	954,518		9.02		—
Providence	68.8		90,327	671,926		7.44		—
Holly Knight	93.2		20,015	349,373		17.46		—
Plaza Park	92.1		105,530	995,169		9.43		—
Northwest Place II	61.7		27,974	140,440		5.02		—
Lion Square	100.0		119,621	1,248,321		10.44		—
Zeta Building	80.0		37,740	443,361		11.75		—
Royal Crest	100.0		24,900	328,037		13.17		—
Featherwood	87.8		49,670	840,519		16.92		—
Interstate 10	74.5		151,000	616,310		4.08		—
Westbelt Plaza	91.3		65,619	609,543		9.29		—
Greens Road	100.0		20,507	386,759		18.86		—
Town Park	100.0		43,526	804,971		18.49		—
Northeast Square	84.1		40,525	473,940		11.69		—
Main Park	87.2		113,410	647,073		5.71		—
Dairy Ashford	51.1		42,902	165,824		3.87		—
South Richey	74.3		69,928	443,745		6.35		—
Corporate Park Woodland	85.7		99,937	868,655		8.69		—
South Shaver	75.7		21,926	230,954		10.53		—
Kempwood Plaza	74.5		112,359	863,884		7.69		—
Bellnot Square	100.0		73,930	788,159		10.66		—
Corporate Park Northwest	83.7		185,627	1,546,646		8.33		—
Westgate	82.7		97,225	604,690		6.22		—
Garden Oaks	78.6		95,046	980,002		10.31		—
Westchase	91.8		42,924	454,396		10.59		—
Sunridge	89.6		49,359	462,296		9.37		—
Holly Hall	100.0		90,000	533,774		5.93		—
Brookhill	69.9		74,757	264,060		3.53		—
Corporate Park West	86.3		175,665	1,587,748		9.04		—
Windsor Park	100.0		192,458	1,863,375		9.68		—
Stafford Plaza	98.6		95,032	1,072,105		11.28		—
Total/Average	86.2	%	2,635,063	$	23,531,702	$	8.93	—

The following table lists, for each property, as of December 31 of each of the last five years or for as long as the Company has owned the property, both the occupancy of each property and the average rental and other income per square foot of gross leasable area.

	2000			2001			2002			2003			2004
Property	Percent Leased		Average Income Per Sq. Ft.	Percent Leased		Average Income Per Sq. Ft.	Percent Leased		Average Income Per Sq. Ft.	Percent Leased		Average Income Per Sq. Ft.	Percent Leased		Average Income Per Sq. Ft.
Bissonnet/Beltway	100	%	$14.42	100	%	$17.02	93	%	$16.50	100	%	$16.97	100	%	$15.54
Webster Point	86		10.92	93		10.57	83		11.83	88		12.05	87		12.99
Centre South	71		6.31	88		7.96	88		7.40	85		8.03	87		9.19
Torrey Square	96		7.69	99		9.71	96		9.82	87		8.09	86		8.02
Providence	—		—	100		8.81	98		12.71	72		11.19	69		6.51
Holly Knight	93		14.02	100		17.58	91		16.46	96		17.50	93		16.39
Plaza Park	85		6.26	83		7.60	93		7.89	79		8.26	92		9.63
Northwest Place II	80		5.76	52		5.31	52		4.40	62		4.96	62		4.61
Lion Square	97		8.84	100		9.59	98		9.91	98		9.68	100		10.50
Zeta Building	86		13.43	91		13.84	94		14.21	98		12.46	80		12.99
Royal Crest	73		10.34	73		7.38	88		10.24	95		11.43	100		12.34
Featherwood	77		2.01	96		12.86	96		15.46	98		16.07	89		17.37
Interstate 10	82		3.97	97		4.36	96		4.78	83		4.84	74		4.09
Westbelt Plaza	93		6.92	85		7.21	92		8.88	82		8.26	91		8.68
Greens Road	78		15.83	100		16.54	100		18.60	100		16.15	100		17.02
Town Park	100		16.09	100		19.01	100		17.88	98		18.12	100		18.08
Northeast Square	81		9.91	84		9.14	90		11.81	81		12.48	84		11.80
Main Park	81		5.41	89		4.89	87		5.53	90		5.57	87		5.57
Dairy Ashford	80		5.94	100		6.11	100		5.83	55		3.41	51		3.99
South Richey	100		8.72	94		9.45	100		9.63	94		8.57	74		7.77
Corporate Park Woodland	4		0.06	19		1.75	76		4.70	97		7.76	86		8.67
South Shaver	57		5.11	83		7.29	97		9.82	89		11.06	76		11.75
Kempwood Plaza	95		5.79	91		5.72	93		6.73	95		7.88	74		7.64
Bellnot Square	96		10.70	98		11.71	98		11.53	96		11.82	100		11.60
Corporate Park Northwest	92		7.38	91		8.28	90		8.74	90		8.33	84		8.34
Westgate	83		4.26	96		5.54	96		6.78	85		6.88	83		6.53
Garden Oaks	86		9.44	82		10.32	86		10.69	78		10.34	79		10.38
Westchase	50		2.51	75		7.16	66		8.15	77		8.94	92		8.83
Sunridge	71		4.33	77		9.39	96		10.71	90		10.93	90		9.56
Holly Hall	91		4.56	100		5.12	100		4.63	100		5.45	90		5.89
Brookhill	52		1.59	75		3.43	89		3.45	59		3.39	70		3.51
Corporate Park West	71		3.88	92		8.47	95		9.79	94		9.13	86		9.68
Windsor Park	—		—	—		—	—		—	—		—	100		11.48
Stafford Plaza	—		—	—		—	—		—	—		—	99		12.24

18

Major Tenants

The following table sets forth certain information that relates to the major tenants at each property.  This information is as of December 31, 2004.  The information summarizes information relating to each anchor or largest tenant at each property.  No single lease accounted for more than 5% of the Company’s total revenues during 2003.

Property	Name of Tenant	Total Leased Area (Sq. Ft.)	Total Annual Rent		Effective Net Rent per Sq. Ft.		Lease Expiration Date
Bissonnet/Beltway	Cash America International	5,300	$	84,444	$	15.93	4/30/05
Webster Point	Houston Learning Academy	3,976	64,737		16.28		12/31/06
Centre South	Carlos Alvarez	10,407	96,091		9.23		3/31/06
Torrey Square	99 Cents Only Stores	25,296	219,100		8.66		9/18/04
Providence	99 Cents Only Stores	23,859	225,567		9.45		9/9/08
Holly Knight	Quick Wash Laundry	2,460	50,373		20.48		9/30/09
Plaza Park	American Medical Response	14,765	136,299		9.23		5/31/06
Northwest Place II	Terra Mar, Inc.	13,923	112,743		8.10		7/31/08
Lion Square	Kroger Food Stores, Inc.	42,205	253,440		6.00		10/31/05
Zeta Building	American Title Co.	3,233	54,314		16.80		2/28/05
Royal Crest	Paragon Benefits, Inc.	2,500	33,596		13.44		2/28/07
Featherwood	Transwestern Publishing	9,543	167,774		17.58		11/30/07
Interstate 10	River Oaks, L-M, Inc.	28,050	159,885		5.70		12/31/05
Westbelt Plaza	National Oilwell	13,300	176,652		13.28		3/31/05
Greens Road	Juan Gailegos	3,985	28,965		7.27		12/31/11
Town Park	Omar’s Meat Market	6,450	121,680		18.87		12/31/07
Northeast Square	99 Cent Store	4,573	52,220		11.42		11/30/05
Main Park	Transport Sales	23,882	103,143		4.32		8/31/05
Dairy Ashford	Foster Wheeler USA Corp.	5,118	34,760		6.79		1/31/09
South Richey	Kroger Food Stores, Inc.	42,130	265,416		6.30		2/28/06
Corporate Park Woodland	Carrier Sales and Distribution	16,991	164,204		9.66		7/31/08
South Shaver	EZ Pawn	4,547	61,133		13.44		11/30/07
Kempwood Plaza	Auto Zone	7,960	84,931		10.67		10/31/14
Bellnot Square	Kroger Food Stores, Inc.	42,130	337,044		8.00		7/31/07
Corporate Park Northwest	Air Consulting & Engineering	11,226	115,472		10.29		5/31/08
Westgate	Postmark DMS, LLC	18,818	139,175		7.40		2/28/09
Garden Oaks	Bally Total Fitness	25,722	259,166		10.08		6/30/05
Westchase	Jesus Corral	5,396	60,271		11.17		2/28/07
Sunridge	Puro Latino, Inc.	9,416	53,381		5.67		5/31/10
Holly Hall	The Methodist Hostpital	30,000	183,960		6.13		12/31/11
Brookhill	T.S. Moly-Lubricants	10,187	48,897		4.80		9/30/07
Corporate Park West	Accurate Restoration, Inc.	18,330	151,003		8.24		7/31/06
Windsor Park	The Sports Authority	54,517	463,472		8.50		8/31/15
Stafford Plaza	Marshall’s	31,008	280,956		9.06		1/31/08

19

Lease Expirations

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

		Gross Leasable Area			Annual Rental Income
Year	Number of Leases	Approximate Square Feet	Percent of Total Leasable Area		Amount		Percent of the Company’s Total Rental Income
2005	144	519,470	19.71	%	$	5,006,293	21.27	%
2006	121	404,615	15.36		3,989,468		16.95
2007	127	402,539	15.28		4,149,674		17.63
2008	82	335,589	12.74		3,603,222		15.31
2009	83	244,549	9.28		2,719,524		11.56
2010	33	131,586	4.99		1,452,767		6.17
2011	15	68,273	2.59		798,986		3.40
2012	8	28,835	1.09		392,686		1.67
2013	6	41,045	1.56		474,432		2.02
2014	8	23,868	.91		313,107		1.33
Total	627	2,200,369	83.50	%	$	22,900,159	97.31	%

Depreciation and Tax Items

Depreciation on the Company’s properties are taken on a straight line basis over 5 to 39 years for book purposes, resulting in a rate of approximately 2.5% per year.  The following table shows certain tax items relating to the Company’s properties.

Property	Federal Tax Basis		Realty Tax Rate	2004 Realty Taxes
Bissonnet/Beltway	$	1,987,210	0.0298627	$	39,717
Webster Point	1,380,961		0.0265927	23,154
Centre South	1,737,670		0.0321040	42,056
Torrey Square	3,607,250		0.0352077	116,185
Providence	4,830,878		0.0330224	118,881
Holly Knight	1,747,039		0.0299125	32,305
Plaza Park	2,099,578		0.0299125	85,251
Northwest Place II	967,581		0.0320077	23,430
Lion Square	4,798,488		0.0298627	141,600
Zeta Building	2,366,569		0.0333127	46,638
Royal Crest	1,941,318		0.0333127	23,319
Featherwood	3,369,216		0.0321040	88,896
Interstate 10	2,855,240		0.0310627	80,142
Westbelt Plaza	1,834,055		0.0310627	59,019
Greens Road	877,843		0.0326328	43,989
Town Park	1,392,577		0.0298627	61,935
Northeast Square	1,681,073		0.0287500	55,229
Main Park	2,756,429		0.0299125	80,764
Dairy Ashford	834,072		0.0299125	28,014
South Richey	3,481,667		0.0321040	96,312
Corporate Park Woodlands	6,504,928		0.0302800	152,499
South Shaver	921,353		0.0312740	33,219
Kempwood Plaza	3,274,773		0.0310627	87,317
Bellnot Square	4,364,091		0.0298627	112,675
Corporate Park Northwest	4,947,247		0.0320077	176,042
Westgate	1,861,804		0.0331627	69,642
Garden Oaks	4,582,312		0.0299125	126,299
Westchase	1,643,016		0.0307627	60,742
Sunridge	2,307,528		0.0307627	69,249
Holly Hall	1,815,336		0.0299125	62,827
Brookhill	1,258,673		0.0299125	34,839
Corporate Park West	9,438,227		0.0331627	248,720
Windsor Park	13,102,500		0.0282601	308,733
Stafford Plaza	8,906,057		0.0298627	198,885

20

Insurance

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

Regulations

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

Item 3.  Legal Proceedings.

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

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

None

21

PART II

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

Market Information

There is no established trading market for the Company’s common stock.  Therefore, there is a risk that a shareholder may not be able to sell the Company’s common stock at a time or price acceptable to the shareholder, and investors should purchase the Company’s shares only as a long-term investment.

For these reasons, an investment in the Company involves significant risk and is only suitable for persons who have adequate financial means, desire a relatively long-term investment and who will not need immediate liquidity from their investment.  In consideration of these factors, we have established suitability standards for investors in the Public Offering, as well as for subsequent purchasers of our shares.  These suitability standards require that a purchaser of shares have either:

•      a net worth of at least $150,000; or

•      a gross annual income of at least $45,000 and a net worth of at least $45,000.

For purposes of determining suitability of an investor, net worth in all cases should be calculated excluding the value of an investor’s home, furnishings and automobiles.  In the case of sales to fiduciary accounts, these suitability standards must be met by the fiduciary account, by the person who directly or indirectly supplied the funds for the purchase of the shares if such person is the fiduciary or by the beneficiary of the account.

The suitability standards described above also apply to potential subsequent purchasers of our shares.  Accordingly, even if a shareholder is able to find a subsequent buyer for his or her shares in the Company, the shares may not be sold to such buyer unless the buyer meets the suitability standards applicable to him or her, including any suitability standards imposed by such potential purchaser’s state of residence.  Our Declaration of Trust also imposes certain restrictions on the ownership of common shares that will apply to potential transferees that may inhibit your ability to sell your shares.  Moreover, except for requests for redemptions by the estate, heir or beneficiary of a deceased shareholder, our board of trustees may reject any request for redemption of shares or amend, suspend or terminate our share redemption program at any time.  Therefore, it will be difficult for holders of the Company’s common shares to sell their shares promptly or at all.  In particular, shareholders may not be able to sell their shares in the event of an emergency, and, if they are able to sell such shares, may have to sell them at a substantial discount.  It is also likely that our shares would not be accepted as the primary collateral for a loan to any of our shareholders.

Unless and until the Company or the Maryland REIT causes its shares to be listed on a national securities exchange or includes the shares for quotation on the Nasdaq Stock Market, it is not expected that a public market for the shares will develop.  To assist fiduciaries of tax-qualified pension, stock bonus or profit-sharing plans, employee benefit plans and annuities described in Section 403(a) or (b) of the Internal Revenue Code or an individual retirement account or annuity described in Section 408 of the Internal Revenue Code, subject to the annual reporting requirements of ERISA and IRA trustees or custodians in preparation of reports relating to an investment in the shares, the Company intends to provide reports of the quarterly and annual determinations of the current value of the net assets per outstanding share to those fiduciaries who request such reports.

Public Offering Proceeds

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

22

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

As of December 31, 2004, no shares had been issued pursuant to the Public Offering, because its terms provided that the Company would not admit new shareholders pursuant to the Public Offering, or receive any proceeds therefrom, until subscriptions aggregating at least $2,000,000 (200,000 shares) were received and accepted by the Company, not including shares sold to residents of either New York or Pennsylvania.  As of December 31, 2004, the Company had received and accepted subscriptions for a total of 147,432 shares for gross offering proceeds of $1,474,320 held in escrow as of such date.

As of February 11, 2005, the Company had accepted subscriptions for 277,775 shares (not including shares sold to residents of either New York or Pennsylvania) and, accordingly, 277,775 shares had been issued pursuant to the Public Offering as of such date with gross offering proceeds received of $2,777,750.  The Company’s application of such gross offering proceeds has been as follows:

Description of Use of Offering Proceeds	Amount of Proceeds so Utilized
Selling Commissions paid to broker/ dealers not affiliated with D.H. Hill Securities , LLP	$	148,816
Dealer Manager Fee paid to D.H. Hill Securities , LLP	$	69,444
Offering expense reimbursements paid to the Management Company	$	69,444
Acquisition Fees paid to the Management Company	$	55,555
Used for Working Capital	$	1,661,375
Amounts temporarily invested in money market accounts pending final application of proceeds by the Company	$	773,116

Issuer Repurchases

The Company did not repurchase any of its equity securities during the fourth quarter of the period covered by this Annual Report on Form 10-K.

Holders

As of March 22, 2005, the Company had 7,443,420 shares of common stock outstanding held by a total of approximately 742 shareholders.

Dividends

In order to remain qualified as a REIT, the Company is required to distribute at least 90% of its annual taxable income to the Company’s shareholders.  The Company currently accrues dividends quarterly and pays such dividends in three monthly installments following the end of the quarter and intends to continue doing so.

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

23

Month Paid	Total Amount of Dividends Paid		Dividends Per Share
November 1999	$	59,365	$	0.1610
February 2000	109,294		0.1628
May 2000	320,276		0.1645
August 2000	402,124		0.1663
November 2000	478,206		0.1680
February 2001	559,440		0.1698
May 2001	541,380		0.1400
August 2001	602,138		0.1400
November 2001	635,778		0.1400
February 2002	687,544		0.1488
May 2002	1,102,340		0.1575
August 2002	1,166,709		0.1663
November 2002	1,226,777		0.1750
February 2003	1,226,777		0.1750
April 2003	408,762		0.0583
May 2003	408,762		0.0583
June 2003	409,253		0.0584
July 2003	408,762		0.0583
August 2003	408,762		0.0583
September 2003	409,253		0.0584
October 2003	408,762		0.0583
November 2003	408,762		0.0583
December 2003	409,253		0.0584
January 2004	408,762		0.0583
February 2004	408,762		0.0583
March 2004	409,253		0.0584
April 2004	408,762		0.0583
May 2004	408,762		0.0583
June 2004	409,253		0.0584
July 2004	408,762		0.0583
August 2004	408,762		0.0583
September 2004	409,253		0.0584
October 2004	408,692		0.0583
November 2004	408,692		0.0583
December 2004	409,392		0.0584
January 2005	408,692		0.0583
February 2005	408,692		0.0583
March 2005	412,897		0.0589
Average Per Quarter			$	0.1652

Recent Sales of Unregistered Securities

None.

24

Item 6.  Selected Financial Data.

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

	Year Ended December 31,
	(in thousands, except per share data)
	2004			2003			2002			2001			2000
Income Statement Data:
Revenues	$	23,484		$	20,973		$	20,755		$	11,704		$	9,626
Operations expenses	9,183			8,383			8,242			5,068			3,925
Interest	2,664			1,323			1,573			812			1,271
Depreciation and amortization	5,223			4,758			4,042			2,151			1,786
Total expenses	17,070			14,464			13,857			8,031			6,982
Income before minority interests	6,414			6,509			6,898			3,673			2,644
Minority interest in income	(2,990		)	(3,035		)	(3,193		)	(1,932		)	(1,770		)
Net income	$	3,424		$	3,474		$	3,705		$	1,741		$	874
Net income per common share	$	0.488		$	0.496		$	0.529		$	0.401		$	0.332
Weighted average shares outstanding	7,010			7,010			7,007			4,336			2,630
Balance Sheet Data:
Real estate	$	126,547		$	120,256		$	109,294		$	66,269		$	62,781
Other assets	16,070			13,810			17,670			4,409			3,017
Total assets	$	142,617		$	134,066		$	126,964		$	70,678		$	65,798
Liabilities	$	66,299		$	55,183		$	45,617		$	16,311		$	17,439
Minority interests in Operating Partnership	36,489			37,567			38,598			27,264			27,278
Shareholders’ equity	39,829			41,316			42,749			27,103			21,081
	$	142,617		$	134,066		$	126,964		$	70,678		$	65,798
Cash Flow Data:
Proceeds from issuance of common shares	$	—		$	—		$	155		$	6,748		$	11,660
Additions to real estate	10,277			8,242			1,983			5,028			6,089
Other Financial Data:
Distributions per share	$	0.7005		$	0.7000		$	0.6738		$	0.5688		$	0.6685

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

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

Overview

We own 34 commercial properties, consisting of 19 retail centers, 12 office/warehouse properties and three office buildings.  All of our properties are located in the Houston, Texas and San Antonio, Texas metropolitan areas.  As of December 31, 2004, we had 632 total tenants.  No individual lease or tenant is material to our business.  Revenues from our largest lease constituted 2.27% of our total revenues for the year ended December 31, 2004.  Leases for our properties range from one year for our smaller spaces to over ten years for larger tenants.  Our leases generally include minimum monthly lease payments and tenant reimbursements for payment of taxes, insurance and maintenance.

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

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

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

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

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

Our management agreement in effect after September 1, 2004 defines gross revenues as all amounts actually collected as rents or other charges for the use and occupancy of our properties, but excludes interest and other investment income and proceeds received for a sale, exchange, condemnation, eminent domain taking, casualty or other disposition of assets.

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

Gross asset value is defined as the amount equal to the aggregate book value of our assets (other than investments in bank accounts, money market funds or other current assets), before depreciation, bad debts or other similar non-cash reserves and without reduction for any debt relating to such assets, at the date of measurement, except that during such periods in which we are obtaining regular independent valuations of the current value of our net assets for purposes of enabling fiduciaries of employee benefit plan shareholders to comply with applicable Department of Labor reporting requirements.  Gross asset value is the greater of (i) the amount determined pursuant to the foregoing or (ii) our assets’ aggregate valuation established by the most recent such valuation report without reduction for depreciation, bad debts or other similar non-cash reserves and without reduction for any debt relating to such assets.

Under the agreement in effect prior to September 1, 2004, we paid the Management Company the following amounts:

•a management fee of 5% of our effective gross revenues to manage our properties;

•a leasing fee of 6% of the effective gross revenues from leases originated by the Management Company and a fee of 4% of the effective gross revenues from expansions or renewals of existing leases;

•an administrative fee of 1% of our effective gross revenues for day-to-day supervisory and general administration services; and

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•the reimbursement of all reasonable and necessary expenses incurred or funds advanced in connection with the management and operation of our properties, including expenses and costs relating to maintenance and construction personnel incurred on behalf of our properties; provided, however, that we will not reimburse the Management Company for its overhead, including salaries and expenses of centralized employees other than salaries of certain maintenance and construction personnel.

Our management agreement in effect prior to September 1, 2004 defines effective gross revenues as all payments actually collected from tenants and occupants of our properties, exclusive of:

•security payments and deposits (unless and until such deposits have been applied to the payment of current or past due rent); and

•pay received from tenants in reimbursement of the expense of repairing damage caused by tenants.

The fees payable to the Management Company under the new agreements effective September 1, 2004 were not significantly different from those that would have been payable under the former agreement.

Critical Accounting Policies

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

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

Basis of Consolidation.  We are the sole general partner of the Operating Partnership and possess full legal control and authority over its operations.  As of December 31, 2004, we owned a majority of the partnership interests in the Operating Partnership.  Consequently, our consolidated financial statements include the accounts of the Operating Partnership.  All significant intercompany balances have been eliminated.  Minority interest in the accompanying consolidated financial statements represents the share of equity and earnings of the Operating Partnership allocable to holders of partnership interests other than us.  Net income is allocated to minority interests based on the weighted-average percentage ownership of the Operating Partnership during the year.  Issuance of additional common shares and OP Units changes our ownership interests as well as those of minority interests.

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

We review our properties for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through our operations.  We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property.  If impairment is indicated, we record a loss for the amount by which the carrying

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value of the property exceeds its fair value.  We have determined that there has been no impairment in the carrying value of our real estate assets as of December 31, 2004.

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

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

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

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

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

Liquidity and Capital Resources

General.  During the year ended December 31, 2004, our properties generated sufficient cash flow to cover our operating expenses and to allow us to pay quarterly distributions.  We generally lease our properties on a triple-

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net basis or on bases which provide for tenants to pay for increases in operating expenses over a base year or set amount, which means that tenants are required to pay for all repairs and maintenance, property taxes, insurance and utilities, or increases thereof, applicable to their space.  We anticipate that cash flows from operating activities and our borrowing capacity will continue to provide adequate capital for our working capital requirements, anticipated capital expenditures and scheduled debt payments during the next 12 months.  We also believe that cash flows from operating activities and our borrowing capacity will allow us to make all distributions required for us to continue to qualify to be taxed as a REIT.  We also believe that our properties are adequately covered by insurance.

Cash and Cash Equivalents.  We had cash and cash equivalents of $631,978 on December 31, 2004 as compared to $578,687 on December 31, 2003 for operations and to purchase marketable securities.  The increase was relatively insignificant because we try to keep cash balances to a minimum by either buying properties, improving properties, reducing debt or making distributions to shareholders.  We place all cash in short-term, highly liquid investments that we believe provide appropriate safety of principal.

Our Debt for Borrowed Money.

In December 2002, we refinanced most of our debt with a new credit facility from GMAC Commercial Mortgage Corporation.  The loan is secured by, among other things, 18 of our properties, which are held by Hartman REIT Operating Partnership II, L.P., a wholly-owned subsidiary formed for the purpose of this credit facility, and the improvements, personal property and fixtures on the properties, all reserves, escrows and deposit accounts held by Hartman REIT Operating Partnership II, L.P., all intangible assets specific to or used in connection with the properties, and an assignment of rents related to such properties.  We believe the fair market value of these properties was approximately $62,000,000 at the time the loan was put in place.  We may prepay the loan after July 1, 2005 without penalty.  We must pay a prepayment fee equal to one percent of the outstanding principal balance under the facility if we prepay the note prior to July 1, 2005.  As of March 1, 2005, the outstanding principal balance under this facility was $34,440,000.

We are required to make monthly interest payments under this credit facility.  During the initial term of the note, indebtedness under the credit facility will bear interest at LIBOR plus 2.5% computed on the basis of a 360 day year, adjusted monthly.  The interest rate was 4.79% as of December 31, 2004.  We are not required to make any principal payments prior to the loan’s maturity.  The credit facility will mature on January 1, 2006, though we have the option, subject to certain conditions, of extending the facility for an additional two-year period.  In no event shall the interest rate be lower than 3.82% during the initial term or lower than 4.32% during the extension term.

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

•acquire additional material assets;

•merge or consolidate with any other entity;

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

•make certain investments;

•incur, assume or guarantee additional indebtedness;

•grant certain liens; and

•loan money to others.

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The security documents related to the note contain a covenant which requires Hartman REIT Operating Partnership II, L.P. to maintain adequate capital in light of its contemplated business operations.  We believe that this covenant and the other restrictions provided for in our credit facility will not affect or limit Hartman REIT Operating Partnership II, L.P.’s ability to make distributions to us.  The note and the security documents related thereto also contain customary events of default, including, without limitation, payment defaults, bankruptcy-related defaults and breach of covenant defaults.  These covenants only apply to Hartman REIT Operating Partnership II, L.P. and do not impact the other operations of the Operating Partnership, including the operation of our 16 properties which do not secure this debt.

Upon the closing of this financing, we repaid approximately $24,800,000 of existing debt, placed approximately $2,800,000 in escrows established at the closing for taxes, insurance, agreed capital improvement and other uses required by the lender and paid fees and expenses of approximately $600,000 incurred in connection with the credit facility.  The remaining proceeds, approximately $6,200,000, were available for general working capital purposes.  We used the loan proceeds to repay debt and the remainder to pay accrued real estate taxes and other operating expenses.

On June 30, 2003, the Operating Partnership entered into a $25,000,000 loan agreement with Union Planter’s Bank, N.A. pursuant to which the Operating Partnership may, subject to the satisfaction of certain conditions, borrow funds to acquire additional income producing properties.  The revolving loan agreement terminates in June, 2005 and provides for interest payments at a rate, adjusted monthly, of either (at the Operating Partnership’s option) 30-day LIBOR plus 225 basis points, or Union Planter’s Bank, N.A.’s prime rate less 50 basis points, with either rate subject to a floor of 3.75% per annum.  The loan is secured by otherwise unencumbered properties currently directly owned by the Operating Partnership as well as those to be acquired with the proceeds drawn from the facility and all improvements, equipment, fixtures, building materials, consumer goods, furnishings, inventory and articles of personal property related thereto, together with all water rights, timber crops and mineral interests pertaining to the acquired properties, all deposits, bank accounts, instruments arising in virtue of transactions related to the acquired properties, all proceeds from insurance, takings or litigation arising out of the acquired properties and all leases, rents, royalties and profits or other benefits of the acquired properties.  As of March 22, 2005, we had borrowed $19,350,000 under this credit facility; and at December 31, 2004, the loan balance was $16,700,000.  We are required to make monthly payments of interest only, with the principal and all accrued unpaid interest being due at maturity of the loan.  The loan may be prepaid at any time without penalty.

In addition, the Operating Partnership entered into certain covenants pursuant to the loan agreement which, among other things, require it to maintain specified levels of insurance.  The facility also limits, among other things, the Operating Partnership’s ability to, without the approval of the lender:

•declare or pay any distribution during the continuance of a default or event of default;

•acquire, consolidate with or merge into any other entity;

•permit a material change in the management group;

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

•change the general character of its business;

•materially change accounting practices, methods or standards;

•sell, lease, transfer, convey or otherwise dispose of a material part of its assets other than in the ordinary course of business;

•form any new subsidiary or acquire all of the assets of a third party;

•permit its net worth to be less than $70,000,000;

•permit the combined occupancy of the properties securing the loan to be less than 86%;

•make certain investments;

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•incur, assume, guarantee or alter the terms of certain additional indebtedness;

•grant certain liens; and

•loan money to others.

The loan agreement and the security documents related thereto also contain customary events of default, including, without limitation, payment defaults, bankruptcy-related defaults, environmental defaults, material uninsured judgment defaults and defaults for breaches of covenant or representations.

In connection with the purchase of the Windsor Park property in December 2003, we assumed a note payable in the amount of $6,550,000 secured by the property.  The balance at December 31, 2004 was $6,086,111.  The note is payable in equal monthly installments of principal and interest of $80,445, with interest at the rate of 8.34% per annum.  The balance of the note is payable in full on December 1, 2006.

In November 2002, we borrowed $3,278,000 from Houston R.E. Income Properties XVI, L.P.  This debt was evidenced by a promissory note and accrued interest at a rate of 4.25%.  The note was secured by our Corporate Park Northwest property and was payable at any time upon the demand of Houston XVI.  We used these borrowed funds to repay existing debt.  Mr. Hartman controls the general partner of Houston XVI.  We were only required to make monthly interest payments under the note.  This note was repaid in full in the second quarter of 2003.

Capital Expenditures.  We currently do not expect to make significant capital expenditures or any significant improvements to any of our currently owned properties during the next 12 months.  However, we may have unexpected capital expenditures or improvements on our existing assets.  Additionally, we intend to continue our ongoing acquisition strategy of acquiring properties in the Houston and San Antonio, Texas metropolitan areas where we believe opportunities exist for acceptable investment returns (generally in the $1,000,000 to $10,000,000 value range), and we may incur significant capital expenditures or make significant improvements in connection with any properties we may acquire.

Total Contractual Cash Obligations.  A summary of our contractual cash obligations, as of December 31, 2004 is as follows:

	Payment due by period
Contractual Obligations	Total		Less than One Year		One to Three Years		Three to Five Years	More than Five Years
Long-Term Debt Obligations	$	57,226,111	$	17,134,503	$	40,091,608	—	—
Capital Lease Obligations	—		—		—		—	—
Operating Lease Obligations	—		—		—		—	—
Purchase Obligations	—		—		—		—	—
Other Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under GAAP	—		—		—		—	—
Total	$	57,226,111	$	17,134,503	$	40,091,608	—	—

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

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

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

We acquired ten properties from five entities operated by Mr. Hartman during 2002.  We acquired four of these properties by merging the selling entities with and into either the Company or the Operating Partnership.  In these mergers, we issued common shares or OP Units, as applicable, to equity holders in the selling entities who were accredited investors and paid cash for equity interests held by non-accredited investors.  For all ten properties, we issued an aggregate of 1,650,879 common shares (2,358,396 after giving effect to the recapitalization), 2,851,066 OP Units (4,072,947 OP Units after giving effect to the recapitalization), including 1,067,646 OP Units (1,525,207 after giving effect to the recapitalization) issued to HCP, assumed mortgage debt and other liabilities aggregating $15,053,870 and paid approximately $1,811,398 to purchase interests held by non-accredited investors in connection with these mergers.

Common Share Distributions.  We declared the following distributions to our shareholders during 2003 and 2004 (as adjusted to give effect to our reorganization as a Maryland real estate investment trust and the concurrent recapitalization of our common shares on July 28, 2004):

Month Paid or Payable	Total Amount of Distributions Paid or Payable		Distributions Per Share
April 2003	$	408,762	$	0.0583
May 2003	408,762		0.0583
June 2003	409,253		0.0584
July 2003	408,762		0.0583
August 2003	408,762		0.0583
September 2003	409,253		0.0584
October 2003	408,762		0.0583
November 2003	408,762		0.0583
December 2003	409,253		0.0584
January 2004	408,762		0.0583
February 2004	408,762		0.0583
March 2004	409,253		0.0584
April 2004	408,762		0.0583
May 2004	408,762		0.0583
June 2004	409,253		0.0584
July 2004	408,762		0.0583
August 2004	408,762		0.0583
September 2004	409,253		0.0584
October 2004	408,692		0.0583
November 2004	408,692		0.0583
December 2004	409,392		0.0584
January 2005	408,692		0.0583
February 2005	408,692		0.0583
March 2005	412,897		0.0589
Average Per Quarter			$	0.1751

The following sets forth the tax status of the amounts we distributed to shareholders during 2000 through 2004:

Tax Status	2004		2003		2002		2001		2000
Ordinary income	67.7	%	24.8	%	85.1	%	70.5	%	75.9	%
Return of capital	32.3	%	75.2	%	14.9	%	29.5	%	24.1	%
Capital gain	—		—		—		—		—
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

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OP Unit Distributions.  The Operating Partnership declared the following distributions to holders of its OP Units, including HCP, during 2003 and 2004 (as adjusted to give effect to our reorganization as a Maryland real estate investment trust and the concurrent recapitalization of our common shares on July 28, 2004):

Month Paid or Payable	Total Amount of Distributions Paid or Payable		Distributions Per Share
April 2003	$	726,368	$	0.0583
May 2003	726,368		0.0583
June 2003	727,240		0.0584
July 2003	726,368		0.0583
August 2003	726,368		0.0583
September 2003	727,240		0.0584
October 2003	726,368		0.0583
November 2003	726,368		0.0583
December 2003	727,240		0.0584
January 2004	726,368		0.0583
February 2004	726,368		0.0583
March 2004	727,240		0.0584
April 2004	726,368		0.0583
May 2004	726,368		0.0583
June 2004	727,240		0.0584
July 2004	726,368		0.0583
August 2004	726,368		0.0583
September 2004	727,240		0.0584
October 2004	726,243		0.0583
November 2004	726,243		0.0583
December 2004	727,488		0.0584
January 2005	726,243		0.0583
February 2005	726,243		0.0583
March 2005	733,717		0.0589
Average Per Quarter			$	0.1751

Results of Operations

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

General

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

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

Revenues

We had rental income and tenant reimbursements of $23,038,966 for the year ended December 31, 2004, as compared to revenues of $20,605,161 for the year ended December 31, 2003, an increase of $2,433,805, or 12%.  Substantially all of our revenues are derived from rents received from the use of our properties.  The increase in our revenues during 2004 as compared to 2003 was due to an increase in the amount of rent charged at some locations

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and the purchase of additional properties.  Our average occupancy rate in 2004 was 87%, as compared to 90% in 2003, and our average annualized revenue was $9.14 per square foot in 2004, as compared to an average annualized revenue of $8.93 per square foot in 2003.

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

Expenses

Our total operating expenses, including interest expense and depreciation and amortization expense, were $17,069,628 for the year ended December 31, 2004, as compared to $14,463,982 for the year ended December 31, 2003, an increase of $2,605,646, or 18%.  We expect that the dollar amount of operating expenses will increase as we acquire additional properties and expand our operations.  However, we expect that general and administrative expenses as a percentage of total revenues will decline as we acquire additional properties.

The increase in our operating expenses during 2004 was primarily the result of increased maintenance, real estate taxes, utilities and depreciation and amortization expenses.

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

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

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

Net Income

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

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Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

General

The following table provides a general comparison of our results of operations for the years ended December 31, 2002 and December 31, 2003:

	December 31, 2002			December 31, 2003
Number of properties owned and operated	32			33
Aggregate gross leasable area (sq. ft.)	2,348,862			2,540,031
Occupancy rate	92		%	88		%
Total Revenues	$	20,755,026		$	20,972,951
Total Operating Expenses	$	13,857,303		$	14,463,982
Income before Minority Interest	$	6,897,723		$	6,508,969
Minority Interest in the Operating Partnership	$	(3,192,605	)	$	(3,034,795	)
Net Income	$	3,705,118		$	3,474,174

Revenues

We had rental income and tenant reimbursements of $20,605,161 for the year ended December 31, 2003, as compared to revenues of $20,423,485 for the year ended December 31, 2002, an increase of $181,676, or 1%.  Substantially all of our revenues are derived from rents received from the use of our properties.  The increase in our revenues during 2003 as compared to 2002 was due to an increase in the amount of rent charged at some locations.  Our average occupancy rate in 2003 was 90%, as compared to 90% in 2002, and our average annualized revenue was $8.93 per square foot in 2003, as compared to an average annualized revenue of $8.84 per square foot in 2002.

We had interest and other income of $367,790 for the year ended December 31, 2003, as compared to $331,541 for the year ended December 31, 2002, an increase of $36,249, or 11%.  We hold all revenues and proceeds we receive from offerings in money market accounts and other short-term, highly liquid investments.  The increase in interest and other income during 2003 as compared to 2002 resulted primarily from temporarily investing excess loan proceeds.  Although more cash was invested in 2003 than in 2002, this increase was offset somewhat by the lower interest rates we earned on our investments in 2003 as compared to 2002.  We expect the percentage of our total revenues from interest income from investments in money market accounts or other short-term, highly liquid investments to decrease as we invest cash holdings in properties.

Expenses

Our total operating expenses, including interest expense and depreciation and amortization expense, were $14,463,982 for the year ended December 31, 2003, as compared to $13,857,303 for the year ended December 31, 2002, an increase of $606,679, or 4%.  We expect that the dollar amount of operating expenses will increase as we acquire additional properties and expand our operations.  However, we expect that general and administrative expenses as a percentage of total revenues will decline as we acquire additional properties.

The increase in our operating expenses during 2003 was primarily the result of increased maintenance, insurance, utilities and depreciation and amortization expenses.  This increase was partially offset by a decrease in real estate tax expense.  Real estate taxes decreased significantly for 2003 due to the settlement of several lawsuits against an appraisal district which resulted in the reduction of previously accrued property taxes.

The amount we pay Hartman Management under our management agreement is based on our revenues and the number of leases that Hartman Management originates.  As a result of our increased revenues in 2003, management fees were $1,232,127 in 2003, as compared to $1,231,212 in 2002, an increase of $915, or .07%.

35

Our interest expense decreased by $249,892, or 16%, in 2003 as compared to 2002.  Although our average outstanding debt increased from $29,263,144 in 2002 to $37,264,685 in 2003, the average interest rate associated with this debt decreased from 5.38% in 2002 to 3.90% in 2003.

Finally, general and administrative expenses increased $233,741, or 28%, in 2003 as compared to 2002, primarily as the result of an increase in professional fees.

Net Income

Income provided by operating activities before minority interest was $6,508,969 for the year ended December 31, 2003, as compared to $6,897,723 for the year ended December 31, 2002, a decrease of $388,754, or 6%.  Net income provided by operating activities for the year ended December 31, 2003 was $3,474,174, as compared to $3,705,118 for the year ended December 31, 2002, a decrease of $230,944, or 6%.

Taxes

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

Inflation

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

Environmental Matters

Our properties are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which our operations are conducted.  From our inception, we have incurred no significant environmental costs, accrued liabilities or expenditures to mitigate or eliminate future environmental contamination.

Off-Balance Sheet Arrangements

The Company has no significant off-balance sheet arrangements as of December 31, 2004.

Recent Accounting Pronouncements

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

36

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

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

Market risk is the risk of loss arising from adverse changes in market rates and prices.  The principal market risk to which the Company is exposed is the risk related to interest rate fluctuations.  The Company will be exposed to changes in interest rates as a result of the Company’s credit facilities that have floating interest rates.  As of December 31, 2004, the Company had $51,140,000 of indebtedness outstanding under such facilities.  The impact of a 1% increase in interest rates on the Company’s debt would result in an increase in interest expense and a decrease in income before minority interests of approximately $511,400 annually.

Item 8.  Financial Statements and Supplementary Data.

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

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

None.

Item 9A.  Controls and Procedures.

In accordance with Rules 13a-15 and 15d-15 under the Securities and Exchange Act, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2004.  No change in our internal control over financial reporting occurred during the fourth fiscal quarter of the period covered by this annual report that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.  Other Information.

None.

37

PART III

Item 10.Directors and Executive Officers of the Registrant.

The information required by this Item will be presented in the Company’s definitive proxy statement for the Company’s annual meeting of shareholders, which will be filed with the Securities and Exchange Commission no later than April 30, 2005, and is incorporated herein by reference to the sections of the proxy statement entitled “Election of Trustees” and “Section 16(a) Beneficial Ownership and Reporting Compliance.”  The Company plans to hold its annual meeting of stockholders approximately 30 days after it files its definitive proxy statement with the Securities and Exchange Commission.

Item 11.Executive Compensation.

The information required by this Item will be presented in the Company’s definitive proxy statement for the Company’s annual meeting of shareholders, which will be filed with the Securities and Exchange Commission no later than April 30, 2005, and is incorporated herein by reference the section of the proxy statement entitled “Executive Compensation.”  The Company plans to hold its annual meeting of stockholders approximately 30 days after it files its definitive proxy statement with the Securities and Exchange Commission.

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

The information required by this Item will be presented in the Company’s definitive proxy statement for the Company’s annual meeting of shareholders, which will be filed with the Securities and Exchange Commission no later than April 30, 2005, and is incorporated herein by reference the sections of the proxy statement entitled “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information as of December 31, 2004.”  The Company plans to hold its annual meeting of stockholders approximately 30 days after it files its definitive proxy statement with the Securities and Exchange Commission.

Item 13.Certain Relationships and Related Transactions.

The information required by this Item will be presented in the Company’s definitive proxy statement for the Company’s annual meeting of shareholders, which will be filed with the Securities and Exchange Commission no later than April 30, 2005, and is incorporated herein by reference the section of the proxy statement entitled “Certain Transactions.”  The Company plans to hold its annual meeting of stockholders approximately 30 days after it files its definitive proxy statement with the Securities and Exchange Commission.

Item 14.Principal Accounting Fees and Services.

The information required by this Item will be presented in the Company’s definitive proxy statement for the Company’s annual meeting of shareholders, which will be filed with the Securities and Exchange Commission no later than April 30, 2005, and is incorporated herein by reference the sections of the proxy statement entitled “Principal Accountants’ Fees and Services.”  The Company plans to hold its annual meeting of stockholders approximately 30 days after it files its definitive proxy statement with the Securities and Exchange Commission.

38

PART IV

Item 15.  Exhibits and Financial Statement Schedules.

(a)List of Documents Filed.

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

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

a.Schedule II — Valuation and Qualifying Amounts

b.Schedule III — Real Estate and Accumulated Depreciation

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

(b)Exhibits.

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

(c)Financial Statement Schedules.

1.Schedule II — Valuation and Qualifying Amounts

2.Schedule III — Real Estate and Accumulated Depreciation

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

39

SIGNATURES

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

	HARTMAN COMMERCIAL PROPERTIES REIT
Dated: March 31, 2005	By:	/s/ Allen R. Hartman
		Allen R. Hartman, President

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

March 31, 2005	/s/ Allen R. Hartman
	Allen R. Hartman, President and Trustee
	(Principal Executive Officer)
March 31, 2005	/s/ Robert W. Engel
	Robert W. Engel, Chief Financial Officer and Trustee
	(Principal Financial and Principal Accounting Officer)
March 31, 2005	/s/ Chris A. Minton
	Chris A. Minton, Trustee
March 31, 2005	/s/ Jack L. Mahaffey
	Jack L. Mahaffey, Trustee
March 31, 2005	/s/ Samuel C. Hathorn
	Samuel C. Hathorn, Trustee
March 31, 2005	/s/ Chand Vyas
	Chand Vyas, Trustee

40

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets as of December 31, 2004 and 2003	F-2
Consolidated Statements of Income for the Years Ended December 31, 2004, 2003 and 2002	F-4
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2004, 2003 and 2002	F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002	F-6
Notes to Consolidated Financial Statements	F-8
Schedule II – Valuation and Qualifying Accounts	F-26
Schedule III – Real Estate and Accumulated Depreciation	F-27

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

Report of Independent Registered Public Accounting Firm

To the Board of Trustees and Shareholders of
Hartman Commercial Properties REIT

We have audited the accompanying consolidated balance sheets of Hartman Commercial Properties REIT and subsidiary (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of income, shareholders’ equity and cash flows, for each of the three years in the period ended December 31, 2004.  In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedules as listed in the accompanying index.  These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  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 Hartman Commercial Properties REIT and subsidiary as of December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with U.S. generally accepted accounting principles.  Also, in our opinion, the related financial statement schedules, when considered in the relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

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

Houston, Texas

February 11, 2005

F-1

Hartman Commercial Properties REIT and Subsidiary

Consolidated Balance Sheets

	December 31,
	2004			2003
Assets
Real estate
Land	$	28,446,210		$	26,664,999
Buildings and improvements	113,551,420			105,055,635
	141,997,630			131,720,634
Less accumulated depreciation	(15,450,416		)	(11,464,280		)
Real estate, net	126,547,214			120,256,354
Cash and cash equivalents	631,978			578,687
Escrows and acquisition deposits	4,978,362			3,188,649
Note receivable	655,035			687,003
Receivables
Accounts receivable, net of allowance for doubtful accounts of $342,690 and $350,750 in 2004 and 2003, respectively	1,008,621			526,855
Accrued rent receivable	2,594,933			1,963,214
Due from affiliates	3,300,202			3,679,602
Receivables, net	6,903,756			6,169,671
Deferred costs, net	2,797,294			3,039,661
Prepaid expenses and other assets	103,301			146,366
Total assets	$	142,616,940		$	134,066,391

See notes to consolidated financial statements.

F-2

Hartman Commercial Properties REIT and Subsidiary

Consolidated Balance Sheets (Continued)

	December 31,
	2004			2003
Liabilities and Shareholders’ Equity
Liabilities
Notes payable	$	57,226,111		$	47,343,182
Accounts payable and accrued expenses	3,354,610			3,324,461
Due to affiliates	675,861			757,451
Tenants’ security deposits	1,066,147			1,061,209
Prepaid rent	254,765			453,421
Offering proceeds escrowed	1,471,696			—
Dividends payable	1,230,281			1,226,777
Other liabilities	1,019,363			1,016,460
Total liabilities	66,298,834			55,182,961
Minority interests of unit holders in Operating Partnership, 5,808,337 units at December 31, 2004 and 2003	36,489,114			37,567,446
Commitments and contingencies	—			—
Shareholders’ equity
Preferred shares, $0.001 par value per share; 50,000,000 shares authorized; none issued and outstanding at December 31, 2004 and 2003	—			—
Common shares, $0.001 par value per share; 400,000,000 shares authorized; 7,010,146 issued and outstanding at December 31, 2004 and 2003	7,010			7,010
Additional paid-in capital	45,527,152			45,527,152
Accumulated deficit	(5,705,170		)	(4,218,178		)
Total shareholders’ equity	39,828,992			41,315,984
Total liabilities and shareholders’ equity	$	142,616,940		$	134,066,391

See notes to consolidated financial statements.

F-3

Hartman Commercial Properties REIT and Subsidiary

Consolidated Statements of Income

	Year Ended December 31,
	2004			2003			2002
Revenues
Rental income	$	18,426,558		$	16,656,340		$	16,794,963
Tenants’ reimbursements	4,612,408			3,948,821			3,628,522
Interest and other income	444,691			367,790			331,541
Total revenues	23,483,657			20,972,951			20,755,026
Expenses
Operation and maintenance	2,838,618			2,505,756			2,299,377
Interest expense	2,664,135			1,323,378			1,573,270
Real estate taxes	2,595,346			2,050,738			2,629,122
Insurance	459,801			509,498			381,155
Electricity, water and gas utilities	817,484			805,772			795,431
Management and partnership and asset management fees to an affiliate	1,339,822			1,232,127			1,231,212
General and administrative	1,139,060			1,065,416			831,675
Depreciation	3,986,136			3,728,925			3,550,325
Amortization	1,237,286			1,029,122			491,536
Bad debt expense (recoveries)	(8,060		)	213,250			74,200
Total operating expenses	17,069,628			14,463,982			13,857,303
Income before minority interests	6,414,029			6,508,969			6,897,723
Minority interests in Operating Partnership	(2,990,410		)	(3,034,795		)	(3,192,605		)
Net income	$	3,423,619		$	3,474,174		$	3,705,118
Net income per common share	$	0.488		$	0.496		$	0.529
Weighted-average shares outstanding	7,010,146			7,010,146			7,007,167

See notes to consolidated financial statements.

F-4

Hartman Commercial Properties REIT and Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity

	Common Stock			Additional		Accumulated
	Shares	Amount		Paid-in Capital		Deficit				Total
Balance, December 31, 2001	4,627,590	4,628		$	28,865,935	$		(1,767,759	)	$	27,102,804
Issuance of common stock for cash, net of offering costs	24,160	24		154,785		—				154,809
Issuance of common stock to acquire Operating Partnership units	1,525,207	1,525		10,674,935		—				10,676,460
Issuance of common stock in exchange for Operating Partnership units	833,189	833		5,831,497		—				5,832,330
Net income	—	—		—		3,705,118				3,705,118
Dividends	—	—		—		(4,722,603			)	(4,722,603			)
Balance, December 31, 2002	7,010,146	7,010		45,527,152		(2,785,244			)	42,748,918
Net income	—	—		—		3,474,174				3,474,174
Dividends	—	—		—		(4,907,108			)	(4,907,108			)
Balance, December 31, 2003	7,010,146	7,010		45,527,152		(4,218,178			)	41,315,984
Net income	—	—		—		3,423,619				3,423,619
Dividends	—	—		—		(4,910,611			)	(4,910,611			)
Balance, December 31, 2004	7,010,146	$	7,010	$	45,527,152	$	(5,705,170		)	$		39,828,992

See notes to consolidated financial statements.

F-5

Hartman Commercial Properties REIT and Subsidiary

Consolidated Statements of Cash Flows

	Year Ended December 31,
	2004			2003			2002
Cash flows from operating activities:
Net income	$	3,423,619		$	3,474,174		$	3,705,118
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation	3,986,136			3,728,925			3,550,325
Amortization	1,237,286			1,029,122			491,536
Minority interests in Operating Partnership	2,990,410			3,034,795			3,192,605
Equity in income of real estate partnership	(209,737		)	—			—
Bad debt expense (recoveries)	(8,060		)	213,250			74,200
Changes in operating assets and liabilities:
Escrows and acquisition deposits	(317,739		)	(223,663		)	(956,051		)
Receivables	(1,105,425		)	(387,143		)	(682,683		)
Due from affiliates	297,810			(939,038		)	847,608
Deferred costs	(952,756		)	(978,398		)	(894,076		)
Prepaid expenses and other assets	352,586			(15,336		)	77,130
Accounts payable and accrued expenses	30,149			23,215			987,052
Tenants’ security deposits	4,938			(60,295		)	67,876
Prepaid rent	(198,656		)	88,828			125,406
Net cash provided by operating activities	9,530,561			8,988,436			10,586,046
Cash flows used in investing activities:
Additions to real estate	(10,276,996		)	(8,242,179		)	(1,982,508		)
Proceeds from sale of property	—			—			60,000
Investment in real estate partnership	(9,033,561		)	—			—
Distributions received from real estate partnership	9,233,555			—			—
Issuance of note receivable	—			(290,000		)	—
Repayment of note receivable	31,968			22,997			—
Net cash used in investing activities	(10,045,034		)	(8,509,182		)	(1,922,508		)
Cash flows from financing activities:
Dividends paid	(4,907,107		)	(4,907,108		)	(4,437,575		)
Distributions paid to OP unit holders	(4,065,839		)	(4,065,840		)	(3,998,069		)
Purchase of nonaccredited investors’ shares	—			—			(1,452,960		)
Proceeds from issuance of common shares	—			—			154,809
Proceeds from stock offering	1,471,696			—			—
Proceeds from stock offering escrowed	(1,471,974		)	—			—
Proceeds from notes payable	19,013,180			6,353,182			18,742,991
Proceeds from (repayment of) note payable to affiliate	—			(3,278,000		)	3,278,000
Repayments of notes payable	(9,430,029		)	—			(14,639,488		)
Payments of loan origination costs	(42,163		)	(94,500		)	(422,965		)
Net cash provided by (used in) financing activities	567,764			(5,992,266		)	(2,775,257		)
Net increase (decrease) in cash	53,291			(5,513,012		)	5,888,281
Cash and cash equivalents at beginning of year	578,687			6,091,699			203,418
Cash and cash equivalents at end of year	$	631,978		$	578,687		$	6,091,699

See notes to consolidated financial statements.

F-6

Hartman Commercial Properties REIT and Subsidiary

Consolidated Statements of Cash Flows

(Continued)

	Year Ended December 31,
	2004		2003		2002
Supplemental disclosure of cash flow information
Debt assumed in connection with acquisition of properties	$	—	$	6,550,000	$	13,595,156
OP Units issued in connection with acquisition of properties	$	—	$	—	$	28,510,660
Shares issued in connection with acquisition of properties	$	—	$	—	$	10,676,460

See notes to consolidated financial statements.

F-7

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2004

Note 1   -Summary of Significant Accounting Policies

Description of business and nature of operations

Hartman Commercial Properties REIT (“HCP”) was formed as a real estate investment trust, pursuant to the Texas Real Estate Investment Trust Act on August 20, 1998 to consolidate and expand the real estate investment strategy of Allen R. Hartman (“Hartman”) in acquiring and managing office and retail properties.  In July 2004, HCP changed its state of organization from Texas to Maryland pursuant to a merger of HCP directly with and into a Maryland real estate investment trust formed for the sole purpose of the reorganization and the conversion of each outstanding common share of beneficial interest of the Texas entity into 1.42857 common shares of beneficial interest of the Maryland entity (see Note 11).  Hartman, HCP’s Chairman of the Board of Trustees, has been engaged in the ownership, acquisition, and management of commercial properties in the Houston, Texas, metropolitan area for over 20 years.  HCP serves as the general partner of Hartman REIT Operating Partnership, L.P. (the “Operating Partnership” or “HROP” or “OP”), which was formed on December 31, 1998 as a Delaware limited partnership.  HCP and the Operating Partnership are collectively referred to herein as the “Company.”  HCP currently conducts substantially all of its operations and activities through the Operating Partnership.  As the general partner of the Operating Partnership, HCP has the exclusive power to manage and conduct the business of the Operating Partnership, subject to certain customary exceptions.  Hartman Management, L.P. (the “Management Company”), a company wholly-owned by Hartman, provides a full range of real estate services for the Company, including leasing and property management, accounting, asset management and investor relations.  As of December 31, 2004, 2003 and 2002, the Company owned and operated 34, 33 and 32 office and retail properties in and around Houston and San Antonio, Texas.

Basis of consolidation

HCP is the sole general partner of the Operating Partnership and possesses full legal control and authority over the operations of the Operating Partnership.  As of December 31, 2004, HCP owned a majority of the partnership interests in the Operating Partnership.  Consequently, the accompanying consolidated financial statements of HCP include the accounts of the Operating Partnership.  All significant intercompany balances have been eliminated.  Minority interest in the accompanying consolidated financial statements represents the share of equity and earnings of the Operating Partnership allocable to holders of partnership interests other than the Company.  Net income is allocated to minority interests based on the weighted-average percentage ownership of the Operating Partnership during the year.  Issuance of additional common shares of beneficial interest in HCP (“common shares”) and units of limited partnership interest in the Operating Partnership (“OP Units”) changes the ownership interests of both the minority interests and HCP.

Basis of accounting

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

Cash and cash equivalents

The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.  Cash and cash equivalents at December 31, 2004 and 2003 consist of demand deposits at commercial banks and money market funds.

F-8

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2004

Note 1   -Summary of Significant Accounting Policies (Continued)

Due from affiliates

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

Escrows and acquisition deposits

Escrow deposits include escrows established pursuant to certain mortgage financing arrangements for real estate taxes, insurance, maintenance and capital expenditures.  Escrow deposits also include the proceeds of the Public Offering until investors are admitted as shareholders as described in Note 11.  The balance in the Public Offering escrow account was $1,471,974 at December 31, 2004 as follows:

Gross offering proceeds	$	1,474,320
Less discounts	(2,624		)
Net offering proceeds	1,471,696
Plus interest earned	278
Balance in escrow account at December 31, 2004	$	1,471,974

Acquisition deposits include earnest money deposits on future acquisitions.

Real estate

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

Management reviews its properties for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations.  Management determines whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property.  If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value.  Management has determined that there has been no impairment in the carrying value of the Company’s real estate assets as of December 31, 2004.

Deferred costs

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

Offering costs

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

F-9

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2004

Note 1   -Summary of Significant Accounting Policies (Continued)

Revenue recognition

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

Federal income taxes

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

Use of estimates

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

Fair value of financial instruments

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

Concentration of risk

Substantially all of the Company’s revenues are obtained from office, office/warehouse and retail locations in the Houston, Texas and San Antonio, Texas metropolitan areas.

F-10

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2004

Note 1   -Summary of Significant Accounting Policies (Continued)

Concentration of risk (continued)

The Company maintains cash accounts in major U.S. financial institutions.  The terms of these deposits are on demand to minimize risk.  The balances of these accounts occasionally  exceed the federally insured limits, although no losses have been incurred in connection with such cash balances.

Comprehensive income

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

New accounting pronouncements

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

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

F-11

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2004

Note 2   -Real Estate

During 2002, the Company completed a series of transactions to acquire ten commercial real estate properties from affiliated partnerships.  Approximately 883,494 square feet of gross leaseable area (“GLA”) was acquired for the following consideration:

2,851,066 (4,072,947 after giving effect to the Company’s recapitalization in July 2004) HCP shares of beneficial interest and HROP partnership units convertible one for one into HCP shares	$	28,510,660
Assumption of mortgage debt	13,595,156
Cash	1,811,398
Other liabilities assumed, net of other assets acquired	1,458,714
Total	$	45,375,928

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

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

F-12

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2004

Note 2   -Real Estate (Continued)

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

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

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

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

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

F-13

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2004

Note 2   -Real Estate (Continued)

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

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

Effective November 19, 2002, the Company sold one of the properties acquired during 2002 to an unrelated third party.  The sales price of the property of $780,000 equaled its carrying value and initial cost and no gain or loss from disposition was recorded.  The Company purchased the property from a related party two months earlier.  Revenues and operating expenses of the property were minimal and are recorded in the consolidated statements of income for the year ended December 31, 2002.  Consideration from the sale included a note receivable from the purchaser in the amount of $420,000 (see Note 4) and $360,000 in cash.

At December 31, 2004, the Company owned 34 commercial properties in the Houston and San Antonio, Texas areas comprising approximately 2,635,000 square feet of GLA.

Note 3  -Investment in Real Estate Partnership

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

The Company’s equity in income of the partnership of $209,737 for the year ended December 31, 2004 is included in other income on the consolidated statement of income.  The Company’s remaining investment in the partnership of $9,743 as of December 31, 2004 is included in other assets on the consolidated balance sheet.  The partnership owns a one-percent tenant-in-common interest in the building.

Note 4   -Note Receivable

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

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

F-14

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2004

Note 5   -Deferred Costs

Deferred costs consist of the following:

	December 31,
	2004			2003
Leasing commissions	$	4,333,305		$	3,380,549
Deferred financing costs	1,485,381			1,443,218
	5,818,686			4,823,767
Less: accumulated amortization	(3,021,392		)	(1,784,106		)
	$	2,797,294		$	3,039,661

Note 6   -Future Minimum Lease Income

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

A summary of minimum future rentals to be received (exclusive of renewals, tenant reimbursements, and contingent rentals) under noncancelable operating leases in existence at December 31, 2004 is as follows:

Years Ended December 31,
2005	$		17,282,303
2006	14,002,419
2007	11,352,173
2008	7,746,235
2009	5,169,253
Thereafter	9,858,969
	$	65,411,352

Note 7   -Debt

Notes payable

Mortgages and other notes payable consist of the following:

	December 31,
	2004		2003
Mortgages and other notes payable	$	40,526,111	$	40,990,000
Revolving loan secured by properties	16,700,000		6,353,182
Total	$	57,226,111	$		47,343,182

F-15

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2004

Note 7   -Debt (Continued)

In December 2002, the Company refinanced substantially all of its mortgage debt with a  $34,440,000 three-year floating rate mortgage loan collateralized by 18 of the Company’s properties and a maturity date of January 1, 2006.  The loan bears interest at 2.5% over a LIBOR rate (4.79% and 3.82% at December 31, 2004 and 2003, respectively) computed on the basis of a 360-day year and has a two-year extension option.  Interest only payments are due monthly for the first 30 month period after the origination date, after which the loan may be repaid in full or in $100,000 increments, with a final balloon payment due upon maturity.  The Company capitalized loan costs of $1,271,043 financed from the proceeds of the refinancing.  The security documents related to the mortgage loan contain a covenant that requires Hartman REIT Operating Partnership II, L.P., a wholly-owned subsidiary formed for the purpose of this credit facility, to maintain adequate capital in light of its contemplated operations.  This covenant and the other restrictions provided for in the credit facility do not affect Hartman REIT Operating Partnership II, L.P.’s ability to make distributions to the Company.

On June 30, 2003, the Company entered into a $25,000,000 loan agreement with a bank pursuant to which the Company may, subject to the satisfaction of certain conditions, borrow funds to acquire additional income producing properties.  The revolving loan agreement terminates in June 2005 and provides for interest payments at a rate, adjusted monthly, of either (at the Company’s option) 30-day LIBOR plus 225 basis points, or the bank’s prime rate less 50 basis points, with either rate subject to a floor of 3.75% per annum.  The loan will be secured by currently owned, unencumbered properties and by properties acquired with the proceeds drawn from the facility.  As of December 31, 2004, the Company had borrowed $16,700,000 under this credit facility.  The Company is required to make monthly payments of interest only, with the principal and all accrued unpaid interest being due at maturity of the loan.  The loan may be prepaid at any time without penalty.

In connection with the purchase of the Windsor Park property in December 2003, the Company assumed a note payable in the amount of $6,550,000 secured by the property.  The balance at December 31, 2004 was $6,086,111.  The note is payable in equal monthly installments of principal and interest of $80,445, with interest at the rate of 8.34% per annum.  The balance of the note is payable in full on December 1, 2006.

As of December 31, 2004, annual maturities of notes payable, including the revolving loan, are as follows:

Year Ended December 31,
2005	$	17,134,503
2006	40,091,608
	$	57,226,111

F-16

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2004

Note 7   -Debt (Continued)

Note payable to affiliate

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

Supplemental cash flow information

The Company made cash payments for interest on debt of $2,728,985, $1,321,758 and $1,636,904 for the years ended December 31, 2004, 2003 and 2002, respectively.

Note 8   -Earnings Per Share

Basic earnings per share is computed using net income to common shareholders and the weighted average number of common shares outstanding.  Diluted earnings per share reflects common shares issuable from the assumed conversion of OP Units convertible into common shares.  Only those items that have a dilutive impact on basic earnings per share are included in the diluted earnings per share.  Accordingly, because conversion of OP Units into common shares is antidilutive, no OP Units were included in the diluted earnings per share calculations.

	Year Ended December 31,
	2004			2003		2002
Basic and diluted earnings per share Weighted average common shares outstanding	7,010,146			7,010,146		7,007,167
Basic and diluted earnings per share	$		0.488	$	0.496	$		0.529
Net income	$	3,423,619		$	3,474,174	$	3,705,118

Note 9   -Federal Income Taxes

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

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

F-17

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2004

Note 9   -Federal Income Taxes (Continued)

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

	2004		2003		2002
Ordinary income (unaudited)	67.7	%	24.8	%	85.1	%
Return of capital (unaudited)	32.3	%	75.2	%	14.9	%
Capital gain distributions (unaudited)	0	%	0	%	0	%
Total	100	%	100	%	100	%

Note 10   -Related-Party Transactions

In January 1999, the Company entered into a property management agreement with the Management Company.  Effective September 1, 2004, this agreement was amended and restated.    Prior to September 1, 2004, in consideration for supervising the management and performing various day-to-day affairs, the Company paid the Management Company a management fee of 5% and a partnership management fee of 1% based on Effective Gross Revenues from the properties, as defined.  After September 1, 2004, the Company pays the Management Company management fees in an amount not to exceed the fees customarily charged in arm’s length transactions by others rendering similar services in the same geographic area, as determined by a survey of brokers and agents in such area.  The Company expects these fees to be between approximately 2% and 4% of Gross Revenues, as such term is defined in the amended and restated property management agreement, for the management of commercial office buildings and approximately 5% of Gross Revenues for the management of retail and industrial properties.  Effective September 1, 2004, the Company entered into an advisory agreement with the Management Company which provides that the Company pay the Management Company a fee of one-fourth of .25% of Gross Asset Value, as such term is defined in the advisory agreement, per quarter for asset management services.  The Company incurred total management, partnership and asset management fees of $1,339,822, $1,232,127 and $1,231,212 for the years ended December 31, 2004, 2003 and 2002, respectively, of which $54,331 and $93,006 were payable at December 31, 2004 and 2003, respectively.

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

Under the provisions of the property management agreements, costs incurred by the Management Company for the management and maintenance of the properties are reimbursable to the Management Company.  At December 31, 2004 and 2003, $188,772 and $288,305, respectively, was payable to the Management Company related to these reimbursable costs.

In  consideration  of  leasing  the  properties,  the  Company also  pays the Management Company leasing  commissions  of  6%  for  leases  originated  by  the  Management  Company  and  4%  for  expansions  and  renewals  of  existing  leases  based  on  Effective Gross Revenues  from the

F-18

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2004

Note 10   -Related-Party Transactions (Continued)

properties.  The Company incurred total leasing commissions to the Management Company of $952,756, $978,398 and $890,852 for the years ended December 31, 2004, 2003 and 2002, respectively, of which $232,343 and $175,725 were payable at December 31, 2004 and 2003, respectively.

The fees payable to the Management Company under the new agreements effective September 1, 2004 were not significantly different from those that would have been payable under the previous agreement.

In connection with the Public Offering described in Note 11, the Company reimburses the Management Company up to 2.5% of the gross selling price of all common shares sold for organization and offering expenses (excluding selling commissions and a dealer manager fee) incurred by the Management Company on behalf of the Company.  No such reimbursable expenses were incurred for the year ended December 31, 2004 because the Company had not received the minimum subscription proceeds required to break escrow.

Also in connection with the Public Offering described in Note 11, the Management Company also receives an acquisition fee equal to 2% of the gross selling price of all common shares sold for services in connection with the selection, purchase, development or construction of properties for the Company.  No such fees were incurred for the year ended December 31, 2004 because the Company had not received the minimum subscription proceeds required to break escrow.

In connection with the Private Offering as described in Note 11, the Company paid the Management Company a fee of up to 2% of the gross selling price of all common shares sold in consideration of offering services performed by the Management Company.  The Company incurred total fees of $3,259 for the year ended December 31, 2002.  Such fees have been treated as offering costs and netted against the proceeds from the sale of common shares.

Also in connection with the Private Offering as described in Note 11, the Management Company received an acquisition fee equal to 4% of the gross selling price of all common shares sold as a reimbursement of expenses incurred in identifying reviewing, and acquiring properties for the Company.  The Company incurred total fees of $6,766 for the year ended December 31, 2002.  Such fees have been treated as offering costs and netted against the proceeds from the sale of common shares.

The Management Company paid the Company $106,824, $106,789 and $79,168 for office space in 2004, 2003 and 2002, respectively.  Such amounts are included in rental income in the consolidated statements of income.

In conjunction with the acquisition of certain properties, the Company assumed liabilities payable to the Management Company.  At December 31, 2004 and 2003, $200,415 was payable to the Management Company related to these liabilities.

HCP’s day-to-day operations are strategically directed by the Board of Trustees and implemented through the Management Company.  Hartman is HCP’s Board Chairman and sole owner of the Management Company.   Hartman was owed $47,386 and $41,306 in dividends payable on his common shares at December 31, 2004 and 2003, respectively.  Hartman owned 3.9%, 3.4% and 3.4% of the issued and outstanding common shares of the Company as of December 31, 2004, 2003 and 2002, respectively.

The Company was a party to various other transactions with related parties which are reflected in due to/from affiliates in the accompanying consolidated balance sheets and also disclosed in Notes 2, 7 and 11.

F-19

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2004

Note 11  -Shareholders’ Equity

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

Prior to June 2004, the Charter and Bylaws of HCP authorized HCP to issue up to 100,000,000 common shares at $0.001 par value per share, and 10,000,000 Preferred Shares at $0.001 par value per share.  HCP commenced a private offering (the “Private Offering”) in May 1999 to sell 2,500,000 common shares, par value $.001 per share, at a price of $10 per common share for a total Private Offering of $25,000,000.  HCP intended that the Private Offering be exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Regulation D promulgated thereunder.  The common shares are “restricted securities” and are not transferable unless they subsequently are registered under the 1933 Act and applicable state securities laws or an exemption from such registration is available.  The Private Offering was directed solely to “accredited investors” as such term is defined in Regulation D.  Pursuant to the Private Offering, HCP sold  for cash or issued in exchange for property or OP Units, 4,907,107 (7,010,146 after the reorganization) shares as of December 31, 2004, 2003 and 2002.  HCP conducts substantially all of its operations through the Operating Partnership.  All net proceeds of the Private Offering were contributed by HCP to the Operating Partnership in exchange for OP Units.  The Operating Partnership used the proceeds to acquire additional commercial properties and for general working capital purposes.  HCP received one OP Unit for each $10 contributed to the Operating Partnership.  OP Units were valued at $10 per unit because they are convertible on a one-for-one basis to common shares which were being sold in the Private Offering for $10 per common share.

On September 15, 2004, HCP’s Registration Statement on Form S-11, with respect to a public offering (the “Public Offering”) of up to 10,000,000 common shares of beneficial interest to be offered at a price of $10 per share was declared effective under the Securities Act of 1933.  The Registration Statement also covers up to 1,000,000 shares available pursuant to HCP’s dividend reinvestment plan to be offered at a price of $9.50 per share.  The shares are offered to investors on a best efforts basis.

As of December 31, 2004, no shares had been issued pursuant to the Public Offering.  HCP will not admit new shareholders pursuant to the Public Offering or receive proceeds from the Public Offering until it receives and accepts subscriptions for a minimum of 200,000 shares for gross offering proceeds of $2,000,000.  As of December 31, 2004, HCP had received and accepted subscriptions for 147,432 shares for gross offering proceeds of $1,474,320.  After the initial 200,000 shares are sold, subscription proceeds will be held in escrow until investors are admitted as shareholders.  HCP intends to admit new stockholders at least monthly.  At that time, subscription proceeds may be released to HCP from escrow and applied to the making of investments and the payment or reimbursement of the dealer manager fee, selling commissions and other organization and offering expenses.  Until required for such purposes, net offering proceeds will be held in short-term, liquid investments.

As of February 11, 2005, 277,775 shares had been issued pursuant to the Public Offering with gross offering proceeds received of $2,777,750.

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

F-20

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2004

Note 11  -Shareholders’ Equity (Continued)

Operating Partnership units

Limited partners in the Operating Partnership holding OP Units have the right to convert their OP Units into common shares at a ratio of one OP Unit for one common share.  In connection with the reorganization discussed above, OP Unit holders received 1.42857 OP Units for each OP Unit previously held.  Subject to certain restrictions, OP Units are not convertible into common shares until the later of one year after acquisition or an initial public offering of the common shares.  As of December 31, 2004 and 2003, after giving effect to the recapitalization, there were 12,456,995 OP Units outstanding.  HCP owned 6,648,658 Units as of December 31, 2004 and 2003.  HCP’s weighted-average share ownership in the Operating Partnership was approximately 53.37%, 53.37% and 53.71% during the years ended December 31, 2004, 2003 and 2002, respectively.  At December 31, 2004, Hartman and the Board of Trustees collectively owned 9.50% of the Operating Partnership’s outstanding units.

During 2002, the Company acquired ten properties from various Hartman operated limited partnerships in exchange for 2,851,066 (4,072,947 after giving effect to the recapitalization) OP Units valued at $10 per unit at the time of the acquisition (see Note 2).

Dividends and distributions

The following tables summarize the cash dividends/distributions payable to holders of common shares and holders of OP Units (after giving effect to the recapitalization) related to the years ended December 31, 2004, 2003 and 2002.

HCP Shareholders
Dividend/Distribution per Common Share		Date Dividend Payable	Total Amount Payable
$	0.1575	5/15/02	$	1,102,340
0.16625		8/15/02	1,166,709
0.1750		11/15/02	1,226,777
0.1750		2/15/03	1,226,777
0.0583		4/15/03	408,762
0.0583		5/15/03	408,762
0.0584		6/15/03	409,253
0.0583		7/15/03	408,762
0.0583		8/15/03	408,762
0.0584		9/15/03	409,253
0.0583		10/15/03	408,762
0.0583		11/15/03	408,762
0.0584		12/15/03	409,253
0.0583		1/15/04	408,762
0.0583		2/15/04	408,762
0.0584		3/15/04	409,253
0.0583		4/15/04	408,762
0.0583		5/15/04	408,762
0.0584		6/15/04	409,253
0.0583		7/15/04	408,762
0.0583		8/15/04	408,762
0.0584		9/15/04	409,253
0.0583		10/15/04	408,692
0.0583		11/15/04	408,692
0.0584		12/15/04	409,392
0.0583		1/15/05	408,692
0.0583		2/15/05	408,692
0.0589		3/15/05	412,897

F-21

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2004

Note 11  -Shareholders’ Equity (Continued)

Dividends and distributions (continued)

OP Unit Holders Including Minority Unit Holders
Dividend/Distribution per OP Unit		Date Dividend Payable	Total Amount Payable
$	0.1575	5/15/02	$	1,942,412
0.16625		8/15/02	2,053,866
0.1750		11/15/02	2,161,143
0.1750		2/15/03	2,179,976
0.0583		4/15/03	726,368
0.0583		5/15/03	726,368
0.0584		6/15/03	727,240
0.0583		7/15/03	726,368
0.0583		8/15/03	726,368
0.0584		9/15/03	727,240
0.0583		10/15/03	726,368
0.0583		11/15/03	726,368
0.0584		12/15/03	727,240
0.0583		1/15/04	726,368
0.0583		2/15/04	726,368
0.0584		3/15/04	727,240
0.0583		4/15/04	726,368
0.0583		5/15/04	726,368
0.0584		6/15/04	727,240
0.0583		7/15/04	726,368
0.0583		8/15/04	726,368
0.0584		9/15/04	727,240
0.0583		10/15/04	726,243
0.0583		11/15/04	726,243
0.0584		12/15/04	727,488
0.0583		1/15/05	726,243
0.0583		2/15/05	726,243
0.0589		3/15/05	733,717

Note 12  -Incentive Share Plan

The Company has adopted an Employee and Trust Manager Incentive Share Plan (the “Incentive Share Plan”) to (i) furnish incentives to individuals chosen to receive share-based awards because they are considered capable of improving operations and increasing profits; (ii) encourage selected persons to accept or continue employment with the Company; and (iii) increase the interest of employees and Trustees in the Company’s welfare through their participation and influence on the growth in value of the common shares.  The class of eligible persons that can receive grants of incentive awards under the Incentive Share Plan consists of key employees, directors, non-employee trustees, members of the Management Company and consultants as determined by the compensation committee of the Board of Trustees.  The total number of common shares that may be issued under the Incentive Share Plan is an amount of shares equal to 5% of the outstanding shares on a fully diluted basis.  As of December 31, 2004, no options or awards to purchase common shares have been granted under the Incentive Share Plan.

F-22

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2004

Note 12  -Incentive Share Plan (Continued)

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

Note 13  -Commitments and Contingencies

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

Note 14  -Segment Information

The operating segments presented are the segments of the Company for which separate financial information is available, and operating performance is evaluated regularly by senior management in deciding how to allocate resources and in assessing performance.  The Company evaluated the performance of its operating segments based on net operating income that is defined as total revenues less operating expenses and ad valorem taxes.  Management does not consider gains or losses from the sale of property in evaluating ongoing operating performance.

The retail segment is engaged in the acquisition, development and management of real estate, primarily anchored neighborhood and community shopping centers located in the Houston and San Antonio, Texas metropolitan areas.  The customer base includes supermarkets and other retailers who generally sell basic necessity-type commodities.  The office/warehouse segment is engaged in the acquisition, development and management of office and warehouse centers located in the Houston, Texas metropolitan area and has a diverse customer base.  The office segment is engaged in the acquisition, development and management of commercial office space.  Included in “Other” are corporate related items, insignificant operations and costs that are not allocated to the reportable segments.

F-23

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2004

Note 14  -Segment Information (Continued)

Information concerning the Company’s reportable segments for the years ended December 31 is as follows:

	Retail				Office/ Warehouse			Office			Other				Total
2004
Revenues	$		12,767,273		$	8,678,627		$		1,660,401	$	377,356			$	23,483,657
Segment operating income	8,736,254				5,476,672			877,505			350,215				15,440,646
Total assets	74,979,000				49,389,486			7,154,937			11,093,517				142,616,940
Capital expenditures	9,653,652				589,791			33,553			—				10,276,996
2003
Revenues	$			10,747,435	$	8,399,522		$	1,552,976		$			273,018	$	20,972,951
Segment operating income	7,082,260				5,508,082			835,171			230,297				13,655,810
Total assets	66,467,920				50,107,322			7,329,468			10,161,681				134,066,391
Capital expenditures	14,065,370				598,583			27,545			—				14,691,498
2002
Revenues	$	10,851,942			$		8,282,170	$		1,558,335	$		62,579		$		20,755,026
Segment operating income	7,200,296				5,361,944			759,761			22,528				13,344,529
Total assets	54,300,713				50,685,602			7,628,230			14,349,231				126,963,776
Capital expenditures	17,005,552				29,411,594			158,046			—				46,575,192

Net operating income reconciles to net income shown on the consolidated statements of income for the years ended December 31 as follows:

	2004				2003				2002
Total segment operating income	$		15,440,646		$	13,655,810			$	13,344,529
Less:
Depreciation and amortization	5,223,422				4,758,047				4,041,861
Interest	2,664,135				1,323,378				1,573,270
General and administrative	1,139,060				1,065,416				831,675
Income before minority interests	6,414,029				6,508,969				6,897,723
Minority interests in Operating Partnership	(2,990,410			)	(3,034,795			)	(3,192,605			)
Net income	$	3,423,619			$		3,474,174		$		3,705,118

F-24

Hartman Commercial Properties REIT and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2004

Note 15  -Pro Forma Financial Information (Unaudited)

During December 2003 the Company acquired a retail center for approximately $13,100,000.  The pro forma financial information for the years ended December 31, 2003 and 2002 is based on the historical statements of the Company after giving effect to the acquisition as if such acquisition took place on January 1, 2002.

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

	Year Ended December 31,
	2003		2002
Pro forma revenues	$	23,082,293	$	22,716,091
Pro forma net income available to common shareholders	$	3,694,840	$	3,810,058
Pro forma basic and diluted earnings per common share	$	0.527	$	0.544

Note 16  -Selected Quarterly Financial Data (Unaudited)

The following is a summary of the unaudited quarterly financial information for the years ended December 31, 2004 and 2003:

	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
2004
Revenues	$	5,486,426		$	6,095,742		$	5,922,856		$	5,978,633
Income before minority interests	1,384,807			1,792,127			1,493,760			1,743,335
Minority interest in income	(645,689		)	(835,606		)	(696,464		)	(812,651		)
Net income	739,118			956,521			797,296			930,684
Basic and diluted earnings per share	$	0.105		$	0.136		$	0.114		$	0.133
2003
Revenues	$	5,537,139		$	5,485,617		$	5,034,083		$	4,916,112
Income before minority interests	1,704,364			1,967,161			1,447,357			1,390,087
Minority interest in income	(794,662		)	(917,156		)	(676,661		)	(646,316		)
Net income	909,702			1,050,005			770,696			743,771
Basic and diluted earnings per share	$	0.130		$	0.150		$	0.110		$	0.106

F-25

Hartman Commercial Properties REIT and Subsidiary

Schedule II - Valuation and Qualifying Accounts

Description	Balance at Beginning of Period		Additions Charged (Recoveries Credited) to Expense			Deductions			Additions Related to Acquired Assets		Balance at End of Period
Allowance for doubtful accounts:
Year ended December 31, 2004	$	350,750	$	(8,060	)	$	—		$	—	$	342,690
Year ended December 31, 2003	391,500		213,250			(254,000		)	—		350,750
Year ended December 31, 2002	225,800		74,200			—			91,500		391,500

F-26

Hartman Commercial Properties REIT and Subsidiary

Schedule III - Real Estate and Accumulated Depreciation

December 31, 2004

		Initial Cost				Costs Capitalized Subsequent to Acquisition				Gross Amount at which Carried at End of Period (1) (2)
Name	Description	Land		Building and Improvements		Improvements		Carrying Costs		Land		Building and Improvements		Total
Holly Knight	Retail	$	319,981	$	1,292,820	$	30,128	—		$	319,981	$	1,322,948	$	1,642,929
Kempwood Plaza	Retail	733,443		1,798,433		785,159		—		733,443		2,583,592		3,317,035
Bissonnet Beltway	Retail	414,515		1,946,808		155,025		—		414,515		2,101,833		2,516,348
Interstate 10	Office/warehouse	207,903		3,700,169		233,368		—		207,903		3,933,537		4,141,440
West Belt Plaza	Office/warehouse	567,805		2,165,204		271,015		—		567,805		2,436,219		3,004,024
Greens Road	Retail	353,604		1,283,613		81,921		—		353,604		1,365,534		1,719,138
Town Park	Retail	849,529		2,911,206		153,305		—		849,529		3,064,511		3,914,040
Webster Point	Retail	720,336		1,150,029		74,089		—		720,336		1,224,118		1,944,454
Centre South	Retail	481,201		1,595,997		386,964		—		481,201		1,982,961		2,464,162
Torrey Square	Retail	1,981,406		2,970,911		329,447		—		1,981,406		3,300,358		5,281,764
Dairy Ashford	Office/warehouse	225,544		1,211,476		90,855		—		225,544		1,302,331		1,527,875
Main Park	Office/warehouse	1,327,762		2,721,075		458,107		—		1,327,762		3,179,182		4,506,944
Northeast Square	Retail	564,927		2,007,585		215,914		—		564,927		2,223,499		2,788,426
Plaza Park	Office/warehouse	901,602		3,293,514		215,065		—		901,602		3,508,579		4,410,181
Northwest Place	Office/warehouse	110,790		978,554		21,970		—		110,790		1,000,524		1,111,314
Lion Square	Retail	1,546,010		4,289,098		262,337		—		1,546,010		4,551,435		6,097,445
Zeta Building	Office	637,180		1,819,409		102,983		—		637,180		1,922,392		2,559,572
Royal Crest	Office	508,850		1,355,215		123,532		—		508,850		1,478,747		1,987,597
Featherwood	Office	368,283		2,591,026		419,156		—		368,283		3,010,182		3,378,465
South Richey	Retail	777,720		2,584,167		218,447		—		777,720		2,802,614		3,580,334
Corporate Park Woodland	Office/warehouse	651,549		5,376,813		492,876		—		651,549		5,869,689		6,521,238
South Shaver	Retail	184,368		632,635		190,061		—		184,368		822,696		1,007,064
Providence	Retail	917,936		3,674,732		226,222		—		917,936		3,900,954		4,818,890
Corporate Park Northwest	Office/warehouse	1,533,940		6,305,599		340,628		—		1,533,940		6,646,227		8,180,167
Bellnot Square	Retail	1,154,239		4,638,055		40,028		—		1,154,239		4,678,083		5,832,322
Corporate Park West	Office/warehouse	2,555,289		10,507,691		228,453		—		2,555,289		10,736,144		13,291,433
Westgate	Office/warehouse	672,303		2,775,879		98,920		—		672,303		2,874,799		3,547,102
Garden Oaks	Retail	1,285,027		5,292,755		173,459		—		1,285,027		5,466,214		6,751,241
Westchase	Retail	422,745		1,750,555		199,784		—		422,745		1,950,339		2,373,084
Sunridge	Retail	275,534		1,186,037		33,821		—		275,534		1,219,858		1,495,392
Holly Hall	Office/warehouse	607,519		2,515,881		18,403		—		607,519		2,534,284		3,141,803
Brookhill	Office/warehouse	185,659		787,605		162,279		—		185,659		949,884		1,135,543
Windsor Park	Retail	2,620,500		10,482,000		—		—		2,620,500		10,482,000		13,102,500
Stafford Plaza	Retail	1,781,211		7,124,846		307		—		1,781,211		7,125,153		8,906,364
TOTAL		$	28,446,210	$	106,717,392	$	6,834,028	$	—	$	28,446,210	$	113,551,420	$	141,997,630

F-27

Hartman Commercial Properties REIT and Subsidiary

Schedule III - Real Estate and Accumulated Depreciation

December 31, 2004

(Continued)

Name	Description	Accumulated Depreciation		Date of Construction	Date Acquired	Depreciation Life
Holly Knight	Retail	$	261,758		8/1/00	5-39 years
Kempwood Plaza	Retail	603,144			2/2/99	5-39 years
Bissonnet Beltway	Retail	495,378			1/1/99	5-39 years
Interstate 10	Office/warehouse	962,309			1/1/99	5-39 years
West Belt Plaza	Office/warehouse	618,554			1/1/99	5-39 years
Greens Road	Retail	303,295			1/1/99	5-39 years
Town Park	Retail	682,895			1/1/99	5-39 years
Webster Point	Retail	226,933			1/1/00	5-39 years
Centre South	Retail	402,012			1/1/00	5-39 years
Torrey Square	Retail	528,529			1/1/00	5-39 years
Dairy Ashford	Office/warehouse	281,205			1/1/99	5-39 years
Main Park	Office/warehouse	741,772			1/1/99	5-39 years
Northeast Square	Retail	436,357			1/1/99	5-39 years
Plaza Park	Office/warehouse	615,354			1/1/00	5-39 years
Northwest Place	Office/warehouse	160,715			1/1/00	5-39 years
Lion Square	Retail	743,685			1/1/00	5-39 years
Zeta Building	Office	322,640			1/1/00	5-39 years
Royal Crest	Office	277,864			1/1/00	5-39 years
Featherwood	Office	636,749			1/1/00	5-39 years
South Richey	Retail	477,805			8/25/99	5-39 years
Corporate Park Woodland	Office/warehouse	949,616		11/1/00		5-39 years
South Shaver	Retail	182,023			12/17/99	5-39 years
Providence	Retail	411,027			3/30/01	5-39 years
Corporate Park Northwest	Office/warehouse	701,674			1/1/02	5-39 years
Bellnot Square	Retail	387,220			1/1/02	5-39 years
Corporate Park West	Office/warehouse	1,082,611			1/1/02	5-39 years
Westgate	Office/warehouse	292,184			1/1/02	5-39 years
Garden Oaks	Retail	546,487			1/1/02	5-39 years
Westchase	Retail	238,720			1/1/02	5-39 years
Sunridge	Retail	161,507			1/1/02	5-39 years
Holly Hall	Office/warehouse	244,786			1/1/02	5-39 years
Brookhill	Office/warehouse	156,326			1/1/02	5-39 years
Windsor Park	Retail	256,247			12/16/03	5-39 years
Stafford Plaza	Retail	61,035			9/8/04	5-39 years
TOTAL		$	15,450,416

(1)   Reconciliations of total real estate carrying value for the three years ended December 31, 2004 follows:

	2004		2003		2002
Balance at beginning of period	$	131,720,634	$	117,029,136	$	70,453,944
Additions during the period
Acquisitions	8,906,057		13,102,500		45,372,684
Improvements	1,370,939		1,588,998		1,982,508
	10,276,996		14,691,498		47,355,192
Deductions – cost of real estate sold	—		—		780,000
Balance at close of period	$	141,997,630	$	131,720,634	$	117,029,136

(2)   The aggregate cost of real estate for federal income tax purposes is $111,474,559.

F-28

Hartman Commercial Properties REIT and Subsidiary

Index to Exhibits

Exhibit No.	Description
3.1**	Declaration of Trust of Hartman Commercial Properties REIT, a Maryland real estate investment trust (previously filed in and incorporated by reference to the Registrant’s Registration Statement on Form S-11/A, Commission File No. 333-111674, filed on May 24, 2004)
3.2**	Articles of Amendment and Restatement of Declaration of Trust of Hartman Commercial Properties REIT (previously filed in and incorporated by reference to the Registrant’s Registration Statement on Form S-11/A, Commission File No. 333-111674, filed on July 29, 2004)
3.3**	Bylaws (previously filed in and incorporated by reference to the Registrant’s Registration Statement on Form S-11, Commission File No. 333-111674, filed on December 31, 2003)
4.1**	Specimen certificate for common shares of beneficial interest, par value $.001 (previously filed in and incorporated by reference to the Registrant’s Registration Statement on Form S-11, Commission File No. 333-111674, filed on December 31, 2003)
4.2**	Declaration of Trust of Hartman Commercial Properties REIT and Articles of Amendment and Restatement of Declaration of Trust, filed as Exhibit Nos. 3.1 and 3.2 and incorporated herein by reference.
4.3**	Bylaws, filed as Exhibit No. 3.3 and incorporated herein by reference.
10.1**	Agreement of Limited Partnership of Hartman REIT Operating Partnership, L.P. (previously filed in and incorporated by reference to the Registrant’s General Form for Registration of Securities on Form 10, Commission File No. 000-50256, filed on April 30, 2003)
10.2*	Amended and Restated Property Management Agreement
10.3*	Advisory Agreement
10.4**	Certificate of Formation of Hartman REIT Operating Partnership II GP, LLC (previously filed in and incorporated by reference to the Registrant’s General Form for Registration of Securities on Form 10, Commission File No. 000-50256, filed on April 30, 2003)
10.5**	Limited Liability Company Agreement of Hartman REIT Operating Partnership II GP, LLC (previously filed in and incorporated by reference to the Registrant’s General Form for Registration of Securities on Form 10, Commission File No. 000-50256, filed on April 30, 2003)
10.6**	Agreement of Limited Partnership of Hartman REIT Operating Partnership II, L.P. (previously filed in and incorporated by reference to the Registrant’s General Form for Registration of Securities on Form 10, Commission File No. 000-50256, filed on April 30, 2003)
10.7**	Promissory Note, dated December 20, 2002, between Hartman REIT Operating Partnership II, L.P. and GMAC Commercial Mortgage Corporation (previously filed in and incorporated by reference to the Registrant’s General Form for Registration of Securities on Form 10, Commission File No. 000-50256, filed on April 30, 2003)

10.8**	Deed of Trust and Security Agreement, dated December 20, 2002, between Hartman REIT Operating Partnership II, L.P. and GMAC Commercial Mortgage Corporation (previously filed in and incorporated by reference to the Registrant’s General Form for Registration of Securities on Form 10, Commission File No. 000-50256, filed on April 30, 2003)
10.9**	Loan Agreement between Hartman REIT Operating Partnership, L.P. and Union Planter’s Bank, N.A. (previously filed in and incorporated by reference to Amendment No. 2 to the Registrant’s General Form for Registration of Securities on Form 10, Commission File No. 000-50256, filed on August 6, 2003)
10.10**+	Employee and Trust Manager Incentive Plan (previously filed in and incorporated by reference to the Registrant’s General Form for Registration of Securities on Form 10, Commission File No. 000-50256, filed on April 30, 2003)
10.11*+	Summary Description of Hartman Commercial Properties REIT Trustee Compensation Arrangements
10.12**	Form of Agreement and Plan of Merger and Reorganization (previously filed in and incorporated by reference to the Registrant’s Proxy Statement, Commission File No. 000-50256, filed on April 29, 2004)
10.13*	Dealer Manager Agreement
10.14*	Escrow Agreement
21.1*	List of subsidiaries of Hartman Commercial Properties REIT
23.1*	Consent of Pannell Kerr Forster of Texas, P.C.
31.1*	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certificate of Chief Executive and Financial Officers

*   Filed herewith.

** Previously filed.

+   Denotes management contract or compensatory plan or arrangement.

EX-10.2

EXHIBIT 10.2

AMENDED AND RESTATED PROPERTY MANAGEMENT AGREEMENT

This AMENDED AND RESTATED PROPERTY MANAGEMENT AGREEMENT (this “Management Agreement”) is made and entered into as of the 1 day of Sept., 2004, by and among HARTMAN COMMERCIAL PROPERTIES REIT, a Maryland real estate investment trust (“Hartman REIT”), HARTMAN REIT OPERATING PARTNERSHIP, L.P., a Delaware limited partnership (sometimes referred to herein as “Hartman OP” or “Owner”), and HARTMAN MANAGEMENT, L.P., Texas limited partnership (the “Manager”).

WHEREAS, Hartman OP was organized to acquire, own, operate, lease and manage real estate properties on behalf of Hartman REIT; and

WHEREAS, Hartman OP and Manager previously entered into that certain Property and Partnership Management Agreement dated as of January 28, 1999 (the “Original Management Agreement”); and

WHEREAS, Hartman REIT intends to raise money from the sale of its common shares of beneficial interest to be used, net of payment of certain offering costs and expenses, for investment in the acquisition or construction of income-producing real estate and other real estate-related investments (including the making or purchase of mortgage loans), some or all of which are to be acquired and held by Owner (as hereinafter defined) on behalf of Hartman REIT; and

WHEREAS, Owner intends to continue to retain Manager to manage and coordinate the leasing of certain of the real estate properties acquired by Owner under the terms and conditions set forth in this Management Agreement; and

WHEREAS, the parties desire to amend and restate the Original Management Agreement in its entirety in accordance with the terms and provisions hereof;

NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, do hereby agree, as follows:

ARTICLE I

DEFINITIONS

Except as otherwise specified or as the context may otherwise require, the following terms have the respective meanings set forth below for all purposes of this Management Agreement, and the definitions of such terms are equally applicable both to the singular and plural forms thereof:

1.1“Affiliate” means, with respect to any Person, (i) any Person directly or indirectly owning, controlling or holding, with the power to vote, 10% or more of the outstanding voting securities of such other Person; (ii) any Person 10% or more of whose outstanding voting securities are directly or indirectly owned, controlled or held, with the power to vote, by such other Person; (iii) any Person directly or indirectly controlling, controlled by or under common control with such other Person; (iv) any executive officer, director, trustee, trust manager, or general partner of such other Person; and (v) any legal entity for which such Person acts as an executive officer, director, trustee, trust manager, or general partner.

1.2“Gross Revenues” means all amounts actually collected as rents or other charges for the use and occupancy of the Properties, but shall exclude interest and other investment income of Owner and proceeds received by Owner for a sale, exchange, condemnation, eminent domain taking, casualty or other disposition of assets of Owner.

1.3“Improvements” means buildings, structures, equipment from time to time located on the Properties and all parking and common areas located on the Properties.

1.4“Intellectual Property Rights” means all rights, titles and interests, whether foreign or domestic, in and to any and all trade secrets, confidential information rights, patents, invention rights, copyrights, service marks, trademarks, know-how, or similar intellectual property rights and all applications and rights to apply for such rights, as well as any and all moral rights, rights of privacy, publicity and similar rights and license rights of any type under the laws or regulations of any governmental, regulatory, or judicial authority, foreign or domestic and all renewals and extensions thereof.

1.5“Lease” means, unless the context otherwise requires, any lease or sublease made by Owner as landlord or by its predecessor.

1.6“Management Fees” has the meaning set forth in Section 5.1 hereof.

1.7“Owner” means Hartman REIT, Hartman OP and any joint venture, limited liability company or other Affiliate of Hartman REIT or Hartman OP that owns, in whole or in part, on behalf of Hartman REIT, any Properties.

1.8“Person” means an individual, corporation, association, business trust, estate, trust, partnership, limited liability company or other legal entity.

1.9“Properties” means all real estate properties owned by Owner and all tracts as yet unspecified but to be acquired by Owner containing income-producing improvements or on which Owner will construct income-producing improvements.

1.10“Proprietary Property” means all modeling algorithms, tools, computer programs, know-how, methodologies, processes, technologies, ideas, concepts, skills, routines, subroutines, operating instructions and other materials and aides used in performing the duties set forth in Article 2 that relate to management advice, services and techniques regarding current and potential Properties, and all modifications, enhancements and derivative works of the foregoing.

ARTICLE II

APPOINTMENT OF MANAGER; SERVICES TO BE PERFORMED

2.1Appointment of Manager.  Owner hereby engages and retains Manager as the manager and as tenant coordinating agent of the Properties, and Manager hereby accepts such appointment on the terms and conditions hereinafter set forth; it being understood that this Management Agreement shall cause Manager to be, at law, Owner’s agent upon the terms contained herein.

2.2General Duties.  Manager shall devote its best efforts to performing its duties hereunder to manage, operate, maintain and lease the Properties in a diligent, careful and vigilant manner.  The services of Manager are to be of scope and quality not less than those generally performed by professional property managers of other similar properties in the area.  Manager shall make available to Owner the full

benefit of the judgment, experience and advice of the members of Manager’s organization and staff with respect to the policies to be pursued by Owner relating to the operation and leasing of the Properties.

2.3Specific Duties.  Manager’s duties include the following:

(a)Lease Obligations.  Manager shall perform all duties of the landlord under all Leases insofar as such duties relate to operation, maintenance, and day-to-day management.  Manager shall also provide or cause to be provided, at Owner’s expense, all services normally provided to tenants of like premises, including where applicable and without limitation, gas, electricity or other utilities required to be furnished to tenants under Leases, normal repairs and maintenance, and cleaning, and janitorial service.  Manager shall arrange for and supervise the performance of all installations and improvements in space leased to any tenant that are either expressly required under the terms of the lease of such space or that are customarily provided to tenants.

(b)Maintenance.  Manager shall cause the Properties to be maintained in the same manner as similar properties in the area.  Manager’s duties and supervision in this respect shall include, without limitation, cleaning of the interior and the exterior of the Improvements and the public common areas on the Properties and the making and supervision of repair, alterations, and decoration of the Improvements, subject to and in strict compliance with this Management Agreement and the Leases.  Construction activities undertaken by Manager, if any, will be limited to activities related to the management, operation, maintenance, and leasing of the Property (e.g., repairs, renovations, and leasehold improvements).

(c)Leasing Functions.  Manager shall coordinate the leasing of the Properties and shall negotiate and use its best efforts to secure executed Leases from qualified tenants, and to execute same on behalf of Owner, if requested, for available space in the Properties, such Leases to be in form and on terms approved by Owner and Manager, and to bring about complete leasing of the Properties.  Manager shall be responsible for the hiring of all leasing agents, as necessary for the leasing of the Properties, and to otherwise oversee and manage the leasing process on behalf of Owner.

(d)Notice of Violations.  Manager shall forward to Owner promptly upon receipt all notices of violation or other notices from any governmental authority, and board of fire underwriters or any insurance company, and shall make such recommendations regarding compliance with such notice as shall be appropriate.

(e)Personnel.  Any personnel hired by Manager to maintain, operate and lease the Property shall be the employees or independent contractors of Manager and not of Owner of such Property, Hartman OP or Hartman REIT.  Manager shall use due care in the selection and supervision of such employees or independent contractors.  Manager shall be responsible for the preparation of and shall timely file all payroll tax reports and timely make payments of all withholding and other payroll taxes with respect to each employee.

(f)Utilities and Supplies.  Manager shall enter into or renew contracts for electricity, gas, steam, landscaping, fuel, oil, maintenance and other services as are customarily furnished or rendered in connection with the operation of similar rental property in the area.

(g)Expenses.  Manager shall analyze all bills received for services, work and supplies in connection with maintaining and operating the Properties, pay all such bills when due, and, if requested by Owner, pay, when due, utility and water charges, sewer rent and assessments,

and any other amount payable in respect to the Properties.  All bills shall be paid by Manager within the time required to obtain discounts, if any. Owner may from time to time request that Manager forward certain bills to Owner promptly after receipt, and Manager shall comply with any such request.  Manager shall pay all bills, assessments, real property taxes, insurance premiums and any other amount payable in respect to the Properties out of the Account (as hereinafter defined).  All expenses shall be billed at net cost (i.e., less all rebates, commissions, discounts and allowances, however designed).

(h)Monies Collected.  Manager shall timely collect all rent and other monies, in the form of a check or money order, from tenants and any sums otherwise due Owner with respect to the Properties in the ordinary course of business.  Owner authorizes Manager to request, demand, collect and provide receipt for all such rent and other monies and to institute legal proceedings in the name of Owner for the collection thereof and for the dispossession of any tenant in default under its Lease.

(i)Banking Accommodations.  Manager shall establish and maintain a separate checking account (the “Account”) for funds relating to the Properties.  All monies deposited from time to time in the Account shall be deemed to be trust funds and shall be and remain the property of Owner and shall be withdrawn and disbursed by Manager for the account of Owner only as expressly permitted by this Management Agreement for the purposes of performing the obligations of Manager hereunder.  No monies collected by Manager on Owner’s behalf shall be commingled with funds of Manager.  The Account shall be maintained, and monies shall be deposited therein and withdrawn therefrom, in accordance with the following:

(i)All sums received from rents and other income from the Properties shall be promptly deposited by Manager in the Account.  Manager shall have the right to designate two or more persons who shall be authorized to draw against the Account, but only for purposes authorized by this Management Agreement.

(ii)All sums due to Manager hereunder, whether for compensation, reimbursement for expenditures, or otherwise, as herein provided, shall be a charge against the operating revenues of the Properties and shall be paid and/or withdrawn by Manager from the Account prior to the making of any other disbursements therefrom.

(iii)By the 15^th day after the end of each month, Manager shall forward to Owner all monies contained in the Account other than a reserve of $5,000 and any other amounts otherwise provided in the budget, which shall remain in the Account.

(j)Ownership Agreements.  Manager has received copies of (and will be provided with copies of future) the Declaration of Trust, Agreements of Limited Partnership, Joint Venture Partnership Agreements and Operating Agreements, each as may be amended from time to time, of Owner, as applicable (the “Ownership Agreements”) and is familiar with the terms thereof.  Manager shall use reasonable care to avoid any act or omission that, in the performance of its duties hereunder, shall in any way conflict with the terms of Ownership Agreements.

(k)Signs.  Manager shall place and remove, or cause to be placed and removed, such signs upon the Properties as Manager deems appropriate, subject, however, to the terms and conditions of the Leases and to any applicable ordinances and regulations.

2.4Approval of Leases, Contracts, Etc.  In fulfilling its duties to Owner, Manager may and hereby is authorized to enter into any leases, contracts or agreements on behalf of Owner in the ordinary course of the management, operation, maintenance and leasing of the Property.

2.5Accounting, Records and Reports.

(a)Records.  Manager shall maintain all office records and books of account and shall record therein, and keep copies of, each invoice received from services, work and supplies ordered in connection with the maintenance and operation of the Properties.  Such records shall be maintained on a double entry basis.  Owner and persons designated by Owner shall at all reasonable time have access to and the right to audit and make independent examinations of such records, books and accounts and all vouchers, files and all other material pertaining to the Properties and this Management Agreement, all of which Manager agrees to keep safe, available and separate from any records not pertaining to the Properties, at a place recommended by Manager and approved by Owner.

(b)Monthly Reports.  On or before the 15^th day after the end of each month during the term of this Management Agreement, Manager shall prepare and submit to Owner the following reports and statements:

(i)rental collection record;

(ii)monthly operating statement;

(iii)copy of cash disbursements ledger entries for such period, if requested;

(iv)copy of cash receipts ledger entries for such period, if requested;

(v)the original copies of all contracts entered into by Manager on behalf of Owner during such period, if requested; and

(vi)copy of ledger entries for such period relating to security deposits maintained by Manager, if requested.

(c)Budgets and Leasing Plans.  Not later than November 15 of each calendar year, Manager shall prepare and submit to Owner for its approval an operating budget and a marketing and leasing plan on each Property for the calendar year immediately following such submission.  In connection with any acquisition of a Property by Owner, Manager shall prepare a budget and marketing and leasing plan for the remainder of the calendar year.  The budget and marketing and leasing plan shall be in the form of the budget and plan approved by Owner prior to the date thereof.  As often as reasonably necessary during the period covered by any such budget, Manager may submit to Owner for its approval an updated budget or plan incorporating such changes as shall be necessary to reflect cost over-runs and the like during such period.  If Owner does not disapprove any such budget within 30 days after receipt thereof by Owner, such budget shall be deemed approved.  If Owner shall disapprove any such budget or plan, it shall so notify Manager within said 30-day period and explain the reasons therefor.  If Owner disapproves of any budget or plan, Manager shall submit a revised budget or plan, as applicable, within 10 (ten) days of receipt of the notice of disapproval, and Owner shall have 10 (ten) days to provide notice to Manager if it disapproves of any such revised budget or plan.  Manager will not incur any costs other than those estimated in any budget except for:

(i)tenant improvements and real estate commissions required under a Lease;

(ii)maintenance or repair costs under $5,000 per Property;

(iii)costs incurred in emergency situations in which action is immediately necessary for the preservation or safety of the Property, or for the safety of occupants or other persons (or to avoid the suspension of any necessary service of the Property);

(iv)expenditures for real estate taxes and assessment; and

(v)maintenance supplies calling for an aggregate purchase price less than $25,000 per annum for all Properties.

Budgets prepared by Manager shall be for planning and informational purposes only, and Manager shall have no liability to Owner for any failure to meet any such budget.  However, Manager will use its best efforts to operate within the approved budget.

(d)Legal Requirements.  Manager shall execute and file when due all forms, reports, and returns required by law relating to the employment of its personnel.  Manager shall be responsible for notifying Owner in the event it receives notice that any Improvement on a Property or any equipment therein does not comply with the requirements of any statute, ordinance, law or regulation of any governmental body or of any public authority or official thereof having or claiming to have jurisdiction thereover.  Manager shall promptly forward to Owner any complaints, warnings, notices or summonses received by it relating to such matters.  Owner represents that to the best of its knowledge each of its Properties and any equipment thereon will upon acquisition by Owner comply with all such requirements.  Owner authorizes Manager to disclose the ownership of the Property by Owner to any such officials.  Owner agrees to indemnify, protect, defend, save and hold Manager and its stockholders, officers, directors, employees, managers, successors and assigns (collectively, the “Indemnified Parties”) harmless of and from any and all Losses (as defined in Section 3.5(a) hereof) that may be imposed on them or any or all of them by reason of the failure of Owner to correct any present or future violation or alleged violation of any and all present or future laws, ordinances, statutes, or regulations of any public authority or official thereof, having or claiming to have jurisdiction thereover, of which it has actual notice.

ARTICLE III

AUTHORITY GRANTED TO MANAGER AND CERTAIN OWNER OBLIGATIONS

3.1Authority As To Tenants, Etc.  Owner agrees and does hereby give Manager the following exclusive authority and powers (all of which shall be exercised either in the name of Manager, as Manager for Owner, or in the name or Owner entered into by Manager as Owner’s authorized agent, and Owner shall assume all expenses in connection with such matters):

(a)to advertise each Property or any part thereof and to display signs thereon, as permitted by law;

(b)to lease the Properties to tenants;

(c)to pay all expenses of leasing such Property, including but not limited to, newspaper and other advertising, signage, banners, brochures, referral commissions, leasing commissions, finder’s fees and salaries, bonuses and other compensation of leasing personnel responsible for the leasing of the Property;

(d)to cause references of prospective tenants to be investigated, it being understood and agreed by the parties hereto that Manager does not guarantee the creditworthiness or collectibility of accounts receivable from tenants, users or lessees; and to negotiate new Leases and renewals and cancellations of existing Leases that shall be subject to Manager obtaining Owner’s approval;

(e)to collect from tenants all or any of the following: a late rent administrative charge, a non-negotiable check charge, credit report fee, a subleasing administrative charge and/or broker’s commission; and Manager need not account for such charges and/or commission to Owner;

(f)to terminate tenancies and to sign and serve in the name of Owner of each Property such notices as are deemed necessary by Manager;

(i)to institute and prosecute actions to evict tenants and to recover possession of the Property or portions thereof;

(ii)with Owner’s authorization, to sue for and in the name of Owner and recover rent and other sums due; and to settle, compromise, and release such actions or suits, or reinstate such tenancies.  All expenses of litigation including, but not limited to, attorneys’ fees, filing fees, and court costs that Manager shall incur in connection with the collecting of rent and other sums, or to recover possession of any Property or any portion thereof, shall be deemed to be an operational expense of the Property.  Manager and Owner shall concur on the selection of the attorneys to handle such litigation.

3.2Operational Authority.  Owner agrees and does hereby give Manager the following exclusive authority and powers (all of which shall be exercised either in the name of Manager, as Manager for Owner, or in the name or Owner entered into by Manager as Owner’s authorized agent, and Owner shall assume all expenses in connection with such matters):

(a)to hire, supervise, discharge, and pay all labor required for the operation and maintenance of each Property including but not limited to on-site personnel, managers, assistant managers, leasing consultants, engineers, janitors, maintenance supervisors and other employees required for the operation and maintenance of the Property, including personnel spending a portion of their working hours (to be charged on a pro rata basis) at the Property.  All expenses of such employment shall be deemed operational expenses of the Property.

(b)to make or cause to be made all ordinary repairs and replacements necessary to preserve each Property in its present condition and for the operating efficiency thereof and all alterations required to comply with lease requirements, and to decorate the Property;

(c)to negotiate and enter into, as Manager of the Property, contracts for all items on budgets that have been approved by Owner, any emergency services or repairs for items not exceeding $5,000, appropriate service agreements and labor agreements for normal operation of the Property, which have terms not to exceed three years, and agreements for all budgeted

maintenance, minor alterations, and utility services, including, but not limited to, electricity, gas, fuel, water, telephone, window washing, scavenger service, landscaping, snow removal, pest exterminating, decorating and legal services in connection with the Leases and service agreements relating to the Property, and other services or such of them as Manager may consider appropriate; and

(d)to purchase supplies and pay all bills.

Manager shall use its best efforts to obtain the foregoing services and utilities for the Property under terms that are as cost-effective and otherwise favorable to Manager as possible for the quality of services and utilities required.  Owner hereby appoints Manager as Owner’s authorized Manager for the purpose of executing, as Manager for said Owner, all such contracts.  In addition, Owner agrees to specifically assume in writing all obligations under all such contracts so entered into by Manager, on behalf of Owner of the Property, upon the termination of this Agreement, and Owner shall indemnify, protect, save, defend and hold Manager and the other Indemnified Parties harmless from and against any and all Losses resulting from, arising out of or in any way related to such contracts and that relate to or concern matters occurring after termination of this Agreement, but excluding matters arising out of Manager’s willful misconduct, gross negligence and/or unlawful acts.  Manager shall secure the approval of, and execution of appropriate contracts by, Owner for any non-budgeted and non-emergency/contingency capital items, alterations or other expenditures in excess of $5,000 for any one item, securing for each item at least three written bids, if practicable, or providing evidence satisfactory to Owner that the contract amount is lower than industry standard pricing, from responsible contractors.  Manager shall have the right from time to time during the term hereof, to contract with and make purchases from Affiliates of Manager, provided that contract rates and prices are competitive with other available sources.  Manager may at any time and from time to time request and receive the prior written authorization of Owner of the Property of any one or more purchases or other expenditures, notwithstanding that Manager may otherwise be authorized hereunder to make such purchases or expenditures.

3.3Rent and Other Collections.  Owner agrees and does hereby give Manager the exclusive authority and powers (all of which shall be exercised either in the name of Manager, as Manager for Owner, or in the name or Owner entered into by Manager as Owner’s authorized agent, and Owner shall assume all expenses in connection with such matters) to collect rents and/or assessments and other items, including but not limited to tenant payments for real estate taxes, property liability and other insurance, damages and repairs, common area maintenance, tax reduction fees and all other tenant reimbursements, administrative charges, proceeds of rental interruption insurance, parking fees, income from coin operated machines and other miscellaneous income, due or to become due and give receipts therefor and to deposit all such Gross Revenue collected hereunder in the Account.  Manager may endorse any and all checks received in connection with the operation of any Property and drawn to the order of Owner, and Owner shall, upon request, furnish Manager’s depository with an appropriate authorization for Manager to make such endorsement.  Manager shall also have the exclusive authority to collect and handle tenants’ security deposits, including the right to apply such security deposits to unpaid rent, and to comply, on behalf of Owner of the Property, with applicable state or local laws concerning security deposits and interest thereon, if any.  Manager shall not be required to advance any monies for the care or management of any Property.  Owner agrees to advance all monies necessary therefor.  If Manager shall elect to advance any money in connection with a Property, Owner agrees to reimburse Manager forthwith and hereby authorizes Manager to deduct such advances from any monies due Owner.  In connection with any insured losses or damages relating to any Property, Manager shall have the exclusive authority to handle all steps necessary regarding any such claim; provided that Manager will not make any adjustments or settlements in excess of $10,000 without Owner’s prior written consent.

3.4Payment of Expenses.  Owner agrees and does hereby give Manager the exclusive authority and power (all of which shall be exercised either in the name of Manager, as Manager for Owner, or in the name or Owner entered into by Manager as Owner’s authorized agent, and Owner shall assume all expenses in connection with such matters) to pay all expenses of the Property from the Gross Revenue collected in accordance with Section 3.3 above, from the Account.  It is understood that the Gross Revenue will be used first to pay the compensation to Manager as contained in Article 5 below, then operational expenses and then any mortgage indebtedness, including real estate tax and insurance impounds, but only as directed by Owner in writing and only if sufficient Gross Revenue is available for such payments.  Nothing in this Agreement shall be interpreted in such a manner as to obligate Manager to pay from Gross Revenue, any expenses incurred by Owner prior to the commencement of this Agreement, except to the extent Owner advances additional funds to pay such expenses.

3.5Certain Owner Indemnification Obligations.

(a)On Termination.  In the event this Agreement is terminated for any reason prior to the expiration of its original term or any renewal term, Owner shall indemnify, protect, defend, save and hold Manager and all of the other Indemnified Parties harmless from and against any and all claims, causes of action, demands, suits, proceedings, loss, judgments, damage, awards, liens, fines, costs, attorney’s fees and expenses, of every kind and nature whatsoever (collectively, “Losses”), that may be imposed on or incurred by Manager by reason of the willful misconduct, gross negligence and/or unlawful acts (such unlawfulness having been adjudicated by a court of proper jurisdiction) of Owner.

(b)Property Damage, Etc.  Owner agrees to indemnify, defend, protect, save and hold Manager and all of the other Indemnified Parties harmless from any and all Losses in connection with or in any way related to the Property and from liability for damage to the Property and injuries to or death of any person whomsoever, and damage to property; provided, however, that such indemnification shall not extend to any such Losses arising out of the willful misconduct, gross negligence and/or unlawful acts (such unlawfulness having been adjudicated by a court of proper jurisdiction) of Manager or any of the other Indemnified Parties.  Manager shall not be liable for any error of judgment or for any mistake of fact or law, or for any thing that it may do or refrain from doing, except in cases of willful misconduct, gross negligence and/or unlawful acts (such unlawfulness having been adjudicated by a court of proper jurisdiction).

3.6Environmental Matters.  Owner hereby warrants and represents to Manager that to the best of Owner’s knowledge, no Property, upon acquisition by Owner, nor any part thereof, will be used to treat, deposit, store, dispose of or place any hazardous substance that may subject Manager to liability or claims under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C.A. Section 9607) or any constitutional provision, statute, ordinance, law, or regulation of any governmental body or of any order or ruling of any public authority or official thereof, having or claiming to have jurisdiction thereover.  Furthermore, Owner agrees to indemnify, protect, defend, save and hold Manager and all of the other Indemnified Parties from any and all Losses involving, concerning or in any way related to any past, current or future allegations regarding treatment, depositing, storage, disposal or placement by any party other than Manager of hazardous substances on the Property.

3.7Legal Status of Properties.  Owner represents that to the best of its knowledge each Property and any equipment thereon, when acquired by Owner, will comply with all legal requirements and authorizes Manager to disclose the identity of the Owner of the Property to any such officials and agrees to indemnify, protect, defend, save and hold Manager and the other Indemnified Parties harmless of and from any and all Losses that may be imposed on them or any of them by reason of the failure of Owner to correct any present or future violation or alleged violation of any and all present or future laws,

ordinances, statutes, or regulations of any public authority or official thereof, having or claiming to have jurisdiction thereover, of which it has actual notice.  In the event it is alleged or charged that any Improvement or any equipment on a Property or any act or failure to act by Owner with respect to the Property or the sale, rental, or other disposition thereof fails to comply with, or is in violation of, any of the requirements of any constitutional provision, statute, ordinance, law, or regulation of any governmental body or any order or ruling of any public authority or official thereof having or claiming to have jurisdiction thereover, and Manager, in its sole and absolute discretion, considers that the action or position of Owner, with respect thereto may result in damage or liability to Manager, Manager shall have the right to cancel this Agreement at any time by written notice to Owner of its election so to do, which cancellation shall be effective upon the service of such notice.  Such cancellation shall not release the indemnities of Owner set forth in this Agreement and shall not terminate any liability or obligation of Owner to Manager for any payment, reimbursement, or other sum of money then due and payable to Manager hereunder.

3.8Extraordinary Payments.  Owner agrees to give adequate advance written notice to Manager if Owner desires that Manager make any extraordinary payment, out of Gross Revenue, to the extent funds are available after the payment of Manager’s compensation as provided for herein and all operational expenses, of mortgage indebtedness, general taxes, special assessments, or fire, boiler or any other insurance premiums.

ARTICLE IV

EXPENSES

4.1Owner’s Expenses.  Except as otherwise specifically provided, all costs and expenses incurred hereunder by Manager in fulfilling its duties to Owner shall be for the account of and on behalf of Owner.  Such costs and expenses shall include the wages and salaries and other employee-related expenses of all on-site and off-site employees of Manager who are engaged in the operation, management, maintenance and leasing or access control of the Properties, including taxes, insurance and benefits relating to such employees, and legal, travel and other out-of-pocket expenses that are directly related to the management of specific Properties.  All costs and expenses for which Owner is responsible under this Management Agreement shall be paid by Manager out of the Account.  In the event the Account does not contain sufficient funds to pay all said expenses, Owner shall fund all sums necessary to meet such additional costs and expenses.

4.2Manager’s Expenses.  Manager shall, out of its own funds, pay all of its general overhead and administrative expenses.

ARTICLE V

MANAGER’S COMPENSATION

5.1Management Fees.  Commencing on the date hereof, Owner shall pay Manager property management and leasing fees in an amount not to exceed the fees customarily charged in arm’s length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of brokers and agents in such area (the “Management Fees”).  The Management Fees shall be calculated on a monthly basis from the rental income received from the Properties over the term of this Management Agreement.  Generally, Owner and Manager expect these fees to be between approximately two and four percent (2.0%-4.0%) of Gross Revenues for the management of commercial office buildings and approximately five percent (5.0%) of Gross Revenues for the management of retail and industrial properties.  Manager’s compensation under this Section 5.1 shall apply to all renewals,

extensions or expansions of Leases that Manager has originally negotiated.  In the event Manager assists with planning and coordinating the construction of any tenant-paid finish-out or improvements, Manager shall be entitled to receive from any such tenant an amount equal to not greater than five percent (5.0%) of the cost of such tenant improvements.

5.2Leasing Fees.  In addition to the compensation paid to Manager under Section 5.1 above, for the leasing of the properties, Manager shall be entitled to receive a separate fee for the Leases of new tenants and renewals of Leases with existing tenants in an amount not to exceed the fee customarily charged in arm’s length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of brokers and agents in such area.

5.3Audit Adjustment.  If any audit of the records, books or accounts relating to the Properties discloses an overpayment or underpayment of Management Fees, Owner or Manager shall promptly pay to the other party the amount of such overpayment or underpayment, as the case may be.  If such audit discloses an overpayment of Management Fees for any fiscal year of more than the correct Management Fees for such fiscal year, Manager shall bear the cost of such audit.

ARTICLE VI

INSURANCE AND INDEMNIFICATION

6.1Insurance to be Carried.

(a)Manager shall obtain and keep in full force and effect insurance on the Properties against such hazards as Owner and Manager shall deem appropriate, but in any event insurance sufficient to comply with the Leases and Ownership Agreements shall be maintained. All liability policies shall provide sufficient insurance satisfactory to both Owner and Manager and shall contain waivers of subrogation for the benefit of Manager.

(b)Manager shall obtain and keep in full force and effect, in accordance with the laws of the state in which each Property is located, employer’s liability insurance applicable to and covering all employees of Manager at the Properties and all persons engaged in the performance of any work required hereunder, and Manager shall furnish Owner certificates of insurers naming Owner as a co-insured and evidencing that such insurance is in effect.  If any work under this Management Agreement is subcontracted as permitted herein, Manager shall include in each subcontract a provision that the subcontractor shall also furnish Owner with such a certificate.

6.2Insurance Expenses.  Premiums and other expenses of such insurance, as well as any applicable payments in respect of deductibles shall be borne by Owner.

6.3Cooperation with Insurers.  Manager shall cooperate with and provide reasonable access to the Properties to representatives of insurance companies and insurance brokers or agents with respect to insurance that is in effect or for which application has been made.  Manager shall use its best efforts to comply with all requirements of insurers.

6.4Accidents and Claims.  Manager shall promptly investigate and shall report in detail to Owner all accidents, claims for damage relating to Ownership, operation or maintenance of the Properties, and any damage or destruction to the Properties and the estimated costs of repair thereof, and shall prepare for approval by Owner all reports required by an insurance company in connection with any such accident, claim, damage, or destruction.  Such reports shall be given to Owner promptly, and any report not so

given within 10 (ten) days after the occurrence of any such accident, claim, damage or destruction shall be noted in the monthly operating statement delivered to Owner pursuant to Section 2.5(b).  Manager is authorized to settle any claim against an insurance company arising out of any policy and, in connection with such claim, to execute proofs of loss and adjustments of loss and to collect and receipt for loss proceeds.

6.5Indemnification.  Manager shall hold Owner harmless from and indemnify and defend Owner against any and all claims or liability for any injury or damage to any person or property whatsoever for which Manager is responsible occurring in, on, or about the Properties, including, without limitation, the Improvements when such injury or damage shall be caused by the negligence of Manager, its agents, servants, or employees, except to the extent that Owner recovers insurance proceeds with respect to such matter.  Owner will indemnify and hold Manager harmless against all liability for injury to persons and damage to property caused by Owner’s negligence and which did not result from the negligence of misconduct of Manager, except to the extent Manager recovers insurance proceeds with respect to such matter.

ARTICLE VII

TERM AND TERMINATION

7.1Term.  This Agreement shall commence on the date first above written and shall continue until the first (1^st) anniversary of such date and thereafter for successive one (1) year renewal periods, unless on or before 30 days prior to the date last above mentioned or on or before 30 days prior to the expiration of any such renewal period, Manager shall notify Owner in writing that it elects to terminate this Agreement, in which case this Agreement shall be thereby terminated on said last mentioned date.  In addition, and notwithstanding the foregoing, Owner may terminate this Agreement at any time upon delivery of written notice to Manager not less than thirty (30) days prior to the effective date of termination, in the event of (and only in the event of) a showing by Owner of misconduct, negligence, or malfeasance by Manager in the performance of Manager’s duties hereunder.  In addition, either party may terminate this Agreement immediately upon the occurrence of any of the following:

(a)A decree or order is rendered by a court having jurisdiction (i) adjudging Manager as bankrupt or insolvent, or (ii) approving as properly filed a petition seeking reorganization, readjustment, arrangement, composition or similar relief for Manager under the federal bankruptcy laws or any similar applicable law or practice, or (iii) appointing a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of Manager or a substantial part of the property of Manager, or for the winding up or liquidation of its affairs, or

(b)Manager (i) institutes proceedings to be adjudicated a voluntary bankrupt or an insolvent, (ii) consents to the filing of a bankruptcy proceeding against it, (iii) files a petition or answer or consent seeking reorganization, readjustment, arrangement, composition or relief under any similar applicable law or practice, (iv) consents to the filing of any such petition, or to the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency for it or for a substantial part of its property, (v) makes an assignment for the benefit of creditors, (vi) is unable to or admits in writing its inability to pay its debts generally as they become due unless such inability shall be the fault of the other party, or (vii) takes corporate or other action in furtherance of any of the aforesaid purposes.

7.2Manager’s Obligations Upon Termination.  Upon the termination of this Management Agreement, Manager shall have the following duties:

(a)Manager shall deliver to Owner or its designee, all books and records with respect to the Properties.

(b)Manager shall transfer and assign to Owner, or its designee, all service contracts and personal property relating to or used in the operation and maintenance of the Properties, except personal property paid for and owned by Manager.  Manager shall also, for a period of sixty (60) days immediately following the date of such termination, make itself available to consult with and advise Owner, or its designee, regarding the operation, maintenance and leasing of the Properties.

(c)Manager shall render to Owner an accounting of all funds of Owner in its possession and shall deliver to Owner a statement of all Management Fees claimed to be due to Manager and shall cause funds of Owner held by Manager relating to the Properties to be paid to Owner or its designee.

7.3Owner’s Obligations Upon Termination.  Owner shall pay or reimburse Manager for any sums of money due it under this Agreement for services and expenses prior to termination of this Agreement.  All provisions of this Agreement that require Owner to have insured, or to protect, defend, save, hold and indemnify or to reimburse Manager shall survive any expiration or termination of this Agreement and, if Manager is or becomes involved in any claim, proceeding or litigation by reason of having been Manager of Owner, such provisions shall apply as if this Agreement were still in effect.

The parties understand and agree that Manager may withhold funds for sixty (60) days after the end of the month in which this Agreement is terminated to pay bills previously incurred but not yet invoiced and to close accounts. Should the funds withheld be insufficient to meet the obligation of Manager to pay bills previously incurred, Owner will, upon demand, advance sufficient funds to Manager to ensure fulfillment of Manager’s obligation to do so, within ten (10) days of receipt of notice and an itemization of such unpaid bills.

ARTICLE VIII

MISCELLANEOUS

8.1Notices.  All notices, approvals, consents and other communications hereunder shall be in writing, and, except when receipt is required to start the running of a period of time, shall be deemed given when delivered in person or on the fifth day after its mailing by either party by registered or certified United States mail, postage prepaid and return receipt requested, to the other party, at the addresses set forth after their respect name below or at such different addresses as either party shall have theretofore advised the other party in writing in accordance with this Section 8.1.

Owner:	HARTMAN REIT OPERATING PARTNERSHIP, L.P.
	c/o Hartman Commercial Properties REIT
	1450 West Sam Houston Parkway, North, Suite 100
	Houston, Texas 77043
	Attention: Chief Financial Officer
Manager:	HARTMAN MANAGEMENT, L.P.
	1450 West Sam Houston Parkway, North, Suite 100
	Houston, Texas 77043
	Attention: Chief Financial Officer

8.2Governing Law; Venue.  This Management Agreement shall be governed by and construed in accordance with the laws of the State of Texas, and any action brought to enforce the agreements made hereunder or any action which arises out of the relationship created hereunder shall be brought exclusively in Harris County, Texas.

8.3Assignment.  Manager may delegate partially or in full its duties and rights under this Management Agreement but only with the prior written consent of Owner.  Owner acknowledges and agrees that any or all of the duties of Manager as contained herein may be delegated by Manager and performed by a person or entity (“Submanager”) with whom Manager contracts for the purpose of performing such duties.  Owner specifically grants Manager the authority to enter into such a contract with a Submanager; provided that, unless Owner otherwise agrees in writing with such Submanager, Owner shall have no liability or responsibility to any such Submanager for the payment of the Submanager’s fee or for reimbursement to the Submanager of its expenses or to indemnify the Submanager in any manner for any matter; and provided further that Manager shall require such Submanager to agree, in the written agreement setting forth the duties and obligations of such Submanager, to indemnify Owner for all Losses incurred by Owner as a result of the willful misconduct or gross negligence of the Submanager, except that such indemnity shall not be required to the extent that Owner recovers issuance proceeds with respect to such matter.  Any contract entered into between Manager and a Submanager pursuant to this Section 8.3 shall be consistent with the provisions of this Agreement, except to the extent Owner otherwise specifically agrees in writing.  This Management Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns.

8.4Third Party Leasing Services.  Manager acknowledges that from time to time Owner may determine that it is in the best interests of Owner to retain a third party to provide certain leasing services with respect to certain Properties and to compensate such third party for such leasing services.  Upon the prior written consent of Manager, Owner shall have the authority to enter into such a contract for leasing services with a third party (a “Third Party Leasing Agreement”); provided that Manager shall have no liability or responsibility to Owner for any of the duties and obligations undertaken by such party, and Owner agrees to indemnify Manager for all Losses incurred by Manager as a result of acts of such third party pursuant to the Third Party Leasing Agreement.  To the extent that leasing services are specifically required to be performed by a third party pursuant to such Third Party Leasing Agreement, Manager shall have no obligation to perform such leasing services and Owner shall have no obligation to Manager for leasing fees pursuant to Section 5.2 hereof.

8.5Third Party Management Services.  Manager acknowledges that from time to time Owner may acquire interests in Properties in which Owner does not control the determination of the party that is engaged to provide property management and other services to be provided by Manager with respect to all Properties acquired by Owner hereunder.  Upon the prior written consent of Manager, Owner shall have the authority to acquire such non-controlling interests in Properties for which a third party provides some or all of the services otherwise required to be performed by Manager hereunder (a “Third Party Management Agreement”); provided that Manager shall have no liability or responsibility to Owner for any of the duties and obligations undertaken by such third party, and Owner agrees to indemnify Manager for all Losses incurred by Manager as a result of the acts of such third party pursuant to the Third Party Management Agreement.  To the extent that property management and other services are specifically required to be performed by a third party pursuant to such Third Party Management Agreement, Manager shall have no obligation to perform such services and Owner shall have no obligation to Manager for compensation for such services pursuant to Article V hereof.

8.6No Waiver.  The failure of Owner to seek redress for violation or to insist upon the strict performance of any covenant or condition of this Management Agreement shall not constitute a waiver thereof for the future.

8.7Amendments.  This Management Agreement may be amended only by an instrument in writing signed by the party against whom enforcement of the amendment is sought.

8.8Headings.  The headings of the various subdivisions of this Management Agreement are for reference only and shall not define or limit any of the terms or provisions hereof.

8.9Counterparts.  This Management Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Management Agreement to produce or account for more than one such counterpart.

8.10Entire Agreement.  This Management Agreement contains the entire understanding and all agreements between Owner and Manager respecting the management of the Properties.  There are no representations, agreements, arrangements or understandings, oral or written, between Owner and Manager relating to the management of the Properties that are not fully expressed herein.

8.11Disputes.  If there shall be a dispute between Owner and Manager relating to this Management Agreement resulting in litigation, the prevailing party in such litigation shall be entitled to recover from the other party to such litigation such amount as the court shall fix as reasonable attorneys’ fees.

8.12Activities of Manager.  The obligations of Manager pursuant to the terms and provisions of this Management Agreement shall not be construed to preclude Manager from engaging in other activities or business ventures, whether or not such other activities or ventures are in competition with Owner or the business of Owner.

8.13Independent Contractor.  Manager and Owner shall not be construed as joint venturers or partners of each other pursuant to this Management Agreement, and neither shall have the power to bind or obligate the other except as set forth herein.  In all respects, the status of Manger to Owner under this Agreement is that of an independent contractor.

8.14No Third-Party Rights.  Nothing expressed or referred to in this Management Agreement will be construed to give any Person other than the parties to this Management Agreement any legal or equitable right, remedy or claim under or with respect to this Management Agreement or any provision of this Management Agreement, except such rights as shall inure to a successor or permitted assignee pursuant to Section 8.3.

8.15Ownership of Proprietary Property.  The Manager retains ownership of and reserves all Intellectual Property Rights in the Proprietary Property.  To the extent that Owner has or obtains any claim to any right, title or interest in the Proprietary Property, including without limitation in any suggestions, enhancements or contributions that Owner may provide regarding the Proprietary Property, Owner hereby assigns and transfers exclusively to the Manager all right, title and interest, including without limitation all Intellectual Property Rights, free and clear of any liens, encumbrances or licenses in favor of Owner or any other party, in and to the Proprietary Property.  In addition, at the Manager’s expense, Owner will perform any acts that may be deemed desirable by the Manager to evidence more fully the transfer of ownership of right, title and interest in the Proprietary Property to the Manager, including but not limited to the execution of any instruments or documents now or hereafter requested by the Manager to perfect, defend or confirm the assignment described herein, in a form determined by the Manager.

IN WITNESS WHEREOF, the parties have executed this Property Management Agreement as of the date first above written.

HARTMAN COMMERCIAL PROPERTIES   REIT
By:	/s/ Allen R. Hartman
Name:
Title:
HARTMAN REIT OPERATING
PARTNERSHIP, L.P.
By:	Hartman Commercial Properties REIT
	General Partner
		By:	/s/ Allen R. Hartman
		Name:
		Title:
HARTMAN MANAGEMENT, L.P .
By:	/s/ Allen R. Hartman
Name:
Title:

EX-10.3

EXHIBIT 10.3

ADVISORY AGREEMENT

THIS ADVISORY AGREEMENT, dated as of August 31, 2004, is between HARTMAN COMMERCIAL PROPERTIES REIT, a Maryland real estate investment trust (the “Company”), and HARTMAN MANAGEMENT, L.P., a Texas limited partnership (the “Advisor”).

W I T N E S S E T H

WHEREAS, the Company has filed with the Securities and Exchange Commission a Registration Statement on Form S-11 (no. 333-111674) (the “Registration Statement”) covering the issuance of common shares of beneficial interest, and the Company may subsequently issue common shares of beneficial interest (collectively, the “Shares”);

WHEREAS, the Company currently qualifies as a REIT (as defined below), and to invest its funds in investments permitted by the terms of the Company’s Declaration of Trust and Sections 856 through 860 of the Code (as defined below);

WHEREAS, the Company desires to continue to avail itself of the experience, sources of information, advice, assistance and certain facilities available to the Advisor and to have the Advisor undertake the duties and responsibilities hereinafter set forth, on behalf of, and subject to the supervision of, the Board of Trustees of the Company all as provided herein; and

WHEREAS, the Advisor is willing to continue to undertake to render such services, subject to the supervision of the Board of Trustees, on the terms and conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements contained herein, the parties hereto agree as follows:

1. Definitions. As used in this Amended and Restated Advisory Agreement (the “Agreement”), the following terms have the definitions hereinafter indicated:

Acquisition Expenses.  Any and all expenses incurred by the Company, the Advisor, or any Affiliate of either in connection with the selection, acquisition or development of any Property, whether or not acquired, including, without limitation, legal fees and expenses, travel and communications expenses, costs of appraisals, nonrefundable option payments on property not acquired, accounting fees and expenses, and title insurance premiums.

Acquisition Fees.  Any and all fees and commissions, exclusive of Acquisition Expenses, paid by any Person to any other Person (including any fees or commissions paid by or to any Affiliate of the Company or the Advisor) in connection with purchase, development or construction of any Property, including, without limitation, real estate commissions, acquisition fees, finder’s fees, selection fees, nonrecurring management fees, consulting fees, loan fees, points, or any other fees or commissions of a similar nature.

Advisor.  Hartman Management, L.P., a Texas limited partnership, any successor advisor to the Company, or any Person(s) to which Hartman Management, L.P. or any successor advisor subcontracts substantially all of its functions.

Affiliate or Affiliated.  An Affiliate of another Person includes only the following: (i) any Person directly or indirectly controlling, controlled by, or under common control with such other Person; (ii) any Person directly or indirectly owning, controlling, or holding with the power to vote 10% or more of the outstanding voting securities of such other Person; (iii) any legal entity for which such Person acts as an executive officer, director, trustee, trust manager, or general partner; (iv) any Person 10% or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held, with power to vote, by such other Person; and (v) any executive officer, director, trustee, trust manager, or general partner of such other Person. An entity shall not be deemed to control or be under common control with an Advisor-sponsored program unless (i) the entity owns 10% or more of the voting equity interests of such program or (ii) a majority of the board (or equivalent governing body) of such program is comprised of Affiliates of the entity.

Appraised Value.  Value according to an appraisal made by an Independent Appraiser.

Declaration of Trust.  The Declaration of Trust of the Company under Title 2 of the Corporations and Associations Article of the Annotated Code of Maryland, as amended from time to time.

Asset Management Fee.  The Asset Management Fee payable to the Advisor as defined in Section 8(a).

Average Invested Assets.  For a specified period, the average of the aggregate book value of the assets of the Company invested, directly or indirectly, in Properties and Loans secured by real estate before reserves for depreciation or bad debts or other similar non-cash reserves, computed by taking the average of such values at the end of each month during such period.

Board of Trustees or Board.  The persons holding such office, as of any particular time, under the Declaration of Trust of the Company, whether they be the Trustees named therein or additional or successor Trustees.

Bylaws.  The bylaws of the Company, as the same are in effect from time to time.

Capped O&O Expenses.  All Organizational and Offering Expenses other than selling commissions and the dealer manager fee as described under “Plan of Distribution” in the Registration Statement.

Cash from Financings.  Net cash proceeds realized by the Company from the financing of Property or from the refinancing of any Company indebtedness.

Cash from Sales.  Net cash proceeds realized by the Company from the sale, exchange or other disposition of any of its assets after deduction of all expenses incurred in connection therewith. Cash from Sales shall not include Cash from Financings.

Cash from Sales and Financings. The total sum of Cash from Sales and Cash from Financings.

Code.  Internal Revenue Code of 1986, as amended from time to time, or any successor statute thereto. Reference to any provision of the Code shall mean such provision as in effect from time to time, as the same may be amended, and any successor provision thereto, as interpreted by any applicable regulations as in effect from time to time.

Company.  Hartman Commercial Properties REIT, a real estate investment trust organized under the laws of the State of Maryland.

Competitive Real Estate Commission.  A real estate or brokerage commission for the purchase or sale of property which is reasonable, customary, and competitive in light of the size, type, and location of the property.

Conflicts Committee.  “Conflicts Committee” shall have the meaning set forth in the Declaration of Trust.

Contract Sales Price.  The total consideration received by the Company for the sale of a Property.

Cumulative Return.  For the period for which the calculation is being made, the percentage resulting from dividing (A) the total Distributions paid on each Distribution date during such period (without regard to Distributions paid out of Cash from Sales and Financings), by (B) the product of (i) the average Invested Capital for such period (calculated on a daily basis), and (ii) the number of days elapsed during such period.

Declaration of Trust.The Declaration of Trust of the Company under Title 8 of the Corporations and Associations Article of the Annotated Code of Maryland, as amended from time to time.

Disposition Fee.  The Disposition Fee as defined in Paragraph 8(c).

Distributions.  Any distributions of money or other property by the Company to owners of Shares, including distributions that may constitute a return of capital for federal income tax purposes.

Gross Asset Value. The amount equal to the aggregate book value of the Company’s assets (other than investments in bank accounts, money market funds or other current assets), before depreciation, bad debts or other similar non-cash reserves and without reduction for any debt relating to such assets, at the date of measurement, except that during such periods in which the Company is obtaining regular independent valuations of the current value of its net assets for purposes of enabling fiduciaries of employee benefit plan Shareholders to comply with applicable Department of Labor reporting requirements, Gross Asset Value is the greater of (i) the amount determined pursuant to the foregoing or (ii) the Company’s assets’ aggregate valuation established by the most recent such valuation report without reduction for depreciation, bad debts or other similar non-cash reserves and without reduction for any debt relating to such assets.

Gross Proceeds.  The aggregate purchase price of all Shares sold for the account of the Company through an Offering, without deduction for Organization and Offering Expenses. For the purpose of computing Gross Proceeds, the purchase price of any Share for which reduced selling commissions or dealer manager fees are paid shall be deemed to be the amount paid by others purchasing Shares in the Offering who paid such fees; therefore, all purchasers of Shares in the Offering covered by the Registration Statement shall be deemed to have paid $10.00 per Share.

Independent Appraiser.  A person or entity with no material current or prior business or personal relationship with the Advisor or the Trustees, who is engaged to a substantial extent in the business of rendering opinions regarding the value of assets of the type held by the Company, and who is a qualified appraiser of real estate as determined by the Board. Membership in a nationally recognized appraisal society such as the American Institute of Real Estate Appraisers (“M.A.I.”) or the Society of Real Estate Appraisers (“S.R.E.A.”) shall be conclusive evidence of such qualification.

Invested Capital.  The amount calculated by multiplying the total number of Shares purchased by Shareholders by the issue price, reduced by the portion of any Distribution that is attributable to Net Sales

Proceeds and by any amounts paid by the Company to repurchase Shares pursuant to the Company’s plan for redemption of Shares.

Joint Venture.  Any joint venture, limited liability company or other Affiliate of the Company that owns, in whole or in part on behalf of the Company, any Properties.

Listing.  The listing of the Shares on a national securities exchange or the quotation of Shares on the NASDAQ National Market System.  Upon such Listing, the Shares shall be deemed Listed.

NASAA Guidelines.  The NASAA Statement of Policy Regarding Real Estate Investment Trusts as in effect on the date hereof.

Net Income.  For any period, the total revenues applicable to such period, less the total expenses applicable to such period excluding additions to reserves for depreciation, bad debts or other similar non-cash reserves; provided, however, Net Income for purposes of calculating total allowable Operating Expenses (as defined herein) shall exclude the gain from the sale of the Company’s assets.

Net Sales Proceeds.  In the case of a transaction described in clause (i) (A) of the definition of Sale, the proceeds of any such transaction less the amount of all real estate commissions and closing costs paid by the Company. In the case of a transaction described in clause (i) (B) of such definition, Net Sales Proceeds means the proceeds of any such transaction less the amount of any legal and other selling expenses incurred in connection with such transaction. In the case of a transaction described in clause (i) (C) of such definition, Net Sales Proceeds means the proceeds of any such transaction actually distributed to the Company from the joint venture. In the case of a transaction described in clause (ii) of the definition of Sale, Net Sales Proceeds means the proceeds of such transaction or series of transactions less all amounts generated thereby and reinvested in one or more Properties within 180 days thereafter and less the amount of any real estate commissions, closing costs, and legal and other selling expenses incurred by or allocated to the Company in connection with such transaction or series of transactions. Net Sales Proceeds shall not include any reserves established by the Company in its sole discretion.

Offering.  Any offering of Shares that is registered with the SEC, excluding Shares offered under any employee benefit plan.

Operating Expenses.  All costs and expenses incurred by the Company, as determined under generally accepted accounting principles, which in any way are related to the operation of the Company or to Company business, including fees paid to the Advisor, but excluding (i) the expenses of raising capital such as Organization and Offering Expenses, legal, audit, accounting, underwriting, brokerage, listing, registration, and other fees, printing and other such expenses and tax incurred in connection with the issuance, distribution, transfer, registration and Listing of the Shares, (ii) interest payments, (iii) taxes, (iv) non-cash expenditures such as depreciation, amortization and bad loan reserves, (v) incentive fees paid in compliance with Section IV.F. of the NASAA Guidelines and (vi) Acquisition Fees, Acquisition Expenses, real estate commissions on resale of property, and other expenses connected with the acquisition, disposition, and ownership of real estate interests, mortgage loans or other property (such as the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of property).

Organization and Offering Expenses.  All expenses incurred by and to be paid from the assets of the Company in connection with and in preparing the Company for registration of and subsequently offering and distributing its Shares to the public, which may include but are not limited to, total underwriting and brokerage discounts and commissions (including fees of the underwriters’ attorneys); expenses for printing, engraving and mailing; salaries of employees while engaged in sales activity;

charges of transfer agents, registrars, trustees, trust managers, escrow holders, depositaries and experts; and expenses of qualification of the sale of the securities under Federal and State laws, including taxes and fees, accountants’ and attorneys’ fees.

Partnership.  Hartman REIT Operating Partnership, L.P., a Texas limited partnership formed to own and operate properties on behalf of the Company.

Person.  An individual, corporation, partnership, estate, trust (including a trust qualified under Section401(a) or 501(c) (17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section642(c) of the Code, association, private foundation within the meaning of Section509(a) of the Code, joint stock company or other entity, or any government or any agency or political subdivision thereof, and also includes a group as that term is used for purposes of Section13(d)(3) of the Securities Exchange Act of 1934, as amended.

Property or Properties.  Any real property or properties transferred or conveyed to the Company or the Partnership, either directly or indirectly.

Property Manager.  Any entity that has been retained to perform and carry out at one or more of the Properties property management services, excluding persons, entities or independent contractors retained or hired to perform facility management or other services or tasks at a particular Property, the costs for which are passed through to and ultimately paid by the tenant at such Property.

REIT.  A “real estate investment trust” under Sections 856 through 860 of the Code.

Sale or Sales.  (i) Any transaction or series of transactions whereby: (A) the Company or the Partnership sells, grants, transfers, conveys, or relinquishes its ownership of any Property or portion thereof, including the lease of any Property consisting of the building only, and including any event with respect to any Property which gives rise to a significant amount of insurance proceeds or condemnation awards; (B) the Company or the Partnership sells, grants, transfers, conveys, or relinquishes its ownership of all or substantially all of the interest of the Company or the Partnership in any joint venture in which it is a co-venturer or partner; or (C) any joint venture in which the Company or the Partnership as a co-venturer or partner sells, grants, transfers, conveys, or relinquishes its ownership of any Property or portion thereof, including any event with respect to any Property which gives rise to insurance claims or condemnation awards, but (ii) not including any transaction or series of transactions specified in clause (i) (A), (i) (B), or (i) (C) above in which the proceeds of such transaction or series of transactions are reinvested in one or more Properties within 180 days thereafter.

Shares.  “Shares” has the meaning set forth in the preamble.

Shareholders.  The registered holders of the Shares.

Shareholders’ 7% Return.  As of each date, an aggregate amount equal to an 7% Cumulative Return.

Subordinated Incentive Fee.  The fee payable to the Advisor under certain circumstances if the Shares are listed on a national securities exchange or quoted on the Nasdaq National Market System.

Subordinated Performance Fee Due Upon Termination.  A fee equal to (1) 15% of the amount, if any, by which (a) the Appraised Value of the Company’s Properties at the Termination Date, less amounts of all indebtedness secured by the Company’s Properties, plus total Distributions through the Termination Date exceeds (b) the sum of Invested Capital, plus Distributions attributable to Net Sales

Proceeds, plus total Distributions required to be made to the Shareholders in order to pay the Shareholders’ 7% Return from inception through the termination date less (2) any prior payment to the Advisor of a Subordinated Share of Net Sales Proceeds.

Subordinated Share of Net Sales Proceeds.  The Subordinated Share of Net Sales Proceeds as defined in Paragraph 8(d).

Termination Date.  The date of termination of the Agreement.

Trustee.  A member of the Board of Trustees of the Company.

Vacant Property.  A Property that has been economically vacant for (i) the period from acquisition until the applicable measurement date, if less than six months or (ii) at least six months as of the applicable date of measurement.

2%/25% Guidelines.  The requirement pursuant to the NASAA Guidelines that, in any 12-month period, total Operating Expenses not exceed the greater of 2% of the Company’s Average Invested Assets during such 12-month period or 25% of the Company’s Net Income over the same 12-month period.

2.  Appointment.  The Company hereby appoints the Advisor to serve as its advisor and asset manager on the terms and conditions set forth in this Agreement, and the Advisor hereby accepts such appointment.

3.  Duties and Authority of the Advisor.  The Advisor undertakes to use its reasonable efforts (1) to present to the Company potential investment opportunities to provide a continuing and suitable investment program consistent with (i) the investment objectives and policies of the Company as determined and adopted from time to time by the Board and (ii) the investment allocation method described at Section11(b) of this agreement and (2) to manage, administer, promote, maintain, and improve the Properties on an overall portfolio basis in a diligent manner.  The services of the Advisor are to be of scope and quality not less than those generally performed by professional asset managers of other similar property portfolios. The Advisor shall make available the full benefit of the judgment, experience and advice of the members of the Advisor’s organization and staff with respect to the duties it will perform under this Agreement. The Advisor shall also obtain Property Managers, which may include Affiliates of the Advisor, to manage, promote, and lease the Properties. To facilitate the Advisor’s performance of these undertakings, but subject to the restrictions included in Paragraphs 4 and 7 and to the continuing and exclusive authority of the Board over the management of the Company and the Partnership, the Company hereby delegates to the Advisor the authority to, and the Advisor hereby agrees to, either directly or by engaging an Affiliate:

(a) serve as the Company’s investment and financial advisor and provide research and economic and statistical data in connection with the Company’s assets and investment policies;

(b) provide the daily management of the Company and perform and supervise the various administrative functions reasonably necessary for the management of the Company;

(c) maintain and preserve the books and records of the Company, including a stock ledger reflecting a record of the Shareholders and their ownership of the Company’s Shares and acting as transfer agent for the Company’s Shares and maintaining the accounting and other record-keeping functions at the Property and Company levels;

(d) investigate, select, and, on behalf of the Company, engage and conduct business with such Persons as the Advisor deems necessary to the proper performance of its obligations hereunder, including but not limited to consultants, accountants, correspondents, lenders, technical advisors, attorneys, brokers, underwriters, corporate fiduciaries, escrow agents, depositaries, custodians, agents for collection, insurers, insurance agents, banks, builders, developers, property owners, mortgagors, and any and all agents for any of the foregoing, including Affiliates of the Advisor, and Persons acting in any other capacity deemed by the Advisor necessary or desirable for the performance of any of the foregoing services, including but not limited to entering into contracts in the name of the Company with any of the foregoing;

(e) consult with the officers and the Board of the Company and assist the Board in the formulation and implementation of the Company’s financial policies, and, as necessary, furnish the Board with advice and recommendations with respect to the making of investments consistent with the investment objectives and policies of the Company and in connection with any borrowings proposed to be undertaken by the Company;

(f) oversee the performance by the Property Managers of their duties, including collection and proper deposits of rental payments and payment of Property expenses and maintenance;

(g) conduct periodic on-site property visits to some or all (as the Advisor deems reasonably necessary) of the Properties to inspect the physical condition of the Properties and to evaluate the performance of the related Property Manager of its duties;

(h) review, analyze and comment upon the operating budgets, capital budgets and leasing plans prepared and submitted by each Property Manager and aggregate these property budgets into the Company’s overall budget;

(i) review and analyze on-going financial information pertaining to each Property and the overall portfolio of Properties;

(j) formulate and oversee the implementation of strategies for the administration, promotion, management, operation, maintenance, improvement, financing and refinancing, marketing, leasing, and disposition of Properties on an overall portfolio basis;

(k) subject to the provisions of Paragraphs 3(l) and 4 hereof, (i) locate, analyze and select potential investments in Properties, (ii) structure and negotiate the terms and conditions of transactions pursuant to which investment in Properties will be made; (iii) make investments in Properties on behalf of the Company or the Partnership in compliance with the investment objectives and policies of the Company; (iv) arrange for financing and refinancing and make other changes in the asset or capital structure of, and dispose of, reinvest the proceeds from the sale of, or otherwise deal with the investments in, Property; (v) enter into leases and service contracts for Property, including oversight of Affiliated companies that perform property management services for the Company; (vi) oversee non-affiliated property managers and other non-affiliated Persons who perform services for the Company; and (vii) to the extent necessary, perform all other operational functions for the maintenance and administration of such Property;

(l) obtain the prior approval of the Board for any and all investments in Properties (as well as any financing acquired by the Company or the Partnership in connection with such investment);

(m) if a transaction requires approval by the Board of Trustees, deliver to the Board of Trustees all documents required by them to properly evaluate the proposed investment in the Property;

(n) negotiate on behalf of the Company with banks or lenders for loans to be made to the Company, and negotiate on behalf of the Company with investment banking firms and broker-dealers or negotiate private sales of Shares and other securities or obtain loans for the Company, but in no event in such a way so that the Advisor shall be acting as broker-dealer or underwriter; and provided, further, that any fees and costs payable to third parties incurred by the Advisor in connection with the foregoing shall be the responsibility of the Company;

(o) obtain reports (which may be prepared by the Advisor or its Affiliates), where appropriate, concerning the value of investments or contemplated investments of the Company in Properties;

(p) from time to time, or at any time reasonably requested by the Board, provide information or make reports to the Board related to its performance of services to the Company under this Agreement;

(q) from time to time, or at any time reasonably requested by the Board, make reports to the Board of the investment opportunities it has presented to other Advisor-sponsored programs or that it has pursued directly or through an Affiliate;

(r) provide the Company with all necessary cash management services;

(s) deliver to or maintain on behalf of the Company copies of all appraisals obtained in connection with the investments in Properties;

(t) notify the Board of all proposed material transactions before they are completed; and

(u) do all things necessary to assure its ability to render the services described in this Agreement.

4.  Modification or Revocation of Authority of Advisor.  The Board may, at any time upon the giving of notice to the Advisor, modify or revoke the authority or approvals set forth in Paragraph 3, provided however, that such modification or revocation shall be effective upon receipt by the Advisor and shall not be applicable to investment transactions to which the Advisor has committed the Company prior to the date of receipt by the Advisor of such notification.

5.  Bank Accounts.  The Advisor may establish and maintain one or more bank accounts in its own name for the account of the Company or in the name of the Company and may collect and deposit into any such account or accounts, and disburse from any such account or accounts, any money on behalf of the Company, under such terms and conditions as the Board may approve, provided that no funds shall be commingled with the funds of the Advisor; and the Advisor shall from time to time render appropriate accountings of such collections and payments to the Board and to the auditors of the Company.

6.  Records; Access.  The Advisor shall maintain appropriate records of all its activities hereunder and make such records available for inspection by the Board and by counsel, auditors and authorized agents of the Company, at any time or from time to time during normal business hours. The Advisor shall at all reasonable times have access to the books and records of the Company.

7.  Limitations on Activities.  Anything else in this Agreement to the contrary notwithstanding, the Advisor shall refrain from taking any action which, in its sole judgment made in good faith, would (a) adversely affect the status of the Company as a REIT, (b) subject the Company to regulation under the Investment Company Act of 1940, as amended, (c) violate any law, rule, regulation or statement of policy of any governmental body or agency having jurisdiction over the Company, its Shares or its other securities, or (d) the Declaration of Trust or Bylaws, except if such action shall be ordered by the Board, in which case the Advisor shall notify promptly the Board of the Advisor’s judgment of the potential

impact of such action and shall refrain from taking such action until it receives further clarification or instructions from the Board. In such event the Advisor shall have no liability for acting in accordance with the specific instructions of the Board so given. Notwithstanding the foregoing, the Advisor, its directors, officers, employees and Shareholders, and Shareholders, directors and officers of the Advisor’s Affiliates shall not be liable to the Company or to the Board or Shareholders for any act or omission by the Advisor, its directors, officers or employees, or Shareholders, directors or officers of the Advisor’s Affiliates except as provided in Paragraphs 17 and 18 of this Agreement.

8.  Fees.

(a) Asset Management Fee.  Commencing on the date hereof, the Advisor shall be paid for the asset management services included in the services described in Section3 a quarterly fee (the “Asset Management Fee”) in an amount equal to one-fourth of 0.25% of the Gross Asset Value calculated on the last day of each preceding quarter.  The Asset Management Fee may or may not be taken, in whole or in part as to any quarter, in the sole discretion of the Advisor.  All or any portion of the Asset Management Fee not taken as to any quarter shall be deferred without interest and may be taken in such other quarter as the Advisor shall determine.

(b) Acquisition Fees.  The Advisor may receive, as compensation for services rendered in connection with the investigation, selection and acquisition (by purchase, investment or exchange) of Properties, Acquisition Fees in an amount equal to 2.0% of Gross Proceeds, payable by the Company upon the Company’s receipt of Gross Proceeds; provided that upon termination of this Agreement, the Advisor will be obligated to reimburse the Company for any Acquisition Fee that has not been allocated to the purchase price of Company Properties as provided for in the Declaration of Trust.

(c) Disposition Fee.  If the Advisor or an Affiliate provides a substantial amount of the services (as determined by the Conflicts Committee) in connection with the Sale of one or more Properties, the Advisor or such Affiliate shall receive at closing a Disposition Fee equal to 1.0% of the sales price of such Property or Properties; provided, however, that no Disposition Fee shall be payable to the Advisor for Property Sales if such Sales involve the Company selling all or substantially all of its Properties in one or more transactions designed to effectuate a business combination transaction (as opposed to a Company liquidation, in which case the Disposition Fee would be payable if the Advisor or an Affiliate provides a substantial amount of services as provided above). Any Disposition Fee payable under this sectionmay be paid in addition to real estate commissions paid to non-Affiliates, provided that the total real estate commissions (including such Disposition Fee) paid to all Persons by the Company for each Property shall not exceed an amount equal to the lesser of (i) 6.0% of the aggregate Contract Sales Price of each Property or (ii) the Competitive Real Estate Commission for each Property.

(d) Subordinated Share of Net Sales Proceeds.  The Subordinated Share of Net Sales Proceeds shall be payable to the Advisor in an amount equal to 15% of Net Sales Proceeds remaining after the Shareholders have received Distributions equal to the sum of the Shareholders’ 7% Return and 100% of Invested Capital. Following Listing, no Subordinated Share of Net Sales Proceeds will be paid to the Advisor.

(e) Subordinated Incentive Fee.  Upon Listing, the Advisor shall be entitled to the Subordinated Incentive Fee in an amount equal to 15.0% of the amount by which (i) the market value of the outstanding Shares of the Company, measured by taking the average closing price or average of bid and asked price, as the case may be, over a period of 30 days during which the Shares are traded, with such period beginning 180 days after Listing (the “Market Value”), plus the total of all Distributions paid to Shareholders from the Company’s inception until the date that Market Value is determined, exceeds (ii) the sum of (A) 100% of Invested Capital and (B) the total Distributions required to be paid to the

Shareholders in order to pay the Shareholders’ 7% Return from inception through the date Market Value is determined. The Company shall have the option to pay such fee in the form of cash, Shares, a promissory note or any combination of the foregoing. The Subordinated Incentive Fee will be reduced by the amount of any prior payment to the Advisor of a Subordinated Share of Net Sales Proceeds. In the event the Subordinated Incentive Fee is paid to the Advisor following Listing, no other performance fee will be paid to the Advisor.

(f) Changes to Fee Structure. In the event of Listing, the Company and the Advisor shall negotiate in good faith to establish a fee structure appropriate for a perpetual-life entity.

9.  Expenses.

(a) Reimbursable Expenses. In addition to the compensation paid to the Advisor pursuant to Paragraph 8 hereof, the Company shall pay directly or reimburse the Advisor for all of the expenses paid or incurred by the Advisor (to the extent not reimbursable by another party, such as the dealer manager) in connection with the services it provides to the Company pursuant to this Agreement, including, but not limited to:

(i) the Organization and Offering Expenses; provided, however, that within 60 days after the end of the month in which an Offering terminates, the Advisor shall reimburse the Company to the extent (i) Capped O&O Expenses borne by the Company exceed 2.5% of the Gross Proceeds raised in a completed offering and (ii) Organization and Offering Expenses borne by the Company exceed 15% of the Gross Proceeds raised in a completed Offering;

(ii) Acquisition Fees and Acquisition Expenses payable to unaffiliated Persons incurred in connection with the selection and acquisition of Properties;

(iii) the actual cost of goods and services used by the Company and obtained from entities not affiliated with the Advisor;

(iv) interest and other costs for borrowed money, including discounts, points and other similar fees;

(v) taxes and assessments on income or Property and taxes as an expense of doing business;

(vi) costs associated with insurance required in connection with the business of the Company or by the Board;

(vii) expenses of managing and operating Properties owned by the Company, whether payable to an Affiliate of the Company or a non-affiliated Person;

(viii) all expenses in connection with payments to the Board and meetings of the Board and Shareholders;

(ix) expenses associated with Listing or with the issuance and distribution of securities other than the Shares, such as selling commissions and fees, advertising expenses, taxes, legal and accounting fees, listing and registration fees;

(x) expenses connected with payments of Distributions in cash or otherwise made or caused to be made by the Company to the Shareholders;

(xi) expenses of organizing, redomesticating, merging, liquidating or dissolving the Company or of amending the Declaration of Trust or the Bylaws;

(xii) expenses of maintaining communications with Shareholders, including the cost of preparation, printing, and mailing annual reports and other Share holder reports, proxy statements and other reports required by governmental entities;

(xiii) administrative service expenses, including all costs and expenses incurred by Advisor in fulfilling its duties hereunder. Such costs and expenses may include reasonable wages and salaries and other employee-related expenses of all employees of Advisor who are engaged in the management, administration, operations, and marketing of the Company, including taxes, insurance and benefits relating to such employees, and legal, travel and other out-of-pocket expenses which are directly related to their services provided hereunder; and

(xiv) audit, accounting and legal fees.

No reimbursement shall be made for costs of personnel of the Advisor or its Affiliates to the extent that such personnel perform services in connection with services for which the Advisor receives the Acquisition Fee or the Disposition Fee.

(b) Other Services.  Should the Board request that the Advisor or any director, officer or employee thereof render services for the Company other than set forth in Paragraph 3, such services shall be separately compensated at such rates and in such amounts as are agreed by the Advisor and the Conflicts Committee, subject to the limitations contained in the Declaration of Trust, and shall not be deemed to be services pursuant to the terms of this Agreement.

(c) Timing of and Limitations on Reimbursements.

(i) Expenses incurred by the Advisor on behalf of the Company and payable pursuant to this Paragraph 9 shall be reimbursed no less than quarterly to the Advisor. The Advisor shall prepare a statement documenting the expenses of the Company during each quarter, and shall deliver such statement to the Company within 45 days after the end of each quarter.

(ii) Notwithstanding anything else in this Section9 to the contrary, the expenses enumerated in this Section9 shall not become reimbursable to the Advisor unless and until the Company has raised $2,000,000 in an Offering.

(iii) The Company shall not reimburse the Advisor at the end of any fiscal quarter Operating Expenses that, in the four consecutive fiscal quarters then ended (the “Expense Year”) exceed (the “Excess Amount”) the greater of 2% of Average Invested Assets or 25% of Net Income (the “2%/25% Guidelines”) for such year unless the Conflicts Committee determines that such excess was justified, based on unusual and nonrecurring factors which the Conflicts Committee deems sufficient. If the Conflicts Committee does not approve such excess as being so justified, any Excess Amount paid to the Advisor during a fiscal quarter shall be repaid to the Company. If the Conflicts Committee determines such excess was justified, then within 60 days after the end of any fiscal quarter of the Company for which total reimbursed Operating Expenses for the Expense Year exceed the 2%/25% Guidelines, the Advisor, at the direction of the Conflicts Committee, shall send to the Shareholders a written disclosure of such fact, together with an explanation of the factors the Conflicts Committee considered in determining that such excess expenses were justified. The Company will ensure that such determination will be reflected in the minutes of the meetings of the Board of Trustees. The Company will not

reimburse the Advisor or its Affiliates for services for which the Advisor or its Affiliates are entitled to compensation in the form of a separate fee. All figures used in the foregoing computation shall be determined in accordance with generally accepted accounting principles applied on a consistent basis.

10.  Other Activities of the Advisor.

(a) General.  Nothing herein contained shall prevent the Advisor from engaging in other activities, including, without limitation, the rendering of advice to other Persons (including other REITs) and the management of other programs advised, sponsored or organized by the Advisor or its Affiliates; nor shall this Agreement limit or restrict the right of any director, officer, employee, or shareholder of the Advisor or its Affiliates to engage in any other business or to render services of any kind to any other partnership, corporation, firm, individual, trust or association. The Advisor may, with respect to any investment in which the Company is a participant, also render advice and service to each and every other participant therein. The Advisor shall report to the Board the existence of any condition or circumstance, existing or anticipated, of which it has knowledge, which creates or could create a conflict of interest between the Advisor’s obligations to the Company and its obligations to or its interest in any other partnership, corporation, firm, individual, trust or association.

(b) Policy with Respect to Allocation of Investment Opportunities.  Before the Advisor presents an investment opportunity that would in its judgment be suitable for the Company to another Advisor-sponsored program, the Advisor shall determine in its sole discretion that the investment opportunity is more suitable for such other program than for the Company based on factors such as the following: the investment objectives and criteria of each program; the cash requirements and anticipated cash flow of each program; the size of the investment opportunity; the effect of the acquisition on diversification of each program’s investments by type of commercial property, geographic area and tenant base; the estimated income tax effects of the purchase on each entity; the policies of each program relating to leverage; the funds of each entity available for investment and the length of time such funds have been available for investment. In the event that an investment opportunity becomes available that is, in the sole discretion of the Advisor, equally suitable for both the Company and another Advisor-sponsored program, then the Advisor may offer the other program the investment opportunity if it has had the longest period of time elapse since it was offered an investment opportunity. The Advisor will use its reasonable efforts to fairly allocate investment opportunities in accordance with such allocation method and will promptly disclose any material deviation from such policy or the establishment of a new policy, which shall be allowed provided (1) the Board is provided with notice of such policy at least 60 days prior to such policy becoming effective and (2) such policy provides for the reasonable allocation of investment opportunities among such programs. The Advisor shall provide the Conflicts Committee with any information reasonably requested so that the Conflicts Committee can insure that the allocation of investment opportunities is applied fairly. Nothing herein shall be deemed to prevent the Advisor or an Affiliate from pursuing an investment opportunity directly rather than offering it to the Company or another Advisor-sponsored program so long as the Advisor is fulfilling its obligation to present a continuing and suitable investment program to the Company which is consistent with the investment policies and objectives of the Company.

11.  Relationship of Advisor and Company.  The Company and the Advisor are not partners or joint venturers with each other, and nothing in this Agreement shall be construed to make them such partners or joint venturers or impose any liability as such on either of them.

12.  Representations and Warranties.

(a) Of the Company. To induce the Advisor to enter into this Agreement, the Company hereby represents and warrants that:

(i) The Company is a real estate investment trust, duly organized, validly existing and in good standing under the laws of the State of Maryland with all requisite corporate power and authority and all material licenses, permits and authorizations necessary to carry out the transactions contemplated by this Agreement.

(ii) The Company’s execution, delivery and performance of this Agreement has been duly authorized. This Agreement constitutes the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. The Company’s execution and delivery of this Agreement and its fulfillment of and compliance with the respective terms hereof do not and will not (i) conflict with or result in a breach of the terms, conditions or provisions of, (ii) constitute a default under, (iii) result in the creation of any lien, security interest, charge or encumbrance upon the assets of the Company pursuant to, (iv) give any third party the right to modify, terminate or accelerate any obligation under, (v) result in a violation of or (vi) require any authorization, consent, approval, exception or other action by or notice to any court or administrative or governmental body pursuant to, the Declaration of Trust or Bylaws or any law, statute, rule or regulation to which the Company is subject, or any agreement, instrument, order, judgment or decree by which the Company is bound, in any such case in a manner that would have a material adverse effect on the ability of the Company to perform any of its obligations under this Agreement.

(b) Of the Advisor. To induce Company to enter into this Agreement, the Advisor represents and warrants that:

(i) The Advisor is a limited partnership, duly organized, validly existing and in good standing under the laws of the State of Texas with all requisite corporate power and authority and all material licenses, permits and authorizations necessary to carry out the transactions contemplated by this Agreement.

(ii) The Advisor’s execution, delivery and performance of this Agreement has been duly authorized. This Agreement constitutes a valid and binding obligation of the Advisor, enforceable against the Advisor in accordance with its terms. The Advisor’s execution and delivery of this Agreement and its fulfillment of and compliance with the respective terms hereof do not and will not (i) conflict with or result in a breach of the terms, conditions or provisions of, (ii) constitute a default under, (iii) result in the creation of any lien, security interest, charge or encumbrance upon the Advisor’s assets pursuant to, (iv) give any third party the right to modify, terminate or accelerate any obligation under, (v) result in a violation of or (vi) require any authorization, consent, approval, exemption or other action by or notice to any court or administrative or governmental body pursuant to, the Advisor’s limited partnership agreement, or any law, statute, rule or regulation to which the Advisor is subject, or any agreement, instrument, order, judgment or decree by which the Advisor is bound, in any such case in a manner that would have a material adverse effect on the ability of the Advisor to perform any of its obligations under this Agreement.

(iii) The Advisor has received copies of the Declaration of Trust, Bylaws, and the Registration Statement and of the Partnership’s limited partnership agreement and is familiar with the terms thereof, including without limitation the investment limitations included therein. Advisor warrants that it will use reasonable care to avoid any act or omission that would conflict with the terms of the Declaration of Trust, Bylaws, the Registration Statement, or the

Partnership’s limited partnership agreement in the absence of the express direction of the Conflicts Committee.

13.  Term; Termination of Agreement.  This Agreement shall continue in force until the first anniversary of the date hereof, subject to an unlimited number of successive one-year renewals upon mutual consent of the parties. The Company, acting through the Board, will evaluate the performance of the Advisor annually before renewing the Agreement, and each such renewal shall be for a term of no more than one year.

14.  Termination by Either Party. This Agreement may be terminated upon 60 days written notice without cause or penalty, by either party (by majority of the independent Trustees of the Advisor, as the case may be). The provisions of Sections 1, 6, 7, and 16 through 27 survive termination of this Agreement.

15.  Assignment to an Affiliate.  This Agreement may be assigned by the Advisor to an Affiliate with the approval of a majority of the Conflicts Committee. The Advisor may assign any rights to receive fees or other payments under this Agreement without obtaining the approval of the Board. This Agreement shall not be assigned by the Company without the consent of the Advisor, except in the case of an assignment by the Company to a corporation or other organization which is a successor to all of the assets, rights and obligations of the Company, in which case such successor organization shall be bound hereunder and by the terms of said assignment in the same manner as the Company is bound by this Agreement.

16.  Payments to and Duties of Advisor upon Termination.  Payments to the Advisor pursuant to this Section16 shall be subject to the 2%/25% Guidelines to the extent applicable.

(a) After the Termination Date, the Advisor shall not be entitled to compensation for further services hereunder except it shall be entitled to receive from the Company within 30 days after the effective date of such termination the following:

(i) all unpaid reimbursements of expenses and all earned but unpaid fees payable to the Advisor prior to termination of this Agreement; and

(ii) the Subordinated Performance Fee Due Upon Termination, provided that no Subordinated Performance Fee Due Upon Termination will be paid if the Company has paid or is obligated to pay the Subordinated Incentive Fee.

(b) The Advisor shall promptly upon termination:

(i) pay over to the Company all money collected and held for the account of the Company pursuant to this Agreement, after deducting any accrued compensation and reimbursement for its expenses to which it is then entitled;

(ii) deliver to the Board a full accounting, including a statement showing all payments collected by it and a statement of all money held by it, covering the period following the date of the last accounting furnished to the Board;

(iii) deliver to the Board all assets, including Properties, and documents of the Company then in the custody of the Advisor; and

(iv) cooperate with the Company to provide an orderly management transition.

17.  Indemnification by the Company.  The Company shall indemnify and hold harmless the Advisor and its Affiliates, including their respective officers, directors, partners and employees, from all liability, claims, damages or losses arising in the performance of their duties hereunder, and related expenses, including reasonable attorneys’ fees, to the extent such liability, claims, damages or losses and related expenses are not fully reimbursed by insurance, subject to any limitations imposed by the laws of the State of Maryland or the Declaration of Trust. Notwithstanding the foregoing, the Advisor shall not be entitled to indemnification or be held harmless pursuant to this Paragraph 17 for any activity which the Advisor shall be required to indemnify or hold harmless the Company pursuant to Paragraph 18. Any indemnification of the Advisor may be made only out of the net assets of the Company and not from Shareholders.

18.  Indemnification by Advisor.  The Advisor shall indemnify and hold harmless the Company from contract or other liability, claims, damages, taxes or losses and related expenses including attorneys’ fees, to the extent that such liability, claims, damages, taxes or losses and related expenses are not fully reimbursed by insurance and are incurred by reason of the Advisor’s bad faith, fraud, willful misfeasance, misconduct, or reckless disregard of its duties.

19.  Notices.  Any notice, report or other communication required or permitted to be given hereunder shall be in writing unless some other method of giving such notice, report or other communication is required by the Declaration of Trust, the Bylaws, or accepted by the party to whom it is given, and shall be given by being delivered by hand or by overnight mail or other overnight delivery service to the addresses set forth herein:

To the Board and to the Company:	Hartman Commercial Properties REIT 1450 West Sam Houston Parkway, North, Suite 100 Houston, Texas 77043
To the Advisor:	Hartman Management, L.P. 1450 West Sam Houston Parkway, North, Suite 100 Houston, Texas 77043

Either party may at any time give notice in writing to the other party of a change in its address for the purposes of this Paragraph19.

20.  Modification.  This Agreement shall not be changed, modified, terminated, or discharged, in whole or in part, except by an instrument in writing signed by both parties hereto, or their respective successors or assignees.

21.  Severability.  The provisions of this Agreement are independent of and severable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part.

22.  Construction.  The provisions of this Agreement shall be construed and interpreted in accordance with the laws of the State of Texas.

23.  Entire Agreement.  This Agreement contains the entire agreement and understanding among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, inducements and conditions, express or implied, oral or written, of any nature whatsoever with respect to the subject matter hereof. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing.

24.  Indulgences, Not Waivers.  Neither the failure nor any delay on the part of a party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver.

25.  Gender.  Words used herein regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context requires.

26.  Titles Not to Affect Interpretation.  The titles of paragraphs and subparagraphs contained in this Agreement are for convenience only, and they neither form a part of this Agreement nor are they to be used in the construction or interpretation hereof.

27.  Execution in Counterparts.  This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when the counterparts hereof, taken together, bear the signatures of all of the parties reflected hereon as the signatories.

[Signatures appear on next page.]

IN WITNESS WHEREOF, the parties hereto have executed this Advisory Agreement as of the date and year first above written.

HARTMAN COMMERCIAL PROPERTIES REIT
By:	/s/ Allen R. Hartman
Name:			Allen R. Hartman
Title:		President
HARTMAN MANAGEMENT, L.P.
By: :		/s/ Allen R. Hartman
Name:			Allen R. Hartman
Title:		President

EX-10.11

Exhibit 10.11

Summary Description of Hartman Commercial Properties REIT
Trustee Compensation Arrangements

Independent trustees of Hartman Commercial Properties REIT (the “Company”) are paid an annual fee of $5,000, $1,000 for each meeting attended, and $1,000 per quarter for committee meetings attended, payable (at the option of the trustee) in either cash or by issuing such trustees common shares of beneficial interest in the Company.

Although the Company has not granted any awards under its equity compensation plans to any of our trustees, the compensation committee may also grant options to purchase common shares or other incentive awards to members of the board of trustees.

All trustees are reimbursed for reasonable out-of-pocket expenses incurred in connection with attendance at meetings of the board of trustees.

Trustees who are not independent, by virtue of the fact that they are officers of Hartman Management, L.P., the affiliate management company which manages all of the Company’s operations, do not receive any separate compensation for services rendered as a trustee.

EX-10.13

EXHIBIT 10.13

HARTMAN COMMERCIAL PROPERTIES REIT

Up to 11,000,000 Common Shares of Beneficial Interest

DEALER MANAGER AGREEMENT

August 31, 2004

D.H. Hill Securties, LLP

19747 Hwy 59 North, Suite 101

Humble, Texas  77338

Attention: Dan H. Hill

Ladies and Gentlemen:

Hartman Commercial Properties REIT, a Maryland real estate investment trust (the “Company”), is registering for public sale a maximum of 11,000,000 common shares of beneficial interest (the “Shares” or the “Stock”), $0.001 par value per share (the “Offering”), to be issued and sold for $10.00 per share at an aggregate purchase price of $109,500,000 (10,000,000 Shares to be offered to the public and 1,000,000 Shares to be offered pursuant to the Company’s dividend reinvestment plan at $9.50 per share).  There shall be a minimum purchase by any one person of 100 Shares (except as otherwise indicated in the Prospectus or in any letter or memorandum from the Company to D.H. Hill Securities, LLP(the “Dealer Manager”)).  Terms not defined herein shall have the same meaning as in the Prospectus.  In connection therewith, the Company hereby agrees with you, the Dealer Manager, as follows:

1.Representations and Warranties of the Company

The Company represents and warrants to the Dealer Manager and each dealer with whom the Dealer Manager has entered into or will enter into a Selected Dealer Agreement in the form attached to this Agreement as Exhibit A (said dealers being hereinafter called the “Dealers”) that:

1.1A registration statement with respect to the Company has been prepared by the Company in accordance with applicable requirements of the Securities Act of 1933, as amended (the “Securities Act”), and the applicable rules and regulations (the “Rules and Regulations”) of the Securities and Exchange Commission (the “SEC”) promulgated thereunder, covering the Shares.  Such registration statement, which includes a preliminary prospectus, was initially filed with the SEC on December 31, 2003.  Copies of such registration statement and each amendment thereto have been or will be delivered to the Dealer Manager.  (The registration statement and prospectus contained therein, as finally amended and revised at the effective date of the registration statement, are respectively hereinafter referred to as the “Registration Statement” and the “Prospectus,” except that if the Prospectus first filed by the Company pursuant to Rule 424(b) under the Securities Act shall differ from the Prospectus, the term “Prospectus” shall also include the Prospectus filed pursuant to Rule 424(b).)

1.2The Company has been duly and validly organized and formed as a corporation under the laws of the state of Maryland, with the power and authority to conduct its business as described in the Prospectus.

1.3The Registration Statement and Prospectus comply with the Securities Act and the Rules and Regulations and do not contain any untrue statements of material facts or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; provided, however, that the foregoing provisions of this Section 1.3 will not extend to such statements contained in or omitted from the Registration

Statement or Prospectus as are primarily within the knowledge of the Dealer Manager or any of the Dealers and are based upon information furnished by the Dealer Manager in writing to the Company specifically for inclusion therein.

1.4The Company intends to use the funds received from the sale of the Shares as set forth in the Prospectus.

1.5No consent, approval, authorization or other order of any governmental authority is required in connection with the execution or delivery by the Company of this Agreement or the issuance and sale by the Company of the Shares, except such as may be required under the Securities Act or applicable state securities laws.

1.6There are no actions, suits or proceedings pending or to the knowledge of the Company, threatened against the Company at law or in equity or before or by any federal or state commission, regulatory body or administrative agency or other governmental body, domestic or foreign, which will have a material adverse effect on the business or property of the Company.

1.7The execution and delivery of this Agreement, the consummation of the transactions herein contemplated and compliance with the terms of this Agreement by the Company will not conflict with or constitute a default under any charter, bylaw, indenture, mortgage, deed of trust, lease, rule, regulation, writ, injunction or decree of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over the Company, except to the extent that the enforceability of the indemnity and/or contribution provisions contained in Section 4 of this Agreement may be limited under applicable securities laws.

1.8The Company has full legal right, power and authority to enter into this Agreement and to perform the transactions contemplated hereby, except to the extent that the enforceability of the indemnity and/or contribution provisions contained in Section 4 of this Agreement may be limited under applicable securities laws.

1.9At the time of the issuance of the Shares, the Shares will have been duly authorized and validly issued, and upon payment therefor, will be fully paid and nonassessable and will conform to the description thereof contained in the Prospectus.

2.Covenants of the Company

The Company covenants and agrees with the Dealer Manager that:

2.1It will, at no expense to the Dealer Manager, furnish the Dealer Manager with such number of printed copies of the Registration Statement, including all amendments and exhibits thereto, as the Dealer Manager may reasonably request.  It will similarly furnish to the Dealer Manager and others designated by the Dealer Manager as many copies as the Dealer Manager may reasonably request in connection with the offering of the Shares of: (a) the Prospectus in preliminary and final form and every form of supplemental or amended prospectus; (b) this Agreement; and (c) any other printed sales literature or other materials (provided that the use of said sales literature and other materials has been first approved for use by the Company and all appropriate regulatory agencies).

2.2It will furnish such proper information and execute and file such documents as may be necessary for the Company to qualify the Shares for offer and sale under the securities laws of such jurisdictions as the Dealer Manager may reasonably designate and will file and make in each year such statements and reports as may be required.  The Company will furnish to the Dealer Manager a copy of such papers filed by the Company in connection with any such qualification.

2.3It will: (a) use its best efforts to cause the Registration Statement to become effective; (b) furnish copies of any proposed amendment or supplement of the Registration Statement or Prospectus to the Dealer Manager; (c) file every amendment or supplement to the Registration Statement or the Prospectus that may be required by the SEC;

2

and (d) if at any time the SEC shall issue any stop order suspending the effectiveness of the Registration Statement, it will use its best efforts to obtain the lifting of such order at the earliest possible time.

2.4If at any time when a Prospectus is required to be delivered under the Securities Act any event occurs as a result of which, in the opinion of either the Company or the Dealer Manager, the Prospectus or any other prospectus then in effect would include an untrue statement of a material fact or, in view of the circumstances under which they were made, omit to state any material fact necessary to make the statements therein not misleading, the Company will promptly notify the Dealer Manager thereof (unless the information shall have been received from the Dealer Manager) and will effect the preparation of an amended or supplemental prospectus which will correct such statement or omission.  The Company will then promptly prepare such amended or supplemental prospectus or prospectuses as may be necessary to comply with the requirements of Section 10 of the Securities Act.

3.Obligations and Compensation of Dealer Manager

3.1The Company hereby appoints the Dealer Manager as its agent and principal distributor for the purpose of selling for cash up to a maximum of 10,000,000 Shares through Dealers, all of whom shall be members of the National Association of Securities Dealers, Inc. (NASD).  The Dealer Manager may also sell Shares for cash directly to its own clients and customers at the public offering price and subject to the terms and conditions stated in the Prospectus.  The Dealer Manager hereby accepts such agency and distributorship and agrees to use its best efforts to sell the Shares on said terms and conditions.  The Dealer Manager represents to the Company that (i) it is a member of the NASD; (ii) it will at all times maintain and employ an adequate number of administrative personnel (who shall be acceptable to the Company) to fulfill its obligations under this agreement and any supplemental or successor agreement and shall be solely responsible for the compensation of such personnel; (iii) it will be responsible for payment of such other costs incurred by it in connection with the Offering as shall be agreed between the Company and the Dealer Manager, which costs are not expected to exceed the amounts received by the Dealer Manager as a dealer manager fee (discussed below); (iv) it and its employees and representatives have all required licenses and registrations to act under this Agreement; and (v) it has established and implemented anti-money laundering compliance programs in accordance with applicable law, including applicable NASD rules, SEC rules and the USA PATRIOT Act of 2001, reasonably expected to detect and cause the reporting of suspicious transactions in connection with the sale of Shares of the Company.  The Dealer Manager agrees to be bound by the terms of the Escrow Agreement executed as of August 31, 2004, among Wells Fargo Bank, N.A., as escrow agent, the Dealer Manager and the Company, a copy of which is enclosed (the “Escrow Agreement”).

3.2Promptly after the effective date of the Registration Statement, the Dealer Manager and the Dealers shall commence the offering of the Shares for cash to the public in jurisdictions in which the Shares are registered or qualified for sale or in which such offering is otherwise permitted.  The Dealer Manager and the Dealers will suspend or terminate offering of the Shares upon request of the Company at any time and will resume offering the Shares upon subsequent request of the Company.

3.3Except as provided in the “Plan of Distribution” Section of the Prospectus, as compensation for the services rendered by the Dealer Manager, the Company agrees that it will pay to the Dealer Manager selling commissions in the amount of 7.0% of the gross proceeds of the Shares sold to the public, plus a dealer manager fee in the amount of up to 2.5% of the gross proceeds of the Shares sold.  As provided in the Prospectus, no selling commissions will be paid to the Dealer Manager for sales made by broker-dealers who are affiliated with the Company or by the Company’s employees who may be registered with the NASD and sponsored by the Dealer Manager, but only for sales made through Dealers.  Notwithstanding the foregoing, no commissions, payments or amount whatsoever will be paid to the Dealer Manager under this Section 3.3 unless or until the gross proceeds of the Shares sold are disbursed to the Company pursuant to paragraph 3(a) of the Escrow Agreement.  Until the Required Capital, the Pennsylvania Required Capital or the New York Required Capital (as applicable and as defined in the Escrow Agreement) is obtained, investments will be held in escrow and, if the Required Capital, the Pennsylvania Required Capital or the New York Required Capital, as applicable, is not obtained, investments will be returned to the

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investors in accordance with the Prospectus.  The Company will not be liable or responsible to any Dealer for direct payment of commissions to such Dealer, it being the sole and exclusive responsibility of the Dealer Manager for payment of commissions to Dealers.  Notwithstanding the above, at its discretion, the Company may act as agent of the Dealer Manager by making direct payment of commissions to such Dealers without incurring any liability therefor.  No sales commission or dealer manager fee will be paid with respect to Shares sold pursuant to the Company’s dividend reinvestment plan.  Under the rules of the NASD, total underwriting compensation, including sales commissions, the dealer manager fee and underwriter expense reimbursement, may not exceed 10% of the gross proceeds from the sale of the Shares, except for bona fide due diligence expenses, which may not exceed 0.5% of the gross proceeds from the sale of the Shares.

3.4The Dealer Manager represents and warrants to the Company and each person and firm that signs the Registration Statement that the information under the caption “Plan of Distribution” in the Prospectus and all other information furnished to the Company by the Dealer Manager in writing expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus, or any amendment or supplement thereto does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading.

3.5The Dealer Manager shall use and distribute in conjunction with the offer and sale of any Shares only the Prospectus and such sales literature and advertising as shall have been previously approved in writing by the Company.

3.6The Dealer Manager shall cause Shares to be offered and sold only in those jurisdictions specified in writing by the Company for whose account Shares are then offered for sale, and such list of jurisdictions shall be updated by the Company as additional states are added.  The Company shall specify only such jurisdictions in which the offering and sale of its Shares has been authorized by appropriate state regulatory authorities.  No Shares shall be offered or sold for the account of the Company in any other states.

3.7The Dealer Manager represents and warrants to the Company that it will not represent or imply that the escrow agent, as identified in the Prospectus, has investigated the desirability or advisability of investment in the Company, or has approved, endorsed or passed upon the merits of the Shares or the Company, nor will it use the name of said escrow agent in any manner whatsoever in connection with the offer or sale of the Shares other than by acknowledgment that it has agreed to serve as escrow agent.

4.Indemnification

4.1The Company will indemnify and hold harmless the Dealers and the Dealer Manager, their officers and directors and each person, if any, who controls such Dealer or Dealer Manager within the meaning of Section 15 of the Securities Act from and against any losses, claims, damages or liabilities, joint or several, to which such Dealers or Dealer Manager, their officers and directors, or such controlling person may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (a) any untrue statement or alleged untrue statement of a material fact contained (i) in any Registration Statement (including the Prospectus as a part thereof) or any post-effective amendment thereto or in the Prospectus or any amendment or supplement to the Prospectus or (ii) in any blue sky application or other document executed by the Company or on its behalf specifically for the purpose of qualifying any or all of the Shares for sale under the securities laws of any jurisdiction or based upon written information furnished by the Company under the securities laws thereof (any such application, document or information being hereinafter called a “Blue Sky Application”), or (b) the omission or alleged omission to state in the Registration Statement (including the Prospectus as a part thereof) or any post-effective amendment thereof or in any Blue Sky Application a material fact required to be stated therein or necessary to make the statements therein not misleading, or (c) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, if used prior to the effective date of the Registration Statement, or in the Prospectus or any amendment or supplement to the

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Prospectus or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, and will reimburse each Dealer or Dealer Manager, its officers and each such controlling person for any legal or other expenses reasonably incurred by such Dealer or Dealer Manager, its officers and directors, or such controlling person in connection with investigating or defending such loss, claim, damage, liability or action; provided that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of, or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company or Dealer Manager by or on behalf of any Dealer or Dealer Manager specifically for use with reference to such Dealer or Dealer Manager in the preparation of the Registration Statement or any such post-effective amendment thereof, any such Blue Sky Application or any such preliminary prospectus or the Prospectus or any such amendment thereof or supplement thereto; and further provided that the Company will not be liable in any such case if it is determined that such Dealer or Dealer Manager was at fault in connection with the loss, claim, damage, liability or action.  Notwithstanding the foregoing, the Company may not indemnify or hold harmless the Dealer Manager, any Dealer or any of their affiliates in any manner that would be inconsistent with the provisions of Section II.G. of the Statement of Policy Regarding Real Estate Investment Trusts of the North American Securities Administrators Association, Inc. effective September 29, 1993, as amended (the “NASAA REIT Guidelines”).  In particular, but without limitation, the Company may not indemnify or hold harmless the Dealer Manager, any Dealer or any of their affiliates for liabilities arising from or out of a violation of state or federal securities laws, unless one or more of the following conditions are met:

(a)there has been a successful adjudication on the merits of each count involving alleged securities law violations;

(b)such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction; or

(c)a court of competent jurisdiction approves a settlement of the claims against the indemnitee and finds that indemnification of the settlement and the related costs should be made, and the court considering the request for indemnification has been advised of the position of the SEC and of the published position of any state securities regulatory authority in which the securities were offered as to indemnification for violations of securities laws.

4.2The Dealer Manager will indemnify and hold harmless the Company and each person or firm which has signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act, from and against any losses, claims, damages or liabilities to which any of the aforesaid parties may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (a) any untrue statement of a material fact contained (i) in the Registration Statement (including the Prospectus as a part thereof) or any post-effective amendment thereof or (ii) any Blue Sky Application, or (b) the omission to state in the Registration Statement (including the Prospectus as a part thereof) or any post-effective amendment thereof or in any Blue Sky Application a material fact required to be stated therein or necessary to make the statements therein not misleading, or (c) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, if used prior to the effective date of the Registration Statement, or in the Prospectus, or in any amendment or supplement to the Prospectus or the omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein in the light of the circumstances under which they were made not misleading in each case to the extent, but, for purposes of subsections (a), (b) and (c) of this Section 4.2, only to the extent, that such untrue statement or omission was made in reliance upon and in conformity with written information furnished to the Company by or on behalf of the Dealer Manager specifically for use with reference to the Dealer Manager in the preparation of the Registration Statement or any such post-effective amendments thereof or any such Blue Sky Application or any such preliminary prospectus or the Prospectus or any such amendment

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thereof or supplement thereto, or (d) any unauthorized use of sales materials or use of unauthorized verbal representations concerning the Shares by the Dealer Manager, or (e) any failure to comply with applicable laws governing money laundry abatement and anti-terrorist financing efforts, including applicable NASD rules, SEC rules and the USA PATRIOT Act of 2001, and will reimburse the aforesaid parties, in connection with investigation or defending such loss, claim, damage, liability or action.  This indemnity agreement will be in addition to any liability which the Dealer Manager may otherwise have.

4.3Each Dealer severally will indemnify and hold harmless the Company, Dealer Manager and each of their directors (including any persons named in any of the Registration Statements with his consent, as about to become a director), each of their officers who has signed any of the Registration Statements and each person, if any, who controls the Company and the Dealer Manager within the meaning of Section 15 of the Securities Act from and against any losses, claims, damages or liabilities to which the Company, the Dealer Manager, any such director or officer, or controlling person may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (a) any untrue statement or alleged untrue statement of a material fact contained (i) in the Registration Statement (including the Prospectus as a part thereof) or any post-effective amendment thereof or (ii) in any Blue Sky Application, or (b) the omission or alleged omission to state in the Registration Statement (including the Prospectus as a part thereof or any post-effective amendment thereof or in any Blue Sky Application a material fact required to be stated therein or necessary to make the statements therein not misleading, or (c) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, if used prior to the effective date of the Registration Statement, or in the Prospectus, or in any amendment or supplement to the Prospectus or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company or the Dealer Manager by or on behalf of such Dealer specifically for use with reference to such Dealer in the preparation of the Registration Statement or any such post-effective amendments thereof or any such Blue Sky Application or any such preliminary prospectus or the Prospectus or any such amendment thereof or supplement thereto, or (d) any unauthorized use of sales materials or use of unauthorized verbal representations concerning the Shares by such Dealer or Dealer’s representations or agents in violation of Section VII of the Selected Dealer Agreement or otherwise, or (e) any failure to comply with applicable laws governing money laundry abatement and anti-terrorist financing efforts, including applicable NASD rules, SEC rules and the USA PATRIOT Act of 2001, and will reimburse the Company and the Dealer Manager and any such directors or officers, or controlling person, in connection with investigating or defending any such loss, claim, damage, liability or action.  This indemnity agreement will be in addition to any liability which such Dealer may otherwise have.

4.4Within thirty (30) business days after receipt by an indemnified party under this Section 4 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 4, notify in writing the indemnifying party of the commencement thereof and the omission so to notify the indemnifying party will relieve such indemnifying party from any liability under this Section 4 as to the particular item for which indemnification is then being sought, but not from any other liability which it may have to any indemnified party.  In case any such action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled, to the extent it may wish, jointly with any other indemnifying party similarly notified, to participate in the defense thereof, with separate counsel.  Such participation shall not relieve such indemnifying party of the obligation to reimburse the indemnified party for reasonable legal and other expenses (subject to Section 4.5) incurred by such indemnified party in defending itself, except for such expenses incurred after the indemnifying party has deposited funds sufficient to effect the settlement, with prejudice, of the claim in respect of which indemnity is sought.  Any such indemnifying party shall not be liable to any such indemnified party on account of any settlement of any claim or action effected without the consent of such indemnifying party.

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4.5The indemnifying party shall pay all legal fees and expenses of the indemnified party in the defense of such claims or actions; provided, however, that the indemnifying party shall not be obligated to pay legal expenses and fees to more than one law firm in connection with the defense of similar claims arising out of the same alleged acts or omissions giving rise to such claims notwithstanding that such actions or claims are alleged or brought by one or more parties against more than one indemnified party.  If such claims or actions are alleged or brought against more than one indemnified party, then the indemnifying party shall only be obliged to reimburse the expenses and fees of the one law firm that has been selected by a majority of the indemnified parties against which such action is finally brought; and in the event a majority of such indemnified parties is unable to agree on which law firm for which expenses or fees will be reimbursable by the indemnifying party, then payment shall be made to the first law firm of record representing an indemnified party against the action or claim. Such law firm shall be paid only to the extent of services performed by such law firm and no reimbursement shall be payable to such law firm on account of legal services performed by another law firm.

4.6The indemnity agreements contained in this Section 4 shall remain operative and in full force and effect regardless of (a) any investigation made by or on behalf of any Dealer, or any person controlling any Dealer or by or on behalf of the Company, the Dealer Manager or any officer or director thereof, or by or on behalf of the Company or the Dealer Manager, (b) delivery of any Shares and payment therefor, and (c) any termination of this Agreement.  A successor of any Dealer or of any of the parties to this Agreement, as the case may be, shall be entitled to the benefits of the indemnity agreements contained in this Section 4.

5.Survival of Provisions

The respective agreements, representations and warranties of the Company and the Dealer Manager set forth in this Agreement shall remain operative and in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of the Dealer Manager or any Dealer or any person controlling the Dealer Manager or any Dealer or by or on behalf of the Company or any person controlling the Company, and (c) the acceptance of any payment for the Shares.

6.Applicable Law; Venue

This Agreement was executed and delivered in, and its validity, interpretation and construction shall be governed by the laws of, the State of Texas; provided however, that causes of action for violations of federal or state securities laws shall not be governed by this Section.  Venue for any action brought hereunder shall lie exclusively in Houston, Texas.

7.Counterparts

This Agreement may be executed in any number of counterparts.  Each counterpart, when executed and delivered, shall be an original contract, but all counterparts, when taken together, shall constitute one and the same Agreement.

8.Successors and Amendment

This Agreement shall inure to the benefit of and be binding upon the Dealer Manager and the Company and their respective successors. Nothing in this Agreement is intended or shall be construed to give to any other person any right, remedy or claim, except as otherwise specifically provided herein.  This Agreement shall inure to the benefit of the Dealers to the extent set forth in Sections 1 and 4 hereof.  This Agreement may be amended by the written agreement of the Dealer Manager and the Company.

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9.Term

This Agreement may be terminated by either party (i) immediately upon notice to the other party in the event that the other party shall have materially failed to comply with any of the material provisions of this Agreement on its part to be performed during the term of this Agreement or if any of the representations, warranties, covenants or agreements of such party contained herein shall not have been materially complied with or satisfied within the times specified or (ii) by either party on 60 days’ written notice.

In any case, this Agreement shall expire at the close of business on the effective date that the Offering is terminated. The provisions of Section 4 hereof shall survive such termination.  In addition, the Dealer Manager, upon the expiration or termination of this Agreement, shall (i) promptly deposit any and all funds in its possession which were received from investors for the sale of Shares into the appropriate escrow account or, if the minimum number of Shares have been sold and accepted by the Company, into such other account as the Company may designate; and (ii) promptly deliver to the Company all records and documents in its possession which relate to the Offering and are not designated as dealer copies.  The Dealer Manager, at its sole expense, may make and retain copies of all such records and documents, but shall keep all such information confidential.  The Dealer Manager shall use its best efforts to cooperate with the Company to accomplish an orderly transfer of management of the Offering to a party designated by the Company.  Upon expiration or termination of this Agreement, the Company shall pay to the Dealer Manager all commissions to which the Dealer Manager is or becomes entitled under Section 3 at such time as such commissions become payable.

10.Confirmation

The Company hereby agrees and assumes the duty to confirm on its behalf and on behalf of dealers or brokers who sell the Shares all orders for purchase of Shares accepted by the Company.  Such confirmations will comply with the rules of the SEC and the NASD, and will comply with applicable laws of such other jurisdictions to the extent the Company is advised of such laws in writing by the Dealer Manager.

11.Suitability of Investors

The Dealer Manager will offer Shares, and in its agreements with Dealers will require that the Dealers offer Shares, only to persons who meet the financial qualifications set forth in the Prospectus or in any suitability letter or memorandum sent to it by the Company and will only make offers to persons in the states in which it is advised in writing that the Shares are qualified for sale or that such qualification is not required.  In offering Shares, the Dealer Manager will, and in its agreements with Dealers, the Dealer Manager will require that the Dealers will, comply with the provisions of all applicable rules and regulations relating to suitability of investors, including without limitation, the provisions of Article III.C. of the NASAA REIT Guidelines.

12.Submission of Orders

12.1Those persons who purchase Shares will be instructed by the Dealer Manager or the Dealer to make their checks payable to “Wells Fargo Bank, Hartman Commercial Properties REIT.”  The Dealer Manager and any Dealer receiving a check not conforming to the foregoing instructions shall return such check directly to such subscriber not later than the end of the next business day following its receipt.  Checks received by the Dealer Manager or Dealer which conform to the foregoing instructions shall be transmitted for deposit pursuant to one of the methods described in this Section 12.  Transmittal of received investor funds will be made in accordance with the following procedures.  The Dealer Manager may authorize certain Dealers which are “$250,000 broker-dealers” to instruct their customers to make their checks for Shares subscribed for payable directly to the Dealer.  In such case, the Dealer will collect the proceeds of the subscribers’ checks and issue a check for the aggregate amount of the subscription proceeds made payable to the order of the escrow agent.

12.2If a Dealer conducts its internal supervisory procedures at the location where subscription documents and checks are initially received, the Dealer shall forward (i) the subscription documents to the Dealer Manager and

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(ii) the checks to the escrow agent by noon of the next business day following receipt of the subscription documents and the check.

12.3If a Dealer’s internal supervisory procedures are to be performed at a different location (the “Final Review Office”), the subscription documents and check must be transmitted to the Final Review Office by the end of the next business day following receipt of the subscription documents and check by the Dealer.  The Final Review Office will, by the next business day following receipt of the subscription documents and check, forward both the subscription documents and check to the Dealer Manager as processing broker-dealer in order that the Dealer Manager may complete its review of the documentation and process the subscription documents and check.

12.4Any check received by the Dealer Manager directly or as processing broker-dealer from the Dealers will, in all cases, be forwarded to the escrow agent as soon as practicable, but in any event by the end of the second business day following receipt by the Dealer Manager of the subscription documents and check.  Checks of rejected subscribers will be promptly returned to such subscribers.

12.5If requested by the Company, the Dealer Manager shall obtain, and shall cause the Dealers to obtain, from subscribers for the Shares, other documentation reasonably deemed by the Company to be required under applicable law or as may be necessary to reflect the policies of the Company.  Such documentation may include, without limitation, subscribers’ written acknowledgement and agreement to the privacy policies of the Company.

13.Selected Investment Advisor Agreement

With respect to any provision of information concerning the Offering by a selected investment advisor (the “Investment Advisor”) presently registered under the Investment Advisers Act of 1940, as amended, and presently and appropriately registered in each state in which the Investment Advisor has clients, the Company and the Investment Advisor shall enter into a Selected Investment Advisor Agreement in substantially the form attached hereto as Exhibit B.

14.Notices.

Any notice, approval, request, authorization, direction or other communication under this Agreement shall be given in writing and shall be deemed to be delivered when delivered in person or deposited in the United States mail, properly addressed and stamped with the required postage, registered or certified mail, return receipt requested, to the intended recipient as set forth below:

If to the Company:	Hartman Commercial Properties REIT
	1450 W. Sam Houston Pkwy. N, Suite 100
	Houston, Texas 77043
	Attention: President
If to the Dealer Manager:	D.H. Hill Securities, LLP
	19747 Hwy 59 N., Suite 101
	Humble, Texas 77338
	Attention: Dan H. Hill

Any party may change its address specified above by giving the other party notice of such change in accordance with this Section 14.

If the foregoing correctly sets forth our understanding, please indicate your acceptance thereof in the space provided below for that purpose, whereupon this letter and your acceptance shall constitute a binding agreement between us as of the date first above written.

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			Very truly yours,
			HARTMAN COMMERCIAL PROPERTIES REIT
			By:	/s/ Allen R. Hartman
				Allen R. Hartman, President
Accepted and agreed as of the
date first above written.
D.H. HILL SECURITIES, LLP
By: H&H Services, Inc., general partner
	By:	/s/ Dan H. Hill
		Dan H. Hill President

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EXHIBIT A

HARTMAN COMMERCIAL PROPERTIES REIT

Up to 11,000,000 Common Shares of Beneficial Interest

SELECTED DEALER AGREEMENT

Ladies and Gentlemen:

D.H. Hill Securities, LLP, as the dealer manager (“Dealer Manager”) for Hartman Commercial Properties REIT (the “Company”), a Maryland real estate investment trust, invites you (the “Dealer”) to participate in the distribution of shares of common stock (“Shares”) of the Company subject to the following terms:

I.Dealer Manager Agreement

The Dealer Manager has entered into an agreement with the Company called the Dealer Manager Agreement dated August 31, 2004, in the form attached hereto as Exhibit A (the “Dealer Manager Agreement”; the terms of the Dealer Manager Agreement relating to the Dealer are incorporated herein by reference as if set forth verbatim and capitalized terms not otherwise defined herein shall have the meanings given them in the Dealer Manager Agreement).  By your acceptance of this Agreement, you will become one of the Dealers referred to in the Dealer Manager Agreement and will be entitled and subject to the indemnification provisions contained in the Dealer Manager Agreement, including the provisions of the Dealer Manager Agreement wherein the Dealers severally agree to indemnify and hold harmless the Company, the Dealer Manager and each officer and director thereof, and each person, if any, who controls the Company and the Dealer Manager within the meaning of the Securities Act of 1933, as amended (the “Securities Act”).  Except as otherwise specifically stated herein, all terms used in this Agreement have the meanings provided in the Dealer Manager Agreement.  The Shares are offered solely through broker-dealers who are members of the National Association of Securities Dealers, Inc. (“NASD”).

Dealer hereby agrees to use its best efforts to sell the Shares for cash on the terms and conditions stated in the Prospectus.  Nothing in this Agreement shall be deemed or construed to make Dealer an employee, agent, representative or partner of the Dealer Manager or of the Company, and Dealer is not authorized to act for the Dealer Manager or the Company or to make any representations on their behalf except as set forth in the Prospectus and such other printed information furnished to Dealer by the Dealer Manager or the Company to supplement the Prospectus (“supplemental information”).

II.Submission of Orders

Those persons who purchase Shares will be instructed by the Dealer to make their checks payable to “Wells Fargo Bank, Hartman Commercial Properties REIT.”  Any Dealer receiving a check not conforming to the foregoing instructions shall return such check directly to such subscriber not later than the end of the next business day following its receipt.  Checks received by the Dealer which conform to the foregoing instructions shall be transmitted for deposit pursuant to one of the methods in this Article II.  The Dealer Manager may authorize Dealer if Dealer is a “$250,000 broker-dealer” to instruct its customers to make its checks for Shares subscribed for payable directly to the Dealer, in which case the Dealer will collect the proceeds of the subscriber’s checks and issue a check made payable to the order of the escrow agent for the aggregate amount of the subscription proceeds.  Transmittal of received investor funds will be made in accordance with the following procedures:

(a)If the Dealer conducts its internal supervisory procedures at the location where subscription documents and checks are initially received, the Dealer shall forward (i) the subscription

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documents to the Dealer Manager and (ii) the checks to the escrow agent by noon of the next business day following receipt of the subscription documents and the check.

(b)If the internal supervisory procedures are to be performed at a different location (the “Final Review Office”), the subscription documents and check must be transmitted to the Final Review Office by the end of the next business day following receipt of the subscription documents and check by the Dealer.  The Final Review Office will, by the next business day following receipt of the subscription documents and check, forward both the subscription documents and check to the Dealer Manager as processing broker-dealer in order that the Dealer Manager may complete its review of the documentation and process the subscription documents and check.

If requested by the Company or the Dealer Manager, the Dealer shall obtain from subscribers for the Shares, other documentation reasonably deemed by the Company or the Dealer Manager to be required under applicable law or as may be necessary to reflect the policies of the Company or the Dealer Manager.  Such documentation may include, without limitation, subscribers’ written acknowledgement and agreement to the privacy policies of the Company or the Dealer Manager.

III.Pricing

Shares shall be offered to the public at the offering price of $10.00 per Share payable in cash, and shares offered pursuant to the Company’s dividend reinvestment plan shall be offered at $9.50 per share.  Except as otherwise indicated in the Prospectus or in any letter or memorandum sent to the Dealer by the Company or Dealer Manager, a minimum initial purchase of 100 Shares is required.  Except as otherwise indicated in the Prospectus, additional investments may be made in cash in minimal increments of at least 2.5 Shares.  The Shares are nonassessable.  The Dealer hereby agrees to place any order for the full purchase price.

IV.Dealers’ Commissions

Except for discounts described in or as otherwise provided in the “Plan of Distribution” Section of the Prospectus, the Dealer’s selling commission applicable to the total public offering price of Shares sold by Dealer which it is authorized to sell hereunder is 7.0% of the gross proceeds of Shares sold by it and accepted and confirmed by the Company, which commission will be paid by the Dealer Manager.  With respect to sales of Shares pursuant to the Company’s dividend reinvestment plan, no selling commission shall be paid.  For these purposes, a “sale of Shares” shall occur if and only if a transaction has closed with a securities purchaser pursuant to all applicable offering and subscription documents and the Company has thereafter distributed the commission to the Dealer Manager in connection with such transaction.  The Dealer hereby waives any and all rights to receive payment of commissions due until such time as the Dealer Manager is in receipt of the commission from the Company.  The Dealer affirms that the Dealer Manager’s liability for commissions payable is limited solely to the proceeds of commissions receivable associated therewith.  In addition, as set forth in the Prospectus, the Dealer Manager may reallow out of its dealer manager fee a marketing fee and due diligence expense reimbursement of up to 1.5% of the gross proceeds of Shares sold by Dealers participating in the offering of Shares, based on such factors as the number of Shares sold by such participating Dealer, the assistance of such participating Dealer in marketing the offering of Shares, and bona fide conference fees incurred.  Under the rules of the NASD, total underwriting compensation, including sales commissions, the dealer manager fee and underwriter expense reimbursement, may not exceed 10% of the gross proceeds from the sale of the Shares, except for bona fide due diligence expenses, which may not exceed 0.5% of the gross proceeds from the sale of the Shares.

Dealer acknowledges and agrees that no commissions, payments or amount whatsoever will be paid to the Dealer unless or until the gross proceeds of the Shares sold are disbursed to the Company pursuant to paragraph 3(a) of the Escrow Agreement.  Until the Required Capital, the Pennsylvania Required Capital or the New York Required Capital, as applicable and as defined in the Escrow Agreement, is obtained, investments will be held in escrow and,

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if the Required Capital or the Pennsylvania Required Capital, as applicable, is not obtained, investments will be returned to the investors in accordance with the Prospectus.

The parties hereby agree that the foregoing commission is not in excess of the usual and customary distributors’ or sellers’ commission received in the sale of securities similar to the Shares, that Dealer’s interest in the offering is limited to such commission from the Dealer Manager and Dealer’s indemnity referred to in Section 4 of the Dealer Manager Agreement, that the Company is not liable or responsible for the direct payment of such commission to the Dealer.

V.Payment

Payments of selling commissions will be made by the Dealer Manager (or by the Company as provided in the Dealer Manager Agreement) to Dealer within 30 days of the receipt by the Dealer Manager of the gross commission payments from the Company.

VI.Right to Reject Orders or Cancel Sales

All orders, whether initial or additional, are subject to acceptance by and shall only become effective upon confirmation by the Company, which reserves the right to reject any order for any or no reason.  Orders not accompanied by a Subscription Agreement and Signature Page and the required check in payment for the Shares may be rejected.  Issuance and delivery of the Shares will be made only after actual receipt of payment therefor.  If any check is not paid upon presentment, or if the Company is not in actual receipt of clearinghouse funds or cash, certified or cashier’s check or the equivalent in payment for the Shares within 15 days of sale, the Company reserves the right to cancel the sale without notice.  In the event an order is rejected, canceled or rescinded for any reason, the Dealer agrees to return to the Dealer Manager any commission theretofore paid with respect to such order.

VII.Prospectus and Supplemental Information

Dealer is not authorized or permitted to give and will not give, any information or make any representation concerning the Shares except as set forth in the Prospectus and supplemental information.  The Dealer Manager will supply Dealer with reasonable quantities of the Prospectus, any supplements thereto and any amended Prospectus, as well as any supplemental information, for delivery to investors, and Dealer will deliver a copy of the Prospectus and all supplements thereto and any amended Prospectus to each investor to whom an offer is made prior to or simultaneously with the first solicitation of an offer to sell the Shares to an investor.  The Dealer agrees that it will not send or give any supplements thereto and any amended Prospectus to that investor unless it has previously sent or given a Prospectus and all supplements thereto and any amended Prospectus to that investor or has simultaneously sent or given a Prospectus and all supplements thereto and any amended Prospectus with such supplemental information. Dealer agrees that it will not show or give to any investor or prospective investor or reproduce any material or writing which is supplied to it by the Dealer Manager and marked “dealer only” or otherwise bearing a legend denoting that it is not to be used in connection with the sale of Shares to members of the public.  Dealer agrees that it will not use in connection with the offer or sale of Shares any material or writing which relates to another Company supplied to it by the Company or the Dealer Manager bearing a legend which states that such material may not be used in connection with the offer or sale of any securities other than the Company to which it relates. Dealer further agrees that it will not use in connection with the offer or sale of Shares any materials or writings which have not been previously approved by the Dealer Manager. Each Dealer agrees, if the Dealer Manager so requests, to furnish a copy of any revised preliminary Prospectus to each person to whom it has furnished a copy of any previous preliminary Prospectus, and further agrees that it will itself mail or otherwise deliver all preliminary and final Prospectuses required for compliance with the provisions of Rule 15c2-8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Regardless of the termination of this Agreement, Dealer will deliver a Prospectus in transactions in the Shares for a period of 90 days from the effective

13

date of the Registration Statement or such longer period as may be required by the Exchange Act.  On becoming a Dealer, and in offering and selling Shares, Dealer agrees to comply with all the applicable requirements under the Securities Act and the Exchange Act.  Notwithstanding the termination of this Agreement or the payment of any amount to Dealer, Dealer agrees to pay Dealer’s proportionate share of any claim, demand or liability asserted against Dealer and the other Dealers on the basis that Dealers or any of them constitute an association, unincorporated business or other separate entity, including in each case Dealer’s proportionate share of any expenses incurred in defending against any such claim, demand or liability.

VIII.License and Association Membership

Dealer’s acceptance of this Agreement constitutes a representation to the Company and the Dealer Manager that Dealer is a properly registered or licensed broker-dealer, duly authorized to sell Shares under Federal and state securities laws and regulations and in all states where it offers or sells Shares, and that it is a member in good standing of the NASD.  This Agreement shall automatically terminate if the Dealer ceases to be a member in good standing of such association, or in the case of a foreign dealer, so to conform.  Dealer agrees to notify the Dealer Manager immediately if Dealer ceases to be a member in good standing, or in the case of a foreign dealer, so to conform. The Dealer Manager also hereby agrees to comply with the Conduct Rules of the NASD, including but not limited to Rules 2730, 2740, 2420 and 2750.

IX.Anti-Money Laundering Compliance Programs

Dealer represents to the Company and the Dealer Manager that Dealer has established and implemented anti-money laundering compliance programs in accordance with applicable law, including applicable NASD rules, SEC rules and the USA PATRIOT Act of 2001, reasonably expected to detect and cause the reporting of suspicious transactions in connection with the sale of Shares of the Company.

X.Limitation of Offer

Dealer will offer Shares only to persons who meet the financial qualifications set forth in the Prospectus or in any suitability letter or memorandum sent to it by the Company or the Dealer Manager and will only make offers to persons in the states in which it is advised in writing that the Shares are qualified for sale or that such qualification is not required.  In offering Shares, Dealer will comply with the provisions of the NASD Conduct Rules set forth in the NASD Manual, as well as all other applicable rules and regulations relating to suitability of investors, including without limitation, the provisions of Article III.C. of the Statement of Policy Regarding Real Estate Investment Trusts of the North American Securities Administrators Association, Inc.

XI.Termination

Dealer will suspend or terminate its offer and sale of Shares upon the request of the Company or the Dealer Manager at any time and will resume its offer and sale of Shares hereunder upon subsequent request of the Company or the Dealer Manager.  Any party may terminate this Agreement by written notice.  Such termination shall be effective 48 hours after the mailing of such notice.  This Agreement is the entire agreement of the parties and supersedes all prior agreements, if any, between the parties hereto.

This Agreement may be amended at any time by the Dealer Manager by written notice to the Dealer, and any such amendment shall be deemed accepted by Dealer upon placing an order for sale of Shares after he has received such notice.

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XII.         Privacy Laws

The Dealer Manager and Dealer (each referred to individually in this section as “party”) agree as follows:

(a)           Each party agrees to abide by and comply with (i) the privacy standards and requirements of the Gramm-Leach-Bliley Act of 1999 (“GLB Act”), (ii) the privacy standards and requirements of any other applicable Federal or state law, and (iii) its own internal privacy policies and procedures, each as may be amended from time to time.

(b)           Each party agrees to refrain from the use or disclosure of nonpublic personal information (as defined under the GLB Act) of all customers who have opted out of such disclosures except as necessary to service the customers or as otherwise necessary or required by applicable law; and

(c)           Each party shall be responsible for determining which customers have opted out of the disclosure of nonpublic personal information by periodically reviewing and, if necessary, retrieving a list of such customers (the “List”) as provided by each to identify customers that have exercised their opt-out rights. In the event either party uses or discloses nonpublic personal information of any customer for purposes other than servicing the customer, or as otherwise required by applicable law, that party will consult the List to determine whether the affected customer has exercised his or her opt-out rights.  Each party understands that each is prohibited from using or disclosing any nonpublic personal information of any customer that is identified on the List as having opted out of such disclosures. 

XIII.Notice

All notices will be in writing and will be duly given to the Dealer Manager when mailed to D.H. Hill Securities, LLP, 19747 Hwy 59 North, Suite 101, Humble, Texas 77338, Attention: Dan H. Hill, and to Dealer when mailed to the address specified by Dealer herein.

XIV.Attorneys’ Fees, Applicable Law and Venue

In any action to enforce the provisions of this Agreement or to secure damages for its breach, the prevailing party shall recover its costs and reasonable attorney’s fees.  This Agreement shall be construed under the laws of the State of Texas and shall take effect when signed by Dealer and countersigned by the Dealer Manager.  Venue for any action (including arbitration) brought hereunder shall lie exclusively in Houston, Texas.

[SIGNATURES ON FOLLOWING PAGES]

15

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on its behalf by its duly authorized agent.

THE DEALER MANAGER:
D.H. HILL SECURITIES, LLP
By: H&H Services, Inc., general partner
	By:
	Dan H. Hill President

16

We have read the foregoing Agreement and we hereby accept and agree to the terms and conditions therein set forth.  We hereby represent that the list below of jurisdictions in which we are registered or licensed as a broker or dealer and are fully authorized to sell securities is true and correct, and we agree to advise you of any change in such list during the term of this Agreement.

1.  Identity of Dealer:

Name:

Type of entity:

(corporation, partnership, proprietorship, etc.)

Organized in the State of:

Licensed as broker-dealer in the following States:

Tax I.D. #:

2. Person to receive notice pursuant to Section XIII:

Name:

Company:

Address:

City, State and Zip Code:

Telephone No.:

Facsimile No.:

17

AGREED TO AND ACCEPTED BY THE DEALER:

(Dealer’s Firm Name)

By:

Signature

Name:

Title:

18

EXHIBIT B

HARTMAN COMMERCIAL PROPERTIES REIT

Up to 11,000,000 Common Shares of Beneficial Interest

SELECTED INVESTMENT ADVISOR AGREEMENT

This Selected Investment Advisor Agreement (the “Agreement”) is made and entered into as of the day indicated on Exhibit A attached hereto and by this reference incorporated herein, between Hartman Commercial Properties REIT, a Maryland corporation (the “Company”), and the selected investment advisor (the “Investment Advisor”) identified in Exhibit A hereto.

WHEREAS, the Company is offering up to 11,000,000 common shares of beneficial interest (the “Shares”) to the general public, pursuant to a public offering (the “Offering”) of the Shares pursuant to a prospectus (the “Prospectus”) filed with the Securities and Exchange Commission (the “SEC”), 1,000,000 of which Shares are being offered pursuant to the Company’s dividend reinvestment plan (the “DRIP”); and

WHEREAS, the Investment Advisor is an entity, as designated in Exhibit A hereto, organized and presently in good standing in the state or states designated in Exhibit A hereto, presently registered as an investment advisor under the Investment Advisers Act of 1940, as amended, and presently registered or licensed as an investment advisor by the appropriate regulatory agency of each state in which the Investment Advisor has clients, or exempt from such registration requirements; and

WHEREAS, the Company has a currently effective registration statement on Form S-11, including a final prospectus, for the registration of the Shares under the Securities Act of 1933, as amended (such registration statement, as it may be amended, and the prospectus and exhibits on file with the SEC, as well as any post-effective amendments or supplements to such registration statement or prospectus after the effective date of registration, being herein respectively referred to as the “Registration Statement” and the “Prospectus”); and

WHEREAS, the offer and sale of the Shares shall be made pursuant to the terms and conditions of the Registration Statement and the Prospectus and, further, pursuant to the terms and conditions of all applicable federal securities laws and the applicable securities laws of all states in which the Shares are offered and sold; and

WHEREAS, the Company desires to give the clients of the Investment Advisor the opportunity to purchase the Shares, and the Investment Advisor is willing and desires to provide its clients with information concerning the Shares and the procedures for subscribing for the Shares upon the following terms and conditions;

NOW, THEREFORE, in consideration of the premises and terms and conditions thereof, it is agreed between the Company and the Investment Advisor as follows.

1.Purchase of Shares

(a)Subject to the terms and conditions herein set forth, the Company hereby makes available for purchase by the clients of the Investment Advisor a portion of the Shares described in the Registration Statement.  The Investment Advisor hereby covenants, warrants and agrees that, in regard to any purchase of the Shares by its clients, it will comply with all of the terms and conditions of the Registration Statement and the Prospectus, all applicable state and federal laws, including the Securities Act of 1933, as amended (the “Securities Act”), the Investment Advisers Act of 1940, as amended, and any and all regulations and rules pertaining thereto, heretofore or

19

hereafter issued by the Securities and Exchange Commission (“SEC”).  Neither the Investment Advisor nor any other person shall have any authority to give any information or make any representations in connection with the Shares other than as contained in the Registration Statement and the Prospectus, as amended and supplemented, and as is otherwise expressly authorized in writing by the Company.

(b)Clients of the Investment Advisor may, following receipt of written notice by the Investment Advisor from the Company of the effective date of the Registration Statement, purchase the Shares according to all such terms as are contained in the Registration Statement and the Prospectus.  The Investment Advisor shall comply with all requirements set forth in the Registration Statement and the Prospectus.  The Investment Advisor shall use and distribute, in connection with the Shares, only the Prospectus and, if necessary, any separate prospectus relating solely to the DRIP, and such sales literature and advertising materials that shall conform in all respects to any restrictions of local law and the applicable requirements of the Securities Act of 1933, as amended, and that have been approved in writing by the Company.  The Company reserves the right to establish such additional procedures as it may deem necessary to ensure compliance with the requirements of the Registration Statement, and the Investment Advisor shall comply with all such additional procedures to the extent that it has received written notice thereof.

(c)All monies received for purchase of any of the Shares shall be forwarded by the Investment Advisor to D.H. Hill Securities, LLP for delivery to Wells Fargo Bank, N.A. (the “Escrow Agent”), where such monies will be deposited in an escrow account established by the Company solely for such subscriptions, except that, until such time (if any) that such monies are deliverable to the Company pursuant to the Escrow Agreement between the Company and the Escrow Agent, the Investment Advisor shall return any check not made payable to “Wells Fargo Bank, Hartman Commercial Properties REIT” directly to the subscriber who submitted the check.  Subscriptions will be accepted as described in the Prospectus.  Each Investment Advisor receiving a subscriber’s check will deliver such check to the Escrow Agent no later than the close of business of the first business day after receipt of the subscription documents by the Investment Advisor.

(d)During the full term of this Agreement, the Company shall have full authority to take such action as it may deem advisable in respect to all matters pertaining to the performance of the Investment Advisor under this Agreement.

(e)The Shares may be purchased by clients of the Investment Advisor only where the Shares may be legally offered and sold, only by such persons who shall be legally qualified to purchase the Shares, and only by such persons in such states in which the Investment Advisor is registered as an investment advisor or exempt from any applicable registration requirements.

(f)The Investment Advisor shall have no obligation under this Agreement to advise its clients to purchase any of the Shares.

(g)The Investment Advisor will use every reasonable effort to assure that Shares are purchased only by investors who:

(1)meet the “investor suitability” standards, including the minimum income and net worth standards established by the Company and set forth in the Prospectus, and minimum purchase requirements set forth in the Registration Statement;

(2)can reasonably benefit from an investment in the Company based on each prospective investor’s overall investment objectives and portfolio structure;

20

(3)are able to bear the economic risk of the investment based on each prospective investor’s overall financial situation; and

(4)have apparent understanding of: (a) the fundamental risks of the investment; (b) the risk that the prospective investor may lose the entire investment; (c) the lack of liquidity of the Shares; (d) the restrictions on transferability of the Shares; (e) the background and qualifications of the employees and agents of Hartman Management, L.P., the advisor to the Company; and (f) the tax consequences of an investment in the Shares.

(5)The Investment Advisor will make the determinations required to be made by it pursuant to this subparagraph (g) based on information it has obtained from each prospective investor, including, at a minimum, but not limited to, the prospective investor’s age, investment objectives, investment experience, income, net worth, financial situation and other investments of the prospective investor, as well as any other pertinent factors deemed by the Investment Advisor to be relevant.

(h)In addition to complying with the provisions of subparagraph (g) above, and not in limitation of any other obligations of the Investment Advisor to determine suitability imposed by state or federal law, the Investment Advisor agrees that it will comply fully with the following provisions:

(1)The Investment Advisor shall have reasonable grounds to believe, based upon information provided by the investor concerning his or her investment objectives, other investments, financial situation and needs, and upon any other information known by the Investment Advisor, that (A) each client of the Investment Advisor that purchases Shares is or will be in a financial position appropriate to enable him or her to realize to a significant extent the benefits (including tax benefits) of an investment in the Shares, (B) each client of the Investment Advisor that purchases Shares has a fair market net worth sufficient to sustain the risks inherent in an investment in the Shares (including potential loss and lack of liquidity), and (C) the Shares otherwise are or will be a suitable investment for each client of the Investment Advisor that purchases Shares, and the Investment Advisor shall maintain files disclosing the basis upon which the determination of suitability was made;

(2)The Investment Advisor shall not execute any transaction involving the purchase of Shares in a discretionary account without prior written approval of the transactions by the investor;

(3)The Investment Advisor shall have reasonable grounds to believe, based upon the information made available to it, that all material facts are adequately and accurately disclosed in the Registration Statement and provide a basis for evaluating the Shares;

(4)In making the determination set forth in subparagraph (3) above, the Investment Advisor shall evaluate items of compensation, physical properties, tax aspects, financial stability and experience of the sponsor, conflicts of interest and risk factors, appraisals, as well as any other information deemed pertinent by it;

(5)The Investment Advisor shall inform each prospective investor of all pertinent facts relating to the lack of liquidity or marketability of the Shares.

(i)The Investment Advisor agrees to retain in its files, for a period of at least six years, information that will establish that each purchaser of Shares falls within the permitted class of investors.

(j)The Investment Advisor either (i) shall not purchase shares for its own account or (ii) shall hold for investment any Shares purchased for its own account.

21

(k)The Investment Advisor hereby confirms that it is familiar with Securities Act Release No. 4968 and Rule 15c2-8 under the Securities Exchange Act of 1934, as amended, relating to the distribution of preliminary and final prospectuses, and confirms that it has complied and will comply therewith.

(l)A sale of Shares shall be deemed to be completed only after the Company receives a properly completed subscription agreement for Shares from the Investment Advisor evidencing the fact that the investor had received a final Prospectus at least five full business days prior to the completion date, together with payment of the full purchase price of each purchased Share, from a buyer who satisfies each of the terms and conditions of the Registration Statement and the Prospectus, and only after such subscription agreement has been accepted in writing by the Company.

(m)Clients of an Investment Advisor who have been advised by such Investment Advisor on an ongoing basis regarding investments other than in the Company, and who are not being charged by such Investment Advisor, through the payment of commissions or otherwise, direct transaction based fees in connection with the purchase of the Shares, may reduce the amount of selling commissions payable with respect to the purchase of their shares down to zero.

2.Compensation to Investment Advisor

The Company shall pay no fees, commissions or other compensation to the Investment Advisor.

3.Association of the Company with Other Advisors and Dealers

It is expressly understood between the Company and the Investment Advisor that the Company may cooperate with broker-dealers who are registered as broker-dealers with the National Association of Securities Dealers, Inc. (the “NASD”) or with other investment advisors registered under the Investment Advisers Act of 1940, as amended. Such broker-dealers and investment advisors may enter into agreements with the Company on terms and conditions identical or similar to this Agreement and shall receive such rates of commission or other fees as are agreed to between the Company and the respective broker-dealers and investment advisors and as are in accordance with the terms of the Prospectus.

4.Conditions of the Investment Advisor’s Obligations

The Investment Advisor’s obligations hereunder are subject, during the full term of this Agreement and the Offering to (a) the performance by the Company of its obligations hereunder and compliance by the Company with the covenants set forth in Section 7 hereofand (b) the conditions that: (i) the Registration Statement shall become and remain effective; and (ii) no stop order shall have been issued suspending the effectiveness of the Offering.

5.Conditions to the Company’s Obligations

The obligations of the Company hereunder are subject, during the full term of this Agreement and the Offering, to the conditions that (a) at the effective date of the Registration Statement and thereafter during the term of this Agreement while any Shares remain unsold, the Registration Statement shall remain in full force and effect authorizing the offer and sale of the Shares; (b) no stop order suspending the effectiveness of the Offering or other order restraining the offer or sale of the Shares shall have been issued nor proceedings therefor initiated or threatened by any state regulatory agency or the SEC; and (c) the Investment Advisor shall have satisfactorily performed all of its obligations hereunder and complied with the covenants set forth in Section 6 hereof.

22

6.Covenants of the Investment Advisor

The Investment Advisor covenants, warrants and represents, during the full term of this Agreement, that:

(a)The Investment Advisor is registered as an investment advisor under the Investment Advisers Act of 1940, as amended, and registered or licensed as an investment advisor by the appropriate regulatory agency of each state in which the advisor has clients, or exempt from such registration requirements.

(b)Neither the Investment Advisor nor any person associated with the Investment Advisor is registered as a broker-dealer or registered representative with the NASD.

(c)The Investment Advisor shall comply with all applicable federal and state securities laws, including, without limitation, the disclosure requirements of the Investment Advisers Act of 1940, as amended, and the provisions thereof requiring disclosure of the existence of this Agreement and the compensation to be paid to the Investment Advisor hereunder.

(d)The Investment Advisor shall maintain the records required by Section 204 of the Investment Advisers Act of 1940, as amended, and Rule 204-2 thereunder in the form and for the periods required thereby.

7.Covenants of the Company

The Company covenants, warrants and represents, during the full term of this Agreement, that:

(a)It shall use its best efforts to maintain the effectiveness of the Registration Statement and to file such applications or amendments to the Registration Statement as may be reasonably necessary for that purpose.

(b)It shall promptly inform the Investment Advisor whenever and as soon as it receives or learns of any order issued by the SEC, any state regulatory agency or any other regulatory agency which suspends the effectiveness of the Registration Statement or prevents the use of the Prospectus or which otherwise prevents or suspends the offering or sale of the Shares, or receives notice of any proceedings regarding any such order.

(c)It shall use its best efforts to prevent the issuance of any order described herein at subparagraph (b) hereof and to obtain the lifting of any such order if issued.

(d)It shall give the Investment Advisor written notice when the Registration Statement becomes effective and shall deliver to the Investment Advisor such number of copies of the Prospectus, and any supplements and amendments thereto, which are finally approved by the SEC, as the Investment Advisor may reasonably request for sale of the Shares.

(e)It shall promptly notify the Investment Advisor of any post-effective amendments or supplements to the Registration Statement or Prospectus, and shall furnish the Investment Advisor with copies of any revised Prospectus and/or supplements and amendments to the Prospectus and/or any prospectus relating solely to the DRIP.

(f)It shall keep the Investment Advisor fully informed of any material development to which the Company is a party or which concerns the business and condition of the Company.

23

(g)It shall use its best efforts to cause, at or prior to the time the Registration Statement becomes effective, the qualification of the Shares for offering and sale under the securities laws of such states as the Company shall elect.

8.Payment of Costs and Expenses

The Investment Advisor shall pay all costs and expenses incident to the performance of its obligations under this Agreement.

9.Indemnification

(a)The Investment Advisor agrees to indemnify, defend and hold harmless the Company, its affiliates and their or its officers, directors, trustees, employees and agents, against all losses, claims, demands, liabilities and expenses, joint or several, including reasonable legal and other expenses incurred in defending such claims or liabilities, whether or not resulting in any liability to the Company, its affiliates and their or its officers, directors, trustees, employees or agents, which they or any of them may incur arising out of (i) the offer or sale (as such term is defined in the Securities Act) by the Investment Advisor, or any person acting on its behalf, of any Shares pursuant to this Agreement, if such loss, claim, demand, liability, or expense arises out of or is based upon an untrue statement or alleged untrue statement of a material fact, or any omission or alleged omission of a material fact, other than a statement, omission, or alleged omission by the Investment Advisor which is also, as the case may be, contained in or omitted from the Prospectus or the Registration Statement and which statement or omission was not based on information supplied to the Company by such Investment Advisor; (ii) the breach by the Investment Advisor, or any person acting on its behalf, of any of the terms and conditions of this Agreement; or (iii) the negligence, malpractice or malfeasance of the Investment Advisor.  This indemnity provision shall survive the termination of this Agreement.

(b)The Company agrees to indemnify, defend and hold harmless the Investment Advisor, its officers, directors, employees and agents, against all losses, claims, demands, liabilities and expenses, including reasonable legal and other expenses incurred in defending such claims or liabilities, which they or any of them may incur, including, but not limited to, alleged violations of the Securities Act, but only to the extent that such losses, claims, demands, liabilities and expenses shall arise out of or be based upon (i) any untrue statement of a material fact contained in the Prospectus or the Registration Statement, as filed and in effect with the SEC or in any amendment or supplement thereto, or in any application prepared or approved in writing by counsel to the Company and filed with the SEC or any state regulatory agency in order to register or qualify the Shares under the securities laws thereof (the “Blue Sky applications”), or (ii) any omission or alleged omission to state therein a material fact required to be stated in the Prospectus or the Registration Statement or the Blue Sky applications, or necessary to make such statements, and any part thereof, not misleading; provided, further, that any such untrue statement, omission or alleged omission is not based on information included in any such document which was supplied to the Company, or any officer of the Company by such Investment Advisor; provided in each case that such claims or liabilities did not arise from Investment Advisor’s own negligence, malpractice or malfeasance.  This indemnity provision shall survive the termination of this Agreement.

(c)No indemnifying party shall be liable under the indemnity provisions contained in subparagraphs (a) and (b) above unless the party to be indemnified shall have notified such indemnifying party in writing promptly after the summons or other first legal process giving information of the nature of the claim served upon the party to be indemnified, but failure to notify an indemnifying party of any such claim shall not relieve it from any liabilities that it may have to the indemnified party

24

against whom action is brought other than on account of its indemnity agreement contained in subparagraphs (a) and (b) above.  In the case of any such claim, if the party to be indemnified notified the indemnifying party of the commencement thereof as aforesaid, the indemnifying party shall be entitled to participate at its own expense in the defense of such claim.  If it so elects, in accordance with arrangements satisfactory to any other indemnifying party or parties similarly notified, the indemnifying party has the option to assume the entire defense of the claim, with counsel who shall be satisfactory to such indemnified party and all other indemnified parties who are defendants in such action; and after notice from the indemnifying party of its election so to assume the defense thereof and the retaining of such counsel by the indemnifying party, the indemnifying party shall not be liable to such indemnified party under subparagraphs (a) and (b) above for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof, other than for the reasonable costs of investigation.

10.Term of Agreement

This Agreement shall become effective on the date on which this Agreement is executed by the Company and the Investment Advisor.  The Investment Advisor and the Company may each prevent this Agreement from becoming effective, without liability to the other, by written notice before the time this Agreement otherwise would become effective.  After this Agreement becomes effective, either party may terminate it at any time for any reason by giving thirty (30) days’ written notice to the other party; provided, however, that this Agreement shall in any event automatically terminate at the first occurrence of any of the following events: (a) the Registration Statement for offer and sale of the Shares shall cease to be effective; (b) the Offering shall be terminated; or (c) the Investment Advisor’s license or registration to act as an investment advisor shall be revoked or suspended by any federal, self-regulatory or state agency and such revocation or suspension is not cured within ten (10) days from the date of such occurrence.  In any event, this Agreement shall be deemed suspended during any period for which such license is revoked or suspended.

11.Notices

All notices and communications hereunder shall be in writing and shall be deemed to have been given and delivered when deposited in the United States mail, postage prepaid, registered or certified mail, to the applicable address set forth below.

If sent to the Company:	Hartman Commercial Properties REIT
	1450 W. Sam Houston Pkwy. N, Suite 100
	Houston, Texas 77043
	Attention: President

If sent to the Investment Advisor: to the person whose name and address are identified in Exhibit A hereto.

12.Successors

This Agreement shall be binding upon and inure to the benefit of the parties hereto, and shall not be assigned or transferred by the Investment Advisor by operation of law or otherwise.

13.Miscellaneous

(a)This Agreement shall be construed in accordance with the applicable laws of the State of Maryland.

25

(b)Nothing in this Agreement shall constitute the Investment Advisor as in association with or in partnership with the Company.

(c)This Agreement, including Exhibit A hereto, embodies the entire understanding, between the parties to the Agreement, and no variation, modification or amendment to this Agreement shall be deemed valid or effective unless it is in writing and signed by both parties hereto.

(d)If any provision of this Agreement shall be deemed void, invalid or ineffective for any reason, the remainder of the Agreement shall remain in full force and effect.

(e)This Agreement may be executed in counterpart copies, each of which shall be deemed an original but all of which together shall constitute one and the same instrument comprising this Agreement.

[SIGNATURES ON FOLLOWING PAGES]

26

IN WITNESS WHEREOF, the parties have executed this Agreement on the date and year indicated on Exhibit A hereto.

SELECTED INVESTMENT ADVISOR:		COMPANY:
		HARTMAN COMMERCIAL PROPERTIES
(Name of Investment Advisor)		REIT
By:		By:
	Print Name:		Print Name:
	Title:		Title:
Witness		Witness

27

EXHIBIT A

TO

SELECTED INVESTMENT ADVISOR AGREEMENT

OF

HARTMAN COMMERCIAL PROPERTIES REIT

This Exhibit A is attached to and made a part of that certain Selected Investment Advisor Agreement, dated as of the       day of                                          , 200 , by and between Hartman Commercial Properties REIT, (the “Company”) and                                                          (the “Advisor”).

1.	Date of Agreement:                                , 200
2.	Identity of Advisor:
	Name:
	Type of Entity:
	State Organized in:
	Qualified to Do Business and in Good Standing in:
	Registered as an Investment Advisor in the Following States:
3.	Name and Address for Notice Purposes:
	Name:
	Title:
	Company:
	Address:
	City, State and Zip Code:
	Telephone Number (including area code):
4.	Please complete the following for our records:
	How many registered investment advisors are with your firm?

(Please enclose a current list.)

28

Does your firm publish a newsletter?   o Yes   o No

What is/are the frequency of the publication(s)?  o Weekly    o Monthly    o Quarterly

o Bi-weekly     o Bi-monthly     o Other (please specify)                                               

PLEASE PLACE HARTMAN COMMERCIAL PROPERTIES REIT ON YOUR MAILING LIST AND
PROVIDE A SAMPLE OF THE PUBLICATION IF AVAILABLE.

Does your firm have regular internal mailings, or bulk package mailings to its registered investment advisors?    o Yes     o No

PLEASE PLACE HARTMAN COMMERCIAL PROPERTIES REIT ON YOUR MAILING LIST
AND PROVIDE A SAMPLE OF THE PUBLICATION IF AVAILABLE.

Does your firm have a computerized electronic mail (E-Mail) system for your registered investment advisors?    o Yes    o No

If so, please provide e-mail address:

Website address:

Person responsible:

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EX-10.14

EXHIBIT 10.14

ESCROW AGREEMENT

Wells Fargo Bank, N.A.

666 Walnut N8200-034

Corporate Trust Services, PFG

Des Moines, IA  50309

Re:Hartman Commercial Properties REIT Escrow Agreement

Ladies and Gentlemen:

HARTMAN COMMERCIAL PROPERTIES REIT, a Maryland real estate investment trust (the “Company”), the issuer for an offering (the “Offering”) of up to 11,000,000 common shares of beneficial interest, par value $.001 per share (the “Shares”), pursuant to a registration statement originally filed on Form S-11 with the Securities and Exchange Commission on December 31, 2003, File No. 333-111674.  D.H. Hill Securities, LLP, a Texas limited liability partnership (the “Dealer Manager”), will act as Dealer Manager for the offering of the Shares. The Company is entering into this Escrow Agreement (the “Agreement”) to set forth the terms on which Wells Fargo Bank, N.A. (“Escrow Agent”), will hold and disburse the proceeds from subscriptions for the purchase of the Shares in the Offering until such time as:  (i) in the case of subscriptions received from all nonaffiliates of the Company, other than from Pennsylvania Subscribers or New York Subscribers (each as defined below), the Company has received subscriptions for Shares resulting in total minimum capital raised of $2,000,000 (the “Required Capital”); (ii) in the case of subscriptions received from residents of Pennsylvania (“Pennsylvania Subscribers”), the Company has received subscriptions for Shares from nonaffiliates of the Company resulting in total minimum capital raised of $5,475,000 (the “Pennsylvania Required Capital”); and (iii) in the case of subscriptions received from residents of New York (“New York Subscribers”), the Company has received subscriptions for Shares from nonaffiliates of the Company, other than from Pennsylvania Subscribers, resulting in total minimum capital raised of $2,500,000 (the “New York Required Capital”).

The Company hereby appoints Escrow Agent as escrow agent for purposes of holding the proceeds from the sale of the Shares, and the Company shall deposit with Escrow Agent such proceeds to be held by Escrow Agent on the terms and conditions hereinafter set forth below:

1.Persons subscribing to purchase the Shares (the “Subscribers”) will be instructed by the Dealer Manager or any soliciting dealers to remit the purchase price in the form of checks (hereinafter called “instruments of payment”) payable to the order of, or funds wired in favor of, “Wells Fargo Bank, Hartman Commercial Properties REIT.” Within one business day after receipt of instruments of payment from the Offering, the Dealer Manager will send to the Escrow Agent: (a) an electronic file in a compatible format containing each subscriber’s name, address, tax identification number, number of Shares purchased, purchase price remitted and whether a IRS Form W-9 has been obtained, and (b) the instruments of payment from such Subscribers (the “Subscription Materials”) for deposit into the deposit account entitled “Wells Fargo Bank, as Escrow Agent for the Benefit of Subscribers of Hartman Commercial Properties REIT” (the “Escrow Account”).  Instruments of payment received from Pennsylvania Subscribers (as identified as such by the Company) shall be accounted for separately in a subaccount entitled “Wells Fargo Bank, as Escrow Agent for the Benefit of Pennsylvania Subscribers of Hartman Commercial Properties REIT” (the “Pennsylvania Escrow Account”), until such Pennsylvania Escrow Account has closed pursuant to paragraph 3(a) hereof.  Instruments of payment received from New York Subscribers (as identified as such by the Company) shall be accounted for separately in a

subaccount entitled “Wells Fargo Bank, as Escrow Agent for the Benefit of New York Subscribers of Hartman Commercial Properties REIT” (the “New York Escrow Account”), until such New York Escrow Account has closed pursuant to paragraph 3(a) hereof.  The Escrow Account, the Pennsylvania Escrow Account, and the New York Escrow Account will be established and maintained in such a way as to permit the interest income calculations described in paragraph 7.

2.The aforesaid instruments of payment are to be promptly processed for collection by Escrow Agent following deposit by the Dealer Manager into the applicable Escrow Account, Pennsylvania Escrow Account, or New York Escrow Account, as applicable. The proceeds thereof are to be held in the Escrow Account, Pennsylvania Escrow Account, or New York Escrow Account, as applicable, until such funds are either returned to the Subscribers in accordance with paragraph 3 hereof or otherwise disbursed in accordance with paragraph 7 hereof. In the event any of the instruments of payment are returned to Escrow Agent for nonpayment prior to receipt by Escrow Agent of the Required Capital, the Pennsylvania Required Capital, or the New York Required Capital, Escrow Agent shall promptly notify the Dealer Manager in writing of such nonpayment, and Escrow Agent is authorized to debit the Escrow Account in the amount of such return payment as well as any interest earned on the investment represented by such payment and return to the Dealer Manager the returned item.

3.(a)Subject to the provisions of subparagraphs 3(b)-3(f) below:

(i)once the aggregate of all collected funds in the Escrow Account, (for purposes of clarification, this amount will not include funds in the Pennsylvania Escrow Account or the New York Escrow Account) is an amount equal to or greater than the Required Capital, the Escrow Agent shall promptly notify the Company and, upon receiving written instruction from the Company, (A) disburse to the Company, by check, ACH or wire transfer, the funds in the Escrow Account representing the gross purchase price for the Shares, and (B) disburse to the Subscribers or the Company, as applicable, any interest thereon pursuant to the provisions of subparagraph 3(f).  For purposes of this Agreement, the term “collected funds” shall mean all funds received by the Escrow Agent that have cleared normal banking channels and are in the form of cash or a cash equivalent.  After such time the Escrow Account shall remain open and the Company shall continue to cause subscriptions for the Shares that are not to be deposited in either the Pennsylvania Escrow Account or the New York Escrow Account to be deposited therein until the Company informs the Escrow Agent in writing to close the Escrow Account, and thereafter any subscription documents and instruments of payment received by the Escrow Agent from Subscribers other than Pennsylvania Subscribers and New York Subscribers shall be forwarded directly to the Company.

(ii)regardless of any closing of the Escrow Account, the Company and the Dealer Manager shall continue to forward instruments of payment and Subscription Materials received from Pennsylvania Subscribers for deposit into the Pennsylvania Escrow Account to the Escrow Agent until such time as the Company notifies the Escrow Agent in writing that total subscription proceeds (including the amount then in the Pennsylvania Escrow Account) equal or exceed the Pennsylvania Required Capital.  Upon receipt of a written notice and instruction from the Company that total subscription proceeds (including the amount then in the Pennsylvania Escrow Account) equaling or exceeding the Pennsylvania Required Capital have been received in collected funds, the Escrow Agent shall (A) disburse to the Company, by check, ACH or wire transfer, the funds then in the Pennsylvania Escrow Account representing the gross purchase price for the Shares, and (B) disburse to the Pennsylvania Subscribers or the Company, as applicable, any interest thereon pursuant to the provisions of subparagraph 3(f).  Following such

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disbursements, the Escrow Agent shall close the Pennsylvania Escrow Account, and thereafter any Subscription Materials and instruments of payment received by the Escrow Agent from Pennsylvania Subscribers shall be deposited directly to the Escrow Account (or to the Company, if it has closed the Escrow Account, as instructed in writing by the Company).

(iii)regardless of any closing of the Escrow Account, the Company and the Dealer Manager shall continue to forward instruments of payment and Subscription Materials received from New York Subscribers for deposit into the New York Escrow Account to the Escrow Agent until such time as the Company notifies the Escrow Agent in writing that total subscription proceeds (including the amount then in the New York Escrow Account but not including the amount then in the Pennsylvania Escrow Account) equal or exceed the New York Required Capital.  Upon receipt of a written notice and instruction from the Company that total subscription proceeds (including the amount then in the New York Escrow Account) equaling or exceeding the New York Required Capital have been received in collected funds, the Escrow Agent shall (A) disburse to the Company, by check, ACH or wire transfer, the funds then in the New York Escrow Account representing the gross purchase price for the Shares, and (B) disburse to the New York Subscribers or the Company, as applicable, any interest thereon pursuant to the provisions of subparagraph 3(f).  Following such disbursements, the Escrow Agent shall close the New York Escrow Account, and thereafter any Subscription Materials and instruments of payment received by the Escrow Agent from New York Subscribers shall be deposited directly to the Escrow Account (or to the Company, if it has closed the Escrow Account, as instructed in writing by the Company).

(b)In the event that at the close of business on the date exactly one year after the SEC grants an effective order under Section 8(a) of the Securities Act of 1933, as amended (the “Expiration Date”), which date will be communicated to the Escrow Agent in writing as soon as possible after determination, Escrow Agent is not in receipt of evidence of subscriptions accepted on or before such date, and instruments of payment dated not later than that date (or actual wired funds), for the purchase of Shares providing for total purchase proceeds that at least equal the Required Capital, Escrow Agent shall promptly notify the Company that such instruments of payment totaling an amount at least equal to the Required Capital have not been received by Escrow Agent. Thereafter, Dealer Manager agrees to use its best efforts to obtain an executed IRS Form W-9 from each subscriber. Promptly following the Expiration Date, and in any event no later than the next business day after the Expiration Date or as soon as possible thereafter, Escrow Agent shall promptly return by check the funds deposited in the Escrow Account, the Pennsylvania Escrow Account, and the New York Escrow Account, or shall return the instruments of payment delivered to Escrow Agent if such instruments have not been processed for collection prior to such time, directly to each Subscriber at the address given to the Company. Included in the remittance shall be a proportionate share of the income earned in the account allocable to each Subscriber’s investment in accordance with the terms and conditions specified in paragraph 7 hereof, except that in the case of Subscribers who have not provided to the Company an executed Form W-9, Escrow Agent shall withhold a portion of the earnings attributable to those Subscribers at the applicable rate in accordance with Section 3406 of the Internal Revenue Code of 1986, as amended. Notwithstanding the foregoing, Escrow Agent shall not be required to remit any payments until funds represented by such payments have been collected by Escrow Agent.

(c)Notwithstanding subparagraphs 3(a) and 3(b) above, if the Escrow Agent is not in receipt of evidence of subscriptions accepted on or before the close of business on such date that is 120 days after the SEC grants an effective order under Section 8(a) of the Securities Act of 1933, as

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amended (the Company will notify the Escrow Agent of the date the SEC grants the effective order) (the “Initial Escrow Period”), and instruments of payment dated not later than that date, for the purchase of Shares providing for total purchase proceeds from all nonaffiliated sources that equal or exceed the Pennsylvania Required Capital, the Escrow Agent shall promptly notify the Company.  Thereafter, the Company shall send to each Pennsylvania Subscriber by certified mail within ten (10) calendar days after the end of the Initial Escrow period a notification in the form of Exhibit A.  If, pursuant to such notification, a Pennsylvania Subscriber requests the return of his or her subscription funds within ten (10) calendar days after receipt of the notification (the “Request Period”) and the Company is not in possession of an executed IRS form W-9, the Company shall obtain an executed IRS Form W-9 from each such Pennsylvania Subscriber within ten (10) calendar days after receiving notice from such Pennsylvania Subscriber.  The Escrow Agent shall promptly refund directly to each Pennsylvania Subscriber the collected funds deposited in the Pennsylvania Escrow Account on behalf of such Pennsylvania Subscriber, or shall return the instruments of payment delivered, but not yet processed for collection prior to such time, to the address provided by the Dealer Manager or the Company, together with interest income in the amounts calculated pursuant to paragraph 7.  If an executed IRS Form W-9 is not received for such Pennsylvania Subscriber within ten (10) calendar days, the Escrow Agent shall thereupon remit an amount to such Pennsylvania Subscriber, in accordance with the provisions hereof, withholding a portion of the earnings attributable to such Pennsylvania Subscriber at the applicable rate in accordance with Section 3406 of the Internal Revenue Code of 1986, as amended. However, the Escrow Agent shall not be required to remit such payments until funds represented by such payments have been collected by the Escrow Agent.

(d)The subscription funds of Pennsylvania Subscribers who do not request the return of their subscription funds within the Request Period shall remain in the Pennsylvania Escrow Account for successive 120-day escrow periods (a “Successive Escrow Period”), each commencing automatically upon the termination of the prior Successive Escrow Period, and the Company and Escrow Agent shall follow the notification and payment procedure set forth in subparagraph 3(c) above with respect to the Initial Escrow Period for each Successive Escrow Period until the occurrence of the earliest of (i) the Expiration Date, (ii) the receipt and acceptance by the Company of subscriptions for the purchase of Shares with total purchase proceeds that equal or exceed the Pennsylvania Required Capital and the disbursement of the Pennsylvania Escrow Account on the terms specified herein, or (iii) all funds held in the Pennsylvania Escrow Account having been returned to the Pennsylvania Subscribers in accordance with the provisions hereof.

(e)In the event that the Company rejects any subscription for which Escrow Agent has already collected funds, Escrow Agent shall promptly issue a refund check to the rejected Subscriber. If the Company rejects any subscription for which Escrow Agent has not yet collected funds but have submitted the Subscriber’s check for collection, Escrow Agent shall promptly issue a check in the amount of the Subscriber’s check to the rejected Subscriber after Escrow Agent has collected such funds. If Escrow Agent has not yet submitted a rejected Subscriber’s check for collection, Escrow Agent shall promptly remit the Subscriber’s check directly to the Subscriber.

(f)At any time after funds are disbursed upon the Company’s acceptance of subscriptions pursuant to subparagraph 3(a) above on the tenth (10th) day following the date of such acceptance, the Escrow Agent shall promptly provide directly to each Subscriber the amount of the interest payable to the Subscribers as calculated in accordance with paragraph 7; provided that the Company is in possession of such Subscriber’s executed IRS Form W-9.  In the event the Company is not in possession of an executed IRS Form W-9 from any Subscriber, the Company shall obtain an executed IRS Form W-9 from such Subscriber within ten (10) calendar days after

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acceptance of such subscription.  In the event an executed IRS Form W-9 is not received for each Subscriber within such period, the Escrow Agent shall remit an amount to the Subscribers in accordance with the provisions hereof, withholding a portion of the earnings attributable to those Subscribers at the applicable rate in accordance with Section 3406 of the Internal Revenue Code of 1986, as amended. However, the Escrow Agent shall not be required to remit any payments until funds represented by such payments have been collected by the Escrow Agent.  The forgoing notwithstanding, interest, if any, earned on accepted subscription proceeds will be payable to a Subscriber only if the Subscriber’s funds have been held in escrow by the Escrow Agent for at least 35 days; interest, if any, earned on accepted subscription proceeds of Subscribers’ funds held less than 35 days will be payable to the Company.

In the event that instruments of payment are returned for nonpayment, the Escrow Agent is authorized to debit the Escrow Account, the Pennsylvania Escrow Account, or the New York Escrow Account, as applicable, in accordance with paragraph 2 hereof.

4.Following receipt by Escrow Agent of instruments of payment (or wired funds) of the Required Capital prior to the time provided in paragraph 3 hereinabove, Escrow Agent shall notify the Company in writing and/or via secure online real-time account access service within one business day when such funds have been deposited in the Escrow Account, the Pennsylvania Escrow Account, or the New York Escrow Account, as applicable, and collected through normal banking channels.

5.Prior to the disbursement of funds deposited in the Escrow Account, the Pennsylvania Escrow Account, or the New York Escrow Account, as applicable, in accordance with the provisions of paragraph 3 or 7 hereof, Escrow Agent shall invest all of the funds deposited in the Escrow Account, the Pennsylvania Account, and the New York Account, as applicable, in “Short-term Investments” (as defined below) and Escrow Agent is further authorized and Escrow Agent agrees to reinvest all earnings and interest derived therefrom in any of the Short-term Investments specified below. In the absence of written direction from the Company, funds deposited in the Escrow Account, the Pennsylvania Escrow Account, and the New York Escrow Account will be invested in the Wells Fargo 100% Treasury Money Market Fund as long as such Fund maintains the highest rating available by Standard & Poor’s or Moody’s.  (Wells Fargo Bank, N.A. is the investment advisor and custodian and receives compensation for these services.  These investments are not deposits of or obligations of Wells Fargo Bank, N.A. nor are they insured or guaranteed by the FDIC or any other government agency). In the event that instruments of payment are returned to Escrow Agent for nonpayment, Escrow Agent is authorized to debit the Escrow Account in accordance with paragraph 2 hereof.

“Short-term Investments” include obligations of, or obligations guaranteed by, the United States government or bank money-market accounts or certificates of deposit of national or state banks that have deposits insured by the Federal Deposit Insurance Corporation (including certificates of deposit of any bank acting as a depository or custodian for any such funds, including, without limitation, such certificates or instruments of the Escrow Agent, which mature on or before the Expiration Date, unless such instrument cannot be readily sold or otherwise disposed of for cash by the Expiration Date without any dissipation of the offering proceeds invested).

The following securities are not permissible investments:

(a)corporate equity or debt securities:

(b)repurchase agreements;

(c)bankers’ acceptances;

(d)commercial paper; and

(e)municipal securities;

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6.The Escrow Agent is entitled to rely upon written instructions received from the Company, unless the Escrow Agent has actual knowledge that such instructions are not valid or genuine; provided that, if in the Escrow Agent’s opinion, any instructions from the Company are unclear, the Escrow Agent may request clarification from the Company prior to taking any action, and if such instructions continue to be unclear, the Escrow Agent may rely upon written instructions from the Company’s legal counsel in distributing or continuing to hold any funds.  However, the Escrow Agent shall not be required to disburse any funds attributable to instruments of payment that have not been processed for collection, until such funds are collected and then shall disburse such funds in compliance with the disbursement instructions from the Company.

7.If the Offering terminates prior to receipt of the Required Capital or one or more Pennsylvania Subscribers elects to have his or her subscription returned in accordance with paragraph 3, interest income earned on subscription proceeds deposited in the Escrow Account (the “Escrow Income”), the Pennsylvania Escrow Account (the “Pennsylvania Escrow Income”), or the New York Escrow Account (the “New York Escrow Income”), as applicable, shall be remitted to Subscribers, or to the Company if the applicable Subscriber’s funds have been held in escrow by the Escrow Agent for less than 35 days, in accordance with paragraph 3.  For each such Subscriber who has invested funds that have been held in escrow by the Escrow Agent for at least 35 days, such Subscriber’s pro rata portion of Escrow Income, Pennsylvania Escrow Income, or New York Escrow Income, as applicable, shall be determined as follows: the total amount of Escrow Income (or Pennsylvania Escrow Income or New York Escrow Income, as appropriate) minus interest earned on accepted subscription proceeds held by the Escrow Agent for less than 35 days shall be multiplied by a fraction, (i) the numerator of which is determined by multiplying the number of Shares purchased by said Subscriber times the number of days said Subscriber’s proceeds are held in the Escrow Account, the Pennsylvania Escrow Account, or the New York Escrow Account, as applicable, prior to the date of disbursement, and (ii) the denominator of which is the total of the numerators for all Subscribers in such account who have invested funds that have been held in escrow by the Escrow Agent for at least 35 days.  The Escrow Agent shall remit all such Escrow Income, Pennsylvania Escrow Income, and New York Escrow Income in accordance with paragraph 3.  Notwithstanding the foregoing, (i) escrow expenses, if any, may be deducted from Escrow Income, Pennsylvania Escrow Income, or New York Escrow Income, as applicable, and the Company shall reimburse the Escrow Agent any reasonable expenses in excess of such amount, and (ii) residents of states where deductions for escrow expenses are prohibited, as set forth on Exhibit B attached hereto, shall be paid their pro rata portion of Escrow Income, Pennsylvania Escrow Income, or New York Escrow Income, as applicable, without any deduction for escrow expenses.  Escrow Agent shall promptly notify the Company of the amount of pro rata escrow expenses attributable to residents of states where deductions are prohibited, and the Company shall reimburse Escrow Agent for such pro rata escrow expenses attributable to such residents.  If the Company chooses to leave the Escrow Account open after receiving the Required Capital then it shall make regular acceptances of subscriptions therein, but no less frequently than monthly, and the Escrow Income from the last such acceptance shall be calculated and remitted to the Subscribers or the Company, as applicable, pursuant to the provisions of paragraph 3(f).

8.As compensation for serving as Escrow Agent hereunder, Escrow Agent shall receive a fee, as set forth on Exhibit C attached hereto.  Notwithstanding anything contained herein to the contrary, the Escrow Agent shall look to the Company for payment of the fees and expenses, and waives all right of offset against the funds held in escrow pursuant to the terms of this Agreement.

9.In performing any of Escrow Agent’s duties hereunder, Escrow Agent shall not incur any liability to anyone for any damages, losses or expenses, except for willful default, breach of trust, or gross negligence, and accordingly Escrow Agent shall not incur any such liability with respect to any action taken or omitted (1) in good faith upon advice of Escrow Agent’s counsel given with respect to any questions relating to Escrow Agent’s duties and responsibilities under this Escrow Agreement, or (2) in

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reliance upon any instrument, including any written instrument or instruction provided for in this Escrow Agreement, not only as to its due execution and validity and effectiveness of its provisions but also as to the truth and accuracy of information contained therein, which Escrow Agent shall in good faith believe to be genuine, to have been signed or presented by a proper person or persons and to conform to the provisions of this Escrow Agreement.

10.The Company hereby agrees to indemnify and hold Escrow Agent harmless against any and all losses, claims, damages, liabilities and expenses, including the reasonable cost of attorneys’ fees and expenses and disbursements, that may be imposed on Escrow Agent or incurred by Escrow Agent in connection with Escrow Agent’s acceptance of appointment as the Escrow Agent hereunder, or the performance of Escrow Agent’s duties hereunder, including any litigation arising from this Escrow Agreement or involving the subject matter hereof, except where such losses, claims, damages, liabilities and expenses result from willful default, breach of trust or gross negligence.

11.In the event of a dispute between the parties hereto sufficient in Escrow Agent’s discretion to justify doing so, Escrow Agent shall be entitled to tender into the registry or custody of any court of competent jurisdiction all money or property in Escrow Agent hands under this Escrow Agreement, together with such legal pleadings as Escrow Agent deems appropriate, and thereupon be discharged from all further duties and liabilities under this Escrow Agreement. In the event of any uncertainty as to Escrow Agent’s duties hereunder, Escrow Agent may refuse to act under the provisions of this Escrow Agreement pending order of a court of competent jurisdiction and Escrow Agent shall have no liability to the Company or to any other person as a result of such action. Any such legal action may be brought in such court as Escrow Agent shall determine to have jurisdiction thereof. The filing of any such legal proceedings shall not deprive Escrow Agent of compensation earned prior to such filing.

12.All written notices and letters required hereunder to Escrow Agent shall only be effective if delivered personally or by certified mail, return receipt requested to:

Wells Fargo Bank, N.A.

666 Walnut N8200-034

Corporate Trust Services, PFG

Des Moines, IA  50309

Attn:  M.J. Dolan or Teresa A. Smith.

All written notices and letters required hereunder to the Company shall only be effective if delivered personally or by certified mail, return receipt requested to Hartman Commercial Properties REIT, 1450 West Sam Houston Parkway, North, Suite 100, Houston, Texas 77043, Attn:  Allen R. Hartman, President.  All written notices and letters required hereunder to the Dealer Manager shall only be effective if delivered personally or by certified mail, return receipt requested to D.H. Hill Securities, LLP, 19747 US Hwy 59 North, Suite 101, Humble, Texas 77338, Attn:  President.  Each party hereto may, from time to time, change the address to which notices to it are to be delivered or mailed hereunder by notice in accordance herewith to the other parties.

13.This Escrow Agreement shall be governed by the laws of the State of Louisiana as to both interpretation and performance.

14.The provisions of this Escrow Agreement shall be binding upon the legal representatives, heirs, successors and assigns of the parties hereto.

15.The Company and Dealer Manager hereby acknowledge that Escrow Agent is serving as escrow agent only for the limited purposes herein set forth, and hereby agrees that it will not represent or imply

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that Escrow Agent, by serving as escrow agent hereunder or otherwise, has investigated the desirabilities or advisability of investment in the Company, or has approved, endorsed or passed upon the merits of the Shares or the Company. The Company further agrees to instruct the Dealer Manager, and each of its representatives, and any other representative who may offer Shares to persons from time to time, that they shall not represent or imply that Escrow Agent has investigated the desirability or advisability of investment in the Company, or has approved, endorsed or passed upon the merits of the Shares or the Company, nor shall they use Escrow Agent’s name in any manner whatsoever in connection with the offer or sale of the Shares other than by acknowledgment that Escrow Agent has agreed to serve as escrow agent for the limited purposes herein set forth.

16.This Escrow Agreement and any amendment hereto may be executed by the parties hereto in one or more counterparts, each of which shall be deemed to be an original.

17.Except as otherwise required for subscription funds received from Pennsylvania Subscribers and New York Subscribers as provided herein, in the event that Escrow Agent receives instruments of payment (or wired funds) after the Required Capital has been received and the proceeds of the Escrow Account have been distributed to the Company, Escrow Agent is hereby authorized to deposit such instruments of payment to any deposit account as directed by the Company. The application of said funds into a deposit account directed by the Company shall be a full acquittance to Escrow Agent and Escrow Agent shall not be responsible for the application of said funds.

18.Escrow Agent shall be bound only by the terms of this Escrow Agreement and shall not be bound or incur any liability with respect to any other agreements or understanding between any other parties, whether or not the Escrow Agent has knowledge of any such agreements or understandings.

19.Indemnification provisions set forth herein shall survive the termination of this Escrow Agreement.

20.In the event that any part of this Agreement is declared by any court or other judicial or administrative body to be null, void, or unenforceable, said provision shall survive to the extent it is not so declared, and all of the other provisions of this Agreement shall remain in full force and effect.

21.Unless otherwise provided in this Agreement, final termination of this Escrow Agreement shall occur on the date that all funds held in the Escrow Account, the Pennsylvania Escrow Account, and the New York Escrow Account are distributed either (a) to the Company or to Subscribers and the Company has informed the Escrow Agent in writing to close the Escrow Account, the Pennsylvania Escrow Account, and the New York Escrow Account pursuant to paragraph 3 hereof or (b) to a successor escrow agent upon written instructions from the Company.

22.Escrow Agent has no responsibility for accepting, rejecting or approving subscriptions.  The Escrow Agent shall complete an OFAC search, in compliance with its policy and procedures, of each subscription check prior to depositing the check in the Escrow Account, the Pennsylvania Escrow Account, or the New York Escrow Account, as applicable, and shall inform the Company if a subscription check fails the OFAC search.

23.This Escrow Agreement shall not be modified, revoked, released or terminated unless reduced to writing and signed by all parties hereto, subject to the following paragraph.

Should, at any time, any attempt be made to modify this Escrow Agreement in a manner that would increase the duties and responsibilities of Escrow Agent or to modify this Escrow Agreement in any manner which Escrow Agent shall deem undesirable, or at any other time, Escrow Agent may resign by

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notifying the Company in writing, by certified mail, and until (i) the acceptance by a successor escrow agent as shall be appointed by the Company; or (ii) thirty (30) days following the date upon which notice was mailed, whichever occurs sooner, Escrow Agent’s only remaining obligation shall be to perform its duties hereunder in accordance with the terms of the Escrow Agreement.

24.Escrow Agent may resign at any time from its obligations under this Escrow Agreement by providing written notice to the Company. Such resignation shall be effective on the date specified in such notice which shall be not less than thirty (30) days after such written notice has been given. Escrow Agent shall have no responsibility for the appointment of a successor escrow agent.

25.Escrow Agent may be removed for cause by the Company by 30 days written notice to the Escrow Agent unless otherwise agreed upon effective on the date specified in such notice. The removal of Escrow Agent shall not deprive Escrow Agent of its compensation earned prior to such removal.

26. To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions, including Escrow Agent, to obtain, verify and record information that identifies each person/entity opening an account.  For this account, Escrow Agent will need the principal name and address of each party, tax payer identification number, and other information, such as certified articles of incorporation, a government-issued business license, a partnership agreement, and annual report filed with the Secretary of State (or equivalent), or a trust agreement, that will allow the Escrow Agent to identify the parties to the Escrow.

[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

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Agreed to as of the 31^st day of August, 2004.

HARTMAN COMMERCIAL PROPERTIES REIT
By:	/s/ Allen R. Hartman
	Allen R. Hartman, President
WUNDERLICH SECURITIES, INC.
By:	/s/ Dan H. Hill
	Dan H. Hill, President

The terms and conditions contained above are hereby accepted and agreed to by:

WELLS FARGO BANK IOWA, NATIONAL ASSOCIATION, as Escrow Agent

By:	/s/ M. J. Dolan
Name:			M. J. Dolan
Title:		V.P. Corporate Trust

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EXHIBIT A

[Form of Notice to Pennsylvania Subscribers]

You have tendered a subscription to purchase shares of beneficial interest of Hartman Commercial Properties REIT. (the “Company”).  Your subscription is currently being held in escrow.  The guidelines of the Pennsylvania Securities Commission do not permit the Company to accept subscriptions from Pennsylvania residents until an aggregate of $5,475,000 of gross offering proceeds have been received by the Company.  The Pennsylvania guidelines provide that until this minimum amount of offering proceeds is received by the Company, every 120 days during the offering period Pennsylvania Subscribers may request that their subscription be returned.

If you wish to continue your subscription in escrow until the Pennsylvania minimum subscription amount is received, nothing further is required.

If you wish to terminate your subscription for the Company’s shares of beneficial interest and have your subscription returned please so indicate below, sign, date, and return to the Escrow Agent, Wells Fargo Bank, N.A., 666 Walnut N8200-034, Corporate Trust Services, PFG, Des Moines, IA  50309.

I hereby terminate my prior subscription to purchase shares of beneficial interest of Hartman Commercial Properties REIT and request the return of my subscription funds.  I certify to Hartman Commercial Properties REIT that I am a resident of Pennsylvania.

Signature:
Name:
	(please print)
Date:

Please send the subscription refund to:

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EXHIBIT B

States Prohibiting Deductions

1. Alabama

2. New Mexico

3. North Carolina

4. Oklahoma

5. Texas

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EXHIBIT C

Hartman Commercial Properties REIT

Escrow Agent Fee Schedule

Acceptance Fee: $ 1,000.00

For initial services including examination of the Escrow Agent Agreement and all supporting documents as well as database development. This is a one-time fee payable upon the execution of the Escrow Agent Agreement.

Annual Administration Fee: $ 4,000.00

This annual administration fee covers standard services required under the documents. An additional charge of $500 per sub-account will be billed for accounts opened in connection with certain state regulations or escrow break limits (i.e. Pennsylvania, Nebraska and similar states). Transaction charges noted below apply for certain responsibilities including payments to subscribers. Customer will be responsible for 1099 Tax Reporting. This fee is payable upon the execution of the Escrow Agreement and annually thereafter for any 12 month period or portion thereof. This fee shall be reviewed at the end of the first year and may be renegotiated in accordance with new volume estimates.

Transaction Fees:
Wire transfer of funds to investors	$17.00 per item
Check transfer of funds to investors	$10.00 per item
Receipt and posting of incoming wires	No charge
Receipt and posting of incoming check	No charge
1099 INT Tax reporting	Customer will be responsible
ACH transfer of funds	No charge
Electronic pre-determined reports	No charge
Interest calculations	No charge
OFAC check on check deposits with copy to the Fund	No charge

Assumptions

•Receipt by Wells Fargo of the electronic transmission of subscriber data in a format compatible with Wells Fargo systems

•WF has no responsibility for collecting or handling subscription documents

•WF receives funds via deposit by issuer in the escrow bank account maintained at the Issuer’s expense

•Continuation of the Escrow Account after the initial break until the maximum REIT amount is reached

•Investment of Funds

•Monthly reporting

Extraordinary Services:

Additional reasonable compensation will be charged for extraordinary services based on the then current standard hourly charge. Extraordinary services include, but are not limited to, attending escrow closings, processing assignments of escrow interest, specialized reports (e.g. tax reporting other than 1099s), unusual certifications, reviewing and accepting modifications or amendments to the escrow agreement, and letter of credit draws, etc. You will be informed in advance of Wells Fargo’s performance of services that are considered extraordinary.

13

All out-of-pockets expenses incurred in the administration of the account, including, but not limited to, postage, telephone charges, insurance, photocopies, supplies, and legal fees with the exception of legal fees incurred at the inception of the account, will be billed to the customer at cost.

Billings over 30 days past due are subject to a 1.5% per month late payment penalty of the balance due.

14

EX-21.1

EXHIBIT 21.1

SUBSIDIARIES

NAME OF SUBSIDIARY	JURISDICTION OF FORMATION
Hartman REIT Operating Partnership, L.P.	Delaware
Hartman REIT Operating Partnership II, L.P.	Texas
Hartman REIT Operating Partnership II GP, LLC	Delaware

EX-23.1

Exhibit 23.1

Independent Registered Public Accounting Firm’s Consent

We consent to the use of our report dated February 11, 2005, on the audit of the consolidated financial statements of Hartman Commercial Properties REIT for the years ended December 31, 2004, 2003 and 2002 included in this Annual Report on Form 10-K.

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

Houston, Texas

March 31, 2005

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Allen R. Hartman, President of the registrant, certify that:

1.I have reviewed this Annual Report on Form 10-K of Hartman Commercial Properties REIT;

2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated this 31st day of March, 2005.
	/s/ Allen R. Hartman
	Allen R. Hartman, President

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Robert W. Engel, Chief Financial Officer of the registrant, certify that:

1.I have reviewed this Annual Report on Form 10-K of Hartman Commercial Properties REIT.

2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated this 31st day of March, 2005.
	/s/ Robert W. Engel
	Robert W. Engel, Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATE OF CHIEF EXECUTIVE AND FINANCIAL OFFICERS

This Certificate is being delivered pursuant to the requirements of Section 1350 of Chapter 63 (Mail Fraud) of Title 18 (Crimes and Criminal Procedures) of the United States Code and shall not be relied on by any person for any other purpose.

The undersigned, who are the Chief Executive Officer and Chief Financial Officer of Hartman Commercial Properties REIT (the “Company”), each hereby certify as follows:

The Annual Report on Form 10-K of the Company (the “Report”), which accompanies this Certificate, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and all information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated this 31st day of March, 2005.
	/s/ Allen R. Hartman
	Allen R. Hartman, President
	/s/ Robert W. Engel
	Robert W. Engel, Chief Financial Officer

In accordance with SEC Release No. 34-47986, this Exhibit is furnished to the SEC as an accompanying document and is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933.  A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the registrant and will be retained by the registrant and furnished to the Securities and Exchange Commission or its staff upon request.