sv3

Approximate date of commencement of proposed sale of the securities to the public:

If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. o

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act of 1933 registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act of 1933 registration statement number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434 of the Securities Act of 1933, please check the following box. o


(1)	Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(c) on the basis of the average of the high and low reported sales prices for the registrant’s common stock, as reported on the New York Stock Exchange on December 11, 2003.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

The selling shareholder, the Retirement Plan for Chicago Transit Authority Employees (or CTA), any of its pledges, donees, transferees or other successors in interest, may offer to sell up to an aggregate of 953,551 shares of our common stock. We are filing the registration statement of which this prospectus is a part at this time to fulfill a contractual obligation to do so.

The shares being registered hereunder for sale were issued to CTA pursuant to the terms of the Limited Partnership Agreement of Net Lease Institutional Realty, L.P., which Net Lease Realty III, Inc., one of our wholly owned subsidiaries, entered into with CTA on August 25, 1997. Under the terms of the Limited Partnership Agreement, CTA had the right to convert its limited partner interests in the partnership into shares of our common stock. CTA exercised that right on October 10, 2003, and we issued 953,551 shares of our common stock in a private transaction thereafter.

Our registration of our common stock for possible resale does not mean that the persons who receive shares of our common stock will offer and sell their shares. We will not receive any money from any offer and sale of shares of our common stock by CTA. See “Use of Proceeds,” “Selling Shareholders” and “Plan of Distribution.”

Our common stock is listed on the New York Stock Exchange under the trading symbol “NNN.” On December 14, 2003, the closing sales price of shares of our common stock as reported on the New York Stock Exchange was $17.69 per share.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 6 of this Prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined that this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

This prospectus is part of a registration statement that we filed with the Securities and Exchange Commission. This prospectus provides you with a general description of our common stock. If required, we will deliver or provide a prospectus supplement if and when the selling shareholder offers and resells any shares of our common stock that it holds, which will contain specific information about all of the terms of that offering. Our prospectus supplement may also add, update or change information contained in this prospectus. You should read both our prospectus and any prospectus supplement together with the additional information described under the heading “Where You Can Find More Information.”

The registration statement that contains this prospectus (including the exhibits to the registration statement) contains additional information about Commercial Net Lease Realty, Inc. and the shares of common stock to be sold under this prospectus. That registration statement can be read on or at the SEC’s web site or at the SEC offices mentioned under the heading “Where You Can Find More Information.”

In this prospectus, the words “we,” “our,” “ours” and “us” refer to Commercial Net Lease Realty, Inc. and its subsidiaries and joint ventures, unless the context indicates otherwise.

We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission, or SEC. You may read and copy any document that we have filed at the SEC’s public reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549; Seven World Trade Center, 13th Floor, New York, New York 10048; and Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our filings are available to the public at the SEC’s web site at http://www.sec.gov. Our common stock is listed on the New York Stock Exchange under the ticker symbol “NNN.” You may inspect our reports, proxy statements and other information at the New York Stock Exchange, 20 Broad Street, New York, New York 10005.

We have filed with the SEC a registration statement (of which this prospectus is a part) on Form S-3 under the Securities Act of 1933, as amended, with respect to our securities. This prospectus does not contain all of the information set forth in the registration statement, including the exhibits and schedules thereto, certain parts of which are omitted as permitted by the rules and regulations of the SEC.

We are incorporating by reference the information we file with the SEC, which means that we can disclose important information to you by referring you to those documents. The information we incorporate by reference is considered to be part of this prospectus, except for any information superseded by information in this prospectus. We incorporate by reference the documents listed below which we have filed with the SEC under Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act file number 0-12989).


	•	The description of our common stock contained in the Registration Statement on Form 8-B, filed with the SEC on August 3, 1994.

	•	Annual Report on Form 10-K for the fiscal year ended December 31, 2002, filed with the SEC on March 28, 2003.

	•	Proxy Statement on Schedule 14A for the 2003 Annual Meeting of Shareholders, filed with the SEC on April 18, 2003.

	•	Quarterly Report for the quarter ended March 31, 2003, filed with the SEC on May 7, 2003.

	•	Current Report on Form 8-K, filed with the SEC on July 11, 2003.

	•	Current Report on Form 8-K, filed with the SEC on July 25, 2003.

	•	Quarterly Report for the quarter ended June 30, 2003, filed with the SEC on August 12, 2003.

	•	Current Report on Form 8-K, filed with the SEC on August 13, 2003.

	•	Quarterly Report for the quarter ended September 30, 2003, filed with the SEC on November 6, 2003.

	•	Current Report on Form 8-K, filed with the SEC on November 26, 2003, as amended on Form 8-K/A, filed on December 4, 2003.

	•	Current Report on Form 8-K, filed with the SEC on December 3, 2003.

All documents that we file after the date of this prospectus shall be deemed to be incorporated by reference in this prospectus and will be part of the prospectus from the date we file that document. Any information in that document that is meant to supersede or modify any existing statement in this prospectus will so supersede or modify the statement as appropriate.

You may request a copy of any or all of the documents incorporated by reference in this prospectus, except the exhibits to such documents (unless such exhibits are specifically incorporated by reference in such documents), at no cost, by writing or telephoning our offices at the following address:

We are a fully integrated, self-administered equity real estate investment trust (REIT) formed in 1984 that acquires, owns, manages and indirectly develops a diversified portfolio of high quality, single-tenant buildings, which may include retail, office or industrial properties that are generally leased to creditworthy businesses under full-credit, long-term commercial net leases.

Our acquisition strategy focuses on properties that are well-located for their intended uses, taking into account market factors (including trade area demographics, employment base and transportation hubs) and property/site characteristics (including access and visibility, traffic counts, customer linkages and intermodal connectivity). These properties attract a wide array of established corporate tenants, such as Barnes & Noble, Best Buy, Eckerd, OfficeMax, Wal-Mart and the United States of America. We believe that single-tenant net-leased properties offer attractive opportunities for stable current returns and potential capital appreciation. In addition, we believe that the location and design of single-tenant properties provide flexibility in use and an increased likelihood of advantageous re-lease terms upon expiration or early termination of the related leases.

We generally acquire properties that are newly constructed or re-developed as of the time of acquisition. In addition, we generally acquire properties that are subject to a lease in order to avoid the risks of not finding a tenant on a timely basis and to provide an immediate revenue stream. Our leases typically provide that the tenant bears responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation, including utilities, property taxes and insurance, and generally also provide that the tenant is responsible for roof and structural repairs. Such leases typically do not limit our recourse against the tenant and any guarantor in the event of a default and for this reason are considered “full-credit” leases. Our properties are leased on a long-term basis, generally 10 to 20 years, with renewal options for an additional 10 to 20 years.


	Commercial Net Lease Realty, Inc.
	450 S. Orange Avenue
	Suite 900
	Orlando, Florida 32801
	(407) 265-7348

In addition to the other information contained or incorporated by reference in this prospectus, you should carefully review the following considerations in determining whether to purchase the common stock from the selling shareholder.

A substantial portion of our revenue is derived from a small number of tenants.

The United States of America (“USA”) accounted for approximately 16.8% of the annualized base rental income from our properties, or base rent, as of September 30, 2003. Our next five largest tenants — Eckerd, Best Buy, OfficeMax, Barnes & Noble and Academy — accounted for an aggregate of approximately 28.6% of our base rent at September 30, 2003. The default, financial distress or bankruptcy of one or more of these tenants could cause additional vacancies among our properties. Vacancies reduce our revenues until we are able to re-lease the affected properties and could decrease the ultimate sale value of each such vacant property. Upon the expiration of the leases that are currently in place, we may not be able to re-lease a vacant property at a comparable lease rate or without incurring additional expenditures in connection with such re-leasing.

As of September 30, 2003, we owned 10 vacant, unleased properties, which account for 2.8% of the total gross leasable area of our portfolio. We are actively marketing these properties for sale or re-lease, but may not be able to sell or re-lease these properties on favorable terms or at all. Additionally, seven properties, representing 2.7% of the total gross leasable area of our portfolio, are leased to five tenants that have each filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, each of the tenants has the right to reject or affirm its leases with us, which, if rejected, could increase our vacancy rate. The lost revenues and increased property expenses resulting from the rejection by any bankrupt tenant of any of their respective leases with us could have a material adverse affect on our liquidity and results of operations and our funds available for distribution to our shareholders if we are unable to re-lease the properties at comparable rental rates and in a timely manner.

Risks associated with our acquisition of two office buildings in Arlington, Virginia.

In August 2003, we acquired two office buildings originally owned and occupied by MCI WorldCom, Inc. located in an area in Arlington, Virginia, known as Pentagon City for a purchase price of $142.8 million. In addition to this purchase price, we are committed to fund additional amounts for building and tenant improvements, currently estimated to be $28.9 million and other costs related to the lease. Because MCI WorldCom is in bankruptcy, the properties were sold by order of the U.S. Bankruptcy Court in the Southern District of New York for the benefit of the creditors of WorldCom, Inc.

The purchase contract for these properties from bankruptcy did not contain many of the representations and warranties regarding the properties which are customarily obtained from private sellers and we acquired the properties on an “as-is, where-is” basis from a bankrupt seller. As a result, we may have no recourse if there are pre-existing problems or conditions at the properties.

The Pentagon City buildings are leased in their entirety to the USA, initially to be used by the Transportation Security Administration (TSA), a recently created federal agency. U.S. Government leases


	•	We cannot provide for acceleration of the government’s payment obligations under the lease even if the government does not make a payment when due or otherwise defaults under the lease;

	•	We are required to maintain and repair the buildings in accordance with specific standards and criteria set forth in the lease;

	•	In performing our maintenance and other obligations under the lease, we must comply with various federal statutes pertaining to government contracts;

	•	The lease requires us to comply with certain statutes relating to, among other things, gratuities to government officials and contingent fees and kickbacks, equal opportunity, use of small businesses, a drug-free workplace, small disadvantaged business concerns and women-owned small businesses, and affirmative action for special disabled and Vietnam-era veterans and handicapped workers. If we fail to comply with such standards, the government may be entitled to terminate the lease or to seek offset against the lease payments;

	•	In the event we fail to perform our obligations under the lease, the government may be entitled to offset from the lease payments the costs incurred by the government in performing such obligations or deduct from lease payments the value of the services not being performed; and

	•	The government may substitute as a tenant any federal government agency or agencies at any time.

We are required to pay a base amount of real estate taxes on the property each year. In addition, under the lease, we are required to perform certain building and tenant improvements, the cost of which may exceed our estimates. Also, we are required to pay for insurance. The presence of a U.S. Government tenant may increase insurance premiums in the future or may result in increased security costs.

Unlike tenants under some of our other leases, the government is only required to pay increases in operating expenses in excess of a base year amount up to the amount of the annual increases in the consumer price index (“CPI”) cap and we will be responsible for increases in operating expenses above the amount of the CPI increase.

The lease contemplates that TSA will take occupancy of the buildings in multiple phases. Rent due under the lease is based upon the occupancy of the tenant and the completion of building and tenant improvements. To the extent TSA does not occupy the space on the timetable we anticipate, the revenues generated by the buildings may be less than anticipated.

The lease for the entire property expires in ten years, which will increase the risk of re-leasing and could result in substantial costs to re-configure the buildings for a new tenant or tenants.

The loss of certain members of our management team could adversely affect our business.

We depend upon the services of James M. Seneff, Jr., as chairman of the board of directors and chief executive officer, and of Gary M. Ralston, as president. Loss of the services of either of Mr. Seneff or Mr. Ralston could have a material adverse effect on our business and financial condition. We have entered into employment agreements with both Mr. Seneff and Mr. Ralston. Our agreement with Mr. Seneff does not require that he devote all of his efforts to us, nor is it expected that he will devote all of his efforts to us.

Mr. Seneff manages numerous business ventures, and his responsibilities to these other ventures will reduce the amount of time that he may devote to us.

We may incur additional debt and we may not be able to repay our debt financing obligations.

While our organizational documents do not limit the level or amount of debt that we may incur, it is our current policy to maintain a ratio of total indebtedness to total assets (before accumulated depreciation) of not more than 50%. However, this policy is subject to reevaluation and modification by the board of directors without shareholder approval. If the board of directors modifies this policy to permit a higher degree of leverage and we incur additional indebtedness, debt service requirements would increase accordingly. Such an increase could adversely affect our financial condition and results of operations. In addition, increased leverage could increase the risk that we may default on our debt obligations, with resulting losses to our cash flow and asset value.

We are subject to the risks associated with debt financing. These risks include our possible inability to generate cash through our operating activities sufficient to meet our required payments of principal and interest and that rising interest rates may cause the rate on our variable rate credit facility to rise. In addition, we may not be able to repay or refinance existing indebtedness, which generally will not have been fully amortized at maturity, on favorable terms. In the event that we are unable to refinance our indebtedness on acceptable terms, we may be forced to resort to alternatives that may adversely affect our ability to generate cash to pay our debt service obligations, such as disposing of properties on disadvantageous terms (which may also result in losses) and accepting financing on unfavorable terms.

Factors beyond our control affect our performance and value. Changes in national, regional and local economic and market conditions may affect our economic performance and the value of our real estate assets. Local real estate market conditions may include excess supply and intense competition for tenants, including competition based on:


	•	rental rates,

	•	attractiveness and location of the property, and

	•	quality of maintenance, insurance and management services.

In addition, other factors may adversely affect the performance and value of our properties, including changes in laws and governmental regulations, including those governing:


	•	usage,

	•	zoning and taxes,

	•	changes in interest rates, and

	•	the availability of financing.

Illiquidity of real estate investments. Because real estate investments are relatively illiquid, our ability to adjust our portfolio promptly in response to economic or other conditions is limited. Certain significant expenditures generally do not change in response to economic or other conditions, including:


	•	debt service (if any),

	•	real estate taxes, and

	•	operating and maintenance costs.

This combination of variable revenue and relatively fixed expenditures may result, under certain market conditions, in reduced income from investment. Such reduction in investment income could have an adverse effect on our financial condition and results of operations.

Environmental Matters. Investments in real property create a potential for environmental liability on the part of the owner of such property from the presence or discharge of hazardous substances on the property. It is our policy, as a part of our acquisition due diligence process, to obtain a Phase I environmental site

assessment for each property and where warranted, a Phase II environmental site assessment; however, not all properties have been subjected to these site assessments. Phase I assessments involve site reconnaissance and review of regulatory files identifying potential areas of concern, whereas Phase II assessments involve some degree of soil and/ or groundwater testing. We may acquire a property whose environmental site assessment indicates that a problem or potential problem exists, subject to a determination of the level of risk and potential cost of remediation. In such cases, we require the seller and/ or tenant to (i) remediate the problem prior to our acquiring the property, (ii) indemnify us for environmental liabilities or (iii) agree to other arrangements deemed appropriate by us to address environmental conditions at the property. We have 14 properties currently under some level of environmental remediation. The seller or the tenant is contractually responsible for the cost of the environmental remediation for some of these properties. However, we cannot be certain that we will not be required to undertake or pay for removal or remediation of any contamination of properties currently or previously owned by us or that the costs of such removal or remediation would not be material.

We may not be able to successfully implement our selective acquisition strategy or fully realize the anticipated benefits of our renovations and development projects.

We cannot assure that we will be able to implement our investment strategies successfully. Additionally, we cannot assure that our property portfolio will expand at all, or if it will expand at any specified rate or to any specified size. In addition, investment in additional real estate assets is subject to a number of risks. Because we expect to invest in markets other than the ones in which our current properties are located, we will also be subject to the risks associated with investment in new markets that may be relatively unfamiliar to our management.

To the extent that we engage in development activities, we will be subject to the risks normally associated with such activities. Such risks include, without limitation, risks relating to the availability and timely receipt of zoning and other regulatory approvals, the cost and timely completion of construction (including risks from factors beyond our control, such as weather or labor conditions or material shortages) and the ability to obtain both construction and permanent financing on favorable terms. These risks could result in substantial unanticipated delays or expenses and, under certain circumstances, could prevent completion of development activities once undertaken or provide a tenant the opportunity to terminate a lease. Any of these situations could have an adverse effect on our financial condition and results of operations and on the amount of funds available for distribution to shareholders.

The ownership and management of office and industrial properties may involve unanticipated difficulties that differ from those in the retail real estate market.

Our property portfolio consists primarily of retail properties, which are leased under full-credit, long-term commercial net leases. As a result of our acquisition of the two Class A office properties in August 2003, we are subject to the risks associated with investment in new property types, which may be relatively unfamiliar to our management. These risks could result in substantial unanticipated difficulties, delays or expenses involved in owning and managing office or industrial properties, which could have an adverse effect on our financial condition and results of operations and on the amount of funds available for distribution to stockholders.

In addition, the price of our capital stock may suffer from any perceived adverse changes in business focus as a result of purchasing and operating office and industrial properties.

Our failure to qualify as a real estate investment trust for federal income tax purposes would affect our ability to maintain our current level of dividends and could result in significant tax liability.

We intend to operate in a manner that will allow us to continue to qualify as a real estate investment trust. We believe that we have been organized as, and our past and present operations qualify us as, a real estate investment trust. However, the IRS could successfully assert that we are not qualified as such. In addition, we may not remain qualified as a real estate investment trust in the future. This is because qualification as a

If we fail to qualify as a real estate investment trust, we will not be allowed a deduction for dividends to shareholders in computing taxable income and would become subject to federal income tax at regular corporate rates. In this event, we could be subject to potentially significant tax liabilities, and the amount of cash available for distribution to shareholders would be reduced and possibly eliminated. Unless entitled to relief under certain statutory provisions, we would also be disqualified from treatment as a real estate investment trust for the four taxable years following the year during which we lost our qualification.

Recent tax legislation provides favorable treatment for dividends of regular corporations, but not generally dividends from REITs.

On May 28, 2003, the President signed into law the Jobs and Growth Tax Relief Reconciliation Act of 2003 (which we will refer to as the Act). Under the Act, the maximum tax rate on the long-term capital gains of non-corporate taxpayers is 15% (applicable to sales occurring from May 7, 2003 through December 31, 2008). The Act also reduced the tax rate on “qualified dividend income” to 15%. Because, as a REIT, we are not generally subject to tax on the portion of our REIT taxable income or capital gains distributed to our shareholders, our distributions are not generally eligible for this new tax rate on dividends. As a result, our ordinary REIT distributions continue to be taxed at the higher tax rates applicable to ordinary income. Without further legislation, the maximum tax rate on long-term capital gains will revert to 20% in 2009, and dividends will again be subject to tax at ordinary rates.

We make certain forward-looking statements in this prospectus that may or may not occur.

Certain statements incorporated by reference or made in this prospectus under the captions “Risk Factors” and “The Company,” and elsewhere in this prospectus are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When we use the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” and other similar expressions in this prospectus, they are generally intended to identify forward-looking statements. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect our actual results, performance or achievements.

We will not receive any proceeds from the sale of shares of our common shares by the selling shareholder, CTA.

The following description of our common stock sets forth certain general terms and provisions of the common stock to which this prospectus relates. The statements below describing the common stock are in all respects subject to and qualified in their entirety by reference to the applicable provisions of our articles of incorporation and bylaws.

Our authorized capital stock consists of 90,000,000 shares of common stock, par value $0.01 per share, and 15,000,000 shares of preferred stock. There also is authorized 105,000,000 shares of excess stock, issuable in exchange for capital stock, as described below under “— Restrictions on Ownership.” At December 14, 2003, we had outstanding 49,514,398 shares of common stock and 1,791,645 shares of preferred stock. All issued and outstanding shares of common stock are duly authorized, validly issued, fully paid and nonassessable.

The holders of common stock elect all directors and are entitled to one vote per share on all matters submitted to a vote of the stockholders. Stockholders are entitled to receive dividends when, as and if declared by our board of directors out of funds legally available for that purpose. Upon our liquidation, dissolution or winding up, holders of common stock are entitled to share pro rata in any distribution to stockholders. Holders of common stock have no preemptive, subscription or conversion rights. The common stock will, when issued, be fully paid and nonassessable and will not be subject to preemptive or other similar rights.

We purchased from six limited partnerships and one general partnership 14 properties in July 1992, and purchased from a trust one property in August 1993, in exchange for the issuance to the partnerships and the trust of an aggregate of 346,172 restricted shares of common stock. All of the shares issued in connection with these acquisitions are subject to piggyback registration rights under certain circumstances.

For us to qualify as a REIT, not more than 50% in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of a taxable year. The shares must be beneficially owned (without reference to any rules of attribution) by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year; and certain other requirements must be satisfied. See “Federal Income Tax Considerations — Taxation of Commercial Net Lease Realty, Inc.”

To ensure that five or fewer individuals do not own more than 50% in value of the outstanding common stock, our articles of incorporation provide that, subject to certain exceptions, no holder may own, or be deemed to own by virtue of the attribution provisions of the Code, more than 9.8% in value of the outstanding capital stock. Our board of directors may waive this ownership limit if evidence satisfactory to us and our tax counsel is presented that such ownership will not then or in the future jeopardize our status as a REIT. As a condition of such waiver, our board of directors may require opinions of counsel satisfactory to it and/or an undertaking from the applicant with respect to preserving our status as a REIT.

This ownership limit will not be automatically removed even if the REIT provisions of the Code are changed so as to no longer contain any ownership concentration limitation or if the ownership concentration limitation is increased. In addition to preserving our status as a REIT, this ownership limit may prevent any person or small group of persons from acquiring unilateral control of us.

If the ownership, transfer or acquisition of shares of common stock, or change in our capital structure or other event or transaction would result in:


	•	any person owning (applying certain attribution rules) capital stock in excess of the ownership limit,

	•	fewer than 100 persons owning our capital stock,

	•	our being “closely held” within the meaning of Section 856(h) of the Code, or

	•	our otherwise failing to qualify as a REIT,

then the ownership, transfer or acquisition, or change in capital structure or other event or transaction that would have such effect will be void as to the purported transferee or owner, and the purported transferee or owner will not have or acquire any rights to the capital stock to the extent required to avoid such a result. Capital stock owned, transferred or proposed to be transferred in excess of the ownership limit or which would otherwise jeopardize our status as a REIT will automatically be converted to excess stock. A holder of excess stock is not entitled to distributions, voting rights, and other benefits with respect to such shares except for the right to payment of the purchase price for the shares (or, in the case of a devise or gift or similar event which results in the issuance of excess stock, the fair market value at the time of such devise or gift or event) and the right to certain distributions upon liquidation. Any dividend or distribution paid to a proposed transferee or holder of excess stock shall be repaid to us upon demand. Excess stock shall be subject to our repurchase at our election. The purchase price of any excess stock shall be equal to the lesser of:


	•	the price paid in such purported transaction (or, in the case of a devise or gift or similar event resulting in the issuance of excess stock, the fair market value at the time of such devise or gift or event), or


	•	the fair market value of such common stock on the date on which we or our designee determines to exercise its repurchase right.

If the foregoing transfer restrictions are determined to be void or invalid by virtue of any legal decision, statute, rule or regulation, then the purported transferee of any excess stock may be deemed, at our option, to have acted as an agent on our behalf in acquiring such excess stock and to hold such excess stock on our behalf.

For purposes of our articles of incorporation, the term “person” shall mean an:


	•	individual,

	•	corporation,

	•	partnership,

	•	estate,

	•	trust (including a trust qualified under Section 401(a) or 501(c)(17) of the Code),

	•	portion of a trust permanently set aside to be used exclusively for the purposes described in Section 642(c) of the Code,

	•	association,

	•	private foundation within the meaning of Section 509(a) of the Code,

	•	joint stock company or other entity, or

	•	group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended;

but does not include an underwriter which participated in a public offering of our capital stock for a period of sixty (60) days following the purchase by such underwriter of capital stock therein, provided that the foregoing exclusions shall apply only if the ownership of such capital stock by such underwriter would not cause us to fail to qualify as a REIT by reason of being “closely held” within the meaning of Section 856(a) of the Code or otherwise cause us to fail to qualify as a REIT.

All certificates representing capital stock will bear a legend referring to the restrictions described above.

Our articles of incorporation provide that all persons who own, directly or by virtue of the attribution provisions of the Code, more than 5.0% of the outstanding capital stock, or such lower percentage as may be required pursuant to regulations under the Code or as may be requested by our board of directors, must file a written notice with us no later than January 31 of each year with respect to the prior year containing:


	•	the name and address of such owner,

	•	the number of shares of capital stock owned by such holder and

	•	a description of how such shares are held.

In addition, each stockholder shall be required to disclose, upon demand, to us in writing such information that we may request in good faith in order to determine our status as a REIT or to comply with the requirements of any taxing authority or governmental agency.

The ownership limitations described above may have the effect of precluding acquisitions of control of us by a third party.

The following is a summary of the material federal income tax consequences of the ownership of our common stock, prepared by Shaw Pittman LLP, our tax counsel. This discussion is based upon the laws, regulations, and reported rulings and decisions in effect as of the date of this prospectus (or, in the case of certain regulations, proposed as of such date), all of which are subject to change, retroactively or prospectively, and to possibly differing interpretations. This discussion does not purport to deal with the federal income tax consequences applicable to all investors in light of their particular investment circumstances, or to all categories of investors, some of whom may be subject to special rules (including, for example, insurance companies, tax-exempt organizations, financial institutions, broker-dealers, foreign corporations and persons who are not citizens or residents of the United States). No ruling on the federal, state or local tax considerations relevant to our operation, or to the purchase, ownership or disposition of our common stock has been requested from the Internal Revenue Service or other tax authority. Shaw Pittman LLP has rendered certain opinions discussed herein and believes that if the Internal Revenue Service were to challenge the conclusions of Shaw Pittman LLP, such conclusions should prevail in court. However, opinions of counsel are not binding on the Internal Revenue Service or on the courts, and no assurance can be given that the conclusions reached by Shaw Pittman LLP would be sustained in court. Investors should consult their own tax advisors in determining the federal, state, local, foreign and other tax consequences to them of the purchase, ownership and disposition of our common stock, the tax treatment of a REIT and the effect of potential changes in applicable tax laws.

General. Since our inception, we have elected, and believe we have qualified, to be taxed as a REIT for federal income tax purposes, as defined in Sections 856 through 860 of the Code. The provisions of the Code pertaining to REITs are highly technical and complex. If various conditions imposed by the Code are met, a REIT is, with limited exceptions, not taxed at the corporate level on income that is currently distributed to the REIT’s stockholders. Undistributed income is taxed at regular corporate rates and may be subject to a 4% excise tax. In addition, a REIT may be subject to the “alternative minimum tax” on its items of tax preference and is subject to income tax at the highest corporate rate on income from foreclosure property and to penalty taxes on excessive unqualified income and prohibited transactions.

If we fail to qualify as a REIT for any taxable year and certain relief provisions do not apply, we will be subject to federal income tax (including alternative minimum tax) as an ordinary corporation on our taxable income at regular corporate rates without any deduction or adjustment for distributions to holders of common stock or preferred stock. To the extent that we would, as a consequence, be subject to tax liability for any such year, the amount of cash available for satisfaction of our liabilities and for distribution to holders of common stock or preferred stock would be reduced. Distributions to holders of common stock or preferred stock generally would be taxable as ordinary income to the extent of current and accumulated earnings and profits and, subject to certain limitations, would be eligible for the corporate dividends received deduction, but there can be no assurance that any such distributions would be made. We would not be eligible to elect REIT status for the four subsequent taxable years, unless our failure to qualify was due to reasonable cause and not willful neglect and unless certain other requirements were satisfied.

Opinion of Shaw Pittman LLP. Based upon representations made by our officers with respect to relevant factual matters, upon the existing Code provisions, rules and regulations promulgated thereunder (including proposed regulations) and reported administrative and judicial interpretations thereof, upon Shaw Pittman LLP’s independent review of such documents and other information as Shaw Pittman LLP deemed relevant in the circumstances and upon the assumption that we will operate in the manner described in this

prospectus, Shaw Pittman LLP has advised us that, in its opinion, (a) we have, for the years 1984 through 2002, met the requirements for qualification and taxation as a REIT and (b) our proposed method of operation will enable us to meet the requirements for qualification and taxation as a REIT for 2003 and future taxable years. It must be emphasized, however, that our ability to qualify as a REIT is dependent upon our actual operating results and future actions and events and no assurance can be given that the actual results of our operations and the future actions and events will enable us to satisfy in any given year the requirements for qualification and taxation as a REIT.

Requirements for Qualification as a REIT. As discussed more fully below, the Code defines a REIT as a corporation:


	•	which is managed by one or more trustees or directors;

	•	the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest;

	•	which would be taxable, but for Sections 856 through 860 of the Code, as a domestic corporation;

	•	which is neither a financial institution nor an insurance company;

	•	the beneficial ownership of which is held by 100 or more persons;

	•	which is not closely held; and

	•	which meets certain other tests regarding the nature of its assets and income and the amount of its distributions.

Corporate Subsidiaries and Partnerships. We currently have several direct corporate subsidiaries and may have additional corporate subsidiaries in the future. A corporation that is a “qualified REIT subsidiary” is not treated as a corporation separate from its parent REIT. All assets, liabilities, and items of income, deduction, and credit of a qualified REIT subsidiary are treated as assets, liabilities, and items of income, deduction, and credit of the REIT. A qualified REIT subsidiary is a corporation, all of the capital stock of which is owned by the parent REIT, unless we and the subsidiary have jointly elected to have it treated as a “taxable REIT subsidiary” (“TRS”), in which case it is treated separately from us and will be subject to federal corporate income taxation. Thus, in applying the requirements described herein, any qualified REIT subsidiary of ours will be ignored, and all assets, liabilities, and items of income, deduction, and credit of such subsidiary will be treated as our assets, liabilities, and items of income, deduction, and credit. We believe our direct corporate subsidiaries are qualified REIT subsidiaries, except for those which are TRSs. Accordingly, the direct corporate subsidiaries are not subject to federal corporate income taxation, though they may be subject to state and local taxation.

A REIT is treated as owning its proportionate share of the assets of any partnership in which it is a partner and as earning its allocable share of the gross income of the partnership for purposes of the applicable REIT qualification tests. Thus, our proportionate share of the assets, liabilities and items of income of any partnership (or limited liability company treated as a partnership) in which we have acquired or will acquire an interest, directly or indirectly, are treated as our assets and gross income for purposes of applying the various REIT qualification requirements.

Ownership Tests. More specifically, the ownership requirements that we must satisfy as a REIT are that (a) during the last half of each taxable year not more than 50% of our outstanding shares may be owned, directly or indirectly, by five or fewer individuals and (b) there must be at least 100 stockholders on at least 335 days of such 12-month taxable year (or a proportionate number of days of a short taxable year). In order to meet these requirements, or to otherwise obtain, maintain or reestablish REIT status, and for no other purpose, our articles of incorporation empower our board of directors to redeem, at its option, a sufficient number of shares or to restrict the transfer thereof to bring or to maintain the ownership of our shares in conformity with the requirements of the Code. The redemption price to be paid will be fair market value as reflected in the latest quotations, or, if no quotations are available, the net asset value of the shares as determined by our board of directors.

Under our articles of incorporation, each holder of our capital stock is required, upon demand, to disclose to our board of directors in writing such information with respect to direct and indirect ownership of our shares as the board of directors deems necessary to comply with provisions of the Code applicable to us, or to comply with the requirements of any other appropriate taxing authority. Certain Treasury regulations govern the method by which we are required to demonstrate compliance with these stock ownership requirements and the failure to satisfy such regulations could subject us to substantial penalties. We have represented that we have met, and expect to meet, these stock ownership requirements for each taxable year.

Asset Tests. At the end of each quarter of our taxable year, at least 75% of the value of our total assets must consist of “real estate assets,” cash and cash items (including receivables) and government securities. The balance of our assets generally may be invested without restriction, except that holdings of securities not within the 75% class of assets generally must not, with respect to any issuer except a TRS, exceed 5% of the value of our assets or 10% of the voting power or value of the issuer’s outstanding securities. In addition, our combined securities holdings in TRSs cannot exceed 20% of our total assets. The term “real estate assets” includes real property, interests in real property, leaseholds of land or improvements thereon, and any property attributable to the temporary investment of new capital (but only if such property is stock or a debt instrument and only for the one-year period beginning on the date we receive such capital). We have represented that at the end of each quarter we have met, and expect in the future to continue to meet, this asset test.

Income Tests. We currently must meet two separate tests with respect to our sources of income for each taxable year. In general, at least 75% of our gross income (excluding income from prohibited transactions) for each taxable year must be from rents from real property, interest on obligations secured by mortgages on real property, gains from the sale or other disposition of real property and certain other sources. In addition, we must derive at least 95% of our gross income (excluding income from prohibited transactions) for each taxable year from any combination of the items of income which qualify under the 75% test, from dividends and interest and from gains from the sale, exchange or other disposition of certain stocks and securities.

Rents received by us will qualify as “rents from real property” in satisfying the gross income requirements described above only if several conditions are met. First, the amount of rent must not be based in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term “rents from real property” solely by reason of being based on a fixed percentage or percentages of receipts of sales. Our leases provide for either fixed rent, sometimes with scheduled escalations, or a fixed minimum rent and a percentage of gross receipts in excess of some threshold. Second, the Code provides that rents received from a tenant will not qualify as “rents from real property” in satisfying the gross income tests if we, or an owner of 10% or more of our aggregate capital stock, directly or constructively own 10% or more of such tenant (referred to as a “related party tenant”). Third, if rent attributable to personal property, leased in connection with a lease of real property, is greater than 15% of the total rent received under the lease, then the portion of rent attributable to such personal property will not qualify as “rents from real property.” We anticipate that none of our gross annual income will be considered attributable to rents that are based in whole or in part on the income or profits of any person; that no more than a de minimis amount of our gross annual income will be considered attributable to the rental of personal property; and that none of our gross annual income will be from related party tenants. Finally, for rents received to qualify as “rents from real property,” we generally must not operate or manage the property or furnish or render services to tenants, other than through an “independent contractor” from whom we derive no revenue or a TRS. The “independent contractor” or TRS requirement, however, does not apply to the extent the services provided by us are “usually or customarily rendered” in connection with the rental of space for occupancy only and are not otherwise considered “rendered to the occupant.” In addition, we are currently permitted to earn up to one percent of our gross income from tenants, determined on a property-by-property basis, by furnishing services that are noncustomary or provided directly to the tenants, without causing the rental income to fail to quality as rents from real property. We will provide certain services with respect to our properties. We do not anticipate that any of these services will be (a) of a type other than those usually or customarily rendered in connection with the rental space for occupancy only or (b) of a type considered rendered to any of the occupants of our properties.

Should we fail to satisfy either or both of the 75% or 95% tests for any taxable year, we may still qualify as a REIT if:


	•	such failure is due to reasonable cause and not willful neglect;

	•	we report the nature and amount of each item of our income on a schedule attached to our tax return for such year; and

	•	the reporting of any incorrect information is not due to fraud with intent to evade tax.

However, even if these three requirements were met and we were not disqualified, we would pay a 100% tax on the greater of (i) the amount by which 90% of our gross income (excluding gross income from prohibited transactions) exceeds our qualifying income under the 95% test, or (ii) the amount by which 75% of our gross income (excluding gross income from prohibited transactions) exceeds our qualifying income under the 75% test, multiplied by a fraction intended to reflect our profitability.

Tax on Prohibited Transactions. A REIT will incur a 100% tax on net income derived from any “prohibited transaction.” A “prohibited transaction” generally is a sale or other disposition of property (other than foreclosure property) that the REIT holds primarily for sale to customers in the ordinary course of a trade or business. We believe that none of our assets are held for sale to customers and that a sale of any such asset would not be in the ordinary course of its business. Whether a REIT holds an asset “primarily for sale to customers in the ordinary course of a trade or business” depends, however, on the facts and circumstances in effect from time to time, including those related to a particular asset. Nevertheless, we will attempt to comply with the terms of safe-harbor provisions in the Code prescribing when an asset sale will not be characterized as a prohibited transaction. We may fail to comply with such safe-harbor provisions or may own property that could be characterized as property held “primarily for sale to customers in the ordinary course of a trade or business.”

Tax and Deduction Limits on Certain Transactions with Taxable REIT Subsidiaries. A REIT will incur a 100% tax on certain transactions between a REIT and a taxable REIT subsidiary to the extent the transactions are not on an arms-length basis. In addition, under certain circumstances the interest paid by a taxable REIT subsidiary may not be deductible by the taxable REIT subsidiary. We believe that none of the transactions we have had with our taxable REIT subsidiaries will give rise to the 100% tax and that none of our taxable REIT subsidiaries will be subject to the interest deduction limits.

Distribution Requirements. We must distribute annually to our stockholders ordinary income dividends in an amount equal to at least:


	•	90% of the sum of (i) our “real estate investment trust taxable income” (before deduction of dividends paid and excluding any net capital gains) and (ii) the excess of net income from foreclosure property over the tax on such income, minus

	•	certain excess non-cash income.

Real estate investment trust taxable income generally is our taxable income computed as if we were an ordinary corporation, with certain adjustments. Distributions must be made in the taxable year to which they relate or, if declared before the timely filing of our tax return for such year and paid not later than the first regular dividend payment after such declaration, in the following taxable year. To the extent that we do not distribute all of our net capital gain or distribute at least 90%, but less than 100%, of our real estate investment trust taxable income, as adjusted, we will be subject to tax thereon at regular ordinary and capital gain corporate tax rates. Furthermore, if we should fail to distribute during each calendar year at least the sum of:


	•	85% of our ordinary income,

	•	95% of our net capital gain net income for such year and

	•	any undistributed taxable income from prior periods,

we would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed.

We have represented that we have made and intend to make distributions to stockholders that will be sufficient to meet the annual distribution requirements. Under some circumstances, however, it is possible that we may not have sufficient funds from our operations to pay cash dividends to satisfy these distribution requirements. If the cash available to us is insufficient, we might raise cash in order to make the distributions by borrowing funds, issuing new securities or selling assets. If we ultimately were unable to satisfy the 90% distribution requirement, we would fail to qualify as a REIT and, as a result, would be subject to federal income tax as an ordinary corporation without any deduction or adjustment for distributions to holders of common stock or preferred stock.

If we were to fail to meet the 90% distribution requirement as a result of an adjustment to our tax returns by the Internal Revenue Service, we could maintain our qualification as a REIT by paying a “deficiency dividend” (plus a penalty and interest) within a specified period which will be permitted as a deduction in the taxable year with respect to which the adjustment is made.

Taxation of Taxable Domestic Stockholders. For any taxable year in which we qualify as a REIT for federal income tax purposes, our distributions to our stockholders that are United States persons (generally, any person other than a nonresident alien individual, a foreign trust or estate or a foreign partnership or corporation) generally will be taxed as ordinary income. Amounts received by such United States persons that we have properly designated as capital gain dividends generally will be taxed as long-term capital gain (to the extent that they do not exceed our actual net capital gain for the taxable year) without regard to the period for which the stockholder has held his common stock. However, corporate stockholders may be required to treat up to 20% of certain capital gain dividends as ordinary income. Such ordinary income and capital gain are not eligible for the dividends received deduction allowed to corporations. Distributions to such United States persons in excess of our current or accumulated earnings and profits will be considered first a tax-free return of capital, reducing the tax basis of each stockholder’s common stock and then, to the extent the distribution exceeds each stockholder’s basis, a gain realized from the sale of common stock. We will notify each stockholder as to the portions of each distribution which, in our judgment, constitute ordinary income, capital gain or return of capital. Any dividend that is (a) declared by us in October, November or December of any calendar year and payable to stockholders of record on a specified date in such months and (b) actually paid by us in January of the following year, shall be deemed to have been both paid by us and received by the stockholders on December 31 of such calendar year and, as a result, will be includable in gross income of the stockholders for the taxable year which includes such December 31.

Stockholders may not deduct on their income tax returns any net operating or net capital losses we may have. We may carry forward net operating losses for 20 years and may use such losses to reduce taxable income and the amounts that we will be required to distribute in order to remain qualified as a REIT. We may carry forward net capital losses for five years and we may use such losses to reduce capital gains. Losses not used within the relevant period expire.

Upon the sale or other disposition of our common stock, a stockholder generally will recognize capital gain or loss equal to the difference between the amount realized on the sale or other disposition and the adjusted basis of the shares involved in the transaction. Such gain or loss will be long-term capital gain or loss if, at the time of sale or other disposition, the shares involved have been held for more than one year. In addition, if a stockholder receives a capital gain dividend with respect to a share of common stock which he has held for six months or less at the time of sale or other disposition, any loss recognized by the stockholder will be treated as long-term capital loss to the extent of the amount of the capital gain dividend that was treated as long-term capital gain.

Distributions from us and gain from the disposition of common stock will not be treated as passive activity income and, therefore, stockholders will not be able to apply any passive activity losses against such income. Dividends from us (to the extent they do not constitute a return of capital or capital gain dividends) and, on an elective basis, capital gain dividends and gain from the disposition of common stock generally will be treated as investment income for purposes of the investment income limitation.

The state and local income tax treatment of us and our stockholders may not conform to the federal income tax treatment described above. (For example, in most states, individual stockholders who are residents

of the state will be subject to state income tax on dividends and gains on their shares in us, but the state of Delaware — unlike most, if not all, other states — also taxes nonresident stockholders of a REIT on dividends and gains from the REIT to the extent, if any, that such income is attributable to property located in Delaware.) As a result, investors should consult their own tax advisors for an explanation of how other state and local tax laws would affect their investment in common stock.

Backup Withholding. We will report to our stockholders and the Internal Revenue Service the amount of distributions paid during each calendar year, and the amount of tax withheld, if any. Under the backup withholding rules, a stockholder may be subject to backup withholding at a rate of 28% with respect to distributions paid unless such holder (i) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact, or (ii) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with applicable requirements of the backup withholding rules. A stockholder that does not provide us with his correct taxpayer identification number also may be subject to penalties imposed by the Internal Revenue Service. Any amount paid as backup withholding will be creditable against the stockholder’s income tax liability. In addition, we may be required to withhold a portion of capital gain distributions to any shareholders who fail to certify their non-foreign status to us.

Taxation of Tax-Exempt Stockholders. Distributions by us to a stockholder that is a tax-exempt entity generally will not constitute “unrelated business taxable income” (“UBTI”) as defined in Section 512(a) of the Code, provided that the tax-exempt entity has not financed the acquisition of its shares with “acquisition indebtedness” within the meaning of the Code and the shares are not otherwise used in an unrelated trade or business of the tax-exempt entity. However, qualified trusts that hold more than 10% (by value) of the shares of certain REITs may be required to treat a certain percentage of the distributions of such REITs as UBTI. The conditions which trigger this requirement do not currently exist, and we do not anticipate that they will ever exist. This requirement will apply only if (a) we would not qualify as a REIT for federal income tax purposes but for the application of a “look-through” exception to the five or fewer requirement applicable to shares being held by qualified trusts and (b) we are “predominantly held” by qualified trusts. A REIT is predominantly held if either (i) a single qualified trust holds more than 25% by value of the REIT interests or (ii) one or more qualified trusts, each owning more than 10% by value of the REIT interests, hold in the aggregate more than 50% of the REIT interests. The percentage of any REIT dividend treated as UBTI is equal to the ratio of (i) the UBTI earned by the REIT (treating the REIT as if it were a qualified trust and therefore subject to tax on UBTI) to (ii) the total gross income (less certain associated expenses of the REIT). A de minimis exception applies where the ratio set forth in the preceding sentence is less than 5% for any year. For these purposes, a qualified trust is any trust described in Section 401(a) of the Code and exempt from tax under Section 501(a) of the Code. The provisions requiring qualified trusts to treat a portion of REIT distributions as UBTI will not apply if we are able to satisfy the five or fewer requirements without relying upon the “look-through” exception. The existing restrictions on ownership of shares in our articles of incorporation will prevent the application of the provisions treating a portion of the REIT distributions as UBTI to tax-exempt entities purchasing shares pursuant to the offering, absent a waiver of the restrictions by our board of directors.

Taxation of Foreign Stockholders. The rules governing United States federal income taxation of nonresident alien individuals, foreign corporations, foreign participants and other foreign stockholders (collectively, “Non-U.S. Stockholders”) are complex, and no attempt will be made herein to provide more than a summary of such rules. The following discussion assumes that the income from investment in the common stock will not be effectively connected with the Non-U.S. Stockholders’ conduct of a United States trade or business. Prospective Non-U.S. Stockholders should consult with their own tax advisors to determine the impact of federal, state and local laws with regard to an investment in common stock, including any reporting requirements.

Distributions that are not attributable to gain from sales or exchanges by us of United States real property interests and not designated by us as capital gain dividends will be treated as dividends of ordinary income to the extent that they are made out of our current and accumulated earnings and profits. Such dividends ordinarily will be subject to a withholding tax equal to 30% of the gross amount of the dividend, unless an

applicable tax treaty reduces or eliminates that tax. A number of U.S. tax treaties that reduce the rate of withholding tax on corporate dividends do not reduce, or reduce to a lesser extent, the rate of withholding applied to dividends from a REIT. We expect to withhold U.S. income tax at the rate of 30% on the gross amount of any such distributions paid to a Non-U.S. Stockholder unless (i) a lower treaty rate applies and the Non-U.S. Stockholder files IRS Form W-8BEN with us and, if the capital stock is not traded on an established securities market, acquires a taxpayer identification number from the Internal Revenue Service or (ii) the Non-U.S. Stockholder files IRS Form W-8ECI with us claiming that the distribution is effectively connected income. Distributions in excess of our current and accumulated earnings and profits will not be taxable to a stockholder to the extent that such distributions do not exceed the adjusted basis of the stockholder’s shares, but rather will reduce the adjusted basis of such shares. To the extent that distributions in excess of current and accumulated earnings and profits exceed the adjusted basis of a Non-U.S. Stockholders’ shares, such distributions will give rise to tax liability if the Non-U.S. Stockholder would otherwise be subject to tax on any gain from the sale or disposition of the shares, as described below. If it cannot be determined at the time a distribution is paid whether or not such distribution will be in excess of current and accumulated earnings and profits, the distribution will be subject to withholding at the rate of 30%. However, a Non-U.S. Stockholder may seek a refund of such amounts from the Internal Revenue Service if it is subsequently determined that such distribution was, in fact, in excess of our current and accumulated earnings and profits. We are permitted, but not required, to make reasonable estimates of the extent to which distributions exceed current or accumulated earnings and profits. Such distributions will generally be subject to a 10% withholding tax, which may be refunded to the extent it exceeds the shareholder’s actual U.S. tax liability, provided the required information is furnished to the Internal Revenue Service.

For any year in which we qualify as a REIT, distributions that are attributable to gain from sales or exchanges by us of United States real property interests will be taxed to a Non-U.S. Stockholder under the provisions of the Foreign Investment in Real Property Tax Act of 1980, as amended (“FIRPTA”). Under FIRPTA, distributions attributable to gain from sales of United States real property interests are taxed to a Non-U.S. Stockholder as if such gain were effectively connected with a United States business. Non-U.S. Stockholders would thus be taxed at the normal capital gain rates applicable to U.S. Stockholders (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals). Also, distributions subject to FIRPTA may be subject to a 30% branch profits tax in the hands of a foreign corporate stockholder not entitled to treaty exemption or rate reduction. We are required by applicable Treasury Regulations to withhold 35% of any distribution that could be designated by us as a capital gain dividend. This amount is creditable against the Non-U.S. Stockholder’s FIRPTA tax liability.

Gain recognized by a Non-U.S. Stockholder upon a sale of shares generally will not be taxed under FIRPTA if we are a “domestically controlled REIT,” defined generally as a REIT in which at all times during a specified testing period less than 50% in value of the stock was held directly or indirectly by foreign persons. We currently believe that we are, and expect to continue to be, a “domestically controlled REIT,” and in such case the sale of shares would not be subject to taxation under FIRPTA. However, gain not subject to FIRPTA nonetheless will be taxable to a Non-U.S. Stockholder if (i) investment in the shares is treated as “effectively connected” with the Non-U.S. Stockholders’ U.S. trade or business, or (ii) the Non-U.S. Stockholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and certain other conditions are met. Effectively connected gain realized by a foreign corporate shareholder may be subject to an additional 30% branch profits tax, subject to possible exemption or rate reduction under an applicable tax treaty. If the gain on the sale of shares were to be subject to taxation under FIRPTA, the Non-U.S. Stockholder would be subject to the same treatment as U.S. Stockholders with respect to such gain (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals), and the purchaser of the shares would be required to withhold and remit to the Internal Revenue Service 10% of the purchase price.

gains of non-corporate taxpayers is 15% (applicable to sales occurring from May 7, 2003 through December 31, 2008). The Act also reduced the tax rate on “qualified dividend income” to 15%. Because, as a REIT, we are not generally subject to tax on the portion of our REIT taxable income or capital gains distributed to our shareholders, our distributions are not generally eligible for this new tax rate on dividends. As a result, our ordinary REIT distributions continue to be taxed at the higher tax rates applicable to ordinary income. However, the new 15% rate does generally apply to:


	•	a shareholder’s long-term capital gain, if any, recognized on the disposition of our shares;

	•	distributions we designate as long-term capital gain dividends (except to the extent attributable to real estate depreciation, in which case the 25% tax rate applies);

	•	distributions attributable to dividends we receive from non-REIT corporations; and

	•	distributions to the extent attributable to income upon which we have paid corporate tax (for example, the tax we would pay if we distributed less than all of our taxable REIT income).

Without further legislation, the maximum tax rate on long-term capital gains will revert to 20% in 2009. The backup withholding rate also has been reduced from 30% to 28%.

The following is a summary of the rights of the Retirement Plan for Chicago Transit Employees (“CTA”) with respect to the 953,551 shares to be sold under this prospectus. It may not contain all the information that is important to you. You can access complete information by referring to the Limited Partnership Agreement described herein.

On August 25, 1997, Net Lease Realty III, Inc., one of our wholly owned subsidiaries, entered into a Limited Partnership Agreement with CTA for the purposes of forming Net Lease Institutional Realty, L.P. to acquire, own and manage certain single-tenant commercial properties subject to net leases. The terms of the Limited Partnership Agreement provide that Net Lease Realty III is the general partner of the partnership, holding 20% of the aggregate partnership interests, and CTA is the limited partner of the partnership, holding 80% of the aggregate partnership interests.

Under the terms of the Limited Partnership Agreement, CTA had the right to direct Net Lease Realty III to convert CTA’s limited partner interest in the partnership into registered shares of our common stock, by providing notice to that effect to Net Lease Realty III. The number of shares of our common stock that CTA was entitled to receive was based on CTA’s pro rata share of the partnership’s projected net operating income and our projected funds from operations per share multiplied by a growth factor, all as described in the Limited Partnership Agreement.

CTA timely exercised its right to convert its limited partnership interest to shares of our common stock on October 10, 2003, and we issued 953,551 shares of our common stock, pursuant to the calculations set forth in the Limited Partnership Agreement, in a private transaction thereafter.

The following table sets forth the number of shares of common stock beneficially owned by the selling shareholder, CTA, as of December , 2003, the number of shares of common stock covered by this prospectus, the total number of shares of common stock which the selling shareholder will beneficially own upon completion of this offering and the percentage of all outstanding common stock to be owned by the selling shareholder upon completion of this offering. Except as noted, this table assumes that the selling shareholder offers for sale all of the shares of common stock covered by this prospectus.

The common stock offered by this prospectus may be offered from time to time by the selling shareholder named below, or by any of its pledges, donees, transferees or other successors in interest. The amounts set forth below are based upon information provided to us by representatives of the selling shareholder, or on our records, as of December , 2003 and are accurate to the best of our knowledge. It is possible, however, that the selling shareholder may acquire or dispose of additional shares of common stock from time to time after the date of this prospectus.

(1)

All 953,551 were issued to CTA pursuant to the terms of the Limited Partnership Agreement of Net Lease Institutional Realty, L.P., which Net Lease Realty III, Inc., one of our wholly owned subsidiaries, entered into with CTA on August 25, 1997. Under the terms Limited Partnership Agreement, CTA had the right to convert its limited partner interests in the partnership into shares of our common stock. CTA exercised that right on October 10, 2003, and we issued 953,551 shares of our common stock in a private transaction thereafter.

This prospectus relates to the sale from time to time of up to an aggregate of 953,551 shares of our common stock by the selling shareholder or any of its pledges, donees, transferees or other successors in interest. We are also registering the common stock pursuant to our obligations under the Limited Partnership Agreement, but the registration of the common stock does not necessarily mean that any of the common stock will be offered or sold by the selling shareholder.

The distribution of the common stock may be effected from time to time in one or more underwritten transactions at a fixed price or prices, which may be changed, or at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices. Any underwritten offering may be on a “best efforts” or a “firm commitment” basis. In connection with any underwritten offering, underwriters or agents may receive compensation in the form of discounts, concessions or commissions from the selling shareholder. Underwriters may sell the common stock to or through dealers, and these dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters and/or commissions from the purchasers for whom they may act as agents.

The selling shareholder and any underwriters, dealers or agents that participate in the distribution of the common stock may be deemed to be underwriters under the Securities Act of 1933, and any profit on the sale of the common stock by them and any discounts, commissions or concessions received by any underwriters, dealers or agents might be deemed to be underwriting discounts and commissions under the Securities Act of


	•	identify any underwriter, dealer or agent;

	•	describe any compensation in the form of discounts, concessions, commissions or otherwise received by each underwriter, dealer or agent and in the aggregate to all underwriters, dealers and agents;

	•	identify the amounts underwritten;

	•	identify the nature of the underwriter’s obligation to take the common stock; and

	•	provide any other required information.

The sale of common stock by the selling shareholder may also be effected by selling common stock directly to purchasers or to or through any broker-dealers. In connection with any such sale, any broker-dealer may act as agent for the selling shareholder or may purchase from the selling shareholder all or a portion of the common stock as principal, and the sale may be made pursuant to any of the methods described below. Sales may be made on the New York Stock Exchange or other exchanges on which the common stock is then traded, in the over-the-counter market, in negotiated transactions or otherwise at prices and at terms then prevailing or at prices related to the then-current market prices or at prices otherwise negotiated.


	•	block transactions in which a broker-dealer may sell all or a portion of the shares as agent but may position and resell all or a portion of the block as principal to facilitate the transaction;

	•	purchases by any broker-dealer as principal and resale by any broker-dealer for its own account pursuant to any supplement to this prospectus;

	•	a special offering, an exchange distribution or a secondary distribution in accordance with applicable New York Stock Exchange or other stock exchange rules;

	•	ordinary brokerage transactions and transactions in which any broker-dealer solicits purchasers;

	•	sales “at the market” to or through a market maker or into an existing trading market, on an exchange or otherwise, for shares; and

	•	sales in other ways not involving market makers or established trading markets, including direct sales to purchasers.

In effecting sales, broker-dealers engaged by the selling shareholder may arrange for other broker-dealers to participate. Broker-dealers will receive commissions or other compensation from the selling shareholder in amounts to be negotiated immediately prior to the sale that will not exceed those customary in the types of transactions involved. Broker-dealers may also receive compensation from purchasers of common stock which is not expected to exceed that which is customary in the types of transactions involved.

To comply with applicable state securities laws, the common stock will be sold, if necessary, in these jurisdictions only through registered or licensed brokers or dealers. In addition, common stock may not be sold in some states unless they have been registered or qualified for sale in the state or an exemption from registration or qualification requirement is available and is complied with.

All expenses relating to the offering and issuance of the common stock, other than commissions, discounts and fees of underwriters, broker-dealers or agents, will be paid by us.

The validity of our securities will be passed upon for us by Shaw Pittman LLP, Washington, D.C., a law partnership including professional corporations. In addition, the description of federal income tax consequences contained in this prospectus is based upon the opinion of Shaw Pittman LLP.

The consolidated balance sheets and financial statement schedules of Commercial Net Lease Realty, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of earnings, stockholders’ equity and statements of cash flows for each of the years in the three-year period ended December 31, 2002, have been incorporated by reference herein, and in the Registration Statement in reliance upon the reports of KPMG LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing.

Set forth below are the amounts of fees and expenses we will pay in connection with the registration of the resale of the securities hereunder. All amounts set forth below, with the exception of the SEC Registration Fee, are estimated.

Our articles of incorporation provide that the liability of our directors and officers for money damages shall be eliminated to the maximum extent permitted by Maryland law. Under current Maryland law, the directors are liable to us or our stockholders for money damages only for liability resulting from (i) acts or omissions committed in bad faith involving active and deliberate dishonesty that were material to the cause of action adjudicated, as established by a final judgment or (ii) actual receipt of an improper benefit or profit in money, property or services. Our articles of incorporation also provide that no amendment thereto may limit or eliminate this limitation of liability with respect to events occurring prior to the effective date of such amendment.

Our articles of incorporation and bylaws require us to indemnify our directors and officers to the fullest extent permitted by Maryland law. Under current Maryland law, we will indemnify (i) any director or officer who has been successful, on the merits or otherwise, in the defense of a proceeding to which he was made a party by reason of his service in that capacity, against reasonable expense incurred by him in connection with the proceeding and (ii) any present or former director or officer against any claim or liability unless it is established that (a) his act or omission was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty; (b) he actually received an improper personal benefit in money, property or services; or (c) in the case of a criminal proceeding, he had reasonable cause to believe that his act or omission was unlawful. In addition, our bylaws require us to pay or reimburse, in advance of the final disposition of a proceeding, reasonable expenses incurred by a present or former director or officer or any person who is or was serving at our request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, who is made a party to a proceeding by reason of his status as a director, officer, employee or agent, to the fullest extent provided by Maryland law. Current Maryland law provides that we shall have received, before providing any such payment or reimbursement, (i) a written affirmation by the director or officer of his good faith belief that he has met the standard of conduct necessary for indemnification by us as authorized by Maryland law and our bylaws and (ii) a written undertaking by or on his behalf to repay the amount paid or reimbursed by us if it shall ultimately be determined that the standard of conduct was not met. Our bylaws also permit us to provide indemnification, payment or reimbursement of expenses to any of our employees or agents in such capacity.

The following exhibits, as noted, are filed herewith, previously have been filed, or will be filed by amendment.


	(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement:


	(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

	(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and

	(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Securities and Exchange Commission by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended, that are incorporated by reference in the registration statement.


	(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.


	(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

(b) We hereby undertake that, for purposes of determining any liability under the Securities Act of 1933, each filing of our annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of us in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.

Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Orlando, State of Florida on December 15, 2003.

Each person whose signature appears below hereby constitutes and appoints James M. Seneff, Jr. as his attorney-in-fact and agent, with full power of substitution and resubstitution for him in any and all capacities, to sign any or all amendments or post-effective amendments to this Registration Statement, or any Registration Statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits thereto and other documents in connection therewith or in connection with the registration of the securities under the Securities Act of 1934, as amended, with the Securities and Exchange Commission, granting unto such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and hereby ratifying and confirming all that such attorney-in-fact and agent or his substitutes may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on December 15, 2003.

Commercial Net Lease Realty, Inc.
450 South Orange Avenue
Suite 900
Orlando, FL 32801

We have acted as counsel to Commercial Net Lease Realty, Inc., a Maryland corporation (the “Company”), in connection with the registration on Form S-3 (the “Registration Statement”), of the resale of up to 953,551 shares of common stock, par value $0.01 per share (the “Common Stock”), by the Retirement Plan for Chicago Transit Authority Employees (“CTA”), which shares were issued to CTA in exchange for limited partnership interests in Net Lease Institutional Realty, L.P.

In our capacity as counsel in connection with such registration, we are familiar with the proceedings taken by the Company in connection with the authorization and issuance of the Common Stock. In addition, we have made such legal and factual examinations and inquiries, including an examination of originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records and instruments as we have deemed necessary or appropriate for purposes of this opinion. Among such documents are the Registration Statement, the First Amended and Restated Articles of Incorporation of the Company certified as of a recent date by the State Department of Assessments and Taxation of Maryland (the “Charter”), the by-laws of the Company (the “By-laws”), and resolutions adopted by the Board of Directors of the Company (the “Board of Directors”) in connection with the issuance and delivery of the Common Stock to CTA and other matters contemplated by the Registration Statement.

In our examination of the aforesaid documents, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the completeness and authenticity of all documents submitted to us as originals, and the conformity to original documents of all documents submitted to us as certified, telecopies, photostatic or reproduced copies.

In connection with the opinions expressed below, we have assumed that, at and prior to the time of the issuance of the Common Stock to CTA and the sale of the

Common Stock pursuant to the Registration Statement, (i) the Resolutions of the Board of Directors referred to herein have not been amended, modified or rescinded, (ii) the Registration Statement has been declared effective and no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings with respect thereto have been commenced or threatened, and (iii) there has not occurred any change in law materially adversely affecting the power of the Company to issue or deliver the Common Stock, the resale of the Common Stock or the validity of the Common Stock. We have also assumed that the sale or delivery of the Common Stock will not at the time of sale or delivery violate or conflict with (1) the Charter or the Bylaws, (2) any provision of any license, indenture, instrument, mortgage, contract, document or agreement to which the Company is a party or by which the Company is then bound, or (3) any law or regulation or any decree, judgment or order applicable to the Company. We have further assumed that the number of shares of Common Stock to be sold and delivered pursuant to the Registration Statement does not exceed the amount of such class of capital shares authorized in the Charter, as then amended, restated or supplemented, and unissued at such time.

Subject to the foregoing and the other matters set forth herein, it is our opinion, as of the date hereof, that the Company had the authority, pursuant to its Charter, to issue and deliver the Common Stock to CTA pursuant to the terms of that certain Limited Partnership Agreement of Net Lease Institutional Realty, L.P. by and between CTA and Net Lease Realty III, Inc., dated as of August 25, 1997 (the “Agreement”). Upon adoption by the Board of Directors of a resolution in form and content as required by applicable law, and upon issuance and delivery of such shares in the manner contemplated by Agreement, the Common Stock was validly issued, fully paid and nonassessable.

We consent to your filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm under the caption “Legal Matters” in the prospectus included therein.

Commercial Net Lease Realty, Inc.
450 South Orange Avenue, Suite 900
Orlando, FL 32801

On December 15, 2003, Commercial Net Lease Realty, Inc. (the “Company”) filed a registration statement on Form S-3 (the “Registration Statement”) with the Securities and Exchange Commission. In connection with the filing of the Registration Statement, you have asked us to render an opinion with respect to the qualification of the Company as a real estate investment trust (“REIT”) under sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”).

We have served as special counsel for the Company in connection with the filing of the Registration Statement and from time to time in the past have represented the Company on specific matters as requested by the Company. Specifically for the purpose of this opinion, we have examined and relied upon the following: copies of the Company’s Articles of Incorporation and any amendments thereto; the Registration Statement; copies of executed leases covering real property owned by the Company; the Form 10-K filed on March 28, 2003; and the Company’s Form S-11 Registration Statement as filed with the Securities and Exchange Commission on August 15, 1984.

We have not served as general counsel to the Company and have not been involved in decisions regarding the day-to-day operation of the Company and its properties. We have, however, discussed the mode of operation of the Company with its officers with a view to learning information relevant to the opinions expressed herein and have received and relied upon a certificate from the Company with respect to certain matters.

We have discussed with management of the Company arrangements relating to the management of its properties, the relationships of the Company with tenants of such properties, and certain terms of leases of such properties to tenants, with a view to assuring that (i) at the close of each quarter of the taxable years covered by this opinion, it met the asset composition requirements set forth in section 856(c)(4), (ii) with respect to years covered by this opinion, it satisfied the 95% and 75% gross income tests set forth in sections 856(c)(2) and (3), respectively, and (iii) with respect to tax years prior to 1998, it satisfied the 30% gross income test. We have further reviewed with management of the Company the requirements that the beneficial ownership of a REIT be held by 100 or more persons for at least 335/365ths of each taxable year and that a REIT must satisfy the diversity of ownership requirements of section

856(h) as such requirements existed in the years covered by this opinion, and we have been advised by management that at all times during the years covered by this opinion (and specifically on each record date for the payment of dividends during 1984 through the date hereof) the Company has had more than 1,000 shareholders of record, that the Company maintains the records required by section 1.857-8 of the Treasury Regulations, that no later than January 30 of each year it sent the demand required by section 1.857-8(d) of the Treasury Regulations to each shareholder of record owning one percent or more of the outstanding shares of the Company on the appropriate date required by said regulation, and that the actual ownership of the Company shares was such that, to the best knowledge of its management (based upon responses to the aforesaid demands, any filing of a Schedule 13D under the Securities Exchange Act of 1934, as amended, or any other sources of information), the Company satisfied the applicable requirements of section 856(h). Further, we have examined various property leases and lease supplements relating to the properties that the Company owns, and although leases relating to certain properties that the Company owns have not been made available to us, the Company has represented with respect to such leases that they do conform in all material respects to a form of lease agreement provided to us. On the basis of discussions with management of the Company, we are not aware that the Company’s election to be a REIT has been terminated or challenged by the Internal Revenue Service or any other party, or that the Company has revoked its election to be a REIT for any such prior year so as to make the Company ineligible to qualify as a REIT for the years covered by this opinion.

In rendering the opinions set forth herein, we are assuming that copies of documents examined by us are true copies of originals thereof and that the information concerning the Company set forth in the Company’s federal income tax returns, and in the Registration Statement, as well as the information provided to us by the Company’s management are true and correct. We have no reason to believe that such assumptions are not warranted.

Based upon the foregoing, we are of the opinion that (i) the Company was a “real estate investment trust” as defined by section 856(a) for its taxable years ended December 31, 1984 through December 31, 2002, (ii) its current and proposed method of operation and ownership will enable it to meet the requirements for qualification and taxation as a REIT for its taxable year ending December 31, 2003 and for all future taxable years, and (iii) the statements in the Registration Statement set forth under the caption “Federal Income Tax Considerations,” insofar as they purport to describe or summarize certain provisions of the agreements, statutes or regulations referred to therein, are accurate descriptions or summaries in all material respects, and the discussion thereunder expresses the opinion of Shaw Pittman LLP insofar as it relates to matters of United States federal income tax law and legal conclusions with regard to those matters. With respect to the 2003 year and all future years, however, we note that the Company’s status as a real estate investment trust at any time is dependent among other things upon its meeting the requirements of section 856 throughout the year and for the year as a whole.

This opinion is based upon the existing provisions of the Code (or predecessor provisions, as applicable), rules and regulations (including proposed regulations) promulgated thereunder, and reported administrative and judicial interpretations thereof, all of which are

subject to change, possibly with retroactive effect. This opinion is limited to the specific matters covered hereby and should not be interpreted to imply that the undersigned has offered its opinion on any other matter.

We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. We also consent to the reference to Shaw Pittman LLP under the caption “Legal Matters” in the Registration Statement. In giving such consent, we do not consider that we are “experts,” within the meaning of the term used in the Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder, with respect to any part of the Registration Statement, including this opinion as an exhibit or otherwise.

We consent to the incorporation by reference herein of our reports dated January 10, 2003, except as to the fifth paragraph of Note 20 to the consolidated financial statements, which is as of February 13, 2003, and the third paragraph of Note 1 and Notes 3, 12, 13 and 18 to the consolidated financial statements, which are as of November 25, 2003, relating to the consolidated balance sheets of Commercial Net Lease Realty, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2002, and the related financial statement schedules, which reports appear in the December 31, 2002 annual report on Form 10-K of Commercial Net Lease Realty, Inc., as updated by the current report on Form 8-K which was filed on November 26, 2003, and to the reference to our firm under the heading “Experts” in the prospectus.

THIS LIMITED PARTNERSHIP AGREEMENT is made and entered into as of August 25, 1997, by and between NET LEASE REALTY III, Inc., a Maryland corporation whose principal place of business is 400 East South Street, Suite 500, Orlando, Florida 32801 (the “General Partner”), and The Northern Trust Company, as Trustee of the Retirement Plan for Chicago Transit Authority Employees, whose principal place of business is 50 S. LaSalle Street, Chicago, Illinois 60675 (the “Limited Partner”) (the General Partner and the Limited Partner being hereinafter collectively sometimes referred to as the “Partners”).

The General Partner and the Limited Partner desire to form the Partnership under the laws of the State of Delaware for the purpose of acquiring, owning and managing single-tenant commercial properties subject to net leases.

NOW, THEREFORE, in consideration of the promises and the mutual covenants herein contained, the parties hereto do hereby mutually covenant and agree as follows:

1.01 “Act” means the Delaware Revised Uniform Limited Partnership Act as amended from time to time.

1.02 “Advisor” means CNL Realty Advisors, Inc., under common management with the General Partner.

1.03 “Affiliated Person” or “Affiliates” means (i) a corporation, partnership or other Entity of which a majority of the voting or partnership interests are owned by any one or more of the Partners identified above; (ii) a corporation or trustee which owns common stock of any corporate Partner; or, (iii) an officer, director, employee or stockholder of a corporation identified above or referred to in the preceding clauses (i) and (ii).

1.04 “Agreement” means this Limited Partnership Agreement as amended from time to time.

1.06 “Assignee” means the Person to whom a Transfer of an Interest is made; an Assignee is not a Partner unless and until the requirements of Section 8.04 are satisfied.

1.07 “Bankruptcy”, “Bankrupt”, or derivations thereof, shall be deemed to refer not only to any bankruptcy under the Federal Bankruptcy Code, but also to any bankruptcy under state or local insolvency procedures.

1.08 “Capital Account” of a Partner means the account maintained by the Partnership for such Partner pursuant to Sections 3.07 and 6.01 in accordance with the applicable requirements of Section 704(b) of the Code and the applicable provisions of the Regulations relating to the allocation of tax attributes to the Partners. Each Partner’s Capital Account shall be credited with (i) the amount of such Partner’s Capital Contributions as and when made by such Partner, (ii) such Partner’s distributive share of any Net Income of the Partnership allocated to such Partner under Section 6.06, (iii) any imputed interest specially allocated to such Partner under Section 6.05, (iv) any other amounts in the nature of income or gain specially allocated to such Partner under Sections 6.05 or 6.06, and (v) the amount of any Partnership liability assumed by, or secured by property distributed to, such Partner. Each Partner’s Capital Account shall be debited with (x) the amount of any cash and the Value (determined as of the date of distribution) of any property distributed by the Partnership to such Partner, (y) such Partner’s share of any Net Losses of the Partnership allocated to such Partner under Section 6.04 or any amounts in the nature of losses or expenses allocated pursuant to Sections 6.05 or 6.06, and (z) the amount of any liabilities of such Partner assumed by, or secured by property contributed by such Partner to, the Partnership. In determining the amount of any liability for purposes of this definition, there shall be taken into account Code Section 752(a) and any other applicable provisions of the Code and Regulations.

1.10 “Capital Commitment” means, with respect to each Partner, the total amount of cash agreed to be paid to the Partnership (whether or not yet paid) by each Partner pursuant to Schedule A.

1.11 “Capital Contribution” means with respect to any Partner, the total of all cash and the Value (at the date of contribution) of all property transferred or assigned by a Partner to the Partnership pursuant to Article III.

1.12 “Certificate” means the Certificate of Limited Partnership of the Partnership as filed with the Delaware Secretary of State, as the same may be amended from time to time.

1.13 “Code” means the Internal Revenue Code of 1986, as amended from time to time, including any corresponding provisions of any succeeding law.

1.14 “Depreciation” means, for each Fiscal Year, an amount equal to the depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such Fiscal Year for federal income tax purposes, except that if the Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such Fiscal Year, Depreciation shall be an amount which bears the same ratio to such beginning Value as the federal income tax depreciation, amortization or other cost recovery deduction for such Fiscal Year bears to such beginning adjusted tax basis. If such an asset has a zero adjusted tax basis, the Depreciation may be determined under any reasonable method selected by the General Partner.

1.15 “Entity” means any general partnership, limited partnership, corporation, joint venture, trust, business trust or association.

1.16 “Extraordinary Cash Proceeds” means the gross cash receipts of the Partnership from any Extraordinary Transaction less partnership expenses related to such Extraordinary Transaction, including payment of interest and principal on any Partnership loans and additions to any Reserves.

1.17 “Extraordinary Transaction” means any refinancing, sale, transfer or disposition of any Partnership Property.

1.18 “Fiscal Year” means the calendar year, or such other fiscal year which the Partnership is required to maintain for federal income tax purposes.

1.19 “General Partner” means Net Lease Realty III, Inc., a Maryland corporation, or any Person or Entity who becomes a General Partner in accordance with this Agreement or as otherwise provided herein, in such Person’s or Entity’s capacity as a General Partner of the Partnership, and also means all such Persons collectively.

1.20 “Interest” means the ownership interest of any Partner at any time including the right of such Partner to any and all benefits to which such Partner may be entitled under this Agreement and the Act, together with the obligations of such Partner to comply with the terms and provisions of this Agreement and the Act, which percentage interest shall be, absent proof to the contrary, as set forth in Schedule A attached hereto.

1.21 “Internal Rate of Return” means the annual discount rate which results in the present value of all distributions to the Limited Partner being equal to the present value of all of the Limited Partner’s Capital Contributions, in all cases discounted to the date of the earliest Capital Contribution made by the Limited Partner.

1.22 “Limited Partner” means The Northern Trust Company, as Trustee of the Retirement Plan for Chicago Transit Authority Employees, or any other Persons or Entities who have been or are hereafter admitted to the Partnership as a Limited Partner in accordance with this Agreement.

1.23 “Liquidation Partner” means the General Partner, unless there is no General Partner, in which case it shall mean the Limited Partner.

1.24 “Management Agreement” means the Management Agreement to be entered into between the Partnership and Advisor for the management of the Projects upon the reasonable consent of the Limited Partner.

1.25 “Net Income and Net Losses” mean, for each Fiscal Year of the Partnership, an amount equal to the Partnership’s taxable income or loss for such Fiscal Year, determined in accordance with Section 703(a) of the Code (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Section 703(a)(l) of the Code shall be included in taxable income or loss), with the following adjustments:


	(a) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Net Income or Net Losses shall be added to such taxable income or loss;

	(b) Any expenditures of the Partnership described in Section 705(a)(2)(B) of the Code or treated as Section 705(a)(2)(B) expenditures pursuant to Regulations Section 1.704-l(b)(2)(iv)(i), and not otherwise taken into account in computing Net Income or Net Losses shall be subtracted from such taxable income or loss;

	(c) Gain or loss resulting from any disposition of Partnership property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Value;

	(d) In lieu of the depreciation, amortization and other cost recovery deductions taken into account in computing such taxable income or loss there shall be taken into account Depreciation of such Fiscal Year;

	(e) Any selling commissions, underwriting fees and other expenses of the Partnership in syndicating the Partnership Interests not otherwise taken into account in computing Net Income or Net Losses shall be subtracted from such taxable income or loss;


	(f) Notwithstanding any other provision of this Section, any items which are specially allocated under Sections 6.05 or 6.06 shall not be taken into account in computing Net Income or Net Losses; and

	(g) If the Value of any Partnership asset is adjusted pursuant to clause (b) of the definition of Value hereunder, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Net Income or Net Losses.

1.26 “Operating Expenses” means all cash costs and cash expenses paid by the Partnership of every kind and nature in connection with the Partnership’s management, business affairs and operations including, without limitation, capital expenditures, amounts allocated to the Reserves by the General Partner, debt service (including amortization of principal) on the loans, and payment of any fees, but excluding partnership expenses related to an Extraordinary Transaction. Any Operating Expenses which relate to more than one period shall be allocated pro rata to the periods to which such Operating Expenses relate.

1.27 “Partner” means the General Partner or the Limited Partner, as the context so provides.

1.28 “Partnership” means the limited partnership formed pursuant to the Certificate, as said limited partnership may, from time to time, be constituted and amended.

1.29 “Percentage Interest” means the ownership interest of a Partner in the Partnership stated as a percentage, which percentage interest for purposes of this Agreement shall be as set forth in Schedule A attached hereto as now existing or hereafter amended.

1.30 “Person” means any individual or Entity, and the heirs, executors, administrators, successors and assigns of such Person where the context so admits; and unless the context otherwise requires, the singular shall include the plural and the masculine gender shall include the feminine and the neuter and vice versa.

1.31 “Prime” means the prime rate of interest as published from time to time in the Wall Street Journal, or any successor publication.

1.32 “Proceeds from Operations” means, for any applicable period, all cash received by the Partnership from operations other than Extraordinary Transactions less the sum of all Operating Expenses paid or incurred by the Partnership (but exclusive of depreciation and other non-cash expenses and distributions to Partners).

1.33 “Project” means each of the individual commercial buildings specified on Schedule B hereto, collectively, the “Projects.”

1.34 “Property” means any real or personal property owned by the Partnership, including the Projects.

1.35 “Regulations” means the Income Tax Regulations promulgated under the Code, as amended from time to time, including the corresponding provisions of any succeeding Regulations.

1.36 “Reserves” means the amount of cash the General Partner from time to time determines in its sole and absolute discretion to be reasonably necessary or advisable as reserves for: (a) repayment of Partnership indebtedness; (b) management, operations, maintenance, replacement or preservation of the Projects and other Partnership Property; (c) payment of anticipated Operating Expenses including property taxes and insurance premiums; and (d) other contingencies related to the Partnership’s business.

1.37 “Substituted Partner” means any Person admitted as a Partner to the Partnership pursuant to Section 8.04.

1.39 “Transfer” means, as a verb, to transfer, sell, assign, exchange, pledge, give, hypothecate or otherwise convey or encumber all or any portion of an Interest and, as a noun, any transfer, sale, assignment, exchange, charge, gift, hypothecation or other conveyance or encumbrance of all or any portion of an Interest.

1.40 “Value” means, with respect to any asset, the asset’s adjusted basis for federal income tax purposes, except as follows:


	(a) The Value of any asset contributed by or distributed to a Partner shall be the gross fair market value of such asset, as determined at the time of contribution or distribution by agreement between the contributing Partner and the other Partners;

	(b) The Values of all Partnership assets shall be adjusted to equal their respective gross fair market values, as determined by a unanimous decision of the Partners (or by Appraisal, as provided in Section 12.17, if the Partners cannot reach a unanimous decision) as of the following times: (x) the acquisition of an additional Partnership Interest by any new or existing Partner in exchange for a capital contribution not presently provided for under the Agreement; (y) the distribution by the Partnership to a Partner of Partnership Property other than money, unless all Partners receive simultaneous


	distributions of undivided interests in the distributed Property in proportion to their Partnership Interests; and (z) the termination of the Partnership for federal income tax purposes pursuant to Section 708(b)(l)(B) of the Code or the liquidation of the Partnership within the meaning of Regulations Section 1.704-l(b)(2)(ii)(g); provided, however, that clause (x) or (y) shall not apply to a contribution or distribution of property of a de minimis gross fair market value;

	(c) If the Value of a Partnership asset has been determined or adjusted pursuant to clause (a) or (b), such Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Net Income and Net Losses;

	(d) The term “gross fair market value” means the amount which would be paid for a particular property by a willing buyer to a willing seller (neither under any compulsion to buy or sell) unreduced by any liabilities secured by the property or assumed by any party in connection therewith; and

	(e) The Values of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 732(d), Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-l(b)(2)(iv)(m) and Section 1.08 hereof; provided, however, that Values shall not be adjusted pursuant to this clause (e) to the extent that an adjustment pursuant to clause (b) hereof is made in connection with a transaction that would otherwise result in an adjustment pursuant to this clause (e).

2.01 Formation. The General Partner and the Limited Partner have formed a limited partnership pursuant to the Act effective as of the filing of the Certificate. The General Partner will execute and file the Certificate with the Delaware Secretary of State and will execute, file, record and publish, as appropriate, renewal reports and any other instrument or document which is required under the laws of the State of Delaware, or any state in which the Partnership is required to qualify to do business, to perfect or maintain the Partnership as a limited partnership under the laws of such state.

2.02 Name. The business of the Partnership shall be conducted under the name of NET LEASE INSTITUTIONAL REALTY, L.P. or such other name as the General Partner and the Limited Partner, jointly, shall deem desirable from time to time.

2.03 Principal Place of Business; Registered Office and Agent. The principal office, or registered office, and place of business of the Partnership shall be located at 400 East South Street, Suite 500, Orlando, Florida 32801, or such other place as the General Partner may from time to time determine.

2.04 Purpose and Scope of Partnership. The purpose of the Partnership shall be to acquire each of the Projects and to own, operate, lease, dispose of and otherwise deal with the Projects as single tenant commercial properties in accordance with the provisions of this Agreement. The Partnership shall not engage in any other business or activity without the prior written approval of all the Partners.

2.05 Representation Regarding Projects. The General Partner represents that each of the Projects is a free-standing property in the $1,000,000 to $7,500,000 price range which is leased to a single retail business under a full credit, long-term, commercial net lease under which the tenant pays all operating expenses related with normal business operations of the properties. The Projects listed on Schedule C hereto were developed and acquired by an Affiliate of the General Partner.

2.06 Term. The term of the Partnership shall commence on the date of filing of the Certificate and shall continue for ten and one-half (10.5) years unless sooner terminated by operation of law, or as hereinafter provided. Upon termination of the Partnership, any Project owned by the Partnership shall be sold by the Liquidating Partner subject to Section 7.04(b).

2.07 Partners. Unless and until Substituted Partners are admitted pursuant to the terms of Article 8.04, the General Partner shall be the sole general partner of the Partnership and the Limited Partner shall be the sole limited partner of the Partnership (within the meaning of the Act). Except as otherwise expressly provided herein, no Partner may be removed as a Partner of the Partnership without such Partner’s prior written approval.

3.01 Capital Commitment and Capital Contribution of General Partner. The name, address and Capital Commitment of the General Partner are set forth on Schedule A hereto, as amended from time to time. The Capital Contribution of the General Partner shall be in cash, or its equivalents, or, with the approval of the Limited Partner, in the form of contributions of property. Such property contributions shall be valued at the lower of cost or market as represented by the General Partner on Schedule D attached hereto.

3.02 Capital Commitment and Capital Contribution of Limited Partner. The name, address and Capital Commitment of the Limited Partner are set forth on Schedule A hereto, as amended from time to time. The Capital Contribution of the Limited Partner shall be entirely in cash or its equivalent.

(a) The General Partner and the Limited Partner shall each contribute Capital Contributions to the Partnership from time to time during the period commencing with the later to occur of (1) the execution of this Agreement and (2) the execution of the Management Agreement and ending on August 31, 1997 an aggregate amount in cash (or, in the case of the General Partner, with the Limited Partner’s approval, property) equal to its Capital Commitment, as set forth on Schedule A hereto, upon five (5) business days prior written notice from the General Partner (each such notice a “Capital Call”).

(b) If a Partner fails to pay a Capital Call when due (the “Non-Contributing Partner”) (said amount being referred to herein as an “Unpaid Amount”), the General Partner shall give written notice of such failure to the Non-Contributing Partner. If the Non-Contributing Partner fails to pay the Unpaid Amount within ten (10) days of such notice, then the other Partner (the “Contributing Partner”) may (in addition to any other remedy available under this Agreement or otherwise) elect either to purchase the entire Interest of the Non-Contributing Partner for an amount equal to the book value of the Non-Contributing Partner’s Capital Account or to proceed as follows:


	(i) The Contributing Partner may elect to contribute the Unpaid Amount as its respective additional Capital Contribution, whereupon the Percentage Interests of the Partners shall be adjusted as hereafter provided:


	(A) The Percentage Interest of the Non-Contributing Partner shall be decreased (but not below zero) by that percentage equal to the product of 100% times the fraction whose numerator is the Unpaid Amount and whose denominator is $18,750,000. By way of illustration, if the Non-Contributing Partner had a Percentage Interest of 80% and the Unpaid Amount were $1,000,000, then the Non-Contributing Partner’s Percentage Interest would be reduced by 5.33% (i.e., 100% times $1,000,000 divided by $18,750,000) from 80% to 74.67%.

	(B) The Percentage Interest of the Contributing Partner shall be increased by the percentage by which the Percentage Interest of the Non-Contributing Partner was decreased under Section 3.03(b)(i) (A).


	(C) The increase and decrease in Percentage Interests required pursuant to any election under this Section 3.03(b)(i) shall be effective on the date the Unpaid Amount was required to be contributed pursuant to the applicable Capital Call.

(ii) Notwithstanding the foregoing, if the Non-Contributing Partner shall contribute to the Partnership the full amount of the Unpaid Amount, plus interest at the rate equal to Prime plus two percentage points per annum, within sixty (60) days after the due date of the Capital Call, then any adjustment otherwise elected under this Section shall be rescinded and any amount the Contributing Partner elected to treat as its additional Capital Contribution under Section 3.03(b)(i) shall be treated as a loan to the Partnership and shall be repaid by the Partnership in full with interest at such rate.


	(iii) The Contributing Partner may loan the Unpaid Amount to the Partnership and such loan will be treated in the same manner as other Partner loans pursuant to Section 3.04.

3.04 No Other Contributions. No Partner shall have the right to make voluntary Capital Contributions to the capital of the Partnership. Except as provided in Section 6.07, no Partner shall be required to make Capital Contributions in excess of the amounts established pursuant to Article III and identified in Schedule A without the prior written consent of such Partner. If the obligations properly incurred (or to be incurred) by the Partnership from time to time exceed the funds available to the Partnership from current income or from the Reserves, then, upon written notice to all Partners, one or both of the Partners may make one or more loans to the Partnership at an interest rate equal to Prime plus one percentage point per annum unless otherwise agreed to by the Partners; such loans shall be treated as Operating Expenses of the Partnership but shall be payable only to the extent of available cash flow remaining after all other current Operating Expenses are paid in full. In the event both Partners desire to make such loans, such loans shall be made in accordance with the Partners respective Percentage Interests or as otherwise agreed to by the Partners.

3.05 No Interest on Capital; Capital Withdrawals and Returns. No interest shall be paid to any Partner on all or a portion of a Capital Contribution or on a balance in its Capital Account. No Partner shall have the right to withdraw or reduce its Capital Contributions to the capital of the Partnership except in accordance with this Agreement.

3.06 Interest. Interest earned on Partnership funds shall inure to the benefit of the Partnership and the Partners shall not receive interest on their Capital Contributions.

(b) In the event any Interest is transferred in accordance with the terms of this Agreement, the Assignee or Substituted Partner shall succeed to the Capital Account of the transferor Partner to the extent it relates to the transferred Interest.

(c) In the event that the Values of the assets of the Partnership are adjusted, the Capital Accounts of the Partners shall be adjusted for the hypothetical “book” gain or loss that would have been realized by the Partners if the Partnership had sold all the assets of the Partnership for their Values in a cash sale, with the net amount of any gain or loss being treated as actually recognized for purposes of Article VI.

(d) The provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Sections 1.704-l(b) and 1.704-2 and shall be interpreted and applied in a manner consistent with such Regulations.

4.01 Responsibility of General Partner. The General Partner shall be solely responsible for the management of the Partnership business with all rights and powers generally conferred by the Act and by law or necessary, advisable or consistent in connection therewith. The Partnership will enter into the Management Agreement with the Advisor in regard to the management of the Projects owned by the Partnership.

The General Partner, the Advisor and any employee, officer, director or Affiliate thereof, shall not be liable to the Partnership or any other Person for any debt, claim, action, demand, suit, proceeding, judgment, decree, liability or obligation of any kind against or with respect to the Partnership arising out of any action taken or omitted by, for or on behalf of the Partnership and all such Persons shall look solely to the Partnership Property for satisfaction of claims of any nature arising in connection with the affairs of the Partnership; except that the General Partner shall be liable for any such loss, damage or claim incurred by reason of any action or omission taken or omitted by the General Partner in fraud, bad faith, willful misconduct, gross negligence or reckless disregard of its duties hereunder. The General Partner shall, in the performance of its duties, be fully and completely justified and protected by relying in good faith upon the opinions, reports or statements presented to the Partnership by a Person, including, without limitation, accountants, attorneys or appraisers as to matters the General Partner reasonably

believes are within such other Person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Partnership. The General Partner shall not incur liability to anyone in acting upon any signature, instrument, notice, resolution, request, consent, order, certificate, report, opinion, bond or other document or paper believed by it in good faith to be genuine and believed by it in good faith to be signed by the proper party or parties.

4.02 Status of General Partnership Interest. The General Partner shall not have the right to withdraw or reduce any Capital Contribution it may make to the Partnership or to assign its Partnership Interest except in accordance with the provisions of Articles VII or VIII hereof. In such event, the General Partner shall have no right to demand or receive property other than cash in return for any Capital Contribution it may make to the Partnership and shall have no priority over the Limited Partner, either as to the return of Capital Contributions or as to profits, losses or distributions as a Partner, except as provided in this Agreement.

4.03 Rights and Powers of the General Partner. The General Partner shall contribute, as it deems necessary, its skill, energy, advice, and experience to the Partnership and shall determine all matters relating to the acquisition, ownership, development, management, operation and sale of the Projects. The General Partner shall not be required to devote full time to the business of the Partnership. The services of the General Partner shall be rendered without cost to the Partnership.

In addition to any other rights and powers which it may possess under law or by virtue of this Agreement, the General Partner shall have all the specific rights and powers required or appropriate to its management of the Partnership business, including, but not limited to, the following specific rights and powers:

(a) To acquire each of the Projects and to purchase, lease or otherwise acquire any other real or personal property necessary for the ownership and operation of the Projects and to sell, convey, assign and grant options with respect to such Projects;

(b) To cause any Project owned by the Partnership to be held in the name of the Partnership, or a nominee temporarily, for convenience, if necessary;

(c) To acquire and maintain such contracts of insurance as the General Partner deems necessary or appropriate to protect the Projects and the Partnership, including, without limitation, the protection of its assets, protection against (i) claims under Worker’s Compensation Acts, (ii) claims for damages because of bodily injury, including death, (iii) claims for damages to property, and (iv) fire, earthquake, flood and other risks protected by extended coverage of the kind usually carried for comparable properties in the general vicinity of the Project, the protection of the

Partners and their interests in the Partnership, and for any other purpose convenient or beneficial to the Partnership;

(d) To acquire and lease property, real or personal, in fee simple, which may be necessary or appropriate for accomplishing the Purpose of the Partnership as set forth in Section 2.04;

(e) To borrow monies necessary to accomplish the Partnership’s Purpose, said borrowings not to exceed $12,000,000 collectively with interest rates not to exceed 8% per annum and on terms and conditions acceptable to the General Partner, said borrowings not to be recourse to the Limited Partner, and said borrowings to be secured by one or more of the Projects;

(f) To invest in short-term obligations of the United States or any State, such funds as are temporarily not required for Partnership purposes;

(g) To delegate duties to and employ from time to time, at the Partnership’s expense and on such terms as the General Partner may determine, any Persons necessary or advisable for the management and operation of the Partnership’s business, including, but not limited to; accountants, agents and attorneys as the General Partner may from time to time determine to be necessary;

(h) To execute, acknowledge and deliver any and all instruments to effectuate the foregoing;

(i) To submit any claim by or against the Partnership to arbitration or reference;

(k) To take any other reasonable action, including, without limitation, the negotiation, execution and delivery of any and all contracts, leases, assignments and other instruments, incidental to any of the foregoing actions set forth in this Article IV or to the purposes of the Partnership.

This Agreement constitutes the prior written consent of the Limited Partner to the authority of the General Partner to engage in any or all of the above actions.

(a) The General Partner shall have all the rights and powers and be subject to all the restrictions and liabilities of partners in a partnership without limited partners, except that the

General Partner shall have no authority, without the prior written consent of the Limited Partner, to:

	(i)		Do any act in contravention of the Certificate, applicable law or the purpose and scope of the Partnership as set forth in Section 2.04 hereof;

	(ii)		Do any act which would make it impossible to carry on the ordinary business of the Partnership;

	(iii)		Confess a judgment against the Partnership;

	(iv)		Possess Partnership property or assign the rights of the Partnership in specific Partnership property for other than a Partnership purpose;

	(v)		Admit any other Person as a General Partner or as a Limited Partner;

	(vi)		Engage in any actions which require the consent of the Limited Partner under this Agreement without having obtained such consent;

	(vii)		Cause the Partnership to make loans to the General Partner or Affiliates of the General Partner;

	(viii)		Engage in reciprocal business arrangements which would circumvent this Agreement;

	(ix)		Assign the Partnership Property in trust for creditors or on the assignee’s promise to pay the debts of the Partnership;

	(x)		Borrow money or mortgage, pledge, hypothecate or otherwise give as security for any indebtedness a lien or security interest in Partnership Property, except in accordance with the provisions of Section 4.03(e);

	(xi)		Acquire other property, real, personal or intangible other than as necessary or appropriate for the purposes of the Partnership; or

	(xii)		Incur any expenses on behalf of the Partnership in syndicating the Partnership Interests.

(b) Notwithstanding any other provisions of this Agreement to the contrary, the General Partner shall have no authority, without the consent of the Limited Partner, to cause the

Partnership, to become a surety or guarantor of, or an accommodation party to, an obligation of any other Person.

4.05 Liability of General Partner to Limited Partner. Except for acts or omissions of fraud, bad faith, gross negligence or breach of fiduciary duty, and except as otherwise provided herein, the General Partner shall not:

	(a)		be liable, responsible or accountable in damages or otherwise to the Limited Partner for any act performed by it within the scope of the authority conferred on it by this Agreement or reasonably required to be performed by it in order to accomplish the purposes hereof;

	(b)		be liable to the Limited Partner for the repayment of its Capital Contribution to the Partnership; or

	(c)		be liable to the Partnership or the Limited Partner because any taxing authority disallows or adjusts any deductions or credits in any Partnership income tax return.

4.06 Advisor. If Proceeds from Operations distributed to the Limited Partner for the lesser of (a) any three (3) year period of operations of the Partnership or (b) the number of years the Partnership has been in existence, is less than the amount required to provide the Limited Partner with an eight percent (8%) Internal Rate of Return on its Capital Contributions assuming the Partnership made a distribution to the Limited Partner as of the last day of such period equal to the Limited Partner’s total Capital Contributions reduced by Extraordinary Cash Proceeds distributed to the Limited Partner, the Limited Partner may direct the General Partner to terminate the Advisor and select another entity (“Successor Advisor”) acceptable to the Limited Partner which Successor Advisor will assume and fulfill the responsibilities of the Advisor. The General Partner promptly shall effectuate this direction unless within thirty (30) days of receipt of the direction, the General Partner offers to purchase for cash, within thirty (30) days of acceptance, the Interest of the Limited Partner at a price equal to an amount sufficient such that the Limited Partner shall have received an Internal Rate of Return on its Capital Contributions of six percent (6%). Such sale is to be consummated within thirty (30) days of receipt by the General Partner of the written acceptance of the Limited Partner of the General Partner’s offer to purchase pursuant to this Section 4.06. If the Limited Partner fails to accept such offer, the General Partner is under no obligation to terminate the Advisor.

4.07 Unrelated Business Taxable Income. The General Partner shall use its best efforts to prevent the Partnership from having unrelated business taxable income (“UBTI”) within the meaning of Code Section 512 (a)(l), including income from debt financed property of the Partnership within the meaning of Code Section 514. The General Partner shall promptly notify the Limited Partner whenever it appears likely that the Limited Partner will incur UBTI on

account of any investment of the Partnership. The Partnership shall take such action as is reasonably necessary to eliminate as soon as possible the realization by the Partnership of UBTI.

5.01 Liability of Limited Partner. The Limited Partner shall not be bound by, or be personally liable for the expenses, liabilities or obligations of the Partnership beyond the amount agreed to be contributed by it to the capital of the Partnership pursuant to this Agreement, and except as provided in Section 6.07, the Limited Partner shall not be responsible for any of the losses of any other Partner.

5.02 Responsibility for Business of the Partnership. The Limited Partner shall take no part in the conduct or control of the business of the Partnership and shall have no right or authority to act for or bind the Partnership in any manner whatsoever.

5.03 Status of Limited Partnership Interest. The Limited Partner shall not have the right to withdraw or reduce its Capital Contribution made pursuant to Article III hereof, except as a result of the dissolution of the Partnership, or as otherwise provided by and in accordance with law. Subject to the provisions of Article IX hereof, the Limited Partner shall not have the right to demand or receive from the Partnership property other than cash in return for its Capital Contribution or in payment of profits, losses or distributions. Any return of Capital Contributions to the Limited Partner shall be solely from Partnership assets. The liability of a Limited Partner upon the return of all or any portion of its Capital Contribution shall be as set forth in Section 6.07 of this Agreement.

6.01 Capital Account References. For purposes of this Article VI, all references to Capital Accounts shall mean the Capital Accounts as maintained for tax purposes pursuant to the Code and the regulations thereunder if such Capital Accounts for tax purposes should vary from the Capital Accounts reflected on the Partnership’s books and records.

6.02 Distributions of Proceeds from Operations. Within 45 days after the end of each quarter, the General Partner shall determine the amount of Proceeds from Operations, if any, available for distribution to the Partners. If Proceeds from Operations are available for

distribution, the General Partner shall distribute all available Proceeds from Operations to the Partners in accordance with their respective Percentage Interests on or before the 45th day after the end of such quarter.

6.03 Proceeds from Extraordinary Transactions. Except as provided in Article VII and subject to any limitation imposed under any Project loan, the Partnership’s Extraordinary Cash Proceeds shall be distributed to the Partners in accordance with their Percentage Interests within 45 days of the receipt of such Extraordinary Cash Proceeds by the Partnership.

6.04 Allocation of Net Income and Net Loss. Net Income and Net Losses of the Partnership for each Fiscal Year (and their various items of income, gain, expense, and credit) (and, in each case, each item of income, gain, loss, deduction and tax preference, required to be taken into account separately under Section 702(a) of the Code by the Partners, which are included in the computation of such Net Income and Net Losses for such Fiscal Year) shall be allocated to the Partners on the last day of the Fiscal Year in accordance with their respective Percentage Interests, after giving effect to Section 6.05.

6.05 Special Allocations. It is the intention of the Partners that the allocation of the tax attributes arising from the Partnership comply with the applicable provisions of Regulations Section 1.704-l(b) and 1.704-2. To conform further the allocation provisions of this Agreement to such Regulations, the Partners agree that the following special allocation rules shall supersede the rules otherwise applicable under this Article VI only to the extent necessary to cause such allocation to be respected under the Regulations and the remaining portion of such allocation shall not be affected. In the event of any inconsistency between the Regulations and the provisions of Section 6.05(a) through (h), the Regulations shall govern.

(a) Loss Limitation Rule. In any allocation of Net Losses for any Fiscal Year otherwise provided in Article VI would (if made) cause or increase a deficit balance in the Capital Account of a Partner (determined for this purpose by taking into account such Partner’s share of Proceeds from Operations and Extraordinary Cash Proceeds in respect of such Fiscal Year and all other adjustments for such Fiscal Year otherwise required under this Agreement) after adjusting such Partner’s Capital Account by crediting any amounts such Partner is obligated to restore or is deemed obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(l) and 1.704-2(i)(5) and debiting the items described in Regulations Sections 1.704-l(b)(2)(ii)(d)(4), 1.704-l(b)(2)(ii)(d)(5) and 1.704-l(b)(2)(ii)(d)(6), the amount of Net Losses otherwise allocable to such Partner shall be reduced by the minimum amount necessary to eliminate such deficit. Any amount of an allocation denied to a Partner under the first sentence of this Section 6.05(a) shall be reallocated among the Partners whose allocations of Net Losses for such year (determined under Section 6.04) are not affected by this Section, such reallocation to be made pro rata in accordance with the ratio that each Partner’s interest in profits and losses bears to the aggregate of the interests of all such Partners.

(b) Minimum Gain Chargeback. If during any Fiscal Year there is a net decrease in the Partnership’s minimum gain (as determined under Regulations Sections 1.704-2(b)(2) and 1.704-2(d)(i)), then items of income and gain of the Partnership shall be allocated to each Partner, for such Fiscal Year (and, if necessary, subsequent periods) in proportion to, and to the extent of, an amount equal to each Partner’s share of the net decrease in the Partnership’s minimum gain during such taxable period in accordance with Regulation Section 1.704-2(g)(2). This Section 6.05(b) is intended to comply with the minimum gain chargeback requirement in such Regulations Sections and shall be interpreted consistently therewith.

(c) Qualified Income Offset. If a Limited Partner receives an adjustment, allocation or distribution described in Regulations Section 1.704-l(b)(2)(ii)(d)(4), (5) or (6) (modified as appropriate, by Regulations Section 1.704-2(g)(l) and 1.704-2(i)(5)) which is unexpected within the meaning of Regulations Section l-704-l(b)(2)(ii)(d) and which causes or increases a negative balance in such Partner’s Capital Account (determined for this purpose with the adjustments required under Section 6.05(a)), such Partner will, to the extent required by Regulations Section 1.704-l(b)(2)(ii)(d), be allocated an amount of gross income and/or gain sufficient to eliminate such negative balance as quickly as possible; provided, however, that an allocation pursuant to this Section 6.05(c) shall be made if and only to the extent that such Partner would have a deficit in its Capital Account (determined as aforesaid) after all other allocations provided for in this Article VI have been tentatively made as if this Section 6.05(c) were not in this Partnership Agreement.

(d) Nonrecourse Deductions. The nonrecourse deductions for any Fiscal Year of the Partnership (as defined in Regulations Section 1.704-2(b)(l)) shall be allocated to the Partners in proportion to their Percentage Interests.

(e) Partner Nonrecourse Deductions. The Partner nonrecourse deductions for any Fiscal Year of the Partnership (as defined in Regulations Section 1.704-2(i)(2)) shall be allocated to the Partner that bears the economic risk of loss for such deductions within the meaning of Regulations Sections 1.704-2(i)(l) and 1.752-2. If more than one Partner bears the economic risk of loss, such deductions shall be allocated between or among such Partners in accordance with the ratios in which such Partners share such risk of loss.

(f) Partner Minimum Gain Chargeback. If during any taxable period there is a net decrease in minimum gain attributable to Partner nonrecourse debt, within the meaning of Regulations Section 1.704-2(b)(4) and 1.704-2(i)(3), each Partner with a share of such Partner minimum gain shall be allocated items of partnership income and gain as specified in Regulations Section 1.704-2(g)(2)(ii) for such period (and if necessary, subsequent periods) as provided in Regulations Section 1.704-2(g)(2)(iii) in proportion to, and to the extent of, an amount equal to such Partner’s share of the net decrease in the minimum gain attributable to Partner nonrecourse debt determined in a manner consistent with the provisions of Regulations Section 1.704-2(i)(4).

This Section 6.05(f) is intended to comply with the minimum gain chargeback requirement of such Regulations Sections and shall be interpreted consistently therewith.

(g) Excess Nonrecourse Liabilities. Solely for purposes of determining a Partner’s proportionate share of the “excess nonrecourse liabilities” of the Partnership within the meaning of Regulations Section 1.752-3(a)(3), each Partner’s interest in Partnership profits shall be such Partner’s Percentage Interest.

(h) Section 732(d), 734(b) and 743(b) Adjustments. To the extent that an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Section 732(d), 734(b) or 743(b) is required under Regulations Section 1.704-b(2)(iv)(m) to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be allocated to the Partners in a manner that achieves the adjustments to their respective Capital Accounts that are required to be made pursuant to such Section of the Regulations.

(i) Change in Regulations. If any of the specific Regulations upon which the special allocations provided for in this Section 6.05 are based are hereafter changed or if new Regulations in the opinion of the reputable tax counsel retained by the Partnership (“Tax Counsel”) make it necessary to revise the foregoing special allocation rules or provide further special allocation rules in order to avoid a significant risk that a material portion of any allocation of Net Income, Net Losses, credits or other tax attributes otherwise provided for in Section 6.04 would be altered as a result of a challenge thereto by the Internal Revenue Service, the Partners agree to make such reasonable amendments to this Agreement as, in the opinion of such Tax Counsel, are reasonably necessary or desirable, taking into account the interests of the Partners as a whole and all other relevant factors, to avoid or reduce significantly such risk to the extent possible without materially affecting the amounts distributable to any Partner pursuant to this Agreement.

(j) Curative Allocations. The allocations set forth in this Section 6.05 (the “Special Allocations”) are intended to comply with certain requirements of the Regulations. It is the intent of the Partners that, to the extent possible, all Special Allocations shall be offset with other Special Allocations or with special allocations of other items of Partnership income, gain, loss, or deduction pursuant to this Section 6.05. Therefore, notwithstanding any other provision of this Article VI (other than the Special Allocations), the General Partner shall make such offsetting allocations of Partnership income, gain, loss or deduction in whatever manner it reasonably determines is appropriate so that, after such offsetting allocations are made, each Partner’s Capital Account balance is, to the extent possible, equal to the Capital Account balance which such Partner would have had if the Special Allocations were not part of this Partnership Agreement and all Partnership items were allocated pursuant to Section 6.04. In exercising its discretion under this Section 6.05, the General Partner shall take into account future Special Allocations under

Section 6.05 that, although not yet made, are likely to offset other Special Allocations previously made under Section 6.05. Notwithstanding the foregoing provisions of this Section 6.05, the General Partner shall not, without the unanimous consent of all of the Partners, make any allocation under this Section 6.05 unless the General Partner obtains advice of Tax Counsel that such allocation is unlikely to cause any allocation made or to be made under this Partnership Agreement to fail to be respected under Code Section 704 of the Regulations thereunder.

6.06 Special Rules. The allocations set forth in this Agreement shall be subject to the following special rules:

(a) Tax Allocations. For each Fiscal Year, the Partnership’s items of income, loss, deduction, gain and other items governed by Section 702(a) of the Code and comparable provisions of state and local law shall be allocated among the Partners proportionately to the allocation of the Net Income and Net Losses to such Partners for such year; and provided that appropriate adjustments shall be made in the event that an election under Section 754 of the Code is in effect; and provided further that any gain recognized from any disposition of an asset which is treated as ordinary income because it is attributable to the recapture of any depreciation or amortization shall be allocated among the Partners in the same ratio as the prior allocations of income or loss which included such depreciation or amortization (but, in each case, only to the extent such gain is otherwise allocable to a Partner).

(b) Changes in Interests. If the Percentage Interest of a Partner is adjusted during the period in question, the Partnership’s books shall be closed as of the date immediately preceding the date of such adjustment. For the period ended on such date, the Net Income and Net Losses shall be allocated based on the Percentage Interest in effect prior to the date of such adjustment; provided, however, that any adjustments to the Value of a Partnership asset treated as gain or loss under Section 1.40 of this Agreement shall be allocated only to those persons who were Partners immediately before the event giving rise to such adjustment. For the balance of such Fiscal Year the Net Income and Net Losses shall be allocated based on the Percentage Interest as so adjusted. For purposes of the foregoing, the expenses of the Partnership shall be allocated between the two periods based upon the date when accrued; provided that amortization, depreciation and other items attributable to specific items of property shall be deemed to accrue ratably over the period of time during which the Partnership holds the property to which such items relate.

(c) Imputed Interest. To the extent the Partnership has imputed interest income pursuant to any provision of the Code with respect to the obligation of a Partner to contribute capital:


	(i) Such interest income shall be specially allocated to the Partner owing such obligation; and


	(ii) The amount of such interest income shall be excluded from the capital contribution credited to such Partner’s Capital Account in connection with payments with respect to such obligation.

(d) Section 704(c). In accordance with Section 704(c) of the Code and the Regulations thereunder, income, gain, loss and deduction with respect to any property contributed to the capital of the Partnership shall, solely for tax purposes, be allocated among the Partners so as to take account of any variation between the adjusted basis of such property to the Partnership for federal income tax purposes and its Value. In the event the Value of any Partnership asset is adjusted, subsequent allocations of income, gain, loss and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Value in the same manner as under Section 704(c) of the Code and the Regulations thereunder. Any elections or other decisions relating to such allocations shall be made by the Accountants in any manner that reasonably reflects the purpose and intent of this Agreement. Allocations pursuant to this Section 6.06 are solely for purposes of federal, state and local taxes and shall not affect, or in any way be taken into account in computing, any Partner’s Capital Account or share of Net Income, Net Losses or other items or distributions pursuant to any provision of this Agreement.

(e) Minimum Allocation to General Partner. Notwithstanding anything to the contrary in this Article VI, subject to the Special Allocations, the General Partner shall at all times have a minimum 1% allocation of each material item of Partnership income, gain, loss, deduction and credit.

(a) If a Partner has received the return of any part of its Capital Contribution without violation of the Certificate, this Agreement or the Act, it is liable to the Partnership for a period of one year thereafter for the amount of the returned Capital Contribution, but only to the extent necessary to discharge the Partnership’s liabilities to creditors who extended credit to the Partnership during the period the Capital Contribution was held by the Partnership.

(b) If a Partner has received the return of any part of its Capital Contribution in violation of the Certificate, this Agreement or the Act, it is liable to the Partnership for a period of six years thereafter for the amount of the Capital Contribution wrongfully returned. For purposes of this Section 6.07, a Partner receives a return of its Capital Contribution to the extent that a distribution to it reduces its share of the fair value of the net assets of the Partnership below the value (as set forth in the records of the Partnership) of its Capital Contribution which has not been distributed to it.

7.01 Limitations. The Partnership may be dissolved, liquidated and terminated pursuant to, and only pursuant to, the provisions of this Article VII, and the parties hereto do hereby irrevocably waive any and all other rights they may have to cause a dissolution of the Partnership or a sale or partition of the Partnership and/or any or all of its assets. The parties hereto do hereby covenant and agree that, except as otherwise provided in this Article VII, neither the dissolution nor the withdrawal from the Partnership for any other reason of any of the parties hereto nor the admission to the Partnership of a Substituted Partner pursuant to the provisions of Article VIII shall cause the Partnership to be dissolved, liquidated or terminated.

7.02 Dissolution. This Partnership shall continue until terminated, and shall be terminated only by, or as a result of:

(b) The sale, transfer or other disposition of all, or substantially all, of the Partnership assets or of its business;

(d) The withdrawal, Bankruptcy, insolvency, dissolution, or other legal incapacity of the General Partner, if there is no other General Partner remaining, unless within a period of ninety (90) days from the date of such event, the Limited Partner elects to continue the Partnership and a successor General Partner is selected by the Limited Partner as provided in Section 7.03;

(e) The occurrence of any event which shall make it unlawful for the existence of the Partnership to be continued;

(f) If the Limited Partner delivers to the General Partner an opinion of counsel reasonably acceptable to the General Partner to the effect that it is more likely than not that an investment by the Partnership or the Limited Partner’s investment in the Partnership would cause the Limited Partner to violate any law, regulation, license, permit or decree or order of a court of competent jurisdiction (including any provisions of ERISA) or that the Limited Partner would lose its tax-exempt status, and the General Partner or Limited Partner is unable to take such action which is reasonably necessary to avoid such violation or loss of tax-exempt status within ninety (90) days of receipt of such opinion of counsel; or

(g) If the General Partner delivers to the Limited Partner an opinion of counsel reasonably acceptable to the Limited Partner to the effect that it is more likely than not that an investment by the Partnership or the General Partner’s investment in the Partnership would cause the General Partner to cease to qualify as a “qualified REIT subsidiary” as defined in Section 856(i) of the Code or would cause Commercial Net Lease Realty, Inc., the parent of the General Partner, to cease to be a “real estate investment trust” within the meaning of Section 856 of the Code.

7.03 Election to Continue Partnership. Upon the withdrawal, Bankruptcy, insolvency, dissolution or other legal incapacity of the General Partner, if there is no other General Partner remaining, the Limited Partner may, at any time within ninety (90) days of such event, elect to continue the Partnership and its business on the terms and conditions contained in this Agreement and select a new General Partner. If the Partnership is so continued, the new General Partner shall execute, acknowledge and file an amendment to this Agreement, the Certificate and any other appropriate documents. The new General Partner shall make such Capital Contributions to the Partnership as the new General Partner and the Limited Partner may agree.

7.04 Distributions on Dissolution. In all cases of dissolution of the Partnership, the business of the Partnership shall be continued to the extent necessary to allow an orderly winding up of its affairs, including the liquidation and termination of the Partnership pursuant to the provisions of this Article VII, as promptly as practicable thereafter, and each of the following shall be accomplished:

(a) The Liquidating Partner shall cause to be prepared a statement setting forth the assets and liabilities of the Partnership as of the date of dissolution, a copy of which statement shall be furnished to the other Partners.

(b) The property and assets of the Partnership shall be liquidated by the Liquidating Partner as promptly as possible, but in an orderly and businesslike manner. In the event that the Partnership elects to sell assets to third parties, the Partners shall have the right of first refusal to purchase any or all of the assets of the Partnership for their fair market value (as determined by Appraisal pursuant to Section 12.17). Subject to the provisions of Section 2.06 hereof, the Liquidating Partner may, in the exercise of its business judgment, determine not to sell all or any portion of the property and assets of the Partnership, in which event such property and assets shall be distributed in kind pursuant to Section 7.04(c).

(c) Any Net Income or Net Loss realized by the Partnership upon the sale of its property and assets shall be deemed recognized and allocated to the Partners in the manner set forth in Article VI. To the extent that an asset is to be distributed in kind, such asset shall be deemed to have been sold at its fair market value on the date of distribution, the gain or loss deemed recognized upon such deemed sale shall be allocated in accordance with Article VI and

the amount of the distribution shall be considered to be such fair market value of the asset. If the Partners cannot agree upon such fair market value, the same shall be determined by Appraisal as provided in Section 12.17.

(d) The Extraordinary Cash Proceeds from the sale of the Projects and all other assets of the Partnership, including Proceeds from Operations of the Partnership, shall be applied and distributed as follows and in the following order of priority:


	(i) First, to creditors, including Partners who are creditors, to the extent permitted by law, in satisfaction of liabilities of the Partnership (other than liabilities for distributions to Partners or distributions to withdrawing Partners) and the expenses of liquidation;

	(ii) Second, to the establishment of any reserves which may be deemed reasonably necessary by the Liquidating Partner for any contingent or unforeseen liabilities or obligations of the Partnership. Such reserves shall be paid over to an escrowee designated by the Person carrying out the dissolution to be held by him or if for the purpose of disbursing such reserves in payment of any of the aforementioned contingencies and, at the expiration of such period as shall be deemed advisable, to distribute the balance thereafter remaining in the manner provided in this Section;

	(iii) Third, to the General Partner and the Limited Partner in proportion to and to the extent of the Partners’ Capital Accounts; and

	(iv) Fourth, the balance, if any, to the Partners in proportion to the Partners’ Percentage Interests.

(e) Distributions in liquidation shall be made by the end of the Fiscal Year in which liquidation occurs or, if later, within ninety (90) days of the liquidation event and shall otherwise comply with Regulation Section 1.704-l(b).

(f) In the event the Partnership is “liquidated” within the meaning of Regulations Section 1.704-l(b)(2)(ii)(g), (a) distributions shall be made pursuant to this Article VII to the Partners who have positive Capital Accounts in compliance with Regulations Section 1.704- l(b)(2)(ii)(b)(2), and (b) if the General Partner’s Capital Account has a deficit balance (after giving effect to all contributions, distributions, and allocations for all taxable years, including the year during which such liquidation occurs), the General Partner shall contribute to the capital of the Partnership the amount necessary to restore such deficit balance to zero in compliance with Regulations Section 1.704-l(b)(2)(ii)(b)(3).

7.05 Liquidating Partner. The Liquidating Partner shall, upon the final dissolution of the Partnership, file an appropriate certificate to such effect in the proper governmental office or offices under the Act as then in effect. Notwithstanding the foregoing, each Partner, upon the request of the Liquidating Partner, shall promptly execute, acknowledge and deliver all such documents, certificates and other instruments as the Liquidating Partner shall reasonably request to effectuate the proper dissolution, liquidation and termination of the Partnership, including the winding up of the business of the Partnership.

Within ninety (90) days after the dissolution and complete liquidation of the Partnership, the Liquidating Partner shall furnish to each of the Partners a financial statement for the period from the first day of the then current fiscal year through the date of such complete liquidation certified by the Partnership’s certified public accountants. Such statement shall include a Partnership statement of operations for such period and a Partnership balance sheet as of the date of such complete liquidation.

7.06 Termination of Partnership. The Partnership shall be terminated upon (a) completion of any dissolution and liquidation thereof pursuant to the provisions of this Article VII, and (b) preparation, execution, acknowledgment, filing, recordation, publication, delivery and/or cancellation of any instruments, documents or statements if and as required by the Act, the Code or any other applicable laws.

7.07 Liability of General Partner Upon Dissolution. Upon the dissolution of the Partnership and the distribution of the net proceeds pursuant to Section 7.04, the Limited Partner shall look solely to the property and assets of the Partnership for the return of its Capital Contribution, and if the Partnership property and assets remaining after the payment or discharge of the debts and liabilities of the Partnership are insufficient to return the full amount of the Capital Contribution of the Limited Partner, the Limited Partner shall have no recourse or claim against the General Partner.

8.01 Prohibition on Transfers. Subject to the provisions of this Article VIII and Article IX hereof, no Transfer shall be made by the Partners of the whole or any part of their respective Interests in the Partnership (including, but not limited to, their interest in the capital or profits of the Partnership). No Transfer, encumbrance, hypothecation or issuance in violation of the provisions hereof shall be valid or effective for any purpose.

(a) Notwithstanding Section 8.01 and subject to the provisions of Article IX hereof, the Limited Partner shall have the right to assign the whole or any portion of its Interest only by a written assignment, the terms of which are not in contravention of any of the provisions of this Agreement or the Act, which assignment shall have been duly executed by the assignor and the Assignee, received by the Partnership, and recorded on the books of the Partnership, subject, however, to the provisions of Section 8.04 hereof.

(b) As used in this Section 8.02, the “effective date” of an assignment of an Interest shall be that date set forth on the written instrument of assignment.

(c) Anything herein to the contrary notwithstanding, both the Partnership and the General Partner shall be entitled to treat the assignor of such Interest as the absolute owner thereof in all respects, and shall incur no liability for distributions of cash or other property made in good faith to it, until such time as the written assignment has been received by the Partnership, consented by the General Partner, which consent shall not be unreasonably withheld, and recorded on the books of the Partnership.

(d) An Assignee of the Limited Partner’s Interest shall be entitled to receive the distributions of cash or other property from the Partnership attributable to the Interest acquired by reason of such assignment from and after the effective date of the assignment of such Interest to it, and such Assignee shall pay all reasonable expenses of the Partnership connected with such assignment.

(e) Net Income and Net Loss attributable to the Interest acquired by reason of such assignment shall be divided among and allocated between the assignor and the Assignee of such Interest as of the effective date of the assignment of such Partnership Interest and in accordance with Section 8.02(f) below.

(f) The division and allocation of annual Net Income and Net Loss attributable to the Interest between the assignor and the Assignee during any Fiscal Year of the Partnership shall be based upon the length of time during such Partnership Fiscal Year, as measured by the effective date of the assignment, that the Interest was owned by each of them, and shall not be based upon the date or dates during such Fiscal Year on which monthly income was earned or monthly losses incurred by the Partnership. Any gain or loss on an Extraordinary Transaction shall be allocated to the Person recognized as the Limited Partner on the records of the Partnership on the date of the Extraordinary Transaction.

An Assignee shall not become a Limited Partner hereunder and shall be considered only an Assignee and shall not have any other rights of a Partner other than its right to Net Income,

Net Losses and distributions, unless and until the assignment has been consented to by the General Partner pursuant to Section 8.04 hereof.

8.03 Assignment by General Partner. The General Partner shall have the right, with prior written consent of the Limited Partner, which shall not be unreasonably withheld or delayed, to assign all or any portion of its Partnership Interest to a corporation, partnership or other entity, a majority of the voting interests or partnership interests of which is owned by the General Partner (the “Controlled Entity”) and with respect to any such corporation owned or controlled by the General Partner only if (i) there shall have been received an opinion of counsel reasonably satisfactory to the Limited Partner, that such entity will not cause the Limited Partner to lose its status as a limited partner under Delaware law or cause the Partnership to be treated for federal income tax purposes as an association taxable as a corporation rather than a partnership and (ii) the General Partner’s ability to transfer its interest in the Controlled Entity is limited in the same manner as its ability to transfer its Partnership Interest pursuant to the terms of this Agreement.

Except as otherwise expressly provided in Article VII, the Partnership shall not be terminated on the dissolution of a corporation acting as sole General Partner, so long as a successor becomes the General Partner in accordance with the terms of this Agreement and applicable law.

8.04 Substituted Partner. An Assignee shall not become a Substituted Partner until the following conditions are satisfied:

(a) The General Partner consents to the substitution, which consent shall not be unreasonably withheld.

(b) The Assignee executes the assignment instrument and such other instruments as the General Partner reasonably may deem necessary to effect the admission of the Assignee as a Substituted Partner, in form satisfactory to the General Partner;

(c) The assignor and the Assignee named therein shall execute and acknowledge such other instrument or instruments as the General Partner reasonably may deem necessary or desirable to effectuate such admission;

(d) The Assignee shall accept and adopt in writing all the terms and provisions of this Agreement, as the same may have been amended; and

(e) Such Assignee shall pay or obligate itself to pay, as the General Partner may determine, all reasonable expenses connected with such admission, including, but not limited to, the cost of the preparation, filing and publishing of any appropriate documents.

8.05 Limitation on Assignment or Transfer. No transfer or assignment of any Interest or portion thereof may be made if such transfer or assignment would, in the opinion of counsel for the Partnership, result in the treatment of the Partnership as an association taxable as a corporation for Federal income tax purposes. No transfer or assignment of any Interest may be made if, in the opinion of counsel for the Partnership, registration is required under the Securities Act of 1933, as amended, or, in the opinion of such counsel, such transfer or assignment would violate applicable state securities or blue sky laws in any respect.

8.06 Void Transfer. In no event shall any Interest, or any portion thereof, be assigned or transferred to a minor or an incompetent or in violation of any state or Federal law. Any such attempted transfer or assignment shall be void and ineffectual and shall not bind the Partnership or the General Partner.

9.01 Disposition of Interest. There are five routes available for total or partial disposition or liquidation of the Interest of a Limited Partner in the Partnership, namely:

	(a)		A sale of all or a portion of all of the Partnership Property and distribution of the Extraordinary Cash Sale Proceeds within thirty (30) days of closing of the sale.

	(b)		The Limited Partner at any time may make an offer in writing to the General Partner to purchase for cash the Interest of the General Partner in the Partnership. The written offer shall specify the purchase price for the General Partner’s Interest equal to the full amount which the General Partner would receive (without consideration of any minority interest discount) if all of the Partnership’s Property were sold to a third party for a price determined by the Limited Partner (the “LP Price”) and the proceeds of sale distributed to the Partners in accordance with the terms of the Partnership Agreement. Within thirty (30) days from receipt of the written offer from the Limited Partner, the General Partner, by written notice served upon the Limited Partner, may respond by committing to purchase the Interest of the Limited Partner for cash, said purchase price to be equal to the full amount which the Limited Partner would receive if all of the Partnership’s Property were sold to a third party for the LP Price and the proceeds of sale distributed to the Partners in accordance with the terms of the Partnership Agreement. If the General Partner does not so respond to the Limited Partner within thirty (30) days, the General Partner shall be deemed to have accepted the offer of the Limited Partner. If the General Partner does so respond within thirty

			(30) days, the Limited Partner shall be deemed to have accepted the responsive proposal by the General Partner. The sale shall close in Chicago, Illinois on the sixtieth (60th) day following the service by the Limited Partner upon the General Partner of its offer to purchase. The General Partner may not initiate this procedure, but may only respond by way of purchasing the Interest of the Limited Partner or selling its Interest to the Limited Partner.

	(c)		The Limited Partner can sell all or a portion of its Interest in the Partnership to a third party on terms and conditions selected by the Limited Partner provided the Limited Partner allows the General Partner the option for a period of thirty (30) days after receipt of written notice of all the terms and conditions of the proposed sale by the Limited Partner, to purchase the available Interest for the same price and on the same terms and conditions as selected by the Limited Partner.

	(d)		The Limited Partner may direct the General Partner to convert the Limited Partner’s Interest to registered shares of the common stock of Commercial Net Lease Realty, Inc. (the “Shares”) by giving written notification to that effect to the General Partner. Within ten (10) days of such notice, the General Partner shall inform the Limited Partner in writing of the number of Shares it is entitled to receive upon conversion of its Interest (the “Conversion Notice”). Upon receipt of the Conversion Notice, the Limited Partner will have ten (10) days to inform the General Partner in writing that it is electing to convert its Interest pursuant to this Section 9.01(d) (the “L.P. Notice”). For a period of thirty (30) days following receipt of the L.P. Notice, the General Partner, in place of the conversion, may elect to purchase the Limited Partner’s Interest for cash in an amount equal to an amount sufficient such that the Limited Partner shall have received an Internal Rate of Return on its Capital Contributions of ten and six-tenths percent (10.6%). Such purchase is to be consummated within thirty (30) days of receipt of the L.P. Notice. If the General Partner fails to make said election, then the General Partner is obligated to consummate the stock conversion to Shares as hereinafter outlined. This stock conversion option is available at any time after the first to occur of the following: (a) the twenty-fifth month following the last acquisition of a Project by the Partnership, or (b) January 1, 1999. The conversion option terminates on the sixth (6th) annual anniversary of the date of this Agreement. The number of Shares which the Limited Partner will receive in the conversion is to be calculated as follows:

			The number of Shares is to be calculated by the following formula, which is intended to reconcile the value of the Shares to the Limited Partner’s Capital Contribution, after taking into consideration the operating performance of the Partnership.

		“Projected Operating Cash Flow” means the Limited Partner’s pro rata share of projected Operating Income for the twelve months following the date of the L.P. Notice as determined by the mutual agreement of the Advisor and the consultant selected by the Limited Partner (the “Consultant”).

		“FFO” means the projected net income per share of Commercial Net Lease Realty, Inc., for the twelve months following the date of the L.P. Notice as determined by mutual agreement of the Advisor and the Consultant computed in accordance with generally accepted accounting principles, excluding Extraordinary Transactions, without deduction for depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. Such computation shall be made as if the conversion of the Limited Partner’s Interest had occurred.

		“FFO Add-On Factor” means the Initial FFO Add-On Factor, times the FFO, times, for each year since inception, the sum of one (1) plus the percentage growth of Operating Income for such year as determined by the mutual agreement of the Advisor and the Consultant.

		“Initial FFO Add-On Factor” means ten and three hundred thirty nine thousandths percent (10.339%).

		“Operating Income” means the net income of the Partnership, computed in accordance with generally accepted accounting principles, (a) excluding gains or losses from Extraordinary Transactions (b) without deduction for depreciation and amortization and (c) excluding any non-cash lease accounting adjustments.

			Attached hereto as Schedule E is an example of the foregoing Share calculation.

	(e)		A sale of the Limited Partner’s Interest to the General Partner pursuant to the terms of Section 4.06.

9.02 Terms. For purposes of any purchase and sale of any portion of an Interest by one Partner from the other Partner pursuant to the provisions of Section 4.06 and Section 9.01, the

Partners agree that the terms of the purchase and sale shall be unconditional, except that (i) the seller shall represent and warrant to the buyer that the Interest to be sold is subject to no legal or equitable claims and upon demand shall deliver an instrument confirming such representation and warranty at the closing, (ii) the General Partner shall provide the Limited Partner with access to all of the Partnership books and records as provided in Section 11.01, and (iii) the General Partner shall provide the Limited Partner with such representations and warranties as the Limited Partner shall reasonably request regarding the accuracy and completeness of the Partnership’s books and records.

10.1. Fees. The General Partner will receive no fees from the Partnership. The Advisor will receive (a) an asset management fee of .45% annually (payable quarterly) of the lesser of (i) the total gross purchase price or (ii) the gross appraised price, of the real estate assets then owned by the Partnership, (b) 4.5% annually of the Proceeds from Operations less any principal amortization of Partnership loans payable yearly and (c) a fee of 1 % of the gross sale price of any disposition of a Project, but this fee is waived if the Project is sold to any Affiliate of the General Partner or Advisor.

10.2 Expenses. The only expenses for which the General Partner will be entitled to be reimbursed by the Partnership will consist of direct costs associated with the Projects and other Property such as real estate taxes, insurance, audit, legal, accounting and appraisal fees incurred by the Partnership, brokers’ commissions paid to third parties unrelated to the General Partner and reasonable travel expenses incurred by the General Partner in regard to protecting the Projects and other Property.

11.01 Books and Records. The General Partner shall keep and retain such books and records relating to the business of the Partnership as it deems necessary or advisable or as are required by the Act or by any governmental authority which has jurisdiction over the Partnership at the principal office of the Partnership. Such books and records shall include, without limitation: (i) a current list of the full name and last known address of each Partner, identifying the General Partner and Limited Partner and setting forth the agreed value of the Capital Contributions of each Partner, the amount of any agreed future Capital Contributions, and the date on which each became a Partner, (ii) an executed copy of the Certificate, as amended or restated,

together with executed copies of any powers of attorney pursuant to which the Certificate was executed, (iii) copies of the Partnership’s federal, state and local income tax returns and reports, if any, for the three most recent years, and (iv) an executed copy of this Agreement, as amended or restated, and of any financial statements of the Partnership for the three most recent years. Records kept under this Section shall at all times be maintained at the principal office of the Partnership. Each Partner has the right, upon reasonable demand and for any purpose reasonably related to the Partner’s interest as a Partner to: (a) inspect, copy or obtain any of the records of the Partnership required to be maintained by this Section or the Act at such Partner’s own expense; (b) obtain from the General Partner from time to time true and full information regarding the state of the business and financial condition of the Partnership; and (c) obtain other information regarding the affairs of the Partnership as is just and reasonable. The General Partner shall not be required to deliver or mail a copy of the Certificate or any subsequent amendment thereto to the Limited Partner.

11.02 Reports. The General Partner will furnish to each of the Partners within ninety (90) days of the end of the Fiscal Year a financial report for the Partnership as reflected in the Partnership’s informational tax return and any other necessary tax information with respect to the Partnership. The Partnership shall also furnish to the Limited Partner on a calendar quarter basis other reports on the Partnership’s operations and conditions.

11.03 Bank Accounts. All funds of the Partnership shall be deposited in its name in such checking and savings accounts, certificates of deposit or U.S. government obligations as shall be designated by the General Partner. Withdrawals therefrom shall be made upon such signatures as the General Partner may designate.

11.04 Tax Returns. In addition to the annual report, the General Partner shall instruct the Partnership’s accountants to prepare and file all federal, state and local income tax returns for the Partnership with the appropriate authorities at Partnership expense.

11.05 Accounting and Tax Decisions. All accounting decisions shall be made in accordance with generally accepted accounting principles unless otherwise decided by the General Partner. The Partnership shall consult with the Partnership’s accountants as to all tax elections or tax decisions so as to produce the greatest benefits for the Partners.

11.06 Tax Matters Partner. The General Partner is hereby designated as Tax Matters Partner pursuant to Section 6231 (a) of the Code. The Tax Matters Partner will notify all Partners of the commencement of any Partnership tax audit or administrative adjustments, and the other Partners waive any right to negotiate or enter into a settlement agreement with the Internal Revenue Service in any proceedings. All such negotiations and settlements shall be conducted solely by the Tax Matters Partner. The Partners, other than the Tax Matters Partner, waive any right to file a petition for readjustment of Partnership matters pursuant to Section 6226 of the

Code unless the Tax Matters Partner does not file such a petition within ninety (90) days of its receipt of notice of a final Partnership administrative adjustment and unless such petition is filed in any Federal District Court chosen by the Limited Partner. The Tax Matters Partner is authorized to represent the Partnership in any tax audit proceedings and in any dispute with the Internal Revenue Service, including negotiating and entering into a settlement agreement as provided for in Section 6224(c) of the Code, contesting any proposed adjustment of Partnership items or petitioning for a readjustment of Partnership items.

12.01 Notices. Any and all notices required or desired to be sent to any party under the Agreement shall be in writing and sent by registered or certified mail, postage prepaid, to the party or parties for whom such notices are intended. All such notices, in order to be effective, shall be addressed to the last address of record on the Partnership books or such other address as the Partner has requested in writing, when intended for a Partner.

12.02 Counterparts. This Agreement may be executed in several counterparts and all so executed shall constitute but a single Agreement binding on all parties hereto, notwithstanding that all the parties are not signatories to the original or the same counterpart.

12.03 Severability. Each provision of this Partnership Agreement shall be considered severable and if for any reason any provision or provisions herein are determined to be invalid and contrary to any existing or future laws, such invalidity shall not impair the operations of or affect those portions of this Agreement which are valid.

12.04 Federal Tax Election. In the event of a transfer of all or any part of the Partnership Interest of the General Partner or the Limited Partner, the General Partner may elect on behalf of the Partnership, pursuant to Section 754 of the Code, to adjust the basis of the property of the Partnership (or any part thereof) and if such an election is made, the Partnership shall, at its expense, provide the Partners with all information necessary as a result of that election.

12.05 Governing Law. This Agreement and the rights of the parties hereunder shall be interpreted in accordance with the laws of the State of Delaware. Except as otherwise provided herein, the rights and obligations of the Partnership shall be governed by the Act. A Partner’s interest in the Partnership shall be personal property for all purposes. All real and other property owned by the Partnership shall be deemed to be owned by the Partnership as an Entity (and may be held in the name of a nominee for the Partnership), and no Partner individually shall have any ownership of such property.

12.06 Consent and Approvals. Whenever under this Agreement the consent or approval of any Partner is required or permitted, such consent or approval may be evidenced by a written consent signed by an authorized officer of such Partner personally or by its agent or attorney-in- fact.

12.07 Execution of Partnership Documents. Any deed, bill of sale, mortgage, lease (other than leases in the ordinary course of business), contract, or other commitment purporting to convey or encumber the interest of the Partnership in all or any portion of property at any time held in its name, shall be signed by the General Partner.

12.08 Waiver of Partition. Each of the parties hereto irrevocably waives during the term of the Partnership any right to maintain any action for partition with respect to the property of the Partnership.

12.09 Litigation. The General Partner shall prosecute and defend such actions at law or in equity as may be necessary to enforce or protect the interest of the Partnership. The Partnership and the General Partner shall respond to any final decree, judgment or decision of any court, board or authority having jurisdiction in the premises. The General Partner shall satisfy any such judgment, decree or decision, first out of any insurance proceeds available therefor, next out of assets of the Partnership, and finally out of the assets of the General Partner. The cost of defending any actions brought against the Partnership and/or the General Partner with respect to Partnership matters shall be borne by the Partnership, so long as the General Partner does not act fraudulently or in bad faith, or in a manner constituting gross negligence or amounting to a breach of fiduciary duty.

12.11 Binding Effects. Subject to the limits on transferability contained herein, each and all of the covenants, terms, provisions, and agreements contained herein shall, as the case may be, be binding upon and inure to the benefit of the parties hereto, their respective heirs, assigns, successors and legal representatives.

12.12 Entire Agreement. This Agreement, including any and all schedules hereto, contains the entire agreement between the parties hereto relative to the formation of the Partnership. No variations, modifications or changes herein shall be binding upon any party unless set forth in a document duly executed by or on behalf of such party. Each of the parties hereto shall from time to time and at all times execute, acknowledge and deliver all such documents and do all such other and further acts as may reasonably be necessary in order fully to perform and carry out the terms and intent hereof.

12.13 Remedies Not Exclusive. Any remedies herein contained for breaches of obligations hereunder shall not be deemed to be exclusive, and shall not impair the right of any party to exercise any other right or remedy, whether for damages, injunction, or otherwise.

12.14 Captions. Section titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof.

12.15 Identification. Whenever the singular is used in this Agreement and when required by the context, the same shall include the plural, and the masculine gender shall include the feminine and neuter genders, and vice versa.

12.16 Indemnity by Partnership. The Partnership shall indemnify and hold harmless any Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including any action by or in the right of the Partnership) by reason of any acts, omissions of alleged acts or omissions arising out of its activities as a General Partner or as a partner, officer or director of a General Partner which is a partnership or a corporation acting on behalf of the Partnership or in furtherance of the interests of the Partnership (collectively the “Indemnified Parties”), against losses, damages or expenses for which such person has not otherwise been reimbursed (including attorneys’ fees, judgments, fines and amounts paid in settlement) actually and reasonably incurred by it in connection with such action, suit or proceeding so long as it did not act fraudulently or in bad faith or in a manner constituting gross negligence or malfeasance. The termination of any action, suit or proceeding by settlement or upon a plea of nolo contendere or its equivalent, shall not of itself create a presumption that the person acted fraudulently or in bad faith or was negligent (gross or otherwise) or breached a fiduciary duty.

12.17 Appraisal. Any appraisal required to be made pursuant to this Agreement (“Appraisal”) shall be made as follows:

(a) Either Partner may serve written notice upon the other Partner stating that an appraisal shall be conducted pursuant to this Section 12.17. In such event, unless otherwise expressly provided to the contrary in this Agreement, within thirty (30) days after receipt of any such notice, either (i) the Partners shall nominate and appoint a single appraiser, or, failing that, (ii) the noticing Partner and the other Partner shall each nominate and appoint one appraiser. Upon the appointment of the two appraisers as hereinabove provided, the two appraisers so appointed shall, within fifteen (15) days after the appointment of the second appraiser and before exchanging views as to the questions at issue, appoint a third appraiser and give written notice of such appointment to the Partners. In the event that a Partner fails to appoint an appraiser within the thirty (30) day period set forth above, the appraiser appointed by the other Partner shall make the appraisal. If the two appraisers selected by the Partners shall fail to appoint or agree upon the

third appraiser within the fifteen (15) day period outlined above, a third appraiser may be selected by the Partners if they can agree upon such third appraiser within a further period of ten (10) days; otherwise, any Partner may apply to any federal or state court of or sitting in the State of Delaware having jurisdiction for appointment of any appraiser not appointed or agreed upon within the time periods herein provided. The appraisers selected pursuant hereto shall be sworn faithfully and fairly to determine expeditiously the question at issue.

(b) The three appraisers (or the one or two appraisers, if only one or two appraisers are appointed) shall, with all possible speed, make the appraisal contemplated herein, set forth their (or its) results in writing, and give notice of the same to the Partners. If two of the three appraisers shall render a concurring determination, then that concurring determination shall be conclusive and binding on the Partners. If no two of the three appraisers shall render a concurring determination, then the determination of the third appraiser appointed by the two appraisers appointed by the Partners shall be conclusive and binding upon the Partners; provided, however, that if the determination of the third appraiser shall be lower than the lowest determination of the other two appraisers, or higher than the highest determination of the other two appraisers, the final determination shall be the median determination of the three appraisers. The Partnership shall pay the fees and expenses of the appraiser selected by or on behalf of the Partners, any fees and expenses of the third appraiser, and any general expenses incurred by the appraisers in connection with the appraisal.

(c) Any appraiser appointed hereunder shall be an MAI appraiser licensed in the state where the Project is located with at least five (5) years’ experience in appraising property of the same type as the Project.

IN WITNESS WHEREOF, the parties have executed this Limited Partnership Agreement as of the day and year first above written.

FIRST AMENDMENT TO THE
LIMITED PARTNERSHIP AGREEMENT
OF
NET LEASE INSTITUTIONAL REALTY, L.P.

THIS FIRST AMENDMENT TO THE LIMITED PARTNERSHIP AGREEMENT of NET LEASE INSTITUTIONAL REALTY, L.P. (this “First Amendment”), is made and entered into as of the 16 th day of September, 1997, by and between NET LEASE REALTY III, INC., a Maryland corporation (the “General Partner”), and THE NORTHERN TRUST COMPANY, as Trustee of the Retirement Plan for Chicago Transit Authority Employees, the limited partner (the “Limited Partner”) on the following terms and conditions:

The General Partner and the Limited Partner entered into that certain Partnership Agreement of Net Lease Institutional Realty, L.P. (the “Partnership”) dated as of August 25, 1997 (the “Partnership Agreement”).

The purposes of this First Amendment to the Partnership Agreement are (1) to extend the date for making capital contributions to September 30, 1997; and (2) to amend Schedule C and Schedule D to the Partnership Agreement.

Unless otherwise defined herein, all terms used in this First Amendment shall have the meaning assigned to those terms in the Partnership Agreement.

NOW, THEREFORE, in consideration of the promises and the mutual covenants herein contained, the parties hereto do hereby amend the Partnership Agreement as follows:

1. Extension of Capital Call Date. Section 3.03(a) of the Partnership Agreement is hereby modified by substituting “September 30, 1997” for “August 31, 1997”.

2. Rights and Powers of General Partner. Section 4.03(a) of the Partnership Agreement is hereby deleted and replaced by the following:


	“(a) To acquire each of the Projects and to purchase, lease or otherwise acquire any other real or personal property necessary for the ownership and operation of the Projects and to sell, convey, assign and grant options with respect to such Projects, provided that the Projects listed in Schedule C shall be acquired at the lower of cost or market from the General Partner or its Affiliate.”

3. Schedule C. The Schedule C to the Partnership Agreement is hereby deleted and replaced by the revised Schedule C attached hereto.

4. Schedule D. The Schedule D to the Partnership Agreement is hereby deleted and replaced by the revised Schedule D attached hereto.

Except as modified or amended hereby, the Partnership Agreement shall remain unmodified and in full force and effect.

This First Amendment may be executed in several counterparts and all such executed counterparts shall constitute a single agreement binding on all of the parties hereto, their successors and their assignees, notwithstanding that all of the parties hereto are not signatories to the original or to the same counterpart.

IN WITNESS WHEREOF, the parties hereto have duly executed this First Amendment to the Partnership Agreement as of the day and year first above written.






		Proposed Maximum	Proposed Maximum	Amount of
Title of Each Class of	Amount To Be	Offering Price	Aggregate	Registration
Securities to be Registered	Registered	Per Share(1)	Offering Price(1)	Fee(1)


Common Stock, $0.01 par value	953,551	$17.48	$16,668,072	$1,349


SEC Registration Fee		$	1,349
Printing and Mailing Costs		$	2,000
Accounting Fees and Expenses		$	5,000
Legal Fees and Expenses		$	10,000
Miscellaneous		$	5,000

	Total	$	23,349


Exhibit No.
(Per Exhibit
Tables in
Item 601 of
Regulation S-K)			Description

	3	.1	First Amended and Restated Articles of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Registration Statement No. 333-64511 on Form S-3 and incorporated herein by reference).
	3	.2	Articles of Amendment to the First Amended and Restated Articles of Incorporation of the Registrant (filed as Exhibit 3.6 to the Registrant’s Form 10-Q for the quarter ended June 30, 2002 and incorporated herein by reference).
	3	.3	Bylaws of the Registrant (filed as Exhibit 3(ii) to Amendment No. 2 to the Registrant’s Registration No. 33-83110 on Form S-3 and incorporated herein by reference).
	4	.1	Specimen Certificate of Common Stock, par value $0.01 per share, of the Registrant (filed as Exhibit 3.4 to the Registrant’s Registration Statement No. 1-11290 on Form 8-B, and incorporated herein by reference).
	5		Opinion of Shaw Pittman LLP, including Consent
	8		Opinion of Shaw Pittman LLP regarding Tax Matters, including Consent
	23	.1	Consent of KPMG LLP
	23	.2	Consent of Shaw Pittman LLP (included in Exhibits 5 and 8)
	24		Power of Attorney (contained on the signature page hereto)
	99	.1	Net Lease Institutional Realty, L.P. Limited Partnership Agreement, as amended.



Signature				Title


/s/ JAMES M. SENEFF, JR. James M. Seneff, Jr.				Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

/s/ GARY M. RALSTON Gary M. Ralston				President and Chief Operating Officer and Director

/s/ KEVIN B. HABICHT Kevin B. Habicht				Executive Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) and Director

/s/ ROBERT A. BOURNE Robert A. Bourne				Vice Chairman of the Board

/s/ CLIFFORD R. HINKLE Clifford R. Hinkle				Director

/s/ RICHARD B. JENNINGS Richard B. Jennings				Director



Signature				Title


/s/ TED B. LANIER Ted B. Lanier				Director

/s/ ROBERT C. LEGLER Robert C. Legler				Director

/s/ ROBERT MARTINEZ Robert Martinez				Director


	Page

About this Prospectus		3
Where You Can Find More Information		4
The Company		5
Risk Factors		6
Use of Proceeds		10
Description of Common Stock		10
Federal Income Tax Considerations		13
Rights of Selling Shareholder		20
Selling Shareholders		21
Plan of Distribution		21
Legal Matters		22
Experts		23


Exhibit No.			Document

	3	.1	First Amended and Restated Articles of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Registration Statement No. 333-64511 on Form S-3 and incorporated herein by reference).
	3	.2	Articles of Amendment to the First Amended and Restated Articles of Incorporation of the Registrant (filed as Exhibit 3.6 to the Registrant’s Form 10-Q for the quarter ended June 30, 2002 and incorporated herein by reference).
	3	.3	Bylaws of the Registrant (filed as Exhibit 3(ii) to Amendment No. 2 to the Registrant’s Registration No. 33-83110 on Form S-3 and incorporated herein by reference).
	4	.1	Specimen Certificate of Common Stock, par value $0.01 per share, of the Registrant (filed as Exhibit 3.4 to the Registrant’s Registration Statement No. 1-11290 on Form 8-B, and incorporated herein by reference).
	5		Opinion of Shaw Pittman LLP, including Consent
	8		Opinion of Shaw Pittman LLP regarding Tax Matters, including Consent
	23	.1	Consent of KPMG LLP
	23	.2	Consent of Shaw Pittman LLP (included in Exhibits 5 and 8)
	24		Power of Attorney (contained on the signature page hereto)
	99	.1	Net Lease Institutional Realty, L.P. Limited Partnership Agreement, as amended.


	Very truly yours,


	SHAW PITTMAN LLP

	By:		/s/ Charles B. Temkin

			Charles B. Temkin, P.C.


Number of Shares	=	Projected Operating Cash Flow

		FFO + FFO Add-On Factor


GENERAL PARTNER:		LIMITED PARTNER:

NET LEASE REALTY III, INC.		THE NORTHERN TRUST COMPANY, as Trustee of the RETIREMENT PLAN FOR CHICAGO TRANSIT AUTHORITY EMPLOYEES

By:	- -s- GARY M.RALSTON	By:	-s- PAMELA S. NEWTON

It: PRESIDENT		Its: VICE PRESIDENT


General Partner:

	NET LEASE REALTY III, INC.

	By:

	Its:	PRESIDENT

Limited Partner:

	THE NORTHERN TRUST COMPANY, as Trustee of the RETIREMENT PLAN FOR CHICAGO TRANSIT AUTHORITY EMPLOYEES

	By:

	Its:	Sr VICE PRESIDENT



	James M. Seneff, Jr.
	Chairman of the Board