10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2004.

OR

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

For the transition period from                      to                     .

Commission file number 0-11290

COMMERCIAL NET LEASE REALTY, INC.

(Exact name of registrant as specified in its charter)

Maryland	56-1431377
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

450 South Orange Avenue, Suite 900
Orlando, Florida 32801

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (407) 265-7348

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

Title of each class	Name of exchange on which registered:
Common Stock, $0.01 par value	New York Stock Exchange
9% Non-Voting Series A Preferred Stock	New York Stock Exchange

Securities registered pursuant to section 12(g) of the Act:
None
(Title of class)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act): Yes   X   No       .

The aggregate market value of voting common stock held by non-affiliates of the registrant as of June 30, 2004 was $831,086,060.

The aggregate market value of voting common stock held by non-affiliates of the registrant as of February 8, 2005 was $963,531,763.

The number of shares of common stock outstanding as of March 3, 2005 was 52,096,633.

DOCUMENTS INCORPORATED BY REFERENCE:

1.   Registrant incorporates by reference portions of the Commercial Net Lease Realty, Inc. Proxy Statement for the 2005 Annual Meeting of Shareholders (Items 10, 11, 12, 13 and 14 of Part III).

TABLE OF CONTENTS

		PAGE
		REFERENCE
Part I
Item 1.	Business		4
Item 2.	Properties		10
Item 3.	Legal Proceedings		13
Item 4.	Submission of Matters to a Vote of Stockholders		14
Part II
Item 5.	Market for the Registrant's Common Equity, Related Stockholder Matters and
	Issuer Purchases of Equity Securities		15
Item 6.	Selected Financial Information		16
Item 7.	Management's Discussion and Analysis of Financial Condition and Results
	of Operations		18
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		40
Item 8.	Financial Statements and Supplementary Data		41
Item 9.	Changes In and Disagreements with Accountants on Accounting and
	Financial Disclosure		90
Item 9A.	Controls and Procedures		91
Item 9B.	Other Information		94
Part III
Item 10.	Directors and Executive Officers of the Registrant		95
Item 11.	Executive Compensation		96
Item 12.	Security Ownership of Certain Beneficial Owners and Management and
	Related Stockholder Matters		97
Item 13.	Certain Relationships and Related Transactions		98
Item 14.	Principal Accountant Fees and Services		99
Part IV
Item 15.	Exhibits and Financial Statement Schedules		100
	Signatures		105

PART I

Item 1. Business

The Company

Commercial Net Lease Realty, Inc., a Maryland corporation, is a fully integrated real estate investment trust (“REIT”) formed in 1984. The terms “Registrant” or “Company” refer to Commercial Net Lease Realty, Inc. and its majority owned and controlled subsidiaries. These subsidiaries include the wholly-owned qualified REIT subsidiaries of Commercial Net Lease Realty, Inc., as well as the taxable REIT subsidiary (“TRS”) Commercial Net Lease Realty Services, Inc. and its majority owned and controlled subsidiaries (collectively, “Services”). The Company holds a 98.7 percent, non-controlling interest in Services and is entitled to receive 98.7 percent of the dividends paid by Services. James M. Seneff, Jr., a director of the Company, Kevin B. Habicht, an officer and director of the Company, and Gary M. Ralston, a former officer and director of the Company, collectively own the remaining 1.3 percent interest, which is 100 percent of the voting interest in Services. Effective January 1, 2005, the Company acquired the remaining 1.3 percent voting interest in Services increasing the Company’s ownership in Services to 100 percent.

The Company’s executive offices are located at 450 S. Orange Avenue, Suite 900, Orlando, Florida 32801, and its telephone number is (800) NNN-REIT (666-7348). The Company has an internet website at www.nnnreit.com where the Company’s filings with the Securities and Exchange Commission can be downloaded free of charge.

The Company’s operations are divided into two primary business segments: real estate held for investment, including structured finance investments, and real estate held for sale. The real estate held for investment and structured finance investments (included in mortgages and notes receivable on the balance sheet) are operated through the Company and its wholly owned qualified REIT subsidiaries. The Company, directly and indirectly, through investment interests, acquires, owns, invests in, manages and develops primarily single-tenant retail properties that are generally leased to established tenants under long-term commercial net leases.

Properties

Real Estate Held for Investment

As of December 31, 2004, the Company owned 362 properties (the “Investment Properties”), with an aggregate gross leaseable area of 8,542,000 square feet, that are leased to established tenants, including Academy, Barnes & Noble, Best Buy, Borders, CVS, Eckerd, OfficeMax, The Sports Authority, United Rentals and the United States of America. Approximately 97 percent of the gross leaseable area of the Company’s portfolio of Investment Properties was leased at December 31, 2004.

The Investment Properties are generally leased under net leases pursuant to which the tenant typically will bear responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation. Certain of the Company’s Investment Properties are subject to leases under which the Company retains responsibility for certain costs and expenses associated with the Investment Property. The leases of each of the Company’s Investment Properties require payment of base rent plus, generally, either percentage rent based on the tenant’s gross sales or contractual increases in base rent.

During 2004, one of the Company’s tenants, the United States of America (the “USA”), accounted for more than 10 percent of the Company’s total rental income. As of December 31, 2004, the USA leased three properties. Based on the minimum rental payments required by the leases, we expect that the USA will continue to account for more than 10 percent of the Company’s total rental income in 2005. Any failure of this lessee to make the lease payments when they are due could materially affect the Company’s income.

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Structured Finance Investments

Structured finance agreements are typically loans secured by a pledge of ownership interests in the borrowers (or their subsidiaries) that own the underlying real estate. These agreements are typically subordinated to senior loans secured by first mortgages encumbering the underlying real estate. Subordinated positions are generally subject to a higher risk of nonpayment of principal and interest than the more senior loans. The Company has entered $50,290,000 structure finance agreements between October 2003 and December 2004. As of December 31, 2004, the structured finance agreements had an outstanding receivable balance of $29,390,000.

Real Estate Held for Sale

The Company’s real estate held for sale is operated through Services, which directly, and indirectly through investment interests, acquires and develops, real estate primarily for the purpose of selling the real estate to purchasers who are looking for replacement like-kind exchange property or to other purchasers with different investment objectives. As of December 31, 2004, Services owned 21 properties that were held for sale (“Inventory Properties”). The portfolio of Inventory Properties consists of properties that have been acquired in the marketplace with the intent to resell and properties that have been, or are currently being, developed by Services. As of December 31, 2004, the portfolio of Inventory Properties consisted of 10 completed inventory properties, seven properties under construction and four land parcels.

Investments in Consolidated Subsidiaries

As of December 31, 2004, the Company had 36 majority or wholly-owned subsidiaries primarily to facilitate the acquisition, development and disposition of certain properties. Some of the subsidiaries were formed to hold an interest in certain of the Company’s unconsolidated affiliates.

Investments in Unconsolidated Affiliates

The Company has entered into five limited liability company (“LLC”) agreements between June 2001 and July 2003, with Orange Avenue Mortgage Investments, Inc. (“OAMI”), formerly known as CNL Commercial Finance, Inc. Each of the LLCs holds an interest in mortgage loans and is 100 percent equity financed. The Company holds a non-voting and non-controlling interest in each of the LLCs ranging from 36.7 to 44.0 percent and accounts for its interests under the equity method of accounting. In 2003, in connection with a loan to OAMI, the Company pledged a portion of its interest in two of the LLCs as partial collateral for the loan.

In May 2002, the Company contributed cash to purchase a combined 25 percent partnership interest in CNL Plaza, Ltd. and CNL Plaza Venture, Ltd. (collectively, “Plaza”), which owns a 346,000 square foot office building and an interest in an adjacent parking garage. Affiliates of James M. Seneff, Jr. and Robert A. Bourne, each a member of the Company’s board of directors, own the remaining partnership interests. The Company accounts for its 25 percent interest in the Plaza under the equity method of accounting. Since November 1999, the Company has leased its office space from Plaza. The Company’s lease expires in October 2014. In addition, the Company has severally guaranteed 41.67% of a $15,500,000 promissory note on behalf of Plaza. The maximum obligation of the Company under this guarantee is $6,458,300 plus interest. Interest accrues at a rate of LIBOR plus 200 basis points per annum on the unpaid principal amount. This guarantee shall continue through the loan maturity, which was extended from the original maturity of November 2004 to May 2005. Plaza intends to refinance the promissory note in 2005.

In 1999, a wholly-owned subsidiary of Services entered into a limited liability membership arrangement, WXI/SMC Real Estate LLC (“WXI”), with Whitehall Street Real Estate Limited Partnership XI. Services’ subsidiary is the sole managing member and holds a 33 1/3 percent interest in WXI. WXI was organized for

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the purpose of owning, developing, redeveloping, operating, leasing and selling a portfolio of real estate. The Company accounts for its interest under the equity method of accounting.

In September 1997, Net Lease Realty III, Inc., a wholly-owned subsidiary of the Company, formed a limited partnership, Net Lease Institutional Realty L.P. (the “Partnership”), with The Northern Trust Company, Trustee of the Retirement Plan for the Chicago Transit Authority Employees (“CTA”) to acquire, own and manage nine properties. Net Lease Realty III, Inc. was the sole general partner with a 20 percent interest in the Partnership and CTA was the sole limited partner with an 80 percent interest in the Partnership. Under the terms of the limited partnership agreement of the Partnership, CTA had the right to convert its 80 percent limited partnership interest into shares of the Company’s common stock. In February 2004, CTA exercised its right to convert and the Company issued 953,551 shares of its common stock to CTA in a private transaction in exchange for CTA’s 80 percent limited partnership interest.

Merger

In December 2001, the Company acquired 100 percent of Captec Net Lease Realty, Inc. (“Captec”), a publicly traded real estate investment trust, which owned 135 freestanding, net lease properties located in 26 states. Captec shareholders had the right to receive $11,839,000 in cash, 4,349,918 newly issued shares of the Company’s common stock and 1,999,974 newly issued shares of the Company’s 9% Series A Preferred Stock. The merger was accounted for under the purchase method of accounting. Under the purchase method of accounting, the merger acquisition price of $124,722,000 was allocated to the assets acquired and liabilities assumed at their fair values. As a result, the Company did not record goodwill.

In January 2002, beneficial owners of shares of Captec stock held of record by Cede & Co. who alleged that they did not vote for the merger (and who alleged that they caused a written demand for appraisal of their Captec shares to be served on Captec), filed in the Chancery Court of the State of Delaware in and for New Castle County a Petition for Appraisal of Stock (“Appraisal Action”). The Appraisal Action alleged that 1,037,946 shares of Captec dissented from the merger and sought to require the Company to pay to all Captec stockholders who demanded appraisal of their shares the fair value of those shares, with interest from the date of the merger. As a result of this action, the plaintiffs were not entitled to receive the Company’s common and Series A Preferred Stock shares as offered in the original merger consideration. Accordingly, the Company reduced the number of common and Series A Preferred Stock shares issued and outstanding by 474,037 and 217,950, respectively, which represents the number of shares that would have been issued to the plaintiffs had they accepted the original merger consideration. In 2003, the Company further reduced the number of common and Series A Preferred Stock shares issued and outstanding by 824 and 379, respectively. In 2004, the Company further reduced the number of common and Series A Preferred Stock shares issued and outstanding by 51 and 56, respectively. As of December 31, 2002, the Company had recorded the value of these shares at the original consideration share price in addition to the cash portion of the original merger consideration as other liabilities totaling $13,278,000. In February 2003, the Company entered into a settlement agreement with the beneficial owners of the 1,037,946 dissenting shares (including the petitioners in the Appraisal Action) which required the Company to pay $15,569,000, which approximated the value of the original merger consideration (which included cash, common stock and Series A Preferred Stock shares) at the time of the litigation settlement plus the dividends that would have been paid if the shares had been issued at the time of the merger. On February 13, 2003, the parties filed a stipulation and order of dismissal and the Court entered the order of dismissal, dismissing the Appraisal Action with prejudice.

Anticipated Merger

In January 2005, the Company entered into an agreement with National Properties Corporation (“NAPE”), which provided that NAPE would merge with and into a subsidiary of the Company. At the time of the merger agreement, NAPE owned 43 properties located in 12 states which were leased to 17 tenants. If the acquisition is consummated, the Company will issue approximately 1,637,000 shares of common stock to holders of NAPE common stock. Total consideration for the merger transaction is estimated to be

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approximately $61,000,000 based on the Company’s closing stock price on the date of the merger agreement. Completion of the merger is subject to customary closing conditions, including the approval of the holders of a majority of the outstanding shares of NAPE common stock. The Company has entered into a shareholders’ agreement with the holders of approximately 53 percent of the outstanding NAPE common stock whereby these holders have agreed to vote in favor of the merger. However, the Company may terminate the merger agreement if a majority of the NAPE shareholders who are not bound by the shareholders’ agreement do not approve the merger. The merger does not require approval by the Company’s shareholders. The Company anticipates that the merger will be completed not later than the second quarter of 2005.

Competition

The Company generally competes with other REITs, commercial developers, real estate limited partnerships and other investors, including but not limited to, insurance companies, pension funds and financial institutions, in the acquisition, leasing, financing, development and disposition of investments in net-leased properties. There are numerous other REITs that own, manage or develop retail properties.

Employees

As of December 31, 2004, the Company employed 74 full-time persons including executive, administrative and field personnel. Reference is made to “Item 10. Directors and Executive Officers of the Registrant” for a listing of the Company’s Executive Officers.

Business Strategies and Policies

The following is a discussion of the Company’s operating strategy and certain of its investment, financing and other policies. These strategies and policies have been determined by the Board of Directors and, in general, may be amended or revised from time to time by the Board of Directors without a vote of the Company’s stockholders.

Operating Strategies

The Company’s strategy is to invest primarily in single-tenant retail properties which typically are located along high traffic commercial corridors near areas of commercial and residential density. Management believes that these types of properties when leased to high-quality tenants primarily pursuant to triple-net leases provide attractive opportunities for a stable current return and the potential for capital appreciation. Triple-net leases typically require the tenant to pay substantially all operating expenses of a property, including, but not limited to, all real estate taxes, assessments and other government charges, insurance, utilities, repairs and maintenance. In management’s view, these types of properties also provide the Company with flexibility in use and tenant selection when the properties are re-let. As of December 31, 2004, the Company owned Investment Properties in 38 states.

In some limited cases, the Company’s investment in properties is in the form of structured finance investments, which are typically loans secured by a pledge of ownership interests in the borrowers (or their subsidiaries) that own the underlying real estate. These agreements are typically subordinated to senior loans secured by first mortgages encumbering the underlying real estate. Subordinated positions are generally subject to a higher risk of nonpayment of principal and interest than the more senior loans. While not a Company strategy, in the past, the Company also has made opportunistic investments in single-tenant office properties.

With respect to real estate held for investment, the Company holds its properties until it determines that the sale of the properties is advantageous in view of the Company’s investment objectives. In deciding whether to sell properties, the Company will consider factors such as potential capital appreciation, net cash flow, potential use of sale proceeds and federal income tax considerations.

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With respect to real estate held for sale, Services’ strategy is to acquire and develop real estate directly and indirectly, through investment interests, primarily for the purpose of selling the real estate to purchasers who are looking for replacement like-kind exchange property, or to other purchasers with different investment objectives.

The Company’s management team focuses on certain key indicators to evaluate the financial condition and operating performance of the Company. The key indicators for the Company include items such as: the composition of the Company’s portfolio of investment properties and structured finance investments (such as tenant, geographic and industry classification diversification); the occupancy rate of the Company’s portfolio of investment properties; certain financial performance ratios and profitability measures; industry trends and performance compared to that of the Company and returns the Company receives on its invested capital in Services.

Investment in Real Estate or Interests in Real Estate

Management believes that attractive acquisition opportunities for single-tenant retail properties will continue to be available and that the Company is suited to take advantage of these opportunities because of its access to capital markets, ability to underwrite and acquire properties, either for cash or securities, and because of management’s experience in seeking out, identifying and evaluating potential acquisitions.

In evaluating a particular acquisition, management will consider a variety of factors, including (i) the location and accessibility of the property; (ii) the geographic area and demographic characteristics of the community, as well as the local real estate market, including potential for growth; (iii) the size of the property; (iv) the purchase price; (v) the non-financial terms of the proposed acquisition; (vi) the availability of funds or other consideration for the proposed acquisition and the cost thereof; (vii) the “fit” of the property with the Company’s existing portfolio; (viii) the potential for, and current extent of, any environmental problems; (ix) the quality of construction and design and the current physical condition of the property; (x) the financial and other characteristics of the existing tenant, (xi) the tenant’s business plan, operating history and management team, (xii) the tenant’s industry, (xiii) the terms of any existing leases; and (xiv) the potential for capital appreciation. As of December 31, 2004, the Company owned retail Investment Properties located in 38 states and on parcels of land averaging 117,000 square feet upon which are constructed single story buildings averaging 22,000 square feet. However, the Company may, in the future, acquire other types of real estate in other areas of the country as opportunities present themselves. While the Company may diversify in terms of property locations, size and market, the Company does not set any limit on the amount or percentage of Company assets that may be invested in any one property or any one geographic area.

The Company intends to engage in such future investment activities in a manner that is consistent with the maintenance of its status as a REIT for federal income tax purposes and that will not make the Company an investment company under the Investment Company Act of 1940, as amended. Equity investments in acquired properties may be subject to existing mortgage financings and other indebtedness or to new indebtedness which may be incurred in connection with acquiring or refinancing these investments.

Investments in Real Estate Mortgages and Securities of or Interests in Persons Engaged in Real Estate Activities

While the Company’s current portfolio of, and its business objectives primarily emphasize, equity investments in single-tenant retail properties, the Company may invest in (i) a wide variety of retail properties or other property and tenant types; (ii) mortgages, participating or convertible mortgages, deeds of trust and other types of real estate interests or (iii) securities of other REITs, other entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities, consistent with its qualification as a REIT. For example, the Company from time to time has made investments in mortgage loans or held mortgages on properties the Company sold and has made structured

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finance investments (as discussed above), which are typically loans secured by a pledge of ownership interests in the borrowers (or their subsidiaries) that own the underlying real estate.

Capital Policies

The Company has authority to offer equity or debt securities in exchange for property and to repurchase or otherwise acquire its common stock or other securities in the open market or otherwise, and may engage in such activities in the future. The Company has not engaged in trading, underwriting or agency distribution or sale of securities of other issues and does not intend to do so.

Policy Changes

Any of the Company’s policies described above may be changed at any time by the Company’s Board of Directors without a vote of the Company’s stockholders.

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Item 2. Properties

Investment Properties

As of December 31, 2004, the Company owned 362 Investment Properties, with an aggregate gross leaseable area of 8,542,000 square feet, located in 38 states, of which 97 percent of the gross leaseable area is leased to established retail and office tenants. Reference is made to the Schedule of Real Estate and Accumulated Depreciation and Amortization filed with this report for a listing of the Investment Properties and their respective carrying costs.

Description of Retail and Office Investment Properties

Retail Investment Properties

Land. The Company’s retail Investment Property sites range from approximately 15,000 to 774,000 (average of 117,000) square feet depending upon building size and local demographic factors. Land costs range from approximately $25,000 to $10,197,000 (average of $1,191,000).

Buildings. The buildings generally are single-story structures constructed from various combinations of stucco, steel, wood, brick and tile. Building sizes range from approximately 1,000 to 135,000 (average of 22,000) square feet. Building costs range from $44,000 to $9,211,000 (average of $1,706,000) for each retail Investment Property, depending upon the size of the building and the site and the area in which the Investment Property is located. Generally, the retail Investment Properties owned by the Company are freestanding, with paved parking areas.

Leases. Although there are variations in the specific terms of the leases, the following is a summarized description of the general structure of the Company’s leases. Generally, the leases of the retail Investment Properties owned by the Company provide for initial terms of 10 to 20 years. As of December 31, 2004, the weighted average remaining lease term was approximately 10 years. The retail Investment Properties are generally leased under net leases pursuant to which the tenant typically will bear responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation, including utilities, property taxes and insurance. In addition, the majority of the Company’s leases provide that the tenant is responsible for roof and structural repairs. The leases of the retail Investment Properties provide for annual base rental payments (payable in monthly installments) ranging from $12,000 to $1,635,000 (average of $272,000). Generally, the leases provide for either percentage rent or contractual increases in annual rent. Leases which provide for contractual increases in annual rent generally have increases which range from one to 10 percent after every one to five years of the lease term. In addition, for those leases which provide for the payment of percentage rent, such rent is generally one to eight percent of the tenants’ annual gross sales for the respective location, less the amount of annual base rent payable in that lease year. As of December 31, 2004, 83 percent of the Company’s annualized base rent was derived from retail Investment Properties. Based on the aggregate annual base rent of the retail Investment Property leases, (i) 55 percent include contractual increases, (ii) eight percent include percentage rent provisions and (iii) 13 percent include both contractual and percentage rent provisions.

Generally, the leases of the retail Investment Properties provide the tenant with one or more multi-year renewal options subject to generally the same terms and conditions as the initial lease. Some of the leases also provide that in the event the Company wishes to sell the Investment Property subject to that lease, the Company first must offer the lessee the right to purchase the Investment Property on the same terms and conditions as any offer which the Company intends to accept for the sale of the Investment Property.

Certain of the Company’s Investment Properties have leases that provide the tenant with a purchase option to acquire the Investment Property from the Company. The purchase price calculations are generally stated in the lease agreement or are based on current market value.

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Office Investment Properties

As of December 31, 2004, the Company’s portfolio of Investment Properties included four office properties with an aggregate gross leaseable area of 687,000 square feet. These office Investment Properties represent 17 percent of the current annual base rent of the entire portfolio of Investment Properties.

In August 2003, the Company acquired two office buildings and a related parking garage in the Washington, D.C. metropolitan area (“DC Office Properties”), for $142,800,000. In addition, the Company has agreed to fund an additional $27,322,000 for building and tenant improvements, and other costs related to the lease. As of December 31, 2004, the Company had funded $23,850,000 of these improvements. The DC Office Properties include two office buildings which have an aggregate of 555,000 rentable square feet and a two-level garage with approximately 1,000 parking spaces. The DC Office Properties are leased substantially to the USA to be used as the headquarters of the Transportation Security Administration. The lease was executed in December 2002 and the USA began occupying space in the buildings in phases beginning in January 2003. The lease will expire in 2014. The USA executed a lease (per which the landlord pays certain property related operating costs), that commenced for a portion of the properties in December 2002. Annual rent for the DC Office Properties is approximately $18,473,000. The USA is responsible for the actual amount of real estate taxes above the base year amount and increases in operating expenses above an expected base year amount, subject to a consumer price index cap. As landlord, the Company is responsible for property insurance.

During 2004, the USA was the Company’s only tenant that accounted for more than 10 percent of the Company’s total rental income. As of December 31, 2004, the USA leased three properties representing 12 percent of the Company’s total assets.

In May 2004, the Company acquired an office building in St. Louis, Missouri for $15,596,000, with 132,000 rentable square feet. The lease was executed in January 2004, with rent commencement in July 2004 and will expire in January 2015. The tenant is responsible for the actual amount of real estate taxes and operating expenses from rent commencement date.

Structured Finance Investments

Notes Receivable. Structured finance agreements are typically loans secured by a pledge of ownership interests in the borrowers (or their subsidiaries) that own the underlying real estate. These agreements are typically subordinated to senior loans secured by first mortgages encumbering the underlying real estate. Subordinated positions are generally subject to a higher risk of nonpayment of principal and interest than the more senior loans.

In 2004 and 2003, the Company made structured finance investments of $6,857,000 and $43,433,000, respectively. As of December 31, 2004, the structured finance investments bear a weighted average interest rate of 14.3% per annum, of which 12.5% is payable monthly and the remaining 1.8% accrues and is due at maturity. The principal balance of each structured finance investment is due in full at maturity, which range between November 2006 and November 2007. The structured finance investments are secured by the borrowers’ pledge of their respective membership interests in the certain subsidiaries which own real estate. In December 2004, the Company received $20,900,000 in principal payments and a $418,000 prepayment fee. As of December 31, 2004 and 2003, the outstanding receivable balance of the structured finance investments was $29,390,000 and $43,433,000, respectively.

In January 2005, the Company received $3,935,000 in principal payments; the outstanding receivable balance of the remaining structured finance agreements was $25,455,000 with a weighted average interest rate of 11.8% per annum.

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Inventory Properties

The portfolio of Inventory Properties may consist of properties that have been acquired with the intent to resell and properties that have been, or are currently being, developed by Services. The Company’s Inventory Properties are typically sold to purchasers who are looking for replacement like-kind exchange property or to other purchasers with different investment objectives. As of December 31, 2004, the Company owned 21 Inventory Properties which include 10 completed inventory properties, seven properties under construction and four land parcels. Reference is made to the Schedule of Real Estate and Accumulated Depreciation and Amortization filed with this report for a listing of the Inventory Properties and their respective carrying costs.

Completed Inventory Properties. The completed Inventory Properties held for sale at December 31, 2004 had sites range from approximately 35,000 to 511,000 (average of 129,000) square feet depending upon building size and local demographic factors. Land costs range from approximately $77,000 to $5,454,000 (average of $1,645,000).

The buildings generally are single-story structures ranging in size from approximately 8,000 to 52,000 (average of 16,000) square feet. Building costs range from $309,000 to $8,779,000 (average of $2,226,000) for each Inventory Property, depending upon the size of the building and the site and the area in which the Inventory Property is located.

Under Construction. In connection with the development of seven Inventory Properties by Services, the Company has agreed to fund construction commitments of $26,409,000, of which $12,248,000 has been funded as of December 31, 2004.

Property Environmental Considerations

The Company may acquire a property whose environmental site assessment indicates that a contamination or potential contamination exists, subject to a determination of the level of risk and potential cost of remediation. 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 the Company’s policy, as a part of its acquisition due diligence process, generally to obtain a Phase I environmental site assessment for each property, and where warranted, a Phase II environmental site assessment. In such cases, the Company generally requires the seller and/or tenant to (i) remediate the problem prior to the Company’s acquiring the property, (ii) indemnify the Company for environmental liabilities or (iii) agree to other arrangements deemed appropriate by the Company to address environmental conditions at the property. 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. The Company has 12 properties currently under some level of environmental remediation. In general, the seller or the tenant is contractually responsible for the cost of the environmental remediation for each of these properties.

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Item 3. Legal Proceedings

In January 2002, Calapasas Investment Partnership No. 1 Limited Partnership (“Calapasas”), a Captec stockholder, filed a class action complaint against Captec, certain former Captec directors, and the Company (as successor in interest to Captec). In its complaint Calapasas alleged that Captec and certain of its directors violated provisions of the Securities and Exchange Act of 1934 by misrepresenting the value of certain Captec assets on certain of its financial statements in 2000 and 2001. In July 2004, the parties entered into a Stipulation of Settlement which was filed with the court. Pursuant to the Stipulation of Settlement, the total settlement amount paid to the plaintiffs was $225,000, which included payment of attorneys’ fees and costs to plaintiffs’ counsel. In July 2004, a final judgment of dismissal was entered by the court.

In the ordinary course of its business, the Company is a party to various other legal actions which management believes is routine in nature and incidental to the operation of the business of the Company. Management believes that the outcome of the proceedings will not have a material adverse effect upon its operations, financial condition or liquidity.

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

None.

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PART II

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

The common stock of the Company currently is traded on the New York Stock Exchange (“NYSE”) under the symbol “NNN.” For each calendar quarter indicated, the following table reflects respective high, low and closing sales prices for the common stock as quoted by the NYSE and the dividends paid per share in each such period.

	First		Second		Third		Fourth
2004	Quarter		Quarter		Quarter		Quarter		Year
High	$	19.750	$	20.080	$	18.340	$	21.250	$	21.250
Low		17.530		14.800		16.400		18.210		14.800
Close		19.750		17.200		18.220		20.600		20.600
Dividends paid per share		0.320		0.320		0.325		0.325		1.290
2003
High	$	15.840	$	17.440	$	18.380	$	18.000	$	18.380
Low		14.350		15.100		16.000		17.040		14.350
Close		15.100		17.240		17.030		17.800		17.800
Dividends paid per share		0.320		0.320		0.320		0.320		1.280

The following presents the characterizations for tax purposes of such common stock dividends for the years ended December 31:

	2004		2003
Ordinary income		70.99%		75.71%
Capital gain		3.13%		-
Qualified 5-year gain		-		0.37%
Unrecaptured Section 1250 gain		3.21%		2.88%
Nontaxable distribution		22.67%		21.04%
		100.00%		100.00%

In February 2005, the Company paid dividends to its stockholders of $16,925,000, or $0.325 per share of common stock.

The Company intends to pay regular quarterly dividends to its stockholders. Future distributions will be declared and paid at the discretion of the board of directors and will depend upon cash generated by operating activities, the Company’s financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986 as amended, and such other factors as the board of directors deems relevant.

On February 28, 2005, there were 1,185 stockholders of record of common stock.

Reference is made to the Registrant’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14(a); certain information responsive to this Item is contained in the section thereof captioned “Executive Compensation – Equity Compensation Plan Information,” and the information in such section is incorporated herein by reference.

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Item 6. Selected Financial Data

Historical Financial Highlights
(dollars in thousands, except per share data)

	2004			2003			2002			2001			2000
Gross revenues(1)	$	157,277		$	124,248		$	109,812		$	85,554		$	83,495
Earnings from continuing operations before cumulative effect of change in accounting principle		50,624			42,866			34,431			24,372			34,778
Net earnings		64,934			53,473			48,058			28,963			38,251
Total assets		1,300,048			1,213,778			958,300			1,010,009			769,295
Total debt		524,241			467,419			386,912			435,333			360,381
Total equity		756,998			730,754			549,141			564,640			393,901
Cash dividends paid to:
Common stockholders		66,272			55,473			51,178			38,637			37,760
Series A Preferred Stock stockholders		4,008			4,008			4,010			-			-
Series B Convertible Preferred Stock stockholders		1,675			502			-			-			-
Weighted average common shares:
Basic		51,312,434			43,108,213			40,383,405			31,539,857			30,387,371
Diluted		51,742,518			43,896,800			40,588,957			31,717,043			30,407,507
Per share information:
Earnings from continuing operations before cumulative effect of change in accounting principle:
Basic		0.870			0.890			0.750			0.770			1.140
Diluted		0.870			0.890			0.750			0.770			1.140
Net earnings:
Basic		1.150			1.140			1.090			0.920			1.260
Diluted		1.150			1.130			1.090			0.910			1.260
Dividends paid to:
Common stockholders		1.290			1.280			1.270			1.260			1.245
Series A Preferred Stock stockholders		2.250			2.250			2.250			-			-
Series B Convertible Preferred Stock stockholders		167.500			50.250			-			-			-
Other data:
Cash flows provided by (used in):
Operating activities		74,792			48,531			111,589			112,267			14,551
Investing activities		(58,955	)		(251,186	)		(15,142	)		(2,700	)		17,195
Financing activities		(19,225	)		205,965			(101,654	)		(8,878	)		(28,929	)
Funds from operations – diluted(2)		73,065			61,749			54,595			32,034			42,061

(1)

Gross revenues include revenues from the Company’s continuing and discontinued operations. The Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and broadens the presentation of discontinued operations in the income statement to include a component of an entity. Accordingly, the results of operations related to these certain properties that have been classified as held for sale or have been disposed of subsequent to December 31, 2001, the effective date of SFAS No. 144, have been reclassified as earnings from discontinued operations.

(2)

Funds from Operations, commonly referred to as FFO, is a relative non-GAAP financial measure of operating performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. FFO is defined by the National Association of Real Estate Investment Trusts and is used by the Company as follows: net earnings (computed in accordance with GAAP) plus depreciation and amortization of assets unique to the real estate industry, excluding gains (or including losses) on the disposition of real estate held for investment, and the Company’s share of these items from the Company’s unconsolidated partnerships.

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FFO is generally considered by industry analysts to be the most appropriate measure of operating performance of real estate companies. FFO does not necessarily represent cash provided by operating activities in accordance with GAAP and should not be considered an alternative to net income as an indication of the Company’s operating performance or to cash flow as a measure of liquidity or ability to make distributions. Management considers FFO an appropriate measure of operating performance of an equity REIT because it primarily excludes the assumption that the value of the real estate assets diminishes predictably over time, and because industry analysts have accepted it as an operating performance measure. The Company’s computation of FFO may differ from the methodology for calculating FFO used by other equity REITs, and therefore, may not be comparable to such other REITs.

The Company has earnings from discontinued operations in each of its segments, real estate held for investment and real estate held for sale. All property dispositions from the Company’s held for investment segment are classified as discontinued operations. In addition, certain properties in the Company’s held for sale segment that have generated revenues before disposition are classified as discontinued operations. These held for sale properties have not historically been classified as discontinued operations, therefore, prior period comparable consolidated financial statements have been restated to include these properties in its earnings from discontinued operations. These adjustments resulted in a decrease in the Company’s reported total revenues and total and per share earnings from continuing operations and an increase in the Company’s earnings from discontinued operations. However, the Company’s total and per share net earnings available to common stockholders are not affected.

The following table reconciles FFO to their most directly comparable GAAP measure, net earnings for the years ended December 31:

	2004			2003			2002			2001			2000
Reconciliation of funds from operations:
Net earnings	$	64,934		$	53,473		$	48,058		$	28,963		$	38,251
Real estate, held for investment depreciation and amortization:
Continuing operations		15,459			11,290			9,259			7,051			7,354
Discontinued operations		256			582			1,069			605			484
Partnership real estate depreciation		622			699			479			63			63
Gain on disposition of real estate held for investment		(2,523	)		(287	)		(260	)		(4,648	)		(4,091	)
FFO		78,748			65,757			58,605			32,034			42,061
Series A Preferred Stock dividends		(4,008	)		(4,008	)		(4,010	)		-			-
Series B Convertible Preferred Stock dividends		(1,675	)		(502	)		-			-			-
FFO available to common stockholders – basic		73,065			61,247			54,595			32,034			42,061
Series B Convertible Preferred Stock dividends		-			502			-			-			-
FFO available to common stockholders – diluted	$	73,065		$	61,749		$	54,595		$	32,034		$	42,061

For a discussion of material events affecting the comparability of the information reflected in the selected financial data, refer to the Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

This information contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements generally are characterized by the use of terms such as “believe,” “expect” and “may.” The terms “Registrant” or “Company” refer to Commercial Net Lease Realty, Inc. and its majority owned and controlled subsidiaries. These subsidiaries include the wholly-owned qualified real estate investment trust (“REIT”) subsidiaries of Commercial Net Lease Realty, Inc., as well as the taxable REIT subsidiary (“TRS”) Commercial Net Lease Realty Services, Inc. and its majority owned and controlled subsidiaries (collectively, “Services”).

Although management believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company’s actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause a difference include the following:

•   the ability of tenants to make payments under their respective leases, including the Company’s reliance on certain major tenants and the ability of the Company to re-lease properties that are currently vacant or that become vacant;

•   the ability of the Company to locate suitable tenants for its properties; changes in real estate market conditions; changes in general economic conditions;

•   the ability of the Company to repay debt financing obligations;

•   the ability of the Company to refinance amounts outstanding under its credit facilities at maturity on terms favorable to the Company;

•   continued availability of proceeds from the Company’s debt or equity capital;

•   the ability of the Company to maintain internal controls and processes to ensure all transactions are accounted for properly, all relevant disclosures and filings are timely made in accordance with all rules and regulations, and any potential fraud or embezzlement is thwarted or detected;

•   the availability of other debt and equity financing alternatives; market conditions affecting the Company’s equity capital;

•   ability to sell properties at an attractive return;

•   changes in interest rates under the Company’s current credit facilities and under any additional variable rate debt arrangements that the Company may enter into in the future;

•   the ability of the Company to be in compliance with certain debt covenants; the inherent risks associated with owning real estate (including: local real estate market conditions, governing laws and regulations and illiquidity of real estate investments);

•   the ability of the Company to integrate office properties into existing operations that historically have been primarily focused on retail properties;

•   the loss of any member of the Company’s management team;

•   the ability of the Company to successfully implement its selective acquisition strategy or fully realize the anticipated benefits of renovation or development projects;

•   the ability of the Company to integrate acquired properties and operations into existing operations;

•   recent changes in tax legislation provide favorable treatment for dividends for regular companies, but not generally dividends from real estate investment trusts; and

•   the ability of the Company to qualify as a real estate investment trust for federal income tax purposes.

Given these uncertainties, readers are cautioned not to place undue reliance on such statements. Management of the Company currently knows of no trends that will have a material adverse effect on its liquidity, capital resources or results of operations.

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Overview

Commercial Net Lease Realty, Inc., a Maryland corporation, is a fully integrated REIT formed in 1984. All prior period comparable consolidated financial statements have been derived from the audited consolidated financial statements and have been restated to include the consolidated financial information of Services. Effective January 1, 2004, Services is included in the consolidated financial statements due to the Company’s implementation of Financial Accounting Standards Board (“FASB”) Interpretation No. 46, “Consolidation of Variable Interest Entities,” as amended (“FIN 46R”). The Company holds a 98.7 percent, non-controlling interest in Services and is entitled to receive 98.7 percent of the dividends paid by Services. James M. Seneff, Jr., a director of the Company, Kevin B. Habicht, an officer and director of the Company, and Gary M. Ralston, a former officer and director of the Company, collectively own the remaining 1.3 percent interest, which is 100 percent of the voting interest in Services. Effective January 1, 2005, the Company acquired the remaining 1.3 percent voting interest in Services increasing the Company’s ownership in Services to 100 percent.

The Company’s operations are divided into two primary business segments: real estate held for investment, including structured finance investments, and real estate held for sale. The real estate held for investment (the “Investment Properties”) and structured finance investments (included in mortgages and notes receivable on the balance sheet), are operated through Commercial Net Lease Realty, Inc. and its wholly owned qualified REIT subsidiaries. The Company, directly and indirectly, through investment interests, acquires, owns, invests in, manages and develops primarily single-tenant retail properties that are generally leased to established tenants under long-term commercial net leases. As of December 31, 2004, the Company owned 362 Investment Properties, with an aggregate gross leaseable area of 8,542,000 square feet, located in 38 states and leased to established tenants, including Academy, Barnes & Noble, Best Buy, Borders, CVS, Eckerd, OfficeMax, The Sports Authority, United Rentals and the United States of America. In addition to the Investment Properties, as of December 31, 2004, the Company had $29,390,000 in structured finance investments. The real estate held for sale is operated through Services. Services, directly and indirectly, through investment interests, acquires and develops real estate primarily for the purpose of selling the real estate to purchasers who are looking for replacement like-kind exchange property or to other purchasers with different investment objectives. As of December 31, 2004, Services owned 21 properties that were held for sale (“Inventory Properties”).

The Company’s management team focuses on certain key indicators to evaluate the financial condition and operating performance of the Company. The key indicators for the Company include items such as: the composition of the Company’s portfolio of Investment Properties and structured finance investments (such as tenant, geographic and industry classification diversification); the occupancy rate of the Company’s portfolio of Investment Properties; certain financial performance ratios and profitability measures; and industry trends and performance compared to that of the Company; and returns the Company receives on its invested capital in Services.

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Liquidity

General. Historically, the Company’s demand for funds has been primarily for (i) payment of operating expenses and dividends, (ii) property acquisitions, structured finance investments, capital expenditures and development, either directly or through investment interests, (iii) payment of principal and interest on its outstanding indebtedness and (iv) other investments.

Contractual Obligations and Commercial Commitments. The information in the following table summarizes the Company’s contractual obligations and commercial commitments outstanding as of December 31, 2004. The table presents principal cash flows by year-end of the expected maturity for debt obligations and commercial commitments outstanding as of December 31, 2004. As the table incorporates only those exposures that exist as of December 31, 2004, it does not consider those exposures or positions which may arise after that date.

	Expected Maturity Date
	(dollars in thousands)
	Total		2005		2006		2007		2008		2009		Thereafter
Long-term debt(1)	$	521,109	$	4,070	$	40,276	$	8,776	$	101,156	$	964	$	365,867
Operating lease		13,095		1,165		1,200		1,236		1,273		1,311		6,910
Total contractual cash obligations(2)	$	534,204	$	5,235	$	41,476	$	10,012	$	102,429	$	2,275	$	372,777

 

(1)	Includes amounts outstanding under the revolving credit facility, mortgages and notes payable and financing lease obligation and excludes unamortized note discounts and unamortized interest rate hedge gain. Excludes $4,334,000 of accrued interest payable due in 2005.
(2)	As of December 31, 2004, the Company does not have any other contractual cash obligations, such as purchase obligations, financing lease obligations or other long-term liabilities other than those reflected in the table. In addition to items reflected in the table, the Company has two series of preferred stock with cumulative preferential cash distributions (see “Liquidity – Dividends”).

Management anticipates satisfying these obligations with a combination of the Company’s current capital resources, cash on hand, its revolving credit facility and debt or equity financings.

In addition to the contractual obligations outlined in the above table, in connection with its acquisition of two office buildings and a related parking garage located in the Washington, D.C. metropolitan area (“DC Office Properties”) in August 2003, the Company has agreed to fund $27,322,000 for building and tenant improvements, of which $23,850,000 had been funded as of December 31, 2004. The Company anticipates funding the additional costs from borrowings under the Company’s revolving credit facility, which is anticipated to be substantially complete by June 30, 2005.

In connection with the development of seven Inventory Properties by Services, the Company has agreed to fund construction commitments of $26,409,000, of which $12,248,000 has been funded as of December 31, 2004. The Company anticipates funding the additional costs from borrowings under the Company’s revolving credit facility.

The Company has also guaranteed 41.67 percent of a $15,500,000 promissory note on behalf of an unconsolidated affiliate. The maximum obligation to the Company is $6,458,000 plus interest, and the guarantee shall continue through the loan maturity, which was extended from the original maturity of November 2004 to May 2005. In the event the Company is required to perform under this guarantee, the Company would potentially use proceeds from its revolving credit facility.

Many of the Investment Properties are recently constructed and are generally net leased, therefore management anticipates that capital demands to meet obligations with respect to these Properties will be modest for the foreseeable future and can be met with funds from operations and working capital. The 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

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insurance. In addition, the Company’s leases generally provide that the tenant is responsible for roof and structural repairs. Certain of the Company’s Investment Properties, including the DC Office Properties, are subject to leases under which the Company retains responsibility for certain costs and expenses associated with the Investment Property. Management anticipates the costs associated with the Company’s vacant Investment Properties or those Investment Properties that become vacant will also be met with funds from operations and working capital. The Company may be required to borrow under the Company’s revolving credit facility or use other sources of capital in the event of unforeseen significant capital expenditures.

The lost revenues and increased property expenses resulting from the rejection by any bankrupt tenant of any of their respective leases with the Company could have a material adverse effect on the liquidity and results of operations of the Company if the Company is unable to re-lease the Investment Properties at comparable rental rates and in a timely manner. As of January 31, 2005, the Company owns 10 vacant, unleased Investment Properties, which account for approximately three percent of the total gross leaseable area of the Company’s portfolio of Investment Properties.

Dividends. The Company has made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations. The Company generally will not be subject to federal income tax on income that it distributes to its stockholders, providing it distributes at least 90 percent of its REIT taxable income and meets certain other requirements for qualifying as a REIT. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost. Such an event could materially affect the Company’s income and its ability to pay dividends. However, the Company believes that it was organized and operated in such a manner as to qualify for treatment as a REIT for the years ended December 31, 2004, 2003 and 2002, and intends to continue to operate the Company so as to remain qualified as a REIT for federal income tax purposes.

One of the Company’s primary objectives, consistent with its policy of retaining sufficient cash for reserves and working capital purposes and maintaining its status as a REIT, is to distribute a substantial portion of its funds available from operations to its stockholders in the form of dividends. During the years ended December 31, 2004, 2003 and 2002, the Company declared and paid dividends to its common stockholders of $66,272,000, $55,473,000 and $51,178,000 respectively, or $1.29, $1.28 and $1.27 per share, respectively, of common stock.

The following presents the characterizations for tax purposes of such common stock dividends for the years ended December 31:

	2004		2003		2002
Ordinary income		70.99%		75.71%		92.41%
Capital gain		3.13%		-		0.47%
Qualified 5-year Gain		-		0.37%		-
Unrecaptured Section 1250 gain		3.21%		2.88%		0.41%
Nontaxable distributions		22.67%		21.04%		6.71%
		100.00%		100.00%		100.00%

In February 2005, the Company paid dividends to its common stockholders of $16,925,000, or $0.325 per share of stock.

Holders of the 9% Non-Voting Series A Preferred Stock (the “Series A Preferred Stock”) are entitled to receive, when and as authorized by the board of directors, cumulative preferential cash distributions at the rate of nine percent of the $25.00 liquidation preference per annum (equivalent to a fixed annual amount of $2.25 per share). For the years ended December 31, 2004, 2003 and 2002, the Company declared and

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paid dividends to its Series A Preferred Stock stockholders of $4,008,000, $4,008,000 and $4,010,000, respectively, or $2.25 per share of stock.

In February 2005, the Company declared dividends of $1,002,000 or $0.5625 per share of Series A Preferred Stock, payable in March 2005.

Holders of the 6.70% Non-Voting Series B Preferred Cumulative Convertible Perpetual Preferred Stock (the “Series B Convertible Preferred Stock”), issued during 2003, are entitled to receive, when and as authorized by the board of directors, cumulative preferential cash distributions at the rate of 6.70 percent of the $2,500.00 liquidation preference per annum (equivalent to a fixed annual amount of $167.50 per share). For the years ended December 31, 2004 and 2003, the Company declared and paid dividends to its Series B Convertible Preferred Stock stockholders of $1,675,000 and $502,000, respectively, or $167.50 and $50.25 per share of stock.

In February 2005, the Company declared dividends of $419,000 or $41.875 per share of Series B Convertible Preferred Stock, payable in March 2005.

Property Environmental Considerations. The Company may acquire a property whose environmental site assessment indicates that a contamination or potential contamination exists, subject to a determination of the level of risk and potential cost of remediation. 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 the Company’s policy, as a part of its acquisition due diligence process, generally to obtain a Phase I environmental site assessment for each property and, where warranted, a Phase II environmental site assessment. In such cases that the Company intends to acquire real estate where contamination or potential contamination exists, the Company generally requires the seller and/or tenant to (i) remediate the problem prior to the Company’s acquiring the property, (ii) indemnify the Company for environmental liabilities or (iii) agree to other arrangements deemed appropriate by the Company to address environmental conditions at the property. 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. The Company has 12 Investment Properties currently under some level of environmental remediation. In general, the seller or the tenant is contractually responsible for the cost of the environmental remediation for each of these Investment Properties.

Capital Resources

Generally, cash needs for property acquisitions, structured finance investments, capital expenditures, development and other investments have been funded by equity and debt offerings, bank borrowings, the sale of properties and, to a lesser extent, from internally generated funds. Cash needs for other items have been met from operations. Potential future sources of capital include proceeds from the public or private offering of the Company’s debt or equity securities, secured or unsecured borrowings from banks or other lenders, proceeds from the sale of properties, as well as undistributed funds from operations. For the years ended December 31, 2004, 2003, and 2002, the company generated $74,792,000, $48,531,000 and $111,589,000 respectively, of net cash from operating activities. The change in cash provided by operations for the years ended December 31, 2004, 2003 and 2002, is primarily the result of changes in revenues and expenses as discussed in “Results of Operations.” Cash generated from operations could be expected to fluctuate in the future.

Indebtedness. The Company expects to use indebtedness primarily for property acquisitions and development of single-tenant retail and office properties, either directly or through investment interests and structured finance investments.

In May 2003, the Company entered into an amended and restated loan agreement for a $225,000,000 revolving credit facility (the “Credit Facility”) which amended the Company’s existing loan agreement by

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(i) increasing the borrowing capacity to $225,000,000 from $200,000,000, (ii) lowering the interest rates of the tiered rate structure from a maximum of 150 points above LIBOR to a maximum rate of 135 basis points above LIBOR (based upon the debt rating of the Company, the current interest rate is 100 basis points above LIBOR), (iii) requiring the Company to pay a commitment fee based on a tiered rate structure to a maximum of 30 basis points per annum (based upon the debt rating of the Company), (iv) providing for a competitive bid option for up to 50 percent of the facility amount, (v) extending the expiration date to May 9, 2006 and (vi) amending certain of the financial covenants of the Company. The principal balance is due in full upon expiration of the Credit Facility in May 2006, which the Company may request to be extended for an additional 12-month period with the consent of the lender. As of December 31, 2004, $17,900,000 was outstanding and approximately $207,100,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit.

In accordance with the terms of the Credit Facility, the Company is required to meet certain restrictive financial covenants, which, among other things, require the Company to maintain certain (i) maximum leverage ratios, (ii) debt service coverage and (iii) cash flow coverage. At December 31, 2004, the Company was in compliance with those covenants. In the event that the Company violates any of the certain restrictive financial covenants, its access to the debt or equity markets may become impaired.

In November 2003, the Company entered into a long-term, fixed rate interest-only loan for $95,000,000. The loan bears interest at a rate of 5.42% per annum with monthly interest payments of $435,000 and the principal balance due in November 2013. Proceeds from the loan were used to pay down outstanding indebtedness of the Company’s Credit Facility. The loan is secured by a first mortgage lien on the DC Office Properties. As of December 31, 2004, the outstanding principal balance was $95,000,000, and the aggregate carrying value of these properties totaled $155,601,000.

In January 1996, the Company entered into a long-term, fixed rate loan for $39,450,000. The loan bears interest at a rate of 7.435% per annum and provides for a ten-year term with monthly principal and interest payments of $330,000 and the balance due in February 2006. The loan is secured by a first mortgage lien on certain of the Company’s Investment Properties. As of December 31, 2004, the outstanding principal balance was $22,466,000, and the aggregate carrying value of these Investment Properties totaled $58,049,000.

In February 2004, the Company increased its ownership in Net Lease Institutional Realty, L.P. to 100 percent (see Capital Resources – Investments in Unconsolidated Affiliates). In October 1997, the partnership entered into a long-term, fixed rated loan for $12,000,000. The loan bears interest at a rate of 7.37% per annum with monthly principal and interest payments of $103,000 and the principal balance due in September 2007. The loan is secured by a first mortgage lien on certain of the partnership’s properties. As of December 31, 2004, the outstanding principal balance was $8,606,000, and the aggregate carrying value of these Investment Properties totaled $28,893,000.

In June 2002, the Company entered into a long-term, fixed rate loan for $21,000,000. The loan bears interest at a rate of 6.9% per annum and provides for a 10-year term, with monthly principal and interest payments of $138,000 and the balance due in July 2012. Proceeds from the loan were used to pay down outstanding indebtedness of the Company’s Credit Facility. The loan is secured by a first mortgage lien on five of the Company’s Investment Properties. As of December 31, 2004, the outstanding principal balance was $20,508,000, and the aggregate carrying value of these Investment Properties totaled $27,111,000.

In February 2004, the Company acquired an Investment Property subject to a mortgage securing a loan for $6,952,000. The loan bears interest at a rate of 6.90% per annum with monthly principal and interest payments of $68,000 and the balance due in January 2016. As of December 31, 2004, the aggregate carrying value of this Investment Property was $12,358,000. The outstanding principal balance as of December 31, 2004, was $6,665,000.

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The Company has acquired four Investment Properties subject to mortgages securing loans in the aggregate original principal balance of $7,214,000 (collectively the “Mortgages”) with the maturities between December 2007 and December 2009. In December 2004, the Company sold one of the properties and the related mortgage was simultaneously paid, which accounted for $2,455,000 of the original principal balance. The remaining Mortgages bear interest at a weighted average rate of 8.45% per annum and have a weighted average remaining maturity of 2.4 years, with an aggregate monthly payment of principal and interest of $60,000. In addition to the Mortgages, the company has letters of credit that also secure two of the loans, which collectively total $2,426,000. As of December 31, 2004, the outstanding principal balances secured by the Mortgages totaled $2,189,000, and the aggregate carrying value of the three Investment Properties and letters of credit totaled $10,751,000.

In July 2002, Services entered into a long-term, fixed rate loan for $2,340,000. The loan bore interest at a rate of 7.42% per annum with monthly principal and interest payments of $18,000 and the principal balance due in July 2012. The loan was secured by a first mortgage lien on one of Services’ properties. In August 2004, the Company disposed of the property, at which time the buyer assumed the loan.

Payments of principal on the mortgage debt and on advances outstanding under the Credit Facility are expected to be met from borrowings under the Credit Facility, proceeds from public or private offerings of the Company’s debt or equity securities, the Company’s secured or unsecured borrowings from banks or other lenders or proceeds from the sale of one or more of its properties.

Debt and Equity Securities. The Company has used, and expects to use in the future, issuances of debt and equity securities primarily to pay down its outstanding indebtedness and to finance investment acquisitions. The Company has maintained investment grade debt ratings from Standard and Poor’s, Moody’s Investor Service and Fitch IBCA on its senior, unsecured debt since 1998. In May 2003, the Company filed a shelf registration statement with the Securities and Exchange Commission, which permits the issuance by the Company of up to $600,000,000 in debt and equity securities; as of December 31, 2004, the Company had $259,167,000 available for issuance under this shelf registration statement.

The Company filed a prospectus supplement to its shelf registration for each issuance of notes outlined in the table below (dollars in thousands).

														Commencement
						Discounted								Day of Semi-
		Purchase				Purchase		Stated			Effective			Annual Interest	Maturity
	Issue Date	Price		Discount(3)		Price		Rate			Rate(4)			Payments	Date
2008 Notes(1)	March 1998	$	100,000	$	271	$	99,729		7.125	%		7.163	%	September 1998	March 2008
2004 Notes(1)(5)	June 1999		100,000		392		99,608		8.125	%		7.547	%	December 1999	June 2004
2010 Notes(1)	September 2000		20,000		126		19,874		8.500	%		8.595	%	March 2001	September 2010
2012 Notes(1)	June 2002		50,000		287		49,713		7.750	%		7.833	%	December 2002	June 2012
2014 Notes(1)(2)(6)	June 2004		150,000		440		149,560		6.250	%		5.910	%	June 2004	June 2014

 

(1)	The proceeds from the note issuance were used to pay down outstanding indebtedness of the Company’s Credit Facility.
(2)	The proceeds from the note issuance were used to repay the obligation of the 2004 Notes.
(3)	The note discounts are amortized to interest expense over the respective term of each debt obligation using the effective interest method.
(4)	Includes the effects of the discount, treasury lock gain and swap gain (as applicable).
(5)	The Company entered into a treasury rate lock agreement which fixed a treasury rate of 5.1854% on a notional amount of $92,000,000. Upon issuance of the 2004 Notes, the Company terminated the treasury rate lock agreement resulting in a gain of $2,679,000. The gain was deferred and amortized as an adjustment to interest expense over the term of the 2004 Notes using the effective interest method.
(6)	The Company entered into a forward starting interest rate swap agreement which fixed a swap rate of 4.61% on a notional amount of $94,000,000. Upon issuance of the 2014 Notes, the Company terminated the forward starting interest rate swap agreement resulting in a gain of $4,148,000. The gain has been deferred and is being amortized as an adjustment to interest expense over the term of the 2014 Notes using the effective interest method.

Each issuance of notes is redeemable at the option of the Company, in whole or in part, at a redemption price equal to the sum of (i) the principal amount of the notes being redeemed plus accrued interest

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thereon through the redemption date and (ii) the make-whole amount, as defined in the respective supplemental indenture notes.

In connection with the debt offerings, the Company incurred debt issuance costs totaling $4,193,000 consisting primarily of underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. Debt issuance costs have been deferred and are being amortized over the term of the respective notes using the effective interest method.

In accordance with the terms of the indenture, pursuant to which the Company’s notes have been issued, the Company is required to meet certain restrictive financial covenants, which, among other things, require the Company to maintain (i) certain leverage ratios and (ii) certain interest coverage. At December 31, 2004, the Company was in compliance with those covenants. In the event that the Company violates any of the certain restrictive financial covenants, its access to the debt or equity markets may become impaired.

In November 2001, the Company entered into an unsecured $70,000,000 term note (“Term Note”), due November 30, 2004, to finance the acquisition of Captec Net Lease Realty, Inc. (“Captec”) and for the repayment of indebtedness and related expenses in connection therewith. As of December 31, 2003, the Term Note had an outstanding principal balance of $20,000,000. The Term Note bore interest at a rate of 175 basis points above LIBOR. In November 2004, the Company used proceeds from the Credit Facility to repay the obligation of the Term Note.

In December 2001, the Company issued 4,349,918 shares of common stock and 1,999,974 shares of Series A Preferred Stock in connection with the acquisition of Captec (see “Results of Operations – Merger Transactions”). Holders of the Series A Preferred Stock are entitled to receive, when and as authorized by the board of directors, cumulative preferential cash distributions at the rate of nine percent of the $25.00 liquidation preference per annum (equivalent to a fixed annual amount of $2.25 per share). The Series A Preferred Stock ranks senior to the Company’s common stock with respect to distribution rights and rights upon liquidation, dissolution or winding up of the Company. The Company may redeem the Series A Preferred Stock on or after December 31, 2006, in whole or from time to time in part, for cash, at a redemption price of $25.00 per share, plus all accumulated and unpaid distributions.

In 2002, as a result of the appraisal action arising out of the Captec merger (see “Results of Operations – Merger Transactions”), the Company reduced the number of common and Series A Preferred Stock shares issued and outstanding by 474,037 and 217,950, respectively. In 2003, the Company further reduced the number of common and Series A Preferred Stock shares issued and outstanding by 823 and 379, respectively. In 2004, the Company further reduced the number of common and Series A Preferred Stock shares issued and outstanding by 51 and 56, respectively. The reduction in shares represent the number of shares that would have been issued to the plaintiffs had they accepted the original merger consideration. As of December 31, 2002, the Company had recorded the value of these shares at the original consideration share price in addition to the cash portion of the original merger consideration as other liabilities totaling $13,278,000. In 2003, the Company used proceeds from its Credit Facility to fund the settlement of the appraisal action.

In May 2003, the Company filed a shelf registration statement with the Securities and Exchange Commission, which permits the issuance by the Company of up to $600,000,000 in debt and equity securities (which includes approximately $89,637,000 of unissued debt and equity securities under the Company’s previous shelf registration statement).

In July 2003, the Company filed a prospectus supplement to its shelf registration statement and issued 5,600,000 shares of common stock and received gross proceeds of $100,800,000. In connection with this offering, the Company incurred stock issuance costs totaling approximately $5,374,000, consisting primarily of underwriters’ commissions and fees, legal and accounting fees and printing expenses. Net proceeds from the offering were used to fund a portion of the acquisition of the DC Office Properties (see “Results of Operations – Property Analysis – Real Estate Held for Investment”).

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In August 2003, the Company filed a prospectus supplement to its shelf registration statement and issued 10,000 shares of Series B Convertible Preferred Stock and received gross proceeds of $25,000,000. In connection with this offering, the Company incurred stock issuance costs totaling approximately $687,000, consisting primarily of placement fees and legal and accounting fees. The Series B Convertible Preferred Stock is convertible at the option of the holder into 1,293,996 shares of the Company’s common stock on and after the first anniversary from the date on which the shares were issued. Holders of the Series B Convertible Preferred Stock are entitled to receive, when and as authorized by the board of directors, cumulative preferential cash distributions at the rate of 6.70 percent of the $2,500.00 liquidation preference per annum (equivalent to a fixed annual amount of $167.50 per share). The Series B Convertible Preferred Stock ranks pari passu with the Series A Preferred Stock and senior to the Company’s common stock with respect to distribution rights and rights upon liquidation, dissolution or winding up of the Company. The Company may redeem the Series B Convertible Preferred Stock on or after August 13, 2008, in whole or from time to time in part, for cash, at a redemption price of $2,500.00 per share, plus all accumulated and unpaid distributions. Net proceeds from the offering were used to pay down outstanding indebtedness of the Company’s Credit Facility.

In December 2003, the Company filed a prospectus supplement to its shelf registration statement and issued 3,250,000 shares of common stock and received gross proceeds of $56,517,000. In addition, the Company issued an additional 487,500 shares of common stock in connection with the underwriters’ over-allotment option and received gross proceeds of $8,478,000. In connection with these offerings, the Company incurred stock issuance costs totaling approximately $671,000, consisting primarily of underwriters’ commissions and fees, legal and accounting fees and printing expenses. Net proceeds from these offerings were used to pay down outstanding indebtedness of the Company’s Credit Facility.

Financing Lease Obligation. In July 2004, the Company sold five investment properties for approximately $26,041,000 and subsequently leased back the properties under a 10-year financing lease obligation. The Company may repurchase one or more of the properties subject to put and call options included in the financing lease. In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 66, “Accounting for Sales of Real Estate,” the Company has recognized this as a financing transaction. The 10-year financing lease bears an interest rate of 5.00% annually with monthly interest payments of $109,000 and expires in June 2014 unless either the put or call option is exercised. The Company used the proceeds from two properties to reinvest in other Investment Properties and the remaining proceeds to pay down outstanding indebtedness of the Company’s Credit Facility.

Compensation Plan Equity Issuances. The Company believes that equity-based or equity-related compensation is an important element of overall compensation for the Company. Such compensation advances the interest of the Company by encouraging, and providing for, the acquisition of equity interests in the Company by directors, officers and other key associates, thereby aligning their interests with stockholders and providing them with a substantial motivation to enhance stockholder value.

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Pursuant to the Company’s 2000 Performance Incentive Plan, the Company has granted and issued shares of restricted stock to certain officers and directors of the Company. The following information is a summary of the restricted stock grants for the years ended December 31, 2004, 2003 and 2002:

				Number of	Shares are
			Annual	Years for	100% Vested
	Shares		Vesting Rate	Vesting	on
Officers:
June 2002		58,000	15% - 30%	5	January 1, 2007
March 2003		40,407	25%	4	January 1, 2007
March 2003		30,000	15% - 30%	5	January 1, 2008
April 2004		100,000	20%	4	January 1, 2008
April 2004		35,000	20%	5	January 1, 2009
April 2004		50,211	14.3%	6	January 1, 2010
September 2004		15,000	14.3%	6	January 1, 2011
Total issued		328,618
Directors:
June 2002		6,000	50%	2	January 1, 2004
June 2003		6,000	50%	2	January 1, 2005
August 2004		4,500	50%	2	January 1, 2006
December 2004		868	50%	2	January 1, 2006
Total issued		17,368

During 2004 and 2003, the Company cancelled 29,926 and 5,950, respectively, shares of restricted stock.

Investments in Unconsolidated Affiliates. In September 1997, the Company entered into a partnership, Net Lease Institutional Realty, L.P. (the “Partnership”), with the Northern Trust Company, as Trustee of the Retirement Plan for the Chicago Transit Authority Employees (“CTA”). Under the terms of the limited partnership agreement of the Partnership, CTA had the right to convert its 80 percent limited partnership interest into shares of the Company’s common stock. In October 2003, CTA exercised that right, and, based on the terms of and calculation defined in the limited partnership agreement, the Company issued 953,551 shares of common stock to CTA in a private transaction in February 2004 in exchange for CTA’s 80 percent limited partnership interest, increasing the Company’s ownership in the Partnership to 100 percent. Prior to CTA’s exercise, the Company accounted for its 20 percent interest in the Partnership under the equity method of accounting. Net income and losses of the Partnership were allocated to the partners in accordance with their respective percentage interest in the Partnership’s term.

The Company has entered into five limited liability company (“LLC”) agreements (collectively, “CCMH LLCs”) with Orange Avenue Mortgage Investments, Inc. (“OAMI”), formerly known as CNL Commercial Finance, Inc. Each of the LLCs holds an interest in mortgage loans and is 100 percent equity financed. The Company holds a non-voting and non-controlling interest in each of the LLCs and accounts for its investment under the equity method of accounting. The following table summarizes each of the investments as of December 31, 2004:

		Investment
Date of Agreement	LLC Agreement	Interest
June 2001	CCMH I, LLC		42.7	%
December 2001	CCMH II, LLC		44.0	%
June 2002	CCMH III, LLC		36.7	%
December 2002	CCMH IV, LLC		38.3	%
July 2003	CCMH V, LLC		38.4	%

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In 2003, in connection with a loan to OAMI, the Company pledged a portion of its interest in two of the LLC’s as partial collateral for the loan.

In May 2002, the Company purchased a combined 25 percent partnership interest for $750,000 in CNL Plaza, Ltd. and CNL Plaza Venture, Ltd. (collectively, “Plaza”), which owns a 346,000 square foot office building and an interest in an adjacent parking garage. Affiliates of James M. Seneff, Jr. and Robert A. Bourne, each members of the Company’s board of directors, own the remaining partnership interests. Since November 1999, the Company has leased its office space from Plaza. The Company’s lease expires in October 2014. In addition, the Company has severally guaranteed 41.67 percent of a $15,500,000 promissory note on behalf of Plaza. The maximum obligation of the Company is $6,458,000 plus interest. Interest accrues at a rate of LIBOR plus 200 basis points per annum on the unpaid principal amount. This guarantee shall continue through the loan maturity, which was extended from the original maturity of November 2004 to May 2005. Plaza intends to refinance the promissory note in 2005.

Notes Receivable. Structured finance agreements are typically loans secured by a pledge of ownership interests in the borrowers (or their subsidiaries) that own the underlying real estate. These agreements are typically subordinated to senior loans secured by first mortgages encumbering the underlying real estate. Subordinated positions are generally subject to a higher risk of nonpayment of principal and interest than the more senior loans.

In 2004 and 2003, the Company made structured finance investments of $6,857,000 and $43,433,000, respectively. As of December 31, 2004, the structured finance investments bear a weighted average interest rate of 14.3% per annum, of which 12.5% is payable monthly and the remaining 1.8% accrues and is due at maturity. The principal balance of each structured finance investment is due in full at maturity, which range between November 2006 and November 2007. The structured finance investments are secured by the borrowers’ pledge of their respective membership interests in the certain subsidiaries which own real estate. In December 2004, the Company received $20,900,000 in principal payments and a $418,000 prepayment fee. As of December 31, 2004 and 2003, the outstanding receivable balance of the structured finance investments was $29,390,000 and $43,433,000, respectively.

In January 2005, the Company received $3,935,000 in principal payments; the outstanding receivable balance of the remaining structured finance agreements was $25,455,000 with a weighted average interest rate of 11.8% per annum.

Results of Operations

Critical Accounting Policies and Estimates.

In response to the SEC’s Release Numbers 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” and 33-8056, “Commission Statement About Analysis of Financial Condition and Results of Operations,” the Company’s management has identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements. The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments on assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments. A summary of the Company’s accounting policies and procedures are included in Note 1 of the Company’s consolidated financial statements. Management believes the following critical accounting policies among others affect its more significant judgment of estimates used in the preparation of the Company’s consolidated financial statements.

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Real Estate Held for Investment and Lease Accounting. The Company records the acquisition of real estate at cost, including acquisition and closing costs. The cost of properties developed by the Company includes direct and indirect costs of construction, property taxes, interest and other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy.

Real estate is generally leased to tenants on a net lease basis, whereby the tenant is responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance and repairs. The leases are accounted for using either the operating or the direct financing method. Such methods are described below:

Operating method – Leases accounted for using the operating method are recorded at the cost of the real estate. Revenue is recognized as rentals are earned and expenses (including depreciation) are charged to operations as incurred. Buildings are depreciated on the straight-line method over their estimated useful lives (generally 35 to 40 years). Leasehold interests are amortized on the straight-line method over the terms of their respective leases. When scheduled rentals vary during the lease term, income is recognized on a straight-line basis so as to produce a constant periodic rent over the term of the lease. Accrued rental income is the aggregate difference between the scheduled rents which vary during the lease term and the income recognized on a straight-line basis.

Direct financing method – Leases accounted for using the direct financing method are recorded at their net investment (which at the inception of the lease generally represents the cost of the property). Unearned income is deferred and amortized into income over the lease terms so as to produce a constant periodic rate of return on the Company’s net investment in the leases.

The Company periodically assesses its real estate assets for possible impairment when certain events or changes in circumstances indicate that the carrying value of the asset, including any accrued rental income, may not be recoverable. Management considers current market conditions and tenant credit analysis in determining whether the recoverability of the carrying amount of an asset should be assessed. When an assessment is warranted, management determines whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the real estate, with the carrying cost of the individual asset. If an impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value.

Intangible Assets. In connection with real estate acquisitions, value is assigned to tangible and other intangible assets. These other intangible assets are computed by valuing the property on an as-if-vacant basis and subtracting from the total acquisition cost the sum of the (i) as-if-vacant value, (ii) contractual to market value rent and (iii) value assigned to in-place leases. Deferred revenue or deferred assets recorded in connection with the contractual to market rent value for acquired properties are amortized into rental revenue over the life of the leases. The value assigned to in-place leases is amortized over the life of the leases.

Real Estate Held for Sale. Services acquires, develops and currently owns properties that it intends to sell. The properties that are classified as held for sale at any given time may consist of properties that have been acquired in the marketplace with the intent to resell the properties that have been, or are currently being, constructed by Services. Services’ records the acquisition of the real estate at cost, including the acquisition and closing costs. The cost of the real estate developed by Services includes direct and indirect costs of construction, interest and other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. The asset is not depreciated. In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” Services classifies its real estate held for sale as discontinued operations when rental revenues are generated.

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When real estate held for sale is disposed of, the related costs are removed from the accounts and gains and losses from the dispositions are reflected in earnings.

Income Taxes. The Company has made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations. The Company generally will not be subject to federal income taxes on amounts distributed to stockholders, providing it distributes at least 90 percent of its real estate investment trust taxable income and meets certain other requirements for qualifying as a REIT. For each of the years in the three-year period ended December 31, 2004, the Company believes it has qualified as a REIT. Not withstanding the Company’s qualification for taxation as a real estate investment trust, the Company is subject to certain state taxes on its income and real estate.

Effective January 1, 2001, Commercial Net Lease Realty, Inc. elected for Services to be treated as a TRS pursuant to the provisions of the REIT Modernization Act. As a TRS, Services is able to engage in activities resulting in income that previously would have been disqualified from being eligible REIT income under the federal income tax regulations. As a result, certain activities of the Company which occur within Services are therefore subject to federal and state income taxes. All provisions for federal income taxes in the accompanying consolidated financial statements are attributable to Services.

Income taxes are accounted for under the asset and liability method as required by SFAS No. 109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are recognized for the temporary differences based on estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Use of Estimates. Additional critical accounting policies of the Company include management’s estimates and assumptions relating to the reporting of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Additional critical accounting policies include management’s estimates of the useful lives used in calculating depreciation expense relating to the Company’s real estate assets, the recoverability of the carrying value of long-lived assets, the collectibility of receivables from tenants, including accrued rental income, and capitalized overhead relating to development projects. Actual results could differ from those estimates.

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Property Analysis

Property Analysis – Real Estate Held for Investment

General. As of December 31, 2004, the Company owned 362 Investment Properties that are leased to established tenants, including Academy, Barnes & Noble, Best Buy, Borders, CVS, Eckerd, OfficeMax, The Sports Authority, United Rentals and the United States of America. Approximately 97 percent of the gross leaseable area of the Company’s portfolio of Investment Properties was leased at December 31, 2004. The following table summarizes the Company’s portfolio of Investment Properties as of December 31:

	2004		2003		2002
Investment Properties Owned:
Number		362		348		350
Total gross leaseable area (square feet)		8,542,000		7,907,000		6,655,000
Investment Properties Leased:
Number		351		337		330
Total gross leaseable area (square feet)		8,322,000		7,669,000		6,293,000
Percent of total gross leaseable area		97%		97%		94%
Weighted average remaining lease term (years)		10		11		12

The Company regularly evaluates its (i) portfolio of Investment Properties, (ii) financial position, (iii) market opportunities and (iv) strategic objectives and, based on certain factors, may decide to acquire or dispose of a given property or portfolio of properties.

Property Acquisitions. Property acquisitions are typically funded using funds from the Company’s revolving credit facility, proceeds for debt or equity offerings and to a lesser extent, proceeds generated from like-kind exchange transactions. The following table summarizes the Investment Property acquisitions for each of the years ended December 31:

	2004		2003		2002
Acquisitions:
Number of Investment Properties		36		23		9
Gross leaseable area (square feet)		825,000		1,439,000		267,000
Construction projects:
Properties completed		-		1		1
Gross leaseable area (square feet)		-		14,000		14,000
Tenant improvements Number of Investment Properties		4		9		7
Total dollars invested	$	139,303,000	$	212,317,000	$	45,541,000

In August 2003, the Company acquired the DC Office Properties. Pursuant to the lease agreement, the Company has agreed to fund $27,322,000 for building and tenant improvements, of which $23,850,000 had been funded as of December 31, 2004. The Company anticipates funding the additional costs, which are anticipated to be substantially complete by June 30, 2005, from borrowings under the Company’s Credit Facility. The properties include two office buildings containing an aggregate of 555,000 rentable square feet and a two-level garage with approximately 1,000 parking spaces.

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Property Dispositions. The Company typically uses property sales proceeds to either (i) pay down the outstanding indebtedness of the Company’s Credit Facility or (ii) reinvest in real estate. The following table summarizes the properties held for investment sold by the Company for each of the years ended December 31:

	2004		2003		2002
Number of properties		20		14		19
Gross leaseable area		155,000		345,000		408,000
Net sales proceeds	$	32,444,000	$	25,023,000	$	29,928,000
Net gain	$	2,452,000	$	161,000	$	256,000

During 2004 and 2003, the Company used the proceeds from the dispositions to pay down the outstanding indebtedness of the Company’s Credit Facility.

During 2002, the Company reinvested the proceeds from three of the investment properties sold to reinvest in additional Investment Properties and the proceeds from the sale of the remaining 16 investment properties to pay down the outstanding indebtedness of the Company’s Credit Facility.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company has classified its investment properties sold during the years ended December 31, 2004, 2003 and 2002, as discontinued operations. In addition, the Company has classified one leasehold interest that expired during the year ended December 31, 2004 as discontinued operations. All investment properties sold subsequent to December 31, 2001, the effective date of SFAS No. 144, have been reclassified to discontinued operations.

Property Analysis – Real Estate Held for Sale

General. The Company’s real estate held for sale is operated through Services, which directly and indirectly, through investment interests, acquires and develops real estate primarily for the purpose of selling the real estate to purchasers who are looking for replacement like-kind exchange property or to other purchasers with different investment objectives. The following summarizes the Company’s real estate held for sale as of December 31:

	2004		2003		2002
Number of properties held for sale:
Completed Inventory Properties		10		6		15
Properties under construction		7		5		3
Land parcels		4		4		1
Total		21		15		19

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Property Acquisitions. Inventory Property acquisitions are typically funded using funds from the Company’s credit facility and proceeds from debt or equity offerings.

The following table summarizes the Inventory Property acquisitions for each of the years ended December 31:

	2004		2003		2002
Acquisitions:
Number of properties		33		23		13
Dollars invested	$	48,318,000	$	38,836,000	$	11,672,000
Completed construction:
Number of properties		8		8		9
Dollars invested	$	26,366,000	$	23,169,000	$	23,178,000
Total dollars invested in real estate held for sale	$	76,647,000	$	63,469,000	$	30,875,000

Property Dispositions. The following table summarizes the number of inventory properties sold and the corresponding gain recognized from the disposition of real estate held for sale included in earnings from continuing and discontinued operations for each of the years ended December 31 (dollars in thousands):

	2004					2003					2002
	# of					# of					# of
	Properties		Gain			Properties		Gain			Properties		Gain
Continuing operations		7	$	4,700			3	$	3,247			4	$	1,290
Discontinued operations:
Gain				17,885					7,891					4,489
Intersegment eliminations				817					1,037					1,966
				18,702					8,928					6,455
Minority interest				(6,422	)				(986	)				-
Total discontinued operations		17		12,280			26		7,942			21		6,455
		24	$	16,980			29	$	11,189			25	$	7,745

During the years ended December 31, 2004, 2003 and 2002, the Company used the proceeds from the sale of the inventory properties to pay down the outstanding indebtedness of the Company’s Credit Facility.

Merger Transactions

In December 2001, the Company acquired 100 percent of Captec, a publicly traded real estate investment trust, which owned 135 freestanding, net lease properties located in 26 states. Captec shareholders received $11,839,000 in cash, 4,349,918 newly issued shares of the Company’s common stock and 1,999,974 newly issued Series A Preferred Stock (see “Capital Resources – Debt and Equity Securities”). Under the purchase method of accounting, the acquisition price of $124,722,000 was allocated to the assets acquired and liabilities assumed at their fair values. No goodwill was recorded in connection with the acquisition. The merger was unanimously approved by both the Company’s and Captec’s board of directors and Captec’s shareholders. This transaction increased funds from operations, increased diversification, produced cost savings from opportunities for economies of scale and operating efficiencies and enhanced the Company’s capital markets profile.

In January 2002, beneficial owners of shares of Captec stock held of record by Cede & Co. who alleged that they did not vote for the merger (and who alleged that they caused a written demand for appraisal of their Captec shares to be served on Captec), filed in the Chancery Court of the State of Delaware in and

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for New Castle County a Petition for Appraisal of Stock (“Appraisal Action”). The Appraisal Action alleged that 1,037,946 shares of Captec dissented from the merger and sought to require the Company to pay to all Captec stockholders who demanded appraisal of their shares the fair value of those shares, with interest from the date of the merger. As a result of this action, the plaintiffs were not entitled to receive the Company’s common and Series A Preferred Stock as offered in the original merger consideration. Accordingly, the Company reduced the number of common and Series A Preferred Stock shares issued and outstanding by 474,037 and 217,950, respectively, which represents the number of shares that would have been issued to the plaintiffs had they accepted the original merger consideration. In 2003, the Company further reduced the number of common and Series A Preferred Stock shares issued and outstanding by 823 and 379, respectively. In 2004, the Company further reduced the number of common and Series A Preferred Stock shares issued and outstanding by 51 and 56, respectively. As of December 31, 2002, the Company had recorded the value of these shares at the original consideration share price in addition to the cash portion of the original merger consideration as other liabilities totaling $13,278,000. In February 2003, the Company entered into a settlement agreement with the beneficial owners of the 1,037,946 dissenting shares (including the petitioners in the Appraisal Action) which required the Company to pay $15,569,000 which approximated the value of the original merger consideration (which included cash, common stock and Series A Preferred Stock shares) at the time of the litigation settlement plus the dividends that would have been paid if the shares had been issued at the time of the merger. The Company used proceeds from its Credit Facility to fund the settlement of the legal action. In February 2003, the parties filed a stipulation and order of dismissal and the Court entered the order of dismissal, dismissing the Appraisal Action with prejudice.

Anticipated Merger

In January 2005, the Company entered into an agreement with National Properties Corporation (“NAPE”), which provided that NAPE would merge with and into a subsidiary of the Company. At the time of the merger agreement, NAPE owned 43 properties located in 12 states which were leased to 17 tenants. If the acquisition is consummated, the Company will issue approximately 1,637,000 shares of common stock to holders of NAPE common stock. Total consideration for the merger transaction is estimated to be approximately $61,000,000 based on the Company’s closing stock price on the date of the merger agreement. Completion of the merger is subject to customary closing conditions, including the approval of the holders of a majority of the outstanding shares of NAPE common stock. The Company has entered into a shareholders’ agreement with the holders of approximately 53 percent of the outstanding NAPE common stock whereby these holders have agreed to vote in favor of the merger. However, the Company may terminate the merger agreement if a majority of the NAPE shareholders who are not bound by the shareholders’ agreement do not approve the merger. The merger does not require approval by the Company’s shareholders. The Company anticipates that the merger will be completed not later than the second quarter of 2005.

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Revenue From Operations Analysis

General. During the year ended December 31, 2004, the Company’s rental income increased primarily due to the acquisition of DC Office Properties in August 2003 and other Investment Properties (See “Results of Operations – Property Analysis – Real Estate Held For Investment – Property Acquisitions”) and maintaining an occupancy rate of 97 percent at December 31, 2004 and 2003. The Company anticipates any significant increase in rental income will continue to come primarily from additional property acquisitions.

The following summarizes the Company’s revenues (dollars in thousands):

	2004				2003				2002
			Percent				Percent				Percent
			of Total				of Total				of Total
Rental income(1)	$	111,135		85.9%	$	92,929		89.7%	$	78,036		92.9%
Real estate expense reimbursement from tenants		5,756		4.5%		5,048		4.9%		2,932		3.5%
Gain on disposition of real estate held for sale		4,700		3.6%		3,247		3.1%		1,290		1.5%
Interest and other income from real estate transactions		7,718		6.0%		2,390		2.3%		1,773		2.1%
Total revenue from continuing operations	$	129,309		100.0%	$	103,614		100.0%	$	84,031		100.0%

⁽¹⁾  Includes rental income from operating leases, earned income from direct financing leases and contingent rental income from continuing operations (“Rental Income”).

Revenue From Operations Analysis by Source of Income. The Company has identified two primary business segments, and thus, sources of revenue: (i) earnings from real estate held for investment and (ii) earnings from real estate held for sale. Breaking down revenues into the Company’s two primary operating segments of revenue shows that revenues are historically consistent. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision makers in deciding how to allocate resources and in assessing performance. The following table summarizes the revenues from continuing operations (dollars in thousands):

	2004				2003				2002
			Percent				Percent				Percent
			of Total				of Total				of Total
Real estate, held for investment	$	124,374		96.2%	$	99,760		96.3%	$	82,171		97.8%
Real estate, held for sale		4,935		3.8%		3,854		3.7%		1,860		2.2%
Total revenue from continuing operations	$	129,309		100.0%	$	103,614		100.0%	$	84,031		100.0%

The Company evaluates its ability to pay dividends to stockholders by considering the combined effect of income from continuing and discontinued operations.

Comparison of Year Ended December 31, 2004 to Year Ended December 31, 2003. Rental Income increased 19.6 percent for the year ended December 31, 2004, as compared to the year ended December 31, 2003, primarily due to the addition of an aggregate gross leaseable area of 825,000 square feet to the Company’s portfolio resulting from the acquisition of 36 Investment Properties during the year ended December 31, 2004 and the addition of 24 Investment Properties with an aggregate gross leaseable area of 1,453,000 during the year ended December 31, 2003. However, this increase is partially offset by the investment property dispositions during the years ended December 31, 2004 and 2003.

Real estate expense reimbursements from tenants increased 14 percent for the year ended December 31, 2004, as compared to the year ended December 31, 2003, primarily due to the addition of properties that reimburse for expenses, see “Results of Operations – Property Analysis – Real Estate Held for Investment”.

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The gain on disposition of real estate held for sale included in continuing operations, increased 44.8 percent for the year ended December 31, 2004, as compared to the year ended December 31, 2003, primarily due to the increase in gross margin on sales of inventory properties. During the year ended December 31, 2004, the Company disposed of seven inventory properties and recognized a gain of $4,700,000 compared to three inventory properties for a $3,247,000 gain for the year ended December 31, 2003.

Interest and other income from real estate transactions increased 222.9 percent for the year ended December 31, 2004 as compared to the year ended December 31, 2003, primarily due to the interest earned on the $50,290,000 structured finance investments entered into since October 2003. However, this increase was partially offset by a decrease in development fees.

Comparison of Year Ended December 31, 2003 to Year Ended December 31, 2002. Rental Income increased 19.1 percent for the year ended December 31, 2003 due to a three percent increase in the Company’s Investment Property portfolio occupancy rate (97 percent at December 31, 2003 versus 94 percent at December 31, 2002) and the addition of 24 Investment Properties with an aggregate gross leaseable area of 1,453,000 square feet and the completed tenant improvements on nine Investment Properties. However, this increase is partially offset by the investment property dispositions during the years ended December 31, 2003 and 2002.

Real estate expense reimbursements from tenants increased 72.2 percent for the year ended December 31, 2003, as compared to the year ended December 31, 2002, primarily due to the addition of properties and the addition of real estate expenses reimbursed by tenants from the DC Office Properties, see “Property Analysis – Real Estate Held for Investment”.

The gain on disposition of real estate held for sale included in continuing operations, increased 151.6 percent, as compared to the year ended December 31, 2002, primarily due to the increase in gross margin on sales of inventory properties. During the year ended December 31, 2003, the Company disposed of three inventory properties and recognized a gain of $3,247,000 compared to four inventory properties for a $1,290,000 gain for the year ended December 31, 2002.

Interest and other income from real estate transactions increased 34.8 percent for the year ended December 31, 2003, compared to the year ended December 31, 2002. This increase was primarily attributable to (i) the $45,200,000 structured finance investment entered into in October 2003, and (ii) an increase in development fees. However, the increase was partially offset by a decrease in mortgage interest income.

Expense Analysis

General. During 2004 operating expenses increased primarily as a result of the acquisition of additional properties but remained generally proportionate to the Company’s total revenue. The following summarizes the Company’s expenses (dollars in thousands):

	2004				2003				2002
			Percent				Percent				Percent
			of Total				of Total				of Total
General and administrative	$	22,996		41.0%	$	21,696		48.5%	$	16,324		49.2%
Real estate		12,161		21.7%		7,394		16.5%		4,365		13.2%
Depreciation and amortization		17,138		30.6%		13,217		29.6%		10,843		32.7%
Provision for loss on impairment of real estate		-		-		-		-		1,613		4.9%
Dissenting shareholders’ settlement		-		-		2,413		5.4%		-		-
Transition costs		3,741		6.7%		-		-		-		-
Total operating expenses from continuing operations	$	56,036		100.0%	$	44,720		100.0%	$	33,145		100.0%

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Comparison of Year Ended December 31, 2004 to Year Ended December 31, 2003. In general, operating expenses increased 25.3 percent for the year ended December 31, 2004, over the year ended December 31, 2003, and increased as a percentage of total revenues by 0.1 percent to 43.3 percent.

General and administrative expenses increased 6.0 percent for the year ended December 31, 2004, but decreased as a percentage of total revenues by 3.1 percent to 17.8 percent. General and administrative expenses increased for the year ended December 31, 2004, primarily as a result of increases in expenses related to personnel. In addition, expenses related to professional services provided to the Company increased for the year ended December 31, 2004. For the year ended December 31, 2004, this increase is partially offset by a decrease in state taxes paid by the Company.

Real estate expenses increased 64.5 percent for the year ended December 31, 2004, and increased as a percentage of total revenues by 2.3 percent to 9.4 percent. Real estate expenses for the year ended December 31, 2004, increased primarily due to the August 2003 acquisition of the DC Office Properties. The DC Office Properties lease and the revenues related to such real estate expenses are included in real estate expense reimbursement from tenants. Real estate expenses related to the DC Office Properties were 59.6 and 51.3 percent, respectively, of total real estate expenses for the years ended December 31, 2004 and 2003, respectively. In addition, real estate expenses on vacant properties increased for the year ended December 31, 2004.

Depreciation and amortization expense increased 29.7 percent for the year ended December 31, 2004, and increased 0.5 percent to 13.3 percent of total revenues for the year ended December 31, 2004. The increase in depreciation and amortization expense for the year ended December 31, 2004, is primarily attributable (i) the depreciation on the acquisition of 36 additional Investment Properties and the tenant improvements on four Investment Properties since December 31, 2003, and (ii) the amortization of additional lease costs. The increase is partially offset by a decrease in the amortization of debt costs and the decrease in depreciation resulting from the disposition of 21 and 14 investment properties during each of the years ended December 31, 2004 and 2003, respectively.

During the year ended December 31, 2003, the Company recorded a dissenting shareholders’ settlement expense of $2,413,000 related to the lawsuit that arose as a result of the merger with Captec in December 2001. (See “Results of Operations – Merger Transactions”).

During the year ended December 31, 2004, the Company recorded transition costs of $3,741,000, including severance, accelerated vesting of restricted stock and recruitment costs in connection with the appointment of Craig Macnab as Chief Executive Officer in February 2004, and the resignation of Gary M. Ralston as President and Chief Operating Officer in May 2004.

Comparison of Year Ended December 31, 2003 to Year Ended December 31, 2002. Operating expenses increased 34.9 percent for the year ended December 31, 2003 over the year ended December 31, 2002, and increased as a percentage of total revenues by 3.8 percent to 43.2 percent.

General and administrative expenses increased 32.9 percent for the year ended December 31, 2003, and increased as a percentage of total revenues by 1.5 percent to 20.9 percent. General and administrative expenses increased for the year ended December 31, 2003 primarily as a result of (i) increases in expenses related to personnel costs, (ii) increases in expenses related to professional services provided to the Company, and (iii) increases in state taxes.

Real estate expenses increased 69.4 percent for the year ended December 31, 2003 primarily due to the August 2003 acquisition of the DC Office Properties, increasing as a percentage of total revenues by 1.9 percent to 7.1 percent. The DC Office Properties lease and the revenues related to such real estate expenses are included in real estate expense reimbursements from tenants. Real estate expenses related to the DC Office Properties were 51.3 percent of total real estate expenses for the year ended December 31,

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2003. The increase in real estate expenses was partially offset by an increase in the Company’s occupancy rate to 97 percent at December 31, 2003 from 94 percent at December 31, 2002.

Depreciation and amortization expense increased 21.9 percent for the year ended December 31, 2003, but decreased as a percentage of total revenues by 0.1 percent to 12.8 percent for the year ended December 31, 2003. The increase in depreciation and amortization expense for the year ended December 31, 2003 is primarily attributable to (i) the depreciation on acquisition of and tenant improvements on additional Investment Properties in 2003, (ii) the amortization of loan costs related to the amended Credit Facility and the Term Note, and (iii) the amortization of additional lease costs.

The Company recorded no loss on impairment of real estate during 2003. The Company recorded a provision for loss on impairment of real estate of $1,613,000 and $1,672,000 in continuing operations and discontinued operations, respectively, in the year ended December 31, 2002. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Generally, the Company makes a provision for impairment loss if estimated future operating cash flows plus estimated disposition proceeds are less than the current book value. Impairment losses are measured as the amount by which the current book value of the asset exceeds the estimated fair value of the asset.

During the year ended December 31, 2003, the Company recorded a dissenting shareholders’ settlement expense of $2,413,000 related to the Appraisal Action that arose as a result of the merger with Captec in December 2001. (See “Results of Operations – Merger Transactions”).

Analysis of Other Expenses and Revenues

General. During the year ended December 31, 2004, interest and other income and interest expense increased with the acquisition of additional properties but remained generally proportionate to the Company’s total revenue and expenses. The following summarizes the Company’s other expenses (revenues) from continuing operations (dollars in thousands):

	2004					2003					2002
				Percent					Percent					Percent
				of Total					of Total					of Total
Interest and other income	$	(3,779	)		(13.2)%	$	(3,346	)		(14.3)%	$	(3,890	)		(18.3)%
Interest expense		32,463			113.2%		26,754			114.3%		25,179			118.3%
Total other expenses (revenues) from continuing operations	$	28,684			100.0%	$	23,408			100.0%	$	21,289			100.0%

Comparison of Year Ended December 31, 2004 to Year Ended December 31, 2003. In general, other expenses (revenues) increased 22.5 percent for the year ended December 31, 2004, over the year ended December 31, 2003, but decreased as a percentage of total revenues by 0.4 percent to 22.2 percent.

Interest expense increased 21.3 percent for the year ended December 31, 2004, but decreased as a percentage of total revenues by 0.7 percent to 25.1 percent for the year ended December 31, 2004. The increase in interest expense for the year ended December 31, 2004, was primarily attributable to an increase in the long-term fixed rate average debt outstanding of $475,802,000 as of December 31, 2004, including the addition of the $95,000,000 fixed rate mortgage loan entered into in November 2003. However, the increase in interest expense was partially offset by a lower average debt outstanding of $39,869,000 as of December 31, 2004 on the Company’s short-term variable interest rate debt.

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Comparison of Year Ended December 31, 2003 to Year Ended December 31, 2002. In general, other expenses (revenues) increased 10.0 percent for the year ended December 31, 2003, over the year ended December 31, 2002, but decreased as a percentage of total revenues by 2.7 percent to 22.6 percent.

Interest and other income decreased 14.0 percent for the year ended December 31, 2003, and decreased as a percentage of total revenues by 1.3 percent to 3.2 percent. Interest and other income decreased for the year ended December 31, 2003, primarily as a result of a decrease of interest earned on a note receivable and a related party line of credit.

Interest expense increased 6.3 percent for the year ended December 31, 2003, but decreased as a percentage of total revenues by 4.2 percent to 25.8 percent for the year ended December 31, 2003. The increase in interest expense for the year ended December 31, 2003, was primarily as a result of refinancing a portion of the Company’s Credit Facility and Term Note to long-term fixed rate debt, including the 2012 Notes and the $21,000,000 fixed rate mortgage loan, both entered into in June 2002 and the addition of the $95,000,000 fixed rate mortgage loan entered into in November 2003, as a means to reduce floating interest rate risk. However, the increase in interest expense was partially offset by a decrease in the average interest rates on the Company’s variable interest rate debt.

Unconsolidated Affiliates

For details on each of the Company’s unconsolidated affiliates, see “Capital Resources – Investments in Unconsolidated Affiliates.”

During the years ended December 31, 2004, 2003 and 2002, the Company recognized equity in earnings of unconsolidated affiliates of $4,724,000, $4,341,000 and $1,800,000, respectively. The increase in equity in earnings of unconsolidated affiliates was primarily attributable to the income earned on investments in mortgage loans.

Earnings from Discontinued Operations

The Company has recorded discontinued operations by the defined Company segments: (i) real estate held for investment and (ii) real estate held for sale. As a result, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company classified the revenues and expenses related to its investment properties that were sold and expired leasehold interests subsequent to December 31, 2001, as discontinued operations. The Company also classified the revenues and expenses of its held for sale properties that were sold and generated rental revenues as discontinued operations. In addition, the Company also classified the revenues and expenses related to its 21 Inventory Properties held for sale as of December 31, 2004, as discontinued operations.

During the years ended December 31, 2004, 2003 and 2002, the Company recognized earnings from discontinued operations of (dollars in thousands):

	# of Sold				# of Sold				# of Sold
	Properties		2004		Properties		2003		Properties		2002
Real estate, held for investment(1)		21	$	4,766		14	$	4,330		19	$	8,023
Real estate, held for sale		17		9,544		26		6,277		21		5,604
		38	$	14,310		40	$	10,607		40	$	13,627

     ⁽¹⁾2004 includes one expired leasehold interest.

The Company occasionally sells investment properties and may reinvest the proceeds of the sales to purchase new properties. The Company evaluates its ability to pay dividends to stockholders by considering the combined effect of income from continuing and discontinued operations.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to interest changes primarily as a result of its variable rate Credit Facility and its long-term, fixed rate debt used to finance the Company’s development and acquisition activities and for general corporate purposes. The Company’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Company borrows at both fixed and variable rates on its long-term debt.

The Company entered into a forward starting interest rate swap in February 2004 and terminated the swap effective June 2004 for a swap gain of $4,148,000. The Company had no outstanding derivatives as of December 31, 2004 and 2003.

The information in the table below summarizes the Company’s market risks associated with its debt obligations outstanding as of December 31, 2004 and 2003. The table presents principal cash flows and related interest rates by year of expected maturity for debt obligations outstanding as of December 31, 2004. The variable interest rates shown represent the weighted average rates for the Credit Facility and Term Note at the end of the periods. As the table incorporates only those exposures that exist as of December 31, 2004, it does not consider those exposures or positions which could arise after those dates. Moreover, because firm commitments are not presented in the table below, the information presented therein has limited predictive value. As a result, the Company’s ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period, the Company’s hedging strategies at that time and interest rates.

	Debt Obligations (dollars in thousands)(1)
	Variable Rate Credit												Financing Lease
	Facility				Fixed Rate Mortgages				Fixed Rate Notes				Obligation(3)
			Weighted				Weighted				Weighted				Weighted
			Average				Average				Average				Average
	Debt		Interest		Debt		Interest		Debt		Interest		Debt		Interest
	Obligation		Rate(2)		Obligation		Rate		Obligation(4)		Rate		Obligation		Rate
2005	$	-		-	$	4,070		6.20%	$	-		6.77%	$	-		5.00%
2006		17,900		2.72%		22,376		6.00%		-		6.77%		-		5.00%
2007		-		-		8,776		5.92%		-		6.77%		-		5.00%
2008		-		-		1,156		5.86%		99,892		6.64%		-		5.00%
2009		-		-		964		5.83%		-		6.59%		-		5.00%
Thereafter		-		-		119,826		7.08%		223,240		6.25%		26,041		5.00%
Total	$	17,900			$	157,168			$	323,132			$	26,041
Fair Value:
December 31, 2004	$	17,900		2.72%	$	157,168		6.27%	$	353,647		7.04%	$	26,041		5.00%
December 31, 2003	$	27,800		2.41%	$	149,861		6.68%	$	295,139		7.54%	$	-		-

⁽¹⁾  The $20,000,000 variable rate term note matured in 2004. As of December 31, 2003, the term note had a weighted average interest rate of 3.01% and a fair value of $20,000,000.

⁽²⁾  Interest rate varies based upon a tiered rate structure ranging from 70 basis points above LIBOR to 135 basis points above LIBOR based upon the debt rating of the Company.

⁽³⁾  In July 2004, the Company sold five investment properties for $26,041,000 and subsequently leased back the properties under a 10-year financing lease obligation. The Company may repurchase one or more of the properties subject to put and call options included in the financing lease.

⁽⁴⁾  Net of unamortized note discounts and unamortized interest rate hedge gain.

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Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Commercial Net Lease Realty, Inc. and Subsidiaries:

We have audited the accompanying consolidated balance sheets of Commercial Net Lease Realty, Inc. and subsidiaries as of December 31, 2004 and 2003, 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, 2004. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedules III and IV. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Commercial Net Lease Realty, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

Effective January 1, 2004, the Company implemented Financial Accounting Standards Board Interpretation No. 46, revised December 2003, “Consolidation of Variable Interest Entities” (FIN 46R) and has restated all prior period consolidated financial statements to reflect its adoption.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Commercial Net Lease Realty, Inc.’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 9, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

Orlando, Florida
March 9, 2005

41

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Commercial Net Lease Realty, Inc. and Subsidiaries:

We have audited management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting, that Commercial Net Lease Realty, Inc. maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Commercial Net Lease Realty, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

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

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

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

In our opinion, management’s assessment that Commercial Net Lease Realty, Inc. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Commercial Net Lease Realty, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Commercial Net Lease Realty, Inc. and subsidiaries as of December 31, 2004 and 2003, 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, 2004, and the related financial statement schedules III and IV and our report dated March 9, 2005 expressed an unqualified opinion on those consolidated financial statements and the related financial statement schedules III and IV.

Orlando, Florida
March 9, 2005

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COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)

	December 31,
ASSETS	2004			2003
Real estate, held for investment:
Accounted for using the operating method, net of accumulated depreciation and amortization	$	1,009,397		$	887,124
Accounted for using the direct financing method		102,311			102,970
Real estate, held for sale net of accumulated depreciation		58,049			45,822
Investments in and other receivables from unconsolidated affiliates		29,307			39,606
Line of credit, note and accrued interest receivable from related party		-			16,530
Mortgages, notes and accrued interest receivable, net of allowance of $896 and $979, respectively		45,564			68,423
Cash and cash equivalents		1,947			5,335
Receivables, net of allowance of $924 and $1,590, respectively		6,636			4,740
Accrued rental income, net of allowance		28,619			25,322
Debt costs, net of accumulated amortization of $8,063 and $6,714, respectively		3,926			3,776
Other assets		14,292			11,596
Deferred income tax asset		-			2,534
Total assets	$	1,300,048		$	1,213,778
LIABILITIES AND STOCKHOLDERS’ EQUITY
Line of credit payable	$	17,900		$	27,800
Mortgages payable		157,168			149,861
Notes payable, net of unamortized discount of $847 and $530, respectively, and unamortized interest rate hedge gain of $3,979 and $288, respectively		323,132			289,758
Financing lease obligation		26,041			-
Accrued interest payable		4,334			3,820
Other liabilities		11,745			11,508
Income tax liability		702			-
Total liabilities		541,022			482,747
Minority interest		2,028			277
Stockholders’ equity:
Preferred stock, $0.01 par value. Authorized 15,000,000 shares
Series A, 1,781,589 and 1,781,645 shares issued and outstanding, at December 31, 2004 and 2003, respectively; stated liquidation value of $25 per share		44,540			44,541
Series B convertible, 10,000 shares issued and outstanding, at December 31, 2004 and 2003; stated liquidation value of $2,500 per share		25,000			25,000
Common stock, $0.01 par value. Authorized 190,000,000 shares; 52,077,825 and 50,001,898 shares issued and outstanding at December 31, 2004 and 2003, respectively		521			500
Excess stock, $0.01 par value. Authorized 205,000,000 shares; none issued or outstanding		-			-
Capital in excess of par value		725,337			691,704
Accumulated dividends in excess of net earnings		(35,188	)		(28,167	)
Deferred compensation		(3,212	)		(2,824	)
Total stockholders’ equity		756,998			730,754
	$	1,300,048		$	1,213,778

See accompanying notes to consolidated financial statements.

43

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in thousands, except per share data)

	Year Ended December 31,
	2004			2003			2002
Revenues:
Rental income from operating leases	$	99,863		$	81,854		$	66,765
Earned income from direct financing leases		10,861			10,670			10,864
Real estate expense reimbursement from tenants		5,756			5,048			2,932
Contingent rental income		411			405			407
Gain on disposition of real estate, held for sale		4,700			3,247			1,290
Interest and other income from real estate transactions		7,718			2,390			1,773
		129,309			103,614			84,031
Operating expenses:
General and administrative		22,996			21,696			16,324
Real estate		12,161			7,394			4,365
Depreciation and amortization		17,138			13,217			10,843
Provision for loss on impairment of real estate		-			-			1,613
Dissenting shareholders’ settlement		-			2,413			-
Transition costs		3,741			-			-
		56,036			44,720			33,145
Earnings from operations		73,273			58,894			50,886
Other expenses (revenues):
Interest and other income		(3,779	)		(3,346	)		(3,890	)
Interest expense		32,463			26,754			25,179
		28,684			23,408			21,289
Earnings from continuing operations before provision for income taxes, minority interest and equity in earnings of unconsolidated affiliates		44,589			35,486			29,597
Provision for income taxes		2,542			2,902			3,042
Earnings from continuing operations before minority interest and equity in earnings of unconsolidated affiliates		47,131			38,388			32,639
Minority interest		(1,231	)		137			(8	)
Earnings from continuing operations before equity in earnings of unconsolidated affiliates		45,900			38,525			32,631
Equity in earnings of unconsolidated affiliates		4,724			4,341			1,800
Earnings from continuing operations		50,624			42,866			34,431
Earnings from discontinued operations:
Real estate, held for investment		4,766			4,330			8,023
Real estate, held for sale, net of provision for income taxes and minority interest		9,544			6,277			5,604
		14,310			10,607			13,627
Net earnings		64,934			53,473			48,058
Series A preferred stock dividends		(4,008	)		(4,008	)		(4,010	)
Series B convertible preferred stock dividends		(1,675	)		(502	)		-
Net earnings available to common stockholders – basic		59,251			48,963			44,048
Series B convertible preferred stock dividends		-			502			-
Net earnings available to common stockholders – diluted	$	59,251		$	49,465		$	44,048

See accompanying notes to consolidated financial statements.

44

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS – CONTINUED
(dollars in thousands, except per share data)

	Year Ended December 31,
	2004		2003		2002
Net earnings per share of common stock:
Basic:
Continuing operations	$	0.87	$	0.89	$	0.75
Discontinued operations		0.28		0.25		0.34
Net earnings	$	1.15	$	1.14	$	1.09
Diluted:
Continuing operations	$	0.87	$	0.89	$	0.75
Discontinued operations		028		0.24		0.34
Net earnings	$	1.15	$	1.13	$	1.09
Weighted average number of common shares outstanding:
Basic		51,312,434		43,108,213		40,383,405
Diluted		51,742,518		43,896,800		40,588,957

See accompanying notes to consolidated financial statements.

45

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December 31, 2004, 2003 and 2002
(dollars in thousands, except per share data)

				Series B								Accumulated			Deferred			Accumulated
	Series A			Convertible					Capital in			Dividends in			Compensation			Other
	Preferred			Preferred		Common			Excess of Par			Excess of Net			on Restricted			Comprehensive
	Stock			Stock		Stock			Value			Earnings			Stock			Income		Total
Balance at December 21, 2001	$	50,000		$	-	$	406		$	531,677		$	(14,527	)	$	(2,916	)	$	-	$	564,640
Net earnings		-			-		-			-			48,058			-			-		48,058
Dividends declared and paid ($2.25 per share of Series A Preferred Stock)		-			-		-			-			(4,010	)		-			-		(4,010	)
Dividends declared and paid ($1.27 per share of common stock)		-			-		-			-			(51,178	)		-			-		(51,178	)
Reversal of 217,950 shares of preferred stock and 474,037 shares of common stock originally offered to the dissenting stockholders in connection with the merger in 2001		(5,449	)		-		(5	)		(6,509	)		-			-			-		(11,963	)
Issuance of 214,490 shares of common stock		-			-		2			2,752			-			-			-		2,754
Issuance of 64,000 shares of restricted common stock		-			-		1			982			-			(983	)		-		-
Stock issuance costs		-			-		-			(14	)		-			-			-		(14	)
Amortization of deferred compensation		-			-		-			-			-			854			-		854
Balances at December 31, 2002		44,551			-		404			528,888			(21,657	)		(3,045	)		-		549,141
Net earnings		-			-		-			-			53,473			-			-		53,473
Dividends declared and paid ($2.25 per share of Series A Preferred Stock)		-			-		-			-			(4,008	)		-			-		(4,008	)
Dividends declared and paid ($50.25 per share of Series B Convertible Preferred Stock)		-			-		-			-			(502	)		-			-		(502	)
Dividends declared and paid ($1.28 per share of common stock)		-			-		-			-			(55,473	)		-			-		(55,473	)
Reversal of 379 shares of preferred stock and 823 shares of common stock originally offered to the dissenting stockholders in connection with the merger in 2001		(10	)		-		-			(11	)		-			-			-		(21	)
Issuance of 9,528,653 shares of common stock		-			-		95			168,512			-			-			-		168,607
Issuance of 10,000 shares of preferred stock		-			25,000		-			-			-			-			-		25,000
Issuance of 76,407 shares of restricted common stock		-			-		1			1,140			-			(1,141	)		-		-
Cancellation of 5,950 shares of restricted common stock		-			-		-			(91	)		-			91			-		-
Stock issuance costs		-			-		-			(6,734	)		-			-			-		(6,734	)
Amortization of deferred compensation		-			-		-			-			-			1,271			-		1,271
Balances at December 31, 2003		44,541			25,000		500			691,704			(28,167	)		(2,824	)		-		730,754

See accompanying notes to consolidated financial statements.

46

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - CONTINUED
Years Ended December 31, 2004, 2003 and 2002
(dollars in thousands, except per share data)

											Accumulated			Deferred			Accumulated
				Series B				Capital in			Dividends in			Compensation			Other
	Series A			Convertible				Excess of Par			Excess of Net			on Restricted			Comprehensive
	Preferred Stock			Preferred Stock		Common Stock		Value			Earnings			Stock			Income			Total
Balances at December 31, 2003		44,541			25,000		500		691,704			(28,167	)		(2,824	)		-			730,754
Net earnings		-			-		-		-			64,934			-			-			64,934
Dividends declared and paid ($2.25 per share of Series A Preferred Stock)		-			-		-		-			(4,008	)		-			-			(4,008	)
Dividends declared and paid ($167.50 per share of Series B Convertible Preferred Stock)		-			-		-		-			(1,675	)		-			-			(1,675	)
Dividends declared and paid ($1.29 per share of common stock)		-			-		1		1,056			(66,272	)		-			-			(65,215	)
Deferred changes in fair value of interest rate swap		-			-		-		-			-			-			(4,148	)		(4,148	)
Reversal of 56 shares of preferred stock and 51 shares of common stock originally offered to the dissenting stockholders in connection with the merger in 2001		(1	)		-		-		-			-			-			-			(1	)
Issuance of 886,962 shares of common stock		-			-		9		12,129			-			-			-			12,138
Issuance of 953,551 shares of common stock in exchange for a partnership interest		-			-		9		17,440			-			-			-			17,449
Issuance of 205,579 shares of restricted common stock		-			-		2		3,487			-			(3,489	)		-			-
Cancellation of 29,926 shares of restricted common stock		-			-		-		(473	)		-			473			-			-
Stock issuance costs		-			-		-		(6	)		-			-			-			(6	)
Amortization of deferred compensation		-			-		-		-			-			2,628			-			2,628
Termination and reclass of interest rate swap		-			-		-		-			-			-			4,148			4,148
Balances at December 31, 2004	$	44,540		$	25,000	$	521	$	725,337		$	(35,188	)	$	(3,212	)	$	-		$	756,998

See accompanying notes to consolidated financial statements.

47

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

	Year Ended December 31,
	2004			2003			2002
Cash flows from operating activities:
Net earnings	$	64,934		$	53,473		$	48,058
Adjustments to reconcile net earnings to net cash provided by operating activities:
Stock compensation expense		978			1,905			1,682
Depreciation and amortization		17,398			13,799			12,640
Provision for loss on impairment of real estate		-			-			3,285
Amortization of notes payable discount		123			146			128
Amortization of deferred interest rate hedge gains		(457	)		(596	)		(555	)
Equity in earnings of unconsolidated affiliates, net of deferred intercompany profits		(5,064	)		(4,674	)		(1,992	)
Minority interest		1,828			341			8
Gain on disposition of real estate, held for investment		(2,523	)		(287	)		(260	)
Income taxes		3,236			941			1,467
Transition costs		1,929			-			-
Change in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
Additions to real estate, held for sale		(74,024	)		(58,612	)		(27,229	)
Proceeds from disposition of real estate, held for sale		87,321			72,262			88,494
Gain on disposition of real estate, held for sale		(23,402	)		(12,175	)		(7,745	)
Decrease in real estate leased to others using the direct financing method		2,770			2,368			2,165
Increase in work in process		(2,093	)		(2,679	)		(3,694	)
Increase (decrease) in mortgages, notes and accrued interest receivable		6,243			(9,798	)		(1,070	)
Decrease (increase) in receivables		(1,642	)		(2,614	)		263
Increase in accrued rental income		(3,438	)		(6,548	)		(3,172	)
Increase in other assets		(1,456	)		(1,682	)		(493	)
Increase in accrued interest payable		485			246			442
Increase (decrease) in other liabilities		1,646			2,715			(833	)
Net cash provided by operating activities		74,792			48,531			111,589
Cash flows from investing activities:
Proceeds from the disposition of real estate, held for investment		32,639			25,024			29,329
Additions to real estate, held for investment:
Accounted for using the operating method		(134,565	)		(215,730	)		(41,236	)
Accounted for using the direct financing method		-			-			(3,201	)
Investment in unconsolidated affiliates		(4	)		(9,362	)		(14,500	)
Distributions received from unconsolidated affiliates		11,008			5,684			5,785
Increase in mortgages and notes receivable		(6,857	)		(48,328	)		(25	)
Mortgage and notes payments received		23,301			1,785			7,642
Increase in mortgages and other receivables from unconsolidated affiliates		(115,600	)		(119,700	)		(80,900	)
Payments received on mortgages and other receivables from unconsolidated affiliates		132,200			125,900			81,818
Business combination, net of cash acquired		1,068			-			1,319
Payment of lease costs		(1,491	)		(3,127	)		-
Consideration due to the dissenting shareholders in connection with the merger of Captec Net Lease Realty, Inc. (“Captec”) in December 2001		-			(13,278	)		-
Other		(654	)		(54	)		(1,173	)
Net cash used in investing activities		(58,955	)		(251,186	)		(15,142	)

See accompanying notes to consolidated financial statements.

48

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED
(dollars in thousands)

	Year Ended December 31,
	2004			2003			2002
Cash flows from financing activities:
Proceeds from line of credit payable		350,900			352,800			111,500
Repayment of line of credit payable		(360,800	)		(363,900	)		(180,000	)
Proceeds from mortgages payable		406			95,000			23,340
Repayment of mortgages payable		(9,163	)		(2,944	)		(2,547	)
Proceeds from financing lease obligation		26,041			-			-
Proceeds from notes payable		149,560			-			49,713
Proceeds from forward starting interest rate swap		4,148			-			-
Repayment of notes payable		(120,000	)		-			(50,000	)
Payment of debt costs		(1,450	)		(1,900	)		(1,197	)
Proceeds from issuance of Series B Convertible Preferred Stock		-			25,000			-
Proceeds from issuance of common stock		13,230			168,579			2,725
Payment of Series A Preferred Stock dividends		(4,008	)		(4,010	)		(4,007	)
Payment of Series B Convertible Preferred Stock dividends		(1,675	)		(502	)		-
Payment of common stock dividends		(66,272	)		(55,472	)		(51,177	)
Stock issuance costs		(140	)		(6,686	)		(4	)
Other		(2	)		-			-
Net cash provided by (used in) financing activities		(19,225	)		205,965			(101,654	)
Net increase (decrease) in cash and cash equivalents		(3,388	)		3,310			(5,207	)
Cash and cash equivalents at beginning of year		5,335			2,025			7,232
Cash and cash equivalents at end of year	$	1,947		$	5,335		$	2,025
Supplemental disclosure of cash flow information – interest paid, net of amount capitalized	$	33,855		$	28,948		$	27,313
Supplemental disclosure of non-cash investing and financing activities:
Issued 205,579, 76,407 and 64,000 shares of restricted common stock in 2004, 2003 and 2002, respectively, in pursuant to the Company’s 2000 Performance Incentive Plan, including grants in connection with transition costs	$	3,016		$	1,050		$	983
Common and preferred stock dividends for non-dissenting, unexchanged shares held by the Company in connection with the merger of Captec	$	-		$	(1	)	$	4
Cash consideration for non-dissenting, unexchanged shares held by the Company in connection with the merger of Captec	$	-		$	(2	)	$	3
Liability for the consideration due to the dissenting stockholders in connection with the merger of Captec	$	-			-		$	13,278
Note and mortgage notes accepted in connection with real estate transactions	$	-		$	17,123		$	4,344
Acquisition of real estate held for investment and assumption of related mortgage payable	$	7,357		$	-		$	-
Issued 953,551 shares of common stock in 2004 in exchange for a partnership interest	$	17,449		$	-		$	-
Disposition of real estate held for sale and transfer of related mortgage payable	$	2,251		$	-		$	-
Note receivable issued in connection with sale of entity	$	-		$	-		$	25

See accompanying notes to consolidated financial statements.

49

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

CONSOLIDATED QUARTERLY FINANCIAL DATA
(unaudited)
(dollars in thousands, except for per share data)

	First		Second		Third		Fourth
2004	Quarter		Quarter		Quarter		Quarter		Year
Gross revenues	$	35,952	$	34,983	$	43,374	$	42,968	$	157,277
Depreciation and amortization expense		4,265		4,265		4,419		4,449		17,398
Interest expense		7,731		7,973		8,744		8,672		33,120
Transition costs		-		3,200		52		489		3,741
Other expenses		8,925		8,812		8,798		9,112		35,647
Net earnings		16,268		12,735		17,005		18,926		64,934
Net earnings per share (2):
Basic		0.29		0.22		0.30		0.34		1.15
Diluted		0.29		0.22		0.30		0.34		1.15
2003
Gross revenues	$	26,370	$	28,090	$	31,236	$	38,551	$	124,247
Depreciation and amortization expense		3,102		3,275		3,330		4,092		13,799
Interest expense		6,523		6,910		6,814		7,658		27,905
Dissenting shareholders’ settlement		2,413		-		-		-		2,413
Other expenses		5,503		5,902		8,048		9,905		29,358
Net earnings		10,154		12,344		15,384		15,591		53,473
Net earnings per share (2):
Basic		0.23		0.28		0.32		0.30		1.14
Diluted		0.23		0.28		0.32		0.30		1.13

(1)

The consolidated quarterly financial data above includes revenues and expenses from the Company’s continuing and discontinued operations. The Financial Accounting Standard Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and broadens the presentation of discontinued operations in the income statement to include a component of an entity. Accordingly, the results of operations related to these certain properties that have been classified as held for sale or have been disposed of in 2004 and 2003 have been reclassified as earnings from discontinued operations for each period reported above. As reported in the current Form 10-K, earnings from discontinued operations for the years ended December 31, 2004 and 2003, were $14,310,000 and $10,607,000, respectively.

(2)

Calculated independently for each period, and consequently, the sum of the quarters may differ from the annual amount.

50

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2003 and 2002

1.	Organization and Summary of Significant Accounting Policies:
	Organization and Nature of Business – Commercial Net Lease Realty, Inc., a Maryland corporation, is a fully integrated real estate investment trust (“REIT”) formed in 1984. The term “Company” refers to Commercial Net Lease Realty, Inc. and its majority owned and controlled subsidiaries. These subsidiaries include the wholly-owned qualified REIT subsidiaries of Commercial Net Lease Realty, Inc., as well as the taxable REIT subsidiary (“TRS”), Commercial Net Lease Realty Services, Inc. and its majority owned and controlled subsidiaries (collectively, “Services”). The Company holds a 98.7 percent, non-controlling interest in Services and is entitled to receive 98.7 percent of the dividends paid by Services. James M. Seneff, Jr., a director of the Company, Kevin B. Habicht, an officer and director of the Company, and Gary M. Ralston, a former officer and director of the Company, collectively own the remaining 1.3 percent interest, which is 100 percent of the voting interest in Services. Effective January 1, 2005, the Company acquired the remaining 1.3 percent voting interest in Services increasing the Company’s ownership in Services to 100 percent.
	The Company’s operations are divided into two primary business segments: real estate held for investment and real estate held for sale. The real estate held for investment is operated through Commercial Net Lease Realty, Inc. and its wholly owned qualified REIT subsidiaries. The Company directly and indirectly, through investment interests, acquires, owns, invests in, manages and develops primarily single-tenant retail properties that are generally leased to established tenants under long-term commercial net leases (“Investment Properties”). As of December 31, 2004, the Company owned 362 properties, located in 38 states, that are leased to established tenants, including Academy, Barnes & Noble, Best Buy, Borders, CVS, Eckerd, OfficeMax, The Sports Authority, United Rentals and the United States of America. The real estate held for sale is operated through Services. Services acquires and develops real estate directly and indirectly, through investment interests, primarily for the purpose of selling the real estate to purchasers who are looking for replacement like-kind exchange property or to other purchasers with different investment objectives. As of December 31, 2004, Services owned 21 properties that were held for sale (“Inventory Properties”).
	Principles of Consolidation – In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46R”). This Interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, addresses consolidation by business enterprises of variable interest entities. A variable interest entity refers to certain entities subject to consolidation according to the provisions of this interpretation. This interpretation required existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the variable interest entities do not effectively disperse risks among parties involved. Effective January 1, 2004, the Company implemented FIN 46R and under the guidelines of this interpretation, Services met the criteria of a variable interest entity which required consolidation by the Company. Accordingly, effective January 1, 2004, the Company consolidated Services and all prior period comparable condensed consolidated financial statements have been restated to include Services as a consolidated subsidiary. The adoption of this interpretation did not have a significant impact on the financial position or results of operations of the Company.
	Therefore, the Company’s consolidated financial statements include the accounts of each of the respective majority owned and controlled affiliates. All significant intercompany account balances and transactions have been eliminated. The Company applies the equity method of

51

accounting to investments in partnerships and joint ventures that are not subject to control by the Company due to the significance of rights held by other parties.

The Company holds a variable interest in, but is not the primary beneficiary of, CNL Plaza Ltd., a variable interest entity. The Company’s maximum exposure to loss as a result of its involvement with CNL Plaza Ltd. as of December 31, 2004, is $6,076,000. As of December 31, 2004, CNL Plaza, Ltd. had total assets and liabilities of $58,913,000 and $62,473,000, respectively.

A wholly-owned subsidiary of Services, CNLRS Equity Ventures, Inc. (“Equity Ventures”), develops real estate through various joint venture development affiliate agreements. Equity Ventures consolidates the joint venture development entities listed in the table below, eliminating significant intercompany balances and transactions and recording a minority interest for its other partners’ ownership percentage. The following table summarizes each of the investments as of December 31, 2004:

Date of			Equity Ventures’
Agreement	Entity Name	Agreement Type	Ownership %
November 2002	WG Grand Prairie TX, LLC	Limited Liability Company		60	%
February 2003	KK-Seminole FL, LLC	Limited Liability Company		40	%
February 2003	Gator Pearson, LLC	Limited Liability Company		50	%
April 2003	MAC Boise ID, LLC	Limited Liability Company		60	%
June 2003	CNLRS WG Grapevine TX, LLC	Limited Liability Company		60	%
January 2004	CNLRS WG Crowley TX, LLC	Limited Liability Company		60	%
February 2004	CNLRS Yosemite Park CO, LLC	Limited Liability Company		50	%
September 2004	CNLRS Bismarck ND, LLC	Limited Liability Company		50	%
October 2004	CNLRS WG Ennis TX, LLC	Limited Liability Company		60	%
November 2004	CNLRS WG Dallas TX, LLC	Limited Liability Company		60	%
December 2004	CNLRS WG Long Beach MS, LLC	Limited Liability Company		50	%
December 2004	CNLRS Arcadian Commons, LLC	Limited Liability Company		50	%

Real Estate Held for Investment – The Company records the acquisition of real estate at cost, including acquisition and closing costs. The cost of properties developed by the Company includes direct and indirect costs of construction, property taxes, interest and other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy.

Real estate is generally leased to tenants on a net lease basis, whereby the tenant is responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance and repairs. The leases are accounted for using either the operating or the direct financing method. Such methods are described below:

Operating method – Leases accounted for using the operating method are recorded at the cost of the real estate. Revenue is recognized as rentals are earned and expenses (including depreciation) are charged to operations as incurred. Buildings are depreciated on the straight-line method over their estimated useful lives (generally 35 to 40 years). Leasehold interests are amortized on the straight-line method over the terms of their respective leases. When scheduled rentals vary during the lease term, income is recognized on a straight-line basis so as to produce a constant periodic rent over the term of the lease. Accrued rental income is the aggregate difference between the scheduled rents which vary during the lease term and the income recognized on a straight-line basis.

Direct financing method – Leases accounted for using the direct financing method are recorded at their net investment (which at the inception of the lease generally represents the

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cost of the property). Unearned income is deferred and amortized into income over the lease terms so as to produce a constant periodic rate of return on the Company’s net investment in the leases.

When real estate is disposed of, the related cost, accumulated depreciation or amortization and any accrued rental income for operating leases and the net investment for direct financing leases are removed from the accounts and gains and losses from the dispositions are reflected in income. Gains from disposition of real estate are generally recognized using the full accrual method in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 66 “Accounting for Real Estate Sales,” provided that various criteria relating to the terms of the sale and any subsequent involvement by the Company with the real estate sold are met. Lease termination fees are recognized when the related leases are cancelled and the Company no longer has a continuing obligation to provide services to the former tenants.

Management reviews its real estate for impairment whenever events or changes in circumstances indicate that the carrying value of the asset, including accrued rental income, may not be recoverable through operations. Management determines whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the real estate, with the carrying cost of the individual asset. If an impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value.

Purchase Accounting for Acquisition of Real Estate – For purchases of real estate that were consummated subsequent to June 30, 2001, the effective date of SFAS No. 141, “Business Combinations,” the fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and value of tenant relationships, based in each case on their relative fair values.

The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, building and tenant improvements based on the determination of the relative fair values of these assets. Management uses the as-if-vacant fair value of a property provided by a qualified appraiser.

In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded as other assets based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term and any fixed rate renewal periods in the respective leases. The Company’s leases do not currently include fixed-rate renewal periods.

The aggregate value of other acquired intangible assets, consisting of in-place leases, is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property as-if-vacant, determined as set forth above. The value of in-place leases exclusive of the value of above-market and below-market in-place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off.

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Real Estate Held for Sale – Services acquires, develops and currently owns properties that it intends to sell. The properties that are classified as held for sale at any given time may consist of properties that have been acquired in the marketplace with the intent to resell the properties that have been, or are currently being, constructed by Services. Services’ records the acquisition of the real estate at cost, including the acquisition and closing costs. The cost of the real estate developed by Services includes direct and indirect costs of construction, interest and other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. The asset is not depreciated. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” Services classifies its real estate held for sale as discontinued operations for each property in which rental revenues are generated (see Note 3). When real estate held for sale is disposed of, the related costs are removed from the accounts and gains and losses from the dispositions are reflected in earnings.

Investment in Unconsolidated Affiliates – The Company accounts for each of its investments in unconsolidated affiliates under the equity method of accounting (see Note 4). The Company exercises influence over these unconsolidated affiliates, but does not control them.

Cash and Cash Equivalents – The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of cash and money market accounts. Cash equivalents are stated at cost plus accrued interest, which approximates fair value.

Cash accounts maintained on behalf of the Company in demand deposits at commercial banks and money market funds may exceed federally insured levels; however, the Company has not experienced any losses in such accounts. The Company limits investment of temporary cash investments to financial institutions with high credit standing; therefore, management believes it is not exposed to any significant credit risk on cash and cash equivalents.

Debt Costs – Debt costs incurred in connection with the Company’s $225,000,000 line of credit and mortgages payable have been deferred and are being amortized over the term of the respective loan commitment using the straight-line method which approximates the effective interest method. Debt costs incurred in connection with the term note payable, which matured in November 2004, were amortized over the term using the straight-line method which approximated the effective interest rate. Debt costs incurred in connection with the issuance of the Company’s notes payable have been deferred and are being amortized over the term of the respective debt obligation using the effective interest method.

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Earnings Per Share – Basic net earnings per share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted net earnings per common share is computed by dividing net earnings available to common stockholders for the period by the number of common shares that would have been outstanding assuming the issuance of common shares for all potentially dilutive common shares outstanding during the periods.

The following is a reconciliation of the denominator of the basic net earnings per common share computation to the denominator of the diluted net earnings per common share computation for each of the years ended December 31:

	2004			2003			2002
Weighted average number of common shares outstanding		51,546,814			43,167,433			40,419,876
Restricted stock		(234,380	)		(59,220	)		(36,471	)
Weighted average number of common shares outstanding used in basic earnings per share		51,312,434			43,108,213			40,383,405
Weighted average number of common shares outstanding		51,546,814			43,167,433			40,419,876
Effect of dilutive securities:
Common stock options		192,370			229,495			169,081
Assumed conversion of Series B Convertible Preferred Stock to common stock		-			499,872			-
Directors’ deferred fee plan		3,334			-			-
Weighted average number of common shares outstanding used in diluted earnings per share		51,742,518			43,896,800			40,588,957

The following represents the number of shares of potentially issuable common stock which were not included in computing diluted earnings per common share because their effects were antidilutive:

	2004		2003		2002
Common stock options		-		398,500		454,500

Stock-Based Compensation – At December 31, 2004, the Company had one stock-based compensation plan, which is described more fully in Note 19. Prior to 2003, the Company accounted for the plan under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. No stock-based compensation costs are reflected in 2002 net earnings, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock at the date of grant. Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” prospectively to all employee and director awards granted, modified, or settled after January 1, 2003. Therefore, the cost related to stock-based employee compensation included in the determination of net earnings for 2004 and 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123.

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The following table illustrates the effect on net earnings available to common stockholders and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period (dollars in thousands, except per share data):

	2004			2003			2002
Net earnings available to common stockholders – basic, as reported:	$	59,251		$	48,963		$	44,048
Add: stock-based employee compensation expense included in reported net earnings		20			3			-
Deduct: total stock-based employee compensation expense determined under the fair value based method for all awards		(65	)		(74	)		(27	)
Pro forma net earnings available to common stockholders – basic	$	59,206		$	48,892		$	44,021
Net earnings available to common stockholders – diluted, as reported:	$	59,251		$	49,465		$	44,048
Add: stock-based employee compensation expense included in reported net earnings		20			3			-
Deduct: total stock-based employee compensation expense determined under the fair value based method for all awards		(65	)		(74	)		(27	)
Pro forma net earnings available to common stockholders – diluted	$	59,206		$	49,394		$	44,021
Earnings available to common stockholders per common share as reported:
Basic	$	1.15		$	1.14		$	1.09
Diluted	$	1.15		$	1.13		$	1.09
Pro forma earnings available to common stockholders per common share:
Basic	$	1.15		$	1.13		$	1.09
Diluted	$	1.14		$	1.13		$	1.08

There were no options granted in 2004. The fair value of each option grant in 2003 and 2002 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (i) risk free rate of 5.5% for the 2003 grant and 5.4% and 5.5% for the 2002 grants, (ii) expected volatility of 18.0% and 18.0%, respectively, (iii) dividend yields of 9.3% and 9.3%, respectively, and (iv) expected lives of 10 years for each of the 2003 and 2002 grants.

Income Taxes – The Company has made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations. The Company generally will not be subject to federal income taxes on amounts distributed to stockholders, providing it distributes at least 90 percent of its real estate investment trust taxable income and meets certain other requirements for qualifying as a REIT. For each of the years in the three-year period ended December 31, 2004, the Company believes it has qualified as a REIT. Not withstanding the Company’s qualification for taxation as a real estate investment trust, the Company is subject to certain state taxes on its income and real estate.

Effective January 1, 2001, Commercial Net Lease Realty, Inc. elected for Services to be treated as a TRS pursuant to the provisions of the REIT Modernization Act. As a TRS, Services is able to engage in activities resulting in income that previously would have been disqualified from being eligible REIT income under the federal income tax regulations. As a result, certain activities of the Company which occur within Services are subject to federal and state income taxes (See “Real Estate Held for Sale”). All provisions for federal income taxes in the accompanying consolidated financial statements are attributable to Services.

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	Income taxes are accounted for under the asset and liability method as required by SFAS No. 109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are recognized for the temporary differences based on estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
	New Accounting Standards –In December 2004, FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets.” This statement is effective for the fiscal years beginning after June 15, 2005. This statement addresses financial accounting and reporting obligations associated with the exchange of nonmonetary assets. The statement eliminates the exception to fair value for exchanges of similar productive assets issued in APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” and replaces it with a general exception for exchange transactions that do not have commercial substance, that is, transactions that are not expected to result in significant changes in the cash flows of the reporting entity. The adoption of this interpretation is not expected to have a significant impact on the financial position or results of operations of the Company.
	In December 2004, FASB revised SFAS No. 123, “Accounting for Stock-Based Compensation.” This revision, SFAS No. 123R, is effective for the first interim or annual reporting period beginning after June 15, 2005. This revision to the statement eliminates the alternative to use APB Opinion No. 25, “Accounting for Stock Issued to Employees,” intrinsic value method of accounting that was provided in Statement 123 as originally issued. An enterprise will initially measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value; the fair value of that award will be remeasured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period. The adoption of this interpretation is not expected to have a significant impact on the financial position or results of operations of the Company.
	Use of Estimates – Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Significant estimates include provision for impairment and allowances for certain assets, accruals, useful lives of assets and capitalization of costs. Actual results could differ from those estimates.
	Reclassification – Certain items in the prior year’s consolidated financial statements and notes to consolidated financial statements have been reclassified to conform with the 2004 presentation. These reclassifications had no effect on stockholders’ equity or net earnings.
2.	Real Estate Held for Investment:
	Leases – The Company generally leases its Investment Properties to established tenants. As of December 31, 2004, 302 of the Investment Property leases have been classified as operating leases and 69 leases have been classified as direct financing leases. For the Investment Property leases classified as direct financing leases, the building portions of the property leases are accounted for as direct financing leases while the land portions of 46 of these leases are accounted for as operating leases. Substantially all leases have initial terms of 10 to 20 years (expiring between 2005 and 2025) and provide for minimum rentals. In addition, the majority of the leases provide for

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contingent rentals and/or scheduled rent increases over the terms of the leases. Generally, the tenant is also required to pay all property taxes and assessments, substantially maintain the interior and exterior of the building and carry property and liability insurance coverage. Certain of the Company’s Investment Properties are subject to leases under which the Company retains responsibility for certain costs and expenses of the property. As of December 31, 2004, the weighted average remaining lease term was approximately 10 years. Generally, the leases of the Investment Properties provide the tenant with one or more multi-year renewal options subject to generally the same terms and conditions as the initial lease.

Accounted for Using the Operating Method – Real estate subject to operating leases consisted of the following as of December 31 (dollars in thousands):

	2004			2003
Land and improvements	$	431,867		$	384,134
Buildings and improvements		631,306			544,246
Leasehold interests		2,532			3,381
		1,065,705			931,761
Less accumulated depreciation and amortization		(61,720	)		(48,863	)
		1,003,985			882,898
Construction in progress		7,025			6,482
		1,011,010			889,380
Less provision for loss on impairment of real estate		(1,613	)		(2,256	)
	$	1,009,397		$	887,124

In August 2003, the Company acquired two office buildings and a related parking garage located in the Washington, D.C. metropolitan area (“DC Office Properties”) for $142,800,000. In addition, pursuant to the lease agreement, the Company has agreed to fund an additional $27,322,000 for building and tenant improvements, of which $23,850,000 had been funded as of December 31, 2004. The Company anticipates the remaining building and improvements to be substantially completed and funded by June 30, 2005.

Some leases provide for scheduled rent increases throughout the lease term. Such amounts are recognized on a straight-line basis over the terms of the leases. For the years ended December 31, 2004, 2003 and 2002, the Company recognized collectively in continuing and discontinued operations, $3,452,000, $6,756,000 and $3,223,000, respectively, of such income. At December 31, 2004 and 2003, the balance of accrued rental income, net of allowances of $1,620,000 and $1,320,000, respectively, was $28,619,000 and $25,322,000, respectively.

The following is a schedule of future minimum lease payments to be received on noncancellable operating leases at December 31, 2004 (dollars in thousands):

2005	$	105,235
2006		105,333
2007		104,579
2008		102,673
2009		98,336
Thereafter		612,181
	$	1,128,337

Since lease renewal periods are exercisable at the option of the tenant, the above table only presents future minimum lease payments due during the initial lease terms. In addition, this table does not include amounts for potential variable rent increases that are based on the Consumer Price Index (“CPI”) or future contingent rents which may be received on the leases based on a percentage of the tenant’s gross sales.

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Accounted for Using the Direct Financing Method – The following lists the components of net investment in direct financing leases at December 31 (dollars in thousands):

	2004			2003
Minimum lease payments to be received	$	166,849		$	175,236
Estimated unguaranteed residual values		32,623			32,354
Less unearned income		(97,161	)		(104,620	)
Net investment in direct financing leases	$	102,311		$	102,970

The following is a schedule of future minimum lease payments to be received on direct financing leases at December 31, 2004 (dollars in thousands):

2005	$	13,559
2006		13,580
2007		13,631
2008		13,635
2009		13,738
Thereafter		98,706
	$	166,849

	The above table does not include future minimum lease payments for renewal periods, potential variable CPI rent increases or for contingent rental payments that may become due in future periods (See Real Estate – Accounted for Using the Operating Method).
3.	Real Estate Held for Sale:
	As of December 31, 2004, the portfolio of Inventory Properties consisted of 10 completed inventory properties, seven properties under construction and four land parcels.
	Real estate held for sale consisted of the following at December 31 (dollars in thousands):

	2004			2003
Inventory:
Land	$	16,449		$	13,644
Buildings		17,660			17,129
Accumulated depreciation		(81	)		(246	)
		34,028			30,527
Under construction:
Land		13,826			7,226
Work in process		10,195			8,069
		24,021			15,295
	$	58,049		$	45,822

In connection with the development of seven Inventory Properties by Services, the Company has agreed to fund construction commitments of $26,409,000, of which $12,248,000 has been funded as of December 31, 2004.

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The following table summarizes the number of inventory properties sold and the corresponding gain recognized on the disposition of real estate held for sale included in earnings from continuing and discontinued operations for the years ended December 31 (dollars in thousands):

	2004					2003					2002
	# of					# of					# of
	Properties		Gain			Properties		Gain			Properties		Gain
Continuing operations		7	$	4,700			3	$	3,247			4	$	1,290
Discontinued operations:
Gain				17,885					7,891					4,489
Intersegment eliminations				817					1,037					1,966
				18,702					8,928					6,455
Minority interest				(6,422	)				(986	)				-
Total discontinued operations		17		12,280			26		7,942			21		6,455
		24	$	16,980			29	$	11,189			25	$	7,745

4.	Investments in Unconsolidated Affiliates:
	In September 1997, the Company entered into a partnership, Net Lease Institutional Realty, L.P. (the “Partnership”), with the Northern Trust Company, as Trustee of the Retirement Plan for Chicago Transit Authority Employees (“CTA”). Under the terms of the limited partnership agreement of the Partnership, CTA had the option to convert its 80 percent limited partnership interest into shares of the Company’s common stock. In October 2003, CTA exercised that right, and based on the terms of and calculation defined in the limited partnership agreement, the Company issued 953,551 shares of common stock to CTA in a private transaction in February 2004 in exchange for CTA’s 80 percent limited partnership interest, increasing the Company’s ownership in the Partnership to 100 percent. Prior to CTA’s exercise, the Company accounted for its 20 percent interest in the Partnership under the equity method of accounting. Net income and losses of the Partnership were allocated to the partners in accordance with their respective percentage interest during the Partnership’s term.
	The Company received $116,000 in distributions from the Partnership for the year ended December 31, 2003. For the years ended December 31, 2004, 2003 and 2002, the Company recognized earnings of $26,000, $280,000 and $270,000, respectively, from the Partnership. The Company managed the Partnership and pursuant to a management agreement, the Partnership paid the Company $17,000, $193,000 and $193,000 in asset management fees during the years ended December 31, 2004, 2003 and 2002, respectively. The Company did not recognize earnings or receive asset management fees from the Partnership subsequent to increasing its ownership in the Partnership to 100 percent in February 2004.

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The Company has entered into five limited liability company (“LLC”) agreements (collectively, “CCMH LLCs”) with Orange Avenue Mortgage Investments, Inc. (“OAMI”), formerly known as CNL Commercial Finance, Inc. Each of the LLCs holds an interest in mortgage loans and is 100 percent equity financed. The Company holds a non-voting and non-controlling interest in each of the LLCs and accounts for its investment under the equity method of accounting. The following table summarizes each of the investments as of December 31, 2004:

Date of Agreement	LLC Agreement	Investment Interest
June 2001	CCMH I, LLC	42.7%
December 2001	CCMH II, LLC	44.0%
June 2002	CCMH III, LLC	36.7%
December 2002	CCMH IV, LLC	38.3%
July 2003	CCMH V, LLC	38.4%

During the years ended December 31, 2004 and 2003, the Company received $10,562,000 and $4,211,000, respectively, in distributions from the CCMH LLC’s. In 2003, in connection with a loan to OAMI, the Company pledged a portion of its interest in two of the LLC’s as partial collateral for the loan.

The following presents the combined condensed financial information of the CCMH LLCs (dollars in thousands):

	December 31,
	2004		2003
Mortgage assets	$	59,840	$	70,472
Other assets		-		1
Total assets	$	59,840	$	70,473
Total liabilities	$	-	$	-
Members’ equity		59,840		70,473
Total liabilities and members’ equity	$	59,840	$	70,473

	Year Ended December 31,
	2004		2003		2002
Revenues/net earnings	$	9,898	$	9,110	$	5,035

For the years ended December 31, 2004, 2003 and 2002, the Company recognized earnings of $5,042,000, $4,583,000 and $2,445,000, respectively, from the CCMH LLCs.

In May 2002, the Company purchased a combined 25 percent partnership interest in CNL Plaza, Ltd. and CNL Plaza Venture, Ltd. (collectively, “Plaza”) for $750,000. The remaining partnership interests in Plaza are owned by affiliates of James M. Seneff, Jr. and Robert A. Bourne, both members of the Company’s board of directors. Plaza owns a 346,000 square foot office building and an interest in an adjacent parking garage. The Company has severally guaranteed 41.67 percent of a $15,500,000 unsecured promissory note on behalf of Plaza. The maximum obligation of the Company under this guarantee is $6,458,000, plus interest. Interest accrues at a rate of LIBOR plus 200 basis points per annum on the unpaid principal amount. This guarantee shall continue through the loan maturity, which was extended from the original maturity of November 2004 to May 2005. The fair value of the Company’s guarantee is $73,000. During the years ended December 31, 2004, 2003 and 2002 the Company received $446,000, $372,000 and $411,000, respectively, in distributions from Plaza. For the years ended December 31, 2004, 2003 and 2002, the Company recognized a loss from Plaza of $276,000, $306,000 and $159,000, respectively.

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Since November 1999, the Company has leased its office space from Plaza. The Company’s lease expires in October 2014. In addition, other affiliates of James M. Seneff, Jr. also lease office space from Plaza. The Company and other affiliates lease an aggregate of 66 percent of the 346,000 square foot office building. During the years ended December 31, 2004, 2003 and 2002, the Company incurred rental expenses in connection with the lease of $1,018,000, $1,001,000 and $1,222,000, respectively. In May 2000, the Company subleased a portion of its office space to affiliates of James M. Seneff, Jr. During the years ended December 31, 2004, 2003 and 2002, the Company earned $345,000, $338,000 and $270,000, respectively, in rental and accrued rental income from these affiliates.

The following is a schedule of the Company’s future minimum lease payments and the future minimum sublease income from the affiliates related to the office space leased from Plaza at December 31, 2004 (dollars in thousands):

	Lease		Sublease
	Payments		Income		Net
2005	$	1,165	$	522	$	643
2006		1,200		538		662
2007		1,236		554		682
2008		1,273		571		702
2009		1,311		588		723
Thereafter		6,910		3,099		3,811
	$	13,095	$	5,872	$	7,223

Since lease renewal periods are exercisable at the option of the tenant, the above table only presents future minimum lease payments due during the initial lease terms. The Company has the option to renew its lease with Plaza for three successive five-year periods subject to similar terms and conditions as the initial lease.

In 1999, a wholly-owned subsidiary of the Company entered into a membership arrangement, WXI/SMC Real Estate LLC (“WXI”), with Whitehall Street Real Estate Limited Partnership XI. The Company is the sole managing member and holds a 33 1/3 percent interest in WXI. WXI was organized for the purpose of owning, developing, redeveloping, operating, leasing and selling a portfolio of real estate. The Company accounts for its interest under the equity method of accounting. During the years ended December 31, 2004, 2003, and 2002, the Company recognized a loss of $68,000, 570,000, and $1,438,000, respectively. The Company provides certain management services for WXI on behalf of Services pursuant to WXI’s Limited Liability Company Agreement and Property Management and Development Agreement. WXI paid the Company $14,000, $52,000 and $86,000 in fees during the years ended December 31, 2004, 2003 and 2002, respectively.

The following presents a reconciliation of investments in and receivables from unconsolidated affiliates at December 31 (dollars in thousands):

	2004			2003
CCMH LLCs investments	$	29,672		$	35,193
Other:
Investments		(365	)		4,396
Receivables		-			17
	$	29,307		$	39,606

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The following presents a reconciliation of equity in earnings of unconsolidated affiliates for the years ended December 31 (dollars in thousands):

	2004			2003			2002
CCMH LLCs	$	5,042		$	4,583		$	2,445
Other		(318	)		(242	)		(645	)
	$	4,724		$	4,341		$	1,800

5.	Note Receivable:
	Structured finance agreements are typically loans secured by a pledge of ownership interests in the borrowers (or their subsidiaries) that own the underlying real estate. These agreements are typically subordinated to senior loans secured by first mortgages encumbering the underlying real estate. Subordinated positions are generally subject to a higher risk of nonpayment of principal and interest than the more senior loans.
	In 2004 and 2003, the Company made structured finance investments of $6,857,000 and $43,433,000, respectively. As of December 31, 2004, the structured finance investments bear a weighted average interest rate of 14.3% per annum, of which 12.5% is payable monthly and the remaining 1.8% accrues and is due at maturity. The principal balance of each structured finance investment is due in full at maturity, which range between November 2006 and November 2007. The structured finance investments are secured by the borrowers’ pledge of their respective membership interests in the certain subsidiaries which own real estate. In December 2004, the Company received $20,900,000 in principal payments and a $418,000 prepayment fee. As of December 31, 2004 and 2003, the outstanding receivable balance of the structured finance investments was $29,390,000 and $43,433,000, respectively.
6.	Line of Credit Payable:
	In May 2003, the Company entered into an amended and restated loan agreement for a $225,000,000 revolving credit facility (the “Credit Facility”) which amended the Company’s existing loan agreement by (i) increasing the borrowing capacity to $225,000,000 from $200,000,000, (ii) lowering the interest rates of the tiered rate structure to a maximum rate of 135 basis points above LIBOR (based upon the debt rating of the Company, the current interest rate is 100 basis points above LIBOR), (iii) requiring the Company to pay a commitment fee based on a tiered rate structure to a maximum of 30 basis points per annum (based upon the debt rating of the Company), (iv) providing for a competitive bid option for up to 50 percent of the facility amount, (v) extending the expiration date to May 9, 2006 and (vi) amending certain of the financial covenants of the Company. The principal balance is due in full upon expiration of the Credit Facility in May 2006, which the Company may request to be extended for an additional 12-month period with the consent of the lender. As of December 31, 2004 and 2003, $17,900,000 and $27,800,000, respectively, was outstanding under the Credit Facility. The Credit Facility had a weighted average interest rate of 2.72% and 2.41% for the years ended December 31, 2004 and 2003, respectively. In accordance with the terms of the Credit Facility, the Company is required to meet certain restrictive financial covenants, which, among other things, require the Company to maintain certain (i) maximum leverage ratios, (ii) debt service coverage and (iii) cash flow coverage. At December 31, 2004, the Company was in compliance with those covenants.
	For the years ended December 31, 2004, 2003 and 2002, interest cost incurred was $1,084,000, $2,103,000 and $2,562,000, respectively, of which $369,000, $177,000 and $1,000, respectively, was capitalized by the Company as a cost of buildings constructed for its own use, and $813,000, $2,001,000 and $3,162,000, respectively, was charged to operations.

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7.	Mortgages Payable:
	In January 1996, the Company entered into a long-term, fixed rate loan for $39,450,000. The loan bears interest at a rate of 7.435% per annum and provides for a ten-year term with monthly principal and interest payments of $330,000 and the balance due in February 2006. The loan is secured by a first mortgage lien on certain of the Company’s properties. As of December 31, 2004, the aggregate carrying value of these properties totaled $58,049,000. The outstanding principal balance as of December 31, 2004 and 2003 was $22,466,000 and $26,118,000, respectively.
	In February 2004, the Company increased its ownership in the Partnership to 100 percent (see Note 4). In October 1997, the Partnership entered into a long-term, fixed rate loan for $12,000,000. The loan bears interest at a rate of 7.37% per annum with monthly principal and interest payments of $103,000 and the principal balance due in September 2007. The loan is secured by a first mortgage lien on certain of the Partnership’s properties. As of December 31, 2004, the aggregate carrying value of the properties totaled $28,893,000 and the outstanding principal balance was $8,606,000.
	The Company has acquired four properties subject to mortgages securing loans in the aggregate original principal balance of $7,214,000 (collectively the “Mortgages”) with maturities between December 2007 and December 2009. In December 2004, the Company sold one of the properties and the related mortgage was simultaneously paid, which accounted for $2,455,000 of the original principal balance. The remaining Mortgages bear interest at a weighted average rate of 8.45% per annum and have a weighted average maturity of 2.4 years, with an aggregate monthly payment of principal and interest of $60,000. In addition to the Mortgages, the Company has letters of credit that also secure two of the loans, which collectively total $2,426,000. As of December 31, 2004, the aggregate carrying value of these three properties and letters of credit totaled $10,751,000. As of December 31, 2004 and 2003, the outstanding principal balances secured by the Mortgages totaled $2,189,000 and $4,244,000, respectively.
	In connection with the acquisition of Captec Net Lease Realty, Inc. (“Captec”) in December 2001, the Company acquired three properties subject to mortgages securing loans with an aggregate principal balance of $1,806,000 (collectively, the “Captec Mortgages”) with maturities between March 2014 and March 2019. The Captec Mortgages bear interest at a weighted average rate of 9.0% per annum and have a weighted maturity of 7.4 years, with an aggregate monthly payment of principal and interest of $25,000. As of December 31, 2004, the aggregate carrying value of these three properties totaled $4,003,000. As of December 31, 2004 and 2003, the outstanding principal balances of the loans secured by the Captec Mortgages totaled $1,328,000 and $1,497,000, respectively.
	In June 2002, the Company entered into a long-term, fixed rate loan for $21,000,000. The loan bears interest at a rate of 6.9% per annum and provides for a 10-year term, with monthly principal and interest payments of $138,000 and the balance due in July 2012. The loan is secured by a first mortgage lien on five of the Company’s properties. As of December 31, 2004, the aggregate carrying value of these properties totaled $27,111,000. As of December 31, 2004 and 2003, the outstanding principal balance was $20,508,000 and $20,721,000, respectively.
	In July 2002, Services entered into a long-term, fixed rate loan for $2,340,000. The loan bore interest at a rate of 7.42% per annum with monthly principal and interest payments of $18,000 and the principal balance due in July 2012. The loan was secured by a first mortgage lien on one of Services’ properties. As of December 31, 2003, the outstanding principal balance was $2,281,000. In August 2004, the Company disposed of the property, at which time the buyer assumed the loan.

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In November 2003, the Company entered into a long-term, fixed rate interest-only loan for $95,000,000. The loan bears interest at a rate of 5.42% per annum with monthly interest payments of $435,000 and the principal balance due in November 2013. The loan is secured by a first mortgage lien on the DC Office Properties. As of December 31, 2004, the aggregate carrying value of these properties totaled $155,601,000. As of December 31, 2004 and 2003, the outstanding principal balance was $95,000,000.

In February 2004, the Company acquired a property subject to a mortgage securing a loan for $6,952,000. The loan bears interest at a rate of 6.90% per annum with monthly principal and interest payments of $68,000 and the balance due in January 2017. As of December 31, 2004, the aggregate carrying value of the property was $12,358,000. The outstanding principal balance as of December 31, 2004, was $6,665,000.

In December 2004, the Company acquired a property subject to a mortgage securing loan for $408,000. The loan bears interest at a rate of 9.375% per annum with monthly principal and interest payments of $5,000 and the balance due in September 2014. As of December 31, 2004, the aggregate carrying value of this property was $697,000. The outstanding principal balance as of December 31, 2004, was $406,000.

The following is a schedule of the annual maturities of the Company’s mortgages payable (dollars in thousands):

2005	$	4,070
2006		22,376
2007		8,776
2008		1,156
2009		964
Thereafter		119,826
	$	157,168

8.	Notes Payable:
	The Company filed a prospectus supplement to its shelf registration for each issuance of notes outlined in the table below (dollars in thousands).

														Commencement
						Discounted								Day of Semi-
		Purchase				Purchase		Stated			Effective			Annual Interest	Maturity
	Issue Date	Price		Discount(3)		Price		Rate			Rate(4)			Payments	Date
2008 Notes (1)	March 1998	$	100,000	$	271	$	99,729		7.125	%		7.163	%	September 1998	March 2008
2004 Notes(1)(5)	June 1999		100,000		392		99,608		8.125	%		7.547	%	December 1999	June 2004
2010 Notes(1)	September 2000		20,000		126		19,874		8.500	%		8.595	%	March 2001	September 2010
2012 Notes(1)	June 2002		50,000		287		49,713		7.750	%		7.833	%	December 2002	June 2012
2014 Notes(1)(2)(6)	June 2004		150,000		440		149,560		6.250	%		5.910	%	June 2004	June 2014

(1)	The proceeds from the note issuance were used to pay down outstanding indebtedness of the Company’s Credit Facility.
(2)	The proceeds from the note issuance were used to repay the obligation of the 2004 Notes.
(3)	The note discounts are amortized to interest expense over the respective term of each debt obligation using the effective interest method.
(4)	Includes the effects of the discount, treasury lock gain and swap gain (as applicable).
(5)	The Company entered into a treasury rate lock agreement which fixed a treasury rate of 5.1854% on a notional amount of $92,000,000. Upon issuance of the 2004 Notes, the Company terminated the treasury rate lock agreement resulting in a gain of $2,679,000. The gain was deferred and amortized as an adjustment to interest expense over the term of the 2004 Notes using the effective interest method.
(6)	The Company entered into a forward starting interest rate swap agreement which fixed a swap rate of 4.61% on a notional amount of $94,000,000. Upon issuance of the 2014 Notes, the Company terminated the forward starting interest rate swap agreement resulting in a gain of $4,148,000. The gain has been deferred and is being amortized as an adjustment to interest expense over the term of the 2014 Notes using the effective interest method.

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	Each issuance of notes is redeemable at the option of the Company, in whole or in part, at a redemption price equal to the sum of (i) the principal amount of the notes being redeemed plus accrued interest thereon through the redemption date and (ii) the make-whole amount, as defined in the respective supplemental indenture notes.
	In connection with the debt offerings, the Company incurred debt issuance costs totaling $4,193,000 consisting primarily of underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. Debt issuance costs have been deferred and are being amortized over the term of the respective notes using the effective interest method.
	In accordance with the terms of the indenture, pursuant to which the Company’s notes have been issued, the Company is required to meet certain restrictive financial covenants, which, among other things, require the Company to maintain (i) certain leverage ratios and (ii) certain interest coverage. At December 31, 2004, the Company was in compliance with those covenants.
	In November 2001, the Company entered into an unsecured $70,000,000 term note (“Term Note”), due November 30, 2004, to finance the acquisition of Captec and for the repayment of indebtedness and related expenses in connection therewith. As of December 31, 2003, the Term Note had an outstanding principal balance of $20,000,000. The Term Note bore interest at a rate of 175 basis points above LIBOR. In November 2004, the Company used proceeds from the Credit Facility to repay the obligation of the Term Note. In connection with the Term Note, the Company incurred debt costs of $376,000 consisting primarily of bank commitment fees. The Term Note costs were deferred and amortized over the term of the loan commitment using the straight-line method which approximated the effective interest method.
9.	Financing Lease Obligation:
	In July 2004, the Company sold five investment properties for approximately $26,041,000 and subsequently leased back the properties under a 10-year financing lease obligation. The Company may repurchase one or more of the properties subject to put and call options included in the financing lease. In accordance with the provisions of SFAS No. 66, “Accounting for Sales of Real Estate,” the Company has recorded this transaction as a financing transaction. The 10-year financing lease bears an interest rate of 5% annually with monthly interest payments of $109,000 and expires in June 2014 unless either the put or call option is exercised.
10.	Preferred Stock:
	In December 2001, the Company issued 1,999,974 shares of 9% Non-Voting Series A Preferred Stock (the “Series A Preferred Stock”) in connection with the acquisition of Captec. Holders of the Series A Preferred Stock are entitled to receive, when and as authorized by the board of directors, cumulative preferential cash distributions at a rate of nine percent of the $25.00 liquidation preference per annum (equivalent to a fixed annual amount of $2.25 per share). The Series A Preferred Stock ranks senior to the Company’s common stock with respect to distribution rights and rights upon liquidation, dissolution or winding up of the Company. The Company may redeem the Series A Preferred Stock on or after December 31, 2006, in whole or from time to time in part, for cash, at a redemption price of $25.00 per share, plus all accumulated and unpaid distributions.
	In 2004, 2003 and 2002, as a result of a legal action in connection with the merger of Captec, the Company reduced the number of Series A Preferred Stock shares issued and outstanding by 56, 379 and 217,950, respectively.
	In August 2003, the Company filed a prospectus supplement to its shelf registration statement and issued 10,000 shares of 6.70% Non-Voting Series B Cumulative Convertible Perpetual Preferred

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	Stock (the “Series B Convertible Preferred Stock”) and received gross proceeds of $25,000,000. In connection with this offering, the Company incurred stock issuance costs totaling approximately $687,000, consisting primarily of placement fees and legal and accounting fees. The Series B Convertible Preferred Stock is convertible at the option of the holder, into 1,293,996 shares of the Company’s common stock on and after the first anniversary from the date on which the shares were issued. Holders of the Series B Convertible Preferred Stock are entitled to receive, when and as authorized by the board of directors, cumulative preferential cash distributions at the rate of 6.70 percent of the $2,500.00 liquidation preference per annum (equivalent to a fixed annual amount of $167.50 per share). The Series B Convertible Preferred Stock ranks pari passu with the Series A Preferred Stock and ranks senior to the Company’s common stock with respect to distribution rights and rights upon liquidation, dissolution or winding up of the Company. The Company may redeem the Series B Convertible Preferred Stock on or after August 13, 2008, in whole or from time to time in part, for cash, at a redemption price of $2,500.00 per share, plus all accumulated and unpaid distributions.
11.	Common Stock:
	In 2004, 2003 and 2002, as a result of a legal action in connection with the merger of Captec, the Company reduced the number of common stock issued and outstanding by 51, 823 and 474,037, respectively.
	In July 2003, the Company filed a prospectus supplement to its shelf registration statement and issued 5,600,000 shares of common stock and received gross proceeds of $100,800,000. In connection with this offering, the Company incurred stock issuance costs totaling approximately $5,374,000, consisting primarily of underwriters’ commissions and fees, legal and accounting fees and printing expenses.
	In December 2003, the Company filed a prospectus supplement to its shelf registration statement and issued 3,250,000 shares of common stock and received gross proceeds of $56,517,000. Subsequently, the Company issued an additional 487,500 shares in connection with the underwriters’ over-allotment option and received gross proceeds of $8,478,000. In connection with these offerings, the Company incurred stock issuance costs totaling approximately $671,000, consisting primarily of underwriters’ commissions and fees, legal and accounting fees and printing expenses.
	Under the terms of the limited partnership agreement of the Partnership, CTA had the right to convert its 80 percent limited partnership interest into shares of the Company’s common stock (see Note 4). In February 2004, CTA exercised its right to convert and the Company issued 953,551 shares of common stock to CTA in a private transaction in exchange for CTA’s 80 percent limited partnership interest.
12.	Employee Benefit Plan:
	Effective January 1, 1998, the Company adopted a defined contribution retirement plan (the “Retirement Plan”) covering substantially all of the employees of the Company. The Retirement Plan permits participants to defer up to a maximum of 15 percent of their compensation, as defined in the Retirement Plan, subject to limits established by the Internal Revenue Code. The Company matches 50 percent of the participants’ contributions up to a maximum of six percent of a participant’s annual compensation. The Company’s contributions to the Retirement Plan for the years ended December 31, 2004, 2003 and 2002 totaled $140,000, $150,000 and $113,000, respectively.

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13.	Dividends:
	The following presents the characterization for tax purposes of common stock dividends paid to stockholders for the years ended December 31:

	2004		2003		2002
Ordinary income	$	0.916	$	0.969	$	1.174
Capital gain		0.040		-		0.006
Qualified 5-year Gain		-		0.005		-
Unrecaptured Section 1250 Gain		0.041		0.037		0.005
Nontaxable distributions		0.293		0.269		0.085
	$	1.290	$	1.280	$	1.270

	The Series A Preferred Stock dividends of $2.25 per share paid in each of the years ended December 31, 2004, 2003 and 2002, were characterized as ordinary income for tax purposes. The Series B Convertible Preferred Stock dividends of $167.50 and $50.25 per share paid during the years ended December 31, 2004 and 2003, respectively, were characterized as ordinary income for tax purposes.
14.	Dissenting Shareholders’ Settlement:
	During the year ended December 31, 2003, the Company recorded a dissenting shareholders’ settlement expense of $2,413,000 related to the appraisal rights litigation disclosed in Item 3 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, that arose as a result of the merger with Captec in December 2001 (the “Appraisal Action”). In February 2003, the Company entered into a settlement agreement with the beneficial owners of the alleged 1,037,946 dissenting shares (including the petitioners in the Appraisal Action) which required the Company to pay $15,569,000, which approximated the value of the original merger consideration (which included cash, common stock and Series A Preferred Stock shares) at the time of the litigation settlement plus the dividends that would have been paid if the shares had been issued at the time of the merger. In February 2003, the parties filed a stipulation and order of dismissal and the Court entered the order of dismissal, dismissing the Appraisal Action with prejudice.
15.	Transition Costs:
	During the year ended December 31, 2004, the Company recorded a transition cost of $3,741,000 including severance, accelerated vesting of restricted stock, and recruitment costs in connection with the appointment of Craig Macnab as Chief Executive Officer in February 2004, and the resignation of Gary M. Ralston as President and Chief Operating Officer in May 2004.
16.	Income Taxes:
	For income tax purposes, the Company has one TRS, Services, in which certain real estate activities are conducted. Services treats depreciation expense and certain other items differently for tax than for financial reporting purposes. The principal differences between Services’ effective tax rates for the years ended December 31, 2004, 2003 and 2002, and the statutory rates relate to state taxes and nondeductible expenses such as meals and entertainment expenses.

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The components of the net income tax asset (liability) consist of the following at December 31 (dollars in thousands):

	2004			2003
Temporary differences:
Depreciation	$	(211	)	$	(249	)
Stock based compensation		59			13
Other		(40	)		(97	)
Net operating loss carryforward		-			2,867
Net deferred income tax asset (liability)	$	(192	)	$	2,534
Current income taxes payable		(510	)		-
Income tax asset (liability)	$	(702	)	$	2,534

In assessing the ability to realize a deferred tax asset, management considers whether it is more likely than not that some portion or all of the deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize all of the benefits of these deductible differences that existed as of December 31, 2004.

The income tax (expense) benefit has been allocated to earnings (loss) from continuing operations and to earnings (loss) from discontinued operations for the years ended December 31, 2004, 2003 and 2002. The income tax (expense) benefit consists of the following components for the years ended December 31, 2004, 2003 and 2002 (dollars in thousands):

	2004			2003			2002
Net loss from continuing operations of Services before income taxes	$	(8,092	)	$	(7,644	)	$	(8,025	)
Provision for income taxes:
Current:
Federal		-			-			-
State and local		-			-			-
Deferred:
Federal		2,141			2,443			2,561
State and local		401			459			481
Total provision for income taxes		2,542			2,902			3,042
Services’ net loss from continuing operations	$	(5,550	)	$	(4,742	)	$	(4,983	)
Net earnings from discontinued operations of Services before income taxes	$	15,383		$	10,118		$	9,033
Provision for income taxes:
Current:
Federal		(420	)		-			-
State and local		(90	)		-			-
Deferred:
Federal		(4,497	)		(3,234	)		(2,887	)
State and local		(832	)		(607	)		(542	)
Total provision for income taxes		(5,839	)		(3,841	)		(3,429	)
Services’ net earnings from discontinued operations	$	9,544		$	6,277		$	5,604
Total Services’ net earnings (loss) from operations	$	3,994		$	1,535		$	621

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17.

Earnings from Discontinued Operations:

Real Estate, Held for Investment – In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company has classified the revenues and expenses related all investment properties that were sold and leasehold interests that expired as discontinued operations. The following is a summary of the earnings from discontinued operations from real estate held for investment for each of the years ended December 31 (dollars in thousands):

	2004			2003			2002
Revenues:
Rental income from operating leases	$	2,198		$	4,226		$	10,302
Earned income from direct financing leases		246			455			578
Real estate expense reimbursement from tenants		3			10			119
Contingent rental income		-			12			72
Interest and other income from real estate transactions		236			85			3
		2,683			4,788			11,074
Operating expenses:
General and administrative		(5	)		24			28
Real estate		119			95			403
Depreciation and amortization		256			582			1,069
Provision for loss on impairment of real estate		-			-			1,672
		370			701			3,172
Other expenses (revenues):
Interest and other income		(56	)		(100	)		(19	)
Interest expense		126			144			158
		70			44			139
Earnings before gain on disposition of real estate		2,243			4,043			7,763
Gain on disposition of real estate, net of losses on disposition of $544,000, $969,000 and $1,806,000, respectively		2,523			287			260
Earnings from discontinued operations from real estate held for investment	$	4,766		$	4,330		$	8,023

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Real Estate, Held for Sale – During the years ended December 31, 2004, 2003 and 2002, the Company has classified the revenues and expenses related to its held for sale properties, which generated rental revenues, as discontinued operations. In addition, the Company also classified revenues and expenses related to the Inventory Properties that were held for sale as of December 31, 2004, as discontinued operations. The following is a summary of the earnings from discontinued operations from real estate held for sale for each of the years ended December 31 (dollars in thousands):

	2004			2003			2002
Revenues:
Rental income from operating leases	$	2,313		$	3,294		$	4,868
Real estate expense reimbursement from tenants		183			123			102
Gain on disposition of real estate held for sale		18,702			8,928			6,455
Interest and other from real estate transactions		224			54			(100	)
		21,422			12,399			11,325
Operating expenses:
General and administrative		33			3			-
Real estate		343			146			89
Depreciation and amortization		4			-			728
		380			149			817
Other expenses (revenues):
Interest and other income		(28	)		-			-
Interest expense		531			1,007			1,475
		503			1,007			1,475
Earnings before provision for income taxes and minority interest		20,539			11,243			9,033
Provision for income taxes		(5,839	)		(3,841	)		(3,429	)
Minority interest		(5,156	)		(1,125	)		-
Earnings from discontinued operations from real estate held for sale	$	9,544		$	6,277		$	5,604

18.	Derivatives:
	SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS No. 133, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
	The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, the Company primarily uses interest rate swaps as part of its cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. To date, such derivatives have been used to hedge the variable cash flows associated with floating rate debt and forecasted interest payments of a forecasted issuance of debt.

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For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company had no outstanding derivatives as of December 31, 2004. Additionally, the Company does not use derivatives for trading or speculative purposes or currently have any derivatives that are not designated as hedges.

The Company discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, the derivative expires or is sold, terminated, or exercised, the derivative is re-designated as a hedging instrument or management determines that designation of the derivative as a hedging instrument is no longer appropriate.

When hedge accounting is discontinued, the Company continues to carry the derivative at its fair value on the balance sheet, and recognizes any changes in its fair value in earnings or may choose to cash settle the derivative at that time.

In June 2004, the Company terminated its forward-starting interest rate swaps with a notional amount of $94,000,000 that were hedging the risk of changes in forecasted interest payments on a forecasted issuance of long-term debt. The fair value of the interest rate swaps when terminated was an asset of $4,148,000, which had been deferred in other comprehensive income. The hedged forecasted interest payments that were designated in the hedging relationships are still probable of occurring and therefore, the Company reclassified the $4,148,000 gain that was deferred in other comprehensive income as the hedged forecasted interest payments affect earnings. During the year ended December 31, 2004, the Company amortized $169,000 to interest expense from unamortized interest rate hedge gain. During the year ended December 31, 2005, the Company expects to reclassify $326,000 to interest expense. The Company has no derivative financial instruments outstanding at December 31, 2004.

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19.

Performance Incentive Plan:

The Company’s 2000 Performance Incentive Plan (“2000 Plan”) allows the Company to award or grant to key employees, directors and persons performing consulting or advisory services for the Company or its affiliates stock options, stock awards, stock appreciation rights, Phantom Stock Awards, Performance Awards and Leveraged Stock Purchase Awards, each as defined in the 2000 Plan. The following summarizes the stock-based compensation activity for the years December 31:

	Number of Shares
	2004			2003			2002
Outstanding, January 1		1,608,144			1,747,851			1,692,158
Options granted		-			15,000			359,300
Options exercised		(886,962	)		(132,357	)		(180,640	)
Options surrendered		(81,417	)		(22,350	)		(122,967	)
Restricted stock granted		205,579			76,407			64,000
Restricted stock issued		(205,579	)		(76,407	)		(64,000	)
Restricted stock surrendered		(29,926	)		(5,950	)		-
Restricted stock cancelled		29,926			5,950			-
Outstanding, December 31		639,765			1,608,144			1,747,851
Exercisable, December 31		537,244			1,372,184			1,293,284
Available for grant, December 31		1,460,636			1,561,192			1,628,809

The 205,579, 76,407 and 64,000 shares of restricted stock granted during the years ended December 31, 2004, 2003 and 2002, respectively, had a weighted average grant price of $16.97, $14.94 and $15.35, respectively, per share. The following represents the weighted average option exercise price information for the years ended December 31:

	2004		2003		2002
Outstanding, January 1	$	14.51	$	14.44	$	15.79
Granted during the year		-		14.57		15.25
Exercised during the year		13.69		13.51		12.17
Outstanding, December 31		15.33		14.51		14.44
Exercisable, December 31		15.36		14.40		14.58

The following summarizes the outstanding options and the exercisable options at December 31, 2004:

	Option Price Range
	$10.1875		$14.5700
	to		to
	$13.6875		$17.8750		Total
Outstanding options:
Number of shares		144,435		495,330		639,765
Weighted-average exercise price	$	12.13	$	16.27	$	15.33
Weighted-average remaining contractual life in years		3.3		5.1		4.7
Exercisable options:
Number of shares		141,096		396,148		537,244
Weighted-average exercise price	$	12.10	$	16.52	$	15.36

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One-third of the grant to each individual becomes exercisable at the end of each of the first three years of service following the date of the grant and the options’ maximum term is 10 years.
Pursuant to the 2000 Plan, the Company has granted and issued shares of restricted stock to certain officers and directors of the Company. The following is a summary of the restricted stock grants during the years ended December 31, 2004, 2003 and 2002:

				Number of Years for	Shares are 100%
	Shares		Annual Vesting Rate	Vesting	Vested on
Officers: June 2002		58,000	15% - 30%	5	January 1, 2007
March 2003		40,407	25%	4	January 1, 2007
March 2003		30,000	15% - 30%	5	January 1, 2008
April 2004		100,000	20%	4	January 1, 2008
April 2004		35,000	20%	5	January 1, 2009
April 2004		50,211	14.3%	6	January 1, 2010
September 2004		15,000	14.3%	6	January 1, 2011
Total issued		328,618
Directors: June 2002		6,000	50%	2	January 1, 2004
June 2003		6,000	50%	2	January 1, 2005
August 2004		4,500	50%	2	January 1, 2006
December 2004		868	50%	2	January 1, 2006
Total issued		17,368

	During 2004 and 2003, the Company cancelled 29,926 and 5,950, respectively, shares of restricted stock. Compensation expense for the restricted stock is determined based upon the fair value at the date of grant and is recognized as the greater of the amount amortized over a straight lined basis or the amount vested over the vesting periods. For the years ended December 31, 2004, 2003 and 2002, the Company recognized $1,113,000, $1,151,000 and $853,000, respectively, of such expense. In addition, in 2004, the Company recognized $1,397,000 of transition cost related to the vesting of restricted stock.
20.	Fair Value of Financial Instruments:
	The Company believes the carrying value of its Credit Facility approximates fair value based upon its nature, terms and variable interest rate. The Company believes the carrying value of its financing lease obligation approximates fair value based upon its nature, terms and interest rate. The Company believes that the carrying value of its cash and cash equivalents, line of credit, note and accrued interest receivable from related party, mortgages, notes and accrued interest receivable, receivables, mortgages payable, accrued interest payable and other liabilities at December 31, 2004 and 2003 approximate fair value, based upon current market prices of similar issues. At December 31, 2004 and 2003, the fair value of the Company’s notes payable was $353,647,000 and $295,139,000, respectively, based upon the quoted market price.

21.	Related Party Transactions:
	For additional related party disclosures see Note 4.
	The Company has revolving lines of credit with Services that allow for an aggregate borrowing capacity of $105,000,000. The lines of credit each bear interest at prime rate plus 0.25% per annum and expire on May 9, 2006 and are secured by a pledge of the real estate and/or the other

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assets owned by the respective borrower. The outstanding aggregate principal balance of the lines of credit at December 31, 2004 and 2003 was $42,473,000 and $55,234,000, respectively, and bore interest at a rate of 5.50% and 4.25%, respectively, per annum. In connection with the lines of credit from Services, the Company earned $3,819,000, $3,327,000, and $6,018,000 in interest and fees during the years ended December 31, 2004, 2003 and 2002, respectively, each of which was eliminated in consolidation.

In 2004, the Company provided disposition and development services to an affiliate of James M. Seneff Jr. and Robert A. Bourne, each a member of the Company’s board of directors. In connection therewith, the Company received an aggregate of $175,000 in fees.

In September 2000, a wholly-owned subsidiary of Services entered into a $6,000,000 promissory note with an affiliate in which James M. Seneff, Jr., a director of the Company, and Kevin B. Habicht, a director and officer of the Company, own a majority equity interest. The note was secured by the affiliate’s common stock in OAMI, formerly know as CNL Commercial Finance, Inc. In July 2003, the promissory note was paid in full. In addition, the wholly-owned subsidiary of Services has an option with the affiliate to purchase up to approximately 79 percent of all the common shares of OAMI equal to the purchase price paid by the affiliate for such common stock. The option expires on December 31, 2010.

In September 2000, a wholly-owned subsidiary of the Services entered into a $15,000,000 line of credit agreement with OAMI. Interest is payable monthly and the principal balance was due in full upon termination of the line of credit. In March 2004, the maturity date of the line of credit agreement was extended to March 31, 2005. In December 2003, the line of credit was amended to have a borrowing capacity of $35,000,000. In May 2004, the line of credit agreement was amended to temporarily increase the available credit to $45,000,000 until September 2004, at which time the available credit decreased to $35,000,000. In December 2004, the credit agreement was terminated. During the years ended December 31, 2004, 2003 and 2002, the Company recognized $1,732,000, $927,000 and $1,898,000, respectively of interest and fee income related to the line of credit.

An affiliate of James M. Seneff, Jr., a director of the Company, provides certain administrative, tax and technology services to the Company. In connection therewith, the Company paid $999,000, $1,363,000 and $1,258,000 in fees relating to these services during the years ended December 31, 2004, 2003 and 2002, respectively.

In 2002, the Company extended the maturity dates to dates between June and December 2007 on four mortgages securing an original aggregate principal indebtedness totaling $8,514,000 from affiliates of James M. Seneff, Jr. and Robert A. Bourne, each members of the Company’s board of directors. The mortgage loans bear interest at a weighted average of 8.9%, per annum with interest payable monthly or quarterly. As of December 31, 2004 and 2003, the aggregate principal balance of the four mortgages, included in mortgages, notes and accrued interest receivable on the balance sheet, was $2,482,000 and $2,935,000, respectively. In connection therewith, the Company recorded $243,000, $281,000 and $663,000 as interest from unconsolidated affiliates and other mortgage receivables during the years ended December 31, 2004, 2003 and 2002, respectively.

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22.	Segment Information:
	The Company has identified two primary financial segments: (i) real estate held for investment and (ii) real estate held for sale. The following tables represent the segment data and a reconciliation to the Company’s condensed consolidated totals for the years ended December 31, 2004, 2003 and 2002 (dollars in thousands):

	Real Estate								Condensed
	Held for		Real Estate			Eliminations			Consolidated
	Investment		Held for Sale			(Intercompany)			Totals
2004
External revenues	$	116,895	$	4,695		$	-		$	121,590
Intersegment revenues		3,819		-			(3,819	)		-
Interest revenue		8,056		2,096			-			10,152
Other revenue		1,027		319			-			1,346
Interest expense		33,001		2,295			(2,833	)		32,463
Depreciation and amortization		16,974		164			-			17,138
Operating expenses		28,387		10,679			(168	)		38,898
Equity in earnings of unconsolidated affiliates		8,733		(68	)		(3,941	)		4,724
Provision for income taxes		-		2,542			-			2,542
Minority interest		-		(1,179	)		(52	)		(1,231	)
Earnings (loss) from continuing operations		60,168		(4,733	)		(4,811	)		50,624
Earnings from discontinued operations		4,766		9,544			-			14,310
Net earnings	$	64,934	$	4,811		$	(4,811	)	$	64,934
Assets	$	1,294,755	$	70,980		$	(65,687	)	$	1,300,048
Additions to long-lived assets:
Real estate	$	134,565	$	74,024		$	-		$	208,589

	Real Estate								Condensed
	Held for		Real Estate			Eliminations			Consolidated
	Investment		Held for Sale			(Intercompany)			Totals
2003
External revenues	$	97,978	$	3,247		$	-		$	101,225
Intersegment revenues		3,327		471			(3,798	)		-
Interest revenue		2,820		1,922			-			4,742
Other revenue		702		291			-			993
Interest expense		27,587		1,263			(2,096	)		26,754
Depreciation and amortization		12,987		230			-			13,217
Operating expenses		21,264		10,986			(747	)		31,503
Equity in earnings of unconsolidated affiliates		6,154		(216	)		(1,597	)		4,341
Provision for income taxes		-		2,902			-			2,902
Minority interest		-		157			(20	)		137
Earnings (loss) from continuing operations		49,143		(3,705	)		(2,572	)		42,866
Earnings from discontinued operations		4,330		6,277			-			10,607
Net earnings	$	53,473	$	2,572		$	(2,572	)	$	53,473
Assets	$	1,208,310	$	80,945		$	(75,477	)	$	1,213,778
Additions to long-lived assets:
Real estate	$	215,730	$	58,612		$	-		$	274,342

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	Real Estate								Condensed
	Held for		Real Estate			Eliminations			Consolidated
	Investment		Held for Sale			(Intercompany)			Totals
2002
External revenues	$	80,968	$	1,290		$	-		$	82,258
Intersegment revenues		6,018		-			(6,018	)		-
Interest revenue		1,852		3,182			-			5,034
Other revenue		629		-			-			629
Interest expense		26,562		2,518			(3,901	)		25,179
Depreciation and amortization		10,673		170			-			10,843
Operating expenses		15,412		7,087			(197	)		22,302
Equity in earnings of unconsolidated affiliates		3,215		(756	)		(659	)		1,800
Provision for income taxes		-		3,042			-			3,042
Minority interest		-		-			(8	)		(8	)
Earnings (loss) from continuing operations		40,035		(3,017	)		(2,587	)		34,431
Earnings from discontinued operations		8,023		5,604			-			13,627
Net earnings	$	48,058	$	2,587		$	(2,587	)	$	48,058
Assets	$	954,108	$	77,320		$	(73,128	)	$	958,300
Additions to long-lived assets:
Real estate	$	44,437	$	27,229		$	-		$	71,666

23.	Major Tenants:
	For the years ended December 31, 2004, the Company recorded rental and earned income from one of the Company’s tenants, the United States of America, of $18,181,000. During the years ended December 31, 2003 and 2002, the Company recorded rental and earned income from Eckerd Corporation, of $11,278,000 and $12,467,000, respectively. The rental and earned income from Eckerd Corporation and the United States of America represents more than 10 percent of the Company’s rental and earned income for each of the respective years.
24.	Commitments and Contingencies:
	In January 2002, Calapasas Investment Partnership No. 1 Limited Partnership (“Calapasas”), a Captec stockholder, filed a class action complaint against Captec, certain former Captec directors, and the Company (as successor in interest to Captec). In its complaint Calapasas alleged that Captec and certain of its directors violated provisions of the Securities and Exchange Act of 1934 by misrepresenting the value of certain Captec assets on certain of its financial statements in 2000 and 2001. In July 2004, the parties entered into a Stipulation of Settlement which was filed with the court. Pursuant to the Stipulation of Settlement, the total settlement amount paid to the plaintiffs was $225,000, which included payment of attorneys’ fees and costs to plaintiffs’ counsel. In July 2004, a final judgment of dismissal was entered by the court.
	In the ordinary course of its business, the Company is a party to various other legal actions which management believes is routine in nature and incidental to the operation of the business of the Company. Management believes that the outcome of the proceedings will not have a material adverse effect upon its operations, financial condition or liquidity.

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25.	Subsequent Events:
	In January 2005, the Company entered into a purchase agreement with James M. Seneff, Jr., a director of the Company, Kevin B. Habicht, an officer and director of the Company, and Gary M. Ralston, a former officer and director of the Company, which provided that the Company would acquire their collective 1.3 percent voting interest in Services. Effective, January 1, 2005, the Company acquired the remaining interest in Services increasing the Company’s ownership in Services to 100 percent.
	In January 2005, the Company entered into an agreement with National Properties Corporation (“NAPE”), which provided that NAPE would merge with and into a subsidiary of the Company. At the time of the merger agreement, NAPE owned 43 properties located in 12 states which were leased to 17 tenants. If the acquisition is consummated, the Company will issue approximately 1,637,000 shares of common stock to holders of NAPE common stock. Total consideration for the merger transaction is estimated to be approximately $61,000,000 based on the Company’s closing stock price on the date of the merger agreement. Completion of the merger is subject to customary closing conditions, including the approval of the holders of a majority of the outstanding shares of NAPE common stock. The Company has entered into a shareholders’ agreement with the holders of approximately 53 percent of the outstanding NAPE common stock whereby these holders have agreed to vote in favor of the merger. However, the Company may terminate the merger agreement if a majority of the NAPE shareholders who are not bound by the shareholders’ agreement do not approve the merger. The merger does not require approval by the Company’s shareholders. The Company anticipates that the merger will be completed not later than the second quarter of 2005.

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

None.

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Item 9A. Controls and Procedures

Process for Assessment and Evaluation of Disclosure Controls and Procedures and Internal Control over Financing Reporting.

The Company carried out an assessment as of December 31, 2004 of the effectiveness of the design and operation of its disclosure controls and procedures and its internal control over financial reporting. This assessment was done under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer. Rules adopted by the Commission require the Company to present the conclusions of the Chief Executive Officer and Chief Financial Officer about the effectiveness of the Company’s disclosure controls and procedures and the conclusions of the Company’s management about the effectiveness of the Company’s internal control over financial reporting as of the end of the period covered by this annual report.

CEO and CFO Certifications. Included as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K are forms of “Certification” of the Company’s Chief Executive Officer and Chief Financial Officer. The forms of Certification are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. This section of the Annual Report on Form 10-K that you are currently reading is the information concerning the assessment referred to in the Section 302 certifications and this information should be read in conjunction with the Section 302 certifications for a more complete understanding of the topics presented.

Disclosure Controls and Procedures and Internal Control over Financial Reporting. Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s Chief Executive Officer and Chief Financial Officer, and affected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”) and includes those policies and procedures that:

•   pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets;

•   provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being made in accordance with authorizations of management or the board of directors; and

•   provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material adverse effect on the Company’s financial statements.

Scope of the Assessments. The assessment by the Company’s Chief Executive Officer and Chief Financial Officer of the Company’s disclosure controls and procedures and the assessment by the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the Company’s internal control over financial reporting included a review of procedures and discussions with the Company’s management and others at the Company. In the course of the assessments, the Company

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sought to identify data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken.

The Company’s internal control over financial reporting is also assessed on an ongoing basis by personnel in the Company’s Accounting department and by the Company’s internal auditors in connection with their internal audit activities. The overall goals of these various assessment activities are to monitor the Company’s disclosure controls and procedures and the Company’s internal control over financial reporting and to make modifications as necessary. The Company’s intent in this regard is that the disclosure controls and procedures and the internal control over financial reporting will be maintained and updated (including with improvements and corrections) as conditions warrant. Among other matters, management sought in its assessment to determine whether there were any “significant deficiencies” or “material weaknesses” in the Company’s internal control over financial reporting, or whether management had identified any acts of fraud involving personnel who have a significant role in the Company’s internal control over financial reporting. In the Public Company Accounting Oversight Board’s Auditing Standard No. 2, a “significant deficiency” is a “control deficiency,” or a combination of control deficiencies, that adversely affects the ability to initiate, authorize, record, process or report external financial data reliably in accordance with GAAP such that there is more than a remote likelihood that a misstatement of the annual or interim financial statements that is more than inconsequential will not be prevented or detected. A “control deficiency” exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A “material weakness” is defined in Auditing Standard No. 2 as a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management also sought to deal with other control matters in the assessment, and in each case if a problem was identified, management considered what revision, improvement and/or correction was necessary to be made in accordance with the Company’s on-going procedures. The assessments of the Company’s disclosure controls and procedures and the Company’s internal control over financial reporting is done on a quarterly basis so that the conclusions concerning effectiveness of those controls can be reported in the Company’s Quarterly Reports on Form 10-Q and Annual Report on Form 10-K.

Assessment of Effectiveness of Disclosure Controls and Procedures.

Based upon the assessments, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2004, the Company’s disclosure controls and procedures were effective.

Management’s Report on Internal Control Over Financial Reporting.

Management, including the Company’s Chief Executive Officer and Chief Financial Officer, are responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework to assess the effectiveness of the Company’s internal control over financial reporting. Based upon the assessments, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2004, the Company’s internal control over financial reporting was effective. The Company’s independent registered public accounting firm has audited the consolidated financial statements in this Annual Report on Form 10-K and have issued an attestation report on management’s assessment of the Company’s internal control over financial reporting and its opinion on the effectiveness of internal control over financial reporting, which appears on page 42 of this Annual Report on Form 10-K.

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Changes in Internal Control Over Financial Reporting.

During the three months ended December 31, 2004, there were no changes in the Company’s internal control over financial reporting that has materially affected, or are reasonably likely to materially affect, the Company’s internal control for financial reporting.

Limitations on the Effectiveness of Controls.

Management, including the Company’s Chief Executive Officer and Chief Financial Officer, do not expect that the Company’s disclosure controls and procedures or the Company’s internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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Item 9B. Other Information.

None.

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PART III

Item 10. Directors and Executive Officers of the Registrant

Reference is made to the Registrant’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14(a); information responsive to this Item is contained in the sections thereof captioned “Proposal I: Election of Directors — Nominees,” “Proposal I: Election of Directors — Executive Officers,” “Proposal I: Election of Directors — Code of Business Conduct” and “Security Ownership,” and the information in such sections is incorporated herein by reference.

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Item 11. Executive Compensation

Reference is made to the Registrant’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14(a); information responsive to this Item is contained in the section thereof captioned “Proposal I: Election of Directors — Compensation of Directors,” “Executive Compensation,” “Compensation Committee Report” and “Performance Graph,” and the information in such sections is incorporated herein by reference.

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

Reference is made to the Registrant’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14(a); information responsive to this Item is contained in the section thereof captioned “Executive Compensation — Equity Compensation Plan Information,” “Security Ownership,” and the information in such section is incorporated herein by reference.

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Item 13. Certain Relationships and Related Transactions

Reference is made to the Registrant’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14(a); information responsive to this Item is contained in the section thereof captioned “Certain Transactions,” and the information in such section is incorporated herein by reference.

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Item 14. Principal Accounting Fees and Services

Reference is made to the Registrant’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14(a); information responsive to this Item is contained in the section thereof captioned “Audit Committee Report,” and the information in such section is incorporated herein by reference.

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PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)   The following documents are filed as part of this report.

(1)	Financial Statements
	Reports of Independent Registered Public Accounting Firm
	Consolidated Balance Sheets as of December 31, 2004 and 2003
	Consolidated Statements of Earnings for the years ended December 31, 2004, 2003 and 2002
	Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2004, 2003 and 2002
	Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
	Notes to Consolidated Financial Statements
(2)	Financial Statement Schedules
	Schedule III – Real Estate and Accumulated Depreciation and Amortization and Notes as of December 31, 2004
	Schedule IV – Mortgage Loans on Real Estate and Notes as of December 31, 2004
	All other schedules are omitted because they are not applicable or because the required information is shown in the financial statements or the notes thereto.
(3)	Exhibits

(a)   The following exhibits are filed as a part of this report.

2.   Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession.

2.1   Agreement and Plan of Merger, dated January 14, 2005, among Commercial Net Lease Realty, Inc., NAPE Acquisition, Inc., National Properties Corporation and Raymond Di Paglia (filed as Exhibit 99.1 to the Registrant’s Current Report on Form 8-K dated January 19, 2005, and incorporated herein by reference).

3.   Articles of Incorporation and By-laws

3.1   First Amended and Restated Articles of Incorporation of the Registrant, as amended (filed herewith).

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3.2	Articles Supplementary Establishing and Fixing the Rights and Preferences of a Series of Preferred Stock (9% Series A Non-Voting Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”) (filed as Exhibit 3 to the Registrant’s Form 8-A dated November 26, 2001 and filed with the Securities and Exchange Commission on November 27, 2001, and incorporated herein by reference).
3.3	Articles Supplementary Classifying and Designating 10,000 Preferred Shares as the Series B Preferred Stock (filed as Exhibit 3 to the Registrant’s Form 8-A dated August 12, 2003 and filed with the Securities and Exchange Commission on August 13, 2003, and incorporated herein by reference).
3.4	Second Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, and incorporated herein by reference).

4.   Instruments Defining the Rights of Security Holders, Including Indentures

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).
4.2	Form of Indenture dated March 25, 1998, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,000 of 7.125% Notes due 2008 (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference).
4.3	Form of Supplemental Indenture No. 1 dated March 25, 1998, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,000 of 7.125% Notes due 2008 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference).
4.4	Form of 7.125% Note due 2008 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference).
4.5	Form of Supplemental Indenture No. 3 dated September 20, 2000, by and among Registrant and First Union National Bank, Trustee, relating to $20,000,000 of 8.5% Notes due 2010 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated September 20, 2000, and incorporated herein by reference).
4.6	Form of 8.5% Notes due 2010 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated September 20, 2000, and incorporated herein by reference).
4.7	Form of Supplemental Indenture No. 4 dated as of May 30, 2002, by and among Registrant and Wachovia Bank, National Association, Trustee, relating to $50,000,000 of 7.75% Notes due 2012 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated June 4, 2002, and incorporated herein by reference).

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4.8	Form of 7.75% Notes due 2012 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated June 4, 2002, and incorporated herein by reference).
4.9	Form of Supplemental Indenture No. 5 dated as of June 18, 2004, by and among Registrant and Wachovia Bank, National Association, Trustee, relating to $150,000,000 of 6.25% Notes due 2014 (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated June 15, 2004, and incorporated herein by reference).
4.10	Form of 6.25% Notes due 2014 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated June 15, 2004, and incorporated herein by reference).
4.11	Articles Supplementary Establishing and Fixing the Rights and Preferences of a Series of Preferred Stock (the Series A Preferred Stock) (filed as Exhibit 3 to the Registrant’s Form 8-A dated November 26, 2001 and filed with the Securities and Exchange Commission on November 27, 2001, and incorporated herein by reference).
4.12	Specimen Stock Certificate relating to the Series A Preferred Stock (filed as Exhibit 4 to the Registrant’s Form 8-A dated November 26, 2001 and filed with the Securities and Exchange Commission on November 27, 2001, and incorporated herein by reference).
4.13	Articles Supplementary Classifying and Designating 10,000 Preferred Shares as the Series B Preferred Stock (filed as Exhibit 3 to the Registrant’s Form 8-A dated August 12, 2003 and filed with the Securities and Exchange Commission on August 13, 2003, and incorporated herein by reference).
4.14	Specimen Stock Certificate relating to the Series B Preferred Stock (filed as Exhibit 4 to the Registrant’s Form 8-A dated August 12, 2003 and filed with the Securities and Exchange Commission on August 13, 2003, and incorporated herein by reference).

10.   Material Contracts

10.1	2000 Performance Incentive Plan (filed as Exhibit 99 to the Registrant’s Registration Statement No. 333-64794 on Form S-8 and incorporated herein by reference).
10.2	Form of Restricted Stock Agreement between the Company and the Participant of the Company (filed herewith).
10.3	Employment Agreement dated February 16, 2004, between the Registrant and Craig Macnab (filed herewith).
10.4	Employment Agreement dated February 1, 2003, between the Registrant and Julian E. Whitehurst (filed herewith).
10.5	Employment Agreement dated January 1, 2003, as amended, between the Registrant and Kevin B. Habicht (filed herewith).

102

10.6	Employment Agreement dated January 1, 2003, between the Registrant and Dennis E. Tracy (filed herewith).
10.7	Third Renewal Promissory Note dated as of April 1, 2001, by Commercial Net Lease Realty Services, Inc. in favor of Registrant relating to an $85,000,000 line of credit (filed as Exhibit 10.13 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, and incorporated herein by reference).
10.8	Separation Agreement and General Release, dated as of April 23, 2004, by and between Gary M. Ralston and the Registrant, as amended (filed herewith).
10.9	Third Modification of Amended and Restated Secured Revolving Line of Credit and Security Agreement and Other Loan Documents effective as of April 1, 2001, by and between Registrant as lender and Commercial Net Lease Realty Services, Inc., as borrower, relating to an $85,000,000 line of credit (filed as Exhibit 10.14 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, and incorporated herein by reference).
10.10	Fourth Modification of Amended and Restated Secured Revolving Line of Credit and Security Agreement and Other Loan Documents effective as of July 1, 2001, by and between Registrant as lender and Commercial Net Lease Realty Services, Inc., as borrower, relating to an $85,000,000 line of credit (filed as Exhibit 10.15 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, and incorporated herein by reference).
10.11	Seventh Amended and Restated Line of Credit and Security Agreement, dated May 9, 2003, by and among Registrant, certain lenders and Wachovia Bank, N.A., as the Agent, relating to a $225,000,000 loan (filed as Exhibit 10.11 to the Registrant’s Current Report on Form 8-K dated July 11, 2003, and incorporated herein by reference).
10.12	Real Estate Purchase Contract, dated as of July 23, 2003, by an between MCI WorldCom Network Services, Inc. and the Company (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated July 25, 2003, and incorporated herein by reference).
10.13	U.S. Government Lease for Real Property, dated as of December 17, 2002, between MCI WorldCom Network Services, Inc. and the United States of America (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated July 25, 2003, and incorporated herein by reference).

12.	Statement of Computation of Ratios of Earnings to Fixed Charges (filed herewith).
21.	Subsidiaries of the Registrant (filed herewith).
23.	Consent of Independent Accountants dated March 9, 2005 (filed herewith).
24.	Power of Attorney (included on signature page).

103

31.   Section 302 Certifications

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.   Section 906 Certifications

32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

99.   Additional Exhibits

99.1   Certification of Chief Executive Officer pursuant to Section 303A.12(a) of the New York Stock Exchange Listed Company Manual (filed herewith).

104

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14^th day of March, 2005.

COMMERCIAL NET LEASE REALTY, INC.

By:	/s/ Craig Macnab
	Craig Macnab
	Director, President, and Chief Executive Officer

105

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each person whose signature appears below hereby constitutes and appoints each of Craig Macnab and Kevin B. Habicht 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 to this report and to file same, with exhibits thereto and other documents in connection therewith, 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.

Signature	Title	Date
/s/ James M. Seneff, Jr. James M. Seneff, Jr.	Chairman of the Board of Directors	March 14, 2005
/s/ Robert A. Bourne Robert A. Bourne	Vice Chairman of the Board of Directors	March 14, 2005
/s/ Clifford R. Hinkle Clifford R. Hinkle	Director	March 14, 2005
/s/ Richard B. Jennings Richard B. Jennings	Director	March 14, 2005
/s/ Ted B. Lanier Ted B. Lanier	Director	March 14, 2005
/s/ Robert C. Legler Robert C. Legler	Director	March 14, 2005
/s/ Robert Martinez Robert Martinez	Director	March 14, 2005
/s/ Craig Macnab Craig Macnab	Director, President and Chief Executive Officer	March 14, 2005
/s/ Kevin B. Habicht Kevin B. Habicht	Director, Chief Financial Officer (Principal Financial and Accounting Officer), Executive Vice President, Assistant Secretary and Treasurer	March 14, 2005

106

COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION

December 31, 2004

										Costs Capitalized															Life on Which
										Subsequent to				Gross Amount at Which											Depreciation and
						Initial Cost to Company				Acquisition				Carried at Close of Period (b)						Accumulated					Amortization in
			Encum-					Building,								Building,				Depreciation		Date			Latest Income
			brances					Improvements and		Improve-		Carrying				Improvements and				and		of Con-	Date		Statement is
			(k)			Land		Leasehold Interests		ments		Costs		Land		Leasehold Interests		Total		Amortization		struction	Acquired		Computed
Real Estate Held for Investment the Company has Invested in Under Operating Leases:
Academy:
Houston, TX			$	-		$	1,074,232	$	-	$	-	$	-	$	1,074,232	$	(c)	$	1,074,232		(c)	1994	05/95		(c)
Houston, TX				-			699,165		-		-		-		699,165		(c)		699,165		(c)	1995	06/95		(c)
N. Richland Hills, TX				-			1,307,655		-		-		-		1,307,655		(c)		1,307,655		(c)	1996	08/95	(f)	(c)
Houston, TX				-			2,098,895		-		-		-		2,098,895		(c)		2,098,895		(c)	1996	02/96	(f)	(c)
Houston, TX				-			795,005		-		-		-		795,005		(c)		795,005		(c)	1996	06/96	(f)	(c)
Baton Rouge, LA				-			1,547,501		-		-		-		1,547,501		(c)		1,547,501		(c)	1997	08/96	(f)	(c)
Houston, TX				-			2,310,845		1,627,872		-		-		2,310,845		1,627,872		3,938,717		235,702	1976	03/99		40 years
Pasadena, TX				-			899,768		2,180,574		-		-		899,768		2,180,574		3,080,342		315,729	1994	03/99		40 years
Beaumont, TX				-			1,423,700		2,449,261		-		-		1,423,700		2,449,261		3,872,961		354,633	1992	03/99		40 years
San Antonio, TX				831,369	(t)		973,123		-		-		-		973,123		(c)		973,123		(c)	1996	09/97		(c)
Ace Hardware and Lighting:
Bourbonnais, IL				-			298,192		1,329,492		-		-		298,192		1,329,492		1,627,684		121,672	1997	11/98		37.4 years
Advanced Auto Parts:
Miami, FL				-			866,927		-		-		-		866,927		-		866,927		-	(e)	12/04		(e)
Albertsons:
Sonora, CA				-			587,782		1,620,311		-		-		587,782		1,620,311		2,208,093		48,947	1984	03/99		40 years
American Signature Home:
White Marsh, MD				-			3,762,030		-		3,006,391		-		3,762,030		3,006,391		6,768,421		510,460	1998	03/98	(g)	40 years
Amoco:
Miami, FL				-			969,156		-		-		-		969,156		-		969,156		-	(e)	05/03		(e)
Sunrise, FL				-			949,185		-		-		-		949,185		-		949,185		-	(e)	05/03		(e)
Applebee’s:
Ballwin, MO				-			1,496,173		1,403,581		-		-		1,496,173		1,403,581		2,899,754		106,731	1995	12/01		40 years
Arby’s:
Colorado Springs, CO				-			205,957		533,540		-		-		205,957		533,540		739,497		40,571	1998	12/01		40 years
Thomson, GA				-			267,842		503,550		-		-		267,842		503,550		771,392		38,291	1997	12/01		40 years
Whitmore Lake, MI				-			170,515		468,916		-		-		170,515		468,916		639,431		35,657	1993	12/01		40 years
Albuquerque, NM				-			442,991		507,790		-		-		442,991		507,790		950,781		38,613	1993	12/01		40 years
Albuquerque, NM				-			250,881		513,970		-		-		250,881		513,970		764,851		39,083	1988	12/01		40 years
Santa Fe, NM				-			450,358		341,960		-		-		450,358		341,960		792,318		26,003	1998	12/01		40 years
Washington Courthouse, OH				-			156,875		545,841		-		-		156,875		545,841		702,716		41,507	1998	12/01		40 years
Ashley Furniture:
Altamonte Springs, FL				-			2,906,409		4,877,225		315,000		-		2,906,409		5,192,225		8,098,634		909,246	1997	09/97		40 years
Babies “R” Us:
Arlington, TX				-			830,689		2,611,867		-		-		830,689		2,611,867		3,442,556		555,566	1996	06/96		40 years
Independence, MO				-			1,678,794		2,301,909		-		-		1,678,794		2,301,909		3,980,703		175,041	1996	12/01		40 years
Barnes & Noble:
Brandon, FL				1,048,316	(j)		1,476,407		1,527,150		-		-		1,476,407		1,527,150		3,003,557		380,950	1995	08/94	(f)	40 years
Denver, CO				-			3,244,785		2,722,087		-		-		3,244,785		2,722,087		5,966,872		697,647	1994	09/94		40 years
Houston, TX				-			3,307,562		2,396,024		-		-		3,307,562		2,396,024		5,703,586		554,089	1995	10/94	(f)	40 years
Plantation, FL				5,002,757	(p)		3,616,357		-		-		-		3,616,457		(c)		3,616,457		(c)	1996	05/95	(f)	(c)
Freehold, NJ	(r	)		-			2,917,219		2,260,663		-		-		2,917,219		2,260,663		5,177,882		504,253	1995	01/96		40 years
Dayton, OH				-			1,412,614		3,223,467		-		-		1,412,614		3,223,467		4,636,081		614,473	1996	05/97		40 years
Redding, CA				-			497,179		1,625,702		-		-		497,179		1,625,702		2,122,881		306,513	1997	06/97		40 years
Marlton, NJ				-			2,831,370		4,318,554		-		-		2,831,370		4,318,554		7,149,924		661,279	1998	11/98		40 years
Memphis, TN				1,206,303	(t)		1,573,875		2,241,639		-		-		1,573,875		2,241,639		3,815,514		51,363	1997	09/97		40 years
Beall’s:
Sarasota, FL				1,615,585	(t)		1,077,802		1,795,173		-		-		1,077,802		1,795,173		2,872,975		43,054	1996	09/97		40 years

See accompanying report of independent registered public accounting firm.

F-1

COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION

December 31, 2004

										Costs Capitalized																Life on Which
										Subsequent to				Gross Amount at Which												Depreciation and
						Initial Cost to Company				Acquisition				Carried at Close of Period (b)							Accumulated					Amortization in
			Encum-					Building,								Building,					Depreciation		Date			Latest Income
			brances					Improvements and		Improve-		Carrying				Improvements and					and		of Con-	Date		Statement is
			(k)			Land		Leasehold Interests		ments		Costs		Land		Leasehold Interests			Total		Amortization		struction	Acquired		Computed
Beautiful America Dry Cleaners:
Orlando, FL				79,983	(u)		40,200		110,531		-		-		40,200		110,531			150,731		2,418	2001	02/04		40 years
Bed, Bath & Beyond:
Richmond, VA				2,867,434	(p)		1,184,144		2,842,759		-		-		1,184,144		2,842,759	(o)		4,026,903		183,595	1997	06/98		33 years
Los Angeles, CA				-			6,318,023		3,089,396		-		-		6,318,023		3,089,396			9,407,419		473,064	1975	11/98		40 years
Glendale, AZ				-			1,082,092		-		2,758,452		-		1,082,092		2,758,452			3,840,544		376,414	1999	12/98	(g)	40 years
Bedford Furniture:
Everett, PA				-			226,366		1,159,833		7,830		-		226,366		817,667			1,044,033		83,888	1998	11/98		40 years
Bennigan’s:
Milford, CT	(r	)		-			921,200		697,298		-		-		921,200		697,298			1,618,498		53,024	1988	12/01		40 years
Altamonte Springs, FL				-			1,088,282		924,425		-		-		1,088,282		924,425			2,012,707		70,295	1988	12/01		40 years
Schaumburg, IL				-			2,064,964		1,311,190		-		-		2,064,964		1,311,190			3,376,154		99,705	1988	12/01		40 years
Wichita Falls, TX				-			818,611		1,107,418		-		-		818,611		1,107,418			1,926,029		84,210	1993	12/01		40 years
Best Buy:
Brandon, FL				-			2,985,156		2,772,137		-		-		2,985,156		2,772,137			5,757,293		545,764	1996	02/97		40 years
Evanston, IL				-			1,850,996		-		-		-		1,850,996		(c)			1,850,996		(c)	1994	02/97		(c)
Cuyahoga Falls, OH				-			3,708,980		2,359,377		-		-		3,708,980		2,359,377			6,068,357		444,841	1970	06/97		40 years
Rockville, MD				-			6,233,342		3,418,783		-		-		6,233,342		3,418,783			9,652,125		637,460	1995	07/97		40 years
Fairfax, VA				-			3,052,477		3,218,018		-		-		3,052,477		3,218,018			6,270,495		593,322	1995	08/97		40 years
St. Petersburg, FL				4,575,692	(p)		4,031,744		2,610,980		-		-		4,031,744		2,610,980	(o)		6,642,724		387,165	1997	09/97		33 years
North Fayette, PA				-			2,330,847		2,292,932		-		-		2,330,847		2,292,932			4,623,779		374,990	1997	06/98		40 years
Denver, CO				-			8,881,890		4,372,684		-		-		8,881,890		4,372,684			13,254,574		192,715	1991	06/01		40 years
Big D’s:
Eden Prairie, MN				-			64,916		180,538		80,809		-		64,916		261,347			326,263		16,627	1997	12/01		40 years
BJ’s Wholesale:
Orlando, FL				6,192,000	(u)		3,137,500		8,626,657		-		-		3,137,500		8,626,657			11,764,157		189,066	2001	02/04		40 years
Blockbuster:
Conyers, GA				-			320,029		556,282		-		-		320,029		556,282			876,311		104,882	1997	06/97		40 years
Mobile, AL				-			491,453		498,488		-		-		491,453		498,488			989,941		37,906	1997	12/01		40 years
Mobile, AL				-			843,121		562,498		-		-		843,121		562,498			1,405,619		42,773	1997	12/01		40 years
Gainesville, GA				-			294,882		611,570		-		-		294,882		611,570			906,452		46,505	1997	12/01		40 years
Glasgow, KY				-			302,859		560,904		-		-		302,859		560,904			863,763		42,652	1997	12/01		40 years
Alice, TX				-			318,285		578,268		-		-		318,285		578,268			896,553		43,973	1995	12/01		40 years
Kingsville, TX				-			498,849		457,695		-		-		498,849		457,695			956,544		34,804	1995	12/01		40 years
BMW:
Duluth, GA				-			4,433,613		4,080,186		-		-		4,433,613		4,080,186			8,513,799		310,264	1984	12/01		40 years
Bodyworks Unlimited:
Rincon, GA				-			244,607		1,166,045		-		-		244,607		791,808			1,036,415		82,570	1997	11/98		37.4 years
Borders Books & Music:
Wilmington, DE				3,173,813	(j)		3,030,769		6,061,538		-		-		2,994,400		6,061,538			9,055,938		1,519,458	1994	12/94		40 years
Richmond, VA				1,667,451	(j)		2,177,310		2,599,587		-		-		2,177,310		2,599,587			4,776,897		621,374	1995	06/95		40 years
Ft. Lauderdale, FL				4,819,730	(p)		3,164,984		3,319,234		-		-		3,164,984		3,319,234	(o)		6,484,218		259,839	1995	02/96		33 years
Bangor, ME				-			1,546,915		2,486,761		-		-		1,546,915		2,486,761			4,033,676		530,164	1996	06/96		40 years
Altamonte Springs, FL				-			1,947,198		-		-		-		1,947,198		(c)			1,947,198		(c)	1997	09/97		(c)
Boston Market:
Geneva, IL				-			1,125,347		1,036,952		-		-		1,125,347		893,485			2,018,832		70,323	1996	12/01		40 years
Orland Park, IL				-			562,384		556,201		-		-		562,384		377,244			939,628		31,655	1995	12/01		40 years
Wheaton, IL				-			1,115,457		1,014,184		-		-		1,115,457		872,736			1,988,193		68,711	1995	12/01		40 years
Burton, MI				-			619,778		707,242		-		-		619,778		707,242			1,327,020		53,780	1997	12/01		40 years
Novi, MI				-			835,669		651,108		-		-		835,669		297,567			1,133,236		28,494	1995	12/01		40 years
North Olmsted, OH				-			601,800		460,521		-		-		601,800		389,065			990,865		30,771	1996	12/01		40 years
Warren, OH				-			562,446		467,592		-		-		562,446		467,592			1,030,038		35,556	1997	12/01		40 years
Buffalo Wild Wings:
Michigan City, IN				-			162,538		492,007		-		-		162,538		492,007			654,545		37,413	1996	12/01		40 years

See accompanying report of independent registered public accounting firm.

F-2

COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION

December 31, 2004

										Costs Capitalized															Life on Which
										Subsequent to				Gross Amount at Which											Depreciation and
						Initial Cost to Company				Acquisition				Carried at Close of Period (b)						Accumulated					Amortization in
			Encum-					Building,								Building,				Depreciation		Date			Latest Income
			brances					Improvements and		Improve-		Carrying				Improvements and				and		of Con-	Date		Statement is
			(k)			Land		Leasehold Interests		ments		Costs		Land		Leasehold Interests		Total		Amortization		struction	Acquired		Computed
Burger King:
Colonial Heights, VA				-			662,345		609,787		-		-		662,345		609,787		1,272,132		46,369	1997	12/01		40 years
Carino’s:
Beaumont, TX				-			439,076		1,363,447		-		-		439,076		1,363,447		1,802,523		103,679	2000	12/01		40 years
Lewisville, TX				-			1,369,836		1,018,659		-		-		1,369,836		1,018,659		2,388,495		77,460	1994	12/01		40 years
Lubbock, TX				-			1,007,432		1,205,512		-		-		1,007,432		1,205,512		2,212,944		91,669	1995	12/01		40 years
CarMax:
Albuquerque, NM				-			10,197,135		-		8,128,062		-		10,197,135		8,128,062		18,325,197		25,400	2004	04/04	(f)	40 years
Certified Auto Sales:
Albuquerque, NM				-			1,112,876		-		-		-		1,112,876		-		1,112,876		-	(e)	04/04		(e)
Champps:
Alpharetta, GA				-			3,032,965		1,641,820		-		-		3,032,965		1,641,820		4,674,785		124,847	1999	12/01		40 years
Irving, TX				-			1,760,020		1,724,220		-		-		1,760,020		1,724,220		3,484,240		131,112	2000	12/01		40 years
Charhut:
Sunrise, FL				-			286,834		423,837		-		-		286,834		423,837		710,671		6,477	1979	05/04		40 years
Checkers:
Orlando, FL				-			256,568		-		-		-		256,568		(c)		256,568		(c)	1988	07/92		(c)
China Star:
Montgomery, AL				-			1,418,158		1,140,080		-		-		1,418,158		1,140,080		2,558,238		86,693	1999	12/01		40 years
Circuit City:
Gastonia, NC				-			2,548,040		3,879,911		-		-		2,547,163		3,874,009		6,421,172		4,042	2004	12/04		40 years
Claim Jumper:
Tempe, AZ				-			2,530,892		2,920,575		-		-		2,530,892		2,920,575		5,451,467		222,085	2000	12/01		40 years
Roseville, CA				-			1,556,732		2,013,650		-		-		1,556,732		2,013,650		3,570,382		153,121	2001	12/01		40 years
CompUSA:
Baton Rouge, LA	(r	)		-			609,069		913,603		-		-		609,069		913,603		1,522,672		205,622	1995	12/95		40 years
Miami, FL				1,598,675	(j)		2,713,192		1,866,676		-		-		2,713,192		1,866,676		4,579,868		499,464	1994	04/94		40 years
Cora Rehabilitation Clinics:
Orlando, FL				159,966	(u)		80,400		221,063		-		-		80,400		221,063		301,463		4,836	2001	02/04		40 years
Corpus Christi Flea Market:
Corpus Christi, TX				-			223,998		2,158,955		-		-		223,998		2,158,955		2,382,953		312,599	1983	03/99		40 years
CVS:
San Antonio, TX				427,591	(j)		440,985		-		-		-		440,985		(c)		440,985		(c)	1993	12/93		(c)
Dallas, TX				411,959	(j)		541,493		-		-		-		541,493		(c)		541,493		(c)	1994	01/94		(c)
Arlington, TX				350,823	(j)		368,964		-		-		-		368,964		(c)		368,964		(c)	1994	02/94		(c)
Amarillo, TX				402,520	(j)		329,231		-		-		-		329,231		(c)		329,231		(c)	1994	12/94		(c)
Amarillo, TX				523,141	(j)		650,864		-		-		-		650,864		(c)		650,864		(c)	1994	12/94		(c)
Kissimmee, FL				578,142	(j)		715,480		-		-		-		715,480		(c)		715,480		(c)	1995	04/95		(c)
Tampa, FL				-			604,683		-		-		-		604,683		(c)		604,683		(c)	1995	12/95		(c)
Lafayette, LA				-			967,528		-		-		-		967,528		(c)		967,528		(c)	1995	01/96		(c)
Moore, OK				-			414,738		-		-		-		414,738		(c)		414,738		(c)	1995	01/96		(c)
Midwest City, OK				-			673,369		1,103,351		-		-		673,369		1,103,351		1,776,720		243,434	1996	03/96		40 years
Irving, TX				-			1,000,222		-		-		-		1,000,222		(c)		1,000,222		(c)	1996	12/96		(c)
Jasper, FL				-			291,147		-		-		-		291,147		(c)		291,147		(c)	1994	01/97		(c)
Williston, FL				-			622,403		-		-		-		622,403		(c)		622,403		(c)	1995	01/97		(c)
Pantego, TX				-			1,016,062		1,448,911		-		-		1,016,062		1,448,911		2,464,973		273,180	1997	06/97		40 years
Norman, OK				-			1,065,562		-		-		-		1,065,562		(c)		1,065,562		(c)	1997	06/97		(c)
Arlington, TX				-			2,078,542		-		1,396,508		-		2,078,542		1,396,508		3,475,050		222,568	1998	11/97	(g)	40 years
Leavenworth, KS				-			726,438		-		1,330,830		-		726,438		1,330,830		2,057,268		217,646	1998	11/97	(g)	40 years
Lewisville, TX				-			789,237		-		1,335,426		-		789,237		1,335,426		2,124,663		210,051	1998	04/98	(g)	40 years
Forest Hill, TX				-			692,165		-		1,174,549		-		692,165		1,174,549		1,866,714		187,194	1998	04/98	(g)	40 years
Del City, OK				-			1,387,362		-		-		-		1,387,362		(c)		1,387,362		(c)	1998	05/98		(c)

See accompanying report of independent registered public accounting firm.

F-3

COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION

December 31, 2004

								Costs Capitalized																Life on Which
								Subsequent to				Gross Amount at Which												Depreciation and
				Initial Cost to Company				Acquisition				Carried at Close of Period (b)							Accumulated					Amortization in
	Encum-					Building,								Building,					Depreciation		Date			Latest Income
	brances					Improvements and		Improve-		Carrying				Improvements and					and		of Con-	Date		Statement is
	(k)			Land		Leasehold Interests		ments		Costs		Land		Leasehold Interests			Total		Amortization		struction	Acquired		Computed
Arlington, TX		-			414,568		-		-		-		414,568		(c)			414,568		(c)	1998	05/98		(c)
Garland, TX		-			522,461		-		1,418,531		-		522,461		1,418,531			1,940,992		214,257	1998	06/98	(g)	40 years
Garland, TX		-			1,476,838		-		1,400,278		-		1,476,838		1,400,278			2,877,116		214,418	1998	06/98	(g)	40 years
Oklahoma City, OK		-			1,581,480		-		1,471,105		-		1,581,480		1,471,105			3,052,585		219,133	1999	08/98	(g)	40 years
Dallas, TX		-			2,617,656		-		2,570,569		-		2,617,656		2,570,569			5,188,225		77,653	2003	06/99		40 years
Gladstone, MO		210,025			1,851,374		-		1,739,568		-		1,851,374		1,739,568			3,590,942		190,265	2000	12/99	(g)	40 years
Ellenwood, GA		464,968	(t)		616,289		921,173		-		-		616,289		921,173			1,537,462		21,104	1996	09/97		40 years
Flower Mound, TX		469,783	(t)		932,233		881,448		-		-		932,233		881,448			1,813,681		20,194	1996	09/97		40 years
Ft. Worth, TX		570,753	(t)		558,657		-		-		-		558,657		-			558,657		(c)	1996	09/97		(c)
Dave & Buster’s:
Utica, MI		-			3,776,169		-		-		-		3,776,169		(c)			3,776,169		(c)	1998	06/98		(c)
DD’s Discount:
Moreno Valley, CA		-			516,154		1,123,471		147,214		-		516,154		1,270,685			1,786,839		163,027	1983	03/99		40 years
Denny’s:
Columbus, TX		-			428,429		816,644		-		-		428,429		816,644			1,245,073		62,099	1997	12/01		40 years
Dick’s Clothing:
Taylor, MI		-			1,920,032		3,526,868		-		-		1,920,032		3,526,868			5,446,900		731,446	1996	08/96		40 years
White Marsh, MD		-			2,680,532		3,916,889		-		-		2,680,532		3,916,889			6,597,421		812,333	1996	08/96		40 years
Dollar Tree:
Garland, TX		-			239,014		626,170		-		-		239,014		626,170			865,184		54,790	1994	02/94		40 years
Copperas Cove, TX		-			241,650		511,624		194,167		-		241,650		705,791			947,441		90,645	1972	11/98		40 years
Donato’s:
Medina, OH		-			405,113		463,582		-		-		405,113		463,582			868,695		35,252	1996	12/01		40 years
Eckerd:
Millville, NJ		435,126	(j)		417,603		-		-		-		417,603		(c)			417,603		(c)	1994	03/94		(c)
Atlanta, GA		388,853	(j)		445,593		-		-		-		445,593		(c)			445,593		(c)	1994	03/94		(c)
Mantua, NJ		452,361	(j)		344,022		-		-		-		344,022		(c)			344,022		(c)	1994	06/94		(c)
Glassboro, NJ		496,281	(j)		534,243		-		-		-		534,243		(c)			534,243		(c)	1994	12/94		(c)
Douglasville, GA		-			413,438		995,209		-		-		413,438		995,209			1,408,647		221,987	1996	01/96		40 years
Conyers, GA		-			574,666		998,900		-		-		574,666		998,900			1,573,566		188,334	1997	06/97		40 years
Chattanooga, TN		-			474,267		-		-		-		457,659		(c)			457,659		(c)	1997	09/97		(c)
Augusta, GA		-			568,606		1,326,748		-		-		568,606		1,326,748			1,895,354		233,563	1997	12/97		40 years
Riverdale, GA		-			1,088,896		1,707,448		-		-		1,088,896		1,707,448			2,796,344		300,582	1997	12/97		40 years
Warner Robins, GA		-			707,488		-		1,227,330		-		707,488		1,227,330			1,934,818		182,821	1999	03/98	(g)	40 years
Vineland, NJ		471,020	(j)		2,068,089		-		-		-		2,068,089		(c)			2,068,089		(c)	1999	09/98		(c)
Falls Church, VA		-			3,127,139		-		2,424,664		-		3,127,139		2,412,036	(q)		5,539,175		165,827	2002	10/01		40 years
West Mifflin, PA		-			1,401,632		2,043,862		-		-		1,401,632		2,043,862			3,445,494		146,903	2002	02/02		40 years
Norfolk, VA		-			2,742,194		1,796,508		-		-		2,742,194		1,796,508			4,538,702		129,124	2002	02/02		40 years
Thorndale, PA		-			2,260,618		2,472,039		-		-		2,260,618		2,472,039			4,732,657		177,678	2002	02/02		40 years
Enterprise Rent-A-Car:
Wilmington, NC		-			218,126		327,329		-		-		218,126		327,329			545,455		24,891	1995	12/01		40 years
Family Dollar:
Cohoes, NY		-			95,644		515,502		-		-		95,644		515,502			611,146		3,759	1994	09/04		40 years
Hudson Falls, NY		-			51,055		379,789		-		-		51,055		379,789			430,844		2,769	1993	09/04		40 years
Fantastic Sams:
Eden Prairie, MN		-			64,916		180,538		80,809		-		64,916		261,347			326,263		16,627	1997	12/01		40 years
Fazoli’s Restaurant:
Bay City, MI		-			647,055		633,899		-		-		647,055		633,899			1,280,954		48,203	1997	12/01		40 years
Food 4 Less:
Lemon Grove, CA		-			3,695,816		-		-		-		3,695,816		(c)			3,695,816		(c)	1996	07/95	(f)	(c)
Chula Vista, CA		-			3,568,862		-		-		-		3,568,862		(c)			3,568,862		(c)	1995	11/98		(c)
Gander Mountain:
Amarillo, TX		-			1,513,714		5,781,294		-		-		1,513,714		5,781,294			7,295,008		18,067	2004	11/04		40 years

See accompanying report of independent registered public accounting firm.

F-4

COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION

December 31, 2004

										Costs Capitalized															Life on Which
										Subsequent to				Gross Amount at Which											Depreciation and
						Initial Cost to Company				Acquisition				Carried at Close of Period (b)						Accumulated					Amortization in
			Encum-					Building,								Building,				Depreciation		Date			Latest Income
			brances					Improvements and		Improve-		Carrying				Improvements and				and		of Con-	Date		Statement is
			(k)			Land		Leasehold Interests		ments		Costs		Land		Leasehold Interests		Total		Amortization		struction	Acquired		Computed
GCS Wireless:
Orlando, FL				73,318	(u)		36,850		101,320		-		-		36,850		101,320		138,170		2,216	2001	02/04		40 years
Gen-X Clothing:
Federal Way, WA				-			2,037,392		1,661,577		257,414		-		2,037,392		1,918,991		3,956,383		279,513	1995	12/95		40 years
Golden Corral:
Leitchfield, KY				-			73,660		306,642		-		-		73,660		306,642		380,302		180,789	1984	12/84		35 years
Atlanta, TX				-			88,457		368,317		-		-		88,457		368,317		456,774		216,781	1985	01/85		35 years
Abbeville, LA				-			98,577		362,416		-		-		98,577		362,416		460,993		209,684	1985	04/85		35 years
Lake Placid, FL				-			115,113		305,074		43,797		-		115,113		348,871		463,984		176,744	1985	05/85		35 years
Tampa, FL				-			1,187,614		1,339,000		-		-		1,187,614		1,339,000		2,526,614		101,820	1997	12/01		40 years
Brandon, FL				-			1,329,793		1,390,502		-		-		1,329,793		1,390,502		2,720,295		105,736	1998	12/01		40 years
Dallas, TX				-			1,138,129		1,024,747		-		-		1,138,129		1,024,747		2,162,876		77,923	1994	12/01		40 years
Good Guys, The:
Foothill Ranch, CA				-			1,456,113		2,505,022		-		-		1,456,113		2,505,022		3,961,135		501,341	1995	12/96		40 years
East Palo Alto, CA				-			2,271,634		3,404,843		-		-		2,271,634		3,404,843		5,676,477		492,993	1999	12/98	(f)	40 years
GymKix:
Copperas Cove, TX				-			203,908		431,715		171,477		-		203,908		603,192		807,100		76,998	1972	11/98		40 years
H&R Block:
Swansea, IL				-			45,842		132,440		69,029		-		45,842		201,469		247,311		14,099	1997	12/01		40 years
Halloween Adventure:
Plymouth Meeting, PA				-			2,911,111		-		2,250,620		-		2,911,111		2,250,620		5,161,731		321,182	1999	10/98	(g)	40 years
Hancock Fabrics:
Arlington, TX				-			317,838		1,680,428		242,483		-		317,838		1,922,911		2,240,749		314,616	1996	06/96		40 years
Hastings:
Nacogdoches, TX				-			397,074		1,257,402		-		-		397,074		1,257,402		1,654,476		192,540	1997	11/98		40 years
Haverty’s:
Clearwater, FL				-			1,184,438		2,526,207		44,005		-		1,184,438		2,570,212		3,754,651		737,322	1992	05/93		40 years
Orlando, FL	(r	)		1,048,984	(j)		820,397		2,184,721		-		-		820,397		2,184,721		3,005,118		633,345	1992	05/93		40 years
Pensacola, FL				934,546			633,125		1,595,405		-		-		603,111		1,595,405		2,198,516		339,467	1994	06/96		40 years
Bowie, MD				-			1,965,508		4,221,074		-		-		1,965,508		4,221,074		6,186,582		598,442	1997	12/97		38.5 years
Heilig-Meyers:
Baltimore, MD				-			469,781		813,073		-		-		469,781		813,073		1,282,854		124,502	1968	11/98		40 years
Glen Burnie, MD				-			631,712		931,931		-		-		631,712		931,931		1,563,643		142,655	1968	11/98		40 years
Hollywood Video:
Cincinnati, OH				-			282,200		520,623		261,238		-		543,438		520,623		1,064,061		39,589	1998	12/01		40 years
Clifton, CO				-			245,462		732,477		-		-		245,462		732,477		977,939		55,699	1998	12/01		40 years
Home Depot:
Sunrise, FL				-			5,148,657		-		-		-		5,148,657		-		5,148,657		-	(e)	05/03		40 years
HomeGoods:
Fairfax, VA				-			977,839		1,414,261		937,301		-		977,839		2,351,562		3,329,401		108,326	1995	12/95		40 years
Hooters:
Tampa, FL				-			783,923		504,768		-		-		783,923		504,768		1,288,691		38,383	1993	12/01		40 years
Humana:
Sunrise, FL				-			800,271		252,717		-		-		800,271		252,717		1,052,988		3,890	1984	05/04		40 years
Hy-Vee:
St. Joseph, MO				-			1,579,583		2,849,246		-		-		1,579,583		2,849,246		4,428,829		163,244	2002	09/02		40 years
International House of Pancakes:
Stafford, TX				332,979	(j)		382,084		-		-		-		331,756		(c)		331,756		(c)	1992	10/93		(c)

See accompanying report of independent registered public accounting firm.

F-5

COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION

December 31, 2004

										Costs Capitalized														Life on Which
										Subsequent to				Gross Amount at Which										Depreciation and
						Initial Cost to Company				Acquisition				Carried at Close of Period (b)						Accumulated				Amortization in
			Encum-					Building,								Building,				Depreciation		Date		Latest Income
			brances					Improvements and		Improve-		Carrying				Improvements and				and		of Con-	Date	Statement is
			(k)			Land		Leasehold Interests		ments		Costs		Land		Leasehold Interests		Total		Amortization		struction	Acquired	Computed
Sunset Hills, MO				351,927	(j)		271,853		-		-		-		271,853		(c)		271,853		(c)	1993	10/93	(c)
Las Vegas, NV				395,676	(j)		519,947		-		-		-		519,947		(c)		519,947		(c)	1993	12/93	(c)
Ft. Worth, TX				368,103	(j)		430,896		-		-		-		430,896		(c)		430,896		(c)	1993	12/93	(c)
Arlington, TX				353,479	(j)		404,512		-		-		-		404,512		(c)		404,512		(c)	1993	12/93	(c)
Matthews, NC				361,531	(j)		380,043		-		-		-		380,043		(c)		380,043		(c)	1993	12/93	(c)
Phoenix, AZ				363,964	(j)		483,374		-		-		-		483,374		(c)		483,374		(c)	1993	12/93	(c)
Midwest City, OK				-			407,268		-		-		-		407,268		-		407,268		-	(i)	03/96	(i)
Jared Jewelers:
Richmond, VA				-			955,134		1,336,152		-		-		955,134		1,336,152		2,291,286		101,603	1998	12/01	40 years
Brandon, FL				-			1,196,900		1,182,150		-		-		1,196,900		1,182,150		2,379,050		77,656	2002	05/02	40 years
Lithonia, GA				-			1,270,517		1,215,818		-		-		1,270,517		1,215,818		2,486,335		79,867	2002	05/02	40 years
Houston, TX				-			1,675,739		1,439,597		-		-		1,675,739		1,439,597		3,115,336		73,479	2002	12/02	40 years
Jo-Ann etc:
Corpus Christi, TX				-			818,448		896,395		12,222		-		818,448		908,617		1,727,065		252,117	1967	11/93	40 years
Kane Realty:
Raleigh, NC				-			793,017		876,727		-		-		793,017		876,727		1,669,744		66,668	1993	12/01	40 years
Kash N’ Karry:
Palm Harbor, FL				-			335,851		1,925,276		-		-		335,851		1,925,276		2,261,127		58,159	1983	03/99	40 years
Brandon, FL				3,242,641	(p)		322,476		1,221,661		-		-		322,476		1,221,661		1,544,137		36,904	1983	03/99	40 years
Sarasota, FL				-			470,600		1,343,746		-		-		470,600		1,343,746		1,814,346		40,592	1983	03/99	40 years
Keg Steakhouse:
Bellingham, WA	(r	)		-			397,443		455,605		-		-		397,443		455,605		853,048		34,645	1981	12/01	40 years
Lynnwood, WA				-			1,255,513		649,236		-		-		1,255,513		649,236		1,904,749		49,369	1992	12/01	40 years
Tacoma, WA				-			526,792		794,722		-		-		526,792		794,722		1,321,514		60,432	1981	12/01	40 years
KFC:
Marysville, WA				-			646,779		545,592		-		-		646,779		545,592		1,192,371		41,488	1996	12/01	40 years
Erie, PA				-			516,508		496,092		-		-		516,508		496,092		1,012,600		37,724	1996	12/01	40 years
Lee County:
Ft. Myers, FL				-			1,956,579		4,045,196		-		-		1,956,579		4,045,196		6,001,775		712,123	1997	12/97	40 years
Lowe’s:
Memphis, TN				-			3,214,835		9,169,885		-		-		3,214,835		9,169,885		12,384,720		583,249	2002	06/02	40 years
Magic China Café:
Orlando, FL				79,983	(u)		40,200		110,531		-		-		40,200		110,531		150,731		2,418	2001	02/04	40 years
Magic Dollar:
Memphis, TN				-			549,309		539,643		364,460		-		549,309		904,103		1,453,412		105,743	1998	11/98	40 years
MCI:
Arlington, VA				1,425,276	(s)		222,721		1,088,680		-		-		222,721		1,088,680		1,311,401		38,557	1982	08/03	40 years
Merryland Chinese Buffet:
Red Oak, TX				-			73,290		520,950		-		-		73,290		520,950		594,240		39,614	1986	12/01	40 years
Mi Pueblo Foods:
Watsonville, CA				-			805,056		1,648,934		-		-		805,056		1,648,934		2,453,990		49,812	1984	03/99	40 years
Michaels:
Fairfax, VA				-			986,131		1,426,254		706,501		-		986,131		2,132,755		3,118,886		246,669	1995	12/95	40 years
Grapevine, TX				-			1,017,934		2,066,715		-		-		1,017,934		2,066,715		3,084,649		337,994	1998	06/98	40 years
Mortgage Marketing:
Swansea, IL				-			91,709		264,956		-		-		91,709		264,956		356,665		20,162	1997	12/01	40 years
Mountain Jack’s:
Centerville, OH				-			850,625		1,059,430		-		-		850,625		1,059,430		1,910,055		80,561	1986	12/01	40 years
New Covenant Church:
Augusta, GA				-			176,656		674,253		-		-		176,656		674,253		850,909		51,271	1998	12/01	40 years

See accompanying report of independent registered public accounting firm.

F-6

COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION

December 31, 2004

								Costs Capitalized															Life on Which
								Subsequent to				Gross Amount at Which											Depreciation and
				Initial Cost to Company				Acquisition				Carried at Close of Period (b)						Accumulated					Amortization in
	Encum-					Building,								Building,				Depreciation		Date			Latest Income
	brances					Improvements and		Improve-		Carrying				Improvements and				and		of Con-	Date		Statement is
	(k)			Land		Leasehold Interests		ments		Costs		Land		Leasehold Interests		Total		Amortization		struction	Acquired		Computed
Office Depot:
Arlington, TX		700,734	(j)		596,024		1,411,432		-		-		596,024		1,411,432		2,007,456		385,123	1991	01/94		40 years
Richmond, VA		-			888,772		1,948,036		-		-		888,772		1,948,036		2,836,808		418,278	1996	05/96		40 years
Hartsdale, NY		2,038,174	(t)		4,508,753		2,327,448						4,508,753		2,327,448		6,836,201		53,329	1996	09/97		40 years
OfficeMax:
Corpus Christi, TX		-			893,270		978,344		76,664		-		893,270		1,055,008		1,948,278		292,987	1967	11/93		40 years
Dallas, TX		987,295	(j)		1,118,500		1,709,891		-		-		1,118,500		1,709,891		2,828,391		470,337	1993	12/93		40 years
Cincinnati, OH		739,335	(j)		543,489		1,574,551		-		-		543,489		1,574,551		2,118,040		412,645	1994	07/94		40 years
Evanston, IL		1,265,520	(j)		1,867,831		1,757,618		-		-		1,867,831		1,757,618		3,625,449		420,119	1995	06/95		40 years
Altamonte Springs, FL		-			1,689,793		3,050,160		-		-		1,689,793		3,050,160		4,739,953		677,014	1995	01/96		40 years
Cutler Ridge, FL		-			989,370		1,479,119		-		-		989,370		1,479,119		2,468,489		314,621	1995	06/96		40 years
Sacramento, CA		-			1,144,167		2,961,206		-		-		1,144,167		2,961,206		4,105,373		592,438	1996	12/96		40 years
Salinas, CA		-			1,353,217		1,829,325		-		-		1,353,217		1,829,325		3,182,542		360,148	1995	02/97		40 years
Redding, CA		-			667,174		2,181,563		-		-		667,174		2,181,563		2,848,737		411,315	1997	06/97		40 years
Kelso, WA		-			868,003		-		1,805,539		-		868,003		1,805,539		2,673,542		314,089	1998	09/97	(g)	40 years
Lynchburg, VA		-			561,509		-		1,851,326		-		561,509		1,851,326		2,412,835		291,198	1998	02/98		40 years
Leesburg, FL		-			640,019		-		1,929,028		-		640,019		1,929,028		2,569,047		291,364	1998	08/98		40 years
Tigard, OR		-			1,539,873		2,247,321		-		-		1,539,873		2,247,321		3,787,194		344,121	1995	11/98		40 years
Dover, NJ		-			1,138,296		3,238,083		-		-		1,138,296		3,238,083		4,376,379		495,831	1995	11/98		40 years
Griffin, GA		-			685,470		-		1,801,905		-		685,470		1,801,905		2,487,375		257,147	1999	11/98	(g)	40 years
Pal Joey’s Sports Pub:
Gresham, OR		-			817,311		108,294		-		-		817,311		108,294		925,605		8,235	1993	12/01		40 years
Party City:
Memphis, TN		-			266,383		-		1,136,334		-		266,383		1,136,334		1,402,717		157,430	1999	12/98		40 years
Perfect Teeth:
Rio Rancho, NM		-			61,517		122,142		-		-		61,517		122,142		183,659		9,295	1997	12/01		40 years
Petco:
Grand Forks, ND		-			306,629		909,671		-		-		306,629		909,671		1,216,300		160,164	1996	12/97		40 years
PETsMART:
Chicago, IL		-			2,724,138		3,565,721		-		-		2,724,138		3,565,721		6,289,859		560,850	1998	09/98		40 years
Picture Factory:
Sarasota, FL		-			1,167,618		1,903,810		-		-		1,167,618		1,903,810		3,071,428		45,549	1996	09/97		40 years
Pier 1 Imports:
Anchorage, AK		-			928,321		1,662,584		-		-		928,321		1,662,584		2,590,905		367,393	1995	02/96		40 years
Memphis, TN		-			713,319		821,770		-		-		713,319		821,770		1,535,089		154,938	1997	09/96	(f)	40 years
Sanford, FL		-			738,051		803,082		-		-		738,051		803,082		1,541,133		136,357	1998	06/97	(f)	40 years
Knoxville, TN		-			467,169		734,833		-		-		467,169		734,833		1,202,002		109,459	1999	01/98	(f)	40 years
Mason, OH		-			593,571		885,047		-		-		593,571		885,047		1,478,618		122,616	1999	06/98	(f)	40 years
Harlingen, TX		-			316,640		756,406		-		-		316,640		756,406		1,073,046		98,490	1999	11/98	(f)	40 years
Valdosta, GA		-			390,838		805,912		-		-		390,838		805,912		1,196,750		103,257	1999	01/99	(f)	40 years
Pizza Hut:
Monroeville, AL		-			547,300		44,237		-		-		547,300		44,237		591,537		3,364	1996	12/01		40 years
Pizza Place, The:
Cohoes, NY		-			16,396		88,372		-		-		16,396		88,372		104,768		644	1994	09/04		40 years
Popeye’s:
Snellville, GA		-			642,169		436,512		-		-		642,169		436,512		1,078,681		33,193	1995	12/01		40 years
Print & Pack Plus:
Eden Prairie, MN		-			75,736		210,628		94,277		-		75,736		304,905		380,641		19,287	1997	12/01		40 years
Quizno’s:
Rio Rancho, NM		-			48,566		96,428		13,398		-		48,566		109,826		158,392		7,921	1997	12/01		40 years
Rally’s:
Toledo, OH		-			125,882		319,770		-		-		125,882		319,770		445,652		103,112	1989	07/92		38.8 years

See accompanying report of independent registered public accounting firm.

F-7

COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION

December 31, 2004

								Costs Capitalized															Life on Which
								Subsequent to				Gross Amount at Which											Depreciation and
				Initial Cost to Company				Acquisition				Carried at Close of Period (b)						Accumulated					Amortization in
	Encum-					Building,								Building,				Depreciation		Date			Latest Income
	brances					Improvements and		Improve-		Carrying				Improvements and				and		of Con-	Date		Statement is
	(k)			Land		Leasehold Interests		ments		Costs		Land		Leasehold Interests		Total		Amortization		struction	Acquired		Computed
Red Lion Chinese Restaurant:
Cohoes, NY		-			27,327		147,286		-		-		27,327		147,286		174,613		1,074	1994	09/04		40 years
Reliable:
St. Louis, MO		-			2,078,777		13,877,631		-		-		2,078,777		13,877,631		15,956,408		153,995	1975	05/04		40 years
Rent-A-Center:
Rio Rancho, NM		-			145,698		289,284		40,193		-		145,698		329,477		475,175		24,082	1997	12/01		40 years
Rite Aid:
Mobile, AL		-			1,136,618		1,694,187		-		-		1,136,618		1,694,187		2,830,805		128,829	2000	12/01		40 years
Orange Beach, AL		-			1,409,980		1,996,043		-		-		1,409,980		1,996,043		3,406,023		151,782	2000	12/01		40 years
Albany, NY		-			24,707		867,257		-		-		24,707		867,257		891,964		6,324	1994	09/04		40 years
Albany, NY		-			33,794		823,923		-		-		33,794		823,923		857,717		6,008	1992	09/04		40 years
Cohoes, NY		-			107,451		579,237		-		-		107,451		579,237		686,688		4,224	1994	09/04		40 years
Hudson Falls, NY		-			56,737		780,091		-		-		56,737		780,091		836,828		5,688	1990	09/04		40 years
Saratoga Springs, NY		-			762,303		590,978		-		-		762,303		590,978		1,353,281		4,309	1980	09/04		40 years
Ticonderoga, NY		-			88,867		688,622		-		-		88,867		688,622		777,489		5,021	1993	09/04		40 years
Rite Rug:
Columbus, OH		-			1,596,197		934,236		-		-		1,596,197		934,236		2,530,433		2,919	1970	11/04		40 years
Roadhouse Grill:
Cheektowaga, NY		-			689,040		386,251		-		-		689,040		386,251		1,075,291		29,371	1994	12/01		40 years
Robb & Stucky:
Ft. Myers, FL		-			2,188,440		6,225,401		-		-		2,188,440		6,225,401		8,413,841		1,108,398	1997	12/97		40 years
Roger & Marv’s:
Kenosha, WI		-			1,917,606		3,431,364		-		-		1,917,606		3,431,363		5,348,969		670,861	1992	02/97		40 years
Rooms To Go:
Pembroke Pines, FL		-			1,550,202		-		-		-		1,550,202		-		1,550,202		-	(e)	10/04		(e)
Ross Dress For Less:
Coral Gables, FL		-			1,782,346		1,661,174		-		-		1,782,346		1,661,174		3,443,520		297,282	1994	06/96		40 years
Lodi, CA		-			613,710		1,414,592		-		-		613,710		1,414,592		2,028,302		42,732	1984	03/99		40 years
Schlotzsky’s Deli:
Phoenix, AZ		-			706,306		315,469		-		-		706,306		315,469		1,021,775		23,989	1995	12/01		40 years
Scottsdale, AZ		-			717,138		310,610		-		-		717,138		310,610		1,027,748		23,619	1995	12/01		40 years
7-Eleven:
Land ‘O Lakes, FL		-			1,076,572		-		816,944		-		1,076,572		816,944		1,893,516		121,691	1999	10/98	(g)	40 years
Tampa Palms, FL		-			1,080,670		-		917,432		-		1,080,670		917,432		1,998,102		132,837	1999	12/98	(g)	40 years
Shoes on a Shoestring:
Albuquerque, NM		-			1,441,777		2,335,475		-		-		1,441,777		2,335,475		3,777,252		440,334	1997	06/97		40 years
Shop & Save:
Homestead, PA		-			1,139,419		-		-		-		1,139,419		(c)		1,139,419		(c)	1994	02/97		(c)
Skinney’s BBQ:
Hammond, LA		-			247,600		813,514		-		-		247,600		813,514		1,061,114		61,861	1997	12/01		40 years
Skipper’s Fish & Chips:
Salem, OR		-			555,951		735,651		-		-		555,951		735,651		1,291,602		55,940	1996	12/01		40 years
Spokane, WA		-			470,840		530,289		-		-		470,840		530,289		1,001,129		40,324	1996	12/01		40 years
Sofa Express:
Buford, GA		-			1,925,129		5,034,846		-		-		1,925,129		5,034,846		6,959,975		57,691	2004	07/04		40 years
Spa and Nails Club:
Orlando, FL		79,983	(u)		40,200		110,531		-		-		40,200		110,531		150,731		2,418	2001	02/04		40 years

See accompanying report of independent registered public accounting firm.

F-8

COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION

December 31, 2004

								Costs Capitalized															Life on Which
								Subsequent to				Gross Amount at Which											Depreciation and
				Initial Cost to Company				Acquisition				Carried at Close of Period (b)						Accumulated					Amortization in
	Encum-					Building,								Building,				Depreciation		Date			Latest Income
	brances					Improvements and		Improve-		Carrying				Improvements and				and		of Con-	Date		Statement is
	(k)			Land		Leasehold Interests		ments		Costs		Land		Leasehold Interests		Total		Amortization		struction	Acquired		Computed
Spencer’s A/C & Appliances:
Glendale, AZ		-			341,713		982,429		-		-		341,713		982,429		1,324,142		133,619	1999	12/98	(g)	40 years
Sports Authority:
Dallas, TX		-			1,311,440		-		-		-		1,311,440		(c)		1,311,440		(c)	1994	03/94		(c)
Tampa, FL		-			2,127,503		1,521,730		-		-		2,127,503		1,521,730		3,649,233		323,685	1994	06/96		40 years
Sarasota, FL		854,466	(t)		1,427,840		1,702,852		-		-		1,427,840		1,702,852		3,130,692		39,012	1996	09/97		40 years
Bradenton, FL		-			1,526,340		4,139,363		-		-		1,526,340		4,139,363		5,665,703		99,172	1997	01/04		40 years
Memphis, TN		-			820,340		-		2,573,264		-		820,340		2,573,264		3,393,604		399,392	1998	12/97	(g)	40 years
Little Rock, AR		-			3,113,375		2,660,206		-		-		3,113,375		2,660,206		5,773,581		418,428	1998	09/98		40 years
Woodbridge, NJ		-			3,749,990		5,982,660		-		-		3,749,990		5,982,660		9,732,650		292,901	1994	01/03		40 years
Steak & Ale:
Jacksonville, FL		-			986,565		855,523		-		-		986,565		855,523		1,842,088		65,055	1996	12/01		40 years
Stillwater Medical:
Stillwater, OK		-			253,603		1,086,792		-		-		253,603		1,086,792		1,340,395		101,434	1998	11/98		37.5 years
Stone Mountain Chevrolet:
Lilburn, GA		-			3,027,056		4,685,189		-		-		3,027,056		4,685,189		7,712,245		43,924	2004	08/04		40 years
Stop & Go:
Grand Prairie, TX		-			421,254		684,568		-		-		421,254		684,568		1,105,822		52,056	1986	12/01		40 years
Kennedale, TX		-			399,988		692,190		-		-		399,988		692,190		1,092,178		52,635	1985	12/01		40 years
Subway:
Eden Prairie, MN		-			54,097		150,449		67,341		-		54,097		217,790		271,887		13,967	1997	12/01		40 years
Cohoes, NY		-			21,862		117,829		-		-		21,862		117,829		139,691		860	1994	09/04		40 years
SuperValu:
Huntington, WV		-			1,254,238		760,602		-		-		1,254,238		760,602		2,014,840		149,744	1971	02/97		40 years
Warwick, RI		-			1,699,330		-		-		-		1,699,330		(c)		1,699,330		(c)	1992	02/97		(c)
Maple Heights, OH		-			1,034,758		2,874,414		-		-		1,034,758		2,874,414		3,909,172		565,900	1985	02/97		40 years
Swansea Quick Cash:
Swansea, IL		-			45,815		132,365		-		-		45,815		132,365		178,180		10,067	1997	12/01		40 years
Taco Bell:
Ocala, FL		-			275,023		754,990		-		-		275,023		754,990		1,030,013		57,411	2001	12/01		40 years
Ormond Beach, FL		-			632,337		525,616		-		-		632,337		525,616		1,157,953		39,969	2001	12/01		40 years
Phoenix, AZ		-			593,718		282,777		-		-		593,718		282,777		876,495		21,503	1995	12/01		40 years
Taco Bron Restaurant:
Tucson, AZ		-			827,002		305,209		17,814		-		844,816		305,209		1,150,025		25,792	1974	12/01		40 years
Target:
Chico, CA		-			1,269,272		4,213,165		-		-		1,269,272		4,213,165		5,482,437		127,273	1983	03/99		40 years
Victorville, CA		-			1,908,815		4,029,669		-		-		1,908,815		4,029,669		5,938,484		121,730	1983	03/99		40 years
San Diego, CA		-			2,672,390		4,270,693		-		-		2,672,390		4,270,693		6,943,083		129,011	1984	03/99		40 years
Texas Roadhouse:
Grand Junction, CO		-			584,237		920,143		-		-		584,237		920,143		1,504,380		69,969	1997	12/01		40 years
Thornton, CO		-			598,556		1,019,164		-		-		598,556		1,019,164		1,617,720		77,499	1998	12/01		40 years
TGI Friday’s:
Corpus Christi, TX		-			1,209,702		1,532,125		-		-		1,209,702		1,532,125		2,741,827		116,505	1995	12/01		40 years
Thomasville:
Buford, GA		-			1,266,527		2,405,629		-		-		1,266,527		2,405,629		3,672,156		27,565	2004	07/04		40 years
Top’s:
Lacey, WA		-			2,777,449		7,082,150		-		-		2,777,449		7,082,150		9,859,599		1,394,298	1992	02/97		40 years
United Rentals:
Carrollton, TX		-			477,893		534,807		-		-		477,893		534,807		1,012,700		557	1981	12/04		40 years
Cedar Park, TX		-			535,091		829,241		-		-		535,091		829,241		1,364,332		864	1990	12/04		40 years

See accompanying report of independent registered public accounting firm.

F-9

COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION

December 31, 2004

								Costs Capitalized														Life on Which
								Subsequent to				Gross Amount at Which										Depreciation and
				Initial Cost to Company				Acquisition				Carried at Close of Period (b)						Accumulated				Amortization in
	Encum-					Building,								Building,				Depreciation		Date		Latest Income
	brances					Improvements and		Improve-		Carrying				Improvements and				and		of Con-	Date	Statement is
	(k)			Land		Leasehold Interests		ments		Costs		Land		Leasehold Interests		Total		Amortization		struction	Acquired	Computed
Clearwater, FL		-			1,173,292		1,810,665		-		-		1,173,292		1,810,665		2,983,957		1,886	2001	12/04	40 years
Fort Collins, CO		-			2,057,322		977,971		-		-		2,057,322		977,971		3,035,293		1,019	1975	12/04	40 years
Irving, TX		-			708,389		910,786		-		-		708,389		910,786		1,619,175		949	1984	12/04	40 years
La Porte, TX		-			1,114,553		2,125,426		-		-		1,114,553		2,125,426		3,239,979		2,214	2000	12/04	40 years
Littleton, CO		-			1,743,092		1,943,650		-		-		1,743,092		1,943,650		3,686,742		2,024	2002	12/04	40 years
Oklahoma City, OK		-			744,145		1,264,885		-		-		744,145		1,264,885		2,009,030		1,317	1997	12/04	40 years
Perrysberg, OH		-			641,867		1,119,085		-		-		641,867		1,119,085		1,760,952		1,166	1979	12/04	40 years
Plano, TX		-			1,030,426		1,148,065		-		-		1,030,426		1,148,065		2,178,491		1,196	1996	12/04	40 years
Temple, TX		-			1,159,775		1,360,379		-		-		1,159,775		1,360,379		2,520,154		1,417	1998	12/04	40 years
United States of America:
Arlington, VA		93,574,724	(s)		24,077,279		117,691,770		16,825,046		-		24,077,279		134,516,816		158,594,095		4,265,631	1982	08/03	40 years
United Trust Bank:
Bridgeview, IL		-			673,238		744,154		-		-		673,238		744,154		1,417,392		56,587	1997	12/01	40 years
Vacant Property:
Vernon, TX		-			105,798		328,943		-		-		105,798		328,943		434,741		190,317	1985	03/85	35 years
Arlington, TX		-			435,002		2,299,881		334,059		-		435,002		2,633,940		3,068,942		422,713	1996	06/96	40 years
Tampa, FL		1,044,505			1,454,908		2,045,833		-		-		1,454,908		2,045,833		3,500,741		435,308	1992	06/96	40 years
Gainesville, FL		-			317,386		1,248,404		-		-		317,386		1,248,404		1,565,790		37,712	1982	03/99	40 years
Moreno Valley, CA		-			242,896		528,692		69,277				242,896		597,969		840,865		76,719	1983	03/99	40 years
Mesa, AZ		-			195,652		512,566		-		-		195,652		512,566		708,218		38,976	1997	12/01	40 years
Indianapolis, IN		-			639,584		1,015,173		-		-		639,584		1,015,173		1,654,757		77,195	1996	12/01	40 years
Chandler, AZ		-			654,765		765,164		7,500		-		654,765		772,664		1,427,429		62,084	1997	12/01	40 years
Columbus, OH		-			1,032,008		1,107,250		-		-		1,032,008		1,107,250		2,139,258		84,197	1998	12/01	40 years
Southfield, MI		-			366,448		643,759		38,660		-		405,108		643,759		1,048,867		54,558	1976	12/01	40 years
Jackson, MS		-			132,821		672,413		-		-		132,821		672,413		805,233		12,059	1979	04/04	40 years
Bonham, TX		-			54,999		202,085		-		-		54,999		202,085		257,084		2,316	1984	07/04	40 years
Albany, NY		-			2,734		66,667		-		-		2,734		66,667		69,401		486	1992	09/04	40 years
Value City:
Florissant, MO		-			2,490,210		2,937,449		-		-		2,490,210		2,937,449		5,427,659		125,454	1996	04/03	40 years
Walgreens:
Sunrise, FL		-			1,957,974		1,400,970		-		-		1,957,974		1,400,970		3,358,944		56,914	1994	05/03	40 years
Wal-Mart:
Sealy, TX		-			1,344,244		1,483,362		-		-		1,344,244		1,483,362		2,827,606		214,778	1982	03/99	40 years
Aransas Pass, TX		-			190,505		2,640,175		-		-		190,505		2,640,175		2,830,680		382,275	1983	03/99	40 years
Winfield, AL		-			419,811		1,684,505		-		-		419,811		1,684,505		2,104,316		243,902	1983	03/99	40 years
Beeville, TX		-			507,231		2,315,424		-		-		507,231		2,315,424		2,822,655		335,254	1983	03/99	40 years
Corpus Christi, TX		-			630,043		3,131,407		-		-		630,043		3,131,407		3,761,450		453,402	1983	03/99	40 years
Waremart:
Eureka, CA		-			3,135,036		5,470,606		-		-		3,135,036		5,470,606		8,605,642		1,077,026	1965	02/97	40 years
Washington Bike Center:
Fairfax, VA		-			192,830		278,892		83,773		-		192,830		362,665		555,495		15,942	1995	12/95	40 years
Wendy’s Old Fashioned Hamburger:
Fenton, MO		-			307,068		496,410		-		-		307,068		496,410		803,478		188,424	1985	07/92	33 years
Sacramento, CA		-			585,872		-		-		-		585,872		-		585,872		-	(i)	02/98	(i)
New Kensington, PA		-			501,136		333,445		-		-		501,136		333,445		834,581		25,356	1980	12/01	40 years
Whataburger:
Albuquerque, NM		-			624,318		418,975		-		-		624,318		418,975		1,043,293		31,860	1995	12/01	40 years
Wherehouse Music:
Homewood, AL		-			1,031,974		696,950		-		-		1,031,974		696,950		1,728,924		52,997	1997	12/01	40 years
Winn-Dixie:
Dallas, GA		-			1,287,630		1,952,791		-		-		1,287,630		1,952,791		3,240,421		79,332	1997	05/03	40 years
Woodstock, GA		-			1,937,017		1,284,901		-		-		1,937,017		1,284,901		3,221,918		52,199	1997	05/03	40 years
Columbus, GA		-			1,023,371		1,874,875		-		-		1,023,371		1,874,875		2,898,246		68,355	1984	07/03	40 years

See accompanying report of independent registered public accounting firm.

F-10

COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION

December 31, 2004

									Costs Capitalized															Life on Which
									Subsequent to				Gross Amount at Which											Depreciation and
				Initial Cost to Company					Acquisition				Carried at Close of Period (b)						Accumulated					Amortization in
	Encum-						Building,								Building,				Depreciation		Date			Latest Income
	brances						Improvements and		Improve-		Carrying				Improvements and				and		of Con-	Date		Statement is
	(k)			Land			Leasehold Interests		ments		Costs		Land		Leasehold Interests		Total		Amortization		struction	Acquired		Computed
Leasehold Interests:		-			2,532,133			-		-		-		2,532,133		-		2,532,133		912,232	—	(n)		(m)
	$	152,109,562		$	434,215,343		$	563,573,672	$	68,068,415	$	-	$	434,398,959	$	629,692,740	$	1,064,091,700		61,720,322
Real Estate Held for investment the Company has Invested in Under Direct Financing Leases:
Academy:
Houston, TX	$	-		$	-		$	1,924,740	$	-	$	-	$	-	$	(c)	$	(c)	$	(c)	1994	05/95		(c)
Houston, TX		-			-			1,867,519		-		-		-		(c)		(c)		(c)	1995	06/95		(c)
N. Richland Hills, TX		-			-			2,253,408		-		-		-		(c)		(c)		(c)	1996	08/95	(f)	(c)
Houston, TX		-			-			2,112,335		-		-		-		(c)		(c)		(c)	1996	02/96	(f)	(c)
Houston, TX		-			-			1,910,697		-		-		-		(c)		(c)		(c)	1996	06/96	(f)	(c)
Baton Rouge, LA		-			-			2,405,466		-		-		-		(c)		(c)		(c)	1997	08/96	(f)	(c)
San Antonio, TX		-			-			1,961,017		-		-		-		(c)		(c)		(c)	1996	09/97	(f)	(c)
Barnes and Noble:
Plantation, FL		-			-			3,498,559		-		-		-		(c)		(c)		(c)	1996	05/95		(c)
Best Buy:
Evanston, IL		-			-			3,400,057		-		-		-		(c)		(c)		(c)	1994	02/97		(c)
Borders Books & Music:
Altamonte Springs, FL		-			-			3,267,579		-		-		-		(c)		(c)		(c)	1997	09/97		(c)
Checkers:
Orlando, FL		-			-			286,910		-		-		-		(c)		(c)		(c)	1988	07/92		(c)
CVS:
San Antonio, TX		-			-			783,974		-		-		-		(c)		(c)		(c)	1993	12/93		(c)
Dallas, TX		-			-			638,684		-		-		-		(c)		(c)		(c)	1994	01/94		(c)
Arlington, TX		-			-			636,070		-		-		-		(c)		(c)		(c)	1994	02/94		(c)
Amarillo, TX		-			-			849,071		-		-		-		(c)		(c)		(c)	1994	12/94		(c)
Amarillo, TX		-			-			869,846		-		-		-		(c)		(c)		(c)	1994	12/94		(c)
Amarillo, TX		341,888	(j)		158,851			855,348		-		-		(d)		(d)		(d)		(d)	1994	12/94		(d)
Kissimmee, FL		-			-			933,852		-		-		-		(c)		(c)		(c)	1995	04/95		(c)
Tampa, FL		-			-			1,090,532		-		-		-		(c)		(c)		(c)	1995	12/95		(c)
Alice, TX		346,912	(j)		189,187			804,963		-		-		(d)		(d)		(d)		(d)	1995	06/95		(d)
Lafayette, LA		-			-			949,128		-		-		-		(c)		(c)		(c)	1995	01/96		(c)
Moore, OK		-			-			879,296		-		-		-		(c)		(c)		(c)	1995	01/96		(c)
Irving, TX		-			-			1,228,436		-		-		-		(c)		(c)		(c)	1996	12/96		(c)
Ft. Worth, TX		-			399,592			2,529,969		78,461		-		(d)		(d)		(d)		(d)	1996	12/96		(d)
Williston, FL		-			-			355,757		-		-		-		(c)		(c)		(c)	1995	01/97		(c)
Jasper, FL		-			-			347,474		-		-		-		(c)		(c)		(c)	1994	01/97		(c)
Oklahoma City, OK		-			(l	)		1,365,125		-		-		(l)		(c)		(c)		(c)	1997	06/97		(c)
Oklahoma City, OK		-			(l	)		1,419,093		-		-		(l)		(c)		(c)		(c)	1997	06/97		(c)
Norman, OK		-			-			1,225,477		-		-		-		(c)		(c)		(c)	1997	06/97		(c)
Del City, OK		-			-			1,376,025		-		-		-		(c)		(c)		(c)	1998	05/98		(c)
Arlington, TX		-			-			-		1,416,071		-		-		(c)		(c)		(c)	1998	11/98	(h)	(c)
Haltom City, TX		554,225	(t)		-			2,074,777		-		-		-		(c)		(c)		(c)	1996	09/97		(c)
Ft. Worth, TX		-			-			1,135,067		-		-		-		(c)		(c)		(c)	1996	09/97		(c)
Dave & Buster’s:
Utica, MI		-			-			4,888,743		-		-		-		(c)		(c)		(c)	1998	06/98		(c)
Eckerd:
Millville, NJ		-			-			828,942		-		-		-		(c)		(c)		(c)	1994	03/94		(c)
Atlanta, GA		-			-			668,390		-		-		-		(c)		(c)		(c)	1994	03/94		(c)
Mantua, NJ		-			-			951,795		-		-		-		(c)		(c)		(c)	1994	06/94		(c)
Vineland, NJ		-			-			-		1,901,335		-		-		(c)		(c)		(c)	1999	03/99	(h)	(c)
Glassboro, NJ		-			-			887,497		-		-		-		(c)		(c)		(c)	1994	12/94		(c)
East Point, GA		-			336,610			1,173,529		-		-		(d)		(d)		(d)		(d)	1996	12/96		(d)
Chattanooga, TN		-			-			1,344,240		-		-		-		(c)		(c)		(c)	1997	09/97		(c)
Kennett Square, PA		-			(l	)		-		1,984,435		-		(l)		(c)		(c)		(c)	2000	12/00		(c)

See accompanying report of independent registered public accounting firm.

F-11

COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION

December 31, 2004

									Costs Capitalized															Life on Which
									Subsequent to				Gross Amount at Which											Depreciation and
				Initial Cost to Company					Acquisition				Carried at Close of Period (b)						Accumulated					Amortization in
	Encum-						Building,								Building,				Depreciation		Date			Latest Income
	brances						Improvements and		Improve-		Carrying				Improvements and				and		of Con-	Date		Statement is
	(k)			Land			Leasehold Interests		ments		Costs		Land		Leasehold Interests		Total		Amortization		struction	Acquired		Computed
Arlington, TX		-			-			3,201,489		-		-		-		(c)		(c)		(c)	2002	02/02		(c)
Food 4 Less:
Lemon Grove, CA		-			-			4,068,179		-		-		-		(c)		(c)		(c)	1996	07/95	(f)	(c)
Chula Vista, CA		-			-			4,266,181		-		-		-		(c)		(c)		(c)	1995	11/98		(c)
Food Lion:
Keystone Heights, FL		675,300	(j)		88,604			1,845,988		-		-		(d)		(d)		(d)		(d)	1993	05/93		(d)
Chattanooga, TN		711,242	(j)		336,488			1,701,072		-		-		(d)		(d)		(d)		(d)	1993	10/93		(d)
Lynchburg, VA		-			128,216			1,674,167		-		-		(d)		(d)		(d)		(d)	1994	01/94		(d)
Martinsburg, WV		695,416	(j)		448,648			1,543,573		-		-		(d)		(d)		(d)		(d)	1994	08/94		(d)
Heilig-Meyers:
York, PA		-			279,312			1,109,609		-		-		(d)		(d)		(d)		(d)	1997	11/98		(d)
Marlow Heights, MD		-			415,926			1,397,178		-		-		(d)		(d)		(d)		(d)	1968	11/98		(d)
International House of Pancakes:
Stafford, TX		-			-			571,832		-		-		-		(c)		(c)		(c)	1992	10/93		(c)
Sunset Hills, MO		-			-			736,345		-		-		-		(c)		(c)		(c)	1993	10/93		(c)
Las Vegas, NV		-			-			613,582		-		-		-		(c)		(c)		(c)	1993	12/93		(c)
Ft. Worth, TX		-			-			623,641		-		-		-		(c)		(c)		(c)	1993	12/93		(c)
Arlington, TX		-			-			608,132		-		-		-		(c)		(c)		(c)	1993	12/93		(c)
Matthews, NC		-			-			655,668		-		-		-		(c)		(c)		(c)	1993	12/93		(c)
Phoenix, AZ		-			-			559,307		-		-		-		(c)		(c)		(c)	1993	12/93		(c)
Jared Jewelers:
Aurora, IL		-			(l	)		1,928,871		-		-		(l)		(c)		(c)		(c)	2000	12/01		(c)
Glendale, AZ		-			(l	)		1,599,105		-		-		(l)		(c)		(c)		(c)	1998	12/01		(c)
Oviedo, FL		537,223			(l	)		1,500,145		-		-		(l)		(c)		(c)		(c)	1998	12/01		(c)
Phoenix, AZ		484,886			(l	)		1,241,825		-		-		(l)		(c)		(c)		(c)	1998	12/01		(c)
Toledo, OH		-			(l	)		1,457,625		-		-		(l)		(c)		(c)		(c)	1998	12/01		(c)
Lewisville, TX		305,469			(l	)		1,502,903		-		-		(l)		(c)		(c)		(c)	1998	12/01		(c)
Kash N’ Karry:
Valrico, FL		-			1,234,519			3,255,257		-		-		(d)		(d)		(d)		(d)	1997	06/02		(d)
Levitz:
Tempe, AZ		-			634,444			2,225,991		-		-		(d)		(d)		(d)		(d)	1994	01/95		(d)
Sports Authority:
Dallas, TX		-			-			2,658,976		-		-		-		(c)		(c)		(c)	1994	03/94		(c)
Shop & Save:
Homestead, PA		-			-			2,578,098		-		-		-		(c)		(c)		(c)	1994	02/97		(c)
SuperValu:
Warwick, RI		-			-			2,978,154		-		-		-		(c)		(c)		(c)	1992	02/97		(c)
	$	4,652,561		$	4,650,396		$	106,082,280	$	5,380,302	$	-	$	-	$	-	$	-	$	-

See accompanying report of independent registered public accounting firm.

F-12

COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION

December 31, 2004

							Costs Capitalized														Life on Which
							Subsequent to				Gross Amount at Which										Depreciation and
			Initial Cost to Company				Acquisition				Carried at Close of Period (b)						Accumulated				Amortization in
	Encum-				Building,								Building,				Depreciation		Date		Latest Income
	brances				Improvements and		Improve-		Carrying				Improvements and				and		of Con-	Date	Statement is
	(k)		Land		Leasehold Interests		ments		Costs		Land		Leasehold Interests		Total		Amortization		struction	Acquired	Computed
Real Estate Held for Sale the Company has Invested in:
Courtyard Marriot:
Charlotte, NC		-		4,894,393		-		-		-		4,894,393		-		4,894,393		-	(e)	05/04	(e)
CVS/pharmacy:
Saginaw, TX		-		1,234,885		-		2,244,454		-		1,234,885		2,244,454		3,479,339		-	2004	12/03	(g)
Moore, OK		-		603,181		-		1,735,663		-		603,181		1,735,663		2,338,844		-	2004	02/04	(g)
Olive Garden:
Findlay, OH		-		883,610		-		-		-		883,610		-		883,610		-	(e)	07/04	(g)
PetsMart:
Coral Springs, FL		-		1,690,550		-		-		-		1,690,550		-		1,690,550		-	(e)	06/04	(e)
Pizza Hut:
Turnersville, NJ		-		389,667		-		-		-		389,667		-		389,667		-	(e)	07/04	(g)
Power Center:
Centennial, CO		-		5,453,651		-		8,779,478		-		5,453,651		8,779,478		14,233,129		-	(e)	03/04	(e)
Bismarck, ND		-		1,792,507		-		-		-		1,792,507		-		1,792,507		-	(e)	10/04	(g)
Myrtle Beach, SC		-		4,034,180		-		-		-		4,034,180		-		4,034,180		-	(e)	12/04	(g)
Rite Aid:
Amsterdam, NY		-		77,332		309,470		-		-		77,332		309,470		386,802		-	(e)	09/04	(g)
Poughkeepsie, NY		-		115,720		581,391		-		-		115,720		581,391		697,111		-	(e)	12/04	(g)
Stanford’s:
Englewood, CO		-		716,608		1,497,996		-		-		716,608		1,497,996		2,214,604		-	1995	12/01	(e)
Vacant Land:
Grand Prairie, TX		-		386,807		-		-		-		386,807		-		386,807		-	(e)	12/02	(e)
Midland, MI		-		231,711		-		-		-		231,711		-		231,711		-	(e)	07/03	(e)
Florence, AL		-		1,580,611		-		-		-		1,580,611		-		1,580,611		-	(e)	06/04	(e)
Vacant Property:
Fridley, MN		-		939,073		1,637,329		-		-		939,073		1,637,329		2,576,402		81,650	1983	12/01	40 years
Wachovia Bank:
Sunrise, FL		-		1,530,197		1,020,131		-		-		1,530,197		1,020,131		2,550,328		-	(e)	05/04	(e)
Walgreen’s:
Ennis, TX		-		1,800,730		-		-		-		1,800,730		-		1,800,730		-	(e)	10/04	(g)
Dallas, TX		-		555,519		-		-		-		555,519		-		555,519		-	(e)	12/04	(g)
Long Beach, MS		-		1,364,118		-		-		-		1,364,118		-		1,364,118		-	(e)	12/04	(g)
	$	-	$	30,275,049	$	5,046,317	$	12,759,595	$	-	$	30,275,049	$	17,805,912	$	48,080,961		81,650

See accompanying report of independent registered public accounting firm.

F-13

COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES
NOTES TO SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION

December 31, 2004

(a)   Transactions in real estate and accumulated depreciation during 2004, 2003 and 2002, are summarized as follows:

	2004			2003			2002
Land, buildings, and leasehold interests:
Balance at the beginning of year	$	982,075,881		$	787,893,067		$	835,266,183
Acquisitions, completed construction and tenant improvements		240,699,423			278,670,366			71,825,377
Disposition of land, buildings, and leasehold interests		(93,648,782	)		(84,487,552	)		(115,913,000	)
Provision for loss on impairment of real estate		-			-			(3,285,493	)
Balance at the close of year	$	1,129,126,522		$	982,075,881		$	787,893,067
Accumulated depreciation and amortization:
Balance at the beginning of year	$	49,108,834		$	39,488,104		$	32,623,991
Disposition of land, buildings, and leasehold interests		(2,118,579	)		(1,868,941	)		(4,039,258	)
Depreciation and amortization expense		14,811,717			11,489,671			10,903,371
Balance at the close of year	$	61,801,972		$	49,108,834		$	39,488,104

(b)	As of December 31, 2004, the leases are treated as either operating or financing leases for federal income tax purposes. As of December 31, 2004, the aggregate cost of the properties owned by the Company that under operating leases were $1,148,234,879 and financing leases were $10,710,568.
(c)	For financial reporting purposes, the portion of the lease relating to the building has been recorded as a direct financing lease; therefore, depreciation is not applicable.
(d)	For financial reporting purposes, the lease for the land and building has been recorded as a direct financing lease; therefore, depreciation is not applicable.
(e)	The Company owns only the land for this property.
(f)	Date acquired represents acquisition date of land. Pursuant to lease agreement, the Company purchased the buildings from the tenants upon completion of construction, generally within 12 months from the acquisition of the land.
(g)	Date acquired represents acquisition date of land. The Company developed the buildings, generally completing construction within 12 months from the acquisition date of the land.
(h)	Date acquired represents date of building construction completion. The land has been recorded as operating lease.
(i)	The Company owns only the land for this property, which is subject to a ground lease between the Company and the tenant. The tenant funded the improvements on the property.
(j)	Property is encumbered as a part of the Company’s $39,450,000 long-term, fixed rate mortgage and security agreement.
(k)	Encumbered properties for which the portion of the lease relating to the land is accounted for as an operating lease and the portion of the lease relating to the building is accounted for as a direct financing lease, the total amount of the encumbrance is listed with the land portion of the property.
(l)	The Company owns only the building for this property. The land is subject to a ground lease between the Company and an unrelated third party.
(m)	The leasehold interests are amortized over the life of the respective leases which range from 11.5 and 12.5 years.
(n)	The leasehold interest sites were acquired between August 1999 and August 2001.
(o)	In 2002, this property was contributed down to a wholly-owned subsidiary of the Company at the property’s net book value.
(p)	Property is encumbered as a part of the Company’s $21,000,000 long-term, fixed rate mortgage and security agreement.
(q)	In 2002, this property was owned by a wholly-owned limited liability entity that was dissolved into the Company.
(r)	The tenant of this property has subleased the property. The tenant continue to be responsible for complying with all the terms of the lease agreement and is continuing to pay rent on this property to the Company.
(s)	Property is encumbered as a part of the Company’s $95,000,000 long-term, fixed rate mortgage and security agreement.
(t)	Property is encumbered as a part of the Company’s $12,000,000 long-term, fixed rate mortgage and security agreement.
(u)	Property is encumbered as a part of the Company’s $6,952,000 long-term, fixed rate mortgage and security agreement.

See accompanying report of independent registered public accounting firm.

F-14

COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES
SCHEDULE IV – MORTGAGE LOANS ON REAL ESTATE

December 31, 2004

												Principal
												Amount
												of Loans
							Face		Carrying			Subject to
				Final	Periodic		Amount		Amount			Delinquent
	Interest			Maturity	Payment	Prior	of		of			Principal or
Description	Rate			Date	Terms	Liens	Mortgages		Mortgages(e)			Interest
First mortgages on properties:
National City, CA		11.5	%	2009	(b)	-	$	2,765,000	$	1,197,116		$	-
San Jose, CA		11.5	%	2009	(b)	-		2,565,000		1,170,795			-
Rockledge, FL		10.0	%	2018	(b)	-		400,000		364,819			-
Bonham, TX		10.0	%	2013	(b)	-		210,000		-			-
Duncanville, TX		10.0	%	2007	(d)	-		690,018		298,519			-
Independence, MO		10.0	%	2007	(d)	-		1,068,788		371,221			-
Lawton and Oklahoma City, OK (g)		8.5	%	2007	(c)	-		4,399,805		1,528,567			-
Burleson, TX (g)		8.5	%	2007	(c)	-		2,355,279		284,023			-
Bellingham, WA		7.2	%	2013	(b)	-		2,605,000		2,575,118			-
Indianapolis, IN		10.5	%	2004	(b)	-		286,000		-			-
Lodi, CA		8.9	%	2004	(b)	-		93,222		-			-
Sonora, CA		8.9	%	2005	(b)	-		150,651		9,962			-
Mira Mesa, CA		9.3	%	2004	(b)	-		369,447		-			-
Roseville, MN (h)		6.5	%	2009	(b)	-		1,894,000		1,883,587			1,883,587
Lake Jackson, TX		7.5	%	2008	(b)	-		1,875,000		1,843,831			-
							$	21,727,210	$	11,527,558	(a)	$	1,883,587

(a) The following shows the changes in the carrying amounts of mortgage loans during the years:

	2004			2003			2003
Balance at the beginning of year	$	19,773,196		$	8,277,867		$	12,270,022
New mortgage loans		-			17,122,868			4,344,460	(f)
Deductions during the year:
Collections of principal		(8,245,638	)		(5,627,539	)		(8,336,615	)
Balance at the close of year	$	11,527,558		$	19,773,196		$	8,277,867

(b) Principal and interest is payable at level amounts over the life of the loan.

(c) Interest only payments are due quarterly. Principal is due at maturity.

(d) Interest only payments are due monthly. Principal is due at maturity.

(e) Mortgages held by the Company and its subsidiaries for federal income tax purposes for the years ended December 31, 2004, 2003 and 2002, were $11,527,558, $13,194,972, and $7,064,659, respectively.

(f) Mortgages totaling $17,122,868 and $4,344,460 were accepted in connection with real estate transactions for the years ended December 31, 2003 and 2002, respectively.

(g) The mortgages are affiliates of certain members of the Company’s board of directors.

(h) In January 2005, the mortgagee became current with all delinquent amounts.

See accompanying report of independent registered public accounting firm.

EX-3.1

Exhibit 3.1

TABLE OF CONTENTS

Part I            First Amended and Restated Articles of Incorporation of Commercial Net Lease Realty, Inc.

Part II            Amendment to First Amended and Restated Articles of Incorporation of Commercial Net Lease Realty, Inc.

PART I

FIRST AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
COMMERCIAL NET LEASE REALTY, INC.

     Commercial Net Lease Realty, Inc., a Maryland corporation (hereinafter the “Corporation”), hereby certifies to the Department of Assessments and Taxation of the State of Maryland, that:

     FIRST: The Corporation desires to amend and restate its charter as currently in effect.

     SECOND: Prior to this amendment and restatement the total number of shares of all classes of capital stock that the Corporation had authority to issue was one 180,000,000 shares, consisting of (i) 90,000,000 shares of common stock, par value $0.01 per share: and (ii) 90,000,000 shares of excess stock, par value $0.01 per share. The aggregate par value of all of the authorized shares of all classes of capital stock having a par value was $1,800,000.00. After this amendment and restatement the total number of shares of all classes of capital stock that the Corporation will have authority to issue will be 210,000,000 shares consisting of (i) 90,000,000 shares of common stock, par value $0.01; (ii) 15,000,000 shares of preferred stock, par value $0.01; and 105,000,000 shares of excess stock, par value $0.01. The aggregate par value of all of the authorized shares of all classes of capital stock having a par value will be $2,100,000.

     THIRD: The provisions of the charter which are now in effect and as amended hereby, stated in accordance with the Maryland General Corporation Law are as follows:

ARTICLE I
NAME

     The name of the Corporation is Commercial Net Lease Realty, Inc.

ARTICLE II
DURATION

     The duration of the Corporation is perpetual.

ARTICLE III
PURPOSES AND POWERS

     The purpose for which the Corporation is formed is to engage in any lawful business, act or activity for which corporations may be organized under the laws of the State of Maryland and, in general, to possess and exercise all the purposes, powers, rights and privileges granted to, or conferred upon, corporations by the laws of the State of Maryland now or hereafter in force, and to exercise any powers suitable, convenient or proper for the accomplishment of the purposes herein enumerated, implied or incidental to the powers herein enumerated or which at any time may appear conducive to or expedient for the accomplishment of such purposes. The foregoing shall, except where otherwise expressed, in no way be limited or restricted by reference to or inference from the terms of any other clause of this or any other provision of this Charter or of any amendment hereto or restatement hereof, and shall each be regarded as independent and construed as powers as well as purposes.

ARTICLE IV
PRINCIPLE OFFICE AND RESIDENT AGENT

     The post office address of the principal office of the Corporation is c/o The Corporation Trust Incorporated, 300 East Lombard Street, Baltimore, MD 21202. The resident agent of the Corporation is The Corporation Trust Incorporated, 300 E. Lombard Street, Baltimore, Maryland 21202. Said resident agent is a Maryland corporation.

ARTICLE V
BOARD OF DIRECTORS

     The number of directors shall be no less than three (3), unless a lesser number is permitted pursuant to the terms of the Maryland General Corporation Law as in effect from time to time or any successor statute thereto (the “MGCL”). Subject to the foregoing, the number of directors of the Corporation shall be fixed by the Bylaws of the Corporation and maybe increased or deceased from time to time in such a manner as may be prescribed by the Bylaws. The following persons will serve as directors of the Corporation until the annual meeting and until their successors are elected and qualify:

Robert A. Bourne	Ted B. Lanier
Edward Clark	James M. Seneff, Jr.
Clifford R. Hinkle

ARTICLE VI
AUTHORIZED STOCK

     SECTION 1. TOTAL CAPITALIZATION

     The total number of shares of all classes of capital stock that the Corporation has authority to issue is two hundred ten million (210,000,000) shares consisting of (i) ninety million (90,000,000) shares of common stock, par value $0.01 (the “Common Stock”); (ii) fifteen million (15,000,000) shares of preferred stock, par value $0.01 (the “Preferred Stock”); and one hundred five million (105,000,000) shares of excess stock, par value $0.01 (the “Excess Stock”). The aggregate par value of all of the authorized shares of all classes of capital stock having a par value is $2,100,000.

     SECTION 2. CAPITAL STOCK

          A. COMMON STOCK

               (1) COMMON STOCK SUBJECT TO TERMS OF PREFERRED STOCK. The Common Stock shall be subject to the express terms of the Preferred Stock.

               (2) DIVIDEND RIGHTS. The holders of shares of Common Stock shall be entitled to receive such dividends as may be declared by the Board of Directors of the Corporation out of funds legally available therefore.

               (3) RIGHTS UPON LIQUIDATION. In the event of any voluntary or involuntary liquidation, dissolution or winding up, or any distribution of the assets, of the Corporation, the aggregate amount available for distribution to holders of shares of Common Stock (including, for purposes of this sentence, holders of shares of Excess Stock) shall be determined by applicable law. Except as provided below, each holder of shares of the Common Stock shall be entitled to receive that portion of such aggregate amount, ratably with (i) each other holder of shares of Common Stock and (ii) each holder of shares of Excess Stock, as the number of shares of the Common Stock held by such holder bears to the total number of shares of Common Stock and Excess Stock. Anything herein to the contrary notwithstanding, in no event shall the amount payable to a holder of shares with respect to Excess Stock hereunder exceed (i) the price per share such holder paid for the Common Stock in the purported Transfer (as that term is defined in paragraph A of Section 3 of this Article VI) that resulted in the Excess Stock or (ii) if the holder did not give full value for such Excess Stock (as through a gift, devise or other event or transaction), a price per share equal to the Market Price (as the term is defined in paragraph A of Section 3 of this Article VI) for the shares of the Common Stock on the date of the purported Transfer that resulted in such Excess Stock. Any amount available for distribution in excess of the foregoing limitations shall be paid ratably to holders of Common Stock and other holders of Excess Stock resulting from the exchange of Common Stock to the extent permitted by the foregoing limitations.

               (4) VOTING RIGHTS. Except as may be provided in this Charter, and subject to the express terms of any series of Preferred Stock, the holders of shares of the Common Stock shall have the exclusive right to vote on all matters (as to which a common stockholder shall be entitled to vote) at all meetings of the stockholders of the Corporation, and shall be entitled to one (1) vote for each share of the Common Stock entitled to vote at such meetings.

          B. PREFERRED STOCK

     The Preferred Stock may be issued from time to time in one or more series as authorized by the Board of Directors. Prior to the issuance of shares of each such series, the Board of Directors, by resolution, shall fix the number of shares to be included in each series, and the terms, rights, restrictions and qualifications of the shares of each series. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following:

(i)	The designation of the series, which may be by distinguishing number, letter or title;
(ii)	The dividend rate on the shares of the series, if any, whether any dividends shall be cumulative and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of the series;
(iii)	The redemption rights, including conditions and the price or prices, if any, for shares of the series;
(iv)	The terms and amounts of any sinking fund for the purchase or redemption of shares of the series;
(v)	The rights of the shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, and the relative rights of priority, if any, of payment of shares of the series;
(vi)	Whether the shares of the series shall be convertible into shares of any other class or series, or any other security, of the Corporation or any other corporation or other entity, and, if so, the specification of such other class or series of such other security, the conversion price or prices or dates on which such shares shall be convertible and all other terms and conditions upon which such conversion may be made;
(vii)	Restrictions on the issuance of shares of the same series or of any other class or series;
(viii)	The voting rights, if any, of the holders of shares of the series; and
(ix)	Any other relative rights, preferences and limitations on that series.

     Subject to the express provisions of any other series of Preferred Stock then outstanding, notwithstanding any other provision of this Charter, the Board of Directors may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares, or alter the designation or classify or reclassify any unissued shares of a particular series of Preferred Stock, by fixing or altering, in one or more respects, from time to time before issuing the shares, the terms, rights, restrictions and qualifications of the shares of any such series of Preferred Stock.

     SECTION 3. RESTRICTIONS ON TRANSFER; ACQUISITIONS AND REDEMPTION SHARES

          A. DEFINITIONS. For purposes of Sections 3 and 4 of this Article VI, the following terms shall have the following meanings:

“Beneficial Ownership” shall mean ownership of shares of Capital Stock by an individual who would be treated as an owner of such shares under Section 542(a)(2) of the Code, either directly or constructively through the application of Section 544, as modified by Section 856(h)(1)(B). For purposes of this definition, the term “individual” also shall include any organization, trust or other entity that is treated as an individual for purposes of Section 542(a)(2) of the Code. The terms “Beneficial Owner,” “Beneficially Own,” “Beneficially Owns” and “Beneficially Owned” shall have correlative meanings.

“Beneficiary” shall mean a beneficiary of the Trust as determined pursuant to paragraph A of Section 4 of this Article VI.

“Board of Directors” shall mean the Board of Directors of the Corporation.

“Bylaws” shall mean the Bylaws of the Corporation.

“Capital Stock” shall mean collectively the stock of the Corporation that is either Common Stock and Preferred Stock.

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

“Constructive Ownership” shall mean ownership of shares of Capital Stock by a Person who would be treated as an owner of such shares, either actually or constructively, through the application of Section 318 of the Code, as modified by Section 856(d)(5) thereof. The terms “Constructive Owner,” “Constructively Own,” “Constructively Owns” and “Constructively Owned” shall have correlative meanings.

“Market Price” on any day shall mean the average of the Closing Prices for the ten (10) consecutive Trading Days immediately preceding such day (or those days during such 10-day period for which Closing Prices are available). The “Closing Price” on any day shall mean the last sale price, regular way, on such day or if no such sale takes place on that day, the average of the closing bid and asked prices, regular way, in either case as reported on the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or the American Stock Exchange, or if the Capital Stock is not so listed or admitted to trading, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange (including the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation System) on which the Capital Stock is listed or admitted to trading or, if the Capital Stock is not so listed or admitted to trading, the last quoted price, or if not quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or, if such system is no longer in use, the principal automated quotation system then in use or, if the Capital Stock is not so quoted by any such system, the average of the closing bid and asked prices as furnished by a professional market maker selected by the Board of Directors making a market in the Capital Stock or, if there is no such market maker or such closing prices otherwise are not available, the fair market value of the Capital Stock as of such day, as determined by the Board of Directors in its discretion.

“Ownership Limit” shall mean 9.8 percent of the Value of the outstanding Capital Stock.

“Person” shall mean an individual, corporation, partnership, estate, trust (including a trust qualified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in 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 a 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 Capital Stock for a period of sixty (60) days following the purchase by such underwriter of Capital Stock therein, provided that the foregoing exclusion shall apply in an underwriting only if the ownership of such Capital Stock by such underwriter would not cause the Corporation 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 the Corporation to fail to qualify as a REIT.

“Purported Beneficial Transferee” shall mean, with respect to any purported Transfer which results in Excess Stock, the purported beneficial transferee for whom the Purported Record Transferee would have acquired shares of Capital Stock if such Transfer had been valid under paragraph B of this Section 3.

“Purported Record Transferee” shall mean, with respect to any purported Transfer which results in Excess Stock, the record holder of the Capital Stock if such Transfer had been valid under paragraph B of this Section 3.

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

“Restriction Termination Date” shall mean the first day on which the Board of Directors and the stockholders of the Corporation determine that it is no longer in the best interests of the Corporation to attempt, or continue, to qualify as a REIT.

“Trading Day” shall mean a day on which the principal national securities exchange on which the Capital Stock is listed or admitted to trading is open for the transaction of business or, if the Capital Stock is not listed or admitted to trading, shall mean any day other than a Saturday, Sunday or other day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close.

“Transfer” shall mean any sale, transfer, gift, hypothecation, assignment, devise or other disposition of Capital Stock (including (i) the granting of any option (including any option to acquire any option or any series of such options) or entering into any agreement for the sale, transfer or other disposition of Capital Stock or (ii) the sale, transfer assignment or other disposition of any securities or rights convertible into or exchangeable for Capital Stock), whether voluntary or involuntary, of record, constructively or beneficially, and whether by operation of law or otherwise. The terms “Transfers” and “Transferred” shall have correlative meanings.

“Trust” shall mean the trust created pursuant to paragraph A of Section 4 of this Article VI.

“Trustee” shall mean the Corporation as trustee for the Trust, and any successor trustee appointed by the Corporation.

“Value” shall mean, as of any given date, the Market Price per share of each class of Capital Stock then outstanding, multiplied by the number of shares of such class then outstanding.

          B. OWNERSHIP AND TRANSFER LIMITATION

                              (1) Notwithstanding any other provision of this Charter, except as provided in paragraph I of this Section 3 and Section 5 of this Article VI, prior to the Restriction Termination Date, no Person shall Beneficially or Constructively Own shares of Capital Stock in excess of the Ownership Limit.

                              (2) Notwithstanding any other provision of this Charter, except as provided in paragraph I of this Section 3 and Section 5 of this Article VI, prior to the Restriction Termination Date, any Transfer, change in the capital structure of the Corporation, or other purported change in Beneficial or Constructive Ownership of Capital Stock that, if effective, would result in any Person Beneficially or Constructively Owning Capital Stock in excess of the Ownership Limit shall be void ab initio as to the Transfer, change in the capital structure of the Corporation, or other purported change in Beneficial or Constructive Ownership with respect to that number of shares of Capital Stock which would otherwise be Beneficially or Constructively Owned by Such Person in excess of the Ownership Limit, and neither the Purported Beneficial Transferee nor the Purported Record Transferee shall acquire any rights in that number of shares of Capital Stock.

                              (3) Notwithstanding any other provision of this Charter, except as provided in Section 5 of this Article VI, prior to the Restriction Termination Date, any Transfer, change in the capital structure of the Corporation, or other purported change in ownership of Capital Stock that, if effective, would result in the Capital Stock being owned by fewer than 100 Persons (determined without reference to any rules of attribution) shall be void ab initio as to the Transfer, change in the capital structure of the Corporation, or other purported change in ownership with respect to that number of shares which otherwise would be owned by the transferee, and the intended transferee or subsequent owner (including a Beneficial Owner) shall acquire no rights in that number of shares of Capital Stock.

                              (4) Notwithstanding any other provisions of this Charter except Section 5 of this Article VI, prior to the Restriction Termination Date, any Transfer, change in the capital structure of the Corporation, or other purported change in Beneficial Ownership of shares of Capital Stock that, if effective, would cause the Corporation to fail to qualify as a REIT by reason of being “closely held” within the meaning of Section 856(h) of the Code or otherwise, directly or indirectly, would cause the Corporation to fail to qualify as a REIT shall be void ab initio as to the Transfer, change in the capital structure of the Corporation, or other purported change in Beneficial Ownership with respect to that number of shares of Capital Stock which would cause the Corporation to be “closely held” within the meaning of Section 856(h) of the Code or otherwise, directly or indirectly, would cause the Corporation to fail to qualify as a REIT, and the intended transferee or subsequent Beneficial Owner shall acquire no rights in that number of shares of Capital Stock.

          C. EXCHANGE FOR EXCESS STOCK.

                              (1) If, notwithstanding the other provisions contained in this Article VI, at any time prior to the Restriction Termination Date, there is a purported Transfer, change in the capital structure of the Corporation or other purported change in the Beneficial or Constructive Ownership of Capital Stock such that any person would either Beneficially or Constructively Own Capital Stock in excess of the Ownership Limit, then, except as otherwise provided in paragraph I of this Section 3, such shares of Capital Stock (rounded up to the next whole number of shares) in excess of the Ownership Limit automatically shall be exchanged for an equal number of shares of Excess Stock having terms, rights, restrictions and qualifications identical thereto, except to the extent that this Article VI requires different terms. Such exchange shall be effective as of the close of business on the business day next preceding the date of the purported Transfer, change in capital structure or other change in purported Beneficial or Constructive Ownership of Capital Stock.

                              (2) If, notwithstanding the other provisions contained in this Article VI, prior to the Restriction Termination Date, there is a purported Transfer, change in the capital structure of the Corporation or other purported change in Beneficial Ownership of Capital Stock which, if effective, would cause the Corporation to fail to qualify as a REIT by reason of being “closely held” within the meaning of Section 856(h) of the Code, or otherwise, directly or indirectly would cause the Corporation to fail to qualify as a REIT, then the shares of Capital Stock (rounded up to the next whole number of shares), being Transferred or which are otherwise affected by the change in capital structure or other purported change in Beneficial Ownership and which, in any case, would cause the Corporation to be “closely held” within the meaning of such Section 856(h) or otherwise would cause the Corporation to fail to qualify as a REIT automatically shall be exchanged for an equal number of shares of Excess Stock having terms, rights, restrictions and qualifications identical thereto, except to the extent that this Article VI requires different terms. Such exchange shall be effective as of the close of business on the business day next preceding the date of the purported Transfer, change in capital structure or other purported change in Beneficial Ownership.

          D. REMEDIES FOR BREACH. If the Board of Directors or its designee shall at any time determine in good faith that a Transfer or change in the capital structure of the Corporation has taken place in violation of paragraph B of this Section 3 or that a Person intends to acquire or has attempted to acquire Beneficial or Constructive Ownership of any shares of Capital Stock in violation of paragraph B of this Section 3, the Board of Directors or its designee shall take such actions as it deems advisable to refuse to give effect to or to prevent such Transfer, change in capital structure of the Corporation or other attempt to acquire Beneficial or Constructive Ownership of any shares of Capital Stock, including, but not limited to, refusing to give effect thereto on the books of the Corporation or instituting injunctive proceedings with respect thereto; provided, however, that any Transfer, change in the capital structure of the Corporation, attempted Transfer or other attempt to acquire Beneficial or Constructive Ownership of any shares of Capital Stock in violation of subparagraphs (2), (3) and (4) of paragraph B of this Section 3 (as applicable) shall be void ab initio and where applicable automatically shall result in the exchange described in paragraph C of this Section 3, irrespective of any action (or inaction) by the Board of Directors or its designee.

          E. NOTICE OF RESTRICTED TRANSFER. Any Person who acquires or attempts to acquire Beneficial or Constructive Ownership of shares of Capital Stock in violation of paragraph B of this Section 3 and any Person who Beneficially or Constructively owns Excess Stock pursuant to paragraph C of this Section 3 shall immediately give written notice to the Corporation, or, in the event of a proposed or attempted Transfer or purported change in Beneficial Ownership, shall give at least fifteen (15) days prior written notice to the Corporation, of such event and shall promptly provide to the Corporation such other information as the Corporation may request in order to determine the effect, if any, of such Transfer, attempted Transfer or purported change in Beneficial Ownership on the Corporation’s status as a REIT.

          F. OWNERS REQUIRED TO PROVIDE INFORMATION. Prior to the Restriction Termination Date:

                              (1) Every Beneficial or Constructive Owner of more than 5.0 percent, or such lower percentages as required pursuant to regulations under the Code or as may be requested by the Board of Directors, of the Value of the outstanding Capital Stock of the Corporation shall annually, no later than January 31 of each calendar year, give written notice to the Corporation stating (i) the name and address of such Beneficial or Constructive Owner; (ii) the number of shares of Capital Stock Beneficially or Constructively Owned and (iii) a description of how such shares are held. Each such Beneficial or Constructive Owner promptly shall provide to the Corporation such additional information as the Corporation, in its sole discretion, may request in order to determine the effect, if any, of such Beneficial or Constructive Ownership on the Corporation’s status as a REIT and to ensure compliance with the Ownership Limit.

                              (2) Each person who is a Beneficial or Constructive Owner of Capital Stock and each Person (including the stockholder of record) who is holding Capital Stock for a Beneficial or Constructive Owner promptly shall provide to the Corporation such information as the Corporation, in its sole discretion, may request in order to determine the Corporation’s status as a REIT, to comply with the requirements of any taxing authority or other governmental agency, to determine any such compliance or to ensure compliance with the Ownership Limit.

          G. REMEDIES NOT LIMITED. Noting contained in this Article VI except Section 5 hereof shall limit scope or application of the provisions of this Section 3, the ability of the Corporation to implement or enforce compliance with the terms thereof or the authority of the Board of Directors to take any such other action or actions as it may deem necessary or advisable to protect the Corporation and the interests of its stockholders by preservation of the Corporation’s status as a REIT and to ensure compliance with the Ownership Limit, including, without limitation, refusal to give effect to a transaction on the books of the Corporation.

          H. AMBIGUITY. In the case of an ambiguity in the application of any of the provisions of this Section 3, including any definition contained in paragraph A hereof, the Board of Directors shall have the power and authority, in its sole discretion, to determine the application of the provisions of this Section 3 with respect to any situation based on the facts known to it.

          I. EXCEPTION. The Board of Directors, upon receipt of a ruling from the Internal Revenue Service, an opinion of counsel, or other evidence satisfactory to the Board of Directors, in its sole discretion, in each case to the effect that the restrictions contained in subparagraph 3 and subparagraph 4 of paragraph B of this Section 3 will not be violated, may waive, in whole or in part, the application of the Ownership Limit with respect to any Person. In connection with any exemption, the Board of Directors may require such representations and undertakings from such Person and may impose such other conditions as the Board deems necessary, in its sole discretion, to determine the effect, if any, of the proposed Transfer on the Corporation’s status as a REIT.

          J. LIMITATIONS ON MODIFICATIONS.

                              (1) The Ownership Limit may not be increased (nor may any additional ownership limitations be created) if, after giving effect to such increase or creation, the Corporation would be “closely held” within the meaning of Section 856(h) of the Code (assuming ownership of shares of Capital Stock by all Persons equal to the greater of the Beneficial Ownership of Capital Stock by such Person or the Ownership Limit,

                              (2) Prior to any modification of the Ownership Limit, the Board of Directors may require such opinions of counsel, affidavits, undertakings or agreements as it may deem necessary, advisable or prudent in order to determine or ensure the Corporation’s status a REIT.

          K. LEGEND. Each certificate for shares of Capital Stock shall bear substantially the following legend:

“The securities represented by this certificate are subject to restrictions on transfer for the purpose of maintenance of the Corporation’s status as a real estate investment trust under the Internal Revenue Code of 1986, as mended (the “Code”). Except as otherwise provided pursuant to he Charter of the Corporation, no Person may (i) Beneficially or Constructively Own shares of Capital Stock in excess of 9.8 percent of the Value of the outstanding shares of Capital Stock of the Corporation; or (ii) Beneficially Own Capital Stock which could result in the Corporation being “closely held” under Section 856(h) of the Code or otherwise would cause the Corporation to fail to qualify as a REIT. Any Person who attempts or proposes to Beneficially or Constructively Own shares of Capital Stock in excess of the above limitations must notify the Corporation in writing at least fifteen (15) days prior to the proposed or attempted transfer. If the transfer restrictions referred to herein are violated, the shares of Capital Stock represented hereby automatically will be exchanged for shares of Excess Stock and will be held in trust by the Corporation, all as provided in the Charter of the Corporation. All capitalized terms in this legend have the meanings identified in the Corporation’s Charter, as the same may be amended or restated from time to time, a copy of which, including the restrictions on transfer, will be sent without charge to each stockholder who so requests.”

     SECTION 4. EXCESS STOCK.

          A. OWNERSHIP IN TRUST. Upon any purported Transfer, change in the capital structure of the Corporation or other purported change in Beneficial Ownership that results in Excess Stock pursuant to paragraph C of Section 3 of this Article VI, such Excess Stock shall be deemed to have been transferred to the Corporation as Trustee of a Trust for the benefit of such Beneficiary or Beneficiaries to whom an interest in such Excess Stock may later be transferred pursuant to paragraph E of this Section 4. Shares of Excess Stock so held in trust shall be issued and outstanding stock of the Corporation. The Purported Record Transferee shall have no rights in such Excess Stock except the right to designate a transferee of such Excess Stock upon the terms specified in paragraph E of this Section 4. The Purported Beneficial Transferee shall have no rights in such Excess Stock except as provided in paragraph C of this Section 4.

          B. DIVIDEND RIGHTS. Excess Stock shall not be entitled to any dividends. Any dividend or distribution paid prior to the discovery by the Corporation that the shares of Capital Stock have been exchanged for Excess Stock shall be repaid to the Corporation upon demand, and any dividend or distribution declared but unpaid at the time of such discovery shall be rescinded as void ab initio with respect to such shares of Excess Stock.

          C. RIGHTS UPON LIQUIDATION.

                              (1) Except as provided below, in the event of any voluntary or involuntary liquidation, dissolution or winding up, or any other distribution of the assets, of the Corporation, each holder of shares of Excess Stock resulting from the exchange of Preferred Stock of any specified series shall be entitled to receive, ratably with each other holder of shares of Excess Stock resulting from the exchange of shares of Preferred Stock of such series and each holder of shares of Preferred Stock of such series, such accrued and unpaid dividends, liquidation preferences and other preferential payments, if any, as are due to holders of shares of Preferred Stock of such series. In the event that holders of shares of any series of Preferred stock are entitled to participate in the Corporation’s distribution of its residual assets, each holder of shares of Excess Stock resulting from the exchange of Preferred Stock of any such series shall be entitled to participate, ratably with (i) each other holder of shares of Excess stock resulting from the exchange of shares of Preferred Stock of all series entitled to so participate; (ii) each holder of shares of Preferred Stock of all series entitled to so participate; and (iii) each holder of shares of Common Stock and Excess Stock resulting from the exchange of shares of Common Stock (to the extent permitted by paragraph C of Section 3 of Article VI hereof), that portion of the aggregate assets available for distribution (determined in accordance with applicable law) as the number of shares of such Excess Stock held by such holder bears to the total number of (i) outstanding shares of Excess Stock resulting from the exchange of Preferred Stock of all series entitled to so participate; (ii) outstanding shares of Preferred Stock of all series entitled to so participate; and (iii) outstanding shares of Common Stock and shares of Excess Stock resulting from the exchange of shares of Common Stock. The Corporation, as holder of the Excess Stock in trust, or, if the Corporation shall have been dissolved, any trustee appointed by the Corporation prior to its dissolution, shall distribute ratably to the Beneficiaries of the Trust, when determined, any such assets received in respect of the Excess Stock in any liquidation, dissolution or winding up, or any distribution of the assets, of the Corporation. Anything to the contrary herein notwithstanding, in no event shall the amount payable to a holder with respect to shares of Excess Stock resulting from the exchange of shares of Preferred Stock exceed (i) the price per share such holder paid for the Preferred Stock in the purported Transfer that resulted in the Excess Stock or (ii) if the holder did not give full value for such Excess Stock (as through a gift, devise or other event or transaction), a price per share equal to the Market Price for the shares of Preferred Stock on the date of the purported Transfer that resulted in such Excess Stock. Any amount available for distribution in excess of the foregoing limitations shall be paid ratably to the holders of shares of Preferred Stock and other holders of Excess Stock resulting from the exchange of Preferred Stock to the extent permitted by the foregoing limitations.

                              (2) Except as provided below, in the event of any voluntary of involuntary liquidation, dissolution or winding up, or any other distribution of the assets, of the Corporation, each holder of shares of Excess Stock resulting from the exchange of Common Stock shall be entitled to receive, ratably with (i) each other holder of shares of such Excess Stock and (ii) each holder of Common Stock, that portion of the aggregate assets available for distribution to holders of shares of Common Stock (including holders of Excess Stock resulting from the exchange of Common Stock pursuant to paragraph C of Section 3 of Article VI hereof), determined in accordance with applicable law, as the number of shares of such Excess Stock held by such holder bears to the total number of shares of outstanding Common Stock and outstanding Excess Stock resulting from the exchange of Common Stock then outstanding. The Corporation, as holder of the Excess Stock in trust, or, if the Corporation shall have been dissolved, any trustee appointed by the Corporation prior to its dissolution, shall distribute ratably to the Beneficiaries of the Trust, when determined, any such assets received in respect of the Excess Stock in any liquidation, dissolution or winding up, or any distribution of the assets, of the Corporation. Anything herein to the contrary notwithstanding, in no event shall the amount payable to a holder with respect to shares of Excess Stock exceed (i) the price per share such holder paid for the Common Stock in the purported Transfer that resulted in the Excess Stock or (ii) if the holder did not give full value for such Excess Stock (as through a gift, devise or other event or transaction), a price per share equal to the Market Price for the shares of Common Stock on the date of the purported Transfer that resulted in such Excess Stock. Any amount available for distribution in excess of the foregoing limitations shall be paid ratably to the holders of shares of Common Stock and other holders of Excess Stock resulting from the exchange of Common Stock to the extent permitted by the foregoing limitations.

          D. VOTING RIGHTS. The holders of shares of Excess Stock shall not be entitled to vote on any matters (except as required by MGCL).

          E. RESTRICTIONS ON TRANSFER; DESIGNATION OF BENEFICIARY.

                              (1) Excess Stock shall not be transferable. The Purported Record Transferee may freely designate a Beneficiary of its interest in the Trust (representing the number of shares of Excess Stock held by the Trust attributable to a purported Transfer that resulted in the Excess Stock, if (i) the shares of Excess Stock held in the Trust would not be Excess Stock in the hands of such Beneficiary and (ii) the Purported Beneficial Transferee does not receive a price for designating such Beneficiary that reflects a price per share for such Excess Stock that exceeds (x) the price per share such Purported Beneficial Transferee paid for the Capital Stock in the purported Transfer that resulted in the Excess Stock or (y) if the Purported Beneficial Transferee did not give value for such shares of Excess Stock (as through a gift, device or other event or transaction), a price per share equal to the Market Price for the shares of Capital Stock on the date of the purported Transfer that resulted in the Excess Stock. Upon such transfer of an interest in the Trust, the corresponding shares of Excess Stock in the Trust automatically shall be exchanged for an equal number of shares of Capital Stock and such shares of Capital Stock shall be transferred of record to the Beneficiary of the interest in the Trust designated by the Purported Record Transferee, as described above, if such Capital Stock would not be Excess Stock in the hands of such Beneficiary. Prior to any transfer of any interest in the Trust, the Purported Record Transferee must give advance notice to the Corporation of the intended transfer and the Corporation must have waived in writing its purchase rights under paragraph F of this Section 4.

                              (2) Notwithstanding the foregoing, if a Purported Beneficial Transferee receives a price for designating a Beneficiary of an interest in the Trust that exceeds the amounts allowable under subparagraph (1) of this paragraph E, such Purported Beneficial Transferee shall pay, or cause the Beneficiary of the interest in the Trust to pay, such excess to the Corporation.

                              (3) If any of the transfer restrictions set forth in this paragraph E, or any application thereof, is determined to be void, invalid or unenforceable by any court having jurisdiction over the issue, the Purported Record Transferee may be deemed, at the option of the Corporation, to have acted as the agent of the Corporation in acquiring the Excess Stock as to which such restrictions would, by their terms, apply, and to hold such Excess Stock on behalf of the Corporation.

          F. PURCHASE RIGHT IN EXCESS STOCK. Shares of Excess Stock shall be deemed to have been offered for sale to the Corporation, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that created such Excess Stock (or, in the case of devise or gift, the Market Price at the time of such devise or gift) and (ii) the Market Price of the Capital Stock exchanged for such Excess Stock on the date the Corporation, or its designee, accepts such offer. The Corporation shall have the right to accept such offer for a period of ninety (90) days after the later of (i) the date of the purported Transfer, change in capital structure of the Corporation or purported change in Beneficial Ownership which resulted in such Excess Stock and (ii) the date on which the Board of Directors determines in good faith that a Transfer, change in capital structure of the Corporation or purported change in Beneficial Ownership resulting in Excess Stock has occurred, if the Corporation does not receive a notice pursuant to paragraph E of Section 3 of this Article VI, but in no event later than a permitted Transfer pursuant to and in compliance with the terms of paragraph E of this Section 4.

          G. REMEDIES NOT LIMITED. Nothing contained in this Article VI except Section 5 hereof shall limit scope or application of the provisions of this Section 4, the ability of the Corporation to implement or enforce compliance with the terms thereof or the authority of the Board of Directors to take any such other action or actions as it may deem necessary or advisable to protect the Corporation and the interests of its stockholders by preservation of the Corporation’s status as a REIT and to ensure compliance with the Ownership Limit, including, without limitation, refusal to give effect to a transaction on the books of the Corporation.

     SECTION 5. SETTLEMENTS.

          Nothing in Sections 3 and 4 of this Article VI shall preclude the settlement of any transaction with respect to the Capital Stock entered into through the facilities of the New York Stock Exchange or other national securities exchange on which the Capital Stock is listed.

     SECTION 6. SEVERABILITY

          If any provision of this Article VI or any application of any such provision is determined to be void, invalid or unenforceable by any court having jurisdiction over the issue, the validity and enforceability of the remainder of this Article VI shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court.

ARTICLE VII
MATTERS RELATING TO THE POWERS OF THE CORPORATION AND ITS
DIRECTORS AND STOCKHOLDERS

     The following provisions are hereby adopted for the purpose of defining, limiting and regulating the powers of the Corporation and of the directors and stockholders thereof:

     SECTION 1. MATTERS RELATING TO THE BOARD OF DIRECTORS.

          A. AUTHORITY AS TO BYLAWS. Except as otherwise provided herein, in furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws of the Corporation and the Corporation may, in its Bylaws, confer powers on the Board of Directors in addition to these contained herein or conferred by applicable law.

          B. AUTHORITY AS TO STOCK ISSUANCES. The Board of Directors of the Corporation may authorize the issuance from time to time of shares of its stock of any class, whether now or hereafter authorized, or securities convertible into shares now or hereafter authorized, for such consideration as the Board of Directors may deem advisable, subject to such restrictions or limitations, if any, as may be set forth in the Charter or the Bylaws of the Corporation or in the general laws of the State of Maryland.

          C. MANNER OF ELECTION. Unless and except to the extent that the Bylaws of the Corporation shall so require, the election of directors of the Corporation need not be by written ballot.

          D. REMOVAL OF DIRECTORS. Any director may be removed from office at any time, with or without cause, by the affirmative vote of the holders of a majority of the then outstanding Capital Stock entitled to vote generally in the election of directors.

          E. PERMISSIBLE CRITERIA FOR CONSIDERATION OF BEST INTERESTS. In determining what is in the best interest of the Corporation, a director of the Corporation shall consider the interests of the stockholders of the Corporation and, in his or her discretion, may consider the interests of the Corporation’s employees, suppliers, creditors and tenants and the long-term as well as short-term interests of the Corporation and its stockholders, including the possibility that these interests may be best served by the continued independence of the Corporation.

          F. DETERMINATIONS BY BOARD. The determination as to any of the following matters, made in good faith by or pursuant to the direction of the Board of Directors consistent with the Charter of the Corporation and in the absence of actual receipt of an improper benefit in money, property or services or active and deliberate dishonesty established by a court, shall be final and conclusive and shall be binding upon the Corporation and every holder of shares of its stock: (i) the amount of the net income of the Corporation for any period and the amount of assets at any time legally available for the payment of dividends, redemption of its stock or the payment of other distributions on its stock; (ii) the amount of paid-in surplus, net assets, other surplus, annual or other net profit, net assets in excess of capital, undivided profits or excess of profits over losses on sales of assets; the amount, purpose, time of creation, increase or decrease, alteration or cancellation of any reserves or charges and the propriety thereof (whether or not any obligation or liability for which such reserves shall have been created shall have been paid or discharged); (iii) the fair value, or any sale, bid or asked priced to be applied in determining the fair value, of any asset owned or held by the Corporation; and (iv) any matters relating to the acquisition, holding and disposition of any assets by the Corporation.

          G. RESERVED POWERS OF BOARD. The enumeration and definition of particular powers of the Board of Directors included in this Article VII shall in no way be limited or restricted by reference to or inference from the terms of any other clause of this or any other provision of the Charter of the Corporation, or construed or deemed by inference or otherwise in any manner to exclude or limit the powers conferred upon the Board of Directors under the laws of the State of Maryland as now or hereafter in force.

          H. ALTERATION OF AUTHORITY GRANTED TO THE BOARD OF DIRECTORS. The affirmative vote of that proportion of the then-outstanding Capital Stock necessary to approve an amendment to this Charter pursuant to the MGCL and Article XI hereof shall be required to amend, repeal or adopt any provision inconsistent with Section 1 of this Article VII or with Section 3.12 of the Bylaws of the Corporation (including defined terms therein).

          I. REIT QUALIFICATION. The Board of Directors shall use its best efforts to cause the Corporation and its stockholders to qualify for U.S. federal income tax treatment in accordance with the provisions of the Code applicable to REITs. In furtherance of the foregoing, the Board of Directors shall use its best efforts to take such actions as are necessary, and may take such actions as it deems desirable (in its sole judgment and discretion) to preserve the status of the Corporation as a REIT (as that term is defined in paragraph A of Section 3 of Article VI hereof); provided, however, that in the event that the Board of Directors determines, in its sole judgment and discretion, that it is no longer in the best interests of the Corporation to qualify as a REIT, the Board of Directors shall take such actions as are required by the Code (as that term is defined in paragraph A of Section 3 of Article VI hereof), the MGCL and other applicable law, to cause the matter of termination of qualification as a REIT to be submitted to a vote of the stockholders of the Corporation pursuant to paragraph A of Section 2 of this Article VII.

     SECTION 2. MATTERS RELATING TO THE STOCKHOLDERS.

          A. TERMINATION OF REIT STATUS. Notwithstanding anything contained in this Charter to the contrary, the affirmative vote of the holders of a majority of the then-outstanding Capital Stock entitled to vote generally in the election of directors and the approval of the Board of Directors shall be required to terminate voluntarily the Corporation’s status as a REIT (as that term is defined in paragraph A of Section 3 of Article VI).

          B. NO CUMULATIVE RIGHTS. Stockholders of the Corporation shall not have cumulative voting rights in the election of directors.

          C. NO PREEMPTIVE RIGHTS. No holders of stock of the Corporation, of whatever class, shall have any preferential right of subscription to any shares of stock of any class or to any securities convertible into shares of stock of any class of the Corporation, nor any right of subscription to any thereof.

ARTICLE VIII
DIRECTORS’ LIABILITY

     To the maximum extent that Maryland law in effect from time to time permits limitation of the liability of directors and officers, no director or officer of the Corporation shall be liable to the Corporation or its stockholders for money damages. Neither the amendment nor repeal of this Article VIII, nor the adoption or amendment of any provision of the Charter or Bylaws of the Corporation inconsistent with this Article VIII, shall apply to or affect in any respect the applicability of the preceding sentence with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption.

ARTICLE IX
INDEMNIFICATION

     Each person who is or was or who agrees to become a director or officer of the Corporation, or each person who, while a director of the Corporation, is or was serving or who agrees to serve, at the request of the Corporation, as a director, officer, partner, joint venture, employee or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise (including the heirs, executor, administrators or estate of such person), shall be indemnified by the Corporation, and shall be entitled to have paid on his behalf or be reimbursed for reasonable expenses in advance of final disposition of a proceeding, in accordance with the Bylaws of the Corporation, to the full extent permitted from time to time by the Maryland General Corporation Law as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment) or any other applicable laws presently or hereafter in effect. The Corporation shall have the power, with the approval of the Board of Directors, to provide such indemnification and advancement of expenses to any employee or agent of the Corporation, in accordance with the Bylaws of the Corporation. Without limiting the generality or the effect of the foregoing, the Corporation may enter into one or more agreements with any person which provide for indemnification greater or different than that provided in this Article IX. Any amendment or repeal of this Article IX shall not adversely affect any right or protection existing hereunder immediately prior to such amendment or repeal.

ARTICLE X
APPLICATION OF CERTAIN PROVISIONS OF LAW

     SECTION 1. BUSINESS COMBINATIONS.

     Notwithstanding any other provision of this Charter or any contrary provision of law, Title 3, subtitle 6 of the Corporations and Associations Article of the Annotated Code of Maryland, as amended from time to time, or any successor statute thereto, shall not apply to any “business combination” (as defined in Section 3.601(d) of the Corporations and Associations Article of the Annotated Code of Maryland, as amended from time to time, or any successor statute thereto) involving the Corporation.

     SECTION 2. CONTROL SHARE TRANSACTIONS.

     Notwithstanding any other provision of this Charter or any contrary provision of law, Title 3, subtitle 7 of the Corporations and Associations Article of the Annotated Code of Maryland, as amended from time to time, or any successor statute thereto shall not apply to any acquisition of shares of stock of the Corporation.

ARTICLE XI
AMENDMENT

     The Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in its Charter and any other provisions authorized by the laws of the State of Maryland at the time in force may be added or inserted in the manner now or hereafter prescribed herein or by applicable law, and all rights, preferences and privileges of whatsoever nature conferred upon stockholder, directors or any other persons whomsoever by and pursuant to this Charter in its present form or as hereafter amended are granted subject to the rights reserved in this Article XI; provided, however, that any amendment or repeal of Articles VIII, IX or this Article XI of this Charter shall not adversely affect any right or protection existing hereunder immediately prior to such amendment or repeal.

     IN WITNESS WHEREOF, these First Amended and Restated Articles of Incorporation are hereby executed by Gary M. Ralston, the President of the Corporation, who hereby acknowledges that the First Amended and Restated Articles of Incorporation are the act of the Corporation, and who does hereby state under the penalties of perjury that the matters and facts set forth herein with respect to authorization and approval of such Articles are true in all material respects to the best of his knowledge, information and belief.

Dated: August 10, 1998

By:	/s/ Gary M. Ralston
Gary M. Ralston, President

ATTEST

By: /s/ Kevin B. Habicht

Kevin B. Habicht, Secretary

PART II

ARTICLES OF AMENDMENT

TO

FIRST AMENDED AND RESTATED ARTICLES OF INCORPORATION

OF

COMMERCIAL NET LEASE REALTY, INC.

Commercial Net Lease Realty, Inc., a Maryland corporation having its principal office in Baltimore, Maryland (hereinafter, the “Corporation”), hereby certifies to the State Department of Assessments and Taxation of Maryland that:

FIRST: The First Amended and Restated Articles of Incorporation (the “Articles of Incorporation”) are hereby amended by renaming Article XI “AMENDMENT AND CERTAIN EXTRAORDINARY ACTIONS” and deleting Article XI in its entirety and inserting the following new Article XI:

     Section 1. Amendment

The Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in its Charter and any other provisions authorized by the laws of the State of Maryland at the time in force may be added or inserted in the manner now or hereafter prescribed herein or by applicable law, and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other person whomsoever by and pursuant to this Charter in its present form or as hereafter amended are granted subject to the rights reserved in this Article XI, provided, however, that any amendment or repeal of Articles VIII, IX or this Article XI of this Charter shall not adversely affect any right or protection existing hereunder immediately prior to such amendment or repeal. Subject to the provisions of any class or series of Preferred Stock at the time outstanding, this Charter may be amended by the affirmative vote of the holders of not less than a majority of the Common Stock then outstanding and entitled to vote thereon.

     Section 2. Consolidation, Merger, Share Exchange or Transfer of Assets

Subject to the provisions of any class or series of Preferred Stock at the time outstanding, the Board of Directors shall have the power to (i) consolidate the Corporation with one or more other entities into a new entity, (ii) merge the Corporation into another entity, (iii) effect a share exchange with another domestic or foreign corporation or other entity or (iv) sell or otherwise dispose of all or substantially all of the Corporation’s assets; provided, however, that such action shall have been approved by the holders of not less than a majority of the Common Stock then outstanding and entitled to vote thereon.

SECOND: The total number of all classes of capital stock which the Corporation has authority to issue immediately prior to this amendment is two hundred ten million (210,000,000) shares consisting of (i) ninety million (90,000,000) shares of common stock, par value $0.01 (the “Common Stock”); (ii) fifteen million (15,000,000) shares of preferred stock, par value $0.01 (the “Preferred Stock”); and one hundred five million (105,000,000) shares of excess stock, par value $0.01 (the “Excess Stock”). The aggregate par value of all of the authorized shares of all classes of capital stock having a par value is $2,100,000.

THIRD: The Articles of Incorporation are hereby amended by deleting Article VI, Section 1 in its entirety and inserting the following new Article VI, Section 1:

The total number of shares of all classes of capital stock that the Corporation has authority to issue is four hundred ten million (410,000,000) shares consisting of (i) one hundred ninety million (190,000,000) shares of common stock, par value $0.01 (the “Common Stock”); (ii) fifteen million (15,000,000) shares of preferred stock, par value $0.01 (the “Preferred Stock”); and (iii) two hundred five million (205,000,000) shares of excess stock, par value $0.01 (the “Excess Stock”). The aggregate par value of all of the authorized shares of all classes of capital stock having a par value is $4,100,000.

FOURTH: The information required by subsection (b)(2)(i) of Section 2-607 of the Maryland General Corporation Law will not be changed by these Articles of Amendment; and

FIFTH: The amendments to the Articles of Incorporation as hereinabove set forth have been duly advised by the Board of Directors and approved by the stockholders of the Corporation.

IN WITNESS WHEREOF, Commercial Net Lease Realty, Inc. has caused these presents to be signed in its name and on its behalf by its Executive Vice President and Chief Operating Officer and attested by its Assistant Secretary on September 23, 2004.

THE UNDERSIGNED, Executive Vice President and Chief Operating Officer of Commercial Net Lease Realty, Inc., who executed on behalf of said corporation, the foregoing Articles of Amendment, of which this certificate is made a part, hereby acknowledges, in the name and on behalf of said corporation, the foregoing Articles of Amendment to be the corporate act of said corporation and further certifies that, to the best of his knowledge, information, and belief, the matters and facts set forth therein with respect to the approval thereof are true in all material respects, under the penalties of perjury.

ATTEST:	Commercial Net Lease Realty, Inc.
/s/Kella W. Schaible	/s/Julian E. Whitehurst
Kella W. Schaible	Julian E. Whitehurst
Assistant Secretary	Executive Vice President and Chief Operating officer

EX-10.2

Exhibit 10.2

Commercial Net Lease Realty, Inc.
Restricted Stock Award Agreement

     This Restricted Stock Award Agreement (this “Agreement”) is entered into between Commercial Net Lease Realty, Inc., a Maryland corporation (the “Company”) and ___ (“Participant”) pursuant to the Stock Award granted to Participant as of the date hereunder (the “Date of Grant”), under the Commercial Net Lease Realty, Inc. 2000 Performance Incentive Plan (the “Plan”). In consideration of the mutual promises and covenants made herein and the terms and conditions of the Plan, which is wholly incorporated herein by reference, the parties hereby agree as follows:

     1. Definitions. Except as is expressly provided herein, all terms defined within the Plan shall have the same meaning herein. Additionally, the following definitions shall apply to this Agreement:

     (a) Cause shall mean with respect to any individual: (i) the conviction of the individual of, or the entry of a plea of guilty or nolo contendere by the individual to, (A) any felony, or (B) any crime involving dishonesty or moral turpitude; (ii) fraud, misappropriation, embezzlement by the individual related to Participant’s duties to the Company; (iii) the individual’s unsatisfactory performance of his assigned duties for the Company, which continues after (A) the individual has received written notice of his unsatisfactory performance, and (B) the individual has had a reasonable opportunity to cure such unsatisfactory performance; or (iv) the breach by the individual of any material term of an agreement pursuant to which he provides services to the Company.

     (b) Restricted Stock shall mean the Stock Award that is the subject of this Agreement.

     (c) Unvested Restricted Stock shall mean shares of Restricted Stock that are subject to forfeiture under the terms of this Agreement.

     (d) Vesting Date shall mean the date on which all or a portion of the Restricted Stock is no longer subject to forfeiture under the terms of this Agreement.

     (e) Vested Restricted Stock shall mean shares of Restricted Stock that are not subject to forfeiture under the terms of this Agreement.

     2. Award. As of the Date of Grant, the Company hereby awards and grants to Participant a Stock Award of ___thousand (___,000) shares of Common Stock of the Company (collectively, the “Restricted Stock”).

     3. Vesting.

          (a) As of each of the following Vesting Dates, Restricted Stock shall become Vested Restricted Stock at the specified rate, provided that the Participant is continuously employed by the Company as of the Vesting Date: [vesting varies per grant]

          (b) [In the event of a Change of Control, Participant shall vest in the Restricted Stock as of the day before the Change of Control and no portion of the Restricted Stock shall be Unvested Restricted Stock.]

          (c) In the event that Participant is terminated as a result of death or Disability or is terminated without Cause, [or if Participant terminates his employment agreement for “Good Reason” (as defined in Participant’s Employment Agreement),] Participant shall vest in the Restricted Stock as of the day before the Termination of Employment and no portion of the Restricted Stock shall be Unvested Restricted Stock.

          (d) In the event Participant incurs a Termination of Employment other than as provided in subsection 3 (c) above, all Unvested Restricted Stock shall immediately and without notice be forfeited and Participant shall have no rights with respect to such Unvested Restricted Stock.

          (e) Except as is provided in Article 12 of the Plan, any adjustment to an award of Restricted Stock pursuant to Article 12 shall not change the ratio of Unvested Restricted Stock to Vested Restricted Stock.

     4. Shareholder Rights and Restrictions on Transfer. The Participant shall have all rights of a stockholder with respect to each share of Unvested Restricted Stock, including the right to receive dividends and vote the share; provided, however, that (i) a Participant may not sell, transfer, pledge, exchange, hypothecate, or otherwise dispose of shares of Unvested Restricted Stock, (ii) the Company shall retain custody of the certificates evidencing shares of Unvested Restricted Stock, and (iii) the Participant will deliver to the Company a stock power, endorsed in blank, with respect to shares of Unvested Restricted Stock. The limitations set forth in the preceding sentence shall not apply to shares of Unvested Restricted Stock once such shares become Vested Restricted Stock. If any transfer or other disposition of shares of Unvested Restricted Stock is made or attempted, such transfer shall be null and void and of no force and effect, and in addition to any other legal or equitable remedies which it may have, the Company may enforce its rights by action for specific performance (to the extent permitted by law) and the Company shall refuse to recognize any transferee as one of its shareholders for any purpose, including without limitation for purposes of dividend and voting rights. This Agreement shall be binding upon the Participant and his heirs, representatives, successors and assigns.

     5. Representations of the Participant and Share Registration. The Company may require that the Participant execute and deliver to the Company a written statement, in form satisfactory to the Company, in which the Participant represents and warrants that the shares of Restricted Stock are being acquired for such person’s own account, for investment only and not with a view to the resale or distribution thereof. The Participant shall, at the request of the Company, be required to represent and warrant in writing that any subsequent resale or distribution of shares of Restricted Stock by the Participant shall be made only pursuant to either (i) a registration statement on an appropriate form under the Securities Act, which registration statement has become effective and is current with regard to the shares of Restricted Stock being sold, or (ii) a specific exemption from the registration requirements of the Securities Act, but in claiming such exemption the Participant shall, prior to any offer of sale or sale of such shares of Restricted Stock, obtain a prior favorable written opinion of counsel, in form and substance satisfactory to counsel for the Company, as to the application of such exemption thereto. The Company may delay issuance or delivery of shares of Restricted Stock if it determines that listing, registration or qualification of the shares or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the sale or purchase of the shares, until such listing, registration, qualification, consent or approval shall have been effected or obtained, or otherwise provided for, free of any conditions not acceptable to the Company.

     6. Stock Legends. In addition to such other legends that the Company determines are necessary and appropriate pursuant to Section 8.4 of the Plan, each certificate of Common Stock issued pursuant to this Agreement shall bear on its face the following legend:

     The shares represented by this certificate are subject to restrictions on transfer, a copy of the terms of which will be furnished by the Company to the holder of this certificate upon written request and without charge.

     7. Tax Gross-Up Payments. [varies per grant]

     8. Right to Continued Services. Nothing herein shall confer upon Participant any right to continued employment by the Company or any subsidiaries or affiliates or to continued service as a Director or limit in any way the right of the Company or any subsidiary or affiliate at any time to terminate or alter the terms of that employment or services as a Director.

     9. Acceptance of Agreement. The shares of the Restricted Stock are granted subject to all of the applicable terms and provisions of the Plan and this Agreement. The terms and provisions of the Plan are incorporated by reference herein. Participant accepts and agrees to be bound by all the terms and conditions hereof.

     Executed as of the ___day of ___, 2004.

Commercial Net Lease Realty, Inc.
 

By:  

Participant:
 

By:  

Print Name:

EX-10.3

Exhibit 10.3

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into effective as of the 16th day of February, 2004, by and between COMMERCIAL NET LEASE REALTY, INC., a Maryland corporation (“CNLR”), and CRAIG MACNAB (“Executive”).

Preliminary Statement

     WHEREAS, CNLR desires to employ Executive, and Executive desires to be employed by CNLR; and

     WHEREAS, CNLR and Executive desire to enter into this Agreement which sets forth the terms and conditions of Executive’s employment by CNLR.

     NOW, THEREFORE, in consideration of the mutual covenants set forth below, the Company and Executive agree as follows:

     1. Employment. CNLR hereby employs the Executive, and Executive agrees to serve CNLR, for the period and upon terms and conditions set forth below. Except as otherwise provided in this Agreement, Executive’s employment shall be subject to the employment policies and practices of CNLR in effect from time to time during the term of Executive’s employment.

     2. Term of Agreement. The term of Executive’s employment pursuant to this Agreement shall commence on February 16, 2004 (the “Effective Date”), and shall continue in effect for a period of three (3) years to and including February 16, 2007, unless terminated earlier in accordance with Section 5 below. Thereafter, this Agreement may be renewed (a) by CNLR for up to a maximum of three additional one-year terms, upon written notice by CNLR to Executive no later than ninety days prior to the termination date of the initial or any renewal term, and (b) thereafter upon the mutual agreement of CNLR and Executive, unless terminated sooner in accordance with Section 5 below. (The natural termination date of the initial term or any renewal term of this Agreement shall be referred to as the “Termination Date.”)

     3. Position and Duties. Executive shall serve as the Chief Executive Officer of CNLR and shall have such duties, authority and responsibilities as are normally associated with and appropriate for such position, and shall perform such other services for CNLR consistent with such position as may be reasonably assigned to him by the Chairman of the Board of Directors of CNLR. Executive shall devote substantially all of his working time and efforts to the business and affairs of CNLR, except that Executive may engage in personal or charitable activities which do not interfere with Executive’s employment duties. Executive shall comply with the policies, standards, and regulations established from time to time by CNLR.

     4. Compensation and Related Matters

          4.1 Base Salary. During the term of this Agreement, CNLR shall pay to Executive a base salary at an annual rate as specified in Attachment “A” to this Agreement (“Base Salary”). If CNLR exercises its option to renew the term of Executive’s employment pursuant to Section 2 above, Executive’s Base Salary in effect for the year prior to such renewal term shall be automatically increased by the highest percentage increase in base salary for CNLR’s Chief Operating Officer, Chief Financial Officer, or General Counsel for the year immediately prior to said renewal term. The Base Salary shall be paid in equal installments in accordance with CNLR’s usual and customary payroll practices, but not less frequently than monthly.

          4.2 Bonus and Deferred Compensation. Executive may be entitled to an annual bonus and shall be entitled to deferred compensation as set forth in Attachment “A”.

          4.3 Benefit Plans and Arrangements. Executive shall be entitled, to the extent Executive is eligible, to participate in and to receive benefits under all existing and future employee benefit plans, perquisites and fringe benefit programs of CNLR that are provided generally to other similarly situated

senior executives of CNLR, on terms similar to those provided to such other executives of CNLR, including, but not limited to, any retirement, health benefits, and life insurance plans. Executive shall also be entitled to the fringe benefits set forth on Attachment “B” to this Agreement.

          4.4 Expenses. CNLR shall reimburse Executive for all reasonable and customary expenses incurred by Executive in performing services for CNLR, including, but not limited to, all reasonable and customary expenses of travel while away from home on business or at the request of and in the service of CNLR, provided that such expenses are incurred and accounted for by Executive in accordance with the policies and procedures established from time to time by CNLR.

          4.5 Paid Time Off. Executive shall be entitled to no fewer than twenty (20) days of paid time off (PTO) per year.

          4.6 Relocation Reimbursement. CNLR shall reimburse Executive, or pay on his behalf, the following: (a) the reasonable cost and expenses of moving Executive’s household goods from his current residence to the Orlando, Florida metropolitan area (the “Orlando Area”); (b) Executive’s reasonable temporary living expenses in the Orlando Area in connection with his relocation; (c) Executive’s reasonable expenses incurred in commuting between Orlando and Atlanta, Georgia on weekends for up to six (6) months from the Effective Date; (d) the reasonable expenses incurred by Executive’s family traveling between Atlanta and Orlando to locate a permanent residence and schools; and (e) the closing costs (including any real estate broker’s commissions) incurred by Executive in connection with the sale of his current primary residence in Atlanta, and the closing costs (excluding any real estate broker’s commission) incurred by Executive in connection with his purchase of a new primary residence in the Orlando Area. Reimbursement or payment of the expenses provided for in this Section 4.6 shall be made by CNLR upon presentation of appropriate receipts, invoices, closing statements, or other documentation as reasonably requested by CNLR.

          4.7 Board of Directors. Upon Executive’s commencement of employment with CNLR, CNLR shall cause Executive to be elected to its Board of Directors.

     5. Termination. The term of Executive’s employment pursuant to this Agreement may be terminated under the following circumstances:

          5.1 Death. The term of Executive’s employment shall terminate upon his death.

          5.2 Disability. CNLR may terminate the term of Executive’s employment as a result of Executive’s Disability. For purposes of this Agreement, “Disability” is defined as the inability, by reason of illness or other physical or mental incapacity or limitation, of Executive substantially to perform the duties of his employment with the Company, as determined in good faith by the Board of Directors of CNLR, which inability continues for at least one hundred twenty (120) consecutive days, or for shorter periods aggregating one hundred twenty (120) days during any consecutive twelve (12) month period.

          5.3 By CNLR for Cause. CNLR may terminate the term of Executive’s employment for “Cause” upon written notice to Executive. For purposes of this Agreement, CNLR shall have “Cause” to terminate Executive’s employment upon any of the following events:

               (a) Executive’s continued failure to perform, or his habitual neglect of, his duties and obligations hereunder;

               (b) Executive’s conviction of, or plea of guilty or nolo contendre to, an indictment or information, or an indictment or information is filed against Executive and is not discharged or otherwise resolved within twelve (12) months thereafter, and said indictment or information charged Executive with a felony, any crime involving moral turpitude, or any crime which is likely to result in material injury to CNLR;

               (c) Executive’s breach of a fiduciary duty relating to the Executive’s employment with CNLR, including but not limited to an act of fraud, theft or dishonesty; or

               (d) Executive’s material breach of this Agreement.

               Notwithstanding the foregoing, CNLR shall not be deemed to have Cause to terminate the term of Executive’s employment under subsections (a) or (d) unless CNLR has provided written notice to the Executive setting forth in reasonable detail the reasons for CNLR’s intention to terminate for Cause, and Executive has failed within thirty (30) days thereafter to cure the event or deficiency set forth in the written notice.

          5.4 By CNLR Without Cause. CNLR may terminate the term of Executive’s employment other than for Cause, death or Disability at any time upon sixty (60) days prior written notice to Executive.

          5.5 By Executive for Good Reason. Executive may terminate the term of his employment for “Good Reason” upon written notice to CNLR. For purposes of this Agreement, “Good Reason” shall include the following events unless otherwise consented to by Executive:

               (a) The assignment to Executive of any duties materially inconsistent with Executive’s position, duties, responsibilities and status within CNLR;

               (b) A material reduction in Executive’s reporting responsibilities not pertaining to job performance issues;

               (c) A “Change in Control” (as defined in Section 2.4 of CNLR’s 2000 Performance Incentive Plan);

               (d) A requirement by CNLR that Executive’s work location be moved more than fifty (50) miles from CNLR’s principal place of business in Orlando, Florida;

               (e) CNLR’s material breach of this Agreement; or

               (f) CNLR’s failure to obtain an agreement from any successor to the business of CNLR by which the successor assumes and agrees to perform this Agreement.

               Notwithstanding the foregoing, Executive shall not be deemed to have Good Reason to terminate the term of his employment under subsections (a), (b), (d), or (e) unless Executive has provided written notice to CNLR setting forth in reasonable detail the reasons for Executive’s intention to terminate his employment for Good Reason, and CNLR has failed within thirty (30) days thereafter to cure the event or deficiency set forth in the written notice.

          5.6 By Executive Without Good Reason. Executive may terminate the term of Executive’s employment other than for Good Reason at any time upon sixty (60) days prior written notice to CNLR

     6. Compensation in the Event of Termination. Upon the termination of this Agreement, CNLR shall pay Executive compensation as set forth below:

          6.1 By CNLR Without Cause; By Executive for Good Reason. In the event that Executive’s employment is terminated by CNLR without Cause, or by the Executive for Good Reason, CNLR shall pay the Executive a cash payment equal to (i) two times Executive’s Base Salary in effect on the date of termination if such termination is on or before June 30, 2005, or (ii) one times Executive’s Base Salary in effect on the date of termination if such termination is after June 30, 2005 (the “Severance Payment”). The Severance Payment shall be made payable in equal installments over a twelve (12) month period in accordance with CNLR’s usual and customary payroll practices, commencing on the first payday following Executive’s termination. Within thirty (30) days of the date of termination of Executive’s employment, CNLR shall also pay Executive a lump sum equal to the sum of: (a) any accrued but unpaid Base Salary, performance bonus for the prior year, and vacation due Executive as of the date of termination of employment; (b) reimbursements for appropriately submitted expenses which have been incurred, but have not been paid by CNLR, as of the date of termination; and (c) a pro-rated performance bonus for the year or partial year in which Executive’s employment hereunder is terminated, determined in accordance with paragraph 2 of Attachment “A”. In the event that any payment to Executive pursuant to this Section 6.1 shall be deemed to be an “excess parachute payment” under Section 280G(b)(1) of the Internal Revenue Code of 1986, as amended (the “Code”) and subject to the excise tax under Section 4999(a) of the Code (the “Parachute Tax”), then the amount of such payment to Executive shall be increased by an additional amount equal to the amount, after deducting the Parachute Tax and any income tax due on such additional amount, as may be required to enable Executive to pay the Parachute Tax due on any payment under this Section 6.1 and any income tax due on such additional amount.

          6.2 By CNLR for Cause; By Executive Without Good Reason. In the event that CNLR terminates Executive’s employment for Cause, or Executive terminates his employment without Good Reason, all compensation or benefits to which Executive may otherwise be entitled to shall cease on the date of termination, except for (a) any accrued but unpaid Base Salary due Executive as of the date of termination of employment; and (b) reimbursements for appropriately submitted expenses which have been incurred, but have not been paid by CNLR, as of the date of termination.

          6.3 Death or Disability. In the event that CNLR terminates Executive’s employment due to his death or Disability, the Company shall pay the Executive or his estate (a) lump sum equal to one (1) times Executive’s Base Salary in effect at the date of termination, payable within thirty (30) days of Executive’s termination; (b) any accrued but unpaid Base Salary, performance bonus for the prior year, and vacation due Executive as of the date of termination of employment; (c) reimbursements for appropriately submitted expenses which have been incurred, but have not been paid by CNLR, as of the date of termination; and (d) a pro-rated performance bonus for the year or partial year in which Executive’s employment hereunder is terminated, determined in accordance with paragraph 2 of Attachment “A”.. This payment shall be in addition to, rather than in lieu of, the entitlement of Executive or his estate to any other insurance or benefit proceeds as a result of his death or Disability.

          6.4 Natural Termination. In the event that Executive’s employment by CNLR pursuant to this Agreement naturally terminates on a Termination Date, the Company shall pay the Executive (a) any accrued but unpaid Base Salary and performance bonus for the prior year due Executive as of the Termination Date, (b) reimbursements for appropriately submitted expenses which have been incurred, but have not been paid by CNLR, as of the Termination Date; and (c) a pro-rated performance bonus for the year or partial year in which Executive’s employment hereunder is terminated, determined in accordance with paragraph 2 of Attachment “A”. Provided, however, that at the election of CNLR in its sole and absolute discretion and upon written notice to the Executive on or prior to the Termination Date, CNLR may, in addition to the amounts set forth in subsections (a), (b) and (c) above, pay the Executive an optional cash payment equal to one (1) times the Executive’s Base Salary which is in effect on the Termination Date, which cash payment shall be made payable over a twelve (12) month period in equal installments in accordance with CNLR’s usual and customary payroll practices, commencing on the first payday following the Termination Date (the “Optional Severance Payment”).

     7. Non-Competition; Non-Solicitation; and Confidentiality.

          7.1 Disclosure of Confidential Information. Executive acknowledges that CNLR will provide Executive with confidential and proprietary information regarding the business in which CNLR or any of its current or future subsidiaries or affiliates (collectively, other than CNLR, the “CNLR Affiliates”) are involved, and CNLR and the CNLR Affiliates will provide Executive with trade secrets, as defined in Section 688.002(4) of the Florida Statutes, of CNLR and the CNLR Affiliates (hereinafter all such confidential information and trade secrets referred to as the “Confidential Information”). For purposes of this Agreement, “Confidential Information” includes, but is not limited to:

               (a) Information related to the business of CNLR and the CNLR Affiliates, including but not limited to marketing strategies and plans, sales procedures, operating policies and procedures, pricing and pricing strategies, business and strategic plans, financial statements and projections, accounting and tax positions and procedures, and other business and financial information of CNLR and the CNLR Affiliates;

               (b) Information regarding the customers of CNLR and the CNLR Affiliates which Executive acquired as a result of his employment with CNLR, including but not limited to, customer contracts, customer lists, work performed for customers, customer contacts, customer requirements and needs, data used by CNLR and the CNLR Affiliates to formulate customer proposals, customer financial information and other information regarding the customer’s business;

               (c) Information regarding the vendors of CNLR and the CNLR Affiliates which Executive acquired as a result of his employment with CNLR, including but not limited to, product and service information and other information regarding the business activities of such vendors;

               (d) Training materials developed by and utilized by CNLR and the CNLR Affiliates;

               (e) Any other information which Executive acquired as a result of his employment with CNLR and which Executive has a reasonable basis to believe CNLR or the CNLR Affiliates, as the case may be, would not want disclosed to a business competitor or to the general public; and

               (f) Information which:

                    (i) is proprietary to, about or created by CNLR or the CNLR Affiliates;

                    (ii) gives CNLR or any of the CNLR Affiliates some competitive advantage, the opportunity of obtaining such advantage or the disclosure of which could be detrimental to the interests of CNLR or the CNLR Affiliates;

                    (iii) is not typically disclosed to non-executives by CNLR or otherwise is treated as confidential by CNLR or the CNLR Affiliates; or

                    (iv) is designated as Confidential Information by CNLR or from all the relevant circumstances should reasonably be assumed by Executive to be confidential to CNLR or any CNLR Affiliates.

                    Notwithstanding the foregoing, “Confidential Information” does not include information that (i) was known to Executive prior to disclosure by the Company; (ii) was generally known or available to the public at the time the Company disclosed the information to Executive; (iii) became generally known or available to the public after disclosure by the Company through no act or omission of Executive; or (iv) was disclosed to Executive by a third party having a bona fide right both to possess the information and to disclose the information to Executive.

          7.2 Covenant Not to Compete. While employed by CNLR and for a period of one (1) year thereafter, in consideration of the obligations of CNLR hereunder, including without limitation their disclosure of Confidential Information to Executive, Executive shall not, directly or indirectly, for compensation or otherwise, engage in or have any interest in any sole proprietorship, partnership, corporation, company, association, business or any other person or entity (whether as an employee, officer, corporation, business or any creditor, consultant or otherwise) that, directly or indirectly, competes with any of the business enterprises in which CNLR or any CNLR Affiliate is now, or during Executive’s employment becomes engaged in, including, but not limited to, all aspects of commercial real estate development, leasing and financing (collectively, “CNLR’s Business”) in any and all states in which CNLR or any CNLR Affiliate conducts such business while Executive is employed by CNLR or any CNLR Affiliate; provided, however, Executive may continue to hold securities of CNLR or any CNLR Affiliate or acquire, solely as an investment, shares of capital stock or other equity securities of any company which are traded on any national securities exchange or are regularly quoted in the over-the-counter market, so long as Executive does not control, acquire a controlling interest in, or become a member of a group which exercises direct or indirect control of more than five percent (5%) of any class of capital stock of such corporation. Notwithstanding the foregoing, in the event that Executive’s employment by CNLR naturally terminates on the Termination Date and CNLR elects not to pay Executive the Optional Severance Payment pursuant to Section 6.4 above, then the prohibitions contained in this Section 7.2 shall terminate on the Termination Date. Further provided, that the prohibitions of this Section 7.2 shall not apply following termination by CNLR without Cause or termination by the Executive for Good Reason.

          7.3 Nonsolicitation of Clients. While employed by CNLR and for a period of one (1) year thereafter, in consideration of the obligations of CNLR hereunder, including without limitation their disclosure of Confidential Information to Executive, Executive shall not, directly or indirectly, for himself or as principal, agent, independent contractor, consultant, director, officer, member, or employee of any other person, firm, corporation, partnership, company, association, business or other entity, solicit, attempt to contract with, or enter into a contractual or business relationship of any kind pertaining to any aspect of CNLR’s Business, or any other business conducted by CNLR or any CNLR Affiliate, with any person or entity with which CNLR or any CNLR Affiliate had any contractual or business relationship, or engaged in negotiations toward such a contract, in the previous twenty-four (24) months. Further provided, that the prohibitions of this Section 7.3 shall not apply following termination by CNLR without Cause or termination by the Executive for Good Reason.

          7.4 Nonsolicitation of Employees. While employed by CNLR and for a period of one (1) year thereafter, in consideration of the obligations of CNLR hereunder, including without limitation their disclosure of Confidential Information to Executive, Executive shall not directly or indirectly, for himself or as principal, agent, independent contractor, consultant, director, officer, member, or employee of any other person, firm, corporation, partnership, company, association or other entity, either (a) hire, attempt to employ, contact, solicit with respect to hiring or enter into any contractual arrangement with any employee or former employee of CNLR or any CNLR Affiliate, or (b) induce or otherwise advise or encourage any employee of CNLR or any CNLR Affiliate to leave his or her employment unless, in each such case, such employee or former employee has not been employed by CNLR or an CNLR Affiliate for a period in excess of six (6) months at the time of such solicitation, attempt to employ, contact, employment, or inducement. Further provided, that the prohibitions of this Section 7.4 shall not apply following termination by CNLR without Cause or termination by the Executive for Good Reason.

          7.5 Nondisparagement. While employed by CNLR and after Executive’s employment terminates, in consideration of the obligations of CNLR hereunder, including without limitation their disclosure of Confidential Information to Executive, Executive shall not disparage, denigrate or comment negatively upon, either orally or in writing, CNLR, any CNLR Affiliate, or any of their officers or directors, including, but not limited to, James M. Seneff, Jr. and Robert A. Bourne (collectively, the “Benefited Persons”), to or in the presence of any person or entity unless compelled to act by a valid subpoena or other legal mandate; provided, however, if Executive receives such a subpoena or other legal mandate he shall provide CNLR with written notice of same at least five (5) business days prior to the date on which Executive is required to make the disclosure. Unless Executive is terminated for Cause, CNLR shall not disparage, denigrate or comment negatively upon, either orally or in writing, the Executive to any prospective employer or third party after Executive’s employment terminates unless compelled to do so by subpoena or other legal mandate; provided however, if CNLR receives such a subpoena or other legal mandate it shall provide Executive with written notice of same at least five (5) business days prior to the date on which CNLR is required to make the disclosure.

          7.6 Confidentiality. While employed by CNLR and after Executive’s employment terminates, in consideration of the obligations of CNLR hereunder, including without limitation their disclosure of Confidential Information to Executive, Executive shall keep secret and retain in strictest confidence, shall not disclose to any third-party, and shall not use for his benefit or the benefit of others, except in connection with the business affairs of CNLR or any other Benefited Persons, all confidential and proprietary information and trade secrets relating to the business of CNLR or any of the other Benefited Persons, including, without limitation, the Confidential Information, which information is not generally known or otherwise obtainable in the public domain, unless such disclosure is required by a valid subpoena or other legal mandate. In the event Executive receives such a subpoena or legal mandate he shall provide CNLR with written notice of same at least five (5) business days prior to the date on which Executive is required to make the disclosure.

     8. Tangible Items. All files, records, documents, manuals, books, forms, reports, memoranda, studies, data, calculations, recordings, or correspondence, in whatever form they may exist, and all copies, abstracts and summaries of the foregoing, and all physical items related to the business of CNLR or any other Benefited Person, whether of a public nature or not, and whether prepared by Executive or not, are and shall remain the exclusive property of CNLR or any other Benefited Person, as the case may be, and shall not be removed from their premises, except as required in the course of Executive’s employment by CNLR, without the prior written consent of CNLR. Such items, including any copies or other reproductions thereof, shall be promptly returned by Executive to CNLR on or before the Termination Date or at any earlier time upon the written request of CNLR.

     9. Remedies.

          9.1 Injunctive Relief. CNLR and Executive acknowledge and agree that a breach by Executive of any of the covenants contained in Sections 7 and 8 of this Agreement will cause immediate and irreparable harm and damage to CNLR and/or any other Benefited Person, and that monetary damages will be inadequate to compensate CNLR, and/or any other Benefited Person, as the case may be, for such breach. Accordingly, Executive acknowledges that CNLR and/or any other Benefited Person affected shall, in addition to any other remedies available to them at law or in equity, be entitled to an injunction from any court of competent jurisdiction enjoining and restraining any violation of said covenants by Executive or any of his affiliates, associates, partners or agents, either directly or indirectly, without the necessity of proving the inadequacy of legal remedies or irreparable harm. In addition, Executive acknowledges that in the event of his breach of any of the provisions of Sections 7 or 8 of this Agreement, in addition to any other remedies CNLR may have, CNLR may cease making the balance of the payments specified in Section 6.1 or 6.4.

          9.2 Arbitration. Except with regard to Section 9.1, all disputes between the parties or any claims concerning the performance, breach, construction or interpretation of this Agreement, or in any manner arising out of this Agreement, shall be submitted to binding arbitration in accordance with the Commercial Arbitration Rules, as amended from time to time, of the American Arbitration Association (the “AAA”), which arbitration shall be carried out in the manner set forth below:

               (a) Within fifteen (15) days after written notice by one party to the other party of its demand for arbitration, which demand shall set forth the name and address of its designated arbitrator, the other party shall appoint its designated arbitrator and so notify the demanding party. Within fifteen (15) days thereafter, the two arbitrators so appointed shall appoint the third arbitrator. If the two appointed arbitrators cannot agree on the third arbitrator, then the AAA shall appoint an independent arbitrator as the third arbitrator. The dispute shall be heard by the arbitrators within ninety (90) days after appointment of the third arbitrator. The decision of any two or all three of the arbitrators shall be binding upon the parties without any right of appeal. The decision of the arbitrators shall be final and binding upon CNLR, its successors and assigns, and upon Executive, his heirs, personal representatives, and legal representatives.

               (b) The arbitration proceedings shall take place in Orlando, Florida, and the judgment and determination of such proceedings shall be binding on all parties. Judgment upon any award rendered by the arbitrators may be entered into any court having competent jurisdiction without any right of appeal.

               (c) Each party shall pay its or his own expenses of arbitration, and the expenses of the arbitrators and the arbitration proceeding shall be shared equally. However, if in the opinion of a majority of the arbitrators, any claim or defense was unreasonable, the arbitrators may assess, as part of their award, all or any part of the arbitration expenses of the other party (including reasonable attorneys’ fees) and of the arbitrators and the arbitration proceeding.

     10. Indemnification. CNLR shall indemnify and hold harmless Executive from any claims, losses or damages (including reasonable attorney’s fees and costs) resulting from any action or inaction on his part while serving as an officer or director of CNLR, or any of its subsidiaries, and shall advance the expenses of defending any claim against Executive related thereto, but only to the extent permitted by CNLR’s certificate of incorporation and by-laws.

     11. Severability. As the provisions of this Agreement are independent of and severable from each other, CNLR and Executive agree that if, in any action before any court or agency legally empowered to enforce this Agreement, any term, restriction, covenant, or promise hereof is found to be unreasonable or otherwise unenforceable, then such decision shall not effect the validity of the other provisions of this Agreement, and such invalid term, restriction, covenant, or promise shall also be deemed modified to the extent necessary to make it enforceable.

     12. Notice. For purposes of this Agreement, notices, demands and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when received if delivered in person, the next business day if delivered by overnight commercial courier (e.g. Federal Express), or the third (3rd) business day if mailed by United States certified mail, return receipt requested, postage prepaid, to the following addresses:

If to Executive:

Craig Macnab
Commercial Net Lease Realty, Inc.
450 South Orange Avenue — 14th Floor
Orlando, Florida 32801

If to CNLR:

Commercial Net Lease Realty, Inc.
450 South Orange Avenue — 14th Floor
Orlando, Florida 32801
Attn: James M. Seneff, Jr.
   Chairman of the Board of Directors

     Either party may change its address for notices in accordance with this Section 11 by providing written notice of such change to the other party.

     13. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Florida.

     14. Benefits; Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties and their respective heirs, personal representatives, legal representatives, successors and permitted assigns. Executive shall not assign this Agreement.

     15. Entire Agreement Amendment. This Agreement, including its incorporated Attachments “A”, “B” and “C”, constitutes the entire agreement between the parties, and all prior understandings, agreements or undertakings between the parties concerning Executive’s employment or the other subject matters of this Agreement are superseded in their entirety by this Agreement. This Agreement may not be modified or amended other than by an agreement in writing executed an delivered by both parties hereto.

     16. Counterparts. This Agreement may be executed in counterparts, each of which will be deemed and original, but which together shall be one and the same instrument.

     17. Tax Advice. Executive confirms and represents to CNLR that he has had the opportunity to obtain the advice of legal counsel, financial and tax advisers, and such other professionals as he deems necessary for entering into this Agreement, and he has not relied upon the advice of CNLR or CNLR’s officers, directors, or employees.

     18. Interpretation. As both parties having had the opportunity to consult with legal counsel, no provision of this Agreement shall be construed against or interpreted to the disadvantage of any party by reason of such party having, or being deemed to have, drafted, devised, or imposed such provision.

[Signatures appear on following page.]

     

     IN WITNESS WHEREOF, the undersigned have executed this Agreement to be effective as of the date first above written.

	“Executive”
	/s/Craig Macnab
Witness	Craig Macnab
	“CNLR” Commercial Net Lease Realty, Inc.
	/s/James M. Seneff, Jr.
Witness	James M. Seneff, Jr. Chairman of the Board of Directors

ATTACHMENTS INTENTIONALLY OMITTED

EX-10.4

Exhibit 10.4

EMPLOYMENT AGREEMENT

(Julian E. Whitehurst)

     THIS EMPLOYMENT AGREEMENT is dated as of February 1, 2003, by and between COMMERCIAL NET LEASE REALTY, INC., a Maryland corporation (hereinafter referred to as the “Company”), and JULIAN E. WHITEHURST (hereinafter referred to as the “Executive”).

     WHEREAS, the Company wishes to offer employment to the Executive, and the Executive wishes to accept such offer, on the terms set forth below.

     Accordingly, the parties hereto agree as follows:

     1. Term. The Company hereby employs the Executive, and the Executive hereby accepts such employment for an initial term commencing as of the date hereof and ending on December 31, 2003, unless sooner terminated in accordance with the provisions of Section 4 or Section 5 (the period during which the Executive is employed hereunder being hereinafter referred to as the “Term”). The Term shall be subject to automatic one (1) year renewals unless either party hereto notifies the other, in accordance with Section 7.5, of non-renewal at least ninety (90) days prior to the end of any such Term.

     2. Duties. The Executive, in his capacity as Executive Vice President and General Counsel of Commercial Net Lease Realty, Inc., shall faithfully perform for the Company the duties of said office and shall perform such other duties of an executive, managerial or administrative nature as shall be specified and designated from time to time by the Board of Directors of the Company (the “Board”), the Chief Executive Officer or the President of the Company (including the performance of services for, and serving on the Board of Directors of, any subsidiary of the Company without any additional compensation). The Executive shall devote substantially all of the Executive’s business time and effort to the performance of the Executive’s duties hereunder, provided that in no event shall this sentence prohibit the Executive from performing personal and charitable activities and any other activities approved by the Board, so long as such activities do not interfere with the Executive’s duties for the Company.

     3. Compensation.

          3.1. Salary. The Company shall pay the Executive during the Term a salary at the rate of $200,850 per annum (the “Annual Salary”), in accordance with the customary payroll practices of the Company applicable to senior executives generally. Annual Salary will increase annually on January 1 of each year by an amount as may be approved by the Board, with such increase to be effective on the date salary increases are effective for the employees of the Company generally and, upon such increase, the increased amount shall thereafter be deemed to be the Annual Salary.

          3.2. Bonus. The Executive will be eligible to participate in the Company’s Annual Bonus Program (the “Bonus Plan”), the terms of which will be established by the Compensation Committee of the Company.

          3.3. Benefits — In General. The Executive shall be permitted during the Term to participate in any group life, hospitalization or disability insurance plans, health programs, pension and profit sharing plans and similar benefits that may be available to other senior executives of the Company generally, on the same terms as may be applicable to such other executives, in each case to the extent that the Executive is eligible under the terms of such plans or programs.

          3.4. Vacation. The Executive shall be entitled to vacation of twenty (20) days per year.

          3.5. Automobile. The Company will provide the Executive a monthly allowance of $500 for the use of an automobile. At the option of the Company, in lieu of providing such allowance, the Company will provide the Executive with an automobile of suitable standard to the Executive’s position.

          3.6. Disability Benefits and Life Insurance. The Executive shall be entitled to long-term disability coverage providing benefits (to continue for such period as is provided in the applicable disability plan or program, as amended from time to time) equal to two-thirds of Annual Salary in the case of a covered disability and life insurance benefits with a face amount equal to Annual Salary.

          3.7. Expenses. The Company shall pay or reimburse the Executive for all ordinary and reasonable out-of-pocket expenses actually incurred (and, in the case of reimbursement, paid) by the Executive during the Term in the performance of the Executive’s services under this Agreement, provided that the Executive submits such expenses in accordance with the policies applicable to senior executives of the Company generally.

     4. Termination upon Death or Disability. If the Executive dies during the Term, the obligations of the Company to or with respect to the Executive shall terminate in their entirety except as otherwise provided under this Section 4. If the Executive becomes eligible for disability benefits under the Company’s long-term disability plans and arrangements (or, if none apply, would have been so eligible under the most recent plan or arrangement), the Company shall have the right, to the extent permitted by law, to terminate the employment of the Executive upon notice in writing to the Executive; provided that the Company will have no right to terminate the Executive’s employment if, in the opinion of a qualified physician reasonably acceptable to the Company, it is reasonably certain that the Executive will be able to resume the Executive’s duties on a regular full-time basis within ninety (90) days of the date the Executive receives notice of such termination. Upon death or other termination of employment by virtue of disability, (i) the Executive (or the Executive’s estate or beneficiaries in the case of the death of the Executive) shall have no right to receive any compensation or benefit hereunder on and after the effective date of the termination of employment other than Annual Salary and other benefits (but excluding any bonuses except as provided in the Bonus Plan or in clause (ii) below) earned and accrued under this Agreement prior to the date of termination (and reimbursement under this Agreement for expenses incurred prior to the date of termination); (ii) the Executive (or the Executive’s estate or beneficiaries in the case of the death of the Executive) shall be entitled to a cash payment equal to the Executive’s Annual Salary (as in effect on the effective date of such termination) payable no later than thirty (30) days after such termination; and (iii) this Agreement shall otherwise terminate upon such death or other termination of employment and there shall be no further rights with respect to the Executive hereunder (except as provided in Section 7.14).

     5. Certain Terminations of Employment.

          5.1. Termination for Cause; Termination of Employment by the Executive Without Good Reason.

               (a) For purposes of this Agreement, “Cause” shall mean:

                    (i) the Executive’s (A) conviction for (or pleading nolo contendere to) any felony, or a misdemeanor involving moral turpitude, or (B) indictment for any felony or misdemeanor involving moral turpitude, if such indictment is not discharged or otherwise resolved within eighteen (18) months;

                    (ii) the Executive’s commission of an act of fraud, theft or dishonesty related to the performance of the Executive’s duties hereunder;

                    (iii) the willful and continuing failure or habitual neglect by the Executive to perform the Executive’s duties hereunder;

                    (iv) any material violation by the Executive of the covenants contained in Section 6; or

                    (v) the Executive’s willful and continuing material breach of this Agreement.

Notwithstanding the foregoing, if there exists (without regard to this sentence) an event or condition that constitutes Cause under clause (iii) or (v) above, the Executive shall have thirty (30) days from the date such notice is given to cure such event or condition and, if the Executive does so, such event or condition shall not constitute Cause hereunder.

               (b) For purposes of this Agreement, “Good Reason” shall mean, unless otherwise consented to by the Executive:

                    (i) the material reduction of the Executive’s authority, duties and responsibilities, or the assignment to the Executive of

     duties materially inconsistent with the Executive’s position or positions with the Company and its subsidiaries;

                    (ii) a reduction in Annual Salary of the Executive;

                    (iii) the failure by the Company to obtain an agreement in form and substance reasonably satisfactory to the Executive from any successor to the business of the Company to assume and agree to perform this Agreement; or

                    (iv) the Company’s material and willful breach of this Agreement.

Notwithstanding the foregoing, if there exists (without regard to this sentence) an event or condition that constitutes Good Reason under clause (i), (ii) or (iv) above, the Company shall have thirty (30) days from the date on which the Executive gives the notice thereof to cure such event or condition and, if the Company does so, such event or condition shall not constitute Good Reason hereunder.

               (c) The Company may terminate the Executive’s employment hereunder for Cause. If the Company terminates the Executive for Cause, (i) the Executive shall have no right to receive any compensation or benefit hereunder on and after the effective date of the termination of employment other than Annual Salary and other benefits (but excluding any bonuses except as provided in the Bonus Plan) earned and accrued under this Agreement prior to the effective date of the termination of employment (and reimbursement under this Agreement for expenses incurred prior to the effective date of the termination of employment); and (ii) this Agreement shall otherwise terminate upon such termination of employment and the Executive shall have no further rights hereunder (except as provided in Section 7.14).

               (d) The Executive may terminate his employment without Good Reason. If the Executive terminates the Executive’s employment with the Company without Good Reason: (i) the Executive shall have no right to receive any compensation or benefit hereunder on and after the effective date of the termination of employment other than Annual Salary and other benefits (but excluding any bonuses except as provided in the Bonus Plan) earned and accrued under this Agreement prior to the effective date of the termination of employment (and reimbursement under this Agreement for expenses incurred prior to the effective date of the termination of employment); and (ii) this Agreement shall otherwise terminate upon such termination of employment and the Executive shall have no further rights hereunder (except as provided in Section 7.14).

     5.2. Termination Without Cause; Termination for Good Reason; Failure to Renew Employment Agreement. The Company may terminate the Executive’s employment at any time for any reason or no reason and the Executive may terminate the Executive’s employment with the Company for Good Reason. If the Company or the Executive terminates the Executive’s employment and such termination is not described in Section 4 or Section 5.1, or if the Company, for any reason, does not renew this agreement at the expiration of its Term, (i) the Executive shall have no right to receive any compensation or benefit hereunder on and after the effective date of the termination of employment or expiration of the Term other than Annual Salary and other benefits (but excluding any bonuses except as provided in the Bonus Plan and clause (ii) below) earned and accrued under this Agreement prior to the effective date of the termination of employment or expiration of the Term (and reimbursement under this Agreement for expenses incurred prior to the effective date of the termination of employment or expiration of the Term); (ii) except as otherwise provided in Section 5.3 below, the Executive shall receive (A) a cash payment equal to two (2) times the Executive’s Annual Salary (as in effect on the effective date of such termination or expiration) payable in twelve (12) equal monthly installments (plus interest on such unpaid amount at the Prime Rate, as hereinafter defined, commencing on the first day of the first calendar month following such termination or expiration and continuing on the first day of each calendar month thereafter until paid in full and (B) for a period of one (1) year after termination of employment or expiration of the term such continuing health benefits (including any medical, vision or dental benefits), under the Company’s health plans and programs applicable to senior executives of the Company generally as the Executive would have received under this Agreement (and at such costs to the Executive) as would have applied in the absence of such termination or expiration (but not taking into account any post-termination increases in Annual Salary that may otherwise have occurred without regard to such termination and that may have favorably affected such benefits) it being expressly understood and agreed that nothing in this clause (ii)(B) shall restrict the ability of the Company to amend or terminate such plans and programs from time to time in its sole discretion; provided, however, that the Company shall in no event be required to provide such coverage after such time as the Executive becomes entitled to receive health benefits from another employer or recipient of the Executive’s services (and provided, further, that such entitlement shall be determined without regard to any individual waivers or other arrangements); (iii) all outstanding unvested options held by the Executive shall vest and such options shall remain exercisable for one (1) year following termination or expiration (or, if shorter, the balance of the regular term of the options); and (iv) this Agreement shall otherwise terminate upon such termination of employment or expiration of the Term and the Executive shall have no further rights hereunder (except as provided in Section 7.14). As used herein, the term “Prime Rate” shall mean the prime rate of interest as published in the Wall Street Journal (or, if the Wall Street Journal is no longer published, a similar national business publication) from time to time.

     5.3. Change of Control. Immediately upon a “change of control”, as hereinafter defined, then the provisions of Section 5.2 (ii)(A) above shall be automatically deleted and replaced with the following new Section 5.2(ii)(A):

     “. . . [(ii) except as otherwise provided in Section 5.3 below, the Executive shall receive] (A) a cash payment equal to two (2) times (x) the Executive’s Annual Salary (as in effect on the effective date of such termination or expiration) plus (y) the average of the Executive’s annual bonus compensation for the previous three (3) years (or such lesser period of time as the Executive has been employed by the Company if the Executive has not been so employed for three (3) previous years) payable no later than thirty (30) days after such termination or expiration and [B] . . .”

     For the purposes hereof, the term “change of control” shall mean:

               (a) a “person” or “group” (which terms shall have the meaning they have when used in Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, any corporation owned directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of voting securities of the Company) becomes (other than solely by reason of a repurchase of voting securities by the Company), the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of forty percent (40%) or more of the combined voting power of the Company’s then total outstanding voting securities; or

               (b) the Company consolidates with or merges with or into another corporation or partnership or conveys, transfers or leases, in any transaction or series of transactions, all or substantially all of its assets to any corporation or partnership, or any corporation or partnership consolidates with or merges with or into the Company, in any event pursuant to a transaction in which the outstanding voting stock of the Company is reclassified or changed into or exchanged for cash, securities or other property, other than any such transaction where (i) the outstanding voting securities of the Company are changed into or exchanged for voting securities of the surviving corporation and (ii) the persons who were the beneficial owners of the Company’s voting securities immediately prior to such transaction beneficially own immediately after such transaction fifty percent (50%) or more of the total outstanding voting power of the surviving corporation, or the Company is liquidated or dissolved or adopts a plan of liquidation or dissolution.

     6. Covenants of the Executive.

          6.1. Covenant Against Competition; Other Covenants. The Executive acknowledges that (i) the principal business of the Company is the acquisition, ownership and management of a diversified portfolio of high-quality, single-tenant, freestanding properties leased to retail businesses (such business, and any and all other businesses that after the date hereof, and from time to time during the Term, become material and substantial with respect to the Company’s then-overall business, herein being collectively referred to as the “Business”); (ii) the Company knows of a limited number of persons who have developed the Company’s Business; (iii) the Company’s Business is, in part, national in scope; (iv) the Executive’s work for the Company and its subsidiaries (and the predecessors of either) has given and will continue to give the Executive access to the confidential affairs and proprietary information of the Company; (vi) the covenants and agreements of the Executive contained in this Section 6 are essential to the business and goodwill of the Company; and (vii) the Company would not have entered into this Agreement but for the covenants and agreements set forth in this Section 6. In light of the foregoing, during the Term and for a period of one (1) year thereafter (and, as to Sections 6.1(b) and (d), at any time during and after the Executive’s employment with the Company and its subsidiaries (and the predecessors of either)):

               (a) The Executive shall not, directly or indirectly, own, manage, control or participate in the ownership, management, or control of, or be employed or engaged by or otherwise affiliated or associated as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director or in any other individual or representative capacity, engage or participate in any business that is in competition in any manner whatsoever with the Business of the Company in any state in which the Company conducts its Business. In the case of a termination by the Company without Cause or by the Executive for Good Reason, the preceding covenant shall expire on the date of termination; provided, however, that notwithstanding the foregoing, the Executive may invest in securities of any entity, solely for investment purposes and without participating in the business thereof, if (i) such securities are traded on any national securities exchange or the National Association of Securities Dealers, Inc. Automated Quotation System, (ii) the Executive is not a controlling person of, or a member of a group which controls, such entity, and (iii) the Executive does not, directly or indirectly, own one percent (1%) or more of any class of securities of such entity.

               (b) The Executive shall keep secret and retain in strictest confidence, and shall not use for his benefit or the benefit of others, except in connection with the business and affairs of the Company and its affiliates, all confidential matters relating to the Company’s Business and the business of any of its affiliates and to the Company and any of its affiliates, learned by the Executive heretofore or hereafter directly or indirectly from the Company or any of its subsidiaries (or any predecessor of either) (the “Confidential Company Information”), including, without limitation, information with respect to the Business and any aspect thereof, profit or loss figures, and the Company’s or its affiliates’, (or any of their predecessors) properties, and shall not disclose such Confidential Company Information to anyone outside of the Company except with the Company’s express written consent and except for Confidential Company Information which (i) at the time of receipt or thereafter becomes publicly known through no wrongful act of the Executive, (ii) is clearly obtainable in the public domain, (iii) was not acquired by the Executive in connection with the Executive’s employment or affiliation with the Company, (iv) was not acquired by the Executive from the Company or its representatives or from a third party who has an agreement with the Company not to disclose such information, or (v) is required to be disclosed by rule of law or by order of a court or governmental body or agency.

               (c) The Executive shall not, without the Company’s prior written consent, directly or indirectly, (i) knowingly solicit or encourage to leave the employment or other service of the Company or any of its affiliates, any employee thereof or hire (on behalf of the Executive or any other person or entity) any employee who has left the employment or other service of the Company or any of its affiliates (or any predecessor of either) within one (1) year of the termination of such employee’s or independent contractor’s employment or other service with the Company and its affiliates, or (ii) whether for the Executive’s own account or for the account of any other person, firm, corporation or other business organization, intentionally interfere with the Company’s or any of its affiliates’, relationship with, or endeavor to entice away from the Company or any of its affiliates, any person who during the Executive’s employment with the Company and its affiliates (or the predecessors of either) is or was a customer or client of the Company or any of its affiliates (or any predecessor of either).

               (d) All memoranda, notes, lists, records, property and any other tangible product and documents (and all copies thereof) made, produced or compiled by the Executive or made available to the Executive concerning the Business of the Company and its affiliates shall be the Company’s property and shall be delivered to the Company at any time on request.

               (e) Notwithstanding anything set forth in this Section to the contrary, if at any time after a “change of control”, as defined above, (i) the Company or the Executive terminates the Executive’s employment and such termination is not described in Section 4 or Section 5.1, or (ii) the Company, for any reason, does not renew this agreement at the expiration of its Term, then the covenants set forth in this Section 6.1 shall expire and terminate immediately upon the expiration or earlier termination of this Agreement.

          6.2. Rights and Remedies upon Breach. The Executive acknowledges and agrees that any breach by him of any of the provisions of Section 6.1 (the “Restrictive Covenants”) would result in irreparable injury and damage for which money damages would not provide an adequate remedy. Therefore, if the Executive breaches, or threatens to commit a breach of, any of the Restrictive Covenants, the Company and its affiliates shall have the right and remedy to have the Restrictive Covenants specifically enforced (without posting bond and without the need to prove damages) by any court having equity jurisdiction, including, without limitation, the right to an entry against the Executive of restraining orders and injunctions (preliminary, mandatory, temporary and permanent) against violations, threatened or actual, and whether or not then continuing, of such covenants. This right and remedy shall be in addition to, and not in lieu of, any other rights and remedies available to the Company and its affiliates under law or in equity (including, without limitation, the recovery of damages). The existence of any claim or cause of action by the Executive, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement of the Restrictive Covenants.

     7. Other Provisions.

          7.1. Severability. The Executive acknowledges and agrees that (i) the Executive has had an opportunity to seek advice of counsel in connection with this Agreement and (ii) the Restrictive Covenants are reasonable in geographical and temporal scope and in all other respects. If it is determined that any of the provisions of this Agreement, including, without limitation, any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the provisions of this Agreement shall not thereby be affected and shall be given full affect, without regard to the invalid portions.

          7.2. Duration and Scope of Covenants. If any court or other decision maker of competent jurisdiction determines that any of the Executive’s covenants contained in this Agreement, including, without limitation, any of the Restrictive Covenants, or any part thereof, are unenforceable because of the duration or geographical scope of such provision, then, after such determination has become final and unappealable, the duration or scope of such provision, as the case may be, shall be reduced so that such provision becomes enforceable and, in its reduced form, such provision shall then be enforceable and shall be enforced.

          7.3. Enforceability; Jurisdictions. The Company and the Executive intend to and hereby confer jurisdiction to enforce the Restrictive Covenants upon the courts of any jurisdiction within the geographical scope of the Restrictive Covenants. If the courts of any one or more of such jurisdictions hold the Restrictive Covenants wholly unenforceable by reason of breadth of scope or otherwise it is the intention of the Company and the Executive that such determination not bar or in any way affect the Company’s right, or the right of any of its affiliates, to the relief provided above in the courts of any other jurisdiction within the geographical scope of such Restrictive Covenants, as to breaches of such Restrictive Covenants in such other respective jurisdictions, such Restrictive Covenants as they relate to each jurisdiction’s being, for this purpose, severable, diverse and independent covenants, subject, where appropriate, to the doctrine of res judicata. Any controversy or claim arising out of or relating to this Agreement or the breach of this Agreement that is not resolved by the Executive and the Company (or its affiliates, where applicable), other than those arising under Section 6, to the extent necessary for the Company (or its affiliates, where applicable) to avail itself of the rights and remedies provided under Section 6.2, shall be submitted to arbitration in Orlando, Florida, in accordance with Florida law and the procedures of the American Arbitration Association. The determination of the arbitrators shall be conclusive and binding on the Company (or its affiliates, where applicable) and the Executive and judgment may be entered on the arbitrator(s)’ award in any court having jurisdiction.

     7.4. Attorneys’ Fees. In the event of any legal proceeding (including an arbitration proceeding) relating to this Agreement or any term or provision thereof, the losing party shall be responsible to pay or reimburse the prevailing party for all reasonable attorneys’ fees incurred by the prevailing party in connection with such proceeding.

     7.5. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when so delivered personally, telegraphed, telexed or sent by facsimile transmission or, if mailed, five (5) days after the date of deposit in the United States mail as follows:

(i)	If to the Company, to:	450 South Orange Avenue
		Suite 1400
		Orlando, Florida 32801
		Attention: James M. Seneff, Jr.
		Facsimile: (407) 650-1011
	with a copy to:	Shaw Pittman LLP
		2300 N Street, N.W.
		Washington, D.C. 20037
		Attention: John McDonald, Esquire
		Facsimile: (202) 663-8007
(ii)	If to the Executive, to:	Julian E. Whitehurst
		450 South Orange Avenue
		Suite 900
		Orlando, Florida 32801
		Facsimile: (407) 650-1044
	with a copy to:	Julian E. Whitehurst
		2077 Santa Antilles Road
		Orlando, FL 32806

Any such person may by notice given in accordance with this Section to the other parties hereto designate another address or person for receipt by such person of notices hereunder.

     7.6. Entire Agreement. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements, written or oral, with the Company or its subsidiaries (or any predecessor of either).

     7.7. Waivers and Amendments. This Agreement may be amended, superseded, canceled, renewed or extended, and the terms hereof may be waived, only by a written instrument signed by the parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any such right, power or privilege nor any single or partial exercise of any such right, power or privilege, preclude any other or further exercise thereof or the exercise of any other such right, power or privilege.

     7.8. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF FLORIDA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.

     7.9. Assignment. This Agreement, and the Executive’s rights and obligations hereunder, may not be assigned by the Executive; any purported assignment by the Executive in violation hereof shall be null and void. In the event of any sale, transfer or other disposition of all or substantially all of the Company’s assets or business, whether by merger, consolidation or otherwise, the Company may assign this Agreement and its rights hereunder.

     7.10. Withholding. The Company shall be entitled to withhold from any payments or deemed payments any amount of withholding required by law. No other taxes, fees, impositions, duties or other charges or offsets of any kind shall be deducted or withheld from amounts payable hereunder, unless otherwise required by law.

     7.11. No Duty to Mitigate. The Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor will any payments hereunder be subject to offset in the event the Executive does mitigate.

     7.12. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors, permitted assigns, heirs, executors and legal representatives.

     7.13. Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original but all such counterparts together shall constitute one and the same instrument. Each counterpart may consist of two (2) copies hereof each signed by one of the parties hereto.

     7.14. Survival. Anything contained in this Agreement to the contrary notwithstanding the provisions of Section 6, 7.3, 7.4, 7.10, and the other provisions of this Section 7 (to the extent necessary to effectuate the survival of Sections 6, 7.3, 7.4, and 7.10) shall survive termination of this Agreement and any termination of the Executive’s employment hereunder.

     7.15. Existing Agreements. Executive represents to the Company that the Executive is not subject or a party to any employment or consulting agreement, non-competition covenant or other agreement, covenant or understanding which might prohibit the Executive from executing this Agreement or limit the Executive’s ability to fulfill the Executive’s responsibilities hereunder.

     7.16. Headings. The headings in this Agreement are for reference only and shall not affect the interpretation of this Agreement.

     7.17. Parachute Provisions. If any amount payable to or other benefit receivable by the Executive pursuant to this Agreement is deemed to constitute a Parachute Payment (as defined below), alone or when added to any other amount payable or paid to or other benefit receivable or received by the Executive which is deemed to constitute a Parachute Payment (whether or not under an existing plan, arrangement or other agreement), and would result in the imposition on the Executive of an excise tax under Section 4999 of the Internal Revenue Code of 1986, as amended, then, in addition to any other benefits to which the Executive is entitled under this Agreement, the Executive shall be paid by the Company an amount in cash equal to the sum of the excise taxes payable by the Executive by reason of receiving Parachute Payments plus the amount necessary to put the Executive in the same after-tax position (taking into account any and all applicable federal, state and local excise, income or other taxes at the highest applicable rates on such Parachute Payments and on any payments under this Section 7.17) as if no excise taxes had been imposed with respect to Parachute Payments. The amount of any payment under this Section 7.17 shall be computed by a certified public accounting firm mutually and reasonably acceptable to the Executive and the Company, the computation expenses of which shall be paid by the Company. “Parachute Payment” shall mean any payment deemed to constitute a “parachute payment” as defined in Section 280G of the Internal Revenue Code of 1986, as amended.

     IN WITNESS WHEREOF, the parties hereto have signed their names as of the day and year first above written.

COMPANY: COMMERCIAL NET LEASE REALTY, INC.
By:	/s/Gary M. Ralston
Name:	Gary M. Ralston
Its:	President
EXECUTIVE:
By:	/s/Julian E. Whitehurst
	Julian E. Whitehurst

EX-10.5

Exhibit 10.5

TABLE OF CONTENTS

Part I.  Employment Agreement

Part II.  Amendment to Employment Agreement

PART I

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT is dated as of January 1,1998, by and between COMMERCIAL NET LEASE REALTY, INC., a Maryland corporation (hereinafter referred to as the “Company”), and Kevin B. Habicht (hereinafter referred to as the “Executive”).

          WHEREAS, the Agreement and Plan of Merger, dated as of May 15, 1997, between CNL REALTY ADVISORS, INC., a Florida corporation (“CNL Advisors”), and the Company contemplates that the Company enter into an employment agreement with the Executive;

          WHEREAS, the Company wishes to offer employment to the Executive, and the Executive wishes to accept such offer, on the terms set forth below;

          Accordingly, the parties hereto agree as follows:

          1. Term. The Company hereby employs the Executive, and the Executive hereby accepts such employment for an initial term commencing as of the date hereof and ending on December 31, 2000, unless sooner terminated in accordance with the provisions of Section 4 or Section 5 (the period during which the Executive is employed hereunder being hereinafter referred to as the “Term”). The Term shall be subject to automatic one-year renewals unless either party hereto notifies the other, in accordance with Section 7.5, of non-renewal at least 90-days prior to the end of any such Term.

          2. Duties. The Executive, in his capacity as Executive Vice President shall faithfully perform for the Company the duties of said office including, without limitation, acting as chief financial officer and shall perform such other duties of an executive, managerial or administrative nature as shall be specified and designated from time to time by the Board of Directors of the Company (the “Board”), the Chief Executive Officer or the President of the Company (including the performance of services for, and serving on the Board of Directors of, any subsidiary of the Company without any additional compensation). The Executive shall devote substantially all of the Executive’s business time and effort to the performance of the Executive’s duties hereunder, provided that in no event shall this sentence prohibit the Executive from performing personal and charitable activities and any other activities approved by the Board, so long as such activities do not interfere with the Executive’s duties for the Company.

          3. Compensation

               3.1. Salary. The Company shall pay the Executive during the Term a salary at the rate of $150,000 per annum (the “Annual Salary”), in accordance with the customary payroll practices of the Company applicable to senior executives generally. Annual Salary will increase annually on January 1 of each year by an amount as may be approved by the Board, with such increase to be effective on the date salary increases are effective for employees of the Company generally and, upon such increase, the increased amount shall thereafter be deemed to be the Annual Salary.

               3.2. Bonus. The Executive will be eligible to participate in the Company’s Annual Bonus Program (the “Bonus Plan”), the terms of which will be established by the Executive Compensation Committee of the Company. Until such time as the Company adopts a formal bonus program, the Executive will be entitled to a bonus of up to 50% of Annual Salary.

               3.3. Benefits — In General. The Executive shall be permitted during the Term to participate in any group life, hospitalization or disability insurance plans, health programs, pension and profit sharing plans and similar benefits that may be available to other senior executives of the Company generally, on the same terms as may be applicable to such other executives, in each case to the extent that the Executive is eligible under the terms of such plans or programs.

               3.4. Vacation. The Executive shall be entitled to vacation of 20 days per year.

               3.5. Automobile. The Company will provide the Executive a monthly allowance of $500 for the use of an automobile. At the option of the Company, in lieu of providing such allowance, the Company will provide the Executive with an automobile of suitable standard to the Executive’s position.

               3.6. Disability Benefits and Life Insurance. The Executive shall be entitled to long-term disability coverage providing benefits (to continue for such period as is provided in the applicable disability plan or program, as amended from time to time) equal to two-thirds of Annual Salary in the case of a covered disability and life insurance benefits with a face amount equal to Annual Salary.

               3.7. Expenses. The Company shall pay or reimburse the Executive for all ordinary and reasonable out-of-pocket expenses actually incurred (and, in the case of reimbursement, paid) by the Executive during the Term in the performance of the Executive’s services under this Agreement; provided that the Executive submits such expenses in accordance with the policies applicable to senior executives of the Company generally.

               4. Termination upon Death or Disability. If the Executive dies during the Term, the obligations of the Company to or with respect to the Executive shall terminate in their entirety except as otherwise provided under this Section 4. If the Executive becomes eligible for disability benefits under the Company’s long-term disability plans and arrangements (or, if none apply, would have been so eligible under the most recent plan or arrangement), the Company shall have the right, to the extent permitted by law, to terminate the employment of the Executive upon notice in writing to the Executive; provided that the Company will have no right to terminate the Executive’s employment if, in the opinion of a qualified physician reasonably acceptable to the Company, it is reasonably certain that the Executive will be able to resume the Executive’s duties on a regular full-time basis within 90 days of the date the Executive receives notice of such termination. Upon death or other termination of employment by virtue of disability, (i) the Executive (or the Executive’s estate or beneficiaries in the case of the death of the Executive) shall have no right to receive any compensation or benefit hereunder on and after the effective date of the termination of employment other than Annual Salary and other benefits (but excluding any bonuses except as provided in the Bonus Plan or in clause (ii) below) earned and accrued under this Agreement prior to the date of termination (and reimbursement under this Agreement for expenses incurred prior to the date of termination); (ii) the Executive (or the Executive’s estate or beneficiaries in the case of the death of the Executive) shall be entitled to a cash payment equal to the Executive’s Annual Salary (as in effect on the effective date of such termination) payable no later than 30 days after such termination; and (iii) this Agreement shall otherwise terminate upon such death or other termination of employment and there shall be no further rights with respect to the Executive hereunder (except as provided in Section 7.14).

          5. Certain Terminations of Employment.

               5.1. Termination for Cause; Termination of Employment by the Executive Without Good Reason.

                    (a) For purposes of this Agreement, “Cause” shall mean:

                    (i) the Executive’s (A) conviction for (or pleading nolo contendere to) any felony, or a misdemeanor involving moral turpitude, or (B) indictment for any felony or misdemeanor involving moral turpitude, if such indictment is not discharged or otherwise resolved within 18 months;

                    (ii) the Executive’s commission of an act of fraud, theft or dishonesty related to the performance of the Executive’s duties hereunder;

                    (iii) the willful and continuing failure or habitual neglect by the Executive to perform the Executive’s duties hereunder;

                    (iv) any material violation by the Executive of the covenants contained in Section 6; or

                    (v) the Executive’s willful and continuing material breach of this Agreement.

Notwithstanding the foregoing, if there exists (without regard to this sentence) an event or condition that constitutes Cause under clause (iii) or (v) above, the Executive shall have 30 days from the date such notice is given to cure such event or condition and, if the Executive does so, such event or condition shall not constitute Cause hereunder.

               (b) For purposes of this Agreement, “Good Reason” shall mean, unless otherwise consented to by the Executive:

                    (i) the material reduction of the Executive’s authority, duties and responsibilities, or the assignment to the Executive of duties materially inconsistent with the Executive’s position or positions with the Company and its subsidiaries;

                    (ii) a reduction in Annual Salary of the Executive;

                    (iii) the failure by the Company to obtain an agreement in form and substance reasonably satisfactory to the Executive from any successor to the business of the Company to assume and agree to perform this Agreement; or

                    (iv) the Company’s material and willful breach of this Agreement.

Notwithstanding the foregoing, if there exists (without regard to this sentence) an event or condition that constitutes Good Reason under clause (i), (ii) or (iv) above, the Company shall have 30 days from the date on which the Executive gives the notice thereof to cure such event or condition and, if the Company does so, such event or condition shall not constitute Good Reason hereunder.

          (c) The Company may terminate the Executive’s employment hereunder for Cause. If the Company terminates the Executive for Cause, (i) the Executive shall have no right to receive any compensation or benefit hereunder on and after the effective date of the termination of employment other than Annual Salary and other benefits (but excluding any bonuses except as provided in the Bonus Plan) earned and accrued under this Agreement prior to the effective date of the termination of employment (and reimbursement under this Agreement for expenses incurred prior to the effective date of the termination of employment); and (ii) this Agreement shall otherwise terminate upon such termination of employment and the Executive shall have no further rights hereunder (except as provided in Section 7.14).

          (d) The Executive may terminate his employment without Good Reason. If the Executive terminates the Executive’s employment with the Company without Good Reason: (i) the Executive shall have no right to receive any compensation or benefit hereunder on and after the effective date of the termination of employment other than Annual Salary and other benefits (but excluding any bonuses except as provided in the Bonus Plan) earned and accrued under this Agreement prior to the effective date of the termination of employment (and reimbursement under this Agreement for expenses incurred prior to the effective date of the termination of employment); and (ii) this Agreement shall otherwise terminate upon such termination of employment and the Executive shall have no further rights hereunder (except as provided in Section 7.14).

          5.2. Termination Without Cause; Termination for Good Reason; Failure to Renew Employment Agreement. The Company may terminate the Executive’s employment at any time for any reason or no reason and the Executive may terminate the Executive’s employment with the Company for Good Reason. If the Company or the Executive terminates the Executive’s employment and such termination is not described in Section 4 or Section 5.1, or if the Company, for any reason, does not renew this Agreement at the expiration of its Term, (i) the Executive shall have no right to receive any compensation or benefit hereunder on and after the effective date of the termination of employment or expiration of the Term other than Annual Salary and other benefits (but excluding any bonuses except as provided in the Bonus Plan and clause (ii) below) earned and accrued under this Agreement prior to the effective date of the termination of employment or expiration of the Term (and reimbursement under this Agreement for expenses incurred prior to the effective date of the termination of employment or expiration of the Term); (ii) the Executive shall receive (A) a cash payment equal to two (2) times the Executive’s Annual Salary (as in effect on the effective date of such termination or expiration) payable no later than 30 days after such termination or expiration and (B) for a period of one (1) year after termination of employment or expiration of the Term such continuing health benefits (including any medical, vision or dental benefits), under the Company’s health plans and programs applicable to senior executives of the Company generally as the Executive would have received under this Agreement (and at such costs to the Executive) as would have applied in the absence of such termination or expiration (but not taking into account any post-termination increases in Annual Salary that may otherwise have occurred without regard to such termination and that may have favorably affected such benefits) it being expressly understood and agreed that nothing in this clause (ii)(B) shall restrict the ability of the Company to amend or terminate such plans and programs from time to time in its sole discretion; provided, however, that the Company shall in no event be required to provide such coverage after such time as the Executive becomes entitled to receive health benefits from another employer or recipient of the Executive’s services (and provided, further, that such entitlement shall be determined without regard to any

individual waivers or other arrangements); (iii) all outstanding unvested options held by the Executive shall vest and such options shall remain exercisable for one (1) year following termination or expiration (or, if shorter, the balance of the regular term of the options); and (iv) this Agreement shall otherwise terminate upon such termination of employment or expiration of the Term and the Executive shall have no further rights hereunder (except as provided in Section 7.14).

          6. Covenants of the Executive.

               6.1. Covenant Against Competition; Other Covenants. The Executive acknowledges that (i) the principal business of the Company is the acquisition, ownership and management of a diversified portfolio of high-quality, single-tenant, freestanding properties leased to retail businesses (such business, and any and all other businesses that after the date hereof, and from time to time during the Term, become material and substantial with respect to the Company’s then-overall business, herein being collectively referred to as the “Business”); (ii) the Company knows of a limited number of persons who have developed the Company’s Business; (iii) the Company’s Business is, in part, national in scope; (iii) the Executive’s work for the Company and its subsidiaries (and the predecessors of either) has given and will continue to give the Executive access to the confidential affairs and proprietary information of the Company; (v) the covenants and agreements of the Executive contained in this Section 6 are essential to the business and goodwill of the Company; and (vi) the Company would not have entered into this Agreement but for the covenants and agreements set forth in this Section 6. In light of the foregoing, during the Term and for a period of one year thereafter (and, as to Section 6.1 (b) and (d), at any time during and after the Executive’s employment with the Company and its subsidiaries (and the predecessors of either)):

                    (a) The Executive shall not, directly or indirectly, own, manage, control or participate in the ownership, management, or control of, or be employed or engaged by or otherwise affiliated or associated as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director or in any other individual or representative capacity, engage or participate in any business that is in competition in any manner whatsoever with the Business of the Company in any state in which the Company conducts its Business. In the case of a termination by the Company without Cause or by the Executive for Good Reason, the preceding covenant shall expire on the date of termination; provided, however, that, notwithstanding the foregoing, the Executive may invest in securities of any entity, solely for investment purposes and without participating in the business thereof, if (i) such securities are traded on any national securities exchange or the National Association of Securities Dealers, Inc. Automated Quotation System, (ii) the Executive is not a controlling person of, or a member of a group which controls, such entity and (iii) the Executive does not, directly or indirectly, own one percent or more of any class of securities of such entity.

                    b) The Executive shall keep secret and retain in strictest confidence, and shall not use for his benefit or the benefit of others, except in connection with the business and affairs of the Company and its affiliates, all confidential matters relating to the Company’s Business and the business of any of its affiliates and to the Company and any of its affiliates, learned by the Executive heretofore or hereafter directly or indirectly from the Company or any of its subsidiaries (or any predecessor of either) (the “Confidential Company Information”), including, without limitation, information with respect to the Business and any aspect thereof, profit or loss figures, and the Company’s or its affiliates, (or any of their predecessors) properties, and shall not disclose such Confidential Company information to anyone outside of the Company except with the Company’s express written consent and except for Confidential Company Information which (i) at the time of receipt or thereafter becomes publicly known through no wrongful act of the Executive, (ii) is clearly obtainable in the public domain, (iii) was not acquired by the Executive in connection with the Executive’s employment or affiliation with the Company, (iv) was not acquired by the Executive from the Company or its representatives or from a third-party who has an agreement with the Company not to disclose such information, or (v) is required to be disclosed by rule of law or by order of a court or governmental body or agency.

                    (c) The Executive shall not, without the Company’s prior written consent, directly or indirectly, (i) knowingly solicit or encourage to leave the employment or other service of the Company or any of its affiliates, any employee thereof or hire (on behalf of the Executive or any other person or entity) any employee who has left the employment or other service of the Company or any of its affiliates (or any predecessor of either) within one year of the termination of such employee’s or independent contractor’s employment or other service with the Company and its affiliates, or (ii) whether for the Executive’s own account or for the account of any other person, firm, corporation or other business organization, intentionally interfere with the Company’s or any of its affiliates, relationship with, or endeavor to entice away from the Company or any of its affiliates, any person who during the Executive’s employment with the Company and its affiliates (or the predecessors of either) is or was a customer or client of the Company or any of its affiliates (or any predecessor of either).

                    (d) All memoranda, notes, lists, records, property and any other tangible product and documents (and all copies thereof) made, produced or compiled by the Executive or made available to the Executive concerning the Business of the Company and its affiliates shall be the Company’s property and shall be delivered to the Company at any time on request.

     6.2. Rights and Remedies upon Breach. The Executive acknowledges and agrees that any breach by him of any of the provisions of Section 6.1 (the “Restrictive Covenants”) would result in irreparable injury and damage for which money damages would not provide an adequate remedy. Therefore, if the Executive breaches, or threatens to commit a breach of, any of the Restrictive Covenants, the Company and its affiliates shall have the right and remedy to have the Restrictive Covenants specifically enforced (without posting bond and without the need to prove damages) by any court having equity jurisdiction, including, without limitation, the right to an entry against the Executive of restraining orders and injunctions (preliminary, mandatory, temporary and permanent) against violations, threatened or actual, and whether or not then continuing, of such covenants. This right and remedy shall be in addition to, and not in lieu of, any other rights and remedies available to the Company and its affiliates under law or in equity (including, without limitation, the recovery of damages). The existence of any claim or cause of action by the Executive, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement of the Restrictive Covenants.

          7. Other Provisions.

               7.1. Severability. The Executive acknowledges and agrees that (i) the Executive has had an opportunity to seek advice of counsel in connection with this Agreement and (ii) the Restrictive Covenants are reasonable in geographical and temporal scope and in all other respects. If it is determined that any of the provisions of this Agreement, including, without limitation, any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the provisions of this Agreement shall not thereby be affected and shall be given full affect, without regard to the invalid portions.

               7.2. Duration and Scope of Covenants. If any court or other decision maker of competent jurisdiction determines that any of the Executive’s covenants contained in this Agreement, including, without limitation, any of the Restrictive Covenants, or any part thereof, are unenforceable because of the duration or geographical scope of such provision, then, after such determination has become final and unappealable, the duration or scope of such provision, as the case may be, shall be reduced so that such provision becomes enforceable and, in its reduced form, such provision shall then be enforceable and shall be enforced.

               7.3. Enforceability; Jurisdictions. The Company and the Executive intend to and hereby confer jurisdiction to enforce the Restrictive Covenants upon the courts of any jurisdiction within the geographical scope of the Restrictive Covenants. If the courts of any one or more of such jurisdictions hold the Restrictive Covenants wholly unenforceable by reason of breadth of scope or otherwise it is the intention of the Company and the Executive that such determination not bar or in any way affect the Company’s right, or the right of any of its affiliates, to the relief provided above in the courts of any other jurisdiction within the geographical scope of such Restrictive Covenants, as to breaches of such Restrictive Covenants in such other respective jurisdictions, such Restrictive Covenants as they relate to each jurisdiction’s being, for this purpose, severable, diverse and independent covenants, subject, where appropriate, to the doctrine of res judicata. Any controversy or claim arising out of or relating to this Agreement or the breach of this Agreement that is not resolved by the Executive and the Company (or its affiliates, where applicable), other than those arising under Section 6, to the extent necessary for the Company (or its affiliates, where applicable) to avail itself of the rights and remedies provided under Section 6.2, shall be submitted to arbitration in Orlando, Florida in accordance with Florida law and the procedures of the American Arbitration Association. The determination of the arbitrators shall be conclusive and binding on the Company (or its affiliates, where applicable) and the Executive and judgment may be entered on the arbitrator(s)’ award in any court having jurisdiction.

               7.4. Attorneys’ Fees. In the event of any legal proceeding (including an arbitration proceeding) relating to this Agreement or any term or provision thereof, the losing party shall be responsible to pay or reimburse the prevailing party for all reasonable attorneys’ fees incurred by the prevailing party in connection with such proceeding.

               7.5. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when so delivered personally, telegraphed, telexed or sent by facsimile transmission or, if mailed, five days after the date of deposit in the United States mails as follows:

(i)	If to the Company, to: 400 East South Street
	Suite 500
	Orlando, Florida 32801
	Attention: James M. Seneff, Jr.
	Facsimile: (407) 648-8756

	with a copy in either case to: Shaw, Pittman, Potts & Trowbridge
	2300 N Street, N.W.
	Washington, D.C. 20037
	Attention: Thomas H. McCormick, Esquire
	Facsimile: (202) 663-8007
(ii)	If to the Executive, to:
	Kevin B. Habicht
	901 Lake Catherine Drive
	Maitland, Florida 32751 with a copy in either case to: Rogers & Wells
	200 Park Avenue
	New York, NY 10166
	Attention: Jay L. Bernstein, Esq.
	Facsimile: (212) 878-8527

Any such person may by notice given in accordance with this Section to the other parties hereto designate another address or person for receipt by such person of notices hereunder.

               7.6. Agreement. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements, written or oral, with the Company or its subsidiaries (or any predecessor of either).

               7.7. Waivers and Amendments. This Agreement may be amended, superseded, canceled, renewed or extended, and the terms hereof may be waived, only by a written instrument signed by the parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any such right, power or privilege nor any single or partial exercise of any such right, power or privilege, preclude any other or further exercise thereof or the exercise of any other such right, power or privilege.

               7.8. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF FLORIDA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.

               7.9. Assignment. This Agreement, and the Executive’s rights and obligations hereunder, may not be assigned by the Executive; any purported assignment by the Executive in violation hereof shall be null and void. In the event of any sale, transfer or other disposition of all or substantially all of the Company’s assets or business, whether by merger, consolidation or otherwise, the Company may assign this Agreement and its rights hereunder.

               7.10. Withholding. The Company shall be entitled to withhold from any payments or deemed payments any amount of withholding required by law. No other taxes, fees, impositions, duties or other charges or offsets of any kind shall be deducted or withheld from amounts payable hereunder, unless otherwise required by law.

               7.11. No Duty to Mitigate. The Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor will any payments hereunder be subject to offset in the event the Executive does mitigate.

               7.12. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors, permitted assigns, heirs, executors and legal representatives.

               7.13. Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original but all such counterparts together shall constitute one and the same instrument. Each counterpart may consist of two copies hereof each signed by one of the parties hereto.

               7.14. Survival. Anything contained in this Agreement to the contrary notwithstanding, the provisions of Sections 6, 7.3, 7.4 and 7.10 and the other provisions of this Section 7 (to the extent necessary to effectuate the survival of Sections 6, 7.3, 7.4 and 7.10) shall survive termination of this Agreement and any termination of the Executive’s employment hereunder.

               7.15. Existing Agreements. Executive represents to the Company that the Executive is not subject or a party to any employment or consulting agreement, non-competition covenant or other agreement, covenant or understanding which might prohibit the Executive from executing this Agreement or limit the Executive’s ability to fulfill the Executive’s responsibilities hereunder.

               7.16. Headings. The headings in this Agreement are for reference only and shall not affect the interpretation of this Agreement.

               7.17. Parachute Provisions. If any amount payable to or other benefit receivable by the Executive pursuant to this Agreement is deemed to constitute a Parachute Payment (as defined below), alone or when added to any other amount payable or paid to or other benefit receivable or received by the Executive which is deemed to constitute a Parachute Payment (whether or not under an existing plan, arrangement or other agreement), and would result in the imposition on the Executive of an excise tax under Section 4999 of the Internal Revenue Code of 1986, as amended, then, in addition to any other benefits to which the Executive is entitled under this Agreement, the Executive shall be paid by the Company an amount in cash equal to the sum of the excise taxes payable by the Executive by reason of receiving Parachute Payments plus the amount necessary to put the Executive in the same after-tax position (taking into account any and all applicable federal, state and local excise, income or other taxes at the highest applicable rates on such Parachute Payments and on any payments under this Section 7.17) as if no excise taxes had been imposed with respect to Parachute Payments. The amount of any payment under this Section 7.17 shall be computed by a certified public accounting firm mutually and reasonably acceptable to the Executive and the Company, the computation expenses of which shall be paid by the Company. “Parachute Payment” shall mean any payment deemed to constitute a “parachute payment” as defined in Section 280G of the Internal Revenue Code of 1986, as amended.

     IN WITNESS WHEREOF, the parties hereto have signed their names as of the day and year first above written.

COMMERCIAL NET LEASE REALTY, INC.
By:	/s/James M. Seneff, Jr.
Its:	Chief Executive Officer
By:	/s/Kevin B. Habicht
	Kevin B. Habicht

PART II

AMENDMENT TO EMPLOYMENT AGREEMENT

(Kevin B. Habicht)

     THIS AMENDMENT TO EMPLOYMENT AGREEMENT (“Amendment”) is dated as of January 1, 2003, by and between COMMERCIAL NET LEASE REALTY, INC., a Maryland corporation (hereinafter referred to as the “Company”), and KEVIN B. HABICHT (hereinafter referred to as the “Executive”).

RECITALS:

     A. The Company and the Executive have entered into that certain Employment Agreement effectively dated January 1, 1998 (the “Agreement”); and

     B. The Company and the Executive wish to amend the Agreement as more particularly set forth herein.

     NOW, THEREFORE, in consideration of the foregoing mutual covenants, representations, warranties and agreements contained herein, and for other good and valuable consideration, the adequacy and receipt of which are hereby acknowledged by all the parties, it is agreed as follows:

TERMS:

     1. Definitions. Capitalized terms as set forth herein shall have the same definition as set forth in the Agreement.

     2. Modification of Section 5.2. Section 5.2 of the Agreement is hereby deleted in its entirety and replaced with the following new Section 5.2:

          5.2 Termination Without Cause; Termination for Good Reason; Failure to Renew Employment Agreement. The Company may terminate the Executive’s employment at any time for any reason or no reason and the Executive may terminate the Executive’s employment with the Company for Good Reason. If the Company or the Executive terminates the Executive’s employment and such termination is not described in Section 4 or Section 5.1, or if the Company, for any reason, does not renew this agreement at the expiration of its Term, (i) the Executive shall have no right to receive any compensation or benefit hereunder on and after the effective date of the termination of employment or expiration of the Term other than Annual Salary and other benefits (but excluding any bonuses except as provided in the Bonus Plan and clause (ii) below) earned and accrued under this Agreement prior to the effective date of the termination of employment or expiration of the Term (and reimbursement under this Agreement for expenses incurred prior to the effective date of the termination of employment or expiration of the Term); (ii) except as otherwise provided in Section 5.3 below, the Executive shall receive (A) a cash payment equal to two (2) times the Executive’s Annual Salary (as in effect on the effective date of such termination or expiration) payable in twelve (12) equal monthly installments (plus interest on such unpaid amount at the Prime Rate, as hereinafter defined, commencing on the first day of the first calendar month following such termination or expiration and continuing on the first day of each calendar month thereafter until paid in full and (B) for a period of one (1) year after termination of employment or expiration of the term such continuing health benefits (including any medical, vision or dental benefits), under the Company’s health plans and programs applicable to senior executives of the Company generally as the Executive would have received under this Agreement (and at such costs to the Executive) as would have applied in the absence of such termination or expiration (but not taking into account any post-termination increases in Annual Salary that may otherwise have occurred without regard to such termination and that may have favorably affected such benefits) it being expressly understood and agreed that nothing in this clause (ii)(B) shall restrict the ability of the Company to amend or terminate such plans and programs from time to time in its sole discretion; provided, however, that the Company shall in no event be required to provide such coverage after such time as the Executive becomes entitled to receive health benefits from another employer or recipient of the Executive’s services (and provided, further, that such entitlement shall be determined without regard to any individual waivers or other arrangements); (iii) all outstanding unvested options held by the Executive shall vest and such options shall remain exercisable for one (1) year following termination or expiration (or, if shorter, the balance of the regular term of the options); and (iv) this Agreement shall otherwise terminate upon such termination of employment or expiration of the Term and the Executive shall have no further rights hereunder (except as provided in Section 7.14). As used herein, the term “Prime Rate” shall mean the prime rate of interest as published in the Wall Street Journal (or, if the Wall Street Journal is no longer published, a similar national business publication) from time to time.

     3. Addition of Section 5.3. Section 5 of the Agreement is hereby amended to add the following new Section 5.3:

               5.3 Change of Control. Immediately upon a “change of control”, as hereinafter defined, then the provisions of Section 5.2 (ii)(A) above shall be automatically modified to read as follows:

               ”. . . [(ii) except as otherwise provided in Section 5.3 below, the Executive shall receive] (A) a cash payment equal to two (2) times (x) the Executive’s Annual Salary (as in effect on the effective date of such termination or expiration) plus (y) the average of the Executive’s annual bonus compensation for the previous three (3) years (or such lesser period of time as the Executive has been employed by the Company if the Executive has not been so employed for three (3) previous years) payable no later than thirty (30) days after such termination or expiration and [B] . . . .”

               For the purposes hereof, the term “change of control” shall mean:

               (a) a “person” or “group” (which terms shall have the meaning they have when used in Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, any corporation owned directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of voting securities of the Company) becomes (other than solely by reason of a repurchase of voting securities by the Company), the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of forty percent (40%) or more of the combined voting power of the Company’s then total outstanding voting securities; or

     (b) the Company consolidates with or merges with or into another corporation or partnership or conveys, transfers or leases, in any transaction or series of transactions, all or substantially all of its assets to any corporation or partnership, or any corporation or partnership consolidates with or merges with or into the Company, in any event pursuant to a transaction in which the outstanding voting stock of the Company is reclassified or changed into or exchanged for cash, securities or other property, other than any such transaction where (i) the outstanding voting securities of the Company are changed into or exchanged for voting securities of the surviving corporation and (ii) the persons who were the beneficial owners of the Company’s voting securities immediately prior to such transaction beneficially own immediately after such transaction fifty percent (50%) or more of the total outstanding voting power of the surviving corporation, or the Company is liquidated or dissolved or adopts a plan of liquidation or dissolution.

     4. Addition of Subsection (e) to Section 6.1. Section 6.1 of the Agreement is hereby amended to add the following new Subsection (e):

               (e) Notwithstanding anything set forth in this Section to the contrary, if at any time after a “change of control”, as defined above, (i) the Company or the Executive terminates the Executive’s employment and such termination is not described in Section 4 or Section 5.1, or (ii) the Company, for any reason, does not renew this agreement at the expiration of its Term, then the covenants set forth in this Section 6.1 shall expire and terminate immediately upon the expiration or earlier termination of this Agreement.

     5. Modification of Section 7.5. Section 7.5 of the Agreement is hereby amended to modify the notice addresses of the Company and the Executive as follows:

If to the Company, to:	450 South Orange Avenue
	Suite 1400
	Orlando, Florida 32801
	Attention: James M. Seneff, Jr.
	Facsimile: (407) 650-1011

     6. No Other Modifications. Except as specifically set forth herein, the Employment Agreement remains unmodified and in full force and effect.

     IN WITNESS WHEREOF, the parties hereto have signed their names as of the day and year first above written.

COMPANY: COMMERCIAL NET LEASE REALTY, INC.
By:	/s/Gary M. Ralston
Name:	Gary M. Ralston
Its:	President
EXECUTIVE:
By:	/s/Kevin B. Habicht
	Kevin B. Habicht

EX-10.6

EMPLOYMENT AGREEMENT

(Dennis E. Tracy)

      THIS EMPLOYMENT AGREEMENT is dated as of January 1, 2003, by and between COMMERCIAL NET LEASE REALTY SERVICES, INC., a Maryland corporation (hereinafter referred to as the “Company”), and DENNIS E. TRACY (hereinafter referred to as the “Executive”).

      WHEREAS, the Company wishes to offer employment to the Executive, and the Executive wishes to accept such offer, on the terms set forth below.

      Accordingly, the parties hereto agree as follows:

      1. Term. The Company hereby employs the Executive, and the Executive hereby accepts such employment for an initial term commencing as of the date hereof and ending on December 31, 2003, unless sooner terminated in accordance with the provisions of Section 4 or Section 5 (the period during which the Executive is employed hereunder being hereinafter referred to as the “Term”). The Term shall be subject to automatic one (1) year renewals unless either party hereto notifies the other, in accordance with Section 7.5, of non-renewal at least ninety (90) days prior to the end of any such Term.

      2. Duties. The Executive, in his capacity as Chief Development Officer and Executive Vice President of the Company, shall faithfully perform for the Company the duties of said office and shall perform such other duties of an executive, managerial or administrative nature as shall be specified and designated from time to time by the Board of Directors of the Company’s parent, Commercial Net Lease Realty, Inc. (“CNLR”) (the “Board”), the Chief Executive Officer or the President of the Company (including the performance of services for, and serving on the Board of Directors of, any subsidiary of the Company without any additional compensation). The Executive shall devote substantially all of the Executive’s business time and effort to the performance of the Executive’s duties hereunder, provided that in no event shall this sentence prohibit the Executive from performing personal and charitable activities and any other activities approved by the Board, so long as such activities do not interfere with the Executive’s duties for the Company.

      3. Compensation.

          3.1. Salary. The Company shall pay the Executive during the Term a salary at the rate of $187,500.00 per annum (the “Annual Salary”), in accordance with the customary payroll practices of the Company applicable to senior executives generally. Annual Salary will increase annually on January 1 of each year by an amount as may be approved by the Board, with such increase to be effective on the date salary increases are effective for the employees of the Company generally and, upon such increase, the increased amount shall thereafter be deemed to be the Annual Salary.

          3.2. Bonus. The Executive will be eligible to participate in the Company’s Annual Bonus Program (the “Bonus Plan”), the terms of which will be established by the Compensation Committee of the Company.

          3.3. Benefits — In General. The Executive shall be permitted during the Term to participate in any group life, hospitalization or disability insurance plans, health programs, pension and profit sharing plans and similar benefits that may be available to other senior executives of the Company generally, on the same terms as may be applicable to such other executives, in each case to the extent that the Executive is eligible under the terms of such plans or programs.

          3.4. Vacation. The Executive shall be entitled to vacation of twenty (20) days per year.

          3.5. Automobile. The Company will provide the Executive a monthly allowance of $500 for the use of an automobile. At the option of the Company, in lieu of providing such allowance, the Company will provide the Executive with an automobile of suitable standard to the Executive’s position.

          3.6. Disability Benefits and Life Insurance. The Executive shall be entitled to long-term disability coverage providing benefits (to continue for such period as is provided in the applicable disability plan or program, as amended from time to time) equal to two-thirds of Annual Salary in the case of a covered disability and life insurance benefits with a face amount equal to Annual Salary.

          3.7. Expenses. The Company shall pay or reimburse the Executive for all ordinary and reasonable out-of-pocket expenses actually incurred (and, in the case of reimbursement, paid) by the Executive during the Term in the performance of the Executive’s services under this Agreement; provided that the Executive submits such expenses in accordance with the policies applicable to senior executives of the Company generally.

      4. Termination upon Death or Disability. If the Executive dies during the Term, the obligations of the Company to or with respect to the Executive shall terminate in their entirety except as otherwise provided under this Section 4. If the Executive becomes eligible for disability benefits under the Company’s long-term disability plans and arrangements (or, if none apply, would have been so eligible under the most recent plan or arrangement), the Company shall have the right, to the extent permitted by law, to terminate the employment of the Executive upon notice in writing to the Executive; provided that the Company will have no right to terminate the Executive’s employment if, in the opinion of a qualified physician reasonably acceptable to the Company, it is reasonably certain that the Executive will be able to resume the Executive’s duties on a regular full-time basis within ninety (90) days of the date the Executive receives notice of such termination. Upon death or other termination of employment by virtue of disability, (i) the Executive (or the Executive’s estate or beneficiaries in the case of the death of the Executive) shall have no right to receive any compensation or benefit hereunder on and after the effective date of the termination of employment other than Annual Salary and other benefits (but excluding any bonuses except as provided in the Bonus Plan or in clause (ii) below) earned and accrued under this Agreement prior to the date of termination (and reimbursement under this Agreement for expenses incurred prior to the date of termination); (ii) the Executive (or the Executive’s estate or beneficiaries in the case of the death of the Executive) shall be entitled to a cash payment equal to the Executive’s Annual Salary (as in effect on the effective date of such termination) payable no later than thirty (30) days after such termination; and (iii) this Agreement shall otherwise terminate upon such death or other termination of employment and there shall be no further rights with respect to the Executive hereunder (except as provided in Section 7.14).

      5. Certain Terminations of Employment.

          5.1. Termination for Cause; Termination of Employment by the Executive Without Good Reason.

               (a) For purposes of this Agreement, “Cause” shall mean:

                    (i) the Executive’s (A) conviction for (or pleading nolo contendere to) any felony, or a misdemeanor involving moral turpitude, or (B) indictment for any felony or misdemeanor involving moral turpitude, if such indictment is not discharged or otherwise resolved within eighteen (18) months;

                    (ii) the Executive’s commission of an act of fraud, theft or dishonesty related to the performance of the Executive’s duties hereunder;

                    (iii) the willful and continuing failure or habitual neglect by the Executive to perform the Executive’s duties hereunder;

                    (iv) any material violation by the Executive of the covenants contained in Section 6; or

                    (v) the Executive’s willful and continuing material breach of this Agreement.

Notwithstanding the foregoing, if there exists (without regard to this sentence) an event or condition that

constitutes Cause under clause (iii) or (v) above, the Executive shall have thirty (30) days from the date such notice is given to cure such event or condition and, if the Executive does so, such event or condition shall not constitute Cause hereunder.

               (b) For purposes of this Agreement, “Good Reason” shall mean, unless otherwise consented to by the Executive:

                    (i) the material reduction of the Executive’s authority, duties and responsibilities, or the assignment to the Executive of duties materially inconsistent with the Executive’s position or positions with the Company and its subsidiaries;

                    (ii) a reduction in Annual Salary of the Executive;

                    (iii) the failure by the Company to obtain an agreement in form and substance reasonably satisfactory to the Executive from any successor to the business of the Company to assume and agree to perform this Agreement; or

                    (iv) the Company’s material and willful breach of this Agreement.

Notwithstanding the foregoing, if there exists (without regard to this sentence) an event or condition that constitutes Good Reason under clause (i), (ii) or (iv) above, the Company shall have thirty (30) days from the date on which the Executive gives the notice thereof to cure such event or condition and, if the Company does so, such event or condition shall not constitute Good Reason hereunder.

               (c) The Company may terminate the Executive’s employment hereunder for Cause. If the Company terminates the Executive for Cause, (i) the Executive shall have no right to receive any compensation or benefit hereunder on and after the effective date of the termination of employment other than Annual Salary and other benefits (but excluding any bonuses except as provided in the Bonus Plan) earned and accrued under this Agreement prior to the effective date of the termination of employment (and reimbursement under this Agreement for expenses incurred prior to the effective date of the termination of employment); and (ii) this Agreement shall otherwise terminate upon such termination of employment and the Executive shall have no further rights hereunder (except as provided in Section 7.14).

               (d) The Executive may terminate his employment without Good Reason. If the Executive terminates the Executive’s employment with the Company without Good Reason: (i) the Executive shall have no right to receive any compensation or benefit hereunder on and after the effective date of the termination of employment other than Annual Salary and other benefits (but excluding any bonuses except as provided in the Bonus Plan) earned and accrued under this Agreement prior to the effective date of the termination of employment (and reimbursement under this Agreement for expenses incurred prior to the effective date of the termination of employment); and (ii) this Agreement shall otherwise terminate upon such termination of employment and the Executive shall have no further rights hereunder (except as provided in Section 7.14).

          5.2. Termination Without Cause; Termination for Good Reason; Failure to Renew Employment Agreement. The Company may terminate the Executive’s employment at any time for any reason or no reason and the Executive may terminate the Executive’s employment with the Company for Good Reason. If the Company or the Executive terminates the Executive’s employment and such termination is not described in Section 4 or Section 5.1, or if the Company, for any reason, does not renew this agreement at the expiration of its Term, (i) the Executive shall have no right to receive any compensation or benefit hereunder on and after the effective date of the termination of employment or expiration of the Term other than Annual Salary and other benefits (but excluding any bonuses except as provided in the Bonus Plan and clause (ii) below) earned and accrued under this Agreement prior to the effective date of the termination of employment or expiration of the Term (and reimbursement under this Agreement for expenses incurred prior to the effective date of the termination of employment or expiration of the Term); (ii) except as otherwise provided in Section 5.3 below, the Executive shall receive (A) a cash payment equal to two (2) times the Executive’s Annual Salary (as in effect on the effective date of such

termination or expiration) payable in twelve (12) equal monthly installments (plus interest on such unpaid amount at the Prime Rate, as hereinafter defined, commencing on the first day of the first calendar month following such termination or expiration and continuing on the first day of each calendar month thereafter until paid in full and (B) for a period of one (1) year after termination of employment or expiration of the term such continuing health benefits (including any medical, vision or dental benefits), under the Company’s health plans and programs applicable to senior executives of the Company generally as the Executive would have received under this Agreement (and at such costs to the Executive) as would have applied in the absence of such termination or expiration (but not taking into account any post-termination increases in Annual Salary that may otherwise have occurred without regard to such termination and that may have favorably affected such benefits) it being expressly understood and agreed that nothing in this clause (ii)(B) shall restrict the ability of the Company to amend or terminate such plans and programs from time to time in its sole discretion; provided, however, that the Company shall in no event be required to provide such coverage after such time as the Executive becomes entitled to receive health benefits from another employer or recipient of the Executive’s services (and provided, further, that such entitlement shall be determined without regard to any individual waivers or other arrangements); (iii) all outstanding unvested options held by the Executive shall vest and such options shall remain exercisable for one (1) year following termination or expiration (or, if shorter, the balance of the regular term of the options); and (iv) this Agreement shall otherwise terminate upon such termination of employment or expiration of the Term and the Executive shall have no further rights hereunder (except as provided in Section 7.14). As used herein, the term “Prime Rate” shall mean the prime rate of interest as published in the Wall Street Journal (or, if the Wall Street Journal is no longer published, a similar national business publication) from time to time.

          5.3. Change of Control. Immediately upon a “change of control”, as hereinafter defined, then the provisions of Section 5.2 (ii)(A) above shall be automatically deleted and replaced with the following new Section 5.2(ii)(A):

      “ . . . [(ii) except as otherwise provided in Section 5.3 below, the Executive shall receive] (A) a cash payment equal to two (2) times (x) the Executive’s Annual Salary (as in effect on the effective date of such termination or expiration) plus (y) the average of the Executive’s annual bonus compensation for the previous three (3) years (or such lesser period of time as the Executive has been employed by the Company if the Executive has not been so employed for three (3) previous years) payable no later than thirty (30) days after such termination or expiration and [B] . . .”

      For the purposes hereof, the term “change of control” shall mean:

               (a) a “person” or “group” (which terms shall have the meaning they have when used in Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (other than CNLR, any trustee or other fiduciary holding securities under an employee benefit plan of CNLR, any corporation owned directly or indirectly, by the stockholders of CNLR in substantially the same proportions as their ownership of voting securities of CNLR) becomes (other than solely by reason of a repurchase of voting securities by CNLR), the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of forty percent (40%) or more of the combined voting power of CNLR’s then total outstanding voting securities; or

               (b) CNLR consolidates with or merges with or into another corporation or partnership or conveys, transfers or leases, in any transaction or series of transactions, all or substantially all of its assets to any corporation or partnership, or any corporation or partnership consolidates with or merges with or into CNLR, in any event pursuant to a transaction in which the outstanding voting stock of CNLR is reclassified or changed into or exchanged for cash, securities or other property, other than any such transaction where (i) the outstanding voting securities of CNLR are changed into or exchanged for voting securities of the surviving corporation and (ii) the persons who were the beneficial owners of CNLR’s voting securities immediately prior to such transaction beneficially own immediately after such transaction fifty percent (50%) or more of the total outstanding voting power of the surviving corporation, or CNLR is liquidated or dissolved or adopts a plan of liquidation or dissolution.

      6. Covenants of the Executive.

          6.1. Covenant Against Competition; Other Covenants. The Executive acknowledges that (i) the principal business of the Company and CNLR is the development, acquisition, ownership, management and sale of a diversified portfolio of high-quality, single-tenant, freestanding properties leased to retail businesses (such business, and any and all other businesses that after the date hereof, and from time to time during the Term, become material and substantial with respect to the Company’s then-overall business, herein being collectively referred to as the “Business”); (ii) the Company knows of a limited number of persons who have developed the Company’s Business; (iii) the Company’s Business is, in part, national in scope; (iv) the Executive’s work for the Company and its subsidiaries (and the predecessors of either) has given and will continue to give the Executive access to the confidential affairs and proprietary information of the Company; (vi) the covenants and agreements of the Executive contained in this Section 6 are essential to the business and goodwill of the Company; and (vii) the Company would not have entered into this Agreement but for the covenants and agreements set forth in this Section 6. In light of the foregoing, during the Term and for a period of one (1) year thereafter (and, as to Sections 6.1(b) and (d), at any time during and after the Executive’s employment with the Company and its subsidiaries (and the predecessors of either)):

               (a) The Executive shall not, directly or indirectly, own, manage, control or participate in the ownership, management, or control of, or be employed or engaged by or otherwise affiliated or associated as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director or in any other individual or representative capacity, engage or participate in any business that is in competition in any manner whatsoever with the Business of the Company in any state in which the Company conducts its Business. In the case of a termination by the Company without Cause or by the Executive for Good Reason, the preceding covenant shall expire on the date of termination; provided, however, that notwithstanding the foregoing, the Executive may invest in securities of any entity, solely for investment purposes and without participating in the business thereof, if (i) such securities are traded on any national securities exchange or the National Association of Securities Dealers, Inc. Automated Quotation System, (ii) the Executive is not a controlling person of, or a member of a group which controls, such entity, and (iii) the Executive does not, directly or indirectly, own one percent (1%) or more of any class of securities of such entity.

               (b) The Executive shall keep secret and retain in strictest confidence, and shall not use for his benefit or the benefit of others, except in connection with the business and affairs of the Company and its affiliates, all confidential matters relating to the Company’s Business and the business of any of its affiliates and to the Company and any of its affiliates, learned by the Executive heretofore or hereafter directly or indirectly from the Company or any of its subsidiaries (or any predecessor of either) (the “Confidential Company Information”), including, without limitation, information with respect to the Business and any aspect thereof, profit or loss figures, and the Company’s or its affiliates’, (or any of their predecessors) properties, and shall not disclose such Confidential Company Information to anyone outside of the Company except with the Company’s express written consent and except for Confidential Company Information which (i) at the time of receipt or thereafter becomes publicly known through no wrongful act of the Executive, (ii) is clearly obtainable in the public domain, (iii) was not acquired by the Executive in connection with the Executive’s employment or affiliation with the Company, (iv) was not acquired by the Executive from the Company or its representatives or from a third party who has an agreement with the Company not to disclose such information, or (v) is required to be disclosed by rule of law or by order of a court or governmental body or agency.

               (c) The Executive shall not, without the Company’s prior written consent, directly or indirectly, (i) knowingly solicit or encourage to leave the employment or other service of the Company or any of its affiliates, any employee thereof or hire (on behalf of the Executive or any other person or entity) any employee who has left the employment or other service of the Company or any of its affiliates (or any predecessor of either) within one (1) year of the termination of such employee’s or independent contractor’s employment or other service with the Company and its affiliates, or (ii) whether for the Executive’s own account or for the account of any other person, firm, corporation or other business organization, intentionally interfere with the Company’s or any of its affiliates’, relationship with, or

endeavor to entice away from the Company or any of its affiliates, any person who during the Executive’s employment with the Company and its affiliates (or the predecessors of either) is or was a customer or client of the Company or any of its affiliates (or any predecessor of either).

               (d) All memoranda, notes, lists, records, property and any other tangible product and documents (and all copies thereof) made, produced or compiled by the Executive or made available to the Executive concerning the Business of the Company and its affiliates shall be the Company’s property and shall be delivered to the Company at any time on request.

               (e) Notwithstanding anything set forth in this Section to the contrary, if at any time after a “change of control”, as defined above, (i) the Company or the Executive terminates the Executive’s employment and such termination is not described in Section 4 or Section 5.1, or (ii) the Company, for any reason, does not renew this agreement at the expiration of its Term, then the covenants set forth in this Section 6.1 shall expire and terminate immediately upon the expiration or earlier termination of this Agreement.

          6.2. Rights and Remedies upon Breach. The Executive acknowledges and agrees that any breach by him of any of the provisions of Section 6.1 (the “Restrictive Covenants”) would result in irreparable injury and damage for which money damages would not provide an adequate remedy. Therefore, if the Executive breaches, or threatens to commit a breach of, any of the Restrictive Covenants, the Company and its affiliates shall have the right and remedy to have the Restrictive Covenants specifically enforced (without posting bond and without the need to prove damages) by any court having equity jurisdiction, including, without limitation, the right to an entry against the Executive of restraining orders and injunctions (preliminary, mandatory, temporary and permanent) against violations, threatened or actual, and whether or not then continuing, of such covenants. This right and remedy shall be in addition to, and not in lieu of, any other rights and remedies available to the Company and its affiliates under law or in equity (including, without limitation, the recovery of damages). The existence of any claim or cause of action by the Executive, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement of the Restrictive Covenants.

      7. Other Provisions

          7.1. Severability. The Executive acknowledges and agrees that (i) the Executive has had an opportunity to seek advice of counsel in connection with this Agreement and (ii) the Restrictive Covenants are reasonable in geographical and temporal scope and in all other respects. If it is determined that any of the provisions of this Agreement, including, without limitation, any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the provisions of this Agreement shall not thereby be affected and shall be given full affect, without regard to the invalid portions.

          7.2. Duration and Scope of Covenants. If any court or other decision maker of competent jurisdiction determines that any of the Executive’s covenants contained in this Agreement, including, without limitation, any of the Restrictive Covenants, or any part thereof, are unenforceable because of the duration or geographical scope of such provision, then, after such determination has become final and unappealable, the duration or scope of such provision, as the case may be, shall be reduced so that such provision becomes enforceable and, in its reduced form, such provision shall then be enforceable and shall be enforced.

          7.3. Enforceability; Jurisdictions. The Company and the Executive intend to and hereby confer jurisdiction to enforce the Restrictive Covenants upon the courts of any jurisdiction within the geographical scope of the Restrictive Covenants. If the courts of any one or more of such jurisdictions hold the Restrictive Covenants wholly unenforceable by reason of breadth of scope or otherwise it is the intention of the Company and the Executive that such determination not bar or in any way affect the Company’s right, or the right of any of its affiliates, to the relief provided above in the courts of any other jurisdiction within the geographical scope of such Restrictive Covenants, as to breaches of such Restrictive Covenants in such other respective jurisdictions, such Restrictive Covenants as they relate to each jurisdiction’s being, for this purpose, severable, diverse and independent covenants, subject, where appropriate, to the doctrine of res

judicata. Any controversy or claim arising out of or relating to this Agreement or the breach of this Agreement that is not resolved by the Executive and the Company (or its affiliates, where applicable), other than those arising under Section 6, to the extent necessary for the Company (or its affiliates, where applicable) to avail itself of the rights and remedies provided under Section 6.2, shall be submitted to arbitration in Orlando, Florida, in accordance with Florida law and the procedures of the American Arbitration Association. The determination of the arbitrators shall be conclusive and binding on the Company (or its affiliates, where applicable) and the Executive and judgment may be entered on the arbitrator(s)’ award in any court having jurisdiction.

          7.4. Attorneys’ Fees. In the event of any legal proceeding (including an arbitration proceeding) relating to this Agreement or any term or provision thereof, the losing party shall be responsible to pay or reimburse the prevailing party for all reasonable attorneys’ fees incurred by the prevailing party in connection with such proceeding.

          7.5. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when so delivered personally, telegraphed, telexed or sent by facsimile transmission or, if mailed, five (5) days after the date of deposit in the United States mail as follows:

(i)	If to the Company, to:	450 South Orange Avenue
		Suite 1400
		Orlando, Florida 32801
		Attention: Gary M. Ralston, Chairman of the Board
		Facsimile: (407) 650-1044
	with a copy to:	Shaw Pittman LLP
		2300 N Street, N.W.
		Washington, D.C. 20037
		Attention: John McDonald, Esquire
		Facsimile: (202) 663-8007
(ii)	It fo the Executive, to:	Dennis E. Tracy
		450 South Orange Avenue
		Suite 900
		Orlando, Florida 32801
		Facsimile: (407) 650-1055
	with a copy to:	Dennis E. Tracy
		843 Palmer Avenue
		Winter Park, FL 32789

Any such person may by notice given in accordance with this Section to the other parties hereto designate another address or person for receipt by such person of notices hereunder.

          7.6. Entire Agreement. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements, written or oral, with the Company or its subsidiaries (or any predecessor of either).

          7.7. Waivers and Amendments. This Agreement may be amended, superseded, canceled, renewed or extended, and the terms hereof may be waived, only by a written instrument signed by the parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any such right, power or privilege nor any single or partial exercise of any such right, power or privilege, preclude any other or further exercise thereof or the exercise of any other such

right, power or privilege.

          7.8. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF FLORIDA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.

          7.9. Assignment. This Agreement, and the Executive’s rights and obligations hereunder, may not be assigned by the Executive; any purported assignment by the Executive in violation hereof shall be null and void. In the event of any sale, transfer or other disposition of all or substantially all of the Company’s assets or business, whether by merger, consolidation or otherwise, the Company may assign this Agreement and its rights hereunder.

          7.10. Withholding. The Company shall be entitled to withhold from any payments or deemed payments any amount of withholding required by law. No other taxes, fees, impositions, duties or other charges or offsets of any kind shall be deducted or withheld from amounts payable hereunder, unless otherwise required by law.

          7.11. No Duty to Mitigate. The Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor will any payments hereunder be subject to offset in the event the Executive does mitigate.

          7.12. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors, permitted assigns, heirs, executors and legal representatives.

          7.13. Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original but all such counterparts together shall constitute one and the same instrument. Each counterpart may consist of two (2) copies hereof each signed by one of the parties hereto.

          7.14. Survival. Anything contained in this Agreement to the contrary notwithstanding the provisions of Section 6, 7.3, 7.4, 7.10, and the other provisions of this Section 7 (to the extent necessary to effectuate the survival of Sections 6, 7.3, 7.4, and 7.10) shall survive termination of this Agreement and any termination of the Executive’s employment hereunder.

          7.15. Existing Agreements. Executive represents to the Company that the Executive is not subject or a party to any employment or consulting agreement, non-competition covenant or other agreement, covenant or understanding which might prohibit the Executive from executing this Agreement or limit the Executive’s ability to fulfill the Executive’s responsibilities hereunder.

          7.16. Headings. The headings in this Agreement are for reference only and shall not affect the interpretation of this Agreement.

          7.17. Parachute Provisions. If any amount payable to or other benefit receivable by the Executive pursuant to this Agreement is deemed to constitute a Parachute Payment (as defined below), alone or when added to any other amount payable or paid to or other benefit receivable or received by the Executive which is deemed to constitute a Parachute Payment (whether or not under an existing plan, arrangement or other agreement), and would result in the imposition on the Executive of an excise tax under Section 4999 of the Internal Revenue Code of 1986, as amended, then, in addition to any other benefits to which the Executive is entitled under this Agreement, the Executive shall be paid by the Company an amount in cash equal to the sum of the excise taxes payable by the Executive by reason of receiving Parachute Payments plus the amount necessary to put the Executive in the same after-tax position (taking into account any and all applicable federal, state and local excise, income or other taxes at the highest applicable rates on such Parachute Payments and on any payments under this Section 7.17) as if no excise taxes had been imposed with respect to Parachute Payments. The amount of any payment under this Section 7.17 shall be computed by a certified public accounting firm mutually and reasonably acceptable to the Executive and the Company, the computation expenses of which shall be paid by the Company.

“Parachute Payment” shall mean any payment deemed to constitute a “parachute payment” as defined in Section 280G of the Internal Revenue Code of 1986, as amended.

      IN WITNESS WHEREOF, the parties hereto have signed their names as of the day and year first above written.

COMPANY: COMMERCIAL NET LEASE REALTY, INC.
By:	/s/Gary M. Ralston
	Name:	Gary M. Ralston
	Its: President
EXECUTIVE:
By:	/s/Dennis E. Tracy
	Dennis E. Tracy

EX-10.8

Exhibit 10.8

TABLE OF CONTENTS

Part I. Separation Agreement and General Release

Part II. First Amendment to Separation Agreement and General Release

PART I

SEPARATION AGREEMENT AND GENERAL RELEASE

     THIS SEPARATION AGREEMENT AND GENERAL RELEASE (the “Agreement”) is made and entered into as of April 23, 2004, by and between GARY M. RALSTON (“Ralston”) and COMMERCIAL NET LEASE REALTY, INC. (“CNLR” or the “Company”).

     WHEREAS, pursuant to an Employment Agreement with CNLR, dated May 15, 1997 (the “Ralston Employment Agreement”), Ralston currently is employed as CNLR’s Chief Operating Officer and President;

     WHEREAS, Ralston has expressed an interest in leaving his position at CNLR;

     WHEREAS, the parties wish to resolve all matters between themselves on an amicable basis; and

     WHEREAS, contemporaneously with the execution of this Agreement, Ralston will enter into a consulting agreement and investment agreement with James M. Seneff, Jr. (the “Seneff/Ralston Agreements”), which the parties acknowledge and agree is not inconsistent with the promises they undertake herein.

     NOW, THEREFORE, in consideration of the mutual promises, covenants and agreements set forth in this Agreement, the sufficiency of which the parties hereto acknowledge, it is agreed as follows:

     1. Ralston will remain as CNLR’s Chief Operating Officer and President and will report to CNLR’s Chief Executive Officer, Craig Macnab, until close of business on April 30, 2004 (the “Separation Date”), after which he will no longer be employed by CNLR. As of the Separation Date, Ralston will voluntarily resign as Chief Operating Officer and President and will also voluntarily resign any other positions, titles, or offices he may hold at CNLR or any affiliated companies or entities. Prior to the Separation Date, CNLR will continue to pay and provide Ralston’s current salary and benefits, pursuant to normal payroll and business practices, as provided in the Ralston Employment Agreement. Upon the execution of this Agreement, Ralston shall execute and deliver to CNLR and its subsidiaries and affiliates (collectively, the “CNLR Group”) his letter of resignation as an officer and director effective as of the Separation Date in form and substance identical to the letter attached hereto as Exhibit “A.” The parties will agree on an appropriate press release with respect to Ralston’s resignation.

     2. In consideration for Ralston’s promises in this Agreement, CNLR makes the following promises:

          (a) CNLR agrees to pay Ralston the sum of Seven Hundred and Fifty Thousand Dollars ($750,000), net of all legally required payroll and income tax withholdings. Of the $750,000, $250,000 shall be due and payable on May 1, 2004, and the remaining $500,000 balance shall be paid in twenty-four equal monthly installments, commencing on June 1, 2004.

          (b) CNLR will also pay Ralston by separate check his regular compensation for hours worked through the Separation Date, but which remain unpaid as of the Separation Date, and any vacation pay that is accrued but unused as of the Separation Date, net of all legally required payroll and income tax withholdings.

          (c) CNLR agrees to pay Ralston the sum of Four Hundred Thirty-Seven Thousand Five Hundred Dollars ($437,500), net of all legally required payroll and income tax withholdings on May 1, 2004.

          (d) CNLR will allow all shares of Restricted Stock (as described in the Restricted Stock Agreement between Ralston and CNLR, dated March 14, 2003 (the “Restricted Stock Agreement”)) currently held in Ralston’s name to fully and completely vest as of the Separation Date and will pay the “tax gross-up payment” as provided in Paragraph 7 of the Restricted Stock Agreement as of such vesting date.. The remaining undistributed shares shall be held in escrow by the Company, and shall be released to Ralston on a pro-rata basis each month over the two-year period commencing May 1, 2004, and Ralston shall be entitled to receive any and all dividends with respect to such escrowed shares in accordance with the terms of the Restricted Stock Agreement. A letter will be provided to Wachovia National Bank indicating that the shares have vested.

          (e) On or before May 31, 2004, CNLR will purchase (or will designate an affiliated or unaffiliated purchaser for) Ralston’s shares of stock or other equity interests in Commercial Net Lease Realty Services, Inc. for an aggregate purchase price of no less than $250,000 or no greater than $315,000. Such purchase price will be based on a valuation prepared by Schonbraun Safris McCann Bekritsky & Co. LLC. At the time of CNLR’s purchase of Ralston’s interests, the other shareholders’ voting interests will be acquired by CNLR at a purchase price equal to each shareholder’s pro-rata interest in Commercial Net Lease Realty Services based on Schonbraun valuation.

          (f) Ralston acknowledges and represents to CNLR that as the President and Chief Operating Officer of CNLR he is familiar with the operations, prospects, and financial condition of the CNLR Group including but not limited to Commercial Net Lease Realty Services, Inc., he believes the aggregate purchase price set forth in subparagraph (e) above is a fair and reasonable price for the Equity Interests, and that neither CNLR, any member of the CNLR Group, nor any of their officers or directors are making any representation as to the fair market value of the Equity Interests, any evaluation of the advisability of the sale of such equity interests, or the fairness of the purchase price for the Equity Interests. On or prior April 30, 2004, the parties hereto will agree as to the allocation of the purchase price among the various Equity Interests.

          (g) CNLR will use commercially reasonable efforts to arrange for the purchase of Ralston’s equity interests in CNL Commercial Finance, Inc., CNL Commercial Investors, Inc. and CNL Funding, L.P. It is contemplated that these entities will be sold to third parties, and that Ralston shall be entitled to his pro-rata share of the purchase price paid with respect thereto based upon his percentage ownership of the entities.

          (h) CNLR will pay Ralston’s documented and reasonable attorneys’ fees related to negotiating this Agreement, not to exceed $24,000.00, within thirty (30) days of Ralston’s submission of the bill for legal services to CNLR.

          (i) The payments and promises set forth above will not be disbursed to Ralston until at least seven (7) business days following CNLR’s receipt of this Agreement executed by Ralston and the expiration without revocation of the revocation period described in Paragraph 13 of this Agreement.

     3. (a) CNLR agrees to engage Ralston to provide consulting services for twelve(12) months (the “Consulting Services”), beginning May 1, 2004, at a rate of Two Hundred Fifty Thousand Dollars ($250,000) per year, payable in equal monthly installments at the beginning of each month throughout the consulting period beginning on June 1, 2004. Until November 30, 2004, Ralston shall provide up to forty (40) hours per month, and during the remainder of this term he shall provide up to twenty (20) hours per month (the “Hours Requirement”) of Consulting Services to CNLR, including, but not limited to, providing counsel and expertise relating to (i) transitioning in a new Chief Executive Officer, (ii) assisting CNLR on issues arising with major tenants, brokers, and shareholders, and (iii) assisting with investor relations. Ralston further agrees that, as a consultant, he shall render the Consulting Services in a diligent, careful, thorough and professional manner consistent with good business practices and shall at all times use his best efforts to endeavor to provide CNLR competent assistance and to promote CNLR’s interest. At the request of CNLR, Ralston shall submit to CNLR by the tenth business day of each month a written report summarizing his hours worked and services provided in the preceding month. Should Ralston incur any reasonable out-of-pocket expenses in connection with the Consulting Services (other than for such office space and support as he might otherwise incur in connection with permissible activities other than the Consulting Services), CNLR shall reimburse Ralston for such expenses upon the presentation of an itemized invoice with appropriate supporting documentation. The consulting engagement shall not be deemed to create an agency, joint venture, partnership or franchise relationship between CNLR and Ralston. Ralston acknowledges that he is voluntarily terminating his employment relationship with CNLR and is choosing to provide services to the Company as an independent contractor. Ralston acknowledges that, after April 30, 2004, he will not be an employee of CNLR and, subject to subparagraph (b) below, will not be entitled to any Company employment rights or benefits nor shall be authorized to act on behalf of Company. Ralston shall not hold himself out as having authority to act on behalf of CNLR unless specifically authorized to do so in writing by CNLR’s Chief Executive Officer. Ralston shall be solely responsible for any and all tax obligations related to his Consulting Services for the Company, including but not limited to, all city, state and federal income taxes, social security withholding tax and other self employment tax incurred by him (provided that such provision does not affect CNLR’s obligation to pay to Ralston the tax gross-up amounts provided in Paragraph 2(d) hereof). Ralston will not cite his Consulting Services in support of any claim to be an employee of CNLR for the purpose of claiming unemployment or workers’ compensation or seeking other employment-related benefits (other than as may be required to enforce CNLR’s obligations described in subparagraph

(b) below). CNLR shall not dictate the work hours of Ralston during the term of his Consulting Services, nor have the right to control the manner, means, or method by which Ralston performs the Consulting Services called for by this Agreement. Rather, CNLR shall be entitled only to direct Ralston with respect to the elements of services to be performed by Ralston and the results expected to be derived by CNLR there from, to inform Ralston as to where and when such services shall be performed, and to review and assess the performance of such services by Ralston for the limited purposes of assuring that such services have been reasonably satisfactorily performed. CNLR shall be entitled to exercise broad general power of supervision and control over the results of Ralston’s work to ensure satisfactory performance, including the right to inspect, the right to stop work, the right to make suggestions or recommendations as to the details of the work, and the right to propose modifications to the work. Except as may be otherwise agreed to by CNLR in writing, Ralston shall not be entitled to any compensation for the Consulting Services other than the compensation set forth in this Paragraph 3. It is acknowledged and understood that if Ralston is requested to engage in development work on behalf of CNLR or its affiliates, to negotiate joint ventures or other arrangements or provide services over and above the types of services normally considered “consulting” in nature, CNLR and Ralston anticipate entering into separate compensation agreements for such services, if any; provided, however, the parties acknowledge and agree that, for the purposes of this Agreement, to the extent such services are provided within the Hours Requirement, the services shall be deemed “consulting” in nature.

          (b) During the first eighteen (18) months of the Non-Compete Period described in Paragraph 5 below, CNLR shall pay, for the benefit of Ralston, all payments Ralston would otherwise be entitled to make under the Consolidated Omnibus Reconciliation Act of 1985 (COBRA) for such continuing health benefits (including any medical, vision or dental benefits) under the Company’s health plans and programs applicable to senior executives of the Company generally. During the remaining six (6) month term of this Agreement, CNLR shall arrange to provide, for the benefit of Ralston, continuing health benefits (including any medical, vision or dental benefits) comparable to those provided under the Company’s health plans and programs applicable to senior executives of the Company. The parties hereto expressly understand and agree that nothing in this subparagraph (b) shall restrict the ability of the Company to amend or terminate such plans and programs from time to time in its sole discretion; provided, however, that the Company shall in no event be required to provide such coverage after such time as Ralston becomes entitled to receive health benefits from another employer or recipient of Ralston’s services, other than a subsidiary or affiliate of CNLR (and provided, further, that (i) such entitlement shall be determined without regard to any individual waivers or other arrangements, and (ii) nothing contained herein shall require Ralston, to the extent he determines to establish a company pursuant to the Seneff/Ralston Agreement, to have such company provide health benefits to Ralston.

          (c) Until November 30, 2004, CNLR shall provide office space and appropriate support services to Ralston to facilitate the provision of the consulting services during the initial term at a location reasonably near the executive offices of the Company.

     4. The parties agree that their promises in Paragraphs 2, 3, 5, 8, 9,11, 12 and 15 are in full, final and complete settlement of all known claims Ralston may have against CNLR, its affiliates, subsidiaries, past and present officers, directors, employees, agents, successors and assigns, and that the various covenants, obligations and undertakings of Ralston as set forth herein are in full, final and complete settlement of all known claims that CNLR and its affiliates may have against Ralston arising out of or relating to his employment by and service to CNLR and its affiliates. Nothing contained herein shall constitute any waiver or relinquishment of the rights of Ralston as a stockholder of CNLR. Notwithstanding the foregoing, to the extent that any claim (whether or not known on the date hereof) by Ralston or CNLR is based on fraud, willful misconduct or gross negligence by the other party, the rights of the party claiming fraud, willful misconduct or gross negligence shall remain unaffected by this Paragraph 4, and such party may pursue any cause of action against the other party, whether at law or equity.

     5. (a) Ralston acknowledges that as the Chief Operating Officer and President of CNLR he has (i) acquired trade secrets (as defined in Section 688.024(4), Florida Statutes) of CNLR, (ii) acquired valuable confidential business information concerning the past, present, and future business of CNLR, and (iii) gained substantial relationships with CNLR customers and prospective customers. Ralston further acknowledges that the Business of the Company (as defined below) is very competitive and that competition by him in that business (except as permitted hereunder) would severely injure the Company. Accordingly, Ralston shall not, for a period of twenty-four (24) months following the date hereof (the “Non-Compete Period”), in any geographic market in which CNLR or any member of the CNLR Group is then doing Business or preparing to do Business, directly or indirectly, own, manage, control or participate in the ownership, management, or control of, or be employed or engaged by or otherwise affiliated or associated as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director or in any other individual or representative capacity, engage or participate in any business that is in competition in any manner whatsoever with the Business of the Company. For the purposes of this Agreement, the Business of the Company shall be defined as the acquisition, ownership and management of a diversified portfolio of high-quality, single-tenant, freestanding properties leased to retail, office and industrial businesses. Notwithstanding the foregoing, Ralston shall be permitted to engage in the following activities;

               (i) Ralston may invest in securities of any entity, solely for investment purposes and without participating in the business thereof, if (i) such securities are traded on any national securities exchange or the National Association of Securities Dealers, Inc. Automated Quotation System, (ii) Ralston is not a controlling person of, or a member of a group which controls, such entity and (iii) Ralston does not, directly or indirectly, own five percent or more of any class of securities of such entity;

               (ii) Ralston may engage in private commercial real estate development business within the State of Florida through the development of commercial real estate projects provided that (A) Ralston notifies CNLR of the activities he intends to engage in prior to commencing the same, and (B) he provides CNLR with the opportunity to participate in the purchase of projects he may develop on a “first refusal” basis (that is, Ralston will provide CNLR with the opportunity to acquire the projects he develops on terms and conditions at least as favorable as those offered to third parties prior to accepting any purchase from a third party);

               (iii) Ralston may have an ownership interest in, and engage in any real estate activities through, the company formed pursuant to the Seneff/Ralston Agreements; and

               (iv) Ralston may become an owner, officer or employee of a privately held real estate competitor so long as (A) Ralston is the largest single stockholder of the real estate competitor (other than Seneff and any other shareholder approved by Seneff), (B) Ralston is actively involved in the management thereof, (C) the Real Estate Competitor is not funded by publicly-solicited debt or equity, and (D) the real estate competitor engages in activities that the company referred to in (iii) above elects not to participate in and such activities are conducted solely in the State of Florida.

          (b) Ralston further agrees that, during the Non-Compete Period, without the prior written consent of CNLR or except in connection with activities he may permissibly undertake pursuant to Paragraph 5(a) above, he (1) shall not solicit, directly or indirectly, for his own behalf or on behalf of any other person(s), any customer of the Company that had utilized services from the Company at any time during the Ralston’s employment or during the Non-Compete Period in any line of business that the Company conducts during Non-Compete Period or that the Company is actively soliciting, for the purpose of marketing or providing any service competitive with any service then offered by the Company; or (2) shall not engage, directly or indirectly, by himself or in connection with any other person(s), in the development or marketing of any service which will compete with any service that the Company is then providing, developing or marketing or is in the process of developing or marketing as of the Separation Date or (3) shall not directly or indirectly, whether for Ralston’s own account or for the account of any other person, firm, corporation or other business organization, intentionally interfere with the Company’s or any of its affiliates, relationship with, or endeavor to entice away from the Company or any of its affiliates, any person who during Ralston’s employment with the Company and its affiliates (or the predecessors of either) is or was a customer or client of the Company or any of its affiliates (or any predecessor of either). Ralston further agrees that he shall not, directly or indirectly knowingly solicit or encourage to leave the employment or other service of the Company or any of its affiliates, any employee thereof or hire (on behalf of Ralston or any other person or entity) any employee who has left the employment or other service of the Company or any of its affiliates (or any predecessor of either) within one year of the termination of such employee’s or independent contractor’s employment or other service with the Company and its affiliates.

          (c) Ralston acknowledges that these restrictions set forth in this Paragraph 5 are reasonable in scope and duration. Ralston further acknowledges that he has sufficient assets and other skills to provide a reasonable livelihood for himself while such obligations are in force, and that together with the consulting engagement set forth in Paragraph 3, he has the ability to provide such a livelihood.

          (d) The restrictions contained in this Paragraph 5 shall terminate upon consummation of any transaction resulting in a “change in control” of CNLR. For the purposes of this Agreement, a change in control of CNLR occurs whenever as a result of a transaction or series of related transactions involving a merger with or acquisition by individuals or entities that are not affiliates of CNLR pursuant to which the then current shareholders (defined as those shareholders of CNLR immediately prior to the consummation of the transaction or the consummation of the first of the series of related transactions) wind up holding less than 50% of the resulting equity interests of CNLR or its successor.

     6. Nothing in this Agreement shall be construed as an admission of liability by CNLR, its affiliates, subsidiaries, or its past and present officers, directors, employees or agents, and CNLR specifically disclaims liability to or wrongful treatment of Ralston on the part of itself, its affiliates, subsidiaries, and its past and present officers, directors, employees and agents.

     7. Ralston represents that he has not filed any complaints or charges against the CNLR Group with the Equal Employment Opportunity Commission, or with any other federal, state or local agency or court, and covenants that he will not seek to recover on any claim released in this Agreement. Ralston also agrees that he will not in the future make any claim, charge, complaint, or demand, or file any suit, of any kind against any member of the CNLR Group or any of their

officers, directors, employees, or agents based upon any facts or events which have occurred at any time prior to the execution of this Agreement except to the extent that he may file any claim, whether at law or equity or in any agency (whether or not known on the date hereof) based on fraud, willful misconduct or gross negligence by any member of the CNLR Group or any of their officers, directors, employees, or agents.

     8. Ralston covenants not to sue, and fully and forever releases and discharges CNLR, its parents, subsidiaries, affiliates, divisions, successors and assigns, together with its past and present trustees, directors, officers, employees, agents, attorneys and representatives (collectively, the “CNLR Releasees”) from any and all claims, debts, liens, liabilities, demands, obligations, acts, agreements, causes of action, suits, costs and expenses (including attorneys’ fees), damages (whether pecuniary, actual, compensatory, punitive or exemplary) or liabilities of any nature or kind whatsoever in law or equity or otherwise, whether now known or unknown, arising out of or in any way connected with Ralston’s employment with CNLR; provided, however, that nothing in this Agreement shall either waive any rights or claims of Ralston that arise after Ralston signs this Agreement or impair or preclude Ralston’s right to take action to enforce the terms of this Agreement or to pursue any claim (whether known or unknown) based on fraud, willful misconduct or gross negligence. CNLR covenants not to sue, and fully and forever releases and discharges Ralston from any and all known claims, debts, liens, liabilities, demands, obligations, acts, agreements, causes of action, suits, costs and expenses (including attorneys’ fees), damages (whether pecuniary, actual, compensatory, punitive or exemplary) or liabilities of any nature or kind whatsoever in law or equity or otherwise, whether now known or unknown, arising out of or in any way connected with Ralston’s employment with CNLR; provided, however, that nothing in this Agreement shall either waive any rights or claims of CNLR that arise after CNLR signs this Agreement or impair or preclude CNLR’s right to take action to enforce the terms of this Agreement or to pursue any claim (whether known or unknown) based on fraud, willful misconduct or gross negligence. This release by Ralston includes but is not limited to claims arising under federal, state or local laws prohibiting employment discrimination, including but not limited to Title VII of the Civil Rights Act of 1964, as amended, the Age Discrimination in Employment Act, as amended, the Equal Pay Act and the Americans with Disabilities Act, claims for attorneys’ fees or costs, workers’ compensation claims, and any and all claims regarding any claimed employment contract, whether written, oral, implied or otherwise, relating to CNLR’s right to terminate its employees, or any other claims under federal, state, or local statute, regulation or ordinance, common law, or any other law in any way relating to Ralston’s employment with CNLR or the termination of that employment.

     9. Each of CNLR and Ralston agrees, without limiting the generality of the above release, not to sue or otherwise institute or cause to be instituted or to in any way participate in or voluntarily assist in the prosecution of any complaints, charges or grievances against any releasee concerning any claims released in this Agreement.

     10. Ralston shall keep secret and retain in strictest confidence all confidential matters relating to (i) the Company’s business and affairs (which term includes activities other than the Business of the Company as defined herein) , (ii) the business of any of its affiliates and (iii) the Company and any of its affiliates, learned by Ralston heretofore or hereafter directly or indirectly from the Company or any of its subsidiaries or any predecessor of either (all such confidential matters, the “Confidential Company Information”), including, without limitation, information with respect to the Business and any aspect thereof, profit or loss figures, and the Company’s or its affiliates, (or any of their predecessors) properties, and shall not disclose such Confidential Company Information to anyone outside of the Company or its affiliates except with the Company’s prior express written consent and except for Confidential Company Information which (i) at the time of receipt or thereafter becomes publicly known through no wrongful act of Ralston, (ii) is clearly obtainable in the public domain, (iii) was not acquired by Ralston in connection with Ralston’s employment, service or affiliation with the Company, (iv) was not acquired by Ralston from the Company or its representatives or affiliates or from a third-party who has an agreement with the Company not to disclose such information, or (v) is required to be disclosed by rule of law or by order of a court or governmental body or agency. Notwithstanding the foregoing, Ralston shall be entitled to retain a copy of his contacts file and other personal materials he may have developed, generated or received during his service with the Company, and shall be entitled to use the same in connection with permissible real estate activities as set forth in Paragraph 5 hereof; provided that nothing contained in this sentence shall permit Ralston to disclose the same to third parties in violation of the provisions of this Paragraph 10. On the Separation Date, Ralston shall deliver to CNLR his CNLR identification card and office keys and any other CNLR property or tangible Company Confidential Information in his possession, custody, or control as the Company may request.

     11. Ralston agrees that he will truthfully give evidence and provide all other assistance which CNLR or any of its affiliates may from time to time reasonably require in connection with the defense or prosecution of any action or proceeding that has been or may be instituted by or against CNLR or any of its affiliates in relation to events which occurred during the period of Ralston’s employment with CNLR. CNLR will reimburse Ralston for all reasonable out-of-pocket expenses incurred in connection with such cooperation upon the presentation of an itemized invoice with appropriate supporting documentation. CNLR and its officers and employees agree that they will truthfully give evidence and provide all other assistance which Ralston may from time to time reasonably require in connection with the defense or prosecution of any

action or proceeding that has been or may be instituted by or against Ralston in relation to events which occurred during the period of Ralston’s employment with CNLR, and Ralston shall reimburse CNLR for all reasonable out-of-pocket expenses incurred in connection with such cooperation upon the presentation of an itemized invoice with appropriate supporting documentation except to the extent that such expenses would otherwise be indemnifiable by the Company as contemplated by Paragraph 12 hereof.

     12. Ralston shall continue to be entitled to the indemnification rights provided by the articles of incorporation, bylaws or special indemnification agreements with respect to actions taken by him (a) during the period of Ralston’s employment with CNLR, (b) specifically at the request of CNLR during the period he is providing Consulting Services to the Company as contemplated by Paragraph 3(a), and (c) to the extent he is requested and agrees to provide services to the Company beyond the scope of the consulting services contemplated in Paragraph 3 (such an engagement in development work on behalf of CNLR or its affiliates or negotiating joint ventures or other arrangements) and such services are in excess of the Hours Requirement in accordance with the term and conditions thereon as in effect on the date hereof, subject only to such amendments as may be effective for all senior executive officers of CNLR hereafter.

     13. Ralston acknowledges that he had adequate time to consider this Agreement and that he has seven (7) calendar days from the date he executes this Agreement in which to revoke it and that this Agreement will not be effective or enforceable nor the amounts set forth in Paragraph 2 paid until after the seven-day revocation period ends without revocation by Ralston. Revocation can be made by delivery of a written notice of revocation to Jay Whitehurst, General Counsel, Commercial Net Lease Realty, Inc., 450 South Orange Avenue, Suite 900, Orlando, FL, 32801, by midnight on or before the seventh calendar day after Ralston signs the Agreement.

     14. Ralston acknowledges that he has been advised to consult with an attorney of his choice with regard to this Agreement. Ralston hereby acknowledges that he understands the significance of this Agreement, and represents that the terms of this Agreement are fully understood and voluntarily accepted by him.

     15. CNLR and Ralston agree that they will treat the existence and terms of this Agreement as confidential and will not discuss the Agreement (with the exception of Paragraphs 1, 3 and 5 herein), the fact of settlement, or the negotiations and communications leading to this Agreement, with anyone other than: (i) their counsel or tax advisor, as necessary to seek their professional advice, (ii) in the case of Ralston, his wife, (iii) as required by compulsory legal process (provided that, to the extent reasonably practicable, the party required to disclose the terms hereof provide written thereof to the other party at least five (5) business days prior to the date that such disclosure is required), (iv) in the case of CNLR, its independent accountants, (v) in the case of CNLR, to a prospective lender or in connection with a proposed transaction (provided that the recipient of the of the disclosure is bound by a written confidentiality agreement), (vi) upon the advice of counsel, to comply with securities law disclosure requirements, or (vi) in order to enforce the terms of this Agreement. To the extent CNLR elects to make the existence or terms of this Agreement public under the provisions of (iii), (iv) or (v) hereof, Ralston shall not be precluded from discussing or disclosing those matters publicly disclosed by CNLR with or to third parties.

     16. Ralston shall not disparage, denigrate or comment negatively upon, either orally or in writing, any member of the CNLR Group or any CNLR Releasee to or in the presence of any other person or entity unless compelled to do so by a valid subpoena or court order; provided, however, that if Ralston receives such a subpoena or court order he gives, to the extent reasonably practicable, CNLR written notice thereof at least five (5) business days prior to the date on which Ralston is required to comply. CNLR shall not disparage, denigrate or comment negatively upon, either orally or in writing Ralston to or in the presence of any other person or entity unless compelled to do so by a valid subpoena or court order; provided, however, that if CNLR receives such a subpoena or court order CNLR gives, to the extent reasonably practicable, Ralston written notice thereof at least five (5) business days prior to the date on which CNLR is required to comply. Nothing contained herein is intended to or shall limit or either parties’ ability to make truthful statements necessary to comply with applicable laws, rules or regulations, to obtain any benefits under any bond and/or insurance policy, or to commence, institute, prosecute or defend any lawsuit, action, claim or proceeding before or in any court, regulatory, governmental, arbitral or other authority.

     17. In the event of violation by either party of the undertakings or agreements set forth in this Agreement, either Ralston or CNLR, as applicable, shall have the right to obtain an injunction or decree of specific performance from any court of competent jurisdiction to restrain the other party from violating such undertakings or agreements or to compel such party to perform such undertakings or agreements. Notwithstanding the foregoing, neither party shall be entitled to exercise the rights and remedies set forth in the remaining sentences of this Paragraph unless (a) such party has given notice to the other party of the violation (setting forth with reasonable specificity the nature of the violation), and (b) the other party has been given an appropriate period to cure the violation. For violations of obligations to make payments hereunder, the cure period shall be three (3) business days. For violations of other obligations that are capable of being cured, the cured period shall be thirty (30) days. There shall be no cure period for violations of obligations that cannot be cured. In the event of a breach by Ralston, CNL shall have the right to (i) immediately stop the payments as described in Paragraph 2(a), (ii) cause the forfeiture of any shares of unissued Restricted Stock held in escrow as described in Paragraph 2(d), and (iii) terminate the consulting

obligations described in Paragraph 3. Ralston shall indemnify and hold the Company harmless from, and shall be fully responsible for, all costs and expenses, including without limitation actual attorney fees and related legal costs and expenses incurred by the Company, in enforcing the covenants, undertakings and agreements of Ralston under this Agreement. In the case of a breach thereof by CNLR (i) all payments required to be made hereunder shall be accelerated and shall be immediately due and payable, (ii) the shares of restricted stock of CNLR held in escrow shall be immediately released to Ralston, and (iii) the restrictions of Paragraph 5 hereof shall immediately terminate. CNLR shall indemnify and hold the Ralston harmless from, and shall be fully responsible for, all costs and expenses, including without limitation actual attorney fees and related legal costs and expenses incurred by Ralston, in enforcing the covenants, undertakings and agreements of CNLR under this Agreement. Nothing herein contained shall in any way limit or exclude any and all other rights granted by law or equity to Ralston or the Company.

     18. This Agreement shall be binding on CNLR and Ralston and upon their respective heirs, administrators, representatives, executors, successors and assigns, and shall run to the benefit of the Releasees and each of them and to their respective heirs, administrators, representatives, executors, successors and assigns. Except for the obligations to pay fees to Ralston in connection with his performance of the Consulting Services (the “Consulting Fees”), the obligations of CNLR to Ralston pursuant to this Agreement shall not be affected by the death, disability or incapacity of Ralston (a “Death or Disability Event”), and in the event thereof, any payments required hereunder shall be made to his heirs or personal representative at such time had such obligations would have been payable had there not been a Death or Disability Event. In the event of a Death or Disability Event, CNLR’s obligation to pay the Consulting Fees shall terminate on the date of such event and CNLR’s obligation to pay such fees shall cease, provided, however, any accrued and unpaid Consulting Fees shall be payable by CNLR to Ralston’s heirs or personal representative through and including the Death or Disability Event. For the purposes of this Agreement, a Disability Event shall be defined as an event or circumstance arising by way of illness or accident that prevents Ralston from carrying out his consulting obligations under Paragraph 3 hereunder for three calendar months out of any consecutive period of six (6) calendar months.

     19. This Agreement sets forth the entire agreement between Ralston and CNLR, and fully supersedes any and all prior agreements or understandings between them regarding its subject matter, including the Ralston Employment Agreement and Restricted Stock Agreement (provided, however, that those provisions of the Restricted Stock Agreement referred to herein shall remain valid and effective, notwithstanding the termination of such Agreement). This Agreement may only be modified by written agreement signed by both parties.

     20. If any of the provisions of this Agreement, including without limitation any of the restrictive covenants herein, or any part thereof, is determined to be invalid or unenforceable by any court or administrative agency of competent jurisdiction, or in the event that any provision cannot be modified so as to be valid and enforceable, then that provision shall be deemed severed from the Agreement and the remainder of the Agreement shall remain in full force and effect. The language of all valid parts of this Agreement shall in all cases be construed as a whole, according to its fair meaning and not strictly for or against any of the parties.

     21. Except as set forth in Paragraph 17 above, any dispute between the parties concerning the performance, breach, construction or interpretation of this Agreement, or in any manner arising out of this Agreement, shall be submitted to binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (“AAA”), which arbitration shall be carried out in the manner set forth below:

          (a) Within fifteen (15) days after written notice by one party to the other party of its demand for arbitration under this Paragraph 11, which demand shall set forth the name and address of its designated arbitrator, the other party shall select its designated arbitrator and so notify the demanding party. Within fifteen (15) days thereafter, the two arbitrators so selected shall select the third arbitrator. The dispute shall be heard by the arbitrators so selected within ninety (90) days after selection of the third arbitrator. The decision of any two arbitrators shall be binding upon the parties. Should any party or arbitrator fail to make a selection, the AAA shall designate such arbitrator upon the application of either party. Any arbitrator designated by any party, the selected arbitrators or the AAA must meet the standards of R-17 of the Commercial Arbitration Rules of the AAA. The decision of the arbitration panel so selected shall be final and binding upon the parties.

          (b) The arbitration proceedings shall take place in Orlando, Florida, and the determination of the arbitrators in such proceedings shall be binding on the parties. Judgment upon any award rendered by the arbitrators may be entered into by any court having competent jurisdiction without any right of appeal.

          (c) Each party shall pay its or his own expenses of arbitration (including its attorneys’ fees and costs), and the expenses of the arbitrators and the arbitration proceeding shall be shared equally. However, the arbitrators shall have the power to assess against a party, as part of their award, all or any part of the arbitration expenses of the other party (including reasonable attorneys’ fees) and the expenses and costs of the arbitrators and the arbitration proceeding.

     22. All notice required to be given under this Agreement to any party shall be in writing and delivered personally to the other party by hand delivery or sent by United States certified mail, return receipt requested, postage prepaid, addressed to the other party at the address set forth below or at such other address as such party shall so notify the other party. Any notice shall be deemed to be received when received if hand delivered or two (2) business days after being properly deposited in the United States mail as set forth above.

     23. No provision of this Agreement shall be construed against or interpreted to the disadvantage of any party by reason of such party having, or being deemed to have, drafted, devised, or imposed such provision.

     24. This Agreement shall be governed in all respects by Florida law, without regard to its conflict of laws principles.

PLEASE READ CAREFULLY.
THIS AGREEMENT AND GENERAL RELEASE INCLUDES A
RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS.

Dated: As of April 23, 2004	/s/Gary M. Ralston
	GARY M. RALSTON
	152 Trismen Terrace Winter Park, FL 32789
Dated: As of April 23, 2004	COMMERCIAL NET LEASE REALTY, INC.
	BY:
	450 South Orange Avenue Suite 900 Orlando, FL 32801 Attn: General Counsel

PART II

FIRST AMENDMENT TO SEPARATION
AGREEMENT AND GENERAL RELEASE

     This First Amendment to Separation Agreement and General Release (“Amendment”) is made and entered into as of the 30th day of December 2004, by and between Gary M. Ralston (“Ralston”) and Commercial Net Lease Realty, Inc., a Maryland corporation (“CNLR” or the “Company”).

     WHEREAS, Ralston and CNLR have entered into that certain Separation Agreement and General Release dated as of April 23, 2004 (the “Agreement”), which provides, among other things, for payment by CNLR of certain amounts to Ralston and consulting services to be provided by Ralston to CNLR, as well as a non-compete period applicable to Ralston;

     WHEREAS, CNLR and Ralston have agreed that CNLR may prepay all remaining amounts due to Ralston, subject to a two percent (2%) discount, and that upon such prepayment that Ralston will be released from all obligations in connection with consulting services or in connection with any non-compete period.

     NOW, THEREFORE, in consideration of the premises hereof, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

          1. All capitalized terms used herein shall have the same meaning as ascribed thereto in the Agreement.

          2. CNLR will pay all amounts due to Ralston under the Agreement within ten (10) days from the effective date hereof.

          3. The provisions of Paragraph 3(a) of the Agreement concerning Consulting Services to be provided by Ralston and the provisions of Paragraph 5 of the Agreement concerning Ralston’s non-compete obligations and the related Non-Compete Period are hereby terminated in their entirety.

          4. CNLR shall promptly cause all remaining shares escrowed pursuant to Paragraph 2(d) of the Agreement to be released to Ralston.

          5. In all other respects, the Agreement shall remain in full force and effect in accordance with its terms.

COMMERCIAL NET LEASE REALTY, INC.
By: /s/ Julian E. Whitehurst	/s/ Gary M. Ralston
Name: Julian E. Whitehurst	Gary M. Ralston
Title: Executive Vice President and Chief Operating officer

EX-12

COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES
EXHIBIT 12
CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES

     The following table sets forth the Company’s consolidated ratios of earnings to fixed charges for the periods as shown.

	2004			2003			2002			2001			2000
Net Earnings	$	64,933,739		$	53,472,592		$	48,058,349		$	28,963,548		$	38,250,664
Fixed Charges:
Interest on Indebtedness		33,453,678			28,356,201			27,239,152			25,522,640			27,213,199
Amortization of Discount Relating to Indebtedness		122,859			146,195			127,375			107,201			93,600
Amortization of Treasury Lock Gain		(456,669	)		(596,741	)		(554,527	)		(515,299	)		(478,846	)
Amortization of Deferred Charges		1,260,198			1,334,224			963,438			817,170			812,529
		34,380,066			29,239,879			27,775,438			25,931,712			27,640,482
Net Earnings Before Fixed Charges	$	99,313,805		$	82,712,471		$	75,833,787		$	54,895,260		$	65,891,146
Divided by Fixed Charges
Fixed Charges	$	34,380,066		$	29,239,879		$	27,775,438		$	25,931,712		$	27,640,482
Capitalized and Deferred Interest		270,879			102,544			(599,902	)		451,624			646,897
	$	34,650,945		$	29,342,423		$	27,175,536		$	26,383,336		$	28,287,379
Ratio of Net Earnings to Fixed Charges		2.87			2.82			2.79			2.08			2.33
Preferred Stock Dividends
Series A Preferred Stock	$	4,008,378		$	4,007,532		$	4,009,554		$	-		$	-
Series B Convertible Preferred Stock		1,675,000			502,500			-			-			-
Total Preferred Stock Dividends	$	5,683,378			4,510,032			4,009,554		$	-		$	-
Combined Fixed Charges and Preferred Stock Dividends	$	40,334,323		$	33,852,455		$	31,185,090		$	26,383,336		$	28,287,379
Ratio of Net Earnings to Combined Fixed Charges and Preferred Stock Dividends		2.46			2.44			2.43			2.08			2.33
Advisor Acquisition Costs	$	-		$	-		$	-		$	12,581,769		$	1,521,063
Net Earnings After Advisor Acquisition Costs and Fixed Charges(1)	$	99,313,805		$	82,712,471		$	75,833,787		$	67,477,029		$	67,412,209
Ratio of Net Earnings After Advisor Acquisition Costs to Fixed Charges(1)		2.87			2.82			2.79			2.56			2.38

⁽¹⁾ The Company’s revolving credit facility and notes payable covenants provide for fixed charge coverage ratios to be calculated before Advisor Acquisiton Costs.

EX-21

COMMERCIAL NET LEASE REALTY, INC.
EXHIBIT 21 – SUBSIDIARIES OF THE REGISTRANT
December 31, 2004

	Jurisdiction
Subsidiary	of Formation
CNLR BJ’s Orlando FL, LLC	Florida
CNLR Citadel St. Louis MO, LLC	Delaware
CNLR DC Acquisitions I, LLC	Delaware
CNLR GP Corp.	Delaware
CNLR LP Corp.	Delaware
CNLR Plantation BT, LLC	Delaware
CNLR RAD Monticello NY, LLC	Delaware
CNLR Ster Florida LLC	Florida
CNLR Ster Glendale Arizona LLC	Arizona
CNLR Ster Paradise Valley Arizona LLC	Arizona
CNLR Ster Richmond Virginia LLC	Virginia
CNLR Ster Texas LP	Texas
CNLR Ster Toledo Ohio LLC	Ohio
CNLR Texas GP Corp.	Delaware
CNLR Texas Opportunity LP	Texas
CNLRS Acquisitions I, LLC	Delaware
CNLRS Acquisitions, Inc.	Maryland
CNLRS Equity Ventures, Inc.	Maryland
CNLRS Exchange I, Inc.	Maryland
CNLRS Funding, Inc.	Maryland
CNLRS Mortgage Capital, Inc.	Florida
Commercial Net Lease Realty Services, Inc.	Maryland
Commercial Net Lease Realty Trust	Maryland
Eck-St. Joseph MO, LLC	Delaware
Forks-Easton, LLC	Delaware
Gator Columns, LLC	Delaware
Hollywood CNLR LLC	Michigan
LHC-Memphis/ Germantown, LLC	Delaware
Net Lease Funding, Inc.	Maryland
Net Lease Institutional Realty, L.P.	Delaware
Net Lease Realty I, Inc.	Maryland
Net Lease Realty II, Inc.	Maryland
Net Lease Realty III, Inc.	Maryland
Net Lease Realty IV, Inc.	Maryland
Net Lease Realty VI, LLC	Delaware
NorthStar Brokerage Services, Inc.	Maryland
RE-Stores, Inc.	Maryland

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
Commercial Net Lease Realty, Inc.:

We consent to the incorporation by reference in the registration statement (no. 333-105635) on Form S-3 and registration statement (no. 333-64794) on Form S-8 of Commercial Net Lease Realty, Inc. and subsidiaries of our reports dated March 9, 2005, with respect to the consolidated balance sheets of Commercial Net Lease Realty, Inc. and subsidiaries as of December 31, 2004 and 2003, 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, 2004, and all related financial statement schedules, management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2004 and the effectiveness of internal control over financial reporting as of December 31, 2004, which reports appear in the December 31, 2004 annual report on Form 10-K of Commercial Net Lease Realty, Inc. and subsidiaries. Our report refers to the Company’s adoption of FIN No. 46(R) “Consolidation of Variable Interest Entities.”

Orlando, Florida
March 11, 2005

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Craig Macnab, Chief Executive Officer of Commercial Net Lease Realty, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Commercial Net Lease Realty, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

March 14, 2005	/s/ Craig Macnab
	Name:  Craig Macnab Title:  Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Kevin B. Habicht, Chief Financial Officer of Commercial Net Lease Realty, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Commercial Net Lease Realty, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

March 14, 2005	/s/ Kevin B. Habicht
	Name:  Kevin B. Habicht Title:  Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Craig Macnab, Chief Executive Officer, certifies that (1) this Annual Report of Commercial Net Lease Realty, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (this “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in this Report fairly presents, in all material respects, the financial condition of the Company as of December 31, 2004 and 2003 and its results of operations for the years ended December 31, 2004, 2003 and 2002.

March 14, 2005	/s/ Craig Macnab
	Name:  Craig Macnab Title:  Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Kevin B. Habicht, Chief Financial Officer, certifies that (1) this Annual Report of Commercial Net Lease Realty, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (this “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in this Report fairly presents, in all material respects, the financial condition of the Company as of December 31, 2004 and 2003 and its results of operations for the years ended December 31, 2004, 2003 and 2002.

March 14, 2005	/s/ Kevin B. Habicht
	Name:  Kevin B. Habicht Title:  Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-99.1

Exhibit 99.1

Annual CEO Certification
(Section 303A.12(a))

As the Chief Executive Officer of Commercial Net Lease Realty, Inc., and as required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual, I hereby certify that as of the date hereof, I am not aware of any violation by the Company of NYSE’s Corporate Governance listing standards, other than has been notified to the Exchange pursuant to Section 303A.12(b) and disclosed as an attachment hereto.

By:         /s/ Craig Macnab
Name:    Craig Macnab
Title:      Chief Executive Officer and President
Date:      August 9, 2004