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

FORM 10-K
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(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, 1998
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from to
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Commission file number 0-23917
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CHASTAIN CAPITAL CORPORATION
(Exact name of registrant as specified in its governing instrument)

Georgia 58-2354416
(State of Organization) (I.R.S. Employer Identification No.)

3424 Peachtree Road N.E., Suite 800, Atlanta, Georgia 30326
(Address of principal executive office) (Zip Code)

(Registrant's telephone number, including area code) (404) 848-8871

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

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

Common Stock, $.01 Par Value
(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 for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes -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. [x]

Indicate the aggregate market value of the voting and non-voting
common equity held by non-affiliates. $27,613,436 as of March 30, 1999.

Indicate the number of shares outstanding of each of issuer's classes
of common stock, as of the latest practicable date. 7,346,778 shares of common
stock outstanding as of March 30, 1999.

DOCUMENTS INCORPORATED BY REFERENCE

PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR ITS 1999 ANNUAL MEETING OF
SHAREHOLDERS ARE INCORPORATED BY REFERENCE IN PART III.

CHASTAIN CAPITAL CORPORATION
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

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PART I .......................................................................................... 3
Item 1. Business ............................................................................ 3
General .................................................................................... 3
Initial Public Offering .................................................................... 3
Business of the Company .................................................................... 4
Investment Guidelines ...................................................................... 5
Competition ................................................................................ 12
Conflicts of Interest ...................................................................... 12
Management Agreement ....................................................................... 12
Employees .................................................................................. 15
REIT Status ................................................................................ 15
Investment Portfolio ....................................................................... 17
Commercial Mortgage-Backed Securities ...................................................... 18
Mezzanine Loans ............................................................................ 18
Mortgage Loans ............................................................................. 19
Real Properties ............................................................................ 19
Item 2. Properties .......................................................................... 20
Item 3. Legal Proceedings ................................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders ................................. 20
PART II ......................................................................................... 20
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ............... 20
Item 6. Selected Financial Data ............................................................. 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 20
Capital Resources and Liquidity............................................................. 21
Working Capital Reserves ................................................................... 22
Financial Condition ........................................................................ 22
Results from Operations .................................................................... 23
REIT Status ................................................................................ 24
Quantitative and Qualitative Disclosures about Market Risk ................................. 24
Year 2000 .................................................................................. 25
Item 8. Financial Statements and Supplementary Data ......................................... 26
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 45
PART III ........................................................................................ 45
Item 10. Directors and Executive Officers of the Registrant ................................. 45
Item 11. Executive Compensation ............................................................. 45
Item 12. Security Ownership of Certain Beneficial Owners and Management ..................... 45
Item 13. Certain Relationships and Related Transactions ..................................... 45
PART IV ......................................................................................... 46
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................... 46
Signatures ................................................................................... 47

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PART I

Item 1. Business.

Certain statements contained in this Annual Report on Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Exchange Act of
1933, as amended, and Section 21E of the Securities Act of 1934, as amended.
These forward-looking statements may be identified by reference to a future
period(s) or by the use of forward-looking terminology, such as "may", "will",
"intend", "should", "expect", "anticipate", "estimate", or "continue" or the
negatives thereof or other comparable terminology. The Company's (as hereinafter
defined) actual results could differ materially from those anticipated in such
forward-looking statements due to a variety of factors, including, but not
limited to, changes in national, regional or local economic environments,
competitive products and pricing, government fiscal and monetary policies,
changes in prevailing interest rates, the course of negotiations, the
fulfillment of contractual conditions, factors inherent to the valuation and
pricing of interests in commercial mortgage-backed securities, credit risk
management, asset/liability management, the financial and securities markets,
the availability of and costs associated with the sources of liquidity, other
factors generally understood to affect the real estate acquisition, mortgage and
leasing markets and security investments, and other risks detailed in the
Company's registration statement on Form S-11 (File No. 333-42629), as amended,
filed with the Securities and Exchange Commission (the "SEC"), and declared
effective on April 23, 1998, the Company's quarterly reports on Form 10-Q filed
with the SEC, and other filings made by the Company with the SEC. The Company
does not undertake, and specifically disclaims any obligation, to publicly
release the results of any revisions which may be made to any forward-looking
statements to reflect the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements.

General.

Chastain Capital Corporation (the "Company") is a Georgia corporation that was
organized on December 16, 1997 and that plans to make an election to be taxed as
a real estate investment trust ("REIT") under the Internal Revenue Code of 1986,
as amended (the "Code") commencing with its first REIT taxable year ended on
December 31, 1998. As a REIT, the Company generally is not subject to federal
income taxation on that portion of its income that it distributes currently to
its shareholders, provided that it distributes at least 95% of its taxable
income (excluding net capital gains) to its shareholders annually and meets
certain other REIT tests for qualification as a REIT under the Code. The Company
was initially capitalized on December 16, 1997 through the sale of 100 shares of
common stock, par value $.01 per share ("Common Stock") for an aggregate
purchase price of $1,000.

The Company incorporated and capitalized two wholly owned subsidiaries, Chastain
GP Holdings, Inc. (the "General Partner") and Chastain LP Holdings, Inc. (the
"Initial Limited Partner") which organized and capitalized Chastain Investments,
L.P. (the "Operating Partnership"), a Georgia limited partnership through which
the business of the Company is conducted. Because the Company indirectly owns
100% of the partnership interests in the Operating Partnership, the Operating
Partnership is disregarded as a separate entity from the Company for federal
income tax purposes unless a third party other than either (i) the Company or
(ii) a qualified REIT subsidiary of the Company is admitted as a partner in the
Operating Partnership. The Company organized the Operating Partnership to
provide potential sellers of assets with the opportunity to transfer those
assets to the Company in a tax-deferred exchange.

The General Partner engaged ERE Yarmouth, Inc. ("ERE Yarmouth"), a wholly-owned
indirect subsidiary of Lend Lease Corporation Limited ("Lend Lease Corporation")
to manage and advise the Company's business and investment affairs. On July 13,
1998, Lend Lease Corporation changed the name of ERE Yarmouth to Lend Lease Real
Estate Investments, Inc. ("Lend Lease" or the "Manager"). Lend Lease continues
to manage and advise the Company.

Initial Public Offering.

The Company offered to the public 7,380,000 shares of Common Stock at $15.00 per
share in an initial public offering (the "Offering") which commenced in April
1998. Gross proceeds from the Offering were $110,700,000 and net proceeds
to the Company were $102,951,000. Additional public offering costs of $1,215,750
were incurred in connection with the Offering.

The Company also issued, pursuant to two separate private placements, an
aggregate of 897,678 shares of Common Stock to Lend Lease Investment Holdings,
Inc. ("LLIH"), (formerly ERE Yarmouth Investment Holdings, Inc.), an indirect,
wholly-owned subsidiary of Lend Lease, and 700,000 shares of Common Stock to FBR
Asset Investment Corporation, an affiliate of Friedman, Billings, Ramsey & Co.,
Inc. (lead underwriter of the Company's Offering), each of which closed
concurrently with the closing of the Offering, at $13.95 per share, with total
proceeds to the Company of $22,287,608.

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Business of the Company.

The Company was organized to originate commercial and multifamily Mortgage Loans
("Mortgage Loans") for the purpose of securitizing the loans by issuing
collateralized mortgage obligations ("CMOs") and retaining residual interests in
the Mortgage Loans subject to the CMO debt. The Company also was organized to
acquire subordinated interests in commercial mortgage-backed securities
("CMBS"), originate and acquire loans on real property that are subordinated to
first lien Mortgage Loans ("Mezzanine Investments") and acquire real property
and other real estate related assets.

Mortgage Loans consist of whole loan originations collateralized by real estate
assets to which an investor has first priority to cash flow.

Commercial mortgage-backed securities represent an ownership interest in a
securitized pool of commercial Mortgage Loans. The most basic mortgage-backed
securities ("MBS"), known as "Pass-Through Certificates," or participation
certificates, represent a direct ownership interest in a trust comprised of a
pool of Mortgage Loans. The trusts are typically organized to issue CMOs or
certificates of Real Estate Mortgage Investment Conduits ("REMICs").

CMOs and REMICs are similar types of securities that allow cash flows to be
split so that different classes of securities with different maturities, coupons
and risk profiles may be created. They may be collateralized by a single
Mortgage Loan or a pool of loans. The key feature is the prioritization of the
cash flows among several different classes of bondholders. This mechanism
creates a series of bonds with varying maturities, interest coupons and risk
profiles that appeal to different investors. Holders of the first tranche
receive all principal paid on the mortgages until that tranche is fully retired,
at which point the holders of the second tranche begin to receive principal
payments. Holders of the last tranche receive principal only when the previous
classes have been fully retired.

Mezzanine Investments are investments that are subordinated to first lien
Mortgage Loans on commercial and multifamily real estate. Mezzanine Mortgage
Loans generally provide the right to receive a stated interest rate on the loan
balance and may also include a percentage of gross revenues from the property,
payable on an ongoing basis, and/or a percentage of any increase in value of the
property, payable upon maturity or refinancing of the loan, or otherwise would
allow an investor to charge an interest rate that would provide an attractive
risk-adjusted return. Mezzanine Investments may also take the form of preferred
equity, which will have a claim against both the operating cash flow and
liquidation proceeds from the specific real estate assets.

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Investment Guidelines

The Company announced in October 1998 that it would cease acquiring any
additional assets or funding any additional loans in order to focus on
stabilizing its existing assets and improving its liquidity position. The Board
of Directors is currently reviewing the strategic alternatives available to the
Company with respect to its remaining assets. The discussion below describes the
principal categories of assets that the Company was authorized to acquire under
its investment guidelines up until October 1998. While the investment guidelines
are currently suspended, they are presented below to describe the environment
the Manager was operating in and might operate in if the suspension is
terminated. All investment guidelines may be amended from time to time by the
Board of Directors.

The Manager is authorized to commit the Company contractually to aggregate
investments in any calendar quarter up to $250,000,000 without the approval of
the Board of Directors. In addition, in any calendar quarter the Manager may
contractually commit the Company to purchase up to a specified aggregate amount
in each category of Real Estate Related Assets, as set forth below. Commencing
on April 28, 1999, the Manager must have approval by the Board of Directors to
invest more than 45% of the Company's aggregate assets in any single region of
the United States, or in any individual property type. In addition, after such
date the Manager will need Board of Directors approval to invest in excess of
45% of the total assets of the Company in any single category of assets
described below.

Subordinated Interests. The Company has the authority to originate commercial
whole loans for the purpose of securitizing such pools of such loans and
retaining non-investment grade subordinated interests. Mortgage-backed
securities ("MBS") typically are divided into two or more classes, sometimes
called "tranches." The senior classes are higher "rated" securities, which
would be rated by independent agencies from low investment grade "BBB" to
higher investment grade "AA" or "AAA." The junior, subordinated classes
typically would include a lower rated, non-investment grade "BB" and
"B" class, and an unrated, higher-yielding, credit support class (the
"Subordinated Interest," which generally is required to absorb the first losses
on the underlying mortgage loans). The Manager may contractually commit the
Company to aggregate Mortgage Loans up to $150 million, or $30 million for any
individual transaction, in any calendar quarter. Any investments outside of
these guidelines must be approved in advance by the Board of Directors.

MBS generally are issued either as CMOs or Pass-Through Certificates. CMOs are
debt obligations of special purpose corporations, owner trusts or other special
purpose entities secured by commercial mortgage loans or MBS. CMOs and
Pass-Through Certificates may be issued or sponsored by private originators of,
or investors in, mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, investment banks and other entities. MBS
are not guaranteed by an entity having the credit status of a governmental
agency or instrumentality and generally are structured with one or more of the
types of credit enhancement described below. In addition, MBS may be illiquid.

In most mortgage loan securitizations, a series of MBS is issued in multiple
classes in order to obtain investment-grade ratings for the senior classes and
thus increase their marketability. Each class of MBS may be issued with a
specific fixed or variable coupon rate and has a stated maturity or final
scheduled distribution date. Principal prepayments on the mortgage loans
comprising the collateral may cause the MBS to be retired substantially earlier
than their stated maturities or final scheduled distribution dates

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although, with respect to commercial mortgage loans, there generally are
penalties for or limitations on the ability of the borrower to prepay the loan.
Interest is paid or accrued on MBS on a periodic basis, typically monthly.

The credit quality of MBS depends on the credit quality of the underlying
mortgage collateral. Among the factors determining the credit quality of the
underlying Mortgage Loans will be the ratio of the Mortgage Loan balances to
the value of the properties securing the Mortgage Loans, the purpose of the
Mortgage Loans (e.g., refinancing or new purchase), the amount and terms of the
Mortgage Loans, the geographic diversification of the location of the
properties and, in the case of commercial Mortgage Loans, the credit-worthiness
of tenants.

Moreover, the principal of and interest on the underlying mortgage loans may be
allocated among the several classes of a MBS in many ways, and the credit
quality of a particular class results primarily from the order and timing of the
receipt of cash flow generated from the underlying Mortgage Loans. Subordinated
Interests carry significant credit risks. Typically, in a "senior-subordinated"
structure, the Subordinated Interests provide credit protection to the senior
classes by absorbing losses from loan defaults or foreclosures before such
losses are allocated to senior classes. Moreover, typically, as long as the more
senior tranches of securities are outstanding, all prepayments on the Mortgage
Loans generally are paid to those senior tranches. In some instances,
particularly with respect to Subordinated Interests in commercial
securitizations, the holders of Subordinated Interests are not entitled to
receive scheduled payments of principal until the more senior tranches are paid
in full. Because of this structuring, Subordinated Interests in a typical
securitization are subject to a substantially greater risk of non-payment than
are those more senior tranches. Accordingly, the Subordinated Interests are
assigned lower credit ratings, or no ratings at all. Neither the Subordinated
Interests nor the underlying Mortgage Loans are guaranteed by agencies or
instrumentalities of the U.S. government or by other governmental entities and,
accordingly, are subject to credit risks.

As a result of the typical "senior-subordinated" structure, the Subordinated
Interest will be extremely sensitive to losses on the underlying Mortgage
Loans. For example, if the Company owns a $10 million Subordinated Interest in
an MBS consisting of $100 million of underlying mortgage loans, a 7% loss on
the underlying mortgage loans will result in a 70% loss on the Subordinated
Interest. Accordingly, the holder of the Subordinated Interest is particularly
interested in minimizing the loss frequency (the percentage of the loan
balances that default over the life of the Mortgage Collateral) and the loss
severity (the amount of loss on a defaulted mortgage loan, i.e., the principal
amount of the mortgage loan unrecovered after applying any recovery to the
expenses of foreclosure and accrued interest) on the underlying Mortgage Loans.

The loss frequency on a pool of mortgage loans will depend upon a number of
factors, most of which will be beyond the control of the Company or the
applicable servicer. Among other things, the default frequency will reflect
broad conditions in the economy generally and real estate particularly,
economic conditions in the local area in which the underlying property is
located, the loan-to-value ratio of the mortgage loan, the purpose of the loan,
and the debt service coverage ratio. The loss severity will depend upon many of
the same factors described above, and will also be influenced by the servicer's
ability to foreclose on the defaulted mortgage loan and sell the underlying
mortgaged property.

The underwriting standards used by the Company in evaluating Mortgage Loans
include a review of (i) the underlying collateral of each Mortgage Loan,
including property characteristics, location and credit-worthiness of tenants,
(ii) the borrower and manager's ability to manage the

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property and make debt service payments, (iii) the relative principal amounts of
the loan, including the loan-to-value and debt service coverage ratios and (iv)
the Mortgage Loan's purpose and documentation. Such evaluation includes
engaging third party appraisal, environmental and engineering firms to prepare
independent reports. The Company's Mortgage Loans have consisted primarily of
assets backed by first liens on commercial property.

Commercial Mortgage-Backed Securities. The Manager is authorized to
contractually commit the Company to aggregate CMBS up to $75 million, or $75
million for any individual transaction, in any calendar quarter. Any
investments outside of these guidelines must be approved in advance by the
Board of Directors. CMBS are backed generally by a more limited number of
commercial or multifamily Mortgage Loans with larger principal balances than
those of single family residential Mortgage Loans. As a result, a loss on a
single Mortgage Loan underlying a CMBS will have a greater negative effect on
the yield of such CMBS, especially the Subordinated Interests in such CMBS.

Before acquiring Subordinated Interests, the Company performs certain credit
underwriting and stress testing to attempt to evaluate future performance of the
Mortgage Collateral supporting the CMBS which will include (i) a review of the
underwriting criteria used in making Mortgage Loans comprising the Mortgage
Collateral for CMBS, (ii) a review of the relative principal amounts of the
loans, their loan-to-value and debt service coverage ratios as well as the
Mortgage Loans' purpose and documentation, (iii) where available, a review of
the historical performance of the loans originated by the particular
originator, (iv) in the case of the CMBS, some level of reunderwriting the
underlying Mortgage Loans, as well as selected site visits and (v) a review of
independent third party appraisal, environmental and engineering reports.

Real Properties. The Company's policy is to conduct an investigation and
evaluation of real property before purchasing such property. Evaluations of
potential properties are conducted primarily by the Manager's employees who
specialize in the analysis of underperforming or distressed assets, often with
further specialization based on geographic or collateral-specific factors. It
is expected that the Manager's employees will use third parties, such as
brokers who are familiar with the property's type and location, to assist them
in conducting an evaluation of the value of the property, and depending on the
circumstances, may use subcontractors, such as local counsel and engineering
and environmental experts, to assist in the evaluation and verification of
information and the gathering of other information not previously made
available by the potential seller. The amount offered by the Company generally
is the price that the Manager estimates is sufficient to generate an acceptable
risk-adjusted return on the Company's investment. The Manager may contractually
commit the Company to aggregate real properties up to $75 million, or $25
million for any individual transaction, in any calendar quarter. Any
investments outside of these guidelines must be approved in advance by the
Board of Directors.

Mezzanine Investments. The Company is authorized to make investments that are
subordinated to first lien Mortgage Loans on commercial and multifamily real
estate. For example, on a commercial property subject to a first lien Mortgage
Loan with a principal balance equal to 70% of the value of the property, the
Company could lend the owner of the property (typically a partnership) an
additional 15% to 20% of the value of the property. Typically the loan would be
secured, either by the property subject to the first lien (giving the Company a
second lien position) or a partnership interest in the owner. If a partnership
interest is pledged, the Company would be in a position to take over the
operation of the property in the event of a default on the loan. These
Mezzanine Investments generally provide the Company with the right to receive a
stated interest rate on the loan balance and may also include a percentage of
gross revenues from the property, payable to the Company on an ongoing basis,
and/or a percentage of

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any increase in value of the property, payable upon maturity or refinancing of
the loan, or otherwise would allow the Company to charge an interest rate that
would provide an attractive risk-adjusted return. Mezzanine Investments may
also take the form of preferred equity, which will have a claim against both
the operating cash flow and liquidation proceeds from the specific real estate
assets. The Manager may contractually commit the Company to aggregate Mezzanine
Investments up to $75 million, or $20 million for any individual transaction,
in any calendar quarter. Any investments outside of these guidelines must be
approved in advance by the Board of Directors.

Before originating Mezzanine Investments, the Company performs certain credit
underwriting to attempt to evaluate future performance of the collateral
supporting such investment, which will include a review of (i) the underlying
collateral of each Mortgage Loan, including property characteristics, location,
credit-worthiness of tenants and economics; (ii) the relative principal amounts
of the loan, including the loan-to-value and debt service coverage ratios,
(iii) the borrower and manager's ability to manage the property and make debt
service payments, and (iv) the Mortgage Loan's purpose and documentation.

Other Real Estate Related Assets. The Manager may contractually commit the
Company to aggregate other real estate related assets up to $50 million, or $20
million for any individual transaction, in any calendar quarter. Any
investments outside of these guidelines must be approved in advance by the
Board of Directors. The Company's policy is to conduct an investigation and
evaluation of real estate related assets before purchasing such assets.
Evaluation of potential properties will be conducted primarily by the Manager's
employees who specialize in the analysis of such assets, often with further
specialization based on geographic or collateral-specific factors. The Company
expects the Manager to use third parties, such as brokers who are familiar with
the property's type and location, to assist it in conducting an evaluation of
the value of the property, and, depending on the circumstances, to use
subcontractors, such as local counsel and engineering and environmental
experts, to assist in the evaluation and verification of information and the
gathering of other information not previously made available by the potential
seller. Other real estate related assets may include the following.

Construction Loans. The Company is authorized to provide construction loans on
commercial property, taking a first lien mortgage to secure the debt.

Agricultural Loans. The Company is authorized to originate or acquire
agricultural loans for use in securitization pools and may acquire agricultural
underperforming real estate assets. Agricultural loans are secured by first
liens on a parcel or parcels of land, which may be improved by buildings,
fixtures, and equipment or other structures permanently affixed to the parcel
or parcels, that are used for the production of one or more agricultural
commodities or products. Loans are secured by a first lien mortgage with
principal amortization based upon the nature of depreciable assets and
commodity types. Lower percentage (longer duration) amortizations are
associated with productive agricultural real estate with limited or no
depreciable buildings or structures. Typically, as the value of depreciable
structures becomes a larger percentage of the security, the amortization
percentage is higher (shorter duration). Agricultural real estate may also be
improved with permanent plantings (orange groves, vineyards, etc.) which
produce crops for multiple years and the loan amortizations are structured to
reflect the economic life of the productive assets. The loans are payable
monthly, quarterly or semi-annually depending upon the nature of the commodity
produced.

Foreign Real Properties. In addition to purchasing real properties, the Company
is authorized to originate or acquire Mortgage Loans secured by real estate
located outside the

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United States or purchase such real estate. The Company has not imposed any
limits with respect to the amounts that it could invest in foreign real
properties in the aggregate, any particular type of foreign real property, or
properties located in any particular country.

Other MBS. The Company may create or acquire interest-only MBS that have
characteristics of Subordinated Interests, known as "Sub IOs." A Sub IO is
entitled to no payments of principal; moreover, interest on a Sub IO often is
withheld in a reserve fund or spread account and is used to fund required
payments of principal and interest on the more senior tranches. Once the
balance in the spread account reaches a certain level, interest on the Sub IO
is paid to the holders of the Sub IO. These Sub IOs provide credit support to
the senior classes, and thus bear substantial credit risk. Moreover, because a
Sub IO receives only interest payments, its yield is extremely sensitive to
changes in the weighted average life of the class, which in turn is dictated by
the rate of prepayments (including as a result of defaults) on the underlying
loans.

Real Estate Companies. The Company is authorized to invest in private
placements of common stock or other securities convertible into common stock.

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Purchases of Assets

During the second quarter of 1998, commencing on the completion of the Offering
on April 23, 1998 and ending June 30, 1998, the Company purchased five CMBS for
$73.6 million and one real estate property for $3.7 million. The Company also
made two Mezzanine Investments for $25.8 million.

During the third quarter ended September 30, 1998, the Company purchased two
CMBS for $29.1 million and one real estate property for $3.2 million. The
Company also made two Mezzanine Investments for $22.4 million and two Mortgage
Loans for $29.5 million.

During October, 1998, the Company made one Mezzanine Investment for $4.6 million
and originated six Mortgage Loans for $60.6 million.

Debt Agreements

On May 15, 1998, the Company entered into two Master Loan and Security
Agreements with Morgan Stanley Mortgage Capital Inc. ("Morgan Stanley") and
Morgan Guaranty Trust Company of New York ("Morgan Guaranty Trust"),
respectively, to provide financing for the Company's investments. On October 26,
1998, the Company terminated the agreement with Morgan Stanley at no cost to the
Company. The Company made no borrowings under the Morgan Stanley agreement. As
of December 31, 1998, there were $52,412,238 in borrowings outstanding under the
Morgan Guaranty Trust agreement, secured by the Company's assets with an
aggregate carrying value of $70,745,575 at December 31, 1998. All borrowings
under the Morgan Guaranty Trust agreement were paid off on March 31, 1999, and
the facility was terminated.

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On August 25, 1998, the Company entered into a Master Repurchase Agreement with
Deutsche Bank Securities, Inc. (the "Deutsche Bank Agreement"), which provided
financing for the Company's investments. As of December 31, 1998, there were
$7,926,375 in borrowings outstanding under the Deutsche Bank Agreement, secured
solely by one of the Company's BBB- rated CMBS. On February 19, 1999, the CMBS
was sold, and the remaining borrowings under the Deutsche Bank Agreement were
repaid.

On November 13, 1998 LLIH agreed to provide the Company with up to $40 million
of unsecured subordinated indebtedness (the "LLIH Agreement"). As of December
31, 1998 borrowings outstanding under the LLIH Agreement were $9,000,000. All
outstanding borrowings under the LLIH Agreement were due on March 31, 1999. On
March 30, 1999, LLIH granted the Company an extension until April 5, 1999.

Repurchase of Common Stock

The Company began repurchasing shares of its Common Stock on August 6, 1998 and
in total, as of December 31, 1998, had repurchased a total of 1,634,000 shares
at an average price of $9.91 per share, for a total price of $16,191,994. The
shares repurchased by the Company have been retired and are presented as a
reduction of Common Stock and additional paid-in capital in the Company's
consolidated financial statements.

Restructuring

During the third quarter of 1998, turmoil in credit markets caused a
significant and unexpected widening of interest rate spreads as market interest
rates for mortgage-related debt instruments increased dramatically relative to
the interest rates of U.S. Treasury securities. As a result, the Company
incurred substantial losses in the market value of its assets. On October 23,
1998, the Company announced that it had experienced estimated losses in its
investment portfolio of $32.0 million. For the three months ended September 30,
1998, the Company recorded non-cash charges of approximately $24.0 million from
marking the value of its investment portfolio to market. In addition, the
Company reported losses of approximately $15.7 million for the third quarter as
a result of the termination of the Company's interest rate hedges. For the
three months ended December 31, 1998, the Company recorded approximately $7.6
million in losses realized upon the sale of assets and approximately $2.0
million in mark-to-market charges and changes in valuation allowances on its
remaining assets.

In response, on October 21, 1998, the Board of Directors formed a special
committee (the "Special Committee") to (i) review and evaluate the short term
and long term strategic alternatives available to the Company and report its
recommendations to the full Board of Directors and (ii) negotiate the terms of
and approve any action that the Special Committee determines involves a conflict
of interest with Lend Lease Corporation. Since its formation, the Special
Committee has discussed and approved the restructuring of the credit facilities
with Morgan Guaranty Trust and Merrill Lynch, the terms of the unsecured
subordinated debt provided by LLIH and the sale of assets to repay the Company's
indebtedness.

On October 23, 1998 the Company announced it was necessary to obtain temporary
waivers from Morgan Guaranty Trust and Merrill Lynch to avoid being in default
of tangible net worth covenants under the Company's credit facilities. The
facilities were amended to provide for new credit limits, debt covenants,
interest rates and maturity dates, as further discussed in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations", and
in "Item 8. Financial Statements and Supplementary Data".

The Company announced on November 13, 1998 that it had reached an agreement with
its lenders to restructure its credit facilities, dispose of certain assets and
that it would cease acquiring new investments. The Board of Directors then
commenced a review of the strategic alternatives available with respect to the
Company's remaining assets. In connection with the credit facility
restructurings, LLIH agreed to provide the Company with up
to $40 million of unsecured subordinated indebtedness.

The dramatic increase in interest rates spreads on mortgage-related debt
instruments also meant that fulfilling the Company's existing whole Mortgage
Loan commitments would be impracticable. The resale value of the Mortgage Loans
underlying such commitments had fallen significantly, rendering any subsequent
resale or securitization of such loans unprofitable. In October, the Company
began discussions with borrowers that had Mortgage Loans from the Company under
commitment. The Company was able to negotiate terminations of several
commitments. These terminations required the Company to pay third party costs,
legal costs and in many cases, a fee to the borrower. As a result of these
terminations, the Company realized losses of $1,116,400 on the termination of
$59,315,000 in Mortgage Loan commitments during the fourth quarter.

Sales of Assets

During the fourth quarter ended December 31, 1998, the Company sold two CMBS for
$13.8 million resulting in a loss of $1.1 million and seven Mortgage Loans for
$68.8 million resulting in a loss of $5.3 million. Subsequent to December 31,
1998, the Company accepted a discounted payoff of its remaining Mortgage Loan
for $15.1 million resulting in a realized loss of $798,000, all of which was
recognized in 1998.

In February, 1999 the Company sold a CMBS for $8.8 million resulting in a
realized loss of $0.6 million, of which $0.5 million was recognized in 1998. The
proceeds were used to repay borrowings under the Deutsche Bank Agreement.

The amended credit facilities and LLIH Agreement provided the Company with the
necessary liquidity in the short term to fund its Mortgage Loan commitments,
meet margin calls and hold investments. In order to meet the Company's
restructured debt maturities and hedging liabilities, the Company began
marketing a package of investments in early March 1999. On March 31, 1999 the
sale of a package of CMBS was completed. The total proceeds were $39.0 million,
resulting in a realized loss of $13.6 million, of which $11.2 million was
recognized in 1998. The Company

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used the proceeds to repay in full its borrowings from Morgan Guaranty Trust. In
connection with its sale of investments on March 31, 1999, the Company entered
into an agreement to sell a Mezzanine Investment to GMAC Commercial Mortgage
Corporation ("GMAC"). The agreement allows the Company to repurchase the
investment no later than April 1, 2000 (transaction referred to hereafter as the
"GMAC Repo"). The GMAC Repo is expected to close no later than April 5, 1999,
and will generate proceeds of $10.5 million. The Company paid a fee of $105,000
in connection with the GMAC Repo. The repurchase price of the GMAC Repo will be
adjusted such that GMAC will receive an 8% annualized yield on its investment if
the Company repurchases the investment prior to October 1, 1999. After October
1, 1999, the repurchase price is fixed at $9.6 million. The Company will use the
proceeds of the GMAC Repo to repay borrowings from LLIH and to meet its
remaining corporate obligations, which primarily consist of hedging liabilities.

On March 25, 1999, the Company sold a 51,388 square foot office complex located
in Atlanta, Georgia. Proceeds of the sale were $3.8 million, resulting in a
realized loss of approximately $258,000, all of which was recognized in 1998.

Competition.

The Company is engaged in a business that has become increasingly competitive as
more companies enter the market. In acquiring real estate related assets
generally, the Company competes with other REITs, investment banking firms,
savings and loan associations, banks, mortgage bankers, insurance companies,
mutual funds and other lenders and other entities purchasing similar assets,
many of which have established operating histories and procedures, may have
access to greater capital and other resources and may have other advantages over
the Company in conducting certain businesses and providing certain services.

Conflicts of Interest.

The Company is subject to conflicts of interest involving the Manager. In
addition to the Management Agreement, the Company has a number of relationships
with the Manager and its affiliates, some of which may give rise to conflicts of
interest. Transactions that may give rise to a conflict of interest between the
Company's shareholders and the Manager include, but are not limited to,
borrowings under the LLIH Agreement and the sale of assets to repay such
indebtedness the re-negotiation of the Management Agreement between the Company
and the Manager, the Company's origination of a Mortgage Loan for a client of
the Manager, the Company's investment in a joint venture with a client of the
Manager, the hiring of an affiliate of the Manager to manage or develop a
property owned by the Company, and the Company's purchase or sale of assets from
the Manager or its affiliates.

The market in which the Company purchases assets is characterized by rapid
evolution of products and services and, as a result, there may, currently or in
the future, be relationships between the Company, the Manager, and affiliates of
the Manager in addition to those described herein.

Officers and Directors. The executive officers of the Company are officers and
employees of the Manager. A majority of the Company's directors have no business
affiliations with the Manager ("Independent Directors"), but were initially
selected by the Manager. Matthew L. Banks, the Chairman of the Board, is Chief
Executive Officer of the Manager. Kurt L. Wright, the President and Chief
Executive Officer and a Director of the Company, is an Executive Vice President
of the Manager.

Role of Independent Directors. The relationships between the Company, on the one
hand, and the Manager and its affiliates, on the other, is governed by policy
guidelines that have been approved by a majority of the Independent Directors.
The guidelines establish certain parameters for the operations of the Company,
including quantitative and qualitative limitations on the Company's assets that
may be acquired. The guidelines are intended to assist and instruct the Manager
and to establish restrictions applicable to transactions with affiliates of the
Manager. Transactions with affiliates of the Manager must be approved by a
majority of the Independent Directors. The Independent Directors will, however,
review the Company's transactions on a quarterly basis to ensure compliance with
the guidelines.

In addition, the Special Committee, which is made up solely of Independent
Directors, was established to negotiate the terms of and approve any action by
the Company that the Special Committee determines involves a conflict of
interest with Lender Lease Corporation. Harald R. Hansen, Elizabeth Kennan and
W. J. Smith were appointed to serve on the Special Committee. The Special
Committee has engaged Alston & Bird LLP as its independent counsel and Chase
Securities, Inc. as its independent financial advisor. Each of the members of
the Special Committee was paid $4,500 in additional Board fees in 1998 for
service on the Special Committee.

Although the Independent Directors review the guidelines periodically and
monitor compliance with those guidelines, investors should be aware that, in
conducting this review, the Independent Directors rely primarily on information
provided to them by the Manager.

If the Independent Directors determine in their periodic review of transactions
that a particular transaction does not comply with the guidelines, then the
Independent Directors will consider what corrective action, if any, can be
taken. Moreover, if transactions are consummated that deviate from the
guidelines, then the Independent Directors will have the option, under the terms
of the Management Agreement, to terminate the Manager. In such event, a
termination fee will be owed to the Manager unless the Manager's actions
demonstrate bad faith, willful misconduct, gross negligence or reckless
disregard of its duties.

Management Agreement.

The Company entered into the Management Agreement with the Manager for an
initial two-year term expiring on April 28, 2000. Thereafter, successive
extensions, each for a period not to exceed 24 months, may be made by agreement
between the Company and the Manager, subject to the affirmative vote of a
majority of the Independent Directors. The Company may terminate, or decline to
extend the term of, the Management Agreement without cause at any time after the
initial term upon 60 days written notice by a majority vote of the Independent
Directors; provided that the Company shall pay

the Manager a termination fee equal to the sum of the base management fee and
incentive management fee, if any, earned with respect to the immediately
preceding four fiscal quarters. This requirement may adversely affect the
Company's ability to terminate the Manager without cause. In addition,
Independent Directors of the Company may terminate the Management Agreement upon
the occurrence of certain specified events, including a material breach by the
Manager of any provision contained in the Management Agreement, without the
payment of any termination fee. If the Management Agreement is terminated for
any reason, LLIH will have certain registration rights with respect to its
Common Stock.

The Manager at all times is subject to the supervision of the Company's Board of
Directors and has only such functions and authority as the Company may delegate
to it. The Company relies on the Manager's expertise in six principal areas: (i)
portfolio management; (ii) equity acquisition and loan origination; (iii) equity
asset management; (iv) interim servicing; (v) special servicing; and (vi)
monitoring servicing. The Manager is responsible for the day-to-day operations
of the Company and performs (or causes to be performed) such services and
activities relating to the assets and operations of the Company as may be
appropriate.

ASSET MANAGEMENT FEE. The following table presents all compensation, fees and
other benefits (including reimbursement of certain out-of-pocket expenses) that
the Manager may earn or receive under the terms of the Management Agreement.
There are no caps on any category of such compensation, fees or benefits payable
under the Management Agreement.

FEE RECIPIENT PAYOR
--- --------- -----

Quarterly base management fee(1) equal to the following:
For the first four fiscal
quarters commencing with the
fiscal quarter ended June
30, 1998 1.00% per annum of the Average
Invested Assets(2) of the
Company....................... Manager Company
During each fiscal quarter
thereafter............. 0.85% per annum of the
Average Invested Assets up to
$1 billion.................... Manager Company
0.75% per annum of the
Average Invested Assets from
$1 billion to $1.25 billion... Manager Company
0.50% per annum of the
Average Invested Assets in
excess of $1.25 billion....... Manager Company
Quarterly non-cumulative incentive management fee based on the
amount, if any, by which the Company's Funds From
Operations(3) and certain net gains exceed a hurdle
rate(4)............................................................ Manager Company
Termination fee equal to the sum of the base management fee and
incentive management fee, if any, earned during the
immediately preceding four fiscal quarters......................... Manager Company
Reimbursement of out-of-pocket expenses of the Manager paid to
third parties(5)................................................... Manager Company

- ----------------------------
(1) Intended to cover the Manager's costs in providing management services to
the Company. In connection with renewal and re-negotiation of the Management
Agreement, the Board of Directors of the Company may adjust the base
management fee in the future to align it more closely with the Manager's
actual costs of providing such services. The Manager will pay a portion of
this fee to Lend Lease Hyperion Capital Advisors, LLC for sub-management
services performed on behalf of the Company.
(2) The term "Average Invested Assets" for any period means the average of the
aggregate book value of the assets of the Company, including a proportionate
amount of the assets of all of its direct and indirect subsidiaries, before
reserves for depreciation or bad debts or other similar non-cash reserves
less (i) un-invested cash balances and (ii) the book value of the Company's
CMO liabilities, computed by dividing (a) the sum of such values for each of
the three months during such quarter (based on the book value of such assets
as of the last day of each month) by (b) three.
(3) The term "Funds From Operations" as defined by the National Association of
Real Estate Investment Trusts ("NAREIT") means net income (computed in
accordance with GAAP) excluding gains (or losses) from debt restructuring
and sales of property, plus depreciation and amortization on real estate
assets, and after deduction of preferred stock dividends, if any, and
similar adjustments for unconsolidated partnerships and joint ventures.
Funds From Operations does not represent cash generated from operating
activities in accordance with GAAP and should not be considered as an
alternative to net income as an indication of the Company's performance or
to cash flows as a measure of liquidity or ability to make distributions.

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(4) The quarterly incentive management fee is equal to the product of (A) 25% of
the dollar amount by which (1) (a) Funds From Operations (before the
incentive fee) of the Company for the applicable quarter per weighted
average number of shares of Common Stock outstanding plus (b) gains (or
minus losses) from debt restructuring or sales of assets not included in
Funds From Operations of the Company for such quarter per weighted average
number of shares of Common Stock outstanding, exceed (2) an amount equal to
(a) the weighted average of the price per share at the initial offering and
the prices per share at any secondary offerings by the Company multiplied by
(b) 25% of the sum of the Ten-Year U.S. Treasury Rate plus four percent,
and (B) the weighted average number of shares of Common Stock outstanding.
Because this amount is based on the income of the Company, it is not
currently determinable. The quarterly incentive fee is non-cumulative. As
used in calculating the Manager's compensation, the term "Ten-Year U.S.
Treasury Rate" means the arithmetic average of the weekly average yield to
maturity for actively traded current coupon U.S. Treasury fixed interest
rate securities (adjusted to constant maturities of ten years) published by
the Federal Reserve Board during a quarter, or, if such rate is not
published by the Federal Reserve Board, any Federal Reserve Bank or agency
or department of the federal government selected by the Company. If the
Company determines in good faith that the Ten-Year U.S. Treasury Rate cannot
be calculated as provided above, then the rate shall be the arithmetic
average of the per annum average yields to maturities, based upon closing
asked prices on each business day during a quarter, for each actively traded
marketable U.S. Treasury fixed interest rate security with a final maturity
date not less than eight nor more than twelve years from the date of the
closing asked prices as chosen and quoted for each business day in each such
quarter in New York City by at least three recognized dealers in U.S.
government securities selected by the Company.
(5) There is no cap on the reimbursement of out-of-pocket expenses.

The ability of the Company to generate Funds from Operations in excess of the
Ten-Year U.S. Treasury Rate, and of the Manager to earn the incentive
compensation described in the above table, is dependent upon the level and
volatility of interest rates, the Company's ability to react to changes in
interest rates and to utilize successfully the operating strategies described
herein, and other factors, many of which are not within the Company's control.

The management fees are payable in arrears. The Manager's base and incentive
fees will be calculated by the Manager within 45 days after the end of each
quarter, and such calculation will be promptly delivered to the Company. The
Company is obligated to pay such fees and expenses within 60 days after the end
of each fiscal quarter.

The Manager is expected to use the proceeds from its base management fee and
incentive compensation in part to pay compensation to its officers who, although
they also are officers of the Company, will receive no cash compensation
directly from the Company. During 1998, the Manager earned $1,096,562 in base
management fees and no incentive fees. There were no out-of-pocket expenses that
the Company had to reimburse the Manager.

Option Plan

Eligibility and Awards. All employees (including officers), directors and others
providing services to the Company, as well as the Manager and employees
(including officers) and directors of the Manager (collectively, the "Eligible
Recipients"), will be eligible to receive stock options at the discretion of the
Compensation Committee of the Board of Directors. In addition, 80% of the
options remaining in the option plan following the initial grant of options to
the Manager have been set aside for future option grants to the Manager. Such
reserve does not guarantee that the Manager will be granted such options. The
Compensation Committee will be authorized to determine which Eligible Recipients
shall receive options, and the terms and conditions on which options shall be
granted. The Compensation Committee may grant options to employees of the
Manager, subject to certain limits described in the option plan. Options granted
pursuant to the option plan will be nonqualified stock options. Options granted
to individuals pursuant to the option plan generally are not transferable except
by will or by the applicable laws of descent and distribution. The Manager may
transfer its options to any other Eligible Recipient. Grants of options under
the option plan to persons or entities other than employees and directors of the
Company may result in a charge against the Company's earnings for financial
reporting purposes under GAAP. Any such charge to earnings will be recognized
over the period during which such options become exercisable.

The Company has a stock option plan for the Company's executive officers and the
Manager, which provides for the issuance of up to 2,500,000 shares of Common
Stock. At the closing of the Offering, the Company granted the Manager a fully
vested option to purchase 1,166,667 shares of Common Stock exercisable at the
Offering price of $15.00 per share. The Manager received the stock option as
compensation for its efforts in completing the Offering. The Manager granted a
portion of its options to the individual officers of the Company. One-fourth of
the Manager's options become exercisable on each of the first four anniversaries
of the Offering. Unless exercised, these options expire in 2008.

The underwriters sold in the Offering 79,586 shares of Common Stock to directors
and officers of the Company and the Manager for $15.00 per share. Pursuant to
the Company's Directed Share Program, such individuals were granted an option to
purchase one share of Common Stock for each share purchased in the Offering at
an exercise price of $15.00 per share. One-fifth of the options became
exercisable immediately, and one-fifth of the options become exercisable on each
of the first four anniversaries of the Offering. Unless exercised, these options
expire in 2008.

Exercise Price and Exercisability. The exercise price of all options will be not
less than 100% of the fair market value of the Common Stock subject to the
options on the date of grant. All options will become exercisable as determined
by the Compensation Committee at the time of the award. Options granted under
the plan generally will be exercisable in five equal installments on the date of
grant and each of the four anniversaries of the date of grant. The exercise
price of an option may be paid by any one or more of the following: (i) cash or
certified check, (ii) shares of Common Stock held more than six months, (iii)
cancellation of any indebtedness owed by the Company, (iv) a full-recourse
promissory note, if approved by the Committee or (v) a "cashless" exercise
pursuant to a sale through a broker of all or a portion of the shares covered by
the option.

Termination of Employment. If an Eligible Recipient's affiliation with the
Company is terminated for cause or if such Eligible Recipient terminates his
affiliation voluntarily, all of such Eligible Recipient's unexercised options
will terminate

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immediately upon such termination. Except as otherwise determined by the
Compensation Committee, if an Eligible Recipient has a termination of
affiliation because of death or total and permanent disability or for any other
reason (other than a voluntary termination or a termination for cause), all of
such Eligible Recipient's unexercised options may be exercised by the Eligible
Recipient or his beneficiary or legal representative to the extent such options
are or become exercisable in accordance with their terms during the shorter of
(i) the one-year period following the Eligible Recipient's death or total and
permanent disability or, if longer, a period to be determined by the Board
acting in its absolute discretion or (ii) the period of the remaining life of
the option. If an Eligible Recipient has a termination of affiliation for any
reason other than death, total and permanent disability, a voluntary termination
or a termination for cause, all of such Eligible Recipient's unexercised options
may be exercised by the Eligible Recipient on the date of such termination or
during the 90 day period immediately following such termination or, if less,
during the remaining life of the option. Upon termination of the Manager, all
options granted to employees of the Manager will become immediately exercisable
for a period of 90 days from such termination.

Amendment and Termination. The Board of Directors generally may amend the option
plan at any time, except that approval by the Company's shareholders will be
required for any amendment that increases the aggregate number of shares of
Common Stock that may be issued pursuant to the option plan, that materially
changes the class of persons eligible to receive such options, that extends the
maximum option term or that decreases the exercise price of any option to less
than the fair market value of the Common Stock on the date of grant. Shares of
Common Stock subject to options that expire, are terminated or otherwise are
surrendered to the Company will be available for issuance in connection with
future awards under the option plan. No option term may exceed ten years from
the date of grant, and no option grant may be made under the option plan after
the tenth anniversary of the date the option plan was adopted by the Board of
Directors.

Limits of Responsibility

Pursuant to the Management Agreement, the Manager does not assume any
responsibility other than to render the services called for thereunder and is
not responsible for any action of the Company's Board of Directors in following
or declining to follow its advice or recommendations. In addition, the Manager
does not owe any fiduciary duties to the Company and its shareholders. The
Manager, its directors and its officers are not liable to the Company, any
subsidiary of the Company, the Independent Directors, the Company's shareholders
or any subsidiary's shareholders for acts performed in accordance with and
pursuant to the Management Agreement, except by reason of acts constituting bad
faith, willful misconduct, gross negligence or reckless disregard of their
duties under the Management Agreement. The Company has agreed to indemnify the
Manager, its directors and its officers with respect to all expenses, losses,
damages, liabilities, demands, charges and claims arising from acts of the
Manager not constituting bad faith, willful misconduct, gross negligence or
reckless disregard of duties, performed in good faith in accordance with and
pursuant to the Management Agreement.

The Management Agreement does not limit or restrict the right of the Manager or
any of its officers, directors, employees or affiliates from engaging in any
business or rendering services of any kind to any other person, including the
purchase of, or rendering advice to others purchasing, assets that meet the
Company's policies and criteria.

Employees.

As of December 31, 1998, the Company had no employees. The Company is managed by
the Manager. The Company is not party to any collective bargaining agreement.

REIT Status.

The Company plans to make an election to be taxed as a REIT under the Code,
commencing with its first REIT taxable year ended on December 31, 1998. The
Company believes that it qualifies for taxation as a REIT and therefore will
not be subject to federal corporate income tax on net income that
it distributes currently.

To qualify as a REIT under the Code, the Company must meet several requirements
regarding, among other things, the ownership of its outstanding stock, the
sources of its gross income, the nature of its assets, and the levels of
distributions to the shareholders. These requirements are highly technical and
complex, and the Company's determination that it qualifies as a REIT requires
an analysis of various factual matters and circumstances that may not be
entirely within the Company's control. Accordingly, there can be no assurance
that the Company has qualified or will remain qualified as a REIT.

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If the Company fails to qualify for taxation as a REIT in any taxable year,
and certain relief provisions of the Code do not apply, the Company will be
subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Distributions to the Company's
shareholders in any year in which the Company fails to qualify will not be
deductible by the Company nor will they be required to be made. In such event,
to the extent of the Company's current and accumulated earnings and profits,
all distributions to shareholders will be taxable as ordinary income and,
subject to certain limitations of the Code, corporate distributees may be
eligible for the dividends received deduction. Unless entitled to relief under
specific statutory provisions, the Company also will be disqualified from
taxation as a REIT for the four taxable years following the year during which
the Company ceased to qualify as a REIT. It is impossible to predict whether
the Company would be entitled to such statutory relief.

INVESTMENT PORTFOLIO.

The Company was organized to invest in commercial and multifamily mortgage and
real estate related assets sourced, managed and actively serviced through the
Manager's offices located in major metropolitan markets throughout the United
States. As of December 31, 1998, the Company's real estate related investments
included $71,567,475 of CMBS, $44,374,346 of Mezzanine Investments, a
$15,150,400 Mortgage Loan and $7,294,583 of real estate investments. The CMBS
and Mezzanine Investments were recorded at the lower of cost or fair value in
order to recognize impairment losses. The Mortgage Loan and real estate
investments were also recorded at the lower of cost or fair value since they
were held for sale at December 31, 1998. During the year, the Company acquired
$18,423,411 in additional CMBS and $68,826,722 in additional Mortgage Loans.
These investments were sold before year-end and resulted in realized losses of
$1,124,753 on the sale of CMBS, and $5,325,524 on the sale of Mortgage Loans. In
addition, the Company incurred a loss of $1,116,400 on the termination of
Mortgage Loan commitments.

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Commercial Mortgage-Backed Securities.

During 1998, the Company acquired $127,077,975 in CMBS investments. Prior to
December 31, 1998, the Company sold $18,928,000 of its CMBS resulting in a
realized loss of $1,167,179. The Company recorded impairment losses on the
remainder of its CMBS in the amount of $16,676,570 at December 31, 1998.

The following table shows the Company's CMBS portfolio as of December 31, 1998.

Weighted Estimated
Average Amortized Impairment Amortized Cost Fair
Security Rating Life Cost Losses Adjusted Value
- --------------- ----------- ----------- -------------- -----------

CMBS:
BBB- 7/7/12 $ 9,452,762 $ 541,562 $ 8,911,200 $ 8,911,200
BB+ 2/6/13 15,861,815 2,922,753 12,939,062 12,939,062
BB 6/30/12 20,658,847 3,490,551 17,168,296 17,168,296
BB- 4/26/13 4,368,958 951,933 3,417,025 3,417,025
B 7/7/11 32,282,831 6,815,014 25,467,817 25,467,817
B- 4/26/13 2,808,723 674,162 2,134,561 2,134,561
Unrated 4/26/13 2,810,109 1,280,595 1,529,514 1,529,514
----------- ----------- ----------- -----------

Total .............................. $88,244,045 $16,676,570 $71,567,475 $71,567,475
=========== =========== =========== ===========

The Company's investments in CMBS are supported by mortgage loans on the
following property types and are located in the following regions:

Property Type % Region %
------------- --- -------- ---

Hotel 28 Northeast 34
Retail 21 West 30
Other 21 Southeast 24
Office 13 Midwest 12
Multifamily 11
Industrial 6

From January 1, 1999 to March 31, 1999 the Company has sold certain of its CMBS
investments. The total proceeds from the sales were $47.8 million resulting in a
realized loss of $14.2 million, of which $11.7 million was recognized in 1998.

Mezzanine Investments.

As of December 31, 1998, the Company's Mezzanine Investments consisted
of the following:

Estimated
Underlying Interest Maturity Amortization Face Amortized Impairment Carrying Fair
Security Rate Date Period Value Cost Loss Value Value
- -------------- -------- ------------ -------------- ------------ ------------ ------------ ------------ -----------

Office 12.00% 05/01/2007 Interest Only $21,000,000 $24,635,473 $ 4,260,059 $20,375,414 $21,000,000
Hotel 11.77% * 06/30/2003 Interest Only 19,647,200 19,722,940 2,958,676 16,764,264 16,764,264
Multi-family 10.63% ** 08/01/2008 10 years 2,800,000 2,746,565 372,308 2,374,257 2,374,257
Retail 9.69% * 05/01/2005 7.5 years 4,570,896 4,488,901 459,590 4,029,311 4,029,311
Other 10.57% ** 07/01/2008 10 years 1,000,000 975,958 144,858 831,100 831,100
----------- ----------- ----------- ----------- -----------

Total $49,018,096 $52,569,837 $ 8,195,491 $44,374,346 $44,998,932
=========== =========== =========== =========== ===========

* Interest rates are for year ended December 31, 1998 however, these interest
rates are adjustable from period to period.
** Interest rates represent the stated coupon rates written into the contract.
The yield to maturities for the multi-family and other underlying security
are 12% and 11.82% respectively.

The Company's $19,647,200 Mezzanine Investment is a British pounds Sterling
loan. The Company purchased the investment for L.11.98 million. Interest on the
loan is based on Sterling Libor ("Base Rate") plus 4.00%. The exchange rate at
the date of investment was 1.64 dollars per pound. In order to reduce the risk
of foreign currency exchange rate fluctuations, the Company entered into a
foreign currency swap arrangement with Merrill Lynch Capital

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Services, Inc. The swap arrangement provides the Company with an exchange rate
of $1.64 per pound on the return of its principal regardless of exchange rate
fluctuation. The swap arrangement also converts the Base Rate to US$ Libor minus
0.06% regardless of movements in the Sterling Libor. The Company is subject to
foreign currency risk on the spread portion (4.00%) of the quarterly interest
payments. The market value of the currency swap at December 31, 1998 was a
liability of $242,000. The foreign currency swap arrangement expires on the
maturity date of the related loan.

Mortgage Loans.

As of December 31, 1998, the Company's investment in Mortgage Loans consisted of
White Station Tower, first Mortgage Loan in the amount of $16,000,000 that
closed in July 1998. The loan is a 10-year loan on which principal and interest
are paid monthly at an annual interest rate of 7.11%. The collateral is a
278,000 square foot office building in Memphis, Tennessee. As of December 31,
1998, the loan was recorded at its negotiated payoff amount. A discounted pay
off was accepted on January 4, 1999 for $15,150,400, resulting in a realized
loss of $797,810.

Real Properties.

As of December 31, 1998, the Company's investment in real property consisted of
the following:

LAKESIDE PLAZA - In June 1998, the Company acquired a 72,829 square foot,
specialty retail and commercial center located in Stockton, California for
$3,675,000. The property was originally built in 1981. The property consists of
one single tenant store anchored by a 26,000 square foot Marshall's and a
multi-tenant strip retail building. The multi-tenant building contains one level
of storefronts on the north side and two levels of storefronts on the south side
containing an additional 46,829 square feet. The total site is 4.39 acres.

BRYARWOOD 85 - In September 1998, the Company acquired a 51,388 square foot
office complex located in Atlanta, Georgia for $4,058,500. The property has two
buildings, each occupied by one tenant. The largest building is 44,974 square
feet and is occupied by BellSouth. The second building is 6,414 square feet and
is occupied by MCG Communications. The property was originally built in 1969. In
1998 the property underwent improvements to complete an ADA ramp and restroom,
exterior stucco was repainted and repaired, a new built-up roof system was
completed and the electrical supply to the property was upgraded. The property
was sold on March 25, 1999 for $3.8 million, resulting in a realized loss of
$258,000, all of which was recognized in 1998.

At December 31, 1998, the Company's investments in real estate are held for
sale. Accordingly, the Company wrote down its investments in real estate to
estimated fair value and recognized an impairment loss of $447,505. The
Company's ability to hold its real estate investments has been negatively
affected by the recent turmoil in the financial markets and its effect on the
value of the property, along with the restructuring of its debt agreements.

Minimum future rentals to be received on real estate properties under leases in
effect as of December 31, 1998 are as follows:

(In Thousands)
Property 1999 2000 2001 2002 2003 Thereafter Total
- --------- ---- ------ ---- ---- ---- ---------- -------

Lakeside Plaza $ 415 $ 398 $234 $ 66 $ 58 $ 41 $1,212
Bryarwood 85 697 718 739 761 432 339 3,686
------ ------ ---- ---- ---- ---- ------

Totals $1,112 $1,116 $973 $827 $490 $380 $4,898
====== ====== ==== ==== ==== ==== ======

The major tenants occupying more than ten percent of leasable space at each of
the Company's real estate properties are as follows:

Property Major Tenants Percentage of Leasable Space
- -------- ------------- ----------------------------

Lakeside Plaza Marshall's 35.7%
California Fitness 12.4%
Bryarwood 85 BellSouth 87.5%
MGC Communications 12.5%

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19

Item 2. Properties.

The Company does not maintain any offices. It relies on the facilities of the
Manager. In addition, reference is made to the section captioned "Business -
Real Properties" in Item 1, which is incorporated by reference herein.

Item 3. Legal Proceedings.

None

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

None

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

The Company's Common Stock is traded under the symbol "CHAS" on the Nasdaq Stock
Market. Below is a table of the high and low sale prices for the Common
Stock during the three quarters of 1998 after the Offering on April 23, 1998.

Quarter High Low

2nd qtr. 98 $15.50 $12.88
3rd qtr. 98 13.38 7.75
4th qtr. 98 10.88 2.53

On March 30, 1999, the Company's Common Stock closed at $5.38 per share. As of
March 30, 1999 there were approximately 10 shareholders of record (including
holders who were nominees for a number of beneficial shareholders) of the
Company's Common Stock.

During 1998, the Company paid total dividends of $0.41 per share. A $0.09 per
share dividend was declared for shareholders of record on June 30, 1998 and paid
on July 15, 1998. A $0.32 per share dividend was declared for shareholders of
record on September 30, 1998 and paid on October 15, 1998. On November 13, 1998,
the Company announced that the fourth quarter dividend had been suspended. Under
its borrowing arrangements with Morgan Guaranty Trust and LLIH, the Company is
allowed to pay distributions only to meet the requirements of a REIT. The
Company was not required to pay any dividends in the fourth quarter of 1998 due
to net taxable losses incurred for the year.

Item 6. Selected Financial Data.

The following sets forth selected financial data for the entire year ended
December 31, 1998 and selected quarterly financial data for the year ended
December 31, 1998:

YEAR ENDED QTR ENDED QTR ENDED QTR ENDED QTR ENDED
31-DEC-98 31-DEC-98 30-SEP-98 30-JUN-98 31-MAR-98
------------- ------------- ------------- ------------ ------------

Total revenue $ 9,374,394 $ 4,406,914 $ 3,595,081 $ 1,372,399
Net income (loss) (45,671,695) (7,605,299) (38,169,032) 102,636
Net income (loss)
per common share (5.54) (1.03) (4.46) .01
Total assets 154,512,426 $ 154,512,427 182,752,533 127,455,082 $ 1,000
Cash distributions
per share $ .41 $ -- $ .32 $ .09 $ --

The above selected financial data for the 1998 should be read in conjunction
with the consolidated financial statements and the related notes appearing
elsewhere in this annual report.

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

The following discussion of the Company's consolidated financial condition,
results from operations, and capital resources and liquidity should be read in
conjunction with the Financial Statements and related Notes included in Item 8.

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20

Capital Resources and Liquidity.

Liquidity is the ability for the Company to meet its cash requirements including
any ongoing commitments, borrowings, shareholder distributions, lending and
general business activities. The Company's source of liquidity during the period
ended December 31, 1998 consisted of net proceeds from the Offering, borrowings
under the Master Loan and Security agreement with Morgan Guaranty Trust (the
"Morgan Guaranty Trust Agreement"), borrowings under the Merrill Lynch
Agreement, borrowings under the LLIH Agreement and repurchase financing from the
Deutsche Bank Agreement. The net proceeds from the Offering were $102,951,000.

From the date of the Offering until the funds were invested in real estate
assets, the Offering proceeds were held in a short-term investment account
earning an annualized yield of 6.15%. Once the Offering proceeds were fully
invested, the Company began to utilize the Master Loan and Security Agreement
that was established with Morgan Guaranty Trust in the amount of $450,000,000,
the Merrill Lynch Agreement in the amount of $35,000,000 and the Deutsche Bank
Agreement, with unlimited transactions subject to the approval of both Deutsche
Bank and the Company. After the Company's disclosure in October 1998 that it
would need to restructure its debt in order to avoid default status under the
debt covenants with Merrill Lynch and Morgan Guaranty Trust, the Company
negotiated amendments to both lines. The Morgan Guaranty Trust debt had two
amendments dated November 13, 1998 and January 29, 1999, respectively. The first
amendment reduced the available line of credit to $90,000,000 until January 31,
1999 and $50,000,000 thereafter. The interest rate was increased to 150 basis
points over Libor until December 31, 1998 and 200 basis points over Libor until
March 31, 1999, the new termination date. The second amendment reduced the
required cash on hand by the Company from $10,000,000 to $5,000,000. On February
8, 1999, Morgan Guaranty Trust agreed to a waiver of the Maintenance of Interest
Coverage Ratio, one of its debt covenants, for the fourth quarter of 1998. The
Merrill Lynch Agreement has been amended three times, first on October 23, 1998,
second on January 27, 1999 and third on February 25, 1999. The first amendment
granted an extension for repayment until January 31, 1999. The second amendment
increased the borrowing rate to 500 basis points over Libor, reduced the line to
$8,005,918 and extended the maturity date until February 26, 1999. The third
amendment extended the maturity date until March 25, 1999. As a result of a
cross-default clause in the Merrill Lynch Agreement, the Company obtained a
waiver from Merrill Lynch of its failure to meet the Maintenance of Interest
Coverage Ratio in the Morgan Guaranty Trust Agreement.

During the fourth quarter, the Company also entered into a unsecured
subordinated debt agreement in the amount of $40,000,000 with LLIH. The debt
originally matured on March 31, 1999, but has been extended to April 5, 1999,
and has an annual interest rate of 14% until January 31, 1999 and 16%
thereafter. As a result of a cross-default clause in the LLIH Agreement, the
Company obtained a waiver from LLIH of its failure to meet the Maintenance of
Interest Coverage Ratio in the Morgan Guaranty Trust Agreement. As of December
31, 1998, the Company had an outstanding balance of $9,000,000 under the LLIH
Agreement.

As a result of the turmoil in the credit markets during the third and fourth
quarter 1999, the Company cancelled its treasury lock positions and incurred a
liability of $13,070,685.

In order to meet the Company's liquidity needs in early 1999, the Board of
Directors, on January 25, 1999, approved a plan of action to sell a portion of
the Company's assets in order to meet the Company's outstanding obligations. On
February 19, 1999, the Company sold a CMBS for total proceeds of $8.8 million.
The proceeds were used to repay the Company's indebtedness under the Deutsche
Bank Agreement. On March 31, 1999, the Company completed the sale of the package
of CMBS. The total proceeds from the sale were $39.0 million. The Company used
the proceeds to repay its borrowings from Morgan Guaranty Trust. In connection
with its sale of investments on March 31, 1999, the Company entered into an
agreement to sell a Mezzanine Investment to GMAC. The agreement allows the
Company to repurchase the investment no later than April 1, 2000. The GMAC Repo
is expected to close no later than April 5, 1999, and will generate proceeds of
$10.5 million. The repurchase price of the GMAC Repo will be adjusted such that
GMAC will receive an 8% annualized yield on its investment if the Company
repurchases the investment prior to October 1, 1999. After October 1, 1999, the
repurchase price is fixed at $9.6 million. The Company will use the proceeds of
the GMAC Repo to repay borrowings from LLIH and to meet its remaining corporate
obligations, which primarily consist of hedging liabilities.

The Company has paid off and terminated all of its existing credit facilities
with the exception of $8.5 million outstanding to LLIH, which is expected to be
repaid on April 5, 1999 with the proceeds of the GMAC Repo. The Company's
remaining material liability is $10.9 million of accrued losses on terminated
forward Treasury locks. $5.9 million of this liability is due on April 30, 1999,
and $5.0 million is due on July 2, 1999. The Company believes its net working
capital and net operating cash flow will be sufficient to meet all of the
Company's remaining hedging liabilities.

20
21

Working Capital Reserves.

At December 31, 1998 the Company had $11,957,616 in cash and short-term
investments. Included in the November 1998 debt restructuring were covenants
requiring the Company to maintain a minimum cash balance of $10,000,000. These
covenants were included in its borrowing agreements with Morgan Guaranty Trust
and Merrill Lynch. As of January 31, 1999, the covenants were amended requiring
the Company to maintain a minimum balance of $5,000,000. The excess cash was
used to reduce its outstanding debt. As of March 31, 1999, the minimum cash
requirements were terminated with the termination of the Morgan Guaranty Trust
Agreement.

Financial Condition.

Securities available-for-sale. Due to uncertainty of the Company's ability to
hold its CMBS investments until the cost of the CMBS could be recovered, the
Company determined that the decline in the market value of its CMBS below
amortized cost for the year ended December 31, 1998 was other than temporary.
Accordingly, the Company wrote down its investment in CMBS to fair value and
recognized an impairment loss of $16,676,570 for the year ended December 31,
1998. The Company sold two CMBS holdings during the fourth quarter for
$13,823,912, resulting in a realized loss of $1,167,179. On March 31, 1999, the
Company sold $39.0 million of CMBS in order to repay its obligations under its
borrowing agreements.

Mezzanine Investment Portfolio. Due to the uncertainty of the Company's ability
to hold the Mezzanine Investments until the cost of the loans could be
recovered, the Company determined that the decline in the market value of the
loans below amortized cost was other than temporary. Accordingly, the Company
wrote down its investments in Mezzanine Investments by $8,195,491 for the year
ended December 31, 1998. In connection with its sale of CMBS on March 31, 1999,
the Company entered into an agreement to sell a Mezzanine Investment to GMAC.
The agreement allows the Company to repurchase the investment no later than
April 1, 2000. The GMAC Repo is expected to close no later than April 5, 1999,
and will generate proceeds of $10.5 million. The repurchase price of the GMAC
Repo will be adjusted such that GMAC will receive an 8% annualized yield on its
investment if the Company repurchases the investment prior to October 1, 1999.
After October 1, 1999, the repurchase price is fixed at $9.6 million. The
Company will use the proceeds of the GMAC Repo to repay borrowings from LLIH and
to meet its remaining corporate obligations, which primarily consist of hedging
liabilities.

Mortgage Loan Portfolio. Due to the uncertainty of the Company's ability to hold
its Mortgage Loans until the cost of the loans could be recovered and due to the
restructuring of its debt agreements, the Company focused on selling or
terminating its Mortgage Loans and Mortgage Loan commitments during the fourth
quarter of 1998. As a result, the Company was able to sell or terminate all of
its loan commitments and all but one of its Mortgage Loans. The activity
resulted in realized losses of $6,441,924 for the year ended December 31, 1998.
The one remaining Mortgage Loan was sold on January 4, 1999 at a loss of
$797,810. This loss was recognized by the Company as an operating loss for the
year ended December 31, 1998.

Real Estate Investments. At December 31, 1998, the Company's two real estate
investments were considered held for sale. Preliminary offers determined that
the values of the properties were less than book value. Thus, the properties
were written down by $447,505 as of December 31, 1998. The Company's ability to
hold its real estate investments had been negatively affected by the turmoil in
the financial markets and its effect on the value of the property and the
Company's cost of capital, along with the restructuring of its debt agreements.
On March 25, 1999 the Company sold one real estate investment for $3.8 million
in order to meet its debt obligations.

Short-term borrowings. During the fourth quarter of 1998, the Company obtained
additional financing from LLIH and restructured its credit facilities with
Morgan Guaranty Trust and Merrill Lynch, as further discussed in "Liquidity and
Capital Resources" and in the footnotes to the Company's consolidated financial
statements as of and for the year ended December 31, 1998 included herein. The
Company used its short-term borrowing arrangements to finance its investments in
certain CMBS, Mortgage Loans and Mezzanine Investments. As of December 31, 1998,
the Company had short-term borrowings totaling $78,844,531. The total amount was
comprised of:

Loan Facility Amount Borrowed Assets Pledged
- ------------- --------------- --------------

Morgan Guaranty $ 52,412,238 Bear Stearns, GSMS 1998-GLII G, ASC 1996-MD6B1 bonds
Merrill Lynch $ 9,505,918 Savoy Mezzanine Investment
Deutsche Bank $ 7,926,375 GMAC 1998-C1 F
LLIH $ 9,000,000 Unsecured

Treasury locks payable. As a result of the turmoil in the credit market during
the fourth quarter of 1998 and the Company's failure to comply with its debt
agreements, the Company determined that its ability to obtain long-term fixed
rate financing is not probable. The turmoil also created uncertainty as to the
Company's ability to hold its investments. Accordingly, the Company discontinued
hedge accounting for its Treasury locks and incurred a loss of $13,070,685 on
these agreements. As part of its debt restructuring on November 13, 1998, the
Company paid $2,390,000 to settle its Treasury locks payable with

21
22
Merrill Lynch. The remaining amounts payable and dates due are provided in the
table below. On January 27, 1999, the Company canceled an interest rate collar
at a cost of $265,000.

Amount Due Due Date
---------- --------

Salomon Brothers Holding Co., Inc. $4,771,187 April 30, 1999
Morgan Guaranty Trust $1,149,570 May 3, 1999
Morgan Guaranty Trust $5,034,953 July 2, 1999

Shareholders' Equity. Shareholders' equity increased by $124,022,858 as a result
of the Offering on April 23, 1998. The increase was primarily offset by
1,634,000 shares of Common Stock repurchased by the Company and retired during
1998, totaling $16,191,994, and net losses of $45,671,695. Also included in the
change were dividends paid of $3,255,239, the value of stock options issued of
$888,773 and shares issued to the Independent Directors in the amount of
$45,000.

Results from Operations.

Revenue. Revenue totaled $9,374,394 for the year ended December 31, 1998.
Revenue is comprised primarily of interest income on CMBS investments, Mezzanine
Investments, Mortgage Loans and from the cash proceeds from the Offering before
they were fully invested. The Offering proceeds were fully invested on July 8,
1998. At December 31, 1998, rental income consisted of two real estate
investments. The real estate investments include one retail property located in
Stockton, California and one office building located in Atlanta, Georgia.

Operating Expenses. Operating expenses consist of expenses incurred in operating
the Company, property and investment operations, and totaled $47,479,412 for the
year ended December 31, 1998. Included in the amount were impairment losses
totaling $26,117,376 and losses on forward interest rate Treasury lock
agreements of $13,070,685. These losses are due to financial market conditions
and the widening of credit spreads. As a result of the Company's restructuring
in November 1998, the Company incurred fees of $1,842,174, $800,000 of which are
classified as additional interest expense. During the year the Company recorded
a one-time charge of $877,917 for stock options issued to the Manager as part of
the Offering. Management fees were calculated at 1% per annum of the Average
Invested Assets per quarter and totaled $1,096,562 for year ended December 31,
1998. The Company also recorded general and administrative expenses of $745,285
for the year ended December 31, 1998. These costs consist of professional fees,
insurance costs and other miscellaneous expenses.

Loss on Sale of CMBS. The loss on sale of CMBS was a result of the disposition
of two CMBS investments during the fourth quarter for $13,823,912. The losses
totaled $1,167,179. The losses were offset by a second quarter gain of $42,426
on the sale of CMBS.

Loss on Sale and Settlement of Mortgage Loans. The loss was a result of the
Company's disposition of its Mortgage Loans and Mortgage Loan commitments.
During the fourth quarter of 1998, all of the commitments were sold or
terminated and all but one of its Mortgage Loans were sold. The Company realized
losses of $5,325,524 on the sale of $68,826,722 in Mortgage Loans and incurred
expenses of $1,116,400 on the termination of $59,315,000 of loan commitments,
resulting in a total loss of $6,441,924.

Recent Developments.

On January 4, 1999 the Company negotiated a discounted payoff of its last
Mortgage Loan, White Station Tower. The Company's current portfolio thereafter
has been primarily comprised of Mezzanine Investments and CMBS. The Company has
used the proceeds from the payoff to continue to reduce its debt obligations.

On January 27, 1999, the Company terminated an interest rate collar at a cost to
the Company of $265,000.

On February 19, 1999 the Company sold a CMBS investment. The total proceeds from
the sale, including accrued interest were $8,862,813. The sale resulted in a
loss of $626,917, $541,561 of which was recognized in 1998. The Company used
$7,955,605 to pay off the amount borrowed from Deutsche Bank and accrued
interest through the date of sale.

On March 25, 1999, the Company borrowed $8,000,000 under its borrowing agreement
with LLIH to pay of its remaining obligation under the Merrill Lynch Agreement.

On March 31, 1999, the Company sold a package of CMBS for $39.0 million,
resulting in realized losses of $13.6 million, of which $11.2 million was
recognized in 1998. On March 31, 1999, the Company used the proceeds to repay
its

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23
borrowings. In connection with its sale of CMBS on March 31, 1999, the
Company entered into the GMAC Repo.

REIT Status.

The Company plans to make an election to be taxed as a REIT under the Code,
commencing with its first REIT taxable year ending on December 31, 1998. The
Company believes that it qualifies for taxation as a REIT and therefore will not
be subject to federal corporate income tax on its net income that is distributed
currently to its shareholders.

To qualify as a REIT under the Code, the Company must meet several requirements
regarding, among other things, the ownership of its outstanding stock, the
sources of its gross income, the nature of its assets, and the levels of
distributions to its shareholders. These requirements are highly technical and
complex, and the Company's determination that it qualifies as a REIT requires
an analysis of various factual matters and circumstances that may not be
entirely within the Company's control. Accordingly, there can be no assurance
that the Company has qualified or will remain qualified as a REIT.

If the Company fails to qualify for taxation as a REIT in any taxable year, and
certain relief provisions of the Code do not apply, the Company will be subject
to tax (including any applicable alternative minimum tax) on its taxable income
at regular corporate rates. Distributions to the Company's shareholders in any
year in which the Company fails to qualify will not be deductible by the
Company nor will they be required to be made. In such event, to the extent of
the Company's current and accumulated earnings and profits, all distributions
to shareholders will be taxable as ordinary income and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific
statutory provisions, the Company also will be disqualified from taxation as a
REIT for the four taxable years following the year during which the Company
ceased to qualify as a REIT. It is impossible to predict whether the Company
would be entitled to such statutory relief.

Quantitative and Qualitative Disclosures about Market Risk.

Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates, commodity prices and equity prices. The Company
is primarily exposed to interest rate and spread risk. Interest rates and
spreads are sensitive to many external forces including, but not limited to,
governmental monetary and tax policies and domestic and international economic
and political factors. These forces are beyond the control of the Manager and
the Company. Changes in the general level of interest rates can affect the
Company's net interest income, which is the difference between the interest
income earned on interest-earning assets and the interest expense incurred in
connection with its interest-bearing liabilities, by affecting the spread
between the Company's interest-earning assets and interest-bearing liabilities.
Changes in the level of interest rates also can affect, among other things, the
ability of the Company to originate and acquire loans, the value of the
Company's mortgage-related securities and other interest-earning assets, and
its ability to realize gains from the sale of such assets.

The Company may utilize a variety of financial instruments, including
interest rate swaps, caps, floors, and other interest rate contracts, in order
to limit the effects of interest rates on its operations. The use of these types
of derivatives to hedge interest-earning assets and/or interest-bearing
liabilities carries certain risks, including the risk that losses on a hedge
position will reduce the funds available for payments to holders of securities
and, indeed, that such losses may exceed the amount invested in such
instruments. A hedge may not perform its intended purpose of offsetting losses
or increased costs. Moreover, with respect to certain of the instruments used as
hedges, the Company is exposed to the risk that the counterparties with which
the Company trades may cease making markets and quoting prices in such
instruments, which may render the Company unable to enter into an offsetting
transaction with respect to an open position.

The following table quantifies the potential changes in net interest income
and net asset value should interest rates rise or fall. Due to the restructuring
of the Company's portfolio during the first quarter of 1999, certain assets were
sold and the Company's borrowings were repaid. Thus, the table below calculates
the changes in the assets owned by the Company as of March 31, 1999, over the
calendar year 1999. The results assume that yield curves of the rate changes
will be parallel to each other. Net asset value is calculated as the sum of the
present value of cash in-flows generated from interest-earning assets net of
cash outflows in respect of interest-bearing liabilities. The base interest rate
scenario assumes interest rates at December 31, 1998. All changes in the net
asset value are a result of valuing assets based on changes in interest rates.
These changes do not include the effects of income or dividends. The net
interest income is interest income (excluding interest income on cash) netted
with interest expense. All changes are measured by percentage changes from the
base interest rate. Actual results could differ significantly from these
estimates.

Net
Change in Interest Rate Net Interest Income Asset Value
- ----------------------- ------------------- -----------

+400 15.6% (16.5)%
+300 11.7% (12.9)%
+200 7.8% (9.0)%
+100 3.9% (4.7)%
Base 0.0% 0.0%
-100 (3.9)% 5.2%
-200 (7.8)% 10.9%
-300 (11.7)% 17.2%
-400 (15.6)% 24.1%

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Year 2000.

The inability of computers, software and other equipment to recognize and
properly process data fields containing a two-digit year is commonly referred to
as the Year 2000 compliance issue ("Y2K"). As the year 2000 approaches, such
systems may be unable to accurately process certain date-based information.

Y2K exposures of the Company are currently being assessed. Potential critical
exposures include reliance on third party vendors and building systems that are
not Y2K compliant. The Company has begun to communicate with third party service
vendors such as the Manager and property managers in an effort to assess their
Y2K compliance status and the adequacy of their Y2K efforts.

The Manager has made Year 2000 compliance a high priority for replacement
applications and is in the process of updating and replacing other applications
that are not Year 2000 compliant. The Manager expects to complete the updating
of its critical systems no later than March 31, 1999, which will allow for nine
months of systems testing to resolve any remaining Year 2000 compliance issues.
However, if any of the vendors of the Manager's Year 2000 compliant software
fail to perform pursuant to their contracts with the Manager, the Manager's Year
2000 compliance could be jeopardized, and could materially adversely affect the
Company. The Manager does not believe that the costs to remediate any Year 2000
issues will materially affect its business, operations or financial condition,
or will have an adverse affect on its clients, including the Company.

Each property owned by the Company is being individually assessed in an effort
to identify critical Y2K issues specific to each property. Required remediation
strategies will depend on the outcome of the assessments and therefore will not
be developed until the property assessments are complete. The Manager expects
the majority of critical property assessments to be completed and remediation
efforts to be underway by the end of the first quarter of 1999.

The Company has not incurred any material costs to date relating to Y2K. Total
property assessment costs to the Company are expected to total approximately
$5,700. These costs were not incurred and therefore not accrued as of December
31, 1998. Remediation efforts may vary significantly from one building to the
next. Therefore remediation costs can not be reasonably estimated until the
assessments are complete and remediation strategies determined. The failure to
adequately address the Year 2000 issue may result in the closure of buildings
owned by the Company. In order to reduce the potential impact on the operations
of the Company, contingency plans will be developed once Y2K exposures have been
assessed.

Building contingency plans will be developed on a property-by-property basis
once assessments have been completed. This will allow the efficient development
of contingency plans that take into account individual circumstances surrounding
each property. Contingency plans may involve the engagement of additional
security services, implementation of temporary systems modifications, and the
identification and engagement of alternate service vendors. Additional
contingency plans may be developed as circumstances warrant.

With respect to the Company's Mortgage Loans and Mezzanine Investments, the
primary Year 2000 issue relates to potential borrower defaults caused by:

- - increased expenses or legal claims related to failures of embedded
technology in building systems,

- - reductions in collateral value due to failure of one or more building
systems,

- - interruptions in building cash flows due to tenant's inability to make
timely lease payments, inaccurate or incomplete accounting of rents, or
decreases in building occupancy levels,

- - the borrower's inability to address all material Y2K issues that may
potentially impact the borrower's operations.

These risks are also applicable to the Company's portfolio of CMBS as these
securities are dependent upon the pool of Mortgage Loans underlying them. If the
investors in these types of securities demand higher returns in recognition of
these potential risks, the market value of the CMBS portfolio of the Company
could also be adversely affected.

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Item 8. Financial Statements and Supplementary Data.

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of
Chastain Capital Corporation

We have audited the accompanying consolidated balance sheets of Chastain Capital
Corporation and its subsidiaries (the "Company") as of December 31, 1998 and
1997 and the related statements of operations, shareholders' equity, and cash
flows for the year ended December 31, 1998 and for the period December 16, 1997
to December 31, 1997. Our audits also included the financial statement schedules
listed in the index at Item 14. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1998
and 1997, and the results of its operations and its cash flows for the year
ended December 31, 1998 and for the period December 16, 1997 to December 31,
1997 in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statements 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.

/s/ Deloitte & Touche LLP

Atlanta, Georgia
February 5, 1999 (March 31, 1999 as to Notes 1, 10, 15)

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CHASTAIN CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS

December 31, December 31,
1998 1997
------------- -----------

ASSETS
Commercial mortgage-backed securities (CMBS) available for sale,
at fair value $ 71,567,475
Mezzanine loan investments 44,374,346
Mortgage loan investments 15,150,400
Real estate investments held for sale, net 7,294,583
Cash and short-term investments 11,957,616 $1,000
Escrow cash 2,138,011
Accrued interest receivable 1,153,989
Other assets 876,006
------------- ------

Total assets $ 154,512,426 $1,000
============= ======

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES:
Short-term borrowings $ 61,918,156
Subordinated debt to related party 9,000,000
Borrowings under repurchase agreement 7,926,375
Treasury locks payable 10,887,660
Accrued management fees 438,842
Accrued interest expense 374,759
Accrued expenses and other liabilities 4,127,931
------------- ------

Total liabilities 94,673,723 --
------------- ------

SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value. Authorized 25,000,000 shares, no
shares issued
Common stock, $.01 par value. Authorized 200,000,000 shares,
7,346,778 and 100 shares issued and outstanding at December 31,
1998 and 1997, respectively 73,468 $ 1
Additional paid-in capital 108,692,169 999
Distributions in excess of earnings:
Accumulated losses from operations (38,105,018)
Accumulated losses from sale of assets (7,566,677)
Dividends paid (3,255,239)
------------- ------

Total distributions in excess of earnings (48,926,934) --
------------- ------

Total shareholders' equity 59,838,703 1,000
------------- ------

Total liabilities and shareholders' equity $ 154,512,426 $1,000
============= ======

See accompanying Notes to Consolidated Financial Statements.

26
27

CHASTAIN CAPITAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS

For the Year
Ended
December 31, 1998
-----------------

REVENUE:
Interest income on CMBS $ 4,547,413
Interest income on mezzanine loan investments 2,151,517
Interest income on mortgage loan investments 851,949
Rental income 492,995
Other income 28,648
Other interest income 1,301,872
------------

Total revenue 9,374,394
------------

OPERATING EXPENSES:
Impairment loss on CMBS 16,676,570
Impairment loss on mezzanine loan investments 8,195,491
Impairment loss on real estate investments 447,505
Impairment loss on mortgage loan investments 797,810
Losses on forward interest rate treasury lock agreements 13,119,685
Loss on interest rate collar 216,000
Interest expense 3,321,327
Management fees 1,096,562
Restructuring fees 1,042,174
Stock compensation to Manager 877,917
General and administrative expense 745,285
Forfeited deposit on real estate and termination expenses 669,913
Real estate operating expenses 154,422
Depreciation and amortization 118,751
------------

Total operating expenses 47,479,412
------------

OPERATING LOSS BEFORE ASSET SALES (38,105,018)

REALIZED LOSSES ON SALE OF ASSETS
Losses on sale and settlement of mortgage loan investments and
Commitments (6,441,924)
Net loss on sale of CMBS (1,124,753)
------------

NET LOSS $(45,671,695)
============

NET LOSS PER COMMON SHARE:
Basic and Diluted $ (5.54)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and Diluted 8,237,032

Chastain Capital Corporation was incorporated on December 16, 1997 and commenced
operations on April 23, 1998 (see Note 1).

See accompanying Notes to Consolidated Financial Statements.

27
28

CHASTAIN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

Distributions in Excess of Earnings
-----------------------------------
Number of Additional Total
Shares Common Paid-in Accumulated Losses from Shareholders'
Outstanding Stock Capital Operations Sale of Assets Dividends Paid Equity
----------- ----- ------- ---------- -------------- -------------- ------

Initial
Contribution on
December 16, 1997 100 $ 1 $ 999 $ 1,000
------------------------------------------------------------------------------------------------------
Balance at
December 31, 1997 100 1 999 1,000

Net proceeds from
initial public
offering and
private placement
on April 23, 1998 8,977,678 89,777 123,933,081 124,022,858

Shares issued to
Board of Directors 3,000 30 44,970 45,000

Purchase and
retirement of
common stock (1,634,000) (16,340) (16,175,654) (16,191,994)

Value of stock
options issued 888,773 888,773

Net loss $ (38,105,018) $ (7,566,677) (45,671,695)

Dividends paid
($0.41 per share) $ (3,255,239) (3,255,239)
======================================================================================================

Balance at
December 31, 1998 7,346,778 $ 73,468 $108,692,169 $ (38,105,018) $ (7,566,677) $ (3,255,239) $ 59,838,703
======================================================================================================

See accompanying Notes to Consolidated Financial Statements.

28
29

CHASTAIN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Period
For the Year December 16,
Ended 1997 to
December 31, December 31,
1998 1997
-------------------- ------------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (45,671,695)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Impairment loss on investments 26,117,376
Losses on forward interest rate lock agreements 13,119,685
Loss on interest rate collar 216,000
Loss on sale of mortgage loan investments 5,325,524
Net loss on sale of CMBS 1,124,753
Depreciation and amortization 118,751
Amortization of discount/premium on CMBS available-for-sale (396,249)
Amortization of premium on mezzanine loan investment 144,526
Stock options issued 888,773
Shares issued for Directors fees 45,000
Net increase in assets:
Accrued interest receivable (1,153,989)
Other assets (930,689)
Net increase in liabilities:
Accrued interest expense 374,759
Accrued management fees 438,842
Accrued expenses and other liabilities 762,207
------------------- -------------------

Net cash provided by operating activities 523,574
------------------- -------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of CMBS available-for-sale (106,273,063)
Proceeds from sale of CMBS available-for-sale 17,295,745
Purchases of mezzanine loan investments (52,873,836)
Purchases of mortgage loan investments (90,110,000)
Proceeds from sale of mortgage loan investments 68,756,166
Purchase of real estate investments (6,854,807)
Repayments on loans 244,342
Capital additions to real estate (44,290)
------------------- -------------------

Net cash used by investing activities (169,859,743)
------------------- -------------------

CHASTAIN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)

CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Proceeds from initial public offering 124,364,120
Proceeds from initial stock purchase - $ 1,000
Deferred financing costs incurred (78,633)
Proceeds from loan facilities 159,869,418
Repayments of loan facilities (81,024,887)
Purchase and retirement of common stock (16,191,994)
Repayment of treasury lock liability (2,390,000)
Dividends paid (3,255,239)
------------------- -------------------

Net cash provided by financing activities 181,292,785 1,000
------------------- -------------------

NET INCREASE IN CASH AND CASH EQUIVALENTS 11,956,616 1,000
Cash and cash equivalents at beginning of period 1,000 0
------------------- -------------------

Cash and cash equivalents at end of period $ 11,957,616 $ 1,000
=================== ==================

Cash paid for interest $ 2,946,568 -
=================== ==================

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Accrued public offering costs $ 341,262 $ -
=================== ==================
Accrued tenant liabilities $ 890,794 $ -
=================== ==================

See accompanying Notes to Consolidated Financial Statements.

CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION

Chastain Capital Corporation (the "Company") was incorporated in Georgia on
December 16, 1997 and was initially capitalized on such date through the sale of
100 shares of common stock, par value $0.01 per share ("Common Stock") for an
aggregate purchase price of $1,000. On April 23, 1998, the Company commenced
operations through the consummation of an initial public offering ("IPO") of
7,380,000 shares of its Common Stock, with gross proceeds of $110,700,000 and
net proceeds to the Company of $102,951,000. Additional public offering costs of
$1,215,750 were incurred in connection with the IPO.

The Company also issued, pursuant to two separate private placements, an
aggregate of 897,678 shares of Common Stock to Lend Lease Investments Holdings,
Inc. ("LLIH", formerly ERE Yarmouth Holdings, Inc.), an indirect wholly-owned
subsidiary of Lend Lease Corporation Limited ("Lend Lease Corporation"), and
700,000 shares of Common Stock to FBR Asset Investment Corporation, an affiliate
of Friedman, Billings, Ramsey & Co., Inc. (lead underwriter of the Company's
IPO). The two private placements closed concurrently with the closing of the
IPO, at $13.95 per share, with total proceeds to the Company of $22,287,608.

Pursuant to the Company's Directors Stock Plan, each of the Company's three
independent directors received, as of the consummation of the IPO, $15,000 worth
of Common Stock equal to 1,000 shares as part of their annual director's fee.

The Company was organized to originate first lien commercial and multifamily
mortgage loans for the purpose of issuing collateralized mortgage obligations
("CMOs") collateralized by its mortgage loans and retaining the mortgage loans
subject to the CMO debt. The Company also was organized to acquire subordinated
interests in commercial mortgage-backed securities ("CMBS"), originate and
acquire loans on real property that are subordinated to first lien mortgage
loans and acquire real property and other real estate related assets.

On October 23, 1998, the Company announced that due to turmoil in the credit
markets, it was necessary to obtain temporary waivers from Morgan Guaranty Trust
Company of New York ("Morgan Guaranty Trust") and Merrill Lynch Mortgage
Capital, Inc. ("Merrill Lynch") to avoid being in default of tangible net worth
covenants under the Company's credit facilities. The Board of Directors decided
to discontinue new investment activity and concluded that the Company needed to
be restructured. On November 13, 1998, the Company reached an agreement with
Morgan Guaranty Trust and Merrill Lynch to restructure its credit facilities and
to dispose of certain assets to reduce the size and stabilize the volatility of
the overall portfolio. Proceeds from the asset sales were used to reduce
outstanding indebtedness on both credit facilities. Through the asset sales and
indebtedness reduction, the Company was able to satisfy its immediate liquidity
needs. The remaining portfolio consists primarily of CMBS, mezzanine loan
investments and real estate.

In connection with the credit facility amendments, LLIH agreed to provide the
Company with up to $40 million of unsecured subordinated debt. An initial
advance of $17 million was drawn on November 13, 1998 and the remaining funds
can be drawn from time to time by the Company through maturity on March 31,
1999. The advances incur interest at the rate of 14% per annum through January
31, 1999 and 16% thereafter. The advances are pre-payable at any time, subject
to certain notice requirements. The terms of the subordinated debt were reviewed
and approved by a special committee of the Board of Directors consisting of
independent directors not affiliated with Lend Lease. The special committee
obtained the advice of independent financial advisors and legal counsel in
negotiating the terms of the loan.

The amended credit facilities and new subordinated debt agreement provided the
Company with the necessary liquidity in the short term to fund its mortgage loan
commitments, meet margin calls and hold investments. The Merrill Lynch amendment
required the $19 million in outstanding borrowings be repaid on or before
January 31, 1999. On January 27, 1999, the Merrill Lynch Agreement was further
amended, requiring the borrowings to be repaid on or before February 26, 1999.
On February 25, 1999, the Merrill Lynch agreement was again amended, extending
the maturity date to March 25, 1999. All outstanding indebtedness under the
Merrill Lynch agreement was repaid on March 25, 1999, and the facility was
terminated. All indebtedness under the Morgan Guaranty Trust agreement was
repaid on March 31, 1999. The LLIH subordinated debt agreement matures on April
5, 1999. The Company continues to evaluate various strategic alternatives
available to maximize shareholder value and to repay its indebtedness, including
additional asset sales, refinancing or further restructuring of its capital
base.

31
32

CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On January 25, 1999, the Board of Directors approved a plan of action to sell
existing assets to meet the debt maturities. From January 25, to March 31,
1999, the Company sold certain CMBS for total proceeds of $47.8 million,
resulting in a realized loss of $14.2 million, of which $11.7 million was
recognized in 1998. On March 25, 1999, the Company sold a real estate asset for
total proceeds of $3.8 million, resulting in a realized loss of $258,000, all
of which was recognized in 1998.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements of the Company include the accounts of the
Company and its wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.

Cash and Short-term Investments

All highly liquid investments with maturities of three months or less when
purchased are considered to be short-term investments.

Comprehensive Income

Comprehensive income is defined as the change in equity of a business during a
period from transactions and other events and circumstances, excluding those
resulting from investments by and distributions to owners. For the year ended
December 31, 1998, there is no difference between net loss and comprehensive net
loss.

CMBS

The Company classifies its CMBS as available-for-sale. Available-for-sale
securities are reported at fair value with net unrealized gains and losses
reported in comprehensive income (loss)as a separate component of shareholders'
equity. The Company recognizes income from CMBS under the effective interest
method, using the anticipated yield over the projected life of the investment.
The Company recognizes impairment on its CMBS when it determines that the
decline in the estimated fair value of its CMBS below cost is other than
temporary. Impairment losses are determined by comparing the estimated fair
value of a CMBS to its current carrying amount, the difference being recognized
as a loss. The Company uses specific identification in determining realized
gains/losses on its CMBS.

Mezzanine Loan Investments

The Company purchased and originated certain mezzanine loans to be held as
long-term investments. Loans held for investment are recorded at cost at the
date of purchase. Premiums and discounts related to these loans are amortized
over their estimated lives using the effective interest method. Any origination
fee income, application fee income and direct costs associated with originating
or purchasing mezzanine investments have been deferred and the net amount is
added to the basis of the loans on the balance sheet. The Company recognizes
impairment on the loans when it is probable that the Company will not be able to
collect all amounts due according to the contractual terms of the loan
agreement, or when the fair value of the loans is below amortized cost and the
Company determines that it may not be able to hold the loans until amortized
cost is recovered. As a result of the Company's November restructuring and the
Board's decision to discontinue new investment activity and to sell assets to
repay the Company's indebtedness, it is currently unlikely that the Company will
hold its mezzanine loan investments until maturity. At December 31, 1998,
mezzanine loans are recorded at lower of amortized cost or estimated fair value.
The Company measures impairment based on the present value of expected future
cash flows discounted at the loan's effective interest rate or management's
estimates of the fair value of the loan.

32
33

CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Mortgage Loan Investments

The Company originated mortgage loans to be held as long-term investments.
Interest income was recognized using the effective interest rate method. Due to
the turmoil in the credit markets in October 1998, and the Company's revised
credit facility terms, the Company changed its strategy and is now holding its
mortgage loans for resale. Loans held for resale are accounted for at the lower
of cost or estimated fair value. Fair value is determined based upon the
Company's estimate of market value. Subsequent to December 31, 1998, the Company
sold its remaining mortgage loan investment.

Real Estate Investments

Real estate assets are stated at cost when purchased and are subsequently
reduced by depreciation charges using the straight-line method over the
estimated useful lives of the assets. At December 31, 1998, the Company's
investment in real estate is classified as held for sale and is carried at the
lower of cost or estimated fair value less estimated selling costs.

Rental income was being recognized over the life of the tenant leases using the
straight-line method. The Company eliminated the effect of the straight-line
adjustment when the properties were reclassified as held for sale.

Interest Rate Protection Agreements

The Company acquired interest rate protection agreements, in the form of forward
treasury locks, to reduce its exposure to interest rate risk on anticipated
long-term borrowings. At the time the treasury locks were acquired it was
anticipated that they would hedge the Company's exposure to future financing
costs and thus qualify for hedge accounting. Under hedge accounting, any gain or
loss on the treasury lock settlements would be amortized over the term of the
anticipated financing agreement. To qualify for hedge accounting, these interest
rate protection agreements must meet certain criteria including: (1) the debt to
be hedged exposes the Company to interest rate risk, (2) the interest rate
protection agreement reduces the Company's exposure to interest rate risk, and
(3) it is probable that the anticipated financing will occur. In the event these
interest rate protection agreements do not qualify as hedges, such agreements
are reclassified to be investments accounted for at fair value, with any gain or
loss included as a component of income or loss in the statement of operations.

As a result of the turmoil in the credit markets in October 1998, the Company
determined that its ability to obtain long-term, fixed-rate financing was no
longer probable. On October 23, 1998 the Company terminated all of its treasury
locks and incurred a realized loss of $13.3 million.

On July 13, 1998 the Company entered into a Libor collar in the notional amount
of $89 million to mature on July 1, 1999, in order to hedge against rising short
term borrowing costs. The collar contract effectively locked in the Company's
Libor base rate between a floor of 5.51% and a ceiling of 5.80% during the term.
At December 31, 1998, the Company no longer considered the interest rate collar
as a hedge, and accordingly recorded the fair value of the collar as a liability
through a charge to income. The Company terminated the collar contract on
January 27, 1999 and realized a loss of $265,000.

Escrow cash

Good faith deposits received from borrowers for mortgage loans to which the
Company is committed are included in escrow cash with a corresponding escrow
liability.

Income Taxes

The Company plans to make an election to be taxed as a REIT under the Internal
Revenue Code of 1986, as amended, commencing with its first REIT taxable year
ended on December 31, 1998. As a REIT, the Company generally is not subject to
federal corporate income taxes on net income that it distributes to
shareholders, provided that the Company meets certain other requirements for
qualification as a REIT under the Code. Because the Company believes that it
qualified as a REIT with respect to its taxable year ended December 31, 1998,
and because the Company is reporting net losses for such year, no provision has
been made for federal income taxes for the Company and its subsidiaries in the
accompanying consolidated financial statements.

All dividends declared and paid during 1998 represent a return of capital.

33
34

CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net Loss Per Share

Basic net loss per share is computed on the basis of the weighted average number
of shares outstanding for the period. Diluted net loss per share is computed on
the basis of the weighted average number of shares and dilutive common
equivalent shares outstanding for the period. The computation for the year ended
December 31, 1998 assumes the year began on April 23, 1998, when the Company
commenced operations. For the year ending December 31, 1998, all outstanding
options to purchase 1,246,253 shares of Common Stock were anti-dilutive.
Accordingly, there is no difference between basic and diluted net loss per
common share.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.

New Accounting Pronouncement

In June 1998, the Financial and Accounting Standards Board issued Statement of
Financial Accounting Standard 133 "Accounting for Derivative Instruments and for
Hedging Activities" ("FAS 133"). FAS 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge. The accounting for changes in the fair value of a derivative depends on
the intended use of the derivative and the resulting designation. FAS 133 is
effective for the Company beginning January 1, 2000. The Company is evaluating
the eventual impact of FAS 133 on its financial statements.

NOTE 3 - SEGMENT DISCLOSURE

The Company has one reportable segment, real estate investments. At December 31,
1998, the Company's real estate investments included CMBS, mezzanine real estate
loans, commercial mortgage loans and commercial real estate properties. The
Company uses net income (loss) to measure profit or loss. The Company separately
discloses assets, revenue and capital expenditures by type of real estate
investment in the consolidated financial statements.

Except for interest income earned on the Company's investment in a British
pounds Sterling mezzanine loan, discussed in Note 6, all of the Company's
revenue is attributed to investments located in the United States.
Revenue information by country is summarized below:

1998
----

United States $8,703,530
United Kingdom 670,864
----------

Total $9,374,394
==========

At December 31, 1998, the carrying amount of the Company's British pounds
Sterling loan was $16,764,264.

At December 31, 1998, the Company's investment in a mezzanine loan on an office
building in New York (Note 6) accounted for more than 10% of revenue.

34
35

CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - MANAGEMENT FEES

The Company entered into a Management Agreement (the "Management Agreement")
with ERE Yarmouth, Inc., an indirect wholly-owned subsidiary of Lend Lease
Corporation Limited, under which ERE Yarmouth, Inc. advises the Company on
various facets of its business and manages its day-to-day operations, subject to
the supervision of the Company's Board of Directors. On July 13, 1998, the name
of ERE Yarmouth, Inc. was changed to Lend Lease Real Estate Investments, Inc.
("Lend Lease" or the "Manager" or "Management"). Lend Lease continues as the
advisor to the Company.

Pursuant to the Management Agreement, the Company will pay the Manager a
quarterly base management fee equal to the following:

For the first four fiscal quarters
commencing with the fiscal
quarter ended June 30, 1998........... 1.00% per annum of the Average Invested Assets (1) of the Company

During each fiscal quarter
thereafter............................ 0.85% per annum of the Average Invested Assets up to $1 billion

0.75% per annum of the Average Invested Assets from $1 billion to
$1.25 billion

0.50% per annum of the Average Invested Assets in excess of
$1.25 billion

The Company incurred base management fees in 1998 of $1,096,562.

The Management Agreement also provides for a quarterly incentive management fee
equal to the product of (A) 25% of the dollar amount by which (1) (a) Funds From
Operations (2) (before the incentive fee) of the Company for the applicable
quarter per weighted average number of shares of Common Stock outstanding plus
(b) gains (or minus losses) from debt restructuring or sales of assets not
included in Funds From Operations of the Company for such quarter per weighted
average number of shares of Common Stock outstanding, exceed (2) an amount equal
to (a) the weighted average of the price per share at initial offering and the
prices per share at any secondary offerings by the Company multiplied by (b) 25%
of the sum of the Ten-Year U.S. Treasury Rate plus four percent, and (B) the
weighted average number of shares of Common Stock outstanding. No incentive
management fees were earned during 1998.

The Management Agreement is for an initial term of two years, and can be
successively extended for two year periods subject to an affirmative vote of a
majority of the Independent Directors. In addition, the Management Agreement
provides for a termination fee equal to the sum of the base management fee and
incentive management fee, if any, earned during the immediately preceding four
fiscal quarters.

- ---------------------------
(1) The term "Average Invested Assets" for any period means the average of the
aggregate book value of the assets of the Company, including a proportionate
amount of the assets of all of its direct and indirect subsidiaries, before
reserves for depreciation or bad debts or other similar non-cash reserves less
(i) un-invested cash balances and (ii) the book value of the Company's CMO
liabilities, computed by dividing (a) the sum of such values for each of the
three months during such quarter (based on the book value of such assets as of
the last day of each month) by (b) three.

(2) The term "Funds From Operations" as defined by the National Association of
Real Estate Investment Trusts, Inc. means net income (computed in accordance
with GAAP) excluding gains (or losses) from debt restructuring, sales of
property and any unusual or non-recurring transactions, plus depreciation and
amortization on real estate assets, and after deduction of preferred stock
dividends, if any, and similar adjustments for unconsolidated partnerships and
joint ventures. Funds From Operations does not represent cash generated from
operating activities in accordance with GAAP and should not be considered as an
alternative to net income as an indication of the Company's performance or to
cash flows as a measure of liquidity or ability to make distributions.

35
36

CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - INVESTMENT IN CMBS

The amortized cost and estimated fair value of commercial mortgage-backed
securities classified as available-for-sale securities at December 31, 1998 are
summarized below. The face value of CMBS was $108,149,975 at December 31, 1998.

Weighted Estimated
Average Amortized Impairment Amortized Cost Fair
Security Rating Life Cost Losses Adjusted Value
- --------------- ----------- ----------- -------------- -----------

BBB- 7/7/12 $ 9,452,762 $ 541,562 $ 8,911,200 $ 8,911,200
BB+ 2/6/13 15,861,815 2,922,753 12,939,062 12,939,062
BB 6/30/12 20,658,847 3,490,551 17,168,296 17,168,296
BB- 4/26/13 4,368,958 951,933 3,417,025 3,417,025
B 7/7/11 32,282,831 6,815,014 25,467,817 25,467,817
B- 4/26/13 2,808,723 674,162 2,134,561 2,134,561
Unrated 4/26/13 2,810,109 1,280,595 1,529,514 1,529,514
----------- ----------- ----------- -----------

Total $88,244,045 $16,676,570 $71,567,475 $71,567,475
=========== =========== =========== ===========

The estimated fair value of the CMBS is based on either i) the price obtained
from the investment banking institutions, which sold the CMBS to the Company, or
ii) an average of at least three quotes received on similarly structured and
rated CMBS. The use of different market assumptions, valuation methodologies,
changing interest rates, interest rate spreads for CMBS over the U.S. Treasury
yields and the timing and magnitude of credit losses may have a material effect
on the estimates of fair value. The fair value estimates presented herein are
based on pertinent information available as of December 31, 1998.

The CMBS tranches owned by the Company provide credit support to the more senior
tranches of the related commercial securitization. Cash flow from the underlying
mortgages is generally allocated first to the senior tranches, with the most
senior tranches having a priority right to cash flow. Any remaining cash flow is
generally allocated among the other tranches based on their seniority. To the
extent there are defaults and unrecoverable losses on the underlying mortgages,
resulting in reduced cash flows, the subordinate tranches will bear those losses
first. To the extent there are losses in excess of the most subordinate tranches
stated right to principal and interest, the remaining tranches will bear such
losses in order of their relative subordination.

At December 31, 1998, the amortized cost of the Company's investments in CMBS
exceeded estimated fair value by $16,676,570. Due to uncertainty of the
Company's ability to hold its CMBS investments until the cost of the CMBS is
recovered, the Company determined that the decline in the fair value of its CMBS
below amortized cost at December 31, 1998 was other than temporary. Accordingly,
the Company carries its investment in CMBS at estimated fair value at December
31, 1998. During the third and fourth quarters of 1998, the Company recognized
impairment losses of $16,676,570. The Company's ability to hold its CMBS has
been negatively affected by the recent turmoil in the financial markets and its
effect on the value of CMBS securities along with the restructuring of the
Company's debt agreements (see Note 10). During the fourth quarter of 1998, the
Company sold certain of its investment in BBB- CMBS securities for $13,826,912
and realized a loss of $1,167,179.

36
37

CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - MEZZANINE LOAN INVESTMENTS

As of December 31, 1998, the Company's investment in mezzanine loans consisted
of the following:

Estimated
Underlying Interest Maturity Face Amortized Impairment Carrying Fair
Security Rate Date Value Cost Loss Value Value
- ---------------- -------- ------------- ------------ ------------ ------------- ------------ -----------

Commercial
real estate:
Office 12.00% 05/01/2007 $21,000,000 $24,635,473 $4,260,059 $20,375,414 $21,000,000
Hotel 11.77% 06/30/2003 19,647,200 19,722,940 2,958,676 16,764,264 16,764,264
Multi-family 10.63% 08/01/2008 2,800,000 2,746,565 372,308 2,374,257 2,374,257
Retail 9.69% 05/01/2005 4,570,896 4,488,901 459,590 4,029,311 4,029,311
Other 10.57% 07/01/2008 1,000,000 975,958 144,858 831,100 831,100
----------- ----------- ---------- ----------- -----------

Total $49,018,096 $52,569,837 $8,195,491 $44,374,346 $44,998,932
=========== =========== ========== =========== ===========

At December 31, 1998, the amortized cost of the Company's investments in
mezzanine loans exceeded their aggregate carrying value by $8,195,491. Due to
the uncertainty of the Company's ability to hold the mezzanine loans until the
cost of the loans can be recovered, the Company determined that the decline in
the fair value of the loans below amortized cost at December 31, 1998 was other
than temporary. Accordingly, the Company carries its investments in mezzanine
loans at the lower of amortized cost after impairment losses or fair value.
During the year ended December 31, 1998, the Company recognized impairment
losses of $8,195,491. The estimated fair value of mezzanine loan investments is
based on Management's best estimate of market conditions at December 31, 1998.
The use of different market assumptions, valuation methodologies, changing
interest rates, interest rate spreads and the timing and magnitude of credit
losses may have a material effect on the estimates of fair value. The Company's
ability to hold its mezzanine loans to maturity has been negatively affected by
the recent turmoil in the financial markets and its effect on the value of the
loans, along with the restructuring of its debt agreements (See Note 10).

The Company's $19,647,200 face value mezzanine loan investment is a British
pounds Sterling loan. The Company purchased the investment for 11.98 million in
British pounds Sterling. Interest on the loan is based on Sterling Libor ("Base
Rate") plus 4.00%. The exchange rate at the date of investment was $1.64 dollars
per pound. In order to reduce the risk of foreign currency exchange rate
fluctuations, the Company entered into a foreign currency swap arrangement with
Merrill Lynch Capital Services, Inc. The swap arrangement provides the Company
with an exchange rate of $1.64 per pound on the return of its principal
regardless of exchange rate fluctuation. The swap arrangement also converts the
Base Rate to US$ Libor minus 0.06% regardless of movements in the Sterling
Libor. The Company is subject to foreign currency risk on the spread portion
(4.00%) of the quarterly interest payments. The market value of the currency
swap at December 31, 1998 was a liability of $242,000. The foreign currency swap
arrangement expires on the maturity date of the related loan. The Company is
exposed to credit loss in the event of nonperformance by the counterparty to the
currency swap agreement. However, the Company does not anticipate nonperformance
by the counterparty.

NOTE 7 - MORTGAGE LOAN INVESTMENTS

As of December 31, 1998, the Company's investment in mortgage loans consisted of
the following:

Estimated
Underlying Interest Maturity Face Amortized Impairment Carrying Fair
Security Rate Date Value Cost Loss Value Value
- ---------------- -------- -------- ----- --------- ---------- ----------- -----------

Commercial
real estate:
Office 7.11% 08/01/2008 $16,000,000 $15,948,210 $797,810 $15,150,400 $15,150,400
----------- ----------- -------- ----------- -----------

Total $16,000,000 $15,948,210 $797,810 $15,150,400 $15,150,400
=========== =========== ======== =========== ===========

At December 31, 1998, the amortized cost of the Company's investment in the
mortgage loan exceeded estimated fair value by $797,810 which is reflected in
the December 31, 1998 financial statements as an impairment loss. A discounted
payoff of the loan was accepted on January 4, 1999 for $15,150,400.

37
38

CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In connection with the Company's initial investment strategy of originating
commercial and multi-family loans for the purpose of issuing collateralized
mortgage obligations, the Company through September 30, 1998 had originated
approximately $29,525,000 in mortgage loans and had entered commitments to fund
an additional $119,900,000 in mortgage loans. Because of the financial turmoil
in the credit markets in October 1998 and the related restructuring of the
Company's credit facilities, the Company discontinued this investment strategy
and began selling its loans and terminating its commitments. During the fourth
quarter of 1998, the Company funded and sold $60,585,000 of these commitments
and terminated the remaining $59,315,000 in commitments. The Company recognized
losses of $5,325,524 on the sale of $68,826,722 in mortgage loans and incurred
expenses of $1,116,400 on the termination of the loan commitments.

NOTE 8 - REAL ESTATE INVESTMENTS HELD FOR SALE

As of December 31, 1998, the Company's investments in real estate consisted of
the following:

Date Acquired Property Location Property Type
- ------------------- ---------------- ---------------- --------------

6/26/98 Lakeside Plaza Stockton, CA Retail
9/24/98 Bryarwood 85 Atlanta, GA Office

The carrying value of real estate investments held for sale at December 31, 1998
is summarized below:

Real estate investments held for sale - at cost
Land $ 2,470,000
Buildings 4,388,263
Tenant Improvements 891,945
Capitalized Costs 39,683
Less accumulated depreciation and amortization (47,803)
Less impairment charge (447,505)
-----------
Real estate investments held for sale - net $ 7,294,583
===========

In connection with the Company's decision to discontinue its initial investment
strategies, the Company also decided to sell its real estate investments and
accordingly, at December 31, 1998, the Company classified its real estate
investments as held for sale. The Company expects to dispose of the real estate
in 1999. The real estate investments have been written down to market value less
estimated selling costs, resulting in an impairment charge of $447,505. Rental
income and expenses approximated $493,000 and $602,000, including depreciation
expense of $47,803 and the impairment charge of $447,505, for the year ended
December 31, 1998.

NOTE 9 - MINIMUM RENTS

Minimum future rentals to be received on real estate properties under leases in
effect as of December 31, 1998 are as follows:

Year Ending December 31,
1999 $ 1,111,743
2000 1,115,674
2001 973,565
2002 827,445
2003 489,957
Thereafter 379,582
-------------
Total $ 4,897,966
=============

38
39

CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 - BORROWING ARRANGEMENTS

On May 15, 1998, the Company entered into two Master Loan and Security
Agreements, to provide financing for the Company's investments. The facilities
require assets to be pledged as collateral. The first loan agreement, which was
with Morgan Stanley Mortgage Capital, Inc. (the "Morgan Stanley Agreement")
permitted the Company to borrow up to $250,000,000 and was scheduled to
terminate on May 14, 1999. The facility was intended to finance first-mortgage
loans originated by the Company. On October 26, 1998, the Company terminated the
agreement with Morgan Stanley at no cost to the Company. There were no
borrowings outstanding under the Morgan Stanley Agreement. The second agreement,
which is with Morgan Guaranty Trust (the "Morgan Guaranty Trust Agreement"),
permitted the company to borrow up to $450,000,000 and was scheduled to
terminate on May 14, 1999. As discussed below, all outstanding indebtedness
under the Morgan Guaranty Agreement was repaid, and the agreement was terminated
on March 31, 1999. As of December 31, 1998, there were $52,412,238 in borrowings
outstanding under the Morgan Guaranty Agreement, secured by the Company's assets
with an aggregate carrying value of $70,745,575 at December 31, 1998. The
annualized interest rate on these borrowings at December 31, 1998 was 6.60%.

On August 21, 1998, the Company entered into a Master Assignment Agreement with
Merrill Lynch Mortgage Capital, Inc. and Merrill Lynch Capital Services, Inc.
(the "Merrill Lynch Agreement"), to provide financing for the Company's
investments. The facility requires assets to be pledged as collateral. The
Merrill Lynch Agreement permitted the Company to borrow up to $35,000,000 and
was scheduled to terminate on August 20, 1999. As discussed below, all
indebtedness outstanding under the Merrill Lynch Agreement was repaid and the
agreement was terminated on March 25, 1999. Outstanding borrowings against this
line of credit bear interest based on the Libor rate plus 1.25%. The Merrill
Lynch Agreement allows the lender to establish a margin requirement on each
borrowing, and to request payments from the Company, at any time, if the market
value of the collateral falls below the applicable margin requirement. As of
December 31, 1998, there were $9,505,918 in borrowings outstanding under the
Merrill Lynch Agreement, secured solely by the Company's Savoy Hotel mezzanine
loan which has a carrying value of $16,764,264 at December 31, 1998. The
annualized interest rate on these borrowings at December 31, 1998 was 6.52%.

As a result of the financial turmoil in the credit markets in October 1998 and
the related widening of spreads between rates on mortgage investments and
treasury securities, the Company experienced significant losses in its
investment portfolio. Because of these losses, on October 23, 1998 the Company
announced it was necessary to obtain temporary waivers from Morgan Guaranty
Trust and Merrill Lynch to avoid being in default of tangible net worth
covenants under the Company's credit facilities. On November 13, 1998 the
Company reached an agreement with Morgan Guaranty Trust and Merrill Lynch to
restructure its credit facilities and terminated the Morgan Stanley Agreement.

Under its amended agreement with Morgan Guaranty Trust, the Company's credit
facility has been reduced to $90 million. The facility reduces to $50 million on
January 31, 1999. The interest rate is Libor plus 1.5% from November 13, 1998 to
December 31, 1998 and Libor plus 2.0% from January 1, 1999 until the facility
matures on March 31, 1999. As part of the amended agreement, the Company sold
$19.6 million of mortgage loans to Morgan Guaranty Trust and paid fees of
$800,000.

Under the amended agreement with Merrill Lynch, the Company agreed to pay down
the outstanding borrowings to $19.0 million, and further agreed that no
additional borrowings would be permitted under the agreement through its
maturity on January 31, 1999. On January 27, 1999, this agreement was further
amended, extending the maturity to February 26, 1999. On February 25, 1999, the
Merrill Lynch Agreement was again amended, extending the maturity date to March
25, 1999. The amended agreements with Morgan Guaranty Trust and Merrill Lynch
contain covenants that appropriately reflect the reduced size of the Company's
portfolio.

In connection with the credit facility restructurings, on November 13, 1998,
LLIH agreed to provide the Company with up to $40 million of unsecured
subordinated indebtedness ("LLIH Agreement"). An initial advance of $17 million
was drawn on November 13, 1998 and the remaining funds can be drawn from time to
time by the Company through maturity at April 5, 1999. The advances incur
interest at the rate of 14% per annum through January 31, 1999 and 16%
thereafter. The advances are prepayable at any time subject to certain notice
requirements. As of December 31, 1998, borrowings outstanding under the LLIH
Agreement were $9,000,000. The annualized interest rate on these borrowings at
December 31, 1998 was 14.00%.

In addition to the $800,000 in fees paid to Morgan Guaranty Trust, the Company
incurred $1,042,174 in restructuring fees. The Company expensed all of these
fees during 1998.

The annualized weighted average rate of interest on all of the Company's
borrowings, including the Deutsche Bank repurchase agreement (see Note 11), for
the year ended December 31, 1998 was 6.91%.

39
40

CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company is required to meet certain debt covenants on its borrowings to
avoid default on its obligations. The Morgan Guaranty Trust Agreement has three
debt covenants. Maintenance of Tangible Net Worth requires that the Company's
Tangible Net Worth, as defined, be at least $100,000,000. The first amendment to
the Morgan Guaranty Trust Agreement reduced the threshold to $65,000,000 for the
period from November 13, 1998 to January 1, 1999 and to $50,000,000 thereafter.
The Company was in compliance with this covenant as of December 31, 1998.
Maintenance of Ratio of Indebtedness to Tangible Net Worth requires that the
ratio of the Company's total debt to its Tangible Net Worth not exceed 5 to 1.
This covenant is still in full effect as of December 31, 1998. Maintenance of
Interest Coverage Ratio requires that the ratio of the Company's interest
expense to Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA"), as defined, shall not be less than 1.45 to 1. The Company failed to
meet the Interest Coverage Ratio covenant for the fourth quarter of 1998, and
received a waiver from Morgan Guaranty Trust in February 1999. The first
amendment to the Morgan Guaranty Trust Agreement also provides that the Company
must maintain a cash position on its balance sheet of a minimum of $10,000,000,
free and clear of all encumbrances. This covenant was in effect until January
29, 1999, when the second amendment to the agreement reduced the requirement to
$5,000,000.

The original Merrill Lynch Agreement includes three debt covenants. Book Net
Worth requires that, in any given period, the Company's ending Book Net Worth,
as defined, shall not be less than 80% of beginning Book Net Worth, and that
total Book Net Worth shall be at least $100,000,000. The first amendment to the
Merrill Lynch Agreement reduced the threshold to $50,000,000 for the period from
October 23, 1998 to November 13, 1998, and to $65,000,000 thereafter. The second
amendment to the Merrill Lynch Agreement reduces the threshold back to
$50,000,000. The Maximum Debt to Equity Ratio requires that the ratio of the
Company's total debt to total equity shall not exceed 8 to 1. This covenant is
still in full effect as of December 31, 1998. Merrill Lynch also has a
cross-default covenant which provides that if the Company fails to meet any of
its covenants under its other borrowing arrangements, that it is also in default
under the Merrill Lynch agreement. The Company received a waiver in March 1999
from Merrill Lynch for the fourth quarter of 1998 when it defaulted on the
Morgan Guaranty Trust Agreement by failing to meet the Maintenance of Interest
Coverage Ratio. The first amendment to the Merrill Lynch Agreement also provides
that the Company must maintain a cash position on its balance sheet of a minimum
of $10,000,000, free and clear of all encumbrances. This covenant was in effect
until January 27, 1999, when the second amendment to the agreement reduced the
requirement to $5,000,000.

The LLIH agreement contains a cross-default covenant which provides that if the
Company fails to meet any of its covenants under its other borrowing
arrangements, that it is also in default under the LLIH Agreement. The Company
received a waiver from LLIH in March 1999 for the fourth quarter of 1998 when it
defaulted on the Morgan Guaranty Trust Agreement by failing to meet the
Maintenance of Interest Coverage Ratio. The LLIH agreement has no other covenant
requirements.

Under its borrowing arrangements with Morgan Guaranty Trust and LLIH, the
Company is allowed to pay distributions only to meet the requirements of a REIT.
The Company was not required to pay any dividends in the fourth quarter of 1998
due to net taxable losses incurred for the year.

NOTE 11 - REPURCHASE AGREEMENT

On August 25, 1998, the Company entered into a Master Repurchase Agreement with
Deutsche Bank Securities, Inc. (the "Deutsche Bank Agreement"), which provides
financing for the Company's investments. The Deutsche Bank Agreement permits the
Company to enter into an unlimited number of transactions, subject to the
approval of both Deutsche Bank and the Company. The Deutsche Bank Agreement is a
30-day revolving facility, which may be terminated by either party upon giving
written notice to the other, except that the agreement shall remain applicable
to any transactions then outstanding. Transactions bear interest at a rate
negotiated between Deutsche Bank and the Company at the inception of a
transaction. The Deutsche Bank Agreement allows Deutsche Bank to establish a
margin requirement on each transaction, and to request payment from the Company
at any time, if the market value of the underlying assets or securities falls
below the applicable margin requirement. As of December 31, 1998, there were
$7,926,375 in borrowings outstanding under the Deutsche Bank Agreement, secured
solely by one of the Company's BBB- rated CMBS with an estimated fair value of
$8,911,200 at December 31, 1998. The annualized interest rate on this borrowing
was 5.93% at December 31, 1998. Subsequent to year-end, the related CMBS was
sold, and the remaining borrowings under the agreement were paid (See Note 15).

40
41

CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 - STOCK OPTION PLAN

The Company has a stock option plan for the Company's executive officers and the
Manager, which provides for the issuance of up to 2,500,000 shares of Common
Stock. At the closing of the IPO, the Company granted the Manager a fully vested
option to purchase 1,166,667 shares of Common Stock exercisable at the IPO price
of $15.00 per share. The Manager received the stock option as compensation for
its efforts in completing the IPO. One-fourth of the Manager's options become
exercisable on each of the first four anniversaries of the IPO. Unless
exercised, these options expire in 2008.

The underwriters sold in the IPO 79,586 shares of Common Stock to directors and
officers of the Company and the Manager for $15.00 per share. Pursuant to the
Company's Directed Share Program, such individuals were granted an option to
purchase one share of Common Stock for each share purchased in the IPO at an
exercise price of $15.00 per share. One-fifth of the options became exercisable
immediately, and one-fifth of the options become exercisable on each of the
first four anniversaries of the IPO. Unless exercised, these options expire in
2008.

The Company accounts for stock options in accordance with FAS 123, "Accounting
for Stock-Based Compensation". FAS 123 applies a market value based approach to
valuing the options. The Company estimated the market value of the options
granted using the Black-Scholes option-pricing model, with the following
assumptions:

Risk-free rate of interest 5.62%
Expected life of options 2.42 years
Volatility 24.05%
Dividend rate 12.76%

The estimated weighted average grant date market value of stock options granted
by the Company in 1998 was approximately $0.75 per share or $932,196. The
Company expensed the $877,197 value of the fully vested options granted to the
Manager upon completion of the IPO. The remaining $54,279 of value related to
the options granted under the Company's Directed Share Program is being
amortized over the vesting period. Total compensation cost related to stock
options recognized in income during 1998 totaled $888,773.

The following table summarizes the status of the Company's stock options at
December 31, 1998:

Granted Per Share Remaining
And Exercise Contractual
Outstanding Price Exercisable Life

Manager 1,166,667 $15.00 None 9.25 years
Others 79,586 $15.00 15,917 9.25 years

Total 1,246,253 $15.00 15,917 9.25 years

NOTE 13 - INTEREST RATE PROTECTION AGREEMENTS

In order to hedge the risk of a material change in interest rates that would
affect the Company's borrowing rate on its lines of credit and on anticipated
future long-term borrowings secured by the Company's investments, the Company
entered into forward treasury lock agreements, an interest rate collar and an
interest rate cap. None of these agreements were held for trading purposes. The
Company's policy was to purchase a forward treasury lock whenever a fixed rate
mortgage loan closed or when a borrower requested a rate lock under an executed
loan application. Depending on the size of fixed rate mortgage loans, the
Company in some cases aggregated loans and purchased a single treasury lock for
a pool of small loans. The Company also entered into forward treasury locks in
anticipation of long-term financing of its CMBS and mezzanine investments that
were expected to close in 1999.

As a result of the financial turmoil in the credit markets in October 1998, and
the Company's failure to comply with its debt agreements, the Company determined
that its ability to obtain long-term, fixed-rate financing was not probable. The
turmoil also created uncertainty as to the Company's ability to hold the
investments, and thus the treasury locks no longer qualified for hedge
accounting. On October 23, 1998 the Company terminated all of its treasury locks
and incurred a realized loss of $13.3 million, which was recognized as a
component of income. The interest rate cap was terminated in July 1998.

41
42

CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Below is a summary of the Company's interest rate protection agreements, which
consisted of an interest rate collar at December 31, 1998.

Notional Floating Market
Purchase Maturity Amount Index Strike Value
- ------------ ---------- ---------- ------------ --------- ---------

7/13/98 7/01/99 $89,131,070 1 mo. LIBOR 5.8%-5.51% $(216,000)

At December 31, 1998, the Company no longer considered the interest rate collar
a hedge and, accordingly recorded the value of the collar as a liability through
a charge to income. Subsequent to December 31, 1998, the Company terminated the
collar contract at a loss of $265,000.

NOTE 14 - Fair Value of Financial Instruments

The estimated fair value of the Company's financial instruments at December 31,
1998 are as follows:

Carrying Amount Fair Value

Assets

Cash and short-term investments $11,957,616 $11,957,616

Commercial mortgage-backed securities 71,567,475 71,567,475

Mezzanine loan investment 44,374,346 44,998,932

Mortgage loan investment 15,150,400 15,150,400

Escrow cash 2,138,011 2,138,011

Accrued interest receivable 1,153,989 1,153,989

Liabilities

Short-term borrowings 61,918,156 61,918,156

Subordinated debt to related party 9,000,000 9,000,000

Borrowings under repurchase agreement 7,926,375 7,926,375

Treasury locks payable 10,887,660 10,887,660

Accrued interest expense 374,759 374,759

Interest rate collar 216,000 216,000

Currency swap $ 242,000 $ 242,000

The carrying amounts of cash and short-term investments, escrow cash, accrued
interest receivable, treasury locks payable and accrued interest expense
approximate their fair values because of the short maturity of those
instruments.

See Note 1 for fair value assumptions with respect to CMBS, mezzanine loan
investments and mortgage loan investments.

Based on their short-term maturities, the carrying amounts of short-term
borrowings, subordinated debt to related party and borrowings under repurchase
agreement approximate their fair values.

42
43

CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The fair values of the interest rate collar and currency swap are the estimated
amounts the Company would pay to terminate the agreements at December 31, 1998,
based on quotes received from the counterparties. The currency swap carrying
amount is included in the related mezzanine loan balance.

NOTE 15 - SUBSEQUENT EVENTS

On January 4, 1999, the Company accepted a discounted payoff of its remaining
$15,948,210 whole mortgage loan for $15,150,400, resulting in a loss of
$797,810, which had been recorded as an impairment loss as of December 31, 1998.

On January 23, 1999, the Company cancelled its interest rate collar agreement
with Merrill Lynch. As a result the Company realized a loss of $265,000.

On February 19, 1999, the Company sold a BBB- bond for $8,827,344 resulting in a
loss of $85,356 since December 31, 1998. Total losses realized on this sale were
$626,917. The proceeds from this sale were used to repay $7,929,250 in
borrowings from Deutsche Bank.

On February 25, 1999, the third amendment was made to the Merrill Lynch
Agreement to extend the maturity date to March 25, 1999.

On March 25, 1999, the Company sold its Bryarwood 85 real estate
investment for $3,800,000, resulting in a realized loss of approximately
$258,000 which was recognized in 1998.

On March 25, 1999, the Company borrowed $8,000,000 under the LLIH Agreement to
repay its remaining borrowings under the Merrill Lynch Agreement.

On March 30, 1999, an amendment was made to the LLIH Agreement to extend the
maturity date to April 5, 1999.

On March 31, 1999, the Company sold CMBS for $39.0 million, resulting in a
realized loss of $13.6 million, of which $11.2 million was recognized in 1998.

On March 31, 1999, the Company used proceeds from the sale of CMBS to repay
in full its borrowings from Morgan Guaranty Trust.

In connection with its sale of CMBS on March 31, 1999, the Company entered into
an agreement to sell a mezzanine loan to GMAC Commercial Mortgage Corporation
("GMAC"). The agreement allows the Company to repurchase the loan no later than
April 1, 2000 (transaction referred to hereafter as the "GMAC Repo"). The GMAC
Repo is expected to close no later than April 5, 1999, and will generate
proceeds of $10.5 million. The repurchase price of the GMAC Repo will be
adjusted such that GMAC will receive an 8% annualized yield on its investment if
the Company repurchases the investment prior to October 1, 1999. After October
1, 1999, the repurchase price is fixed at $9.6 million. The Company will use the
proceeds of the GMAC Repo to repay borrowings from LLIH and to meet its
remaining corporate obligations, which primarily consist of terminated treasury
lock agreements.

43
44

CHASTAIN CAPITAL CORPORATION SCHEDULE III

CONSOLIDATED SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1998

COSTS GROSS COST
INITIAL COST TO COMPANY CAPITALIZED AT WHICH CARRIED AT END OF THE YEAR(1)
----------------------------- SUBSEQUENT TO -------------------------------------------
BUILDINGS ACQUISITION BUILDINGS
AND ------------- AND
DESCRIPTION LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL

RETAIL
Lakeside Plaza, Stockton, California $ 1,470,000 $ 2,222,413 $ 24,158 $ 1,470,000 $ 2,056,863 $ 3,526,863

OFFICE
Bryarwood 85, Atlanta, Georgia 1,000,000 3,053,188 20,132 1,000,000 2,815,523 3,815,523
------------- -------------- -------------- ------------ -------------- -------------

$ 2,470,000 $ 5,275,601 $ 44,290 $ 2,470,000 $ 4,872,386 $ 7,342,386
============= ============== ============== ============ ============== =============

ACCUMULATED DATE OF DATE
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED

RETAIL
Lakeside Plaza, Stockton, California $ 32,280 1981 6/26/98

OFFICE
Bryarwood 85, Atlanta, Georgia 15,523 1969 9/24/98
-------------

$ 47,803
=============

RECONCILIATION OF BEGINNING AND ENDING
BALANCES 1998

Rental Properties:
Balance at beginning of year $ 0

Lakeside Plaza Acquisition 3,692,413
Bryarwood 85 Acquisition 4,053,188

Improvements 44,290
Impairment Losses1 (447,505)
-------------

Balance at end of year $ 7,342,386
=============

Accumulated Depreciation:
Balance at beginning of year $ 0
Depreciation for year 47,803
-------------

Balance at end of year $ 47,803
=============

(1) All real estate properties are held for sale as of December 31, 1998,
and are accounted for at lower of cost or market value less costs to
sell, resulting in impairment losses on Lakeside Plaza and Bryarwood 85
of $189,708 and $257,797, respectively.

44
45

CHASTAIN CAPITAL CORPORATION SCHEDULE IV

CONSOLIDATED SCHEDULE OF MORTGAGE AND MEZZANINE LOANS ON REAL ESTATE
AS OF DECEMBER 31, 1998

Carrying Balloon
Interest/ Final Periodic Face Amount Payment
Coupon Maturity Payment Amount of of at
Description Rate Date Terms Mortgages Mortgages Maturity

Mortgage Loans:
First mortgage loan on office Principal and interest amortizing
building in Tennessee 7.11% 08/01/2008 at stated interest rate Prepayment
penalty: defeasance 16,000,000 15,150,400
Mezzanine Loans:
Mezzanine loan on an office Interest only
building in New York 12.00% 05/01/2007 Prepayment lockout until April 30,
2002, yield maintenance thereafter
Mezzanine loan on apartment through April 30, 2006 21,000,000 20,375,414 21,000,000
complex in Texas 10.63% ** 08/01/2008
Principal and interest amortizing
Mezzanine loan on retail at stated interest rate Prepayment
properties in various states 9.69% * 05/01/2005 prohibited for first 12 months of
loan term 2,800,000 2,374,257 --
Mezzanine loan on a hotel
in England 11.77% * 06/30/2003 Interest only; variable interest
rate 400 basis points over one-month
Mezzanine loan on a retail Libor rate. No prepayment penalties 4,570,896 4,029,311 5,000,000
property in Florida 10.57% ** 07/01/2008
------- Interest only quarterly; variable
interest rate based on 400 basis
points over 90 day sterling
Libor rate. No prepayment penalty 19,647,200 16,764,264

Principal and interest amortizing
at stated interest rate Prepayment
lockout for 12 months, yield
maintenance thereafter through
August, 2004, penalty to realize
of IRR of 10 year Treasury plus
spread thereafter 1,000,000 831,100 --
---------- ---------- ----------

65,018,096 59,524,746 26,000,000
========== ========== ==========

* Interest rates are for year ended December 31, 1998 however, these
interest rates are adjustable from period to period.
** Interest rates represent stated coupon rates written into the contract.
The yield to maturities for the apartment complex and retail property
are 12% and 11.82% respectively.

Reconciliation of Beginning and Ending
Balances 1998

Balance at beginning of year $ 0
Additions during year:
New mortgage loans 90,110,000
New mezzanine loans 52,798,096
Capitalized costs 75,740
----------------
142,983,836
----------------

Deductions during year
Collections of principal (244,342)
Cost of mortgages sold (74,076,921)
Amortization of premium/discount (144,526)
Impairment write-downs (8,993,301)
----------------
Balance at end of year $ 59,524,746
================

45
46

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

PAGE IN THIS
ANNUAL REPORT
ON FORM 10-K
-------------

(a)1. Financial Statements:

Independent Auditors' Report 25
Consolidated Balance Sheets 26
Consolidated Statements of Operations 27
Consolidated Statements of Changes in Shareholders' Equity 28
Consolidated Statements of Cash Flows 29
Notes to Consolidated Financial Statements 31

(a)2. Financial Statement Schedules:

Schedule III. Real Estate and Accumulated Depreciation

Schedule IV. Mortgage Loans on Real Estate

(a)3. Exhibits

(Asterisk indicates exhibit previously filed with the Securities and
Exchange Commission as indicated in parentheses and incorporated herein by
reference.)

EXHIBIT
NUMBER NUMBER DESCRIPTION
- ------- ------------------

3.1* -- Form of Amended and Restated Articles of Incorporation of the Company (Exhibit 3.1 to Company's Registration Statement
on Form S-11 (Reg. No. 333-42629) ("S-11")).

3.2* -- Bylaws of the Company (Exhibit 3.2 to the S-11).

10.1* -- Form of Management Agreement (Exhibit 10.1 to the S-11).

10.2* -- Form of Registration Rights Agreement between the Company and Yarmouth Lend Lease Holdings, Inc. (Exhibit 10.2 to
the S-11).

10.3* -- Form of Registration Rights Agreement between the Company and FBR Asset Investment Corporation (Exhibit 10.3 to the
S-11).

10.4* -- Chastain Capital Corporation 1998 Non-Incentive Stock Option Plan (Exhibit 10.4 to the S-11).

10.5* -- Chastain Capital Corporation Directors Stock Incentive Plan (Exhibit 10.5 to the S-11).

10.6* -- Form of Agreement of Limited Partnership of Chastain Capital Investments, L.P. (Exhibit 10.6 to the S-11).

10.7* -- Master Loan and Security Agreement between Chastain Capital Corporation and Morgan Guaranty Trust Company of New York
dated May 15, 1998 (Exhibit 10.1 to Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1998 ("June
30, 1998 10-Q").

10.8* -- Master Loan and Security Agreement between Chastain Capital Corporation and Morgan Stanley Mortgage Capital dated May
15, 1998 (Exhibit 10.2 to the June 30, 1998 10-Q).

10.9 -- Waiver, dated as of October 22, 1998, to the Master Loan and Security Agreement, dated as of May 15, 1998, between
Chastain Capital Corporation and Morgan Guaranty Trust Company of New York.

10.10* -- Master Assignment Agreement among Chastain Capital Corporation, Merrill Lynch Mortgage Capital, Inc., and Merrill Lynch
Capital Services, Inc. (Exhibit 10.3 to Company's Quarterly report on Form 10-Q for the Quarter ended September 30, 1998
("September 30, 1998 10-Q").

10.11* -- Amendment No. 1, dated as of October 23, 1998, to Master Assignment Agreement among Chastain Capital Corporation, Merrill
Lynch Mortgage Capital, Inc., and Merrill Lynch Capital Services, Inc. (Exhibit 10.4 to September 30, 1998 10-Q).

10.12 -- Waiver, dated as of November 5, 1998, to the Master Loan and Security Agreement, dated as of May 15, 1998 (as amended,
supplemented or otherwise modified prior to the date thereof), between Chastain Capital Corporation and Morgan Guaranty
Trust Company of New York.

10.13 -- Waiver, dated as of November 6, 1998, to the Master Loan and Security Agreement, dated as of May 15, 1998 (as amended
supplemented or otherwise modified prior to the date thereof), between Chastain Capital Corporation and Morgan Guaranty
Trust Company of New York.

10.14* -- Subordinated Loan Agreement dated as of November 13, 1998 between Chastain Capital Corporation and Lend Lease Investments
Holdings, Inc. (Exhibit 10.1 to September 30, 1998 10-Q).

10.15* -- Amendment and Agreement, dated as of November 13, 1998, to and in respect of the Master Loan and Security Agreement,
dated as of May 15, 1998, between Chastain Capital Corporation and Morgan Guaranty Trust Company of New York (Exhibit
10.2 to September 30, 1998 10-Q).

10.16 Mortgage Loan Purchase Agreement, dated as of November 16, 1998, between Chastain Capital Corporation and Morgan Guaranty
Trust Company of New York.

10.17 -- Amendment No. 2, dated as of January 27, 1999, to Master Assignment Agreement among Chastain Capital Corporation, Merrill
Lynch Mortgage Capital, Inc. and Merrill Lynch Capital Services, Inc.

10.18 -- Amendment, dated as of January 29, 1999, to the Master Loan and Security Agreement, dated as of May 15, 1998 (as
amended, supplemented and otherwise modified prior to the date thereof), between Chastain Capital Corporation and Morgan
Guaranty Trust Company of New York.

10.19 -- Amendment No. 3, dated as of February 25, 1999, to Master Assignment Agreement among Chastain Capital Corporation,
Merrill Lynch Mortgage Capital, Inc. and Merrill Lynch Capital Services, Inc.

10.20 -- Extension Amendment, dated as of March 29, 1999, to and in respect of the Master Loan and Security Agreement, dated as
of May 15, 1998 (as amended, supplemented or otherwise modified prior to the date thereof), between Chastain Capital
Corporation and Morgan Guaranty Trust Company of New York.

10.21 -- Extension Amendment, dated as of March 30, 1999, to and in respect of the Subordinated Loan Agreement, dated as of
November 13, 1998 (as amended, supplemented or otherwise modified prior to the date thereto), between Chastain Capital
Corporation and Lend Lease Investments Holdings, Inc.

21.1* -- List of Subsidiaries of the Company (Exhibit 21.1 to the S-11).

27.1 -- Financial Data Schedule (for SEC filing purposes only).

(b) Reports on Form 8-K

The Company did not file any Form 8-K's for the period covered by this
report.

See Item 14(a)(3) above.

48
47

Signatures.

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on the 31st day of
March, 1999.

CHASTAIN CAPITAL CORPORATION

By: /s/Kurt L. Wright
--------------------------------------
Kurt L. Wright
Chief Executive Officer and Director

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 indicated on March 31, 1998.

/s/Matthew Banks
--------------------------------------
Matthew Banks
Chairman of the Board

/s/Kurt L. Wright
--------------------------------------
Kurt L. Wright
Chief Executive Officer and Director
(Principal Executive Officer)

/s/Steven G. Grubenhoff
--------------------------------------
Steven G. Grubenhoff
Chief Financial Officer (Principal
Financial and Accounting Officer)

/s/Harald R. Hansen
--------------------------------------
Harald R. Hansen
Director

--------------------------------------
Elizabeth Kennan
Director

--------------------------------------
W.J. Smith
Director

50
48

EXHIBIT INDEX

(Asterisk indicates exhibit previously filed with the Securities and
Exchange Commission as indicated in parentheses and incorporated herein by
reference.)

Exhibit No. Description
----------- -----------

3.1* -- Form of Amended and Restated Articles of Incorporation of the Company (Exhibit 3.1 to Company's Registration
Statement on Form S-11 (Reg. No. 333-42629) ("S-11")).