ITEM 3.        LEGAL PROCEEDINGS

    Other than the matter described below, the Company currently is not involved in any pending legal proceedings, other than ordinary routine litigation incidental to the business, nor are any such proceedings known to be contemplated by governmental authorities.  The lessees have advised the Company that they currently are not involved in any material pending litigation, other than routine litigation arising in the ordinary course of business, substantially all of which is expected to be covered by liability insurance.

    On July 16, 1999, Walton Construction Company, Inc. (“Walton”) filed a civil lawsuit in the State Court of Fulton County, Georgia naming the Partnership as defendant.  The Partnership removed the action to the United States District Court for the Northern District of Georgia on August 30, 1999.  The complaint alleges that the Partnership has not paid approximately $2,800,000 due under a contract entered into by the parties in connection with the construction of the Partnership’s Alpharetta, GA Homewood Suites Hotel.  The Partnership’s answer, counterclaim and third party complaint (against Walton’s bonding company) were filed September 7, 1999.   The Partnership disputes that such monies are due to Walton based upon Walton’s alleged inability to complete construction on the hotel within the time set out in the construction contract.  The Partnership’s counterclaims against Walton arise out of the construction delays and construction deficiencies allegedly caused by Walton.  On August 2, 1999, Walton initiated a virtually identical action in the United States District Court for the Eastern District of North Carolina.  On February 29, 2000, the Partnership answered Walton’s complaint and counterclaimed for recovery of damages due to the construction delays and construction deficiencies allegedly caused by Walton.  Simultaneously, the Partnership also filed a third party action against Walton’s bonding company for recovery on a performance bond.  At present, the Partnership’s aggregate claim is estimated to exceed $2,100,000.

    By order entered April 11, 2000, all proceedings in the Georgia action were stayed so that the claims arising out of the Alpharetta hotel dispute could be litigated in North Carolina.

    Each party has served amended pleadings.  Walton amended its complaint on June 30, 2000 to add the Project Architect, Godwin Associates, P.A., as a party defendant.  The Partnership responded by agreeing to defend Godwin Associates, P.A.  A joint defense and a Tolling Agreement were entered into.  On July 12, 2000, the Partnership amended its third party complaint by adding a bad faith claim against the bonding company.  A first round of reciprocal document productions was made in September, 2000.  Supplemental productions by all parties were made in December, 2000 and early January, 2001.  All discovery is to close by March 15, 2001.  The case will be tried before the United States District Court of the Eastern District of North Carolina and is not expected to occur before July 20, 2001.

    The Partnership believes that it has substantial and meritorious defenses against the claims alleged against it, and the Partnership intends to vigorously defend against these claims and pursue its own claims.