Davidson Diversified Real Estate III LP – ‘10KSB’ for 12/31/97

As of:  Monday, 3/16/98   ·   For:  12/31/97   ·   Accession #:  787621-98-2   ·   File #:  0-15676

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Annual Report — Small Business   —   Form 10-KSB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10KSB       Annual Report -- Small Business                       25±    97K 
 2: EX-27       Financial Data Schedule (Pre-XBRL)                     2±     7K 

10KSB   —   Annual Report — Small Business
Document Table of Contents

FORM 10-KSB--ANNUAL OR TRANSITIONAL REPORT UNDER
SECTION 13 OR 15(D) 

FORM 10-KSB 
(Mark One)                                                                      
[X]   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT    
OF 1934 [No Fee Required]                                           

For the fiscal year ended December 31, 1997 

[  ]  TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE    
ACT OF 1934 [No Fee Required]                                       

For the transition period from ___________ to ______________

Commission file number 0-15676

DAVIDSON DIVERSIFIED REAL ESTATE III LIMITED PARTNERSHIP
(Name of small business issuer in its charter)

  Delaware                                                62-1242599
(State or other jurisdiction of                              (I.R.S. Employer   
incorporation or organization)                              Identification No.) 

One Insignia Financial Plaza, P.O. Box 1089                                     
Greenville, South Carolina                                  29602       
(Address of principal executive offices)                      (Zip Code)        

Issuer's telephone number (864) 239-1000

Securities registered under Section 12(b) of the Exchange Act:

None

Securities registered under Section 12(g) of the Exchange Act:

Units of Limited Partnership Interest 
(Title of class)

Check whether the issuer (1) filed all reports required to be filed by Section  
13 or 15(d) of the Exchange Act during the past 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           

Check if there is no disclosure of delinquent filers in response to Item 405 of 
Regulation S-B contained in this form, and no disclosure will 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-KSB or any     
amendment to this Form 10-KSB. [X]                                              

State issuer's revenues for its most recent fiscal year:  $5,706,000            

State the aggregate market value of the voting partnership interests held by    
non-affiliates computed by reference to the price at which the partnership      
interests were sold, or the average bid and asked prices of such partnership    
interests, as of a specified date within the past 60 days.  Market value        
information for the Registrant's partnership interests is not available.        
Should a trading market develop for these interests, it is the Managing General 
Partner's belief that the aggregate market value of the voting partnership      
interests would not exceed $25,000,000.                                         

DOCUMENTS INCORPORATED BY REFERENCE 

    PART I

ITEM 1.  DESCRIPTION OF BUSINESS                                                

Davidson Diversified Real Estate III Limited Partnership (the "Registrant" or   
"Partnership") is a Delaware limited partnership organized in July 1985.  The   
general partners of the Registrant are Davidson Diversified Properties, Inc., a 
Tennessee corporation ("Managing General Partner"); Freeman Equities, Limited, a
Tennessee limited partnership  ("Associate General Partner"); and David W.      
Talley and James T. Gunn (collectively, "Individual General                     
Partners") (collectively, the "General Partners").                              

The Managing General Partner is owned by MAE GP corporation ("MAE GP"), which is
wholly owned by Metropolitan Asset Enhancement, L.P., an affiliate of Insignia  
Financial Group, Inc. ("Insignia").  Effective February 25, 1998, MAE GP was    
merged into Insignia Properties Trust ("IPT"), an affiliate of Insignia.  Thus  
the Managing General Partner is now a wholly-owned subsidiary of IPT.           

Effective December 31, 1991, the majority of general partner and limited partner
interests in Freeman Equities, Ltd., the Associate General Partner, were        
acquired by MAE Investments, Inc. and Insignia Jacques-Miller, L.P.,            
respectively, both of whom are affiliates of Insignia.                          

The offering of the Partnership's limited partnership units ("Units") commenced 
on October 28, 1985, and terminated on October 24, 1986.  The Partnership       
received gross proceeds from the offering of $20,240,000 and net proceeds of    
$17,912,400.                                                                    

Holders of Units shall hereinafter be referred to as Limited Partners ("Limited 
Partners").  Limited Partners together with the General Partners shall be       
referred to as the Partners ("Partners").                                       

The Partnership's primary business is to operate and hold for investment        
existing income-producing residential real properties.  Industry segment        
information is not relevant.  The Partnership does not engage in any foreign    
operations nor derive any income from foreign sources.                          

All of the net proceeds of the offering were invested in the Partnership's six  
properties, four of which have since been sold or foreclosed.  See "Item 2.     
Description of Properties," below for a description of the Partnership's        
remaining properties.                                                           

The Partnership receives income from its properties and is responsible for      
operating expenses, capital improvements and debt service payments under        
mortgage obligations secured by the properties.  The Partnership financed its   
properties primarily through non-recourse debt.  Therefore, in the event of     
default, the lender can generally look only to the subject property for recovery
of amounts due.                                                                 

The real estate business is highly competitive and the Partnership is not a     
significant factor in this industry.  The Partnership's properties are subject  
to competition from similar properties in the vicinity in which each property is
located.  In addition, various limited partnerships have been formed by the     
General Partners and/or their affiliates to engage in business which may be     
competitive with the Registrant.                                                

The Partnership has no employees.  Management and administrative services are   
performed by the Managing General Partner and affiliates of Insignia.  Effective
January 1, 1992, affiliates of Insignia began providing property management and 
asset management services to the Partnership.  See "Item 12. Certain            
Relationships and Related Transactions" for a discussion of transactions with   
the Managing General Partner and its affiliates.                                

ITEM 2.  DESCRIPTION OF PROPERTIES:                                             

The following table sets forth the Partnership's investments in properties:     

Date of               
Property                    Purchase    Type of Ownership       Use             

Plainview Apartments        05/06/86  Fee ownership subject   Apartment -       
Louisville, Kentucky                to wraparound mortgage  480 units       

Salem Courthouse Apartments 11/30/85  Fee ownership subject   Apartment -       
Indianapolis, Indiana               to first and second     388 units       
     mortgages

SCHEDULE OF PROPERTIES:                                                         
(dollar amounts in thousands)                                                   

Gross                             
                Carrying  Accumulated     Useful             Federal
Property               Value    Depreciation     Life     Method  Tax Basis     

Plainview Apartments  $20,998     $ 8,977     5-25 years   S/L    $ 8,287       
Salem Courthouse       12,952       6,077     5-25 years   S/L      4,321       
Totals            $33,950     $15,054                         $12,608   

See "Note A" of the consolidated financial statements included in "Item 7." for 
a description of the Partnership's depreciation policy.                         

SCHEDULE OF MORTGAGES:                                                          
(dollar amounts in thousands)                                                   

                  Principal                                  Principal
                Balance At                                   Balance
               December 31,  Interest    Period   Maturity    Due At
Property                 1997        Rate     Amortized   Date     Maturity     

Plainview Apartments                                                            
1st mortgage          $15,336        9.33%       (1)    11/15/10   $15,336      

Salem Courthouse                                                                
1st mortgage          8,352        7.83%    28.67 yrs 10/15/03     7,513    
2nd mortgage              271        7.83%       (1)    10/15/03       271      
23,959                            
Less unamortized                                                                
discounts              (117)                                                
Total                 $23,842                                      $23,120      

(1) Interest only payments                                                      

The discount is reflected as a reduction of the mortgage notes payable and      
increases the effective rate of the debt to 8.13% for Salem Courthouse.         

SCHEDULE OF RENTAL RATES AND OCCUPANCY:                                         

               Average Annual                Average
                 Rental Rates                Occupancy
Property                  1997            1996         1997       1996          

Plainview Apartments  $6,974/unit     $6,672/unit      92%        94%           
Salem Courthouse       6,021/unit      5,915/unit      93%        93%           

as noted under "Item 1. Description of Business," the real estate industry is   
highly competitive.  All of the properties of the Partnership are subject to    
competition from other residential apartment complexes in the area.  The        
Managing General Partner believes that all of the properties are adequately     
insured.  The multi-family residential properties' lease terms are for one year 
or less.  No residential tenant leases 10% or more of the available space.      

Real estate taxes and rates in 1997 for each property were:                     
(dollar amounts in thousands)                                                   

              1997          1997
             Taxes          Rate

Plainview                             $148          1.1%                        
Salem Courthouse (a)                   265          9.6%                        

(a)  Amount per 1996 billings, tax bills for 1997 not yet received.             

ITEM 3.   LEGAL PROCEEDINGS                                                     

The Registrant is unaware of any pending or outstanding litigation that is not  
of a routine nature.  The Managing General Partner of the Partnership believes  
that all such pending or outstanding litigation will be resolved without a      
material adverse effect upon the business, financial condition, or operations of
the Partnership.                                                                

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                    

The Unit holders of the Partnership did not vote on any matter during the fiscal
year covered by this report.                                                    

   PART II

ITEM 5.   MARKET FOR PARTNERSHIP EQUITY AND RELATED PARTNER MATTERS             

There is no established market for the Units and it is not anticipated that any 
will occur in the foreseeable future.  As of January 1998, there were 1,370     
holders of record owning an aggregate of 1,011.5 Units.                         

Pursuant to the terms of the Partnership Agreement, there are restrictions on   
the ability of the Limited Partners to transfer their Units.  In all cases, the 
General Partners must consent to any transfer.                                  

There were no distributions to the partners for the years ending December 31,   
1996 and 1997.  There are no material restrictions upon the Registrant's present
or future ability to make distributions in accordance with the provisions of the
Registrant's Partnership Agreement.  Future cash distributions will depend on   
the levels of cash generated from operations, refinancings, property sales and  
cash reserves.                                                                  

ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION             

This item should be read in conjunction with the financial statements and other 
items contained elsewhere in this report.                                       

RESULTS OF OPERATIONS                                                           

The Partnership realized net losses of approximately $1,168,000 and             
approximately $940,000 for the years ended December 31, 1997 and 1996,          
respectively. The increase in net loss for the year ended December 31, 1997,    
versus the same period in 1996, is primarily due to the non-recurring casualty  
gain recognized in 1996 relating to the Plainview Apartments' fire and hail     
damage (See "Note F" in the Notes to Consolidated Financial Statements in "Item 
7").  Also contributing to the increase in net loss is an increase in total     
expenses, partially offset by an increase in rental revenue.                    

Despite a slight drop in occupancy at Plainview Apartments, rental revenues     
increased due to an increase in average rental rates at both investment         
properties. Operating expenses increased for the year ended December 31, 1997,  
as compared to the year ended December 31, 1996, due to utility rate increases  
at both investment properties, the addition of a maintenance technician, the    
completion of an exterior painting project and increased corporate units rentals
at Plainview Apartments.  At Salem Courthouse, property expenses increased due  
to increased administrative and maintenance salaries.  Offsetting these         
increases to operating expense was a decrease in maintenance expense at         
Plainview Apartments due to the completion of a wood replacement project,       
parking lot repairs and various interior and exterior building repairs in 1996. 

The casualty gain for the year ended December 31, 1996, related to the          
recognition of $10,000 of deferred gain from a fire at Plainview Apartments in  
1994 and a $201,000 gain relating to fire and hail damage at Plainview          
Apartments in 1996 (See "Note F" in the Notes to Consolidated Financial         
Statements in "Item 7").                                                        

Included in operating expense for the year ended December 31, 1997, is          
approximately $227,000 of major repairs and maintenance comprised primarily of  
expenses to enhance the interior of the offices, exterior painting, and major   
landscaping expenses. Included in operating expense for the year ended December 
31, 1996 is, approximately $294,000 of major repairs and maintenance comprised  
primarily of exterior building repairs, swimming pool repairs, parking lot      
repairs and major landscaping expenses.                                         

As part of the ongoing business plan of the Partnership, the Managing General   
Partner monitors the rental market environment of each of its investment        
properties to assess the feasibility of increasing rents, maintaining or        
increasing occupancy levels, and protecting the Partnership from increases in   
expenses.  As part of this plan, the Managing General Partner attempts to       
protect the Partnership from the burden of inflation-related increases in       
expenses by increasing rents and maintaining a high overall occupancy level.    
However, due to changing market conditions which can result in the use of rental
concessions and rental reductions to offset softening market conditions, there  
is no guarantee that the Managing General Partner will be able to sustain such a
plan.                                                                           

LIQUIDITY AND CAPITAL RESOURCES                                                 

The Partnership held cash and cash equivalents of approximately $251,000 and    
$465,000 at December 31, 1997 and 1996, respectively.  For the year ended       
December 31, 1997 cash and cash equivalents decreased $214,000 compared to a    
decrease of $76,000 for the year ended December 31, 1996.  The decrease in net  
cash provided by operating activities for the year ended December 31, 1997, was 
primarily due to the increase in net loss, a decrease in other liabilities and  
the timing of the payment of various operating expenses.  Net cash used in      
investing activities decreased for the year ended December 31, 1997, primarily  
due to a decrease in property improvements and replacements relating to the     
reconstruction of the clubhouse and roof replacement necessitated by the        
casualties at Plainview Apartments in 1994 and 1996.  This decrease was offset  
by the receipt of insurance proceeds in 1996 from these casualties.  Net cash   
used in financing activities was consistent for the years ended December 31,    
1997 and 1996.                                                                  

The sufficiency of existing liquid assets to meet future liquidity and capital  
expenditure requirements is directly related to the level of capital            
expenditures required at the various properties to adequately maintain the      
physical assets as well as future maturing mortgage obligations and related     
refinancing expenses.  Such assets are currently thought to be sufficient for   
any near-term needs of the Partnership.  The mortgage indebtedness of           
approximately $23,842,000, net of discount, requires balloon payments which     
total approximately $23,120,000 at dates ranging from October 2003, to November 
2010, at which time the Managing General Partner intends to sell or refinance   
the individual properties.  There were no cash distributions made for the years 
ended December 31, 1997 or 1996.  Future cash distributions will depend on the  
levels of net cash generated from operations, refinancings and property sales.  

YEAR 2000                                                                       

The Partnership is dependent upon the Managing General Partner and Insignia for 
management and administrative services.  Insignia has completed an assessment   
and will have to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and       
thereafter (the "Year 2000 Issue").  The project is estimated to be completed   
not later than December 31, 1998, which is prior to any anticipated impact on   
its operating systems.  The Managing General Partner believes that with         
modifications to existing software and conversions to new software, the Year    
2000 Issue will not pose significant operational problems for its computer      
systems. However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on the       
operations of the Partnership.                                                  

OTHER                                                                           

Certain items discussed in this annual report may constitute forward-looking    
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "Reform Act") and as such may involve known and unknown risks,        
uncertainties and other factors which may cause the actual results, performance 
or achievements to be materially different from any future results, performance 
or achievements expressed or implied by such forward-looking statements.  Such  
forward-looking statements speak only as of the date of this annual report.  The
Partnership expressly disclaims any obligation or undertaking to release        
publicly any updates or revisions to any forward-looking statements contained   
herein to reflect any change in the Partnership's expectations with regard      
thereto or any change in events, conditions or circumstances on which any such  
statement is based.                                                             

ITEM 7.  FINANCIAL STATEMENTS                                                   

DAVIDSON DIVERSIFIED REAL ESTATE III LIMITED PARTNERSHIP                        

LIST OF CONSOLIDATED FINANCIAL STATEMENTS                                       

Report of Independent Auditors                                                  

Consolidated Balance Sheet - December 31, 1997                                  

Consolidated Statements of Operations - Years ended December 31, 1997 and 1996  

Consolidated Statements of Changes in Partners' Deficit - Years ended December  
31, 1997 and 1996                                                               

Consolidated Statements of Cash Flows - Years ended December 31, 1997 and 1996  

Notes to Consolidated Financial Statements                                      

   Report of Ernst & Young LLP, Independent Auditors

The Partners                                                                    
Davidson Diversified Real Estate III, L.P.                                      

We have audited the accompanying consolidated balance sheet of Davidson         
Diversified Real Estate III, L.P. as of December 31, 1997, and the related      
consolidated statements of operations, changes in partners' deficit and cash    
flows for each of the two years in the period ended December 31, 1997.  These   
financial statements are the responsibility of the Partnership's management.    
Our responsibility is to express an opinion on these financial statements 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 the  
Partnership's management, as well as evaluating the overall financial statement 
presentation.  We believe that our audits provide a reasonable basis for our    
opinion.                                                                        

In our opinion, the financial statements referred to above present fairly, in   
all material respects, the consolidated financial position of Davidson          
Diversified Real Estate III, L.P. at December 31, 1997, and the consolidated    
results of its operations and its cash flows for each of the two years in the   
period ended December 31, 1997, in conformity with generally accepted accounting
principles.                                                                     

                      /s/  ERNST & YOUNG LLP

Greenville, South Carolina                                                      
February 25, 1998                                                               

DAVIDSON DIVERSIFIED REAL ESTATE III LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEET
(in thousands, except unit data)
December 31, 1997   

Assets                                                                          
Cash and cash equivalents                                       $  251      
Receivables and deposits                                           255      
Restricted escrows                                                 175      
Other assets                                                       425      
Investment properties (Notes B and E):                                      
Land                                           $  2,821               
Buildings and related personal property          31,129               
                                  33,950
Less accumulated depreciation                   (15,054)    18,896    

                                                       $20,002

Liabilities and Partners' Deficit                                               
Liabilities                                                                     
Accounts payable                                               $   209      
Tenant security deposits                                            84      
Accrued property taxes                                             278      
Other liabilities                                                  208      
Mortgage notes payable (Notes B and E)                          23,842      

Partners' Deficit                                                               
General partners                                  $    (92)                 
Limited partners (1,013 units issued and                                    
1,011.5 outstanding)                              (4,527)    (4,619)    

                                                       $20,002

See Accompanying Notes to Consolidated Financial Statements 

DAVIDSON DIVERSIFIED REAL ESTATE III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS 
(in thousands, except unit data)

                                            Years Ended December 31,
                                            1997        1996
Revenues:                                                                       
Rental income                                   $    5,297   $  5,156       
Other income                                           409        433       
Casualty gain (Note F)                                  --        211       
Total revenues                                  5,706      5,800  

Expenses:                                                                       
Operating                                            2,689      2,619       
General and administrative                             172        173       
Depreciation                                         1,403      1,352       
Interest                                             2,174      2,183       
Property taxes                                         436        413       
Total expenses                                  6,874      6,740  

Net loss                                        $   (1,168)  $   (940)      

Net loss allocated to general partners (2%)       $      (23)  $    (19)        

Net loss allocated to limited partners (98%)          (1,145)      (921)        

                                          $   (1,168)  $   (940)

Net loss per limited partnership unit:            $(1,131.63)  $(910.53)        

See Accompanying Notes to Consolidated Financial Statements 

DAVIDSON DIVERSIFIED REAL ESTATE III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT 
(in thousands, except unit data)

Limited       
             Partnership   General   Limited
                          Units     Partners   Partners    Total

Original capital contributions  1,013.0     $      1   $ 20,240   $ 20,241      

Partners' deficit at                                                            
December 31, 1995              1,011.5     $    (50) $ (2,461)   $ (2,511)    

Net loss for the year ended                                                     
December 31, 1996                   --          (19)     (921)       (940)    

Partners' deficit at                                                            
December 31, 1996              1,011.5          (69)   (3,382)     (3,451)    

Net loss for the year ended                                                     
December 31, 1997                   --          (23)   (1,145)     (1,168)    

Partners' deficit at                                                            
December 31, 1997              1,011.5     $    (92) $ (4,527)   $ (4,619)    

   See Accompanying Notes to Consolidated Financial Statements

DAVIDSON DIVERSIFIED REAL ESTATE III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS 
(in thousands)

                                                    Years Ended December 31,
                                                     1997         1996
Cash flows from operating activities:                                           
Net loss                                             $ (1,168)   $   (940)  
Adjustments to reconcile net loss to net cash                               
provided by operating activities:                                       
Depreciation                                          1,403       1,352 
Amortization of mortgage discounts and loan costs        64          64 
Casualty gain                                            --        (211)
Loss on disposal of property                             --          25 
Change in accounts:                                                     
  Receivables and deposits                               (3)        (40)
 Other assets                                          (37)          4
 Accounts payable                                       18         115
 Accrued property taxes                                 11           4
 Tenant security deposit liabilities                   (34)          8
 Other liabilities                                    (101)         82

Net cash provided by operating activities              153         463

Cash flows from investing activities:                                           
Property improvements and replacements                   (337)       (710)  
Net receipts from (deposits to) restricted escrows         79         (71)  
Insurance proceeds from property damage                    --         343   

     Net cash used in investing activities             (258)       (438)

Cash flows used in financing activities:                                        
Payments on mortgage notes payable                       (109)       (101)  

Net decrease in cash and cash equivalents                  (214)        (76)    

Cash and cash equivalents at beginning of period            465         541     

Cash and cash equivalents at end of period             $    251    $    465     

Supplemental disclosure of cash flow information:                               
Cash paid for interest                               $  2,111    $  2,119   

 See Accompanying Notes to Consolidated Financial Statements

DAVIDSON DIVERSIFIED REAL ESTATE III LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1997 

NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES                       

ORGANIZATION                                                                    

Davidson Diversified Real Estate III Limited Partnership (the "Partnership" or  
the "Registrant") is a Delaware limited partnership organized in July 1985 to   
acquire and operate residential and commercial real estate properties.  The     
Partnership owns and operates two apartment complexes located in Kentucky and   
Indiana. The general partners of the Registrant are Davidson Diversified        
Properties, Inc., a Tennessee corporation ("Managing General Partner"); Freeman 
Equities, Limited, a Tennessee limited partnership  ("Associate General         
Partner"); and David W. Talley and James T. Gunn (collectively, "Individual     
General Partners")(collectively, the "General Partners").                       

PRINCIPLES OF CONSOLIDATION                                                     

The consolidated financial statements of the Partnership include its 99.99%     
limited partnership interest in Plainview Apartments, L.P. and its wholly owned 
partnership Salem GP, LLC.  The Partnership may remove the General Partner of   
Plainview Apartments, L.P.; therefore, the partnership is controlled and        
consolidated by the Partnership.  All significant interpartnership balances have
been eliminated.                                                                

ALLOCATIONS TO PARTNERS                                                         

Net income (other than that arising from the occurrence of a sale or            
disposition) and net loss shall be allocated 2% to the General Partners and 98% 
to the Limited Partners.                                                        

Net income arising from the occurrence of a sale or disposition shall be        
allocated as follows:                                                           

First, to each Partner having a negative balance in his capital account, an     
amount of such net income (limited to such negative balance) in the same ratio  
as the negative balance in such Partner's capital account bears to the aggregate
of the negative balances in all Partners' capital accounts;                     

Second, the remainder of such net income, if any, shall be allocated 2% to the  
General Partners and 98% to the Limited Partners until the capital account      
balance of each Limited Partner shall equal an amount equal to the excess, if   
any, of (A) the sum of such Limited Partner's original invested capital, as     
defined, plus an amount equal to an 8% per annum cumulative noncompounded return
on such Limited Partner's adjusted invested capital (commencing on the last day 
of the calendar quarter in which such Limited Partner's contribution of original
invested capital is received by the Partnership), over (B) distributions        
previously made to such Limited Partner in payment of such amounts.             

Third, the remainder of such net income, if any, shall be allocated 15% to the  
General Partners and 85% to the Limited Partners.                               

INVESTMENT PROPERTIES                                                           

Investment properties are stated at cost.  Acquisition fees are capitalized as a
cost of real estate.  In accordance with Statement of Financial Accounting      
Standards("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets  
and for Long-Lived Assets to be Disposed Of", the Partnership records impairment
losses on long-lived assets used in operations when events and circumstances    
indicate that the assets might be impaired and the undiscounted cash flows      
estimated to be generated by those assets are less than the carrying amounts of 
those assets.  For the years ended December 31, 1997 and 1996, no adjustments   
for impairment of value were necessary.                                         

DEPRECIATION                                                                    

Depreciation is calculated using the straight-line method over an estimated life
of 25 years for buildings and improvements and 5 to 15 years for furniture and  
fixtures.  For Federal income tax purposes, the accelerated cost recovery method
is used (1) for real property over 18 years for additions after March 15, 1984, 
and before May 9, 1985, and 19 years for additions after May 8, 1985, and before
January 1, 1987, and (2) for personal property over 5 years for additions prior 
to January 1, 1987.  As a result of the Tax Reform Act of 1986, for additions   
after December 31, 1986, the modified accelerated cost recovery method is used  
for depreciation of (1) real property additions over 27 1/2 years, and (2)      
personal property additions over 7 years.                                       

ADVERTISING                                                                     

The Partnership expenses the costs of advertising as incurred.  Advertising     
expense, included in operating expenses, was approximately $68,000 and $83,000  
for the years ended December 31, 1997 and 1996, respectively.                   

CASH AND CASH EQUIVALENTS:                                                      

Cash and cash equivalents includes cash on hand and in banks, money market      
funds, and certificates of deposit with original maturities of less than 90     
days.  At certain times, the amount of cash deposited at a bank may exceed the  
limit on insured deposits.                                                      

SECURITY DEPOSITS:                                                              

The Partnership requires security deposits from lessees for the duration of the 
lease and such deposits are included in receivables and deposits.  The security 
deposits are refunded when the tenant vacates, provided the tenant has not      
damaged its space and is current on its rental payments.                        

RESTRICTED ESCROWS                                                              

CAPITAL IMPROVEMENT RESERVES                                                    

At the time of the 1993 refinancing of the Salem Courthouse mortgage note       
payable, approximately $176,000 of the proceeds were designated for a "Capital  
Improvement Reserve" for certain capital improvements.  At December 31, 1997,   
the remaining reserve balance was $5,000.  The capital improvements are         
anticipated to be completed in calendar year 1998 and any excess funds will be  
released for property operations.                                               

RESERVE ACCOUNT                                                                 

In addition to the Capital Improvement Reserve, a general operating reserve     
account of approximately $114,000 was established with the refinancing proceeds 
for Salem Courthouse.  These funds were established to fund necessary repairs   
and replacements of investment property, debt service, out-of-pocket expenses   
incurred for ordinary and necessary administrative tasks, and payment of real   
property taxes and insurance premiums.  The Partnership was required to deposit 
net operating income (as defined in the mortgage note) from the refinanced      
property to the reserve account until the reserve account equaled $400 per      
apartment unit or approximately $155,000 in total. At December 31, 1997, the    
balance in the reserve account was approximately $171,000 including interest    
earned on the reserves.                                                         

PROJECT IMPROVEMENT ACCOUNT                                                     

Plainview Apartments had a project improvement account which held insurance     
proceeds received after the 1994 clubhouse fire.  The funds were used to make   
repairs and improvements to the clubhouse.  At December 31, 1996, the balance in
the project improvement account was $15,000.  During 1997, the repairs to the   
clubhouse were completed and the balance was expended.                          

LOAN COSTS                                                                      

Loan costs of approximately $559,000 less accumulated amortization of           
approximately $171,000, included in other assets, are amortized on a straight-  
line basis over the life of the respective loans.  The amortization expense is  
included in interest expense.                                                   

LEASES                                                                          

The Partnership generally leases apartment units for twelve-month terms or less.
The Partnership recognized income as earned on its leases.                      

USE OF ESTIMATES                                                                

The preparation of consolidated financial statements in conformity with         
generally accepted accounting principles requires management to make estimates  
and assumptions that affect the amounts reported in the consolidated financial  
statements and accompanying notes.  Actual results could differ from those      
estimates.                                                                      

RECLASSIFICATIONS                                                               

Certain reclassifications have been made to the 1996 balances to conform to the 
1997 presentation.                                                              

FAIR VALUE                                                                      

SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", as       
amended by SFAS No. 119, "Disclosures about Derivative Financial Instruments and
Fair Value of Financial Instruments", requires disclosure of fair value         
information about financial instruments, whether or not recognized in the       
balance sheet, for which it is practicable to estimate fair value. Fair value is
defined in the SFAS as the amount at which the instruments could be exchanged in
a current transaction between willing parties, other than in a forced or        
liquidation sale. The Partnership believes that the carrying amount of its      
financial instruments (except for long term debt) approximates their fair value 
due to the short term maturity of these instruments. The Partnership estimates  
the fair value of its fixed rate mortgages by discounted cash flow analysis,    
based on estimated borrowing rates currently available to the partnership (Note 
B).                                                                             

NOTE B -  MORTGAGE NOTES PAYABLE                                                
(dollar amounts in thousands)                                                   

The principle terms of mortgage notes payable are as follows:                   

                   Principal    Monthly                        Principal
                 Balance At    Payment     Stated              Balance
               December 31,  Including   Interest  Maturity   Due At
Property                 1997       Interest     Rate      Date    Maturity     

Plainview Apartments   $15,336       $119 (1)   9.33%    11/15/10    $15,336    
Salem Courthouse                                                                
1st mortgage            8,352         64       7.83%    10/15/03      7,513   
2nd mortgage              271          2 (1)   7.83%    10/15/03        271   
23,959                          
Less unamortized                                                                
discounts                 (117)                                                 

Totals             $23,842                                       $23,120

(1)  Interest only payments.                                                    

The Partnership exercised an interest rate buy-down option for Salem Courthouse 
when the debt was refinanced, reducing the stated rate from 8.13% to 7.83%.  The
fee for the interest rate reduction amounted to $177,000 and is being amortized 
as a mortgage discount on the interest method over the life of the loan.  The   
unamortized discount fee is reflected as a reduction of the mortgage notes      
payable and increases the effective rate of the debt to 8.13%.                  

Scheduled principal payments of mortgage notes payable subsequent to December   
31, 1997, are as follows (dollar amounts in thousands):                         

Years Ending December 31,                                     
1998                  $   118               
1999                      128               
2000                      138               
2001                      149               
2002                      161               
Thereafter                 23,265                   
       $23,959

Mortgages are collateralized by the related property and improvements of the    
Partnership.  Certain of the notes require prepayment penalties if repaid prior 
to maturity.                                                                    

The estimated fair value of the Partnership's aggregate mortgage notes payable  
is approximately $26,943,000 as compared to the carrying value of approximately 
$23,959,000.  This estimate is not necessarily indicative of the amounts the    
Partnership may pay in actual market transactions.                              

NOTE C - INCOME TAXES                                                           

The Partnership has received a ruling from the Internal Revenue Service that it 
is classified as a partnership for Federal income tax purposes.  Accordingly, no
provision for income taxes is made in the consolidated financial statements of  
the Partnership. Taxable income or loss of the Partnership is reported in the   
income tax returns of its partners.                                             

The following is a reconciliation of reported net loss and Federal taxable loss 
(dollar amounts in thousands, except unit data):                                

                          1997            1996

Net loss as reported                  $   (1,168)      $    (940)               
Add (deduct)                                                                    
Debt write-off                               104                                
Depreciation differences                       2             (35)               
Unearned income                               26             (10)               
Amortization                                  (2)             (3)               
Disposition of property                       --            (145)               
Other                                        (37)             28                

Federal taxable loss                  $   (1,075)     $   (1,105)               

Federal taxable loss per                                                        
limited partnership unit           $(1,041.52)     $(1,070.59)            

The following is a reconciliation between the Partnership's reported amounts and
Federal tax basis of net liabilities (dollar amounts in thousands):             

Net deficit as reported                         $(4,619)              
Land and buildings                                  641               
Accumulated depreciation                         (6,929)              
Syndication                                       1,621               
Distribution fees                                 1,051               
Other                                                92               
Net deficit - Federal tax basis                $(8,143)             

NOTE D - TRANSACTIONS WITH AFFILIATED PARTIES                                   

Affiliates of Insignia Financial Group, Inc. ("Insignia") own the Partnership's 
Managing General Partner.  The Partnership has no employees and is dependent on 
the Managing General Partner and its affiliates for the management and          
administration of all partnership activities. The Partnership Agreement provides
for payments for services and as reimbursement of certain expenses incurred by  
affiliates on behalf of the Partnership.                                        

The following transactions with affiliates of Insignia were incurred during the 
years ended December 31, 1997 and 1996 (dollar amounts in thousands):           

                                   1997         1996

Property management fees (included in                                           
operating expenses)                             $284         $277             
Reimbursement for services of affiliates                                        
including $2,000 and $46,000 in                                               
construction services reimbursements                                          
in 1997 and 1996, respectively                                                
(included in investment property and                                          
general and administrative and                                                
operating expenses)                              130         174              

For the period from January 1, 1996, to August 31, 1997, the Partnership insured
its properties under a master policy through an agency and insurer unaffiliated 
with the Managing General Partner.  An affiliate of the Managing General Partner
acquired, in the acquisition of a business, certain financial obligations from  
an insurance agency which was later acquired by the agent who placed the master 
policy.  The agent assumed the financial obligations to the affiliate of the    
Managing General Partner who received payment on these obligations from the     
agent. The amount of the Partnership's insurance premiums that accrued to the   
benefit of the affiliate of the Managing General Partner by virtue of the       
agent's obligations was not significant.                                        

NOTE E - INVESTMENT PROPERTIES AND ACCUMULATED DEPRECIATION                     
(dollar amounts in thousands)                                                   

                  Initial Cost
                    To Partnership
                                       Buildings        Cost
                                         and Related   Capitalized
                                            Personal   Subsequent to
Description              Encumbrances   Land      Property    Acquisition       

Salem Courthouse                                                                
Indianapolis, Indiana    $ 8,623     $  774     $11,198        $   980      
Plainview Apartments                                                            
Louisville, Kentucky      15,336      2,047      16,584          2,367      

Totals                     $23,959     $2,821     $27,782        $ 3,347        

                                                        [Enlarge/Download Table]

                            Gross Amount At Which Carried                                             
                                At December 31, 1997                                                  
                                    Buildings                                                         
                                   And Related                                                        
                                    Personal           Accumulated    Date of      Date    Depreciable
Description                  Land   Property    Total Depreciation Construction  Acquired  Life-Years 
                                                                                                      
Salem Courthouse Apartments $  774   $12,178   $12,952 $ (6,077)       1978        11/85      5-25    
                                                                   Phase I 1973    05/86              
Plainview Apartments         2,047    18,951    20,998   (8,977)   Phase II        05/86      5-25    

Totals                      $2,821   $31,129   $33,950 $(15,054)                                      

Reconciliation of "Investment Properties and Accumulated Depreciation":         

                        Years Ended December 31,
                       1997         1996
Investment Properties                                                           
Balance at beginning of year            $  33,613   $  33,183                   
Property improvements                      337         710                
Disposition of apartment property           --         (42)               
Removal for casualty event                  --        (238)               

Balance at end of Year                  $  33,950   $  33,613                   

Accumulated Depreciation                                                        
Balance at beginning of year            $  13,651   $  12,412                   
Additions charged to expense             1,403       1,352                
Disposition of apartment property           --         (17)               
Removal for casualty event                  --         (96)               

Balance at end of year                  $  15,054   $  13,651                   

The aggregate cost of the real estate for Federal income tax purposes at        
December 31, 1997 and 1996, is $34,591,000 and $34,253,000.  The accumulated    
depreciation taken for Federal income tax purposes at December 31, 1997 and     
1996, is $21,983,000 and $20,581,000.                                           

NOTE F - DAMAGES                                                                

In May 1996, Plainview Apartments sustained hail damage to many of the roofs on 
the property. Insurance proceeds received in connection with this casualty were 
approximately $220,000 and were deposited in an escrow held by the mortgage     
company. Payments were made from the escrow as the roofs were repaired.  During 
1997, the remaining funds in escrow were expended to complete the repairs to the
roofs.  The insurance proceeds received approximated the estimated cost of the  
roof replacements.                                                              

In September 1996, Plainview Apartments incurred damage to eight apartment units
as the result of a fire at the property.  Insurance proceeds received related to
the fire approximated $123,000.  Total insurance proceeds received approximated 
the estimated cost of replacing the damaged property.                           

As a result of the 1996 casualty events, investment property with a replacement 
cost of approximately $343,000 and a net book value of approximately $142,000   
was replaced. Additionally, during 1996, approximately $10,000 of deferred gain 
from a prior year's casualty event was recognized.  Accordingly, a casualty gain
of approximately $211,000 was recorded during 1996.                             

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND         
FINANCIAL DISCLOSURE                                            

None.                                                                           

    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT                          

Davidson Diversified Properties, Inc., ("DDPI" or the "Managing General         
Partner"), is owned by MAE GP Corporation, which is wholly owned by Metropolitan
Asset Enhancement, L.P., an affiliate of Insignia Financial Group, Inc.         
("Insignia").  Effective February 25, 1998, MAE GP was merged into Insignia     
Properties Trust ("IPT"), an affiliate of Insignia.  Thus the Managing General  
Partner is now a wholly-owned subsidiary of IPT.                                

Effective January 1, 1992, services for partnership administration, asset       
management, and investor relations were assumed by affiliates of Insignia.      

The Registrant has no officers or directors.  The Managing General Partner      
manages and controls the Registrant and has general responsibility and authority
in all matters affecting its business.                                          

The names of the directors and executive officers of the Managing General       
Partner, as of December 31, 1997, their ages and the nature of all positions    
with DDPI presently held by them are as follows:                                

Name                                Age               Position        

Carroll D. Vinson                        57                President and        
                                              Director

Robert D. Long, Jr.                      30                Vice President and   
                                                      Chief Accounting
                                             Officer

William H. Jarrard, Jr.                  51                Vice President       

Daniel M. LeBey                          32                Secretary            

Kelley M. Buechler                       40                Assistant Secretary  

Carroll D. Vinson has been President and Director of the Managing General       
Partner and President of Metropolitan Asset Enhancement, L.P., and subsidiaries 
since August 1994. He has acted as Chief Operating Officer of Insignia          
Properties Trust, an affiliate of the General Partner, since May 1997.  During  
1993 to August 1994, Mr. Vinson was affiliated with Crisp, Hughes & Co.         
(regional CPA firm) and engaged in various other investment and consulting      
activities which included portfolio acquisitions, asset dispositions, debt      
restructurings and financial reporting. Briefly, in early 1993, Mr. Vinson      
served as President and Chief Executive Officer of Angeles Corporation, a real  
estate investment firm.  From 1991 to 1993, Mr. Vinson was employed by Insignia 
in various capacities including Managing Director - President during 1991.      

Robert D. Long, Jr. has been Vice President of the Managing General Partner     
since January 2, 1998. Mr. Long joined Metropolitan Asset Enhancement, L.P.     
("MAE"), an affiliate of Insignia, in September 1993.  Since 1994 he has acted  
as Vice President and Chief Accounting Officer of the MAE subsidiaries.  Mr.    
Long was an accountant for Insignia until joining MAE in 1993. Prior to joining 
Insignia, Mr. Long was an auditor for the State of Tennessee and was associated 
with the accounting firm of Harsman Lewis and Associates.                       

William H. Jarrard, Jr. is Vice President of the Managing General Partner.  He  
has acted as Senior Vice President of Insignia Properties Trust ("IPT"), an     
affiliate of Insignia, since May 1997.  Mr. Jarrard previously acted as Managing
Director - Partnership Administration of Insignia from January 1991 through     
September 1997 and served as Managing Director - Partnership Administration and 
Asset Management from July 1994 until January 1996.                             

Daniel M. LeBey has been Vice President and Secretary of the Managing General   
Partner since January 29, 1998 and Insignia's Assistant Secretary since April   
30, 1997. Since July 1996 he has also served as Insignia's Associate General    
Counsel.  From September 1992 until June 1996, Mr. LeBey was an attorney with   
the law firm of Alston & Bird LLP, Atlanta, Georgia.                            

Kelley M. Buechler has been Assistant Secretary of the Managing General Partner 
since June 1996 and Assistant Secretary of Insignia since 1991.                 

ITEM 10.   EXECUTIVE COMPENSATION                                               

No direct form of compensation or remuneration was paid by the Partnership to   
any officer or director of the Managing General Partner.  The Partnership has no
plan, nor does the Partnership presently propose a plan, which will result in   
any remuneration being paid to any officer or director upon termination of      
employment.  However, fees and other payments have been made to the             
Partnership's Managing General Partner and its affiliates, as described in "Item
12. Certain Relationships and Related Transactions."                            

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT       

As of February 1998, no security holder was known by the Registrant to be the   
beneficial owner of more than 5% of the Units of the Registrant.                

As of February 1998, no director or officer of the Managing General Partner     
owns, nor do the directors or officers as a whole own more than 1% of the       
Registrant's Units. No such director or officer had any right to acquire        
beneficial ownership of additional Units of the Registrant.                     

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                        

(dollar amounts in thousands)                                                   

Affiliates of Insignia Financial Group, Inc. ("Insignia") own the Partnership's 
Managing General Partner.  The Partnership has no employees and is dependent on 
the Managing General Partner and its affiliates for the management and          
administration of all partnership activities. The Partnership Agreement provides
for payments for services and as reimbursement of certain expenses incurred by  
affiliates on behalf of the Partnership.                                        

The following transactions with affiliates of Insignia were incurred in 1997 and
1996:                                                                           

                                  1997          1996

Property management fees (included in                                           
operating expenses)                          $  284        $  277             
Reimbursement for services of affiliates                                        
including $2,000 and $46,000 in                                               
construction services reimbursements                                          
in 1997 and 1996, respectively                                                
(included in investment property and                                          
general and administrative and                                                
operating expenses)                              130          174             

For the period from January 1, 1996, to August 31, 1997, the Partnership insures
its properties under a master policy through an agency and insurer unaffiliated 
with the Managing General Partner.  An affiliate of the Managing General Partner
acquired, in the acquisition of a business, certain financial obligations from  
an insurance agency which was later acquired by the agent who placed the current
year's master policy.  The agent assumed the financial obligations to the       
affiliate of the Managing General Partner who receives payment on these         
obligations from the agent. The amount of the Partnership's insurance premiums  
that accrued to the benefit of the affiliate of the Managing General Partner by 
virtue of the agent's obligations was not significant.                          

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K                                      

(a)   Exhibits:                                               

            Exhibit 27, Financial Data Schedule, is filed as an exhibit to
this report.                                      

      (b)   No Reports on Form 8-K were filed during the fourth quarter of
1997.                                             

    SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant      
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.                                                                     

                    DAVIDSON DIVERSIFIED REAL ESTATE III

                             By:    Davidson Diversified Properties, Inc.,
                      Managing General Partner

           By:    /s/Carroll D. Vinson
               Carroll D. Vinson
       President

In accordance with the Exchange Act, this report has been signed below by the   
following persons on behalf of the Registrant and in the capacities and on the  
dates indicated.                                                                

Signature/Name                      Title                           Date        

/s/Carroll D. Vinson                President                    March 16, 1998 
Carroll D. Vinson                                                               

/s/Robert D. Long, Jr.              Vice President and Chief     March 16, 1998 
Robert D. Long, Jr.                 Accounting Officer                          

   EXHIBIT INDEX

EXHIBIT NO.                                                                     

3          Partnership Agreement dated July 8, 1985 and amended as of October   
         9, 1985 is incorporated by reference to Exhibit A to the Prospectus
of the Registrant dated October 28, 1985 as filed with the
Commission pursuant to Rule 424(b) under the Act.         

3A         Second Amendment dated April 1, 1986 to the Partnership Agreement    
      dated July 8, 1985 as amended October 9, 1985 is incorporated by
       reference to Exhibit 3A to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1986.         

4          Certificate of Limited Partnership dated June 28, 1985 is            
incorporated by reference to Exhibit 4 to the Registrant's
     Registration Statement on Form S-11 (Registration No. 2-99257).

10A        Property Management Agreement dated July 26, 1985 between the        
    Registrant and Harvey Freeman & Sons, Inc., is incorporated by
     reference to Exhibit 10B to Amendment No. 1 to the Registrant's
     Registration Statement on Form S-11 (Registration No. 2-99257).

10B        Agreement Among Agents dated November 1, 1983 by and among Harvey    
    Freeman & Sons, Inc., Harvey Freeman & Sons, Inc. of Arkansas,
         Harvey Freeman & Sons, Inc. of Florida, Harvey Freeman & Sons, Inc.
          of Georgia, Harvey Freeman & Sons, Inc. of Indiana, Harvey Freeman &
         Sons, Inc. of Kentucky, Harvey Freeman & Sons, Inc. of Mississippi,
       Harvey Freeman & Sons, Inc. of North Carolina, Harvey Freeman and
          Sons, Inc. of Ohio and Harvey Freeman & Sons, Inc. of South Carolina
        is incorporated by reference to Exhibit 10C to Registrant's Annual
      Report on Form 10-K for the fiscal year ended December 31, 1983.

10C        Acquisition and Disposition Services Agreement dated October 28,     
 1985 between the Registrant and Criswell Freeman Company is
         incorporated by reference to Exhibit 10D to the Registrant's Annual
      Report on Form 10-K for the fiscal year ended December 31, 1985.

10D        Contract for Sale of Real Estate for Salem Courthouse Apartments     
          dated September 25, 1985 between Salem-Oxford Associates, an Indiana
  limited partnership and Tennessee Trust Company, Trustee, is
    incorporated by reference to Exhibit 10(a) to the Registrant's
Current Report on Form 8-K dated December 2, 1985.        

10E        First Amendment to Contract for Sale of Real Estate dated October    
      29, 1985 between Salem Courthouse Associates, an Indiana limited
          partnership and Tennessee Trust Company is incorporated by reference
     to Exhibit 10(b) to the Registrant's Current Report on Form 8-K
dated December 2, 1985.                                   

10F        Assignment of Contract for Sale of Real Estate dated November  20,   
         1985 between Tennessee Trust Company, Trustee and the Registrant is
    incorporated by reference to Exhibit 19(c) to the Registrant's
Current Report on Form 8-K dated December 2, 1985.        

10G        Mortgage Note dated December 2, 1985 payable to BancOhio National    
     Bank executed by the Registrant is incorporated by reference to
        Exhibit 10H to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1985.                      

10H        Real Estate Mortgage and Security Agreement dated December 2, 1985   
          to BancOhio National Bank executed by the Registrant is incorporated
      by reference to Exhibit 10I to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1985.    

10I        Promissory Note dated December 2, 1985 payable to Freeman Mortgage   
         Corporation executed by the Registrant is incorporated by reference
       to Exhibit 10J to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1985.                  

10J        Note executed by the Registrant payable to Phoenix Mutual Life       
         Insurance Company dated March 28, 1986 relating to Salem Courthouse
    Apartments, is incorporated by reference to Exhibit 10J to the
       Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1986.                                        

10K        Mortgage and Security Agreement executed by the Registrant to        
         Phoenix Mutual Life Insurance Company dated March 28, 1986 relating
     to Salem Courthouse Apartments, is incorporated by reference to
        Exhibit 10K to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1986.                      

10L        Contract for Sale of Real Estate for Plainview Apartments dated      
          November 11, 1985 between NTS-Plainview Partners, a Kentucky limited
          partnership and Tennessee Trust Company, a Tennessee corporation, is
    incorporated by reference to Exhibit 10(a) to the Registrant's
Current Report on Form 8-K dated May 6, 1986.             

10M        Assignment of Contract for Sale of Real Estate dated May 2, 1986     
      between Tennessee Trust Company, a Tennessee corporation and the
     Registrant is incorporated by reference to Exhibit 10(b) to the
Registrant's Current Report on Form 8-K dated May 6, 1986.

10N        Amendment and Reinstatement of Contract for Sale of Real Estate      
       dated April 15, 1986 between NTS-Plainview Partners and Tennessee
        Trust company is incorporated by reference to Exhibit 10(c) to the
Registrant's Current Report on Form 8-K dated May 6, 1986.

10O        Mortgage Note dated May 6, 1986 executed by the Registrant payable   
   to NTS-Plainview partners, a Kentucky limited partnership, is
    incorporated by reference to Exhibit 10(f) to the Registrant's
Current Report on Form 8-K dated May 6, 1986.             

10P        Mortgage and Security Agreement dated May 6, 1986 executed by the    
Registrant to NTS-Plainview Partners, a Kentucky limited  
       partnership, is incorporated by reference to Exhibit 10(g) to the
Registrant's Current Report on Form 8-K dated May 6, 1986.

10Q        Agreement for Purchase and Sale of Woodbridge Apartments dated April 
4, 1986 between Regal Oaks Associates, an Illinois general
          partnership and Tennessee Trust Company, a Tennessee corporation, is
    incorporated by reference to Exhibit 10(a) to the Registrant's
Current Report on Form 8-K dated May 30, 1986.            

10R        Assignment of Agreement dated May 30, 1986 between Tennessee Trust   
         Company, a Tennessee corporation and the Registrant is incorporated
         by reference to Exhibit 10(b) to the Registrant's Current Report on
Form 8-K dated May 30, 1986.                              

10S        Memorandum of Understanding amount SEC Realty Corp., Tennessee       
         Properties, L.P., Freeman Mortgage Corporation, J. Richard Freeman,
W. Criswell Freeman and Jacques-Miller Properties, Inc. is
          incorporated by reference to Exhibit 10II to the Registrant's Annual
      Report on Form 10-K for the fiscal year ended December 31, 1988.

10T        Partnership Administration and Consultation Agreement among Freeman  
      Properties, Inc., Freeman Diversified Properties, Inc., Residual
          Equities Limited and Jacques-Miller Properties, Inc. is incorporated
       by reference to Exhibit 10JJ to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1988.    

10U        Termination Agreement, dated December 31, 1991 among Jacques-Miller, 
    Inc., Jacques-Miller Property Management, Davidson Diversified
       Properties, Inc., and Supar, Inc. is incorporated by reference to
         Exhibit 10KK to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991.                      

10V        Assignment of Limited Partnership Interest of Freeman Equities,      
   Limited, dated December 31, 1991 between Davidson Diversified
        Properties, Inc. and Insignia Jacques-Miller, L.P. is incorporated
       by reference to Exhibit 10LL to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.    

10W        Assignment of General Partner Interests of Freeman Equities,         
   Limited, dated December 31, 1991 between Davidson Diversified
          Properties, Inc. and MAE GP Corporation is incorporated by reference
        to Exhibit 10MM to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991.                  

10X        Stock certificate, dated December 31, 1991 showing ownership of      
     1,000 shares of Davidson Diversified Properties, Inc. by MAE GP
     Corporation is incorporated by reference to Exhibit 10NN to the
       Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.                                        

10Y        Notice of Trustee's Sale of Real Estate in the Matter of Foreclosure 
        of the Deed of Trust of Davidson Diversified Real Estate III, L.P.
(regarding Woodbridge Apartments).                        

10Z        Contracts related to refinancing of debt:                            

(a)        First Mortgage and Security Agreement dated September 30, 1993       
      between Salem Courthouse, L.P. and Lexington Mortgage Company, a
Virginia Corporation, securing Salem Courthouse.          

(b)        Seconds Mortgage and Security Agreement dated September 30, 1993     
      between Salem Courthouse, L.P. and Lexington Mortgage Company, a
Virginia Corporation, securing Salem Courthouse.          

(c)        First Assignments of Leases and Rents dated September 30, 1993       
      between Salem Courthouse, L.P. and Lexington Mortgage Company, a
Virginia Corporation, securing Salem Courthouse.          

(d)        Second Assignments of Leases and Rents dated September 30, 1993      
      between Salem Courthouse, L.P. and Lexington Mortgage Company, a
Virginia Corporation, securing Salem Courthouse.          

(e)        First Mortgage Note dated September 30, 1993 between Salem           
        Courthouse, L.P. and Lexington Mortgage Company, relating to Salem
Courthouse.                                               

(f)        Second Mortgage Note dated September 30, 1993 between Salem          
        Courthouse, L.P. and Lexington Mortgage Company, relating to Salem
Courthouse.                                               

10AA       Amended, Restated and Substituted Mortgage Note dated November 15,   
  1995, executed by Plainview Apartments, L.P. payable to NTS-
Plainview Associates.                                     

10BB       Assignment of Leases, Rents, and Profits dated November 15, 1995,    
         executed by Plainview Apartments, L.P. to Nationwide Life Insurance
Co. and West Coast Life Insurance Co.                     

16         Letter from the Registrant's former independent accountant regarding 
   its concurrence with the statements made by the Registrant is
        incorporated by reference to the exhibit filed with Form 8-K dated
September 30, 1992.                                       

22         Subsidiaries.                                                        

27         Financial Data Schedule                                              

99A        Agreement of Limited Partnership for Davidson III GP Limited         
   Partnership between Davidson Diversified Properties, Inc. and
Davidson Diversified Real Estate III.                     

99B        Agreement of Limited Partnership for Salem Courthouse L.P. between   
       Davidson III GP Limited Partnership and Davidson Diversified Real
Estate III, L.P. entered into on September 15, 1993.      

Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10KSB’ Filing		Date		Other Filings
		12/31/98		10KSB
		3/17/98
Filed on:		3/16/98
		2/25/98
		1/29/98
		1/2/98
For Period End:		12/31/97
		8/31/97
		4/30/97
		12/31/96		10KSB
		1/1/96
		11/15/95
		9/30/93
		9/15/93
		9/30/92
		1/1/92
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