Davidson Diversified Real Estate III LP – ‘10KSB’ for 12/31/96

As of:  Tuesday, 3/25/97   ·   For:  12/31/96   ·   Accession #:  720392-97-8   ·   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±    99K 
 2: EX-27       Financial Data Schedule (Pre-XBRL)                     2±     8K 

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   

[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, 1996   
or  
[ ]  Transition Report Under Section 13 or 15(d) of the                         
Securities Exchange Act of 1934 [No Fee Required]                     

For the transition period.........to.........   

Commission file number 0-15676  

DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.  
(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 of 1934 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:  $5,589,000            

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 December 31, 1996:  Market value information for the           
Registrant's partnership interests is not available.  Should a trading market   
develop for these interests, it is management's belief that such trading would  
not exceed $25,000,000.                                                         

DOCUMENTS INCORPORATED BY REFERENCE   
1.   Portions of the Prospectus of Registrant dated October 28, 1985 (included  
    in Registration Statement, No. 2-99257, of Registrant) are incorporated by
reference into Parts I and III.                                       

    PART I

ITEM 1.  DESCRIPTION OF BUSINESS                                                

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

The Registrant's primary business is to operate and hold for investment         
existing income-producing residential real properties.  Industry segment        
information is not relevant.  The Registrant 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 Registrant's six   
properties, four of which have since been sold or foreclosed upon.  See "Item 2.
Description of Properties," below for a description of the Registrant's         
remaining properties.                                                           

The Registrant 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 Registrant 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.                                                                 

Both the income and expenses of operating the properties owned by the           
Registrant are subject to factors outside of the Registrant's control, such as  
over-supply of similar properties resulting from over-building, increases in    
unemployment or population shifts, reduced availability of permanent mortgage   
funds, changes in zoning laws, or changes in patterns or needs of users.  In    
addition, there are inherent risks in owning and operating residential          
properties because such properties are susceptible to the impact of economic and
other conditions outside of the control of the Registrant.                      

At this time, it appears that the Partnership's investment objective of capital 
growth will not be attained.  In addition, unless there is significant          
improvement in the performance of the Registrant's properties and the markets in
which such properties are located, investors may not receive a return of a      
portion of their initial capital contributions.                                 

For the year ended December 31, 1996, the Registrant's properties accounted     
for, in the aggregate, in excess of 99% of the Registrant's gross revenues.     

Competition                                                                     

The real estate business is highly competitive.  The Registrant'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.                                             

Employees                                                                       

The Registrant has no employees.  Management and administrative services are    
performed by Davidson Diversified Properties, Inc., the Managing General        
Partner, and affiliates of Insignia Financial Group, Inc. ("Insignia").         
Effective January 1, 1992, affiliates of Insignia began providing property      
management and asset management services to the Registrant.  See "Item 12.      
Certain Relationships and Related Transactions" for an enumeration of the       
affiliates and the compensation and reimbursement received from the Registrant  
during 1996 and 1995.                                                           

ITEM 2. DESCRIPTION OF PROPERTIES:                                              

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

                                                                [Download Table]

                              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)                                                   

                                                                [Download Table]

                    Gross                                              
                  Carrying  Accumulated     Useful             Federal 
Property            Value   Depreciation     Life     Method  Tax Basis
                                                                       
Plainview         $20,800    $ 8,116      5-25 years   S/L    $ 8,950  
Salem Courthouse   12,813      5,535      5-25 years   S/L      4,722  
    Totals        $33,613    $13,651                          $13,672  


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)                                                   

                                                                [Download Table]

                           Principal                                   Principal
                          Balance At                                    Balance 
                         December 31,  Interest   Period    Maturity    Due At  
Property                     1996        Rate    Amortized     Date    Maturity 
                                                                                
Plainview                                                                       
  1st mortgage             $15,336       9.33%      (1)     11/15/10  $15,336   

Salem Courthouse                                                                
  1st mortgage               8,462       7.83%   28.67 yrs  10/15/03    7,513   
  2nd mortgage                 271       7.83%      (1)     10/15/03      271   
                            24,069                                              
Less unamortized                                                                
  discounts                  (133)                                              
       Total              $23,936                                               
<FN>                                                                            
(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                         1996           1995          1996        1995  

Plainview                    $6,672/unit      $6,450/unit      94%         89%  
Salem Courthouse              5,915/unit       5,895/unit      93%         93%  

The Managing General Partner attributes the increase in occupancy and average   
rental rates at Plainview Apartments to rebuilt amenities at the clubhouse      
including an indoor pool and sauna.                                             

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 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 1996 for each property were:                     
(dollar amounts in thousands)                                                   

              1996          1996
             Taxes          Rate

Plainview                             $149          1.1%                        
Salem Courthouse                       254          9.2%                        

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 Registrant 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 Registrant did not vote on any matter during the fourth 
quarter of 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 1996, there were 1,382     
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 of cash from operations for the years ending        
December 31, 1995 and 1996.  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.                       

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

RESULTS OF OPERATIONS                                                           

The Partnership realized a net loss of $940,000 for the year ended December 31, 
1996, compared to a net loss of $997,000 for the year ended December 31, 1995.  
The net loss decreased primarily due to the non-recurring casualty gain         
recognized in 1996 relating to the Plainview Apartments fire and hail damage    
(See "Note G" to the Consolidated Financial Statements in "Item 7").  Rental    
revenues increased slightly to $5,156,000 for the year ended December 31, 1996, 
compared to $4,883,000 for the year ended December 31, 1995 due to the increased
occupancy and average rental rates at Plainview discussed in "Item 2" above.    

Maintenance expenses increased $193,000 or 27.4% for the year ended December 31,
1996, compared to the year ended December 31, 1995, due to parking lot repairs  
and various interior and exterior building repairs at Plainview Apartments and  
major landscaping improvements, repairs for a gas leak and swimming pool repairs
at Salem Courthouse Apartments.  Also during 1996, Salem Courthouse performed   
various exterior building repairs including balcony and stairway renovations.   

The casualty loss recognized during the year ended December 31, 1995, resulted  
from negotiations with the insurance carrier that modified the scope of the     
clubhouse replacement and adjusted the insurance proceeds to be received by     
$51,000, offset by recognition of $25,000 of deferred gain.  The casualty gain  
for the year ended December 31, 1996, related to the recognition of $10,000 of  
the deferred gain and a $201,000 gain relating to fire and hail damage at       
Plainview Apartments (See "Note G" to the Consolidated Financial Statements in  
"Item 7").                                                                      

The loss on disposal of property for the years ended December 31, 1995 and 1996,
relates to roof replacements at Plainview Apartments.                           

Included in maintenance expense for 1996 is approximately $294,000 of major     
repairs and maintenance comprised primarily of major landscaping expenses,      
swimming pool repairs, exterior building repairs and parking lot repairs.       

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                                                 

On November 15, 1995, the Partnership refinanced the mortgage encumbering       
Plainview Apartments.  The total indebtedness refinanced was $15,336,000, of    
which $14,500,000 represented principal and $836,000 represented accrued        
interest.  The refinancing replaced the aforementioned indebtedness which       
carried a stated interest rate of 9.33% and a maturity date of June 20, 1995.   
The new mortgage indebtedness carries the original stated interest rate and     
requires interest-only payments through the maturity date of November 15, 2010. 
Loan costs paid in 1995 for the refinancing totaled $216,000.                   

To facilitate the refinancing of Plainview Apartments during 1995, the property 
was placed into a lower-tier partnership known as Plainview Apartments, L.P. in 
1994 in which Davidson Diversified Real Estate III is the 99.99% limited        
partner. Davidson Diversified Real Estate III retained substantially all        
economic benefits of the property.                                              

The Partnership held unrestricted cash of $465,000 at December 31, 1996,        
compared to unrestricted cash of $541,000 at December 31, 1995.  The decrease in
net cash provided by operating activities for the year ended December 31, 1996, 
was primarily due to an increase in operating and maintenance expenses at both  
properties.  Net cash used in investing activities increased for the year ended 
December 31, 1996, primarily due to an increase in the net deposits to          
restricted escrows and a decrease in insurance proceeds received during the     
year. Net cash used in financing activities decreased for the year ended        
December 31, 1996, due to the non-recurring nature of the loan costs associated 
with the debt refinancing at Plainview Apartments in 1995.                      

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           
$23,936,000, net of discount, is amortized over varying periods as previously   
discussed in "Item 2. Description of Properties."  The mortgage notes require   
balloon payments at dates ranging from October 15, 2003, to November 15, 2010,  
by which time the General Partner intends to sell or refinance the individual   
properties.  Future cash distributions will depend on the levels of net cash    
generated from operations, refinancings, property sales and the availability of 
these funds.                                                                    

ITEM 7.  FINANCIAL STATEMENTS                                                   

DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.                                      

LIST OF CONSOLIDATED FINANCIAL STATEMENTS                                       

Report of Independent Auditors                                                  

Consolidated Balance Sheet - December 31, 1996                                  

Consolidated Statements of Operations - Years ended December 31, 1996 and 1995  

Consolidated Statement of Changes in Partners' Deficit - Years ended December   
31, 1996 and 1995                                                               

Consolidated Statements of Cash Flows - Years ended December 31, 1996 and 1995  

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, 1996, 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, 1996.  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. as of December 31, 1996, and the consolidated 
results of its operations and its cash flows for each of the two years in the   
period ended December 31, 1996, in conformity with generally accepted accounting
principles.                                                                     

                      /s/  ERNST & YOUNG LLP

Greenville, South Carolina                                                      
January 25, 1997                                                                

DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.  

CONSOLIDATED BALANCE SHEET  
(in thousands, except unit data)

December 31, 1996   

Assets                                                                          
Cash:                                                                       
   Unrestricted                                                       $  465
   Restricted-tenant security deposits                                   117
Accounts receivable                                                        5
Escrows for taxes                                                        130
Restricted escrows                                                       254
Other assets                                                             437
Investment properties (Notes B and F):                                      
Land                                             $  2,821             
Buildings and related personal property            30,792             
                                      33,613
   Less accumulated depreciation                     (13,651)         19,962
                                                                     $21,370

Liabilities and Partners' Deficit                                               
Liabilities                                                                     
Accounts payable                                                     $   191
Tenant security deposits                                                 118
Accrued interest                                                          89
Accrued taxes                                                            267
Other liabilities                                                        220
Mortgage notes payable (Note B)                                       23,936

Partners' Deficit                                                               
General partners                                    $    (69)               
Limited partners (1,011.5 units                                             
  issued and outstanding)                              (3,382)         (3,451)

                                                                     $21,370

See Accompanying Notes to Consolidated Financial Statements   

DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.  

CONSOLIDATED STATEMENTS OF OPERATIONS   
(in thousands, except unit data)    

                                        Years Ended December 31,
                                           1996             1995
Revenues:                                                                       
Rental income                                 $  5,156         $  4,883     
Other income                                       433              469     
Total revenues                              5,589            5,352

Expenses:                                                                       
Operating                                        1,697            1,589     
General and administrative                         173              158     
Maintenance                                        897              704     
Depreciation                                     1,352            1,283     
Interest                                         2,183            2,163     
Property taxes                                     413              396     
Total expenses                              6,715            6,293

Casualty events (Note G)                             211              (26)      
Loss on disposal of property                         (25)             (30)      

Net loss                                      $   (940)        $   (997)    

Net loss allocated to general partners (2%)     $    (19)        $    (20)      
Net loss allocated to limited partners (98%)        (921)            (977)      

                                          $   (940)        $   (997)

Net loss per limited partnership unit           $(910.53)        $(965.79)      

See Accompanying Notes to Consolidated Financial Statements 

    DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

    CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
(in thousands, except unit data)

Limited       
             Partnership  General    Limited
                             Units     Partners   Partners       Total

Original capital contributions     1,013    $      1   $ 20,240     $ 20,241    

Partners' deficit at                                                            
December 31, 1994              1,011.5    $    (30)  $ (1,484)    $ (1,514) 

Net loss for the year ended                                                     
December 31, 1995                   --         (20)      (977)        (997) 

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)   

   See Accompanying Notes to Consolidated Financial Statements

DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.  

CONSOLIDATED STATEMENTS OF CASH FLOWS   
(in thousands)

                                                                [Download Table]

                                                           Years Ended December 31,
                                                              1996            1995 
                                                                                   
Cash flows from operating activities:                                              
  Net loss                                                $   (940)       $   (997)
  Adjustments to reconcile net loss to net cash                                    
    provided by operating activities:                                              
    Depreciation                                             1,352           1,283 
    Amortization of discounts and loan costs                    64              51 
    Casualty (gain) loss                                      (211)             26 
    Loss on disposal of property                                25              30 
    Change in accounts:                                                            
      Restricted cash                                           (7)             (4)
      Accounts receivable                                       24               3 
      Escrows for taxes                                        (57)             30 
      Other assets                                               4              16 
      Accounts payable                                         115              (6)
      Accrued property taxes                                     4              (1)
      Tenant security deposit liabilities                        8               3 
      Accrued interest                                          --              97 
      Other liabilities                                         82             (38)

     Net cash provided by operating activities                 463             493 

Cash flows from investing activities:                                              
  Property improvements and replacements                      (710)           (755)
  Deposits to restricted escrows                              (355)           (144)
  Receipts from restricted escrows                             284             165 
  Insurance proceeds from property damage                      343             430 

         Net cash used in investing activities                (438)           (304)

Cash flows from financing activities:                                              
  Payments on mortgage notes payable                          (101)            (93)
  Loan costs                                                    --            (216)

         Net cash used in financing activities                (101)           (309)

Net decrease in cash                                           (76)           (120)

Cash at beginning of period                                    541             661 

Cash at end of period                                     $    465        $    541 

Supplemental disclosure of cash flow information:                                  
  Cash paid for interest                                  $  2,119        $  2,015 
<FN>                                                                               
           See Accompanying Notes to Consolidated Financial Statements             

        DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

        SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY

Interest Reclassification                                                       

As a result of the refinancing of the Plainview Apartments mortgage on November 
7, 1995, $836,000 of accrued interest was reclassified to mortgage principal for
the year ended December 31, 1995, as discussed in "Note C".                     

       See Accompanying Notes to Consolidated Financial Statements

NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES                       

ORGANIZATION                                                                    

Davidson Diversified Real Estate III, L.P. (the "Partnership") 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.                            

PRINCIPLES OF CONSOLIDATION                                                     

The financial statements include all the accounts of the Partnership and the    
99.99% owned lower-tier partnerships.  All significant interpartnership balances
have been eliminated.                                                           

To facilitate the refinancings of Salem Courthouse and Plainview Apartments in  
1993 and 1994, respectively, the properties were placed into lower-tier         
partnerships known as Salem Courthouse, L.P. and Plainview, L.P., respectively. 
Davidson Diversified Real Estate III is the 99.99% limited partner in both lower
tier partnerships and retained substantially all economic benefits of the       
properties. The minority interests in the lower-tier partnerships are           
immaterial.                                                                     

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                                                           

During 1995 the Partnership adopted "FASB Statement No. 121, Accounting for the 
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"   
which requires impairment losses to be recorded on long-lived assets used in    
operations when indicators of impairment are present and the undiscounted cash  
flows estimated to be generated by those assets are less than the assets'       
carrying amount.  The impairment loss is measured by comparing the fair value of
the asset to its carrying amount. The effect of adoption was not material.      

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 $83,000 and $71,000 for the years  
ended December 31, 1996 and 1995, respectively.                                 

CASH                                                                            

The Partnership considers only unrestricted cash to be cash.  At certain times, 
the amount of cash deposited at a bank may exceed the limit on insured deposits.

RESTRICTED ESCROWS                                                              

1)  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, 1996,   
the remaining reserve balance was $5,000.  The capital improvements are         
anticipated to be completed in calendar year 1997 and any excess funds will be  
released for property operations.                                               

2)  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 the refinanced property.  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 equalled   
$400 per apartment unit or approximately $155,000 in total.  At December 31,    
1996, the balance in the reserve account was $164,000 including interest earned 
on the reserves.                                                                

3)  PROJECT IMPROVEMENT ACCOUNT                                           

Plainview Apartments has a project improvement account which holds insurance    
proceeds received after the 1994 clubhouse fire.  The funds are used to make    
repairs and improvements to the clubhouse.  At December 31, 1996, the balance in
the project improvement account was $15,000.                                    

LOAN COSTS                                                                      

Loan costs of $559,000 less accumulated amortization of $122,000, 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.

RESTRICTED CASH - TENANT SECURITY DEPOSITS                                      

The Partnership requires security deposits from all apartment lessees for the   
duration of the lease and considers the deposits to be restricted cash.         
Deposits are refunded when the tenant vacates the apartment if there has been no
damage to the unit.                                                             

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 1995 balances to conform to the 
1996 presentation.                                                              

FAIR VALUE                                                                      

In 1995, the Partnership implemented "Statement of Financial Accounting         
Standards No. 107, Disclosures about Fair Value of Financial Instruments," which
requires disclosure of fair value information about financial instruments for   
which it is practicable to estimate that value.  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.  The       
carrying amounts of variable-rate mortgages approximate fair value due to       
frequent re-pricing (see "Note B").                                             

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

The principal terms of mortgage notes payable are as follows:                   

                                                                [Download Table]

                       Principal      Monthly                          Principal
                       Balance At     Payment     Stated                Balance 
                      December 31,   Including   Interest  Maturity     Due At  
Property                  1996       Interest      Rate       Date     Maturity 
                                                                                
Plainview Apartments   $15,336        $119(1)     9.33%    11/15/10     $15,336 
Salem Courthouse                                                                
 1st mortgage            8,462          64        7.83%    10/15/03       7,513 
 2nd mortgage              271           2(1)     7.83%    10/15/03         271 
                        24,069                                                  
Less unamortized                                                                
 discounts                (133)                                                 

    Totals             $23,936                                          $23,120 
<FN>                                                                            
(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
are as follows:                                                                 

Years Ending December 31,                                     

1997                          $   109                   
1998                              118                   
1999                              128                   
2000                              138                   
2001                              149                   
Thereafter                     23,427                   
           $24,069

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 carrying value of the Partnership's aggregate mortgages approximates their  
estimated fair value.                                                           

NOTE C - REFINANCING                                                            

On November 15, 1995, the Partnership refinanced the mortgage encumbering       
Plainview Apartments.  The total indebtedness refinanced was $15,336,000, of    
which $14,500,000 represented principal and $836,000 represented accrued        
interest.  The refinancing replaced the aforementioned indebtedness which       
carried a stated interest rate of 9.33% and a maturity date of June 20, 1995.   
The new mortgage indebtedness carries the original stated interest rate and     
requires interest-only payments through the maturity date of November 15, 2010. 
Total loan costs incurred in 1995 for the refinancing totaled $216,000 and are  
included in other assets.                                                       

NOTE D - INCOME TAXES                                                           
(dollar amounts in thousands, except unit data)                                 

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.                                             

Differences between the net loss as reported and Federal taxable loss result    
primarily from (1) amortization of present value discounts, (2) depreciation    
over different methods and lives and on differing cost bases of investment      
properties, (3) change in rental income received in advance, (4) casualty gain  
(loss) on property damages,  and (5) gain (loss) on disposition of property.    

(dollar amounts in thousands, except unit data)                                 

The following is a reconciliation of reported net loss and Federal taxable loss:

                                    1996                  1995

Net loss as reported                   $    (940)         $     (997)           
Add (deduct)                                                                    
Depreciation differences                  (35)                (73)        
Unearned income                           (10)                (91)        
Amortization                               (3)                 (4)        
Disposition of property                  (145)                 56         
Other                                       28                 19         

Federal taxable loss                   $   (1,105)        $   (1,090)           

Federal taxable loss per                                                        
limited partnership unit            $(1,070.45)        $(1,055.04)        

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

Net deficit as reported                             $(3,451)          
Land and buildings                                      640           
Accumulated depreciation                             (6,930)          
Syndication                                           1,621           
Distribution fees                                     1,051           
Other                                                     2           
Net deficit - Federal tax basis                    $(7,067)         

NOTE E - TRANSACTIONS WITH AFFILIATED PARTIES                                   
(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 payments were made to affiliates of Insignia in 1996 and 1995:    

                                          1996                1995

Property management fees                        $ 277           $ 261           
Reimbursement for services of affiliates          174             114           

Included in reimbursement for services of affiliates above are $46,000 and      
$24,000 for the years ending December 31, 1996 and 1995, respectively, for      
reimbursements for construction oversight costs related to the Partnership's    
capital improvement and major repair projects.                                  

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 current 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 accruing to the benefit of the affiliate of the
Managing General Partner by virtue of the agent's obligations is not            
significant.                                                                    

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

                                                                [Download Table]

                                            Initial Cost                         
                                            To Partnership                       
                                                        Buildings       Cost     
                                                       and Related   Capitalized 
                                                         Personal   Subsequent to
Description                  Encumbrances   Land         Property    Acquisition 
                                                                                 
Salem Courthouse Apartments                                                      
  Indianapolis, Indiana       $ 8,733      $  774         $11,198      $  841    
Plainview                                                                        
  Louisville, Kentucky         15,336       2,047          16,584       2,169    

     Totals                   $24,069      $2,821         $27,782      $3,010    

                                                        [Enlarge/Download Table]

                   Gross Amount At Which Carried                                              
                    At December 31, 1996                                                      
                           Buildings                                                          
                              And                                                             
                            Related                                                           
                           Personal          Accumulated     Date of       Date    Depreciable
Description        Land    Property   Total  Depreciaion  Construction   Acquired   Life-Years
                                                                                              
Salem Courthouse  $  774    $12,039  $12,813   $ (5,535)      1978        11/85       5-25    
                                                           Phase I 1973   05/86               

Plainview          2,047     18,753   20,800     (8,116)    Phase II      05/86       5-25    
                                                              1978                            

     Totals       $2,821    $30,792  $33,613   $(13,651)                                      

Reconciliation of "Investment Properties and Accumulated Depreciation":         

                                    Years Ended December 31,
                                       1996             1995
Investment Properties                                                           
Balance at beginning of year                   $33,183         $ 32,504         
Property improvements                           710              755      
Disposition of apartment property              (42)              (76)     
Removal for casualty event                     (238)               --     

Balance at End of Year                         $33,613          $ 33,183        
Accumulated Depreciation                                                        
Balance at beginning of year                   $12,412          $ 11,175        
Additions charged to expense                  1,352             1,283     
Disposition of apartment property              (17)               (46)    
Removal for casualty event                     (96)                --     

Balance at end of year                         $13,651          $ 12,412        

The aggregate cost of the real estate for Federal income tax purposes at        
December 31, 1996 and 1995, is $34,253,000 and $33,886,000.  The accumulated    
depreciation taken for Federal income tax purposes at December 31, 1996 and     
1995, is $20,581,000 and $19,195,000.                                           

NOTE G - DAMAGES                                                                

In November 1994, the clubhouse at Plainview Apartments sustained extensive     
damage due to an electrical fire.  The insurance proceeds to be received        
subsequent to December 31, 1994, were originally estimated at $500,000.  The    
destroyed clubhouse had a net book value of $263,000 resulting in a casualty    
gain of $237,000.  A receivable for the estimated proceeds, along with the      
retirement of the clubhouse's net book value and $202,000 of the corresponding  
casualty gain was recognized at December 31, 1994.  The remaining $35,000 of the
$237,000 casualty gain was deferred at December 31, 1994, due to related        
expenses expected to be incurred during the coming year that were not           
reimbursable by insurance.  During the year ended December 31, 1995, the        
Partnership recognized $25,000 of the deferred gain and reduced its estimate of 
the casualty gain by $51,000 due to negotiations with the insurance carrier     
which modified the scope of the clubhouse replacement and reduced the insurance 
proceeds to be received.  The Partnership received approximately $430,000 of the
insurance proceeds during 1995.  During the year ended December 31, 1996, the   
Partnership recognized the remaining $10,000 of the deferred gain. As of        
December 31, 1996, all insurance proceeds relating to the fire had been         
received.                                                                       

In May 1996, Plainview 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 are being made from the escrow as the roofs are repaired.  At 
December 31, 1996, approximately $71,000 remains in the escrow.  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.  Accordingly, a casualty gain of $201,000 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                          

The names of the directors and executive officers of Davidson Diversified       
Properties, Inc., ("DDPI") the Partnership's Managing General Partner as of     
December 31, 1996, their ages and the nature of all positions with DDPI         
presently held by them are as follows:                                          

Name                        Age             Position                            

Carroll D. Vinson           56              President                           

Robert D. Long, Jr.         29              Controller and Principal            
                          Accounting Officer

William H. Jarrard, Jr.     50              Vice President                      

John K. Lines               37              Secretary                           

Kelley M. Buechler          39              Assistant Secretary                 

Carroll D. Vinson has been President of Metropolitan Asset Enhancement, L.P.,   
and subsidiaries since August of 1994.  Prior to that, 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.  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. is Controller and Principal Accounting Officer.  Prior to   
joining Metropolitan Asset Enhancement, L.P., and subsidiaries, he was an       
auditor for the State of Tennessee and was associated with the accounting firm  
of Harshman Lewis and Associates.                                               

William H. Jarrard, Jr. has been Managing Director - Partnership Administration 
of Insignia since January 1991.  Mr. Jarrard served as Managing Director -      
Partnership Administration and Asset Management from July 1994 until January    
1996.                                                                           

John K. Lines has been General Counsel of Insignia since June 1994 and General  
Counsel and Secretary since July 1994.  From May 1993 until June 1994, Mr. Lines
was the Assistant General Counsel and Vice President of Ocwen Financial         
Corporation in West Palm Beach, Florida.  From October 1991 until April 1993,   
Mr. Lines was a Senior Attorney with Banc One Corporation in Columbus, Ohio.    
From May 1984 until October 1991, Mr. Lines was employed as an Associate        
Attorney with Squire Sanders & Dempsey in Columbus, Ohio.                       

Kelley M. Buechler is Assistant Secretary of Insignia.  During the five years   
prior to joining Insignia in 1991, she served in a similar capacity for U.S.    
Shelter.                                                                        

ITEM 10.   EXECUTIVE COMPENSATION                                               

The Registrant was not required to and did not pay remuneration to officers     
and/or directors of the Managing General Partner during 1996 or 1995.  See "Item
12". below and "Note E" of the Notes to the Consolidated Financial Statements   
for a discussion of compensation and reimbursements paid to the General Partners
and certain affiliates.                                                         

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT       

As of February 1997, no security holder was known by Registrant to be the       
beneficial owner of more than 5% of the Units of Registrant.                    

As of February 1997, 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                        

Davidson Diversified Properties, Inc., the Managing General Partner of the      
Registrant, is owned by MAE GP Corporation, which is wholly owned by            
Metropolitan Asset Enhancement, L.P., an affiliate of Insignia.                 

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.                          

Effective January 1, 1992, services for partnership administration, asset       
management, and investor relations were assumed by affiliates of Insignia.  The 
management fees paid to Insignia affiliates in 1996 and 1995 were $277,000 and  
$261,000 respectively.  Reimbursements for administrative services paid to      
Insignia affiliates in 1996 and 1995 were $174,000 and $114,000, respectively.  

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
1996.                                             

    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

     Date:  March 25, 1997

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

/s/Carroll D. Vinson                President                                   
Carroll D. Vinson                                                               

/s/Robert D. Long, Jr.              Controller and Principal                    
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
		11/15/10
		10/15/03		8-K
		12/31/97		10KSB
Filed on:		3/25/97
		1/25/97
For Period End:		12/31/96
		12/31/95		10KSB
		11/15/95
		11/7/95
		6/20/95
		12/31/94
		9/30/93
		9/15/93
		9/30/92
		1/1/92
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