TARR Tarragon (MM)

 

 

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

Title of each class		Name of each exchange on which registered
Common Stock, $.01 par value		The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12 (g) of the Act:
10% Cumulative Preferred Stock, $.01 par value
(Title of class)

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes þ No

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

      Large accelerated filer o           Accelerated filer þ                    Non-accelerated filer o                     Smaller reporting company o

                                    (Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No

     The aggregate market value of the shares of voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the price of the last trade as reported by the National Association of Securities Dealers Automated Quotation System as of June 30, 2007 (the last business day of registrant’s most recently completed second fiscal quarter) was an aggregate value of $129,963,891 based upon a total of 15,362,162 shares held as of June 30, 2007, by persons believed to be non-affiliates of the Registrant.  The basis of this calculation does not constitute a determination by the Registrant that any persons or entities are affiliates of the Registrant as defined in Rule 405 of the Securities Act of 1933, as amended. 

     As of March 26, 2008, there were 28,990,293 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Part III — Proxy statement for the fiscal year ended December 31, 2007

 

 

INDEX TO
ANNUAL REPORT ON FORM 10-K

				Page
PART I
Forward-Looking Statements					3
Item 1.		Business			5
Item 1A.		Risk Factors			13
Item 1B.		Unresolved Staff Comments			22
Item 2.		Properties			24
Item 3.		Legal Proceedings			31
Item 4.		Submission of Matters to a Vote of Security Holders			31
PART II
Item 5.		Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities			32
Item 6.		Selected Financial Data			33
Item 7.		Management's Discussion and Analysis of Financial Condition and Results of Operations			34
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			81
Item 8.		Financial Statements and Supplementary Data			83
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			144
Item 9A.		Controls and Procedures			145
Item 9B.		Other Information			145
PART III
Item 10.		Directors, Executive Officers, and Corporate Governance			147
Item 11.		Executive Compensation			147
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			147
Item 13.		Certain Relationships and Related Transactions, and Director Independence			148
Item 14.		Principal Accounting Fees and Services			148
PART IV
Item 15.		Exhibits and Financial Statement Schedules			149
		Signature Page			153
Purchase and Sale Agreement
Membership Interest Purchase and Sale Agreement
Settlement Agreement
Subsidiaries
Consent of Grant Thornton LLP
Rule 13a-14(a) Certification - William S. Friedman, CEO
Rule 13a-14(a) Certification - Erin D. Pickens, Executive Vice President and CFO
Section 1350 Certifications

 Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These statements are based on our current expectations, estimates, forecasts, and projections about the industries in which we operate, our beliefs, and assumptions that we have made based on our current knowledge. In addition, other written or oral statements that constitute forward-looking statements may be made by or on behalf of us. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and/or variations of such words and similar expressions are intended to identify our forward-looking statements. These statements are not guarantees of future performance and involve many risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual outcomes and results may be materially different from what is expressed or forecast in our forward-looking statements. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission (the “SEC”), we do not have any intention or obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

The risks, uncertainties, and assumptions that are involved in our forward-looking statements include:

	•		our ability to continue as a going concern and raise additional funds to implement our business plan;
	•		our ability to complete our planned sales of properties to generate cash proceeds and reduce debt;
	•		our ability to generate sufficient cash flow to meet our debt service and other obligations;
	•		our ability to continue to satisfy the listing requirements of The Nasdaq Global Select Market;
	•		our substantial indebtedness and high leverage ratio, which have adversely affected our financial health and our ability to fulfill our debt service obligations or otherwise comply with the financial and other covenants in the related debt instruments;
	•		our ability to meet covenants, or remedy, modify, or obtain waivers of existing and future noncompliance, under our existing credit facilities and other agreements evidencing our outstanding indebtedness;
	•		the extent of adverse effects of fluctuations in real estate values on the book value of our real estate assets;
	•		continued deterioration in the homebuilding industry causing increases in competition for, and decrease in demand by, homebuyers;
	•		the pricing and availability of construction and mortgage financing;
	•		construction delays or cost overruns, either of which may increase project development costs;
	•		our ability to obtain zoning, occupancy, and other required governmental permits and authorizations;
	•		opposition from local community or political groups with respect to development or construction at a particular site;

	•		the adoption, on the national, state, or local level, of more restrictive laws and governmental regulations, including more restrictive zoning, land use, or environmental regulations and increased real estate taxes; and
	•		general industry, economic, and market conditions particularly with regard to new home construction, apartment property occupancy, rental growth rates, prevailing rental rates, and competition in the markets where our development properties and rental properties are concentrated.

These factors are representative of the risks, uncertainties, and assumptions that could cause actual outcomes and results to differ materially from what is expressed or forecast in our forward-looking statements. In addition, these statements could be affected by local, national, and world economic conditions and political events, including global economic slowdowns and fluctuations in interest and currency exchange rates. For additional information regarding factors that may affect our actual financial condition and results of operations, see the information in ITEM 1A. “RISK FACTORS.”

PART I

Our plan to improve our liquidity contemplates additional property sales and, more importantly, continued reduction in our condominium inventory. In addition, we continue to negotiate extensions of maturing debt obligations. Some of our efforts to reduce costs were offset by fees totaling $4.6 million through December 31, 2007, paid to financial advisors and other consultants we engaged in the third quarter of 2007 to assist with the evaluation of strategic and financial alternatives.

During 2007, we recorded impairment charges of $368.8 million, $101.3 million of which was recorded in cost of sales, $223.8 million of which was recorded in impairment charges, and $43.7 million of which was reported in discontinued operations in the Consolidated Statements of Operations. We also recorded an impairment charge of approximately $6 million during 2007 to write down our investment in an unconsolidated joint venture. In addition, we wrote off $7.8 million in pursuit costs (contract deposits) in 2007 which were included in general and administrative expenses – corporate in the Consolidated Statement of Operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Business Overview” for additional information regarding impairment charges.

Our consolidated financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As of December 31, 2007, we had $1,111.6 million in consolidated debt, and had guaranteed additional debt of our unconsolidated joint ventures totaling $31.6 million. For the year ended December 31, 2007, we incurred a net loss of ($388.4 million). As of December 31, 2007, we had stockholders’ deficit of ($112.8 million), which was a significant decrease compared to stockholders’ equity of $279.5 million as of December 31, 2006. These factors raise substantial doubt about our ability to continue as a going concern; however, management believes that our current initiatives will continue to generate sufficient liquidity to adequately fund operations and enable us to continue as a going concern. Nonetheless, there can be no assurance that we will be able to successfully implement our plan on favorable terms, or at all. The success of this plan will depend on our ability to complete our planned sales of properties, to modify or obtain waivers of financial covenants in our debt agreements, to extend or refinance our maturing debt obligations and to continue to sell completed homes in our inventory. If we are unable to generate sufficient liquidity to fund our operations or are unable to modify or obtain waivers of financial covenants and extend or refinance our maturing debt, it may be necessary for us to undertake other actions as may be appropriate at such time. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets.

Corporate History

We were incorporated in Nevada in 1997. We are the successor by merger to Vinland Property Trust, a public real estate investment trust formed in 1973, and National Income Realty Trust, a public real estate investment trust that began operations in 1978. In 1995, we began to develop new rental apartment communities in Texas and later in Florida, Georgia, Tennessee, South Carolina, Alabama, and Connecticut. In 1998, we began our first conversion of an apartment property to condominiums and, two years later, acquired the land for our first high-rise residential condominium development in Fort Lauderdale, Florida. From 2001 through 2006, we devoted significant capital and efforts to expanding our development activities, especially in Florida and the northeast. In 2007, we reduced both our investment portfolio of rental real estate and our active development projects and development pipeline through asset sales in response to market conditions and in connection with our efforts to improve liquidity and reduce debt.

Business Operations

We operate two distinct divisions, a real estate development division (the “Development Division”) and an investment division (the “Investment Division”). Our Development Division focuses on developing, renovating, building and marketing homes in high-density, urban locations and in master-planned communities. Our Investment Division owns and operates a portfolio of stabilized rental apartment communities located in

Alabama, Connecticut, Florida, New Jersey, Texas, Rhode Island, Tennessee, Maryland, Oklahoma, Michigan, and Georgia.

Each of our divisions is an operating segment. Financial information about these two segments can be found in NOTE 10. “SEGMENT REPORTING” in the Notes to Consolidated Financial Statements.

Development Division

Our Development Division concentrates on the following distinct property types.

Development of Low- and Mid-Rise Rental Apartment Communities. We build luxury and affordable rental properties to sell on completion and lease-up. These developments are sometimes part of larger development projects and, in the case of affordable or subsidized projects, our ability and willingness to undertake them may be instrumental in obtaining approval for related market-rate, for sale developments.

High- and Mid-Rise Condominiums. These large, multi-year high- and mid-rise projects are designed for luxury and urban living. Development, construction, and sale of homes in these types of projects typically have taken two to five years. We believe our ability to obtain sites and development approvals in areas of proven desirability with water views or coveted downtown locations and our ability to design homes with appeal to specific targeted markets are keys to success in developing high- and mid-rise condominiums.

Townhomes, Traditional New Developments and Low-Rise Condominiums. Projects in this category target several highly defined market segments, including first-time, move-up, retirement, empty-nester and affluent second-home buyers. Active adult communities featuring spacious homes with distinctive designs that are located in affluent, suburban communities attract adults seeking a carefree housing choice near where they presently live. These developments also produce positive local tax revenues and are often welcomed by municipalities that otherwise oppose high-density residential developments.

Conversion of Existing Rental Apartment Communities to Condominiums. In the past, we have acquired rental apartment communities in order to sell the individual apartments as condominiums. Where appropriate, we renovate the homes and add amenities to make them more attractive to homebuyers. Prices of homes in condominium conversion projects in Florida, Texas and South Carolina may range from $70,000 to $540,000, depending largely on size, location and view. A majority of these homes are targeted at first-time homebuyers and priced considerably below nearby townhomes and single-family residences under construction. As of December 31, 2007, we had 694 units in this property type and have no current plans to acquire additional properties for immediate conversion.

In February 2007, our developments at 1100 Adams, a mid-rise development, and 1118 Adams, a rental development, in Hoboken, New Jersey, received a Best American Building Award from the National Association of Homebuilders as the best smart growth development of 2006.

Strategy

Recent Developments. The marked slowdown in sales, the decline in home prices in the markets where we operate together with the increasingly more restricted credit market and the financial constraints affecting us have led us to deemphasize for sale housing in our future project planning in favor of rental housing, hospitality developments and mixed-use projects. These factors have also led us to seek financially strong partners to join in future developments. As a result, we expect the level of home sales to continue to decline and the volume of sales of rental properties we have developed to increase. This change may make our earnings and revenue even more volatile. In view of market conditions, we anticipate that, over the next several years, new developments undertaken by the Development Division will be primarily traditional, rental apartment properties with a greater

emphasis on suburban garden apartment developments than in the recent past. We believe this approach will enable us to maintain a sufficient development infrastructure to undertake additional developments as appropriate opportunities arise.

Focus on High-density, Urban Markets. We believe our previous focus on development of urban and high-density housing designed for non-traditional households will present us with fewer opportunities for a number of reasons, including:

	•		scarcity of urban land for development in established communities and increased restrictions and controls on growth in many areas is channeling a larger share of new construction into areas where high- density housing predominates;
	•		cost increases affecting concrete, high-rise and mid-rise construction more than stick built garden apartments;
	•		greater difficulty financing higher cost developments; and
	•		the continuing decline in prices and demand for luxury condominiums.

We believe we have several competitive advantages in the urban markets in which we operate. Urban development requires close cooperation with municipalities and community groups throughout the often complex approval process. Our senior management is familiar with the greater complexity of doing business in these markets and is personally involved in these large urban developments from the outset, which we believe increases our effectiveness in dealing with sellers and governmental decision makers. Our development activities grew out of the experience of our executives in commercial and residential development, real estate finance and property management. The expertise and industry contacts developed through these activities is particularly relevant to the development of high-density, urban residential communities, which often require a complex blend of design, construction, financial, political and marketing skills. Moreover, the direct involvement of our senior executives permits us to act promptly, which we believe is often a factor in closing a purchase. Our experienced planners and architects and our ability to fund the extensive environmental, traffic, fiscal impact and other studies required are important advantages in obtaining opportunities for urban development.

Increasingly, most large projects in urban areas involve a combination of uses and tenancies. The experience of our management in owning and developing retail and office properties as well as both for sale and rental housing is valuable in evaluating opportunities to develop mixed-use projects and gives more credibility to our proposals.

Site Selection, Design , and Construction of New Developments. We acquire land for development subject to or after receiving zoning and other approvals to reduce development-related risk and preserve capital. Prior to closing the purchase, we will take our design through the approval process, or we will assist the owner in the process. In markets where the supply of land and housing is constrained, such as Hoboken or Edgewater, New Jersey, our primary focus is to obtain sites at a cost that makes development economically feasible. Sites in such locations often require environmental remediation, demolition and removal of hazardous wastes, which we typically require the seller to accomplish to our satisfaction prior to closing.

Our land purchase agreements are typically subject to a number of conditions, including our ability to obtain necessary governmental approvals. If all governmental approvals are not obtained prior to a pre-determined contractual deadline, we may extend the deadline or cancel the contract, upon which our initial deposit will be

returned to us. In addition, we retain the right to cancel any of our agreements and forfeit our deposit. In such instances, we generally are not able to recover any pre-development costs.

For high- and mid-rise buildings, we generally retain a contractor during the early stages of design to assist in value engineering and estimation of construction costs alongside our own construction personnel. We generally retain bonded general contractors under fixed-price contracts and assign full-time, on-site project supervisors to monitor construction progress and quality.

Target Marketing and Sale Strategy. Our urban projects are usually targeted at highly defined market segments, such as first-time, move-up, retirement, empty-nester, and affluent second-home buyers. We expect that future urban projects will continue to be targeted toward specific markets in keeping with the more varied lifestyles often associated with the urban areas in which our development activities are concentrated.

We use a variety of techniques to sell our homes. We employ marketing professionals who supervise and coordinate the design and development of multimedia marketing plans for each of our communities. We typically attract a significant number of our homebuyers through the use of property-specific web sites that offer detailed information about our communities.

We typically begin sales after we begin but before completion of construction. Home purchase contracts require a deposit of 3% to 20% of the purchase price. After the expiration of any statutory rescission period, the deposit becomes non-refundable. However, purchasers generally have no obligation beyond the deposit in the event of a default in their obligation to purchase the home. In July 2007, we began experiencing increased buyer defaults at One Hudson Park, located in Edgewater, New Jersey, where buyers were required to make deposits of up to 10% of the purchase price. The increase in defaults was the result of recent changes in the credit markets that have made it more difficult for buyers to obtain suitable financing.

Financing. We finance our development activities through acquisition, development or construction loans and corporate borrowings, with the required equity investment coming principally from internally generated funds. We are usually required to guarantee payment on these loans. Mortgage financing proceeds and proceeds from the sale of properties generated by our rental real estate portfolio have historically also been significant sources of funding for our development activities.

Joint Ventures. We often undertake development projects in partnership with third parties when our partner has either site control or a particular expertise in the proposed project, or both. In addition, we anticipate expanding our use of operating and financial joint ventures with third parties with access to capital to facilitate obtaining construction financing and to fund a portion of the required equity of our future development projects. We believe this approach will enable us to maintain a sufficient development infrastructure to undertake additional developments should appropriate opportunities arise.

Our partners in our development projects in Hoboken, New Jersey, were selected because of their local market expertise and control of a number of attractive sites in a market with significant barriers to entry and limited sites available for development. We and our partners have completed three mid-rise condominium developments with 353 units and two rental apartment communities with 90 affordable units and 217 market rate units (this 217 unit property was sold in February 2008) and presently have two additional rental apartment communities, one with 217 units and one with 113 units, under development in Hoboken.

Management of the Development Division

The Development Division is currently managed by Mr. Friedman, Mr. Rothenberg, and William J. Rosato, president of Tarragon Development Corporation, a wholly-owned subsidiary of Tarragon. These three executives

collectively have over 75 years of experience in the residential development business. The Development Division has a team of developers, engineers and architects, project managers, attorneys and marketing professionals.

Investment Division

Property Management. We manage our apartment communities with a focus on adding value. We have implemented programs to optimize revenue generated by the properties under our management, including daily value pricing and lease inventory management, as well as programs to enhance ancillary income from cable television, telephone and high-speed internet services, laundry facilities, and vending machines. We assign a high priority to the development and maintenance of our budget and cost-control systems and procedures and have an integrated accounting, financial and operational management information system, connecting our regional offices and management sites with our corporate headquarters. We also provide property management services to our Development Division’s rental properties that are under conversion to condominiums or under construction and in the initial lease-up stage.

Strategic Joint Venture. We are seeking a strong financial and business partner with whom we can form a residential property joint venture capable of expanding our residential property management platform and committed to financing acquisitions of both value-added and investment quality residential properties. We believe this strategy will leverage the strengths of our property management platform and allow us to expand its operations and achieve economies of scale. Through this joint venture, we expect to capitalize on our experience in supervising apartment renovations and repositioning through selective and opportunistic acquisitions of older or underperforming apartment properties in markets where we presently operate. Our acquisitions of properties have historically been, and are expected to continue to be, financed with mortgage financing.

Opportunistic Acquisitions. We intend to seek opportunities to acquire unsold condominium and/or apartment communities in bulk to operate as rentals or to hold pending recovery of the condominium sales market. These acquisitions may be effectuated through the purchase, at a discount, of mortgages in default or through purchase from lenders or others willing to sell at substantial discounts to recent values. We expect transactions in this area to be conducted in joint ventures with partners who have greater access to capital.

Sales of Apartment Communities and Commercial Properties. In 2005, we divested many of our non-core commercial properties and apartment communities to generate capital to employ in expanding the Development Division, to reduce debt, to repurchase stock and to take advantage of favorable prices for rental real estate properties. In 2007, we sold 16 apartment communities and commercial properties in connection with our efforts to improve liquidity and reduce debt. Please see the information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Results of Operations” for information about sales of properties during the past three years.

Funds generated by the operation, sale, and refinancing of our rental real estate portfolio have primarily been used to finance the expansion of our development operations and, in 2007, to repay debt and other obligations. To a lesser extent, such funds have been used to enhance the value of our investment portfolio through consistent capital improvements.

Complementary Financial Services. In 2005, we formed a joint venture, Choice Home Financing, LLC, with Wells Fargo Ventures, LLC to conduct a residential mortgage lending business. Our residential mortgage lending services are marketed to our home buyers, as well as unrelated borrowers. The mortgage lending services are intended to attract quality tenants by offering them competitive pricing. Revenues from these activities consist of sales of mortgage loans and origination and premium fee income. The sale of the mortgage loans is non-recourse.

Management of the Investment Division

Mr. Rothenberg and Eileen Swenson, president of Tarragon Management, Inc. (“TMI”), a wholly-owned subsidiary of Tarragon, share management of the Investment Division. Ms. Swenson, a certified property manager, has been in the northeast multi-family property management industry for over 25 years. Functional management, including property management, training and marketing, and environmental compliance, reports to her. In addition, we use independent management firms to manage our rental apartment properties located in Texas and Oklahoma and our commercial properties.

Competition

The real estate development industry is highly competitive. We compete against numerous public and private homebuilders, developers and others where our communities are located. Therefore, we may be competing for investment opportunities, financing, available land, and potential buyers with entities that may possess greater financial, marketing, or other resources.

The real estate investment industry is highly fragmented among individuals, partnerships and public and private entities. No single company or person dominates the market for investment opportunities. Although we may compete against large sophisticated owners and operators for opportunities and prospective residents, owners and operators of any size can provide effective competition for potential tenants. We compete for tenants in our markets primarily on the basis of property location, amenities offered, rent charged, services provided and the design and condition of improvements. Other forms of multifamily residential communities, and “for sale” housing, also provide housing alternatives to potential residents of our apartment communities.

Our management believes that there is and will continue to be a strong demand for rental housing in the markets where we will seek additional business and that opportunities will continue to be available.

Compliance with Environmental Regulations

We are subject to various federal, state, and local laws, ordinances, rules and regulations concerning protection of public health and the environment. These laws may impose liability on property owners or operators for the costs of removal or remediation of hazardous or toxic substances on real property, without regard to whether the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. The presence of, or the failure to properly remediate, these substances may adversely affect the value of a property, as well as our ability to lease-up or sell the property or individual condominium units or apartments, or to borrow funds using that property as collateral. Environmental claims are generally not covered by our insurance programs.

The particular environmental laws that apply to a specific development site vary according to the site’s location, its environmental condition and the present and former uses of the site, as well as adjoining properties. Environmental laws and conditions may result in delays, may cause us to incur substantial compliance and other costs and can prohibit or severely restrict development activity in environmentally sensitive regions or areas, which could negatively affect our results of operations.

The laws, ordinances, rules and regulations governing the removal, encapsulation and disturbance of asbestos containing materials (“ACMs”) may impose liability on owners or operators for the release of ACMs when such materials are disturbed in connection with the renovation or demolition of existing buildings or apartment communities. We have operations and maintenance plans in place to maintain and monitor ACMs in those apartment communities where ACMs are present.

In April 2003, in connection with renovations at Pine Crest Village at Victoria Park, our contractor disturbed asbestos-containing materials. These actions were subsequently investigated by the Environmental Protection Agency and the United States Attorney for the Southern District of Florida for possible violations of federal criminal laws. On April 25, 2006, the United States Attorney filed a criminal information charging TMI with one felony count for failure to comply with Clean Air Act Work Practice Standards for Asbestos in the United States District Court for the Southern District of Florida. Pursuant to an agreement with the United States Attorney, TMI entered a plea of guilty to such charge on June 19, 2006 and agreed to pay fines and community service payments totaling $1 million for the offense. TMI also agreed to institute an environmental compliance program and was placed on five years probation with the right to seek an early termination after three years of documented compliance with the program. The United States Attorney filed separate but identical charges against the contractor, and one current and one former employee of Tarragon with oversight responsibility for the Pine Crest condominium conversion, each of whom also subsequently entered a plea of guilty to the charges against them.

TMI has established a comprehensive environmental compliance program, under the supervision of the court and the EPA, which is and will continue to be applicable to all properties under its management.

In recent years, there has been a widely-publicized proliferation of mold-related claims by tenants, employees, and other building occupants against the owners of those buildings. When we identify any measurable presence of mold, whether or not a claim is made, we undertake remediation we believe to be appropriate for the circumstances encountered. There is little in the way of government standards, insurance industry specifications, or otherwise generally accepted guidelines dealing with mold propagation. Although considerable research into mold toxicity and exposure levels is underway, there are currently no definitive standards available to property owners and managers against which to evaluate risk and design remediation practices.

Policy With Respect to Certain Activities

We may offer debt or shares of our common or preferred stock to the public to raise capital for general corporate purposes, including, without limitation, repayment of debt or acquisition of additional properties or lines of service business, or in private transactions in exchange for property or investment businesses. We issued subordinated unsecured notes of $65 million in 2005 and $60 million in 2006. See NOTE 5. “NOTES PAYABLE” in the Notes to Consolidated Financial Statements for more information regarding the subordinated unsecured notes.

We may invest in interests in other persons and securities of other issuers engaged in real estate related activities. Although we do not currently have any plans to invest in the securities of other issuers for the purpose of exercising control, we may in the future acquire all or substantially all of the securities or assets of other entities if that investment would be consistent with our growth strategy. We do not intend to underwrite securities of other issuers. We do not expect that our investment activity will require us to register as an “investment company” under the Investment Company Act of 1940, and we would divest securities before any such registration would be required.

We have in the past, and may in the future, repurchase or otherwise acquire our own common stock on the open market or through private transactions. See ITEM 5. “MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES” and NOTE 7. “COMMON STOCK REPURCHASE PROGRAM” in the Notes to Consolidated Financial Statements for a discussion of our share repurchase program.

We do not presently intend to make investments other than as described above, although we may do so in the future. Our investment policies may be reviewed and modified from time to time by our officers and directors

without the vote of stockholders. There are no limitations on the amounts we may invest in any single property or development, or on the amounts we can borrow for such purposes.

Employees

As of December 31, 2007, we employed 511 people of whom 499 were full-time employees and 12 were part-time employees. This includes 299 site-level property employees and 212 corporate staff. All of our site-level property employees and approximately 60% of our corporate staff are devoted to the Investment Division. Our Development Division employs 84 people. We do not have any union employees. We believe we have a good relationship with our employees.

Other Information

Our common stock is currently traded on The Nasdaq Global Select Market under the symbol “TARR.” Our principal executive offices are located at 423 West 55 ^th Street, 12 ^th Floor, New York, New York 10019, and our telephone number is 212-949-5000.

We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other information with the SEC. In addition, our directors, executive officers and certain stockholders file reports with the SEC pursuant to Section 16 of the Securities Exchange Act of 1934. Information regarding these filings are made available, free of charge, on our website at http://www.tarragoncorp.com . These SEC filings are also available to the public over the Internet at the SEC’s web site at http://www.sec.gov.

You may also read and copy any document we file at the SEC’s public reference room at 100 F. Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the SEC’s public reference room in Washington, D.C. by calling the SEC at 1-800-SEC-0330. In addition, we have posted the charters for our Audit Committee, Executive Compensation Committee, Corporate Governance and Nominating Committee, as well as our Code of Business Conduct and Ethics on our website under the heading “Governance Documents” under “Investor Relations.” These charters and the code are not incorporated by reference in this report. We will also provide a copy of these documents free of charge to stockholders upon written request to our secretary at 3100 Monticello Avenue, Suite 200, Dallas, Texas 75205. We issue annual reports containing audited financial statements to our common stockholders.

debt, comply with our loan covenants, or obtain waivers of non-compliance could give lenders the right to declare a default and accelerate the payment of the outstanding indebtedness. We may not be able to repay those amounts without selling additional assets, which we might have to do at prices below the fair values and the carrying values of those assets.

These matters raise substantial doubt regarding our ability to continue as a going concern. For the year ended December 31, 2007, we incurred a net loss of ($388.4 million). As of December 31, 2007, we had stockholder’s deficit of ($112.8 million). Our ability to continue as a going concern will be dependent upon our ability to complete asset sales, restructure or refinance existing debt, obtain modifications or waivers of our loan covenants, and continue to sell completed homes in inventory. There can be no assurance of our success in these efforts. The consolidated financial statements included elsewhere in this Form 10-K do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets.

We have a significant amount of debt maturing in the near term and are currently not in compliance with covenants in certain of our loan agreements.

We have loans with an aggregate December 31, 2007 balance of $213.5 million that are maturing during 2008. The deterioration in the real estate credit markets during 2007 and our recent liquidity challenges that resulted in defaults on most of our existing indebtedness may negatively impact our ability to refinance this indebtedness as it matures. Our ability to repay this debt as it matures or obtain loan extensions or refinancing will depend on our future performance and successful execution of our business strategy. If we are unable to repay this debt as it matures, or obtain loan extensions or refinancings, we may lose our investment in the properties secured by the related debt.

Further, at December 31, 2007, we were not in compliance with financial covenants contained in debt agreements with an aggregate principal balance of $9 million for which we have not obtained waivers of noncompliance from our lenders. If we are unable to obtain modifications of these covenants or waivers of noncompliance, these lenders could give us notices of default and accelerate payment of this outstanding indebtedness. We may not be able to repay these amounts without selling additional assets, which we might have to do at prices below the fair value or carrying value of those assets.

We have had to take significant impairment charges against certain of our real estate assets, and a continuing decline in the homebuilding industry or other changed circumstances could result in additional write-downs.

As a result of deteriorating market conditions in the homebuilding industry during 2006 and 2007, we have adjusted our strategy with respect to many of the apartment communities we had acquired or targeted for conversion to condominiums, necessitating significant write downs of the carrying values of those and other assets. For the year ended December 31, 2007, we recorded impairment charges on real estate inventory and rental real estate of $368.8 million. If conditions in the homebuilding industry worsen, or our strategy or estimates of cash flows related to certain projects change, some of our assets may be subject to further write-downs in the future, further decreasing the value of the assets reflected on our consolidated balance sheets and increasing stockholders’ deficit.

Our ability to grow our businesses depends on our ability to access capital on favorable terms.

We have historically relied on project financing to fund growth opportunities in our Development Division, and non-recourse mortgage financing for our Investment Division. The sudden and rapid deterioration of the real estate credit markets in 2007 prevented us from completing almost $50 million in financing transactions that had been under negotiation at that time. Under current market conditions, we cannot predict whether additional sources of financing will be available on terms acceptable to us in the future or the cost of this financing. Our

access to debt or equity financing depends on lenders’ willingness to lend, conditions in the capital markets, restrictions and covenants contained in our existing debt arrangements and our own financial condition, and we may not be able to secure additional sources of financing on commercially reasonable terms, if at all. A failure to obtain needed additional financing may require us to limit our development activities, abandon projects in the pipeline, or dispose of properties.

Our substantial indebtedness limits our flexibility in adverse market conditions.

As of December 31, 2007, we had $1,111.6 million in consolidated borrowings and additional guaranteed debt of our unconsolidated joint ventures totaling $31.6 million. As a result of this substantial indebtedness:

	•		we must dedicate a substantial portion of our cash flow from operations to interest and principal payments on our indebtedness, thereby reducing available cash flow to fund working capital, capital expenditures, acquisitions of property and other general corporate purposes;
	•		our flexibility in planning for and reacting to changes in our business and the industry in which we operate is limited;
	•		we are more vulnerable to adverse economic, industry and competitive conditions;
	•		we are at a competitive disadvantage compared to our competitors that have less debt; and
	•		we are limited in our ability to borrow additional funds.

Risks Related to Market Conditions and Our Development Business

We may experience a continuing decline in demand for new homes in the markets in which we operate.

The homebuilding industry is in the midst of a significant downturn. In 2007, we experienced a decline in demand for our condominium homes in most of our markets, and particularly in Florida. As a result, we had to decrease prices, and increase the use of sales discounts and other incentives, resulting in significant reductions in cash flows and our profit margins. A further decline in the demand for our condominium homes, or an increase in the inventory of new homes and alternatives to new homes, in the markets in which we operate could adversely affect our sales volume and pricing even further. We believe that housing market conditions will continue to be challenging and may deteriorate further. We cannot predict the duration or ultimate severity of these challenging conditions.

Our customers may not be able to obtain suitable mortgage financing.

Sales of our condominium homes are directly impacted by the inability of our potential buyers to obtain mortgage financing for their purchase. During 2007, the mortgage lending industry experienced significant instability. The uncertainties created by events in the sub-prime mortgage market and their impact on the overall real estate credit markets have adversely affected the ability of our buyers to obtain affordable home mortgages. Also, because many potential buyers must first sell their existing homes in order to purchase a condominium from us, the lack of availability of suitable financing for their purchasers also impacts our sales. As a result of increased default rates, particularly in the sub-prime mortgage market, many lenders are no longer offering certain types of residential mortgages loans, or have significantly tightened their loan qualifications for mortgage loans. The lack of availability of these loan products, together with the imposition of more stringent underwriting standards and increased cost of financing have reduced the pool of qualified home buyers and made purchases more difficult for first time and second home homebuyers. These reductions in demand have adversely affected our sales volume and revenues in 2007. Continued unavailability of affordable mortgage

financing could further reduce demand for our condominium homes. If the buyers in our backlog of units to be delivered cannot obtain suitable financing in order to purchase our condominiums, it could cause them to cancel the contracts they have signed, or default under these contracts, further reducing our sales and profitability.

Future cash flows from our development projects may be lower than expected.

We use the percentage-of-completion method of revenue recognition to report revenue and profit from high- and mid-rise residential projects. Under this method of accounting, we may recognize revenue from sales of homes before those sales have closed. Due to various contingencies, including delayed construction, cost overruns or buyer defaults, we may receive less cash than the amount of revenue already recognized or the cash may be received at a later date than we expected. These circumstances could affect our profitability and ability to pay our debts. In addition, our revenue may fluctuate significantly as a result of the timing of the completion of development projects and closings of sales, seasonality of housing demand, the timing and seasonality of construction activity, the condition of the real estate market and the economy in general, material and labor costs and the availability and cost of mortgage financing.

We may continue to experience high buyer default rates.

Our backlog reflects the number and value of condominiums for which we have entered into sales contracts with home buyers, but have not yet delivered the condominium. In each case, we have received a deposit from the buyer, and generally have the right to retain the deposit if the buyer does not complete their purchase. In 2007, we experienced an increase in purchaser defaults in our new development projects. We also experienced an increase in the number of buyers contesting our right to retain their deposits upon default. Although we do not believe the defenses asserted by these buyers are valid, and intend to vigorously pursue our rights, there can be no assurance that we will prevail in each claim or be entitled to keep the buyers deposit. Also, there can be no assurance that our rate of defaults will not increase in the future if the current industry downturn continues, or if mortgage financing becomes less available. Future defaults may limit our ability to deliver units from backlog and collect contracts receivable upon the completion of high- and mid-rise residential projects.

Our future operations may be adversely affected by high inflation.

In a period of high inflation, increasing costs of land, materials and labor require us to attempt to increase our sale prices in order to maintain satisfactory margins. However, an excess of supply over demand for new homes, such as the one that we are currently experiencing, requires that we reduce prices, rather than increase them. If the current challenging and highly competitive conditions in the homebuilding market persist, we may be required to further decrease prices in an attempt to stimulate sales volume. Under these circumstances, the effect of cost increases is to reduce the margins on the homes we sell, and sustained increases in those costs could have a material adverse effect on our business.

We may not be able to complete planned development projects or those projects may not be profitable.

As a result of changing conditions in our target markets due to competitive, economic, demographic and other factors, we were unable to achieve desired sales levels at our development projects in 2007, and experienced lower than expected returns from these projects. Because of the long-term nature of most development projects, it can be difficult for us to adjust our business strategies quickly to compensate for changes in market conditions. This long lead-time may also result in delayed revenue recognition and difficulty in predicting whether there will be sufficient demand for our homes. Other factors that may affect our ability to complete planned projects or the profitability of those projects include the availability and cost of project financing, shortages of lumber or other construction materials, shortages of labor, labor disputes, unforeseen environmental or engineering problems, work stoppages or natural disasters, all of which could delay

construction and result in substantial cost overruns. Sustained increases in construction costs may, over time, further erode our margins and make development projects in our pipeline economically unfeasible.

We may have to hold our condominium conversion inventory longer than we anticipated.

In 2005 and 2006, we acquired many newer, high quality apartment communities for conversion to condominiums at premium prices. In addition, we targeted a number of properties from our Investment Division portfolio for conversion to condominiums. We generally financed these purchases and conversions with short-term floating rate debt. As demand for condominium homes declined, we were forced to reduce prices and increase sales discounts and other incentives, decreasing our cash flows and requiring additional cash from us to satisfy lender release prices. We repositioned some of these assets as rental properties, incurring additional lease-up and interest costs. Nine of these properties were sold between September 2007 and January 2008, improving our liquidity by reducing negative cash flow, and additional sales are contemplated. However, we may be left with unsold units in “fractured condominiums” that we cannot sell, which may result in additional losses due to write downs in inventory, additional costs associated with carrying inventory, such as insurance and interest expense, costs and inefficiencies associated with conversion of unsold inventory into rental units or sales of units for a significantly lower price than projected. In addition, we may not be able to generate sufficient rental revenue from these assets to cover these carrying costs.

Our development business is subject to warranty and liability claims in the ordinary course of business that can be significant.

As a developer of condominium homes, we are subject to warranty and construction defect claims arising in the ordinary course of business. We record warranty reserves for the homes we sell based upon historical experience, taking into consideration the types and locations of our projects. Although we believe these reserves are adequate, there can be no assurance that our liabilities to condominium purchasers for warranty claims and latent defects will not exceed our estimates and available insurance.

Risks Related to our Businesses Generally

Increases in interest rates could materially increase our interest expense or could reduce our revenues.

As of December 31, 2007, we had approximately $546.5 million of consolidated variable rate debt. On that date, our unconsolidated partnerships and joint ventures had an additional $116.3 million of variable rate debt. We may incur additional variable rate indebtedness in the future. Accordingly, increases in interest rates could materially increase our interest expense.

Further, most purchasers of our condominium homes obtain mortgage loans to finance their purchases. In general, housing demand is adversely affected by increases in interest rates, housing costs and unemployment and by decreases in the availability of mortgage financing. This general tendency is intensified by the fact that prospective buyers of our homes may need to sell a home prior to purchasing, and buyers for those homes also require mortgage financing. In addition, there have been discussions of possible changes in the federal income tax laws that would remove or limit the deduction for home mortgage interest. An increase in effective mortgage interest rates, or an adverse change in tax laws, would negatively impact the ability or willingness of prospective buyers to finance home purchases, further reducing demand for our homes.

The regional concentration of our assets may increase the effects of adverse trends in those markets.

A substantial number of our assets are located in Connecticut, New Jersey, Florida, Tennessee and Texas. In 2006 and 2007, deterioration of the homebuilding industry in the markets in which we operate, and in Florida in particular, led to a decline in new home prices, increased use of sales discounts and other incentives and

increased interest and other carrying costs in 2007. The decline in home prices and increase in discounts and incentives decreased our cash flows as closings required additional cash from us to satisfy lender release prices. We also incurred additional lease-up and interest costs associated with apartment properties that we targeted for conversion into condominiums but subsequently decided to operate as rental properties. Nine of these properties were sold between September 2007 and January 2008, and the last two properties are under contract of sale. However, current market conditions in the markets in which we operate remain difficult, and there can be no assurance that these conditions will not continue to adversely impact our operations and cash flows.

In addition, deterioration in economic conditions in any of our primary markets, including business layoffs and downsizing, industry slowdowns, relocations or closings of businesses, geopolitical factors, changing demographics and oversupply of or reduced demand for homes, could also adversely affect occupancy levels and rental rates in our investment portfolio, and our ability to attract new tenants and collect rent from existing tenants.

Our growth strategy for our Investment Division is dependent on our ability to identify a suitable joint venture partner.

Our ability to execute our growth strategy for the Investment Division depends in large part on our ability to identify and enter into a joint venture with a complementary real estate investment company capable of executing our plan to expand our residential property management platform and financing the acquisition of additional value-added and investment quality residential properties. There can be no assurance that we will finalize and close any such transaction or, if so, that it will be on terms and conditions favorable to us. Our failure to implement this strategy successfully could limit the growth of our Investment Division, or necessitate the sale of additional properties.

We may not be able to sell our apartment communities at the desired time or price.

Because of the lack of liquidity of real estate investments generally, our ability to respond to changing circumstances may be impaired. Real estate assets generally cannot be sold quickly. We cannot predict whether there will be a market for our real estate assets, or whether we will be able to sell them at a price equal to our estimates of their value or at a price that will allow us to fully recoup our investment. We may not be able to realize the full potential value of our real estate assets, and in some cases we will incur costs related to the early pay-off of the debt secured by such assets.

Property ownership through partnerships and joint ventures generally limits control of those investments and entails other risks.

We hold properties, and may hold more properties in the future, in a number of consolidated and unconsolidated partnerships and joint ventures in which outside partners may have significant decision-making authority and voting rights. These partnerships and joint ventures involve risks not otherwise present when a property is owned wholly and directly by us. Our partners might become bankrupt or might have or develop different interests or goals, or might take action contrary to our instructions, requests, policies or investment objectives. Another risk of ownership through a partnership investment is the possibility of an impasse on decisions, such as a sale or refinancing, or disputes with partners over the appropriate pricing and timing of any sale or refinancing. In addition, joint venture and partnership agreements typically contain provisions restricting the ability of partners to transfer interests in the joint venture or partnership and may contain “buy-sell” provisions, which, under certain circumstances, permit a partner to initiate an offer to buy the other partner’s interests or to sell its interests to the other partner, at the other partner’s option. Buy-sell provisions may result in us buying or selling interests in a project at a different time or at a different valuation than we otherwise would have chosen, and we may not have sufficient available funds to make a purchase pursuant to these provisions. There is no

limitation under our organizational documents or loan agreements as to the amount of funds that may be invested in partnerships or joint ventures.

Increased insurance costs and reduced insurance coverage may affect our results of operations and increase our potential exposure to liability.

In recent years, the cost of insurance has risen, deductibles and retentions have increased and the availability of insurance has diminished. In addition, there are some risks of loss for which we may be unable to purchase insurance coverage. For example, losses associated with landslides, earthquakes and other geologic events may not be economically insurable, and other losses, such as those arising from terrorism or from the presence of mold in rental properties or for-sale homes, may not be economically insurable. Significant increases in our cost of insurance coverage, significant limitations on coverage or a material uninsured loss could materially and adversely affect our businesses, financial condition and results of operations.

We have in the past, and will continue to, engage in transactions with related parties, which may cause a conflict of interest and negatively affect our business.

We have in the past, and will continue to, engage in transactions with related parties. These related-party transactions include ongoing financial arrangements with several members of our board and senior management, including a $36 million unsecured term loan extended to us by affiliates of Mr. and Mrs. Friedman and Robert Rothenberg with the unanimous approval of our board of directors, including all of the disinterested members of our board of directors. In addition, in October 2007, we sold a rental property under development for $4.3 million of cash and the assumption of a $1.2 million construction loan to an affiliate of Robert C. Rohdie, who served as president and chief executive officer of Tarragon Development Corporation, a wholly owned subsidiary of Tarragon, until March 31, 2007, and as a member of our board of directors until August 14, 2007. We believe that these related-party transactions are advantageous to us and in our best interest. However, there may be instances when the interests of these related parties are inconsistent with or adverse to our interests and our stockholders, and as a result, these transactions may cause a conflict of interest.

We are subject to environmental laws and regulations, and our properties may have environmental or other contamination.

Our properties are subject to various federal, state and local laws, ordinances, rules and regulations concerning protection of public health and the environment. These laws may impose liability on property owners for the costs of removal or remediation of hazardous or toxic substances on real property, without regard to whether the owner knew of, or was responsible for, the presence of the hazardous or toxic substances. The presence of, or the failure to properly remediate, such substances may materially and adversely affect the value of a property, as well as our ability to sell the property or individual condominium units, lease apartments, or borrow funds using that property as collateral. Environmental claims will generally not be covered by our insurance programs.

The particular environmental laws that apply to any given development site vary according to the site’s location, its environmental condition and the present and former uses of the site, as well as adjoining properties. Environmental laws and conditions may result in delays, may cause us to incur substantial compliance and other costs and can prohibit or severely restrict development activity in environmentally sensitive regions or areas, which could materially and adversely affect our results of operations.

The laws, ordinances, rules and regulations governing the removal, encapsulation and disturbance of asbestos containing materials, or ACMs, may impose liability on owners or operators for the release of ACMs when such materials are disturbed in connection with the renovation of an existing building or apartment community. We have programs in place to maintain and monitor ACMs in the investment properties where ACMs are present. However, in 2006, pursuant to an agreement with the United States Attorney for the Southern District of Florida, Tarragon Management, Inc., or TMI, entered into a plea of guilty with respect to one felony count for failure to comply with the Clean Air Act Work Practice Standards for Asbestos in connection with the

renovation of an apartment community undergoing conversion to condominiums. TMI agreed to pay a $1 million fine and received a five-year probation period. It also agreed to institute a comprehensive environmental compliance program, under the supervision of the court and the EPA.

In recent years, there has been a widely publicized proliferation of mold-related claims by tenants, employees and other building occupants. When we identify any measurable presence of mold, whether or not a claim is made, we undertake remediation we believe to be appropriate for the circumstances encountered. There is little in the way of government standards, insurance industry specifications or other generally accepted guidelines dealing with mold propagation. Although considerable research into mold toxicity and exposure levels is underway, there are currently no definitive standards available to property owners against which to evaluate risk and design remediation practices.

Our business could be adversely affected by the loss of key personnel.

Our success depends on the efforts and abilities of our executive officers and other key employees, many of whom have significant experience in developing residential and commercial properties. In particular, we depend on the services of William S. Friedman, our chairman of the board of directors and chief executive officer, and Robert P. Rothenberg, a director and our president and chief operating officer. Although each of Messrs. Friedman and Rothenberg are subject to a three-year employment contract with the Company, the loss of the services of either of these executives, for any reason, could have a material adverse effect upon our business, financial condition and results of operations.

Risks Related to Our Capital Stock and the Securities Markets Generally

Failure to satisfy the listing requirements of The Nasdaq Global Select Market could result in our common stock being delisted.

On January 4, 2008, we received a staff determination letter from The Nasdaq Stock Market stating that our common stock is subject to delisting from The Nasdaq Global Select Market for our failure to solicit proxies and hold an annual meeting in 2007, in accordance with Nasdaq Marketplace Rules. We requested a hearing to appeal Nasdaq’s determination, which was held on February 21, 2008. Tarragon’s common stock will continue to be listed on The Nasdaq Global Select Market pending a decision on the appeal. There can be no assurance, however, that Nasdaq will grant our request to waive this requirement or that our common stock will not be delisted.

If our common stock is delisted from The Nasdaq Global Select Market, our common stock would be traded over-the-counter, more commonly known as OTC. OTC transactions involve risks in addition to those associated with transactions in securities traded on The Nasdaq Global Select Market. Many OTC stocks trade less frequently and in smaller volumes than securities traded on The Nasdaq Global Select Market. Accordingly, our common stock would be less liquid, and the value of our common stock could decline.

In addition, the delisting of our common stock could result in breaches of covenants prohibiting transfer of ownership contained in certain of our debt agreements. Under these circumstances, the lenders could give us a notice of default and accelerate payment of our outstanding indebtedness. The acceleration of our obligations under these debt agreements would have a material adverse effect on our liquidity and financial position.

The market price of our common stock has been highly volatile.

The market price of our common stock has been strongly affected by changes in public perception of the homebuilding industry, the significant deterioration of that industry in the markets in which we operate, and

adverse conditions in the real estate credit markets. A variety of factors may continue to have a significant impact on the market price of our common stock, including:

	•		our financial condition, results of operations and prospects;
	•		changes in our industry;
	•		further deterioration in our markets;
	•		future issuances of our common stock, which may include primary offerings for cash, issuances in connection with business acquisitions and the grant or exercise of stock options and restricted stock awards;
	•		speculation in the press or investment community; and
	•		general market and economic conditions.

In addition, The Nasdaq Global Select Market can experience significant price and volume fluctuations that can be unrelated or disproportionate to the operating performance of the companies listed on The Nasdaq Global Select Market. Broad market and industry factors may negatively affect the market price of our common stock regardless of our operating performance.

We are subject to class action securities litigation that could be costly to defend and distracting to management.

The Company and three of its officers, including William S. Friedman, chairman of the board of directors and chief executive officer, Robert P. Rothenberg, president and chief operating officer, and Erin D. Pickens, executive vice president and chief financial officer, are defendants in a securities class action lawsuit brought on behalf of persons who purchased our common stock between January 5, 2005 and August 9, 2007. In addition, members of our board of directors and Ms. Pickens are defendants in a related shareholder derivative action. The plaintiffs in both lawsuits allege generally that the Company issued materially false and misleading statements regarding our business and financial results during the relevant time period. We do not believe that there is any merit to the claims asserted in these lawsuits, and we intend to defend them vigorously. However, the cost of this defense may be high, and the necessary participation of these key individuals could detract from their ability to devote their full time and resources to improving our business and prospects.

Shares of common stock eligible for public sale could adversely affect the market price of our common stock.

The market price of our common stock could decline as a result of sales or other issuances of a large number of shares in the market or market perception that these transactions could occur, including sales or distributions of shares by one or more of our large stockholders. Based on holdings of Tarragon common stock as of December 31, 2007, Mr. and Mrs. William S. Friedman and their family partnership and our other directors and executive officers beneficially own 28.8% of the outstanding shares of our common stock.

Our governing documents contain anti-takeover provisions that may make it more difficult for a third party to acquire control of us.

Our articles of incorporation contain provisions designed to discourage attempts to acquire control of the company by merger, tender offer, proxy contest or removal of incumbent management without the approval of our board of directors. As a result, a transaction that otherwise might appear to be in the best interests of our stockholders could be discouraged, delayed or prevented altogether, and our stockholders may be deprived of an

opportunity to receive a premium for their shares over prevailing market prices. The provisions contained in our articles of incorporation include:

	•		the requirement of a supermajority vote to make, adopt, alter, amend, change or repeal our bylaws or certain key provisions of the articles of incorporation that embody, among other things, the aforementioned anti-takeover provisions;
	•		the requirement of a supermajority vote for the removal of a director from our board of directors and certain extraordinary transactions; and
	•		the inability of stockholders to call a meeting of stockholders.

As of December 31, 2007, our directors and executive officers beneficially owned 28.8% of our outstanding common stock. In the light of these shareholdings, these anti-takeover provisions could help entrench our board of directors and may effectively give our management the power to block any attempted change in control.

Our principal stockholders have significant influence over corporate actions.

William S. Friedman, our chairman of the board and chief executive officer, his spouse, Lucy N. Friedman, and their family partnership, beneficially own 22.3% of our outstanding common stock at December 31, 2007. Accordingly, Mr. and Mrs. Friedman have substantial influence over our management and affairs, including the election of directors. In addition, they have significant influence over a broad range of corporate actions requiring a stockholder vote under our articles of incorporation, including, without limitation, mergers, business combinations, change-in-control transactions, substantial asset sales and other similar and extraordinary corporate transactions that can affect the value of our common stock.

William S. Friedman has served as our chief executive officer and director since April 1997 and has served as chairman of our board of directors since December 2000. He previously served as Tarragon’s president from April 1997 through June 2004 and served as a trustee (from March 1988), chief executive officer (from December 1993), president (from December 1988), acting chief financial officer (from May 1990 to February 1991), treasurer (from August to September 1989) and acting principal financial and accounting officer (from December 1988 to August 1989) of Tarragon’s predecessors, Vinland Property Trust (until July 1997) and National Income Realty Trust (until November 1998). Mr. Friedman currently serves on the board of trustees of Brandeis University.

Robert P. Rothenberg has served as our chief operating officer and director since September 2000 and as our president since June 2004. Mr. Rothenberg has been the managing member of APA Management L.L.C., a real estate investment and management company, since 1994. He has also been a managing member of Ansonia L.L.C., which is our limited partner in Ansonia Apartments, L.P., since 1997. Mr. Rothenberg graduated from the Harvard Business School with a Masters of Business Administration in June 1984.

Kathryn Mansfield has served as our executive vice president since December 1998, secretary since May 1998 and general counsel since June 2004. She previously served as our vice president and our predecessor, National Income Realty Trust (from May 1998 to December 1998). Ms. Mansfield has been an attorney at law since 1984.

Todd C. Minor has served as our executive vice president since November 2001 and as our treasurer and our predecessors, Vinland Property Trust and National Income Realty Trust, since December 1996. He also served as our senior vice president (from March 1994 to December 1998) and vice president (from April 1991 to July 1993) of our predecessors. Mr. Minor has a Masters of Business Administration in Real Estate Analysis and is a Certified Treasury Professional.

Erin D. Pickens has served as our executive vice president and chief financial officer since December 1998. She previously served as our vice president and chief accounting officer (from September 1996 to November 1998) and accounting manager (from June 1995 to August 1996) of our predecessors, Vinland Property Trust and National Income Realty Trust. Ms. Pickens has been a certified public accountant since 1990.

Charles D. Rubenstein has served as our executive vice president and chief real estate counsel since December 1998. He served as our senior vice president of our predecessor, National Income Realty Trust, from September 1998 to December 1998. Mr. Rubenstein has been an attorney at law since 1984.

William M. Thompson , has served as our executive vice president of operations since March 2003. He previously served as our chief information officer (from September 2000 to March 2003). Mr. Thompson has been a certified public accountant since 1981.

Eileen A. Swenson has served as president of Tarragon Management, Inc., one of our wholly owned subsidiaries since September 2000. Ms. Swenson is a Certified Property Manager (CPM) and a member of the Institute of Real Estate Management.

William J. Rosato was named president of Tarragon Development Corporation in September 2007. He previously served as senior vice president (from February 2005 to September 2007) and director of construction (from October 2003 to February 2005) of Tarragon Development Corporation. Mr. Rosato received his BA and Master of Architecture degrees from the University of Pennsylvania. He is a member of the American Institute of Architects and a licensed architect in the state of New York.

ITEM 2. PROPERTIES

At December 31, 2007, we had 13 consolidated active for-sale communities and three unconsolidated active for-sale communities, including four high- or mid-rise condominium developments, three townhome or traditional new developments, and nine condominium conversions. Information about our active for-sale communities is presented in the table below entitled “Active Development Projects.” At December 31, 2007, we also had 2,398 units in 13 communities in our development pipeline.

Our rental apartment communities at December 31, 2007, included 38 consolidated properties with 8,451 units (including six properties with 1,419 units classified as held for sale). We also owned three consolidated commercial properties, all but one of which was classified as held for sale. Information about our rental apartment communities is presented in the table below entitled “Rental Apartment Communities.” We also had eight rental communities with 1,969 apartments under development. Information about our rental developments is presented in the table below entitled “Active Development Projects.”

Tarragon, or the consolidated or unconsolidated subsidiaries, partnerships, or joint ventures that own the properties, generally hold fee simple title to these properties. Most of these properties are pledged to secure debt. These mortgages are presented in the tables below entitled “Loans Secured by Real Estate Developments” and “Mortgage Loans Secured by Rental Apartment Communities.” We believe our properties are adequately covered by liability and casualty insurance, consistent with industry standards.

Our development program includes the construction of the communities presented above. Costs in excess of construction and other financing have been or are expected to be paid for with internally generated funds. For outstanding debt at December 31, 2007, see “LOANS SECURED BY REAL ESTATE DEVELOPMENTS” below.

PART II

ITEM 6. SELECTED FINANCIAL DATA

Please read the following information along with the Consolidated Financial Statements and Notes and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K. Dollar amounts are in thousands, except per share amounts.