NOTES AND INTEREST PAYABLE

9 Months Ended

Sep. 30, 2011

NOTES AND INTEREST PAYABLE

NOTES AND INTEREST PAYABLE

NOTE 5. NOTES AND INTEREST PAYABLE

The following table lists the mortgage notes payable as of September 30, 2011 (dollars in thousands):

Project	Principal Balance
Mercer Crossing/Travelers Land  *		27,635
Accrued interest		995
	$	28,630

* This mortgage note represents the allocation of a note with an aggregate outstanding balance of $36.0 million as of September 30, 2011.  The remaining balance of this note of $8.4 million is held on the books of Transcontinental Realty Investors, Inc., an affiliated entity.  As a joint grantor of the mortgage loan, we have joint and several liability of the obligations and liabilities of the loan in its entirety, which include, but are not limited to, payment of all unpaid and accrued interest and principal for the entire outstanding loan balance.  Since April 11, 2010, interest has accrued on the loan and as of April 12, 2011, the borrower is in default under the current loan documents and the lender accelerated the maturity of the indebtedness. On April 28, 2011, a forbearance agreement was entered into between the borrower, the guarantor and the lender in order to temporarily suspend the lender from the exercise of its rights and remedies under the loan documents and foreclose on the property.  The forbearance period expires April 17, 2012 and requires the borrower to make monthly payments of $150,000.  Upon reconciliation of the balance due to the lender, an adjustment was made to the allocation of the loan balance between TCI and IOT.  The total amount did not change but the allocations of payments were corrected to reflect the pro-rata share in correlation to the original loan balance allocation.

As of September 30, 2011, there are no remaining properties that we have treated as “subject to sales contract” on the Consolidated Balance Sheets and deferred recognition of the sale to a related party.   For asset listings of properties treated as “subject to sales contract” in prior periods on the Consolidated Balance Sheets, they are  listed in detail in Schedule III, “Real Estate and Accumulated Depreciation” in the Company’s Annual Report on Form 10-K.  These properties were sold to a related party in order to help facilitate an appropriate debt or organizational restructure and have been ultimately resulted in ownership transfer to the lender or satisfactory resolution.  These properties have mortgages that are secured by the property and many have corporate guarantees.  We do not believe that IOT is liable for any deficiencies that may have resulted from corporate guarantees after the lender took possession of the property from the related party owner.