Edgar Filing: INCOME OPPORTUNITY REALTY INVESTORS INC /TX/

Percent ownership

Investee

TCI Eton Square, L.P. (“Eton Square”)

Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-14784

Income Opportunity Realty Investors, Inc.

(Exact name of registrant as specified in its charter)


Nevada		75-2615944
(State or other jurisdiction of Incorporation or organization)		(IRS Employer Identification Number)
1800 Valley View Lane, Suite 300 Dallas, Texas		75234
(Address of principal executive offices)		(Zip Code)

(469) 522-4200

Registrant’s Telephone Number, including area code

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


Title of Each Class		Name of each exchange on which registered
Common Stock, $0.01 par value		American Stock Exchange

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

None

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

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

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. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ 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. ¨

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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer x	(Do not check if smaller reporting company)	Smaller Reporting Company ¨

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

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 closing sales price of the Common Stock on the American Stock Exchange as of June 30, 2009 (the last business day of the Registrant’s most recently completed second fiscal quarter) was $3,825,600 based upon a total of 612,096 shares held as of June 30, 2009 by persons believed to be non-affiliates of the Registrant. The basis of the calculation does not constitute a determination by the Registrant as defined in Rule 405 of the Securities Act of 1933, as amended, such calculation, if made as of a date within sixty days of this filing, would yield a different value.

As of March 25, 2010, there were 4,168,214 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

None.

INDEX TO

ANNUAL REPORT ON FORM 10-K


		Page
	PART I

Item 1.	Business.	3

Item 1A.	Risk Factors.	6

Item 1B.	Unresolved Staff Comments.	9

Item 2.	Properties.	9

Item 3.	Legal Proceedings.	9

Item 4.	Submission of Matters to a Vote of Security Holders.	9

	PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	10

Item 6.	Selected Financial Data.	12

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	13

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	23

Item 8.	Financial Statements and Supplementary Data.	24

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.	51

Item 9A(T).	Controls and Procedures.	51

Item 9B.	Other Information.	51

	PART III

Item 10.	Directors, Executive Officers and Corporate Governance	52

Item 11.	Executive Compensation.	61

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	62

Item 13.	Certain Relationships and Related Transactions, and Director Independence.	63

Item 14.	Principal Accounting Fees and Services.	64

	PART IV

Item 15.	Exhibits, Financial Statement Schedules.	66

Signature Page		68

FORWARD-LOOKING STATEMENTS

Certain Statements in this Form 10-K are 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. The words “estimate”, “plan”, “intend”, “expect”, “anticipate”, “believe” and similar expressions are intended to identify forward-looking statements. The forward-looking statements are found at various places throughout this Report and in the documents incorporated herein by reference. The Company disclaims any intention or obligations to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that our expectations are based upon reasonable assumptions, we can give no assurance that our goals will be achieved. Important factors that could cause our actual results to differ from estimates or projections contained in any forward-looking statements are described under Part I, Item 1A. “Risk Factors.”

PART I

ITEM 1.

BUSINESS

As used herein, the terms “IOT,” “the Company,” “We,” “Our,” or “Us” refer to Income Opportunity Realty Investors, Inc., a Nevada corporation, individually or together with its subsidiaries. Income Opportunity Realty Investors, Inc. is the successor to a California business trust organized on December 14, 1984, which commenced operations on April 10, 1985.

On July 17, 2009, Transcontinental Realty Investors, Inc. (“TCI”), acquired from Syntek West, Inc., (“SWI”), 2,518,934 shares of common stock, par value $0.01 per share of Income Opportunity Realty Investors, Inc. (“IOT”) at an aggregate price of $17,884,431 (approximately $7.10 per share), the full amount of which was paid by TCI through an assumption of an aggregate amount of indebtedness of $17,884,431 of the outstanding balance owed by SWI to IOT. The 2,518,934 shares of IOT common stock acquired by TCI constituted approximately 60.4% of the issued and outstanding common stock of IOT. TCI has owned for several years an aggregate of 1,037,184 shares of common stock of IOT (approximately 25% of the issued and outstanding stock). After giving effect to the transaction on July 17, 2009, TCI owns an aggregate of 3,556,118 shares of IOT common stock which constitutes approximately 85.3% of the shares of common stock of IOT outstanding (which is a total of 4,168,214 shares). Shares of IOT are traded on the American Stock Exchange.

SWI served as the Company’s external advisor from July 1, 2003 until July 1, 2009. Effective July 1, 2009, the Advisory Agreement and the Cash Management Agreement with SWI was terminated. IOT has engaged Prime Income Asset Management, LLC (“Prime”) as our Contractual Advisor under the substantially same terms as under the SWI Agreements. Prime also serves as an Advisor to TCI and American Realty Investors, Inc. (“ARL”). We are an externally advised and managed real estate company. We have no employees. Our principal offices are located at 1800 Valley View Lane, Suite 300, Dallas, Texas 75234.

Our primary business is investing in real estate. We divested ourselves of our commercial segment with the sale of the 2010 Valley View office building and the Parkway Centre retail shopping center in October 2009, resulting in land held for development or sale remaining as our sole operating segment. At December 31, 2009, our land consisted of 203.31 acres of land held for future development or sale. All of our land holdings are located in Texas. The principal source of revenue for the Company is interest income on over $36.9 million of note receivables due from affiliated and/or related parties.

Significant transactions

The significant transactions that occurred throughout the current year are listed below.

On September 3, 2009, we sold 15.06 acres of Travelers land, located in Farmers Branch, Texas for a sales price of $6.9 million. The property was sold to a related party; therefore the gain of $4.9 million was deferred and will be recorded upon sale to a third party.

In October 2009, we sold the 2010 Valley View office building; a 40,666 square foot facility located in Farmers Branch, Texas for a sales price of $3.2 million. We received $1.2 million in cash by way of an intercompany note receivable increase after paying off the existing debt of $2.0 million. The property was sold to a related party; therefore the gain of $0.8 million was deferred and will be recorded upon sale to a third party. We also sold the Parkway Centre retail shopping center; a 28,374 square foot facility located in Dallas, Texas for a sales price of $4.0 million. We received $1.3 million in cash by way of an intercompany note receivable increase after paying off the existing debt of $2.6 million. The property was sold to a related party; therefore the gain of $0.6 million was deferred and will be recorded upon sale to a third party.

Business Plan

Our business is investing in equity interests in real estate through direct equity investments and partnerships, and financing real estate and real estate related activities through investments in mortgage loans. All of our real estate is located in the southwest region of the continental United States. The land portfolio is currently our sole operating segment.

Our business is not seasonal. Management has determined to pursue a balanced investment strategy, seeking both current income and capital appreciation. With respect to new investments, management’s plan of operation is to acquire above average apartment and commercial properties, in keeping with the current class of properties in our real estate portfolio. Management intends to focus on income-producing property acquisitions to maintain a balance between income-producing and non-income-producing properties. Management does not expect that we will seek to fund or acquire additional mortgage loans. We may, however, originate mortgage loans in conjunction with providing purchase money financing of a property acquisition.

Management of the Company

IOT’s contractual advisor is Prime, a Nevada limited liability company, the sole member of which is Prime Income Asset Management, Inc. a Nevada corporation (“PIAMI”) which is owned 100% by Realty Advisors, LLC, a Nevada limited liability company, the sole member of which is Realty Advisors, Inc., a Nevada corporation, which is owned 100% by a Trust known as the May Trust. See also Part III, Item 10. “Directors, Executive Officers and Corporate Governance—The Advisor.”

Although the Board of Directors is directly responsible for managing the affairs of the Company and for setting the policies that guide it, the day-to-day operations of the Company are performed by Prime, the contractual advisor under the supervision of the Board. Prime’s duties include, among other things, locating, investigating, evaluating and recommending real estate and mortgage note investments, acquisitions and sales opportunities, as well as financing and refinancing sources. Prime also serves as a consultant in connection with the Company’s business plan and investment decisions made by the Board. IOT has no employees.

Affiliates of Prime provide property management services to IOT. To the extent we own operating properties, Triad Realty Services, LP (“Triad”) provides property management services. Triad subcontracts with other entities for the provision of property-level management services to IOT. The general partner of Triad is PIAMI, the sole member of Prime. The limited partner of Triad is HRS Holdings, LLC (“HRSHLLC”). Triad subcontracts the property-level management and leasing of IOT’s office buildings and the commercial property owned by a real estate partnership, in which IOT and TCI are partners, to Regis Realty I, LLC (“Regis I”), which is owned by HRSHLLC. Regis I is entitled to receive property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Triad. Regis I is also entitled to receive real estate brokerage commissions in accordance with the terms of a non-exclusive brokerage agreement. See Part III, Item 10. “Directors, Executive Officers and Corporate Governance”.

Competition

The real estate business is highly competitive and IOT competes with numerous entities engaged in real estate activities (including certain entities described in Part III, Item 13. “Certain Relationships and Related Transactions, and Director Independence”), some of which have greater financial resources than those of IOT. Management believes that success against such competition is dependent upon the geographic location of the property; the performance of the property-level managers in areas such as marketing, collection and control of operating expenses; the amount of new construction in the area and the maintenance and appearance of the property. Additional competitive factors with respect to commercial properties are the ease of access to the property, the adequacy of related facilities, such as parking, and sensitivity to market conditions in setting rent levels. With respect to apartments, competition is also based upon the design and mix of units and our ability to provide a community atmosphere for the tenants. Management believes that beyond general economic circumstances and trends, the rate at which properties are renovated or the rate new properties are developed in the vicinity of each of our properties also are competitive factors.

To the extent that the Company seeks to sell any of its properties, the sales prices for such properties may be affected by competition from other real estate entities and financial institutions also attempting to sell their properties located in the same areas as well as aggressive buyers attempting to penetrate or dominate a particular market.

As described above (and in Part III, Item 13. “Certain Relationships and Related Transactions, and Director Independence”) some of the officers and directors of IOT also serve as officers or directors of certain other entities, such as Prime, PIAMI, ARI and TCI, some of which have business objectives similar to those of IOT. Two of IOT’s directors also serve as directors of both ARI and TCI. IOT’s directors, officers and advisor owe fiduciary duties to such other entities as well as to IOT under applicable law. In determining to which entity a particular investment opportunity will be allocated, the officers, directors and contractual advisors consider the respective investment objectives of each entity and the appropriateness of a particular investment in light of each entity’s existing real estate and mortgage notes receivable portfolios. To the extent that any particular investment opportunity is appropriate to more than one of the entities, the investment opportunity will be allocated to the entity that has these funds available for investment for the longest period of time, or, if appropriate, the investment may be shared among all or some of such entities. In addition, IOT also competes with other entities, which may have investment objectives similar to IOT’s and may compete with it in the acquisition, sale, leasing and financing of real estate. In resolving any potential conflicts of interest that may arise, Prime has informed management that it intends to continue to exercise its best judgment as to what is fair and reasonable under the circumstances in accordance with applicable law.

Certain Factors Associated with Real Estate and Related Investments

We are subject to all risks incident to ownership and financing of real estate and interests therein, many of which relate to the general illiquidity of real estate investments. These risks include, but are not limited to, changes in general or local economic conditions; changes in interest rates and the availability of permanent mortgage financing, which may render the acquisition, sale or refinancing of a property difficult or unattractive and which may make debt service burdensome; changes in real estate and zoning laws; increases in real estate taxes; federal or local economic or rent controls; floods, earthquakes, hurricanes and other acts of God and other factors beyond the control of management. The illiquidity of real estate investments also may impair the ability of management to respond promptly to changing circumstances. Management believes that such risks can be partially mitigated with diversification by geographic region and property type of our real estate portfolio. However, to the extent property acquisitions are concentrated in any particular geographic region or property type, the advantages of diversification may be limited. See Part I, Item 1A. “Risk Factors”, for further information regarding risk.

Available Information

IOT’s Common Stock is traded on the American Stock Exchange (“AMEX”) under the symbol “IOT”. We maintain an internet website at http://www.incomeopp-realty.com. We make available through our website, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, reports filed pursuant to Section 16 and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the Securities and Exchange Commission. In addition, we have posted the Charters of our Audit Committee, Compensation Committee, and our Governance and Nominating Committee, as well as our Code of Business Conduct and Ethics, Corporate Governance Guidelines on Director Independence and other information on our website. These charters and principles are not incorporated in this Report by reference. We will also provide a copy of these documents free of charge to stockholders upon written request. The Company issues Annual Reports containing audited financial statements to its common stockholders.

ITEM 1A. RISK

FACTORS

Risk Factors Related to Our Business

An investment in our securities involves various risks. All investors should carefully consider the following risk factors in conjunction with the other information in this report before trading our securities.

We may not be able to compete successfully with other entities that operate in our industry.

We experience a great deal of competition in attracting purchasers for our properties and in locating land to develop and properties to acquire.

In our effort to lease our properties, we compete with a broad spectrum of other entities in each of our markets. These competitors include, among others, publicly held REITs, privately held entities and individual property owners. Some of these competitors may be able to offer more attractive financial terms than we are able to offer.

If the availability of land or high quality properties in our markets diminishes, our operating results could be adversely affected.

We may experience increased operating costs, which could adversely affect our financial results and the value of our properties.

Our properties are subject to increases in operating expenses such as insurance, administrative costs and other costs associated with security and maintenance of our properties. While our current tenants generally are obligated to pay a portion of these costs, there is no assurance that these tenants will make such payments or agree to pay these costs upon renewal or that new tenants will agree to pay these costs. If operating expenses increase in our markets, we may not be able to increase rents or reimbursements in all of these markets so as to meet increased expenses without, at the same time, decreasing occupancy rates. If this occurs, our ability to make distributions to shareholders and service our indebtedness could be adversely affected.

We face risks associated with property acquisitions.

We acquire individual properties and portfolios of properties and intend to continue to do so. Our acquisition activities and their successes are subject to the following risks:

•

when we are able to locate a desired property, competition from other real estate investors may significantly increase the purchase price;

•

acquired properties may fail to perform as expected;

•

the actual costs of repositioning or redeveloping acquired properties may be higher than original estimates;

•

acquired properties may be located in new markets where we face risks associated with an incomplete knowledge or understanding of the local market, a limited number of established business relationships in the area and a relative unfamiliarity with local governmental and permitting procedures; and

•

we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into existing operations, and results of operations and financial condition could be adversely affected.

We may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities. As a result, if a liability were asserted against us based upon ownership of those properties, we may be required to pay substantial sums to settle it, which could adversely affect our cash flow.

Many of our properties are concentrated in our primary markets, and we therefore may suffer economic harm as a result of adverse conditions in those markets.

Our properties are located principally in a specific geographic area in the southwestern United States. Due to the concentration of our properties in this area, performance is dependent on economic conditions. This area has experienced periods of economic decline in the past, and may do so in the future.

We are leveraged and we may not be able to meet our debt service obligations.

We had total indebtedness at December 31, 2009 of approximately $37.1 million. Substantially all assets have been pledged to secure debt. These borrowings increase the risk of loss because they represent a prior claim on assets and most require fixed payments regardless of profitability. Our leveraged position makes us vulnerable to declines in the general economy and may limit the Company’s ability to pursue other business opportunities in the future.

We may not be able to access financial markets to obtain capital on a timely basis, or on acceptable terms.

We rely on proceeds from property dispositions and third party capital sources for a portion of our capital needs, including capital for acquisitions and development. The public debt and equity markets are among the sources on which we rely. There is no guarantee that we will be able to access these markets, or any other source of capital. The ability to access the public debt and equity markets depends on a variety of factors, including:

•

general economic conditions affecting these markets;

•

our own financial structure and performance;

•

the market’s opinion of real estate companies in general; and

•

the market’s opinion of real estate companies that own properties like ours.

We may suffer adverse effects as a result of the terms of and covenants relating to our indebtedness.

Required payments on our indebtedness generally are not reduced if the economic performance of the portfolios declines. If the economic performance declines, net income, cash flow from operations and cash available for distribution to stockholders will be reduced. If payments on debt cannot be made, we could sustain a loss, or in the case of mortgages, suffer foreclosures by mortgagees or suffer judgments. Further, some obligations contain cross-default and/or cross-acceleration provisions, meaning that a default on one obligation may constitute a default on other obligations.

We anticipate that only a small portion of the principal of our debt will be repaid prior to maturity. Therefore, we are likely to need to refinance at least a portion of our outstanding debts as they mature. There is a risk that we may not be able to refinance existing debt or that the terms of any refinancing will not be as favorable as the terms of our existing debt. If principal payments due at maturity cannot be refinanced, extended or repaid with proceeds from other sources, such as the proceeds of sales of assets or new equity securities, our cash flow will not be sufficient to repay all maturing debt in years when significant “balloon” payments come due.

Our credit facilities and unsecured debt securities contain customary restrictions, requirements and other limitations on our ability to incur indebtedness, including total debt to asset ratios, secured debt to total asset ratios, debt service coverage ratios and minimum ratios of unencumbered assets to unsecured debt, which we must maintain. Our continued ability to borrow is subject to compliance with our financial and other covenants. In addition, our failure to comply with such covenants could cause a default under credit facilities and we may then be required to repay such debt with capital from other sources. Under those circumstances, other sources of capital may not be available to us, or be available only on unattractive terms.

Our degree of leverage could limit our ability to obtain additional financing or affect the market price of our common stock.

Our degree of leverage could affect our ability to obtain additional financing for working capital, capital expenditures, acquisitions, development or other general corporate purposes. Our degree of leverage could also make us more vulnerable to a downturn in business or the economy.

An increase in interest rates would increase our interest costs on variable rate debt and could adversely impact our ability to refinance existing debt.

We currently have, and may incur more, indebtedness that bears interest at variable rates. Accordingly, if interest rates increase, so will our interest costs, which would adversely affect our cash flow and our ability to pay principal and interest on our debt and our ability to make distributions to our stockholders. Further, rising interest rates could limit our ability to refinance existing debt when it matures.

We may need to sell properties from time to time for cash flow purposes.

Because of the lack of liquidity of real estate investments generally, our ability to respond to changing circumstances may be impaired. Real estate investments generally cannot be sold quickly. In the event that we must sell assets to generate cash flow, we cannot predict whether there will be a market for those assets in the time period we desire or need to sell them, or whether we will be able to sell them 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 assets and we may incur costs related to the early pay-off of the debt secured by such assets.

Our business overall is subject to all of the risks associated with the real estate industry.

We are subject to all risks incident to investment in real estate, many of which relate to the general lack of liquidity of real estate investments, including, but not limited to:

•

changes in general or local economic conditions—because our real estate assets are concentrated in the southwest, any deterioration in the general economic conditions in any of those states could have an adverse effect on our business and assets in a given state;

•

changes in interest rates that may make our ability to satisfy our debt service requirements materially more burdensome;

•

lack of availability of financing that may render the purchase, sale or refinancing of a property more difficult or unattractive;

•

changes in real estate and zoning laws;

•

increases in real estate taxes and insurance costs;

•

federal or local economic or rent control; and

•

floods, earthquakes and other similar natural disasters.

ITEM 1B. UNRESOLVED

STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

On December 31, 2009, our portfolio consisted of 203.3 acres of land held for development or sale. The table below shows information relating to the land owned:


Land	Location	Acres
Mercer Crossing Multi-Tracts	Farmers Branch, TX	203.3

Total		203.3

ITEM 3.

LEGAL PROCEEDINGS

The Company and its subsidiaries, from time to time, have been involved in various items of litigation incidental to and in the ordinary course of its business and, in the opinion of management; the outcome of such litigation will not have a material adverse impact upon the Company’s financial condition, results of operations or liquidity.

During the fourth quarter of the fiscal year covered by this Report, no proceeding previously reported was terminated.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Registrant’s Annual Meeting of Stockholders occurred on December 10, 2009, for which proxies were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934 (the “Exchange Act”). There was no solicitation in opposition to the management nominees listed in the Proxy Statement and all of such nominees were elected. At the annual meeting, stockholders were asked to consider and vote upon the election of directors and the ratification of the selection of the independent registered public accounting firm for IOT for the fiscal year ending December 31, 2009 and any interim period. With respect to each nominee for election as a director, the following information sets forth the number of votes cast for or withheld:


	Shares Voting
Director	For	Withheld Authority
Robert A. Jakuszewski	3,831,146	12,979
Peter L. Larsen	3,832,806	11,319
Ted R. Munselle	3,825,498	18,627
Martha C. Stephens	3,832,806	11,319

There were no broker non-votes on the election of directors. All nominees were elected.

With respect to the ratification of Swalm & Associates, P.C., as the independent registered public accountant for the Company for the fiscal year ending December 31, 2009 and any interim period, 3,823,153 votes were received in favor of such proposal, 6,705 votes were received against such proposal and 14,267 votes abstained; there were no broker non-votes on this issue.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s Common Stock is listed and traded on the AMEX under the symbol “IOT”. The following table sets forth the high and low closing sales prices for the Company’s Common Stock for each full, quarterly period within the two most recent fiscal years and any subsequent interim period as reported by published financial sources.


	2009				2008
	High		Low		High		Low
First Quarter	$	8.10	$	3.60	$	6.75	$	4.74
Second Quarter	$	9.83	$	3.40	$	11.25	$	5.01
Third Quarter	$	7.97	$	4.11	$	6.49	$	4.52
Fourth Quarter	$	8.40	$	4.08	$	10.20	$	3.05

On March 25, 2010, the closing sale price of the Company’s Common Stock on the AMEX was $5.60 per share. The approximate number of record holders of our common stock at March 25, 2010 was 700.

Performance Graph

The following graph compares the cumulative total stockholder return on shares of Common Stock of the Company with the Dow Jones Industrial Average (“DJ Industrial”) and the Dow Jones Real Estate Investment Index (“DJ Real Estate Index”). The comparison assumes that $100 was invested on December 31, 2004, in shares of Common Stock of the Company, and in each of the indices, and further assumes the reinvestment of all distributions. Past performance is not necessarily an indicator of future performance.

LOGO

$100 invested on 12/31/04 in stock or index-including reinvestment of dividends.

Fiscal year ending December 31.

12/04

12/05

12/06

12/07

12/08

12/09

Income Opportunity Realty Investors, Inc.

100.00

118.20

124.77

101.31

106.94

157.60

Dow Jones US Real Estate

100.00

99.39

115.58

123.02

81.39

96.71

Dow Jones Industrial

100.00

109.01

145.15

116.33

69.18

85.32

No cash dividends on the Company’s Common Stock were declared or paid in 2007, 2008 or 2009. Although no express intention or policy with respect to the future declaration or payment of cash dividends has been adopted by the Board of Directors, it is unlikely that any cash dividends on the Company’s Common Stock will be declared or paid in 2010.

On December 5, 1989, the governing body of the predecessor of the Company approved a share repurchase program authorizing the repurchase of up to a total of 200,000 shares of the predecessor. In June 2000, the Board of Directors of the Company increased the authorization to 300,000 shares. With the 3-for-1 forward split of the Company’s Common Stock in June 2005, such authorization would be appropriately increased to 900,000 shares and the number of shares previously purchased would be appropriately increased by the same ratio. During the three months ended December 31, 2009, no share repurchases occurred. The following table represents shares repurchased during the three months ended December 31, 2009:


Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Number of Shares that May Yet be Purchased Under the Program^(a)
Balance as of September 30, 2009			810,272	89,728
October 31, 2009	—	—	810,272	89,728
November 30, 2009	—	—	810,272	89,728
December 31, 2009	—	—	810,272	89,728
Total	—

(a)	On June 23, 2005, the IOT Board of Directors approved a share repurchase program for up to 900,000 shares of our common stock. This repurchase program has no termination date.

ITEM 6.

SELECTED FINANCIAL DATA

INCOME OPPORTUNITY REALTY INVESTORS, INC.


	For the Years Ended December 31,
	2009			2008			2007			2006			2005
	(dollars in thousands, except share and per share amounts)
EARNINGS DATA
Total operating revenues	$	246		$	310		$	402		$	503		$	1,424
Total operating expenses		191			381			222			287			2,450

Operating (loss) income		55			(71	)		180			216			(1,026	)
Other income (expense)		1,355			5,283			(356	)		(587	)		2,021

Income (loss) before gain on land sales, minority interest, and taxes		1,410			5,212			(176	)		(371	)		995
Gain on land sales		—			—			—			—			—
Income tax benefit (expense)		(493	)		7,524			(170	)		222			—

Net income (loss) from continuing operations		917			12,736			(346	)		(149	)		995

Net income from discontinuing operations, net of non-controlling interest		3			13,973			(317	)		413			310

Net income (loss)		920			26,709			(663	)		264			1,305
Net income (loss) attributable to non-controlling interest		—			—			(72	)		(92	)		72

Net income (loss) applicable to common shares	$	920		$	26,709		$	(735	)	$	172		$	1,377

PER SHARE DATA
Earnings per share—basic
Income (loss) from continuing operations	$	0.22		$	3.06		$	(0.10	)	$	(0.04	)	$	0.26
Discontinued operations		—			3.35			(0.08	)		0.08			0.07

Net income (loss) applicable to common shares	$	0.22		$	6.41		$	(0.18	)	$	0.04		$	0.33

Weighted average common share used in computing earnings per share		4,168,214			4,168,264			4,168,414			4,173,675			4,168,035
Earnings per share—diluted
Income (loss) from continuing operations	$	0.22		$	3.06		$	(0.10	)	$	(0.04	)	$	0.26
Discontinued operations		—			3.35			(0.08	)		0.08			0.07

Net income (loss) applicable to common shares	$	0.22		$	6.41		$	(0.18	)	$	0.04		$	0.33

Weighted average common share used in computing diluted earnings per share		4,168,214			4,168,264			4,168,414			4,173,675			4,168,035

Note: All share data including earnings per share has been adjusted to reflect the 3-for-1 forward split in the form of a 200% stock dividend in May 2005.

BALANCE SHEET DATA
Real estate, net	$	29,503		$	36,942		$	57,603		$	58,621		$	30,772
Notes and interest receivable, net	$	36,992		$	38,015		$	27,441		$	27,777		$	63,230
Total assets	$	115,665		$	115,553		$	116,307		$	108,911		$	99,341
Notes and interest payables	$	37,080		$	42,319		$	69,506		$	61,546		$	54,674
Shareholders’ equity	$	71,694		$	70,774		$	44,744		$	45,444		$	45,180
Book value per share	$	17.20		$	16.98		$	10.73		$	10.89		$	10.84

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.

This Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws, principally, but not only, under the captions “Business”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. We caution investors that any forward-looking statements in this report, or which management may make orally or in writing from time to time, are based on management’s beliefs and on assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “result” and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. These statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you that, while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update our forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.

Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

•

general risks affecting the real estate industry (including, without limitation, the inability to enter into or renew leases, dependence on tenants’ financial condition, and competition from other developers, owners and operators of real estate);

•

risks associated with the availability and terms of financing and the use of debt to fund acquisitions and developments;

•

failure to manage effectively our growth and expansion into new markets or to integrate acquisitions successfully;

•

risks and uncertainties affecting property development and construction (including, without limitation, construction delays, cost overruns, inability to obtain necessary permits and public opposition to such activities);

•

risks associated with downturns in the national and local economies, increases in interest rates and volatility in the securities markets;

•

costs of compliance with the Americans with Disabilities Act and other similar laws and regulations;

•

potential liability for uninsured losses and environmental contamination;

•

risks associated with our dependence on key personnel whose continued service is not guaranteed; and

•

the other risk factors identified in this Form 10-K, including those described under the Part I, Item 1A. “Risk Factors”.

The risks included here are not exhaustive. Other sections of this report, including Part I, Item 1A. “Risk Factors” include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can we assess the impact of all such risk

factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also refer to our quarterly reports on Form 10-Q for future periods and current reports on Form 8-K as we file them with the SEC, and to other materials we may furnish to the public from time to time through Forms 8-K or otherwise.

Overview

We are an externally advised and managed real estate investment company that currently owns land held for development or sale. As of December 31, 2009, we owned or had interests in 203.3 acres of land held for future development or sale.

Our primary source of revenue is from the interest income received on our notes receivable and the rents collected on our commercial properties, and sales of properties.

Significant Transactions

Significant transactions for the year ended December 31, 2009 include the following:

Our Board of Directors is responsible for managing the affairs of our Company and for setting the policies which guide the Company. The Company’s day-to-day operations are managed by Prime. Prime’s duties include, among other things, locating, investigating, evaluating and recommending real estate, mortgage note investment and sales opportunities, as well as financing and refinancing sources. Prime also serves as consultant in connection with our business plan and investment decisions made by the Board.

FASB Accounting Standards Codification

The company presents its financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). In June 2009, the Financial Accounting Standards Board (“FASB”) completed its accounting guidance codification project. The FASB Accounting Standards Codification (“ASC”) became effective for the Company’s financial statements issued subsequent to June 30, 2009 and is the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. As of the effective date, the company will no longer refer to the authoritative guidance dictating its accounting methodologies under the previous accounting standards hierarchy. Instead, the Company will refer to the ASC Codification as the sole source of authoritative literature.

Basis of presentation

The accompanying Consolidated Financial Statements include the accounts of the Company, its subsidiaries, generally all of which are wholly-owned, and all entities in which the Company has a controlling interest. Arrangements that are not controlled through voting or similar rights are accounted for as a Variable Interest Entity (VIE), in accordance with the provisions and guidance of ASC Topic 810 “Consolidation”, whereby the Company has been determined to be a primary beneficiary of the VIE and meets certain criteria of a sole general partner or managing member as identified in accordance with Emerging Issues Task Force (“EITF”) Issue 04-5, Investor’s Accounting for an Investment in a Limited Partnership when the Investor is the Sole General Partner and the Limited Partners have Certain Rights (“EITF 04-5”). VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders as a group lack adequate decision making ability, the obligation to absorb expected losses or residual returns of the entity, or have voting rights that are not proportional to their economic interests. The primary beneficiary generally is the entity that provides financial support and bears a majority of the financial risks, authorizes certain capital transactions, or makes operating decisions that materially affect the entity’s financial results. All significant intercompany balances and transactions have been eliminated in consolidation.

In determining whether we are the primary beneficiary of a VIE, we consider qualitative and quantitative factors, including, but not limited to: the amount and characteristics of our investment; the obligation or likelihood for us or other investors to provide financial support; our and the other investors’ ability to control or significantly influence key decisions for the VIE; and the similarity with and significance to the business activities of us and the other investors. Significant judgments related to these determinations include estimates about the current future fair values and performance of real estate held by these VIEs and general market conditions.

For entities in which the Company has less than a controlling financial interest or entities where it is not deemed to be the primary beneficiary, the entities are accounted for using the equity method of accounting. Accordingly, the Company’s share of the net earnings or losses of these entities is included in consolidated net income. IOT’s investment in Eton Square is accounted for under the equity method.

Real estate, depreciation, and impairment

Real estate assets are stated at the lower of depreciated cost or fair value, if deemed impaired. Major replacements and betterments are capitalized and depreciated over their estimated useful lives. Depreciation is computed on a straight-line basis over the useful lives of the properties (buildings and improvements – 20-40 years; furniture, fixtures and equipment – 5-10 years). The Company continually evaluates the recoverability of the carrying value of its real estate assets using the methodology prescribed in ASC Topic 360, “Property, Plant and Equipment,” Factors considered by management in evaluating impairment of its existing real estate assets held for investment include significant declines in property operating profits, annually recurring property operating losses and other significant adverse changes in general market conditions that are considered permanent in nature. Under ASC Topic 360, a real estate asset held for investment is not considered impaired if the undiscounted, estimated future cash flows of an asset (both the annual estimated cash flow from future operations and the estimated cash flow from the theoretical sale of the asset) over its estimated holding period are in excess of the asset’s net book value at the balance sheet date. If any real estate asset held for investment is considered impaired, a loss is provided to reduce the carrying value of the asset to its estimated fair value.

Real estate held-for-sale

The Company periodically classifies real estate assets as held for sale. An asset is classified as held for sale after the approval of the Company’s board of directors and after an active program to sell the asset has commenced. Upon the classification of a real estate asset as held for sale, the carrying value of the asset is reduced to the lower of its net book value or its estimated fair value, less costs to sell the asset. Subsequent to the

classification of assets as held for sale, no further depreciation expense is recorded. Real estate assets held for sale are stated separately on the accompanying Consolidated Balance Sheets. Upon a decision to no longer market as an asset for sale, the asset is classified as an operating asset and depreciation expense is reinstated. The operating results of real estate assets held for sale and sold are reported as discontinued operations in the accompanying Statements of Operations. Income from discontinued operations includes the revenues and expenses, including depreciation and interest expense, associated with the assets. This classification of operating results as discontinued operations applies retroactively for all periods presented. Additionally, gains and losses on assets designated as held for sale are classified as part of discontinued operations.

Cost Capitalization

Costs related to planning, developing, leasing and constructing a property are capitalized and classified as Properties in the Consolidated Balance Sheets. The Company capitalizes interest to qualifying assets under development based on average accumulated expenditures outstanding during the period. In capitalizing interest to qualifying assets, the Company first uses the interest incurred on specific project debt, if any, and next uses the company’s weighted average interest rate of non-project specific debt.

The company capitalizes interest, real estate taxes and certain operating expenses on the unoccupied portion of recently completed properties from the date a project receives its certificate of occupancy to the date on which the project achieves 80% economic occupancy.

The company capitalizes leasing costs which include commissions paid to outside brokers, legal costs incurred to negotiate and document a lease agreement and any internal costs that may be applicable. The company allocates these costs to individual tenant leases and amortizes them over the related lease term.

Fair value measurement

The company applies the guidance in ASC Topic 820, “Fair Value Measurements and Disclosures,” to the valuation of real estate assets. These provisions define fair value as the price that would be received to sell an asset or paid to transfer a liability in a transaction between market participants at the measurement date, establish a hierarchy that prioritizes the information used in developing fair value estimates and require disclosure of fair value measurements by level within the fair value hierarchy. The hierarchy gives the highest priority to quoted prices in active markets (Level 1 measurements) and the lowest priority to unobservable data (Level 3 measurements), such as the reporting entity’s own data.

The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and includes three levels defined as follows:

Level 1—Unadjusted quoted prices for identical and unrestricted assets or liabilities in active markets.

Level 2—Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3—Unobservable inputs that are significant to the fair value measurement.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Recognition of Revenue

Our revenues are composed largely of interest income on notes receivable and also include rents received on a storage warehouse. In accordance with ASC 805 “Business Combinations”, the Company recognizes rental revenue of acquired in-place “above-” and “below-market” leases at their fair values over the terms of the respective leases, as applicable.

Sales and the associated gains or losses of real estate assets are recognized in accordance with the provisions of ASC Topic 360-20, “Property, Plant and Equipment – Real Estate Sale”. The specific timing of a sale is measured against various criteria in ASC 360-20 related to the terms of the transaction and any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria for the full accrual method are not met, the Company defers some or all of the gain recognition and accounts for the continued operations of the property by applying the finance, leasing, deposit, installment or cost recovery methods, as appropriate, until the sales criteria are met.

Related Party Transactions

The Company has historically engaged in and may continue to engage in certain business transactions with related parties, including but not limited to asset acquisition and dispositions. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities. Related party transactions may not always be favorable to our business and may include terms, conditions and agreements that are not necessarily beneficial to or in the best interest of our company.

Non-performing Notes Receivable

The Company considers a note receivable to be non-performing when the maturity date has passed without principal repayment and the borrower is not making interest payments in accordance with the terms of the agreement.

Interest recognition on notes receivable

For notes other than surplus cash notes, we record interest income as earned in accordance with the terms of the related loan agreements. On cash flow notes where payments are based upon surplus cash from operations, accrued but unpaid interest income is only recognized to the extent cash is received.

Allowance for estimated losses

We assess the collectability of notes receivable on a periodic basis, of which the assessment consists primarily of an evaluation of cash flow projections of the borrower to determine whether estimated cash flows are sufficient to repay principal and interest in accordance with the contractual terms of the note. We recognize impairments on notes receivable when it is probable that principal and interest will not be received in accordance with the contractual terms of the loan. The amount of the impairment to be recognized generally is based on the fair value of the partnership’s real estate that represents the primary source of loan repayment. See Note 3 for details on our Notes Receivable.

Contractual Obligations

We have contractual obligations and commitments primarily with regards to the payment of mortgages. The following table aggregates our expected contractual obligations and commitments and includes items not accrued, per Generally Accepted Accounting Principles, through the term of the obligation such as interest expense. Our aggregate obligations subsequent to December 31, 2009 are shown in the table below (dollars in thousands):


	Total		2010		2011		2012-2014		Thereafter
Long-term debt obligation	$	41,312	$	2,737	$	31,147	$	7,428	$	—
Capital lease obligation		—		—		—		—		—
Operating lease obligation		—		—		—		—		—
Purchase obligation		—		—		—		—		—
Other long-term debt liabilities reflected on the Registrant’s Balance Sheet under GAAP		—		—		—		—		—

Total	$	41,312	$	2,737	$	31,147	$	7,428	$	—

Results of Operations

The following discussion is based on our Consolidated Financial Statements “Consolidated Statement of Operations” for the years ended December 31, 2009, 2008, and 2007 from Part I, Item 8., “Financial Statements and Supplementary Data” and is not meant to be an all-inclusive discussion of the changes in our net income applicable to common shares. Instead, we have focused on significant fluctuations within our operations that we feel are relevant to obtain an overall understanding of the change in income applicable to common shareholders.

Our current operations consist of land held for future development or sale. There is a warehouse located on one of the land parcels that is used for storage and generates some revenues through the leasing of that storage space. Our operating expenses relate mainly to the administration and maintenance costs associated with the land held for development or sale and storage space.

We also have other income and expense items. We receive interest income from the funds deposited with our advisor at a rate of prime plus 1%. We have receivables from our affiliates which also provide interest income. Our other significant expense item is from the mortgage expense which includes interest payments on the debt secured by our properties.

Comparison of the year ended December 31, 2009 to the year ended December 31, 2008

We had a net income applicable to common shares of $0.92 million or $0.22 per diluted earnings per share for the year ended December 31, 2009 which included income from discontinued operations, net of non-controlling interest, of $3,000, as compared to a net income applicable to common shares of $26.71 million or $6.41 per diluted earnings per share for the same period ended 2008 which includes income from discontinued operations, net of non-controlling interest, of $13.97 million.

Property revenue and operating expense

Property operations expenses decreased due to an overall decrease in costs and additional repairs and maintenance incurred.

General and administrative

General and administrative expense decreased in 2009. The decrease was attributable to franchise taxes, accounting fees and professional fees which were less in 2009. The accounting fees expensed in 2008 included accounting fees for 2007 and 2008.

Other income (expense)

Our interest income has increased as compared to the prior period. The increase is due to payments received on our notes receivables from Unified Housing Foundation, an affiliated entity. The receivables are surplus cash flow notes. The entity is required to pay on the notes when they generate surplus cash flow, thus interest income is recorded when received.

Mortgage loan interest expense has decreased primarily due to a reduction of loan fees paid in the current year.

Earnings from unconsolidated subsidiaries and investees increased due to writing off the majority of the value of our investment in Nakash Income Associates in the prior year.

Income from involuntary conversion is due to insurance proceeds received in 2008, from the tornado damage incurred on the Falcon Point apartments. There were no involuntary conversions in the current year.

Due to the overall positive income, we had a net income fee expense due to our advisor. This fee is based on a percentage of total net income. Our net income in the prior year was higher than the current year, therefore the fee decreased.

Discontinued operations

Our discontinued operations for 2009 consist of two commercial properties sold. In 2008, discontinued operations consist of the two commercial properties sold in 2009 and seven apartment complexes sold in 2008. The office building and shopping center, 2010 Valley View and Parkway Centre, were sold in October 2009. Six of the apartment complexes; Brighton Court, Del Mar, Enclave, Meridian, Signature Place, and Sinclair Place, which are known as the Midland/Odessa properties, were sold in January 2008. One of the apartments, Falcon Point, was reclassified to discontinued operations in May 2008 due to the condemnation of the property as a result of tornado damage and management’s subsequent decision to sell the property. The property was sold “As-Is” in November 2008. The statements of operations for all prior periods presented have been restated to reflect the reclassification to discontinued operations. Included in discontinued operations for 2008 is a gain of $29.8 million, net of non-controlling interest, on the sale of the Midland/Odessa properties. The results of operations from these properties are shown below (dollars in thousands):


	For Years Ended December 31,
	2009			2008
Revenue
Rental	$	964		$	1,963
Property operations		354			1,725

		610			238
Expenses
Interest		(448	)		(2,900	)
General and administration		(11	)		(885	)
Depreciation		(146	)		(194	)

		(605	)		(3,979	)

Net income (loss) from discontinued operations before gains on sale of real estate, taxes, fees and non-controlling interest		5			(3,741	)
Gain on sale of discontinued operations		—			29,750
Net income/sales fee to affiliate		—			(4,512	)

Income (loss) from discontinued operations, net of non-controlling interest before tax		5			21,497
Tax benefit (expense)		(2	)		(7,524	)

Income (loss) from discontinued operations, net of non-controlling interest	$	3		$	13,973

Comparison of the year ended December 31, 2008 to the year ended December 31, 2007

We had net income applicable to common shares of $26.71 million or $6.41 per diluted earnings per share in 2008, which includes income from discontinued operations of $13.97 million, as compared to a net loss applicable to common shares of ($735,000) or ($0.18) per diluted earnings per share in 2007, which includes a loss from discontinued operations of ($317,000) for the same period ended 2007.

Property revenue and operating expense

Rental and other property revenues decreased from $402,000 in 2007 to $310,000 in 2008. The decrease was due to a loss in rental revenues within our storage property.

Property operating expenses increased from $222,000 in 2007 to $381,000 in 2008. The increase was due to an overall increase in costs and additional repairs and maintenance incurred.

Advisory fees decreased from $1,034,000 in 2007 to $895,000 in 2008. The advisory fees are based on the total net assets. We sold six apartment complexes in January 2008 and one in November 2008, reducing our asset base, thus reducing our fee.

Other income (expense)

Interest income decreased from $4.0 million in 2007 to $3.0 million in 2008. The decrease is due to no longer accruing interest income on our surplus cash flow notes receivable from Unified Housing Foundation, an affiliated entity. This entity is required to pay on the notes when they generate surplus cash flow, thus interest income is recorded when payments received.

Mortgage and loan interest decreased in 2008 due to a decrease in the interest rate on the Travelers land mortgage.

Discontinued operations

Our discontinued operations for 2007 and 2008 consist of seven apartment complexes sold in 2008 and an office building and a shopping center sold subsequent to 2008. The office building and shopping center, 2010 Valley View and Parkway Centre, were sold in October 2009. Six of the apartment complexes; Brighton Court, Del Mar, Enclave, Meridian, Signature Place, and Sinclair Place which are known as the Midland/Odessa properties were sold in January 2008. One of the apartments, Falcon Point, was reclassified to discontinued operations in May 2008 due to the condemnation of the property as a result of tornado damage and management’s subsequent decision to sell the property. The property was sold “As-Is” in November 2008. The statements of operations for all prior periods presented have been restated to reflect the reclassification to discontinued operations, as shown below (dollars in thousands):


	For Years Ended December 31,
	2008			2007
Revenue
Rental	$	1,963		$	8,170
Property operations		1,725			4,631

		238			3,539
Expenses
Interest		(2,900	)		(3,261	)
General and administration		(885	)		(19	)
Depreciation		(194	)		(746	)

		(3,979	)		(4,026	)

Net loss from discontinued operations before gains on sale of real estate, taxes, fees and non-controlling interest		(3,741	)		(487	)
Gain on sale of discontinued operations		29,750			—
Net income/sales fee to affiliate		(4,512	)		—

Income (loss) from discontinued operations, net of non-controlling interest before tax		21,497			(487	)
Tax benefit (expense)		(7,524	)		170

Income (loss) from discontinued operations, net of non-controlling interest	$	13,973		$	(317	)

Liquidity and Capital Resources

General

Our principal liquidity needs are:

•

meeting debt service requirements including balloon payments;

•

fund normal recurring expenses;

•

fund capital expenditures; and

•

fund new property acquisitions.

Our primary source of cash is from rents, collection on receivables, sale of assets, and refinancing of existing mortgages. In 2010, we will refinance debt obligations as they become due and generate cash from interest payments on notes receivable, storage rents and sale of properties. However, if refinancing and excess cash from operations does not prove to be sufficient to satisfy all our obligations as they mature, we may sell real estate, refinance real estate, and incur additional borrowings secured by real estate to meet our cash requirements.

Financial Position

The following impacted our balance sheet as of December 31, 2009:

Our Real estate at cost decreased due the sale of the office building, 2010 Valley View and shopping center, Parkway Centre in October 2009. The sale of these income-producing projects reduces our real estate costs and the assets that remain include a storage warehouse and land held for development or sale.

The Notes and interest payable balance decreased in connection with the disposition of the mortgage on the 2010 Valley View and Parkway Centre properties and our continued pay down of our debt obligations.

Cash Flow Summary

The following summary discussion of our cash flows is based on the Consolidated Statements of Cash Flows as presented in Part I, Item 8. “Financial Statements and Supplementary Data” and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented.

Our cash and cash equivalents were $2,000 and $52,000 as of December 31, 2009 and December 31, 2008, respectively. The decrease was a result of the following increases and decreases in cash flows (dollars in thousands).


	Year ended December 31,
	2009			2008			Variance
	(amounts in thousands)
Net cash provided by (used in) operating activities	$	1,566		$	(2,336	)	$	3,902
Net cash provided by (used in) investing activities	$	3,623		$	29,143		$	(25,520	)
Net Cash provided by (used in) financing activities	$	(5,239	)	$	(27,022	)	$	21,783

Our cash from operating activities has increased from the prior year. This change is primarily due to the receipt of interest income from our notes receivable from Unified Housing Foundation.

Our cash from investing activities decreased from the prior year due to fewer sales in the current period. In addition, we withdrew cash previously invested with our advisor. In the prior period, we had cash from investing activities due to the sale of seven apartment complexes, and the current period includes one land sale and two income-producing projects sold, offset by investing a portion of the proceeds with our advisor.

Our cash used in financing activities decreased from the prior period due to the payoff, in 2008, of the mortgages on the six Midland/Odessa properties and the Falcon Point apartment complex. In the current year, we made regular monthly debt payments and paid off the mortgages for 2010 Valley View and Parkway Centre properties.

We paid no dividends in 2009, 2008, or 2007. It is unlikely that we will pay any quarterly dividends in 2010.

Management reviews the carrying values of our properties at least annually and whenever events or a change in circumstances indicates that impairment may exist. Impairment is considered to exist if the future cash flow from a property (undiscounted and without interest) is less than the carrying amount of the property. If impairment is found to exist, a provision for loss is recorded by a charge against earnings. The property review generally includes selective property inspections, discussions with the manager of the property and visits to selected properties in the area, and a review of (1) the property’s current rents compared to market rents, (2) the property’s expenses, (3) the property’s maintenance requirements and (4) the property’s cash flows.

Environmental Matters

Under various federal, state and local environmental laws, ordinances and regulations, IOT may be potentially liable for removal or remediation costs, as well as certain other potential costs, relating to hazardous or toxic substances (including governmental fines and injuries to persons and property) where property-level managers have arranged for the removal, disposal or treatment of hazardous or toxic substances. In addition, certain environmental laws impose liability for release of asbestos-containing materials into the air and third parties may seek recovery for personal injury associated with such materials.

Management is not aware of any environmental liability relating to the above matters that would have a material adverse effect on IOT’s business, assets or results of operations.

Inflation

The effects of inflation on IOT’s operations are not quantifiable. Revenues from property operations tend to fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect the sales values of properties and the ultimate gain to be realized from property sales. To the extent that inflation affects interest rates, earnings from short-term investments and the cost of new financings, as well as the cost of variable interest rate, debt will be affected.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

IOT’s future operations, cash flow and fair values of financial instruments are partially dependent upon the then existing market interest rates and market equity prices. Market risk is the change in the market rates and prices and the affect of these changes on future operations. Market risk is managed by matching a property’s anticipated net operating income to an appropriate financing.

IOT is exposed to interest rate risk associated with variable rate notes payable and maturing debt that has to be refinanced. IOT does not hold financial instruments for trading or other speculative purposes, but rather issues these financial instruments to finance its portfolio of real estate assets. Interest rate sensitivity is the relationship between changes in market interest rates and the fair value of market rate-sensitive assets and liabilities. IOT’s earnings are affected as changes in short-term interest rates impact its cost of variable rate debt and maturing fixed rate debt. A large portion of IOT’s market risk is exposure to short-term interest rates from variable rate borrowings. If market interest rates for variable rate debt average 100 basis points more in 2010 than they did during 2009, IOT’s interest expense would increase and net income would decrease by $346,930. This amount is determined by considering the impact of hypothetical interest rates on IOT’s borrowing cost. This analysis did not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no change in IOT’s financial structure.

The following table contains only those exposures that existed at December 31, 2009. Anticipation of exposures or risk on positions that could possibly arise was not considered. IOT’s ultimate interest rate risk and its affect on operations will depend on future capital market exposures, which cannot be anticipated with a probable assurance level (dollars in thousands):


	2010			2011			2012			2013			2014			Thereafter			Total
Assets
Market securities at fair value																			$	—
Note Receivable
Variable interest rate—fair value																			$	6,900
Instrument’s maturities	$	—		$	—		$	—		$	—		$	6,900		$	—		$	6,900
Instrument’s amortization		—			—			—			—			—			—			—
Interest		362			362			362			362			272			—			1,721
Average Rate		5.25	%		5.25	%		5.25	%		5.25	%		5.25	%		0.00	%

Fixed interest rate—fair value																			$	31,918
Instrument’s maturities	$	2,990		$	—		$	—		$	28,928		$	—		$	—		$	31,918
Instrument’s amortization		—			—			—			—			—			—			—
Interest		3,618			3,442			3,442			3,442			—			—			13,945
Average Rate		11.73	%		11.90	%		11.90	%		11.90	%		0.00	%		0.00	%

	2010			2011			2012			2013			2014			Thereafter			Total
Notes Payable
Variable interest rate—fair value																			$	34,693
Instrument’s maturities	$	—		$	26,714		$	—		$	—		$	5,796		$	—		$	32,510
Instrument’s amortization		914			717			276			276			—			—			2,183
Interest		1,613			1,190			408			390			282			—			3,883
Average Rate		4.86	%		5.06	%		6.50	%		6.50	%		6.50	%		0.00	%

Fixed interest rate—fair value																			$	2,387
Instrument’s maturities	$	—		$	2,334		$	—		$	—		$	—		$	—		$	2,334
Instrument’s amortization		27			26			—			—			—			—			53
Interest		183			166			—			—			—			—			349
Average Rate		7.72	%		7.72	%		0.00	%		0.00	%		0.00	%		0.00	%

ITEM 8.

CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


		Page
Financial Statements
Report of Independent Registered Public Accounting Firm		25
Consolidated Balance Sheets—December 31, 2009 and 2008		26
Consolidated Statements of Operations—Years Ended December 31, 2009, 2008 and 2007		27
Consolidated Statements of Shareholders’ Equity—Years Ended December 31, 2009, 2008 and 2007		28
Consolidated Statements of Cash Flows—Years Ended December 31, 2009, 2008 and 2007		29
Notes to Consolidated Financial Statements		30

Financial Statement Schedules
Schedule III—Real Estate and Accumulated Depreciation		47
Schedule IV—Mortgage Loans on Real Estate		49

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors of

Income Opportunity Realty Investors, Inc.

Dallas, Texas

We have audited the accompanying consolidated balance sheets of Income Opportunity Realty Investors, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years ended December 31, 2009, 2008 and 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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 management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As described in the notes to the financial statements, Income Opportunity Realty Investors, Inc. has significant transactions with and balances due from affiliates.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Income Opportunity Realty Investors, Inc. as of December 31, 2009 and 2008, and the results of its operations, changes in stockholders’ equity and its cash flows for the years ended December 31, 2009, 2008 and 2007, in conformity with U.S. generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. Schedules III and IV are presented for the purpose of complying with the Securities and Exchange Commission’s rules and is not a required part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the consolidated financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the consolidated financial statements taken as a whole.

/s/ Swalm & Associates, P.C.

Swalm & Associates, P.C.

Plano, Texas

March 31, 2010

INCOME OPPORTUNITY REALTY INVESTORS, INC.

BALANCE SHEETS


	December 31, 2009			December 31, 2008
	(dollars in thousands, except share and par value amounts)
Assets
Real estate, at cost	$	29,503		$	39,255
Less accumulated depreciation		—			(2,313	)

Total real estate		29,503			36,942
Notes and interest receivable from related parties		38,818			39,841
Less allowance for doubtful accounts		(1,826	)		(1,826	)

Total notes and interest receivable		36,992			38,015
Cash and cash equivalents		2			52
Investments in unconsolidated subsidiaries and investees		92			74
Receivable and accrued interest from related parties		46,676			38,203
Other assets		2,400			676

Total assets	$	115,665		$	113,962

Liabilities and Shareholders’ Equity
Liabilities:
Notes and interest payable	$	37,080		$	42,319
Liabilities related to assets held for sale		—			—
Accounts payable and other liabilities (including $6,552 in 2009 and $212 in 2008 from affiliated and related parties)		6,891			869

		43,971			43,188
Commitments and contingencies:
Shareholders’ equity:
Common Stock, $.01 par value, authorized 10,000,000 shares; issued 4,173,675 shares in 2009 and 2008		42			42
Treasury Stock at cost		(39	)		(39	)
Paid-in capital		61,955			61,955
Retained earnings		9,736			8,816

Total shareholders’ equity		71,694			70,774

Total liabilities and shareholders’ equity	$	115,665		$	113,962

The accompanying notes are an integral part of these financial statements.

INCOME OPPORTUNITY REALTY INVESTORS, INC.

STATEMENTS OF OPERATIONS


	For the Years Ended December 31,
	2009			2008			2007
	(dollars in thousands, except share and per share amounts)
Revenues:
Rental and other property revenues (including $241 and $249 and $242 for the year ended 2009 and 2008 and 2007 respectively from affiliates and related parties)	$	246		$	310		$	402

Expenses:
Property operating expenses (including $5 and $8 and $12 for the year ended 2009 and 2008 and 2007 respectively from affiliates and related parties)		191			381			222
Depreciation and amortization		40			60			48
General and administrative (including $117 and $0 and $0 for the year ended 2009 and 2008 and 2007 respectively from affiliates and related parties)		405			599			728
Advisory fee to affiliates		881			895			1,034

Total operating expenses		1,517			1,935			2,032

Operating loss		(1,271	)		(1,625	)		(1,630	)

Other income (expense):
Interest income (including $4,661 and $2,964 and $3,944 for the year ended 2009 and 2008 and 2007 respectively from affiliates and related parties)		4,661			2,993			3,946
Mortgage and loan interest		(1,883	)		(2,043	)		(2,509	)
Gain on involuntary conversion		—			7,356			—
Earnings from unconsolidated subsidiaries and investees		18			(458	)		17
Net income fee to affiliates		(115	)		(1,011	)		—

Total other income (expenses)		2,681			6,837			1,454

Income (loss) before gain on land sales, non-controlling interest, and taxes		1,410			5,212			(176	)

Income (loss) from continuing operations before tax		1,410			5,212			(176	)
Income tax benefit (expense)		(493	)		7,524			(170	)

Net income (loss) from continuing operations		917			12,736			(346	)

Discontinued operations:
Income (loss) from discontinued operations		5			21,497			(487	)
Income tax benefit (expense) from discontinued operations		(2	)		(7,524	)		170

Net income (loss)		920			26,709			(663	)
Net income (loss) attributable to non-controlling interests		—			—			(72	)

Net income (loss) attributable to common shares		920			26,709			(735	)
Earnings per share—basic
Income (loss) from continuing operations	$	0.22		$	3.06		$	(0.10	)
Discontinued operations		—			3.35			(0.08	)

Net income (loss) applicable to common shares	$	0.22		$	6.41		$	(0.18	)

Earnings per share—diluted
Income (loss) from continuing operations	$	0.22		$	3.06		$	(0.10	)
Discontinued operations		—			3.35			(0.08	)

Net income (loss) applicable to common shares	$	0.22		$	6.41		$	(0.18	)

Weighted average common share used in computing earnings per share		4,168,214			4,168,264			4,168,414
Weighted average common share used in computing diluted earnings per share		4,168,214			4,168,264			4,168,414

The accompanying notes are an integral part of these financial statements.

INCOME OPPORTUNITY REALTY INVESTORS, INC.

STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Three Years Ended December 31, 2009

(dollars in thousands)


	Total			Common Stock			Treasury Stock			Paid-in Capital		Retained Earnings
	Total			Shares	Amount		Treasury Stock			Paid-in Capital		Retained Earnings
Balance, December 31, 2006	$	44,839		4,173,675	$	42	$	—		$	61,955	$	(17,158	)
Net loss		(735	)	—		—		—			—		(735	)
Repurchase /sale of treasury stock, net		(37	)	—		—		(37	)		—		—

Balance, December 31, 2007	$	44,067		4,173,675	$	42	$	(37	)	$	61,955	$	(17,893	)
Net income		26,709		—		—		—			—		26,709
Repurchase /sale of treasury stock, net		(2	)					(2	)

Balance, December 31, 2008	$	70,774		4,173,675	$	42	$	(39	)	$	61,955	$	8,816
Net income		920		—		—		—			—		920

Balance, December 31, 2009	$	71,694		4,173,675	$	42	$	(39	)	$	61,955	$	9,736

The accompanying notes are an integral part of these financial statements.

INCOME OPPORTUNITY REALTY INVESTORS, INC.

STATEMENTS OF CASH FLOWS


	For the Years Ended December 31,
	2009			2008			2007
	(dollars in thousands)
Cash Flow From Operating Activities:
Net income (loss) applicable to common shares	$	920		$	26,709		$	(735	)
Adjustments to reconcile net loss applicable to common shares to net cash used in operating activities:
Depreciation and amortization		186			255			793
Earnings from unconsolidated subsidiaries and investees		(18	)		458			(17	)
Income (loss) on non-controlling interest		—			(677	)		72
Gain on sale of income producing properties		—			(29,750	)		—
(Increase) decrease in assets:
Accrued interest receivable		2,292			(1,537	)		1,354
Other assets		(1,205	)		1,970			1,489
Increase (decrease) in liabilities:
Accrued interest payable		—			(167	)		240
Other liabilities		(609	)		403			136

Net cash provided by (used in) operating activities		1,566			(2,336	)		3,332

Cash Flow From Investing Activities:
Proceeds from sales of income producing properties		6,860			49,679			—
Proceeds from sales of land		6,891			—			—
Acquisition of income producing properties		—			—			(26	)
Change in notes receivable		(440	)		(10,628	)		—
Real estate improvements		(156	)		458			—
Cash invested with Advisor		(9,532	)		(10,366	)		(9,413	)

Net cash provided by (used in) investing activities		3,623			29,143			(9,439	)

Cash Flow From Financing Activities:
Proceeds from notes payable		—			—			14,579
Payments on maturing notes payable		(5,239	)		(27,020	)		(7,884	)
Deferred financing costs		—			—			(364	)
Stock buyback		—			(2	)		(37	)

Net cash provided by (used in) financing activities		(5,239	)		(27,022	)		6,294

Net increase (decrease) in cash and cash equivalents		(50	)		(215	)		187
Cash and cash equivalents, beginning of period		52			267			80

Cash and cash equivalents, end of period	$	2		$	52		$	267

Supplemental disclosures of cash flow information:
Cash paid for interest	$	2,139		$	5,612		$	5,489
Cash paid for income taxes	$	—		$	—		$	—

The accompanying notes are an integral part of these financial statements.

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accompanying Consolidated Financial Statements of Income Opportunity Realty Investors, Inc. and consolidated entities were prepared in conformity with accounting principles generally accepted in the United States of America, the most significant of which are described in Note 1. Summary of Significant Accounting Policies. The Notes to Consolidated Financial Statements are an integral part of these Consolidated Financial Statements. The data presented in the Notes to Consolidated Financial Statements are as of December 31 of each year and for the year then ended, unless otherwise indicated. Dollar amounts in tables are in thousands, except per share amounts.

Certain balances in the 2008 and 2007 presentation have been reclassified to conform to the 2009 presentation.

NOTE 1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

FASB Accounting Standards Codification. The company presents its financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). In June 2009, the Financial Accounting Standards Board (“FASB”) completed its accounting guidance codification project. The FASB Accounting Standards Codification (“ASC”) became effective for the Company’s financial statements issued subsequent to June 30, 2009 and is the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. As of the effective date, the company will no longer refer to the authoritative guidance dictating its accounting methodologies under the previous accounting standards hierarchy. Instead, the Company will refer to the ASC Codification as the sole source of authoritative literature.

Basis of presentation. The accompanying Consolidated Financial Statements include the accounts of the Company, its subsidiaries, generally all of which are wholly-owned, and all entities in which the Company has a controlling interest. Arrangements that are not controlled through voting or similar rights are accounted for as a Variable Interest Entity (VIE), in accordance with the provisions and guidance of ASC Topic 810 “Consolidation”, whereby the Company has been determined to be a primary beneficiary of the VIE and meets certain criteria of a sole general partner or managing member as identified in accordance with Emerging Issues Task Force (“EITF”) Issue 04-5, Investor’s Accounting for an Investment in a Limited Partnership when the Investor is the Sole General Partner and the Limited Partners have Certain Rights (“EITF 04-5”). VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders as a group lack adequate decision making ability, the obligation to absorb expected losses or residual returns of the entity, or have voting rights that are not proportional to their economic interests. The primary beneficiary generally is the entity that provides financial support and bears a majority of the financial risks, authorizes certain capital transactions, or makes operating decisions that materially affect the entity’s financial results. All significant intercompany balances and transactions have been eliminated in consolidation.

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Real estate, depreciation, and impairment. Real estate assets are stated at the lower of depreciated cost or fair value, if deemed impaired. Major replacements and betterments are capitalized and depreciated over their estimated useful lives. Depreciation is computed on a straight-line basis over the useful lives of the properties (buildings and improvements—20-40 years; furniture, fixtures and equipment—5-10 years). The Company continually evaluates the recoverability of the carrying value of its real estate assets using the methodology prescribed in ASC Topic 360, “Property, Plant and Equipment,” Factors considered by management in evaluating impairment of its existing real estate assets held for investment include significant declines in property operating profits, annually recurring property operating losses and other significant adverse changes in general market conditions that are considered permanent in nature. Under ASC Topic 360, a real estate asset held for investment is not considered impaired if the undiscounted, estimated future cash flows of an asset (both the annual estimated cash flow from future operations and the estimated cash flow from the theoretical sale of the asset) over its estimated holding period are in excess of the asset’s net book value at the balance sheet date. If any real estate asset held for investment is considered impaired, a loss is provided to reduce the carrying value of the asset to its estimated fair value.

Real estate held-for-sale. The Company periodically classifies real estate assets as held for sale. An asset is classified as held for sale after the approval of the Company’s board of directors and after an active program to sell the asset has commenced. Upon the classification of a real estate asset as held for sale, the carrying value of the asset is reduced to the lower of its net book value or its estimated fair value, less costs to sell the asset. Subsequent to the classification of assets as held for sale, no further depreciation expense is recorded. Real estate assets held for sale are stated separately on the accompanying Consolidated Balance Sheets. Upon a decision to no longer market as an asset for sale, the asset is classified as an operating asset and depreciation expense is reinstated. The operating results of real estate assets held for sale and sold are reported as discontinued operations in the accompanying statements of operations. Income from discontinued operations includes the revenues and expenses, including depreciation and interest expense, associated with the assets. This classification of operating results as discontinued operations applies retroactively for all periods presented. Additionally, gains and losses on assets designated as held for sale are classified as part of discontinued operations.

Cost Capitalization. Costs related to planning, developing, leasing and constructing a property are capitalized and classified as Properties in the Consolidated Balance Sheets. The Company capitalizes interest to qualifying assets under development based on average accumulated expenditures outstanding during the period. In capitalizing interest to qualifying assets, the Company first uses the interest incurred on specific project debt, if any, and next uses the company’s weighted average interest rate of non-project specific debt.

Fair value measurement. The company applies the guidance in ASC Topic 820, “Fair Value Measurements and Disclosures,” to the valuation of real estate assets. These provisions define fair value as the price that would be received to sell an asset or paid to transfer a liability in a transaction between market participants at the measurement date, establish a hierarchy that prioritizes the information used in developing fair value estimates and require disclosure of fair value measurements by level within the fair value hierarchy. The hierarchy gives the highest priority to quoted prices in active markets (Level 1 measurements) and the lowest priority to unobservable data (Level 3 measurements), such as the reporting entity’s own data.

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and includes three levels defined as follows:

Level 1—Unadjusted quoted prices for identical and unrestricted assets or liabilities in active markets.

Level 3—Unobservable inputs that are significant to the fair value measurement.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Recognition of Revenue. Our revenues, which are composed largely of rental income, include rents reported on a straight-line basis over the lease term. In accordance with ASC 805 “Business Combinations”, the Company recognizes rental revenue of acquired in-place “above-” and “below-market” leases at their fair values over the terms of the respective leases.

Sales and the associated gains or losses of real estate assets are recognized in accordance with the provisions of ASC Topic 360-20, “Property, Plant and Equipment—Real Estate Sale”. The specific timing of a sale is measured against various criteria in ASC 360-20 related to the terms of the transaction and any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria for the full accrual method are not met, the Company defers some or all of the gain recognition and accounts for the continued operations of the property by applying the finance, leasing, deposit, installment or cost recovery methods, as appropriate, until the sales criteria are met.

Interest recognition on notes receivable. For notes other than surplus cash notes, we record interest income as earned in accordance with the terms of the related loan agreements. On cash flow notes where payments are based upon surplus cash from operations, accrued but unpaid interest income is only recognized to the extent cash is received.

Non-performing Notes Receivable. IOT considers a note receivable to be non-performing when the maturity date has passed without principal repayment and the borrower is not making interest payments in accordance with the terms of the agreement.

Allowance for estimated losses. We assess the collectability of notes receivable on a periodic basis, of which the assessment consists primarily of an evaluation of cash flow projections of the borrower to determine whether estimated cash flows are sufficient to repay principal and interest in accordance with the contractual terms of the note. We recognize impairments on notes receivable when it is probable that principal and interest will not be received in accordance with the contractual terms of the loan. The amount of the impairment to be recognized generally is based on the fair value of the partnership’s real estate that represents the primary source of loan repayment. See Note 3 for details on our Notes Receivable.

Related Party Transactions. The Company has historically engaged in and may continue to engage in certain business transactions with related parties, including but not limited to asset acquisition and dispositions. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities. Related party transactions may not always be favorable to our business and may include terms, conditions and agreements that are not necessarily beneficial to or in the best interest of our company.

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Cash equivalents. For purposes of the Consolidated Statements of Cash Flows, all highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents.

Earnings per share. Earnings per share “(EPS)” have been computed pursuant to the provisions of ASC 260 “Earnings Per Share”. The computation of basic EPS is calculated by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Shares issued during the period shall be weighted for the portion of the period that they were outstanding.

Use of estimates. In the preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America, it is necessary for management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expense for the year ended. Actual results could differ from those estimates.

Income Taxes. IOT is a “C Corporation” for U.S. federal income tax purposes. IOT files an annual consolidated income tax return with ARL and TCI and their subsidiaries. ARL is the common parent for the consolidated group. IOT is part of a tax sharing and compensating agreement with respect to federal income taxes between ARL, TCI and IOT and their subsidiaries that was entered into in July of 2009. Prior to July of 2009, ARL and TCI and their subsidiaries were in a tax sharing and compensating agreement with respect to federal income taxes and IOT was the parent company of its own consolidated filing group. The agreement specifies the manner in which the group will share the consolidated tax liability and also how certain tax attributes are to be treated among members of the group.

Recent Accounting Pronouncements. There were no recent accounting pronouncements that our company has not implemented that materially affect our financial statements.

NOTE 2.

REAL ESTATE

Real estate consisted of the following at December 31, (dollars in thousands):


	2009		2008
Apartments	$	—	$	—
Office Building		—		3,507
Shopping Center		—		3,982
Industrial Warehouse		—		4,072
Land held for development		29,503		27,694
Accumulated Depreciation		—		(2,313	)

	$	29,503	$	36,942

Concentration of investment risk. IOT has a high concentration of investment risk on properties in the southwest region of the United States, specifically Texas. This risk includes, but is not limited to, changes in local economic conditions, changes in real estate and zoning laws, increases in real estate taxes, floods, tornados and other acts of God and other factors beyond the control of management. In the opinion of management, this investment risk is partially mitigated by the diversification of property types in other geographical regions of the United States, management’s review of additional investments, acquisitions in other areas and by insurance.

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 3.

NOTES AND INTEREST RECEIVABLE FROM AFFILIATES

Junior Mortgage Loans. Junior mortgage loans are loans secured by mortgages that are subordinate to one or more prior liens on the underlying real estate. Recourse on the loans ordinarily includes the real estate which secures the loan, other collateral and personal guarantees of the borrower.

At December 2009 and 2008, we had junior mortgage loans and accrued interest receivable from affiliates, totaling $36.9 million and $38.0 million, respectively. The loans mature at various dates through December 2014 and have stated interest rates ranging from 5.25% to 12.0%. Payments are due from surplus cash flow or sale or refinancing of the underlying properties. These notes are cross collateralized to the extent that any surplus cash available from the sale or refinance of any of the properties underlying these notes will be used to repay outstanding interest and principal for the remaining notes. See Schedule IV to the financial statements—Mortgage Loans on Real Estate.


Borrower	Maturity	Principal Balance			Interest Rate
Housing for Seniors of Humble, LLC	12/27/13	$	2,000		11.50%
Housing for Seniors of Humble, LLC	12/27/13		6,883		11.50%
Unified Housing Foundation, Inc. (Marquis at VR)	12/10/13		2,735		12.00%
Unified Housing Foundation, Inc. (Echo Station)	12/26/13		1,668		12.00%
Unified Housing Foundation, Inc. (Cliffs of El Dorado)	09/15/10		2,990		10.00%
Unified Housing Foundation, Inc. (Timbers of Terrell)	12/18/13		1,323		12.00%
Unified Housing Foundation, Inc. (Tivoli)	12/31/13		1,826		12.00%
Unified Housing Foundation, Inc. (Parkside Crossing)	12/29/13		1,936		12.00%
Unified Housing Foundation, Inc. (Sendero Ridge)	12/31/13		5,227		12.00%
Unified Housing Foundation, Inc. (Limestone Ranch)	12/29/13		2,250		12.00%
Unified Housing Foundation, Inc. (Limestone Canyon)	12/19/13		3,080		12.00%
Centura Land Mortgage (due from Transcontinental Realty Investors, Inc.—a related party)	09/18/14		6,900		prime + 2.00%
Less: purchase allowance			(1,826	)

		$	36,992


All are related party notes.

NOTE 4.

INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES AND INVESTEES

Investments in unconsolidated subsidiaries, jointly owned companies and other investees in which we have a 20% to 50% interest or otherwise exercise significant influence are carried at cost, adjusted for the Company’s proportionate share of their undistributed earnings or losses, via the equity method of accounting.

Our interest in Eton Square in the amount of 10% is accounted for under the equity method, because the general partner is an affiliated entity, thus allowing us to exercise significant influence over the operations and financial activities. Accordingly, the investment is carried at cost, adjusted for the companies’ proportionate share of earnings or losses.

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The market values as of the year ended December 31, 2009 and 2008 were not determinable as there were no traded markets, either active or inactive, for this investment.

The following is a summary of the financial position and results of operations from our investees (dollars in thousands):


	2009			2008			2007
Real estate, net of accumulated depreciation	$	13,747		$	14,362		$	14,084
Notes receivable		—			—			902
Other assets		319			597			493
Notes payable		(9,253	)		(9,494	)		(9,735	)
Other liabilities		(3,895	)		(4,690	)		(3,669	)
Shareholders equity/partners capital	$	(918	)	$	(775	)	$	(2,075	)

Rents	$	1,929		$	2,066		$	1,835
Interest income		—			—			150
Depreciation		(536	)		(667	)		(598	)
Operating expenses		(638	)		(1,057	)		(573	)
Gain on land sales		—			—			—
Interest expense		(611	)		(626	)		(642	)

Income (loss) from continuing operations		144			(284	)		172
Income from discontinued operations		—			—			—

Net income (loss)	$	144		$	(284	)	$	172

Company’s proportionate share of earnings	$	18		$	(43	)	$	17

NOTE 5.

NOTES AND INTEREST PAYABLE

The following table shows the principal payments due on our notes payable through the next five years and thereafter (dollars in thousands):


2010	$	941
2011		29,791
2012		276
2013		276
2014		5,796
Thereafter		—

	$	37,080

Notes payable at December 31, 2009, bear interest at rates ranging from 4.25% to 7.72% and mature between 2010 and 2014. The mortgages are collateralized by deeds of trust on real estate with a net carrying value of $37.1 million.

NOTE 6.

RELATED PARTY TRANSACTIONS

The Company and SWI entered into an Advisory Agreement and Cash Management Agreement to further define the administration of the Company’s day-to-day investment operations, relationship contacts, flow of

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

funds and deposit and borrowing of funds. Effective July 1, 2009, the Advisory Agreement and Cash Management Agreement with SWI was terminated. IOT has engaged Prime as Cash Manager under the substantially same terms as under the SWI Agreement. Under the Cash Management Agreement, which requires us to deposit excess cash for investment with our Advisor, we earn interest at a rate of prime plus 1% on the funds deposited with our advisor. See Note 9, “Advisory Agreement.” For 2009, we earned $0.14 million from Prime and $0.84 million from SWI and in 2008 and 2007; we earned $2.4 million and $1.9 million in interest, from SWI, respectively.

Included in income are rents from related parties of approximately $0.4 million, $0.4 million, and $0.3 million for the years ended 2009, 2008, and 2007 respectively.

The following table reconciles the beginning and ending balances of amounts receivable from affiliates as of December 31, 2009 (dollars in thousands):


	SWI			TCI			Arcadian*		Prime			Total
Balance, December 31, 2008	$	35,704		$	2,499		$	—	$	—		$	38,203
Cash receipts		(796	)		—			—		(9,981	)		(10,777	)
Cash payments		131			—			—		13,607			13,738
Other additions		1,531			200			—		20,923			22,654
Other repayments		(4,198	)		(3,194	)		—		(1,522	)		(8,914	)
Note receivable		(32,372	)		18,267			5,877		—			(8,228	)

Balance, December 31, 2009	$	—		$	17,772		$	5,877	$	23,027		$	46,676

*	Arcadian Energy, Inc. was formerly known as International Health Products, Inc.

NOTE 7.

DIVIDENDS

No quarterly dividends were declared or paid in 2009, 2008 or 2007. Management expects to pay no cash dividends in 2010.

NOTE 8.

RENTAL INCOME UNDER OPERATING LEASES

Operations include the leasing of office buildings. Due to the sale of the 2010 Valley View office building and Parkway Centre retail shopping center; there is no future rental income on operating leases. There is a storage warehouse that generates rental income but there are no current leases.

NOTE 9.

ADVISORY AGREEMENT

The Company had an Advisory Agreement with SWI until July 1, 2009. Effective July 1, 2009, the agreement with SWI was terminated and an Advisory Agreement was entered into with Prime on substantially the same terms as the agreement with SWI. The Advisor is responsible for the Company’s day-to-day operations. The Advisor must formulate and submit to IOT’s Board of Directors for approval an annual budget and business plan containing a twelve-month forecast of operations and cash flow with a general plan for asset sales and purchases, borrowing activity and other investments. The Advisor reports to the Board quarterly on IOT’s performance against the business plan. The Advisory Agreement further placed the Advisor in a fiduciary relationship to IOT’s stockholders and contains a broad standard governing the Advisor’s liability for any losses incurred by IOT.

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Advisor receives, as compensation for its management and advice, monthly advisory fees based on 0.0625% of IOT’s assets annually as well as specific fees for assisting IOT in obtaining financing and completing acquisitions. If IOT’s operating expenses exceed limits specified in the Advisory Agreement, The Advisor is obligated to refund a portion of the advisory fees. The Advisor also receives a net income fee calculated as 7.50% of IOT’s net income.

The Company and SWI entered into a Cash Management Agreement to further define the administration of the Company’s day-to-day investment operations, relationship contacts, flow of funds and deposit and borrowing of funds. Effective July 1, 2009, the Cash Management Agreement with SWI was terminated. IOT has engaged Prime as Cash Manager under the substantially same terms as under the SWI Agreement. Under the Cash Management Agreement, all funds of the Company are delivered to the Cash Manager which has a deposit liability to the Company and is responsible for investment of all excess funds, which earn interest at the Wall Street Journal prime rate plus one percent per annum, set quarterly on the first day of each calendar quarter. Borrowings for the benefit of the Company bear the same interest rate.

The Cash Management Agreement and the Advisory Agreement are automatically renewed each year unless terminated by either party. Prime also serves as an Advisor and Cash Manager to TCI and ARL.

NOTE 10.

PROPERTY MANAGEMENT

Triad provides property management services for a fee of 3% or less of the monthly gross rents collected on commercial properties under its management. Triad subcontracts with other entities for property-level management services at various rates. The general partner of Triad is PIAMI. The limited partner of Triad is HRSHLLC. Triad subcontracted to Regis I, the property-level management and leasing of IOT’s storage warehouse and the commercial property owned by Eton Square, until December 2002. Since January 1, 2003, Regis I, which is also owned by HRSHLLC, provided property management services. Regis I was and is entitled to receive property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Triad.

NOTE 11.

ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.

Fees and cost reimbursements to Prime, SWI and affiliates (dollars in thousands):


	2009			2008			2007
Fees
Advisory fee	$	881		$	895		$	1,034
Incentive fee		—			3,100			—
Net income fee		115			2,422			—
Commission on property sale		—			1,319			—
Mortgage brokerage and equity refinancing		20			—			154
Property, construction management and leasing commissions		51			70			—

	$	1,067		$	7,806		$	1,188

Interest income received	$	973		$	2,353		$	1,897
Rental revenue		431			391			334
Cost reimbursement (expense)		(117	)		(1	)		(13	)

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 12.

INCOME TAXES

For tax periods before July 17, 2009, IOT was required to file a consolidated federal return. Due to change of ownership in July, 2009, IOT has joined the ARL consolidated group for tax purposes. The income tax expense (benefit) for 2009 in the accompanying financial statement was calculated under a tax sharing and compensating agreement between ARL, TCI and IOT. For 2009, ARL and TCI had a net taxable loss and IOT had net taxable income. For 2009, IOT recorded a current tax expense of $495,000. The benefit or expense is calculated based on the amount of losses absorbed by taxable income multiplied by the statutory rate of 35%.

Current income tax expense (benefit) is attributable to:


	2009		2008	2007
Income from continuing operations	$	494	Not applicable	Not applicable
Income from discontinued operations		1

	$	495

Due to the use net loss carryforwards and the alternative minimum tax credit carry forwards for 2008 and 2007, IOT recorded no provision for income taxes in 2008 or 2007. IOT’s tax basis in its net assets differs from the amount at which its net assets are reported for financial statement purposes, principally due to the accounting for gains and losses on property sales, and depreciation on owned properties.

Deferred income taxes reflect the tax effects of temporary timing differences between carrying amounts of assets and liabilities reflected on the financial statements and the amounts used for income tax purposes. The tax effects of temporary differences and net operating loss carry forwards that give rise to the deferred tax assets are presented below (amounts in thousands):


	December 31,
	2009			2008			2007
Accumulated depreciation and amortization	$	203		$	382		$	7,251
Allowance for loss		694			0			0
Other		203			79			79
Federal benefit of NOL carryforward		984			689			922
Federal benefit of AMT carryforward		164			164			164

Deferred tax asset		2,248			1,314			8,416
Less valuation allowance		(2,248	)		(1,314	)		(8,416	)

Total deferred tax asset	$	—		$	—		$	—

Recognition of the benefits of deferred tax assets will require the Company to generate future taxable income. There is no assurance that the Company will generate earnings in future years. Therefore, the Company has established a valuation allowance for deferred tax assets of approximately $2,248,000, $1,314,000 and $8,416,000 as of December 31, 2009, 2008 and 2007, respectively.

In 2009, the company used current losses from the ARL consolidated group of approximately $1,415,000. In prior years, the company generated taxable loss carryforwards totaling $2,589,587. The most recent loss year is 2008, which, if not used, will expire in 2028. The alternative minimum tax credit balance did not change in 2009 and remains at approximately $164,000. The credit has no expiration date.

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents the principal reasons for the differences between the Company’s effective tax rate and the United States statutory income tax rate of 35% (amounts in thousands).


	2009			2008			2007
Federal income tax at statutory rate	$	495		$	—		$	—
State tax expense		19			55			45
Gain on sale differences		—			—			—
Other		(19	)		(55	)		(45	)
Utilization of net operating loss and minimum tax credit carry forwards		—			—			—

Effective income tax rate		35	%		0	%		0	%

NOTE 13.

OPERATING SEGMENTS

The Company’s segments are based on our method of internal reporting which classifies operations by the type of property in the portfolio. The Company’s segments by use of property are; land and other (dollars in thousands).


	Commercial Properties		Apartments		Land			Other		Total
For year ended 2009
Operating revenue	$	—	$	—	$	243		$	3	$	246
Operating expenses		—		—		165			26		191
Depreciation and amortization		—		—		40			—		40
Mortgage and loan interest		—		—		1,883			—		1,883
Interest income		—		—		—			4,661		4,661
Gain on land sales		—		—		—			—		—

Segment operating income (loss)	$	—	$	—	$	(1,845	)	$	4,638	$	2,793

Capital expenditures		—		—		(56	)		—		(56	)
Assets		—		—		29,503			—		29,503

Property Sales
Sales price	$	7,150	$	6,891	$	—		$	—	$	14,041
Cost of sale		5,727		1,973		—			—		7,700
Deferred current gain		1,423		4,918		—			—		6,341
Recognized prior deferred gain		—		—		—			—		—

Gain on sale	$	—	$	—	$	—		$	—	$	—

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


	Commercial Properties		Apartments		Land			Other			Total
For year ended 2008
Operating revenue	$	—	$	—	$	281		$	29		$	310
Operating expenses		—		—		276			105			381
Depreciation and amortization		—		—		60			—			60
Mortgage and loan interest		—		—		1,990			53			2,043
Interest income		—		—		—			2,993			2,993
Gain on land sales		—		—		—			—			—

Segment operating income (loss)	$	—	$	—	$	(2,045	)	$	2,864		$	819

Capital expenditures		—		—		18			—			18
Assets		—		—		36,942			—			36,942

Property Sales
Sales price	$	—	$	49,679	$	—		$	—		$	49,679
Cost of sale		—		19,929		—			—			19,929
Deferred current gain		—		—		—			—			—
Recognized prior deferred gain		—		—		—			—			—

Gain on sale	$	—	$	29,750	$	—		$	—		$	29,750


	Commercial Properties		Apartments		Land			Other			Total
For year ended 2007
Operating revenue	$	—	$	—	$	363		$	39		$	402
Operating expenses		—		—		203			19			222
Depreciation and amortization		—		—		48			—			48
Mortgage and loan interest		—		—		1,721			788			2,509
Interest income		—		—		(770	)		4,716			3,946
Gain on land sales		—		—		—			—			—

Segment operating income (loss)	$	—	$	—	$	(2,379	)	$	3,948		$	1,569

Capital expenditures		—		—		2			(16	)		(14	)
Assets		—		—		31,575			—			31,575

Property Sales
Sales price	$	—	$	—	$	—		$	—		$	—
Cost of sale		—		—		—			—			—
Deferred current gain		—		—		—			—			—
Recognized prior deferred gain		—		—		—			—			—

Gain on sale	$	—	$	—	$	—		$	—		$	—

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The tables below reconcile the segment information to the corresponding amounts in the Consolidated Statements of Operations (dollars in thousands):


	2009			2008			2007
Segment operating income	$	2,793		$	819		$	1,569
Other non-segment items of income (expense)
General and administrative		(405	)		(599	)		(728	)
Advisory fee		(881	)		(895	)		(1,034	)
Other income		—			—			—
Net income fee to affiliate		(115	)		(1,011	)		—
Equity in earnings of investees		18			(458	)		17
Involuntary conversion		—			7,356			—
Deferred tax		(493	)		7,524			(170	)
Non-controlling interest		—			—			—

Income (loss) from continuing operations	$	917		$	12,736		$	(346	)


SEGMENT ASSET RECONCILIATION TO TOTAL ASSETS
	2009			2008			2007
Segment assets	$	29,503		$	36,942		$	31,575
Investments in real estate partnerships		92			74			532
Other assets and receivables		86,070			76,946			58,172
Assets held for sale		—			—			26,028

Total assets	$	115,665		$	113,962		$	116,307

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 14.

DISCONTINUED OPERATIONS

IOT adopted ASC 360, “Property, Plant and Equipment”, which established a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. This statement requires that the operations related to properties that have been sold or properties that are intended to be sold be presented as discontinued operations in the statement of operations for all periods presented, and properties intended to be sold are to be designated as “held-for-sale” on the balance sheet.

The discontinued operations for the three years reported below consist of seven apartment complexes, an office building and a shopping center. The office building and shopping center, 2010 Valley View and Parkway Centre, were sold in October 2009. Six of the apartment complexes; Brighton Court, Del Mar, Enclave, Meridian, Signature Place, and Sinclair Place, which are known as the Midland/Odessa properties, were sold in January 2008. One of the apartments, Falcon Point, was reclassified to discontinued operations in May 2008 due to the condemnation of the property as a result of tornado damage and management’s subsequent decision to sell the property. The property was sold “As-Is” in November 2008. The statements of operations for all prior periods presented have been restated to reflect the reclassification to discontinued operations. Included in discontinued operations for 2008 is a gain of $29.8 million, net of non-controlling interest, on the sale of the Midland/Odessa properties. The results of operations from these properties are shown below (dollars in thousands):


	For Years Ended December 31,
	2009			2008			2007
Revenue
Rental	$	964		$	1,963		$	8,170
Property operations		354			1,725			4,631

		610			238			3,539
Expenses
Interest		(448	)		(2,900	)		(3,261	)
General and administration		(11	)		(885	)		(19	)
Depreciation		(146	)		(194	)		(746	)

		(605	)		(3,979	)		(4,026	)

Net income (loss) from discontinued operations before gains on sale of real estate, taxes, fees and non-controlling interest		5			(3,741	)		(487	)
Gain on sale of discontinued operations		—			29,750			—
Net income/sales fee to affiliate		—			(4,512	)		—

Income (loss) from discontinued operations, net of non-controlling interest before tax		5			21,497			(487	)
Tax benefit (expense)		(2	)		(7,524	)		170

Income (loss) from discontinued operations, net of non-controlling interest	$	3		$	13,973		$	(317	)

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 15.

QUARTERLY DATA

The following is a table of quarterly results of operations for the years 2009, 2008, and 2007 (dollars in thousands except per share data):


	Three Months Ended 2009
	March 31,			June 30,			September 30,			December 31,
	(dollars in thousands, except share and per share amounts)
2009
Total operating revenues	$	69		$	70		$	69		$	38
Total operating expenses		42			53			54			42

Operating (loss) income		27			17			15			(4	)
Other income (expense)		(402	)		(570	)		(399	)		2,726

Income (loss) before gain on land sales, non-controlling interest, and taxes		(375	)		(553	)		(384	)		2,722
Gain on land sales		—			—			—			—
Income tax benefit (expense)		2			58			(5	)		(548	)

Net income (loss) from continuing operations		(373	)		(495	)		(389	)		2,174

Net income (loss) from discontinuing operations, net of non-controlling interest		5			109			(10	)		(101	)

Net income (loss)		(368	)		(386	)		(399	)		2,073
Less: net income (loss) attributable to non-controlling interest		—			—			—			—

Net income (loss) applicable to common shares	$	(368	)	$	(386	)	$	(399	)	$	2,073


PER SHARE DATA

Earnings per share—basic
Income (loss) from continuing operations	$	(0.09	)	$	(0.12	)	$	(0.09	)	$	0.52
Discontinued operations		—			0.03			—			(0.03	)

Net income (loss) applicable to common shares	$	(0.09	)	$	(0.09	)	$	(0.09	)	$	0.49

Weighted average common shares used in computing earnings per share		4,168,214			4,168,214			4,168,214			4,168,214

Earnings per share—diluted
Income (loss) from continuing operations	$	(0.09	)	$	(0.12	)	$	(0.09	)	$	0.52
Discontinued operations		—			0.03			—			(0.03	)

Net income (loss) applicable to common shares	$	(0.09	)	$	(0.09	)	$	(0.09	)	$	0.49

Weighted average common shares used in computing diluted earnings per share		4,168,214			4,168,214			4,168,214			4,168,214

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


	Three Months Ended 2008
	March 31,			June 30,			September 30,			December 31,
	(dollars in thousands, except share and per share amounts)
2008
Total operating revenues	$	66		$	66		$	115		$	63
Total operating expenses		528			(224	)		24			53

Operating (loss) income		(462	)		290			91			10
Other income (expense)		(5,909	)		(281	)		10,807			666

Income (loss) before gain on land sales, non-controlling interest, and taxes		(6,371	)		9			10,898			676
Gain on land sales		—			—			—			—
Income tax benefit (expense)		9,218			(48	)		(1,577	)		(69	)

Net income (loss) from continuing operations		2,847			(39	)		9,321			607

Net income (loss) from discontinuing operations, net of non-controlling interest		17,118			(89	)		(2,928	)		(128	)

Net income (loss)		19,965			(128	)		6,393			479
Less: net income (loss) attributable to non-controlling interest		—			—			—			—

Net income (loss) applicable to common shares	$	19,965		$	(128	)	$	6,393		$	479


PER SHARE DATA

Earnings per share—basic
Income (loss) from continuing operations	$	0.68		$	(0.01	)	$	2.24		$	0.15
Discontinued operations		4.11			(0.02	)		(0.70	)		(0.03	)

Net income (loss) applicable to common shares	$	4.79		$	(0.03	)	$	1.54		$	0.12

Weighted average common shares used in computing earnings per share		4,168,414			4,168,214			4,168,214			4,168,214

Earnings per share—diluted
Income (loss) from continuing operations	$	0.68		$	(0.01	)	$	2.24		$	0.15
Discontinued operations		4.11			(0.02	)		(0.70	)		(0.03	)

Net income (loss) applicable to common shares	$	4.79		$	(0.03	)	$	1.54		$	0.12

Weighted average common shares used in computing diluted earnings per share		4,168,414			4,168,214			4,168,214			4,168,214

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


	Three Months Ended 2007
	March 31,			June 30,			September 30,			December 31,
	(dollars in thousands, except share and per share amounts)
2007
Total operating revenues	$	112		$	154		$	147		$	(11	)
Total operating expenses		133			66			(82	)		105

Operating (loss) income		(21	)		88			229			(116	)
Other income (expense)		(272	)		(235	)		25			126

Income (loss) before gain on land sales, non-contolling interest, and taxes		(293	)		(147	)		254			10
Gain on land sales		—			—			—			—
Income tax expense		139			(283	)		(20	)		(6	)

Net income (loss) from continuing operations		(154	)		(430	)		234			4

Net income (loss) from discontinuing operations, net of non-controlling interest		258			(525	)		(38	)		(12	)

Net income (loss)		104			(955	)		196			(8	)
Less: net income (loss) attributable to non-controlling interest		(38	)		(6	)		(18	)		(10	)

Net income (loss) applicable to common shares	$	66		$	(961	)	$	178		$	(18	)


PER SHARE DATA

Earnings per share—basic
Income (loss) from continuing operations
Discontinued operations	$	(0.04	)	$	(0.10	)	$	0.06		$	—
Net income (loss) applicable to common shares		0.06			(0.13	)		(0.01	)		—

Weighted average common shares used in computing earnings per share	$	0.02		$	(0.23	)	$	0.05		$	—

		4,173,675			4,173,675			4,173,675			4,168,414
Earnings per share—diluted
Income (loss) from continuing operations
Discontinued operations	$	(0.04	)	$	(0.10	)	$	0.06		$	—
Net income (loss) applicable to common shares		0.06			(0.13	)		(0.01	)		—

Weighted average common shares used in computing diluted earnings per share	$	0.02		$	(0.23	)	$	0.05		$	—

		4,173,675			4,173,675			4,173,675			4,168,414

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 16.

COMMITMENTS, CONTINGENCIES AND LIQUIDITY

Litigation

Liquidity

Management anticipates that IOT will generate excess cash from operations in 2010 due to the interest collected from notes receivable; however, such excess may not be sufficient to discharge all of IOT’s debt obligations as they mature. Management intends to reduce its cash invested with its Advisor to meet its cash requirements not funded through operations.

SCHEDULE III

INCOME OPPORTUNITY REALTY INVESTORS, INC.

Real Estate and Accumulated Depreciation

December 31, 2009


			Initial Cost				Cost Capitalized Subsequent to Acquisition and Improvements		Gross Amounts at Which Carried at End of Year						Accumulated Depreciation		Date of Construction	Date Acquired	Life On Which Depreciation In Latest Statement of Operations Is Computed
	Encumbrances		Land		Building & Improvements				Land		Building & Improvements		Total		Accumulated Depreciation		Date of Construction	Date Acquired
	(dollars in thousands)
Properties Held for Investment Mercer Crossing Land
Eagle Crest, Farmers Branch, TX	$	2,387	$	3,782	$	—	$	—	$	3,782	$	—	$	3,782	$	—	—	12/03	—
Three Hickory Center, Farmers Branch, TX		—		1,210		—		—		1,210		—		1,210		—	—	11/06	—
Travelers Land, Farmers Branch, TX		27,793		24,511		—		—		24,511		—		24,511		—	—	11/06	—
Corporate
Centura Land Mortgage		6,900

	$	37,080	$	29,503	$	—	$	—	$	29,503	$	—	$	29,503	$	—

SCHEDULE III

(Continued)

INCOME OPPORTUNITY REALTY INVESTORS, INC.

Real Estate and Accumulated Depreciation

For the Years Ended December 31,


	2009			2008			2007
	(dollars in thousands)
Reconciliation of Real Estate
Balance at January 1,	$	39,255		$	63,457		$	63,682
Additions
Acquisitions and improvements		—			—			11,852
Deductions
Sale of real estate		(9,752	)		(24,202	)		(12,077	)

Balance at December 31,	$	29,503		$	39,255		$	63,457

Reconciliation of Accumulated Depreciation
Balance at January 1,	$	2,313		$	5,712		$	5,061
Additions
Depreciation		185			203			794
Deductions
Sale of real estate		(2,498	)		(3,602	)		(143	)

Balance at December 31	$	—		$	2,313		$	5,712

Schedule IV

INCOME OPPORTUNITY REALTY INVESTORS, INC.

Mortgage Loans on Real Estate

December 31, 2009


Description	Interest Rate		Final Maturity Date	Periodic Payment Term	Prior Liens		Face Amount of Mortgages		Carrying Amount of Mortgages			Principal Amount of Loans Subject to Delinquent Principal or Interest
	(dollars in thousands)
JUNIOR MORTGAGE LOANS
Housing for Seniors of Humble, LLC	11.50%		12/27/2013	Excess cash flow	$	16,223	$	2,000	$	2,000		$	—
Housing for Seniors of Humble, LLC	11.50%		12/27/2013	Excess cash flow		16,223		6,363		6,883			—
Unified Housing Foundation, Inc. (Marquis at VR)	12.00%		12/10/2013	Excess cash flow		14,961		2,437		2,735			—
Unified Housing Foundation, Inc. (Echo Station)	12.00%		12/26/2013	Excess cash flow		9,928		1,487		1,668			—
Unified Housing Foundation, Inc. (Cliffs of El Dorado)	10.00%		9/15/2010	Excess cash flow		9,607		2,990		2,990			—
Unified Housing Foundation, Inc. (Timbers of Terrell)	12.00%		12/18/2013	Excess cash flow		7,201		1,180		1,323			—
Unified Housing Foundation, Inc. (Tivoli)	12.00%		12/31/2013	Excess cash flow		10,759		2,014		1,826			—
Unified Housing Foundation, Inc. (Parkside Crossing)	12.00%		12/29/2013	Excess cash flow		11,525		1,539		1,936			—
Unified Housing Foundation, Inc. (Sendero Ridge)	12.00%		12/31/2013	Excess cash flow		23,581		5,227		5,227			—
Unified Housing of Limestone Ranch	12.00%		12/29/2013	Excess cash flow		13,108		2,320		2,250			—
Unified Housing of Limestone Canyon	12.00%		12/19/2013	Excess cash flow		14,093		3,080		3,080			—
OTHER
Centura Land Mortgage (due from Transcontinental Realty Investors, Inc., a related party)	prime + 2	%	9/18/2014	Interest only				7,000		6,900			—

							$	37,637	$	38,818		$	—

				Interest receivable						—
				Allowance						(1,826	)

			Total notes and interest receivable						$	36,992

Schedule IV

(Continued)

INCOME OPPORTUNITY REALTY INVESTORS, INC.

Mortgage Loans on Real Estate

For the Years Ended December 31,


	2009			2008			2007
	(dollars in thousands)
Balance at January 1	$	39,841		$	27,441		$	27,777
Additions
New mortgages		—			12,452			—
Conversion of accrued interest to principal		—			—			1,427
Increase of interest receivable on mortgage loans		3,016			(52	)		—
Deductions
Amounts paid		(3,939	)		—			(1,763	)
Non-cash reduction		(100	)		—
Cost of mortgages sold		—			—			—

Balance at December 31	$	38,818		$	39,841		$	27,441