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FILED PURSUANT TO
RULE 424 (b) (3)
FILE NO. 333-83933
WELLS REAL ESTATE INVESTMENT TRUST, INC.
Up to 20,000,000 shares offered to the public
_________________________________________
Wells Real Estate Investment Trust, Inc. (Wells REIT) is a real estate
investment trust. We invest in commercial real estate properties such as office
buildings. We currently own interests in 16 office buildings located in 11
states.
We are offering and selling to the public up to 20,000,000 shares for $10
per share and up to 2,200,000 shares to be issued pursuant to our dividend
reinvestment plan at a purchase price of $10 per share. An additional 800,000
shares are being registered which are reserved for issuance at $12 per share to
participating broker-dealers upon their exercise of warrants.
You must purchase at least 100 shares for $1,000. Your money will be placed
initially in an escrow account with Bank of America, N.A.
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The most significant risks relating to your investment include the following:
. lack of a public trading market for the shares
. reliance on Wells Capital, Inc., our advisor, to select properties and
conduct our operations
. authorization of substantial fees to the advisor and its affiliates
. borrowing - which increases the risk of loss of our investments
. conflicts of interest facing the advisor and its affiliates
You should see the complete discussion of the risk factors beginning on page 16.
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The Offering:
. The shares will be offered on a best efforts basis to investors at $10 per
share.
. We will pay selling commissions to broker-dealers of 7% and a dealer
manager fee for reimbursement of marketing expenses of 2.5% out of the
offering proceeds raised.
. We will invest approximately 84% of the offering proceeds raised in real
estate properties, and the balance will be used to pay fees and expenses.
. The offering will terminate on or before December 19, 2001.
Neither the Securities and Exchange Commission, the Attorney General of the
State of New York nor any other state securities regulator has approved or
disapproved of these securities or determined if this prospectus is truthful or
complete. It is a criminal offense if someone tells you otherwise.
The use of projections or forecasts in this offering is prohibited. No one
is permitted to make any oral or written predictions about the cash benefits or
tax consequences you will receive from your investment.
WELLS INVESTMENT SECURITIES, INC.
December 20, 1999
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Questions and Answers About This Offering..................................................................... 1
Prospectus Summary............................................................................................ 9
Risk Factors.................................................................................................. 16
Investment Risks....................................................................................... 16
Real Estate Risks...................................................................................... 20
Federal Income Tax Risks............................................................................... 24
Retirement Plan Risks.................................................................................. 25
Suitability Standards......................................................................................... 25
Estimated Use of Proceeds..................................................................................... 27
Management.................................................................................................... 28
General................................................................................................ 28
Executive Officers and Directors....................................................................... 30
Compensation of Directors.............................................................................. 33
Independent Director Stock Option Plan................................................................. 34
Limited Liability and Indemnification of Directors, Officers, Employees and other Agents............... 35
The Advisor............................................................................................ 37
The Advisory Agreement................................................................................. 38
Shareholdings.......................................................................................... 40
Affiliated Companies................................................................................... 41
Management Decisions................................................................................... 42
Management Compensation....................................................................................... 43
Conflicts of Interest......................................................................................... 46
Interests in Real Estate Programs...................................................................... 46
Other Activities of the Advisor and its Affiliates..................................................... 47
Competition............................................................................................ 48
Affiliated Dealer Manager.............................................................................. 48
Affiliated Property Manager............................................................................ 48
Lack of Separate Representation........................................................................ 48
Joint Ventures with Affiliates of the Advisor.......................................................... 48
Receipt of Fees and Other Compensation by the Advisor and its Affiliates............................... 49
Certain Conflict Resolution Procedures................................................................. 49
Investment Objectives and Criteria............................................................................ 50
General................................................................................................ 50
Acquisition and Investment Policies.................................................................... 51
Development and Construction of Properties............................................................. 53
Acquisition of Properties from Wells Development Corporation........................................... 53
Terms of Leases and Tenant Creditworthiness............................................................ 55
Joint Venture Investments.............................................................................. 56
Borrowing Policies..................................................................................... 57
Disposition Policies................................................................................... 57
Investment Limitations................................................................................. 58
Change in Investment Objectives and Limitations........................................................ 60
Description of Properties..................................................................................... 60
Joint Ventures with Affiliates......................................................................... 61
The Lucent Building.................................................................................... 63
The ABB Knoxville Building............................................................................. 64
The Ohmeda Building.................................................................................... 66
</TABLE>
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<TABLE>
<S> <C>
The Interlocken Building............................................................................... 67
The Iomega Building.................................................................................... 68
The Fairchild Building................................................................................. 69
The Cort Furniture Building............................................................................ 70
The PWC Building....................................................................................... 71
The Vanguard Cellular Building......................................................................... 73
The Matsushita Property................................................................................ 76
The EYBL CarTex Building............................................................................... 81
The Sprint Building.................................................................................... 82
The ABB Richmond Property.............................................................................. 83
The Johnson Matthey Building........................................................................... 88
The Videojet Building.................................................................................. 89
The Gartner Building................................................................................... 90
Property Management Fees............................................................................... 91
Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 92
Liquidity and Capital Resources........................................................................ 92
Cash Flows from Operating Activities................................................................... 94
Cash Flow From Investing Activities.................................................................... 94
Cash Flows from Financing Activities................................................................... 94
Results of Operations.................................................................................. 94
Recent Accounting Pronouncements....................................................................... 94
Inflation.............................................................................................. 95
Year 2000 Compliance................................................................................... 95
Prior Performance Summary..................................................................................... 96
Publicly Offered Unspecified Real Estate Programs...................................................... 97
Federal Income Tax Considerations............................................................................. 105
General................................................................................................ 105
Requirements for Qualification as a REIT............................................................... 106
Failure to Qualify as a REIT........................................................................... 112
Sale-Leaseback Transactions............................................................................ 112
Taxation of U.S. Shareholders.......................................................................... 112
Treatment of Tax-Exempt Shareholders................................................................... 114
Special Tax Considerations for Non-U.S. Shareholders................................................... 115
Statement of Stock Ownership........................................................................... 117
State and Local Taxation............................................................................... 117
Tax Aspects of the Operating Partnership............................................................... 117
ERISA Considerations.......................................................................................... 121
Plan Asset Considerations.............................................................................. 122
Other Prohibited Transactions.......................................................................... 123
Annual Valuation....................................................................................... 124
Description of Shares......................................................................................... 125
Common Stock........................................................................................... 125
Preferred Stock........................................................................................ 125
Soliciting Dealer Warrants............................................................................. 126
Meetings and Special Voting Requirements............................................................... 126
Restriction on Ownership of Shares..................................................................... 127
Dividends.............................................................................................. 128
Dividend Reinvestment Plan............................................................................. 129
Share Redemption Program............................................................................... 129
Restrictions on Roll-Up Transactions................................................................... 130
</TABLE>
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<TABLE>
<S> <C>
Business Combinations........................................................................... 131
Control Share Acquisitions...................................................................... 132
The Operating Partnership Agreement.................................................................... 133
General......................................................................................... 133
Capital Contributions........................................................................... 134
Operations...................................................................................... 134
Exchange Rights................................................................................. 135
Transferability of Interests.................................................................... 135
Plan of Distribution................................................................................... 136
Supplemental Sales Material............................................................................ 141
Legal Opinions......................................................................................... 141
Experts................................................................................................ 142
Audited Financial Statements.................................................................... 142
Unaudited Financial Statements.................................................................. 142
Additional Information................................................................................. 142
Glossary............................................................................................... 143
Financial Statements .................................................................................. 151
Prior Performance Tables .............................................................................. 242
Subscription Agreement ................................................................................ Exhibit A
Amended and Restated Dividend Reinvestment Plan ....................................................... Exhibit B
</TABLE>
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Questions and Answers About This Offering
Below we have provided some of the more frequently asked questions and
answers relating to an offering of this type. Please see the "Prospectus
Summary" and the remainder of this prospectus for more detailed information
about this offering.
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Q: What is a REIT?
A: In general, a REIT is a company that:
. pays dividends to investors of at least 95% of its taxable income;
. avoids the "double taxation" treatment of income that generally results
from investments in a corporation because a REIT is not generally
subject to federal corporate income taxes on its net income, provided
certain income tax requirements are satisfied;
. combines the capital of many investors to acquire or provide financing
for real estate properties; and
. offers the benefit of a diversified real estate portfolio under
professional management.
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Q: What is Wells Real Estate Investment Trust, Inc.?
A: Our REIT is structured as a Maryland corporation formed in 1997 to acquire
commercial real estate properties such as high grade office buildings and
lease them on a triple-net basis to companies that typically have a net
worth in excess of $100,000,000.
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Q: Who will choose which real estate properties to invest in?
A: Wells Capital, Inc. (Wells Capital) is our advisor and makes all of our
investment decisions. In addition, our board of directors must approve all
of our acquisitions.
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Q: Who is Wells Capital?
A: Wells Capital is a Georgia corporation formed in 1984. As of October 1,
1999, Wells Capital has sponsored public real estate programs which have
raised in excess of $400,784,000 from approximately 30,000 investors and
own and operate a total of 43 commercial real estate properties.
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Q: Does Wells Capital use any specific criteria when selecting a potential
property acquisition?
A: Yes. Wells Capital generally seeks to acquire office buildings located in
densely populated suburban markets leased to large corporations on a
triple-net basis. Typically, our corporate tenants have net worths in
excess of $100,000,000. Current tenants of public real estate programs
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sponsored by Wells Capital include Fairchild Technologies, Cort Furniture
Rental, IBM, Lucent Technologies and PriceWaterhouseCoopers.
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Q. Do you currently own any real estate properties?
A. Yes. As of the date of this prospectus, our REIT has acquired and owns
interests in 16 real estate properties. We own interests in the following
real estate properties through joint ventures with affiliates:
<TABLE>
<CAPTION>
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Tenant Building Type Location
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<S> <C> <C>
Gartner Group, Inc. Office Building Ft. Myers, Florida
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Johnson Matthey, Inc. Research and Development, Tredyffrin Township, Pennsylvania
Office and Warehouse
Building
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Sprint Communications Office Building Leawood, Kansas
Company L.P.
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EYBL CarTex, Inc. Manufacturing and Office Fountain Inn, South Carolina
Building
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Cort Furniture Rental Office and Warehouse Building Fountain Valley, California
Corporation
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Fairchild Technologies Manufacturing and Office Fremont, California
U.S.A., Inc. Building
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Iomega Corporation Office Building Ogden City, Utah
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ODS Technologies, L.P. Office Building Broomfield, Colorado
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Ohmeda, Inc. Office Building Louisville, Colorado
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ABB Flakt, Inc. Office Building Knoxville, Tennessee
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Lucent Technologies, Inc. Office Building Oklahoma City, Oklahoma
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</TABLE>
We own the following properties directly:
<TABLE>
<CAPTION>
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Tenant Building Type Location
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<S> <C> <C>
Videojet Systems International, Office, Assembly and Wood Dale, Illinois
Inc. Manufacturing Building
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ABB Power Generation, Inc. Office Building Richmond, Virginia
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Matsushita Avionics Office Building Lake Forest, California
Systems Corporation
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Pennsylvania Cellular Office Building Harrisburg, Pennsylvania
Telephone Corp.
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PriceWaterhouseCoopers Office Building Tampa, Florida
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</TABLE>
If you want to read more detailed information about each of these
properties, see the "Description of Properties" section of this prospectus.
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Q: What are the terms of your leases?
A: Our leases are "triple-net" leases, generally having terms of seven to ten
years, many of which have renewal options for an additional five to ten
years. "Triple-net" means that the tenant, not the Wells REIT, is
responsible for repairs, maintenance, property taxes, utilities and
insurance. We often enter into leases where we have responsibility for
replacement of specific structural components of a property such as the
roof of the building or the parking lot.
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Q: If I buy shares, will I receive dividends and how often?
A: We have been making and intend to continue to make dividend distributions
on a quarterly basis to our shareholders. The amount of each dividend
distribution is determined by the board of directors and typically depends
on the amount of distributable funds, current and projected cash
requirements, tax considerations and other factors. However, in order to
remain qualified as a REIT, we must make distributions of at least 95% of
our REIT taxable income each year.
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Q: How do you calculate the payment of dividends to shareholders?
A: We calculate our quarterly dividends using daily record and declaration
dates so your dividend benefits will begin to accrue immediately upon
becoming a shareholder.
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Q: What have your dividend payments been since you began operations on June 5,
1998?
A: We have paid the following dividends since we began operations:
<TABLE>
<CAPTION>
Annualized
Percentage Return
on an Investment
Quarter Amount of $10 per Share
------- ------ -----------------
<S> <C> <C>
3/rd/ Qtr. 1998 $.15 per share 6.0%
4/th/ Qtr. 1998 $.16 per share 6.5%
1/st/ Qtr. 1999 $.17 per share 7.0%
2/nd/ Qtr. 1999 $.17 per share 7.0%
3/rd/ Qtr. 1999 $.17 per share 7.0%
</TABLE>
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Q: May I reinvest the dividends I am supposed to receive in shares of the
Wells REIT?
A: Yes. You may participate in our dividend reinvestment plan by checking the
appropriate box on the Subscription Agreement or by filling out an
enrollment form we will provide at your request. The purchase price for
shares purchased under the dividend reinvestment plan is currently $10 per
share.
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Q: Will the dividends I receive be taxable?
A: Yes. Generally, dividends that you receive, including dividends that are
reinvested pursuant to our dividend reinvestment plan, will be taxed as
ordinary income to the extent they are from current or accumulated earnings
and profits. We expect that some portion of your dividends will not be
subject to tax in the year received due to the fact that depreciation
expenses reduce taxable income but do not reduce cash available for
distribution. Amounts not subject to tax immediately will reduce the tax
basis of your investment. This, in effect, defers a portion of your tax
until your investment is sold or the Wells REIT is liquidated, at which
time you will be taxed at capital gains rates. However, because each
investor's tax considerations are different, we suggest that you consult
with your tax advisor. You should also review the section of the
prospectus entitled "Federal Income Tax Considerations."
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Q: What will you do with the money raised in this offering?
A: We will use your investment proceeds to purchase commercial real estate
such as high grade office buildings. We intend to invest a minimum of 84%
of the proceeds from this offering to acquire real estate properties, and
approximately 16% of the proceeds will be used to pay fees and expenses of
this offering and acquisition-related expenses. The payment of these fees
and expenses will not reduce your invested capital. Your initial invested
capital amount will remain $10 per share, and your dividend yield will be
based on your $10 per share investment.
Until we invest the proceeds of this offering in real estate, we will
invest in short-term, highly liquid investments. These short-term
investments will not earn as high of a return as we expect to earn on our
real estate investments, and we cannot guarantee how long it will take to
fully invest the proceeds in real estate.
We commenced our initial public offering of common stock in an offering
very similar to this one on January 30, 1998. Our initial public offering
was terminated on December 20, 1999. As of December 15, 1999, we had
received approximately $131,500,000 in gross offering proceeds from our
initial public offering, of which at least $110,460,000 was or is expected
to be invested in properties.
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Q: What kind of offering is this?
A: We are offering the public up to 20,000,000 shares of common stock on a
best efforts basis.
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Q: How does a best efforts offering work?
A: When shares are offered to the public on a best efforts basis, the brokers
participating in the offering are only required to use their best efforts
to sell the shares and have no firm commitment or obligation to purchase
any of the shares.
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Q: How long will this offering last?
A: The offering will not last beyond December 19, 2001.
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Q: Who can buy shares?
A: Anyone who receives this prospectus can buy shares provided that they have
either (1) a net worth of at least $45,000 and an annual gross income of at
least $45,000, or (2) a net worth of at least $150,000. For this purpose,
net worth does not include your home, home furnishings and personal
automobiles. These minimum levels may be higher in certain states, so you
should carefully read the more detailed description in the "Suitability
Standards" section of this prospectus.
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Q: Is there any minimum investment required?
A: Yes. Generally, you must invest at least $1,000. Except in Maine,
Minnesota and Washington, investors who already own our shares or who have
purchased units from an affiliated Wells public real estate program can
make purchases for less than the minimum investment. These minimum
investment levels may be higher in certain states, so you should carefully
read the more detailed description of the minimum investment requirements
appearing later in the "Suitability Standards" section of this prospectus.
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Q: How do I subscribe for shares?
A: If you choose to purchase shares in this offering, you will need to fill
out a Subscription Agreement, like the one contained in this prospectus as
Exhibit A, for a specific number of shares and pay for the shares at the
time you subscribe. The purchase price will be placed into an escrow
account with Bank of America, N.A., which will hold your funds, along with
those of other subscribers, until we withdraw funds for the acquisition of
real estate properties or the payment of fees and expenses.
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Q: If I buy shares in this offering, how may I later sell them?
A: At the time you purchase the shares, they will not be listed for trading on
any national securities exchange or over-the-counter market. In fact, we
expect that there will not be any public market for the shares when you
purchase them, and we cannot be sure if one will ever develop. As a
result, you may find it difficult to find a buyer for your shares and
realize a return on your investment. You may sell your shares to any buyer
unless such sale would cause the buyer to own more than 9.8% of the
outstanding stock. See "Description of Shares Restriction on Ownership of
Shares."
If we have not listed the shares on a national securities exchange or over-
the-counter market by January 30, 2008, our articles of incorporation
require us to sell our properties and other assets and return the proceeds
from these sales to our shareholders through distributions.
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Q: What is the experience of your officers and directors?
A: Our management team has extensive previous experience investing in and
managing commercial real estate. Our directors are listed below.
. Leo F. Wells, III - President of the Wells REIT and founder of Wells
Real Estate Funds in 1985 and has been involved in real estate sales,
management and brokerage services for over 27 years;
. John L. Bell - Former owner and Chairman of Bell-Mann, Inc., the
largest flooring contractor in the Southeast;
. Richard W. Carpenter - President and a director of Realmark Holdings
Corp., a residential and commercial real estate developer;
. Bud Carter - Former broadcast news director and anchorman and current
Senior Vice President for the Executive Committee, an organization
established to aid corporate presidents and CEOs;
. William H. Keogler, Jr. - Founder and former executive officer and
director of Keogler, Morgan & Company, Inc., a full service brokerage
firm;
. Donald S. Moss - Former executive officer of Avon Products, Inc.;
. Walter W. Sessoms - Former executive officer of BellSouth
Telecommunications, Inc.; and
. Neil H. Strickland - Founder of Strickland General Agency, Inc., a
property and casualty general insurance agency concentrating on
commercial customers.
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Q: What steps do you take to make sure you purchase environmentally compliant
property?
A: We always obtain a Phase I environmental assessment of each property
purchased. In addition, we generally obtain a representation from the
seller that, to its knowledge, the property is not contaminated with
hazardous materials.
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Q: Why do you acquire properties in joint ventures?
A: We acquire some of our properties in joint ventures in order to diversify
our portfolio of properties in terms of geographic region, property type
and industry group of our tenants.
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Q: How does our REIT own its real estate properties?
A: We own all of our real estate properties through an "UPREIT" called Wells
Operating Partnership, L.P. (Wells OP). Wells OP was organized to own,
operate and manage real properties on our behalf. We are the sole general
partner of Wells OP.
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Q: What is an "UPREIT"?
A: UPREIT stands for "Umbrella Partnership Real Estate Investment Trust." We
use this structure because a sale of property directly to the REIT would
generally be fully taxable to the property owner. In an UPREIT structure,
the seller of a property who desires to defer taxable gain on the sale of
his property may transfer the property to the UPREIT in exchange for
limited partnership units in the UPREIT and defer taxation of gain until
the seller later exchanges his UPREIT units on a one-for-one basis for REIT
shares. If the REIT shares are publicly traded, the former property owner
will achieve liquidity for his investment. Using an UPREIT structure gives
us an advantage in acquiring desired properties from persons who would not
otherwise be able to sell such properties because of unfavorable tax
results.
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Q: Will I be notified of how my investment is doing?
A: You will receive periodic updates on the performance of your investment
with us, including:
. Four detailed quarterly dividend reports;
. Three quarterly financial reports;
. An annual report; and
. An annual IRS Form 1099.
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Q: When will I get my detailed tax information?
A: Your Form 1099 tax information will be mailed to you by January 31 of each
year.
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Q: Are you prepared for the year 2000 problem?
A: Yes, we have concluded our assessment of year 2000 compliance issues on our
information systems and business operations. We have made renovations and
replacements to our equipment and software packages as warranted. We have
also confirmed the year 2000 readiness of our third-party service
providers. Although we do not anticipate any material risk relating to the
year 2000 problem, we have developed contingency plans to address potential
risks. See the "Management's Discussion and Analysis of Financial
Condition and Results of Operations--
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Year 2000 Compliance" section of this prospectus for a detailed description
of our year 2000 readiness.
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Q: Who can help answer my questions?
A: If you have more questions about the offering or if you would like
additional copies of this prospectus, you should contact your registered
representative or contact:
Investor Services Department
Wells Capital, Inc.
Suite 250
6200 The Corners Parkway
Norcross, Georgia 30092
(800) 448-1010 or (770) 449-7800
www.wellsref.com
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Prospectus Summary
This summary highlights selected information contained elsewhere in this
prospectus. It is not complete and does not contain all of the information that
is important to your decision whether to invest in the Wells REIT. To understand
this offering fully, you should read the entire prospectus carefully, including
the "Risk Factors" section and the financial statements.
Wells Real Estate Investment Trust, Inc.
Wells Real Estate Investment Trust, Inc. is a REIT that owns net leased
commercial real estate properties. We currently own interests in 16 commercial
real estate properties located in 11 states. Our office is located at 6200 The
Corners Parkway, Suite 250, Norcross, Georgia 30092. Our telephone number
outside the State of Georgia is 800-448-1010 (770-449-7800 in Georgia). We refer
to Wells Real Estate Investment Trust, Inc. as the Wells REIT in this
prospectus.
Our Advisor
Our advisor is Wells Capital, Inc., which is responsible for managing our
affairs on a day-to-day basis and for identifying and making acquisitions on our
behalf. We refer to Wells Capital, Inc. as Wells Capital in this prospectus.
Our Management
The board of directors must approve each real property acquisition proposed
by Wells Capital, as well as certain other matters set forth in our articles of
incorporation. We have eight members on our board of directors. Seven of the
directors are independent of Wells Capital and have responsibility for reviewing
its performance. The directors are elected annually by the shareholders.
Our REIT Status
As a REIT, we generally are not subject to federal income tax on income
that we distribute to our shareholders. Under the Internal Revenue Code, REITs
are subject to numerous organizational and operational requirements, including a
requirement that they distribute at least 95% of their taxable income, as
calculated on an annual basis. If we fail to qualify for taxation as a REIT in
any year, our income will be taxed at regular corporate rates, and we may be
precluded from qualifying for treatment as a REIT for the four year period
following our failure to qualify. Even if we qualify as a REIT for federal
income tax purposes, we may still be subject to state and local taxes on our
income and property and to federal income and excise taxes on our undistributed
income.
Summary Risk Factors
Following are the most significant risks relating to your investment:
. There is no public trading market for the shares, and we cannot assure you
that one will ever develop. Until the shares are publicly traded, you will
have a difficult time trying to sell your shares.
. You must rely on Wells Capital, our advisor, for the day-to-day management
of our business and the selection of our real estate properties.
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. To ensure that we continue to qualify as a REIT, our articles of
incorporation prohibit any shareholder from owning more than 9.8% of our
outstanding shares.
. We may not remain qualified as a REIT for federal income tax purposes,
which would subject us to the payment of tax on our income at corporate
rates and reduce the amount of funds available for payment of dividends to
our shareholders.
. The number of additional properties that we acquire from the proceeds of
this offering will be reduced to the extent that we sell less than all of
the 20,000,000 shares offered to the public.
. You will not have preemptive rights as a shareholder so any shares we issue
in the future may dilute your interest in the Wells REIT.
. We will pay significant fees to Wells Capital and its affiliates.
. Real estate investments are subject to cyclical trends which are out of our
control.
. You will not have an opportunity to evaluate all of the properties that
will be in our portfolio prior to investing.
. Loans we obtain will generally be secured by our properties, which will put
us at risk of losing a property if we are unable to pay our debts.
. Our investment in vacant land to be developed may create risks relating to
the builder's ability to control construction costs, failure to perform or
failure to build in conformity with plan specifications and timetables.
. The vote of shareholders owning at least a majority of the shares will bind
all of the shareholders as to matters such as the election of directors and
amendment of our articles of incorporation.
. If we do not obtain listing of the shares on a national exchange by January
30, 2008, our articles of incorporation provide that we must sell all of
our properties and distribute the net proceeds to our shareholders.
. Our advisor will face various conflicts of interest resulting from its
activities with affiliated entities.
Before you invest in the Wells REIT, you should see the complete discussion
of the "Risk Factors" beginning on page 16 of this prospectus.
Description of Properties
Please refer to the "Description of Properties" section of this prospectus
for a description of the real estate properties we have purchased to date. Wells
Capital is currently evaluating additional potential property acquisitions. When
we believe that there is a reasonable probability that we will purchase a
particular property, we will provide a supplement to this prospectus to describe
the property. You should not assume that we will actually acquire any property
described in a supplement because one or more contingencies to the purchase may
prevent the acquisition.
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Estimated Use of Proceeds of Offering
We anticipate that we will invest approximately 84% of the proceeds of this
offering in real estate properties. We will use the remainder of offering
proceeds to pay selling commissions, fees and expenses relating to the selection
and acquisition of properties and the costs of the offering.
Investment Objectives
Our investment objectives are:
. to maximize cash dividends paid to you;
. to preserve, protect and return your capital contribution;
. to realize growth in the value of our properties upon our ultimate
sale of such properties; and
. to provide you with liquidity of your investment by listing the shares
on a national exchange or, if we do not obtain listing of the shares
by January 30, 2008, by selling our properties and distributing the
cash to you.
We may only change these investment objectives upon a majority vote of the
shareholders. See the "Investment Objectives and Criteria" section of this
prospectus for a more complete description of our business and objectives.
Conflicts of Interest
The advisor will experience conflicts of interest in connection with the
management of our business affairs, including the following:
. the advisor will have to allocate its time between the Wells REIT and
other real estate programs and activities it is involved in;
. the advisor must determine which Wells program or other entity should
enter into a joint venture with the Wells REIT for the acquisition and
operation of specific properties;
. the advisor may compete with other Wells programs for the same tenants
in negotiating leases or in selling similar properties at the same
time; and
. we will pay fees to the advisor and its affiliates in connection with
transactions involving the purchase, management and sale of our
properties regardless of the quality of the property acquired or the
services provided to us.
See the "Conflicts of Interest" section of this prospectus on page 48 for a
detailed discussion of the various conflicts of interest relating to your
investment, as well as the procedures that we have established to resolve a
number of these potential conflicts.
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The following chart shows the ownership structure of the various Wells
entities that are affiliated with the advisor.
<TABLE>
<CAPTION>
-----------------------
LEO F. WELLS, III
President
-----------------------
<S> <C> <C>
100%
- -------------------------------------------------------------------------------------------------------------------
Wells Real Estate Funds, Inc.
- -------------------------------------------------------------------------------------------------------------------
100% 100% 100%
- ------------------------- ----------------------------------------------- --------------------------
Wells
Management Wells Wells Capital,
Company, Investment Inc.
Inc. Securities, Inc. (Advisor)
(Property (Dealer Manager)
Manager)
- ------------------------- ----------------------------------------------- --------------------------
100% Advisory
Agreement
- ------------------------- --------------------------
Wells
Development Wells REIT
Corporation
- ------------------------- --------------------------
</TABLE>
Prior Offering Summary
The advisor and its affiliates have previously sponsored 13 publicly
offered real estate limited partnerships and the Wells REIT on an unspecified
property or "blind pool" basis. As of October 1, 1999, they have raised
approximately $400,784,000 from approximately 30,000 investors in these 14 real
estate programs. The "Prior Performance Summary" on page 100 of this prospectus
contains a discussion of the Wells programs sponsored to date. Certain
statistical data relating to the Wells programs with investment objectives
similar to ours is also provided in the "Prior Performance Tables" included at
the end of this prospectus.
The Offering
We are offering up to 20,000,000 shares to the public at $10 per share. We
are also offering up to 2,200,000 shares pursuant to our dividend reinvestment
plan at $10 per share, and up to 800,000 shares to broker-dealers pursuant to
warrants whereby participating broker-dealers will have the right to purchase
one share for every 25 shares they sell in this offering. The exercise price for
shares purchased pursuant to the warrants is $12 per share.
================================================================================
12
<PAGE>
================================================================================
Terms of the Offering
We will begin selling shares in this offering upon the effective date of
this prospectus and the offering will terminate on or before December 19, 2001.
However, we may terminate this offering at any time prior to such termination
date. We will hold your proceeds in escrow until we withdraw funds for the
acquisition of real estate properties or the payment of fees and expenses. We
generally admit shareholders to the Wells REIT on a daily basis.
Compensation to the Advisor and its Affiliates
The advisor and its affiliates will receive compensation and fees for
services relating to this offering and the investment and management of our
assets. The most significant items of compensation are included in the following
table:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
$$ Amount for
Type of Compensation Form of Compensation Maximum Offering
(22,200,000 shares)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Offering Stage
- ------------------------------------------------------------------------------------------------------
Sales Commission 7% of gross offering proceeds $15,540,000
- ------------------------------------------------------------------------------------------------------
Dealer Manager Fee 2.5% of gross offering proceeds $ 5,550,000
- ------------------------------------------------------------------------------------------------------
Offering Expenses 3% of gross offering proceeds $ 6,660,000
- ------------------------------------------------------------------------------------------------------
Acquisition and Development Stage
- ------------------------------------------------------------------------------------------------------
Acquisition and 3% of gross offering proceeds $ 6,660,000
Advisory Fees
- ------------------------------------------------------------------------------------------------------
Acquisition Expenses .5% of gross offering proceeds $ 1,110,000
- ------------------------------------------------------------------------------------------------------
Operational Stage
- ------------------------------------------------------------------------------------------------------
Property Management Fees 2.5% of gross revenues N/A
- ------------------------------------------------------------------------------------------------------
Leasing Fees 2% of gross revenues N/A
- ------------------------------------------------------------------------------------------------------
Initial Lease-Up Fee for Competitive fee for geographic N/A
Newly Constructed Property location of property based on a
survey of brokers and agents
(customarily equal to the first
month's rent)
- ------------------------------------------------------------------------------------------------------
Real Estate Commission 3% of sale price after investors N/A
receive a return of capital plus a 6%
return on capital
- ------------------------------------------------------------------------------------------------------
Subordinated Participation in 10% of remaining amounts of net sale N/A
Net Sale Proceeds (Payable proceeds after return of capital plus
only if the Wells REIT is not payment to investors of an 8%
listed on an exchange) cumulative non-compounded return on
the capital contributed by investors
- ------------------------------------------------------------------------------------------------------
Subordinated Incentive Listing 10% of the amount by which the N/A
Fee (Payable only if the Wells adjusted market value of the Wells
REIT is listed on an exchange) REIT exceeds the aggregate capital
contributions contributed by investors
- ------------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
13
<PAGE>
===============================================================================
There are many additional conditions and restrictions on the amount of
compensation Wells Capital may receive. There are also some smaller items of
compensation and expense reimbursements that Wells Capital may receive. For a
more detailed explanation of these fees and expenses payable to Wells Capital
and its affiliates, please see the "Management Compensation" section of this
prospectus on page 44.
Dividend Policy
We are required to distribute 95% of our annual taxable income to our
shareholders in order to remain qualified as a REIT. We have paid dividends to
our shareholders at least quarterly since the first quarter after we commenced
operations on June 5, 1998. We calculate our quarterly dividends based upon
daily record and dividend declaration dates so investors will be entitled to
dividends immediately upon purchasing shares. We expect to pay dividends to you
on a quarterly basis.
Listing
We anticipate listing our shares on a national securities exchange on or
before January 30, 2008. In the event we do not obtain listing prior to that
date, our articles of incorporation require us to begin the sale of our
properties and liquidate our assets.
Dividend Reinvestment Plan
You may participate in our dividend reinvestment plan pursuant to which you
may have the dividends you receive reinvested in the Wells REIT. If you
participate, you will be taxed on your share of our taxable income even though
you will not receive any cash dividends. As a result, you may have a tax
liability with no cash dividends to pay such liability. We may terminate the
dividend reinvestment plan in our discretion at any time upon 10 days notice to
you. (See "Description of Shares -- Dividend Reinvestment Plan.")
Share Redemption Program
We may use proceeds received from the sale of shares pursuant to our
dividend reinvestment plan to redeem your shares. After you have held your
shares for a minimum of one year, our share redemption program provides an
opportunity to you to redeem your shares, subject to certain restrictions and
limitations, for $10 per share. The board of directors reserves the right to
reject any request for redemption of shares or to amend or terminate the share
redemption program at any time. You will have no right to request redemption of
your shares after the shares are listed on a national exchange. (See
"Description of Shares - Share Redemption Program.")
===============================================================================
14
<PAGE>
================================================================================
Wells Operating Partnership, L.P.
We own all of our real estate properties through Wells Operating
Partnership, L.P., our operating partnership. We are the sole general partner of
the operating partnership. Wells Capital is currently the only limited partner
based on its initial contribution of $200,000. Our ownership of properties in
the operating partnership is referred to as an "UPREIT." The UPREIT structure
allows us to acquire real estate properties in exchange for limited partnership
units in the operating partnership. This structure will also allow sellers of
properties to transfer their properties to the UPREIT in exchange for units of
the UPREIT and defer gain recognition for tax purposes with respect to such
transfers of properties. At present, we have no plans to acquire any specific
properties in exchange for operating partnership units. The holders of units in
the operating partnership may have their units redeemed for cash under certain
circumstances. (See "The Operating Partnership Agreement.")
ERISA Considerations
The section of this prospectus entitled "ERISA Considerations" describes
the effect the purchase of shares will have on individual retirement accounts
(IRAs) and retirement plans subject to the Employee Retirement Income Security
Act of 1974, as amended (ERISA), and/or the Internal Revenue Code. ERISA is a
federal law that regulates the operation of certain tax-advantaged retirement
plans. Any retirement plan trustee or individual considering purchasing shares
for a retirement plan or an IRA should read this section of the prospectus very
carefully.
Description of Shares
General
- -------
Your investment will be recorded on our books only. We will not issue stock
certificates. If you wish to transfer your shares, you will be required to send
an executed transfer form to us. We will provide the required form to you upon
request.
Shareholder Voting Rights and Limitations
- -----------------------------------------
We will hold an annual meeting of shareholders for the election of
directors. Other business matters may be presented at the annual meeting or at a
special meeting of shareholders. You are entitled to one vote for each share you
own.
Limitation on Share Ownership
- -----------------------------
Our articles of incorporation contain a restriction on ownership of the
shares that prevents one person from owning more than 9.8% of the outstanding
shares. (See "Description of Shares -- Restriction on Ownership of Shares.")
These restrictions are designed to enable us to comply with share accumulation
restrictions imposed on REITs by the Internal Revenue Code.
For a more complete description of the shares, including limitations on the
ownership of shares, please see the "Description of Shares" section of this
prospectus on page 131.
================================================================================
15
<PAGE>
Risk Factors
Your purchase of shares involves a number of risks. In addition to other
risks discussed in this prospectus, you should specifically consider the
following:
Investment Risks
Marketability Risk
There is no public trading market for your units.
There is no current public market for the shares and, therefore, it will be
difficult for you to sell your shares promptly. In addition, the price received
for any shares sold is likely to be less than the proportionate value of the
real estate we own. Therefore, the shares should be purchased as a long-term
investment only. See "Description of Shares - Share Redemption Program" for a
description of our share redemption program.
Management Risks
You must rely on the advisor for selection of properties.
Our ability to achieve our investment objectives and to pay dividends is
dependent upon the performance of Wells Capital in the acquisition of
investments, the selection of tenants and the determination of any financing
arrangements. Except for the investments described in this prospectus, you will
have no opportunity to evaluate the terms of transactions or other economic or
financial data concerning our investments. You must rely entirely on the
management ability of Wells Capital and the oversight of the board of directors.
We depend on key personnel.
Our success depends to a significant degree upon the continued
contributions of certain key personnel, including Leo F. Wells, III and Michael
C. Berndt, each of whom would be difficult to replace. If any of our key
employees were to cease employment, our operating results could suffer. We also
believe that our future success depends, in large part, upon our ability to hire
and retain highly skilled managerial, operational and marketing personnel.
Competition for such personnel is intense, and we cannot assure you that we will
be successful in attracting and retaining such skilled personnel.
Conflicts of Interest Risks
The advisor will face conflicts of interest relating to time management.
The advisor and its affiliates are general partners and sponsors of other
real estate programs having investment objectives and legal and financial
obligations similar to the Wells REIT. Because the advisor and its affiliates
have interests in other real estate programs and also engage in other business
activities, they may have conflicts of interest in allocating their time between
our business and these other activities. During times of intense activity in
other programs and ventures, they may devote less time and resources to our
business than is necessary or appropriate. (See "Conflicts of Interest.")
16
<PAGE>
The advisor will face conflicts of interest relating to the purchase and
leasing of properties.
We may be buying properties at the same time as one or more of the other
Wells programs are buying properties. There is a risk that the advisor will
choose a property that provides lower returns to us than a property purchased by
another Wells program. We may acquire properties in geographic areas where
other Wells programs own properties. If one of the Wells programs attracts a
tenant that we are competing for, we could suffer a loss of revenue due to
delays in locating another suitable tenant. (See "Conflicts of Interest.")
The advisor will face conflicts of interest relating to joint ventures with
affiliates.
We are likely to enter into one or more joint ventures with other Wells
programs for the acquisition, development or improvement of properties,
including Wells Fund XI or Wells Fund XII. We may also purchase and develop
properties in joint ventures or in partnerships, co-tenancies or other co-
ownership arrangements with the sellers of the properties, affiliates of the
sellers, developers or other persons. Such investments may involve risks not
otherwise present, including, for example:
. the possibility that our co-venturer, co-tenant or partner in an
investment might become bankrupt;
. that such co-venturer, co-tenant or partner may at any time have
economic or business interests or goals which are or which become
inconsistent with our business interests or goals; or
. that such co-venturer, co-tenant or partner may be in a position to
take action contrary to our instructions or requests or contrary to
our policies or objectives.
Actions by such a co-venturer, co-tenant or partner might have the result of
subjecting the property to liabilities in excess of those contemplated and may
have the effect of reducing your returns.
Affiliates of the advisor are currently sponsoring a public offering on
behalf of Wells Fund XII, an unspecified property real estate program. (See
"Prior Performance Summary.") In the event that we enter into a joint venture
with Wells Fund XII or any other Wells program or joint venture, we may face
certain additional risks and potential conflicts of interest. For example,
Wells Fund XII and the other Wells public limited partnerships will never have
an active trading market. Therefore, if we become listed on a national
exchange, we may no longer have similar goals and objectives with respect to the
resale of properties in the future. In addition, in the event that the Wells
REIT is not listed on a securities exchange by January 30, 2008, our
organizational documents provide for an orderly liquidation of our assets. In
the event of such liquidation, any joint venture between the Wells REIT and
another Wells program may be required to sell its properties at such time. The
Wells program we have co-ventured with may not desire to sell the properties at
that time. Although the terms of any joint venture agreement between the Wells
REIT and another Wells program would grant the other Wells program a right of
first refusal to buy such properties, it is unlikely that they would have
sufficient funds to exercise the right of first refusal under these
circumstances.
Under certain joint venture arrangements, neither co-venturer may have the
power to control the venture, and an impasse could be reached regarding matters
pertaining to the joint venture, which might have a negative influence on the
joint venture and decrease potential returns to you. In the event that a co-
venturer has a right of first refusal to buy out the other co-venturer, it may
be unable to finance such buy-out at that time. It may also be difficult for us
to sell our interest in any such joint venture or partnership or as a co-tenant
in property. In addition, to the extent that our co-venturer, partner or co-
17
<PAGE>
tenant is an affiliate of the advisor, certain conflicts of interest will exist.
(See "Conflicts of Interest -- Joint Ventures with Affiliates of the Advisor.")
General Investment Risks
Maryland Corporation Law may prevent a business combination involving the
Wells REIT.
Provisions of Maryland Corporation Law applicable to us prohibit business
combinations with:
. any person who beneficially owns 10% or more of the voting power of
outstanding shares;
. any of our affiliates who, at any time within the two year period
prior to the date in question, was the beneficial owner of 10% or more
of the voting power of our outstanding shares (interested
shareholder); or
. an affiliate of an interested shareholder.
These prohibitions last for five years after the most recent date on which
the interested shareholder became an interested shareholder. Thereafter, any
business combination must be recommended by our board of directors and approved
by the affirmative vote of at least 80% of the votes entitled to be cast by
holders of our outstanding shares and two-thirds of the votes entitled to be
cast by holders of our shares other than shares held by the interested
shareholder. These requirements could have the effect of inhibiting a change in
control even if a change in control were in your best interest. These provisions
of Maryland law do not apply, however, to business combinations that are
approved or exempted by our board of directors prior to the time that someone
becomes an interested shareholder.
A limit on the number of shares a person may own may discourage a takeover.
Our articles of incorporation restrict ownership by one person to no more
than 9.8% of the outstanding shares. This restriction may discourage a change of
control of the Wells REIT and may deter individuals or entities from making
tender offers for shares, which offers might be financially attractive to
shareholders or which may cause a change in the management of the Wells REIT.
(See "Description of Shares -- Restriction on Ownership of Shares.")
You are bound by the majority vote on matters on which you are entitled to
vote.
You may vote on certain matters at any annual or special meeting of
shareholders, including the election of directors. However, you will be bound
by the majority vote on matters requiring approval of a majority of the
shareholders even if you do not vote with the majority on any such matter.
You are limited in your ability to sell your shares pursuant to the share
redemption program.
Even though our share redemption program provides you with the opportunity
to redeem your shares for $10 per share after you have held them for a period of
one year, you should be fully aware that our share redemption program contains
certain restrictions and limitations. Shares will be redeemed on a first-come,
first-served basis and will be limited to the lesser of (1) during any calendar
year, one-half of one percent (0.5%) of the weighted average number of shares
outstanding during the prior calendar year, or (2) the proceeds we receive from
the sale of shares under our dividend reinvestment plan such that in no event
shall the aggregate amount of redemptions under our share redemption program
exceed aggregate proceeds received from the sale of shares pursuant to our
dividend reinvestment plan. In
18
<PAGE>
addition, the board of directors reserves the right to reject any request for
redemption or to amend or terminate the share redemption program at any time.
Therefore, in making a decision to purchase shares of the Wells REIT, you should
not assume that you will be able to sell any of your shares back to us pursuant
to our share redemption program. (See "Description of Shares - Share Redemption
Program.")
We established the offering price on an arbitrary basis.
The board of directors has arbitrarily determined the selling price of the
shares and such price bears no relationship to any established criteria for
valuing issued or outstanding shares.
Your interest in the Wells REIT may be diluted if we issue additional
shares.
Existing shareholders and potential investors in this offering do not have
preemptive rights to any shares issued by the Wells REIT in the future.
Therefore, in the event that we (1) sell shares in this offering or sell
additional shares in the future, including those issued pursuant to the dividend
reinvestment plan, (2) sell securities that are convertible into shares, (3)
issue shares in a private offering of securities to institutional investors, (4)
issue shares of common stock upon the exercise of the options granted to
independent directors or the warrants issued and to be issued to participating
broker-dealers, or (5) issue shares to sellers of properties acquired by us in
connection with an exchange of limited partnership units from the operating
partnership, existing shareholders and investors purchasing shares in this
offering may experience dilution of their equity investment in the Wells REIT.
Payment of fees to the advisor and its affiliates will reduce cash
available for investment and distribution.
The advisor and its affiliates will perform services for us in connection
with the offer and sale of the shares, the selection and acquisition of our
properties, and the management and leasing of our properties. They will be paid
substantial fees for these services, which will reduce the amount of cash
available for investment in properties or distribution to shareholders. (See
"Management Compensation.")
The availability and timing of cash dividends is uncertain.
We bear all expenses incurred in our operations, which are deducted from
cash funds generated by operations prior to computing the amount of cash
dividends to be distributed to the shareholders. In addition, the board of
directors, in its discretion, may retain any portion of such funds for working
capital. We cannot assure you that sufficient cash will be available to pay
dividends to you.
We are uncertain of our sources for funding of future capital needs.
Substantially all of the gross proceeds of the offering will be used for
investment in properties and for payment of various fees and expenses. (See
"Estimated Use of Proceeds.") In addition, we do not anticipate that we will
maintain any permanent working capital reserves. Accordingly, in the event that
we develop a need for additional capital in the future for the improvement of
our properties or for any other reason, we have not identified any sources for
such funding, and we cannot assure you that such sources of funding will be
available to us for potential capital needs in the future.
Your investment may suffer adverse consequences if we are not prepared for
the year 2000 issue.
19
<PAGE>
Many existing computer programs were designed to use only two numeric
digits to identify a year without considering the impact of the year 2000. If
not corrected, many computer applications could fail or create erroneous data.
We are currently addressing the year 2000 issue with respect to our operations.
Our failure or the failure of our tenants to properly or timely resolve the year
2000 issue could have a material adverse effect on our business and the return
on your investment. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000 Issues.")
Real Estate Risks
General Real Estate Risks
Your investment will be affected by adverse economic and regulatory
changes.
We will be subject to risks generally incident to the ownership of real
estate, including:
. changes in general economic or local conditions;
. changes in supply of or demand for similar or competing properties in
an area;
. changes in interest rates and availability of permanent mortgage funds
which may render the sale of a property difficult or unattractive;
. changes in tax, real estate, environmental and zoning laws; and
. periods of high interest rates and tight money supply.
For these and other reasons, we cannot assure you that we will be profitable or
that we will realize growth in the value of our properties.
A property that incurs a vacancy could be difficult to sell or re-lease.
A property may incur a vacancy either by the continued default of a tenant
under its lease or the expiration of one of our leases. Many of our properties
are specifically suited to the particular needs of our tenants. Therefore, we
may have difficulty obtaining a new tenant for any vacant space we have in our
properties. If the vacancy continues for a long period of time, we may suffer
reduced revenues resulting in less cash dividends to be distributed to
shareholders. In addition, the resale value of the property could be diminished
because the market value of a particular property will depend principally upon
the value of the leases of such property.
We are dependent on tenants for our revenue.
Most of our properties are occupied by a single tenant and, therefore, the
success of our investments are materially dependant on the financial stability
of our tenants. Lease payment defaults by tenants could cause us to reduce the
amount of distributions to shareholders. A default of a tenant on its lease
payments to us would cause us to lose the revenue from the property and cause us
to have to find an alternative source of revenue to meet the mortgage payment
and prevent a foreclosure if the property is subject to a mortgage. In the event
of a default, we may experience delays in enforcing our rights as landlord and
may incur substantial costs in protecting our investment and reletting our
property. If a lease is terminated, there is no assurance that we will be able
to lease the property for the rent previously received or sell the property
without incurring a loss.
20
<PAGE>
We may not have funding for future tenant improvements.
When a tenant at one of our properties does not renew its lease or
otherwise vacates its space in one of our buildings, it is likely that, in order
to attract one or more new tenants, we will be required to expend substantial
funds for tenant improvements and tenant refurbishments to the vacated space.
Substantially all of our net offering proceeds will be invested in real estate
properties, and we do not anticipate that we will maintain permanent working
capital reserves. We also have no identified funding source to provide funds
which may be required in the future for tenant improvements and tenant
refurbishments in order to attract new tenants. We cannot assure you that we
will have any sources of funding available to us for such purposes in the
future.
Uninsured losses relating to real property may adversely affect your
returns.
The advisor will attempt to ensure that all of our properties are insured
to cover casualty losses. However, in the event that any of our properties
incurs a casualty loss which is not fully covered by insurance, the value of our
assets will be reduced by any such uninsured loss. In addition, we have no
source of funding to repair or reconstruct the damaged property, and we cannot
assure you that any such sources of funding will be available to us for such
purposes in the future.
Development and construction of properties may result in delays and
increased costs and risks.
We may invest some or all of the proceeds available for investment in the
acquisition and development of properties upon which we will develop and
construct improvements at a fixed contract price. We will be subject to risks
relating to the builder's ability to control construction costs or to build in
conformity with plans, specifications and timetables. The builder's failure to
perform may necessitate legal action by us to rescind the purchase or the
construction contract or to compel performance. Performance may also be
affected or delayed by conditions beyond the builder's control. Delays in
completion of construction could also give tenants the right to terminate
preconstruction leases for space at a newly developed project. We may incur
additional risks when we make periodic progress payments or other advances to
such builders prior to completion of construction. Factors such as those
discussed above can result in increased costs of a project or loss of our
investment. In addition, we will be subject to normal lease-up risks relating
to newly constructed projects. Furthermore, we must rely upon projections of
rental income and expenses and estimates of the fair market value of property
upon completion of construction when agreeing upon a price to be paid for the
property at the time of acquisition of the property. If our projections are
inaccurate, we may pay too much for a property.
21
<PAGE>
If we contract with Wells Development Corporation for newly developed
property, we cannot guarantee that our earnest money deposit made to Wells
Development Corporation will be fully refunded.
We may enter into one or more contracts, either directly or indirectly
through joint ventures with affiliates, to acquire real property from Wells
Development Corporation (Wells Development), an affiliate of the advisor.
Properties acquired from Wells Development may be either existing income-
producing properties or properties to be developed or under development. We
anticipate that we will be obligated to pay a substantial earnest money deposit
at the time of contracting to acquire such properties. In the case of
properties to be developed by Wells Development, we anticipate we will be
required to close the purchase of the property upon completion of the
development of the property by Wells Development and the tenant taking
possession of the property. At the time of contracting and the payment of the
earnest money deposit by us, Wells Development typically will not have acquired
title to any real property. Wells Development will only have a contract to
acquire land, a development agreement to develop a building on the land and an
agreement with a tenant to lease the property upon its completion. We may enter
into such a contract with Wells Development even if at the time of contracting
we have not yet raised sufficient proceeds in our offering to enable us to close
the purchase of such property. However, we will not be required to close a
purchase from Wells Development, and will be entitled to a refund of our earnest
money, in the following circumstances:
. Wells Development fails to develop the property;
. the tenant fails to take possession under its lease for any reason; or
. we are unable to raise sufficient proceeds from our offering to pay
the purchase price at closing.
The obligation of Wells Development to refund our earnest money is
unsecured, and it is unlikely that we would be able to obtain a refund of such
earnest money deposit from it under these circumstances since Wells Development
is an entity without substantial assets or operations. Although Wells
Development's obligation to refund the earnest money deposit to us under these
circumstances will be guaranteed by Wells Management Company, Inc., an
affiliated entity (Wells Management), Wells Management has no substantial assets
other than contracts for property management and leasing services pursuant to
which it receives substantial monthly fees. Therefore, we cannot assure you that
Wells Management would be able to refund all of our earnest money deposit in a
lump sum. If we were forced to collect our earnest money deposit by enforcing
the guaranty of Wells Management, we will likely be required to accept
installment payments over time payable out of the revenues of Wells Management's
property management and leasing operations. We cannot assure you that we would
be able to collect the entire amount of our earnest money deposit under such
circumstances. (See "Investment Objectives and Criteria -- Acquisition of
Properties from Wells Development Corporation.")
Competition for investments may increase costs and reduce returns.
We will experience competition for real property investments from
individuals, corporations and bank and insurance company investment accounts, as
well as other real estate investment trusts, real estate limited partnerships,
and other entities engaged in real estate investment activities. Competition
for investments may have the effect of increasing costs and reducing your
returns.
22
<PAGE>
Delays in acquisitions of properties may have adverse effects on your
investment.
Delays we encounter in the selection, acquisition and development of
properties could adversely affect your returns. Where properties are acquired
prior to the start of construction or during the early stages of construction,
it will typically take several months to complete construction and rent
available space. Therefore, you could suffer delays in the distribution of cash
dividends attributable to that particular property.
Uncertain market conditions and the broad discretion of the advisor
relating to the future disposition of properties could adversely affect the
return on your investment.
We generally will hold the various real properties in which we invest until
such time as the advisor determines that a sale or other disposition appears to
be advantageous to achieve our investment objectives or until it appears that
such objectives will not be met. Otherwise, the advisor, subject to approval of
the board, may exercise its discretion as to whether and when to sell a
property, and we will have no obligation to sell properties at any particular
time, except upon a liquidation of the Wells REIT if we do not list the shares
by January 30, 2008. We cannot predict with any certainty the various market
conditions affecting real estate investments which will exist at any particular
time in the future. Due to the uncertainty of market conditions which may
affect the future disposition of our properties, we cannot assure you that we
will be able to sell our properties at a profit in the future. Accordingly, the
extent to which you will receive cash distributions and realize potential
appreciation on our real estate investments will be dependent upon fluctuating
market conditions.
Discovery of previously undetected environmentally hazardous conditions may
adversely affect our operating results.
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the cost of removal or remediation of hazardous or toxic substances
on such property. Such laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. Environmental laws also may impose restrictions on the manner
in which property may be used or businesses may be operated, and these
restrictions may require expenditures. Environmental laws provide for sanctions
in the event of noncompliance and may be enforced by governmental agencies or,
in certain circumstances, by private parties. In connection with the
acquisition and ownership of our properties, we may be potentially liable for
such costs. The cost of defending against claims of liability, of compliance
with environmental regulatory requirements or of remediating any contaminated
property could materially adversely affect the business, assets or results of
operations of the Wells REIT and, consequently, amounts available for
distribution to you.
Financing Risks
If we fail to make our debt payments, we could lose our investment in a
property.
Loans obtained to fund property acquisitions will generally be secured by
mortgages on our properties. If we are unable to make our debt payments as
required, a lender could foreclose on the property or properties securing its
debt. This could cause us to lose part or all of our investment which in turn
could cause the value of the shares and the dividends payable to shareholders to
be reduced.
23
<PAGE>
Lenders may require us to enter into restrictive covenants relating to our
operations.
In connection with obtaining certain financing, a lender could impose
restrictions on us which affect our ability to incur additional debt and our
distribution and operating policies. Loan documents we enter into may contain
customary negative covenants which may limit our ability to further mortgage the
property, to discontinue insurance coverage, replace Wells Capital as our
advisor or impose other limitations.
If we enter into financing arrangements involving balloon payment
obligations, it may adversely affect our ability to pay dividends.
Some of our financing arrangements may require us to make a lump-sum or
"balloon" payment at maturity. We may finance more properties in this manner.
Our ability to make a balloon payment at maturity is uncertain and may depend
upon our ability to obtain additional financing or our ability to sell the
property. At the time the balloon payment is due, we may or may not be able to
refinance the balloon payment on terms as favorable as the original loan or sell
the property at a price sufficient to make the balloon payment. The effect of a
refinancing or sale could affect the rate of return to shareholders and the
projected time of disposition of our assets. In addition, payments of principal
and interest made to service our debts may leave us with insufficient cash to
pay the distributions that we are required to pay to maintain our qualification
as a REIT.
Federal Income Tax Risks
Failure to qualify as a REIT could adversely affect our operations and our
ability to make distributions.
If we fail to qualify as a REIT for any taxable year, we will be subject to
federal income tax on our taxable income at corporate rates. In addition, we
would generally be disqualified from treatment as a REIT for the four taxable
years following the year of losing our REIT status. Losing our REIT status would
reduce our net earnings available for investment or distribution to shareholders
because of the additional tax liability. In addition, distributions to
shareholders would no longer qualify for the distributions paid deduction and we
would no longer be required to make distributions. We might be required to
borrow funds or liquidate some investments in order to pay the applicable tax.
Qualification as a REIT is subject to the satisfaction of tax requirements
and various factual matters and circumstances which are not entirely within our
control. New legislation, regulations, administrative interpretations or court
decisions could change the tax laws with respect to qualification as a REIT or
the federal income tax consequences of being a REIT.
Legislative or regulatory action could adversely affect investors.
In recent years, numerous legislative, judicial and administrative changes
have been made in the provisions of the federal income tax laws applicable to
investments similar to an investment in shares. The Taxpayer Relief Act of 1997
and the Internal Revenue Service Restructuring and Reform Act enacted in 1998
contain numerous provisions affecting the real estate industry, generally, and
the taxation of REITs, specifically. Changes are likely to continue to occur in
the future, and we cannot assure you that any such changes will not adversely
affect the taxation of a shareholder. Any such changes could have an adverse
effect on an investment in shares or on the market value or the resale potential
of our properties. You are urged to consult with your own tax advisor with
respect to the impact of recent legislation on your investment in shares and the
status of legislative, regulatory or administrative developments and proposals
and their potential effect on an investment in shares.
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<PAGE>
Retirement Plan Risks
There are special considerations that apply to pension or profit sharing
trusts or IRAs investing in shares.
If you are investing the assets of a pension, profit sharing, 401(k), Keogh
or other qualified retirement plan or the assets of an IRA in the Wells REIT,
you should satisfy yourself that:
. your investment is consistent with your fiduciary obligations under
ERISA and the Internal Revenue Code;
. your investment is made in accordance with the documents and
instruments governing your plan or IRA, including your plan's
investment policy;
. your investment satisfies the prudence and diversification
requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA;
. your investment will not impair the liquidity of the plan;
. your investment will not produce "unrelated business taxable income"
for the plan or IRA;
. you will be able to value the assets of the plan annually in
accordance with ERISA requirements; and
. your investment will not constitute a prohibited transaction under
Section 406 of ERISA or Section 4975 of the Internal Revenue Code.
For a more complete discussion of the foregoing issues and other risks
associated with an investment in shares by retirement plans, please see the
"ERISA Considerations" section of this prospectus on page 127.
Suitability Standards
The shares we are offering are suitable only as a long-term investment for
persons of adequate financial means. Initially, there is not expected to be any
public market for the shares, which means that it may be difficult for you to
sell your shares. You should not buy these shares if you need to sell them
immediately or will need to sell them quickly in the future.
In consideration of these factors, we have established suitability
standards for initial shareholders and subsequent transferees. These suitability
standards require that a purchaser of shares have either:
. a net worth of at least $150,000; or
. a gross annual income of at least $45,000 and a net worth, excluding
the value of a purchaser's home, furnishings and automobiles of at
least $45,000.
The minimum purchase is 100 shares ($1,000), except in certain states as
described below. You may not transfer less shares than the minimum purchase
requirement. In addition, you may not transfer, fractionalize or subdivide your
shares so as to retain less than the number of shares required for the minimum
purchase. In order to satisfy the minimum purchase requirements for retirement
plans, unless
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<PAGE>
otherwise prohibited by state law, a husband and wife may jointly contribute
funds from their separate IRAs, provided that each such contribution is made in
increments of $100. You should note that an investment in the Wells REIT will
not, in itself, create a retirement plan and that, in order to create a
retirement plan, you must comply with all applicable provisions of the Internal
Revenue Code.
The minimum purchase for Maine, New York and North Carolina residents is
250 shares ($2,500), except for IRAs which must purchase a minimum of 100 shares
($1,000). The minimum purchase for Minnesota residents is 250 shares ($2,500),
except for IRAs and other qualified retirement plans which must purchase a
minimum of 200 shares ($2,000).
Except in the states of Maine, Minnesota, Nebraska and Washington, if you
have satisfied the minimum purchase requirements and have purchased units in
other Wells programs or units or shares in other public real estate programs,
you may purchase less than the minimum number of shares set forth above, but in
no event less than 2.5 shares ($25). After you have purchased the minimum
investment, any additional purchase must be in increments of at least 2.5 shares
($25), except for (1) purchases made by residents of Maine and Minnesota, who
must still meet the minimum investment requirements set forth above, and (2)
purchases of shares pursuant to the dividend reinvestment plan of the Wells REIT
or reinvestment plans of other public real estate programs, which may be in
lesser amounts.
Several states have established suitability standards different from those
we have established. Shares will be sold only to investors in these states who
meet the special suitability standards set forth below.
Arizona, Iowa, Massachusetts, Missouri, North Carolina and Tennessee -
Investors must have either (1) a net worth of at least $225,000 or (2) gross
annual income of $60,000 and a net worth of at least $60,000.
Maine - Investors must have either (1) a net worth of at least $200,000, or
(2) gross annual income of $50,000 and a net worth of at least $50,000.
Michigan, Ohio, Oregon and Pennsylvania - In addition to our suitability
requirements, investors must have a net worth of at least ten times their
investment in the Wells REIT.
Missouri - Investors must have either (1) a net worth of at least $250,000
or (2) gross annual income of $75,000 and a net worth of at least $75,000.
New Hampshire - Investors must have either (1) a net worth of at least
$250,000, or (2) taxable income of $50,000 and a net worth of at least $125,000.
In the case of sales to fiduciary accounts, these suitability standards
must be met by the fiduciary account, by the person who directly or indirectly
supplied the funds for the purchase of the shares or by the beneficiary of the
account. These suitability standards are intended to help ensure that, given the
long-term nature of an investment in the Wells REIT, our investment objectives
and the relative illiquidity of the shares, the shares are an appropriate
investment for certain investors. Each selected dealer must make every
reasonable effort to determine that the purchase of shares is a suitable and
appropriate investment for each shareholder based on information provided by the
shareholder in the Subscription Agreement. Each selected dealer is required to
maintain for six years records of the information used to determine that an
investment in the shares is suitable and appropriate for a shareholder.
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<PAGE>
Estimated Use of Proceeds
The following table sets forth information about how the proceeds raised in
this offering will be used. Many of the figures set forth below represent the
best estimate since they cannot be precisely calculated at this time. We expect
that approximately 84% of the money you invest will be used to buy real estate,
while the remaining 16% will be used for working capital and to pay expenses and
fees including the payment of fees to Wells Investment Securities.
<TABLE>
<CAPTION>
Maximum Offering(1)
----------------
Amount Percent
------ -------
<S> <C> <C>
Gross Offering Proceeds 222,000,000 100%
Less Public Offering Expenses:
Selling Commissions and Dealer Manager Fee (2) 21,090,000 9.5%
Organization and Offering Expenses (3) 6,660,000 3%
------------ ----
Amount Available for Investment (4) $194,250,000 87.5%
Acquisition and Development:
Acquisition and Advisory Fees (5) $ 6,660,000 3%
Acquisition Expenses (6) 1,110,000 .5%
Initial Working Capital Reserve (7) (7) --
------------ ----
Amount Invested in Properties (4)(8) $186,480,000 84%
</TABLE> ============ ====
- -------------------------
(Footnotes to "Estimated Use of Proceeds")
1. Includes 20,000,000 shares offered to the public at $10 per share and
2,200,000 shares offered pursuant to our dividend reinvestment plan at $10
per share. Excludes 800,000 shares to be issued upon exercise of the
soliciting dealer warrants.
2. Includes selling commissions equal to 7% of aggregate gross offering
proceeds which commissions may be reduced under certain circumstances and a
dealer manager fee equal to 2.5% of aggregate gross offering proceeds, both
of which are payable to the Dealer Manager, an affiliate of the advisor.
The Dealer Manager, in its sole discretion, may reallow selling commissions
of up to 7% of gross offering proceeds to other broker-dealers participating
in this offering attributable to the units sold by them and may reallow out
of its dealer manager fee up to 1.5% of gross offering proceeds in marketing
fees and due diligence expenses to broker-dealers participating in this
offering based on such factors as the volume of units sold by such
participating broker-dealers, marketing support provided by such
participating broker-dealers and bona fide conference fees incurred. The
amount of selling commissions may often be reduced under certain
circumstances for volume discounts. See the "Plan of Distribution" section
of this prospectus for a description of such provisions.
3. Organization and offering expenses consist of estimated legal, accounting,
printing and other accountable offering expenses other than selling
commissions and the dealer manager fee. The advisor and its affiliates will
be responsible for the payment of organization and offering expenses other
than selling commissions and the dealer manager fee to the extent they
exceed 3% of gross offering proceeds without recourse against or
reimbursement by the Wells REIT.
4. Until required in connection with the acquisition and development of
properties, substantially all of the net proceeds of the offering and,
thereafter, the working capital reserves of the Wells REIT, may be invested
in short-term, highly-liquid investments including government obligations,
bank certificates of deposit, short-term debt obligations and interest-
bearing accounts.
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<PAGE>
5. Acquisition and advisory fees are defined generally as fees and commissions
paid by any party to any person in connection with the purchase, development
or construction of properties. We will pay Wells Capital, our advisor,
acquisition and advisory fees up to a maximum amount of 3% of gross offering
proceeds in connection with the acquisition of the real estate properties.
Acquisition and advisory fees do not include acquisition expenses.
6. Acquisition expenses include legal fees and expenses, travel expenses, costs
of appraisals, nonrefundable option payments on property not acquired,
accounting fees and expenses, title insurance premiums and other closing
costs and miscellaneous expenses relating to the selection, acquisition and
development of real estate properties.
7. Because the vast majority of leases for the properties acquired by the Wells
REIT will provide for tenant reimbursement of operating expenses, we do not
anticipate that a permanent reserve for maintenance and repairs of real
estate properties will be established. However, to the extent that the we
have insufficient funds for such purposes, we may apply an amount of up to
1% of gross offering proceeds for maintenance and repairs of real estate
properties. We also may, but are not required to, establish reserves from
gross offering proceeds, out of cash flow generated by operating properties
or out of nonliquidating net sale proceeds, defined generally to mean the
net cash proceeds received by the Wells REIT from any sale or exchange of
properties.
8. Includes amounts anticipated to be invested in properties net of fees and
expenses. We estimate that approximately 84% of the proceeds received from
the sale of shares will be used to acquire properties.
Management
General
We operate under the direction of the board, the members of which are
accountable to us and our shareholders as fiduciaries. The board is responsible
for the management and control of our affairs. The board has retained Wells
Capital to manage our day-to-day affairs and the acquisition and disposition of
our investments, subject to the board's supervision.
Our articles of incorporation and bylaws provide that the number of
directors of the Wells REIT may be established by a majority of the entire board
of directors but may not be fewer than three nor more than fifteen. We
currently have a total of eight directors. The articles of incorporation also
provide that a majority of the directors must be independent directors. An
"independent director" is a person who is not an officer or employee of the
Wells REIT, Wells Capital or their affiliates and has not otherwise been
affiliated with such entities for the previous two years. Of the eight current
directors, seven directors are considered independent directors.
Proposed transactions are often discussed before being brought to a final
board vote. During these discussions, independent directors often offer ideas
for ways in which deals can be changed to make them acceptable and these
suggestions are taken into consideration when structuring transactions. Each
director will serve until the next annual meeting of shareholders or until his
successor has been duly elected and qualified. Although the number of directors
may be increased or decreased, a decrease shall not have the effect of
shortening the term of any incumbent director.
Any director may resign at any time and may be removed with or without cause
by the shareholders upon the affirmative vote of at least a majority of all the
votes entitled to be cast at a meeting
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<PAGE>
called for the purpose of the proposed removal. The notice of the meeting shall
indicate that the purpose, or one of the purposes, of the meeting is to
determine if the director shall be removed. The term "cause" as used in this
context is a term used in the Maryland Corporation Law. Since the Maryland
Corporation Law does not define the term "cause," shareholders may not know
exactly what actions by a director may be grounds for removal.
Unless filled by a vote of the shareholders as permitted by Maryland
Corporation Law, a vacancy created by an increase in the number of directors or
the death, resignation, removal, adjudicated incompetence or other incapacity of
a director shall be filled by a vote of a majority of the remaining directors
and,
. in the case of a director who is not an independent director (affiliated
director), by a vote of a majority of the remaining affiliated
directors, or
. in the case of an independent director, by a vote of a majority of the
remaining independent directors,
unless there are no remaining affiliated directors or independent directors, as
the case may be. In such case a majority vote of the remaining directors shall
be sufficient. If at any time there are no independent or affiliated directors
in office, successor directors shall be elected by the shareholders. Each
director will be bound by the articles of incorporation and the bylaws.
The directors are not required to devote all of their time to our business
and are only required to devote the time to our affairs as their duties require.
The directors will meet quarterly or more frequently if necessary. We do not
expect that the directors will be required to devote a substantial portion of
their time to discharge their duties as our directors. Consequently, in the
exercise of their fiduciary responsibilities, the directors will be relying
heavily on Wells Capital. The board is empowered to fix the compensation of all
officers that it selects and may pay compensation to directors for services
rendered to us in any other capacity.
Our general investment and borrowing policies are set forth in this
prospectus. The directors may establish further written policies on investments
and borrowings and shall monitor our administrative procedures, investment
operations and performance to ensure that the policies are fulfilled and are in
the best interest of the shareholders. We will follow the policies on
investments and borrowings set forth in this prospectus unless and until they
are modified by the directors.
The board is also responsible for reviewing our fees and expenses on at
least an annual basis and with sufficient frequency to determine that the
expenses incurred are in the best interest of the shareholders. In addition, a
majority of the independent directors and a majority of directors not otherwise
interested in the transaction must approve all transactions with Wells Capital
or its affiliates. The independent directors will also be responsible for
reviewing the performance of Wells Capital and determining that the compensation
to be paid to Wells Capital is reasonable in relation to the nature and quality
of services to be performed and that the provisions of the advisory agreement
are being carried out. Specifically, the independent directors will consider
factors such as:
. the amount of the fee paid to Wells Capital in relation to the size,
composition and performance of our investments;
. the success of Wells Capital in generating appropriate investment
opportunities;
. rates charged to other REITs and other investors by advisors performing
similar services;
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. additional revenues realized by Wells Capital and its affiliates through
their relationship with us, whether we pay them or they are paid by
others with whom we do business;
. the quality and extent of service and advice furnished by Wells Capital
and the performance of our investment portfolio; and
. the quality of our portfolio relative to the investments generated by
Wells Capital for its other clients.
Neither the directors nor their affiliates will vote or consent to the
voting of shares they now own or hereafter acquire on matters submitted to the
shareholders regarding either (1) the removal of Wells Capital, any director or
any affiliate; or (2) any transaction between us and Wells Capital, any director
or any affiliate.
Executive Officers and Directors
We have provided below certain information about our executive officers and
directors.
<TABLE>
<CAPTION>
Name Position(s) Age
- ---- ---------- ---
<S> <C> <C>
Leo F. Wells, III President and Director 55
Douglas P. Williams Executive Vice President, Secretary and Treasurer 49
John L. Bell(1) Director 59
Richard W. Carpenter(1) Director 62
Bud Carter(1) Director 61
William H. Keogler, Jr.(1) Director 54
Donald S. Moss(1) Director 63
Walter W. Sessoms(1) Director 65
Neil H. Strickland(1) Director 63
</TABLE>
- --------
(1) Messrs. Bell, Carpenter, Carter, Keogler, Moss, Sessoms and Strickland serve
on our Audit Committee.
Leo F. Wells, III is the President and a director of the Wells REIT and the
President and sole director of Wells Capital. He is also the sole shareholder
and sole director of Wells Real Estate Funds, Inc., the parent corporation of
Wells Capital. Mr. Wells is President of Wells & Associates, Inc., a real
estate brokerage and investment company formed in 1976 and incorporated in 1978,
for which he serves as principal broker. He is also the sole director and
President of:
. Wells Management Company, Inc., our property manager;
. Wells Investment Securities, Inc., the dealer manager;
. Wells Advisors, Inc., a company he organized in 1991 to act as a non-bank
custodian for IRAs; and
. Wells Development Corporation, a company he organized in 1997 to
temporarily own, operate, manage and develop real properties.
Mr. Wells was a real estate salesman and property manager from 1970 to 1973
for Roy D. Warren & Company, an Atlanta real estate company, and he was
associated from 1973 to 1976 with Sax Gaskin Real Estate Company, during which
time he became a Life Member of the Atlanta Board of Realtors
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<PAGE>
Million Dollar Club. From 1980 to February 1985 he served as Vice President of
Hill-Johnson, Inc., a Georgia corporation engaged in the construction business.
Mr. Wells holds a Bachelor of Business Administration degree in economics from
the University of Georgia. Mr. Wells is a member of the International
Association for Financial Planning (IAFP) and a registered NASD principal.
Mr. Wells has over 25 years of experience in real estate sales, management
and brokerage services. In addition to being the President and a director of
the Wells REIT, he is currently a co-general partner in a total of 26 real
estate limited partnerships formed for the purpose of acquiring, developing and
operating office buildings and other commercial properties. As of October 1,
1999, these 26 real estate limited partnerships represented investments totaling
approximately $300,000,000 from approximately 27,000 investors.
Douglas P. Williams, who was elected as Executive Vice President, Secretary
and Treasurer of the Wells REIT on July 30, 1999, previously served as Vice
President, Controller of OneSource, Inc., a leading supplier of janitorial and
landscape services, from 1996 to 1999 where he was responsible for corporate-
wide accounting activities and financial analysis. Mr. Williams was employed by
ECC International Inc. ("ECC"), a supplier to the paper industry and to the
paint, rubber and plastic industries, from 1982 to 1995. While at ECC, Mr.
Williams served in a number of key accounting positions, including Corporate
Accounting Manager, U.S. Operations, Division Controller, Americas Region and
Corporate Controller, America/Pacific Division. Prior to joining ECC and for
one year after leaving ECC, Mr. Williams was employed by Lithonia Lighting, a
manufacturer of lighting fixtures, as a Cost and General Accounting Manager and
Director of Planning and Control. Mr. Williams started his professional career
as an auditor for KPMG Peat Marwick LLP.
Mr. Williams is a member of the American Institute of Certified Public
Accountants and the Georgia Society of Certified Public Accountants. Mr.
Williams received a bachelor of arts degree from Dartmouth College and a Masters
of Business Administration degree from the Amos Tuck School of Graduate Business
Administration at Dartmouth College.
John L. Bell was the owner and Chairman of Bell-Mann, Inc., the largest
commercial flooring contractor in the Southeast from February 1971 to February
1996. Mr. Bell also served on the Board of Directors of Realty South Investors,
a REIT traded on the American Stock Exchange, and was the founder and served as
a director of both the Chattahoochee Bank and the Buckhead Bank. In 1997, Mr.
Bell initiated and implemented a "Dealer Acquisition Plan" for Shaw Industries,
Inc., a floor covering manufacturer and distributor, which plan included the
acquisition of Bell-Mann.
Mr. Bell currently serves on the advisory boards of Windsor Capital,
Mountain Top Boys Home and the Eagle Ranch Boys Home. Mr. Bell is also
extensively involved in buying and selling real estate both individually and in
partnership with others. Mr. Bell graduated from Florida State University
majoring in accounting and marketing.
Richard W. Carpenter served as General Vice President of Real Estate
Finance of The Citizens and Southern National Bank from 1975 to 1979, during
which time his duties included the establishment and supervision of the United
Kingdom Pension Fund, U.K.-American Properties, Inc. which was established
primarily for investment in commercial real estate within the United States.
Mr. Carpenter is currently President and director of Realmark Holdings
Corp., a residential and commercial real estate developer, and has served in
that position since October 1983. He is also President and director of Leisure
Technology, Inc., a retirement community developer, a position which he has held
since March 1993, Managing Partner of Carpenter Properties, L.P., a real estate
limited partnership, and
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President and director of the oil storage companies Wyatt Energy, Inc. and
Commonwealth Oil Refining Company, Inc., positions which he has held since 1995
and 1984, respectively.
Mr. Carpenter also serves as Vice Chairman of the Board of Directors of both
First Liberty Financial Corp. and Liberty Savings Bank, F.S.B. and Chairman of
the Audit Committee of First Liberty Financial Corp. He has been a member of
The National Association of Real Estate Investment Trusts and served as
President and Chairman of the Board of Southmark Properties, an Atlanta-based
REIT investing in commercial properties. Mr. Carpenter is a past Chairman of
the American Bankers Association Housing and Real Estate Finance Division
Executive Committee. Mr. Carpenter holds a Bachelor of Science degree from
Florida State University, where he was named the outstanding alumnus of the
School of Business in 1973.
Bud Carter was an award-winning broadcast news director and anchorman for
several radio and television stations in the Midwest for over 20 years. From
1975 to 1980, Mr. Carter served as General Manager of WTAZ-FM, a radio station
in Peoria, Illinois and served as editor and publisher of The Peoria Press, a
weekly business and political journal in Peoria, Illinois. From 1981 until
1989, Mr. Carter was also an owner and General Manager of Transitions, Inc., a
corporate outplacement company in Atlanta, Georgia.
Mr. Carter currently serves as Senior Vice President for The Executive
Committee, a 42-year old international organization established to aid
presidents and CEOs share ideas on ways to improve the management and
profitability of their respective companies. The Executive Committee operates
in numerous large cities throughout the United States, Canada, Australia,
France, Italy, Malaysia, Brazil, the United Kingdom and Japan. The Executive
Committee has more than 6,000 presidents and CEOs who are members. In addition,
Mr. Carter was the first Chairman of the organization recruited in Atlanta and
still serves as Chairman of the first two groups formed in Atlanta, each
comprised of 14 noncompeting CEOs and presidents. Mr. Carter is a graduate of
the University of Missouri where he earned degrees in journalism and social
psychology.
William H. Keogler, Jr. was employed by Brooke Bond Foods, Inc. as a Sales
Manager from June 1965 to September 1968. From July 1968 to December 1974, Mr.
Keogler was employed by Kidder Peabody & Company, Inc. and Dupont, Glore, Forgan
as a corporate bond salesman responsible for managing the industrial corporate
bond desk and the utility bond area. From December 1974 to July 1982, Mr.
Keogler was employed by Robinson-Humphrey, Inc. as the Director of Fixed Income
Trading Departments responsible for all municipal bond trading and municipal
research, corporate and government bond trading, unit trusts and SBA/FHA loans,
as well as the oversight of the publishing of the Robinson-Humphrey Southeast
Unit Trust, a quarterly newsletter. Mr. Keogler was elected to the Board of
Directors of Robinson-Humphrey, Inc. in 1982. From July 1982 to October 1984,
Mr. Keogler was Executive Vice President, Chief Operating Officer, Chairman of
the Executive Investment Committee and member of the Board of Directors and
Chairman of the MFA Advisory Board for the Financial Service Corporation. He
was responsible for the creation of a full service trading department
specializing in general securities with emphasis on municipal bonds and
municipal trusts. Under his leadership, Financial Service Corporation grew to
over 1,000 registered representatives and over 650 branch offices. In March
1985, Mr. Keogler founded Keogler, Morgan & Company, Inc., a full service
brokerage firm, and Keogler Investment Advisory, Inc., in which he served as
Chairman of the Board of Directors, President and Chief Executive Officer. In
January 1997, both companies were sold to SunAmerica, Inc., a publicly traded
New York Stock Exchange company. Mr. Keogler continued to serve as President
and Chief Executive Officer of these companies until his retirement in January
1998.
Mr. Keogler serves on the Board of Trustees of Senior Citizens Services of
Atlanta. He graduated from Adelphi University in New York where he earned a
degree in psychology.
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<PAGE>
Donald S. Moss was employed by Avon Products, Inc. from 1957 until his
retirement in 1986. While at Avon, Mr. Moss served in a number of key
positions, including Vice President and Controller from 1973 to 1976, Group Vice
President of Operations-Worldwide from 1976 to 1979, Group Vice President of
Sales-Worldwide from 1979 to 1980, Senior Vice President-International from 1980
to 1983 and Group Vice President-Human Resources and Administration from 1983
until his retirement in 1986. Mr. Moss was also a member of the board of
directors of Avon Canada, Avon Japan, Avon Thailand, and Avon Malaysia from
1980-1983.
Mr. Moss is currently a director of The Atlanta Athletic Club. He formerly
was the National Treasurer and a director of the Girls Clubs of America from
1973 to 1976. Mr. Moss graduated from the University of Illinois where he
received a degree in business.
Walter W. Sessoms was employed by BellSouth Telecommunications, Inc. from
1971 until his retirement in June 1997. While at BellSouth, Mr. Sessoms served
in a number of key positions, including Vice President-Residence for the State
of Georgia from June 1979 to July 1981, Vice President-Transitional Planning
Officer from July 1981 to February 1982, Vice President-Georgia from February
1982 to June 1989, Senior Vice President-Regulatory and External Affairs from
June 1989 to November 1991, and Group President-Services from December 1991
until his retirement on June 30, 1997.
Mr. Sessoms currently serves as a director of the Georgia Chamber of
Commerce for which he is a past Chairman of the Board, the Atlanta Civic
Enterprises and the Salvation Army's Board of Visitors of the Southeast Region.
Mr. Sessoms is also a past executive advisory council member for the University
of Georgia College of Business Administration and past member of the executive
committee of the Atlanta Chamber of Commerce. Mr. Sessoms is a graduate of
Wofford College where he earned a degree in economics and business
administration and is currently a lecturer at the University of Georgia.
Neil H. Strickland was employed by Loyalty Group Insurance (which
subsequently merged with America Fore Loyalty Group and is now known as The
Continental Group) as an automobile insurance underwriter. From 1957 to 1961,
Mr. Strickland served as Assistant Supervisor of the Casualty Large Lines
Retrospective Rating Department. From 1961 to 1964, Mr. Strickland served as
Branch Manager of Wolverine Insurance Company, a full service property and
casualty service company, where he had full responsibility for underwriting of
insurance and office administration in the State of Georgia. In 1964, Mr.
Strickland and a non-active partner started Superior Insurance Service, Inc., a
property and casualty wholesale general insurance agency. Mr. Strickland served
as President and was responsible for the underwriting and all other operations
of the agency. In 1967, Mr. Strickland sold his interest in Superior Insurance
Service, Inc. and started Strickland General Agency, Inc., a property and
casualty general insurance agency concentrating on commercial customers. Mr.
Strickland is currently the Senior Operation Executive of Strickland General
Agency, Inc. and devotes most of his time to long-term planning, policy
development and senior administration.
Mr. Strickland is a past President of the Norcross Kiwanis Club and served
as both Vice President and President of the Georgia Surplus Lines Association.
He also served as President and a director of the National Association of
Professional Surplus Lines Offices. Mr. Strickland currently serves as a
director of First Capital Bank, a community bank located in the State of
Georgia. Mr. Strickland attended Georgia State University where he majored in
business administration. He received his L.L.B. degree from Atlanta Law School.
Compensation of Directors
We pay our independent directors $250 for each board meeting they attend.
In addition, we have reserved 100,000 shares of common stock for future issuance
upon the exercise of stock options granted
33
<PAGE>
to the independent directors pursuant to our Independent Director Stock Option
Plan. All directors receive reimbursement of reasonable out-of-pocket expenses
incurred in connection with attendance at meetings of the board of directors. If
a director also is an officer of the Wells REIT, we do not pay separate
compensation for services rendered as a director.
Independent Director Stock Option Plan
The independent directors were each issued non-qualified stock options to
purchase 2,500 shares (Initial Options) pursuant to the Independent Director
Stock Option Plan (Plan). The Plan further provides for subsequent grants of
options to purchase 1,000 shares (Subsequent Options) to each independent
director then in office on the date of each annual stockholder's meeting
beginning with the annual meeting to be held in the year 2000. The Initial
Options and the Subsequent Options are collectively referred to as the
"Options." However, Options may not be granted at any time when the grant,
along with grants to other independent directors, would exceed 10% of our issued
and outstanding shares. The option price for the Initial Options will be $12.00
per share. The option price for the Subsequent Options shall be the greater of
(1) $12.00 per share or (2) the fair market value of the shares on the date they
are granted. Fair market value is defined generally to mean:
. the average closing price for the five consecutive trading days ending
on such date if the shares are traded on a national exchange;
. the average of the high bid and low asked prices if the shares are
quoted on NASDAQ;
. the average of the last 10 sales made pursuant to a public offering if
there is a current public offering and no market maker for the shares;
. the average of the last 10 purchases (or fewer if less than 10
purchases) under our share redemption program if there is no current
public offering; or
. the price per share under the dividend reinvestment plan if there are
no purchases under the share redemption program.
One-fifth of the Initial Options are exercisable beginning on the date we
granted them and an additional one-fifth of the Initial Options will become
exercisable on each anniversary of the date we grant them for a period of four
years until 100% of the shares become exercisable. The Subsequent Options
granted under the Plan will become exercisable on the second anniversary of the
date we grant them.
A total of 100,000 shares have been authorized and reserved for issuance
under the Plan. If the number of outstanding shares is changed into a different
number or kind of shares or securities through a reorganization or merger in
which the Company is the surviving entity, or through a combination,
recapitalization or otherwise, an appropriate adjustment will be made in the
number and kind of shares that may be issued pursuant to exercise of the
Options. A corresponding adjustment to the exercise price of the Options granted
prior to any change will also be made. Any such adjustment, however, will not
change the total payment, if any, applicable to the portion of the Options not
exercised, but will change only the exercise price for each share.
Options granted under the Plan shall lapse on the first to occur of (1) the
tenth anniversary of the date we grant them, (2) the removal for cause of the
independent director as a member of the board of directors, or (3) three months
following the date the independent director ceases to be a director for any
reason other than death or disability, and may be exercised by payment of cash
or through the delivery of
34
<PAGE>
common stock. Options granted under the Plan are generally exercisable in the
case of death or disability for a period of one year after death or the
disabling event. No Option issued may be exercised if such exercise would
jeopardize our status as a REIT under the Internal Revenue Code.
The independent directors may not sell pledge, assign or transfer their
options other than by will or the laws of descent or distribution.
Upon the dissolution or liquidation of the Wells REIT, upon our
reorganization, merger or consolidation with one or more corporations as a
result of which we are not the surviving corporation or upon sale of all or
substantially all of our properties, the Plan will terminate, and any
outstanding Options will terminate and be forfeited. The board of directors may
provide in writing in connection with any such transaction for any or all of the
following alternatives:
. for the assumption by the successor corporation of the Options granted
or the replacement of the Options with options covering the stock of
the successor corporation, or a parent or subsidiary of such
corporation, with appropriate adjustments as to the number and kind of
shares and exercise prices;
. for the continuance of the Plan and the Options by such successor
corporation under the original terms; or
. for the payment in cash or shares of common stock in lieu of and in
complete satisfaction of such Options.
Limited Liability and Indemnification of Directors, Officers, Employees and
Other Agents
Our organizational documents limit the personal liability of our directors
and officers for monetary damages to the fullest extent permitted under current
Maryland Corporation Law. We also maintain a directors and officers liability
insurance policy. Maryland Corporation Law allows directors and officers to be
indemnified against judgments, penalties, fines, settlements and expenses
actually incurred in a proceeding unless the following can be established:
. an act or omission of the director or officer was material to the
cause of action adjudicated in the proceeding, and was committed in
bad faith or was the result of active and deliberate dishonesty;
. the director or officer actually received an improper personal benefit
in money, property or services; or
. with respect to any criminal proceeding, the director or officer had
reasonable cause to believe his act or omission was unlawful.
Any indemnification or any agreement to hold harmless is recoverable only out of
our assets and not from the shareholders. Indemnification could reduce the legal
remedies available to us and the shareholders against the indemnified
individuals, however.
This provision does not reduce the exposure of directors and officers to
liability under federal or state securities laws, nor does it limit the
shareholder's ability to obtain injunctive relief or other equitable remedies
for a violation of a director's or an officer's duties to us or our
shareholders, although the equitable remedies may not be an effective remedy in
some circumstances.
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<PAGE>
In spite of the above provisions of Maryland Corporation Law, our articles
of incorporation provide that the directors, Wells Capital and its affiliates
will be indemnified by us for losses arising from our operation only if all of
the following conditions are met:
. the directors, Wells Capital or its affiliates have determined, in
good faith, that the course of conduct which caused the loss or
liability was in our best interests;
. the directors, Wells Capital or its affiliates were acting on our
behalf or performing services for us;
. in the case of affiliated directors, Wells Capital or its affiliates,
the liability or loss was not the result of negligence or misconduct
by the party seeking indemnification;
. in the case of independent directors, the liability or loss was not
the result of gross negligence or willful misconduct by the party
seeking indemnification; and
. the indemnification or agreement to hold harmless is recoverable only
out of our net assets and not from the shareholders.
We have agreed to indemnify and hold harmless Wells Capital and its
affiliates performing services for us from specific claims and liabilities
arising out of the performance of its obligations under the advisory agreement.
As a result, we and our shareholders may be entitled to a more limited right of
action than they would otherwise have if these indemnification rights were not
included in the advisory agreement.
The general effect to investors of any arrangement under which any of our
controlling persons, directors or officers are insured or indemnified against
liability is a potential reduction in distributions resulting from our payment
of premiums associated with insurance. In addition, indemnification could reduce
the legal remedies available to the Wells REIT and our shareholders against the
officers and directors.
The Securities and Exchange Commission takes the position that
indemnification against liabilities arising under the Securities Act of 1933 is
against public policy and unenforceable. Indemnification of the directors,
officers, Wells Capital or its affiliates will not be allowed for liabilities
arising from or out of a violation of state or federal securities laws, unless
one or more of the following conditions are met:
. there has been a successful adjudication on the merits of each count
involving alleged securities law violations;
. such claims have been dismissed with prejudice on the merits by a
court of competent jurisdiction; or
. a court of competent jurisdiction approves a settlement of the claims
against the indemnitee and finds that indemnification of the
settlement and the related costs should be made, and the court
considering the request for indemnification has been advised of the
position of the Securities and Exchange Commission and of the
published position of any state securities regulatory authority in
which the securities were offered as to indemnification for violations
of securities laws.
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<PAGE>
Indemnification will be allowed for settlements and related expenses of
lawsuits alleging securities laws violations and for expenses incurred in
successfully defending any lawsuits, provided that a court either:
. approves the settlement and finds that indemnification of the
settlement and related costs should be made; or
. dismisses with prejudice or there is a successful adjudication on the
merits of each count involving alleged securities law violations as to
the particular indemnitee and a court approves the indemnification.
The Advisor
The advisor of the Wells REIT is Wells Capital. Some of our officers and
directors are also officers and directors of Wells Capital. Wells Capital has
responsibility as a fiduciary to the Wells REIT and its stockholders pursuant to
the advisory agreement.
The directors and executive officers of Wells Capital are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- ---------
<S> <C> <C>
Leo F. Wells, III 55 President and sole director
Douglas P. Williams 49 Senior Vice President
Stephen G. Franklin 52 Senior Vice President
Kim R. Comer 44 Vice President and Assistant Director
of Investor Services
Edna B. King 61 Vice President of Investor Services
Linda L. Carson 55 Vice President of Accounting
</TABLE>
The backgrounds of Messrs. Wells and Williams are described in the
"Management -- Executive Officers and Directors" section of this prospectus.
Below is a brief description of the other executive officers of Wells Capital.
Stephen G. Franklin, Ph.D. most recently served as President of Global
Access Learning, an international executive education and management development
firm. From 1997 to 1999, Dr. Franklin served as President, Chief Academic
Officer and Director of EduTrek International, a publicly traded provider of
international post-secondary education that owns the American InterContinental
University, with campuses in Atlanta, Ft. Lauderdale, Los Angeles, Washington,
D.C., London and Dubai. While at EduTrek, he was instrumental in developing the
Masters and Bachelors of Information Technology, International MBA and Adult
Evening BBA programs. Prior to joining EduTrek, Dr. Franklin was Associate Dean
of the Goizueta Business School at Emory University and a former tenured
Associate Professor of Business Administration. He served on the founding
Executive MBA faculty, and has taught graduate, undergraduate and executive
courses in Management and Organizational Behavior, Human Resources Management
and Entrepreneurship. He is also co-founder and Director of the Center for
Healthcare Leadership in the Emory University School of Medicine. Dr. Franklin
was a frequent guest lecturer at universities throughout North America, Europe
and South Africa.
In 1984, Dr. Franklin took a sabbatical from Emory University and became
Executive Vice President and a principal shareholder of Financial Service
Corporation ("FSC"), an independent financial planning broker-dealer. Dr.
Franklin and the other shareholders of FSC later sold their interests in FSC to
Mutual of New York Life Insurance Company.
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<PAGE>
Kim R. Comer rejoined Wells Capital as National Vice President of Marketing
in April 1997 after working for Wells Capital in similar capacities from January
1992 through September 1995. Mr. Comer currently serves as Vice President and
Assistant Director of Investor Services. In prior positions with Wells Capital,
he served as Vice President of Marketing for the southeast and northeast
regions. Mr. Comer has over ten years experience in the securities industry and
is a registered representative and financial principal with the NASD.
Additionally, he has strong financial experience including experience as
controller and chief financial officer of two regional broker-dealers. In 1976,
Mr. Comer graduated with honors from Georgia State University with a BBA degree
in accounting.
Edna B. King is the Vice President of Investor Services for Wells Capital.
She is responsible for processing new investments, sales reporting and investor
communications. Prior to joining Wells Capital in 1985, Ms. King served as the
Southeast Service Coordinator for Beckman Instruments and as office manager for
a regional office of Commerce Clearing House. Ms. King holds an Associates
Degree in Business Administration from DeKalb Community College in Atlanta,
Georgia, and has completed courses at the University of North Carolina at
Wilmington.
Linda L. Carson is Vice President of Accounting for Wells Capital. She is
responsible for fund, property and corporate accounting, SEC reporting and
coordination of all audits by the independent public accountants. Ms. Carson
joined Wells Capital in 1989 as Staff Accountant, became Controller in 1991 and
assumed her current position in 1996. Prior to joining Wells Capital, Ms.
Carson was an accountant with an electrical distributor. She is a graduate of
City College of New York and has completed additional accounting courses at
Kennesaw State. She is also a member of the National Society of Accountants.
Wells Capital employs personnel, in addition to the directors and executive
officers listed above, who have extensive experience in selecting and managing
commercial properties similar to the properties sought to be acquired by the
Wells REIT.
Wells Capital currently owns 20,000 limited partnership units in Wells OP,
our operating partnership, for which it contributed $200,000. Wells Capital may
not sell these units while the advisory agreement is in effect, although it has
the right to transfer such units to an affiliate. (See "The Operating
Partnership Agreement.")
The Advisory Agreement
Many of the services to be performed by Wells Capital in managing our day-
to-day activities are summarized below. This summary is provided to illustrate
the material functions which Wells Capital will perform for us as our advisor
and it is not intended to include all of the services which may be provided to
us by third parties. Under the terms of the advisory agreement, Wells Capital
undertakes to use its best efforts to present to us investment opportunities
consistent with our investment policies and objectives as adopted by the board
of directors. In its performance of this undertaking, Wells Capital, either
directly or indirectly by engaging an affiliate, shall, subject to the authority
of the board:
. find, present and recommend to us real estate investment opportunities
consistent with our investment policies and objectives;
. structure the terms and conditions of transactions pursuant to which
acquisitions of properties will be made;
38
<PAGE>
. acquire properties on our behalf in compliance with our investment
objectives and policies;
. arrange for financing and refinancing of properties; and
. enter into leases and service contracts for the properties acquired.
The term of the advisory agreement ends on January 30, 2000 and may be
renewed for an unlimited number of successive one year periods. Additionally,
the advisory agreement may be terminated:
. immediately by us for "cause" or upon the bankruptcy of Wells Capital
or a material breach of the advisory agreement by Wells Capital;
. without cause by a majority of the independent directors of the Wells
REIT or a majority of the directors of Wells Capital upon 60 days'
written notice; or
. immediately with "good reason" by Wells Capital.
"Good reason" is defined in the advisory agreement to mean either:
. any failure by us to obtain a satisfactory agreement from our
successor to assume and agree to perform our obligations under the
advisory agreement; or
. any material breach of the advisory agreement of any nature whatsoever
by us.
"Cause" is defined in the advisory agreement to mean fraud, criminal
conduct, willful misconduct or willful or negligent breach of fiduciary duty by
Wells Capital or a breach of the advisory agreement by Wells Capital.
Wells Capital and its affiliates expect to engage in other business ventures
and, as a result, their resources will not be dedicated exclusively to our
business. However, pursuant to the advisory agreement, Wells Capital must devote
sufficient resources to the administration of the Wells REIT to discharge its
obligations. Wells Capital may assign the advisory agreement to an affiliate
upon approval of a majority of the independent directors. We may assign or
transfer the advisory agreement to a successor entity.
Wells Capital may not make any acquisition of property or financing of such
acquisition on our behalf without the prior approval of a majority of our
independent directors. The actual terms and conditions of transactions involving
investments in properties shall be determined in the sole discretion of Wells
Capital, subject at all times to such board approval.
We will reimburse Wells Capital for all of the costs it incurs in connection
with the services it provides to us, including, but not limited to:
. organization and offering expenses in an amount up to 3% of gross
offering proceeds, which include expenses attributable to preparing
the SEC registration statement, formation and organization of the
Wells REIT, qualification of the shares for sale in the states, escrow
arrangements, filing fees and expenses attributable to selling the
shares including, but not limited to, selling commissions, advertising
expenses, expense reimbursements, and counsel and accounting fees;
39
<PAGE>
. the annual cost of goods and materials used by us and obtained from
entities not affiliated with Wells Capital, including brokerage fees
paid in connection with the purchase and sale of securities;
. administrative services including personnel costs, provided, however,
that no reimbursement shall be made for costs of personnel to the
extent that personnel are used in transactions for which Wells Capital
receives a separate fee; and
. acquisition expenses, which are defined to include expenses related to
the selection and acquisition of properties, at the lesser of actual
cost or 90% of competitive rates charged by unaffiliated persons
providing similar services.
Wells Capital must reimburse us at least annually for reimbursements paid to
Wells Capital in any year to the extent that such reimbursements to Wells
Capital cause our operating expenses to exceed the greater of (1) 2% of our
average invested assets, which generally consists of the average book value of
our real estate properties before reserves for depreciation or bad debts, or (2)
25% of our net income, which is defined as our total revenues less total
expenses for any given period excluding reserves for depreciation and bad debt.
Such operating expenses do not include amounts payable out of capital
contributions which are capitalized for tax and accounting purposes such as the
acquisition and advisory fees payable to Wells Capital. To the extent that
operating expenses payable or reimbursable by us exceed this limit and the
independent directors determine that the excess expenses were justified based on
unusual and nonrecurring factors which they deem sufficient, Wells Capital may
be reimbursed in future years for the full amount of the excess expenses, or any
portion thereof, but only to the extent the reimbursement would not cause our
operating expenses to exceed the limitation in any year. Within 60 days after
the end of any of our fiscal quarters for which total operating expenses for the
12 months then ended exceed the limitation, there shall be sent to the
shareholders a written disclosure, together with an explanation of the factors
the independent directors considered in arriving at the conclusion that the
excess expenses were justified.
Wells Capital or its affiliates will be paid fees in connection with
services provided to us. (See "Management Compensation.") In the event the
advisory agreement is terminated, Wells Capital will be paid all accrued and
unpaid fees and expense reimbursements, and any subordinated acquisition fees
earned prior to the termination. We will not reimburse Wells Capital or its
affiliates for services for which Wells Capital or its affiliates are entitled
to compensation in the form of a separate fee.
Shareholdings
Wells Capital currently owns 20,000 limited partnership units of Wells OP,
which constitutes 100% of the limited partner units outstanding. Wells Capital
may not sell any of these units during the period it serves as our advisor.
Wells Capital also owns 100 shares of the Wells REIT, which it acquired upon the
initial formation of the Wells REIT. Any resale of the shares that Wells
Capital currently owns and the resale of any shares which may be acquired by our
affiliates are subject to the provisions of Rule 144 promulgated under the
Securities Act of 1933, which rule limits the number of shares that may be sold
at any one time and the manner of such resale. Although Wells Capital and its
affiliates are not prohibited from acquiring additional shares, Wells Capital
has no options or warrants to acquire any additional shares and has no current
plans to acquire additional shares. Wells Capital has agreed to abstain from
voting any shares it now owns or hereafter acquires in any vote for the election
of directors or any vote regarding the approval or termination of any contract
with Wells Capital or any of its affiliates.
40
<PAGE>
Affiliated Companies
Property Manager
Our properties will be managed and leased initially by Wells Management
Company, Inc. (Wells Management). Wells Real Estate Funds, Inc. is the sole
shareholder of Wells Management, and Mr. Wells is the President and sole
director of Wells Management. (See "Conflicts of Interest.") The other
principal officers of Wells Management are as follows:
Name Positions
---- ---------
Michael C. Berndt Vice President and Chief Investment Officer
M. Scott Meadows Vice President of Property Management
Robert H. Stroud Vice President of Leasing
Michael L. Watson Vice President of Development
Wells Management is engaged in the business of real estate management. It
was organized and commenced active operations in 1983 to lease and manage real
estate projects which the advisor and its affiliates operate or in which they
own an interest. As of October 1, 1999, Wells Management was managing in excess
of 3,200,000 square feet of office buildings and shopping centers. We will pay
Wells Management property management fees equal to 2.5% of the gross revenues of
each building managed for management of our commercial properties. In addition,
we will pay Wells Management leasing fees equal to 2.0% of the gross revenues of
each building for which Wells Management provides leasing and tenant
coordinating services. A special one-time initial rent-up or leasing fee
typically equal to the first month's rent may be paid on the first leases for
newly constructed properties. This fee must be competitive for the geographic
area of the property, and the amount of this fee received by Wells Management
will be reduced by any amount paid to an outside broker. The advisor believes
these terms will be no less favorable to the Wells REIT than those customary for
similar services in the relevant geographic area. Depending upon the location
of certain of our properties and other circumstances, we may retain unaffiliated
property management companies to render property management services for some of
our properties.
In the event that Wells Management assists a tenant with tenant
improvements, a separate fee may be charged to the tenant and paid by the
tenant. This fee will not exceed 5% of the cost of the tenant improvements.
Wells Management derives all of its income from its property management and
leasing operations. For the fiscal year ended December 31, 1998, Wells
Management reported $1,581,235 in gross operating revenues and $352,963 in net
income.
The property manager will hire, direct and establish policies for the Wells
REIT employees who will have direct responsibility for each property's
operations, including resident managers and assistant managers, as well as
building and maintenance personnel. Some or all of the other Wells REIT
employees may be employed on a part-time basis and may also be employed by one
or more of the following:
. the advisor;
. the property manager;
41
<PAGE>
. partnerships organized by the advisor and its affiliates; and
. other persons or entities owning properties managed by the property
manager.
The property manager will also direct the purchase of equipment and supplies and
will supervise all maintenance activity.
The management fees to be paid to Wells Management will cover, without
additional expense to the Wells REIT, the property manager's general overhead
costs such as its expenses for rent and utilities.
The principal office of Wells Management is located at 6200 The Corners
Parkway, Suite 250, Norcross, Georgia 30092.
Dealer Manager
Wells Investment Securities, Inc., the Dealer Manager, a member firm of the
National Association of Securities Dealers, Inc. (NASD), was organized in May
1984 for the purpose of participating in and facilitating the distribution of
securities of Wells programs.
The Dealer Manager will provide certain wholesaling, sales promotional and
marketing assistance services to the Wells REIT in connection with the
distribution of the shares offered pursuant to this prospectus. It may also
sell a limited number of shares at the retail level. (See "Plan of
Distribution.")
Wells Real Estate Funds, Inc. is the sole shareholder of the Dealer Manager,
and Mr. Wells is the President and sole director. (See "Conflicts of
Interest.")
IRA Custodian
Wells Advisors, Inc. was organized in 1991 for the purpose of acting as a
non-bank custodian for IRAs investing in the securities of Wells real estate
programs. Wells Advisors currently charges no fees for such services. Wells
Advisors was approved by the Internal Revenue Service to act as a qualified non-
bank custodian for IRAs on March 20, 1992. In circumstances where Wells Advisors
acts as an IRA custodian, the authority of Wells Advisors is limited to holding
limited partnership units or REIT shares on behalf of the beneficiary of the IRA
and making distributions or reinvestments in such units or shares solely at the
direction of the beneficiary of the IRA. Well Advisors is not authorized to vote
any of such units or shares held in any IRA except in accordance with the
written instructions of the beneficiary of the IRA. Mr. Wells is the President
and sole director and owns 50% of the common stock and all of the preferred
stock of Wells Advisors. As of October 1, 1999, Wells Advisors was acting as the
IRA custodian for in excess of $50,000,000 in Wells real estate program
investments.
Management Decisions
The primary responsibility for the selection of our investments and the
negotiation for these investments will reside in Michael C. Berndt, an officer
of Wells Management and the principal real estate acquisition employee of Wells
Capital, and Leo F. Wells, III, an officer and director of Wells Capital.
Messrs. Berndt and Wells seek to invest in commercial properties, typically
office buildings in which the major tenant is a company with a net worth of in
excess of $100,000,000. The board of directors must approve all acquisitions of
real estate properties.
42
<PAGE>
Management Compensation
The following table summarizes and discloses all of the compensation and
fees, including reimbursement of expenses, to be paid by the Wells REIT to the
advisor and its affiliates.
<TABLE>
<CAPTION>
Form of Determination Estimated
Compensation of Amount Maximum
---------
and Entity Dollar Amount(1)
- ---------- ----------------
Receiving
- ---------
<S> <C> <C>
Organizational and Offering Stage
Selling Up to 7% of gross offering proceeds before reallowance of $15,540,000
Commissions - The commissions earned by participating broker-dealers. The
Dealer Manager Dealer Manager intends to reallow 100% of commissions
earned to participating broker-dealers.
Dealer Manager Up to 2.5% of gross offering proceeds before reallowance $ 5,550,000
Fee - The Dealer to participating broker-dealers. The Dealer Manager, in
Manager its sole discretion, may reallow a portion of its dealer
manager fee of up to 1.5% of the gross
offering proceeds to be paid to such participating
broker-dealers as a marketing fee and due diligence
expense reimbursement, based on such factors as the
volume of shares sold by such participating
broker-dealers, marketing support and bona fide
conference fees incurred.
Reimbursement of Up to 3% of gross offering proceeds. All $ 6,660,000
Organization organization and offering expenses (excluding selling
and Offering commissions and the dealer manager fee) will be
Expenses - The advanced by the advisor or its affiliates and
Advisor or its reimbursed by the Wells REIT.
Affiliates
Acquisition and Development Stage
Acquisition and For the review and evaluation of potential real $ 6,660,000
Advisory property acquisitions, a fee of up to 3% of gross
Fees - The offering proceeds.
Advisor or its
Affiliates (2)
Reimbursement of Up to .5% of gross offering proceeds for $ 1,110,000
Acquisition reimbursement of expenses related to real property
Expenses - The acquisitions, such as legal fees, travel expenses,
Advisor or its property appraisals, title insurance premium expenses
Affiliates (2) and other closing costs.
</TABLE>
43
<PAGE>
Operational Stage
<TABLE>
<S> <C> <C>
Property For the management of our properties, property management Actual amounts are
Management and fees equal to 2.5% of gross revenues. For leasing and dependent upon
Leasing Fees - tenant coordinating services, leasing fees equal to 2% of results of
Wells Management gross revenues. In addition, a separate fee for the operations and
Company, Inc. one-time initial rent-up or leasing-up of newly therefore cannot be
constructed properties in an amount not to exceed the fee determined at the
customarily charged in arm's-length transactions by present time.
others rendering similar services in the same geographic
area for similar properties as determined by a survey of
brokers and agents in such area (customarily equal to the
first month's rent).
Real Estate In connection with the sale of properties, an amount not Actual amounts are
Commissions - exceeding the lesser of: (A) 50% of the reasonable, dependent upon
The Advisor or customary and competitive real estate brokerage results of
its Affiliates commissions customarily paid for the sale of a comparable operations and
property in light of the size, type and location of the therefore cannot be
property, or (B) 3% of the gross sales price of each determined at the
property, subordinated to distributions to investors present time.
from sale proceeds of an amount which, together with
prior distributions to the investors, will equal (1) 100%
of their capital contributions plus (2) an 8% annual
cumulative, noncompounded return on their net capital
contributions.
Subordinated After investors have received a return of their net Actual amounts are
Participation in capital contributions and an 8% per year cumulative, dependent upon
Net Sale Proceeds noncompounded return, then the advisor is entitled to results of
- - The Advisor (3) receive 10% of remaining net sales proceeds. operations and
therefore cannot be
determined at the
present time.
Subordinated Upon listing, a fee equal to 10% of the amount by which Actual amounts are
Incentive (1) the market value of the outstanding stock of the dependent upon
Listing Fee - Wells REIT plus distributions paid by the Wells REIT results of
The Advisor(4)(5) prior to listing, exceeds (2) the sum of the total amount operations and
of capital raised from investors and the amount cash flow therefore cannot be
necessary to generate an 8% per year cumulative, determined at the
noncompounded return to investors. present time.
The Wells REIT may not reimburse any entity for operating
expenses in excess of the greater of 2% of our average
invested assets or 25% of our net income for the year.
</TABLE>
_________________________
(Footnotes to "Management Compensation")
44
<PAGE>
1. The estimated maximum dollar amounts are based on the sale of a maximum of
20,000,000 shares to the public at $10 per share and the sale of 2,200,000
shares at $10 per share pursuant to our dividend reinvestment plan.
2. The total of all acquisition and advisory fees and the acquisition expenses
shall not exceed, in the aggregate, an amount equal to 6% of the contract
price of all of the properties which we will purchase.
3. The subordinated participation in net sale proceeds and the subordinated
incentive listing fee to be received by the advisor are mutually exclusive
of each other. In the event that the Wells REIT becomes listed and the
advisor receives the subordinated incentive listing fee prior to its
receipt of the subordinated participation in net sale proceeds, the advisor
shall not be entitled to any such participation in net sale proceeds.
4. If at any time the shares become listed on a national securities exchange
or included for quotation on Nasdaq, we will negotiate in good faith with
Wells Capital a fee structure appropriate for an entity with a perpetual
life. A majority of the independent directors must approve the new fee
structure negotiated with Wells Capital. In negotiating a new fee
structure, the independent directors shall consider all of the factors they
deem relevant, including but not limited to:
. the size of the advisory fee in relation to the size, composition and
profitability of our portfolio;
. the success of Wells Capital in generating opportunities that meet our
investment objectives;
. the rates charged to other REITs and to investors other than REITs by
advisors performing similar services;
. additional revenues realized by Wells Capital through their
relationship with us;
. the quality and extent of service and advice furnished by Wells
Capital;
. the performance of our investment portfolio, including income,
conservation or appreciation of capital, frequency of problem
investments and competence in dealing with distress situations; and
. the quality of our portfolio in relationship to the investments
generated by Wells Capital for the account of other clients.
The board, including a majority of the independent directors, may not
approve a new fee structure that is, in its judgment, more favorable to
Wells Capital than the current fee structure.
5. The market value of the outstanding stock of the Wells REIT will be
calculated based on the average market value of the shares issued and
outstanding at listing over the 30 trading days beginning 180 days after
the shares are first listed on a stock exchange.
We have the option to pay the listing fee in the form of stock, cash, a
promissory note or any combination thereof. In the event the subordinated
incentive listing fee is paid to Wells Capital as a result of the listing
of the shares, we will not be required to pay Wells Capital any further
subordinated participation in net sales proceeds.
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In addition, the advisor and its affiliates will be reimbursed only for the
actual cost of goods, services and materials used for or by the Wells REIT. The
advisor may be reimbursed for the administrative services necessary to the
prudent operation of the Wells REIT provided that the reimbursement shall be at
the lower of the advisor's actual cost or the amount the Wells REIT would be
required to pay to independent parties for comparable administrative services in
the same geographic location. We will not reimburse the advisor or its
affiliates for services for which they are entitled to compensation by way of a
separate fee. Excluded from allowable reimbursement shall be: (1) rent or
depreciation, utilities, capital equipment, other administrative items; and (2)
salaries, fringe benefits, travel expenses and other administrative items
incurred by or allocated to any controlling persons of the advisor or its
affiliates.
Since the advisor and its affiliates are entitled to differing levels of
compensation for undertaking different transactions on behalf of the Wells REIT
such as the property management fees for operating the properties and the
subordinated participation in net sale proceeds, the advisor has the ability to
affect the nature of the compensation it receives by undertaking different
transactions. However, the advisor is obligated to exercise good faith and
integrity in all its dealings with respect to our affairs pursuant to the
advisory agreement. (See "Management -- The Advisory Agreement.") Because
these fees or expenses are payable only with respect to certain transactions or
services, they may not be recovered by the advisor or its affiliates by
reclassifying them under a different category.
Conflicts of Interest
We are subject to various conflicts of interest arising out of our
relationship with the advisor and its affiliates, including conflicts related to
the arrangements pursuant to which the advisor and its affiliates will be
compensated by the Wells REIT. (See "Management Compensation.")
The independent directors have an obligation to function on our behalf in
all situations in which a conflict of interest may arise and will have a
fiduciary obligation to act on behalf of the shareholders. These conflicts
include, but are not limited to, the following:
Interests in Real Estate Programs
The advisor and its affiliates are general partners of other Wells
programs, including partnerships which have investment objectives similar to
those of the Wells REIT, and we expect that they will organize other such
partnerships in the future. The advisor and such affiliates have legal and
financial obligations with respect to these partnerships which are similar to
their obligations to the Wells REIT. As general partners, they may have
contingent liability for the obligations of such partnerships as well as those
of the Wells REIT which, if such obligations were enforced against them, could
result in substantial reduction of their net worth.
The advisor and its affiliates are currently sponsoring a real estate
program known as Wells Real Estate Fund XII, L.P. The registration statement of
Wells Real Estate Fund XII, L.P. was declared effective by the Securities and
Exchange Commission on March 22, 1999 for the offer and sale to the public of up
to 7,000,000 units of limited partnership interest at a price of $10.00 per
unit.
As described in the "Prior Performance Summary," the advisor and its
affiliates have sponsored the following 13 other public real estate programs
with substantially identical investment objectives as those of the Wells REIT:
1. Wells Real Estate Fund I (Wells Fund I),
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2. Wells Real Estate Fund II (Wells Fund II),
3. Wells Real Estate Fund II-OW (Wells Fund II-OW),
4. Wells Real Estate Fund III, L.P. (Wells Fund III),
5. Wells Real Estate Fund IV, L.P. (Wells Fund IV),
6. Wells Real Estate Fund V, L.P. (Wells Fund V),
7. Wells Real Estate Fund VI, L.P. (Wells Fund VI),
8. Wells Real Estate Fund VII, L.P. (Wells Fund VII),
9. Wells Real Estate Fund VIII, L.P. (Wells Fund VIII),
10. Wells Real Estate Fund IX, L.P. (Wells Fund IX),
11. Wells Real Estate Fund X, L.P. (Wells Fund X),
12. Wells Real Estate Fund XI, L.P. (Wells Fund XI), and
13. Wells Real Estate Fund XII, L.P. (Wells Fund XII)
In the event that the Wells REIT, or any other Wells program or other
entity formed or managed by the advisor or its affiliates is in the market for
similar properties, the advisor will review the investment portfolio of each
such affiliated entity prior to making a decision as to which Wells program will
purchase such properties. (See "Certain Conflict Resolution Procedures.")
The advisor may acquire, for its own account or for private placement,
properties which it deems not suitable for purchase by the Wells REIT, whether
because of the greater degree of risk, the complexity of structuring inherent in
such transactions, financing considerations or for other reasons, including
properties with potential for attractive investment returns.
Other Activities of the Advisor and its Affiliates
We rely on the advisor for the day-to-day operation of our business. As a
result of its interests in other Wells programs and the fact that it has also
engaged and will continue to engage in other business activities, the advisor
and its affiliates will have conflicts of interest in allocating their time
between the Wells REIT and other Wells programs and activities in which they are
involved. (See "Risk Factors -- Investment Risks.") However, the advisor
believes that it and its affiliates have sufficient personnel to discharge fully
their responsibilities to all of the Wells programs and ventures in which they
are involved.
The advisor or any of its affiliates may temporarily enter into contracts
relating to investment in properties to be assigned to the Wells REIT prior to
closing or may purchase property in their own name and temporarily hold title
for the Wells REIT provided that such property is purchased by the Wells REIT at
a price no greater than the cost of such property, including acquisition and
carrying costs, to the advisor or the affiliate. Further, the advisor or such
affiliate may not have held title to any such property on our behalf for more
than 12 months prior to the commencement of this offering; the advisor or its
affiliates shall not sell property to the Wells REIT if the cost of the property
exceeds the funds reasonably anticipated to be available for the Wells REIT to
purchase any such property; and all profits and losses during the period any
such property is held by the Wells REIT or its affiliates will accrue to the
Wells REIT. In no event may the Wells REIT:
. loan funds to the advisor or any of its affiliates; or
. enter into agreements with the advisor or its affiliates for the
provision of insurance covering the Wells REIT or any of our
properties.
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Competition
Conflicts of interest will exist to the extent that we may acquire
properties in the same geographic areas where properties owned by other Wells
programs are located. In such a case, a conflict could arise in the leasing of
properties in the event that the Wells REIT and another Wells program were to
compete for the same tenants in negotiating leases, or a conflict could arise in
connection with the resale of properties in the event that the Wells REIT and
another Wells program were to attempt to sell similar properties at the same
time. Conflicts of interest may also exist at such time as the Wells REIT or
our affiliates managing property on our behalf seek to employ developers,
contractors or building managers as well as under other circumstances. The
advisor will seek to reduce conflicts relating to the employment of developers,
contractors or building managers by making prospective employees aware of all
such properties seeking to employ such persons. In addition, the advisor will
seek to reduce conflicts which may arise with respect to properties available
for sale or rent by making prospective purchasers or tenants aware of all such
properties. However, these conflicts cannot be fully avoided in that the
advisor may establish differing compensation arrangements for employees at
different properties or differing terms for resales or leasing of the various
properties.
Affiliated Dealer Manager
Since Wells Investment Securities, Inc., the Dealer Manager, is an
affiliate of the advisor, we will not have the benefit of an independent due
diligence review and investigation of the type normally performed by an
unaffiliated, independent underwriter in connection with the offering of
securities. (See "Plan of Distribution.")
Affiliated Property Manager
Since we anticipate that properties we acquire will be managed and leased
by Wells Management Company, Inc., we will not have the benefit of independent
property management. (See "Management -- Affiliated Companies.")
Lack of Separate Representation
Holland & Knight LLP is counsel to the Wells REIT, the advisor, the Dealer
Manager and their affiliates in connection with this offering and may in the
future act as counsel to the Wells REIT, the advisor, the Dealer Manager and
their affiliates. There is a possibility that in the future the interests of
the various parties may become adverse. In the event that a dispute were to
arise between the Wells REIT and the advisor, the Dealer Manager or any of their
affiliates, separate counsel for such matters will be retained as and when
appropriate.
Joint Ventures with Affiliates of the Advisor
We are likely to enter into one or more joint venture agreements with other
Wells programs for the acquisition, development or improvement of properties.
(See "Investment Objectives and Criteria -- Joint Venture Investments.") The
advisor and its affiliates may have conflicts of interest in determining which
Wells program should enter into any particular joint venture agreement. The co-
venturer may have economic or business interests or goals which are or which may
become inconsistent with our business interests or goals. In addition, should
any such joint venture be consummated, the advisor may face a conflict in
structuring the terms of the relationship between our interests and the interest
of the affiliated co-venturer and in managing the joint venture. Since the
advisor and its affiliates will control both the Wells REIT and the affiliated
co-venturer, agreements and transactions between the co-venturers with respect
to any such joint venture will not have the benefit of arm's-length negotiation
of the type normally conducted between unrelated co-venturers. (See "Risk
Factors -- Investment Risks.")
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Receipt of Fees and Other Compensation by the Advisor and its Affiliates
A transaction involving the purchase and sale of properties may result in
the receipt of commissions, fees and other compensation by the advisor and its
affiliates, including acquisition and advisory fees, the dealer manager fee,
property management and leasing fees, real estate brokerage commissions, and
participation in nonliquidating net sale proceeds. However, the fees and
compensation payable to the advisor and its affiliates relating to the sale of
properties are subordinated to the return to the shareholders of their capital
contributions plus cumulative returns on such capital. Subject to oversight by
the board of directors, the advisor has considerable discretion with respect to
all decisions relating to the terms and timing of all transactions. Therefore,
the advisor may have conflicts of interest concerning certain actions taken on
our behalf, particularly due to the fact that such fees will generally be
payable to the advisor and its affiliates regardless of the quality of the
properties acquired or the services provided to the Wells REIT. (See
"Management Compensation.")
Every transaction we enter into with Wells Capital or its affiliates is
subject to an inherent conflict of interest. The board may encounter conflicts
of interest in enforcing our rights against any affiliate in the event of a
default by or disagreement with an affiliate or in invoking powers, rights or
options pursuant to any agreement between us and any affiliates. A majority of
the independent directors who are otherwise disinterested in the transaction
must approve each transaction between us and Wells Capital or any of its
affiliates as being fair and reasonable to us and on terms and conditions no
less favorable to us than those available from unaffiliated third parties.
Certain Conflict Resolution Procedures
In order to reduce or eliminate certain potential conflicts of interest,
our articles of incorporation contain a number of restrictions relating to (1)
transactions we enter into with the advisor and its affiliates, (2) certain
future offerings, and (3) allocation of properties among affiliated entities.
These restrictions include, among others, the following:
. We will not accept goods or services from Wells Capital or its
affiliates unless a majority of the directors, including a majority of
the independent directors, not otherwise interested in the
transactions approve such transactions as fair and reasonable to the
Wells REIT and on terms and conditions not less favorable to the Wells
REIT than those available from unaffiliated third parties.
. We will not purchase or lease properties in which Wells Capital or its
affiliates has an interest without a determination by a majority of
the directors, including a majority of the independent directors, not
otherwise interested in such transaction, that such transaction is
competitive and commercially reasonable to the Wells REIT and at a
price to the Wells REIT no greater than the cost of the property to
Wells Capital or its affiliates unless there is substantial
justification for any amount that exceeds such cost and such excess
amount is determined to be reasonable. In no event will we acquire
any such property at an amount in excess of its appraised value. We
will not sell or lease properties to Wells Capital or its affiliates
or to our directors unless a majority of the directors, including a
majority of the independent directors, not otherwise interested in the
transaction determine the transaction is fair and reasonable to the
Wells REIT.
. We will not make any loans to Wells Capital or its affiliates or to
our directors. In addition, Wells Capital and its affiliates will not
make loans to us or to joint ventures in which we are a joint venture
partner for the purpose of acquiring properties. Any loans made to us
by Wells Capital or its affiliates or to our directors for other
purposes must be
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approved by a majority of the directors, including a majority of the
independent directors, not otherwise interested in the transaction as
fair, competitive and commercially reasonable, and no less favorable
to the Wells REIT than comparable loans between unaffiliated parties.
Wells Capital and its affiliates shall be entitled to reimbursement,
at cost, for actual expenses incurred by them on behalf of the Wells
REIT or joint ventures in which we are a joint venture partner,
subject to the limitation on reimbursement of operating expenses to
the extent that they exceed the greater of 2% of our average invested
assets or 25% of our net income, as described in the "Management --
The Advisory Agreement" section of this prospectus.
. In the event that an investment opportunity becomes available which is
suitable, under all of the factors considered by the advisor, for the
Wells REIT and one or more other public or private entities affiliated
with Wells Capital and its affiliates, then the entity which has had
the longest period of time elapse since it was offered an investment
opportunity will first be offered such investment opportunity. In
determining whether or not an investment opportunity is suitable for
more than one program, Wells Capital, subject to approval by the board
of directors, shall examine, among others, the following factors:
. the cash requirements of each program;
. the effect of the acquisition both on diversification of each
program's investments by type of commercial property and
geographic area, and on diversification of the tenants of its
properties;
. the policy of each program relating to leverage of properties;
. the anticipated cash flow of each program;
. the income tax effects of the purchase of each program;
. the size of the investment; and
. the amount of funds available to each program and the length of
time such funds have been available for investment.
If a subsequent development, such as a delay in the closing of a property
or a delay in the construction of a property, causes any such investment, in the
opinion of our board of directors and the advisor, to be more appropriate for a
program other than the program that committed to make the investment, Wells
Capital may determine that another program affiliated with the advisor or its
affiliates will make the investment. Our board of directors has a duty to ensure
that the method used by Wells Capital for the allocation of the acquisition of
properties by two or more affiliated programs seeking to acquire similar types
of properties shall be reasonable.
Investment Objectives and Criteria
General
We invest in commercial real properties, including properties which are
under development or construction, are newly constructed or have been
constructed and have operating histories. Our investment objectives are:
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. to maximize cash dividends paid to you;
. to preserve, protect and return your capital contributions; and
. to realize growth in the value of our properties upon our ultimate
sale of such properties; and
. to provide you with liquidity of your investment by listing the shares
on a national exchange or, if we do not obtain listing of the shares
by January 30, 2008, by selling our properties and distributing the
net proceeds from such sales to you.
We cannot assure you that we will attain these objectives or that our capital
will not decrease. We may not change our investment objectives, except upon
approval of shareholders holding a majority of the shares.
Decisions relating to the purchase or sale of properties will be made by
Wells Capital subject to approval by the board of directors. See "Management"
for a description of the background and experience of the directors and
executive officers.
Acquisition and Investment Policies
We will seek to invest substantially all of the offering proceeds available
for investment in the acquisition of high grade commercial office buildings,
which are newly constructed, under construction, or which have been previously
constructed and have operating histories. We are not limited to such
investments, however. We may invest in other commercial properties such as
shopping centers, business and industrial parks, manufacturing facilities and
warehouse and distribution facilities. We will attempt to acquire commercial
properties which are less than five years old, the space in which has been
leased or preleased to one or more large corporate tenants who satisfy our
standards of creditworthiness. (See "Terms of Leases and Tenant
Creditworthiness.") The trend of the advisor and its affiliates in the most
recently sponsored Wells programs has been to invest primarily in office
buildings located in densely populated suburban markets. (See "Prior
Performance Summary.")
We will seek to invest in properties that will satisfy the primary
objective of providing dividend distributions to shareholders. However, because
a significant factor in the valuation of income-producing real properties is
their potential for future income, we anticipate that the majority of properties
we acquire will have both the potential for growth in value and providing
dividend distributions to shareholders. To the extent feasible, we will strive
to invest in a diversified portfolio of properties, in terms of geography, type
of property and industry group of our tenants, that will satisfy our investment
objectives of maximizing cash available for distribution as dividends,
preserving our capital and realizing growth in value upon the ultimate sale of
our properties.
We anticipate that approximately 84% of the proceeds from the sale of
shares will be used to acquire real estate properties and the balance will be
used to pay various fees and expenses. (See "Estimated Use of Proceeds.")
We will not invest more than 10% of the net offering proceeds available for
investment in properties in unimproved or non-income producing properties. A
property which is expected to produce income within two years of its acquisition
will not be considered a non-income producing property.
Investment in real estate generally will take the form of fee title or of a
long-term leasehold estate. We will acquire such interests either directly in
Wells OP (see "The Operating Partnership
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Agreement") or indirectly through limited liability companies or through
investments in joint ventures, general partnerships, co-tenancies or other co-
ownership arrangements with the developers of the properties, affiliates of the
advisor or other persons. (See "Joint Venture Investments" below.) In addition,
we may purchase properties and lease them back to the sellers of such
properties. While we will use our best efforts to structure any such sale-
leaseback transaction such that the lease will be characterized as a "true
lease" so that we will be treated as the owner of the property for federal
income tax purposes, we cannot assure you that the IRS will not challenge such
characterization. In the event that any such sale-leaseback transaction is
recharacterized as a financing transaction for federal income tax purposes,
deductions for depreciation and cost recovery relating to such property would be
disallowed. (See "Federal Income Tax Considerations -- Sale-Leaseback
Transactions.")
Although we are not limited as to the geographic area where we may conduct
our operations, we intend to invest in properties located in the United States.
We are not specifically limited in the number or size of properties we may
acquire or on the percentage of net proceeds of this offering which we may
invest in a single property. The number and mix of properties we acquire will
depend upon real estate and market conditions and other circumstances existing
at the time we are acquiring our properties and the amount of the proceeds we
raise in this offering.
In making investment decisions for us, Wells Capital will consider relevant
real estate property and financial factors, including the location of the
property, its suitability for any development contemplated or in progress, its
income-producing capacity, the prospects for long-range appreciation, its
liquidity and income tax considerations. In this regard, Wells Capital will
have substantial discretion with respect to the selection of specific
investments.
Our obligation to close the purchase of any investment will generally be
conditioned upon the delivery and verification of certain documents from the
seller or developer, including, where appropriate:
. plans and specifications;
. environmental reports;
. surveys;
. evidence of marketable title subject to such liens and encumbrances as
are acceptable to the advisor;
. audited financial statements covering recent operations of properties
having operating histories unless such statements are not required to
be filed with the Securities and Exchange Commission and delivered to
shareholders; and
. title and liability insurance policies.
We will not close the purchase of any property unless and until we obtain
an environmental assessment, a minimum of a Phase I review, for each property
purchased and are generally satisfied with the environmental status of the
property.
We may also enter into arrangements with the seller or developer of a
property whereby the seller or developer agrees that if during a stated period
the property does not generate a specified cash
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flow, the seller or developer will pay in cash to the Wells REIT a sum necessary
to reach the specified cash flow level, subject in some cases to negotiated
dollar limitations.
In determining whether to purchase a particular property, we may, in
accordance with customary practices, obtain an option on such property. The
amount paid for an option, if any, is normally surrendered if the property is
not purchased and is normally credited against the purchase price if the
property is purchased.
In purchasing, leasing and developing real estate properties, we will be
subject to risks generally incident to the ownership of real estate, including:
. changes in general economic or local conditions;
. changes in supply of or demand for similar or competing properties in
an area;
. changes in interest rates and availability of permanent mortgage funds
which may render the sale of a property difficult or unattractive;
. changes in tax, real estate, environmental and zoning laws;
. periods of high interest rates and tight money supply which may make
the sale of properties more difficult;
. tenant turnover; and
. general overbuilding or excess supply in the market area.
Development and Construction of Properties
We may invest substantially all of the proceeds available for investment in
properties on which improvements are to be constructed or completed although we
may not invest in excess of 10% of the offering proceeds available for
investment in properties which are not expected to produce income within two
years of their acquisition. To help ensure performance by the builders of
properties which are under construction, completion of properties under
construction shall be guaranteed at the price contracted either by an adequate
completion bond or performance bond. Wells Capital may rely upon the
substantial net worth of the contractor or developer or a personal guarantee
accompanied by financial statements showing a substantial net worth provided by
an affiliate of the person entering into the construction or development
contract as an alternative to a completion bond or performance bond. Development
of real estate properties is subject to risks relating to a builder's ability to
control construction costs or to build in conformity with plans, specifications
and timetables. (See "Risk Factors -- Real Estate Risks.")
We may directly employ one or more project managers to plan, supervise and
implement the development of any unimproved properties which we may acquire.
Such persons would be compensated directly by the Wells REIT.
Acquisition of Properties from Wells Development Corporation
We may acquire properties, directly or through joint ventures with
affiliated entities, from Wells Development Corporation (Wells Development), a
corporation formed by Wells Management Company, Inc. (Wells Management) as a
wholly owned subsidiary for the purposes of (1) acquiring existing income-
producing commercial real estate properties, and (2) acquiring land, developing
commercial real
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properties, securing tenants for such properties, and selling such properties
upon completion to the Wells REIT or other Wells programs. In the case of
properties to be developed by Wells Development and sold to the Wells REIT, we
anticipate that Wells Development will:
. acquire a parcel of land;
. enter into contracts for the construction and development of a
commercial building thereon;
. enter into an agreement with one or more tenants to lease all or a
majority of the property upon its completion; and
. secure a financing commitment from a commercial bank or other
institutional lender to finance the acquisition and development of the
property.
Contracts between Wells Development and the Wells REIT will generally
provide for the Wells REIT to acquire the developed property upon its completion
and upon the tenant taking possession under its lease.
We will be required to pay a substantial sum to Wells Development at the
time of entering into the contract as a refundable earnest money deposit to be
credited against the purchase price at closing, which Wells Development will
apply to the cost of acquiring the land and initial development costs. We
expect that the earnest money deposit will represent approximately twenty to
thirty percent (20-30%) of the purchase price of the developed property set
forth in the purchase contract.
In the case of properties we acquire from Wells Development that have
already been developed, Wells Development will be required to obtain an
appraisal for the property prior to our contracting with them, and the purchase
price we will pay under the purchase contract will not exceed the fair market
value of the property as determined by the appraisal. In the case of properties
we acquire from Wells Development which have not yet been constructed at the
time of contracting, Wells Development will be required to obtain an independent
"as built" appraisal for the property prior to our contracting with them, and
the purchase price we will pay under the purchase contract will not exceed the
anticipated fair market value of the developed property as determined by the
appraisal.
We anticipate that Wells Development will use the earnest money deposit
received from the Wells REIT upon execution of a purchase contract as partial
payment for the cost of the acquisition of the land and construction
expenditures. Wells Development will borrow the remaining funds necessary to
complete the development of the property from an independent commercial bank or
other institutional lender by pledging the real property, development contracts,
leases and all other contract rights relating to the project as security for
such borrowing. Our contract with Wells Development will require it to deliver
to us at closing title to the property, as well as an assignment of leases.
Wells Development will hold the title to the property on a temporary basis only
for the purpose of facilitating the acquisition and development of the property
prior to its resale to the Wells REIT and other affiliates of Wells Capital.
We may enter into a contract to acquire property from Wells Development
notwithstanding the fact that at the time of contracting, we have not yet raised
sufficient proceeds to enable us to pay the full amount of the purchase price at
closing. We anticipate that we will be able to raise sufficient additional
proceeds from the offering during the period between execution of the contract
and the date provided in the contract for closing. In the case of properties to
be developed by Wells Development, the contract will likely provide that the
closing will occur immediately following the completion of the development by
Wells Development. However, the contract may also provide that we may elect to
close the purchase
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of the property before the development has been completed, in which case we
would obtain an assignment of the construction and development contracts from
Wells Development and would complete the construction either directly or through
a joint venture with an affiliate. Any contract between the Wells REIT, directly
or indirectly through a joint venture with an affiliate, and Wells Development
for the purchase of property to be developed by Wells Development will provide
that we will be obligated to purchase the property only if:
. Wells Development completes the development of the improvements in
accordance with the specifications of the contract, and an approved
tenant takes possession of the building under a lease satisfactory to
the advisor; and
. we have sufficient proceeds available for investment in properties at
closing to pay the balance of the purchase price remaining after
payment of the earnest money deposit.
Wells Capital will not cause the Wells REIT to enter into a contract to
acquire property from Wells Development if it does not reasonably anticipate
that funds will be available to purchase the property at the time of closing.
If we enter into a contract to acquire property from Wells Development and, at
the time for closing, are unable to purchase the property because we do not have
sufficient proceeds available for investment, we will not be required to close
the purchase of the property and will be entitled to a refund of our earnest
money deposit from Wells Development. Because Wells Development is an entity
without substantial assets or operations, however, Wells Development's
obligation to refund our earnest money deposit will be guaranteed by Wells
Management. See the "Management -- Affiliated Companies" section of this
prospectus for a description of Wells Management.
If Wells Management is required to make good on its guaranty, we may not be
able to obtain the earnest money deposit from Wells Management in a lump sum
since Wells Management's only significant assets are its contracts for property
management and leasing services, in which case we would more than likely be
required to accept installment payments over some period of time out of Wells
Management's operating revenues. (See "Risk Factors -- Real Estate Risks.")
Terms of Leases and Tenant Creditworthiness
The terms and conditions of any lease we enter into with our tenants may
vary substantially from those we describe in this prospectus. However, we
expect that a majority of our leases will be what is generally referred to as
"triple net" leases. A "triple net" lease provides that the tenant will be
required to pay or reimburse the Wells REIT for all real estate taxes, sales and
use taxes, special assessments, utilities, insurance and building repairs, and
other building operation and management costs, in addition to making its lease
payments.
Wells Capital has developed specific standards for determining the
creditworthiness of potential tenants of our properties. While authorized to
enter into leases with any type of tenant, we anticipate that a majority of our
tenants will be U.S. corporations or other entities which have a net worth in
excess of $100,000,000 or whose lease obligations are guaranteed by another
corporation or entity with a net worth in excess of $100,000,000.
In an attempt to limit or avoid speculative purchases, to the extent
possible, the advisor will seek to secure, on our behalf, leases with tenants at
or prior to the closing of acquisitions of our properties.
We anticipate that tenant improvements required to be funded by the
landlord in connection with newly acquired properties will be funded from our
offering proceeds. However, at such time as a tenant
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at one of our properties does not renew its lease or otherwise vacates its space
in one of our buildings, it is likely that, in order to attract new tenants, we
will be required to expend substantial funds for tenant improvements and tenant
refurbishments to the vacated space. Since we do not anticipate maintaining
permanent working capital reserves, we may not have access to funds required in
the future for tenant improvements and tenant refurbishments in order to attract
new tenants to lease vacated space. (See "Risk Factors -- Real Estate Risks.")
Joint Venture Investments
We are likely to enter into one or more joint ventures with affiliated
entities for the acquisition, development or improvement of properties for the
purpose of diversifying our portfolio of assets. In this connection, we will
likely enter into joint ventures with Wells Fund XI or Wells Fund XII or other
Wells programs. Our advisor also has the authority to cause us to enter into
joint ventures, general partnerships, co-tenancies and other participations with
real estate developers, owners and others for the purpose of developing, owning
and operating real properties. (See "Conflicts of Interest.") In determining
whether to invest in a particular joint venture, our advisor will evaluate the
real property which such joint venture owns or is being formed to own under the
same criteria described elsewhere in this prospectus for the selection of real
estate property investments of the Wells REIT. (See generally "Investment
Objectives and Criteria.")
At such time as the advisor believes that a reasonable probability exists
that we will enter into a joint venture with another Wells program for the
acquisition or development of a specific property, this prospectus will be
supplemented to disclose the terms of such proposed investment transaction.
Based upon the advisor's experience, in connection with the development of a
property which is currently owned by a Wells program, this would normally occur
upon the signing of legally binding purchase agreement for the acquisition of a
specific property or leases with one or more major tenants for occupancy at a
particular property, but may occur before or after any such signing, depending
upon the particular circumstances surrounding each potential investment. You
should not rely upon such initial disclosure of any proposed transaction as an
assurance that we will ultimately consummate the proposed transaction or that
the information we provide in any supplement to this prospectus concerning any
proposed transaction will not change after the date of the supplement.
We intend to enter into joint ventures with other Wells programs for the
acquisition of properties, but we may only do so provided that:
. a majority of our directors, including a majority of the independent
directors, approve the transaction as being fair and reasonable to the
Wells REIT;
. the investment by the Wells REIT and such affiliate are on
substantially the same terms and conditions; and
. we will have a right of first refusal to buy if such co-venturer
elects to sell its interest in the property held by the joint venture.
In the event that the co-venturer were to elect to sell property held in any
such joint venture, however, we may not have sufficient funds to exercise our
right of first refusal to buy the other co-venturer's interest in the property
held by the joint venture. In the event that any joint venture with an
affiliated entity holds interests in more than one property, the interest in
each such property may be specially allocated based upon the respective
proportion of funds invested by each co-venturer in each such property.
Entering into joint ventures with other Wells programs will result in certain
conflicts of interest. (See "Conflicts of Interest -- Joint Ventures with
Affiliates of the Advisor.")
56
<PAGE>
Borrowing Policies
While we strive for diversification, the number of different properties we
can acquire will be affected by the amount of funds available to us.
Our ability to increase our diversification through borrowing could be
adversely impacted by banks and other lending institutions reducing the amount
of funds available for loans secured by real estate. When interest rates on
mortgage loans are high or financing is otherwise unavailable on a timely basis,
we may purchase certain properties for cash with the intention of obtaining a
mortgage loan for a portion of the purchase price at a later time.
There is no limitation on the amount we may invest in any single improved
property or on the amount we can borrow for the purchase of any property. The
NASAA Guidelines only limit our borrowing to 75% of the value of all properties
unless any excess borrowing is approved by a majority of the independent
directors and is disclosed to shareholders in our next quarterly report.
However, under our articles of incorporation, we have a self-imposed limitation
on borrowing which precludes us from borrowing in the aggregate in excess of 50%
of the value of all of our properties.
By operating on a leveraged basis, we will have more funds available for
investment in properties. This will allow us to make more investments than
would otherwise be possible, resulting in a more diversified portfolio. Although
our liability for the repayment of indebtedness is expected to be limited to the
value of the property securing the liability and the rents or profits derived
therefrom, our use of leveraging increases the risk of default on the mortgage
payments and a resulting foreclosure of a particular property. (See "Risk
Factors -- Real Estate Risks.") To the extent that we do not obtain mortgage
loans on our properties, our ability to acquire additional properties will be
restricted. Wells Capital will use its best efforts to obtain financing on the
most favorable terms available to us. Lenders may have recourse to assets not
securing the repayment of the indebtedness.
Wells Capital will refinance properties during the term of a loan only in
limited circumstances, such as when a decline in interest rates makes it
beneficial to prepay an existing mortgage, when an existing mortgage matures or
if an attractive investment becomes available and the proceeds from the
refinancing can be used to purchase such investment. The benefits of the
refinancing may include an increased cash flow resulting from reduced debt
service requirements, an increase in dividend distributions from proceeds of the
refinancing, if any, and/or an increase in property ownership if some
refinancing proceeds are reinvested in real estate.
We may not borrow money from any of our directors or from Wells Capital and
its affiliates for the purpose of acquiring real properties. Any loans by such
parties for other purposes must be approved by a majority of the directors,
including a majority of the independent directors, not otherwise interested in
the transaction as fair, competitive and commercially reasonable and no less
favorable to the Wells REIT than comparable loans between unaffiliated parties.
Disposition Policies
We intend to hold each property we acquire for an extended period. However,
circumstances might arise which could result in the early sale of some
properties. A property may be sold before the end of the expected holding period
if:
. the tenant has involuntarily liquidated;
. in the judgment of Wells Capital, the value of a property might
decline substantially;
57
<PAGE>
. an opportunity has arisen to improve other properties;
. we can increase cash flow through the disposition of the property;
. the tenant is in default under the lease; or
. in our judgment, the sale of the property is in our best interests.
The determination of whether a particular property should be sold or
otherwise disposed of will be made after consideration of relevant factors,
including prevailing economic conditions, with a view to achieving maximum
capital appreciation. We cannot assure you that this objective will be
realized. The selling price of a property which is net leased will be determined
in large part by the amount of rent payable under the lease. If a tenant has a
repurchase option at a formula price, we may be limited in realizing any
appreciation. In connection with our sales of properties we may lend the
purchaser all or a portion of the purchase price. In these instances, our
taxable income may exceed the cash received in the sale. (See "Federal Income
Considerations -- Failure to Qualify as a REIT.") The terms of payment will be
affected by custom in the area in which the property being sold is located and
the then prevailing economic conditions.
If the shares are not listed for trading on a national securities exchange
or included for quotation on Nasdaq by January 30, 2008, our articles of
incorporation require us to sell all of our properties and distribute the net
sale proceeds to you in liquidation of the Wells REIT. In making the decision
to apply for listing of the shares, the directors will try to determine whether
listing the shares or liquidating our assets will result in greater value for
the shareholders. It cannot be determined at this time the circumstances, if
any, under which the directors will agree to list the shares. Even if the
shares are not listed or included for quotation, we are under no obligation to
actually sell our portfolio within this period since the precise timing will
depend on real estate and financial markets, economic conditions of the areas in
which the properties are located and federal income tax effects on shareholders
which may prevail in the future. Furthermore, we cannot assure you that we will
be able to liquidate our assets, and it should be noted that we will continue in
existence until all properties are sold and our other assets are liquidated.
Investment Limitations
Our articles of incorporation place numerous limitations on us with respect
to the manner in which we may invest our funds. These limitations cannot be
changed unless our articles of incorporation are amended, which requires the
approval of the shareholders. Unless the articles are amended, we will not:
. invest in commodities or commodity futures contracts, except for
futures contracts when used solely for the purpose of hedging in
connection with our ordinary business of investing in real estate
assets and mortgages;
. invest in real estate contracts of sale, otherwise known as land sale
contracts, unless the contract is in recordable form and is
appropriately recorded in the chain of title;
. make or invest in mortgage loans except in connection with a sale or
other disposition of a property;
. make or invest in mortgage loans unless an appraisal is obtained
concerning the underlying property except for those mortgage loans
insured or guaranteed by a government or government agency. Mortgage
debt on any property shall not exceed
58
<PAGE>
such property's appraised value. In cases where the board of directors
determines, and in all cases in which the transaction is with any of
our directors or Wells Capital and its affiliates, such appraisal
shall be obtained from an independent appraiser. We will maintain such
appraisal in our records for at least five years and it will be
available for your inspection and duplication. We will also obtain a
mortgagee's or owner's title insurance policy as to the priority of
the mortgage;
. make or invest in mortgage loans that are subordinate to any mortgage
or equity interest of any of our directors, Wells Capital or its
affiliates;
. make or invest in mortgage loans, including construction loans, on any
one property if the aggregate amount of all mortgage loans on such
property would exceed an amount equal to 85% of the appraised value of
such property as determined by appraisal unless substantial
justification exists because of the presence of other underwriting
criteria;
. invest in junior debt secured by a mortgage on real property which is
subordinate to the lien or other senior debt except where the amount
of such junior debt plus any senior debt exceeds 90% of the appraised
value of such property, if after giving effect thereto, the value of
all such mortgage loans of the Wells REIT would not then exceed 25% of
our net assets, which shall mean our total assets less our total
liabilities;
. borrow in excess of 50% of the aggregate value of all properties owned
by us, provided that we may borrow in excess of 50% of the value of an
individual property;
. engage in any short sale or borrow on an unsecured basis, if the
borrowing will result in asset coverage of less than 300%. "Asset
coverage," for the purpose of this clause, means the ratio which the
value of our total assets, less all liabilities and indebtedness for
unsecured borrowings, bears to the aggregate amount of all of our
unsecured borrowings;
. make investments in unimproved property or indebtedness secured by a
deed of trust or mortgage loans on unimproved property in excess of
10% of our total assets;
. issue equity securities on a deferred payment basis or other similar
arrangement;
. issue debt securities in the absence of adequate cash flow to cover
debt service;
. issue equity securities which are non-voting or assessable;
. issue "redeemable securities" as defined in Section 2(a)(32) of the
Investment Company Act of 1940;
. grant warrants or options to purchase shares to officers or affiliated
directors or to Wells Capital or its affiliates except on the same
terms as the options or warrants are sold to the general public and
the amount of the options or warrants does not exceed an amount equal
to 10% of the outstanding shares on the date of grant of the warrants
and options;
. engage in trading, as compared with investment activities, or engage
in the business of underwriting or the agency distribution of
securities issued by other persons;
. invest more than 5% of the value of our assets in the securities of
any one issuer if the investment would cause us to fail to qualify as
a REIT;
59
<PAGE>
. invest in securities representing more than 10% of the outstanding
voting securities of any one issuer if the investment would cause us
to fail to qualify as a REIT; or
. lend money to Wells Capital or its affiliates;
Wells Capital will continually review our investment activity to attempt to
ensure that we do not come within the application of the Investment Company Act
of 1940. Among other things, Wells Capital will attempt to monitor the
proportion of our portfolio that is placed in various investments so that we do
not come within the definition of an "investment company" under the act. If at
any time the character of our investments could cause us to be deemed an
investment company for purposes of the Investment Company Act of 1940, we will
take the necessary action to ensure that we are not deemed to be an "investment
company."
Change in Investment Objectives and Limitations
Our articles of incorporation require that the independent directors review
our investment policies at least annually to determine that the policies we are
following are in the best interest of the shareholders. Each determination and
the basis therefor shall be set forth in our minutes. The methods of
implementing our investment policies also may vary as new investment techniques
are developed. The methods of implementing our investment objectives and
policies, except as otherwise provided in the organizational documents, may be
altered by a majority of the directors, including a majority of the independent
directors, without the approval of the shareholders.
Description of Properties
As of September 30, 1999, we had purchased interests in 16 real estate
properties located in 11 states, all of which are leased to tenants on a triple-
net basis. The cost of each of the properties will be depreciated for tax
purposes over a 40 year period on a straight-line basis. We believe all of the
properties are adequately covered by insurance and are suitable for their
intended purposes. The following table provides certain additional information
about these properties.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Tenant Property % Purchase Square Annual Lease
Location Owned Price Feet Rent Expiration
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gartner Group, Ft. Myers, FL 56.8% $ 8,320,000 62,400 $ 642,798 01/2008
Inc.
- --------------------------------------------------------------------------------------------------------------
Videojet Systems Wood Dale, 100% $32,630,940 250,354 $2,838,952 11/2008
International, IL
Inc.
- --------------------------------------------------------------------------------------------------------------
Johnson Tredyffrin 56.8% $ 8,000,000 130,000 $ 789,750 06/2007
Matthey, Inc. Township,
PA
- --------------------------------------------------------------------------------------------------------------
ABB Power Richmond, 100% $11,559,347 100,000 $ 956,000 05/2011
Generation Inc. VA
- --------------------------------------------------------------------------------------------------------------
Sprint Communi- Leawood, 56.8% $ 9,500,000 68,900 $ 999,050 05/2007
cations Company KS
L.P.
- --------------------------------------------------------------------------------------------------------------
EYBL CarTex, Fountain 56.8% $ 5,121,828 169,510 $ 508,530 02/2008
Inc. Inn, SC
- --------------------------------------------------------------------------------------------------------------
</TABLE>
60
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Matsushita Lake Forest, 100% $18,400,000 150,000 $1,830,000 12/2009
Avionics CA
Systems
Corporation
- --------------------------------------------------------------------------------------------------------------
Pennsylvania Harrisburg, PA 100% $12,291,200 81,859 $ 880,264 11/2008
Cellular
Telephone Corp.
- --------------------------------------------------------------------------------------------------------------
Price- Tampa, FL 100% $21,127,854 130,091 $1,915,741 12/2008
Waterhouse-
Coopers, LLP
- --------------------------------------------------------------------------------------------------------------
Cort Furniture Fountain 43.7% $ 6,400,000 52,000 $ 758,964 10/2003
Rental Valley, CA
Corporation
- --------------------------------------------------------------------------------------------------------------
Fairchild Fremont, CA 77.5% $ 8,900,000 58,424 $ 842,062 11/2004
Technologies
U.S.A., Inc.
- --------------------------------------------------------------------------------------------------------------
Iomega Ogden City, 3.7% $ 5,025,000 108,000 $ 480,000 07/2006
Corporation UT
- --------------------------------------------------------------------------------------------------------------
ODS Broomfield, CO 3.7% $ 8,275,000 51,974 $ 839,400 10/2001
Technologies,
L.P. and
Transecon, Inc.
- --------------------------------------------------------------------------------------------------------------
Ohmeda, Inc. Louisville, CO 3.7% $10,325,000 106,750 $1,004,520 01/2005
- --------------------------------------------------------------------------------------------------------------
ABB Flakt, Inc. Knoxville, TN 3.7% $ 7,900,000 87,000 $ 881,150 12/2007
- --------------------------------------------------------------------------------------------------------------
Lucent Oklahoma 3.7% $ 5,504,276 55,017 $ 508,383 01/2008
Technologies, City, OK
Inc.
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Joint Ventures with Affiliates
The Wells Fund XI-Fund XII-REIT Joint Venture
Wells OP entered into an Amended and Restated Joint Venture Partnership
Agreement with Wells Fund XI and Wells Fund XII for the purpose of the
acquisition, ownership, development, leasing, operation, sale and management of
real properties known as The XI-XII-REIT Joint Venture (XI-XII-REIT Joint
Venture). The XI-XII-REIT Joint Venture was originally formed on May 1, 1999
between Wells OP and Wells Fund XI. On June 21, 1999, Wells Fund XII was
admitted to the XI-XII-REIT Joint Venture as a joint venture partner. The
investment objectives of Wells Fund XI and Wells Fund XII are substantially
identical to our investment objectives.
The XI-XII-REIT Joint Venture Agreement provides that all income, profit,
loss, cash flow, resale gain, resale loss and sale proceeds of the XI-XII-REIT
Joint Venture will be allocated and distributed among Wells OP, Wells Fund XI
and Wells Fund XII based on their respective capital contributions to the joint
venture. As of September 30, 1999, the joint venture partners of the XI-XII-
REIT Joint Venture had made the following contributions and held the following
equity percentage interests:
61
<PAGE>
<TABLE>
<CAPTION>
Joint Venture Partner Capital Contribution Equity Interest
--------------------- -------------------- ---------------
<S> <C> <C>
Wells OP $17,641,211 56.77
Wells Fund XI $ 8,131,351 26.17%
Wells Fund XII $ 5,300,000 17.06%
</TABLE>
The XI-XII-REIT Joint Venture owns the EYBL CarTex Building, the Sprint
Building, the Johnson Matthey Building and the Gartner Building.
The Fund IX, Fund X, Fund XI and REIT Joint Venture
Wells OP entered into an Amended and Restated Joint Venture Agreement with
Wells Fund IX, Wells Fund X and Wells Fund XI, known as The Fund IX, Fund X,
Fund XI and REIT Joint Venture (IX-X-XI-REIT Joint Venture) for the purpose of
the acquisition, ownership, development, leasing, operation, sale and management
of real properties. The IX-X-XI-REIT Joint Venture, formerly known as Fund IX
and X Associates, was originally formed on March 20, 1997 between Wells Fund IX
and Wells Fund X. On June 11, 1998, Wells OP and Wells Fund XI were admitted as
joint venture partners to the IX-X-XI-REIT Joint Venture. The investment
objectives of Wells Fund IX, Wells Fund X and Wells Fund XI are substantially
identical to our investment objectives.
The IX-X-XI-REIT Joint Venture Agreement provides that all income, profit,
loss, cash flow, resale gain, resale loss and sale proceeds of the IX-X-XI-REIT
Joint Venture will be allocated and distributed among Wells OP, Wells Fund IX,
Wells Fund X and Wells Fund XI based on their respective capital contributions
to the IX-X-XI-REIT Joint Venture. As of September 30, 1999, the joint venture
partners of the IX-X-XI-REIT Joint Venture had made the following contributions
and held the following equity percentage interests:
<TABLE>
<CAPTION>
Joint Venture Partner Capital Contribution Equity Interest
--------------------- -------------------- ----------------
<S> <C> <C>
Wells OP $ 1,421,466 3.74%
Wells Fund IX $14,833,708 39.00%
Wells Fund X $18,420,162 48.43%
Wells Fund XI $ 3,357,436 8.83%
</TABLE>
The IX-X-XI-REIT Joint Venture owns the Lucent Building, the ABB Knoxville
Building, the Ohmeda Building, the Interlocken Building and the Iomega Building.
Wells OP is acting as the initial Administrative Venturer of both the XI-
XII-REIT Joint Venture and the IX-X-XI-REIT Joint Venture and, as such, is
responsible for establishing policies and operating procedures with respect to
the business and affairs of these joint ventures. However, approval of the
other joint venture partners will be required for any major decision or any
action which materially affects such joint ventures or their real properties.
The XI-XII-REIT Joint Venture Agreement and the IX-X-XI-REIT Joint Venture
Agreement each allow any joint venture partner to make a buy/sell election upon
receipt by any other joint venture partner of a bona fide third-party offer to
purchase all or substantially all of the properties or the last remaining
property of the respective joint venture. Upon receipt of notice of such third-
party offer, each joint venture partner must elect within 30 days after receipt
of the notice to either (1) purchase the entire interest of each venture partner
that wishes to accept the offer on the same terms and conditions as the third-
party offer to purchase, or (2) consent to the sale of the properties or last
remaining property pursuant to such third-party offer.
62
<PAGE>
The Lucent Building
The Lucent Building is a one story office building containing approximately
57,186 rentable square feet which was developed and constructed on certain real
property located in Oklahoma City, Oklahoma by Wells Development. The Lucent
Building was purchased by the IX-X-XI-REIT Joint Venture on June 24, 1998 for a
purchase price of $5,504,276, which was equal to the aggregate cost to Wells
Development of the acquisition, construction and development of the Lucent
Building, including interest and other carrying costs, and accordingly, Wells
Development made no profit from the sale of the Lucent Building to the IX-X-XI-
REIT Joint Venture. Construction of the Lucent Building was completed in January
1998.
The Lucent Building is located at 14400 Hertz Quail Springs Parkway,
Oklahoma City, Oklahoma. The site consists of approximately 5.3 acres located in
the Quail Springs Office Park in the northwest sector of Oklahoma City.
The Lucent Building is currently being leased to Lucent Technologies Inc.
(Lucent Technologies). Lucent Technologies is a telecommunications company which
was spun off by AT&T in April 1996. Lucent Technologies is in the business of
designing, developing and marketing communications systems and technologies
ranging from microchips to whole networks and is one of the world's leading
designers, developers and manufacturers of telecommunications system software
and products. Lucent Technologies is a public company traded on the New York
Stock Exchange. For the fiscal year ended September 30, 1998, Lucent
Technologies had total assets of in excess of $26 billion dollars and a net
worth of in excess of $5 billion dollars.
The initial term of the Lucent lease is ten years which commenced on
January 5, 1998 and expires in January 2008. Lucent Technologies has the option
to extend the initial term of the Lucent lease for two additional five year
periods.
The annual base rent payable under the Lucent lease will be $508,383
payable in equal monthly installments of $42,365 during the first five years of
the initial lease term, and $594,152 payable in equal monthly installments of
$49,513 during the second five years of the initial lease term. The annual base
rent for each extended term under the lease will be based upon the fair market
rent then being charged by landlords under new leases of office space in the
metropolitan Oklahoma City market for similar space in a building of comparable
quality with comparable amenities. The Lucent lease provides that if the
parties cannot agree upon the appropriate fair market value rate, the rate will
be established by real estate appraisers.
Under the Lucent lease, Lucent Technologies also has a one-time option to
terminate the Lucent lease on the seventh anniversary of the rental commencement
date, which is exercisable by written notice to the landlord at least 12 months
in advance of such seventh anniversary. If Lucent Technologies elects to
exercise its option to terminate the Lucent lease, Lucent Technologies would be
required to pay a termination payment intended to compensate the landlord for
the present value of funds expended as a construction allowance and leasing
commissions relating to the Lucent lease, amortized over and attributable to the
remaining lease term, and a rental payment equal to approximately 18 months of
monthly rental payments. We currently anticipate that the termination payment
required to be paid by Lucent Technologies, in the event it exercises its option
to terminate the Lucent lease on the seventh anniversary, would be approximately
$1,339,000 upon certain assumptions.
63
<PAGE>
The ABB Knoxville Building
The ABB Knoxville Building is a three story multi-tenant steel-framed
office building containing approximately 84,404 square feet located in
Knoxville, Tennessee. Wells Fund IX purchased the land and constructed the ABB
Knoxville Building. Wells Fund IX contributed the ABB Knoxville Building to the
IX-X-XI-REIT Joint Venture on March 26, 1997 and was credited with making a
$7,900,000 capital contribution. Construction of the ABB Knoxville Building was
completed in December 1997.
The site is approximately 5.6 acres located in an office park known as
Center Point Business Park on Pellissippi Parkway just north of the intersection
of Interstates 40 and 75, in Knox County, Tennessee approximately 10 miles west
of the Knoxville central business district.
The ABB Knoxville Building is currently leased as follows:
<TABLE>
<CAPTION>
Rentable
Floors Tenant Sq. Ft.
------ ------- -------
<S> <C> <C>
1 Center Partners, Inc. 23,992
2, 3 ABB Flakt, Inc. 57,831
2 Green Tree Financial
Servicing Corporation 2,581
</TABLE>
The entire third floor and most of the second floor of the ABB Knoxville
Building containing approximately 57,831 square feet (69% of the total square
feet) is currently under lease to ABB Flakt, Inc. (ABB). The initial term of
the ABB lease is nine years and 11 months which commenced on January 1, 1998 and
expires in December 2007.
ABB is principally engaged in the business of pollution control engineering
and consulting. ABB will use the leased area as office space for approximately
220 employees. ABB Asea Brown Boveri, Ltd., a Swiss corporation based in
Zurich, is the holding company of the ABB Asea Brown Boveri Group which is
comprised of approximately 1,000 companies around the world, including ABB. The
ABB Group revenue is predominately provided by contracts with utilities and
independent power producers for the design and engineering, construction,
manufacture and marketing of products, services and systems in connection with
the generation, transmission and distribution of electricity. In addition, the
ABB Group generates a significant portion of its revenues from the sale of
industrial automation products, systems and services to pulp and paper,
automotive and other manufacturers.
As security for ABB's obligations under its lease, ABB has provided to the
IX-X-XI-REIT Joint Venture an irrevocable standby letter of credit in accordance
with the terms and conditions set forth in the ABB lease. The letter of credit
maintained by ABB is required to be in the amount of $4,000,000 until the
seventh anniversary of the rental commencement date, at which time it will be
reduced by $1,000,000 each year until the end of the lease term.
The annual base rent payable under the ABB lease is $646,250 payable in
equal monthly installments of $53,854 during the first five years of the initial
lease term, and $728,750 payable in equal monthly installments of $60,729 during
the last four years and 11 months of the initial lease term.
The IX-X-XI-REIT Joint Venture has agreed to provide ABB on the fifth
anniversary of the rental commencement date a redecoration allowance of an
amount equal to (1) $5.00 per square foot of useable area of the premises leased
which has been leased and occupied by ABB for at least three consecutive years
ending with such fifth anniversary reduced by (2) $177,000.
The terms of the ABB lease provide that ABB has the right of first refusal
for the lease of the space in the ABB Knoxville Building that was not initially
leased by ABB. Therefore, at the expiration
64
<PAGE>
of the lease terms of Center Partners, Inc. and Green Tree Financial Services
which are described below, ABB will again have a right of first refusal for this
space.
ABB has a one-time option to terminate the ABB lease as of the seventh
anniversary of the rental commencement date which is exercisable by written
notice to the IX-X-XI-REIT Joint Venture at least 12 months in advance of such
seventh anniversary. If ABB elects to exercise this termination option, ABB is
required to pay to the IX-X-XI-REIT Joint Venture, on or before 90 days prior to
the seventh anniversary of the rental commencement date, a termination payment
intended to compensate the IX-X-XI-REIT Joint Venture for the present value of
certain sums which the joint venture has expended in connection with the ABB
lease amortized over and attributable to the remaining lease term and a rent
payment equal to approximately 15 months of monthly base rental payments. We
currently anticipate that the termination payment required to be paid by ABB in
the event it exercises its option to terminate the ABB lease on the seventh
anniversary would be approximately $1,800,000 based upon certain assumptions.
The entire first floor of the ABB Knoxville Building containing
approximately 23,992 square feet (28% of the total square feet) is currently
under lease to Center Partners, Inc. (CPI). The initial term of the CPI lease
is five years which commences in January 2000 and expires in December 2004. CPI
has the right to extend the lease for two additional five year periods of time.
CPI is engaged in the business of providing comprehensive solutions to
corporations in technical support, customer service and order processing.
The base rent payable under the CPI lease is as follows:
<TABLE>
<CAPTION>
Year Annual Rent Monthly Rent
---- ----------- ------------
<S> <C> <C>
1 $299,900 $24,991.67
2 $307,338 $25,611.46
3 $315,015 $26,251.25
4 $322,932 $26,911.03
5 $331,090 $27,590.80
</TABLE>
The base rent payable during the extension term shall be the market rental
rate then being charged by landlords under new leases in the Knoxville rental
market for a building, parking area and other improvements similar to the ABB
Knoxville Building. If the parties cannot agree on the market rental rate
within six months of the commencement of the extension term, such rental rate
shall be determined by appraisal.
A portion of the second floor of the ABB Knoxville Building containing
approximately 2,581 square feet (3% of the total square feet) is currently under
lease to Green Tree Financial Servicing Corporation (Green Tree). The term of
the Green Tree lease is five years which commenced on January 1, 1999 and will
expire in December 2003.
The base rent payable under the Green Tree lease is as follows:
<TABLE>
<CAPTION>
Year Annual Rent Monthly Rent
---- ----------- ------------
<S> <C> <C>
1 $50,330 $4,194.13
2 $51,672 $4,305.97
3 $53,091 $4,424.26
4 $41,632 $3,469.29
</TABLE>
65
<PAGE>
5 $43,103 $3,591.89
The Ohmeda Building
The Ohmeda Building is a two story office building with approximately
106,750 rentable square feet located in Louisville, Colorado. The IX-X-XI-REIT
Joint Venture purchased the Ohmeda Building on February 13, 1998 for a purchase
price of $10,325,000. Construction of the Ohmeda Building was completed in
January 1988.
The site is a 15 acre tract of land in the Centennial Valley Business Park
located approximately five miles southeast of Boulder and approximately 17 miles
northwest of Denver, situated near Highway 36, which is the main thoroughfare
between Boulder and Denver.
The entire 106,750 rentable square feet of the Ohmeda Building is currently
under lease with Ohmeda, Inc. (Ohmeda). The Ohmeda lease currently expires in
January 2005, subject to (1) Ohmeda's right to effectuate an early termination
of the Ohmeda lease under the terms and conditions described below, and (2)
Ohmeda's right to extend the Ohmeda Lease for two additional five year periods
of time.
Ohmeda is a medical supply firm based in Boulder, Colorado and is a
worldwide leader in vascular access and hemodynamic monitoring for hospital
patients. Ohmeda also has a special products division, which produces neonatal
and other oxygen care products. Ohmeda recently extended an agreement with
Hewlett-Packard to include co-marketing and promotion of combined Ohmeda/H-P
neonatal products.
On April 13, 1998, Instrumentarium Corporation, a Finnish company, acquired
the division of Ohmeda that occupies the Ohmeda Building. Instrumentarium is an
international health care company concentrating on selected fields of medical
technology manufacturing, marketing and distribution.
The base rent payable under the Ohmeda lease is as follows:
<TABLE>
<CAPTION>
Year Annual Rent Monthly Rent
---- ----------- ------------
<S> <C> <C>
1999-2002 $1,004,520 $83,710
2003 $1,054,692 $87,891
2004 $1,107,000 $92,250
</TABLE>
The Ohmeda lease contains an early termination clause that allows Ohmeda
the right to terminate the Ohmeda lease, subject to certain conditions, on
either January 31, 2001 or January 31, 2002. In order to exercise this early
termination clause, Ohmeda must give the IX-X-XI-REIT Joint Venture notice on or
before 5:00 p.m. MST, January 31, 2000, and said notice must identify which
early termination date Ohmeda is exercising. If Ohmeda exercises its right to
terminate on January 31, 2001, then Ohmeda must tender $753,388 plus an amount
equal to the amount of real property taxes estimated to be payable to the
landlord in 2002 for the tax year 2001 based on the most recent assessment
information available on the early termination date. If Ohmeda exercises its
right to terminate on January 31, 2002, then Ohmeda must tender $502,259 plus an
amount equal to the amount of real property taxes estimated to be payable to the
landlord in 2003 for the tax year 2002 based on the most recent assessment
information available on the early termination date. At the present time, real
property taxes relating to this property are approximately $135,500 per year.
The payment of these amounts by Ohmeda for early termination must be made on or
before the 180th day prior to the appropriate early termination date. If the
amount of the real property taxes actually assessed is greater or lesser than
the amount paid by Ohmeda on the early termination date, then the difference
shall be adjusted accordingly within 30 days of notice of such difference.
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<PAGE>
In addition, the Ohmeda Lease contains an option to expand the premises by
an amount of square feet up to a total of 200,000 square feet which, if
exercised by Ohmeda, will require the IX-X-XI-REIT Joint Venture to expend funds
necessary to acquire additional land, if necessary, and to construct the
expansion space. Ohmeda's option to expand the premises is subject to
deliverance of at least four months' prior written notice to the IX-X-XI-REIT
Joint Venture. During the four months subsequent to the notice of Ohmeda's
intention to expand the premises, Ohmeda and the IX-X-XI-REIT Joint Venture
shall negotiate in good faith and enter into an amendment to the Ohmeda lease
for the construction and rental of the expansion space. If Ohmeda exercises its
option to expand the premises, the right to terminate clause described above
will automatically be canceled, and the primary lease term shall be extended for
a period of ten years from the date on which a certificate of occupancy is
issued by the City of Louisville with respect to the expansion space.
The base rental for the expansion space payable under the Ohmeda lease
shall be calculated to generate a rate of return to the IX-X-XI-REIT Joint
Venture on its project costs and any retrofit expenses with respect to the
existing premises incurred by landlord over the new, ten year extended primary
lease term, equal to the prime lending rate published by Norwest Bank, N.A. on
the first day of such extended primary lease term, plus 3.0%, plus full
amortization of the tenant finish costs with respect to the expansion space and
the existing premises. This base rental shall be payable through January 31,
2005. The base rental payable under the Ohmeda lease from February 1, 2005
through the remaining balance of the new, extended ten year primary lease term,
shall be based on a combined rental rate equal to the sum of (1) the base rental
payable by Ohmeda during lease year number seven for the existing premises, plus
(2) the base rent payable by Ohmeda during lease year number seven for the
expansion space, plus an amount equal to 2% of the combined rental rate.
Thereafter, the base rent payable for the entire premises shall be the base rent
payable during the previous lease year plus an amount equal to 2% of the base
rent payable during such previous lease year.
The Interlocken Building
The Interlocken Building is a three story multi-tenant office building with
51,974 rentable square feet located in Broomfield, Colorado. The IX-X-XI-REIT
Joint Venture purchased the Interlocken Building on March 20, 1998 for a
purchase price of $8,275,000. Construction of the Interlocken Building was
completed in December 1996.
The site is a 5.1 acre tract of land in the Interlocken Business Park
located on Highway 36, the Boulder-Denver Turnpike, which is the main
thoroughfare between Boulder and Denver, and is located approximately eight
miles southeast of Boulder and approximately 15 miles northwest of Denver. The
Interlocken Building is currently leased as follows:
<TABLE>
<CAPTION>
Rentable
Floor Tenant Sq. Ft.
----- ------ -------
<S> <C> <C>
1 Multiple 15,599
2 ODS Technologies, L.P. 17,146
3 Transecon, Inc. 19,229
</TABLE>
The entire third floor of the Interlocken Building containing 19,229
rentable square feet (37% of the total rentable square feet) is currently under
lease to Transecon, Inc. The Transecon lease currently expires in October 2001,
subject to Transecon's right to extend for one additional term of five years
upon 180 days' notice.
Transecon is a consumer distributor of environmental friendly products,
including on-site video and audio production of environmental and alternative
health videos using state-of-the-art
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<PAGE>
electronics and sound stage. Transecon was founded in 1989 and currently employs
approximately 60 people.
The monthly base rent payable under the Transecon Lease is approximately
$24,000 for the initial term of the lease, and is calculated under the Transecon
lease based upon 18,011 rentable square feet. In addition, Transecon has a
right of first refusal under the lease for any second floor space proposed to be
leased by the landlord. If Transecon elects to extend the lease, the monthly
base rent shall be a market rate, but no less than $24,000 and no more than
$27,700. In accordance with the Transecon lease, Golden Rule, Inc., an
affiliate of Transecon, occupies 6,621 rentable square feet of the third floor.
Transecon guarantees the entire payment due under the Transecon Lease.
Transecon also leases 1,510 rentable square feet on the first floor. The base
rent payable for this space is as follows:
<TABLE>
<CAPTION>
Year Annual Rent Monthly Rent
---- ----------- ------------
<S> <C> <C>
1999 $25,200 $2,100
2000 $25,800 $2,150
2001 $26,400 $2,200
</TABLE>
The entire second floor of the Interlocken Building containing 17,146
rentable square feet (33% of total rentable square feet) is currently under
lease to ODS Technologies, L.P. (ODS). The ODS lease expires in September 2003,
subject to ODS's right to extend for one additional term of three years upon 180
days' notice.
ODS provides in-home financial transaction services via telephone and
television, and it has developed interactive computer-based applications for
such in-home purchasing. Originally based in Tulsa, Oklahoma, ODS has relocated
its business to the Interlocken Building.
The base rent payable under the ODS lease is as follows:
<TABLE>
<CAPTION>
Year Annual Rent Monthly Rent
---- ----------- ------------
<S> <C> <C>
1999 $271,200 $22,600
2000 $277,200 $23,100
2001 $282,600 $23,550
2002 $288,600 $24,050
2003 $294,600 $24,550
</TABLE>
The rental payments to be made by the tenant under the ODS lease are also
secured by the assignment of a $275,000 letter of credit which may be drawn upon
by the landlord in the event of a tenant default under the lease.
The first floor of the Interlocken Building containing 15,599 rentable
square feet is occupied by several tenants whose leases expire in late 2001 or
2002. The aggregate monthly base rent payable under these leases for 1999 is
approximately $22,055.
The Iomega Building
The Iomega Building is a warehouse and office building with 108,000
rentable square feet located in Ogden City, Utah. Wells Fund X originally
purchased the Iomega Building on April 1, 1998 for a purchase price of
$5,025,000 and contributed the Iomega Building to the IX-X-XI-REIT Joint Venture
on July 1, 1998.
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<PAGE>
The site is an approximately 8 acre tract of land located at 2976 South
Commerce Way in the Ogden Commercial and Industrial Park, which is one mile
north of Roy City, one mile northwest of Riverdale City and three miles
southwest of the Ogden central business district.
The entire Iomega Building is currently under lease to Iomega Corporation
(Iomega). The Iomega lease had a ten year lease term which commenced on August
1, 1996. In March 1999, the IX-X-XI-REIT Joint Venture acquired an adjacent
parcel of land and began constructing additional parking at the site. As a
result, Iomega increased its monthly base rent and extended the term of its
lease until April 30, 2009. The Iomega lease contains no further extension
provisions. Iomega's world headquarters are located within one mile of the
Iomega Building.
Iomega, a New York Stock Exchange company, is a manufacturer of computer
storage devices used by individuals, businesses, government and educational
institutions, including "Zip" drives and disks, "Jaz" one gigabyte drives and
disks, and tape backup drives and cartridges. Iomega reported total sales of in
excess of $1.6 billion and a net worth of in excess of $400 million for its
fiscal year ended December 31, 1998.
The monthly base rent payable under the Iomega lease is $54,989.41. On
March 1, 2003 and July 1, 2006, the monthly base rent payable under the Iomega
lease will be increased to reflect an amount equal to 100% of the increase in
the Consumer Price Index during the preceding 40 months; provided however, that
in no event shall the base rent be increased with respect to any one year by
more than 6% or by less than 3% per year, compounded annually, on a cumulative
basis from the beginning of the lease term.
The Fairchild Building
Wells OP entered into a Joint Venture Agreement known as Wells/Fremont
Associates (Fremont Joint Venture) with Fund X and Fund XI Associates (Fund X-XI
Joint Venture), a joint venture between Wells Fund X and Wells Fund XI. The
purpose of the Fremont Joint Venture is the acquisition, ownership, leasing,
operation, sale and management of real properties, including, but not limited
to, the Fairchild Building.
As of October 15, 1999, Wells OP had made total capital contributions to
the Fremont Joint Venture of $6,983,110 and held an equity percentage interest
in the Fremont Joint Venture of 77.5%, and the Fund X-XI Joint Venture had made
total capital contributions to the Fremont Joint Venture of $2,000,000 and held
an equity percentage interest in the Fremont Joint Venture of 22.5%.
The Fairchild Building is a two story manufacturing and office building
with 58,424 rentable square feet located in Fremont, Alameda County, California.
The Fremont Joint Venture purchased the Fairchild Building on July 21, 1998 for
a purchase price of $8,900,000. Construction of the Fairchild Building was
completed in 1985.
The site is approximately 3 acres and is located at 47320 Kato Road on the
corner of Kato Road and Auburn Road in the City of Fremont, California.
The entire 58,424 rentable square feet of the Fairchild Building is
currently under lease to Fairchild Technologies U.S.A., Inc. (Fairchild). The
Fairchild lease commenced on December 1, 1997 and expires in November 2004,
subject to Fairchild's right to extend the Fairchild lease for an additional
five year period.
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<PAGE>
Fairchild is a global leader in the design and manufacture of production
equipment for semiconductor and compact disk manufacturing. The semiconductor
equipment group recently unveiled a new line of semiconductor wafer processing
equipment which will provide alternatives to the traditional semiconductor chip
production methods.
Fairchild is a wholly-owned subsidiary of the Fairchild Corporation
(Fairchild Corp). Fairchild Corp is the largest aerospace fastener and fastening
system manufacturer and is one of the largest independent aerospace parts
distributors in the world. Fairchild Corp is a leading supplier to aircraft
manufacturers such as Boeing, Airbus, Lockheed Martin, British Aerospace and
Bombardier and to airlines such as Delta Airlines and U.S. Airways. The
obligations of Fairchild under the Fairchild lease are guaranteed by Fairchild
Corp, which reported total consolidated sales of in excess of $741 million and a
net worth of in excess of $470 million for its fiscal year ended June 30, 1998.
The base rent payable under the Fairchild lease is as follows:
<TABLE>
<CAPTION>
Year Annual Rent Monthly Rent
---- ------------ ------------
<S> <C> <C>
1999 $817,536 $68,128
2000 $842,064 $70,172
2001 $867,324 $72,277
2002 $893,340 $74,445
2003 $920,136 $76,678
2004 $947,736 $78,978
</TABLE>
The base rent during the first year of the extended term of the Fairchild lease,
if exercised by Fairchild, shall be 95% of the then fair market rental value of
the Fairchild Building subject to the annual 3% increase adjustments. If
Fairchild and the Fremont Joint Venture are unable to agree upon the fair rental
value for the extended lease term, each party shall select an appraiser and the
two appraisers shall establish the rent by agreement.
The Cort Furniture Building
Wells OP entered into another Joint Venture Agreement with the Fund X-XI
Joint Venture known as Wells/Orange County Associates (Cort Joint Venture) for
the purpose of the acquisition, ownership, leasing, operation, sale and
management of real properties, including, but not limited to, the Cort Furniture
Building.
As of October 15, 1999, Wells OP had made total capital contributions to
the Cort Joint Venture of $2,870,982 and held an equity percentage interest in
the Cort Joint Venture of 43.7%, and the Fund X-XI Joint Venture made total
capital contributions to the Cort Joint Venture of $3,695,000 and held an equity
percentage interest in the Cort Joint Venture of 56.3%.
Wells OP is acting as the initial Administrative Venturer of both the
Fremont Joint Venture and the Cort Joint Venture and, as such, is responsible
for establishing policies and operating procedures with respect to the business
and affairs of each of these joint ventures. However, approval of each of Wells
Fund X and Wells Fund XI will be required for any major decision or any action
which materially affects the Fremont Joint Venture or the Cort Joint Venture or
its real property investments.
The Cort Furniture Building is a one story office and warehouse building
with 52,000 rentable square feet comprised of an 18,000 square foot office and
open showroom area and a 34,000 square foot
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<PAGE>
warehouse area. The Cort Joint Venture purchased the Cort Furniture Building on
July 31, 1998 for a purchase price of $6,400,000. Construction of the Cort
Furniture Building was completed in 1975.
The site consists of two parcels of land totaling approximately 3.6 acres
and is located at 10700 Spencer Street on the southeast corner of Spencer Avenue
and Mt. Langley Street adjacent on the south side to Interstate 405 in the City
of Fountain Valley, California.
The entire 52,000 rentable square feet of the Cort Furniture Building is
currently under lease to Cort Furniture Rental Corporation (Cort). Cort uses
the Cort Furniture Building as its regional corporate headquarters with an
attached clearance showroom and warehouse storage areas.
The Cort lease contains a lease term of 15 years which commenced on
November 1, 1988, and expires in October 2003. Cort has an option to extend the
Cort lease for an additional five year period of time.
Cort is a wholly-owned subsidiary of Cort Business Services Corporation, a
New York Stock Exchange Company trading under the symbol CBZ (Cort Business
Services). Cort Business Services is the largest and only national provider of
high-quality office and residential rental furniture and related accessories.
Cort Business Services has operations that cover 32 states and the District of
Columbia and includes 119 rental showrooms. The obligations of Cort under the
Cort Furniture lease are guaranteed by Cort Business Services, which reported
net income of in excess of $23 million on total consolidated revenue of in
excess of $319 million, and reported a net worth of in excess of $175 million
for its fiscal year ended December 31, 1998.
The monthly base rent payable under the Cort lease is $63,247 through April
30, 2001 at which time the monthly base rent will be increased 10% to $69,574
for the remainder of the lease term. The monthly base rent during the first
year of the extended term shall be 90% of the then fair market rental value of
the Cort Furniture Building, but will be no less than the rent in the 15th year
of the Cort lease. If Cort and the Cort Joint Venture are unable to agree upon
a fair rental value for the extended lease term, each party shall select an
appraiser and the two appraisers shall provide appraisals on the Cort Furniture
Building. If the appraisal values established are within 10% of each other, the
average of such appraised value shall be the fair market rental value. If said
appraisals are varied by more than 10%, the two appraisers shall appoint a third
appraiser and the middle appraisal of the three shall be the fair rental value.
The PWC Building
The PWC Building is a four story office building containing approximately
130,090 rentable square feet located in Tampa, Florida. Wells OP purchased the
PWC Building on December 31, 1998 for a purchase price of $21,127,854.
Construction of the PWC Building was completed in 1998.
Wells OP purchased the PWC Building subject to a loan from SouthTrust
Bank, N.A. (SouthTrust) in the outstanding principal amount of $14,132,537.87
(SouthTrust Loan). The SouthTrust Loan consists of a revolving credit facility
whereby SouthTrust agreed to loan up to $15.2 million to Wells OP in connection
with its purchase of real properties. The principal balance of the SouthTrust
Loan relating to the acquisition of the PWC Building has since been paid off by
Wells OP leaving in place the revolving credit facility. The SouthTrust Loan
requires monthly payments of interest only and matures on December 31, 2000. The
interest rate on the SouthTrust Loan is a variable rate per annum equal to the
London InterBank Offered Rate for a thirty day period plus 200 basis points.
The current interest rate under the SouthTrust Loan is 7.44%. The SouthTrust
Loan is secured by a first mortgage against the PWC Building.
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<PAGE>
The site consists of approximately 9 acres of land located in Sunforest
Business Park between Eisenhower Boulevard and George Road approximately 1,250
feet south of West Hillsborough Avenue. The Sunforest Business Park is located
in the Westshore Business District, which is a suburban business center
surrounding Tampa International Airport.
The entire PWC Building is under lease to PriceWaterhouseCoopers (PWC). The
PWC lease currently expires in December 2008, subject to PWC's right to extend
the lease for two additional five year periods of time.
PWC provides a full range of business advisory services to leading global,
national and local companies and to public institutions. These services include
audit, accounting and tax advice; management, information technology and human
resource consulting; financial advisory services including mergers and
acquisitions, business recovery, project finance and litigation support;
business process outsourcing services; and legal advice through a global network
of affiliated law firms. PWC employs more than 140,000 people in 152 countries.
The annual base rent payable under the PWC lease is $1,915,741 ($14.73 per
square foot) payable in equal monthly installments of $159,645.09 during the
first year of the initial lease term. The base rent escalates at the rate of 3%
per year throughout the ten year lease term. In addition, PWC is required to pay
a "reserve" of $13,009 ($.10 per square foot) as additional rent.
The annual base rent for each renewal term under the lease will be equal to
the greater of (a) ninety percent (90%) of the "market rent rate" for such space
multiplied by the rentable area of the leased premises, or (b) one hundred
percent (100%) of the base rent paid during the last lease year of the initial
term, or the then current renewal term, as the case may be. If the base rent for
the first lease year under the renewal term is determined pursuant to clause (a)
above, then the base rent for each lease year of such renewal term after the
first lease year shall be one hundred three percent (103%) of the base rent for
the immediately preceding lease year. If the base rent for the first lease year
of a renewal term is determined pursuant to clause (b) above, then there shall
be no escalation of the base rent until such time that the total base rent paid
during the renewal term is equal to the total base rent that would have been
paid during such renewal term if the base rent had been determined pursuant to
clause (a) above; and thereafter, the base rent for each subsequent lease year
of such renewal term shall be one hundred three percent (103%) of the base rent
for the immediately preceding lease year.
The "market rent rate" under the PWC lease shall be determined by agreement
of the parties within 30 days after the date on which PWC delivers its notice of
renewal. If Wells OP and PWC are unable to reach agreement on the market rent
rate within said 30 day period, then each party shall simultaneously submit to
the other in a sealed envelope its good faith estimate of the market rent rate
within seven days of expiration of the 30 day period. If the higher of such
estimates is not more than one hundred five percent (105%) of the lower of such
estimates then the market rent rate shall be the average of the two estimates.
Otherwise, within five days either party may request in writing to resolve the
dispute by arbitration. The "market rate rent" shall be based upon the fair
market rent then being charged by landlords under new leases of office space in
the Westshore Business District for similar space in a building of comparable
quality with comparable amenities.
In addition, the PWC lease contains an option to expand the premises to
include a second three or four story building with an amount of square feet up
to a total of 132,000 square feet which, if exercised by PWC, will require Wells
OP to expend funds necessary to construct the expansion building. PWC may
exercise its expansion option by delivering written notice to Wells OP at any
time between the 60th day after the rental commencement date and the expiration
of the initial term of the lease. If PWC for any
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<PAGE>
reason fails to deliver the expansion notice on or prior to the last day of the
initial term, the expansion option shall automatically expire. Upon PWC's
delivery of the expansion notice and commencement of construction of the
improvements by Wells OP, the term of the lease shall automatically be extended
for an additional period of ten years from the date of substantial completion of
the expansion building, without further action by either PWC or Wells OP. During
the first five lease years of the initial term, Wells OP shall be obligated to
construct the expansion building if PWC delivers the expansion notice. Wells OP
and PWC have agreed that Wells OP shall not be required to construct the
expansion building, however, if PWC delivers the expansion notice after the end
of the fifth lease year and, following delivery of such expansion notice, Wells
OP determines not to construct the expansion building based upon the base rent
it would receive for the expansion building. If Wells OP notifies PWC in writing
of such determination within 30 days after Wells OP's receipt of the expansion
notice, PWC shall have the right to exercise its option to purchase the PWC
building.
If PWC elects to exercise its expansion option, in addition to the
construction of a second building which is of a quality equal to or better than
the PWC building, Wells OP will be required to expand the parking garage such
that a sufficient number of parking spaces, at least equal to four parking
spaces per 1,000 square feet of rentable area, is maintained. Wells OP agrees to
fund the cost of the design, development and construction of the expansion
building up to a maximum of $150.00 per square foot of rentable area, as
increased by increases in the Consumer Price Index between the rental
commencement date and the date of expansion notice. PWC shall be responsible for
the payment of any costs of the expansion building in excess of the maximum
expansion cost.
The base rent per square foot of rentable area payable for the expansion
building in the first lease year of such building shall be an amount equal to
the product of (a) the expansion building cost per square foot of rentable area
multiplied by (b) the sum of 300 basis points plus the weekly average yield on
United States Treasury Obligations, amortized on an annual basis over a period
of 20 years. The base rent for each subsequent lease year shall be one hundred
three percent (103%) of the base rent for the immediately preceding lease year.
In the event that PWC elects to exercise its expansion option and Wells OP
determines not to proceed with the construction of the expansion building as
described above, or if Wells OP is otherwise required to construct the expansion
building and fails to do so in a timely basis pursuant to the PWC lease, PWC may
exercise its purchase option by giving Wells OP written notice of such exercise
within 30 days after either such event. If PWC properly exercises its purchase
option, PWC must simultaneously deliver a deposit in the amount of $50,000. The
purchase price for the PWC Building pursuant to the purchase option shall be
equal to (a) the average of the monthly base rent for each month remaining in
the initial term as of the closing date on the Purchase Option multiplied by 12,
and (b) such average annual base rent shall be multiplied by 11.
The Vanguard Cellular Building
The Vanguard Cellular Building is a four story office building containing
approximately 81,859 rentable square feet located in Harrisburg, Pennsylvania.
Construction of the Vanguard Cellular Building was completed in November 1998.
Wells OP purchased the Vanguard Cellular Building on February 4, 1999 for a
purchase price of $12,291,200. Wells OP expended cash proceeds in the amount of
$6,332,100 and obtained a loan in the amount of $6,425,000 from Bank of America,
N.A., (BOA Loan), the net proceeds of which were used to fund the remainder of
the purchase price of the Vanguard Cellular Building.
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<PAGE>
The BOA loan matures on January 4, 2002. The interest rate on the BOA Loan
is a fixed rate equal to the rate appearing on Telerate Page 3750 as the London
Inter Bank Offered Rate plus 200 basis points over a six month period. Wells OP
made a required principal installment in the amount of $6,150,000 on July 22,
1999. As of September 30, 1999, the outstanding principal balance of the BOA
Loan was $203,504. On September 13, 1999, Bank of America agreed to make a new
revolving credit loan of up to $9,825,000 to Wells OP for the acquisition of
real properties. Wells OP is required to make monthly installments of accrued
interest under the BOA Loan. The BOA Loan is secured by a first mortgage against
the Vanguard Cellular Building. Leo F. Wells, III and the Wells REIT are co-
guarantors of the BOA Loan.
The site consists of approximately 10.5 acres of land in Commerce Park,
located in the Lower Paxton Township, a planned business park, at the
intersection of Progress Avenue and Interstate Drive just off of the Progress
Avenue exit of Interstate 81.
The Vanguard Cellular Building is leased to Pennsylvania Cellular Telephone
Corp., a subsidiary of Vanguard Cellular, and the obligations of Pennsylvania
Telephone under the Vanguard Cellular Lease are guaranteed by Vanguard Cellular.
Vanguard Cellular is an independent operator of cellular telephone systems
in the United States with over 664,000 subscribers located in 26 markets in the
Mid-Atlantic, Ohio Valley and New England regions of the United States. Vanguard
Cellular markets its wireless products and services under the name CellularOne,
a nationally recognized brand name partially owned by Vanguard Cellular.
Vanguard Cellular operates primarily in suburban and rural areas that are close
in proximity to major urban areas, which it believes affords several advantages
over its traditional urban competitors, including (1) greater network capacity,
(2) greater roaming revenue opportunities, (3) lower distribution costs, and (4)
higher barriers to entry by competitors. Vanguard Cellular reported net income
in excess of $74 million on revenues in excess of $420 million and a net worth
in excess of $100 million for the year ended December 31, 1998.
On May 3, 1999, Vanguard Cellular was merged with and became a wholly-owned
subsidiary of AT&T Corp.
The initial term of the Vanguard Cellular lease is ten years which
commenced on November 16, 1998. Vanguard has the option to extend the initial
term of the Vanguard Cellular lease for three additional five year periods and
one additional four year and 11 month period. Each extension option must be
exercised by giving written notice to the landlord at least 12 months prior to
the expiration date of the then current lease term. The following table
summarizes the annual base rent payable during the remainder of the initial term
of the Vanguard Cellular lease:
<TABLE>
<CAPTION>
Year Annual Rent $ Per Sq. Ft. Monthly Rent
---- ----------- ------------- ------------
<S> <C> <C> <C>
2 $1,390,833 $16.99 $115,902.76
3 $1,416,221 $17.30 $118,018.38
4 $1,442,116 $17.62 $120,176.32
5 $1,468,529 $17.94 $122,377.41
6 $1,374,011 $16.79 $114,500.91
7 $1,401,491 $17.12 $116,790.93
8 $1,429,521 $17.46 $119,126.74
9 $1,458,111 $17.81 $121,509.28
10 $1,487,274 $18.17 $123,939.47
</TABLE>
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The annual base rent for each extended term under the lease will be equal
to 93% of the "fair market rent" determined either (1) as agreed upon by the
parties, or (2) as determined by appraisal pursuant to the terms and conditions
of the Vanguard Cellular lease. The fair market rent shall be multiplied by the
"fair market escalator" (which represents the yearly rate of increases in the
fair market rent for the entire renewal term), if any. If the fair market rent
is to be determined by appraisal, both the landlord and the tenant shall
designate an independent appraiser, and both appraisers shall mutually designate
a third appraiser. After their appointment, the appraisers shall determine the
fair market rent and the fair market escalator by submitting independent
appraisals. The fair market rent and fair market escalator shall be deemed to be
the middle appraisal of the three submitted.
In addition, the Vanguard Cellular lease contains an option to expand the
premises to create additional office space of not less than 40,000 gross square
feet and not more than 90,000 gross square feet, as well as additional parking
to accommodate such office space. If Pennsylvania Telephone exercises its option
for the expansion improvements, Wells OP will be obligated to expend the funds
necessary to construct the expansion improvements. Pennsylvania Telephone may
exercise its expansion option by delivering written notice to Wells OP at any
time before the last business day of the 96th month of the initial term of the
Vanguard Cellular lease.
Within 60 days after Wells OP's receipt of the expansion notice, Wells OP
shall consult with Pennsylvania Telephone concerning Pennsylvania Telephone's
specific requirements with regard to the expansion improvements and, within such
60 day period, Wells OP shall notify Pennsylvania Telephone in writing of the
total estimated expansion costs to be incurred in planning and constructing the
expansion improvements. Within 60 days after Pennsylvania Telephone receives
Wells OP's written notification of the costs for the expansion improvements,
Pennsylvania Telephone shall notify Wells OP in writing either (1) that
Pennsylvania Telephone authorizes Wells OP to proceed with the construction of
the expansion improvements, (2) that Pennsylvania Telephone intends to submit
revised specifications within 60 days to reduce the estimated costs of the
expansion improvements to an amount satisfactory to Pennsylvania Telephone, or
(3) that Pennsylvania Telephone elects not to expand the premises. If
Pennsylvania Telephone fails to deliver its notice to proceed within the above
mentioned 60 day period, then Pennsylvania Telephone shall be deemed to have
elected not to expand.
If Pennsylvania Telephone delivers its notice to proceed with the expansion
improvements, Pennsylvania Telephone shall be deemed to have exercised its
option for such full or partial renewal terms such that, as of the date of
substantial completion of the expansion improvements, the remaining lease term
shall be ten years from such date of substantial completion. Pennsylvania
Telephone shall continue to have the right to exercise its option for any of the
renewal terms discussed above which remain beyond the ten year additional term;
provided that, if the remaining portion of a renewal term after the ten year
extension shall be less than one year, then the ten year term shall be further
extended to include the remaining portion of the renewal term which is less than
one year.
The annual base rent for the expansion improvements for the first twelve
months shall be equal to the product of (a) the expansion costs, multiplied by
(b) a factor of 1.07, multiplied by (c) the greater of (X) 10.50%, or (Y) an
annual interest rate equal to 375 basis points in excess of the ten year United
States Treasury Note Rate then most recently announced by the United States
Treasury as of the commencement date of the expansion improvements. Thereafter,
the annual base rent for the expansion improvements shall be increased annually
by the lesser of (1) 5%, or (2) 75% of the percentage by which the United
States, Bureau of Labor Statistics, Consumer Price Index for All Items - All
Urban Wage Earners and Clerical Workers for the Philadelphia Area published
nearest to the expiration date of each 12 month period subsequent to the
expansion commencement date is greater than the CPI Index most recently
published prior to the Vanguard commencement date.
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<PAGE>
The Matsushita Property
Purchase of the Matsushita Property. On March 15, 1999, Wells OP purchased
-----------------------------------
an 8.8 acre tract of land located in Lake Forest, Orange County, California for
a purchase price of $4,450,230.
Wells OP entered into a development agreement for the construction of a two
story office building containing approximately 150,000 rentable square feet to
be erected on the Matsushita Property. Wells OP entered into an Office Lease
with Matsushita Avionics Systems Corporation (Matsushita Avionics), pursuant to
which Matsushita Avionics agreed to lease all of the Matsushita Project upon its
completion.
Termination of Existing Lease. Matsushita Avionics is currently a tenant
-----------------------------
of a building located at 15253 Bake Parkway, Irvine, California owned by Fund
VIII and Fund IX Associates (Fund VIII-IX Joint Venture), a Georgia joint
venture between Wells Fund VIII and Wells Fund IX. Matsushita Avionics and the
Fund VIII-IX Joint Venture have entered into a Lease and Guaranty Termination
Agreement dated February 18, 1999 pursuant to which Matsushita Avionics will be
vacating the existing building in December 1999 and relieved of any of its
obligations under the existing lease upon the Matsushita commencement date of
the Matsushita lease. The existing lease terminates in September 2003.
Rental Income Guaranty by Wells OP. In consideration for the Fund VIII-IX
----------------------------------
Joint Venture releasing Matsushita Avionics from its obligations under the
existing lease and thereby allowing Wells OP to enter into the Matsushita lease
with Matsushita Avionics, Wells OP entered into a Rental Income Guaranty
Agreement dated February 18, 1999, whereby Wells OP guaranteed the Fund VIII-IX
Joint Venture that it will receive rental income on the existing building at
least equal to the rental and building expenses that the Fund VIII-IX Joint
Venture would have received over the remaining term of the existing lease.
Current rental and building expenses are approximately $90,000 per month. The
Wells REIT's maximum exposure to liability to the Fund VIII-IX Joint Venture
under this Rental Income Guaranty was taken into account in the economic
analysis performed in making the determination to go forward with the
development of the Matsushita project. Management of the Wells REIT anticipates
that the ultimate liability will be less than the maximum exposure to liability;
however, management cannot, at this time, determine the ultimate liability under
the Rental Income Guaranty Agreement. (See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources.")
Description of the Matsushita Project and the Site. The Matsushita project
--------------------------------------------------
involves the construction of a two story office building containing 150,000
rentable square feet. The building will contain parking for approximately 600
vehicles.
The site consists of an 8.8 acre tract of land located in the Pacific
Commercentre, which is a 33 acre master-planned business park positioned near
the Irvine Spectrum in the heart of Southern California's Technology Coast.
Pacific Commercentre is a nine building complex featuring office, technology,
and light manufacturing uses, and is located in the city of Lake Forest in
Southern Orange County with easy access to the Foothill Transportation Corridor
and the San Diego Freeway.
An independent appraisal of the Matsushita project dated March 16, 1999 was
prepared by CB Richard Ellis, Inc., real estate appraisers, pursuant to which
the market value of the land and the leased fee interest in the Matsushita
project subject to the Matsushita lease was estimated to be $18.9 million, in
cash or terms equivalent to cash, as of December 21, 1999, the anticipated
completion date. This value estimate was based upon a number of assumptions,
including that the Matsushita project will be finished in accordance with plans
and specifications, that total development costs would not exceed $17.8 million
and that the building will be operated following completion at a stabilized
level with Matsushita Avionics
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<PAGE>
occupying 100% of the building at a rental rate calculated based upon the $17.8
million development budget. Prior to closing of the Matsushita loan (described
below), Bank of America will obtain a revised independent appraisal of the
Matsushita Property reflecting a value estimate based upon a development budget
of $18.4 million. Wells OP obtained an environmental report prior to closing of
the Matsushita Property evidencing that the environmental condition of the
Matsushita Property is satisfactory.
The Matsushita Project Loans. Wells OP obtained $7,000,000 in financing
----------------------------
for the Matsushita project from SouthTrust Bank, N.A. pursuant to the revolving
credit facility extended to Wells OP in connection with the acquisition of the
PWC Building.
In addition, Wells OP obtained a construction loan from Bank of America,
N.A. in the maximum principal amount of $15,375,000, the proceeds of which are
being used to fund the development and construction of the Matsushita project.
The Matsushita loan shall mature on May 9, 2001. The interest rate on the
Matsushita loan is a variable rate equal to either (1) the Bank of America
"prime rate," or (2) at the option of Wells OP, the rate per annum appearing on
Telerate Page 3750 as the London Inter Bank Offered Rate for a 30 day period,
plus 200 basis points. Wells OP is making monthly installments of interest, and
it is anticipated that, commencing in January 2000, Wells OP will make monthly
installments of principal in the amount of $10,703 until maturity. On the
maturity date, the entire outstanding principal balance plus any accrued but
unpaid interest shall be due and payable. The Matsushita loan is secured by a
first priority mortgage against the Matsushita project. Leo F. Wells, III and
the Wells REIT are co-guarantors of the Matsushita loan.
Development Agreement. On March 23, 1999, Wells OP entered into a
---------------------
development agreement with ADEVCO Corporation as the exclusive development
manager to supervise, manage and coordinate the planning, design, construction
and completion of the Matsushita project.
The developer is an Atlanta-based real estate development and management
company formed in 1990 which specializes in the development of office buildings.
The developer has previously developed or is developing a total of six office
buildings for affiliates of our advisor. In this regard, the developer entered
into:
. a development agreement with Wells Real Estate Fund III, L.P. (Wells
Fund III) for the development of a two-story office building
containing approximately 34,300 rentable square feet located in
Greenville, North Carolina;
. a development agreement with Fund IV and Fund V Associates, a joint
venture between Wells Real Estate Fund IV, L.P., (Wells Fund IV) and
Wells Real Estate Fund V, L.P. (Wells Fund V), for the development of
a four-story office building located in Jacksonville, Florida
containing approximately 87,600 rentable square feet;
. a development agreement with the Fund VII-VIII Joint Venture, a joint
venture between Wells Real Estate Fund VII, L.P.(Wells Fund VII), and
Wells Real Estate Fund VIII, L.P. (Wells Fund VIII), for the
development of a two-story office building containing approximately
62,000 rentable square feet located in Alachua County, near
Gainesville, Florida;
. a development agreement with Fund VI, Fund VII and Fund VIII
Associates, a joint venture among Wells Real Estate Fund VI, L.P.
(Wells Fund VI), Wells Fund VII and Wells Fund VIII, for the
development of a four-story office building containing approximately
92,964 rentable square feet located in Jacksonville, Florida;
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<PAGE>
. a development agreement with Fund VIII and Fund IX Associates, a joint
venture between Wells Fund VIII and Wells Real Estate Fund IX, L.P.
(Wells Fund IX), for the development of a four-story office building
containing approximately 96,750 rentable square feet located in
Madison, Wisconsin; and
. a development agreement with Wells Fund IX for the development of a
three-story office building containing approximately 83,885 rentable
square feet located in Knoxville, Tennessee.
The President of the Developer is David M. Kraxberger. Mr. Kraxberger has
been in the real estate business for over 17 years. From 1984 to 1990, Mr.
Kraxberger served as Senior Vice President of Office Development for The Oxford
Group, Inc., an Atlanta-based real estate company with operations in seven
southeastern states. Mr. Kraxberger holds a Masters Degree in Business
Administration from Pepperdine University in Los Angeles, California, and is a
member of the Urban Land Institute and the National Association of Industrial
Office Parks. Mr. Kraxberger also holds a Georgia real estate license. Pursuant
to the terms of a guaranty agreement, Mr. Kraxberger has personally guaranteed
the performance of the developer under the development agreement. Mr. Kraxberger
has also personally guaranteed the performance of the contractor, Integra
Construction, Inc., under the construction contract pursuant to the terms of a
separate guaranty agreement. Neither the developer nor Mr. Kraxberger are
affiliated with the advisor or its affiliates.
As compensation for the services to be rendered by the developer under the
development agreement, Wells OP will pay a development fee of $250,000. The fee
will be due and payable ratably (on the basis of the percentage of construction
completed) as the construction and development of the Matsushita project is
completed.
We anticipate that the aggregate of all costs and expenses to be incurred
by Wells OP with respect to the acquisition of the Matsushita property, the
planning, design, development, construction and completion of the Matsushita
project, the build-out of tenant improvements under the Matsushita lease and the
contingency reserve will total approximately $18,400,000. The development budget
may be adjusted upward or downward based upon changes agreed to by Wells OP and
Matsushita Avionics. The development budget is as follows:
<TABLE>
<S> <C>
Construction Contract $6,492,431
Tenant Improvements 3,675,957
Land 4,450,230
Property Taxes 65,000
Architectural Fees 622,472
Architect's Expenses 60,000
Development Fee 250,000
Government Fees 1,072,019
Survey and Engineering 30,300
Appraisal 7,500
Miscellaneous 32,000
Lease Commissions 608,292
Contingency 300,000
Construction Interest 535,757
Loan Fees 91,844
Legal Fees 75,000
</TABLE>
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<PAGE>
Under the terms of the development agreement, the developer has agreed
that, in the event that the total of all such costs and expenses exceeds
$18,400,000 (except for changes agreed to by Wells OP and Matsushita Avionics),
the amount of fees payable to the developer shall be reduced by the amount of
any such excess. Unless the fees otherwise payable to the developer are reduced
as set forth above, it is estimated that the total sums due and payable to the
developer under the development agreement will be approximately $250,000.
Construction Contract. Wells OP entered into a construction contract with
---------------------
the general contracting firm of GWGC, Inc. doing business as Gordon & Williams
General Contractors, Inc. for the construction of the Matsushita project. The
contractor is a California corporation based in Laguna Hills, California
specializing in commercial, industrial, amusement park and office buildings. The
contractor is presently engaged in the construction of ten projects with a total
construction value of in excess of $72 million, and since 1993, has completed 45
projects with a total construction value in excess of $1.9 billion. Construction
of the Matsushita project began in May 1999.
The construction contract provides that Wells OP shall pay the contractor a
fee equal to 3% of the cost of the work performed by the contractor, as adjusted
by approved change orders, for the construction of the Matsushita project,
excluding tenant improvements. The contractor will be responsible for all costs
of labor, materials, construction equipment and machinery necessary for
completion of the Matsushita project. In addition, the contractor will be
required to secure and pay for any additional business licenses, tap fees and
building permits which may be necessary for construction of the Matsushita
project. Under the construction contract, the cost of the work and the
contractor's fees will be guaranteed not to exceed $6,500,000, subject to
additions and deductions by approved change orders. To the extent that costs
incurred by the contractor exceed such guaranteed maximum price, the contractor
will be required to pay all such costs without reimbursement by Wells OP.
Any amounts saved by the contractor as a result of bids awarded or
subcontracted at amounts below the approved costs for such items shall be set
aside as a contingency reserve. The contractor may only be reimbursed from the
contingency reserve for reasonable costs incurred in connection with certain
unknown and unforeseeable risks enumerated in the construction contract, and
only to the extent that such costs will not cause the contractor to exceed the
guaranteed maximum price. In the event that, at the time of final completion,
the total aggregate sum of the actual cost of the work, the contractor's fees
and any amounts incurred to remedy defects in the work is less than the
guaranteed maximum price, the difference shall be divided evenly by the
contractor and Wells OP.
Wells OP will make monthly progress payments to the contractor in an amount
of 90% of the portion of the contract price properly allocable to labor,
materials and equipment, less the aggregate of any previous payments made by
Wells OP. Wells OP will pay the entire unpaid balance when the Matsushita
project has been fully completed in accordance with the terms and conditions of
the construction contract.
As of September 30, 1999, Wells OP had spent in excess of $8,800,000 on the
Matsushita project, and it was approximately 51% complete. We anticipate that
the Matsushita project will be completed in December 1999.
The contractor will be responsible to Wells OP for the acts or omissions of
its subcontractors and suppliers of materials and of persons either directly or
indirectly employed by them. The contractor will agree to indemnify Wells OP
from and against all liability, claims, damages, losses, expenses and costs of
any kind or description arising out of or in connection with the performance of
the construction contract, provided that such liability, claim, damage, loss or
expense is caused in whole or in part by any action or omission of the
contractor, any subcontractor or materialmen, anyone directly or indirectly
employed by
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<PAGE>
any of them or anyone for whose acts any of them may be liable. The construction
contract will also require the contractor to obtain and maintain, until
completion of the Matsushita project, adequate insurance coverage relating to
the Matsushita project, including insurance for workers' compensation, personal
injury and property damage.
Architect's Agreement. Ware & Malcomb Architects, Inc. is the architect
---------------------
for the Matsushita project pursuant to the architect's agreement dated January
11, 1999 entered into with Wells OP. The architect, which was founded in 1972,
is based in Irvine, California, has a professional staff of over 75 persons, and
specializes in the design of office buildings, corporate facilities, industrial
and research and development buildings, healthcare and high-tech facilities, as
well as commercial/retail centers.
The architect's basic services under the architect's agreement include the
schematic design phase, the design development phase, the construction documents
phase, the bidding or negotiation phase and the construction phase.
The total amount of fees payable to the architect under the architect's
agreement is $622,472. Payments are being paid to the architect on a monthly
basis in proportion to the services performed within each phase of service. In
addition, the architect and its employees and consultants are reimbursed for
expenses including, but not limited to, transportation in connection with the
Matsushita project, living expenses in connection with out-of-town travel, long
distance communications and fees paid for securing approval of authorities
having jurisdiction over the Matsushita project. It is estimated that the total
reimbursable expenses in connection with the development of the Matsushita
project will be approximately $60,000.
Matsushita Lease. On February 18, 1999, Wells OP entered into an office
----------------
lease pursuant to which Matsushita Avionics agreed to lease 100% of the 150,000
rentable square feet of the Matsushita project.
Matsushita Avionics is a wholly-owned subsidiary of Matsushita Electric
Corporation of America (Matsushita Electric). Matsushita Avionics manufactures
and sells audio-visual products to the airline industry for passenger use in
airplanes. Matsushita Electric is a wholly-owned subsidiary of Matsushita
Electric Industrial Co., Ltd. (Matsushita Industrial), a Japanese company which
is the world's largest consumer electronics manufacturer. Matsushita Electric
oversees the North American operations of Matsushita Industrial. In North
America, Matsushita Electric makes consumer, commercial and industrial
electronics, including products ranging from juke boxes to flat digital
television sets, primarily under the Panasonic brand name. Matsushita Electric
has more than 20 plants in the United States, Mexico and Canada and employs over
23,000 people. Matsushita Electric has guaranteed the obligations of Matsushita
Avionics under the Matsushita lease. Matsushita Electric reported net income for
the fiscal year ended March 31, 1998 of over $700 million on gross revenues of
over $8.0 billion.
The initial term of the Matsushita lease will be seven years to commence on
the earlier of (1) the date Matsushita Avionics commences business in the
premises, or (2) the date upon which a series of conditions are met, including
but not limited to, Wells OP's completion of the improvements and a certificate
of occupancy is issued. Matsushita Avionics has the option to extend the initial
term of the Matsushita Lease for two successive five year periods. Each
extension option must be exercised not more than 19 months and not less than 15
months prior to the expiration of the then current lease term.
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The base rent payable under the Matsushita lease shall be as follows:
<TABLE>
<CAPTION>
Yearly Monthly
Lease Year Base Rent Base Rent
---------- --------- ---------
<S> <C> <C>
1-2 $1,830,000 $152,500
3-4 $1,947,120 $162,260
5-6 $2,064,240 $172,020
7 $2,181,360 $181,780
</TABLE>
The monthly base rent is based upon a projected total cost for the
Matsushita project of $17,847,769. If the total project cost, as provided in the
work letter attached as an exhibit to the Matsushita lease, is more or less than
$17,847,769, then the monthly base rent shall be adjusted upward or downward, as
the case may be, by ten percent (10%) of the difference.
The monthly base rent payable during the option term shall be ninety-five
percent (95%) of the stated rental rate at which, as of the commencement of the
option term, tenants are leasing non-expansion, non-affiliated, non-sublease,
non-encumbered, non-equity space comparable in size, location and quality to the
Matsushita project for a term of five years in the Lake Forest and Irvine area
of Southern California. The monthly base rent during the option term shall be
adjusted upward during the option term at the beginning of the 24th and 48th
month of each option term by an amount equal to six percent (6%) of the monthly
base rent payable immediately preceding such period. Within 30 days of tenant
providing written notice of its intent to exercise a renewal option, Wells OP
shall deliver to Matsushita Avionics notice containing the proposed rent for the
option term. If, after reasonable good faith efforts, landlord and tenant are
unable to agree upon the option rent before the 13th month prior to the
expiration of the appropriate lease term, option rent shall be determined by
arbitration.
The EYBL CarTex Building
The EYBL CarTex Building is a manufacturing and office building consisting
of a total of 169,510 square feet comprised of approximately 140,580 square feet
of manufacturing space, 25,300 square feet of two story office space and 3,360
square feet of cafeteria/training space. The XI-XII-REIT Joint Venture purchased
the EYBL CarTex Building on May 18, 1999 for a purchase price of $5,085,000.
The site is an 11.9 acre tract of land located at 111 SouthChase Boulevard
in the SouthChase Industrial Park, which is located adjacent to I-385 in
southwest Greenville, South Carolina.
The entire 169,510 rentable square feet of the EYBL CarTex Building is
currently under lease to EYBL CarTex, Inc. (EYBL CarTex). The EYBL CarTex lease
commenced on March 1, 1998 and expires in February 2008, subject to EYBL
CarTex's right to extend the lease for two additional five year periods of time.
EYBL CarTex produces automotive textiles for BMW, Mercedes, GM Bali, VW
Mexico and Golf A4. EYBL CarTex is a wholly-owned subsidiary of EYBL
International, AG, Krems/Austria. EYBL International is the world's largest
producer of circular knit textile products and loop pile plushes for the
automotive industry. It has plants in Austria, Germany, Hungary, Slovakia,
Brazil and the United States. EYBL International reported total consolidated
sales of in excess of $260 million and a net worth of approximately $50 million
during 1998.
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<PAGE>
The base rent payable under the EYBL CarTex lease for the remainder of the
lease term shall be as follows:
<TABLE>
<CAPTION>
Lease Year Annual Rent Monthly Rent
---------- ----------- ------------
<S> <C> <C>
2 $508,530.00 $42,377.50
3 $508,530.00 $42,377.50
4 $508,530.00 $42,377.50
5 $550,907.50 $45,908.95
6 $550,907.50 $45,908.95
7 $593,285.00 $49,440.42
8 $593,285.00 $49,440.42
9 $610,236.00 $50,853.00
10 $610,236.00 $50,853.00
</TABLE>
The monthly base rent payable for each extended term of the lease will be
equal to the fair market rent as submitted by the landlord. If the tenant does
not agree to the proposed rent by the landlord for the extension term, tenant
may require the fair market rent be determined by three appraisers, one of which
will be selected by the tenant, one by the landlord and the final appraiser
shall be selected by the first two appraisers.
Under the lease, EYBL CarTex has an option to purchase the EYBL CarTex
Building at the expiration of the initial lease term by giving notice to the
landlord by March 1, 2007. Within 30 days after landlord receives notice of
tenant's intent to exercise its purchase option, landlord shall submit a
proposed purchase price for the EYBL CarTex Building based upon its good faith
estimate of the fair market value of the building. If tenant does not agree to
the purchase price, tenant may require that the purchase price be established by
three appraisers, one of which will be selected by the tenant, one of which will
be selected by the landlord and the final appraiser shall be selected by the
first two appraisers. In no event, however, will the purchase price under the
purchase option be less than $5,500,000.
The Sprint Building
The Sprint Building is a three story office building with approximately
68,900 rentable square feet. The XI-XII-REIT Joint Venture purchased the Sprint
Building on July 2, 1999 for a purchase price of $9,500,000. Construction of the
Sprint Building was completed in 1992.
The site is a 7.1 acre tract of land located adjacent to the Leawood
Country Club in Leawood, Kansas near the affluent Overland Park suburb of Kansas
City. The site is within walking distance of Ward Parkway Mall and is convenient
to downtown Kansas City and I-435, the interstate loop around Kansas City.
The entire 68,900 rentable square feet of the Sprint Building is currently
under lease to Sprint Communications Company L.P. (Sprint). The Sprint lease
commenced on May 19, 1997 and expires in May 2007, subject to Sprint's right to
extend the lease for two additional five year periods of time.
Sprint is the nation's third largest long distance phone company, which
operates on an all-digital long distance telecommunications network using state-
of-the-art fiber optic and electronic technology. Sprint provides domestic and
international voice, video and data communications services as well as
integration management and support services for computer networks. Sprint
reported net income of in excess of $1.3 billion on net revenues of in excess of
$9.9 billion for its fiscal year ended December 31, 1998.
The monthly base rent payable under the Sprint lease is $83,254 through May
18, 2002 and $91,867 for the remainder of the lease term. The monthly base rent
payable for each extended term of the
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Sprint lease will be equal to 95% of the then current market rate for
comparable office buildings in the suburban south Kansas City, Missouri and
south Johnson County, Kansas areas. If the parties are unable to agree upon the
current market rate within 30 days of the date negotiations begin, the current
market rate shall be determined by three licensed real estate brokers, one of
which will be selected by Sprint, one of which will be selected by the XI-XII-
REIT Joint Venture and the final appraiser will be selected by the two
appraisers previously selected.
The Sprint lease contains a termination option which may be exercised by
Sprint effective as of May 18, 2004 provided that Sprint has not exercised
either expansion option, as described below. Sprint must provide notice to the
XI-XII-REIT Joint Venture of its intent to exercise its termination option on or
before August 21, 2003. If Sprint exercises its termination option, it will be
required to pay the joint venture a termination payment equal to $6.53 per
square foot, or $450,199.
Sprint also has an expansion option for an additional 20,000 square feet of
office space which may be exercised in two expansion phases. Sprint's expansion
rights involve building on unfinished ground level space that is currently used
as covered parking within the existing building footprint and shell. At each
exercise of an expansion option, the remaining lease term will be extended to be
a minimum of an additional five years from the date of the completion of such
expansion space.
Sprint must give written notice to the XI-XII-REIT Joint Venture of its
election to exercise each expansion option at least 270 days prior to the date
Sprint will require delivery of the expansion space.
If Sprint exercises either expansion option, the XI-XII-REIT Joint Venture
will be required to construct the expansion improvements in accordance with the
specific drawings and plans attached as an exhibit to the Sprint lease. The
joint venture will be required to fund the expansion improvements and to fund to
Sprint a tenant finish allowance of $10 per square foot for the expansion space.
The base rental per square foot for the expansion space shall be determined
by the XI-XII-REIT Joint Venture taking into consideration the value of the
joint venture's work related to such expansion space and the base rental rate
increase per square foot applicable at the end of year five of the lease term.
The expansion space base rental rate shall be presented to Sprint no later than
45 days after delivery to the XI-XII-REIT Joint Venture of each expansion
notice. In no event shall such rental rate be greater than the base rental rate
for the Sprint Building as of the date of the expansion space commencement date.
The ABB Richmond Property
Purchase of the ABB Richmond Property. On July 22, 1999, Wells REIT, LLC -
-------------------------------------
VA I (Wells LLC VA), a limited liability company wholly owned by Wells OP,
purchased a 7.49 acre tract of land located in Midlothian, Chesterfield County,
Virginia for a purchase price of $936,250.
Wells LLC VA entered into a development agreement for the construction of a
four-story brick office building containing approximately 100,000 rentable
square feet to be erected on the ABB Richmond Property. Wells LLC VA entered
into an office lease with ABB Power Generation Inc. (ABB Power) pursuant to
which ABB Power agreed to lease the ABB Richmond project upon its completion.
Description of the ABB Richmond Project and the Site. The ABB Richmond
----------------------------------------------------
project involves the construction of a four-story brick office building
containing 102,000 gross square feet with on-grade parking for approximately 500
cars.
The site consists of a 7.49 acre tract of land located in the Waterford
Business Park in Southwest Richmond, Virginia. Waterford is a 250-acre office
park in the Clover Hill District of Chesterfield
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County, one of the fastest growing counties in Virginia. The office park is
located at the interchange of I-288 and the Powhite Parkway with excellent
access to I-95 and I-64.
Midlothian is located approximately nine miles southwest of the Richmond
central business district. The moderate cost of living, low taxes and strong
economic base, as well as the transportation networks and waterways, make
Richmond an attractive location for businesses.
An independent appraisal of the ABB Richmond project was prepared by CB
Richard Ellis, Inc., real estate appraisers, as of June 21, 1999, pursuant to
which the market value of the land and the leased fee interest in the ABB
Richmond project subject to the ABB Richmond lease was estimated to be $11.6
million, in cash or terms equivalent to cash. This value estimate was based upon
a number of assumptions, including that the ABB Richmond project will be
finished in accordance with plans and specifications, that total development
costs would not exceed $11.5 million and that the building will be operated
following completion at a stabilized level with ABB Power occupying 80% of the
building at a rental rate calculated based upon the $11.5 million development
budget. Wells OP obtained an environmental report prior to closing of the ABB
Richmond Property evidencing that the environmental condition of the ABB
Richmond Property is satisfactory.
The ABB Richmond Loan. In addition, Wells LLC VA has received a commitment
---------------------
to obtain a construction loan from SouthTrust Bank, N.A. in the maximum
principal amount of $9,280,000, the proceeds of which will be used to fund the
development and construction of the ABB Richmond project. The ABB Richmond loan
matures 30 months from the date of the loan closing. The interest rate on the
ABB Richmond loan is 225 basis points over the London Inter Bank Offered Rate
with a 1/2 point origination fee. The loan will be secured by a pledge of the
real estate, the ABB Richmond lease and a $4,000,000 letter of credit issued by
Unibank. Leo F. Wells, III will be a guarantor of the ABB Richmond loan.
Although management of Wells LLC VA currently anticipates obtaining the ABB
Richmond loan from SouthTrust Bank, N.A., pursuant to the terms described above,
Wells LLC VA has not yet entered into a formal loan agreement. Therefore, there
is no guarantee that Wells LLC VA will obtain the ABB Richmond loan under the
terms described above or that the loan obtained to fund the construction and
development of the ABB Richmond project will materially differ from the terms
described above.
Development Agreement. On June 28, 1999, Wells LLC VA entered into a
---------------------
development agreement with ADEVCO Corporation as the exclusive development
manager to supervise, manage and coordinate the planning, design, construction
and completion of the ABB Richmond project.
As compensation for the services to be rendered by the developer under the
development agreement, Wells LLC VA will pay a development fee of $150,000. The
development fee will be due and payable ratably (on the basis of the percentage
of construction completed) as the construction and development of the ABB
Richmond project is completed. Wells LLC VA will also pay the developer an "ABB
Work Fee" of $150,000 which will be payable in a lump sum at the completion of
the ABB Richmond project. The ABB Work Fee is for services rendered by the
developer with respect to the supervision and management of tenant build-out of
the premises leased by ABB Power pursuant to the ABB Power lease.
We anticipate that the aggregate of all costs and expenses to be incurred
by Wells LLC VA with respect to the acquisition of the ABB Richmond Property,
the planning, design, development, construction and completion of the ABB
Richmond project, the build-out of tenant improvements under the ABB Richmond
lease and the contingency reserve will total approximately $11,559,347 comprised
of the following expenditures:
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<TABLE>
<S> <C>
Construction Contract $5,549,527
Tenant Improvements - ABB Premises 2,047,112
Tenant Improvements - Additional Space 483,050
Land 937,500
Contractor's Bond 45,000
Work Fee 60,000
Architectural Fees & Expenses 235,134
Space Planning 80,000
Development Fee 150,000
ABB Work Fee 150,000
Survey and Engineering 78,500
Landscape Construction 150,000
Holdover Contingency 75,000
Construction Interest 350,000
Loan Commitment Fee 100,000
Commissions 600,639
Legal Fees 75,000
Contingency 298,233
Miscellaneous 94,652
</TABLE>
Under the terms of the development agreement, the developer has agreed
that, in the event that the total of all such costs and expenses (excluding
costs for closing costs, loan fees, construction interest, tenant improvements
and leasing commissions) exceeds $9,454,658 (except for changes agreed to by
Wells LLC VA and ABB Power), the amount of fees payable to the developer shall
be reduced by the amount of any such excess.
Construction Contract. Wells LLC VA entered into a construction contract
---------------------
dated June 14, 1999 with the general contracting firm of Bovis Construction
Corp. for the construction of the ABB Richmond project. The contractor, which
was founded in London in 1885, now ranks among the world's top 10 construction
companies with projects in 36 countries. At any one time, the contractor is
engaged in approximately 500 projects.
The construction contract provides that Wells LLC VA shall pay the
contractor $5,549,527 for the full and proper work detailed in the contract. The
contractor commenced work on the ABB Richmond project in June 1999.
Wells LLC VA will make monthly progress payments to the contractor in an
amount of 90% of the portion of the contract price properly allocable to labor,
materials and equipment, less the aggregate of any previous payments made by
Wells LLC VA; provided, however, that when a total of $277,500 has been withheld
as retainage, no further retainage will be withheld from the monthly progress
payments. Wells LLC VA will pay the entire unpaid balance when the ABB Richmond
project has been fully completed in accordance with the terms and conditions of
the construction contract. As a condition of final payment, the contractor will
be required to execute and deliver a release of all claims and liens against
Wells LLC VA.
As of September 30, 1999, Wells OP had spent approximately $1,800,000 on
the ABB Richmond project and it was approximately 15% complete. We anticipate
that the ABB Richmond project will be completed in May 2000.
The contractor is responsible to Wells LLC VA for the acts or omissions of
its subcontractors and suppliers of materials and of persons either directly or
indirectly employed by them. The contractor
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agreed to indemnify Wells LLC VA from and against all liability, claims,
damages, losses, expenses and costs of any kind or description arising out of or
in connection with the performance of the construction contract, provided that
such liability, claim, damage, loss or expense is caused in whole or in part by
any action or omission of the contractor, any subcontractor or materialmen,
anyone directly or indirectly employed by any of them or anyone for whose acts
any of them may be liable. The construction contract also requires the
contractor to obtain and maintain, until completion of the ABB Richmond project,
adequate insurance coverage relating to the ABB Richmond project, including
insurance for workers' compensation, personal injury and property damage.
The contractor is required to work expeditiously and diligently to maintain
progress in accordance with the construction schedule and to achieve substantial
completion of the ABB Richmond project within the contract time. The contractor
is required to employ all such additional labor, services and supervision,
including such extra shifts and overtime, as may be necessary to maintain
progress in accordance with the construction schedule. The performance of the
contractor is secured by a $1,000,000 letter of credit. In addition, performance
by the contractor of the construction contract has been personally guaranteed by
David Kraxberger, a principal of the developer.
Architect's Agreement. Smallwood, Reynolds, Stewart, Stewart & Associates,
---------------------
Inc. is the architect for the ABB Richmond project pursuant to the architect's
agreement dated May 18, 1999 entered into with Wells LLC VA. The architect,
which was founded in 1979, is based in Atlanta, Georgia, has a staff of over 200
persons, and specializes in programming, planning, architecture, interior
design, landscape architecture and construction administration. The architect
has its principal office in Atlanta, Georgia and additional offices in Tampa,
Florida and Singapore, Malaysia. The architect has designed a wide variety of
projects, with a total construction cost in excess of $2 billion, including
facilities for corporate office space, educational and athletic facilities,
retail space, manufacturing, warehouse and distribution facilities, hotels and
resorts, correctional institutions, and luxury residential units. The architect
has performed architectural services with respect to various projects for
affiliates of the Wells REIT and is currently performing such services for the
Matsushita project. The architect is not affiliated with the Wells REIT or our
advisor.
The architect's basic services under the architect's agreement include the
schematic design phase, the design development phase, the construction documents
phase, the bidding or negotiation phase and the construction phase. During the
schematic design phase, the architect will prepare schematic design documents
consisting of drawings and other documents illustrating the scale and
relationship of the ABB Richmond project components. The architect will be paid
$35,190 for these services.
The total amount of fees payable to the architect under the architect's
agreement is $234,600. Payments are being paid to the architect on a monthly
basis in proportion to the services performed within each phase of service. In
addition, the architect and its employees and consultants are reimbursed for
expenses including, but not limited to, transportation in connection with the
ABB Richmond project, living expenses in connection with out-of-town travel,
long distance communications and fees paid for securing approval of authorities
having jurisdiction over the ABB Richmond project. It is estimated that the
total reimbursable expenses in connection with the development of the ABB
Richmond project will be approximately $25,000.
ABB Richmond Lease. Wells LLC VA entered into an office lease pursuant to
------------------
which ABB Power agreed to lease 100% of the 99,057 rentable square feet of the
ABB Richmond project.
ABB Power is a subsidiary of Asea Brown Boveri, Inc., a large multi-
national engineering and construction company headquartered in Switzerland. ABB
Power reported net income for the fiscal year
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ended December 31, 1998 of over $1.3 billion on gross revenues of over $30.9
billion and a net worth of over $6.0 billion.
The initial term of the ABB Richmond lease will be seven years to commence
on the later of April 1, 2000 or the earlier of (1) the date which is ten days
after "Substantial Completion" (as defined in Exhibit D of the lease) or the
date ABB Power commences business in the premises. ABB Power has the right to
extend the lease for two additional five year periods of time. Each extension
option must be exercised by giving notice to the landlord at least 12 months
prior to the expiration date of the then-current lease term.
The ABB Richmond lease is credit enhanced by a letter of credit in the
amount of $4 million issued by Unibank, a large Danish bank with offices in New
York, for the account of Asea Brown Boveri, Inc., the parent company.
The base rent payable under the ABB Richmond lease will be as follows:
<TABLE>
<CAPTION>
Lease Year Yearly Base Rent Monthly Base Rent
---------- ---------------- -----------------
<S> <C> <C>
1 $1,183,731 $ 98,644.26
2 $1,213,324 $101,110.37
3 $1,243,657 $103,638.08
4 $1,274,748 $106,229.04
5 $1,306,618 $108,884.80
6 $1,339,283 $111,606.90
7 $1,372,765 $114,397.11
</TABLE>
The monthly base rent is based upon a projected total cost for the ABB
Richmond project of $11,036,139. If the total project cost, as provided in the
work letter attached as an exhibit to the ABB Richmond lease, is more or less
than $11,036,139, then the monthly base rent shall be adjusted upward or
downward, as the case may be, by 10.54% of the difference.
The monthly base rent payable for each extended term of the ABB Richmond
lease will be equal to the "Market Rate" for new leases of office space in that
portion of the Richmond, Virginia market that is located south of the James
River and west of I-95 for space similar to the premises. In the event the
parties are unable to agree upon the Market Rate, then each party shall appoint
a real estate appraiser. If the appraisers are unable to agree upon the Market
Rate, they shall appoint a third appraiser and each shall make a determination
of the Market Rate. The appraisal that is farthest from the middle appraisal
shall be disregarded and the remaining two appraisals shall be averaged to
establish the Market Rate.
ABB Power has a one-time option to terminate the ABB Richmond lease as to a
portion of the premises containing between 12,500 and 13,000 rentable square
feet as of the third anniversary of the rental commencement date. If ABB Power
elects to exercise this termination option, ABB Power is required to pay a
termination fee equal to eight times the sum of the next due installments of
rent plus the unamortized portions of the base improvement allowance, additional
allowance and broker commission, each being amortized in equal monthly
installments of principal and interest over the initial term of the lease at a
rate of ten percent (10%) per annum. ABB Power must give notice of its intent to
exercise such option to terminate at least seven months in advance of the third
anniversary; provided, however, that ABB Power may pay a penalty, as stipulated
in the lease, to provide less than seven months notice.
In the event that ABB Power exercises its termination option as of the
third anniversary of the rental commencement date, ABB Power has a one-time
option to terminate the ABB Richmond lease as
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to a portion of the premises containing between 12,500 and 13,000 rentable
square feet as of the fifth anniversary of the rental commencement date. If ABB
Power elects to exercise this termination option, ABB Power is required to pay a
termination fee equal to six times the sum of the next due installments of rent
plus the unamortized portions of the base improvement allowance, additional
allowance and broker commission, each being amortized in equal monthly
installments of principal and interest over the initial term of the lease at a
rate of ten percent (10%) per annum. ABB Power must give notice of its intent to
exercise such option to terminate at least seven months in advance of the fifth
anniversary; provided, however, that ABB Power may pay a penalty, as stipulated
in the lease, to provide less than seven months notice.
In the event that ABB Power does not exercise its termination option as of
the third anniversary of the rental commencement date, ABB Power has a one-time
option to terminate the ABB Richmond lease as to a portion of the premises
containing between 24,500 and 25,500 rentable square feet as of the fifth
anniversary of the rental commencement date. If ABB Power elects to exercise
this termination option, ABB Power is required to pay a termination fee equal to
six times the sum of the next due installments of rent plus the unamortized
portions of the base improvement allowance, additional allowance and broker
commission, each being amortized in equal monthly installments of principal and
interest over the initial term of the lease at a rate of ten percent (10%) per
annum. ABB Power must give notice of its intent to exercise such option to
terminate at least nine months in advance of the fifth anniversary; provided,
however, that ABB Power may pay a penalty, as stipulated in the lease, to
provide less than seven months notice.
The Johnson Matthey Building
The Johnson Matthey Building is a 130,000 square foot research and
development, office and warehouse building. The XI-XII-REIT Joint Venture
purchased the Johnson Matthey Building on August 17, 1999 for a purchase price
of $8,000,000. The Johnson Matthey Building was first constructed in 1973 as a
multi-tenant facility and it was subsequently converted into a single-tenant
facility in 1998.
The site consists of a 10.0 acre tract of land located at 434-436 Devon
Park Drive in Tredyffrin Township, Chester County, Pennsylvania. The site is
located along the Route 202 "high tech" corridor close to King of Prussia and is
considered a suburb of Philadelphia. The site is within five minutes of Route
422, the Pennsylvania Turnpike and Interstate 76.
The XI-XII-REIT Joint Venture obtained an environmental report prepared by
Dames & Moore evidencing that the environmental condition of the land and the
Johnson Matthey Building was satisfactory. Although the soil does contain some
traces of environmental groundwater contaminants approximately 60 feet below the
surface, Dames & Moore, in a letter addressed to Wells Capital, Inc. dated
August 13, 1999, did not recommend any further environmental investigation for
the site. At the closing, the seller assigned its rights to a $2,000,000
insurance policy to the XI-XII-REIT Joint Venture relating to potential losses
from environmental contamination. Management of the Wells REIT is satisfied that
the environmental condition of the site is satisfactory and believes that the
rights assigned under this insurance policy protect us from potential liability
exposure resulting from environmental contamination.
The entire 130,000 rentable square feet of the Johnson Matthey Building is
currently leased to Johnson Matthey, Inc. (Johnson Matthey). The current lease
term expires in June 2007. Johnson Matthey has the right to extend the lease for
two additional three year periods of time.
Johnson Matthey is a wholly owned subsidiary of Johnson Matthey, PLC of the
United Kingdom, a world leader in advanced materials technology. Johnson
Matthey, PLC applies the latest technology to
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add value to precious metals and other specialized materials. Johnson Matthey,
PLC is a publicly traded company that is over 175 years old, has operations in
38 countries and employs 12,000 people.
Johnson Matthey is one of the parent company's primary operating companies
in the U.S. and includes the Catalytic Systems Division (CSD). The CSD is the
world's leading supplier of catalytic converters for automotive exhaust emission
and air pollution control. In addition, Johnson Matthey is the largest U.S.
supplier of diesel catalytic converters, which enable customers to meet
constantly tightening regulatory requirements.
The base rent payable under the Johnson Matthey lease for the remainder of
the lease term is as follows:
<TABLE>
<CAPTION>
Lease Year Yearly Rent Monthly Rent
---------- ----------- ------------
<S> <C> <C>
3 $789,750 $65,812.50
4 $809,250 $67,437.50
5 $828,750 $69,062.50
6 $854,750 $71,229.17
7 $874,250 $72,854.17
8 $897,000 $74,750.00
9 $916,500 $76,375.00
10 $939,250 $78,270.84
</TABLE>
The monthly base rent payable for each extension term will be equal to the
fair market rent taking into consideration rental rates for comparable
industrial and research and development properties in the local market area. If
the parties cannot agree upon the fair market rent, the matter shall be
submitted to arbitration.
Johnson Matthey has a right of first refusal to purchase the Johnson
Matthey Building in the event that the XI-XII-REIT Joint Venture desires to sell
the building to an unrelated third-party. The XI-XII-REIT Joint Venture must
give Johnson Matthey written notice of its intent to sell the Johnson Matthey
Building, and Johnson Matthey will have ten days from the date of such notice to
provide written notice of its intent to purchase the building. If Johnson
Matthey exercises its right of first refusal, it must purchase the Johnson
Matthey Building on the same terms contained in the offer.
The Videojet Building
The Videojet Building is a two story office, assembly and manufacturing
building containing approximately 250,354 rentable square located in the
Chancellory Business Park in Wood Dale, Illinois. Wells OP purchased the
Videojet Building on September 10, 1999 for a purchase price of $32,630,940.
Construction of the Videojet Building was completed in 1991.
The $33,158,865 required to close the Videojet acquisition consisted of
$26,158,865 in cash funded from a capital contribution by the Wells REIT and
$7,000,000 in loan proceeds obtained from SouthTrust Bank, N.A. pursuant to the
revolving credit facility originally extended to Wells OP in connection with the
acquisition of the PWC Building.
The site is a 15.3 acre tract of land that is adjacent to the western
entrance to O'Hare International Airport. The site is also situated very
convenient to most of Chicago's major interstates, including the Elgin/O'Hare
Expressway which, when finished, will extend along Thorndale Road adjacent to
the main entrance to the Chancellory Business Park. The Chancellory Business
Park consists of good quality
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office, manufacturing and warehouse buildings mostly
occupied by national tenants such as Sony, Mitsubishi, NEC Minolta and United
Airlines.
Wood Dale is a small suburb with a population of greater than 12,000
located northwest of the City of Chicago and directly west of O'Hare
International Airport. Since the City of Chicago is bordered on the East by
Lake Michigan, some have described Wood Dale as the true center of Chicago.
Wood Dale has a long-term positive outlook due to its superior location.
The entire 250,354 rentable square feet of the Videojet Building is
currently under a net lease agreement with Videojet Systems International, Inc.
(Videojet). The initial term of the Videojet lease is twenty years which
commenced in November 1991 and expires in November 2011. Videojet has the right
to extend the Videojet lease for one additional five year period of time.
Videojet is the world's leading producer of state-of-the-art industrial ink
jet marking and coding products. Videojet manufactures and distributes
industrial ink jet printers, digital imaging systems, laser coding systems, inks
and fluids to customers worldwide. The Videojet lease is guaranteed by GEC
Incorporated, a Delaware corporation which is a wholly-owned subsidiary of
General Electric Company, p.l.c., a publicly traded United Kingdom corporation
that ranks among the largest electronic system and equipment manufacturers in
the world.
The base rent payable for the remainder of the lease term is as follows:
<TABLE>
<CAPTION>
Lease Year Yearly Base Rent Monthly Base Rent
---------- ---------------- -----------------
<S> <C> <C>
2000-2001 $2,838,952 $236,579.33
2002-2011 $3,376,746 $281,395.50
Extension Term $4,667,439 $388,953.25
</TABLE>
The Gartner Building
The Gartner Building is a two story office building containing
approximately 62,400 rentable square feet located in Fort Myers, Lee County,
Florida. The XI-XII-REIT Joint Venture purchased the Gartner Building on
September 20, 1999 for a purchase price of $8,320,000. Construction of the
Gartner Building was completed in 1998.
The site is a 4.9 acre tract of land within the Gateway development at
12600 Gateway Boulevard in Fort Myers, Florida. Gateway is a mixed use
development with over 3,000 acres planned for residential purposes and over 800
acres planned for commercial purposes. Sony Electronics and Ford Motor Credit
Company are two of the commercial tenants in this development.
The recent growth of the Fort Myers area is primarily due to the opening of
Interstate 75 in the eastern portion of the metro area and the relatively new
Southwest Florida Regional Airport, which is located just south of Gateway and
is easily accessible by a two lane road. Another major expansion to the local
economy is the new Florida Gulf Coast University, which is part of the State of
Florida University system. The enrollment at this university is expected to
increase to between 10,000 and 15,000 in the next few years.
The entire 62,400 rentable square feet of the Gartner Building is currently
leased to Gartner. The initial term of the Gartner lease is ten years which
commenced on February 1, 1998 and expires on January 31, 2008. Gartner has the
right to extend the lease for two additional five year periods of time.
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The Gartner Building will be occupied by Gartner's Financial Services
Division. Gartner, which was founded in 1979, is the world's leading
independent provider of research and analysis related to information and
technology solutions. Gartner serves as a consultant to business clients for
their information technology purchasing decisions. Gartner has over 80
locations worldwide and over 12,000 clients. Gartner, which is headquartered in
Stamford, Connecticut, had net income of over $98 million and a net worth of
over $530 million for its fiscal year ended September 30, 1998.
The base rent payable for the remainder of the lease term is as follows:
<TABLE>
<CAPTION>
Lease Year Yearly Base Rent Monthly Base Rent
---------- ---------------- -----------------
<S> <C> <C>
2/1999-1/2000 $642,798 $53,566.50
2/2000-1/2001 $790,642 $65,886.83
2/2001-1/2002 $810,408 $67,534.00
2/2002-1/2003 $830,668 $69,222.35
2/2003-1/2004 $851,435 $70,952.89
2/2004-1/2005 $872,721 $72,726.74
2/2005-1/2006 $894,539 $74,544.92
2/2006-1/2007 $916,902 $76,408.54
2/2007-1/2008 $939,825 $78,318.71
</TABLE>
The monthly base rent payable for each extended term of the lease will be
equal to the lesser of (i) the prior rate increased by 2.5%, or (ii) 95% of the
then current market rate which is calculated as a full-service rental rate less
anticipated annual operating expenses on a rentable square foot basis charged
for space of comparable location, size and conditions in comparable office
buildings in the Fort Myers area.
Gartner also has two expansion options for additional buildings under the
Gartner lease. The two option plans are described in the lease as the "Small
Option Building" and the "Large Option Building".
The "Small Option Building" expansion option allows Gartner the ability to
expand into a separate, free standing facility on the property containing
between 30,000 and 32,000 rentable square feet to be constructed by the
XI-XII-REIT Joint Venture. Gartner may exercise its expansion right for the
Small Option Building by providing notice in writing to the joint venture on or
before February 15, 2002. In the event that Gartner exercises its expansion
option, the parties shall enter into a separate lease within 30 days of such
notice by Gartner with a guaranteed ten year lease term and yearly base rent to
be determined by mutual agreement of the parties.
The "Large Option Building" expansion option allows Gartner the ability to
expand into a separate, free standing facility on the property containing
between 60,000 and 75,000 rentable square feet to be constructed by the
XI-XII-REIT Joint Venture. Gartner may exercise its expansion right for the
Small Option Building by providing notice in writing to the joint venture on or
before February 15, 2002. In the event that Gartner exercises its expansion
option, the parties shall enter into a separate lease within 30 days of such
notice by Gartner with a guaranteed ten year lease term and yearly base rent to
be determined by mutual agreement of the parties.
Property Management Fees
Wells Management has been retained to manage and lease the Fairchild
Building, the Cort Furniture Building, the Associates Building, the PWC
Building, the Vanguard Cellular Building, the EYBL CarTex Building, the Sprint
Building, the Johnson Matthey Building, the Videojet Building and the Gartner
Building. Wells Management will also be retained to manage and lease the
Matsushita
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project and the ABB Richmond project upon completion of such projects. Wells
Management shall receive 4.5% of gross revenues of each of these buildings for
property management and leasing services.
Wells Management has also been retained to manage and lease all of the
properties currently owned by the IX-X-XI-REIT Joint Venture. While Wells Fund
XI and the Wells REIT are authorized to pay aggregate management and leasing
fees to Wells Management in the amount of 4.5% of gross revenues, Wells Fund IX
and Wells Fund X are authorized to pay aggregate management and leasing fees to
Wells Management in the amount of 6% of gross revenues. Since Wells Fund IX and
Wells Fund X hold an aggregate 87.4% ownership percentage interest in the IX-X-
XI-REIT Joint Venture, while Wells Fund XI and the Wells REIT hold an aggregate
12.6% ownership percentage interest in the IX-X-XI-REIT Joint Venture, 87.4% of
the gross revenues of the IX-X-XI-REIT Joint Venture are subject to a 6%
property management and leasing fee, while 12.6% of the gross revenues of the
IX-X-XI-REIT Joint Venture are subject to a 4.5% property management and leasing
fee.
Wells Management received a one-time initial lease-up fee equal to the
first month's rent for the leasing of the ABB Knoxville Building and the Lucent
Building. In addition, Wells Management will receive a one-time initial lease-
up fee equal to the first month's rent for the leasing of the Matsushita project
and the ABB Richmond project.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with
our accompanying financial statements and the notes thereto.
This section and other sections of the prospectus contain forward-looking
statements, within the meaning of Section 27A of the Securities Act of 1933 and
21E of the Securities Exchange Act of 1934, including discussion and analysis of
the financial condition of the Wells REIT, anticipated capital expenditures
required to complete certain projects, amounts of cash distributions anticipated
to be distributed to shareholders in the future and certain other matters.
Readers of this prospectus should be aware that there are various factors that
could cause actual results to differ materially from any forward-looking
statement made in this prospectus, which include changes in general economic
conditions, changes in real estate conditions, construction costs which may
exceed estimates, construction delays, increases in interest rates, lease-up
risks, inability to obtain new tenants upon the expiration of existing leases,
lack of availability of financing and the potential need to fund tenant
improvements or other capital expenditures out of operating cash flow.
Liquidity and Capital Resources
We began active operations on June 5, 1998, when we received and accepted
subscriptions for 125,000 shares. As of December 31, 1998, we had raised
$31,541,360 in offering proceeds through the sale of 3,154,136 shares, which
includes the 5,122 shares we issued pursuant to our dividend reinvestment plan.
After we paid $5,046,458 in acquisition and advisory fees and acquisition
expenses, selling commissions and organizational and offering expenses, and
$18,442,540 in capital contributions to Wells OP for investment in joint
ventures and acquisitions of real properties, as of December 31, 1998, we were
holding net offering proceeds of approximately $8,052,362 available for
investment in additional properties.
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Between December 31, 1998 and September 30, 1999, we raised an additional
$76,927,944 in offering proceeds through the sale of 7,692,795 shares and
invested an additional $71,477,174 in real properties. Accordingly, as of
September 30, 1999, we had raised a total of $108,469,304 in offering proceeds
through the sale of 10,846,930 shares. After we paid a total of $17,354,929 in
acquisition and advisory fees and acquisition expenses, selling commissions and
organizational and offering expenses, and a total of $89,919,734 in capital
contributions to Wells OP for investment in joint ventures and acquisitions of
real properties, as of September 30, 1999, we were holding net offering proceeds
of approximately $1,194,641 available for investment in additional properties.
Cash and cash equivalents at September 30, 1999 and 1998 were $2,850,263
and $591,122, respectively. The increase in cash and cash equivalents resulted
primarily from raising additional capital in our initial public offering. We
intend to use cash and cash equivalents to purchase additional properties, to
pay dividends and to pay offering costs.
Our capital needs and resources are expected to undergo changes as a result
of the completion of our initial public offering of shares, the commencement of
the follow-on offering and the future acquisition of properties. Operating cash
flow is expected to increase as additional properties are added to our
portfolio. Dividends to be distributed to our shareholders are determined by
our board of directors and are dependent on a number of factors, including our
funds available for payment of dividends, our financial condition, our capital
expenditure requirements and our annual distribution requirements in order to
maintain our REIT status under the Internal Revenue Code.
As of September 30, 1999, we had acquired interests in 16 real estate
properties. These properties are generating sufficient cash flow to cover our
operating expenses and pay quarterly dividends. Dividends declared for the
third quarter of 1999 totaled $0.175 per share, which were calculated using
daily declaration and record dates in the amount of $0.001902 per share to the
shareholders of record at the close of business on each day during the third
quarter of 1999, commencing on July 1, 1999, and continuing on each day
thereafter through and including September 30, 1999. Similarly, our board of
directors has declared dividends for the fourth quarter of 1999, also totalling
$0.175 per share, to be calculated using daily declaration and record dates in
the amount of $0.001902 per share to shareholders of record at the close of
business on each day during the fourth quarter of 1999, commencing on October 1,
1999, and continuing on each day thereafter through and including December 31,
1999.
On February 18, 1999, Wells OP entered into a Rental Income Guaranty
Agreement with the Fund VIII-IX Joint Venture, whereby Wells OP guaranteed the
Fund VIII-IX Joint Venture that the joint venture would receive rental income on
its existing building previously leased to Matsushita Avionics at least equal to
the rental and building expenses that the Fund VIII-IX Joint Venture would have
received over the remaining term of its lease with Matsushita Avionics.
Matsushita Avionics will vacate the existing building in December 1999, with the
existing term ending in September 2003. Currently rental and building expenses
are approximately $90,000 per month. (See "Description of Properties -- The
Matsushita Property.")
Our maximum exposure to liability to the Fund VIII-IX Joint Venture for
rental income and building expenses potentially payable under this Rental Income
Guaranty Agreement was taken into account in the economic analysis performed in
making the determination to go forward with the development of the Matsushita
project. Management of the Wells REIT anticipates that our actual liability
will be less than our maximum exposure; however, management cannot, at this
time, determine the amount of our actual liability under the Rental Income
Guaranty Agreement. Any payment made to the Fund VIII-IX Joint Venture for
rental and building expenses will be made from the operating cash flow of the
Wells REIT and will reduce the amount of cash available for payment of
dividends.
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Cash Flows From Operating Activities
Net cash provided by operating activities was $2,273,102 for the nine
months ended September 30, 1999, as compared to $20,007 for the four-month
period ended September 30, 1998. The increase in net cash provided by operating
activities was due primarily to the purchase of additional properties in 1999
and a full nine months of operations for the properties acquired during 1998.
Cash Flows From Investing Activities
The increase in net cash used in investing activities from $9,959,917 for
the four months ended September 30, 1998 to $75,420,671 for the nine months
ended September 30, 1999 was due primarily to the raising of additional capital
through the sale of our shares and investing such capital in acquisitions of
real property.
Cash Flows From Financing Activities
The increase in net cash provided by financing activities from $10,330,032
for the four months ended September 30, 1998 to $68,018,429 for the nine months
ended September 30, 1999 was also due primarily to the raising of additional
capital. We raised $76,927,944 in offering proceeds for the nine months ended
September 30, 1999, as compared to $11,691,923 for the four months ended
September 30, 1998. In addition, during the nine months ended September 30,
1999, we received loan proceeds from various financing transactions of
$25,598,666 and repaid a total of $22,732,539 of our company debt.
Results of Operations
As of September 30, 1999, the properties owned by the Wells REIT were
99.99% occupied. Gross revenues for the four months ended September 30, 1998
and for the nine months ended September 30, 1999 were $84,209 and $3,996,290,
respectively. This increase was due to the purchase of interests in additional
properties during 1998 and 1999 and a full nine months of operations of the
properties acquired during 1998. The purchase of interests in additional
properties also resulted in an increase in rental income, operating expenses and
depreciation expenses.
During the offering period, interest income is likely to be higher since we
will invest funds in short-term investments while we are evaluating potential
real estate acquisitions. Interest income will eventually decrease and will not
be a significant component of revenues after the net offering proceeds are fully
invested in real properties.
We have invested significant funds in the Matsushita project and the ABB
Richmond project which are under construction. During the construction period,
we will not receive any rental income from these properties, nor will we receive
interest income on the amounts we must pay to the developer as construction
progresses. Therefore, if the number of construction projects represents a
significant percentage of our investments during our initial acquisitions
stages, net income will be adversely affected on a short-term basis. However,
we believe that the return on investment on our construction projects will
produce long-term returns that are in excess of returns on existing buildings.
Recent Accounting Pronouncements
Effective April 3, 1998, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 is effective for fiscal years beginning after
December 15, 1998, and initial application is required to be reported as a
cumulative effect of change in accounting principle. This SOP provides guidance
on the financial reporting of start-
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up costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. Adoption of this Statement by the
Wells REIT in the first quarter of 1999 may result in the write-off of certain
capitalized organization costs. Adoption of this Statement is not expected to
have a material impact on our results of operations and financial condition.
Inflation
The real estate market has not been affected significantly by inflation in
the past three years due to the relatively low inflation rate. There are
provisions in a majority of our tenant leases to protect us from the impact of
inflation. These leases contain common area maintenance charges, real estate
tax and insurance reimbursements on a per square foot basis, or in some cases,
annual reimbursement of operating expenses above a certain per square foot
allowance. These provisions should reduce our exposure to increases in costs
and operating expenses resulting from inflation.
Year 2000 Compliance
We began a full assessment of year 2000 compliance issues on our
information systems and business operations in late 1997, and we completed the
assessment during the first quarter of 1999. Renovations and replacements of
equipment have been and are being made as warranted. We have not incurred any
material costs so far for such renovations and replacements. Testing of our
systems has been completed.
As to the status of our information technology systems, we presently
believe that all major systems and software packages are year 2000 compliant.
We have purchased the upgrade for the accounting and property management package
system and it was installed at the end of the first quarter of 1999. At the
present time, we believe that all major non-information technology systems are
year 2000 compliant. We have not incurred any material costs to upgrade our
non-compliant systems.
We confirmed the year 2000 readiness of our vendors, including third-party
service providers such as banks. Based on the information we received, the
primary third-party service providers with which we have relationships are year
2000 compliant.
We rely on computers and operating systems provided by equipment
manufacturers, and also on application software designed for use with our
accounting, property management and investment portfolio tracking. We have
preliminarily determined that any costs, problems or uncertainties associated
with the potential consequences of year 2000 issues are not expected to have a
material impact on our future operations or financial condition. We will
perform due diligence as to the year 2000 readiness of each property we own and
each property we contemplate for purchase.
Our reliance on embedded computed systems (i.e., microcontrollers) is
limited to facilities related matters, such as office security systems and
environmental control systems.
Contingency plans have been developed to operate the business in the
unlikely circumstance that the computer and phone systems are rendered
inoperable. Offsite facilities and alternative procedures to communicate with
key third party vendors have been identified for use should existing facilities
not function properly. A written contingency plan has been disseminated to each
staff member of our advisor.
We believe that our risk of year 2000 problems is minimal. In the unlikely
event there is a problem, the worst case scenarios would include the risks that
the elevator or security systems within our properties would fail or the key
third-party vendors upon which we rely would be unable to provide accurate
investor information. In the event that the elevator shuts down, we have
devised a plan for each
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building whereby the tenants will use the stairs until the elevators are fixed.
In the event that the security system shuts down, we have devised a plan for
each building to hire temporary on-site security guards. In the event that a
third-party vendor has year 2000 problems relating to investor information, we
intend to perform a full system back-up of all investor information as of
December 31, 1999 so that we will have accurate hard-copy investor information.
Prior Performance Summary
The information presented in this section represents the historical
experience of real estate programs managed by the advisor and its affiliates.
Investors in the Wells REIT should not assume that they will experience returns,
if any, comparable to those experienced by investors in such prior real estate
programs.
Leo F. Wells, III has served as a general partner of a total of 13 publicly
offered real estate limited partnerships, 12 of such limited partnerships have
completed their respective offerings. These 12 limited partnerships and the
year in which each of their offerings was completed are:
1. Wells Real Estate Fund I (1986)
2. Wells Real Estate Fund II (1988)
3. Wells Real Estate Fund II-OW (1988)
4. Wells Real Estate Fund III, L.P. (1990)
5. Wells Real Estate Fund IV, L.P. (1992)
6. Wells Real Estate Fund V, L.P. (1993)
7. Wells Real Estate Fund VI, L.P. (1994)
8. Wells Real Estate Fund VII, L.P. (1995)
9. Wells Real Estate Fund VIII, L.P. (1996)
10. Wells Real Estate Fund IX, L.P. (1996)
11. Wells Real Estate Fund X, L.P. (1997)
12. Wells Real Estate Fund XI, L.P. (1998).
In addition to the foregoing real estate limited partnerships, the advisor
and its affiliates sponsored the initial public offering of 14,400,000 shares of
Common Stock of the Wells REIT. The initial public offering began on January 30,
1998 and was terminated on December 20, 1999. As of December 15, 1999, we had
received gross proceeds of approximately $131,500,000 from the sale of
approximately 13,150,000 shares from our initial public offering.
The advisor and its affiliates are currently also sponsoring a public
offering of 7,000,000 units on behalf of Wells Real Estate Fund XII, L.P., a
public limited partnership. Wells Fund XII began its offering on March 22, 1999,
and as of October 1, 1999, Wells Fund XII had raised $7,044,956 from 710
investors.
The Prior Performance Tables included in the back of this prospectus set
forth information as of the dates indicated regarding certain of these Wells
programs as to (1) experience in raising and investing funds (Table I); (2)
compensation to sponsor (Table II); and (3) annual operating results of prior
programs (Table III). No information is given as to results of completed
programs or sales or disposals of property because, to date, none of the Wells
programs have sold any of their properties.
In addition to the real estate programs sponsored by the advisor and its
affiliates discussed above, they are also sponsoring an index mutual fund which
invests in various REIT stocks known as the Wells S&P REIT Index Fund (REIT
Fund). The REIT Fund is a mutual fund which seeks to provide investment
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results corresponding to the performance of the S&P REIT Index by investing in
the REIT stocks included in the S&P REIT Index. The REIT Fund began its offering
on January 12, 1998, and as of October 1, 1999, the REIT Fund had raised
$26,465,998 from 1,232 investors.
Publicly Offered Unspecified Real Estate Programs
The advisor and its affiliates have previously sponsored the above listed
12 publicly offered real estate limited partnerships and are currently
sponsoring Wells Fund XII offered on an unspecified property or "blind pool"
basis. The total amount of funds raised from investors in the offerings of these
13 publicly offered limited partnerships, as of October 1, 1999, was
approximately $292,000,000, and the total number of investors in such programs
was approximately 27,100.
The investment objectives of each of the other Wells programs are
substantially identical to the investment objectives of the Wells REIT. All of
the proceeds of the offerings of Wells Fund I, Wells Fund II, Wells Fund II-OW,
Wells Fund III, Wells Fund IV, Wells Fund V, Wells Fund VI, Wells Fund VII,
Wells Fund VIII, Wells Fund IX, Wells Fund X and Wells Fund XI available for
investment in real properties have been invested in properties. For the fiscal
year ended December 31, 1998, approximately 75% of the aggregate gross rental
income of the 12 publicly offered programs listed above was derived from tenants
which are U.S. corporations, each of which has net worth of at least
$100,000,000 or whose lease obligations are guaranteed by another corporation
with a net worth of at least $100,000,000.
Because of the cyclical nature of the real estate market, decreases in net
income of the public partnerships could occur at any time in the future when
economic conditions decline. None of the Wells programs has liquidated or sold
any of its real properties to date and, accordingly, no assurance can be made
that Wells programs will ultimately be successful in meeting their investment
objectives. (See "Risk Factors.")
The aggregate dollar amount of the acquisition and development costs of the
properties purchased by the previously sponsored Wells programs, as of December
31, 1998, was $252,097,627 of which $170,000 (or approximately .07%) had not yet
been expended on the development of certain of the projects which are still
under construction. Of the aggregate amount, approximately 73% was or will be
spent on acquiring or developing office buildings, and approximately 27% was or
will be spent on acquiring or developing shopping centers. Of the aggregate
amount, approximately 6% was or will be spent on new properties, 49% on existing
or used properties and 45% on construction properties. Following is a table
showing a breakdown of the aggregate amount of the acquisition and development
costs of the properties purchased by the Wells REIT and the 12 Wells programs
listed above as of December 31, 1998:
<TABLE>
<CAPTION>
Type of Property New Used Construction
---------------- --- ---- ------------
<S> <C> <C> <C>
Office Buildings 6% 41% 26%
Shopping Centers 0% 9% 18%
</TABLE>
Wells Fund I terminated its offering on September 5, 1986, and received
gross proceeds of $35,321,000 representing subscriptions from 4,895 limited
partners. $24,679,000 of the gross proceeds were attributable to sales of Class
A Units, and $10,642,000 of the gross proceeds were attributable to sales of
Class B Units. Limited partners in Wells Fund I have no right to change the
status of their units from Class A to Class B or vice versa. Wells Fund I owns
interests in the following properties:
. a three story medical office building in Atlanta, Georgia;
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. two commercial office buildings in Atlanta, Georgia;
. a shopping center in DeKalb County, Georgia having Kroger as the anchor
tenant;
. a shopping center in Knoxville, Tennessee;
. a shopping center in Cherokee County, Georgia having Kroger as the
anchor tenant; and
. a project consisting of seven office buildings and a shopping center in
Tucker, Georgia.
The prospectus of Wells Fund I provided that the properties purchased by
Wells Fund I would typically be held for a period of eight to 12 years, but that
the general partners may exercise their discretion as to whether and when to
sell the properties owned by Wells Fund I and that the general partners were
under no obligation to sell the properties at any particular time. Wells Fund I
acquired its properties between 1985 and 1987, and has not yet liquidated or
sold any of its properties.
Wells Fund II and Wells Fund II-OW terminated their offerings on September
7, 1988, and received aggregate gross proceeds of $36,870,250 representing
subscriptions from 4,659 limited partners. $28,829,000 of the gross proceeds
were attributable to sales of Class A Units, and $8,041,250 of the gross
proceeds were attributable to sales of Class B Units. Limited partners in Wells
Fund II and Wells Fund II-OW have no right to change the status of their units
from Class A to Class B or vice versa. Wells Fund II and Wells Fund II-OW own
all of their properties through a joint venture, which owns interests in the
following properties:
. a shopping center in Cherokee County, Georgia having Kroger as the
anchor tenant;
. a project consisting of seven office buildings and a shopping center in
Tucker, Georgia;
. a two story office building in Charlotte, North Carolina leased to First
Union Bank;
. a four story office building in Houston, Texas leased to The Boeing
Company;
. a restaurant property in Roswell, Georgia leased to Brookwood Grill of
Roswell, Inc.; and
. a combined retail and office development in Roswell, Georgia.
The prospectus of Wells Fund II and Wells Fund II-OW provided that the
properties purchased by Wells Fund II and Wells Fund II-OW would typically be
held for a period of eight to 12 years, but that the general partners may
exercise their discretion as to whether and when to sell the properties owned by
Wells Fund II and Wells Fund II-OW and that the partnerships were under no
obligation to sell their properties at any particular time. Wells Fund II and
Wells Fund II-OW acquired their properties between 1987 and 1989, and have not
yet liquidated or sold any of their properties.
Wells Fund III terminated its offering on October 23, 1990, and received
gross proceeds of $22,206,310 representing subscriptions from 2,700 limited
partners. $19,661,770 of the gross proceeds were attributable to sales of Class
A Units, and $2,544,540 of the gross proceeds were attributable to sales of
Class B Units. Limited partners in Wells Fund III have no right to change the
status of their units from Class A to Class B or vice versa. Wells Fund III
owns interests in the following properties:
. a four story office building in Houston, Texas leased to The Boeing
Company;
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. a restaurant property in Roswell, Georgia leased to Brookwood Grill of
Roswell, Inc.;
. a combined retail and office development in Roswell, Georgia;
. a two story office building in Greenville, North Carolina leased to
International Business Machines Corporation (IBM);
. a shopping center in Stockbridge, Georgia having Kroger as the anchor
tenant; and
. a two story office building in Richmond, Virginia leased to General
Electric.
Wells Fund IV terminated its offering on February 29, 1992, and received
gross proceeds of $13,614,655 representing subscriptions from 1,286 limited
partners. $13,229,150 of the gross proceeds were attributable to sales of Class
A Units, and $385,505 of the gross proceeds were attributable to sales of Class
B Units. Limited partners in Wells Fund IV have no right to change the status
of their units from Class A to Class B or vice versa. Wells Fund IV owns
interests in the following properties:
. a shopping center in Stockbridge, Georgia having Kroger as the anchor
tenant;
. a four story office building in Jacksonville, Florida leased to IBM and
Customized Transportation Inc. (CTI);
. a two story office building in Richmond, Virginia leased to General
Electric; and
. two two story office buildings in Stockbridge, Georgia, a substantial
portion of which is leased to Georgia Baptist Hospital.
Wells Fund V terminated its offering on March 3, 1993, and received gross
proceeds of $17,006,020 representing subscriptions from 1,667 limited partners.
$15,209,666 of the gross proceeds were attributable to sales of Class A Units,
and $1,796,354 of the gross proceeds were attributable to sales of Class B
Units. Limited partners in Wells Fund V who purchased Class B Units are
entitled to change the status of their units to Class A, but limited partners
who purchased Class A Units are not entitled to change the status of their units
to Class B. After taking into effect conversion elections made by limited
partners subsequent to their subscription for units, as of December 31, 1998,
$15,590,210 of units of Wells Fund V were treated as Class A Units, and
$1,415,810 of units were treated as Class B Units. Wells Fund V owns interests
in the following properties:
. a four story office building in Jacksonville, Florida leased to IBM and
CTI;
. two two story office buildings in Stockbridge, Georgia, a substantial
portion of which is leased to Georgia Baptist Hospital;
. a four story office building in Hartford, Connecticut leased to Hartford
Fire Insurance Company;
. two restaurant properties in Stockbridge, Georgia leased to Apple
Restaurants, Inc. and Glenn's Open Pit Bar-B-Que; and
. a three story office building in Appleton, Wisconsin leased to Jaako
Poyry Fluor Daniel.
Wells Fund V experienced an operating loss of $18,089 in 1992 (at which
time it only owned interests in the Jacksonville, Florida property which was
under construction and the first office building in
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Stockbridge, Georgia which was under construction), recognized net income of
$354,999 in 1993 (at which time it had also acquired an interest in the
Hartford, Connecticut property and the second office building in Stockbridge,
Georgia was under construction), recognized net income of $561,721 in 1994 (at
which time it owned interests in all of the properties listed above for which it
currently holds an ownership interest, with the exception that only one of the
two restaurants had been developed on the tract of land in Stockbridge,
Georgia), recognized net income of $689,639 in 1995, recognized net income of
$505,650 in 1996 and recognized net income of $559,801 in 1997.
Wells Fund VI terminated its offering on April 4, 1994, and received gross
proceeds of $25,000,000 representing subscriptions from 1,793 limited partners.
$19,332,176 of the gross proceeds were attributable to sales of Class A Units,
and $5,667,824 of the gross proceeds were attributable to sales of Class B
Units. Limited partners in Wells Fund VI are entitled to change the status of
their units from Class A to Class B and vice versa. After taking into effect
conversion elections made by limited partners subsequent to their subscription
for units, as of December 31, 1998, $21,877,575 of units of Wells Fund VI were
treated as Class A Units, and $3,122,425 of units were treated as Class B Units.
Wells Fund VI owns interests in the following properties:
. a four story office building in Hartford, Connecticut leased to Hartford
Fire Insurance Company;
. two restaurant properties in Stockbridge, Georgia leased to Apple
Restaurants, Inc. and Glenn's Open Pit Bar-B-Que;
. a restaurant and retail building in Stockbridge, Georgia;
. a shopping center in Stockbridge, Georgia;
. a three story office building in Appleton, Wisconsin leased to Jaako
Poyry Fluor Daniel;
. a shopping center in Cherokee County, Georgia having Kroger as the
anchor tenant;
. a combined retail and office development in Roswell, Georgia;
. a four story office building in Jacksonville, Florida leased to
Bellsouth Advertising and Publishing Corporation and American Express
Travel Related Services Company, Inc.; and
. a shopping center in Clemmons, North Carolina having Harris Teeter, Inc.
as the anchor tenant.
Wells Fund VI recognized net income of $31,428 in 1993 (at which time it
only owned an interest in the Hartford, Connecticut property), recognized net
income of $700,896 in 1994 (at which time it owned only interests in (1) the
four story office building in Hartford, Connecticut; (2) the retail building and
an undeveloped tract of land in Stockbridge, Georgia; and (3) the three story
office building in Appleton, Wisconsin), recognized net income of $901,828 in
1995 (at which time each of the following properties was under construction: (1)
one of the retail buildings in Stockbridge, Georgia, (2) the combined retail and
office development in Roswell, Georgia, (3) the office building in Jacksonville,
Florida, and (4) the shopping center in Clemmons, North Carolina), recognized
net income of $589,053 in 1996, recognized net income of $795,654 in 1997 and
recognized net income of $855,788 in 1998.
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Wells Fund VII terminated its offering on January 5, 1995, and received
gross proceeds of $24,180,174 representing subscriptions from 1,910 limited
partners. $16,788,095 of the gross proceeds were attributable to sales of Class
A Units, and $7,392,079 of the gross proceeds were attributable to sales of
Class B Units. Limited partners in Wells Fund VII are entitled to change the
status of their units from Class A to Class B and vice versa. After taking into
effect conversion elections made by limited partners subsequent to their
subscriptions for units, as of December 31, 1998, $20,095,174 of units in Wells
Fund VII were treated as Class A Units, and $4,085,000 of units were treated as
Class B Units. Wells Fund VII owns interests in the following properties:
. a three story office building in Appleton, Wisconsin leased to Jaako
Poyry Fluor Daniel;
. a restaurant and retail building in Stockbridge, Georgia;
. a shopping center in Stockbridge, Georgia;
. a shopping center in Cherokee County, Georgia having Kroger as the
anchor tenant;
. a combined retail and office development in Roswell, Georgia;
. a two story office building in Alachua County, Florida near Gainesville
leased to CH2M Hill, Engineers, Planners, Economists, Scientists;
. a four story office building in Jacksonville, Florida leased to
Bellsouth Advertising and Publishing Corporation and American Express
Travel Related Services Company, Inc.;
. a shopping center in Clemmons, North Carolina having Harris Teeter, Inc.
as the anchor tenant; and
. a retail development in Clayton County, Georgia.
Wells Fund VII recognized net income of $203,263 in 1994 (at which time it
only owned an interest in the three story office building in Appleton, Wisconsin
and an undeveloped tract of land in Stockbridge, Georgia), recognized net income
of $804,043 in 1995 (at which time it only owned interests in the office
building in Appleton, Wisconsin, the developments in Stockbridge, Georgia, the
office building in Alachua County, Florida, the office building in Jacksonville,
Florida, the tract of land in Clemmons, North Carolina, which was under
construction, and the retail building in Stockbridge, Georgia, which was under
construction), recognized net income of $452,776 in 1996, recognized net income
of $733,149 in 1997 and recognized net income of $754,334 in 1998.
Wells Fund VIII terminated its offering on January 4, 1996, and received
gross proceeds of $32,042,689 representing subscriptions from 2,241 limited
partners. $26,135,339 of the gross proceeds were attributable to sales of Class
A Units, and $5,907,350 were attributable to sales of Class B Units. Limited
partners in Wells Fund VIII are entitled to change the status of their units
from Class A to Class B and vice versa. After taking into effect conversion
elections made by limited partners subsequent to their subscriptions for units
and certain repurchases made by Wells Fund VIII, as of December 31, 1998,
$26,745,845 of units in Wells Fund VIII were treated as Class A Units, and
$5,286,844 of units were treated as Class B Units. Wells Fund VIII owns
interests in the following properties:
. a two story office building in Alachua County, Florida near Gainsville
leased to CH2M Hill, Engineers, Planners, Economists, Scientists;
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. a four story office building in Jacksonville, Florida leased to
Bellsouth Advertising and Publishing Corporation and American Express
Travel Related Services Company, Inc.;
. a shopping center in Clemmons, North Carolina having Harris Teeter, Inc.
as the anchor tenant;
. a retail development in Clayton County, Georgia;
. a four story office building in Madison, Wisconsin leased to US
Cellular, a subsidiary of Bellsouth Corporation;
. a one story office building in Farmers Branch, Texas leased to TCI
Valwood Limited Partnership I;
. a two story office building in Orange County, California; and
. a two story office building in Boulder County, Colorado leased to Cirrus
Logic, Inc.
Wells Fund VIII recognized net income of $273,914 in 1995 (at which time it
only owned interests in the office building in Alachua County, Florida, the
office building in Jacksonville, Florida, which was under construction, and the
tract of land in Clemmons, North Carolina, which was under construction),
recognized net income of $936,590 in 1996, recognized net income of $1,102,567
in 1997 and recognized net income of $1,269,171 in 1998.
Wells Fund IX terminated its offering on December 30, 1996, and received
gross proceeds of $35,000,000 representing subscriptions from 2,098 limited
partners. $29,359,310 of the gross proceeds were attributable to sales of Class
A Units, and $5,640,690 were attributable to sales of Class B Units. After
taking into effect conversion elections made by limited partners subsequent to
their subscriptions for units, as of December 31, 1998, $29,898,750 of units in
Wells Fund IX were treated as Class A Units, and $5,101,250 of units were
treated as Class B Units. Wells Fund IX owns interests in the following
properties:
. a one story office building in Farmers Branch, Texas leased to TCI
Valwood Limited Partnership I;
. a four story office building in Madison, Wisconsin leased to US
Cellular, a subsidiary of Bellsouth Corporation;
. a two story office building in Orange County, California;
. a two story office building in Boulder County, Colorado leased to Cirrus
Logic, Inc.;
. a two story office building in Boulder County, Colorado leased to
Ohmeda, Inc.;
. a three story office building in Knox County, Tennessee leased to ABB
Environmental Systems;
. a one story office and warehouse building in Weber County, Utah leased
to Iomega Corporation;
. a three story office building in Boulder County, Colorado; and
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. a one story office building in Oklahoma City, Oklahoma leased to Lucent
Technologies, Inc.
Wells Fund IX recognized net income of $298,756 in 1996, recognized net
income of $1,091,766 in 1997 and recognized net income of $1,449,955 in 1998.
Wells Fund X terminated its offering on December 30, 1997, and received
gross proceeds of $27,128,912 representing subscriptions from 1,806 limited
partners. $21,160,992 of the gross proceeds were contributable to sales of
Class A Units, and $5,967,920 were attributable to sales of Class B Units.
After taking into effect conversion elections made by limited partners
subsequent to their subscriptions for units as of December 31, 1998, $21,258,042
of units in Wells Fund X were treated as Class A Units and $5,870,870 of units
were treated as Class B Units. Wells Fund X owns interests in the following
properties:
. a three story office building in Knox County, Tennessee leased to ABB
Environmental Systems;
. a two story office building in Boulder County, Colorado leased to
Ohmeda, Inc.;
. a one story office and warehouse building in Weber County, Utah leased
to Iomega Corporation;
. a three story office building in Boulder County, Colorado;
. a one story office building in Oklahoma City, Oklahoma leased to Lucent
Technologies, Inc.;
. a one story office and warehouse building in Orange County, California
leased to Cort Furniture Rental Corporation; and
. a two story office and manufacturing building in Alameda County,
California leased to Fairchild Technologies U.S.A., Inc.
Wells Fund X recognized net income of $278,025 in 1997 and recognized net
income of $1,050,329 in 1998.
Wells Fund XI terminated its offering on December 30, 1998, and received
gross proceeds of $16,532,802 representing subscriptions from 1,345 limited
partners. $13,029,424 of the gross proceeds were attributable to sales of Class
A Units and $3,503,378 were attributable to sales of Class B Units. Wells Fund
XI owns interests in the following properties:
. a three story office building in Knox County, Tennessee leased to ABB
Environmental Systems;
. a one story office building in Oklahoma City, Oklahoma leased to Lucent
Technologies, Inc.;
. a two story office building in Boulder County, Colorado leased to
Ohmeda, Inc.;
. a three story office building in Boulder County, Colorado;
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. a one story office and warehouse building in Weber County, Utah leased
to Iomega Corporation;
. a one story office and warehouse building in Orange County, California
leased to Cort Furniture Rental Corporation;
. a two story office and manufacturing building in Alameda County,
California leased to Fairchild Technologies U.S.A., Inc.;
. a two story manufacturing and office building in Greenville County,
South Carolina leased to EYBL CarTex, Inc.;
. a three story office building in Johnson County, Kansas leased to Sprint
Communications Company L.P.;
. a two story research and development office and warehouse building in
Chester County, Pennsylvania leased to Johnson Matthey, Inc.; and
. a two story office building in Fort Myers, Florida leased to Gartner
Group, Inc.
Wells Fund XI recognized net income of $143,295 in 1998.
Wells Fund XII began its offering on March 22, 1999. As of October 1,
1999, Wells Fund XII had received gross proceeds of $7,044,956 representing
subscriptions from 710 limited partners. $5,515,572 of the gross proceeds were
attributable to sales of cash preferred units and $1,529,384 were attributable
to sales of tax preferred units. Wells Fund XII owns interests in the following
properties:
. a two story manufacturing and office building in Greenville County,
South Carolina leased to EYBL CarTex, Inc.;
. a three story office building In Johnson County, Kansas leased to Sprint
Communications Company L.P.;
. a two story research and development office and warehouse building in
Chester County, Pennsylvania leased to Johnson Matthey, Inc.; and
. a two story office building in Fort Myers, Florida leased to Gartner
Group, Inc.
The information set forth above should not be considered indicative of
results to be expected from the partnership.
The foregoing properties in which the above 13 limited partnerships have
invested have all been acquired on an all cash basis.
Leo F. Wells, III and Wells Partners, L.P. are the general partners of
Wells Fund IV, Wells Fund V, Wells Fund VI, Wells Fund VII, Wells Fund VIII,
Wells Fund IX, Wells Fund X, Wells Fund XI and Wells Fund XII. Wells Capital,
which is the general partner of Wells Partners, L.P., and Leo F. Wells, III are
the general partners of Wells Fund I, Wells Fund II, Wells Fund II-OW and Wells
Fund III.
Potential investors are encouraged to examine the Prior Performance Tables
included in the back of the prospectus for more detailed information regarding
the prior experience of the sponsors. In addition, upon request, prospective
investors may obtain from us without charge copies of offering
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materials and any reports prepared in connection with any of the Wells programs,
including a copy of the most recent Annual Report on Form 10-K filed with the
Securities and Exchange Commission. For a reasonable fee, we will also furnish
upon request copies of the exhibits to any such Form 10-K. Any such request
should be directed to our secretary. Additionally, Table VI contained in Part II
of the registration statement, which is not part of this prospectus, gives
certain additional information relating to properties acquired by the Wells
programs. We will furnish, without charge, copies of such table upon request.
Federal Income Tax Considerations
General
The following is a summary of material federal income tax
considerations associated with an investment in the shares. This summary does
not address all possible tax considerations that may be material to an investor
and does not constitute tax advice. Moreover, this summary does not deal with
all tax aspects that might be relevant to you, as a prospective shareholder, in
light of your personal circumstances; nor does it deal with particular types of
shareholders that are subject to special treatment under the Code, such as
insurance companies, tax-exempt organizations, financial institutions or broker-
dealers, or foreign corporations or persons who are not citizens or residents of
the United States ("Non-US Shareholders"). The Internal Revenue Code provisions
governing the federal income tax treatment of REITs are highly technical and
complex, and this summary is qualified in its entirety by the express language
of applicable Internal Revenue Code provisions, Treasury Regulations promulgated
thereunder and administrative and judicial interpretations thereof.
We urge you, as a prospective investor, to consult your own tax adviser
regarding the specific tax consequences to you of a purchase of shares,
ownership and sale of the shares and of our election to be taxed as a REIT,
including the federal, state, local, foreign and other tax consequences of such
purchase, ownership, sale and election.
Opinion of Counsel
Holland & Knight LLP has acted as our counsel, has reviewed this summary
and is of the opinion that it fairly summarizes the federal income tax
considerations addressed that are material to shareholders. It is also the
opinion of our counsel that, commencing with our taxable year ended December 31,
1998, it is more likely than not that we qualified to be taxed as a REIT under
the Internal Revenue Code, provided that we have operated and will continue to
operate in accordance with various assumptions and the factual representations
we made to counsel concerning our business, properties and operations. It must
be emphasized that Holland & Knight LLP's opinion is based on various
assumptions and is conditioned upon the assumptions and representations we made
concerning our business and properties. Moreover, our qualification for
taxation as a REIT depends on our ability to meet the various qualification
tests imposed under the Internal Revenue Code discussed below, the results of
which will not be reviewed by Holland & Knight LLP. Accordingly, we cannot
assure you that the actual results of our operations for any one taxable year
will satisfy these requirements. See "Risk Factors -- Failure to Qualify as a
REIT."
The statements made in this section of the prospectus and in the opinion of
Holland & Knight LLP are based upon existing law and Treasury Regulations, as
currently applicable, currently published administrative positions of the
Internal Revenue Service and judicial decisions, all of which are subject to
change, either prospectively or retroactively. We cannot assure you that any
changes will not modify the conclusions expressed in counsel's opinion.
Moreover, an opinion of counsel is not binding on the Internal Revenue Service
and we cannot assure you that the Internal Revenue Service will not successfully
challenge our status as a REIT.
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Taxation of the Company
If we qualify for taxation as a REIT, we generally will not be subject to
federal corporate income taxes on that portion of our ordinary income or capital
gain that we distribute currently to our shareholders, because the REIT
provisions of the Internal Revenue Code generally allow a REIT to deduct
distributions paid to its shareholders. This substantially eliminates the
federal "double taxation" on earnings (taxation at both the corporate level and
shareholder level) that usually results from an investment in a corporation.
Even if we qualify for taxation as a REIT, however, we will be subject to
federal income taxation as follows:
. we will be taxed at regular corporate rates on our undistributed REIT
taxable income, including undistributed net capital gains;
. under some circumstances, we will be subject to "alternative minimum
tax";
. if we have net income from the sale or other disposition of "foreclosure
property" that is held primarily for sale to customers in the ordinary
course of business or other non-qualifying income from foreclosure
property, we will be subject to tax at the highest corporate rate on
that income;
. if we have net income from prohibited transactions (which are, in
general, sales or other dispositions of property other than foreclosure
property held primarily for sale to customers in the ordinary course of
business), the income will be subject to a 100% tax;
. if we fail to satisfy either of the 75% or 95% gross income tests
(discussed below) but have nonetheless maintained our qualification as a
REIT because certain conditions have been met, we will be subject to a
100% tax on an amount equal to the greater of the amount by which we
fail the 75% or 95% test multiplied by a fraction calculated to reflect
our profitability;
. if we fail to distribute during each year at least the sum of (i) 85% of
our REIT ordinary income for the year, (ii) 95% of our REIT capital gain
net income for such year and (iii) any undistributed taxable income from
prior periods, we will be subject to a 4% excise tax on the excess of
the required distribution over the amounts actually distributed; and
. if we acquire any asset from a C corporation (i.e., a corporation
generally subject to corporate-level tax) in a carryover-basis
transaction and we subsequently recognize gain on the disposition of the
asset during the ten year period beginning on the date on which we
acquired the asset, then a portion of the gains may be subject to tax at
the highest regular corporate rate, pursuant to guidelines issued by the
Internal Revenue Service (the "Built-In-Gain Rules").
Requirements for Qualification as a REIT
We elected to be taxable as a REIT for our taxable year ended December 31,
1998. In order for us to qualify as a REIT, however, we had to meet and we must
continue to meet the requirements discussed below relating to our organization,
sources of income, nature of assets and distributions of income to our
shareholders.
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Organizational Requirements
In order to qualify for taxation as a REIT under the Internal Revenue Code,
we must:
. be a domestic corporation;
. elect to be taxed as a REIT and satisfy relevant filing and other
administrative requirements;
. be managed by one or more trustees or directors;
. have transferable shares;
. not be a financial institution or an insurance company;
. use a calendar year for federal income tax purposes;
. have at least 100 shareholders for at least 335 days of each taxable
year of 12 months; and
. not be closely held.
As a Maryland corporation, we satisfy the first requirement, and we have
filed an election to be taxed as a REIT with the IRS. In addition, we are
managed by a board of directors, we have transferable shares and we do not
intend to operate as a financial institution or insurance company. We utilize
the calendar year for federal income tax purposes, and we have more than 100
shareholders. We would be treated as closely held only if five or fewer
individuals or certain tax-exempt entities own, directly or indirectly, more
than 50% (by value) of our shares at any time during the last half of our
taxable year. For purposes of the closely-held test, the Internal Revenue Code
generally permits a look-through for pension funds and certain other tax-exempt
entities to the beneficiaries of the entity to determine if the REIT is closely
held. Five or fewer individuals or tax-exempt entities have never owned more
than 50% of our outstanding shares during the last half of any taxable year.
We are authorized to refuse to transfer our shares to any person if the
sale or transfer would jeopardize our ability to satisfy the REIT ownership
requirements. There can be no assurance that a refusal to transfer will be
effective. However, based on the foregoing, we should currently satisfy the
organizational requirements, including the share ownership requirements.
Notwithstanding compliance with the share ownership requirements outlined above,
tax-exempt shareholders may be required to treat all or a portion of their
distributions from us as "unrelated business taxable income" if tax-exempt
shareholders, in the aggregate, exceed certain ownership thresholds set forth in
the Internal Revenue Code. (See "Taxation of Tax Exempt Shareholders.")
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Ownership of Interests in Partnerships and Qualified REIT Subsidiaries
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT is deemed to own its proportionate share,
based on its interest in partnership capital, of the assets of the partnership
and is deemed to have earned its allocable share of partnership income. Also,
if a REIT owns a qualified REIT subsidiary, which is defined as a corporation
wholly-owned by a REIT, the REIT will be deemed to own all of the subsidiary's
assets and liabilities and it will be deemed to be entitled to treat the income
of that subsidiary as its own. In addition, the character of the assets and
gross income of the partnership or qualified REIT subsidiary shall retain the
same character in the hands of the REIT for purposes of satisfying the gross
income tests and asset tests set forth in the Internal Revenue Code.
Operational Requirements -- Gross Income Tests
To maintain our qualification as a REIT, we must satisfy annually two gross
income requirements.
. At least 75% of our gross income, excluding gross income from
prohibited transactions, for each taxable year must be derived
directly or indirectly from investments relating to real property or
mortgages on real property. Gross income includes "rents from real
property" and, in some circumstances, interest, but excludes gross
income from dispositions of property held primarily for sale to
customers in the ordinary course of a trade or business. Such
dispositions are referred to as "prohibited transactions." This is the
75% Income Test.
. At least 95% of our gross income, excluding gross income from
prohibited transactions, for each taxable year must be derived from
the real property investments described above and from distributions,
interest and gains from the sale or disposition of stock or securities
or from any combination of the foregoing. This is the 95% Income Test.
. The rents we receive or that we are deemed to receive qualify as
"rents from real property" for purposes of satisfying the gross income
requirements for a REIT only if the following conditions are met:
. the amount of rent received from a tenant generally must not be
based in whole or in part on the income or profits of any person,
however, an amount received or accrued generally will not be
excluded from the term "rents from real property" solely by
reason of being based on a fixed percentage or percentages of
gross receipts or sales;
. rents received from a tenant will not qualify as "rents from real
property" if an owner of 10% or more of the REIT directly or
constructively owns 10% or more of the tenant (a "Related Party
Tenant") or a subtenant of the tenant (in which case only rent
attributable to the subtenant is disqualified);
. if rent attributable to personal property leased in connection
with a lease of real property is greater than 15% of the total
rent received under the lease, then the portion of rent
attributable to the personal property will not qualify as "rents
from real property"; and
. the REIT must not operate or manage the property or furnish or
render services to tenants, other than through an "independent
contractor" who is adequately
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compensated and from whom the REIT does not derive any income.
However, a REIT may provide services with respect to its
properties, and the income derived therefrom will qualify as
"rents from real property," if the services are "usually or
customarily rendered" in connection with the rental of space
only and are not otherwise considered "rendered to the
occupant." Even if the services with respect to a property are
impermissible tenant services, the income derived therefrom will
qualify as "rents from real property" if such income does not
exceed one percent of all amounts received or accrued with
respect to that property.
If we acquire ownership of property by reason of the default of a borrower
on a loan or possession of property by reason of a tenant default, if the
property qualifies and we elect to treat it as foreclosure property, the income
from the property will qualify under the 75% Income Test and the 95% Income Test
notwithstanding its failure to satisfy these requirements for three years, or if
extended for good cause, up to a total of six years. In that event, we must
satisfy a number of complex rules, one of which is a requirement that we operate
the property through an independent contractor. We will be subject to tax on
that portion of our net income from foreclosure property that does not otherwise
qualify under the 75% Income Test.
Prior to the making of investments in properties, we may satisfy the 75%
Income Test and the 95% Income Test by investing in liquid assets such as
government securities or certificates of deposit, but earnings from those types
of assets are qualifying income under the 75% Income Test only for one year from
the receipt of proceeds. Accordingly, to the extent that offering proceeds have
not been invested in properties prior to the expiration of this one year period,
in order to satisfy the 75% Income Test, we may invest the offering proceeds in
less liquid investments such as mortgage-backed securities, maturing mortgage
loans purchased from mortgage lenders or shares in other REITs. We expect to
receive proceeds from the offering in a series of closings and to trace those
proceeds for purposes of determining the one year period for "new capital
investments." No rulings or regulations have been issued under the provisions of
the Internal Revenue Code governing "new capital investments," however, so that
there can be no assurance that the Internal Revenue Service will agree with this
method of calculation.
Except for amounts received with respect to certain investments of cash
reserves, we anticipate that substantially all of our gross income will be from
sources that will allow us to satisfy the income tests described above; however,
there can be no assurance given in this regard. Notwithstanding our failure to
satisfy one or both of the 75% Income and the 95% Income Tests for any taxable
year, we may still qualify as a REIT for that year if we are eligible for relief
under specific provisions of the Internal Revenue Code. These relief provisions
generally will be available if:
. our failure to meet these tests was due to reasonable cause and not
due to willful neglect;
. we attach a schedule of our income sources to our federal income tax
return; and
. any incorrect information on the schedule is not due to fraud with
intent to evade tax.
It is not possible, however, to state whether, in all circumstances, we would be
entitled to the benefit of these relief provisions. For example, if we fail to
satisfy the gross income tests because nonqualifying income that we
intentionally earn exceeds the limits on this income, the Internal Revenue
Service could conclude that our failure to satisfy the tests was not due to
reasonable cause. As discussed above in "Taxation of the Company," even if these
relief provisions apply, a tax would be imposed with respect to the excess net
income.
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Operational Requirements -- Asset Tests
At the close of each quarter of our taxable year, we also must satisfy
three tests relating to the nature and diversification of our assets.
. First, at least 75% of the value of our total assets must be
represented by real estate assets, cash, cash items and government
securities. The term "real estate assets" includes real property,
mortgages on real property, shares in other qualified REITs and a
proportionate share of any real estate assets owned by a partnership
in which we are a partner or of any qualified REIT subsidiary of ours.
. Second, no more than 25% of our total assets may be represented by
securities other than those in the 75% asset class.
. Third, of the investments included in the 25% asset class, the value
of any one issuer's securities that we own may not exceed 5% of the
value of our total assets. Additionally, we may not own more than 10%
of any one issuer's outstanding voting securities.
The 5% test must generally be met for any quarter in which we acquire
securities. Further, if we meet the asset tests at the close of any quarter, we
will not lose our REIT status for a failure to satisfy the asset tests at the
end of a later quarter if such failure occurs solely because of changes in asset
values. If our failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, we can cure the failure by
disposing of a sufficient amount of nonqualifying assets within 30 days after
the close of that quarter. We maintain, and will continue to maintain, adequate
records of the value of our assets to ensure compliance with the asset tests and
will take other action within 30 days after the close of any quarter as may be
required to cure any noncompliance.
Operational Requirements -- Annual Distribution Requirement
In order to be taxed as a REIT, we are required to make distributions,
other than capital gain distributions, to our shareholders. The amount of these
distributions must be equal to at least 95% of our REIT taxable income (computed
without regard to the distributions-paid deduction and our capital gain and
subject to certain other potential adjustments).
We must generally pay distributions in the taxable year to which they
relate. Alternatively, however, distributions may be made in the following
taxable year if (1) they are declared before we timely file our federal income
tax return for the taxable year in question and if (2) they are paid on or
before the first regular distribution payment after the declaration.
Even if we satisfy the foregoing distribution requirement and, accordingly,
continue to qualify as a REIT for tax purposes, we will still be subject to tax
on the excess of our net capital gain and our REIT taxable income, as adjusted,
over amounts distributed to shareholders.
In addition, if we fail to distribute during each calendar year at least
the sum of:
. 85% of our ordinary income for that year;
. 95% of our capital gain net income other than the capital gain net
income which we elect to retain and pay tax on for that year; and
. any undistributed taxable income from prior periods,
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we will be subject to a 4% excise tax on the excess of the amount of such
required distributions over amounts actually distributed during such year.
We intend to make timely distributions sufficient to satisfy this
requirement; however, it is possible that we may experience timing differences
between (1) the actual receipt of income and payment of deductible expenses, and
(2) the inclusion of that income. It is also possible that we may be allocated a
share of net capital gain attributable to the sale of depreciated property that
exceeds our allocable share of cash attributable to that sale.
In such circumstances, we may have less cash than is necessary to meet our
annual distribution requirement or to avoid income or excise taxation on certain
undistributed income. We may find it necessary in such circumstances to arrange
for financing or raise funds through the issuance of additional shares in order
to meet our distribution requirements, or we may pay taxable stock distributions
to meet the distribution requirement.
If we fail to satisfy the distribution requirement for any taxable year by
reason of a later adjustment to our taxable income made by the Internal Revenue
Service, we may be able to pay "deficiency dividends" in a later year and
include such distributions in our deductions for dividends paid for the earlier
year. In such event, we may be able to avoid being taxed on amounts distributed
as deficiency dividends, but we would be required in such circumstances to pay
interest to the Internal Revenue Service based upon the amount of any deduction
taken for deficiency dividends for the earlier year.
As noted above, we may also elect to retain, rather than distribute our net
long-term capital gains. The effect of such an election would be as follows:
. we would be required to pay the tax on these gains;
. shareholders, while required to include their proportionate share of
the undistributed long-term capital gains in income, would receive a
credit or refund for their share of the tax paid by the REIT; and
. the basis of a shareholder's shares would be increased by the amount
of our undistributed long-term capital gains (minus the amount of
capital gains tax we pay) included in the shareholder's long-term
capital gains.
In computing our REIT taxable income, we will use the accrual method of
accounting and depreciate depreciable property under the alternative
depreciation system. We are required to file an annual federal income tax
return, which, like other corporate returns, is subject to examination by the
Internal Revenue Service. Because the tax law requires us to make many judgments
regarding the proper treatment of a transaction or an item of income or
deduction, it is possible that the Internal Revenue Service will challenge
positions we take in computing our REIT taxable income and our distributions.
Issues could arise, for example, with respect to the allocation of the purchase
price of properties between depreciable or amortizable assets and nondepreciable
or non-amortizable assets such as land and the current deductibility of fees
paid to Wells Capital or its affiliates. Were the Internal Revenue Service to
challenge successfully our characterization of a transaction or determination of
our REIT taxable income, we could be found not to have satisfied a requirement
for qualification as a REIT and mitigation provisions might not apply. (See
"Sale-Leaseback Transactions.") If, as a result of a challenge, we are
determined not to have satisfied the distribution requirements for a taxable
year, we would be disqualified as a REIT, unless we were permitted to pay a
deficiency distribution to our shareholders and pay interest thereon to the
Internal Revenue Service, as provided by the Internal Revenue Code. A
deficiency
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distribution cannot be used to satisfy the distribution requirement, however, if
the failure to meet the requirement is not due to a later adjustment to our
income by the Internal Revenue Service.
Operational Requirements -- Recordkeeping
In order to continue to qualify as a REIT, we must maintain certain records
as set forth in applicable Treasury Regulations. Further, we must request, on an
annual basis, certain information designed to disclose the ownership of our
outstanding shares. We intend to comply with such requirements.
Failure to Qualify as a REIT
If we fail to qualify as a REIT for any reason in a taxable year and
applicable relief provisions do not apply, we will be subject to tax (including
any applicable alternative minimum tax) on our taxable income at regular
corporate rates. We will not be able to deduct distributions to our shareholders
in any year in which we fail to qualify as a REIT. We also will be disqualified
for the four taxable years following the year during which qualification was
lost unless we are entitled to relief under specific statutory provisions. (See
"Risk Factors -- Federal Income Tax Risks")
Sale-Leaseback Transactions
Some of our investments may be in the form of sale-leaseback transactions.
In most instances, depending on the economic terms of the transaction, we will
be treated for federal income tax purposes as either the owner of the property
or the holder of a debt secured by the property. We do not expect to request an
opinion of counsel concerning the status of any leases of properties as true
leases for federal income tax purposes.
The Internal Revenue Service may take the position that a specific sale-
leaseback transaction which we treat as a true lease is not a true lease for
federal income tax purposes but is, instead, a financing arrangement or loan. We
may also structure some sale-leaseback transactions as loans. In this event, for
purposes of the asset tests and the 75% Income Test, each such loan likely would
be viewed as secured by real property to the extent of the fair market value of
the underlying property. It is expected that, for this purpose, the fair market
value of the underlying property would be determined without taking into account
our lease. If a sale-leaseback transaction were so recharacterized, we might
fail to satisfy the asset tests or the Income Tests and, consequently, lose our
REIT status effective with the year of recharacterization. Alternatively, the
amount of our REIT taxable income could be recalculated which might also cause
us to fail to meet the distribution requirement for a taxable year.
Taxation of U.S. Shareholders
Definition
In this section, the phrase "U.S. shareholder" means a holder of shares
that for federal income tax purposes:
. is a citizen or resident of the United States;
. is a corporation, partnership or other entity created or organized in
or under the laws of the United States or of any political subdivision
thereof;
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. is an estate or trust, the income of which is subject to U.S. federal
income taxation regardless of its source; or
. a trust if a U.S. court is able to exercise primary supervision over
the administration of the trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust.
For any taxable year for which we qualify for taxation as a REIT, amounts
distributed to taxable U.S. shareholders will be taxed as described below.
Distributions Generally
Distributions to U.S. shareholders, other than capital gain distributions
discussed below, will constitute dividends up to the amount of our current or
accumulated earnings and profits and will be taxable to the shareholders as
ordinary income. These distributions are not eligible for the dividends received
deduction generally available to corporations. To the extent that we make a
distribution in excess of our current or accumulated earnings and profits, the
distribution will be treated first as a tax-free return of capital, reducing the
tax basis in each U.S. shareholder's shares, and the amount of each distribution
in excess of a U.S. shareholder's tax basis in its shares will be taxable as
gain realized from the sale of its shares. Distributions that we declare in
October, November or December of any year payable to a shareholder of record on
a specified date in any of these months will be treated as both paid by us and
received by the shareholder on December 31 of the year, provided that we
actually pay the distribution during January of the following calendar year.
U.S. shareholders may not include any of our losses on their own federal income
tax returns.
We will be treated as having sufficient earnings and profits to treat as a
dividend any distribution by us up to the amount required to be distributed in
order to avoid imposition of the 4% excise tax discussed above. Moreover, any
"deficiency distribution" will be treated as an ordinary or capital gain
distribution, as the case may be, regardless of our earnings and profits. As a
result, shareholders may be required to treat some distributions that would
otherwise result in a tax-free return of capital as taxable.
Capital Gain Distributions
Distributions to U.S. shareholders that we properly designate as capital
gain distributions will be treated as long-term capital gains, to the extent
they do not exceed our actual net capital gain, for the taxable year without
regard to the period for which the U.S. shareholder has held his stock.
Passive Activity Loss and Investment Interest Limitations
Our distributions and any gain you realize from a disposition of shares
will not be treated as passive activity income, and shareholders may not be able
to utilize any of their "passive losses" to offset this income in their personal
tax returns. Our distributions (to the extent they do not constitute a return of
capital) will generally be treated as investment income for purposes of the
limitations on the deduction of investment interest. Net capital gain from a
disposition of shares and capital gain distributions generally will be included
in investment income for purposes of the investment interest deduction
limitations only if, and to the extent, you so elect, in which case any such
capital gains will be taxed as ordinary income.
Certain Dispositions of the Shares
In general, any gain or loss realized upon a taxable disposition of shares
by a U.S. shareholder who is not a dealer in securities will be treated as long-
term capital gain or loss if the shares have been
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held for more than 12 months and as short-term capital gain or loss if the
shares have been held for 12 months or less. If, however, a U.S. shareholder has
received any capital gains distributions with respect to his shares, any loss
realized upon a taxable disposition of shares held for six months or less, to
the extent of the capital gains distributions received with respect to his
shares, will be treated as long-term capital loss. Also, the Internal Revenue
Service is authorized to issue Treasury Regulations that would subject a portion
of the capital gain a U.S. shareholder recognizes from selling his shares or
from a capital gain distribution to a tax at a 25% rate, to the extent the
capital gain is attributable to depreciation previously deducted.
Information Reporting Requirements and Backup Withholding for U.S.
Shareholders
Under some circumstances, U.S. shareholders may be subject to backup
withholding at a rate of 31% on payments made with respect to, or cash proceeds
of a sale or exchange of, our shares. Backup withholding will apply only if the
shareholder:
. fails to furnish his or her taxpayer identification number (which, for
an individual, would be his or her Social Security Number);
. furnishes an incorrect tax identification number;
. is notified by the Internal Revenue Service that he or she has failed
properly to report payments of interest and distributions or is
otherwise subject to backup withholding; or
. under some circumstances, fails to certify, under penalties of
perjury, that he or she has furnished a correct tax identification
number and that (a) he or she has not been notified by the Internal
Revenue Service that he or she is subject to backup withholding for
failure to report interest and distribution payments or (b) he or she
has been notified by the Internal Revenue Service that he or she is no
longer subject to backup withholding.
Backup withholding will not apply with respect to payments made to some
shareholders, such as corporations and tax-exempt organizations. Backup
withholding is not an additional tax. Rather, the amount of any backup
withholding with respect to a payment to a U.S. shareholder will be allowed as a
credit against the U.S. shareholder's U.S. federal income tax liability and may
entitle the U.S. shareholder to a refund, provided that the required information
is furnished to the Internal Revenue Service. U.S. shareholders should consult
their own tax advisors regarding their qualifications for exemption from backup
withholding and the procedure for obtaining an exemption.
Treatment of Tax-Exempt Shareholders
Tax-exempt entities such as employee pension benefit trusts, individual
retirement accounts, charitable remainder trusts, etc. generally are exempt from
federal income taxation. Such entities are subject to taxation, however, on any
"unrelated business taxable income," as defined in the Internal Revenue Code.
The payment of dividends to a tax-exempt employee pension benefit trust or other
domestic tax-exempt shareholder generally will not constitute unrelated business
taxable income to such shareholder unless such shareholder has borrowed to
acquire or carry its shares.
If we are deemed to be "predominately held" by qualified employee pension
benefit trusts that each hold more than 10% (by value) of our shares, such
trusts would be required to treat a certain percentage of the dividend
distributions paid to them as unrelated business taxable income. We would be
deemed to be "predominately held" by such trusts if either (1) one such trust
owns more than 25% in value of our shares, or (ii) any group of such trusts,
each owning more than 10% in value of our shares,
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holds in the aggregate more than 50% in value of our shares. If either of these
ownership thresholds is exceeded, any such qualified employee pension benefit
trust holding more than 10% in value of our shares will generally be subject to
tax on that portion of our dividend distributions made to it which is equal to
the percentage of our income which would be "unrelated business taxable income"
if we were a qualified trust, rather than a REIT. We will attempt to monitor the
concentration of ownership of such trusts in our shares, and we do not expect
our shares to be deemed to be "predominately held" by qualified employee pension
benefit trusts, as defined in the Internal Revenue Code, to the extent required
to trigger the treatment of our income as unrelated business taxable income.
For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans exempt from
federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of
the Internal Revenue Code, respectively, income from an investment in our shares
will constitute unrelated business taxable income unless the shareholder in
question is able to deduct amounts "set aside" or placed in reserve for certain
purposes so as to offset the unrelated business taxable income generated. Any
such organization which is a prospective shareholder should consult its own tax
advisor concerning these "set aside" and reserve requirements.
Special Tax Considerations for Non-U.S. Shareholders
The rules governing U.S. income taxation of non-resident alien individuals,
foreign corporations, foreign partnerships and foreign trusts and estates
(collectively, "Non-U.S. shareholders") are complex. The following discussion is
intended only as a summary of these rules. Non-U.S. investors should consult
with their own tax advisors to determine the impact of federal, state and local
income tax laws on an investment in our shares, including any reporting
requirements.
Income Effectively Connected With a U.S. Trade or Business
In general, Non-U.S. shareholders will be subject to regular U.S. federal
income taxation with respect to their investment in our shares if the income
derived therefrom is "effectively connected" with the Non-U.S. shareholder's
conduct of a trade or business in the United States. A corporate Non-U.S.
shareholder that receives income that is (or is treated as) effectively
connected with a U.S. trade or business also may be subject to a branch profits
tax under Section 884 of the Internal Revenue Code, which is payable in addition
to the regular U.S. federal corporate income tax.
The following discussion will apply to Non-U.S. shareholders whose income
derived from ownership of our shares is deemed to be not effectively connected
with a U.S. trade or business.
Distributions Not Attributable to Gain From the Sale or Exchange of a
United States Real Property Interest
A distribution to a Non-U.S. shareholder that is not attributable to gain
realized by us from the sale or exchange of a United States real property
interest and that we do not designate as a capital gain distribution will be
treated as an ordinary income distribution to the extent that it is made out of
current or accumulated earnings and profits. Generally, any ordinary income
distribution will be subject to a U.S. federal income tax equal to 30% of the
gross amount of the distribution unless this tax is reduced by the provisions of
an applicable tax treaty. Any such distribution in excess of our earnings and
profits will be treated first as a return of capital that will reduce each Non-
U.S. shareholder's basis in its shares (but not below zero) and then as gain
from the disposition of those shares, the tax treatment of which is described
under the rules discussed below with respect to dispositions of shares.
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Distributions Attributable to Gain From the Sale or Exchange of a United
States Real Property Interest
Distributions to a Non-U.S. shareholder that are attributable to gain from
the sale or exchange of a United States real property interest will be taxed to
a Non-U.S. shareholder under Internal Revenue Code provisions enacted by the
Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA,
such distributions are taxed to a Non-U.S. shareholder as if the distributions
were gains "effectively connected" with a U.S. trade or business. Accordingly,
a Non-U.S. shareholder will be taxed at the normal capital gain rates applicable
to a U.S. shareholder (subject to any applicable alternative minimum tax and a
special alternative minimum tax in the case of non-resident alien individuals).
Distributions subject to FIRPTA also may be subject to a 30% branch profits tax
when made to a corporate Non-U.S. shareholder that is not entitled to a treaty
exemption.
Withholding Obligations With Respect to Distributions to Non-U.S.
Shareholders
Although tax treaties may reduce our withholding obligations, we generally
will be required to withhold from distributions to Non-U.S. shareholders, and
remit to the Internal Revenue Service:
. 35% of designated capital gain distributions or, if greater, 35% of
the amount of any distributions that could be designated as capital
gain distributions; and
. 30% of ordinary income distributions (i.e., distributions paid out of
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our earnings and profits).
In addition, if we designate prior distributions as capital gain distributions,
subsequent distributions, up to the amount of the prior distributions, will be
treated as capital gain distributions for purposes of withholding. A
distribution in excess of our earnings and profits will be subject to 30%
withholding if at the time of the distribution it cannot be determined whether
the distribution will be in an amount in excess of our current or accumulated
earnings and profits. If the amount of tax we withhold with respect to a
distribution to a Non-U.S. shareholder exceeds the shareholder's U.S. tax
liability with respect to that distribution, the Non-U.S. shareholder may file a
claim with the Internal Revenue Service for a refund of the excess.
Sale of Our Shares by a Non-U.S. Shareholder
A sale of our shares by a Non-U.S. shareholder will generally not be
subject to U.S. federal income taxation unless our shares constitute a "United
States real property interest" within the meaning of FIRPTA. Our shares will not
constitute a United States real property interest if we are a "domestically
controlled REIT." A "domestically controlled REIT" is a REIT that at all times
during a specified testing period has less than 50% in value of its shares held
directly or indirectly by Non-U.S. shareholders. We currently anticipate that we
will be a domestically controlled REIT. Therefore, sales of our shares should
not be subject to taxation under FIRPTA. However, we cannot assure you that we
will continue to be a domestically controlled REIT. If we were not a
domestically controlled REIT, whether a Non-U.S. shareholder's sale of our
shares would be subject to tax under FIRPTA as a sale of a United States real
property interest would depend on whether our shares were "regularly traded" on
an established securities market and on the size of the selling shareholder's
interest in us. Our shares currently are not "regularly traded" on an
established securities market.
If the gain on the sale of shares were subject to taxation under FIRPTA, a
Non-U.S. shareholder would be subject to the same treatment as a U.S.
shareholder with respect to the gain, subject to any applicable alternative
minimum tax and a special alternative minimum tax in the case of
non-resident
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alien individuals. In addition, distributions that are treated as gain from the
disposition of shares and are subject to tax under FIRPTA also may be subject to
a 30% branch profits tax when made to a corporate Non-U.S. shareholder that is
not entitled to a treaty exemption. Under FIRPTA, the purchaser of our shares
may be required to withhold 10% of the purchase price and remit this amount to
the Internal Revenue Service.
Even if not subject to FIRPTA, capital gains will be taxable to a Non-U.S.
shareholder if the Non-U.S. shareholder is a non-resident alien individual who
is present in the United States for 183 days or more during the taxable year and
some other conditions apply, in which case the non-resident alien individual
will be subject to a 30% tax on his or her U.S. source capital gains.
Recently promulgated Treasury Regulations may alter the procedures for
claiming the benefits of an income tax treaty. Our Non-U.S. shareholders should
consult their tax advisors concerning the effect, if any, of these Treasury
Regulations on an investment in our shares.
Information Reporting Requirements and Backup Withholding for Non-U.S.
Shareholders
Additional issues may arise for information reporting and backup
withholding for Non-U.S. shareholders. Non-U.S. shareholders should consult
their tax advisors with regard to U.S. information reporting and backup
withholding requirements under the Internal Revenue Code.
Statement of Stock Ownership
We are required to demand annual written statements from the record holders
of designated percentages of our shares disclosing the actual owners of the
shares. Any record shareholder who, upon our request, does not provide us with
required information concerning actual ownership of the shares is required to
include specified information relating to his shares in his federal income tax
return. We also must maintain, within the Internal Revenue District in which we
are required to file our federal income tax return, permanent records showing
the information we have received about the actual ownership of shares and a list
of those persons failing or refusing to comply with our demand.
State and Local Taxation
We and any operating subsidiaries of ours may be subject to state and local
tax in states and localities in which we or they do business or own property.
The tax treatment of the Wells REIT, our operating partnership, our operating
subsidiaries and the holders of our shares in local jurisdictions may differ
from the federal income tax treatment described above.
Tax Aspects of the Operating Partnership
The following discussion summarizes certain federal income tax
considerations applicable to our investment in Wells OP, our operating
partnership. The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
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Classification as a Partnership
We will be entitled to include in our income a distributive share of Wells
OP's income and to deduct our distributive share of Wells OP's losses only if
Wells OP is classified for federal income tax purposes as a partnership, rather
than as an association taxable as a corporation. Under applicable Treasury
Regulations (the "Check-the-Box-Regulations"), an unincorporated entity with at
least two members may elect to be classified either as an association taxable as
a corporation or as a partnership. If such an entity fails to make an election,
it generally will be treated as a partnership for federal income tax purposes.
Wells OP intends to be classified as a partnership for federal income tax
purposes and will not elect to be treated as an association taxable as a
corporation under the Check-the-Box-Regulations.
Even though Wells OP will elect to be treated as a partnership for federal
income tax purposes, it may be taxed as a corporation if it is deemed to be a
"publicly traded partnership." A publicly traded partnership is a partnership
whose interests are traded on an established securities market or are readily
tradable on a secondary market (or the substantial equivalent thereof);
provided, that even if the foregoing requirements are met, a publicly traded
partnership will not be treated as a corporation for federal income tax purposes
if at least 90% of such partnership's gross income for a taxable year consists
of "qualifying income" under Section 7704(d) of the Internal Revenue Code.
Qualifying income generally includes any income that is qualifying income for
purposes of the 95% gross income test applicable to REITs (90% Passive-Type
Income Exception). (See "Requirements for Qualification as a REIT --
Operational Requirements -- Gross Income Tests").
Under applicable Treasury Regulations (PTP Regulations), limited safe
harbors from the definition of a publicly traded partnership are provided.
Pursuant to one of those safe harbors (Private Placement Exclusion), interests
in a partnership will not be treated as readily tradable on a secondary market
or the substantial equivalent thereof if (i) all interests in the partnership
were issued in a transaction (or transactions) that was not required to be
registered under the Securities Act of 1933, as amended, and (ii) the
partnership does not have more than 100 partners at any time during the
partnership's taxable year. In determining the number of partners in a
partnership, a person owning an interest in a flow-through entity (i.e., a
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partnership, grantor trust, or S corporation) that owns an interest in the
partnership is treated as a partner in such partnership only if (a)
substantially all of the value of the owner's interest in the flow-through is
attributable to the flow-through entity's interest (direct or indirect) in the
partnership and (b) a principal purpose of the use of the flow-through entity is
to permit the partnership to satisfy the 100 partner limitation. Wells OP
qualifies for the Private Placement Exclusion. Even if Wells OP is considered a
publicly traded partnership under the PTP Regulations because it is deemed to
have more than 100 partners, however, Wells OP should not be treated as a
corporation because it should be eligible for the 90% Passive-Type Income
Exception described above.
We have not requested, and do not intend to request, a ruling from the
Internal Revenue Service that Wells OP will be classified as a partnership for
federal income tax purposes. Holland & Knight LLP is of the opinion, however,
that based on certain factual assumptions and representations, Wells OP will
more likely than not be treated for federal income tax purposes as a partnership
and not as an association taxable as a corporation, or as a publicly traded
partnership. Unlike a tax ruling, however, an opinion of counsel is not binding
upon the Internal Revenue Service, and no assurance can be given that the
Internal Revenue Service will not challenge the status of Wells OP as a
partnership for federal income tax purposes. If such challenge were sustained
by a court, Wells OP would be treated as a corporation for federal income tax
purposes, as described below. In addition, the opinion of Holland & Knight LLP
is based on existing law, which is to a great extent the result of
administrative and judicial interpretation. No assurance can be given that
administrative or judicial changes would not modify the conclusions expressed in
the opinion.
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If for any reason Wells OP were taxable as a corporation, rather than a
partnership, for federal income tax purposes, we would not be able to qualify as
a REIT. (See "Federal Income Tax Considerations -- Requirements for
Qualification as a REIT -- Operational Requirements - Gross Income Tests" and
"Requirements for Qualification as a REIT -- Operational Requirements - Asset
Tests.") In addition, any change in Wells OP's status for tax purposes might be
treated as a taxable event, in which case we might incur a tax liability without
any related cash distribution. (See "Federal Income Tax Considerations --
Requirements for Qualification as a REIT -- Operational Requirements- Annual
Distribution Requirement.") Further, items of income and deduction of Wells OP
would not pass through to its partners, and its partners would be treated as
shareholders for tax purposes. Consequently, Wells OP would be required to pay
income tax at corporate tax rates on its net income, and distributions to its
partners would constitute dividends that would not be deductible in computing
Wells OP's taxable income.
Income Taxation of the Operating Partnership and its Partners
Partners, Not a Partnership, Subject to Tax. A partnership is not a
taxable entity for federal income tax purposes. As a partner in Wells OP, we
will be required to take into account our allocable share of Wells OP's income,
gains, losses, deductions, and credits for any taxable year of Wells OP ending
within or with our taxable year, without regard to whether we have received or
will receive any distribution from Wells OP.
Partnership Allocations. Although a partnership agreement generally
determines the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes under Section 704(b) of the Internal
Revenue Code if they do not comply with the provisions of Section 704(b) of the
Internal Revenue Code and the Treasury Regulations promulgated thereunder. If
an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partner's
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic arrangement of the
partners with respect to such item. Wells OP's allocations of taxable income
and loss are intended to comply with the requirements of Section 704(b) of the
Internal Revenue Code and the Treasury Regulations promulgated thereunder.
Tax Allocations With Respect to Contributed Properties. Pursuant to
Section 704(c) of the Internal Revenue Code, income, gain, loss, and deduction
attributable to appreciated or depreciated property that is contributed to a
partnership in exchange for an interest in the partnership must be allocated for
federal income tax purposes in a manner such that the contributor is charged
with, or benefits from, the unrealized gain or unrealized loss associated with
the property at the time of the contribution. The amount of such unrealized
gain or unrealized loss is generally equal to the difference between the fair
market value of the contributed property at the time of contribution and the
adjusted tax basis of such property at the time of contribution. Under
applicable Treasury Regulations, partnerships are required to use a "reasonable
method" for allocating items subject to Section 704(c) of the Internal Revenue
Code and several reasonable allocation methods are described therein.
Under the partnership agreement for Wells OP, depreciation or amortization
deductions of Wells OP generally will be allocated among the partners in
accordance with their respective interests in Wells OP, except to the extent
that Wells OP is required under Section 704(c) to use a method for allocating
depreciation deductions attributable to its properties that results in us
receiving a disproportionately large share of such deductions. It is possible
that we may (1) be allocated lower amounts of depreciation deductions for tax
purposes with respect to contributed properties than would be allocated to us if
each such property were to have a tax basis equal to its fair market value at
the time of contribution, and (2) be allocated taxable gain in the event of a
sale of such contributed properties in excess of the economic profit
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allocated to us as a result of such sale. These allocations may cause us to
recognize taxable income in excess of cash proceeds received by us, which might
adversely affect our ability to comply with the REIT distribution requirements,
although we do not anticipate that this event will occur. The foregoing
principles also will affect the calculation of our earnings and profits for
purposes of determining which portion of our distributions is taxable as a
dividend. The allocations described in this paragraph may result in a higher
portion of our distributions being taxed as a dividend than would have occurred
had we purchased such properties for cash.
Basis in Operating Partnership Interest. The adjusted tax basis of our
partnership interest in Wells OP generally is equal to (1) the amount of cash
and the basis of any other property contributed to Wells OP by us, (2) increased
by (A) our allocable share of Wells OP's income and (B) our allocable share of
indebtedness of Wells OP, and (3) reduced, but not below zero, by (A) our
allocable share of Wells OP's loss and (B) the amount of cash distributed to us,
including constructive cash distributions resulting from a reduction in our
share of indebtedness of Wells OP.
If the allocation of our distributive share of Wells OP's loss would reduce
the adjusted tax basis of our partnership interest in Wells OP below zero, the
recognition of such loss will be deferred until such time as the recognition of
such loss would not reduce our adjusted tax basis below zero. If a distribution
from Wells OP or a reduction in our share of Wells OP's liabilities (which is
treated as a constructive distribution for tax purposes) would reduce our
adjusted tax basis below zero, any such distribution, including a constructive
distribution, would constitute taxable income to us. The gain realized by us
upon the receipt of any such distribution or constructive distribution would
normally be characterized as capital gain, and if our partnership interest in
Wells OP has been held for longer than the long-term capital gain holding period
(currently one year), the distribution would constitute long-term capital gain.
Depreciation Deductions Available to the Operating Partnership. Wells OP
will use a portion of contributions made by the Wells REIT from offering
proceeds to acquire interests in properties. To the extent that Wells OP
acquires properties for cash, Wells OP's initial basis in such properties for
federal income tax purposes generally will be equal to the purchase price paid
by Wells OP. Wells OP plans to depreciate each such depreciable property for
federal income tax purposes under the alternative depreciation system of
depreciation ("ADS"). Under ADS, Wells OP generally will depreciate such
buildings and improvements over a 40 year recovery period using a straight-line
method and a mid-month convention and will depreciate furnishings and equipment
over a 12 year recovery period. To the extent that Wells OP acquires properties
in exchange for units of Wells OP, Wells OP's initial basis in each such
property for federal income tax purposes should be the same as the transferor's
basis in that property on the date of acquisition by Wells OP. Although the law
is not entirely clear, Wells OP generally intends to depreciate such depreciable
property for federal income tax purposes over the same remaining useful lives
and under the same methods used by the transferors.
Sale of the Operating Partnership's Property
Generally, any gain realized by Wells OP on the sale of property held for
more than one year will be long-term capital gain, except for any portion of
such gain that is treated as depreciation or cost recovery recapture. Any gain
recognized by Wells OP upon the disposition of a property acquired by Wells OP
for cash will be allocated among the partners in accordance with their
respective percentage interests in Wells OP.
Our share of any gain realized by Wells OP on the sale of any property held
by Wells OP as inventory or other property held primarily for sale to customers
in the ordinary course of Wells OP's trade or business will be treated as income
from a prohibited transaction that is subject to a 100% penalty tax. Such
prohibited transaction income also may have an adverse effect upon our ability
to satisfy the income
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tests for maintaining our REIT status. (See "Federal Income Tax Considerations--
Requirements for Qualification as a REIT -- Gross Income Tests" above.) We,
however, do not presently intend to acquire or hold or allow Wells OP to acquire
or hold any property that represents inventory or other property held primarily
for sale to customers in the ordinary course of our or Wells OP's trade or
business.
ERISA Considerations
The following is a summary of some non-tax considerations associated with
an investment in our shares by a qualified employee pension benefit plan or an
IRA. This summary is based on provisions of ERISA and the Internal Revenue
Code, as amended through the date of this prospectus, and relevant regulations
and opinions issued by the Department of Labor and the Internal Revenue Service.
We cannot assure you that legislative, regulatory or administrative changes or
court decisions may not be forthcoming which would significantly modify the
statements expressed herein. Any changes may or may not apply to transactions
entered into prior to the date of their enactment.
Each fiduciary of an employee pension benefit plan subject to ERISA, such
as a profit sharing, section 401(k) or pension plan, or of any other retirement
plan or account subject to Section 4975 of the Internal Revenue Code, such as an
IRA (Benefit Plans), seeking to invest plan assets in our shares must, taking
into account the facts and circumstances of such Benefit Plan, consider, among
other matters:
. whether the investment is consistent with the applicable provisions of
ERISA and the Internal Revenue Code;
. whether, under the facts and circumstances attendant to the Benefit
Plan in question, the fiduciary's responsibility to the plan has been
satisfied;
. whether the investment will produce unrelated business taxable income
to the Benefit Plan (see "Federal Income Tax Considerations --
Treatment of Tax-Exempt Shareholders"); and
. the need to value the assets of the Benefit Plan annually.
Under ERISA, a plan fiduciary's responsibilities include the following
duties:
. to act solely in the interest of plan participants and beneficiaries
and for the exclusive purpose of providing benefits to them, as well
as defraying reasonable expenses of plan administration;
. to invest plan assets prudently;
. to diversify the investments of the plan unless it is clearly prudent
not to do so;
. to ensure sufficient liquidity for the plan; and
. to consider whether an investment would constitute or give rise to a
prohibited transaction under ERISA or the Internal Revenue Code.
ERISA also requires that the assets of an employee benefit plan be held in trust
and that the trustee, or a duly authorized named fiduciary or investment
manager, have exclusive authority and discretion to manage and control the
assets of the plan.
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Section 406 of ERISA and Section 4975 of the Internal Revenue Code prohibit
specified transactions involving the assets of a Benefit Plan which are between
the plan and any "party in interest" or "disqualified person" with respect to
that Benefit Plan. These transactions are prohibited regardless of how
beneficial they may be for the Benefit Plan. Prohibited transactions include
the sale, exchange or leasing of property, the lending of money or the extension
of credit between a Benefit Plan and a party in interest or disqualified person,
and the transfer to, or use by, or for the benefit of, a party in interest, or
disqualified person, of any assets of a Benefit Plan. A fiduciary of a Benefit
Plan also is prohibited from engaging in self-dealing, acting for a person who
has an interest adverse to the plan or receiving any consideration for its own
account from a party dealing with the plan in a transaction involving plan
assets. Furthermore, Section 408 of the Internal Revenue Code states that
assets of an IRA trust may not be commingled with other property except in a
common trust fund or common investment fund.
Plan Asset Considerations
In order to determine whether an investment in our shares by Benefit Plans
creates or gives rise to the potential for either prohibited transactions or the
commingling of assets referred to above, a fiduciary must consider whether an
investment in our shares will cause our assets to be treated as assets of the
investing Benefit Plans. Neither ERISA nor the Internal Revenue Code define the
term "plan assets," however, U.S. Department of Labor Regulations provide
guidelines as to whether, and under what circumstances, the underlying assets of
an entity will be deemed to constitute assets of a Benefit Plan when the plan
invests in that entity (29 C.F.R. Section 2510.3-101, the Regulation). Under
the Regulation, the assets of corporations, partnerships or other entities in
which a Benefit Plan makes an equity investment will generally be deemed to be
assets of the Benefit Plan unless the entity satisfies one of the exceptions to
this general rule. As discussed below, we have received an opinion of counsel
that, based on the Regulation, our underlying assets should not be deemed to be
"plan assets" of Benefit Plans investing in shares, assuming the conditions set
forth in the opinion are satisfied, based upon the fact that at least one of the
specific exemptions set forth in the Regulation is satisfied, as determined
below.
Specifically, the Regulation provides that the underlying assets of REITs
will not be treated as assets of a Benefit Plan investing therein if the
interest the Benefit Plan acquires is a "publicly-offered security." A publicly-
offered security must be:
. sold as part of a public offering registered under the Securities Act
of 1933 and be part of a class of securities registered under the
Securities Exchange Act of 1934, as amended, within a specified time
period;
. part of a class of securities that is owned by 100 or more persons who
are independent of the issuer and one another; and
. "freely transferable."
Our shares are being sold as part of an offering of securities to the
public pursuant to an effective registration statement under the Securities Act,
and are part of a class registered under the Securities Exchange Act. Any
shares purchased, therefore, should satisfy the first criterion of the publicly-
offered security exemption.
We have over 100 independent shareholders. Thus, the second criterion of
the publicly-offered security exception will be satisfied.
Whether a security is "freely transferable" depends upon the particular
facts and circumstances. Our shares are subject to certain restrictions on
transferability intended to ensure that we continue to
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qualify for federal income tax treatment as a REIT. The Regulation provides,
however, that where the minimum investment in a public offering of securities is
$10,000 or less, the presence of a restriction on transferability intended to
prohibit transfers which would result in a termination or reclassification of
the entity for state or federal tax purposes will not ordinarily affect a
determination that such securities are freely transferable. The minimum
investment in our shares is less than $10,000; thus, the restrictions imposed in
order to maintain our status as a REIT should not cause the shares to be deemed
to be not freely transferable.
In the event that our underlying assets were treated by the Department of
Labor as the assets of investing Benefit Plans, our management would be treated
as fiduciaries with respect to each Benefit Plan shareholder, and an investment
in our shares might constitute an ineffective delegation of fiduciary
responsibility to Wells Capital and expose the fiduciary of the Benefit Plan to
co-fiduciary liability under ERISA for any breach by Wells Capital of the
fiduciary duties mandated under ERISA. Further, if our assets are deemed to be
"plan assets," an investment by an IRA in our shares might be deemed to result
in an impermissible commingling of IRA assets with other property.
If our management were treated as fiduciaries with respect to Benefit Plan
shareholders, the prohibited transaction restrictions of ERISA and the Internal
Revenue Code would apply to any transaction involving our assets. These
restrictions could, for example, require that we avoid transactions with
entities that are affiliated with us or our affiliates or restructure our
activities in order to obtain an administrative exemption from the prohibited
transaction restrictions. Alternatively, we might have to provide Benefit Plan
shareholders with the opportunity to sell their shares to us or we might
dissolve or terminate.
If a prohibited transaction were to occur, the Internal Revenue Code
imposes an excise tax equal to 15 percent of the amount involved and authorizes
the IRS to impose an additional 100% excise tax if the prohibited transaction is
not "corrected." These taxes would be imposed on any disqualified person who
participates in the prohibited transaction. In addition, Wells Capital and
possibly other fiduciaries of Benefit Plan shareholders subject to ERISA who
permitted the prohibited transaction to occur or who otherwise breached their
fiduciary responsibilities, or a non-fiduciary participating in a prohibited
transaction, could be required to restore to the Benefit Plan any profits they
realized as a result of the transaction or breach, and make good to the Benefit
Plan any losses incurred by the Benefit Plan as a result of the transaction or
breach. With respect to an IRA that invests in our shares, the occurrence of a
prohibited transaction involving the individual who established the IRA, or his
or her beneficiary, would cause the IRA to lose its tax-exempt status under
Section 408(e)(2) of the Internal Revenue Code.
We have obtained an opinion from Holland & Knight LLP that our shares more
likely than not constitute "publicly-offered securities" and, accordingly, it is
more likely than not that our underlying assets should not be considered plan
assets under the Regulation, assuming the offering takes place as described in
this prospectus. If our underlying assets are not deemed to be "plan assets,"
the problems discussed in the immediately preceding three paragraphs are not
expected to arise.
Other Prohibited Transactions
Regardless of whether the shares qualify for the "publicly-offered
security" exception of the Regulation, a prohibited transaction could occur if
the Wells REIT, the advisor, any selected dealer, the escrow agent or any of
their affiliates is a fiduciary (within the meaning of Section 3(21) of ERISA)
with respect to any Benefit Plan purchasing the shares. Accordingly, unless an
administrative or statutory exemption applies, shares should not be purchased by
a Benefit Plan with respect to which any of the above persons is a fiduciary. A
person is a fiduciary with respect to a Benefit Plan under Section 3(21) of
ERISA if, among other things, the person has discretionary authority or control
with respect to plan assets
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or provides investment advice for a fee with respect to plan assets. Under a
regulation issued by the Department of Labor, a person shall be deemed to be
providing investment advice if that person renders advice as to the advisability
of investing in our shares and that person regularly provides investment advice
to the Benefit Plan pursuant to a mutual agreement or understanding (written or
otherwise) (1) that the advice will serve as the primary basis for investment
decisions, and (2) that the advice will be individualized for the Benefit Plan
based on its particular needs.
Annual Valuation
A fiduciary of an employee benefit plan subject to ERISA is required to
determine annually the fair market value of each asset of the plan as of the end
of the plan's fiscal year and to file a report reflecting that value with the
Department of Labor. When the fair market value of any particular asset is not
available, the fiduciary is required to make a good faith determination of that
asset's "fair market value" assuming an orderly liquidation at the time the
determination is made. In addition, a trustee or custodian of an IRA must
provide an IRA participant with a statement of the value of the IRA each year.
In discharging its obligation to value assets of a plan, a fiduciary subject to
ERISA must act consistently with the relevant provisions of the plan and the
general fiduciary standards of ERISA.
Unless and until our shares are listed on a national securities exchange or
are included for quotation on Nasdaq, it is not expected that a public market
for the shares will develop. To date, neither the Internal Revenue Service nor
the Department of Labor has promulgated regulations specifying how a plan
fiduciary should determine the "fair market value" of the shares, namely when
the fair market value of the shares is not determined in the marketplace.
Therefore, to assist fiduciaries in fulfilling their valuation and annual
reporting responsibilities with respect to ownership of shares, we intend to
provide reports of our annual determinations of the current value of our net
assets per outstanding share to those fiduciaries (including IRA trustees and
custodians) who identify themselves to us and request the reports. Until
December 31, 2002, we intend to use the offering price of shares as the per
share net asset value. Beginning with the year 2003, the value of the properties
and our other assets will be based on a valuation. Such valuation will be
performed by a person independent of us and of Wells Capital.
We anticipate that we will provide annual reports of our determination of
value (1) to IRA trustees and custodians not later than January 15 of each year,
and (2) to other Benefit Plan fiduciaries within 75 days after the end of each
calendar year. Each determination may be based upon valuation information
available as of October 31 of the preceding year, up-dated, however, for any
material changes occurring between October 31 and December 31.
We intend to revise these valuation procedures to conform with any relevant
guidelines that the Internal Revenue Service or the Department of Labor may
hereafter issue. Meanwhile, we cannot assure you:
. that the value determined by us could or will actually be realized by
us or by shareholders upon liquidation (in part because appraisals or
estimated values do not necessarily indicate the price at which assets
could be sold and because no attempt will be made to estimate the
expenses of selling any of our assets);
. that shareholders could realize this value if they were to attempt to
sell their shares; or
. that the value, or the method used to establish value, would comply
with the ERISA or IRA requirements described above.
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Description of Shares
The following description of the shares is not complete but is a summary of
portions of our articles of incorporation and is qualified in its entirety by
reference to the articles of incorporation.
Under our articles of incorporation, we have authority to issue a total of
90,000,000 shares of capital stock. Of the total shares authorized, 40,000,000
shares are designated as common stock with a par value of $.01 per share,
5,000,000 shares are designated as preferred stock with a par value of $.01 per
share and 45,000,000 shares are designated as shares-in-trust, which would be
issued only in the event we have purchases in excess of the ownership limits
described below.
As of December 15, 1999, approximately 13,150,000 shares of our common
stock were issued and outstanding.
Common Stock
The holders of common stock are entitled to one vote per share on all
matters voted on by shareholders, including election of our directors. Our
articles of incorporation do not provide for cumulative voting in the election
of directors. Therefore, the holders of a majority of the outstanding common
shares can elect our entire board of directors. Subject to any preferential
rights of any outstanding series of preferred stock, the holders of common stock
are entitled to such dividends as may be declared from time to time by our board
of directors out of legally available funds and, upon liquidation, are entitled
to receive all assets available for distribution to shareholders. All shares
issued in the offering will be fully paid and non-assessable shares of common
stock. Holders of shares of common stock will not have preemptive rights, which
means that you will not have an automatic option to purchase any new shares that
we issue.
We will not issue certificates for our shares. Shares will be held in
"uncertificated" form which will eliminate the physical handling and safekeeping
responsibilities inherent in owning transferable stock certificates and
eliminate the need to return a duly executed stock certificate to effect a
transfer. Wells Capital, our advisor, acts as our registrar and as the transfer
agent for our shares. Transfers can be effected simply by mailing to Wells
Capital a transfer and assignment form, which we will provide to you at no
charge.
Preferred Stock
Our articles of incorporation authorize our board of directors to designate
and issue one or more classes or series of preferred stock without stockholder
approval. The board of directors may determine the relative rights, preferences
and privileges of each class or series of preferred stock so issued, which may
be more beneficial than the rights, preferences and privileges attributable to
the common stock. The issuance of preferred stock could have the effect of
delaying or preventing a change in control of the Wells REIT. Our board of
directors has no present plans to issue preferred stock, but may do so at any
time in the future without shareholder approval.
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Soliciting Dealer Warrants
We have agreed to issue and sell to the Dealer Manager warrants to purchase
up to 800,000 shares of our common stock at a price of $0.0008 per warrant. The
Dealer Manager may retain or reallow these warrants to broker-dealers
participating in the offering, unless such issuance of soliciting dealer
warrants is prohibited by either federal or state securities laws. The shares
to be issued upon exercise of these warrants are being registered as part of
this offering.
Each participating broker-dealer will receive from the Dealer Manager one
soliciting dealer warrant for every 25 shares sold by such participating broker-
dealer during this offering. All shares sold by the Wells REIT other than
through the dividend reinvestment plan will be included in the computation of
the number of shares sold to determine the number of soliciting dealer warrants
to be issued.
The holder of a soliciting dealer warrant will be entitled to purchase one
share of our common stock at a price of $12 per share (120% of the offering
price) during the time period beginning one year from the effective date of this
offering and ending five years after the effective date of this offering.
A soliciting dealer warrant may not be exercised unless the shares to be
issued upon exercise have been registered or are exempt from registration in the
state of residence of the holder of the warrant and any prospectus required
under the laws of such state has been delivered to the buyer on behalf of the
Wells REIT. In addition, holders of soliciting dealer warrants may not exercise
them to the extent such exercise would jeopardize our status as a REIT under the
Internal Revenue Code.
The terms of the soliciting dealer warrants, including exercise price and
the number and type of securities issuable upon exercise of these warrants, may
be adjusted in the event of stock dividends, stock splits or a merger,
consolidation, reclassification, reorganization, recapitalization or sale of our
assets. Soliciting dealer warrants are not transferable or assignable except by
the Dealer Manager, the participating broker-dealers, or their successors in
interest, or to individuals who are officers of such participating broker-
dealers. Exercise of the soliciting dealer warrants is governed by the terms
and conditions detailed in this prospectus and in the Warrant Purchase
Agreement, which is an exhibit to the registration statement.
Holders of soliciting dealer warrants do not have the rights of
stockholders and, therefore, may not vote on matters and are not entitled to
receive dividends until such time as the warrants are exercised.
Meetings and Special Voting Requirements
An annual meeting of the shareholders will be held each year, at least 30
days after delivery of our annual report. Special meetings of shareholders may
be called only upon the request of a majority of the directors, a majority of
the independent directors, the chairman, the president or upon the written
request of 10% of the shareholders. The presence of a majority of the
outstanding shares either in person or by proxy shall constitute a quorum.
Generally, the affirmative vote of a majority of all votes entitled to be voted
is necessary to take shareholder action authorized by our articles of
incorporation, except that a majority of the votes represented in person or by
proxy at a meeting at which a quorum is present is sufficient to elect a
director.
Under Maryland Corporation Law and our articles of incorporation,
shareholders are entitled to vote at a duly held meeting at which a quorum is
present on (1) amendment of our articles of incorporation, (2) liquidation or
dissolution of the Wells REIT, (3) reorganization of the Wells REIT, (4) merger,
consolidation or sale or other disposition of substantially all of our assets,
and (5) termination of our status as a REIT. Shareholders voting against any
merger or sale of assets are permitted under
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Maryland Corporation Law to petition a court for the appraisal and payment of
the fair value of their shares. In an appraisal proceeding, the court appoints
appraisers who attempt to determine the fair value of the stock as of the date
of the shareholder vote on the merger or sale of assets. After considering the
appraisers' report, the court makes the final determination of the fair value to
be paid to the dissenting shareholder and decides whether to award interest from
the date of the merger or sale of assets and costs of the proceeding to the
dissenting shareholders.
Our advisor is selected and approved annually by our directors. While the
shareholders do not have the ability to vote to replace Wells Capital or to
select a new advisor, shareholders do have the ability, by the affirmative vote
of a majority of the shareholders entitled to vote on such matter, to elect to
remove a director from our board.
Shareholders are entitled to receive a copy of our shareholder list upon
request. The list provided by us will include each shareholder's name, address
and telephone number, if available, and number of shares owned by each
shareholder and will be sent within ten days of the receipt by us of the
request. A shareholder requesting a list will be required to pay reasonable
costs of postage and duplication. We have the right to request that a
requesting shareholder represent to us that the list will not be used to pursue
commercial interests.
In addition to the foregoing, shareholders have rights under Rule 14a-7
under the Securities Exchange Act, which provides that, upon the request of
investors and the payment of the expenses of the distribution, we are required
to distribute specific materials to shareholders in the context of the
solicitation of proxies for voting on matters presented to shareholders or, at
our option, provide requesting shareholders with a copy of the list of
shareholders so that the requesting shareholders may make the distribution of
proxies themselves.
Restriction on Ownership of Shares
In order for us to qualify as a REIT, not more than 50% of our outstanding
shares may be owned by any five or fewer individuals, including some tax-exempt
entities. In addition, the outstanding shares must be owned by 100 or more
persons independent of us and each other during at least 335 days of a 12-month
taxable year or during a proportionate part of a shorter taxable year. We may
prohibit certain acquisitions and transfers of shares so as to ensure our
continued qualification as a REIT under the Internal Revenue Code. However, we
cannot assure you that this prohibition will be effective.
In order to assist us in preserving our status as a REIT, our articles of
incorporation contain a limitation on ownership which prohibits any person or
group of persons from acquiring, directly or indirectly, beneficial ownership of
more than 9.8% of our outstanding shares. Our Articles of Incorporation provide
that a transfer of shares that would violate our share ownership limitations is
null and void and the intended transferee will acquire no rights in such shares,
unless such transfer is approved by the board of directors based upon
information that such transfer would not violate the provisions of the Internal
Revenue Code thereby adversely affecting our status as a REIT.
The shares in excess of the ownership limit which are attempted to be
transferred will be designated as "shares-in-trust" and will be transferred
automatically to a trust effective on the day before the reported transfer of
such shares. The record holder of the shares that are designated as shares-in-
trust will be required to submit such number of shares to the Wells REIT in the
name of the trustee of the trust. We will designate a trustee of the share
trust that will not be affiliated with us. We will also name one or more
charitable organizations as a beneficiary of the share trust. Shares-in-trust
will remain issued and outstanding shares and will be entitled to the same
rights and privileges as all other shares of the same class or series. The
trustee will receive all dividends and distributions on the shares-in-trust and
will hold
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such dividends or distributions in trust for the benefit of the
beneficiary. The trustee will vote all shares-in-trust during the period they
are held in trust.
At our direction, the trustee will transfer the shares-in-trust to a person
whose ownership will not violate the ownership limits. The transfer shall be
made within 20 days of our receipt of notice that shares have been transferred
to the trust. During this 20 day period, we will have the option of redeeming
such shares. Upon any such transfer or redemption, the purported transferee or
holder shall receive a per share price equal to the lesser of (a) the price per
share in the transaction that created such shares-in-trust, or (b) the market
price per share on the date of the transfer or redemption.
Any person who (1) acquires shares in violation of the foregoing
restriction or who owns shares that were transferred to any such trust is
required to give immediate written notice to the Wells REIT of such event or (2)
transfers or receives shares subject to such limitations is required to give the
Wells REIT 15 days written notice prior to such transaction. In both cases,
such persons shall provide to the Wells REIT such other information as we may
request in order to determine the effect, if any, of such transfer on our status
as a REIT.
The foregoing restrictions will continue to apply until (1) the board of
directors determines it is no longer in the best interest of the Wells REIT to
continue to qualify as a REIT and (2) there is an affirmative vote of the
majority of shares entitled to vote on such matter at a regular or special
meeting of the shareholders of the Wells REIT.
The ownership limit does not apply to an offeror which, in accordance with
applicable federal and state securities laws, makes a cash tender offer, where
at least 85% of the outstanding shares are duly tendered and accepted pursuant
to the cash tender offer. The ownership limit also does not apply to the
underwriter in a public offering of shares. In addition, the ownership limit
does not apply to a person or persons which the directors so exempt from the
ownership limit upon appropriate assurances that our qualification as a REIT is
not jeopardized.
Any person who owns 5% or more of the outstanding shares during any taxable
year will be asked to deliver a statement or affidavit setting forth the number
of shares beneficially owned, directly or indirectly.
Dividends
Dividends will be paid on a quarterly basis regardless of the frequency
with which such distributions are declared. Dividends will be paid to investors
who are shareholders as of the record dates selected by the directors. We
calculate our quarterly dividends based upon daily record and dividend
declaration dates so our investors will be entitled to be paid dividends
immediately upon their purchase of shares.
We are required to make distributions sufficient to satisfy the
requirements for qualification as a REIT for tax purposes. Generally, income
distributed as dividends will not be taxable to us under the Internal Revenue
Code if we distribute at least 95% of our taxable income. (See "Federal Income
Tax Considerations--Requirements for Qualification as a REIT.")
Dividends will be declared at the discretion of the board of directors, in
accordance with our earnings, cash flow and general financial condition. The
board's discretion will be directed, in substantial part, by its obligation to
cause us to comply with the REIT requirements. Because we may receive income
from interest or rents at various times during our fiscal year, dividends may
not reflect our income earned in that particular distribution period but may be
made in anticipation of cash flow which we expect
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to receive during a later quarter and may be made in advance of actual receipt
of funds in an attempt to make dividends relatively uniform. We may borrow
money, issue new securities or sell assets in order to make dividend
distributions.
We are not prohibited from distributing our own securities in lieu of
making cash dividends to shareholders, provided that the securities distributed
to shareholders are readily marketable. Shareholders who receive marketable
securities in lieu of cash dividends may incur transaction expenses in
liquidating the securities.
Dividend Reinvestment Plan
We currently have a dividend reinvestment plan available that allows you to
have your dividends otherwise distributable to you invested in additional shares
of the Wells REIT.
You may purchase shares under the dividend reinvestment plan for $10 per
share until all of the 2,200,000 shares registered as part of this offering have
been sold. After this time, we may purchase shares either through purchases on
the open market, if a market then exists, or through an additional issuance of
shares. In any case, the price per share will be equal to the then-prevailing
market price, which shall equal the price on the securities exchange or over-
the-counter market on which such shares are listed at the date of purchase if
such shares are then listed.
You may elect to participate in the dividend reinvestment plan by
completing the Subscription Agreement, the enrollment form or by other written
notice to the plan administrator. Participation in the plan will begin with the
next distribution made after receipt of your written notice. We may terminate
the dividend reinvestment plan for any reason at any time upon 10 days' prior
written notice to participants. Your participation in the plan will also be
terminated to the extent that a reinvestment of your distributions in our shares
would cause the percentage ownership limitation contained in our articles of
incorporation to be exceeded.
If you elect to participate in the dividend reinvestment plan and are
subject to federal income taxation, you will incur a tax liability for dividends
allocated to you even though you have elected not to receive the dividends in
cash but rather to have the dividends held pursuant to the dividend reinvestment
plan. Specifically, you will be treated as if you have received the dividend
from us in cash and then applied such dividend to the purchase of additional
shares. You will be taxed on the amount of such dividend as ordinary income to
the extent such dividend is from current or accumulated earnings and profits,
unless we have designated all or a portion of the dividend as a capital gain
dividend.
Share Redemption Program
Prior to the time that our shares are listed on a national securities
exchange, shareholders of the Wells REIT who have held their shares for at least
one year may receive the benefit of limited interim liquidity by presenting for
redemption all or any portion of their shares to us at any time in accordance
with the procedures outlined herein. At that time, we may, subject to the
conditions and limitations described below, redeem the shares presented for
redemption for cash to the extent that we have sufficient funds available to us
to fund such redemption.
If you have held your shares for the required one-year period, you may
redeem your shares for a purchase price to the Wells REIT of $10 per share. The
board of directors reserves the right to reject any request for redemption and
to amend or change the purchase price in its sole discretion at any time and
from time to time as it deems appropriate.
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Redemption of shares, when requested, will be made quarterly on a first-
come, first-served basis. Subject to funds being available, we will limit the
number of shares redeemed pursuant to our share redemption program as follows:
(1) during any calendar year, we will not redeem in excess of one-half of one
percent (0.5%) of the weighted average number of shares outstanding during the
prior calendar year; and (2) funding for the redemption of shares will come
exclusively from the proceeds we receive from the sale of shares under our
dividend reinvestment plan such that in no event shall the aggregate amount of
redemptions under our share redemption program exceed aggregate proceeds
received from the sale of shares pursuant to our dividend reinvestment plan.
The board of directors, at its sole discretion, may choose to terminate the
share redemption program or reduce the number of shares purchased under the
share redemption program if it determines the funds otherwise available to fund
our share redemption program are needed for other purposes. (See "Risk Factors--
General Investment Risks.")
We cannot guarantee that the funds set aside for the share redemption
program will be sufficient to accommodate all requests made in any year. If we
do not have such funds available, at the time when redemption is requested, you
can (1) withdraw your request for redemption, or (2) ask that we honor your
request at such time, if any, when sufficient funds become available. Such
pending requests will be honored on a first-come, first-served basis.
The share redemption program is only intended to provide interim liquidity
for shareholders until a secondary market develops for the shares. No such
market presently exists, and we cannot assure you that any market for your
shares will ever develop.
The shares we purchase under the share redemption program will be
cancelled, and will have the status of authorized, but unissued shares. We will
not reissue such shares unless they are first registered with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933 and
under appropriate state securities laws or otherwise issued in compliance with
such laws.
If we terminate, reduce the scope of or otherwise change the share
redemption program, we will send a letter to you informing you of the changes
and disclose the changes in reports filed with the Commission.
Restrictions on Roll-Up Transactions
In connection with any proposed transaction considered a "Roll-up
Transaction" involving the Wells REIT and the issuance of securities of an
entity (a Roll-up Entity) that would be created or would survive after the
successful completion of the Roll-up Transaction, an appraisal of all properties
shall be obtained from a competent independent appraiser. The properties shall
be appraised on a consistent basis, and the appraisal shall be based on the
evaluation of all relevant information and shall indicate the value of the
properties as of a date immediately prior to the announcement of the proposed
Roll-up Transaction. The appraisal shall assume an orderly liquidation of
properties over a 12-month period. The terms of the engagement of the
independent appraiser shall clearly state that the engagement is for our benefit
and the shareholders. A summary of the appraisal, indicating all material
assumptions underlying the appraisal, shall be included in a report to
shareholders in connection with any proposed Roll-up Transaction.
A "Roll-up Transaction" is a transaction involving the acquisition, merger,
conversion or consolidation, directly or indirectly, of the Wells REIT and the
issuance of securities of a Roll-up Entity. This term does not include:
. a transaction involving our securities that have been for at least 12
months listed on a national securities exchange or included for
quotation on Nasdaq; or
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. a transaction involving the conversion to corporate, trust, or
association form of only the Wells REIT if, as a consequence of the
transaction, there will be no significant adverse change in any of the
following: shareholder voting rights; the term of our existence;
compensation to Wells Capital; or our investment objectives.
In connection with a proposed Roll-up Transaction, the person sponsoring
the Roll-up Transaction must offer to shareholders who vote "no" on the proposal
the choice of:
(1) accepting the securities of a Roll-up Entity offered in the proposed
Roll-up Transaction; or
(2) one of the following:
(A) remaining as shareholders of the Wells REIT and preserving their
interests therein on the same terms and conditions as existed
previously, or
(B) receiving cash in an amount equal to the shareholder's pro rata
share of the appraised value of our net assets.
We are prohibited from participating in any proposed Roll-up Transaction:
. which would result in the shareholders having democracy rights in a
Roll-up Entity that are less than those provided in our bylaws and
described elsewhere in this prospectus, including rights with respect
to the election and removal of directors, annual reports, annual and
special meetings, amendment of our articles of incorporation, and
dissolution of the Wells REIT;
. which includes provisions that would operate to materially impede or
frustrate the accumulation of shares by any purchaser of the
securities of the Roll-up Entity, except to the minimum extent
necessary to preserve the tax status of the Roll-up Entity, or which
would limit the ability of an investor to exercise the voting rights
of its securities of the Roll-up Entity on the basis of the number of
shares held by that investor;
. in which investor's rights to access of records of the Roll-up Entity
will be less than those provided in the section of this prospectus
entitled "Description of Shares -- Meetings and Special Voting
Requirements;" or
. in which any of the costs of the Roll-up Transaction would be borne by
us if the Roll-up Transaction is not approved by the shareholders.
Business Combinations
Under Maryland Corporation Law, business combinations between a Maryland
corporation and an interested shareholder or the interested shareholder's
affiliate are prohibited for five years after the most recent date on which the
shareholder becomes an interested shareholder. For this purpose, the term
"business combinations" includes mergers, consolidations, share exchanges, asset
transfers and issuances or reclassifications of equity securities. An
"interested shareholder" is defined for this purpose as:
(1) any person who beneficially owns ten percent or more of the voting
power of the corporation's shares; or
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(2) an affiliate or associate of the corporation who, at any time within
the two-year period prior to the date in question, was the beneficial owner of
ten percent or more of the voting power of the then outstanding voting shares of
the corporation.
After the five-year prohibition, any business combination between the
corporation and an interested shareholder generally must be recommended by the
board of directors of the corporation and approved by the affirmative vote of at
least:
(1) 80% of the votes entitled to be cast by holders of outstanding voting
shares of the corporation; and
(2) two-thirds of the votes entitled to be cast by holders of voting
shares of the corporation other than shares held by the interested shareholder
or its affiliate with whom the business combination is to be effected, or held
by an affiliate or associate of the interested shareholder voting together as a
single voting group.
These super-majority vote requirements do not apply if the corporation's
common shareholders receive a minimum price, as defined under Maryland
Corporation Law, for their shares in the form of cash or other consideration in
the same form as previously paid by the interested shareholder for its shares.
None of these provisions of the Maryland Corporation Law will apply, however, to
business combinations that are approved or exempted by the board of directors of
the corporation prior to the time that the interested shareholder becomes an
interested shareholder.
The business combination statute may discourage others from trying to
acquire control of us and increase the difficulty of consummating any offer.
Control Share Acquisitions
Maryland Corporation Law provides that control shares of a Maryland
corporation acquired in a control share acquisition have no voting rights except
to the extent approved by a vote of two-thirds of the votes entitled to be cast
on the matter. Shares owned by the acquiror, or by officers or directors who
are employees of the corporation are not entitled to vote on the matter. As
permitted by Maryland Corporation Law, we have provided in our bylaws that the
control share provisions of Maryland Corporation Law will not apply to
transactions involving the Wells REIT, but the board of directors retains the
discretion to change this provision in the future.
"Control shares" are voting shares which, if aggregated with all other
shares owned by the acquiror or with respect to which the acquiror has the right
to vote or to direct the voting of, other than solely by virtue of revocable
proxy, would entitle the acquiror to exercise voting power in electing directors
within one of the following ranges of voting powers:
. one-fifth or more but less than one-third;
. one-third or more but less than a majority; or
. a majority or more of all voting power.
Control shares do not include shares the acquiring person is then entitled
to vote as a result of having previously obtained shareholder approval.
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Except as otherwise specified in the statute, a "control share acquisition"
means the acquisition of control shares.
Once a person who has made or proposes to make a control share acquisition
has undertaken to pay expenses and has satisfied other required conditions, the
person may compel the board of directors to call a special meeting of
shareholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the corporation may itself
present the question at any shareholders meeting.
If voting rights are not approved for the control shares at the meeting or
if the acquiring person does not deliver an "acquiring person statement" for the
control shares as required by the statute, the corporation may redeem any or all
of the control shares for their fair value, except for control shares for which
voting rights have previously been approved. Fair value is to be determined for
this purpose without regard to the absence of voting rights for the control
shares, and is to be determined as of the date of the last control share
acquisition or of any meeting of shareholders at which the voting rights for
control shares are considered and not approved.
If voting rights for control shares are approved at a shareholders meeting
and the acquiror becomes entitled to vote a majority of the shares entitled to
vote, all other shareholders may exercise appraisal rights. The fair value of
the shares as determined for purposes of these appraisal rights may not be less
than the highest price per share paid in the control share acquisition. Some of
the limitations and restrictions otherwise applicable to the exercise of
dissenters' rights do not apply in the context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the corporation is a party to the
transaction or to acquisitions approved or exempted by the articles of
incorporation or bylaws of the corporation.
The Operating Partnership Agreement
General
Wells Operating Partnership, L.P. (Wells OP) was formed in January 1998 to
acquire, own and operate properties on our behalf. It is considered to be an
Umbrella Partnership Real Estate Investment Trust (UPREIT), which structure is
utilized generally to provide for the acquisition of real property from owners
who desire to defer taxable gain otherwise to be recognized by them upon the
disposition of their property. Such owners may also desire to achieve diversity
in their investment and other benefits afforded to owners of stock in a REIT.
For purposes of satisfying the asset and income tests for qualification as a
REIT for tax purposes, the REIT's proportionate share of the assets and income
of an UPREIT, such as Wells OP, will be deemed to be assets and income of the
REIT.
The property owner's goals are accomplished because a property owner may
contribute property to an UPREIT in exchange for limited partnership units on a
tax-free basis. Further, Wells OP is structured to make distributions with
respect to limited partnership units which are equivalent to the dividend
distributions made to shareholders of the Wells REIT. Finally, a limited partner
in Wells OP may later exchange his limited partnership units in Wells OP for
shares in the Wells REIT (in a taxable transaction) and, if our shares are then
listed, achieve liquidity for his investment.
Substantially all of our assets are held by Wells OP, and we intend to make
future acquisitions of real properties using the UPREIT structure. The Wells
REIT is the sole general partner of Wells OP and,
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as of October 1, 1999, owned an approximately 99% equity percentage interest in
Wells OP. Wells Capital, our advisor, has contributed $200,000 to Wells OP and
is currently the only limited partner owning the other approximately 1% equity
percentage interest in Wells OP. As the sole general partner of Wells OP, we
have the exclusive power to manage and conduct the business of Wells OP.
The following is a summary of certain provisions of the partnership
agreement of Wells OP. This summary is not complete and is qualified by the
specific language in the partnership agreement. You should refer to the
partnership agreement, itself, which we have filed as an exhibit to the
registration statement, for more detail.
Capital Contributions
As we accept subscriptions for shares, we will transfer substantially all
of the net proceeds of the offering to Wells OP as a capital contribution;
however, we will be deemed to have made capital contributions in the amount of
the gross offering proceeds received from investors. Wells OP will be deemed to
have simultaneously paid the selling commissions and other costs associated with
the offering. If Wells OP requires additional funds at any time in excess of
capital contributions made by us and Wells Capital or from borrowing, we may
borrow funds from a financial institution or other lender and lend such funds to
Wells OP on the same terms and conditions as are applicable to our borrowing of
such funds. In addition, we are authorized to cause Wells OP to issue
partnership interests for less than fair market value if we conclude in good
faith that such issuance is in the best interest of Wells OP and the Wells REIT.
Operations
The partnership agreement requires that Wells OP be operated in a manner
that will enable the Wells REIT to (1) satisfy the requirements for being
classified as a REIT for tax purposes, (2) avoid any federal income or excise
tax liability, and (3) ensure that Wells OP will not be classified as a
"publicly traded partnership" for purposes of Section 7704 of the Internal
Revenue Code, which classification could result in Wells OP being taxed as a
corporation, rather than as a partnership. (See "Federal Income Tax
Considerations - Tax Aspects of the Operating Partnership -Classification as a
Partnership.")
The partnership agreement provides that Wells OP will distribute cash flow
from operations to the limited partners of Wells OP in accordance with their
relative percentage interests on at least a quarterly basis in amounts
determined by the Wells REIT as general partner such that a holder of one unit
of limited partnership interest in Wells OP will receive the same amount of
annual cash flow distributions from Wells OP as the amount of annual dividends
paid to the holder of one of our shares. Remaining cash from operations will be
distributed to the Wells REIT as the general partner to enable us to make
dividend distributions to our shareholders.
Similarly, the partnership agreement of Wells OP provides that taxable
income is allocated to the limited partners of Wells OP in accordance with their
relative percentage interests such that a holder of one unit of limited
partnership interest in Wells OP will be allocated taxable income for each
taxable year in an amount equal to the amount of taxable income to be recognized
by a holder of one of our shares, subject to compliance with the provisions of
Sections 704(b) and 704(c) of the Internal Revenue Code and corresponding
Treasury Regulations. Losses, if any, will generally be allocated among the
partners in accordance with their respective percentage interests in Wells OP.
Upon the liquidation of Wells OP, after payment of debts and obligations,
any remaining assets of Wells OP will be distributed to partners with positive
capital accounts in accordance with their respective positive capital account
balances. If the Wells REIT were to have a negative balance in its capital
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account following a liquidation, it would be obligated to contribute cash to
Wells OP equal to such negative balance for distribution to other partners, if
any, having positive balances in their capital accounts.
In addition to the administrative and operating costs and expenses incurred
by Wells OP in acquiring and operating real properties, Wells OP will pay all
administrative costs and expenses of the Wells REIT and such expenses will be
treated as expenses of Wells OP. Such expenses will include:
. all expenses relating to the formation and continuity of existence of the
Wells REIT;
. all expenses relating to the public offering and registration of securities
by the Wells REIT;
. all expenses associated with the preparation and filing of any periodic
reports by the Wells REIT under federal, state or local laws or
regulations;
. all expenses associated with compliance by the Wells REIT with applicable
laws, rules and regulations; and
. all other operating or administrative costs of the Wells REIT incurred in
the ordinary course of its business on behalf of Wells OP.
Exchange Rights
The limited partners of Wells OP, including Wells Capital, have the right
to cause Wells OP to redeem their limited partnership units for cash equal to
the value of an equivalent number of our shares, or, at our option, we may
purchase their limited partnership units by issuing one share of the Wells REIT
for each limited partnership unit redeemed. These exchange rights may not be
exercised, however, if and to the extent that the delivery of shares upon such
exercise would (1) result in any person owning shares in excess of our ownership
limits, (2) result in shares being owned by fewer than 100 persons, (3) result
in the Wells REIT being "closely held" within the meaning of Section 856(h) of
the Internal Revenue Code, (4) cause the Wells REIT to own 10% or more of the
ownership interests in a tenant within the meaning of Section 856(d)(2)(B) of
the Internal Revenue Code, or (5) cause the acquisition of shares by a redeemed
limited partner to be "integrated" with any other distribution of our shares for
purposes of complying with the Securities Act.
Subject to the foregoing, limited partners may exercise their exchange
rights at any time after one year following the date of issuance of their
limited partnership units; provided, however, that a limited partner may not
deliver more than two exchange notices each calendar year and may not exercise
an exchange right for less than 1,000 limited partnership units, unless such
limited partner holds less than 1,000 units, in which case, he must exercise his
exchange right for all of his units.
Transferability of Interests
The Wells REIT may not (1) voluntarily withdraw as the general partner of
Wells OP, (2) engage in any merger, consolidation or other business combination,
or (3) transfer its general partnership interest in Wells OP (except to a
wholly-owned subsidiary), unless the transaction in which such withdrawal,
business combination or transfer occurs results in the limited partners
receiving or having the right to receive an amount of cash, securities or other
property equal in value to the amount they would have received if they had
exercised their exchange rights immediately prior to such transaction or unless,
in the case of a merger or other business combination, the successor entity
contributes substantially all of its assets to Wells OP in return for an
interest in Wells OP and agrees to assume all obligations of the general
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partner of Wells OP. The Wells REIT may also enter into a business combination
or we may transfer our general partnership interest upon the receipt of the
consent of a majority-in-interest of the limited partners of Wells OP, other
than Wells Capital. With certain exceptions, the limited partners may not
transfer their interests in Wells OP, in whole or in part, without the written
consent of the Wells REIT as general partner. In addition, Wells Capital may not
transfer its interest in Wells OP as long as it is acting as the advisor to the
Wells REIT, except pursuant to the exercise of its right to exchange limited
partnership units for Wells REIT shares, in which case similar restrictions on
transfer will apply to the REIT shares received by Wells Capital .
Plan of Distribution
We are offering a maximum of 20,000,000 shares to the public through Wells
Investment Securities, Inc., the Dealer Manager, a registered broker-dealer
affiliated with the advisor. (See "Conflicts of Interest.") The shares are
being offered at a price of $10.00 per share on a "best efforts" basis, which
means generally that the Dealer Manager will be required to use only its best
efforts to sell the shares and it has no firm commitment or obligation to
purchase any of the shares. We are also offering 2,200,000 shares for sale
pursuant to our dividend reinvestment plan at a price of $10 per share. An
additional 800,000 shares are reserved for issuance upon exercise of soliciting
dealer warrants, which are granted to participating broker-dealers based upon
the number of shares they sell. Therefore, a total of 23,000,000 shares are
being registered in this offering.
Except as provided below, the Dealer Manager will receive selling
commissions of 7% of the gross offering proceeds. The Dealer Manager will also
receive 2.5% of the gross offering proceeds in the form of a dealer manager fee
as compensation for acting as the Dealer Manager and for expenses incurred in
connection with coordinating sales efforts, training of personnel and generally
performing "wholesaling" functions. We will not pay referral or similar fees to
any accountants, attorneys or other persons in connection with the distribution
of the shares. Shareholders who elect to participate in the dividend
reinvestment plan will be charged selling commissions and dealer manager fees on
shares purchased pursuant to the dividend reinvestment plan on the same basis as
shareholders purchasing shares other than pursuant to the dividend reinvestment
plan.
We will also award to participating broker-dealers one soliciting dealer
warrant for every 25 shares they sell during the offering period. The holder of
a soliciting dealer warrant will be entitled to purchase one share from the
Wells REIT at a price of $12 per share during the period beginning on the first
anniversary of the effective date of this offering and ending five years after
the effective date of this offering. Subject to certain exceptions, a
soliciting dealer warrant may not be transferred, assigned, pledged or
hypothecated for a period of one year following the effective date of this
offering. The shares issuable upon exercise of the soliciting dealer warrants
are being registered as part of this offering. For the life of the soliciting
dealer warrants, participating broker-dealers are given the opportunity to
profit from a rise in the market price for the common stock without assuming the
risk of ownership, with a resulting dilution in the interest of other
shareholders upon exercise of such warrants. In addition, holders of the
soliciting dealer warrants would be expected to exercise such warrants at a time
when we could obtain needed capital by offering new securities on terms more
favorable than those provided by the soliciting dealer warrants.
The Dealer Manager may authorize certain other broker-dealers who are
members of the NASD to sell shares. In the event of the sale of shares by such
other broker-dealers, the Dealer Manager may reallow its commissions in the
amount of up to 7% of the gross offering proceeds to such participating broker-
dealers. In addition, the Dealer Manager, in its sole discretion, may reallow
to broker-dealers participating in the offering a portion of its dealer manager
fee in the aggregate amount of up to 1.5% of
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gross offering proceeds to be paid to such participating broker-dealer as
marketing fees and as reimbursement of due diligence expenses, based on such
factors as the number of shares sold by such participating broker-dealer, the
assistance of such participating broker-dealer in marketing the offering and
bona fide conference fees incurred.
We anticipate that the total underwriting compensation, including sales
commissions, the dealer manager fee and underwriting expense reimbursements,
will not exceed 9.5% of gross offering proceeds, except for the soliciting
dealer warrants described above.
We have agreed to indemnify the participating broker-dealers, including the
Dealer Manager, against certain liabilities arising under the Securities Act of
1933, as amended.
The broker-dealers participating in the offering of our shares are not
obligated to obtain any subscriptions on our behalf, and we cannot assure you
that any shares will be sold.
Our executive officers and directors, as well as officers and employees of
Wells Capital or other affiliates, may purchase shares offered in this offering
at a discount. The purchase price for such shares shall be $8.90 per share
reflecting the fact that the acquisition and advisory fees relating to such
shares will be reduced by $0.15 per share and selling commissions in the amount
of $0.70 per share and dealer manager fees in the amount of $0.25 per share will
not be payable in connection with such sales. The net offering proceeds we
receive will not be affected by such sales of shares at a discount. Wells
Capital and its affiliates shall be expected to hold their shares purchased as
shareholders for investment and not with a view towards distribution. In
addition, shares purchased by Wells Capital or its affiliates shall not be
entitled to vote on any matter presented to the shareholders for a vote.
You should pay for your shares by check payable to "Bank of America, N.A.,
as Escrow Agent." Subscriptions will be effective only upon our acceptance, and
we reserve the right to reject any subscription in whole or in part. We may not
accept a subscription for shares until at least five business days after the
date you receive this prospectus. You will receive a confirmation of your
purchase. Except for purchases pursuant to our dividend reinvestment plan or
reinvestment plans of other public real estate programs, all accepted
subscriptions will be for whole shares and for not less than 100 shares
($1,000). (See "Suitability Standards.") Except in Maine, Minnesota, Nebraska
and Washington, investors who have satisfied the minimum purchase requirement
and have purchased units or shares in Wells programs or units or shares in other
public real estate programs may purchase less than the minimum number of shares
discussed above, provided that such investors purchase a minimum of 2.5 shares
($25). After investors have satisfied the minimum purchase requirement, minimum
additional purchases must be in increments of at least 2.5 shares ($25), except
for purchases made pursuant to our dividend reinvestment plan or reinvestment
plans of other public real estate programs.
We will place the subscription proceeds in an interest-bearing account with
Bank of America, N.A., Atlanta, Georgia. Subscription proceeds held in the
escrow account will be invested in securities backed by the United States
government or bank money-market accounts or certificates of deposit of national
or state banks that have deposits insured by the Federal Deposit Insurance
Corporation, including certificates of deposit of any bank acting as depository
or custodian for any such funds, as directed by our advisor. Subscribers may
not withdraw funds from the escrow account. We will withdraw funds from the
escrow account periodically for the acquisition of real estate properties or the
payment of fees and expenses. We generally admit shareholders to the Wells REIT
on a daily basis.
Investors who desire to establish an IRA for purposes of investing in
shares may do so by having Wells Advisors, Inc., a qualified non-bank IRA
custodian affiliated with the advisor, act as their IRA custodian. In the event
that an IRA is established having Wells Advisors, Inc. as the IRA custodian,
the
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authority of Wells Advisors, Inc. will be limited to holding the shares on
behalf of the beneficiary of the IRA and making distributions or reinvestments
in shares solely at the discretion of the beneficiary of the IRA. Wells
Advisors, Inc. will not have the authority to vote any of the shares held in an
IRA except strictly in accordance with the written instructions of the
beneficiary of the IRA.
The offering of shares will terminate on or before December 19, 2001.
However, we reserve the right to terminate this offering at any time prior to
such termination date.
The proceeds of this offering will be received and held in trust for the
benefit of purchasers of shares to be used only for the purposes set forth in
the "Estimated Use of Proceeds" section. Subscriptions will be accepted or
rejected within 30 days of receipt by the Wells REIT, and if rejected, all funds
shall be returned to the rejected subscribers within ten business days.
We may sell shares to retirement plans of broker-dealers participating in
the offering, to broker-dealers in their individual capacities, to IRAs and
qualified plans of their registered representatives or to any one of their
registered representatives in their individual capacities for 93% of the public
offering price in consideration of the services rendered by such broker-dealers
and registered representatives in the offering. The net proceeds to the Wells
REIT from such sales will be identical to net proceeds we receive from other
sales of shares.
In connection with sales of 25,000 or more shares ($250,000) to a
"purchaser" as defined below, investors may agree with their registered
representatives to reduce the amount of selling commissions payable to
participating broker-dealers. Such reduction will be credited to the purchaser
by reducing the total purchase price payable by such purchaser. The following
table illustrates the various discount levels:
<TABLE>
<CAPTION>
Dollar Net
Volume Sales Commissions Purchase Net
of Shares ----------------- Price Proceeds
Purchased Percent Per Share Per Share Per Share
- --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C>
Under $250,000 7.0% $0.7000 $10.000 $9.30
$250,000-$649,999 6.0% $0.5936 $9.8936 $9.30
$650,000-$999,999 3.0% $0.2876 $9.5876 $9.30
$1,000,000-$1,999,999 1.0% $0.0939 $9.3939 $9.30
$2,000,000 and Over 0.5% $0.0467 $9.3467 $9.30
</TABLE>
For example, if an investor purchases 100,000 shares, he could pay as
little as $939,390 rather than $1,000,000 for the shares in which event the
commission on the sale of such shares would be $9,390 ($0.0939 per share), and
we would receive net proceeds of $930,000 ($9.30 per share). The net proceeds
to the Wells REIT will not be affected by volume discounts.
Because all investors will be deemed to have contributed the same amount
per share to the Wells REIT for purposes of declaring and paying dividends, an
investor qualifying for a volume discount will receive a higher return on his
investment than investors who do not qualify for such discount.
Subscriptions may be combined for the purpose of determining the volume
discounts in the case of subscriptions made by any "purchaser," as that term is
defined below, provided all such shares are purchased through the same broker-
dealer. The volume discount shall be prorated among the separate subscribers
considered to be a single "purchaser." Any request to combine more than one
subscription
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must be made in writing, and must set forth the basis for such
request. Any such request will be subject to verification by the advisor that
all of such subscriptions were made by a single "purchaser."
For the purposes of such volume discounts, the term "purchaser" includes:
. an individual, his or her spouse and their children under the age of
21 who purchase the units for his, her or their own accounts;
. a corporation, partnership, association, joint-stock company, trust
fund or any organized group of persons, whether incorporated or not;
. an employees' trust, pension, profit sharing or other employee benefit
plan qualified under Section 401(a) of the Internal Revenue Code; and
. all commingled trust funds maintained by a given bank.
Notwithstanding the above, in connection with volume sales made to investors in
the Wells REIT, the advisor may, in its sole discretion, waive the "purchaser"
requirements and aggregate subscriptions, including subscriptions to public real
estate programs previously sponsored by the advisor, or its affiliates, as part
of a combined order for purposes of determining the number of shares purchased,
provided that any aggregate group of subscriptions must be received from the
same broker-dealer, including the Dealer Manager. Any such reduction in selling
commission will be prorated among the separate subscribers except that, in the
case of purchases through the Dealer Manager, the Dealer Manager may allocate
such reduction among separate subscribers considered to be a single "purchaser"
as it deems appropriate. An investor may reduce the amount of his purchase
price to the net amount shown in the foregoing table, if applicable. If such
investor does not reduce the purchase price, the excess amount submitted over
the discounted purchase price shall be returned to the actual separate
subscribers for shares. Except as provided in this paragraph, separate
subscriptions will not be cumulated, combined or aggregated.
In addition, in order to encourage purchases in amounts of 500,000 or more
shares, a potential purchaser who proposes to purchase at least 500,000 shares
may agree with the advisor and the Dealer Manager to have the acquisition and
advisory fees payable to the advisor with respect to the sale of such shares
reduced to 0.5%, to have the dealer manager fee payable to the Dealer Manager
with respect to the sale of such shares reduced to 0.5%, and to have the selling
commissions payable with respect to the sale of such shares reduced to 0.5%, in
which event the aggregate fees payable with respect to the sale of such shares
would be reduced by $1.10 per share, and the purchaser of such shares would be
required to pay a total of $8.90 per share purchased, rather than $10.00 per
share. The net proceeds to the Wells REIT would not be affected by such fee
reductions. Of the $8.90 paid per share, we anticipate that approximately $8.40
per share or approximately 94.4% will be used to acquire properties and pay
required acquisition expenses relating to the acquisition of properties. All
such sales must be made through registered broker-dealers.
California residents should be aware that volume discounts will not be
available in connection with the sale of shares made to California residents to
the extent such discounts do not comply with the provisions of Rule 260.140.51
adopted pursuant to the California Corporate Securities Law of 1968. Pursuant
to this Rule, volume discounts can be made available to California residents
only in accordance with the following conditions:
. there can be no variance in the net proceeds to the Wells REIT from
the sale of the shares to different purchasers of the same
offering;
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. all purchasers of the shares must be informed of the availability of
quantity discounts;
. the same volume discounts must be allowed to all purchasers of shares
which are part of the offering;
. the minimum amount of shares as to which volume discounts are allowed
cannot be less than $10,000;
. the variance in the price of the shares must result solely from a
different range of commissions, and all discounts allowed must be
based on a uniform scale of commissions; and
. no discounts are allowed to any group of purchasers.
Accordingly, volume discounts for California residents will be available in
accordance with the foregoing table of uniform discount levels based on dollar
volume of shares purchased, but no discounts are allowed to any group of
purchasers, and no subscriptions may be aggregated as part of a combined order
for purposes of determining the number of shares purchased.
Investors who, in connection with their purchase of shares, have engaged
the services of a registered investment advisor with whom the investor has
agreed to pay a fee for investment advisory services in lieu of normal
commissions based on the volume of securities sold may agree with the
participating broker-dealer selling such shares and the Dealer Manager to reduce
the amount of selling commissions payable with respect to such sale to zero.
The net proceeds to the Wells REIT will not be affected by eliminating the
commissions payable in connection with sales to investors purchasing through
such investment advisors. All such sales must be made through registered
broker-dealers.
Neither the Dealer Manager nor its affiliates will directly or indirectly
compensate any person engaged as an investment advisor by a potential investor
as an inducement for such investment advisor to advise favorably for investment
in the Wells REIT.
In addition, subscribers for shares may agree with their participating
broker-dealers and the Dealer Manager to have selling commissions due with
respect to the purchase of their shares paid over a six year period pursuant to
a deferred commission arrangement. Shareholders electing the deferred
commission option will be required to pay a total of $9.40 per share purchased
upon subscription, rather than $10.00 per share, with respect to which $0.10 per
share will be payable as commissions due upon subscription. For the period of
six years following subscription, $0.10 per share will be deducted on an annual
basis from dividends or other cash distributions otherwise payable to the
shareholders and used by the Wells REIT to pay deferred commission obligations.
The net proceeds to the Wells REIT will not be affected by the election of the
deferred commission option. Under this arrangement, a shareholder electing the
deferred commission option will pay a 1% commission upon subscription, rather
than a 7% commission, and an amount equal to a 1% commission per year thereafter
for the next six years will be deducted from dividends or other cash
distributions otherwise payable to such shareholder and used by the Wells REIT
to satisfy commission obligations. The foregoing commission amounts may be
adjusted with approval of the Dealer Manager by application of the volume
discount provisions described previously.
Shareholders electing the deferred commission option who are subject to
federal income taxation will incur tax liability for dividends or other cash
distributions otherwise payable to them with respect to their shares even though
such dividends or other cash distributions will be withheld from such
shareholders and will instead be paid to third parties to satisfy commission
obligations.
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Investors who wish to elect the deferred commission option should make the
election on their Subscription Agreement Signature Page. Election of the
deferred commission option shall authorize the Wells REIT to withhold dividends
or other cash distributions otherwise payable to such shareholder for the
purpose of paying commissions due under the deferred commission option;
provided, however, that in no event may the Wells REIT withhold in excess of
$0.60 per share in the aggregate under the deferred commission option. Such
dividends or cash distributions otherwise payable to shareholders may be pledged
by the Wells REIT, the Dealer Manager, the advisor or their affiliates to secure
one or more loans, the proceeds of which would be used to satisfy sales
commission obligations.
In the event that listing of the shares occurs or is reasonably anticipated
to occur at any time prior to the satisfaction of our remaining commission
obligations, the remaining commissions due under the deferred commission option
may be accelerated by the Wells REIT. In such event, we shall provide notice of
such acceleration to shareholders who have elected the deferred commission
option. The amount of the remaining commissions due shall be deducted and paid
by the Wells REIT out of dividends or other cash distributions otherwise payable
to such shareholders during the time period prior to listing; provided that, in
no event may the Wells REIT withhold in excess of $0.60 per share in the
aggregate. To the extent that the distributions during such time period are
insufficient to satisfy the remaining commissions due, the obligation of Wells
REIT and our shareholders to make any further payments of deferred commissions
under the deferred commission option shall terminate, and participating broker-
dealers will not be entitled to receive any further portion of their deferred
commissions following listing of our shares.
Supplemental Sales Material
In addition to this prospectus, we may utilize certain sales material in
connection with the offering of the shares, although only when accompanied by or
preceded by the delivery of this prospectus. In certain jurisdictions, some or
all of such sales material may not be available. This material may include
information relating to this offering, the past performance of the advisor and
its affiliates, property brochures and articles and publications concerning real
estate. In addition, the sales material may contain certain quotes from various
publications without obtaining the consent of the author or the publication for
use of the quoted material in the sales material.
The offering of shares is made only by means of this prospectus. Although
the information contained in such sales material will not conflict with any of
the information contained in this prospectus, such material does not purport to
be complete, and should not be considered a part of this prospectus or the
registration statement of which this prospectus is a part, or as incorporated by
reference in this prospectus or said registration statement or as forming the
basis of the offering of the shares.
Legal Opinions
The legality of the shares being offered hereby has been passed upon for
the Wells REIT by Holland & Knight LLP (Counsel). The statements under the
caption "Federal Income Tax Consequences" as they relate to federal income tax
matters have been reviewed by such counsel, and counsel has opined as to certain
income tax matters relating to an investment in the Wells REIT. Counsel has
represented the advisor, as well as affiliates of the advisor, in other matters
and may continue to do so in the future. (See "Conflicts of Interest.")
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Experts
Audited Financial Statements
The financial statements of the Wells REIT as of December 31, 1998 and
1997, and for each of the years in the two year period ended December 31, 1998,
included in this prospectus and elsewhere in the registration statement, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included in this
prospectus in reliance upon the authority of said firm as experts in giving said
report.
The financial statements of Fund IX and X Associates as of December 31,
1997 and for the period from inception (March 20, 1997) to December 31, 1997,
included in this prospectus and elsewhere in the registration statement, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included in this
prospectus in reliance upon the authority of said firm as experts in giving said
report.
The Statements of Revenues over Certain Operating Expenses of the Iomega
Building for the year ended December 31, 1997; the Cort Furniture Building for
the year ended December 31, 1997; the Fairchild Building for the year ended
December 31, 1997; the Vanguard Cellular Building for the period from inception
(November 16, 1998) to December 31, 1998; the EYBL CarTex Building for the year
ended December 31, 1998; the Sprint Building for the year ended December 31,
1998; the Johnson Matthey Building for the year ended December 31, 1998; the
Videojet Building for the year ended December 31, 1998; and the Gartner Building
for the year ended December 31, 1998 , which are included in this prospectus and
elsewhere in the registration statement, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included in this prospectus in reliance upon the authority of
said firm as experts in giving said reports.
Unaudited Financial Statements
The interim financial statements of the Wells REIT as of September 30, 1999
and for the nine month periods ended September 30, 1999 and 1998, which are
included in this prospectus, have not been audited.
The interim financial statements of Fund IX and X Associates as of March
31, 1998 and for the three months ended March 31, 1998, which are included in
this prospectus, have not been audited.
The Statements of Revenues over Certain Operating Expenses of the Lucent
Building for the three months ended March 31, 1998; the Iomega Building for the
six months ended June 30, 1998; the Cort Furniture Building for the six months
ended June 30, 1998; the Fairchild Building for the six months ended June 30,
1998; the EYBL CarTex Building for the three months ended March 31, 1999; the
Sprint Building for the three months ended March 31, 1999; the Johnson Matthey
Building for the six months ended June 30, 1999; the Videojet Building for the
six months ended June 30, 1999; and the Gartner Building for the six months
ended June 30, 1999, which are included in this prospectus, have not been
audited.
The pro forma financial information for Wells Real Estate Investment Trust,
Inc. for the year ended December 31, 1998 and for the nine months ended
September 30, 1999, which are included in this prospectus, have not been
audited.
Additional Information
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We have filed with the Securities and Exchange Commission (Commission),
Washington, D.C., a registration statement under the Securities Act of 1933, as
amended, with respect to the shares offered pursuant to this prospectus. This
prospectus does not contain all the information set forth in the registration
statement and the exhibits related thereto filed with the Commission, reference
to which is hereby made. Copies of the registration statement and exhibits
related thereto, as well as periodic reports and information filed by the Wells
REIT, may be obtained upon payment of the fees prescribed by the Commission, or
may be examined at the offices of the Commission without charge, at:
. the public reference facilities in Washington, D.C. at Judiciary
Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549;
. the Northeast Regional Office in New York at 7 World Trade Center,
Suite 1300, New York, New York 10048; and
. the Midwest Regional Office in Chicago, Illinois at 500 West Madison
Street, Suite 1400, Chicago, Illinois 66661-2511.
The Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the Commission's website is
http://www.sec.gov.
Glossary
The following are definitions of certain terms used in this prospectus and
not otherwise defined in this prospectus:
"Dealer Manager" means Wells Investment Securities, Inc.
"IRA" means an individual retirement account established pursuant to
Section 408 or Section 408A of the Internal Revenue Code.
"NASAA Guidelines" means the Statement of Policy Regarding Real Estate
Investment Trusts of the North American Securities Administrators Association,
Inc., as revised and adopted on September 29, 1993.
"Property Manager" means Wells Management Company, Inc.
"UBTI" means unrelated business taxable income, as that term is defined in
Sections 511 through 514 of the Internal Revenue Code.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Wells Real Estate Investment Trust, Inc. and Subsidiary
Audited Financial Statements
----------------------------
Report of Independent Public Accountants 154
Consolidated Balance Sheets as of December 31, 1998 and
December 31, 1997 155
Consolidated Statement of Income for the year ended
December 31, 1998 156
Consolidated Statement of Shareholders' Equity for the
year ended December 31, 1998 157
Consolidated Statement of Cash Flows for the year ended
December 31, 1998 158
Notes to Consolidated Financial Statements 159
Interim (Unaudited) Financial Statements
----------------------------------------
Balance Sheets as of September 30, 1999 and December 31, 1998 176
Statements of Income for the three months ended September 30, 1999
and 1998, the nine months ended September 30, 1999 and the four
months ended September 30, 1998 177
Statements of Shareholders' Equity for the nine months ended
September 30, 1999 and the year ended December 31, 1998 178
Statements of Cash Flows for the nine months ended September 30, 1999
and the four months ended September 30, 1998 179
Condensed Notes to Financial Statements 180
Fund IX and X Associates
Report of Independent Public Accountants 190
Balance Sheets as of March 31, 1998 (Unaudited) and
December 31, 1997 (Audited) 191
Statements of Income (Loss) for the three months ended March 31,
1998 (Unaudited) and the period from inception (March 20, 1997)
to December 31, 1997 (Audited) 192
Statements of Partners' Capital for the three months ended March 31,
1998 (Unaudited) and the period from inception (March 20, 1997)
to December 31, 1997 (Audited) 193
Statements of Cash Flows for the three months ended March 31,
1998 (Unaudited) and the period from inception (March 20, 1997)
to December 31, 1997 (Audited) 194
Notes to Financial Statements 195
</TABLE>
151
<PAGE>
<TABLE>
<S> <C>
The Lucent Building
Statement of Revenues Over Certain Operating Expenses for the
three months ended March 31, 1998 (Unaudited) 199
Notes to Statement of Revenues Over Certain Operating Expenses for
the three months ended March 31, 1998 (Unaudited) 200
The Iomega Building
Report of Independent Public Accountants 201
Statement of Revenues Over Certain Operating Expenses for the
year ended December 31, 1997 (Audited) and for the six months
ended June 30, 1998 (Unaudited) 202
Notes to Statement of Revenues Over Certain Operating Expenses for
year ended December 31, 1997 (Audited) and for the six months ended
June 30, 1998 (Unaudited) 203
The Fairchild Building
Report of Independent Public Accountants 205
Statement of Revenues Over Certain Operating Expenses for the
year ended December 31, 1997 (Audited) and for the six months
ended June 30, 1998 (Unaudited) 206
Notes to Statement of Revenues Over Certain Operating Expenses for
year ended December 31, 1997 (Audited) and for the six months ended
June 30, 1998 (Unaudited) 207
The Cort Furniture Building
Report of Independent Public Accountants 209
Statement of Revenues Over Certain Operating Expenses for the
year ended December 31, 1997 (Audited) and for the six months
ended June 30, 1998 (Unaudited) 210
Notes to Statement of Revenues Over Certain Operating Expenses for
year ended December 31, 1997 (Audited) and for the six months ended
June 30, 1998 (Unaudited) 211
The Vanguard Cellular Building
Report of Independent Public Accountants 213
Statement of Revenues Over Certain Operating Expenses for the period
from Inception (November 16, 1998) to December 31, 1998 (Audited) 214
Notes to Statement of Revenues Over Certain Operating Expenses for the
period from Inception (November 16, 1998) to December 31, 1998 (Audited) 215
The EYBL CarTex Building
Report of Independent Public Accountants 217
Statement of Revenues Over Certain Operating Expenses for the
year ended December 31, 1998 (Audited) and for the three months
ended March 31, 1999 (Unaudited) 218
Notes to Statement of Revenues Over Certain Operating Expenses for
the year ended December 31, 1998 (Audited) and for the three months
ended March 31, 1999 (Unaudited) 219
</TABLE>
152
<PAGE>
<TABLE>
<S> <C>
The Sprint Building
Report of Independent Public Accountants 221
Statement of Revenues Over Certain Operating Expenses for the
year ended December 31, 1998 (Audited) and for the three months
ended March 31, 1999 (Unaudited) 222
Notes to Statement of Revenues Over Certain Operating Expenses for
the year ended December 31, 1998 (Audited) and for the three months
ended March 31, 1999 (Unaudited) 223
The Johnson Matthey Building
Report of Independent Public Accountants 225
Statement of Revenues Over Certain Operating Expenses for the
year ended December 31, 1998 (Audited) and for the six months
ended June 30, 1999 (Unaudited) 226
Notes to Statement of Revenues Over Certain Operating Expenses for
the year ended December 31, 1998 (Audited) and for the six months
ended June 30, 1999 (Unaudited) 227
The Videojet Building
Report of Independent Public Accountants 229
Statement of Revenues Over Certain Operating Expenses for the
year ended December 31, 1998 (Audited) and for the six months
ended June 30, 1999 (Unaudited) 230
Notes to Statement of Revenues Over Certain Operating Expenses for
the year ended December 31, 1998 (Audited) and for the six months
ended June 30, 1999 (Unaudited) 231
The Gartner Building
Report of Independent Public Accountants 233
Statement of Revenues Over Certain Operating Expenses for the
year ended December 31, 1998 (Audited) and for the six months
ended June 30, 1999 (Unaudited) 234
Notes to Statement of Revenues Over Certain Operating Expenses for
the year ended December 31, 1998 (Audited) and for the six months
ended June 30, 1999 (Unaudited) 235
Wells Real Estate Investment Trust, Inc.
Summary of Unaudited Pro Forma Financial Statements 237
Pro Forma Statement of Income for the year ended December 31, 1998 238
Pro Forma Statement of Income for the nine month period ended
September 30, 1999 240
</TABLE>
153
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wells Real Estate Investment Trust, Inc.:
We have audited the accompanying consolidated balance sheets of WELLS REAL
ESTATE INVESTMENT TRUST, INC. (a Maryland corporation) AND SUBSIDIARY as of
December 31, 1998 and 1997 and the related consolidated statements of income,
shareholders' equity, and cash flows for the year ended December 31, 1998.
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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wells Real Estate Investment
Trust, Inc. and subsidiary as of December 31, 1998 and 1997 and the results of
their operations and their cash flows for the year ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
January 27, 1999
154
<PAGE>
WELLS REAL ESTATE INVESTMENT TRUST, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------- -----------
<S> <C> <C>
REAL ESTATE ASSETS, at cost:
Land $ 1,520,834 $ 0
Building 20,076,845 0
------------- -----------
Total real estate assets 21,597,679 0
INVESTMENT IN JOINT VENTURES 11,568,677 0
CASH AND CASH EQUIVALENTS 7,979,403 201,000
DEFERRED OFFERING COSTS 548,729 289,073
DEFERRED PROJECT COSTS 335,421 0
DUE FROM AFFILIATES 262,345 0
PREPAID EXPENSES AND OTHER ASSETS 540,319 0
------------- -----------
Total assets $42,832,573 $490,073
------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 187,827 $ 0
Note payable 14,059,930 0
Shareholder distributions payable 408,176 0
Due to affiliate 554,953 289,073
------------- -----------
Total liabilities 15,210,886 289,073
------------- -----------
MINORITY INTEREST OF UNIT HOLDER IN OPERATING PARTNERSHIP
200,000 200,000
------------- -----------
SHAREHOLDERS' EQUITY:
Common shares, $.01 par value; 16,500,000 shares authorized, 3,154,136 and
100 shares issued and outstanding, respectively 31,541 1
Additional paid-in capital 27,056,112 999
Retained earnings 334,034 0
------------- -----------
Total shareholders' equity 27,421,687 1,000
------------- -----------
Total liabilities and shareholders' equity $42,832,573 $490,073
------------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
155
<PAGE>
WELLS REAL ESTATE INVESTMENT TRUST, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
REVENUES:
Rental income $ 20,994
Equity in income of joint ventures 263,315
Interest income 110,869
--------
395,178
--------
EXPENSES:
Operating costs, net of reimbursements 11,033
General and administrative 29,943
Legal and accounting 19,552
Computer costs 616
--------
61,144
--------
NET INCOME $334,034
========
EARNINGS PER SHARE:
Basic and diluted $ 0.40
========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
156
<PAGE>
WELLS REAL ESTATE INVESTMENT TRUST, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Retained Shareholders'
--------------------
Shares Amount Capital Earnings Equity
---------- --------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 100 $ 1 $ 999 $ 0 $ 1,000
Issuance of common stock 3,154,036 31,540 31,508,820 0 31,540,360
Net income 0 0 0 334,034 334,034
Distributions 0 0 (511,163) 0 (511,163)
Sales commissions 0 0 (2,996,334) 0 (2,996,334)
Other offering expenses 0 0 (946,210) 0 (946,210)
---------- --------- ------------- ----------- --------------
BALANCE, December 31, 1998 3,154,136 $31,541 $27,056,112 $334,034 $27,421,687
========== ========= ============= =========== ==============
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
157
<PAGE>
WELLS REAL ESTATE INVESTMENT TRUST, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 334,034
------------
Adjustments to reconcile net income to net cash used in operating activities:
Equity in income of joint ventures (263,315)
Changes in assets and liabilities:
Prepaid expenses and other assets (540,319)
Accounts payable and accrued expenses 187,827
Due to affiliates 6,224
------------
Total adjustments (609,583)
------------
Net cash used in operating activities (275,549)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate (21,299,071)
Investment in joint ventures (11,276,007)
Deferred project costs paid (1,103,913)
Distributions received from joint ventures 178,184
------------
Net cash used in investing activities (33,500,807)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable 14,059,930
Distributions (102,987)
Issuance of common stock 31,540,360
Sales commission paid (2,996,334)
Offering costs paid (946,210)
------------
Net cash provided by financing activities 41,554,759
------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,778,403
CASH AND CASH EQUIVALENTS, beginning of year 201,000
------------
CASH AND CASH EQUIVALENTS, end of year $ 7,979,403
============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES:
Deferred project costs applied to real estate assets $ 298,608
============
Deferred project costs contributed to joint ventures $ 469,884
============
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
158
<PAGE>
WELLS REAL ESTATE INVESTMENT TRUST, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Wells Real Estate Investment Trust, Inc. (the "Company") is a Maryland
corporation that qualifies as a real estate investment trust ("REIT"). The
Company is conducting an offering for the sale of a maximum of 15,000,000
(exclusive of 1,500,000 shares available pursuant to the Company's dividend
reinvestment plan) shares of common stock, $.01 par value per share, at a
price of $10 per share. During 1997, the Company sold 100 shares to Wells
Capital, Inc. (the "Advisor") at the proposed initial public offering price
of $10 per share. The Company will seek to acquire and operate commercial
properties, including, but not limited to, office buildings, shopping
centers, business and industrial parks, and other commercial and industrial
properties, including properties which are under construction, are newly
constructed, or have been constructed and have operating histories. All such
properties may be acquired, developed, and operated by the Company alone or
jointly with another party. The Company is likely to enter into one or more
joint ventures with affiliated entities for the acquisition of properties.
In connection with this, the Company may enter into joint ventures for the
acquisition of properties with prior or future real estate limited
partnership programs sponsored by the Advisor or its affiliates.
Substantially all of the Company's business is conducted through Wells
Operating Partnership, L.P. (the "Operating Partnership"), a Delaware limited
partnership. During 1997, the Operating Partnership issued 20,000 limited
partner units to the Advisor in exchange for $200,000. The Company is the
sole general partner in the Operating Partnership and possesses full legal
control and authority over the operations of the Operating Partnership;
consequently, the accompanying consolidated financial statements of the
Company include the amounts of the Operating Partnership.
The Company owns interests in several properties through a joint venture
among the Operating Partnership, Wells Real Estate Fund IX, L.P. ("Wells Fund
IX"), Wells Real Estate Fund X, L.P. ("Wells Fund X"), and Wells Real Estate
Fund XI, L.P. ("Wells Fund XI"). This joint venture is referred to as the
Fund IX, Fund X, Fund XI, and REIT Joint Venture ("Fund IX, X, XI, and REIT
Joint Venture"). In addition, the Company owns two properties through joint
ventures between the Operating Partnership and a joint venture between Wells
Fund X
159
<PAGE>
and Wells Fund XI, referred to as "Fund X and XI Associates." In addition,
the Operating Partnership directly owns an office building in Tampa, Florida.
Through its investment in the Fund IX, X, XI, and REIT Joint Venture, the
Company owns interests in the following properties: (i) a three-story office
building in Knoxville, Tennessee (the "ABB Building"), (ii) a two-story
office building in Louisville, Colorado (the "Ohmeda Building"), (iii) a
three-story office building in Broomfield, Colorado (the "360 Interlocken
Building"), (iv) a one-story warehouse facility in Ogden, Utah (the "Iomega
Building"), and (v) a one-story office building in Oklahoma City, Oklahoma
(the "Lucent Technologies Building").
The following properties are owned by the Operating Partnership through
investments in joint ventures with Fund X and XI Associates: (i) a one-story
office and warehouse building in Fountain Valley, California (the "Cort
Furniture Building") owned by Wells/Orange County Associates and (ii) a
warehouse and office building in Fremont, California (the "Fairchild
Building") owned by Wells/Fremont Associates.
Use of Estimates and Factors Affecting the Company
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires 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 financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
The carrying values of real estate are based on management's current intent
to hold the real estate assets as long-term investments. The success of the
Company's future operations and the ability to realize the investment in its
assets will be dependent on the Company's ability to maintain rental rates,
occupancy, and an appropriate level of operating expenses in future years.
Management believes that the steps it is taking will enable the Company to
realize its investment in its assets.
Real Estate Assets
Real estate assets held by the Company and joint ventures are stated at cost
less accumulated depreciation. Major improvements and betterments are
capitalized when they extend the useful life of the related asset. All
repair and maintenance are expensed as incurred.
Management continually monitors events and changes in circumstances which
could indicate that carrying amounts of real estate assets may not be
recoverable. When events or changes in circumstances are present which
indicate that the carrying amounts of real estate assets may not be
recoverable, management assesses the recoverability of real estate assets by
determining whether the carrying value of such real estate assets will be
recovered through the future cash flows expected from the use of the asset
and its eventual disposition. Management has determined that there has been
no impairment in the carrying
160
<PAGE>
value of real estate assets held by the Company or the joint ventures as of
December 31, 1998.
Depreciation of building and improvements is calculated using the straight-
line method over 25 years. Tenant improvements are amortized over the life
of the related lease or the life of the asset, whichever is shorter.
Investment in Joint Ventures
The Operating Partnership does not have control over the operations of the
joint ventures; however, it does exercise significant influence.
Accordingly, the Operating Partnership's investment in the joint ventures is
recorded using the equity method of accounting.
Revenue Recognition
All leases on real estate assets held by the Company or the joint ventures
are classified as operating leases, and the related rental income is
recognized on a straight-line basis over the terms of the respective leases.
Deferred Lease Acquisition Costs
Costs incurred to procure operating leases are capitalized and amortized on a
straight-line basis over the terms of the related leases.
Cash and Cash Equivalents
For the purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months
or less to be cash equivalents. Cash equivalents include cash and short-term
investments. Short-term investments are stated at cost, which approximates
fair value, and consist of investments in money market accounts.
2. DEFERRED PROJECT COSTS
The Company paid a percentage of shareholder contributions to the Advisor for
acquisition and advisory services. These payments, as stipulated in the
prospectus, can be up to 3.5% of shareholder contributions, subject to
certain overall limitations contained in the prospectus. Aggregate fees paid
through December 31, 1998 were $1,103,913 and amounted to 3.5% of
shareholders' contributions received. These fees are allocated to specific
properties as they are purchased or developed and are included in capitalized
assets of the joint ventures or real estate assets. Deferred project costs
at December 31, 1998 represent fees not yet applied to properties.
161
<PAGE>
3. DEFERRED OFFERING COSTS
Organization and offering expenses, to the extent they exceed 3% of gross
proceeds, will be paid by the Advisor and not by the Company. Organization
and offering expenses do not include sales or underwriting commissions but do
include such costs as legal and accounting fees, printing costs, and other
offering expenses.
As of December 31, 1998 and 1997, the Advisor had paid organization and
offering expenses related to the Company of $946,211 and $0, respectively.
4. RELATED-PARTY TRANSACTIONS
Due from affiliates at December 31, 1998 represents the Operating
Partnership's share of the cash to be distributed for the fourth quarter of
1998 as follows:
<TABLE>
<S> <C>
Fund IX, X, XI, and REIT Joint Venture $ 38,360
Wells/Orange County Associates 77,123
Wells/Fremont Associates 146,862
--------
$262,345
========
</TABLE>
The Company entered into a property management agreement with Wells
Management Company, Inc. ("Wells Management"), an affiliate of the Advisor.
In consideration for supervising the management and leasing of the Operating
Partnership's properties, the Operating Partnership will pay Wells Management
management and leasing fees equal to the lesser of (a) fees that would be
paid to a comparable outside firm, or (b) 4.5% of the gross revenues
generally paid over the life of the lease plus a separate competitive fee for
the one-time initial lease-up of newly constructed properties generally paid
in conjunction with the receipt of the first month's rent. In the case of
commercial properties which are leased on a long-term (ten or more years) net
lease basis, the maximum property management fee from such leases shall be 1%
of the gross revenues generally paid over the life of the leases except for a
one-time initial leasing fee of 3% of the gross revenues on each lease
payable over the first five full years of the original lease term.
The Operating Partnership's portion of the management and leasing fees and
lease acquisition costs paid to Wells Management by the joint ventures was
$5,673 for the year ended December 31, 1998.
The Advisor performs certain administrative services for the Operating
Partnership, such as accounting and other partnership administration, and
incurs the related expenses. Such expenses are allocated among the Operating
Partnership and the various Wells Real Estate Funds based on time spent on
each fund by individual administrative personnel. In the opinion of
management, such allocation is a reasonable basis for allocating such
expenses.
The Advisor is a general partner in various Wells Real Estate Funds. As
such, there may exist conflicts of interest where the Advisor, while serving
in the
162
<PAGE>
capacity as general partner for Wells Real Estate Funds, may be in
competition with the Operating Partnership for tenants in similar geographic
markets.
5. INVESTMENT IN JOINT VENTURES
The Operating Partnership's investment and percentage ownership in joint
ventures at December 31, 1998 is summarized as follows:
<TABLE>
<CAPTION>
Amount Percent
------ -------
<S> <C> <C>
Fund IX, X, XI, and REIT Joint Venture $ 1,443,378 4%
Wells/Orange County Associates 2,958,617 44
Wells/Fremont Associates 7,166,682 78
-----------
$11,568,677
===========
</TABLE>
The following is a roll forward of the Operating Partnership's investment in
joint ventures for the year ended December 31, 1998:
<TABLE>
<S> <C>
Investment in joint ventures, beginning of year $ 0
Equity in income of joint ventures 263,315
Contributions to joint ventures 11,745,890
Distributions from joint venture (440,528)
-----------
Investment in joint ventures, end of year $11,568,677
===========
</TABLE>
Fund IX, X, XI, and REIT Joint Venture
On March 20, 1997, Wells Fund IX and Wells Fund X entered into a joint
venture agreement. The joint venture, Fund IX and X Associates, was formed
to acquire, develop, operate, and sell real properties. On March 20, 1997,
Wells Fund IX contributed a 5.62-acre tract of real property in Knoxville,
Tennessee, and improvements thereon, known as the ABB Building, to the Fund
IX and X Associates joint venture. A 83,885-square-foot, three-story
building was constructed and commenced operations at the end of 1997.
On February 13, 1998, the joint venture purchased a two-story office
building, known as the Ohmeda Building, in Louisville, Colorado. On March
20, 1998, the joint venture purchased a three-story office building, known as
the 360 Interlocken Building, in Broomfield, Colorado. On June 11, 1998,
Fund IX and X Associates was amended and restated to admit Wells Fund XI and
the Operating Partnership. The joint venture was renamed the Fund IX, X, XI,
and REIT Joint Venture. On June 24, 1998, the new joint venture purchased a
one-story office building, known as the Lucent Technologies Building, in
Oklahoma City, Oklahoma. On April 1, 1998, Wells Fund X purchased a one-
story warehouse facility, known as the Iomega Building, in Ogden, Utah. On
July 1, 1998, Wells Fund X contributed the Iomega Building to the Fund IX, X,
XI, and REIT Joint Venture.
163
<PAGE>
Following are the financial statements for the Fund IX, X, XI, and REIT Joint
Venture:
The Fund IX, X, XI, and REIT Joint Venture
(A Georgia Joint Venture)
Balance Sheets
December 31, 1998 and 1997
Assets
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Real estate assets, at cost:
Land $ 6,454,213 $ 607,930
Building and improvements, less
accumulated depreciation of $1,253,156 in
1998 and $36,863 in 1997 30,686,845 6,445,300
Construction in progress 990 35,622
----------- ----------
Total real estate assets 37,142,048 7,088,852
Cash and cash equivalents 1,329,457 289,171
Accounts receivable 133,257 40,512
Prepaid expenses and other assets 441,128 329,310
----------- ----------
Total assets $39,045,890 $7,747,845
=========== ==========
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 409,737 $ 379,770
Due to affiliates 4,406 2,479
Partnership distributions payable 1,000,127 0
----------- ----------
Total liabilities 1,414,270 382,249
----------- ----------
Partners' capital:
Wells Real Estate Fund IX 14,960,100 3,702,793
Wells Real Estate Fund X 18,707,139 3,662,803
Wells Real Estate Fund XI 2,521,003 0
Wells Operating Partnership, L.P. 1,443,378 0
----------- ----------
Total partners' capital 37,631,620 7,365,596
----------- ----------
Total liabilities and partners' capital $39,045,890 $7,747,845
=========== ==========
</TABLE>
The Fund IX, X, XI, and REIT Joint Venture
164
<PAGE>
The Fund IX, X, XI, and REIT Joint Venture
(A Georgia Joint Venture)
Statements of Income (Loss)
for the Year Ended December 31, 1998 and
for the Period from Inception (March 20, 1997) to December 31, 1997
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Revenues:
Rental income $2,945,980 $ 28,512
Interest income 20,438 0
---------- --------
2,966,418 28,512
---------- --------
Expenses:
Depreciation 1,216,293 36,863
Management and leasing fees 226,643 1,711
Operating costs, net of reimbursements (140,506) 10,118
Property administration 34,821 0
Legal and accounting 15,351 0
---------- --------
1,352,602 48,692
---------- --------
Net income (loss) $1,613,816 $(20,180)
========== ========
Net income (loss) allocated to Wells Real Estate $ 692,116 $(10,145)
Fund IX ========== ========
Net income (loss) allocated to Wells Real Estate $ 787,481 $(10,035)
Fund X ========== ========
Net income allocated to Wells Real Estate Fund XI $ 85,352 $ 0
========== ========
Net income allocated to Wells Operating $ 48,867 $ 0
========== ========
Partnership, L.P.
</TABLE>
The Fund IX, X, XI, and REIT Joint Venture
(A Georgia Joint Venture)
Statements of Partners' Capital
for the Year Ended December 31, 1998 and
for the Period from Inception (March 20, 1997) to December 31, 1997
<TABLE>
<CAPTION>
Wells Real Wells Real Wells Real Wells Total
Estate Estate Estate Operating Partners'
Fund IX Fund X Fund XI Partnership, L.P. Capital
------------ ----------- ---------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 0 $ 0 $ 0 $ 0 $ 0
Net loss (10,145) (10,035) 0 0 (20,180)
Partnership contributions 3,712,938 3,672,838 0 0 7,385,776
----------- ----------- ---------- ------------ -----------
Balance, December 31, 1997 3,702,793 3,662,803 0 0 7,365,596
Net income 692,116 787,481 85,352 48,867 1,613,816
Partnership contributions 11,771,312 15,613,477 2,586,262 1,480,741 31,451,792
Partnership distributions (1,206,121) (1,356,622) (150,611) (86,230) (2,799,584)
----------- ----------- ---------- ------------ -----------
Balance, December 31, 1998 $14,960,100 $18,707,139 $2,521,003 $1,443,378 $37,631,620
=========== =========== ========== ============ ===========
</TABLE>
165
<PAGE>
The Fund IX, X, XI, and REIT Joint Venture
(A Georgia Joint Venture)
Statements of Cash Flows
for the Year Ended December 31, 1998 and
for the Period from Inception (March 20, 1997) to December 31, 1997
<TABLE>
<CAPTION>
1998 1997
-------------------- ----------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 1,613,816 $ (20,180)
-------------------- ----------------
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation 1,216,293 36,863
Changes in assets and liabilities:
Accounts receivable (92,745) (40,512)
Prepaid expenses and other assets (111,818) (329,310)
Accounts payable 29,967 379,770
Due to affiliates 1,927 2,479
-------------------- ----------------
Total adjustments 1,043,624 49,290
-------------------- ----------------
Net cash provided by operating activities 2,657,440 29,110
-------------------- ----------------
Cash flows from investing activities:
Investment in real estate (24,788,070) (5,715,847)
-------------------- ----------------
Cash flows from financing activities:
Distributions to joint venture partners (1,799,457) 0
Contributions received from partners 24,970,373 5,975,908
-------------------- ----------------
Net cash provided by financing activities 23,170,916 5,975,908
-------------------- ----------------
Net increase in cash and cash equivalents 1,040,286 289,171
Cash and cash equivalents, beginning of period 289,171 0
-------------------- ----------------
Cash and cash equivalents, end of year $ 1,329,457 $ 289,171
==================== ================
Supplemental disclosure of noncash activities:
Deferred project costs contributed $ 1,470,780 $ 318,981
Contribution of real estate assets $ 5,010,639 $ 1,090,887
==================== ================
</TABLE>
Wells/Orange County Associates
On July 27, 1998, the Operating Partnership entered into a joint venture
agreement with Wells Development Corporation, referred to as Wells/Orange
County Associates. On July 31, 1998, Wells/Orange County Associates acquired
a 52,000-square-foot warehouse and office building located in Fountain
Valley, California, known as the Cort Furniture Building.
On September 1, 1998, Fund X and XI Associates acquired Wells Development
Corporation's interest in Wells/Orange County Associates which resulted in
Fund X and XI Associates becoming a joint venture partner with the Operating
Partnership in the ownership of the Cort Furniture Building.
166
<PAGE>
Following are the financial statements for Wells/Orange County Associates:
Wells/Orange County Associates
(A Georgia Joint Venture)
Balance Sheet
December 31, 1998
Assets
<TABLE>
<CAPTION>
Real estate assets, at cost:
<S> <C>
Land $2,187,501
Building, less accumulated depreciation of $92,087 4,572,028
-----------
Total real estate assets 6,759,529
Cash and cash equivalents 180,895
Accounts receivable 13,123
-----------
Total assets $6,953,547
===========
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 1,550
Partnership distributions payable 176,614
-----------
Total liabilities 178,164
-----------
Partners' capital:
Wells Operating Partnership, L.P. 2,958,617
Fund X and XI Associates 3,816,766
-----------
Total partners' capital 6,775,383
-----------
Total liabilities and partners' capital $6,953,547
===========
</TABLE>
Wells/Orange County Associates
(A Georgia Joint Venture)
Statement of Income
for the Period From Inception (July 27, 1998)
to December 31, 1998
<TABLE>
<CAPTION>
Revenues:
<S> <C>
Rental income $331,477
Interest income 448
-----------
331,925
-----------
Expenses:
Depreciation 92,087
Management and leasing fees 12,734
Operating costs, net of reimbursements 2,288
Interest 29,472
Legal and accounting 3,930
-----------
140,511
-----------
Net income $191,414
===========
Net income allocated to Wells Operating Partnership, L.P. $ 91,978
===========
Net income allocated to Fund X and XI Associates $ 99,436
===========
</TABLE>
167
<PAGE>
Wells/Orange County Associates
(A Georgia Joint Venture)
Statement of Partners' Capital
for the Period From Inception (July 27, 1998)
to December 31, 1998
<TABLE>
<CAPTION>
Wells
Operating Fund X Total
Partnership, and XI Partners'
L.P. Associates Capital
------------------ ----------------- -----------------
<S> <C> <C> <C>
Balance, December 31, 1997 $ 0 $ 0 $ 0
Net income 91,978 99,436 191,414
Partnership contributions 2,991,074 3,863,272 6,854,346
Partnership distributions (124,435) (145,942) (270,377)
------------------ ----------------- -----------------
Balance, December 31, 1998 $2,958,617 $3,816,766 $6,775,383
================== ================= =================
</TABLE>
Wells/Orange County Associates
(A Georgia Joint Venture)
Statement of Cash Flows
for the Period From Inception (July 27, 1998)
to December 31, 1998
<TABLE>
<CAPTION>
Cash flows from operating activities:
<S> <C>
Net income $ 191,414
-----------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 92,087
Changes in assets and liabilities:
Accounts receivable (13,123)
Accounts payable 1,550
-----------
Total adjustments 80,514
-----------
Net cash provided by operating activities 271,928
-----------
Cash flows from investing activities:
Investment in real estate (6,563,700)
-----------
Cash flows from financing activities:
Issuance of note payable 4,875,000
Payment of note payable (4,875,000)
Distributions to partners (93,763)
Contributions received from partners 6,566,430
-----------
Net cash provided by financing activities 6,472,667
-----------
Net increase in cash and cash equivalents 180,895
Cash and cash equivalents, beginning of period 0
-----------
Cash and cash equivalents, end of year $ 180,895
===========
Supplemental disclosure of noncash investing activities:
Deferred project costs contributed $ 287,916
===========
</TABLE>
168
<PAGE>
Wells/Fremont Associates
On July 15, 1998, the Operating Partnership entered into a joint venture
agreement with Wells Development Corporation, referred to as Wells/Fremont
Associates. On July 21, 1998, Wells/Fremont Associates acquired a 58,424-
square-foot warehouse and office building located in Fremont, California,
known as the Fairchild Building.
On October 8, 1998, Fund X and XI Associates acquired Wells Development
Corporation's interest in Wells/Fremont Associates which resulted in Fund X
and XI Associates becoming a joint venture partner with the Operating
Partnership in the ownership of the Fairchild Building.
169
<PAGE>
Following are the financial statements for Wells/Fremont Associates:
Wells/Fremont Associates
(A Georgia Joint Venture)
Balance Sheet
December 31, 1998
Assets
<TABLE>
<CAPTION>
Real estate assets, at cost:
<S> <C>
Land $2,219,251
Building, less accumulated depreciation of $142,720 6,995,439
----------
Total real estate assets 9,214,690
Cash and cash equivalents 192,512
Accounts receivable 34,742
----------
Total assets $9,441,944
==========
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 3,565
Due to affiliate 2,052
Partnership distributions payable 189,490
----------
Total liabilities 195,107
----------
Partners' capital:
Wells Operating Partnership, L.P. 7,166,682
Fund X and XI Associates 2,080,155
----------
Total partners' capital 9,246,837
----------
Total liabilities and partners' capital $9,441,944
==========
</TABLE>
170
<PAGE>
Wells/Fremont Associates
(A Georgia Joint Venture)
Statement of Income
for the Period From Inception (July 15, 1998)
to December 31, 1998
<TABLE>
<CAPTION>
Revenues:
<S> <C>
Rental income $401,058
Interest income 3,896
--------
404,954
--------
Expenses:
Depreciation 142,720
Management and leasing fees 16,726
Operating costs, net of reimbursements 3,364
Interest 73,919
Legal and accounting 6,306
--------
243,035
--------
Net income $161,919
--------
Net income allocated to Wells Operating Partnership, L.P. $122,470
--------
Net income allocated to Fund X and XI Associates $ 39,449
--------
</TABLE>
Wells/Fremont Associates
(A Georgia Joint Venture)
Statement of Partners' Capital
for the Period From Inception (July 15, 1998)
to December 31, 1998
<TABLE>
<CAPTION>
Wells
Operating Fund X Total
Partnership, and XI Partners'
L.P. Associates Capital
-------------- ------------ -----------
<S> <C> <C> <C>
Balance, December 31, 1997 $ 0 $ 0 $ 0
Net income 122,470 39,449 161,919
Partner contributions 7,274,075 2,083,334 9,357,409
Partnership distributions (229,863) (42,628) (272,491)
-------------- ------------ -----------
Balance, December 31, 1998 $7,166,682 $2,080,155 $9,246,837
============== ============ ===========
</TABLE>
171
<PAGE>
Wells/Fremont Associates
(A Georgia Joint Venture)
Statement of Cash Flows
for the Period From Inception (July 15, 1998)
to December 31, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income $ 161,919
------------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 142,720
Changes in assets and liabilities:
Accounts receivable (34,742)
Accounts payable 3,565
Due to affiliate 2,052
------------
Total adjustments 113,595
------------
Net cash provided by operating activities 275,514
------------
Cash flows from investing activities:
Investment in real estate (8,983,111)
------------
Cash flows from financing activities:
Issuance of note payable 5,960,000
Payment of note payable (5,960,000)
Distributions to partners (83,001)
Contributions received from partners 8,983,110
------------
Net cash provided by financing activities 8,900,109
------------
Net increase in cash and cash equivalents 192,512
Cash and cash equivalents, beginning of period 0
------------
Cash and cash equivalents, end of year $ 192,512
============
Supplemental disclosure of noncash investing activities:
Deferred project costs contributed $ 374,299
============
</TABLE>
172
<PAGE>
6. INCOME TAX BASIS NET INCOME AND PARTNERS' CAPITAL
The Operating Partnership's income tax basis net income for the year ended
December 31, 1998 is calculated as follows:
<TABLE>
<S> <C>
Financial statement net income $334,034
Increase (decrease) in net income resulting from:
Depreciation expense for financial reporting purposes in excess of amounts
for income tax purposes 82,618
Rental income accrued for financial reporting purposes in excess of amounts
for income tax purposes (35,427)
Expenses capitalized for income tax purposes, deducted for financial
reporting purposes 1,634
-----------
Income tax basis net income $382,859
===========
The Operating Partnership's income tax basis partners' capital at December
31, 1998 is computed as follows:
Financial statement partners' capital $27,421,687
Increase (decrease) in partners' capital resulting from:
Depreciation expense for financial reporting purposes in excess of amounts
for income tax purposes 82,618
Capitalization of syndication costs for income tax purposes, which are
accounted for as cost of capital for financial reporting purposes 3,942,545
Accumulated rental income accrued for financial reporting purposes in
excess of amounts for income tax purposes (35,427)
Accumulated expenses capitalized for income tax purposes, deducted for
financial reporting purposes 1,634
Operating Partnership's distributions payable 408,176
-----------
Income tax basis partners' capital $31,821,233
============
</TABLE>
173
<PAGE>
7. RENTAL INCOME
The future minimum rental income due from the Operating Partnership's direct
investment in real estate or its respective ownership interest in the joint
ventures under noncancelable operating leases at December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Year ended December 31:
<S> <C>
1999 $ 3,056,108
2000 3,130,347
2001 3,229,087
2002 3,306,364
2003 3,332,111
Thereafter 12,865,333
------------
$28,919,350
============
</TABLE>
Two tenants contributed 47% and 35% of rental income, which is included in
equity in income of joint ventures for the year ended December 31, 1998. In
addition, one tenant will contribute 77% of future minimum rental income.
The future minimum rental income due the Fund IX, X, XI, and REIT Joint
Venture under noncancealable operating leases at December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Year ended December 31:
<S> <C>
1999 $ 3,689,498
2000 3,615,011
2001 3,542,714
2002 3,137,241
2003 3,196,100
Thereafter 8,225,566
------------
$25,406,130
============
</TABLE>
Three significant tenants contributed 31%, 26%, and 13% of rental income for
the year ended December 31, 1998. In addition, four significant tenants will
contribute 27%, 25%, 21%, and 15% of future minimum rental income.
The future minimum rental income due Wells/Orange County Associates under
noncancealable operating leases at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Year ended December 31:
<S> <C>
1999 $ 758,964
2000 758,964
2001 809,580
2002 834,888
2003 695,740
-----------
$3,858,136
===========
</TABLE>
One tenant contributed 100% of rental income for the year ended December 31,
1998 and will contribute 100% of future minimum rental income.
174
<PAGE>
The future minimum rental income due Wells/Fremont Associates under
noncancelable operating leases at December 31, 1998 is as follows:
<TABLE>
Year ended December 31:
<S> <C>
1999 $ 844,167
2000 869,492
2001 895,577
2002 922,444
2003 950,118
Thereafter 894,832
-----------
$5,376,630
===========
</TABLE>
One tenant contributed 100% of rental income for the year ended December 31,
1998 and will contribute 100% of future minimum rental income.
8. COMMITMENTS AND CONTINGENCIES
Management, after consultation with legal counsel, is not aware of any
significant litigation or claims against the Company, the Operating
Partnership, or the Advisor. In the normal course of business, the Company,
the Operating Partnership, or the Advisor may become subject to such
litigation or claims.
175
<PAGE>
WELLS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS:
Real estate, at cost:
Land $ 12,984,155 $ 1,520,834
Building improvements, less accumulated
depreciation of $1,036,003 in 1999 66,019,334 20,076,845
------------ -----------
Total real estate 79,003,489 21,597,679
Investments in joint ventures (Note 2) 29,617,140 11,568,677
Due from affiliates 546,602 262,345
Cash and cash equivalents 2,850,263 7,979,403
Deferred project costs (Note 3) 19,431 335,421
Deferred offering costs (Note 4) 749,369 548,729
Prepaid expenses and other assets 946,847 540,319
------------ -----------
Total assets $113,733,141 $42,832,573
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Accounts payable $ 513,993 $ 187,827
Notes payable (Note 6) 16,926,057 14,059,930
Due to affiliates (Note 5) 838,493 554,953
Dividends payable 1,645,122 408,176
Minority interest of unit holder in operating
partnership 200,000 200,000
------------ -----------
Total liabilities 20,123,665 15,410,886
------------ -----------
COMMITMENT AND CONTINGENT
LIABILITIES (Note 7)
Shareholders' equity:
Common shares, $.01 par value;
40,000,000 shares authorised,
10,846,930 shares issued and
outstanding at September 30,1999
and 3,154,136 shares issued and
outstanding at December 31, 1998 108,469 31,541
Additional paid-in capital 90,894,541 27,056,112
Retained earnings 2,606,466 334,034
------------ -----------
Total shareholders' equity 93,609,476 27,421,687
------------ -----------
Total liabilities and shareholders'
equity $113,733,141 $42,832,573
============ ===========
</TABLE>
See accompanying condensed notes to financial statements.
176
<PAGE>
WELLS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine Months Four Months
Three Months Ended Ended Ended
----------------------------- ----------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
REVENUES:
<S> <C> <C> <C> <C>
Rental income $1,227,144 $ 0 $2,806,158 $ 0
Equity in income of joint ventures 384,887 68,683 783,065 75,314
Interest income 191,321 4,609 407,067 8,895
---------- ------- ---------- -------
1,803,352 73,292 3,996,290 84,209
---------- ------- ---------- -------
EXPENSES:
Operating costs, net of reimbursements (11,632) 0 359,112 0
Management and leasing fees 68,823 0 150,908 0
Depreciation 423,760 0 1,036,003 0
Administrative costs 21,076 10,846 91,016 10,864
Legal and accounting 22,187 318 78,637 318
Computer costs 2,119 0 8,182 0
---------- ------- ---------- -------
526,333 11,164 1,723,858 11,182
---------- ------- ---------- -------
NET INCOME $1,277,019 $62,128 $2,272,432 $73,027
---------- ------- ---------- -------
BASIC AND DILUTED EARNINGS PER
SHARE $ 0.18 $ 0.06 $ 0.37 $ 0.06
---------- ------- ---------- -------
</TABLE>
See accompanying condensed notes to financial statements.
177
<PAGE>
WELLS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
STATEMENTS OF SHAREHOLDERS' EQUITY
THE NINE MONTHS ENDED SEPTEMBER 30, 1999
AND FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Total
Additional Paid- Retained Shareholders'
Shares Amounts In Capital Earnings Equity
----------- -------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 100 $ 1 $ 999 $ 0 $ 1,000
Issuance of common stock 3,154,036 31,540 31,508,820 0 31,540,360
Net income 0 0 0 334,034 334,034
Dividends 0 0 (511,163) 0 (511,163)
Sales commissions 0 0 (2,996,334) 0 (2,996,334)
Other offering expenses 0 0 (946,210) 0 (946,210)
----------- -------- ----------- ---------- -----------
BALANCE, December 31, 1998 3,154,136 31,541 27,056,112 334,034 27,421,687
Issuance of common stock 7,692,794 76,928 76,851,016 0 76,927,944
Net income 0 0 0 2,272,432 2,272,432
Dividends 0 0 (3,396,594) 0 (3,396,594)
Sales commissions 0 0 (7,308,155) 0 (7,308,155)
Other offering expenses 0 0 (2,307,838) 0 (2,307,838)
----------- -------- ----------- ---------- -----------
BALANCE, September 30, 1999 10,846,930 $108,469 $90,894,541 $2,606,466 $93,609,476
=========== ======== =========== ========== ===========
</TABLE>
See accompanying condensed notes to financial statements.
178
<PAGE>
WELLS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Four Months
Ended Ended
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,272,432 $ 73,027
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 1,036,003 0
Equity in income of joint ventures (783,065) (75,314)
Changes in assets and liabilities:
Accounts payable 326,166 0
Increase in prepaid expenses and other assets (661,335) (11,250)
Increase due to affiliates 82,901 33,544
----------- ----------
Net cash provided by operating activities 2,273,102 20,007
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in real estate (55,913,594) 0
Investments in joint ventures (17,641,421) (9,566,007)
Deferred project costs (2,692,478) (409,217)
Distributions received from joint ventures 826,822 15,307
----------- ----------
Net cash used in investing activities (75,420,671) (9,959,917)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable 25,598,666 0
Repayment of note (22,732,539) 0
Dividends paid (2,159,649) 0
Issuance of common stock 76,927,944 11,691,923
Sales commission paid (7,308,155) (1,011,133)
Offering costs paid (2,307,838) (350,758)
----------- ----------
Net cash provided by financing activities 68,018,429 10,330,032
----------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,129,140) 390,122
CASH AND CASH EQUIVALENTS, beginning of year 7,979,403 201,000
----------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 2,850,263 $ 591,122
=========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Deferred project costs applied to investing activities $ 3,008,467 $ 398,634
=========== ==========
</TABLE>
See accompanying condensed notes to financial statements.
179
<PAGE>
WELLS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
(A Georgia Public Limited Partnership)
CONDENSED NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) General
Wells Real Estate Investment Trust, Inc. (the "Company") is a Maryland
corporation formed on July 3, 1997. The Company is the sole general partner
of Wells Operating Partnership, L.P. ("Wells OP"), a Delaware limited
partnership organized for the purpose of acquiring, developing, owning,
operating, improving, leasing, and otherwise managing for investment purposes
income-producing commercial properties on behalf of the Company.
On January 30, 1998, the Company commenced a public offering of up to
16,500,000 shares of common stock ($10 per share) pursuant to a registration
statement on Form S-11 filed under the Securities Act of 1933. The Company
commenced active operations on June 5, 1998, when it received and accepted
subscriptions for 125,000 shares. As of September 30, 1999, the Company had
sold 10,846,930 shares for total capital contributions of $108,469,304.
After payment of $3,796,391 in acquisition and advisory fees and acquisition
expenses, payment of $13,558,538 in selling commissions and organization and
offering expenses, and investment by Wells OP of $89,919,734 in property
acquisitions, as of September 30, 1999, the Company was holding net offering
proceeds of $1,194,641 available for investment in properties.
Wells OP owns interests in properties both directly and through equity
ownership in the following joint ventures: (i) the Fund IX-X-XI-REIT Joint
Venture, a joint venture among Wells OP and Wells Real Estate Fund IX, L.P.,
Wells Real Estate Fund X, L.P., and Wells Real Estate Fund XI, L.P. (the
"Fund IX-X-XI-REIT Joint Venture"), (ii) Wells/Fremont Associates (the
"Fremont Joint Venture"), a joint venture between Wells OP and Fund X and
Fund XI Associates, which is a joint venture between Wells Real Estate Fund
X, L.P. and Wells Real Estate Fund XI, L.P. (the "Fund X-XI Joint Venture"),
(iii) Wells/Orange County Associates (the "Cort Joint Venture"), a joint
venture between Wells OP and the Fund X-XI Joint Venture, and (iv) the Fund
XI-XII-REIT Joint Venture, a joint venture among Wells OP, Wells Real Estate
Fund XI, L.P., and Wells Real Estate Fund XII, L.P. (the "Fund XI-XII-REIT
Joint Venture").
As of September 30, 1999, Wells OP owned interests in the following
properties: (i) a three story office building in Knoxville, Tennessee (the
"ABB Building"), (ii) a two-story office building in Louisville, Colorado
(the "Ohmeda Building"), (iii) a three-story office building in Broomfield,
Colorado (the "360 Interlocken
180
<PAGE>
Building"), (iv) a one-story office building in Oklahoma City, Oklahoma (the
"Lucent Technologies Building"), (v) a one-story warehouse and office
building in Ogden, Utah (the "Iomega Building"), all five of which are owned
by the Fund IX-X-XI-REIT Joint Venture, (vi) a two-story warehouse and office
building in Fremont, California (the "Fairchild Building"), which is owned by
the Fremont Joint Venture, (vii) a one-story warehouse and office building in
Fountain Valley, California (the "Cort Building"), which is owned by the Cort
Joint Venture, (viii) a four-story office building in Tampa, Florida (the
"PWC Building"), (ix) a four-story office building in Harrisburg,
Pennsylvania (the "AT&T Building"), which are owned directly by Wells OP, (x)
a two-story manufacturing and office building located in Fountain Inn, South
Carolina (the "EYBL CarTex Building"), (xi) a three-story office building
located in Leawood, Kansas (the "Sprint Building"), (xii) a one-story office
building and warehouse in Tredyffrin Township, Pennsylvania (the "Johnson
Matthey Building"), (xiii) a two-story office building in Ft. Meyers, Florida
(the "Gartner Building"), all four of which are owned by Fund XI-XII-REIT
Joint Venture, (xiv) a two-story office building under construction located
in Lake Forest, California ( the "Matsushita Project"), (xv) a four-story
office building under construction in Richmond, Virginia (the "ABB
Building"), and (xvi) a two-story office building and warehouse in Wood Dale,
Illinois (the "Videojet Building"), all three of which are owned directly by
Wells OP.
(b) Employees
The Company has no direct employees. The employees of Wells Capital, Inc.,
the Company's Advisor (the "Advisor"), perform a full range of real estate
services including leasing and property management, accounting, asset
management, and investor relations for the Company.
(c) Insurance
Wells Management Company, Inc., an affiliate of the Company and the Advisor,
carries comprehensive liability and extended coverage with respect to all the
properties owned directly or indirectly by the Company. In the opinion of
management, the properties are adequately insured.
(d) Competition
The Company will experience competition for tenants from owners and managers
of competing projects which may include its affiliates. As a result, the
Company may be required to provide free rent, reduced charges for tenant
improvements, and other inducements, all of which may have an adverse impact
on results of operations. At the time the Company elects to dispose of its
properties, the Company will also be in competition with sellers of similar
properties to locate suitable purchasers for its properties.
(e) Basis of Presentation
Substantially all of the Company's business will be conducted through Wells
OP. At December 31, 1997, Wells OP had issued 20,000 limited partner units
to Wells Capital Inc., the Advisor, in exchange for a capital contribution of
$200,000. The
181
<PAGE>
Company is the sole general partner in Wells OP and possesses full legal
control and authority over the operations of Wells OP; consequently, the
accompanying consolidated balance sheets of the Company include the amounts
of the Company and Wells OP.
The consolidated financial statements of the Company have been prepared in
accordance with instructions to Form 10-Q and do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. These quarterly statements
have not been examined by independent accountants, but in the opinion of the
board of directors, the statements for the unaudited interim periods
presented include all adjustments, which are of a normal and recurring
nature, necessary to present a fair presentation of the results for such
periods. For further information, refer to the financial statements and
footnotes included in the Company's Form 10-K for the year ended December 31,
1998.
(f) Distribution Policy
The Company is required to make distributions each taxable year (not
including a return of capital for federal income tax purposes) equal to at
least 95% of its real estate investment trust taxable income. The Company
intends to make regular quarterly dividend distributions to holders of the
shares. Distributions will be made to those shareholders who are
shareholders as of the record dates selected by the directors. Distributions
will be paid on a quarterly basis.
(g) Income Taxes
The Company has made an election under Section 856(c) of the Internal Revenue
Code of 1986, as amended (the "Code"), to be taxed as a real estate
investment trust ("REIT") under the Code beginning with its taxable year
ended December 31, 1998. As a REIT for federal income tax purposes, the
Company generally will not be subject to federal income tax on income that it
distributes to its shareholders. If the Company fails to qualify as a REIT
in any taxable year, it will then be subject to federal income tax on its
taxable income at regular corporate rates and will not be permitted to
qualify for treatment as a REIT for federal income tax purposes for four
years following the year during which qualification is lost. Such an event
could materially adversely affect the Company's net income and net cash
available to distribute to shareholders. However, the Company believes that
it is organized and operates in such a manner as to qualify for treatment as
a REIT and intends to continue to operate in the foreseeable future in such a
manner so that the Company will remain qualified as a REIT for federal income
tax purposes.
(h) Statements of Cash Flows
For the purpose of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents. Cash equivalents include cash and
short-term investments.
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2. INVESTMENTS IN JOINT VENTURES
The Company owns interests in 14 office buildings and 2 office buildings
under construction through its ownership in Wells OP which owns properties
directly or through its interest in four joint ventures. The Company does
not have control over the operations of these joint ventures; however, it
does exercise significant influence. Accordingly, investments in joint
ventures are recorded using the equity method.
The following describes additional information about the properties in which
the Company owns interests as of September 30, 1999:
The Sprint Building
On July 2, 1999, the Fund XI-XII-REIT Joint Venture acquired a three-
story office building with approximately 68,900 rentable square feet on
a 7.12-acre tract of land located in Leawood, Johnson County, Kansas
(the "Sprint Building") from Bridge Information Systems America, Inc.
The purchase price for the Sprint Building was $9,500,000. The Fund XI-
XII-REIT Joint Venture also incurred additional acquisition expenses in
connection with the purchase of the Sprint Building, including
attorneys' fees, recording fees, and other closing costs, of
approximately $46,210.
The entire 68,900 rentable square feet of the Sprint Building are
currently under a net lease agreement with Sprint Communications, Inc.
("Sprint") dated February 14, 1997 (the "Lease"). The landlord's
interest in the Lease was assigned to the Fund XI-XII-REIT Joint Venture
at the closing.
The initial term of the Lease is ten years which commenced on May 19,
1997 and expires on May 18, 2007. Sprint has the right to extend the
Lease for two additional five-year periods of time.
The monthly base rent payable under the Lease is $83,254.17 ($14.50 per
square foot) through May 18, 2002 and $91,866.67 ($16 per square foot)
for the remainder of the lease term. The monthly base rent payable for
each extended term of the Lease will be equal to 95% of the then
"current market rate" which is calculated as a full-service rental rate
less anticipated annual operating expenses on a rentable square foot
basis charged for space of comparable location, size, and conditions in
comparable office buildings in the suburban south Kansas City, Missouri,
and south Johnson County, Kansas, areas.
Under the Lease, Sprint is required to pay as additional rent all real
estate taxes, special assessments, utilities, taxes, insurance, and
other operating costs with respect to the Sprint Building during the
term of the Lease. In addition, Sprint is responsible for all routine
maintenance and repairs including the interior mechanical and electrical
systems, the HVAC system, the parking lot, and the landscaping to the
Sprint Building. The
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Fund XI-XII-REIT Joint Venture, as landlord, is responsible for repair
and replacement of the exterior, roof, foundation, and structure.
The Lease contains a termination option which may be exercised by Sprint
effective as of May 18, 2004 provided that Sprint has not exercised
either expansion option, as described below. Sprint must provide notice
to the Fund XI-XII-REIT Joint Venture of its intent to exercise its
termination option on or before August 21, 2003. If Sprint exercises
its termination option, it will be required to pay the Fund XI-XII-REIT
Joint Venture a termination payment equal to $6.53 per square foot, or
$450,199.
Sprint also has an expansion option for an additional 20,000 square feet
of office space which may be exercised in two expansion phases.
Sprint's expansion rights involve building on unfinished ground-level
space that is currently used as covered parking within the existing
building footprint and shell. At each exercise of an expansion option,
the remaining lease term will be extended to be a minimum of an
additional five years from the date of the completion of such expansion
space.
For additional information regarding the Sprint Building, refer to the
Form 8-K of Wells Real Estate Investment Trust, Inc. dated July 2, 1999,
which was filed with the Commission on July 16, 1999 (Commission File
No. 0-25739).
The Johnson Matthey Building
On August 17, 1999, the Fund XI-XII-REIT Joint Venture acquired a
research and development office and warehouse building located in
Chester County, Pennsylvania, from Alliance Commercial Properties Ltd.
Wells Capital, Inc., as original purchaser under the agreement, assigned
its rights under the agreement to the Fund XI-XII-REIT Joint Venture at
closing. The purchase price paid for the Johnson Matthey Building was
$8,000,000. The Fund XI-XII-REIT Joint Venture also incurred additional
acquisition expenses in connection with the purchase of the Johnson
Matthey Building, including attorneys' fees, recording fees, and other
closing costs, of approximately $50,000.
The Johnson Matthey Building is a 130,000 square-foot research and
development office and warehouse building that was first constructed in
1973 as a multitenant facility. It was subsequently converted into a
single-tenant facility in 1998. The site consists of a ten-acre tract
of land located at 434-436 Devon Park Drive in the Tredyffrin Township,
Chester County, Pennsylvania.
The entire 130,000 rentable square feet of the Johnson Matthey Building
are currently leased to Johnson Matthey. The Johnson Matthey lease was
assigned to the Fund XI-XII-REIT Joint Venture at the closing with the
result that the joint venture is now the landlord under the lease. The
annual base rent payable under the Johnson Matthey lease for the
remainder of the lease term is as follows: year three-$789,750, year
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<PAGE>
four-$809,250, year five-$828,750, year six-$854,750, year seven-
$874,250, year eight-$897,000, year nine-$916,500, and year ten-
$939,250.
The current lease term expires in June 2007. Johnson Matthey has the
right to extend the lease for two additional three-year periods of time.
Under the lease, Johnson Matthey is required to pay as additional rent
all real estate taxes, special assessments, utilities, taxes, insurance,
and other operating costs with respect to the Johnson Matthey Building
during the term of the lease. In addition, Johnson Matthey is
responsible for all routine maintenance and repairs to the Johnson
Matthey Building. The Fund XI-XII-REIT Joint Venture, as landlord, is
responsible for maintenance of the footings and foundations and the
structural steel columns and girders associated with the building.
Johnson Matthey has a right of first refusal to purchase the Johnson
Matthey Building in the event that the Fund XI-XII REIT Joint Venture
desires to sell the building to an unrelated third party. The joint
venture must give Johnson Matthey written notice of its intent to sell
the Johnson Matthey Building, and Johnson Matthey will have ten days
from the date of such notice to provide written notice of its intent to
purchase the building. If Johnson Matthey exercises its right of first
refusal, it must purchase the Johnson Matthey Building on the same terms
contained in the offer.
For additional information regarding the Johnson Matthey Building, refer
to Supplement No. 10 dated October 10, 1999, to the Prospectus of Wells
Real Estate Investment Trust, Inc. dated January 30, 1998, contained in
Post-Effective Amendment No. 7 to Form S-11 Registration Statement of
Wells Real Estate Investment Trust, Inc., which was filed with the
Commission on October 14, 1999 (Commission File No. 333-32099).
The Videojet Building
On September 10, 1999, Wells OP acquired an office, assembly, and
manufacturing building containing approximately 250,354 rentable square
feet on a 15.3-acre tract of land located in Wood Dale, DuPage County,
Illinois. Wells OP acquired the Videojet Building from Sun-Pla, a
California limited partnership, pursuant to the agreement of purchase
and sale (the "Contract"). The rights under the Contract were assigned
by Wells Capital, Inc., the original purchaser under the Contract, to
Wells OP at closing. The purchase price for the Videojet Building was
$32,630,940. In addition, Wells OP paid brokerage commissions of
$500,000 at closing. Wells OP incurred acquisition expenses in
connection with the purchase of the Videojet Building, including
attorneys' fees, appraisers' fees, environmental consultants' fees, and
other closing costs, of approximately $27,925.
The Videojet Building is a two-story corporate headquarters facility
with 128,247 square feet of office space and 122,107 square feet of
assembly
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<PAGE>
and distribution space. The Videojet Building was completed in 1991 and
is located at 1500 Mittel Boulevard in the Chancellory Business Park in
Wood Dale, Illinois. The site is a 15.3-acre tract of land that is
adjacent to the western entrance to O'Hare International Airport.
The entire 250,354 rentable square feet of the Videojet Building are
currently under a net lease agreement with Videojet dated May 31, 1991
(the "Videojet Lease"). The landlord's interest in the Videojet Lease
was assigned to Wells OP at the closing. The initial term of the
Videojet Lease is 20 years which commenced in November 1991 and expires
in November 2011. Videojet has the right to extend the Videojet Lease
for one additional five-year period of time. The extension option must
be exercised by giving notice to the landlord at least 365 days prior to
the expiration date of the current lease term.
The base rent payable for the remainder of the Videojet Lease term is as
follows:
<TABLE>
<CAPTION>
Lease Year Yearly Base Rent Monthly Base Rent
---------- ---------------- -----------------
<S> <C> <C>
2000-2001 $2,838,952 $236,579.33
2002-2011 3,376,746 281,395.50
Extension Term 4,667,439 388,953.25
</TABLE>
Under its lease, Videojet is responsible for repairs and maintenance of
the roof, walls, structure and foundation landscaping, and the heating,
ventilating, air conditioning, mechanical, electrical, plumbing, and
other systems, and all other operating costs, including, but not limited
to, real estate taxes, special assessments, utilities, and insurance.
For additional information regarding the Videojet Building, refer to the
Form 8-K of Wells Real Estate Investment Trust, Inc. dated September 10,
1999, which was filed with the Commission on September 24, 1999
(Commission File No. 0-25739).
The Gartner Building
On September 20, 1999, the Fund XI-XII-REIT Joint Venture acquired a
two-story office building with approximately 62,400 rentable square feet
on a 4.9-acre tract of land located at 12600 Gateway Boulevard in Fort
Myers, Lee County, Florida, from Hogan Triad Ft. Myers I, Ltd., a
Florida limited partnership.
The rights under the contract were assigned by Wells Capital, Inc, the
original purchaser under the contract, to the Fund XI-XII-REIT Joint
Venture at closing. The purchase price for the Gartner Building was
$8,320,000. The Fund XI-XII-REIT Joint Venture also incurred additional
acquisition expenses in connection with the purchase of the Gartner
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<PAGE>
Building, including attorneys' fees, recording fees, and other closing
costs, of approximately $27,600.
The entire 62,400 rentable square feet of the Gartner Building are
currently under a net lease agreement with Gartner dated July 30, 1997
(the "Gartner Lease"). The landlord's interest in the Gartner Lease was
assigned to the Fund XI-XII-REIT Joint Venture at the closing.
The initial term of the Gartner Lease is ten years which commenced on
February 1, 1998 and expires on January 31, 2008. Gartner has the right
to extend the Gartner Lease for two additional five-year periods of
time. The yearly base rent payable for the remainder of the Gartner
Lease term is $642,798 through January 2000, $790,642 through January
2001, and thereafter will increase by 2.5% through the remainder of the
Gartner Lease.
Under the Gartner Lease, Gartner is required to pay as additional rent
all real estate taxes, special assessments, utilities, taxes, insurance,
and other operating costs with respect to the Gartner Building during
the term of the Gartner Lease. In addition, Gartner is responsible for
all routine maintenance and repairs to the Gartner Building. The Fund
XI-XII-REIT Joint Venture, as landlord, is responsible for repairs and
replacement of the roof, structures, and paved parking areas.
Gartner also has two expansion options for additional buildings under
the Gartner Lease. The two option plans are described in the Gartner
Lease as the "Small Option Building" and the "Large Option Building."
The "Small Option Building" expansion option allows Gartner the ability
to expand into a separate, free-standing facility on the property
containing between 30,000 and 32,000 rentable square feet to be
constructed by the Fund XI-XII-REIT Joint Venture. Gartner may exercise
its expansion right for the "Small Option Building" by providing notice
in writing to the Fund XI-XII-REIT Joint Venture on or before February
15, 2002.
The "Large Option Building" expansion option allows Gartner the ability
to expand into a separate, free-standing facility on the property
containing between 60,000 and 75,000 rentable square feet to be
constructed by the Fund XI-XII-REIT Joint Venture. Gartner may exercise
its expansion right for the "Small Option Building" by providing notice
in writing to the Fund XI-XII-REIT Joint Venture on or before February
15, 2002.
For additional information regarding the Gartner Building, refer to the
Form 8-K of Wells Real Estate Investment Trust, Inc. dated September 20,
1999, which was filed with the Commission on October 5, 1999 (Commission
File No. 0-25739).
187
<PAGE>
3. DEFERRED PROJECT COSTS
The Company pays acquisition and advisory fees and acquisition expenses to
Wells Capital, Inc., the Advisor, for acquisition and advisory services and
as reimbursement for acquisition expenses. These payments may not exceed 3
1/2% of shareholders' capital contributions. Acquisition and advisory fees
and acquisition expenses paid as of September 30, 1999 amounted to $3,796,391
and represented approximately 3 1/2% of shareholders' capital contributions
received. These fees are allocated to specific properties as they are
purchased.
4. DEFERRED OFFERING COSTS
The Advisor pays all the offering expenses for the Company. The Advisor may
be reimbursed by the Company to the extent that such offering expenses do not
exceed 3% of shareholders' capital contributions. As of September 30, 1999,
the Company had reimbursed the Advisor for $3,254,048 in offering expenses,
which amounted to approximately 3% of shareholders' capital contributions.
5. DUE TO AFFILIATES
Due to Affiliates consists of acquisition and advisory fees, deferred
offering costs, and other operating expenses paid by the Advisor on behalf of
the Company.
6. NOTES PAYABLE
Wells OP obtained a loan in the amount of $6,450,000 from Bank of America,
N.A. (the "Bank of America"), formerly known as NationsBank, N.A., on
February 4, 1999 with an outstanding balance of $203,504 at September 30,
1999. The Bank of America loan matures on January 4, 2002. The interest
rate on the Bank of America loan is a fixed rate equal to the rate appearing
on Telerate Page 3750 as the London InterBank Offered Rate plus 200 basis
points over a six-month period. The interest rate is fixed for the initial
six months of the loan at 7% per annum. Wells OP is required to make
quarterly installments of principal in an amount to one-ninth of the
outstanding principal balance as of October 1, 1999. The Bank of America
loan is secured by a first mortgage against the AT&T Building.
Wells OP also obtained a revolving credit facility loan in the amount of
$15,500,000 on December 31, 1998 from SouthTrust Bank with an outstanding
balance of $11,500,000 at September 30, 1999. The SouthTrust Loan matures on
December 31, 2000. The interest rate on the SouthTrust Loan is a variable
rate per annum equal to the London InterBank Offered Rate for a 30-day
period, plus 185 basis points. The SouthTrust Loan is secured by a first
mortgage against the PWC Building.
Wells OP obtained a construction loan dated May 10, 1999 from Bank of
America, N.A., formerly known as NationsBank, N.A., with a maximum principal
amount of
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<PAGE>
$15,375,000, the proceeds of the loan are being used to fund the development
and construction of the Matsushita Project (the "Matsushita Loan"). At
September 30, 1999, the balance on the Matsushita Loan was $5,222,553. The
Matsushita Loan will mature 24 months from the date of the loan closing. The
interest rate on the Matsushita Loan will be a variable rate equal to either
(1) the Bank of America "prime rate" or (2) at the option of Wells OP, the
rate per annum appearing on Telerate Page 3750 as the London InterBank
Offered Rate for a 30-day period, plus 200 basis points. Wells OP will make
monthly installments of interest, and commencing one year after the date of
the loan closing, Wells OP will make monthly installments of principal in the
amount of $10,703 until maturity. On the maturity date, the entire
outstanding principal balance plus any accrued but unpaid interest shall be
due and payable. At the closing, Wells OP paid a nonrefundable origination
fee of $76,900 to Bank of America. The Matsushita Loan was secured by a first
priority mortgage against the Matsushita Project. Leo F. Wells, III (an
officer and director of the Company and the Advisor) and the Company will be
coguarantors of the Matsushita Loan.
7. COMMITMENTS AND CONTINGENT LIABILITIES
On March 15, 1999, Wells OP purchased an 8.8 tract of land in Lake Forest,
Orange County, California, for a purchase price of $4,450,230. On February
18, 1999, Wells OP entered into an office lease with Matsushita Avionics
Systems Corporation ("Matsushita Avionics") for the occupancy of a to be
constructed two-story office building containing approximately 150,000
rentable square feet on this tract (the "Matsushita Project"). Matsushita
Avionics currently occupies an existing building owned by Fund VIII and IX
Joint Venture, a joint venture between Wells Real Estate Fund VIII, L.P. and
Wells Real Estate Fund IX, L.P.--related parties to Wells OP.
On February 18, 1999, Wells OP entered into a rental income guaranty
agreement with Fund VIII and IX Joint Venture, whereby Wells OP guaranteed
the Fund VIII-Fund IX Joint Venture that the joint venture would receive
rental income on the existing building at least equal to the rent and
building expenses that the Fund VIII-Fund IX Joint Venture would have
received over the remaining term of the existing lease. Matsushita Avionics
will vacate the existing building in December 1999, with the existing lease
term ending in September 2003. Current rental and building expenses are
approximately $90,000 per month.
The Company's maximum liability to Fund VIII-Fund XI Joint Venture for rental
income and building expenses for the existing building was included in the
economic analysis for developing the Matsushita Project. The Company
anticipates that the ultimate liability will be less than the maximum
liability; however, management cannot determine at this time the ultimate
liability under the rental income guaranty agreement. Any payment made to
the Fund VIII-Fund IX Joint Venture for rental income and building expenses
will be made from the Wells REIT operating cash flow and will reduce cash
available for dividends.
189
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Fund IX and X Associates
We have audited the accompanying balance sheet of FUND IX AND X ASSOCIATES (a
Georgia Joint Venture) as of December 31, 1997 and the related statements of
loss, partners' capital, and cash flows for the period from inception (March 20,
1997) to December 31, 1997. These financial statements are the responsibility of
the Joint Venture's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fund IX and X Associates as of
December 31, 1997 and the results of its operations and its cash flows for the
period from inception (March 20, 1997) to December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
January 9, 1998
190
<PAGE>
FUND IX AND X ASSOCIATES
(A Georgia Joint Venture)
BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------ -----------
(Unaudited)
<S> <C> <C>
REAL ESTATE ASSETS, AT COST:
Land $ 5,004,893 $ 607,930
Building and improvements, less accumulated depreciation of
$205,915 in 1998 and $36,863 in 1997 22,005,710 6,445,300
Construction in progress 6,498 35,622
------------ -----------
Total real estate assets 27,017,101 7,088,852
CASH AND CASH EQUIVALENTS 390,276 289,171
ACCOUNTS RECEIVABLE 150,402 40,512
PREPAID EXPENSES AND OTHER ASSETS 383,399 329,310
------------ -----------
Total assets $27,941,178 $7,747,845
============ ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable $ 385,072 $ 379,770
Due to affiliates 2,281 2,479
------------ -----------
Total liabilities 387,353 382,249
------------ -----------
PARTNERS' CAPITAL:
Wells Real Estate Fund IX 14,569,085 3,702,793
Wells Real Estate Fund X 12,984,740 3,662,803
------------ -----------
Total partners' capital 27,553,825 7,365,596
------------ -----------
Total liabilities and partners' capital $27,941,178 $7,747,845
============ ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
191
<PAGE>
FUND IX AND X ASSOCIATES
(A Georgia Joint Venture)
STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND THE PERIOD FROM INCEPTION (MARCH 20, 1997)
TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
---------- -----------
(Unaudited)
<S> <C> <C>
REVENUES:
Rental income $351,203 $ 28,512
---------- -----------
EXPENSES:
Depreciation and amortization 178,881 36,863
Management and leasing fees 22,838 1,711
Operating costs, net of reimbursements 24,052 10,118
Property administration 5,632 0
---------- -----------
231,403 48,692
---------- -----------
NET INCOME (LOSS) $119,800 $(20,180)
========== ===========
NET INCOME (LOSS) ALLOCATED TO WELLS REAL ESTATE FUND IX $ 57,858 $(10,145)
========== ===========
NET INCOME (LOSS) ALLOCATED TO WELLS REAL ESTATE FUND X $ 61,942 $(10,035)
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
192
<PAGE>
FUND IX AND X ASSOCIATES
(A Georgia Joint Venture)
STATEMENTS OF PARTNERS' CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND THE PERIOD FROM INCEPTION (MARCH 20, 1997)
TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
Wells Real Wells Real Total
Estate Estate Partners'
Fund IX Fund X Capital
------------ ------------- ------------
<S> <C> <C> <C>
BALANCE, December 31, 1996 $ $ $
0 0 0
Net loss (10,145) (10,035) (20,180)
Partnership contributions 3,712,938 3,672,838 7,385,776
------------ ------------- ------------
BALANCE, December 31, 1997 3,702,793 3,662,803 7,365,596
Partnership distributions (100,863) (101,419) (202,282)
Net income 57,858 61,942 119,800
Partnership contributions 10,909,297 9,361,414 20,270,711
------------ ------------- ------------
BALANCE, March 31, 1998 (unaudited) $ 14,569,085 $ 12,984,740 $ 27,553,825
============ ============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
193
<PAGE>
FUND IX AND X ASSOCIATES
(A Georgia Joint Venture)
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND THE PERIOD FROM INCEPTION (MARCH 20, 1997)
TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
------------- --------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 119,800 $ (20,180)
------------- --------------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 178,881 36,863
Changes in assets and liabilities:
Accounts receivable (109,890) (40,512)
Prepaid expenses and other assets (54,089) (329,310)
Accounts payable 5,302 379,770
Due to affiliates (198) 2,479
------------- --------------
Total adjustments 20,006 49,290
------------- --------------
Net cash provided by operating activities 139,806 29,110
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate from partners (19,123,419) (5,715,847)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to joint venture partners (202,282) 0
Contributions received from partners 19,287,000 5,975,908
------------- --------------
Net cash provided by financing activities 19,084,718
------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 101,105 289,171
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 289,171 0
------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 390,276 $ 289,171
============= ==============
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Deferred project costs applied by partners, net of deferred project costs
transferred $ 983,711 $ 318,981
============= ==============
Contribution of real estate assets $ 0 $ 1,090,887
============= ==============
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
FUND IX AND X ASSOCIATES
(A Georgia Joint Venture)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
On March 20, 1997, Fund IX and X Associates (a joint venture between Wells
Real Estate Fund IX, L.P. ("Fund IX") and Wells Real Estate Fund X, L.P.
("Fund X") was formed to acquire, develop, operate, and sell real properties.
On March 20, 1997, Fund IX contributed a 5.62-acre tract of real property in
Knoxville, Tennessee, and improvements thereon, known as the ABB Property, to
Fund IX and X Associates (the "Joint Venture"). A 83,885-square-foot, three-
story office building was constructed and commenced operations at the end of
1997.
Cash and Cash Equivalents
For the purposes of the statements of cash flows, the Joint Venture considers
all highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents. Cash equivalents include cash and
short-term investments. Short-term investments are stated at cost, which
approximates fair value, and consist of investments in money market accounts.
Use of Estimates and Factors Affecting the Partnership
The preparation of financial statements in conformity with generally accepted
accounting principles requires 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 financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The carrying values of the real estate assets are based on management's
current intent to hold the real estate assets as long-term investments. The
success of the Joint Venture's future operations and the ability to realize
the investment in its assets will be dependent on the Joint Venture's ability
to maintain an appropriate level of rental rates, occupancy, and operating
expenses in future years. Management believes that the steps it is taking
will enable the Joint Venture to realize its investment in its assets.
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Income Taxes
The Joint Venture is not subject to federal or state income taxes, and
therefore, none have been provided for in the accompanying financial
statements. The partners of Fund IX and Fund X are required to include their
respective shares of profits and losses in their individual income tax
returns.
Real Estate Assets
Real estate assets held by the Joint Venture are stated at cost less
accumulated depreciation. Major improvements and betterments are capitalized
when they extend the useful life of the related asset. All ordinary repairs
and maintenance are expensed as incurred.
Management continually monitors events and changes in circumstances which
could indicate that the carrying amounts of real estate assets may not be
recoverable. When events or changes in circumstances are present that
indicate the carrying amounts of real estate assets may not be recoverable,
management assesses the recoverability of real estate assets under Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of," by
determining whether the carrying value of such real estate assets will be
recovered through the future cash flows expected from the use of the asset
and its eventual disposition. Management believes that there has been no
impairment in the carrying value of real estate assets held by the Joint
Venture.
Depreciation of buildings and land improvements is calculated using the
straight-line method over 25 years. Tenant improvements are amortized over
the life of the related lease or the life of the asset, whichever is shorter.
Revenue Recognition
All leases on real estate assets held by the Joint Venture are classified as
operating leases, and the related rental income is recognized on a straight-
line basis over the terms of the respective leases.
Partners' Distributions and Allocations of Profit and Loss
Cash available for distribution and allocations of profit and loss to Fund IX
and Fund X by the Joint Venture are made in accordance with the terms of the
joint venture agreement. Generally, these items are allocated in proportion
to the partners' respective ownership interests. Cash distributions are
generally paid by the Joint Venture to Fund IX and Fund X quarterly.
Deferred Lease Acquisition Costs
Costs incurred to procure operating leases are capitalized and amortized on a
straight-line basis over the terms of the related leases.
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<PAGE>
2. DEFERRED PROJECT COSTS
The Wells Real Estate Funds pay a percentage of limited partner
contributions to Wells Capital, Inc., an affiliate of the Joint Venture,
for acquisition and advisory services. These payments, as stipulated by
the partnership agreement, can be up to 5% of the limited partner
contributions, subject to certain overall limitations contained in the
partnership agreement. These fees are allocated to specific properties as
they are purchased or developed and are included in capitalized assets of
the Joint Venture.
3. FUTURE MINIMUM RENTAL INCOME
The future minimum rental income due Fund IX and X Associates under
noncancelable operating leases at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1998 $ 646,250
1999 646,250
2000 646,250
2001 646,250
2002 646,250
Thereafter 3,583,021
----------
$6,814,271
==========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
Management, after consultation with legal counsel, is not aware of any
significant litigation or claims against the Joint Venture or its partners.
In the normal course of business, the Joint Venture or its partners may
become subject to such litigation or claims.
5. SUBSEQUENT EVENTS (UNAUDITED)
On February 13, 1998, the Joint Venture acquired a two-story office
building, the Ohmeda Building, a 106,750-square-foot office building located
in Louisville, Colorado, for a cash purchase price of $10,325,000 plus
acquisition expenses of $6,644. The building is 100% occupied by one tenant
with an original lease term of ten years that commenced February 1, 1988.
The lease term was extended for an additional seven years commencing
February 1, 1998.
On March 20, 1998, the Joint Venture acquired the Interlocken Building, a
51,974-square-foot three-story multitenant office building located in
Broomfield, Colorado, for a cash purchase price of $8,275,000 plus
acquisition expenses of $18,000.
On June 11, 1998, Wells Operating Partnership, L.P. (of which Wells Real
Estate Investment Trust, Inc. is the sole general partner) and Wells Real
Estate Fund XI, L.P. were admitted to the Joint Venture. The Joint Venture
agreement was
197
<PAGE>
restated and amended as such and was renamed the Fund IX, Fund X, Fund XI,
and REIT Joint Venture.
On June 24, 1998, Fund IX, Fund X, Fund XI, and REIT Joint Venture acquired
the Lucent Building, a one-story office building, from Wells Development
Corporation, an affiliate of the Joint Venture, for a cash purchase price of
$5,504,276 which equaled the book value of the building. The building is 100%
occupied by one tenant with an original lease term of ten years that
commenced January 1, 1998.
198
<PAGE>
LUCENT BUILDING
STATEMENT OF REVENUES OVER CERTAIN
OPERATING EXPENSES
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
REVENUES:
<S> <C>
Rental revenue $137,817
OPERATING EXPENSES 675
--------
REVENUES OVER OPERATING EXPENSES $137,142
--------
</TABLE>
The accompanying notes are an integral part of this statement.
199
<PAGE>
LUCENT BUILDING
NOTES TO STATEMENT OF REVENUES OVER CERTAIN
OPERATING EXPENSES
FOR THE THREE MONTHS ENDED MARCH 31, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Description of Real Estate Property Acquired
On June 24, 1998, Wells Real Estate Fund IX, L.P., Wells Real Estate Fund X,
L.P., Wells Real Estate Fund XI, L.P., and Wells Real Estate Investment
Trust, Inc., through Fund IX, Fund X, Fund XI, and REIT Joint Venture (a
Georgia joint venture), acquired the Lucent Building, a 57,186-square-foot
one-story office building located in Oklahoma City, Oklahoma, for a cash
purchase price of $5,504,276. The building is 100% occupied by one tenant
with an original lease term of 10 years that commenced January 1, 1998. The
lease is a triple net lease, whereby the terms require the tenant to pay all
operating expenses relating to the building.
Rental Revenues
Rental income from the lease is recognized on a straight-line basis over the
life of the lease.
2. BASIS OF ACCOUNTING
The accompanying statement of revenues over operating expenses are presented
on the accrual basis. This statement has been prepared in accordance with the
applicable rules and regulations of the Securities and Exchange Commission
for real estate properties acquired. Accordingly, the statement excludes
certain historical expenses, such as depreciation, interest, and management
fees, not comparable to the operations of the Lucent Building after
acquisition by Wells Real Estate Fund IX, L.P., Wells Real Estate Fund X,
L.P, Wells Real Estate Fund XI, L.P., and Wells Real Estate Investment Trust,
Inc.
200
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wells Real Estate Fund XI, L.P. and
Wells Real Estate Investment Trust, Inc.:
We have audited the accompanying statement of revenues over certain operating
expenses for the IOMEGA BUILDING for the year ended December 31, 1997. This
financial statement is the responsibility of management. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of revenues over certain operating
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement of
revenues over certain operating expenses. 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
audit provides a reasonable basis for our opinion.
As described in Note 2, this financial statement excludes certain expenses that
would not be comparable with those resulting from the operations of the Iomega
Building after acquisition by Fund IX, X, XI, and REIT Joint Venture (a joint
venture between Wells Real Estate Fund IX, L.P., Wells Real Estate Fund X, L.P.,
Wells Real Estate Fund XI, L.P. and Wells Operating Partnership, L.P.). The
accompanying statement of revenues over certain operating expenses was prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission and is not intended to be a complete presentation of the
Iomega Building's revenues and expenses.
In our opinion, the statement of revenues over certain operating expenses
presents fairly, in all material respects, the revenues over certain operating
expenses of the Iomega Building for the year ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
August 6, 1998
201
<PAGE>
IOMEGA BUILDING
STATEMENTS OF REVENUES OVER CERTAIN
OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
1997 1998
---------- ----------
(Unaudited)
<S> <C> <C>
RENTAL REVENUES $552,828 $276,414
OPERATING EXPENSES, net of reimbursements (1,426) 9,750
--------- ---------
REVENUES OVER CERTAIN OPERATING EXPENSES $554,254 $266,664
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
202
<PAGE>
IOMEGA BUILDING
NOTES TO STATEMENTS OF REVENUES
OVER CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Description of Real Estate Property Acquired
On July 1, 1998, Wells Real Estate Fund X, L.P. ("Fund X") contributed a
single-story warehouse and office building with 108,000 rentable square feet
(the "Iomega Building") to the Fund IX, Fund X, Fund XI, and REIT Joint
Venture ("IX-X-XI-REIT Joint Venture") (a Georgia joint venture) as a capital
contribution. Fund X was credited with making a capital contribution to the
IX-X-XI-REIT Joint Venture in the amount of $5,050,425, which represents the
purchase price of $5,025,000 plus acquisition expenses of $25,425 originally
paid by Fund X for the Iomega Building on April 1, 1998. As of August 1,
1998, Fund X had made total capital contributions to the IX-X-XI-REIT Joint
Venture of $18,410,965 and held an equity percentage interest in the IX-X-XI-
REIT Joint Venture of 49.9%; Wells Real Estate Fund IX, L.P. had made total
capital contributions to the IX-X-XI-REIT Joint Venture of $14,571,686 and
held an equity percentage interest in the IX-X-XI-REIT Joint Venture of
39.5%; Wells Operating Partnership, L.P. had made total capital contributions
to the IX-X-XI-REIT Joint Venture of $1,421,466 and held an equity percentage
interest in the IX-X-XI-REIT Joint Venture of 3.9%; and Wells Real Estate
Fund XI, L.P. had made total capital contributions to the IX-X-XI-REIT Joint
Venture of $2,482,810 and held an equity percentage interest in the IX-X-XI-
REIT Joint Venture of 6.7%.
The building is 100% occupied by one tenant with a ten year lease term that
expires on July 31, 2006. The monthly base rent payable under the lease is
$40,000 through November 12, 1999. Beginning on the 40th and 80th months of
the lease term, the monthly base rent payable under the lease will be
increased to reflect an amount equal to 100% of the increase in the Consumer
Price Index (as defined in the lease) during the preceding 40 months;
provided however, that in no event shall the base rent be increased with
respect to any one year by more than 6% or by less than 3% per annum,
compounded annually, on a cumulative basis from the beginning of the lease
term. The lease is a triple net lease, whereby the terms require the tenant
to reimburse the IX-X-XI-REIT Joint Venture for certain operating expenses,
as defined in the lease, related to the building.
203
<PAGE>
Rental Revenues
Rental income from the lease is recognized on a straight-line basis over the
life of the lease.
2. BASIS OF ACCOUNTING
The accompanying statement of revenues over certain operating expenses is
presented on the accrual basis. This statement has been prepared in
accordance with the applicable rules and regulations of the Securities and
Exchange Commission for real estate properties acquired. Accordingly, the
statement excludes certain historical expenses, such as depreciation and
management fees, not comparable to the operations of the Iomega Building
after acquisition by the IX-X-XI-REIT Joint Venture.
204
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wells Real Estate Fund XI, L.P. and
Wells Real Estate Investment Trust, Inc.:
We have audited the accompanying statement of revenues over certain operating
expenses for the FAIRCHILD BUILDING for the year ended December 31, 1997. This
financial statement is the responsibility of management. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of revenues over certain operating
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement of
revenues over certain operating expenses. 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
audit provides a reasonable basis for our opinion.
As described in Note 2, this financial statement excludes certain expenses that
would not be comparable with those resulting from the operations of the
Fairchild Building after acquisition by the Fremont Joint Venture (a joint
venture between Wells Operating Partnership, L.P. and Wells Development
Corporation). The accompanying statement of revenues over certain operating
expenses was prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission and is not intended to be
a complete presentation of the Fairchild Building's revenues and expenses.
In our opinion, the statement of revenues over certain operating expenses
presents fairly, in all material respects, the revenues over certain operating
expenses of the Fairchild Building for the year ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
August 6, 1998
205
<PAGE>
FAIRCHILD BUILDING
STATEMENTS OF REVENUES OVER CERTAIN
OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
1997 1998
--------- ----------
(Unaudited)
<S> <C> <C>
RENTAL REVENUES $220,090 $440,178
OPERATING EXPENSES 67,573 10,420
--------- ---------
REVENUES OVER CERTAIN OPERATING EXPENSES $152,517 $429,758
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
206
<PAGE>
FAIRCHILD BUILDING
NOTES TO STATEMENTS OF REVENUES
OVER CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Description of Real Estate Property Acquired
The Wells Operating Partnership, L.P. ("Wells OP"), a Delaware limited
partnership organized to own and operate properties on behalf of the Wells
Real Estate Investment Trust, Inc., entered into a Joint Venture Agreement
known as Wells/Fremont Associates ("Fremont Joint Venture") with Wells
Development Corporation. On July 21, 1998, the Fremont Joint Venture
acquired the Fairchild Building, a 58,424-square-foot warehouse and office
building located in Fremont, California, for a purchase price of $8,900,000
plus acquisition expenses of approximately $60,000. The Fremont Joint
Venture used the $2,995,480 aggregate capital contributions described below
to partially fund the purchase of the Fairchild Building. The Fremont Joint
Venture obtained a loan in the amount of $5,960,000 from NationsBank, N.A.,
the proceeds of which were used to fund the remainder of the cost of the
Fairchild Building (the "Fairchild Loan"). The Fairchild Loan matures on
July 21, 1999 (the "Fairchild Maturity Date"), unless the Fremont Joint
Venture exercises its option to extend the Fairchild Maturity Date to January
21, 2000. The interest rate on the Fairchild Loan is a variable rate per
annum equal to the rate appearing on Telerate Page 3750 as the LIBOR Rate for
a 30-day period plus 220 basis points.
The building is 100% occupied by one tenant with a seven-year lease term that
commenced on December 1, 1997 (with an early possession date of October 1,
1997) and expires on November 30, 2004. The monthly base rent payable under
the lease is $68,128 with a 3% increase on each anniversary of the
commencement date. The lease is a triple net lease, whereby the terms
require the tenant to reimburse Wells/Fremont for certain operating expenses,
as defined in the lease, related to the building. Prior to October 1, 1997,
the building was unoccupied and all operating expenses were paid by the
former owner of the Fairchild Building.
Acquisition of the Fremont Joint Venture Interest
Wells Real Estate Fund XI, L.P. ("Wells Fund XI") entered into a Joint
Venture Agreement with Wells Real Estate Fund X, L.P. ("Wells Fund X") known
as Fund X and Fund XI Associates ("Fund X-XI Joint Venture") for the purpose
of the
207
<PAGE>
acquisition, ownership, leasing, operation, sale and management of real
properties, and interests in real properties, including but not limited to,
the acquisition of equity interests in the Fremont Joint Venture.
On July 17, 1998, the Fund X-XI Joint Venture entered into an Agreement for
the Purchase and Sale of Joint Venture Interest (the "Fremont JV Contract")
with Wells Development. Pursuant to the Fremont JV Contract, the Fund X-XI
Joint Venture contracted to acquire Wells Development's interest in the
Fremont Joint Venture (the "Freemont JV Interest") which, at closing, will
result in the Fund X-XI Joint Venture becoming a joint venture partner with
Wells OP in the ownership of the Fairchild Building. Wells Fund X, Wells OP
and Wells Development are all affiliates of Wells Fund XI.
At the time of the entering into the Fremont JV Contract, the Fund X-XI Joint
Venture delivered $2,000,000 to Wells Development as an earnest money deposit
(the "Fremont Earnest Money"). Wells Fund XI contributed $1,000,000 of the
Fremont Earnest Money as a capital contribution to the Fund X-XI Joint
Venture and, as of July 21, 1998, held an equity percentage interest in the
Fund X-XI Joint Venture of 50%; and Wells Fund X contributed $1,000,000 of
the Fremont Earnest Money as a capital contribution to the Fund X-XI Joint
Venture and, as of July 21, 1998, held an equity percentage interest in the
Fund X-XI Joint Venture of 50%. Wells Development contributed the Fremont
Earnest Money it received from the Fund X-XI Joint Venture to the Fremont
Joint Venture as its initial capital contribution, and Wells OP
simultaneously contributed $995,480 to the Fremont Joint Venture as its
initial capital contribution.
Cash flow distributions allocable by the Fremont Joint Venture to Wells
Development will be credited as a purchase price adjustment or paid to the
Fund X-XI Joint Venture at the closing of the acquisition of the Fremont JV
Interest from Wells Development since Wells Development is prohibited from
making any profit on the transaction during the holding period. The Fund X-
XI Joint Venture will have no property rights in the Fairchild Building prior
to closing nor any potential liability on the Fairchild Loan, which will be
paid off prior to closing.
Rental Revenues
Rental income from the lease is recognized on a straight-line basis over the
life of the lease.
2. BASIS OF ACCOUNTING
The accompanying statement of revenues over certain operating expenses is
presented on the accrual basis. This statement has been prepared in
accordance with the applicable rules and regulations of the Securities and
Exchange Commission for real estate properties acquired. Accordingly, the
statement excludes certain historical expenses, such as interest,
depreciation, and management fees, not comparable to the operations of the
Fairchild Building after acquisition by Wells/Fremont.
208
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wells Real Estate Fund XI, L.P. and
Wells Real Estate Investment Trust, Inc.:
We have audited the accompanying statement of revenues over certain operating
expenses for the CORT FURNITURE BUILDING for the year ended December 31, 1997.
This financial statement is the responsibility of management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of revenues over certain operating
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement of
revenues over certain operating expenses. 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
audit provides a reasonable basis for our opinion.
As described in Note 2, this financial statement excludes certain expenses that
would not be comparable with those resulting from the operations of the Cort
Furniture Building after acquisition by the Cort Joint Venture (a joint venture
between Wells Operating Partnership, L.P. and Wells Development Corporation).
The accompanying statement of revenues over certain operating expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission and is not intended to be a complete
presentation of the Cort Furniture Building's revenues and expenses.
In our opinion, the statement of revenues over certain operating expenses
presents fairly, in all material respects, the revenues over certain operating
expenses of the Cort Furniture Building for the year ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
August 6, 1998
209
<PAGE>
CORT FURNITURE BUILDING
STATEMENTS OF REVENUES OVER CERTAIN
OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
1997 1998
-------- -----------
(Unaudited)
<S> <C> <C>
RENTAL REVENUES $771,618 $385,809
OPERATING EXPENSES 16,408 4,104
-------- --------
REVENUES OVER CERTAIN OPERATING EXPENSES $755,210 $381,705
-------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
210
<PAGE>
CORT FURNITURE BUILDING
NOTES TO STATEMENTS OF REVENUES
OVER CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Description of Real Estate Property Acquired
The Wells Operating Partnership, L.P. ("Wells OP"), a Delaware limited
partnership organized to own and operate properties on behalf of the Wells
Real Estate Investment Trust, Inc, entered into a Joint Venture Agreement
known as Wells/Orange County Associates ("Cort Joint Venture") with Wells
Development Corporation. On July 31, 1998, the Cort Joint Venture acquired
the Cort Furniture Building, a 52,000-square-foot warehouse and office
building located in Fountain Valley, California, for a purchase price of
$6,400,000 plus acquisition expenses of approximately $150,000. The Cort
Joint Venture used the $1,668,000 aggregate capital contributions described
below to partially fund the purchase of the Cort Furniture Building. The
Cort Joint Venture obtained a loan in the amount of $4,875,000 from
NationsBank, N.A., the proceeds of which were used to fund the remainder of
the cost of the Cort Furniture Building (the "Cort Loan"). The Cort Loan
matures on July 31, 1999 (the "Cort Maturity Date"), unless the Cort Joint
Venture exercises its option to extend the Cort Maturity Date to January 31,
2000. The interest rate on the Cort Loan is a variable rate per annum equal
to the rate appearing on Telerate Page 3750 as the LIBOR Rate for 30-day
period plus 220 basis points.
The building is 100% occupied by one tenant with a 15-year lease term that
commenced on November 1, 1988 and expires on October 31, 2003. The monthly
base rent payable under the lease is $63,247 through April 30, 2001 at which
time the monthly base rent will be increased 10% to $69,574 for the remainder
of the lease term. The lease is a triple net lease, whereby the terms
require the tenant to reimburse the Cort Joint Venture for certain operating
expenses, as defined in the lease, related to the building.
Acquisition of the Cort Joint Venture Interest
Wells Real Estate Fund XI, L.P. ("Wells Fund XI") entered into a Joint
Venture Agreement with Wells Real Estate Fund X, L.P. ("Wells Fund X") known
as Fund X and Fund XI Associates ("Fund X-XI Joint Venture") for the purpose
of the acquisition, ownership, leasing, operation, sale and management of
real
211
<PAGE>
properties, and interests in real properties, including but not limited
to, the acquisition of equity interests in the Cort Joint Venture.
On July 30, 1998, the Fund X-XI Joint Venture entered into an Agreement for
the Purchase and Sale of Joint Venture Interest (the "Cort JV Contract") with
Wells Development. Pursuant to the Cort JV Contract, the Fund X-XI Joint
Venture contracted to acquire Wells Development's interest in the Cort Joint
Venture (the "Cort JV Interest") which, at closing, will result in the Fund
X-XI Joint Venture becoming a joint venture partner with Wells OP in the
ownership of the Cort Furniture Building. Wells Fund X, Wells OP and Wells
Development are all affiliates of Wells Fund XI.
At the time of entering into the Cort JV Contract, the Fund X-XI Joint
Venture delivered $1,500,000 to Wells Development as an earnest money deposit
(the "Cort Earnest Money"). Wells Fund XI contributed $750,000 of the Cort
Earnest Money as a capital contribution to the Fund X-XI Joint Venture and,
as of July 31, 1998, held an equity percentage interest in the Fund X-XI
Joint Venture of 50%; and Wells Fund X contributed $750,000 of the Cort
Earnest Money as a capital contribution to the Fund X-XI Joint Venture and,
as of July 31, 1998, held an equity percentage interest in the Fund X-XI
Joint Venture of 50%. Wells Development contributed the Cort Earnest Money
it received from the Fund X-XI Joint Venture to the Cort Joint Venture as its
initial capital contribution, and Wells OP simultaneously contributed
$168,000 to the Cort Joint Venture as its initial capital contribution.
Cash flow distributions allocable by the Cort Joint Venture to Wells
Development will be credited as a purchase price adjustment or paid to the
Fund X-XI Joint Venture at the closing of the acquisition of the Cort JV
Interest from Wells Development since Wells Development is prohibited from
making any profit on the transaction during the holding period. The Fund X-
XI Joint Venture will have no property rights in the Cort Building prior to
closing nor any potential liability on the Cort Loan, which will be paid off
prior to closing.
Rental Revenues
Rental income from the lease is recognized on a straight-line basis over the
life of the lease.
2. BASIS OF ACCOUNTING
The accompanying statement of revenues over certain operating expenses is
presented on the accrual basis. This statement has been prepared in
accordance with the applicable rules and regulations of the Securities and
Exchange Commission for real estate properties acquired. Accordingly, the
statement excludes certain historical expenses, such as interest,
depreciation, and management fees, not comparable to the operations of the
Cort Furniture Building after acquisition by the Cort Joint Venture.
212
<PAGE>
Arthur Andersen LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wells Real Estate Investment Trust, Inc.:
We have audited the accompanying statement of revenues over certain operating
expenses for the VANGUARD CELLULAR BUILDING for the period from inception
(November 16, 1998) to December 31, 1998. This financial statement is the
responsibility of management. Our responsibility is to express an opinion on
this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of revenues over certain operating
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement of
revenues over certain operating expenses. 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
audit provides a reasonable basis for our opinion.
As described in Note 2, this financial statement excludes certain expenses that
would not be comparable with those resulting from the operations of the Vanguard
Cellular Building after acquisition by Wells Operating Partnership, L.P. (on
behalf of Wells Real Estate Investment Trust, Inc.). The accompanying statement
of revenues over certain operating expenses was prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission and is not intended to be a complete presentation of the Vanguard
Cellular Building's revenues and expenses.
In our opinion, the statement of revenues over certain operating expenses
presents fairly, in all material respects, the revenues over certain operating
expenses of the Vanguard Cellular Building for the period from inception
(November 16, 1998) to December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
February 26, 1999
213
<PAGE>
VANGUARD CELLULAR BUILDING
STATEMENT OF REVENUES OVER CERTAIN
OPERATING EXPENSES
FOR THE PERIOD FROM INCEPTION
(NOVEMBER 16, 1998) TO DECEMBER 31, 1998
<TABLE>
<S> <C>
RENTAL REVENUES $171,855
OPERATING EXPENSES, net of reimbursements 0
---------
REVENUES OVER CERTAIN OPERATING EXPENSES $171,855
=========
</TABLE>
The accompanying notes are an integral part of this statement.
214
<PAGE>
VANGUARD CELLULAR BUILDING
NOTES TO STATEMENT OF REVENUES
OVER CERTAIN OPERATING EXPENSES
FOR THE PERIOD FROM INCEPTION
(NOVEMBER 16, 1998) TO DECEMBER 31, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Description of Real Estate Property Acquired
On February 4, 1999, Wells Operating Partnership, L.P. ("Wells OP"), a
Delaware limited partnership, formed to acquire and hold real estate
properties on behalf of Wells Real Estate Investment Trust, Inc. (the
"Registrant"), acquired a four-story office building (the "Vanguard Cellular
Building") containing approximately 81,859 rentable square feet, for the
price of $12,291,200 plus acquisition expenses, including legal fees, of
approximately $240,900. Wells OP paid $6,382,100 in cash and obtained a loan
in the amount of $6,450,000 from NationsBank, N.A. (the "NationsBank Loan").
As of February 4, 1999, $6,150,000 was outstanding on the NationsBank Loan.
The NationsBank Loan gives Wells OP the option of extending the term of the
loan after the initial six months. The interest rate for the initial six
months of the NationsBank Loan is fixed at 7%. On August 1, 1999, Wells OP
may extend the NationsBank Loan at a rate of LIBOR plus 200 basis points for
up to 29 additional months. During the term of the extension, Wells OP is
required to make quarterly principal installments in an amount equal to one-
ninth of the outstanding principal balance as of October 1, 1999. The
NationsBank Loan is secured by a first mortgage against the Vanguard Cellular
Building. Legal fees, loan origination costs, and appraisal fees incurred
from obtaining the NationsBank Loan totaled approximately $29,000.
The Vanguard Cellular Building is 100% occupied by one tenant with a ten-year
lease term that commenced on November 16, 1998 and expires on November 15,
2008. Construction of the building was completed in November 1998. Under
the terms of the lease agreement, monthly base rent payable is subject to
escalations of 2% per annum and certain lease inception discounts. The lease
is a triple net lease, whereby the terms require the tenant to reimburse
Wells OP for certain operating expenses, as defined in the lease, related to
the building. All of the operating expenses for the period from lease
inception (November 16, 1998) to December 31, 1998 have been passed through
to the tenant.
215
<PAGE>
Rental Revenues
Rental income from the lease is recognized on a straight-line basis over the
life of the lease.
2. BASIS OF ACCOUNTING
The accompanying statement of revenues over certain operating expenses is
presented on the accrual basis. This statement has been prepared in
accordance with the applicable rules and regulations of the Securities and
Exchange Commission for real estate properties acquired. Accordingly, the
statement excludes certain historical expenses, such as interest,
depreciation, and management fees, not comparable to the operations of the
Vanguard Cellular Building after acquisition by Wells OP.
216
<PAGE>
Arthur Andersen LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wells Real Estate Investment Trust, Inc. and Wells Real Estate Fund XII,
L.P.:
We have audited the accompanying statement of revenues over certain operating
expenses for the EYBL CARTEX BUILDING for the year ended December 31, 1998.
This financial statement is the responsibility of management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of revenues over certain operating
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement of
revenues over certain operating expenses. 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
audit provides a reasonable basis for our opinion.
As described in Note 2, this financial statement excludes certain expenses that
would not be comparable with those resulting from the operations of the EYBL
CarTex Building after acquisition by the Wells Fund XI-Fund XII-REIT Joint
Venture (a joint venture between the Wells Operating Partnership, L.P. [on
behalf of Wells Real Estate Investment Trust, Inc.], Wells Real Estate Fund XI,
L.P., and Wells Real Estate Fund XII, L.P.). The accompanying statement of
revenues over certain operating expenses was prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission and is not intended to be a complete presentation of the EYBL CarTex
Building's revenues and expenses.
In our opinion, the statement of revenues over certain operating expenses
presents fairly, in all material respects, the revenues over certain operating
expenses of the EYBL CarTex Building for the year ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
May 21, 1999
217
<PAGE>
EYBL CARTEX BUILDING
STATEMENTS OF REVENUES
OVER CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
1998 1999
--------- ----------
(Unaudited)
<S> <C> <C>
RENTAL REVENUES $213,330 $63,990
OPERATING EXPENSES, net of reimbursements 14,343 0
--------- --------
REVENUES OVER CERTAIN OPERATING EXPENSES $198,987 $63,990
========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
218
<PAGE>
EYBL CARTEX BUILDING
NOTES TO STATEMENTS OF REVENUES
OVER CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Description of Real Estate Property Acquired
The EYBL CarTex Building is an industrial building consisting of a total of
169,510 square feet. On May 18, 1999, Wells Real Estate, LLC - SC I
("Wells LLC"), a Georgia limited liability company wholly owned by the
Wells Fund XI-REIT Joint Venture (the "Joint Venture"), acquired an
industrial building located in Fountain Inn, unincorporated Greenville
County, South Carolina (the "EYBL CarTex Building"). Wells LLC purchased
the EYBL CarTex Building from Liberty Property Trust, a Pennsylvania
limited partnership.
The Joint Venture is a Georgia joint venture between Wells Real Estate Fund
XI, L.P. ("Wells Fund XI"), a Georgia limited partnership, and Wells
Operating Partnership, L.P. ("Wells OP"), a Delaware limited partnership
formed to acquire, own, lease, operate, and manage real properties on
behalf of Wells Real Estate Investment Trust, Inc. The Joint Venture was
formed on May 1, 1999 for the purpose of the acquisition, ownership,
development, leasing, operations, sale, and management of real properties.
On June 21, 1999, Wells Real Estate Fund XII, L.P., a Georgia limited
partnership, was admitted to the Joint Venture, and the Joint Venture was
renamed the Wells Fund XI-Fund XII-REIT Joint Venture.
The purchase price for the EYBL CarTex Building was $5,085,000. Wells LLC
also incurred additional acquisition expenses in connection with the
purchase of the EYBL CarTex Building, including attorneys' fees, recording
fees, and other closing costs of $36,828. Wells Fund XI contributed
$1,530,000 to the Joint Venture and Wells OP contributed $3,591,828 to the
Joint Venture.
Rental Revenues
Rental income from the lease is recognized on a straight-line basis over
the life of the lease.
219
<PAGE>
2. BASIS OF ACCOUNTING
The accompanying statements of revenues over certain operating expenses are
presented on the accrual basis. These statements have been prepared in
accordance with the applicable rules and regulations of the Securities and
Exchange Commission for real estate properties acquired. Accordingly, the
statements exclude certain historical expenses, such as depreciation and
management fees, not comparable to the operations of the EYBL CarTex
Building after acquisition by the Joint Venture.
220
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wells Real Estate Fund XI, L.P.,
Wells Real Estate Fund XII, L.P., and
Wells Real Estate Investment Trust, Inc.:
We have audited the accompanying statement of revenues over certain operating
expenses for the SPRINT BUILDING for the year ended December 31, 1998. This
financial statement is the responsibility of management. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of revenues over certain operating
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement of
revenues over certain operating expenses. 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
audit provides a reasonable basis for our opinion.
As described in Note 2, this financial statement excludes certain expenses that
would not be comparable with those resulting from the operations of the Sprint
Building after acquisition by the Wells Fund XI-Fund XII-REIT Joint Venture (a
joint venture between the Wells Operating Partnership, L.P. [on behalf of Wells
Real Estate Investment Trust, Inc.], Wells Real Estate Fund XI, L.P., and Wells
Real Estate Fund XII, L.P.). The accompanying statement of revenues over
certain operating expenses was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission and is not
intended to be a complete presentation of the Sprint Building's revenues and
expenses.
In our opinion, the statement of revenues over certain operating expenses
presents fairly, in all material respects, the revenues over certain operating
expenses of the Sprint Building for the year ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
July 12, 1999
221
<PAGE>
SPRINT BUILDING
STATEMENTS OF REVENUES OVER CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
1998 1999
-------------- -----------------
(Unaudited)
<S> <C> <C>
RENTAL REVENUES $1,050,725 $262,681
OPERATING EXPENSES, net of reimbursements 19,410 2,250
---------- --------
REVENUES OVER CERTAIN OPERATING EXPENSES $1,031,315 $260,431
---------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
222
<PAGE>
SPRINT BUILDING
NOTES TO STATEMENTS OF REVENUES
OVER CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Description of Real Estate Property Acquired
On July 2, 1999, the Wells Fund XI-XII-REIT Joint Venture (the "Joint
Venture") acquired a three-story office building with approximately 68,900
rentable square feet located in Leawood, Johnson County, Kansas (the "Sprint
Building"). The Joint Venture is a joint venture partnership between Wells
Real Estate Fund XI, L.P. ("Wells Fund XI"), Wells Real Estate Fund XII, L.P.
("Wells Fund XII"), and Wells Operating Partnership, L.P. ("Wells OP"), a
Delaware limited partnership formed to acquire, own, lease, operate and
manage real properties on behalf of Wells Real Estate Investment Trust, Inc.
(the "Wells REIT"). Wells Fund XI contributed $3,000,000, Wells Fund XII
contributed $1,000,000 and Wells OP contributed $5,546,210 to the Joint
Venture for their respective share of the purchase of the Sprint Building.
The entire 68,900 rentable square feet of the Sprint Building is currently
under a net lease agreement dated February 14, 1997 (the "Lease") with
Sprint. The Lease was assigned to the Joint Venture at the closing. The
initial term of the Lease is ten years which commenced on May 19, 1997 and
expires on May 18, 2007. Sprint has the right to extend the Lease for 2
additional five-year periods. Each extension option must be exercised by
giving notice to the landlord at least 270 days, but no earlier than 365
days, prior to the expiration date of the then current lease term. The
monthly base rent payable under the Lease will be $83,254.17 through May 18,
2002 and $91,866.67 for the remainder of the Lease term. The monthly base
rent payable for each extended term of the Lease will be equal to 95% of the
then current market rate which is calculated as a full-service rental rate
less anticipated annual operating expenses on a rentable square foot basis
charged for space of comparable location, size, and conditions in comparable
office buildings in the suburban south Kansas City, Missouri and south
Johnson County, Kansas areas.
Under the Lease, Sprint is required to pay as additional rent all real estate
taxes, special assessments, utilities, taxes, insurance, and other operating
costs with respect to the Sprint Building during the term of the Lease. In
addition, Sprint is responsible for all routine maintenance and repairs
including interior mechanical and electrical, HVAC, parking lot, and
landscaping to the Sprint Building. The
223
<PAGE>
Joint Venture, as landlord, is responsible for repair and replacement of the
exterior, roof, foundation, and structure.
The Lease contains a termination option which may be exercised by Sprint
effective as of May 18, 2004 provided Sprint has not exercised its expansion
option, as described below. The early termination requires nine months'
notice and a termination payment to the Joint Venture equal to $6.53 per
square foot, or $450,199. Sprint also has an expansion option for an
additional 20,000 square feet of office space which may be exercised in two
phases, which involves building on unfinished ground level space that is
currently used as covered parking within the existing building footprint and
shell. At each exercise of an expansion option, the remaining lease term will
be extended to be a minimum of an additional five years from the date of the
completion of such expansion.
Rental Revenues
Rental income from the lease is recognized on a straight-line basis over the
life of the lease.
2. BASIS OF ACCOUNTING
The accompanying statements of revenues over certain operating expenses are
presented on the accrual basis. These statements have been prepared in
accordance with the applicable rules and regulations of the Securities and
Exchange Commission for real estate properties acquired. Accordingly, the
statements exclude certain historical expenses, such as depreciation and
management fees, not comparable to the operations of the Sprint Building
after acquisition by the Joint Venture.
224
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wells Real Estate Investment Trust, Inc.,
Wells Real Estate Fund XI, L.P.,
and Wells Real Estate Fund XII, L.P.:
We have audited the accompanying statement of revenues over certain operating
expenses for the JOHNSON MATTHEY BUILDING for the year ended December 31, 1998.
This financial statement is the responsibility of management. Our responsibility
is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of revenues over certain operating
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement of
revenues over certain operating expenses. 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
audit provides a reasonable basis for our opinion.
As described in Note 2, this financial statement excludes certain expenses that
would not be comparable with those resulting from the operations of the Johnson
Matthey Building after acquisition by the Wells Fund XI-Fund XII-REIT Joint
Venture (a joint venture between the Wells Operating Partnership, L.P. [on
behalf of Wells Real Estate Investment Trust, Inc.], Wells Real Estate Fund XI,
L.P., and Wells Real Estate Fund XII, L.P.). The accompanying statement of
revenues over certain operating expenses was prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission and is not intended to be a complete presentation of the Johnson
Matthey Building's revenues and expenses.
In our opinion, the statement of revenues over certain operating expenses
presents fairly, in all material respects, the revenues over certain operating
expenses of the Johnson Matthey Building for the year ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
August 30, 1999
225
<PAGE>
JOHNSON MATTHEY BUILDING
STATEMENTS OF REVENUES OVER CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999
1998 1999
-------- ----------
(Unaudited)
RENTAL REVENUES $745,935 $424,724
OPERATING EXPENSES, net of reimbursements 100,314 59,398
-------- --------
REVENUES OVER CERTAIN OPERATING EXPENSES $645,621 $365,326
-------- --------
The accompanying notes are an integral part of these statements.
226
<PAGE>
JOHNSON MATTHEY BUILDING
NOTES TO STATEMENTS OF REVENUES
OVER CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Description of Real Estate Property Acquired
On August 17, 1999, the Wells Fund XI-Fund XII-REIT Joint Venture (the
"Joint Venture") acquired an office building with approximately 130,000
rentable square feet located in Tredyffrin Township, Chester County,
Pennsylvania (the "Johnson Matthey Building"). The Joint Venture is a joint
venture partnership between Wells Real Estate Fund XI, L.P. ("Wells Fund
XI"), Wells Real Estate Fund XII, L.P. ("Wells Fund XII"), and Wells
Operating Partnership, L.P. ("Wells OP"), a Delaware limited partnership
formed to acquire, own, lease, operate, and manage real properties on
behalf of Wells Real Estate Investment Trust, Inc. (the "Wells REIT").
Wells Fund XI contributed $3,494,797, Wells Fund XII contributed
$1,500,000, and Wells OP contributed $3,055,694 to the Joint Venture for
their respective share of the purchase of the Johnson Matthey Building.
The entire 133,000 rentable square feet of the Johnson Matthey Building is
currently under a net lease agreement (the "Lease") with Johnson Matthey.
The Lease was assigned to the Joint Venture at the closing. The initial
term of the Lease is ten years, which commenced on July 1, 1997 and expires
on June 30, 2007. Johnson Matthey has the right to extend the Lease for two
additional three-year periods. Each extension option must be exercised by
giving notice to the landlord at least 12 months prior to the expiration
date of the then current lease term. The monthly base rent payable for each
extended term of the Lease will be equal to the fair market rent taking
into consideration rental rates for comparable industrial and research and
development properties in the local market area.
Under the Lease, Johnson Matthey is required to pay as additional rent all
real estate taxes, special assessments, utilities, taxes, insurance, and
other operating costs with respect to the Johnson Matthey Building during
the term of the Lease. In addition, Johnson Matthey is responsible for all
routine maintenance and repairs including interior mechanical and
electrical, HVAC, parking lot, and landscaping to the Johnson Matthey
Building. The Joint Venture, as landlord, is responsible for repair and
replacement of the exterior, roof, foundation, and structure.
227
<PAGE>
The Lease contains a purchase option, which may be exercised by Johnson
Matthey in the event that the Joint Venture desires to sell the building to
an unrelated third party. The Joint Venture must give Johnson Matthey
written notice of its intent to sell the Johnson Matthey Building, and
Johnson Matthey will have ten days from the date of such notice to provide
written notice of its intent to purchase the building. If Johnson Matthey
exercises the purchase option, it must purchase the Johnson Matthey
Building on the same terms contained in the offer.
Rental Revenues
Rental income from the lease is recognized on a straight-line basis over
the life of the lease.
2. BASIS OF ACCOUNTING
The accompanying statements of revenues over certain operating expenses are
presented on the accrual basis. These statements have been prepared in
accordance with the applicable rules and regulations of the Securities and
Exchange Commission for real estate properties acquired. Accordingly, the
statements exclude certain historical expenses, such as depreciation, not
comparable to the operations of the Johnson Matthey Building after
acquisition by the Joint Venture.
228
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wells Real Estate Investment Trust, Inc.:
We have audited the accompanying statement of revenues over certain operating
expenses for the VIDEOJET BUILDING for the year ended December 31, 1998. This
financial statement is the responsibility of management. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of revenues over certain operating
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement of
revenues over certain operating expenses. 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
audit provides a reasonable basis for our opinion.
As described in Note 2, this financial statement excludes certain expenses that
would not be comparable with those resulting from the operations of the Videojet
Building after acquisition by the Wells Operating Partnership, L.P. (on behalf
of Wells Real Estate Investment Trust, Inc.). The accompanying statement of
revenues over certain operating expenses was prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission and is not intended to be a complete presentation of the Videojet
Building's revenues and expenses.
In our opinion, the statement of revenues over certain operating expenses
presents fairly, in all material respects, the revenues over certain operating
expenses of the Videojet Building for the year ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
September 17, 1999
229
<PAGE>
VIDEOJET BUILDING
STATEMENTS OF REVENUES OVER CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
RENTAL REVENUES $2,995,806 $1,497,903
OPERATING EXPENSES, net of reimbursements 0 0
------------ -----------
REVENUES OVER CERTAIN OPERATING
EXPENSES $2,995,806 $1,497,903
------------ -----------
</TABLE>
The accompanying notes are an integral part of these statements.
230
<PAGE>
VIDEOJET BUILDING
NOTES TO STATEMENTS OF REVENUES
OVER CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Description of Real Estate Property Acquired
On September 10, 1999, the Wells Operating Partnership L.P. ("Wells OP"), a
Delaware Limited Partnership formed to acquire, own, lease, operate, and
manage real properties on behalf of the Wells Real Estate Investment Trust,
Inc., acquired a two-story corporate office building with a single story
assembly and manufacturing space containing approximately 250,354 rentable
square feet located in Wood Dale, DuPage County, Illinois (the "Videojet
Building"). The purchase price of the Videojet Building was $33,158,865
which includes acquisition related expenses and $500,000 in selling
commissions paid by Wells OP. Wells OP paid $26,130,940 in cash and obtained
$7,000,000 in loan proceeds from a line of credit held by SouthTrust Bank,
N.A. Additional acquisition fees of $27,925 were incurred related to
attorneys' fees, environmental consultants fees, appraisers fees, and other
costs.
The entire 250,354 rentable square feet of the Videojet Building is currently
under a net lease agreement dated November 1991 (the "Lease") with Videojet
Systems International, Inc. ("Videojet"). The Lease was assigned to Wells OP
at the closing. The initial term of the Lease is 20 years which commenced in
November 1991 and expires in November 2011. Videojet has the right to extend
the Lease for one additional five-year period. The extension option must be
exercised by giving notice to the landlord at least 365 days prior to the
expiration date of the then current lease term. The monthly base rent
payable under the Lease is $236,579 through November 2001 and will be
$281,396 for the remainder of the lease term. The monthly base rent payable
for the extended term of the Lease will be $388,953, should Videojet choose
to extend the lease.
Under the Lease, Videojet is required to pay as additional rent all real
estate taxes, special assessments, utilities, taxes, insurance, and other
operating costs associated with the Videojet Building during the term of the
Lease. In addition, Videojet is responsible for repair and maintenance of
the roof, walls, structure and foundation, landscaping and the heating,
ventilating, air conditioning, mechanical, electrical, plumbing, and other
systems.
231
<PAGE>
Rental Revenues
Rental income from the lease is recognized on a straight-line basis over the
life of the lease.
2. BASIS OF ACCOUNTING
The accompanying statements of revenues over certain operating expenses are
presented on the accrual basis. These statements have been prepared in
accordance with the applicable rules and regulations of the Securities and
Exchange Commission for real estate properties acquired. Accordingly, the
statements exclude certain historical expenses, such as depreciation,
interest, and management fees, not comparable to the operations of the
Videojet Building after acquisition by Wells OP.
232
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wells Real Estate Investment Trust, Inc.,
and Wells Real Estate Fund XII, L.P.:
We have audited the accompanying statement of revenues over certain operating
expenses for the GARTNER BUILDING for the year ended December 31, 1998. This
financial statement is the responsibility of management. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of revenues over certain operating
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement of
revenues over certain operating expenses. 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
audit provides a reasonable basis for our opinion.
As described in Note 2, this financial statement excludes certain expenses that
would not be comparable with those resulting from the operations of the Gartner
Building after acquisition by the Wells Fund XI-Fund XII-REIT Joint Venture (a
joint venture between the Wells Operating Partnership, L.P. [on behalf of Wells
Real Estate Investment Trust, Inc.], Wells Real Estate Fund XI, L.P., and Wells
Real Estate Fund XII, L.P.). The accompanying statement of revenues over
certain operating expenses was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission and is not
intended to be a complete presentation of the Gartner Building's revenues and
expenses.
In our opinion, the statement of revenues over certain operating expenses
presents fairly, in all material respects, the revenues over certain operating
expenses of the Gartner Building for the year ended December 31, 1998 in
conformity with generally accepted accounting principles.
/S/ Arthur Andersen LLP
Atlanta, Georgia
September 24, 1999
233
<PAGE>
GARTNER BUILDING
STATEMENTS OF REVENUES OVER CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
1998 1999
---------- ----------
(Unaudited)
<S> <C> <C>
RENTAL REVENUES $738,074 $402,590
OPERATING EXPENSES, net of reimbursements 8,505 75
---------- ----------
REVENUES OVER CERTAIN OPERATING EXPENSES $729,569 $402,515
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
234
<PAGE>
GARTNER BUILDING
NOTES TO STATEMENTS OF REVENUES
OVER CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Description of Real Estate Property Acquired
On September 20, 1999, the Wells Fund XI-Fund XII-REIT Joint Venture (the
"Joint Venture") acquired a two story office building with approximately
62,400 rentable square feet located in Fort Myers, Lee County, Florida (the
"Gartner Building").
The Joint Venture is a partnership between Wells Real Estate Fund XII, L.P.
("Wells Fund XII"), Wells Real Estate Fund XI, L.P. ("Wells Fund XI"), and
Wells Operating Partnership, L.P. ("Wells OP"), a Delaware limited
partnership formed to acquire, own, lease, operate, and manage real
properties on behalf of Wells Real Estate Investment Trust, Inc.
The purchase price for the Gartner Building was $8,320,000. The Joint
Venture also incurred additional acquisition expenses in connection with the
purchase of the Gartner Building, including attorneys' fees, recording fees
and other closing costs, of $27,600.
The Wells Fund XII contributed $2,800,000, Wells Fund XI contributed
$106,550, and Wells OP contributed $5,441,050 to the Joint Venture for their
respective share of the acquisition costs for the Gartner Building.
The entire 62,400 rentable square feet of the Gartner Building is currently
under a net lease agreement with Gartner dated July 30, 1997 (the "Lease").
The Lease was assigned to the Joint Venture at the closing.
The initial term of the Lease is ten years which commenced on February 1,
1998 and expires on January 31, 2008. Gartner has the right to extend the
Lease for two additional five year periods of time. Each extension option
must be exercised by giving at least one year's notice to the landlord prior
to the expiration date of the then current lease term.
Under the Lease, Gartner is required to pay as additional rent all real
estate taxes, special assessments, utilities, taxes, insurance, and other
operating costs with respect to the Gartner Building during the term of the
Lease. In addition, Gartner
235
<PAGE>
is responsible for all routine maintenance and repairs to the Gartner
Building. The Joint Venture, as landlord, is responsible for repair and
replacement of the roof, structure, and paved parking areas.
Rental Revenues
Rental income from the lease is recognized on a straight-line basis over the
life of the lease.
2. BASIS OF ACCOUNTING
The accompanying statements of revenues over certain operating expenses are
presented on the accrual basis. These statements have been prepared in
accordance with the applicable rules and regulations of the Securities and
Exchange Commission for real estate properties acquired. Accordingly, the
statements exclude certain historical expenses, such as depreciation and
management and leasing fees, not comparable to the operations of the Gartner
Building after acquisition by the Joint Venture.
236
<PAGE>
WELLS REAL ESTATE INVESTMENT TRUST, INC.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Wells Operating Partnership, L.P., ("Wells OP") is a Delaware limited
partnership that was organized to own and operate properties on behalf of Wells
Real Estate Investment Trust, Inc. ("Wells REIT"). Wells REIT is the general
partner of Wells OP.
The following unaudited pro forma statements of income for the year ended
December 31, 1998 and the nine-month period ended September 30, 1999 have been
prepared to give effect to the following transactions as if each occurred on
January 1, 1998: (i) Wells OP's acquisition of an equity interest in Fund IX,
Fund X, Fund XI, and REIT Joint Venture (formerly Fund IX-Fund X Associates) (a
joint venture between Wells Real Estate Fund IX, L.P., Wells Real Estate Fund X,
L.P. ["Wells Fund X"], Wells Real Estate Fund XI, L.P. ["Wells Fund XI"], and
Wells OP); (ii) acquisition of Lucent Building by Fund IX, Fund X, Fund XI, and
REIT Joint Venture; (iii) Wells OP's adjusted equity interest in Fund IX, Fund
X, Fund XI, and REIT Joint Venture after giving affect to the contribution by
Wells Fund X of Iomega Building to Fund IX, Fund X, Fund XI, and REIT Joint
Venture; (iv) acquisition of the Fairchild Building by Wells/Fremont Associates
(a joint venture between Wells OP and Fund X and Fund XI Associates [a joint
venture between Wells Fund X and Wells Fund XI]); (v) acquisition of the Cort
Furniture Building by Wells/Orange County Associates (a joint venture between
Wells OP and Fund X and Fund XI Associates); (vi) acquisition of the EYBL CarTex
Building by Wells Fund XI-Fund XII-REIT Joint Venture (a joint venture between
Wells Fund XI, Wells Real Estate Fund XII, L.P., and Wells OP); (vii)
acquisition of the Sprint Building by Wells Fund XI-Fund XII-REIT Joint Venture;
(viii) acquisition of the Johnson Matthey Building by Wells Fund XI-Fund XI-REIT
Joint Venture; and (ix) acquisition of the Gartner Building by Wells Fund XI-
Fund XI-REIT Joint Venture.
The following unaudited pro forma statements of income for the year ended
December 31, 1998 and the nine-month period ended September 30, 1999 have been
prepared to give effect to the acquisition by Wells OP of the Vanguard Cellular
Building and the Videojet Building as if the acquisitions had occurred on
November 16, 1998 (Vanguard Cellular lease inception date) and on January 1,
1998, respectively.
No pro forma balance sheet as of September 30, 1999 has been prepared since no
acquisitions have occurred since September 30, 1999, the date of Wells REIT's
most recently issued historical balance sheet.
These unaudited pro forma financial statements are prepared for informational
purposes only and are not necessarily indicative of future results or of actual
results that would have been achieved had the acquisition been consummated at
the beginning of the period presented.
237
<PAGE>
WELLS REAL ESTATE INVESTMENT TRUST, INC.
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Fund IX,
Fund X,
Wells Real Fund XI,
Estate and REIT
Investment Joint Cort Vanguard
Trust, Inc. Venture Lucent Iomega Fairchild Furniture Cellular
----------- ----------- -------- -------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental income $ 20,994 $ 0 $ 0 $ 0 $ 0 $ 0 $ 171,855(b)
Equity in income (loss) of joint
ventures 263,315 17,909(a) 7,142(a) 6,158(a) 13,316(a) 11,489(a) 0
Interest income 110,869 0 0 0 0 0 0
-------- ----------- ------- ---------- ---------- --------- ---------
395,178 17,909 7,142 6,158 13,316 11,489 171,855
-------- ----------- ------- ---------- ---------- --------- ---------
EXPENSES:
Operating costs, net of
reimbursements 11,033 0 0 0 0 0 0
General and administrative 29,943 0 0 0 0 0 2,384
Depreciation 0 0 0 0 0 0 60,896(c)
Interest 0 0 0 0 0 0 54,255(d)
Legal and accounting 19,552 0 0 0 0 0 0
Computer costs 616 0 0 0 0 0 0
-------- ----------- ------- ---------- ---------- --------- ---------
61,144 0 0 0 0 0 117,535
-------- ----------- ------- ---------- ---------- --------- ---------
NET INCOME (LOSS) $334,034 $ 17,909 $ 7,142 $ 6,158 $ 13,316 $ 11,489 $ 54,320
======== =========== ======= ========== ========== ========= =========
HISTORICAL EARNINGS PER SHARE (BASIC AND
DILUTED) $ 0.40
========
PRO FORMA EARNINGS PER SHARE (BASIC AND
DILUTED)
</TABLE>
238
<PAGE>
<TABLE>
<CAPTION>
Pro
EYBL Johnson Forma
CarTex Sprint Matthey Gartner Videojet Total
-------- -------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental income $ 0 $ 0 $ 0 $ 0 $2,995,806(b) $3,188,655
Equity in income (loss) of joint ventures (5,022)(a) 391,893(a) 235,468(a) 258,285(a) 0 1,199,953
Interest income 0 0 0 0 0 110,869
-------- -------- --------- --------- ---------- ----------
(5,022) 391,893 235,468 258,285 2,995,806 4,499,477
-------- -------- --------- --------- ---------- ----------
EXPENSES:
Operating costs, net of reimbursements 0 0 0 0 0 11,033
General and administrative 0 0 0 0 0 32,327
Depreciation 0 0 0 0 1,173,286(c) 1,234,182
Interest 0 0 0 0 520,625(e) 574,880
Legal and accounting 0 0 0 0 0 19,552
Computer costs 0 0 0 0 0 616
-------- -------- --------- --------- ---------- ----------
0 0 0 0 1,693,911 1,872,590
-------- -------- --------- --------- ---------- ----------
NET INCOME (LOSS) $(5,022) $391,893 $235,468 $258,285 $1,301,895 $2,626,887
======== ======== ========= ========= ========== ==========
HISTORICAL EARNINGS PER SHARE (BASIC AND DILUTED)
PRO FORMA EARNINGS PER SHARE (BASIC AND DILUTED) $ 0.25(f)
==========
</TABLE>
(a) Reflects Wells Real Estate Investment Trust, Inc.'s equity in income (loss)
of the joint venture which owns the respective property; the pro forma
adjustments result from rental revenues less operating expenses, management
and leasing fees, and depreciation of the respective property.
(b) Rental income is recognized on a straight-line basis.
(c) Depreciation expense is based on the straight-line method and a 25-year
life; depreciation expense commences when the property is placed in
service.
(d) Interest expense is based on the $6,150,000 note payable which bears
interest at 7%.
(e) Interest expense is based on the $7,000,000 note payable which bears
interest at 7.4375%.
(f) As of the latest property acquisition date, September 20, 1999, Wells Real
Estate Investment Trust, Inc. had 10,588,947 shares of common stock
outstanding; the pro forma earnings per share amount is as if these shares
were outstanding for the year ending December 31, 1998.
239
<PAGE>
WELLS REAL ESTATE INVESTMENT TRUST, INC.
STATEMENT OF INCOME
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Wells Real Estate
Investment EYBL
Trust, Inc. Vanguard CarTex Sprint
---------------- ---------- --------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Rental income $2,806,158 $87,071(a) $ 0 $ 0
Equity in income of joint ventures 783,065 0 9,428(d) 183,914(d)
Interest income 407,067 0 0 0
------------- --------- --------- ----------
3,996,290 87,071 9,428 183,914
------------- --------- --------- ----------
EXPENSES:
Operating costs, net of reimbursements 359,112 0 0 0
Management and leasing fees 150,908 1,710 0 0
Depreciation 1,036,003 40,236(b) 0 0
Interest 0 33,866(c) 0 0
Administrative costs 91,016 0 0 0
Legal and accounting 78,637 0 0 0
Computer costs 8,182 0 0 0
------------- --------- --------- ----------
1,723,858 75,812 0 0
------------- --------- --------- ----------
NET INCOME $2,272,432 $ 11,259 $9,428 $183,914
============= ========= ========= ===========
HISTORICAL EARNINGS PER SHARE (BASIC AND DILUTED) $ 0.37
=============
PRO FORMA EARNINGS PER SHARE (BASIC AND DILUTED)
</TABLE>
240
<PAGE>
<TABLE>
<CAPTION>
Johnson Pro Forma
Matthey Gartner Videojet Total
--------- ---------- -------------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Rental income $ 0 $ 0 $2,093,754(a) $4,986,983
Equity in income of joint ventures 166,931(d) 194,078(d) 0 1,337,416
Interest income 0 0 0 407,067
-------- --------- ----------- -----------
166,931 194,078 2,093,754 6,731,466
-------- --------- ----------- -----------
EXPENSES:
Operating costs, net of reimbursements 0 0 0 359,112
Management and leasing fees 0 0 0 152,618
Depreciation 0 0 820,004(b) 1,896,243
Interest 0 0 363,863(e) 397,729
Administrative costs 0 0 0 91,016
Legal and accounting 0 0 0 78,637
Computer costs 0 0 0 8,182
-------- --------- ----------- -----------
0 0 1,183,867 2,983,537
-------- --------- ----------- -----------
NET INCOME $166,931 $194,078 $ 909,887 $3,747,929
======== ========= =========== ===========
HISTORICAL EARNINGS PER SHARE (BASIC AND DILUTED)
PRO FORMA EARNINGS PER SHARE (BASIC AND DILUTED) $ 0.35(f)
===========
</TABLE>
(a) Rental income is recognized on a straight-line basis.
(b) Depreciation expense is based on the straight-line method and a 25-year
life; depreciation expense commences when the property is placed in
service.
(c) Interest expense is based on the $6,150,000 note payable which bears
interest at 7%.
(d) Reflects Wells Real Estate Investment Trust, Inc.'s equity in income of the
joint venture which owns the respective property; the pro forma adjustments
result from rental revenues less operating expenses, management and leasing
fees, and depreciation of the respective property.
(e) Interest expense is based on the $7,000,000 note payable which bears
interest at 7.4375%.
(f) As of the latest property acquisition date, September 20, 1999, Wells Real
Estate Investment Trust, Inc. had 10,588,957 shares of common stock
outstanding; the pro forma earnings per share amount is as if these shares
were outstanding for the nine-month period ending September 30, 1999.
241
<PAGE>
PRIOR PERFORMANCE TABLES
The following prior performance tables (Tables) provide information
relating to real estate investment programs sponsored by the advisor and its
affiliates (Wells Public Programs) which have investment objectives
substantially similar to the Wells REIT. (See "Investment Objectives and
Criteria.") All of the Wells Public Programs, except for the Wells REIT, have
used a substantial amount of capital, and no acquisition indebtedness, to
acquire their properties.
Prospective investors should read these Tables carefully together with the
summary information concerning the Wells Public Programs as set forth in the
"Prior Performance Summary" section of this prospectus.
Investors in the Wells REIT will not own any interest in the other Wells
Public Programs and should not assume that they will experience returns, if any,
comparable to those experienced by investors in the Wells Public Programs.
The advisor is responsible for the acquisition, operation, maintenance and
resale of the real estate properties. The financial results of the Wells Public
Programs thus provide an indication of the advisor's performance of its
obligations during the periods covered. However, general economic conditions
affecting the real estate industry and other factors contribute significantly to
financial results.
The following tables are included in this Supplement to the Prospectus:
Table I - Experience in Raising and Investing Funds (As a Percentage of
Investment)
Table II - Compensation to Sponsor (in Dollars)
Table III - Annual Operating Results of Wells Public Programs
Table IV (Results of completed programs) and Table V (sales or disposals of
property) have been omitted since none of the Wells Public Programs have sold
any of their properties to date.
Additional information relating to the acquisition of properties by the
Wells Public Programs is contained in Table VI, which is included in Part II of
the registration statement which the Wells REIT has filed with the Securities
and Exchange Commission. As described above, no Wells Public Program has sold
or disposed of any property held by it. Copies of any or all information will
be provided to prospective investors at no charge upon request.
The following are definitions of certain terms used in the Tables:
"Acquisition Fees" shall mean fees and commissions paid by a Wells Public
Program in connection with its purchase or development of a property, except
development fees paid to a person not affiliated with the Wells Public Program
or with a general partner or advisor of the Wells Public Program in connection
with the actual development of a project after acquisition of the land by the
Wells Public Program.
"Organization Expenses" shall include legal fees, accounting fees,
securities filing fees, printing and reproduction expenses and fees paid to the
sponsor in connection with the planning and formation of the Wells Public
Program.
"Underwriting Fees" shall include selling commissions and wholesaling fees
paid to broker-dealers for services provided by the broker-dealers during the
offering.
242
<PAGE>
TABLE I
(UNAUDITED)
EXPERIENCE IN RAISING AND INVESTING FUNDS
This Table provides a summary of the experience of the sponsors of Wells
Public Programs for which offerings have been completed since December 31, 1995.
Information is provided with regard to the manner in which the proceeds of the
offerings have been applied. Also set forth is information pertaining to the
timing and length of these offerings and the time period over which the proceeds
have been invested in the properties. All figures are as of December 31, 1998.
<TABLE>
<CAPTION>
Wells Real Wells Real Wells Real Wells Real
Estate Fund Estate Fund Estate Fund Estate Fund
VIII, L.P. IX, L.P. X, L.P. XI, L.P.
----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Dollar Amount Raised $32,042,689/(3)/ $35,000,000/(4)/ $27,128,912/(5)/ $16,532,802/(6)/
================ ================ ================ ================
Percentage Amount Raised 100.0%/(3)/ 100.0%/(4)/ 100%/(5)/ 100%/(6)/
Less Offering Expenses
Underwriting Fees 10.0% 10.0% 10.0% 9.5%
Organizational Expenses 5.0% 5.0% 5.0% 3.0%
Reserves/(1)/ 0.0% 0.0% 0.0% 0.0%
------ ------ ----- ------
Percent Available for Investment 85.0% 85.0% 85.0% 87.5%
Acquisition and Development Costs
Prepaid Items and Fees related to
Purchase of Property .1% 2.0% 2.4%
Cash Down Payment 80.0% 66.4% 42.1% 0.0%
Acquisition Fees/(2)/ 4.5% 4.5% 4.5% 29.5%
Development and Construction Costs .4% 10.1% 12.0% 3.5%
Reserve for Payment of Indebtedness 0.0% 0.0% 0.0% 0.0%
------ ------ ----- -----
Total Acquisition and Development Cost 85.0% 83.0% 61.0% 33.0%
Percent Leveraged 0.0% 0.0% 0.0% 0.0%
====== ====== ===== =====
Date Offering Began 01/06/95 01/05/96 12/31/96 12/31/97
Length of Offering 12 mo. 12 mo. 12 mo. 12mo.
Months to Invest 90% of Amount Available
for Investment (Measured from Beginning 17 mo. 14 mo. 19 mo. /(7)/
of Offering)
Number of Investors as of 12/31/98 2,247 2,118 1,812 1,345
</TABLE>
______________________
(1) Does not include general partner contributions held as part of reserves.
(2) Includes acquisition fees, real estate commissions, general contractor fees
and/or architectural fees paid to affiliates of the general partners.
(3) Total dollar amount registered and available to be offered was $35,000,000.
Wells Real Estate Fund VIII, L.P. closed its offering on January 4, 1996,
and the total dollar amount raised was $32,042,689.
(4) Total dollar amount registered and available to be offered was $35,000,000.
Wells Real Estate Fund IX, L.P. closed its offering on December 30, 1996,
and the total dollar amount raised was $35,000,000.
243
<PAGE>
(5) Total dollar amount registered and available to be offered was $35,000,000.
Wells Real Estate Fund X, L.P. closed its offering on December 30, 1997,
and the total dollar amount raised was $27,128,912.
(6) Total dollar amount registered and available to be offered was $35,000,000.
Wells Real Estate Fund XI, L.P. closed its offering on December 30, 1998,
and the total dollar amount raised was $16,532,802.
(7) As of December 31, 1998, Wells Real Estate Fund XI, L.P. had not yet
invested 90% of the amount available for investment. The amount invested
in properties (including acquisition fees paid but not yet associated with
a specific property) at December 31, 1998 was 33% of the total dollar
amount raised.
244
<PAGE>
TABLE II
(UNAUDITED)
COMPENSATION TO SPONSOR
The following sets forth the compensation received by general partners or
their affiliates, including compensation paid out of offering proceeds and
compensation paid in connection with the ongoing operations of Wells Public
Programs having similar or identical investment objectives the offerings of
which have been completed since December 31, 1995. These partnerships have not
sold or refinanced any of their properties to date. All figures are as of
December 31, 1998.
<TABLE>
<CAPTION>
Wells Real Wells Real Wells Real Wells Real Other
Estate Fund Estate Fund Estate Fund Estate Fund Public
VIII, L.P. IX, L.P. X, L.P. XI, L.P. Programs/(1)/
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Date Offering Commenced 01/06/95 01/05/96 12/31/96 12/31/97 --
Dollar Amount Raised $32,042,689 $35,000,000 $27,128,912 $16,532,802 $174,198,406
to Sponsor from Proceeds of Offering:
Underwriting Fees/(2)/ $ 174,295 $ 309,556 $ 260,748 $ 151,911 $ 749,861
Acquisition Fees
Real Estate Commissions -- -- -- --
Acquisition and Advisory Fees/(3)/ $ 1,281,708 $ 1,400,000 $ 1,085,157 $ 578,648 $ 8,877,691
Dollar Amount of Cash Generated from Operations
Before Deducting Payments to Sponsor/(4)/ $ 5,898,456 $ 4,472,419 $ 2,100,001 $ 87,465 $ 31,156,353
Amount Paid to Sponsor from Operations:
Property Management Fee/(1)/ $ 165,073 $ 82,791 $ 39,957 $ 6,267 $ 1,089,740
Partnership Management Fee -- -- -- -- --
Reimbursements $ 171,240 $ 72,803 $ 41,659 $ 14,623 $ 1,300,327
Leasing Commissions $ 225,234 $ 174,185 $ 110,655 $ 17,559 $ 1,148,836
General Partner Distributions -- -- -- -- 15,205
Other -- -- -- -- --
Dollar Amount of Property Sales and Refinancing
Payments to Sponsors:
Cash -- -- -- -- --
Notes -- -- -- -- --
Amount Paid to Sponsor from Property Sales
and Refinancing:
Real Estate Commissions -- -- -- -- --
Incentive Fees -- -- -- -- --
Other -- -- -- -- --
</TABLE>
- ------------------------------------------
(1) Includes compensation paid to general partners from Wells Real Estate Fund
I, Wells Real Estate Fund II, Wells Real Estate Fund II-OW, Wells Real
Estate Fund III, L.P., Wells Real Estate Fund IV, L.P., Wells Real Estate
Fund V, L.P., Wells Real Estate Fund VI, L.P. and Wells Real Estate Fund
VII, L.P. during the past three years. In addition to the amounts shown,
affiliates of the general partners of Wells Real Estate Fund I are entitled
to certain property management and leasing fees but have elected to defer
the payment of such fees until a later year on properties owned by Wells
Real Estate Fund I. At December 31, 1998, the amount of such fees due the
general partners totaled $2,283,808.
(2) Includes net underwriting compensation and commissions paid to Wells
Investment Securities, Inc. in connection with the offerings of Wells Real
Estate Funds VIII, IX, X, and XI, which were not reallowed to participating
broker-dealers.
245
<PAGE>
(3) Fees paid to the general partners or their affiliates for acquisition and
advisory services in connection with the review and evaluation of potential
real property acquisitions.
(4) Includes $567,231 in net cash provided by operating activities, $4,769,678
in distributions to limited partners and $561,547 in payments to sponsor for
Wells Real Estate Fund VIII, L.P.; $732,687 in net cash provided by
operating activities, $3,409,953 in distributions to limited partners and
$329,779 in payments to sponsor for Wells Real Estate Fund IX, L.P.;
$500,687 in net cash provided by operating activities, $1,407,043 in
distributions to limited partners and $192,271 in payments to sponsor for
Wells Real Estate Fund X, L.P.; $50,858 in net cash used by operating
activities, $99,874 in distributions to limited partners and $38,449 in
payments to sponsor for Wells Restate Fund XI, L.P.; and $2,917,222 in net
cash provided by operating activities, $24,700,228 in distributions to
limited partners and $3,538,903 in payments to sponsor for other public
programs.
246
<PAGE>
TABLE III
(UNAUDITED)
The following six tables set forth operating results of Wells Public
Programs the offerings of which have been completed since December 31, 1993.
The information relates only to public programs with investment objectives
similar to those of the partnership. All figures are as of December 31 of the
year indicated.
247
<PAGE>
TABLE III (UNAUDITED)
OPERATING RESULTS OF WELLS PROGRAMS
WELLS REAL ESTATE FUND VI, L.P.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------ ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Gross Revenues/(1)/ $ 939,519 $ 884,802 $ 675,782 $ 1,002,567 $ 819,535
Profit on Sale of Properties -- -- -- -- --
Less: Operating Expenses/(2)/ 82,168 82,898 80,479 94,489 112,389
Depreciation and Amortization/(3)/ 1,563 6,250 6,250 6,250 6,250
---------- ---------- ---------- ------------- -----------
Net Income GAAP Basis/(4)/ $ 855,788 $ 795,654 $ 589,053 $ 901,828 700,896
========== ========== ========== ============= ===========
Taxable Income: Operations $1,206,968 $1,091,770 $ 809,389 $ 916,531 667,682
========== ========== ========== ============= ===========
Cash Generated (Used By):
Operations (70,649) (57,206) (2,716) 278,728 276,376
Joint Ventures 1,829,428 1,500,023 1,044,891 766,212 203,543
---------- ---------- ---------- ------------- -----------
$1,758,779 $1,442,817 $1,042,175 $ 1,044,940 $ 479,919
Less Cash Distributions to Investors:
Operating Cash Flow 1,745,626 1,442,817 1,042,175 1,044,940 245,800
Return of Capital 9,986 125,314 -- --
Undistributed Cash Flow from Prior Year Operations 13,153 -- $ 18,027 216,092 --
---------- ---------- ---------- ------------- -----------
Cash Generated (Deficiency) after Cash Distributions $ 13,153 $ (9,986) (143,341) $ (216,092) $ 234,119
Special Items (not including sales and financing):
Source of Funds:
General Partner Contributions -- -- -- -- --
Increase in Limited Partner Contributions -- -- -- -- 12,163,461
---------- ---------- ---------- ------------- -----------
$ 13,153 $ (9,986) $ (143,341) $ (216,092) $12,397,580
Use of Funds:
Sales Commissions and Offering Expenses -- -- -- -- 1,776,909
Return of Original Limited Partner's Investment -- -- -- -- --
Property Acquisitions and Deferred Project Costs 135,602 310,759 234,924 10,721,376 5,912,454
---------- ---------- ---------- ------------- -----------
Cash Generated (Deficiency) after Cash Distributions
and $ (122,449) $ (320,745) $ (378,265) $ (10,937,468) $ 4,708,217
========== ========== ========== ============= ===========
Special Items
Net Income and Distributions Data per $1,000 Invested:
Net Income on GAAP Basis:
Ordinary Income (Loss)
- Operations Class A Units 81 78 59 57 43
- Operations Class B Units (280) (247) (160) (60) (12)
Capital Gain (Loss) -- -- -- -- --
Tax and Distributions Data per $1,000 Invested:
Federal Income Tax Results:
Ordinary Income (Loss)
- Operations Class A Units 80 75 56 56 41
- Operations Class B Units (171) (150) (99) (51) (22)
Capital Gain (Loss) -- -- -- -- --
Cash Distributions to Investors:
Source (on GAAP Basis)
- Investment Income Class A Units 80 67 56 57 14
- Return of Capital Class A Units -- -- -- 4 --
- Return of Capital Class B Units -- -- -- -- --
Source (on Cash Basis)
- Operations Class A Units 80 67 50 61 14
- Return of Capital Class A Units 0 0 6 -- --
- Operations Class B Units -- -- -- -- --
Amount (in Percentage Terms) Remaining Invested in
Program Properties at the end of the Last Year Reported
in the Table 100%
</TABLE>
248
<PAGE>
- ----------------------------------
(1) Includes $285,711 in equity in earnings of joint ventures and $533,824 from
investment of reserve funds in 1994, $681,033 in equity in earnings of joint
ventures and $321,534 from investment of reserve funds in 1995, $607,214 in
equity in earnings of joint ventures and $68,568 from investment of reserve
funds in 1996, $856,710 in equity in earnings of joint ventures and $28,092
from investment of reserve funds in 1997, and $928,000 in equity in earnings
of joint ventures and $11,519 from investment of reserve funds in 1998. At
December 31, 1998, the leasing status was 95%.
(2) Includes partnership administrative expenses.
(3) Included in equity in earnings of joint ventures in gross revenues is
depreciation of $107,807 for 1994, $264,866 for 1995, $648,478 for 1996,
$896,753 for 1997, and $917,224 for 1998.
(4) In accordance with the partnership agreement, net income or loss,
depreciation and amortization are allocated $762,218 to Class A Limited
Partners, $(62,731) to Class B Limited Partners and $1,409 to the General
Partners for 1994; $1,172,944 to Class A Limited Partners, $(269,288) to
Class B Limited Partners and $(1,828) to the General Partners for 1995;
$1,234,717 to Class A Limited Partners, $(645,664) to Class B Limited
Partners and $0 to the General Partners for 1996; $1,677,826 to Class A
Limited Partners, $(882,172) to Class B Limited Partners and $0 to the
General Partners for 1997; and $1,770,058 to Class A Limited Partners
$(914,270) to Class B Limited Partners and $0 to the general partners for
1998.
249
<PAGE>
TABLE III (UNAUDITED)
OPERATING RESULTS OF WELLS PROGRAMS
WELLS REAL ESTATE FUND VII, L.P.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross Revenues/(1)/ $ 846,306 $ 816,237 $ 543,291 $ 925,246 $ 286,371
Profit on Sale of Properties -- -- -- -- --
Less: Operating Expenses/(2)/ 85,722 76,838 84,265 114,953 78,420
Depreciation and Amortization/(3)/ 6,250 6,250 6,250 6,250 4,688
---------- ---------- --------- ------------ -----------
Net Income GAAP Basis/(4)/ $ 754,334 $ 733,149 $ 452,776 $ 804,043 $ 203,263
========== ========== ========= ============ ===========
Taxable Income: Operations $1,109,096 $1,008,368 $ 657,443 $ 812,402 $ 195,067
========== ========== ========= ============ ===========
Cash Generated (Used By):
Operations (72,194) (43,250) 20,883 431,728 47,595
Joint Ventures 1,770,742 1,420,126 760,628 424,304 14,243
---------- ---------- --------- ------------ -----------
$1,698,548 $1,376,876 $ 781,511 $ 856,032 $ 61,838
Less Cash Distributions to Investors:
Operating Cash Flow 1,636,158 1,376,876 781,511 856,032 52,195
Return of Capital -- 2,709 10,805 22,064 --
Undistributed Cash Flow from Prior Year Operations -- -- -- 9,643 --
---------- ---------- --------- ------------ -----------
Cash Generated (Deficiency) after Cash Distributions $ 62,390 $ (2,709) $ (10,805) $ (31,707) $ 9,643
Special Items (not including sales and financing):
Source of Funds:
General Partner Contributions -- -- -- -- --
Increase in Limited Partner Contributions $ -- $ -- $ -- $ 805,212 $23,374,961
---------- ---------- --------- ------------ -----------
$ 62,390 $ (2,709) $ (10,805) $ 773,505 $23,384,604
Use of Funds:
Sales Commissions and Offering Expenses -- -- -- $ 244,207 $ 3,351,569
Return of Original Limited Partner's Investment -- -- -- 100 --
Property Acquisitions and Deferred Project Costs 181,070 169,172 736,960 14,971,002 4,477,765
---------- ---------- --------- ------------ -----------
Cash Generated (Deficiency) after Cash Distributions and
Special Items $ (118,680) $ (171,881) $(747,765) $(14,441,804) $15,555,270
========== ========== ========= ============ ===========
Net Income and Distributions Data per $1,000 Invested:
Net Income on GAAP Basis:
Ordinary Income (Loss)
- Operations Class A Units 85 86 62 57 29
- Operations Class B Units (224) (168) (98) (20) (9)
Capital Gain (Loss) -- -- -- -- --
Tax and Distributions Data per $1,000 Invested:
Federal Income Tax Results:
Ordinary Income (Loss)
- Operations Class A Units 82 78 55 55 28
- Operations Class B Units (134) (111) (58) (16) 17
Capital Gain (Loss) -- -- -- -- --
Cash Distributions to Investors:
Source (on GAAP Basis)
- Investment Income Class A Units 81 70 43 52 7
- Return of Capital Class A Units -- -- -- -- --
- Return of Capital Class B Units -- -- -- -- --
Source (on Cash Basis)
- Operations Class A Units 81 70 42 51 7
- Return of Capital Class A Units -- -- 1 1 --
- Operations Class B Units -- -- -- -- --
Source (on a Priority Distribution Basis)/(5)/
- Investment income Class A Units 62 54 29 30 4
- Return of Capital Class A Units 19 16 14 22 3
- Return of Capital Class B Units -- -- -- -- --
Amount (in Percentage Terms) Remaining Invested in
Program Properties at the end of the Last Year Reported in
the Table 100%
</TABLE>
250
<PAGE>
_____________
(1) Includes $78,799 in equity in earnings of joint ventures and $207,572
from investment of reserve funds in 1994, $403,325 in equity in earnings
of joint ventures and $521,921 from investment of reserve funds in 1995,
$457,144 in equity in earnings of joint ventures and $86,147 from
investment of reserve funds in 1996, $785,398 in equity in earnings of
joint ventures and $30,839 from investment of reserve funds in 1997, and
$839,037 in equity in earnings of joint ventures and $7,269 from
investment of reserve funds in 1998. At December 31, 1998, the leasing
status was 96% including developed property in initial lease up.
(2) Includes partnership administrative expenses.
(3) Included in equity in earnings of joint ventures in gross revenues is
depreciation of $25,468 for 1994, $140,533 for 1995, $605,247 for 1996,
$877,869 for 1997, and $955,245 for 1998.
(4) In accordance with the partnership agreement, net income or loss,
depreciation and amortization are allocated $233,337 to Class A Limited
Partners, $(29,854) to Class B Limited Partners and $(220) to the General
Partner for 1994; $950,826 to Class A Limited Partners, $(146,503) to
Class B Limited Partners and $(280) to the General Partners for 1995;
$1,062,605 to Class A Limited Partners, $(609,829) to Class B Limited
Partners and $0 to the General Partners for 1996; $1,615,965 to class A
Limited Partners, $(882,816) to Class B Limited Partners and $0 to the
General Partners for 1997; and $1,704,213 to Class A Limited Partners,
$(949,879) to Class B Limited Partners and $0 to the General Partners for
1998.
(5) Pursuant to the terms of the partnership agreement, an amount equal to
the cash distributions paid to Class A Limited Partners is payable as
priority distributions out of the first available net proceeds from the
sale of partnership properties to Class B Limited Partners. The amount of
cash distributions paid per unit to Class A Limited Partners is shown as
a return of capital to the extent of such priority distributions payable
to Class B Limited Partners. As of December 31, 1998, the aggregate
amount of such priority distributions payable to Class B Limited Partners
totalled $1,364,217.
251
<PAGE>
TABLE III (UNAUDITED)
OPERATING RESULTS OF WELLS PROGRAMS
WELLS REAL ESTATE FUND VIII, L.P.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------- -------------- ------------- ------------ ----
<S> <C> <C> <C> <C> <C>
Gross Revenues/(1)/ 1,362,513 $ 1,204,018 $ 1,057,694 $ 402,428 N/A
Profit on Sale of Properties -- -- -- --
Less: Operating Expenses/(2)/ 87,092 95,201 114,854 122,264
Depreciation and Amortization/(3)/ 6,250 6,250 6,250 6,250
----------- ------------ ----------- -----------
Net Income GAAP Basis/(4)/ 1,269,171 $ 1,102,567 $ 936,590 273,914
=========== ============ =========== ===========
Taxable Income: Operations 1,683,192 $ 1,213,524 $ 1,001,974 404,348
=========== ============ =========== ===========
Cash Generated (Used By):
Operations (63,946) 7,909 623,268 204,790
Joint Ventures 2,293,504 1,229,282 279,984 20,287
----------- ------------ ----------- -----------
$ 2,229,558 $ 1,237,191 $ 903,252 225,077
Less Cash Distributions to Investors:
Operating Cash Flow 2,218,400 1,237,191 903,252 --
Return of Capital -- 183,315 2,443 --
Undistributed Cash Flow from Prior Year -- -- 225,077 --
----------- ------------ ----------- -----------
Operations $ 11,158 $ (183,315) $ (227,520) 225,077
Cash Generated (Deficiency) after Cash Distributions
Special Items (not including sales and financing):
Source of Funds:
General Partner Contributions -- -- -- --
Increase in Limited Partner Contributions/(5)/ -- -- 1,898,147 30,144,542
----------- ------------ ----------- -----------
11,158 $ (183,315) $ 1,670,627 30,369,619
Use of Funds:
Sales Commissions and Offering Expenses -- -- 464,760 4,310,028
Return of Limited Partner's Investment -- 8,600 -- --
Property Acquisitions and Deferred Project Costs 1,850,859 10,675,811 7,931,566 6,618,273
----------- ------------ ----------- -----------
Cash Generated (Deficiency) after Cash Distributions
and Special Items $(1,839,701) $(10,867,726) $(6,725,699) 19,441,318
=========== ============ =========== ===========
Net Income and Distributions Data per $1,000
Invested:
Net Income on GAAP Basis:
Ordinary Income (Loss)
- Operations Class A Units 91 73 46 28
- Operations Class B Units (212) (150) (47) (3)
Capital Gain (Loss) -- -- -- --
Tax and Distributions Data per $1,000 Invested:
Federal Income Tax Results:
Ordinary Income (Loss)
- Operations Class A Units 89 65 46 17
- Operations Class B Units (131) (95) (33) (3)
Capital Gain (Loss) -- -- -- --
Cash Distributions to Investors:
Source (on GAAP Basis)
- Investment Income Class A Units 83 54 43 --
- Return of Capital Class A Units -- -- -- --
- Return of Capital Class B Units -- -- -- --
Source (on Cash Basis)
- Operations Class A Units 83 47 43 --
- Return of Capital Class A Units -- 7 0 --
- Operations Class B Units -- -- -- --
Source (on a Priority Distribution Basis)/(5)/
- Investment Income Class A Units 67 42 33 --
- Return of Capital Class A Units 16 12 10 --
- Return of Capital Class B Units -- -- -- --
Amount (in Percentage Terms) Remaining Invested in
Program Properties at the end of the Last Year Reported
in the Table 100%
</TABLE>
252
<PAGE>
___________________
(1) Includes $28,377 in equity in earnings of joint ventures and $374,051 from
investment of reserve funds in 1995, $241,819 in equity in earnings of joint
ventures and $815,875 from investment of reserve funds in 1996, $1,034,907
in equity in earnings of joint ventures and $169,111 from investment of
reserve funds in 1997, and $1,346,367 in equity in earnings of joint
ventures and $16,146 from investment of reserve funds in 1998. At December
31, 1998, the leasing status was 99% including developed property in initial
lease up.
(2) Includes partnership administrative expenses.
(3) Included in equity in earnings of joint ventures in gross revenues is
depreciation of $14,058 for 1995, $265,259 for 1996, $841,666 for 1997, and
$1,157,355 for 1998.
(4) In accordance with the partnership agreement, net income or loss,
depreciation and amortization are allocated $294,221 to Class A Limited
Partners, $(20,104) to Class B Limited Partners and $(203) to the General
Partners for 1995; $1,207,540 to Class A Limited Partners, $(270,653) to
Class B Limited Partners and $(297) to the General Partners for 1996;
$1,947,536 to Class A Limited Partners, $(844,969) to Class B Limited
Partners and $0 to the General Partners for 1997; and $2,431,246 to Class A
Limited Partners, $(1,162,075) to Class B Limited Partners and $0 to the
General Partners for 1998.
(5) Pursuant to the terms of the partnership agreement, an amount equal to the
cash distributions paid to Class A Limited Partners is payable as priority
distributions out of the first available net proceeds from the sale of
partnership properties to Class B Limited Partners. The amount of cash
distributions paid per unit to Class A Limited Partners is shown as a return
of capital to the extent of such priority distributions payable to Class B
Limited Partners. As of December 31, 1998, the aggregate amount of such
priority distributions payable to Class B Limited Partners totalled
$989,966.
253
<PAGE>
TABLE III (UNAUDITED)
OPERATING RESULTS OF WELLS PROGRAMS
WELLS REAL ESTATE FUND IX, L.P.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------- -------------- ------------- ---- ----
<S> <C> <C> <C> <C> <C>
Gross Revenues/(1)/ $ 1,561,456 $ 1,199,300 $ 406,891 N/A N/A
Profit on Sale of Properties -- -- --
Less: Operating Expenses/(2)/ 105,251 101,284 101,885
Depreciation and Amortization/(3)/ 6,250 6,250 6,250
----------- ------------ -----------
Net Income GAAP Basis/(4)/ $ 1,449,955 $ 1,091,766 $ 298,756
=========== ============ ===========
Taxable Income: Operations $ 1,906,011 $ 1,083,824 $ 304,552
=========== ============ ===========
Cash Generated (Used By):
Operations $ 80,147 $ 501,390 $ 151,150
Joint Ventures 2,125,489 527,390 --
----------- ------------ -----------
$ 2,205,636 $ 1,028,780 $ 151,150
Less Cash Distributions to Investors:
Operating Cash Flow 2,188,189 1,028,780 149,425
Return of Capital -- $ 41,834 $ --
Undistributed Cash Flow From Prior Year Operations -- 1,725 --
----------- ------------ -----------
Cash Generated (Deficiency) after Cash Distributions $ 17,447 $ (43,559) $ 1,725
Special Items (not including sales and financing):
Source of Funds:
General Partner Contributions -- -- --
Increase in Limited Partner Contributions -- -- 35,000,000
----------- ------------ -----------
17,447 $ (43,559) $35,001,725
Use of Funds:
Sales Commissions and Offering Expenses -- 323,039 4,900,321
Return of Original Limited Partner's Investment -- 100 --
Property Acquisitions and Deferred Project Costs 9,455,554 13,427,158 6,544,019
----------- ------------ -----------
Cash Generated (Deficiency) after Cash Distributions and
Special Items $(9,438,107) $(13,793,856) $23,557,385
=========== ============ ===========
Net Income and Distributions Data per $1,000 Invested:
Net Income on GAAP Basis:
Ordinary Income (Loss)
- Operations Class A Units 88 53 28
- Operations Class B Units (218) (77) (11)
Capital Gain (Loss) -- -- --
Tax and Distributions Data per $1,000 Invested:
Federal Income Tax Results:
Ordinary Income (Loss)
- Operations Class A Units 85 46 26
- Operations Class B Units (123) (47) (48)
Capital Gain (Loss) -- -- --
Cash Distributions to Investors:
Source (on GAAP Basis)
- Investment Income Class A Units 73 36 13
- Return of Capital Class A Units -- -- --
- Return of Capital Class B Units -- -- --
Source (on Cash Basis)
- Operations Class A Units 73 35 13
- Return of Capital Class A Units -- 1 --
- Operations Class B Units -- -- --
Source (on a Priority Distribution Basis)/(5)/
- Investment Income Class A Units 61 29 10
- Return of Capital Class A Units 12 7 3
- Return of Capital Class B Units -- -- --
Amount (in Percentage Terms) Remaining Invested in
Program Properties at the end of the Last Year Reported in
the Table 100%
</TABLE>
254
<PAGE>
_________________
(1) Includes $23,007 in equity in earnings of joint ventures and $383,884 from
investment of reserve funds in 1996, and $593,914 in equity in earnings of
joint ventures and $605,386 from investment of reserve funds in 1997, and
$1,481,869 in equity in earnings of joint ventures and $79,587 from
investment of reserve funds in 1998. At December 31, 1998, the leasing
status was 99% including developed property in initial lease up.
(2) Includes partnership administrative expenses.
(3) Included in equity in earnings of joint ventures in gross revenues is
depreciation of $25,286 for 1996, $469,126 for 1997, and $1,143,407 for
1998.
(4) In accordance with the partnership agreement, net income or loss,
depreciation and amortization are allocated $330,270 to Class A Limited
Partners, $(31,220) to Class B Limited Partners and $(294) to the General
Partners for 1996; $1,564,778 to Class A Limited Partners, $(472,806) to
Class B Limited Partners and $(206) to the General Partners for 1997; and
$2,597,938 to Class A Limited Partners, $(1,147,983) to Class B Limited
Partners and $0 to the General Partners for 1998.
(5) Pursuant to the terms of the partnership agreement, an amount equal to the
cash distributions paid to Class A Limited Partners is payable as priority
distributions out of the first available net proceeds from the sale of
partnership properties to Class B Limited Partners. The amount of cash
distributions paid per unit to Class A Limited Partners is shown as a return
of capital to the extent of such priority distributions payable to Class B
Limited Partners. As of December 31, 1998, the aggregate amount of such
priority distributions payable to Class B Limited Partners totalled
$609,724.
255
<PAGE>
TABLE III (UNAUDITED)
OPERATING RESULTS OF WELLS PROGRAMS
WELLS REAL ESTATE FUND X, L.P.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------------- ------------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross Revenues/(1)/ $ 1,204,597 $ 372,507 N/A N/A N/A
Profit on Sale of Properties -- --
Less: Operating Expenses/(2)/ 99,034 88,232
Depreciation and Amortization/(3)/ 55,234 6,250
------------ -----------
Net Income GAAP Basis/(4)/ $ 1,050,329 $ 278,025
============ ===========
Taxable Income: Operations $ 1,277,016 $ 382,543
============ ===========
Cash Generated (Used By):
Operations 300,019 $ 200,668
Joint Ventures 886,846 --
------------ -----------
1,186,865 $ 200,668
Less Cash Distributions to Investors:
Operating Cash Flow 1,186,865 --
Return of Capital 19,510 --
Undistributed Cash Flow From Prior Year Operations 200,668 --
------------ -----------
Cash Generated (Deficiency) after Cash Distributions $ (220,178) $ 200,668
Special Items (not including sales and financing):
Source of Funds:
General Partner Contributions -- --
Increase in Limited Partner Contributions -- 27,128,912
------------ -----------
$ (220,178) $27,329,580
Use of Funds:
Sales Commissions and Offering Expenses 300,725 3,737,363
Return of Original Limited Partner's Investment -- 100
Property Acquisitions and Deferred Project Costs 17,613,067 5,188,485
------------ -----------
Cash Generated (Deficiency) after Cash Distributions and
Special Items $(18,133,970) $18,403,632
============ ===========
Net Income and Distributions Data per $1,000 Invested:
Net Income on GAAP Basis:
Ordinary Income (Loss)
- Operations Class A Units 85 28
- Operations Class B Units (123) (9)
Capital Gain (Loss) -- --
Tax and Distributions Data per $1,000 Invested:
Federal Income Tax Results:
Ordinary Income (Loss)
- Operations Class A Units 78 35
- Operations Class B Units (64) 0
Capital Gain (Loss) -- --
Cash Distributions to Investors:
Source (on GAAP Basis)
- Investment Income Class A Units 66 --
- Return of Capital Class A Units -- --
- Return of Capital Class B Units -- --
Source (on Cash Basis)
- Operations Class A Units 56 --
- Return of Capital Class A Units 10 --
- Operations Class B Units -- --
Source (on a Priority Distribution Basis)/(5)/
- Investment Income Class A Units 48 --
- Return of Capital Class A Units 18 --
- Return of Capital Class B Units -- --
Amount (in Percentage Terms) Remaining Invested in
Program Properties at the end of the Last Year Reported in
the Table 100%
</TABLE>
256
<PAGE>
_______________________
(1) Includes $(10,035) in equity in earnings of joint ventures and $382,542 from
investment of reserve funds in 1997, and $869,555 in equity in earnings of
joint ventures, $120,000 in rental income and $215,042 from investment of
reserve funds in 1998. At December 31, 1998, the leasing status was 99%
including developed property in initial lease up.
(2) Includes partnership administrative expenses.
(3) Included in equity in earnings of joint ventures in gross revenues is
depreciation of $18,675 for 1997, and $674,986 for 1998.
(4) In accordance with the partnership agreement, net income or loss,
depreciation and amortization are allocated $302,862 to Class A Limited
Partners, $(24,675) to Class B Limited Partners and $(162) to the General
Partners for 1997, and $1,779,191 to Class A Limited Partners, $(728,524) to
Class B Limited Partners and $(338) to General Partners for 1998.
(5) Pursuant to the terms of the partnership agreement, an amount equal to the
cash distributions paid to Class A Limited Partners is payable as priority
distributions out of the first available net proceeds from the sale of
partnership properties to Class B Limited Partners. The amount of cash
distributions paid per unit to Class A Limited Partners is shown as a return
of capital to the extent of such priority distributions payable to Class B
Limited Partners. As of December 31, 1998, the aggregate amount of such
priority distributions payable to Class B Limited Partners totalled
$388,585.
257
<PAGE>
TABLE III (UNAUDITED)
OPERATING RESULTS OF WELLS PROGRAMS
WELLS REAL ESTATE FUND XI, L.P.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------ ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross Revenues/(1)/ 262,729 N/A N/A N/A N/A
Profit on Sale of Properties --
Less: Operating Expenses/(2)/ 113,184
Depreciation and Amortization/(3)/ 6,250
-----------
Net Income GAAP Basis/(4)/ $ 143,295
===========
Taxable Income: Operations $ 177,692
===========
Cash Generated (Used By):
Operations (50,858)
Joint Ventures 102,662
-----------
51,804
Less Cash Distributions to Investors:
Operating Cash Flow 51,804
Return of Capital 48,070
Undistributed Cash Flow From Prior Year Operations --
-----------
Cash Generated (Deficiency) after Cash Distributions (48,070)
Special Items (not including sales and financing):
Source of Funds:
General Partner Contributions --
Increase in Limited Partner Contributions 16,532,801
-----------
16,484,731
Use of Funds:
Sales Commissions and Offering Expenses 1,779,661
Return of Original Limited Partner's Investment --
Property Acquisitions and Deferred Project Costs 5,412,870
-----------
Cash Generated (Deficiency) after Cash Distributions and
Special Items $ 9,292,200
===========
Net Income and Distributions Data per $1,000 Invested:
Net Income on GAAP Basis:
Ordinary Income (Loss)
- Operations Class A Units 50
- Operations Class B Units (77)
Capital Gain (Loss) --
Tax and Distributions Data per $1,000 Invested:
Federal Income Tax Results:
Ordinary Income (Loss)
- Operations Class A Units 18
- Operations Class B Units (17)
Capital Gain (Loss) --
Cash Distributions to Investors:
Source (on GAAP Basis)
- Investment Income Class A Units 14
- Return of Capital Class A Units --
- Return of Capital Class B Units --
Source (on Cash Basis)
- Operations Class A Units 7
- Return of Capital Class A Units 7
- Operations Class B Units --
Source (on a Priority Distribution Basis)/(5)/
- Investment Income Class A Units 11
- Return of Capital Class A Units 3
- Return of Capital Class B Units --
Amount (in Percentage Terms) Remaining Invested in Program
Properties at the end of the Last Year Reported in the Table 100%
</TABLE>
258
<PAGE>
- ---------------------------------
(1) Includes $142,163 in equity in earnings of joint ventures and $120,566 from
investment of reserve funds in 1998. At December 31, 1998, the leasing
status was 99% including developed property in initial lease up.
(2) Includes partnership administrative expenses.
(3) Included in equity in earnings of joint ventures in gross revenues is
depreciation of $105,458 for 1998.
(4) In accordance with the partnership agreement, net income or loss,
depreciation and amortization are allocated $254,862 to Class A Limited
Partners, $(111,067) to Class B Limited Partners and $(500) to General
Partners for 1998.
(5) Pursuant to the terms of the partnership agreement, an amount equal to the
cash distributions paid to Class A Limited Partners is payable as priority
distributions out of the first available net proceeds from the sale of
partnership properties to Class B Limited Partners. The amount of cash
distributions paid per unit to Class A Limited Partners is shown as a return
of capital to the extent of such priority distributions payable to Class B
Limited Partners. As of December 31, 1998, the aggregate amount of such
priority distributions payable to Class B Limited Partners totalled $24,621.
259
<PAGE>
EXHIBIT "A"
SUBSCRIPTION AGREEMENT
To: WELLS REAL ESTATE INVESTMENT TRUST, INC.
Suite 250
6200 The Corners Parkway
Norcross, Georgia 30092
Ladies and Gentlemen:
The undersigned, by signing and delivering a copy of the attached
Subscription Agreement Signature Page, hereby tenders this subscription and
applies for the purchase of the number of shares of common stock ("Shares") of
Wells Real Estate Investment Trust, Inc., a Maryland corporation (the
"Company"), set forth on such Subscription Agreement Signature Page. Payment
for the Shares is hereby made by check payable to "Bank of America, N.A., as
Escrow Agent."
I hereby acknowledge receipt of the Prospectus of the Company dated
December 20, 1999 (the "Prospectus").
I agree that if this subscription is accepted, it will be held, together
with the accompanying payment, on the terms described in the Prospectus.
Subscriptions may be rejected in whole or in part by the Company in its sole and
absolute discretion.
Prospective investors are hereby advised of the following:
(a) The assignability and transferability of the Shares is restricted and
will be governed by the Company's Articles of Incorporation and Bylaws and all
applicable laws as described in the Prospectus.
(b) Prospective investors should not invest in Shares unless they have an
adequate means of providing for their current needs and personal contingencies
and have no need for liquidity in this investment.
(c) There will be no public market for the Shares, and accordingly, it may
not be possible to readily liquidate an investment in the Company.
A-1
<PAGE>
SPECIAL NOTICE FOR CALIFORNIA RESIDENTS ONLY
CONDITIONS RESTRICTING TRANSFER OF SHARES
260.141.11 RESTRICTIONS ON TRANSFER.
------------------------
(a) The issuer of any security upon which a restriction on transfer has
been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 of the Rules
(the "Rules") adopted under the California Corporate Securities Law (the "Code")
shall cause a copy of this section to be delivered to each issuee or transferee
of such security at the time the certificate evidencing the security is
delivered to the issuee or transferee.
(b) It is unlawful for the holder of any such security to consummate a
sale or transfer of such security, or any interest therein, without the prior
written consent of the Commissioner (until this condition is removed pursuant to
Section 260.141.12 of the Rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in subdivision (i) of Section 25102 of
the Code or Section 260.105.14 of the Rules;
(4) to the transferor's ancestors, descendants or spouse, or any
custodian or trustee for the account of the transferor or the transferor's
ancestors, descendants or spouse; or to a transferee by a trustee or custodian
for the account of the transferee or the transferee's ancestors, descendants or
spouse;
(5) to holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either
acting as such or as a finder) to a resident of a foreign state, territory or
country who is neither domiciled in this state to the knowledge of the broker-
dealer, nor actually present in this state if the sale of such securities is not
in violation of any securities laws of the foreign state, territory or country
concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting syndicate or
selling group;
(9) if the interest sold or transferred is a pledge or other lien
given by the purchaser to the seller upon a sale of the security for which the
Commissioner's written consent is obtained or under this rule not required;
(10) by way of a sale qualified under Sections 25111, 25112, 25113 or
25121 of the Code, of the securities to be transferred, provided that no order
under Section 25140 or subdivision (a) of Section 25143 is in effect with
respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such
corporation, or by a wholly owned subsidiary of a corporation to such
corporation;
A-2
<PAGE>
(12) by way of an exchange qualified under Section 25111, 25112 or
25113 of the Code provided that no order under Section 25140 or subdivision (a)
of Section 25143 is in effect with respect to such qualification;
(13) between residents of foreign states, territories or countries who
are neither domiciled or actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law or
to the administrator of the unclaimed property law of another state;
(15) by the State Controller pursuant to the Unclaimed Property Law or
by the administrator of the unclaimed property law of another state if, in
either such case, such person (i) discloses to potential purchasers at the sale
that transfer of the securities is restricted under this rule, (ii) delivers to
each purchaser a copy of this rule, and (iii) advises the Commissioner of the
name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does not
involve a change in the beneficial ownership of the securities;
(17) by way of an offer and sale of outstanding securities in an
issuer transaction that is subject to the qualification requirement of Section
25110 of the Code but exempt from that qualification requirement by subdivision
(f) of Section 25102; provided that any such transfer is on the condition that
any certificate evidencing the security issued to such transferee shall contain
the legend required by this section.
(c) The certificates representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend, prominently stamped or printed
thereon in capital letters of not less than 10-point size, reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS
SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY
CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT
AS PERMITTED IN THE COMMISSIONER'S RULES."
[Last amended effective January 21, 1988.]
SPECIAL NOTICE FOR MAINE, MASSACHUSETTS, MINNESOTA, MISSOURI
AND NEBRASKA RESIDENTS ONLY
In no event may a subscription for Shares be accepted until at least five
business days after the date the subscriber receives the Prospectus. Residents
of the States of Maine, Massachusetts, Minnesota, Missouri and Nebraska who
first received the Prospectus only at the time of subscription may receive a
refund of the subscription amount upon request to the Company within five days
of the date of subscription.
A-3
<PAGE>
STANDARD REGISTRATION REQUIREMENTS
The following requirements have been established for the various forms of
registration. Accordingly, complete Subscription Agreements and such supporting
material as may be necessary must be provided.
TYPE OF OWNERSHIP AND SIGNATURE(S) REQUIRED
1. INDIVIDUAL: One signature required.
2. JOINT TENANTS WITH RIGHT OF SURVIVORSHIP: All parties must sign.
3. TENANTS IN COMMON: All parties must sign.
4. COMMUNITY PROPERTY: Only one investor signature required.
5. PENSION OR PROFIT SHARING PLANS: The trustee signs the Signature Page.
6. TRUST: The trustee signs the Signature Page. Provide the name of the
trust, the name of the trustee and the name of the beneficiary.
7. COMPANY: Identify whether the entity is a general or limited partnership.
The general partners must be identified and their signatures obtained on
the Signature Page. In the case of an investment by a general partnership,
all partners must sign (unless a "managing partner" has been designated for
the partnership, in which case he may sign on behalf of the partnership if
a certified copy of the document granting him authority to invest on behalf
of the partnership is submitted).
8. CORPORATION: The Subscription Agreement must be accompanied by (1) a
certified copy of the resolution of the Board of Directors designating the
officer(s) of the corporation authorized to sign on behalf of the
corporation and (2) a certified copy of the Board's resolution authorizing
the investment.
9. IRA AND IRA ROLLOVERS: Requires signature of authorized signer (e.g., an
officer) of the bank, trust company, or other fiduciary. The address of
the trustee must be provided in order for the trustee to receive checks and
other pertinent information regarding the investment.
10. KEOGH (HR 10): Same rules as those applicable to IRAs.
11. UNIFORM GIFT TO MINORS ACT (UGMA) or UNIFORM TRANSFERS TO MINORS ACT
(UTMA): The required signature is that of the custodian, not of the parent
(unless the parent has been designated as the custodian). Only one child
is permitted in each investment under UGMA or UTMA. In addition, designate
the state under which the gift is being made.
A-4
<PAGE>
INSTRUCTIONS TO SUBSCRIPTION AGREEMENT SIGNATURE PAGE
TO WELLS REAL ESTATE INVESTMENT TRUST, INC. SUBSCRIPTION AGREEMENT
- --------------------------------------------------------------------------------
INVESTOR Please follow these instructions carefully.
INSTRUCTIONS Failure to do so may result in the rejection
of your subscription. All information on the
Subscription Agreement Signature Page should
be completed as follows:
- --------------------------------------------------------------------------------
1. INVESTMENT a. GENERAL: A minimum investment of $1,000 (100
Shares) is required, except for certain states
which require a higher minimum investment. A CHECK
FOR THE FULL PURCHASE PRICE OF THE SHARES
SUBSCRIBED FOR SHOULD BE MADE PAYABLE TO THE ORDER
OF "BANK OF AMERICA, N.A., AS ESCROW AGENT."
Investors who have satisfied the minimum purchase
requirements in Wells Real Estate Fund I, Wells
Real Estate Fund II, Wells Real Estate Fund II-OW,
Wells Real Estate Fund III, L.P., Wells Real
Estate Fund IV, L.P., Wells Real Estate Fund V,
L.P., Wells Real Estate Fund VI, L.P., Wells Real
Estate Fund VII, L.P., Wells Real Estate Fund
VIII, L.P., Wells Real Estate Fund IX, L.P., Wells
Real Estate Fund X, L.P., Wells Real Estate Fund
XI, L.P. or Wells Real Estate Fund XII, L.P. or in
any other public real estate program may invest as
little as $25 (2.5 Shares) except for residents of
Maine, Minnesota, Nebraska or Washington. Shares
may be purchased only by persons meeting the
standards set forth under the Section of the
Prospectus entitled "Investor Suitability
Standards." Please indicate the state in which the
sale was made.
b. DEFERRED COMMISSION OPTION: Please check the box
if you have agreed with your Broker-Dealer to
elect the Deferred Commission Option, as described
in the Prospectus, as supplemented to date. By
electing the Deferred Commission Option, you are
required to pay only $9.40 per Share purchased
upon subscription. For the next six years
following the year of subscription, you will have
a 1% sales commission ($.10 per Share) per year
deducted from and paid out of dividends or other
cash distributions otherwise distributable to you.
Election of the Deferred Commission Option shall
authorize the Company to withhold such amounts
from dividends or other cash distributions
otherwise payable to you as is set forth in the
"Plan of Distribution" section of the Prospectus.
- --------------------------------------------------------------------------------
A-5
<PAGE>
- --------------------------------------------------------------------------------
2. Additional Investments Please check if you plan to make one or more
additional investments in the Company. All
additional investments must be in increments of at
least $25. Additional investments by residents of
Maine must be for the minimum amounts stated under
"Suitability Standards" in the Prospectus, and
residents of Maine must execute a new Subscription
Agreement Signature Page to make additional
investments in the Company. If additional
investments in the Company are made, the investor
agrees to notify the Company and the Broker-Dealer
named on the Subscription Agreement Signature Page
in writing if at any time he fails to meet the
applicable suitability standards or he is unable
to make any other representations or warranties
set forth in the Prospectus or the Subscription
Agreement. The investor acknowledges that the
Broker-Dealer named in the Subscription Agreement
Signature Page may receive a commission not to
exceed 7% of any such additional investments in
the Company.
- --------------------------------------------------------------------------------
3. TYPE OF OWNERSHIP Please check the appropriate box to indicate the
type of entity or type of individuals subscribing.
- --------------------------------------------------------------------------------
4. REGISTRATION NAME AND Please enter the exact name in which the Shares
ADDRESS are to be held. For joint tenants with right of
survivorship or tenants in common, include the
names of both investors. In the case of
partnerships or corporations, include the name of
an individual to whom correspondence will be
addressed. Trusts should include the name of the
trustee. All investors must complete the space
provided for taxpayer identification number or
social security number. By signing in Section 6,
the investor is certifying that this number is
correct. Enter the mailing address and telephone
numbers of the registered owner of this
investment. In the case of a Qualified Plan or
trust, this will be the address of the trustee.
Indicate the birthdate and occupation of the
registered owner unless the registered owner is a
partnership, corporation or trust.
- --------------------------------------------------------------------------------
5. INVESTOR NAME Complete this Section only if the investor's name
AND ADDRESS and address is different from the registration
name and address provided in Section 4. If the
Shares are registered in the name of a trust,
enter the name, address, telephone number, social
security number, birthdate and occupation of the
beneficial owner of the trust.
- --------------------------------------------------------------------------------
6. SUBSCRIBER SIGNATURES Please separately initial each representation made
by the investor where indicated. Except in the
case of fiduciary accounts, the investor may not
grant any person a power of attorney to make such
representations on his or her behalf. Each
investor must sign and date this Section. If title
is to be held jointly, all parties must sign. If
the registered owner is a partnership, corporation
or trust, a general partner, officer or trustee of
the entity must sign. PLEASE NOTE THAT THESE
SIGNATURES DO NOT HAVE TO BE NOTARIZED.
- --------------------------------------------------------------------------------
A-6
<PAGE>
- --------------------------------------------------------------------------------
7. DIVIDENDS a. DIVIDEND REINVESTMENT PLAN: By electing the
Dividend Reinvestment Plan, the investor elects to
reinvest all dividends otherwise payable to such
investor in Shares of the Company. The investor
agrees to notify the Company and the Broker-Dealer
named on the Subscription Agreement Signature Page
in writing if at any time he fails to meet the
applicable suitability standards or he is unable
to make any other representations and warranties
as set forth in the Prospectus or Subscription
Agreement or in the prospectus and subscription
agreement of any future limited partnerships
sponsored by the Advisor or its affiliates. The
investor acknowledges that the Broker-Dealer named
in the Subscription Agreement Signature Page may
receive a commission not to exceed 7% of any
reinvested dividends.
b. DIVIDEND ADDRESS: If cash dividends are to be sent
to an address other than that provided in Section
4 (i.e., a bank, brokerage firm or savings and
loan, etc.), please provide the name, account
number and address.
- --------------------------------------------------------------------------------
8. BROKER-DEALER This Section is to be completed by the Registered
Representative. Please complete all BROKER-DEALER
information contained in Section 8 including
suitability certification. SIGNATURE PAGE MUST BE
SIGNED BY AN AUTHORIZED REPRESENTATIVE.
- --------------------------------------------------------------------------------
The Subscription Agreement Signature Page, which has been delivered with
this Prospectus, together with a check for the full purchase price, should be
delivered or mailed to your Broker-Dealer. Only original, completed copies of
Subscription Agreements can be accepted. Photocopied or otherwise duplicated
Subscription Agreements cannot be accepted by the Company.
IF YOU NEED FURTHER ASSISTANCE IN COMPLETING THIS
SUBSCRIPTION AGREEMENT SIGNATURE PAGE,
PLEASE CALL 1-800-448-1010
A-7
<PAGE>
-------------------------------------------
SEE PRECEDING PAGE Special Instructions:
FOR INSTRUCTIONS
-------------------------------------------
WELLS REAL ESTATE INVESTMENT TRUST, INC.
SUBSCRIPTION AGREEMENT SIGNATURE PAGE
<TABLE>
<S> <C>
1. =====INVESTMENT================================================================================================================
--------------------------------------------------------
Make Investment Check Payable to:
______________________ _________________________ Bank of America, N.A.
# of Shares Total $ Invested as Escrow Agent
--------------------------------------------------------------
(# Shares x $10 = $ Invested) [ ] Initial Investment (Minimum $1,000)
[ ] Additional Investment (Minimum $25)
Minimum purchase $1,000 or 100 Shares State in which sale was made________________________
-------------------------------------------------------- --------------------------------------------------------------
Check the following box to elect the Deferred Commission Option: [ ]
(This election must be agreed to by the Broker-Dealer listed below)
2. ===== ADDITIONAL INVESTMENTS ==================================================================================================
Please check if you plan to make additional investments in the Company: [ ]
[If additional investments are made, please include social security number or other taxpayer identification number on your
check.]
[All additional investments must be made in increments of at least $25.]
3. ===== TYPE OF OWNERSHIP =======================================================================================================
[ ] IRA (06) [ ] Individual (01)
[ ] Keogh (10) [ ] Joint Tenants With Right of Survivorship (02)
[ ] Qualified Pension Plan (11) [ ] Community Property (03)
[ ] Qualified Profit Sharing Plan (12) [ ] Tenants in Common (04)
[ ] Other Trust_______________________ [ ] Custodian: A Custodian for_________________under
For the Benefit of________________ the Uniform Gift to Minors Act or the Uniform Transfers
[ ] Company (15) to Minors Act of the State of______________________(08)
[ ] Other___________________________________
4. ===== REGISTRATION NAME AND ADDRESS=============================================================================================
Please print name(s) in which Shares are to be registered. Include trust name if applicable.
[ ] Mr [ ] Mrs [ ] Ms [ ] MD [ ] PhD [ ] DDS [ ] Other_____________
________________________________________________________
| | Taxpayer Identification Number
________________________________________________________ [ ] [ ] - [ ] [ ] [ ] [ ] [ ] [ ] [ ]
| | Social Security Number
________________________________________________________ [ ] [ ] [ ] - [ ] [ ] - [ ] [ ] [ ] [ ]
----------------------------------------------------------------------------------------------------------
Street Address
or P.O. Box ----------------------------------------------------------------------------------------------------------
City State Zip Code
---------------------------- --------------- -----------------------------------------
---------------------------- ---------------------------------------------------------
Home Business
Telephone No. ( ) Telephone No. ( )
---------------------------- ---------------------------------------------------------
---------------------------- ---------------------------------------------------------
Birthdate Occupation
---------------------------- ---------------------------------------------------------
5. ===== INVESTOR NAME AND ADDRESS ================================================================================================
(COMPLETE ONLY IF DIFFERENT FROM REGISTRATION NAME AND ADDRESS)
[ ] Mr [ ] Mrs [ ] Ms [ ] MD [ ] PhD [ ] DDS [ ] Other__________
Name Social Security Number
-------------------------------------------------------
[ ] [ ] [ ]-[ ] [ ]-[ ] [ ] [ ] [ ]
-------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Street Address
or P.O. Box ----------------------------------------------------------------------------------------------------------
City State Zip Code
---------------------------- --------------- -----------------------------------------
---------------------------- ---------------------------------------------------------
Home Business
Telephone No. ( ) Telephone No. ( )
---------------------------- ---------------------------------------------------------
---------------------------- ---------------------------------------------------------
Birthdate Occupation
---------------------------- ---------------------------------------------------------
==================================================================================================================================
(REVERSE SIDE MUST BE COMPLETED)
</TABLE>
A-8
<PAGE>
<TABLE>
<S> <C>
6. ===== SUBSCRIBER SIGNATURES ====================================================================================================
Please separately initial each of the representations below. Except in the case of fiduciary accounts, you may not grant any
person a power of attorney to make such representations on your behalf. In order to induce the Company to accept this
subscription, I hereby represent and warrant to you as follows:
(a) I have received the Prospectus. ____________ ___________
Initials Initials
(b) I accept and agree to be bound by the terms and conditions of the Articles
of Incorporation. ____________ ____________
Initials Initials
(c) I have (i) a net worth (exclusive of home, home furnishings and automobiles)
of $150,000 or more; or (ii) a net worth (as described above) of at least
$45,000 and had during the last tax year or estimate that I will have during
the current tax year a minimum of $45,000 annual gross income, or that I meet
the higher suitability requirements imposed by my state of primary residence
as set forth in the Prospectus under "Suitability Standards." ____________ ____________
Initials Initials
(d) If I am a California resident or if the Person to whom I subsequently propose to
assign or transfer any Shares is a California resident, I may not consummate a
sale or transfer of my Shares, or any interest therein, or receive any consideration
therefor, without the prior written consent of the Commissioner of the Department
of Corporations of the State of California, except as permitted in the Commissioner's
Rules, and I understand that my Shares, or any document evidencing my Shares, will
bear a legend reflecting the substance of the foregoing understanding. ____________ ____________
Initials Initials
(e) ARKANSAS, NEW MEXICO AND TEXAS RESIDENTS ONLY: I am purchasing the Shares for my own
account and acknowledge that the investment is not liquid. ____________ ____________
Initials Initials
I declare that the information supplied above is true and correct and may be relied upon by the Company in connection with my
investment in the Company. Under penalties of perjury, by signing this Signature Page, I hereby certify that (a) I have
provided herein my correct Taxpayer Identification Number, and (b) I am not subject to back-up withholding as a result of a
failure to report all interest or dividends, or the Internal Revenue Service has notified me that I am no longer subject to
back-up withholding.
------------------------------------- --------------------------------------------- ---------------------------
------------------------------------- --------------------------------------------- ---------------------------
Signature of Investor or Trustee Signature of Joint Owner, if applicable Date
(MUST BE SIGNED BY TRUSTEE(S) IF IRA, KEOGH OR QUALIFIED PLAN.)
7. ===== DISTRIBUTIONS ===========================================================================================================
7a. Check the following box to participate in the Dividend Reinvestment Plan: []
7b. Complete the following section only to direct dividends to a party other than registered owner:
_______________________________________________________________________________________________
Name
_______________________________________________________________________________________________
Account Number
_______________________________________________________________________________________________
Street Address or P.O. Box
_______________________________________________________________________________________________
City State Zip Code
_______________________________________ _________ _____________________
8. ===== BROKER-DEALER ===========================================================================================================
(TO BE COMPLETED BY REGISTERED REPRESENTATIVE)
The Broker-Dealer or authorized representative must sign below to complete order. Broker-Dealer warrants that it is a duly
licensed Broker-Dealer and may lawfully offer Shares in the state designated as the investor's address or the state in which
the sale was made, if different. The Broker-Dealer or authorized representative warrants that he has reasonable grounds to
believe this investment is suitable for the subscriber as defined in Section 3(b) of the Rules of Fair Practice of the NASD
Manual and that he has informed subscriber of all aspects of liquidity and marketability of this investment as required by
Section 4 of such Rules of Fair Practice.
--------------------------------------------------------------- -----------------
Broker-Dealer Name Telephone No.( )
----------------------------------------------------------------------------------------------------
Broker-Dealer Street
Address or P.O. Box
----------------------------------------------------------------------------------------------------
City State Zip Code
--------------------------- ----------------------- -----------------
--------------------------------------------------------------- -----------------
Registered
Representative Name Telephone No.( )
----------------------------------------------------------------------------------------------------
Broker-Dealer Street
Address or P.O. Box
----------------------------------------------------------------------------------------------------
City State Zip Code
----------------------------------------------------- ----------------------- -----------------
----------------------------------------------------- -----------------------------------------------------------
Broker-Dealer Name Signature, if required Registered Representative Name Signature
Please mail completed Subscription Agreement (with all signatures) and check(s)
made payable to
Bank of America, N.A., as Escrow Agent to:
WELLS INVESTMENT SECURITIES, INC.
Suite 250
6200 The Corners Parkway
Norcross, Georgia 30092
800-448-1010 or 770-449-7800
Overnight address: Mailing address:
6200 The Corners Parkway, Suite 250 P.O. Box 926040
Norcross, Georgia 30092 Norcross, Georgia 30092-9209
FOR COMPANY USE ONLY:
-----------------------------------------------------------------------------------------------------------------------------
ACCEPTANCE BY COMPANY Amount_______________ Date ______________________________________________
Received and Subscription Accepted: Check No. ____________________ Certificate No. ______________________________
By: ___________________________________ Wells Real Estate Investment Trust, Inc.
______________________________ ___________________________________________________________ ______________________
Broker-Dealer # Registered Representative # Account #
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
A-9
<PAGE>
EXHIBIT "B"
AMENDED AND RESTATED
DIVIDEND REINVESTMENT PLAN
As of December 20, 1999
Wells Real Estate Investment Trust, Inc., a Maryland corporation (the
"Company"), pursuant to its Amended and Restated Articles of Incorporation,
adopted a Dividend Reinvestment Plan (the "DRP"), which is hereby amended and
restated in its entirety as set forth below. Capitalized terms shall have the
same meaning as set forth in the Articles unless otherwise defined herein.
1. Dividend Reinvestment. As agent for the shareholders
---------------------
("Shareholders") of the Company who (a) purchased shares of the Company's common
stock (the "Shares") pursuant to the Company's initial public offering (the
"Initial Offering"), which commenced on January 30, 1998 and will terminate on
or before January 30, 2000, (b) purchase Shares pursuant to the Company's second
public offering (the "Second Offering"), which will commence immediately upon
the termination of the Initial Offering, or (c) purchase Shares pursuant to any
future offering of the Company ("Future Offering"), and who elect to participate
in the DRP (the "Participants"), the Company will apply all dividends and other
distributions declared and paid in respect of the Shares held by each
Participant (the "Dividends"), including Dividends paid with respect to any full
or fractional Shares acquired under the DRP, to the purchase of the Shares for
such Participants directly, if permitted under state securities laws and, if
not, through the Dealer Manager or Soliciting Dealers registered in the
Participant's state of residence.
2. Effective Date. The effective date of this Amended and Restated
--------------
Dividend Reinvestment Plan (the "DRP") shall be the date that the Second
Offering becomes effective with the Securities and Exchange Commission (the
"Commission").
3. Procedure for Participation. Any Shareholder who purchased Shares
---------------------------
pursuant to the Initial Offering, the Second Offering or any Future Offering and
who has received a prospectus, as contained in the Company's registration
statement filed with the Commission, may elect to become a Participant by
completing and executing the Subscription Agreement, an enrollment form or any
other appropriate authorization form as may be available from the Company, the
Dealer Manager or Soliciting Dealer. Participation in the DRP will begin with
the next Dividend payable after receipt of a Participant's subscription,
enrollment or authorization. Shares will be purchased under the DRP on the date
that Dividends are paid by the Company. Dividends of the Company are currently
paid quarterly. Each Participant agrees that if, at any time prior to the
listing of the Shares on a national stock exchange or inclusion of the Shares
for quotation on the National Association of Securities Dealers, Inc. Automated
Quotation System ("Nasdaq"), he or she fails to meet the suitability
requirements for making an investment in the Company or cannot make the other
representations or warranties set forth in the Subscription Agreement, he or she
will promptly so notify the Company in writing.
4. Purchase of Shares. Participants will acquire DRP Shares from the
------------------
Company at a fixed price of $10 per Share until (i) all 2,200,000 of the DRP
Shares registered in the Second Offering are issued or (ii) the Second Offering
terminates and the Company elects to deregister with the Commission the unsold
DRP Shares. Participants in the DRP may also purchase fractional Shares so that
100% of the Dividends will be used to acquire Shares. However, a Participant
will not be able to acquire DRP Shares to the extent that any such purchase
would cause such Participant to exceed the Ownership Limit as set forth in the
Articles.
B-1
<PAGE>
Shares to be distributed by the Company in connection with the DRP may
(but are not required to) be supplied from: (a) the DRP Shares which will be
registered with the Commission in connection with the Company's Second Offering,
(b) Shares to be registered with the Commission in a Future Offering for use in
the DRP (a "Future Registration"), or (c) Shares of the Company's common stock
purchased by the Company for the DRP in a secondary market (if available) or on
a stock exchange or Nasdaq (if listed) (collectively, the "Secondary Market").
Shares purchased on the Secondary Market as set forth in (c) above
will be purchased at the then-prevailing market price, which price will be
utilized for purposes of purchases of Shares in the DRP. Shares acquired by the
Company on the Secondary Market or registered in a Future Registration for use
in the DRP may be at prices lower or higher than the $10 per Share price which
will be paid for the DRP Shares pursuant to the Initial Offering and the Second
Offering.
If the Company acquires Shares in the Secondary Market for use in the
DRP, the Company shall use reasonable efforts to acquire Shares for use in the
DRP at the lowest price then reasonably available. However, the Company does
not in any respect guarantee or warrant that the Shares so acquired and
purchased by the Participant in the DRP will be at the lowest possible price.
Further, irrespective of the Company's ability to acquire Shares in the
Secondary Market or to complete a Future Registration for shares to be used in
the DRP, the Company is in no way obligated to do either, in its sole
discretion.
It is understood that reinvestment of Dividends does not relieve a
Participant of any income tax liability which may be payable on the Dividends.
5. Share Certificates. The ownership of the Shares purchased through
------------------
the DRP will be in book-entry form only until the Company begins to issue
certificates for its outstanding common stock.
6. Reports. Within 90 days after the end of the Company's fiscal
-------
year, the Company shall provide each Shareholder with an individualized report
on his or her investment, including the purchase date(s), purchase price and
number of Shares owned, as well as the dates of Dividend distributions and
amounts of Dividends paid during the prior fiscal year. In addition, the
Company shall provide to each Participant an individualized quarterly report at
the time of each Dividend payment showing the number of Shares owned prior to
the current Dividend, the amount of the current Dividend and the number of
Shares owned after the current Dividend.
7. Commissions and Other Charges. In connection with Shares sold
-----------------------------
pursuant to the DRP, the Company will pay selling commissions of 7%; a dealer
manager fee of 2.5%; and, in the event that proceeds from the sale of DRP Shares
are used to acquire properties, acquisition and advisory fees and expenses of
3.5%, of the purchase price of the DRP Shares.
8. Termination by Participant. A Participant may terminate
--------------------------
participation in the DRP at any time, without penalty by delivering to the
Company a written notice. Prior to listing of the Shares on a national stock
exchange or Nasdaq, any transfer of Shares by a Participant to a non-Participant
will terminate participation in the DRP with respect to the transferred Shares.
If a Participant terminates DRP participation, the Company will ensure that the
terminating Participant's account will reflect the whole number of shares in his
or her account and provide a check for the cash value of any fractional share in
such account. Upon termination of DRP participation, Dividends will be
distributed to the Shareholder in cash.
B-2
<PAGE>
9. Amendment or Termination of DRP by the Company. The Board of
----------------------------------------------
Directors of the Company may by majority vote (including a majority of the
Independent Directors) amend or terminate the DRP for any reason upon 10 days'
written notice to the Participants.
10. Liability of the Company. The Company shall not be liable for
------------------------
any act done in good faith, or for any good faith omission to act, including,
without limitation, any claims or liability; (a) arising out of failure to
terminate a Participant's account upon such Participant's death prior to receipt
of notice in writing of such death; and (b) with respect to the time and the
prices at which Shares are purchased or sold for a Participant's account. To
the extent that indemnification may apply to liabilities arising under the
Securities Act of 1933, as amended, or the securities act of a sate, the Company
has been advised that, in the opinion of the Commission and certain state
securities commissioners, such indemnification is contrary to public policy and,
therefore, unenforceable.
B-3
<PAGE>
<TABLE>
<CAPTION>
ALPHABETICAL INDEX Page
----
<S> <C>
Additional Information.................................................... 150
Conflicts of Interest..................................................... 48
Description of Properties................................................. 62
Description of Shares..................................................... 131
ERISA Considerations...................................................... 126
Estimated Use of Proceeds................................................. 27
Experts................................................................... 149
Federal Income Tax Considerations......................................... 110
Financial Statements...................................................... 151
Glossary.................................................................. 150
Investment Objectives and Criteria........................................ 52
Legal Opinions............................................................ 148
Management................................................................ 28
Management Compensation................................................... 44
Management's Discussion and Analysis of Financial Condition
And Results of Operations................................................ 96
Plan of Distribution...................................................... 142
Prior Performance Summary................................................. 100
Prior Performance Tables.................................................. 242
Prospectus Summary........................................................ 9
Questions and Answers About This Offering................................. 1
Risk Factors.............................................................. 16
Suitability Standards..................................................... 25
Supplemental Sales Material............................................... 148
The Operating Partnership Agreement....................................... 140
</TABLE>
Until March 19, 2000 (90 days after the date of this prospectus), all
dealers that affect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the obligation of dealers to deliver a prospectus when acting as
soliciting dealers.
We have not authorized any dealer, salesperson or other individual to give
any information or to make any representations that are not contained in this
prospectus. If any such information or statements are given or made, you should
not rely upon such information or representation. This prospectus does not
constitute an offer to sell any securities other than those to which this
prospectus relates, or an offer to sell, or a solicitation of an offer to buy,
to any person in any jurisdiction where such an offer or solicitation would be
unlawful. You should not assume that the delivery of this prospectus or that any
sale made pursuant to this prospectus creates an implication that the
information contained in this prospectus will remain fully accurate and correct
as of any time subsequent to the date of this prospectus.
________________
WELLS REAL ESTATE
INVESTMENT TRUST, INC.
Up to 20,000,000 Shares
Of Common Stock
Offered to the Public
________________
PROSPECTUS
________________
WELLS INVESTMENT
SECURITIES, INC.
December 20, 1999
