<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the quarterly period ended DECEMBER 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-10322
CORPORATE PROPERTY ASSOCIATES 3
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 94-2708080
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (212) 492-1100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
LIMITED PARTNERSHIP UNITS
(Title of Class)
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of deliquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ X ]
Aggregate market value of the voting stock held by non-affiliates of
Registrant: There is no active market for Limited Partnership Units.
<PAGE> 2
PART II
Item 8. Financial Statements and Supplementary Data.
(i) Report of Independent Accountants.
(ii) Balance Sheets as of December 31, 1995 and 1996.
(iii) Statements of Income for the years ended December 31, 1994, 1995 and
1996.
(iv) Statements of Partners' Capital for the years ended December 31, 1994,
1995 and 1996.
(v) Statements of Cash Flows for the years ended December 31, 1994, 1995
and 1996.
(vi) Notes to Financial Statements.
<PAGE> 3
REPORT of INDEPENDENT ACCOUNTANTS
To the Partners of
Corporate Property Associates 3:
We have audited the accompanying balance sheets of Corporate
Property Associates 3 (a California limited partnership) as of December 31, 1995
and 1996, and the related statements of income, partners' capital and cash flows
for each of the three years in the period ended December 31, 1996. We have also
audited the financial statement schedule included on pages 17 to 18 of this
Annual Report. These financial statements and financial statement schedule are
the responsibility of the General Partners. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by the General Partners, 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 Corporate Property
Associates 3 (a California limited partnership) as of December 31, 1995 and
1996, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. In addition, in our opinion, the Schedule of
Real Estate and Accumulated Depreciation as of December 31, 1996, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the financial information required to
be included therein pursuant to Securities and Exchange Commission Regulation
S-X Rule 12-28.
/s/ Coopers & Lybrand L.L.P.
New York, New York
March 17, 1997
-5-
<PAGE> 4
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
BALANCE SHEETS
December 31, 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
ASSETS:
Real estate leased to others:
Accounted for under the
operating method:
Land $ 1,255,499 $ 1,255,499
Buildings 4,514,428 4,817,871
----------- -----------
5,769,927 6,073,370
Accumulated depreciation 1,175,202 1,364,095
----------- -----------
4,594,725 4,709,275
Net investment in direct financing leases 25,291,792 25,689,201
----------- -----------
Real estate leased to others 29,886,517 30,398,476
Real estate held for sale 1,853,816
Cash and cash equivalents 1,158,302 1,496,001
Accrued interest and rents receivable 210,362 200,696
Other assets 114,160 435,177
----------- -----------
Total assets $33,223,157 $32,530,350
=========== ===========
LIABILITIES:
Note payable to affiliate $ 2,300,000 $ 500,000
Accounts payable and accrued expenses 86,776 63,200
Accounts payable to affiliates 57,298 73,313
----------- -----------
Total liabilities 2,444,074 636,513
----------- -----------
Commitments and contingencies
PARTNERS' CAPITAL:
General Partners 191,606 214,807
Limited Partners (66,000 Limited
Partnership Units issued and
outstanding) 30,587,477 31,679,030
----------- -----------
Total partners' capital 30,779,083 31,893,837
----------- -----------
Total liabilities and
partners' capital $33,223,157 $32,530,350
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-6-
<PAGE> 5
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
STATEMENTS of INCOME
For the years ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Rental income $ 287,779 $ 290,657 $ 845,257
Interest income from direct financing leases 7,055,695 6,502,361 4,735,487
Other interest Income 48,378 230,926 74,338
Other income 225,321 75,000
----------- ----------- -----------
7,391,852 7,249,265 5,730,082
----------- ----------- -----------
Expenses:
Interest 1,602,175 1,255,047 75,158
Depreciation 158,567 198,590 188,893
General and administrative 309,069 372,006 326,082
Property expenses 1,387,498 781,442 705,915
Amortization 22,405 19,605
Writedown to net realizable value 697,325 146,184
----------- ----------- -----------
4,177,039 2,772,874 1,296,048
----------- ----------- -----------
Income before gain on settlement 3,214,813 4,476,391 4,434,034
Gain on settlement, net of $7,400,000
writedown to net realizable value 11,499,176
----------- ----------- -----------
Net income $ 3,214,813 $15,975,567 $ 4,434,034
=========== =========== ===========
Net income allocated to:
Individual General Partner $ 3,215 $ 15,976 $ 4,434
=========== =========== ===========
Corporate General Partner $ 61,081 $ 303,536 $ 84,247
=========== =========== ===========
Limited Partners $ 3,150,517 $15,656,055 $ 4,345,353
=========== =========== ===========
Net income per Unit
(66,000 Limited Partnership
Units outstanding) $ 47.74 $ 237.21 $ 65.84
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-7-
<PAGE> 6
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
STATEMENTS of PARTNERS' CAPITAL
For the years ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
Partners' Capital Accounts
---------------------------------------------------------------
Limited
Partners'
General Limited Amount Per
Total Partners Partners Unit (a)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 $ 28,967,437 $ 75,372 $ 28,892,065 $ 438
Distributions (4,656,367) (93,127) (4,563,240) (69)
Net income 1994 3,214,813 64,296 3,150,517 48
------------ ------------ ------------ ------------
Balance, December 31, 1994 27,525,883 46,541 27,479,342 417
Distributions (12,722,367) (174,447) (12,547,920) (190)
Net income 1995 15,975,567 319,512 15,656,055 237
------------ ------------ ------------ ------------
Balance, December 31, 1995 30,779,083 191,606 30,587,477 464
Distributions (3,319,280) (65,480) (3,253,800) (49)
Net income 1996 4,434,034 88,681 4,345,353 66
------------ ------------ ------------ ------------
Balance, December 31, 1996 $ 31,893,837 $ 214,807 $ 31,679,030 $ 481
============ ============ ============ ============
</TABLE>
(a) Based on 66,000 Units issued and outstanding during all periods.
The accompanying notes are an integral part of the financial statements.
-8-
<PAGE> 7
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
STATEMENTS of CASH FLOWS
For the years ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income $ 3,214,813 $ 15,975,567 $ 4,434,034
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 180,972 218,195 188,893
Gain on settlement, net (11,499,176)
Restructuring fees received, net of costs 8,150,941
Cash receipts on direct financing leases in
excess of (less than) amortization of unearned
income and straight-line adjustments 9,046 (26,973) (592,942)
Writedown to net realizable value 697,325 146,184
Net change in operating assets and liabilities 545,219 (47,161) (123,379)
------------ ------------ ------------
Net cash provided by operating
activities 4,647,375 12,917,577 3,906,606
------------ ------------ ------------
Cash flows from investing activities:
Capitalized costs (303,443)
Proceeds from settlement, net 4,850,869
Proceeds from sale of real estate 1,853,816
Payments received in connection with
exercise of purchase option 2,286,195 585,000
------------ ------------ ------------
Net cash provided by
investing activities 2,286,195 5,435,869 1,550,373
------------ ------------ ------------
Cash flows from financing activities:
Distributions to partners (4,656,367) (12,722,367) (3,319,280)
Payment of mortgage principal (1,453,396) (1,113,283)
Prepayment of mortgage principal (14,510,913)
Payment of note to affiliate (1,800,000)
Proceeds from issuance of note to affiliate 2,300,000
------------ ------------ ------------
Net cash used in
financing activities (6,109,763) (26,046,563) (5,119,280)
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents 823,807 (7,693,117) 337,699
Cash and cash equivalents,
beginning of year 8,027,612 8,851,419 1,158,302
------------ ------------ ------------
Cash and cash equivalents,
end of year $ 8,851,419 $ 1,158,302 $ 1,496,001
============ ============ ============
Supplemental cash flows information:
Interest paid $ 1,613,684 $ 1,357,609 $ 97,192
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
-9-
<PAGE> 8
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES to FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Use of Estimates:
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.
Real Estate Leased to Others:
Real estate is leased to others on a net lease basis, whereby the tenant
is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance, repairs,
renewals and improvements.
Corporate Property Associates 3 (the "Partnership") diversifies its
real estate investments among various corporate tenants engaged in
different industries and by property type throughout the United
States.
The leases are accounted for under the direct financing or operating
methods. Such methods are described below:
Direct financing method - Leases accounted for under the direct
financing method are recorded at their net investment (Note 5).
Unearned income is deferred and amortized to income over the
lease terms so as to produce a constant periodic rate of return
on the Partnership's net investment in the lease.
Operating method - Real estate is recorded at cost, revenue is
recognized as rentals are earned and expenses (including
depreciation) are charged to operations as incurred.
The Partnership assesses the recoverability of its real estate assets,
including residual interests, based on projections of undiscounted
cash flows over the life of such assets. In the event that such cash
flows are insufficient, the assets are adjusted to their estimated
net realizable value.
Substantially all of the Partnership's leases provide for either
scheduled rent increases or periodic rent increases based on formulas
indexed to increases in the Consumer Price Index ("CPI").
Real Estate Held for Sale:
Real estate held for sale is accounted for at the lower of cost or fair
value less costs to sell.
Depreciation:
Depreciation is computed using the straight-line method over the
estimated useful lives of components of the property, which range
from 5 to 36 years.
Cash Equivalents:
The Partnership considers all short-term, highly-liquid investments that
are both readily convertible to cash and have a maturity of generally
three months or less at the time of purchase to be cash equivalents.
Items classified as cash equivalents include commercial paper and
money market funds. Substantially all of the Partnership's cash and
cash equivalents at December 31, 1995 and 1996 were held in the
custody of two financial institutions.
Continued
-10-
<PAGE> 9
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES to FINANCIAL STATEMENTS, Continued
Income Taxes:
A partnership is not liable for Federal income taxes as each partner
recognizes his proportionate share of the partnership income or loss
in his tax return. Accordingly, no provision for income taxes is
recognized for financial statement purposes.
2. Partnership Agreement:
The Partnership was organized on November 7, 1980 under the Uniform
Limited Partnership Act of the State of California for the purpose of
engaging in the business of investing in and leasing industrial and
commercial real estate. The Corporate General Partner purchased 200
Limited Partnership Units in connection with the Partnership's public
offering. The Partnership will terminate on December 31, 2018, or
sooner, in accordance with the terms of the Amended Agreement of
Limited Partnership (the "Agreement").
The Agreement provides that the General Partners are allocated 2% (.1%
to the Individual General Partner, William P. Carey, and 1.9% to the
Corporate General Partner, W. P. Carey & Co., Inc. ("W.P. Carey") and
the Limited Partners are allocated 98% of the profits and losses as
well as distributions of distributable cash from operations, as
defined. The partners are also entitled to receive net proceeds from
the sale of the Partnership properties as defined in the Agreement.
The General Partners may be entitled to receive a subordinated
preferred return, measured based upon the cumulative proceeds arising
from the sale of Partnership assets. Pursuant to the subordination
provisions of the Agreement, the preferred return may be paid only
after the limited partners receive 100% of their initial investment
from the proceeds of asset sales and a cumulative annual return
ranging from 6% to 9% since the inception of the Partnership. The
General Partners interest in such preferred return amounts to
$731,823 based upon the cumulative proceeds from the sale of assets
since the inception of the Partnership through December 31, 1996. The
Partnership's ability to satisfy the subordination provisions of the
Agreement may not be determinable until liquidation of a substantial
portion of the Partnership's assets has been made, formal plans of
liquidation are adopted or limited partnership units are converted to
other securities which provide the security holder with greater
liquidity than a limited partnership unit. Management believes that
as of the report date, ultimate payment of the preferred return is
reasonably possible but not probable, as defined pursuant to
Statement of Financial Accounting Standards No. 5.
3. Transactions with Related Parties:
Under the Agreement, a division of W.P. Carey is also entitled to
receive a property management fee and reimbursement of certain
expenses incurred in connection with the Partnership's operations.
Property management fee in 1995 includes the effects of certain
transactions described in Notes 10 and 11. General and administrative
expense reimbursements consist primarily of the actual cost of
personnel needed in providing administrative services necessary to
the operation of the Partnership. Property management fee and general
and administrative expense reimbursements are summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Property management fee $162,711 $ 930,191 $ 218,507
General and administrative
expense reimbursements 84,839 86,183 84,519
-------- ---------- ----------
$247,550 $1,016,374 $ 303,026
======== ========== ==========
</TABLE>
During 1994, 1995 and 1996, fees and expenses aggregating $32,352,
$96,306 and $284,067, respectively, were incurred for legal services
performed by a firm in which the Secretary of the Corporate General
Partner and other affiliates is a partner.
Continued
-11-
<PAGE> 10
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES to FINANCIAL STATEMENTS, Continued
The Partnership is a participant in an agreement with W.P. Carey and
other affiliates for the purpose of leasing office space used for the
administration of real estate entities and W.P. Carey and for sharing
the associated costs. Pursuant to the terms of the agreement, the
Partnership's share of rental, occupancy and leasehold improvement
costs is based on adjusted gross revenues as defined. Net expenses
incurred in 1994, 1995 and 1996 were $53,757, $87,907 and $67,625,
respectively.
The Partnership incurred interest expense of $75,158 on its note payable
to an affiliate. The loan, evidenced by a promissory note, bears
interest at the prime rate and is due on demand.
The Partnership's ownership interests in certain properties are jointly
held with affiliated entities as tenants-in-common with the
Partnership's ownership interests in such jointly held properties
ranging from 16.76% to 71.5%. The Partnership accounts for its assets
and liabilities relating to tenants-in-common interests on a
proportional basis.
4. Real Estate Leased to Others Accounted for Under the Operating Method:
Scheduled future minimum rents, exclusive of renewals, under a
noncancelable operating leases amount to approximately $1,188,000 in
1997; $1,323,000 in 1998; $511,000 in 1999 through 2001 and aggregate
approximately $6,369,000 through 2012.
Contingent rents were approximately $36,000 in 1994, $39,000 in 1995 and
$18,000 in 1996.
5. Net Investment in Direct Financing Leases:
Net investment in direct financing leases is summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------
1995 1996
------------ ------------
<S> <C> <C>
Minimum lease payments receivable $ 72,193,297 $ 67,855,219
Unguaranteed residual value 33,409,444 33,409,444
------------ ------------
105,602,741 101,264,663
Less, Unearned income 80,310,949 75,575,462
------------ ------------
$ 25,291,792 $ 25,689,201
============ ============
</TABLE>
Scheduled future minimum rents, exclusive of renewals, under
noncancelable direct financing leases amount to approximately
$4,375,000 in 1997, $4,339,000 in 1998, $4,321,000 in 1999,
$4,360,000 in 2000 and $4,871,000 in 2001 and aggregate approximately
$67,855,000 through 2013.
Contingent rents were approximately $1,904,000 in 1994 and $1,142,000 in
1995. No contingent rents were realized in 1996.
6. Distributions:
Distributions are declared and paid to partners quarterly and are
summarized as follows:
<TABLE>
<CAPTION>
Year Ending Distributions Paid to Distributions Paid to Per Limited
December 31, General Partners Limited Partners Partners Unit
- -------------- --------------------- --------------------- -------------
<S> <C> <C> <C>
1994 $ 93,127 $ 4,563,240 $ 69.14
=========== =========== ========
1995
Quarterly distributions $ 94,447 $ 4,627,920 $ 70.12
Special distribution
- Note 10 80,000 7,920,000 120.00
----------- ----------- --------
$ 174,447 $12,547,920 $ 190.12
=========== =========== ========
1996 $ 65,480 $ 3,253,800 $ 49.30
=========== =========== ========
</TABLE>
Continued
-12-
<PAGE> 11
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES to FINANCIAL STATEMENTS, Continued
Distributions of $16,671 to the General Partners and $818,400 to the
Limited Partners for the quarter ended December 31, 1996 were declared and
paid in January 1997.
7. Income for Federal Tax Purposes:
Income for financial statement purposes differs from income for Federal
income tax purposes because of the difference in the treatment of
certain items for income tax purposes and financial statement
purposes. A reconciliation of accounting differences is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net income per Statements of Income $ 3,214,813 $ 15,975,567 $ 4,434,034
Excess tax depreciation (1,423,529) (1,364,376) (880,310)
Recognition of purchase installments
as operating income 2,286,195 (5,880,601)
Writedown to net realizable value 697,325 7,546,184
Restructuring fee 8,150,941
Other (312,950) (474,841) (407,625)
------------ ------------ ------------
Income reported for Federal income
tax purposes $ 4,461,854 $ 23,952,874 $ 3,146,099
============ ============ ============
</TABLE>
8. Industry Segment Information:
The Partnership's operations consist of the investment in and the
leasing of industrial and commercial real estate.
In 1994, 1995 and 1996, the Partnership earned its total operating
revenues (rental income plus interest income from direct financing
leases) from the following lease obligors:
<TABLE>
<CAPTION>
1994 % 1995 % 1996 %
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gibson Greetings, Inc. $5,962,090 81% $5,525,671 81% $2,560,499 46%
Cleo, Inc. 150,885 2 1,349,237 24
Hughes Markets, Inc. 287,779 4 290,657 4 747,946 13
AT&T Corporation 457,818 6 458,275 7 458,807 8
New Valley Corporation 635,786 9 367,530 6 366,944 7
Sports & Recreation, Inc. 93,829 2
Excel Telecommunications, Inc. 3,482
---------- ---------- ---------- ---------- ---------- ----------
$7,343,473 100% $6,793,018 100% $5,580,744 100%
========== ========== ========== ========== ========== ==========
</TABLE>
9. Properties Formerly Leased to New Valley Corporation:
The Partnership and Corporate Property Associates 2 ("CPA(R):2"), an
affiliate, own 61% and 39% interests, respectively, in properties
located in Reno, Nevada; Bridgeton, Missouri; and Moorestown, New
Jersey. Until May 1993, the properties were leased to New Valley
Corporation ("New Valley"). On April 1, 1993, New Valley filed a
petition of voluntary bankruptcy seeking reorganization under Chapter
11 of the United States Bankruptcy Code. In connection with the
bankruptcy filing, the Bankruptcy Court approved New Valley's
termination of its lease with the Partnership and CPA(R):2 for the
Moorestown, New Jersey property in May 1993. In December 1994, the
Bankruptcy Court also approved the termination of New Valley's lease
on the Reno property effective December 31, 1994. In connection with
the lease termination, the Partnership
Continued
-13-
<PAGE> 12
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES to FINANCIAL STATEMENTS, Continued
wrote down the Reno property in 1994 to its estimated net realizable
value of $2,000,000 and recognized a charge of $697,325 on the
writedown. New Valley continues to lease the Bridgeton property.
In 1995 the Partnership and CPA(R):2 entered into a net lease for the
Moorestown property with Sports & Recreation, Inc. ("Sports &
Recreation"). The agreement provided that after conversion of the
facility into a retail store, a lease term of 16 years with an
initial rent of $308,750 (of which the Partnership's share is
$187,750) would commence. During 1996 Sports & Recreation indicated
to the Partnership and CPA(R):2 that it had decided not to occupy the
property and would seek to terminate the lease. At that time, the
Partnership and CPA(R):2 rejected as inadequate Sports & Recreation's
offer of $300,000 as a settlement in exchange for being released from
its lease obligations. Sports & Recreation has paid all scheduled
rents. The Partnership and CPA(R):2 expect that Sports & Recreation
will resume discussions for the purposes of reaching a termination
settlement; however, no discussions are currently in progress.
On August 28, 1996 the Partnership and CPA(R):2 entered into a lease
agreement for the Reno property with Excel Teleservices, Inc.
("Excel"). The lease obligations of Excel have been guaranteed by its
parent company, Excel Telecommunications, Inc. The initial lease term
commenced on December 26, 1996. Annual rent during the first five
years is $532,800 increasing to $580,800 thereafter (of which the
Partnership's share is $325,000 and $354,200, respectively). The
lease, which has a term of ten years, provides Excel with two
five-year renewal options with the rent during such renewal terms
based on the then prevailing market rate. Excel has the right to
terminate the lease at the end of the sixth lease year.
In connection with the termination of the Moorestown and Reno leases,
the Partnership and CPA(R):2 expect to receive a bankruptcy
settlement from New Valley. The amount of such settlement cannot be
estimated and no amounts that the Partnership may ultimately receive
have been recorded in the accompanying financial statements.
10. Gain on Settlement:
In August 1995, the Partnership reached a settlement with The Leslie Fay
Company ("Leslie Fay") and its surety company regarding Leslie Fay's
lease with the Partnership. In connection with the settlement, the
Partnership recognized a gain of $11,499,176, which consisted of
aggregate net cash received from Leslie Fay and the surety company of
$18,839,750 and the waiving of the $382,706 interest obligation that
had been accrued on the Leslie Fay monthly payments, offset by the
writedown of $7,400,000 and aggregate management fees, payable to an
affiliate, of $323,280 on the monthly payments received from Leslie
Fay since the beginning of the dispute in 1992. Of the rent received,
$5,435,869 was received in 1995. Under the settlement agreement,
Leslie Fay was required to dismiss with prejudice all of its suits
filed against the Partnership, and the Partnership's bankruptcy claim
against Leslie Fay, as an unsecured creditor, was reduced to
$2,650,000. The bankruptcy claim is pending and the Partnership may
not realize the full amount of the bankruptcy claim.
As the fair value of the property was no longer impacted by the Leslie
Fay lease, the Partnership wrote down the estimated fair value of the
property, net of anticipated selling costs, to $2,000,000 and
recognized a noncash charge of $7,400,000, which is netted against
the gain on settlement.
As a result of the settlement, a special distribution of $120 per
Limited Partner Unit ($7,920,000) was declared and paid in October
1995. In 1992, a special distribution of $50 per Limited Partner Unit
($3,300,000) was paid from the receipt of the $7,200,000 installment
from Leslie Fay.
Continued
-14-
<PAGE> 13
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES to FINANCIAL STATEMENTS, Continued
On January 10, 1996, the Partnership sold the vacant property to a third
party, net of transaction costs, for $1,853,816. The Partnership
recognized an additional writedown on the property to an amount equal
to the net sales proceeds, resulting in a charge to income in 1995 of
$146,184. Accordingly, no gain or loss was recognized in 1996 in
connection with the sale.
11. Properties Leased to Gibson Greetings, Inc.:
In January 1982, the Partnership and CPA(R):2 entered into a net lease
with Gibson Greetings, Inc. ("Gibson"), for three properties in
Memphis, Tennessee; Berea, Kentucky; and Cincinnati, Ohio. In 1988,
the Partnership and CPA(R):2 consented to Gibson's sublease of the
Memphis, Tennessee property to a wholly-owned subsidiary, Cleo, Inc.
("Cleo"). The lease for the three properties had an initial term of
20 years with two five-year renewal options and provided for minimum
annual rentals of $5,865,000 with rent increases every five years
based on a formula indexed to the CPI. The lease also provided Gibson
with a purchase option which was exercisable during the tenth year of
the lease and at the end of the initial term. Gibson declined to
exercise its purchase option in 1992.
In connection with Gibson's sale of the Cleo subsidiary to CSS
Industries, Inc. ("CSS"), the Partnership, CPA(R):2 and Gibson
entered into an agreement on November 15, 1995, whereby the Memphis,
Tennessee property occupied by Cleo was severed from the Gibson
master lease, the Gibson lease was amended and Cleo entered into a
separate lease for the Tennessee property with CSS as the guarantor
of Cleo's lease obligations. The Partnership and CPA(R):2 received
$12,200,000 (of which the Partnership's share was $8,723,000) as a
one-time lump sum payment in consideration for severing the Tennessee
property from the Gibson master lease. Gibson still retains certain
specific obligations for any environmental violations which may be
detected and which resulted from any pre-existing conditions at the
Tennessee property.
The Gibson lease on the two remaining properties in Kentucky and Ohio,
as amended, provides for an initial term which has been extended
through November 30, 2013, and provides for one renewal term of ten
years. Annual rent is $3,100,000 (of which the Partnership's share is
approximately $2,367,000), with stated increases of 20% every five
years through the end of the renewal term. The lease includes new
purchase options exercisable on November 30, 2005 and 2010 and Gibson
has the right to exercise the purchase option on either one of its
leased properties or both. The option is exercisable at fair market
value of the properties as encumbered by the lease.
The Cleo lease provides for a ten-year term through December 31, 2005
with two five-year renewal terms. Annual rent is $1,500,000 (of which
the Partnership's share is approximately $1,145,000), and there is a
rent increase effective January 1, 2001. The rent increase will be
based on a formula indexed to the CPI; however, the increased annual
rent will be at least $1,689,000 but no more than $1,898,000. Cleo
has an option to purchase the property at any time during the term of
the lease so long as there is no monetary default. Exercise of the
purchase option requires at least six months' notice. The exercise
price is the greater of (i) $15,000,000 or (ii) fair market value
capped at a maximum of $16,250,000.
In connection with the payment made by Gibson to sever the Tennessee
property from the Gibson lease, the Partnership deferred recognition
of a gain on restructuring of $8,150,941, consisting of the
Partnership's $8,723,000 share of the lump sum payment offset by
costs of $572,059, including management fees of $429,560, payable to
an affiliate, with such deferred gain included in the net investment
in direct financing leases. The Partnership is amortizing such
deferred gain over the remaining initial terms of the Gibson and Cleo
direct financing leases. Such amortization, included in interest
income from direct financing leases, was $398,065 in 1996. The net
proceeds from the agreement as well as other available funds were
used to pay off the Partnership's share of the mortgage loan
collateralized by the Gibson properties of $13,190,566 in November
1995.
Continued
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<PAGE> 14
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES to FINANCIAL STATEMENTS, Continued
12. Property Leased to Hughes Markets, Inc.:
The Partnership and Corporate Property Associates 4 ("CPA(R):4"), an
affiliate, own a dairy processing facility in Los Angeles, California
as tenants-in-common with 16.76% and 83.24% ownership interests,
respectively. On May 1, 1996, the Partnership and CPA(R):4 entered
into a lease amendment agreement with the lessee, Hughes Markets,
Inc. ("Hughes"), to extend the lease term from April 30, 1996 to
April 30, 1998. Under the extension agreement, Hughes' monthly rent
increased to $336,166 (of which the Partnership's share is $56,341)
from $151,686 (of which the Partnership's share was $25,420). At the
end of the lease term, Hughes is obligated to pay a lump sum rental
payment of $3,500,000 (of which the Partnership's share will be
approximately $587,000). Hughes has an option to extend the lease on
a month-to-month basis for up to six months at a rental of $500,000
per month.
In accordance with the lease amendment agreement, Hughes has provided
the Partnership and CPA(R):4 an irrevocable letter of credit in the
amount of $3,500,000, an amount equal to Hughes' lump sum payment
obligation. For financial reporting purposes, the $3,500,000 lump sum
rental payment due at the end of the lease term is being recognized
on a straight-line basis over the lease extension term. For the year
ended December 31, 1996, the difference between scheduled rents under
the lease and rent recognized for financial reporting purposes
including the adjustment for lump sum payment amounts to $195,533.
13. Environmental Matters:
All of the Partnership's properties are subject to environmental
statutes and regulations regarding the discharge of hazardous
materials and related remediation obligations. All of the
Partnership's properties are currently leased to corporate tenants.
The Partnership generally structures a lease to require the tenant to
comply with all laws. In addition, substantially all of the
Partnership's net leases include provisions which require tenants to
indemnify the Partnership from all liabilities and losses related to
their operations at the leased properties. The costs for remediation,
which are being performed and paid for by the affected tenant at
three of the properties, are not expected to be material. In the
event that the Partnership absorbs a portion of such costs because of
a tenant's failure to fulfill its obligations, the General Partners
believe such expenditures will not have a material adverse effect on
the Partnership's financial condition, liquidity or results of
operations.
In 1994, based on the results of Phase I environmental reviews performed
in 1993, the Partnership voluntarily conducted Phase II environmental
reviews on four of its properties. The Partnership believes, based on
the results of Phase I and Phase II reviews, that its properties are
in substantial compliance with Federal and state environmental
statutes and regulations. Portions of certain properties have been
documented as having a limited degree of contamination, principally
in connection with surface spills from facility activities. For those
conditions which were identified, the Partnership advised the
affected tenants of the Phase II findings and of their obligations to
perform required remediation.
14. Disclosures About Fair Value of Financial Instruments:
The carrying amounts of cash, receivables and accounts payable and
accrued expenses approximate fair value because of the short maturity
of these items.
Continued
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<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
BY: W. P. CAREY & CO., INC.
09/03/97 BY: /s/ Steven M. Berzin
- -------------- --------------------------------
Date Claude Fernandez
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
09/03/97 BY: /s/ Claude Fernandez
- -------------- --------------------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
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