UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-11081
COMMERCIAL PROPERTIES 1, L.P.
(formerly Hutton/GSH Commercial Properties 1)
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Exact name of registrant as specified in its charter
Virginia 13-3075804
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State or other jurisdiction I.R.S. Employer Identification No.
of incorporation or organization
3 World Financial Center, 29th Floor,
New York, NY ATTN: Andre Anderson 10285
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Address of principal executive offices zip code
Registrant's telephone number, including area code: (212) 526-3732
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
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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 shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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
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Documents Incorporated by Reference:
Portions of Prospectus of Registrant dated November 10, 1981 (included in
Amendment No. 1 to Registration Statement, No. 2-78248, of Registrant filed
July 13, 1982) are incorporated by reference into Part III.
Portions of Parts I, II and IV are incorporated by reference to the
Partnership's Annual Report to Unitholders for the year ended December 31, 1996
filed as an exhibit under Item 14.
PART I
Item 1. Business
(a) General Development of Business
Commercial Properties 1, L.P. (the "Registrant" or "Partnership") (formerly
known as Hutton/GSH Commercial Properties 1) is a Virginia limited partnership
organized pursuant to an Amended and Restated Certificate and Agreement of
Limited Partnership, dated April 30, 1982, of which CP1 Real Estate Services
Inc. ("RE Services"), formerly Hutton Real Estate Services IV, Inc. (See Item
10. "Directors and Executive Officers") and HS Advisors II, Ltd. ("HS
Advisors"), are the general partners (the "General Partners"). The Partnership
was formed to engage in the business of acquiring, operating and holding for
investment, the following four joint ventures: (i) Watkins Center Joint
Venture, a Georgia joint venture partnership which currently owns and operates
Watkins Center; (ii) Dawson Business Center Joint Venture, a Georgia joint
venture partnership which owns and operates Dawson Business Center; (iii)
Maitland Center Associates Joint Venture, a Florida joint venture partnership
which owns and operates the Maitland Center Office Building; and (iv) Beta
Building Associates Joint Venture, a California joint venture partnership which
owns and operates Swenson Business Park-Building B. (The properties described
above are collectively referred to herein as the "Properties").
The Partnership originally held a $6.5 million equity convertible loan on the
965 Ridgelake Office Building in Memphis, Tennessee. On May 17, 1988, the
Partnership exercised its option to convert the debt into equity, however,
before the conversion was finalized, the Partnership was able to negotiate a $5
million partial payment, which was distributed to Limited Partners on October
3, 1990. The remaining $1.5 million was converted into a non-interest bearing
second mortgage which matured on August 17, 1995. At that time, the borrower
was unable to pay the entire outstanding balance of the loan and initially
offered to satisfy the obligation by paying a substantially discounted amount.
Following subsequent negotiations, and after evaluating various alternatives,
including acquiring the property, an agreement was reached whereby the
Partnership received $1,150,000 in December 1995, in full satisfaction of the
loan. The proceeds were distributed to the Partners on February 9, 1996. The
final resolution of this issue coupled with improved performance of the
Partnership's properties enabled the General Partners to reinstate quarterly
distributions of cash flow, beginning with the fourth quarter of 1995. Further
information is incorporated by reference to the section entitled "Message to
Investors" in the Partnership's Annual Report to Unitholders for the year ended
December 31, 1996 filed as an exhibit under Item 14.
(b) Financial Information About Industry Segment
The Registrant's sole business is the ownership and operation of the
Properties. All of the Registrant's revenues, operating profit or losses and
assets relate solely to such industry segment.
(c) Narrative Description of Business
The Registrant's principal investment objectives with respect to the Properties
(in no particular order of priority) are:
- Capital appreciation;
- Distributions of Net Cash From Operations attributable to rental income;
- Preservation and protection of capital; and
- Equity build-up through principal reduction of mortgage loans, if any, on
the Properties.
Distributions of net cash from operations will be the Registrant's objective
during its operational phase, while the preservation and appreciation of
capital will be the Registrant's long-term objective. Future distributions will
be made from rental operations with respect to the Registrant's investment in
the Properties, as well as from returns of capital. The attainment of the
Registrant's investment objectives will depend on many factors, including
future economic conditions in the United States as a whole and, in particular,
in the localities in which the Registrant's Properties are located, especially
with regard to achievement of capital appreciation.
The Registrant expects to market its Properties for sale during 1997. No
Property will be sold, financed or refinanced by the Registrant without
agreement of both General Partners. Proceeds from any future sale, financing
or refinancing of the Properties will not be reinvested but will be distributed
to the Limited Partners as a return of capital, so that the Registrant, in
effect, will be self-liquidating. As partial payment for Properties sold, the
Registrant may receive purchase money obligations collateralized by mortgages
or deeds of trust. In such cases, the amount of such obligations will not be
included in net proceeds from sale or refinancing (distributable to the Limited
Partners) until and to the extent the obligations are realized in cash, sold or
otherwise liquidated.
(d) Competition
Incorporated by reference to the section entitled "Property Profiles & Leasing
Update" in the Partnership's Annual Report to Unitholders for the year ended
December 31, 1996 filed as an exhibit under Item 14.
(e) Employees
The Partnership has no employees.
Item 2. Properties
Description of Properties and material leases incorporated by reference to the
section entitled "Property Profiles & Leasing Update" in the Partnership's
Annual Report to Unitholders for the year ended December 31, 1996 filed as an
exhibit under Item 14 and Note 4 "Real Estate Investments" and Note 7 "Rental
Income Under Operating Leases" of the Notes to the Consolidated Financial
Statements.
Item 3. Legal Proceedings
Neither the Registrant nor any of the Properties is subject to any material
legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of Unitholders during the fourth quarter of
1996.
PART II
Item 5. Market for Registrant's Limited Partnership Units and Related
Unitholder Matters
(a) Market Information
No established public trading market has developed for the Units, and it is
not anticipated that such a market will develop in the future.
(b) Holders
As of December 31, 1996, the number of holders of Units was 5,613.
(c) Distributions
Cash distributions paid to the Limited Partners for the two years ended
December 31, 1996 and December 31, 1995 are incorporated by reference to the
section entitled "Message to Investors" in the Partnership's Annual Report to
Unitholders for the year ended December 31, 1996 filed as an exhibit under Item
14.
Item 6. Selected Financial Data
Incorporated by reference to the section entitled "Financial Highlights" in the
Partnership's Annual Report to Unitholders for the year ended December 31,
1996, which is filed as an exhibit under Item 14.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
- -------------------------------
The Partnership's cash and cash equivalents balance was $301,658 at December
31, 1996, compared with $2,040,428 at December 31, 1995. The decrease is
primarily due to the payment of a special cash distribution on February 9,
1996, and payments for building and tenant improvements. Additionally, the
Partnership had a restricted cash balance of $203,626 at December 31, 1996
representing security deposits and funds reserved for property tax payments.
Rent receivable totaled $19,966 at December 31, 1996 compared with $138,460 at
December 31, 1995. The decrease is due to the timing of rental receipts.
Prepaid leasing costs decreased to $379,758 at December 31, 1996 from $443,745
at December 31, 1995, primarily as a result of the amortization of leasing
commissions related to the execution of a lease in January 1995 for 100% of the
leasable space at Swenson Business Park - Building B. Deferred rent receivable
totaled $215,389 at December 31, 1996 compared to $195,197 at December 31,
1995. The increase is primarily due to leases executed in 1996 and in 1995.
Distribution payable decreased to $416,667 at December 31, 1996, from
$1,483,333 at December 31, 1995. The higher 1995 balance reflects quarterly
cash distributions in the amount of $333,333 in addition to a special
distribution of $1,150,000, representing proceeds received in full satisfaction
of the note receivable on the 965 Ridgelake Office Building. These proceeds
were distributed to Partners on February 9, 1996.
The Partnership paid cash distributions from operations to the Limited Partners
of $1,425,000 or $19.00 per Unit for the year ended December 31, 1996,
including a distribution of $375,000 or $5.00 per Unit for the fourth quarter
of the 1996 fiscal year, which was paid on February 11, 1997.
In light of the Properties' stable high occupancy rates and improved conditions
in the markets where the properties are located, the General Partners have
recently engaged brokers to assist in marketing the Properties for sale.
However, there can be no assurance that the General Partners will be successful
in selling any or all of the Properties during 1997. As a result of the
possible pending sales, the properties were reclassified on the consolidated
balance sheet as of December 31, 1996, as real estate held for sale.
The mortgage notes secured by Watkins Center are payable in full on June 10,
1997. At December 31, 1996 the outstanding balance of the notes totaled
$4,795,775. In the event that the property is not sold by such date, the
Partnership will consider various options including a refinancing of the notes.
Further details are incorporated by reference to Note 6 "Mortgage Notes
Payable" of the Notes to the Consolidated Financial Statements contained in the
Partnership's Annual Report to Unitholders for the year ended December 31, 1996
filed as an exhibit under Item 14.
A discussion of leasing activity at all of the Partnership's properties is
incorporated herein by reference to the sections entitled "Message to
Investors" and "Property Profiles & Leasing Update" contained in the
Partnership's Annual Report to Unitholders for the year ended December 31, 1996
filed as an exhibit under Item 14.
On March 15, 1996, based upon, among other things, the advice of legal counsel,
Skadden, Arps, Slate, Meagher & Flom, the General Partners adopted a resolution
that states, among other things, if a Change of Control (as defined below)
occurs, the General Partners may distribute the Partnership's cash balances not
required for its ordinary course day-to-day operations. "Change of Control"
means any purchase or offer to purchase more than 10% of the Units that is not
approved in advance by the General Partners. In determining the amount of the
distribution, the General Partners may take into account all material factors.
In addition, the Partnership will not be obligated to make any distribution to
any partner and no partner will be entitled to receive any distribution until
the General Partners have declared the distribution and established a record
date and distribution date for the distribution. The Partnership filed a Form
8-K disclosing this resolution on March 21, 1996.
Results of Operations
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1996 versus 1995
- ----------------
Partnership operations resulted in net income of $96,543 for the year ended
December 31, 1996 compared to a net loss of $290,192 for the year ended
December 31, 1995. The change to net income in 1996 from the net loss in 1995
is primarily attributable to higher rental income and lower bad debt expense.
Rental income totaled $4,502,900 for the year ended December 31, 1996 compared
to $4,071,987 for the year ended December 31, 1995. The increase is primarily
due to rental income received from a tenant leasing 100% of Swenson Business
Park - Building B, pursuant to a lease which commenced in April 1995, in
addition to increased rental rates on new leases at Watkins Center. Interest
income decreased to $41,647 for the year ended December 31, 1996 from $132,699
for the year ended December 31, 1995, primarily due to lower cash balances in
1996.
Property operating expenses totaled $1,827,870 for the year ended December 31,
1996 compared to $1,637,509 in 1995. The increase is largely attributable to
higher repair and maintenance expenses at all of the Partnership's properties,
in addition to higher electric utility expenses at Maitland Center Office
Building A and Swenson Business Park - Building B. General and administrative
expenses increased to $330,066 for the year ended December 31, 1996 from
$262,764 in 1995, largely due to higher Partnership administrative expenses and
appraisal costs. Bad debt expense totaled $30,293 for the year ended December
31, 1996 compared to $384,353 for the year ended December 31, 1995. The higher
1995 amount includes the uncollected portion of the $1.5 million note
receivable on 965 Ridgelake Office Building. On December 28, 1995, the
Partnership received $1,150,000 in full satisfaction of the $1,500,000 note
receivable. The remaining $350,000 was declared uncollectible and was included
in the Partnership's 1995 bad debt expense.
As of December 31, 1996, the lease levels of the Properties were as follows:
Watkins Center - 94%; Dawson Business Center - 89%; Maitland Center Office
Building A - 100%; Swenson Business Park, Building B - 100%.
1995 versus 1994
- ----------------
Partnership operations resulted in a net loss of $290,192 for the year ended
December 31, 1995 compared to a net loss of $383,446 for the year ended
December 31, 1994. The lower net loss is attributable to higher rental income
which was partially offset by bad debt expense of $384,353 of which $350,000
represents the uncollected portion of the $1.5 million note receivable on 965
Ridgelake Office Building.
Rental income totaled $4,071,987 for the year ended December 31, 1995 compared
to $3,076,135 for the year ended December 31, 1994. The increase is primarily
attributable to a lease which commenced in April 1995 for 100% of the leasable
space at Swenson Business Park Building B in addition to increased occupancy at
Watkins Center and Maitland Center Office Building A. Interest income
decreased to $132,699 for the year ended December 31, 1995, from $200,887 for
the year ended December 31, 1994 largely due to fully accreting the discount on
the note receivable as of August 1995.
Depreciation and amortization increased to $1,718,858 for the year ended
December 31, 1995 from $1,361,343 in 1994, primarily due to the depreciation of
tenant improvements and leasing commissions associated with leases executed in
late 1994 and 1995. Property operating expenses totaled $1,637,509 for the
year ended December 31, 1995 compared to $1,563,128 for the year ended December
31, 1994. The increase is primarily attributable to higher repairs and
maintenance and management fees at Swenson Business Park - Building B. Bad
debt expense totaled $384,353 for the year ended December 31, 1995 compared to
$72,977 for the year ended December 31, 1994. The increase primarily represents
the uncollected portion, in the amount of $350,000, of the $1.5 million note
receivable on 965 Ridgelake Office Building.
As of December 31, 1995, the lease levels of the Properties were as follows:
Watkins Center - 91%; Dawson Business Center - 85%; Maitland Center Office
Building A - 95%; Swenson Business Park, Building B - 100%.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to the Partnership's Annual Report to Unitholders for
the year ended December 31, 1996 filed as an exhibit under Item 14 and page F-1
of this report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Registrant has no officers and directors. RE Services and HS Advisors, the
co-General Partners of the Registrant, jointly manage and control the affairs
of the Registrant and have general responsibility and authority in all matters
affecting its business.
CP1 Real Estate Services Inc.
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CP1 Real Estate Services Inc., is a Delaware corporation and affiliate of
Lehman Brothers Inc. ("Lehman"). See the section captioned "Certain Matters
Involving Affiliates" below for a description of the sale of certain Shearson
Lehman Brothers, Inc. ("Shearson") domestic retail brokerage and asset
management businesses to Smith Barney, Harris Upham & Co. Incorporated, which
resulted in a change in the general partner's name. The names and ages of, as
well as the positions held by, the directors and executive officers of RE
Services are set forth below. There are no family relationships between or
among any officer and any other officer or director.
Certain officers and directors of RE Services are now serving (or in the past
have served) as officers or directors of entities which act as general partners
of a number of real estate limited partnerships which have sought protection
under the provisions of the Federal Bankruptcy Code. The partnerships which
have filed bankruptcy petitions own real estate which has been adversely
affected by the economic conditions in the markets in which that real estate is
located and, consequently, the partnerships sought the protection of the
bankruptcy laws to protect the partnerships' assets from loss through
foreclosure.
Name Office
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Kenneth L. Zakin President and Director
William Caulfield Vice President and Chief Financial Officer
Moshe Braver Vice President
Kenneth L. Zakin, 49, is a Senior Vice President of Lehman Brothers and has
held such title since November 1988. He is currently a senior manager in
Lehman Brothers' Diversified Asset Group and was formerly group head of the
Commercial Property Division of Shearson Lehman Brothers' Direct Investment
Management Group responsible for the management and restructuring of limited
partnerships owning commercial properties throughout the United States. From
January 1985 through November 1988, Mr. Zakin was a Vice President of Shearson
Lehman Brothers Inc. Mr. Zakin is a director of Lexington Corporate
Properties, Inc. He is a member of the Bar of the State of New York and
previously practiced as an attorney in New York City from 1973 to 1984
specializing in the financing, acquisition, disposition, and restructuring of
real estate transactions. Mr. Zakin is a member of the Real Estate Lender's
Association and is currently an associate member of the Urban Land Institute
and a member of the New York District Council Advisory Services Committee. He
received a Juris Doctor degree from St. John's University School of Law in 1973
and a B.A. degree from Syracuse University in 1969.
William Caulfield, 37, is a Vice President of Lehman Brothers and is
responsible for investment management of commercial real estate in the
Diversified Asset Group. Prior to the Shearson/E.F. Hutton merger in 1988, Mr.
Caulfield was a Senior Analyst with E.F. Hutton since October 1986 in E.F.
Hutton's Partnership Administration Group. Before joining E.F. Hutton, Mr.
Caulfield was a Business Systems Analyst at Eaton Corp. from 1985 to 1986.
Prior to Eaton Corp., he was an Assistant Treasurer with National Westminster
Bank USA. Mr. Caulfield holds a B.S. degree in Finance from St. John's
University and an M.B.A. from Long Island University - C.W. Post Campus.
Moshe Braver, 43, is currently a Managing Director of Lehman Brothers and has
held such position since October 1985. During this time, he has held positions
with the Business Analysis Group, International and Capital Markets
Administration and currently, with the Diversified Asset Group. Mr. Braver
joined Shearson Lehman Brothers in August 1983 as Senior Vice President. Prior
to joining Shearson, Mr. Braver was employed by the accounting firm of Coopers
& Lybrand from January 1975 through August 1983 as an Audit Manager. He
received a Bachelor of Business Administration degree from Bernard Baruch
College in January 1975 and is a Certified Public Accountant.
HS Advisors II, Ltd.
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HS Advisors II, Ltd. is a California limited partnership formed on May 20,
1980, the sole general partner of which is Hogan Stanton Investment, Inc. ("HS
Inc."), a wholly-owned subsidiary of Goodman Segar Hogan, Inc. The names and
ages of, as well as the positions held by, the directors and executive officers
of HS Inc. are as set forth below. There are no family relationships between
or among any officer and any other officer or director.
Name Office
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Mark P. Mikuta President
Donald T. Herrick, Jr. Vice President and Treasurer
Julie R. Adie Vice President and Secretary
Mark P. Mikuta, 42, is Senior Vice President of Goodman Segar Hogan, Inc. and
is Controller of Dominion Capital, Inc., a wholly-owned subsidiary of Dominion
Resources. Mr. Mikuta joined Dominion Resources in 1987. Prior to joining
Dominion Resources, he was an internal auditor with Virginia Commonwealth
University in Richmond, Virginia from 1980 - 1987 and an accountant with
Coopers & Lybrand from 1977 - 1980. Mr. Mikuta earned a bachelor of science
degree in accounting from the University of Richmond in 1977. He is a
Certified Public Accountant (CPA) and Certified Financial Planner (CFP) in the
state of Virginia and a member of the American Institute of Certified Public
Accountants.
Donald T. Herrick, Jr., 53, is President of Goodman Segar Hogan, Inc. He is
also President of Dominion Lands, Inc. and Vice President of Dominion Capital,
Inc., both of which are wholly-owned subsidiaries of Dominion Resources, Inc.
Mr. Herrick joined Dominion Resources in 1970. He earned a Bachelor of
Business Administration degree from the University of Michigan in 1965 and an
M.B.A. from American University in 1969. Mr. Herrick has completed all course
work towards the M.A.I. designation.
Julie R. Adie, 42, is a Vice President of Goodman Segar Hogan, Inc. and Senior
Vice President of Goodman Segar Hogan Hoffler, L.P. ("GSHH"). She is
responsible for investment management of a commercial real estate portfolio for
the company's Asset Management Division. Prior to GSHH, Ms. Adie was an asset
manager with Aetna Real Estate Investors from 1986 to 1988. Ms. Adie practiced
as an attorney from 1978 through 1984 and is currently a member of the Virginia
Bar Association. She holds a B.A. Degree from Duke University, a Juris Doctor
from University of Virginia and an M.B.A. from Dartmouth College.
Certain Matters Involving Affiliates
- ------------------------------------
On July 31, 1993, Shearson sold certain of its domestic retail brokerage and
asset management businesses to Smith Barney, Harris Upham & Co. Incorporated
("Smith Barney"). Subsequent to the sale, Shearson changed its name to Lehman
Brothers Inc. The transaction did not affect the ownership of the
Partnership's General Partners. However, the assets acquired by Smith Barney
included the name "Hutton." Consequently, Hutton Real Estate Services IV,
Inc., a General Partner, changed its name to CP1 Real Estate Services Inc.
Additionally, effective August 3, 1995, the Partnership changed its name to
Commercial Properties 1, L.P., to delete any reference to "Hutton."
On August 1, 1993, Goodman Segar Hogan ("GSH") transferred all of its leasing,
management and sales operations to Goodman Segar Hogan Hoffler, L.P., a
Virginia limited partnership ("GSHH"). On that date, the leasing, management
and sales operations of a portfolio of properties owned by the principals of
Armada/Hoffler ("HK") were also obtained by GSHH. The General Partner of GSHH
is Goodman Segar Hogan Hoffler, Inc., a Virginia corporation ("GSHH Inc."),
which has a one percent interest in GSHH. The stockholders of GSHH Inc. are
GSH with a sixty-two percent stock interest and H.K. Associates, L.P., an
affiliate of HK, with a thirty-eight percent stock interest. The remaining
interests in GSHH are limited partnership interests owned by GSH, HK and 23
employees of GSHH. The transaction did not affect the ownership of the general
partners.
Item 11. Executive Compensation
Neither of the General Partners nor any of their directors and officers
received any compensation from the Registrant. See Item 13 below with respect
to a description of certain transactions of the General Partners and their
affiliates with the Registrant.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Beneficial Owners
No person (including any "group" as that term is used in Section 13(d)(3) of
the Securities Exchange Act of 1934) is known to the Registrant to be the
beneficial owner of more than five percent of the outstanding Units as of
December 31, 1996.
(b) Security Ownership of Management
The General Partners own 200 Units (134 by RE Services and 66 by HS Advisors),
as required by the terms of the offering described in the Prospectus of
Registrant, dated November 10, 1981 (the "Prospectus"), contained in Amendment
No. 1 to Registration Statement No. 2-73033, filed November 10, 1981, and in
Amendment No. 1 to Registration Statement No. 2-78248 of Registrant filed July
13, 1982. None of the officers or directors of either General Partner owns any
Units.
(c) Changes in Control
None.
Item 13. Certain Relationships and Related Transactions
For a description of the share of net cash from operations and the allocation
of income and loss to which the General Partners are entitled, reference is
made to Note 4 "Real Estate Investments" and Note 8 "Transactions with the
General Partners and Affiliates" of Notes to the Consolidated Financial
Statements in the Partnership's Annual Report to Unitholders for the year ended
December 31, 1996 filed as an exhibit under Item 14.
The Registrant may enter into one or more property management agreements with
GSH pursuant to which GSH will provide certain property management services
with respect to certain Properties owned by the Registrant or its joint
ventures. For such services GSH will be entitled to receive a management fee
as described under the section captioned "Investment Objectives and Policies -
Management of Properties" in the Prospectus, which section is incorporated
herein by reference thereto.
Pursuant to Section 12(g) of the Registrant's Certificate and Agreement of
Limited Partnership, the General Partners and certain affiliates may be
reimbursed by the Registrant for certain costs as described on page 16 of the
Prospectus, which description is incorporated herein by reference thereto.
First Data Investor Services Group (formerly "The Shareholder Services Group")
("FDISG") provides partnership accounting and investor relations services for
the Registrant. Prior to May 1993, these services were provided by an
affiliate of a general partner. The Registrant's transfer agent and certain
tax reporting services are provided by Service Data Corporation ("SDC"). Both
FDISG and SDC are unaffiliated companies. Disclosure relating to amounts paid
to the General Partners or their affiliates during the past three years is
incorporated by reference to Note 8 "Transactions With the General Partners and
Affiliates" of Notes to Consolidated Financial Statements contained in the
Partnership's Annual Report to Unitholders for the year ended December 31, 1996
filed as an exhibit under Item 14.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements:
Report of Independent Auditors (1)
Consolidated Balance Sheets - At December 31, 1996 and 1995 (1)
Consolidated Statements of Operations - For the
years ended December 31, 1996, 1995 and 1994 (1)
Consolidated Statements of Partners' Capital (Deficit)
- For the years ended December 31, 1996, 1995 and 1994 (1)
Consolidated Statements of Cash Flows - For the years ended
December 31, 1996, 1995 and 1994 (1)
Notes to Consolidated Financial Statements (1)
(a)(2) Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation 11
No other schedules are presented because the information is not
applicable or is included in the financial statements or notes
thereto.
(1) Incorporated by reference to the Partnership's Annual Report to
Unitholders for the year ended December 31, 1996, which is filed
as an exhibit under Item 14.
(a)(3) Exhibits:
(4)(A) Amended and Restated Certificate and Agreement of Limited Partnership
(included as, and incorporated herein by reference to, Exhibit A to
the Prospectus of Registrant dated November 10, 1981 (the
"Prospectus"), contained in Amendment No. 1 to Registration Statement,
No. 2-73033, of Registrant filed November 10, 1981 (the "Registration
Statement"), and in Amendment No. 1 to Registration Statement, No.
2-78248, of Registrant filed July 13, 1982).
(4)(B) Subscription
Agreement and Signature Page (included as, and incorporated herein by
reference to, Exhibit B to the Prospectus).
(10)(A) Permanent Loan Commitment, as amended, relating to the Ridgelake
Office Building, between the Registrant and Boyle Investment Company,
and the exhibits thereto (included as, and incorporated herein by
reference to, Exhibit 10.3 to Amendment No. 1 to the Registration
Statement).
(10)(B) Purchase Agreement relating to Watkins Center, between the Registrant
and Norcross-85 Park, Inc., and the exhibits thereto (included as, and
incorporated herein by reference to, Exhibit (10)(A) to the
Registrant's Quarterly Report on Form 10-Q filed on or about May
15,1982 (the "Quarterly Report")).
(13) Annual Report to the Unitholders for the year ended December 31, 1996.
(23) Consent of Independent Auditors
(27) Financial Data Schedule
(28) Portions of Prospectus of Registrant dated November 10, 1981 (included
as, and incorporated herein by reference to Exhibit (28) of the
Registrant's Annual Report on Form 10-K filed March 30, 1988).
(b)(3) Reports on Form 8-K:
No reports on form 8-K were filed in the fourth quarter of the
calendar year 1996.
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Schedule III - Real Estate and Accumulated Depreciation
December 31, 1996
-------------------------------------------------------
Dawson Maitland Swenson
Consolidated Watkins Business Center Office Business Park
Ventures: Center Center Building A Building B Total
------------ ------------ ----------- ------------ --------
Location Norcross, GA Norcross, GA Orlando, FL San Jose, CA na
Construction
date: 1977-1980 1982 1982-1984 1984-1985 na
Acquisition
date: 05-26-82 01-25-83 08-19-83 04-06-84 na
Life on which
depreciation
in latest income
statements
is computed (3) 1-25 yrs 1-25 yrs 1-25 yrs 1-25 yrs na
Encumbrances $4,795,775 $ - $ - $ - $4,795,775
Initial cost to Partnership:
Land 1,938,440 506,336 1,215,861 1,211,08 14,871,718
Buildings and
improvements 12,920,239 1,938,777 5,174,612 1,644,094 21,677,722
Costs capitalized
subsequent to acquisition:
Buildings and
improvements 1,454,974 1,324,229 2,754,513 1,706,610 7,240,326
Gross amount at which
carried at close of period (2):
Land $1,938,440 $506,336 $1,215,861 $1,211,081 $4,871,718
Buildings and
improvements 14,375,213 3,263,006 7,929,125 3,350,704 28,918,048
$16,313,653 $3,769,342 $9,144,986 $4,561,785 $33,789,766
Accumulated
depreciation (1) $8,013,485 $1,731,952 $4,049,534 $1,483,364 $15,278,335
(1) For Federal income tax purposes, the amount of accumulated
depreciation is $ 17,947,750.
(2) For Federal income tax purposes, the basis of land, building
and improvements is $ 34,197,578.
(3) Tenant improvements are depreciated on a straight-line basis
over lives of the respective leases.
A reconciliation of the carrying amount of real estate and accumulated
depreciation for the years ended December 31, 1996, 1995, and 1994 follows:
1996 1995 1994
Real estate investments:
Beginning of year $33,052,706 $32,097,064 $30,932,307
Additions 739,672 1,320,011 1,207,722
Deletions (2,612) (364,369) (42,965)
End of year $33,789,766 $33,052,706 $32,097,064
Accumulated depreciation:
Beginning of year $13,642,791 $12,413,346 $11,149,056
Depreciation expense 1,638,156 1,593,814 1,307,255
Deletions (2,612) (364,369) (42,965)
End of year $15,278,335 $13,642,791 $12,413,346
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.
Date: March 21, 1997
COMMERCIAL PROPERTIES 1, L.P.
BY: HS Advisors II, Ltd.
General Partner
Hogan Stanton Investment, Inc.
General Partner
Date: March 21, 1997
BY: /s/Mark P. Mikuta
Mark P. Mikuta
President
BY: CP1 Real Estate Services Inc.
General Partner
BY: /s/ Kenneth L. Zakin
Name: Kenneth L. Zakin
Title: Director and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capabilities and on the dates indicated.
CP1 REAL ESTATE SERVICES INC.
A General Partner
Date: March 21, 1997
BY: /s/ Kenneth L. Zakin
Kenneth L. Zakin
Director and President
Date: March 21, 1997
BY: /s/ William Caulfield
William Caulfield
Vice President and
Chief Financial Officer
Date: March 21, 1997
BY: /s/Moshe Braver
Moshe Braver
Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capabilities and on the dates indicated.
HS ADVISORS II, LTD.
A General Partner
Date: March 21, 1997
BY: /s/Mark P.Mikuta
Mark P. Mikuta
President of Hogan Stanton
Investment, Inc., as general
partner of HS Advisors II, Ltd.
Date: March 21, 1997
BY: /s/Donald T. Herrick, Jr.
Donald T. Herrick, Jr.
Vice President and Treasurer of
Hogan Stanton Investment, Inc.,
as general partner of
HS Advisors II, Ltd.
Date: March 21, 1997
BY: /s/Julie R. Adie
Julie R. Adie
Vice President and Secretary of
Hogan Stanton Investments, Inc.
as general partner of HS Advisors II, Ltd.
EXHIBIT 13
1996 Annual Report to Unitholders
Commercial Properties 1, L.P.
Commercial Properties 1, L.P. is a limited partnership formed in 1982 to
acquire, operate and hold for investment commercial real estate properties. The
Partnership's investments are currently comprised of a research and development
building in San Jose, California, an office building in Orlando, Florida, and
two office/warehouse properties located in Norcross, Georgia. Provided below
is a comparison of lease levels at the properties as of December 31, 1996 and
1995.
Percentage Leased
Property Location 1996 1995
- ------------- ------------ ---- ----
Swenson Business Park - Building B San Jose, CA 100% 100%
Maitland Center Office Building A Orlando, FL 100% 95%
Watkins Center Norcross, GA 94% 91%
Dawson Business Center Norcross, GA 89% 85%
Contents
1 Message to Investors
3 Property Profiles & Leasing Update
5 Financial Highlights
6 Consolidated Financial Statements
10 Notes to the Consolidated
Financial Statements
15 Report of Independent Auditors
16 Net Asset Valuation
Administrative Inquiries Performance Inquiries/Form 10-Ks
Address Changes/Transfers First Data Investor Services Group
Service Data Corporation P.O. Box 1527
2424 South 130th Circle Boston, Massachusetts 02104-1527
Omaha, Nebraska 68144-2596 Attn: Financial Communications
800-223-3464 800-223-3464
--------------------
Message to Investors
--------------------
We are pleased to present the 1996 Annual Report for Commercial Properties 1,
L.P. Included in this report is a review of national market conditions, an
update of Partnership operations, and financial highlights for the year. Please
refer to the Property Profiles & Leasing Update section of this report for
additional information regarding local market conditions for each of the
Partnership's properties, as well as their operating performance and lease
levels at December 31, 1996.
Market Overview and Property Sales
- ----------------------------------
The commercial office market continued to recover throughout the year,
particularly in the suburban office sector. Suburban office vacancy rates
declined to 11% at year-end 1996 versus 15% a year earlier. Overall, demand
for office space continues to increase, bringing about continually lower
vacancy rates and, in many regions of the country, enabling property owners to
raise rental rates. Accordingly, the availability of financing for investment
in this sector has also improved. Conditions in the markets where the
Partnership's properties are located mirrored those in the national market, and
all four of the Partnership's properties reported stable high occupancy rates.
In view of these ongoing improvements in the real estate and capital markets,
we believe that the current favorable market environment may present
opportunities to sell the Partnership's properties. As a result, the General
Partners have recently engaged brokers to assist in marketing the properties
for sale. There can be no assurance that the Partnership's current marketing
efforts will result in a sale of any or all of the properties during 1997. It
should be noted that the mortgage notes secured by Watkins Center are payable
in full on July 10, 1997. In the event that the property is not sold by such
date, the Partnership will consider various options including a refinancing of
the notes.
Cash Distributions
- ------------------
The Partnership paid cash distributions from operations to Limited Partners
totaling $19.00 per Unit for the year ended December 31, 1996, including a
fourth quarter cash distribution of $5.00 per Unit that was either credited to
your brokerage account or sent directly to you on February 11, 1997. In
addition, on February 9, 1996, a special distribution of $15.18 per Unit was
paid, which represented proceeds from the payoff of the 965 Ridgelake Office
Building note receivable. Since inception, the Partnership has paid total cash
distributions of $335.57 per original $500 Unit, including $111.17 per Unit in
return of capital payments which have reduced the Unit size from $500 to
$388.83. The timing and amount of future cash distributions will be determined
quarterly and will depend on the adequacy of the Partnership's cash flow and
cash reserve requirements. Additionally, in the event that one or more of the
Partnership's properties are sold, the General Partners expect to reduce cash
distributions to reflect the corresponding reduction in the Partnership's cash
flow.
Cash Distributions Per Limited Partnership Unit
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1995 - - - $19.18* $19.18
1996 $4.00 $5.00 $5.00 $ 5.00 $19.00
* Includes a special return of capital distribution of $15.18 per Unit paid
on February 9, 1996.
General Information
- -------------------
As you are probably aware, several third parties have commenced partial tender
offers to purchase units of the Partnership at prices which are substantially
below the Partnership's Net Asset Value. In response to these offers, we have
recommended that limited partners reject these offers because they do not
reflect the underlying value of the Partnership's assets. According to
published industry sources, most investors who hold units of limited
partnerships similar to the Partnership have rejected these types of tender
offers due to their inadequacy. Please be assured that if any additional
tender offers are made for your units, we will make every effort to provide you
with our position regarding those offers on a timely basis.
Summary
- -------
We anticipate that our marketing efforts will result in the sale of all of the
properties in 1997. Until such time, we will continue to focus on leasing any
available space and renewing any leases which are scheduled to expire so as to
further improve the properties' marketability and appeal. We will keep you
apprised of significant developments affecting your investment in future
reports.
Very truly yours,
CP1 Real Estate Services Inc. Hogan Stanton Investment, Inc.
General Partner General Partner of HS Advisors II,
Ltd.
/s/Kenneth L. Zakin /s/Mark P. Mikuta
Kenneth L. Zakin Mark P. Mikuta
President President
March 21, 1997
----------------------------------
Property Profiles & Leasing Update
----------------------------------
SWENSON BUSINESS PARK-BUILDING B San Jose, California
Swenson Building B is a 49,782 square foot research and development facility
situated within a 65-acre business park which is located just north of central
San Jose in California. The property provides an attractive location for many
high technology companies due to its easy access to the San Jose Airport and
Interstate 880.
Leasing Update - Allstate Insurance Company ("Allstate") occupies 100% of the
property pursuant to a lease executed on January 31, 1995. The lease provides
Allstate with an option to cancel the lease after five years, subject to the
payment of a significant cancellation fee. Allstate's lease generated $776,599
in rental revenues or approximately 18% of the Partnership's 1996 consolidated
revenues.
Market Update - The continued expansion of the high-technology and
biotechnology industry contributed to the Silicon Valley's stable population
growth and low unemployment rate during the year, making the region one of the
strongest economies in the United States. The demand for space within the
area's research and development sector continued to increase throughout 1996,
leading to a decline in vacancy rates at year-end 1996 to approximately 3.1%
from approximately 4.9% one year earlier. The San Jose market, located within
the Silicon Valley, benefited from this increased demand as economic conditions
in the area remained very strong. Vacancy rates for research and development
space in San Jose fell to 3.2% as of year-end 1996 from 4.8% a year earlier.
The area also experienced an increase in rental rates throughout the year,
which have contributed to significant increases in the values of most
properties.
MAITLAND CENTER OFFICE BUILDING A Orlando, Florida
Maitland Center Office Building A is a 100,067 square foot, three- story brick
and glass office building located in Maitland Center Office Park, a 230-acre
development in northwest metropolitan Orlando.
Leasing Update - The General Partners executed one new lease for 1,464 square
feet and two lease expansions totaling 8,720 square feet, during the year. A
tenant leasing 2,198 square feet pursuant to a lease which expired in November
1996, continues to lease its space on a month-to-month basis. Another tenant
leasing 6,380 square feet, vacated the premises upon the expiration of its
lease in April 1996. Overall, the property was 100% leased at December 31,
1996 versus 95% at the same time in 1995. Eight leases representing 18,848
square feet are scheduled to expire in 1997. The General Partners will
approach these tenants regarding renewals at the appropriate time.
Approximately 11% of the Partnership's 1996 consolidated revenues, or $488,940,
was generated by one lease representing 40% of the property's leasable area,
which is scheduled to expire in December 1998.
Market Update - The Orlando economy continued to be one of the strongest in the
country in 1996. With increased population growth and tourism, Orlando's
businesses have flourished, which has in turn caused a further increase in
demand for office space. The overall vacancy rate in Orlando decreased to 7.6%
at December 31, 1996 as compared to 10.4% the previous year. The Maitland
Center submarket, the largest submarket outside of downtown Orlando, also
benefited greatly from these improvements. Despite the relocation of several
large companies out of the Maitland submarket into build-to-suit facilities in
1996, the submarket's vacancy rate remained relatively unchanged from a year
earlier at 3.4%, and as a result, rental rates have increased.
WATKINS CENTER & DAWSON BUSINESS CENTER Norcross, Georgia
Watkins Center is an office/warehouse facility comprised of fifteen one-story
buildings (four distribution buildings and eleven office/service buildings)
containing 362,419 leasable square feet. Dawson Business Center is a light
industrial facility located adjacent to Watkins Center. The property consists
of five one-story office/service buildings with a total of 75,670 leasable
square feet.
Leasing Activity - Watkins Center caters to a broad range of small businesses
and substantial leasing activity occurs on an ongoing basis at the property.
Eighteen new leases totaling 32,106 square feet and four lease expansions
totaling 8,277 square feet were executed during 1996. As of December 31, 1996,
the property was 94% leased, compared to 91% as of December 31, 1995. Twenty
eight leases totaling 76,984 square feet are scheduled to expire in 1997.
At Dawson Business Center, the General Partners executed six new leases for
10,123 square feet and two lease expansions for 1,836 square feet. This
leasing activity was partially offset by the vacancy of six tenants leasing a
total of 9,910 square feet. Overall, the property's lease level increased to
89% as of December 31, 1996 versus 85% a year earlier. Four leases totaling
26,865 square feet are scheduled to expire in 1997.
Market Update - Market conditions for commercial real estate in Atlanta
continued to improve during 1996. As demand for office/warehouse space
increased throughout the year, property owners were able to maintain high
occupancy levels and increase rental rates. In the Northeast/I-85 submarket,
where Norcross county is located, the increase in demand led to a decline in
the submarket's vacancy rate, which was 4.8% at year-end 1996, compared to 6.4%
at year-end 1995. Although the improved operating environment has encouraged
the development of new office/warehouse space, market conditions are expected
to remain healthy throughout the remainder of 1997.
--------------------
Financial Highlights
--------------------
For The Years Ended December 31,
(dollars in thousands except per Unit data)
1996 1995 1994 1993 1992
Total income $4,544 $4,205 $3,277 $3,658 $3,740
Net income (loss) 97 (290) (383) (250) 63
Net income (loss) per Unit .82 (4.47) (5.11) (3.61) .75
Total assets 19,713 22,512 22,919 23,628 24,589
Mortgage payable 4,796 4,992 5,170 5,331 5,476
Net cash from operations 1,847 1,320 373 968 887
Cash distributions declared
per Limited Partnership Unit 19.00 19.18* -- 2.50 15.00
* Paid February 9, 1996. Includes $15.18 per Unit return of capital.
The above selected financial data should be read in conjunction with the
financial statements and related notes included in this report.
- - Total income was higher in 1996 versus 1995 due to higher rental income
associated with the execution of the Allstate lease at Swenson Business Park
Building B, in April 1995, in addition to increased rental activity at
Watkins Center
- - The change from net loss to net income and the increase in net cash from
operations in 1996 is primarily attributable to higher rental income and
lower bad debt expense. Bad debt expense in 1995 totaled $384,353 which
includes the uncollected portion of the $1.5 million note receivable on 965
Ridgelake Office Building. On December 28, 1995, the Partnership received
$1,150,000 in satisfaction of the $1,500,000 note receivable. The
remaining $350,000 was declared uncollectible and was included in the
Partnership's 1995 bad debt expense.
---------------------------
Consolidated Balance Sheets
---------------------------
At December 31, At December 31,
Assets 1996 1995
- --------------- -------------- --------------
Real estate investments, at cost:
Land $ -- $ 4,871,718
Building and improvements -- 28,180,988
-- 33,052,706
Less accumulated depreciation -- (13,642,791)
-- 19,409,915
Real estate held for sale 18,511,431 --
Cash and cash equivalents 301,658 2,040,428
Restricted cash 203,626 196,362
Rent receivable, net of allowance
for doubtful accounts of $16,960 in 1996 19,966 138,460
Deferred rent receivable 215,389 195,197
Prepaid leasing costs, net of accumulated
amortization of $298,213 in 1996 and
$172,695 in 1995 379,758 443,745
Other assets 80,783 87,565
Total Assets $19,712,611 $22,511,672
Liabilities and Partners' Capital
- ---------------------------------
Liabilities:
Mortgage notes payable $ 4,795,775 $ 4,991,850
Distribution payable 416,667 1,483,333
Accounts payable and accrued expenses 128,984 120,241
Due to affiliates 12,335 17,448
Security deposits payable 198,977 199,507
Prepaid rent 5,517 62,974
Total Liabilities 5,558,255 6,875,353
Minority interest 837,392 832,564
Partners' Capital (Deficit):
General Partners (929,816) (929,816)
Limited Partners
(75,000 units outstanding) 14,246,780 15,733,571
Total Partners' Capital 13,316,964 14,803,755
Total Liabilities and Partners' Capital $19,712,611 $22,511,672
------------------------------------------------------
Consolidated Statements of Partners' Capital (Deficit)
For the years ended December 31, 1996, 1995 and 1994
------------------------------------------------------
General Limited
Partners Partners Total
-------- ---------- ----------
Balance at December 31, 1993 $(929,816) $17,890,542 $16,960,726
Net Loss -- (383,446) (383,446)
Balance at December 31, 1994 (929,816) 17,507,096 16,577,280
Net Income (Loss) 44,833 (335,025) (290,192)
Distributions (44,833) (1,438,500) (1,483,333)
Balance at December 31, 1995 (929,816) 15,733,571 14,803,755
Net Income (Loss) 158,334 (61,791) 96,543
Distributions (158,334) (1,425,000) (1,583,334)
Balance at December 31, 1996 $(929,816) $14,246,780 $13,316,964
-------------------------------------
Consolidated Statements of Operations
For the years ended December 31,
-------------------------------------
Income 1996 1995 1994
- --------------- --------- --------- ---------
Rent $4,502,900 $4,071,987 $3,076,135
Interest 41,647 132,699 200,887
Total Income 4,544,547 4,204,686 3,277,022
Expenses
- ---------------
Property operating 1,827,870 1,637,509 1,563,128
Depreciation and amortization 1,780,187 1,718,858 1,361,343
Interest 474,760 499,347 515,849
General and administrative 330,066 262,764 254,561
Bad debt expense 30,293 384,353 72,977
Total Expenses 4,443,176 4,502,831 3,767,858
Income (Loss) before minority interest 101,371 (298,145) (490,836)
Minority interest (4,828) 7,953 107,390
Net Income (Loss) $ 96,543 $ (290,192) $ (383,446)
Net Income (Loss) Allocated:
To the General Partners $ 158,334 $ 44,833 $ --
To the Limited Partners (61,791) (335,025) (383,446)
$ 96,543 $ (290,192) $ (383,446)
Per limited partnership unit
(75,000 outstanding) $(.82) $(4.47) $(5.11)
-------------------------------------
Consolidated Statements of Cash Flows
-------------------------------------
For the years ended December 31, 1996 1995 1994
- -------------------------------- -------- -------- --------
Cash Flows From Operating Activities
Net Income (Loss) $ 96,543 $ (290,192) $ (383,446)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation 1,638,155 1,593,814 1,310,644
Amortization 142,032 125,044 50,699
Accretion of discount on note receivable -- (75,808) (152,123)
Bad debt expense-loss on note receivable -- 350,000 --
Minority interest 4,828 (7,953) (107,390)
Increase (decrease) in cash arising from changes
in operating assets and liabilities:
Restricted cash (7,264) (33,393) (24,196)
Rent receivable 118,494 (56,967) 31,211
Prepaid leasing costs (78,044) (296,611) (257,017)
Deferred rent receivable (20,192) (68,625) (6,247)
Other assets 6,782 12,044 (31,937)
Accounts payable and accrued expenses 8,743 (26,480) 22,810
Due to affiliates (5,113) 11,044 (6,673)
Security deposits payable (530) 29,328 34,142
Prepaid rent (57,457) 54,679 (107,029)
Net cash provided by operating activities 1,846,977 1,319,924 373,448
Cash Flows From Investing Activities
Additions to real estate (739,672) (1,320,011) (1,207,722)
Collection of note receivable -- 1,150,000 --
Net cash used for investing activities (739,672) (170,011) (1,207,722)
Cash Flows From Financing Activities
Mortgage principal payments (196,075) (177,837) (161,334)
Cash distributions (2,650,000) -- --
Net cash used for financing activities (2,846,075) (177,837) (161,334)
Net increase (decrease) in cash
and cash equivalents (1,738,770) 972,076 (995,608)
Cash and cash equivalents, beginning
of period 2,040,428 1,068,352 2,063,960
Cash and cash equivalents, end of period $ 301,658 $2,040,428 $1,068,352
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest $ 474,760 $ 499,347 $ 515,849
Supplemental Disclosure of Non Cash Investing and Financing Activity
Effective December 31, 1996 the Partnership reclassified all real estate
investments to real estate held for sale.
----------------------------------------------
Notes to the Consolidated Financial Statements
December 31, 1996, 1995 and 1994
----------------------------------------------
1. Organization
Commercial Properties 1, L.P. (the "Partnership"), formerly Hutton/GSH
Commercial Properties 1, was organized as a limited partnership under the laws
of the Commonwealth of Virginia pursuant to a Certificate and Agreement of
limited partnership dated and filed June 5, 1981, as amended and restated on
April 30, 1982 (the "Partnership Agreement"). The Partnership was formed for
the purpose of making acquisitions in and operating certain types of commercial
real estate. The General Partners of the Partnership are CP1 Real Estate
Services Inc. ("RE Services"), which is an affiliate of Lehman Brothers (see
below) and HS Advisors II , Ltd. ("HS Advisors"), which is an affiliate of
Goodman Segar Hogan, Inc. ("GSH"). The Partnership will continue until
December 31, 2010, unless sooner terminated in accordance with the terms of the
Partnership Agreement.
On July 31, 1993, Shearson Lehman Brothers Inc. sold certain of its domestic
retail brokerage and asset management businesses to Smith Barney, Harris Upham
& Co. Incorporated ("Smith Barney"). Subsequent to the sale, Shearson Lehman
Brothers Inc. changed its name to Lehman Brothers Inc. ("Lehman Brothers"). The
transaction did not affect the ownership of the General Partners. However, the
assets acquired by Smith Barney included the name "Hutton". Consequently,
effective October 22, 1993, the Hutton Real Estate Services IV, Inc. General
Partner changed its name to CP1 Real Estate Services Inc. Additionally,
effective August 3, 1995, the Partnership changed its name to Commercial
Properties 1, L.P., to delete any reference to "Hutton."
On August 1, 1993, GSH transferred all of its leasing, management and sales
operations to Goodman Segar Hogan Hoffler, L.P., a Virginia limited partnership
("GSHH"). On that date, the leasing, management and sales operations of a
portfolio of properties owned by the principals of Armada/Hoffler were also
obtained by GSHH. The General Partner of GSHH is Goodman Segar Hogan Hoffler,
Inc., a Virginia corporation ("GSHH Inc."), which has a one percent interest in
GSHH. The stockholders of GSHH Inc. are GSH with a sixty-two percent stock
interest and H.K. Associates, L.P., an affiliate of Armada/Hoffler ("HK"), with
a thirty-eight percent stock interest. The remaining ninety-nine percentage
interests in GSHH are limited partnership interests owned fifty percent by GSH
and forty-nine percent by HK. The transaction did not affect the ownership of
the General Partners.
On March 15, 1996, based upon, among other things, the advice of legal counsel,
Skadden, Arps, Slate, Meagher & Flom, the General Partners adopted a resolution
that states, among other things, if a Change of Control (as defined below)
occurs, the General Partners may distribute the Partnership's cash balances not
required for its ordinary course day-to-day operations. "Change of Control"
means any purchase or offer to purchase more than 10% of the Units that is not
approved in advance by the General Partners. In determining the amount of the
distribution, the General Partners may take into account all material factors.
In addition, the Partnership will not be obligated to make any distribution to
any partner and no partner will be entitled to receive any distribution until
the General Partners have declared the distribution and established a record
date and distribution date for the distribution. The Partnership filed a Form
8-K disclosing this resolution on March 21, 1996.
2. Significant Accounting Policies
Basis of Accounting - The accompanying financial statements have been prepared
on the accrual basis of accounting in accordance with generally accepted
accounting principles. Revenues are recognized as earned and expenses are
recorded as obligations are incurred.
Consolidation - The consolidated financial statements include the accounts of
the Partnership and its ventures, Watkins Center Joint Venture, Dawson Business
Center Joint Venture, Maitland Center Associates and Beta Building Associates
Joint Venture. Intercompany accounts and transactions between the Partnership
and the ventures have been eliminated in consolidation.
Real Estate Investments - Real estate investments, which consist of commercial
buildings, were recorded at cost less accumulated depreciation. Cost included
the initial purchase price of the property plus closing costs, acquisition and
legal fees and capital improvements. Depreciation was computed using the
straight-line method based on an estimated useful life of 25 years except for
tenant improvements which were depreciated over the terms of the respective
leases.
Real Estate Held for Sale - As of December 31, 1996 the Partnership's real
estate investments (as discussed in Note 4) which had a carrying value of
$18,511,431 were reclassified as Real Estate Held for Sale. During 1996 the
General Partners agreed to market for sale all four of the Partnership's
commercial office buildings once certain lease levels were obtained, various
tenant and building improvements were completed and market conditions improved.
Subsequent to December 31, 1996 the Partnership signed agreements with
commercial real estate brokers to market the properties for sale. The General
Partners anticipate that the properties will be sold before the end of 1997.
However, there can be no assurance that the General Partners will be successful
in selling any or all of the Properties.
Accounting for Impairment - In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" ("FAS 121"), which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. FAS 121 requires that assets held for
sale or disposal be carried at the lower of carrying amount of fair value less
cost to sell and prohibits depreciation from being recorded during the periods
which the asset is being held for sale or disposal. The Partnership adopted
FAS 121 in the fourth quarter of 1995.
Reclassifications - Certain prior year amounts have been reclassified in order
to conform to the current year's presentation.
Cash Equivalents - Cash equivalents consist of short-term highly liquid
investments with maturities of three months or less from the date of issuance.
The carrying amount approximates fair value because of the short maturity of
these instruments.
Concentration of Credit Risk - Financial instruments which potentially subject
the Partnership to a concentration of credit risk principally consist of cash
in excess of the financial institutions' insurance limits. The Partnership
invests available cash with high credit quality financial institutions.
Restricted Cash - Restricted cash consists of security deposits and amounts
held in escrow for the payment of real estate taxes.
Deferred Rent Receivable - Deferred rent receivable consists of rental income
recognized on a straight-line basis over the terms of the respective leases but
will not be received until later periods as a result of rent concessions.
Prepaid Leasing Costs - Leases are accounted for as operating leases. Prepaid
leasing costs are amortized over the terms of the leases.
Note Receivable Discount - The discount on the non-interest bearing note
receivable was accreted over the life of the note.
Income Taxes - No provision for income taxes has been made in the financial
statements of the Partnership since such taxes are the responsibility of the
individual partners rather than of the Partnership.
Fair Value of Financial Instruments - Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments "
("FAS 107"), requires that the Partnership disclose the estimated fair values
of its financial instruments. Fair values generally represent estimates of
amounts at which a financial instrument could be exchanged between willing
parties in a current transaction other than in forced liquidation. Fair value
estimates are subjective and are dependent on a number of significant
assumptions based on management's judgment regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. In addition, FAS 107 allows a wide
range of valuation techniques, therefore, comparisons between entities, however
similar, may be difficult.
Based on the borrowing rates currently available to the Partnership for
mortgage loans with similar average maturities, the fair value of long-term
debt approximates carrying value.
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.
3. The Partnership Agreement
The Partnership Agreement provides that net cash from operations, as defined,
to the extent available, will be distributed on a quarterly basis 90% to the
Limited Partners and 10% to the General Partners. Net proceeds from sales or
refinancings shall be distributed 99% to the Limited Partners and 1% to the
General Partners until each Limited Partner has received an amount equal to its
adjusted capital value, as defined, and an 8% cumulative annual return thereon,
reduced by any net cash from operations actually distributed to such Limited
Partner. The balance of net proceeds, if any, will be distributed 85% to the
Limited Partners and 15% to the General Partners.
Taxable losses for any fiscal year shall be allocated 98% to the Limited
Partners and 2% to the General Partners, provided, however, that the deficit
balance of the General Partners' capital account does not exceed the amount
they are required to contribute upon dissolution of the Partnership, discussed
below. Taxable income for any fiscal year will be allocated in substantially
the same manner as net cash from operations. In 1994, net loss was allocated
100% to the Limited Partners as a result of the negative balance in the General
Partners' capital accounts exceeding their maximum required contribution upon
dissolution. In 1995 and 1996 income was allocated to the General Partners in
an amount equal to their current year cash distributions. This was done in
order not to further increase the General Partners' deficit beyond their
obligations required by the Partnership Agreement, discussed below.
Gains from sales, as defined, shall be allocated in substantially the same
manner as net proceeds from sales or refinancings.
Upon the dissolution of the Partnership, the General Partners shall contribute
to the capital of the Partnership an amount not to exceed 1% of the total
capital contributions made by all the Partners, less any prior capital
contributions made by the General Partners. In no event shall the General
Partners be obligated to contribute an amount in excess of any negative balance
in their respective capital accounts. As of December 31, 1996, the maximum
amount that the General Partners would be required to contribute is
approximately $373,000.
If, as a result of the dissolution of the Partnership, the sum of the Limited
Partners' capital contributions plus an amount equal to an 8% cumulative annual
return on each Limited Partner's adjusted capital value less any distributions
made to each Limited Partner from net cash flow from operations exceeds total
contributions to the Limited Partners of net proceeds from a sale or
refinancing, the General Partners will contribute to the Partnership for
distribution to the Limited Partners an amount equal to the lesser of such
excess or the aggregate distribution of net proceeds from a sale or refinancing
distributed to the General Partners.
4. Real Estate Investments
Since inception, the Partnership has acquired four commercial office buildings
through investments in joint ventures with unaffiliated coventurers as follows:
Square Date
Property Name Feet Location Acquired Price
Watkins Center 362,419 Norcross, GA 5/26/82 $10,570,000
Dawson Business Center 75,703 Norcross, GA 1/25/83 $ 2,789,885
Maitland Center Office
- Building A 95,000 Orlando, FL 8/19/83 $ 6,961,000
Swenson Business Park
- Building B 49,782 San Jose, CA 4/06/84 $ 4,100,000
The joint venture partnership agreements substantially provide that:
i. Net cash from operations will be distributed 100% to the
Partnership until it has received an annual, noncumulative
preferred return on its capital contribution, as adjusted,
ranging from 8% to 12%. With regard to Watkins Center, net
cash from operations will then be distributed 100% to the
coventurer until it has received an 8% annual, noncumulative
return on its interest in the venture. Thereafter, any
remaining cash from operations is generally shared in ratios
relating to the various ownership interests of the
Partnership and coventurers.
ii. Net proceeds from a sale or refinancing of the properties
will be distributed 100% to the Partnership until it has
received 120% of its capital contribution, as adjusted, plus
an amount equal to any deficiencies (on a cumulative basis)
in distributions of the Partnership's preferred return of
net cash from operations. Then, in the case of Watkins
Center, net proceeds will be distributed to the coventurer
until it receives a 120% return on its capital contribution
plus an amount equal to any deficiencies (on a cumulative
basis) in distributions of the coventurers preferred return
of net cash from operations. Any remaining net proceeds
will be distributed in ratios ranging from 50% to 65% to the
Partnership and the balance to the venture partners.
iii. Taxable income will be allocated in substantially the same
manner as net cash from operations. With regard to Watkins
Center, 75% will be allocated to the Partnership and the
balance to the coventurer. Tax losses will be allocated in
ratios ranging from 50% to 100% to the Partnership and the
balance to the venture partners.
5. Note Receivable
On August 20, 1990, the Partnership received cash from the developer of the 965
Ridgelake Boulevard, Memphis, Tennessee property (the "Property") totaling
$5,000,000 and a non-interest bearing/profit participation second subordinated
five year note for $1,500,000 which had been discounted at 10%, secured by the
Property, in satisfaction of the Partnership's equity convertible loan
receivable. The note was due on August 17, 1995. On December 28, 1995, the
partnership received $1,150,000 in satisfaction of the $1,500,000 note
receivable. The remaining $350,000 was declared uncollectible and was included
in 1995 bad debt expense.
6. Mortgage Notes Payable
The first mortgage loan, secured by Watkins Center, is evidenced by two
mortgage notes. The net book value of Watkins Center is $8,300,169 at
December 31, 1996. The estimated fair value of the two mortgage notes at
December 31, 1996 is approximately equal to the outstanding principal. Mortgage
notes payable at December 31, 1996 and 1995 are as follows:
1996 1995
First mortgage note payable in monthly
installments of $23,278 including
interest at 9.375%, through June 10, 1997,
at which time the entire unpaid
principal is due $1,965,120 $2,055,180
First mortgage note payable in monthly
installments of $33,154, including interest
at 10.125%, through June 10, 1997, at which
time the entire unpaid principal is due 2,830,655 2,936,670
$4,795,775 $4,991,850
7. Rental Income Under Operating Leases
Future minimum rental income to be received on operating leases as of December
31, 1996 is as follows:
Year Amount
1997 $ 3,864,299
1998 2,815,666
1999 1,539,437
2000 1,033,423
2001 910,300
Thereafter 2,713,115
$12,876,240
Generally, leases are for terms ranging from three to five years. The leases
allow for increases in certain property operating expenses to be passed on to
tenants. In 1996, 1995 and 1994, 11%, 12% and 16% of consolidated rental
revenue was provided by a lessee under a lease that expires December 31, 1998
extended pursuant to certain provisions contained within the lease. The lease
also provides the lessee with the right to terminate at any time after the
thirty-sixth month of the term. The lessee shall provide the Partnership with
not less than six months prior written notice of its intent to terminate and
shall be required to pay a termination penalty of $211,874. In 1996 and 1995,
18% and 14% of consolidated rental revenue was provided by the tenant occupying
the Swenson Business Park - Building B property under a lease that expires
April 15, 2005.
8. Transactions with the General Partners and Affiliates
The following is a summary of amounts earned by, or reimbursed to, the General
Partners and their affiliates for property management fees and expenses during
the years ended December 31, 1996, 1995 and 1994.
Unpaid at
December 31, Earned
1996 1996 1995 1994
RE Services and affiliates
Out-of-pocket expenses $ 1,349 $ 6,365 $ 12,827 $ 3,701
HS Advisors and affiliates
Out-of-pocket expenses 4,986 1,218 9,688 10,752
Property management fees (GSH) 6,000 183,598 154,608 147,750
$12,335 $191,181 $177,123 $162,203
9. Reconciliation of Financial Statement Net Income (Loss) to
Federal Income Tax Basis Net Income (Loss)
Reconciliation of financial statement net income (loss) to federal income
tax basis net income (loss):
Years Ended December 31,
1996 1995 1994
Financial statement net income (loss) $96,543 $(290,192) $(383,446)
Tax basis depreciation over financial
statement depreciation 279,903 250,868 21,758
Adjustment for deferred rent, free rent (77,649) (13,862) (113,277)
Adjustment for bad debt expense 16,960 (51,065) (75,251)
Other miscellaneous adjustments 5,141 (461) (146,682)
Federal income tax basis net income (loss) $320,898 $(104,712) $(696,898)
------------------------------
Report of Independent Auditors
------------------------------
The Partners
Commercial Properties 1, L.P.
and Consolidated Ventures
We have audited the accompanying consolidated balance sheets of Commercial
Properties 1, L.P. and Consolidated Ventures as of December 31, 1996 and 1995,
and the related consolidated statements of operations, partners' capital
(deficit) and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Partnership'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 represent fairly, in
all material respects, the consolidated financial position of Commercial
Properties 1, L.P. and Consolidated Ventures at December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepting accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
February 3, 1997
-----------------------------------------------------------------
Comparison of Acquisition Costs to Appraised Value and
Determination of Net Asset Value Per $388.83 Unit at December 31,
1996 (Unaudited)
-----------------------------------------------------------------
Acquisition Cost
(Purchase Price Partnership's
Plus General Share of
Partners' December 31,
Date of Acquisition 1996 Appraised
Property Acquisition Fees) Value (1)
Watkins Center (2) 05-26-82 $ 6,468,661 $ 8,204,237
Dawson Business Center 01-25-83 3,514,325 3,800,000
Maitland Center Office Building A 08-19-83 7,342,558 8,100,000
Swenson Business Park-Building B 04-06-84 4,259,454 5,700,000
$21,584,998 $25,804,237
Cash and cash equivalents 301,658
Restricted Cash 203,626
Accounts and rent receivable, net of allowance
for doubtful accounts 19,966
Other Assets 80,783
26,410,270
Less:
Total liabilities - net of mortgage notes (762,480)
Partnership Net Asset Value (7) $25,647,790
Net Asset Value Allocated:
Limited Partners $25,391,312
General Partners 256,478
$25,647,790
Net Asset Value Per Unit
(75,000 units outstanding) $ 338.55
(1) This represents the Partnership's share of the December 31, 1996 Appraised
Values which were determined by an independent property appraisal firm.
The Partnership's share of the December 31, 1996 Appraised Values takes
into account the allocation provisions of the joint venture agreements
governing the distribution of sales proceeds for each of the properties.
(2) The Acquisition Cost and the Partnership's share of the December 31, 1996
Appraised Value are net of the outstanding mortgage note balances at the
time of acquisition and at December 31, 1996, respectively.
Limited Partners should note that appraisals are only estimates of current
value and actual values realizable upon sale may be significantly different. A
significant factor in establishing an appraised value is the actual selling
price for properties which the appraiser believes are comparable. Further, the
appraised value does not reflect the actual costs which would be incurred in
selling the properties. As a result of these factors and the illiquid nature of
an investment in Units of the Partnership, the variation between the appraised
value of the Partnership's properties and the price at which Units of the
Partnership could be sold is likely to be significant. Fiduciaries of Limited
Partners which are subject to ERISA or other provisions of law requiring
valuations of Units should consider all relevant factors, including, but not
limited to Net Asset Value per Unit, in determining the fair market value of
the investment in the Partnership for such purposes.
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Commercial Properties 1, L.P. of our report dated February 3, 1997, included
in the 1996 Annual Report to Shareholders of Commercial Properties 1, L.P. and
Consolidated Ventures.
Our audit also included the financial statement schedule of Commercial
Properties 1, L.P. and Consolidated Ventures listed in Item 14(a). This
schedule is the responsibility of the Partnership's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
the financial statement schedule referred to above, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth herein.
ERNST & YOUNG LLP
Boston, Massachusetts
February 3, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Dec-31-1996
<CASH> 301,658
<SECURITIES> 000
<RECEIVABLES> 252,315
<ALLOWANCES> 16,960
<INVENTORY> 000
<CURRENT-ASSETS> 321,624
<PP&E> 18,511,431
<DEPRECIATION> 000
<TOTAL-ASSETS> 19,712,611
<CURRENT-LIABILITIES> 762,480
<BONDS> 000
<COMMON> 000
000
000
<OTHER-SE> 13,316,964
<TOTAL-LIABILITY-AND-EQUITY> 19,712,611
<SALES> 000
<TOTAL-REVENUES> 4,544,547
<CGS> 000
<TOTAL-COSTS> 000
<OTHER-EXPENSES> 3,938,123
<LOSS-PROVISION> 30,293
<INTEREST-EXPENSE> 474,760
<INCOME-PRETAX> 96,543
<INCOME-TAX> 000
<INCOME-CONTINUING> 96,543
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> 96,543
<EPS-PRIMARY> (0.82)
<EPS-DILUTED> (0.82)
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