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, 1997
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)
Exact name of registrant as specified in its charter
Virginia 13-3075804
State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization
3 World Financial Center, 29th Floor,
New York, NY ATTN: Andre Anderson 10285
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
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
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,
1997 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
owned and operated the Maitland Center Office Building; and (iv) Beta Building
Associates Joint Venture, a California joint venture partnership which owned
and operated Swenson Business Park-Building B (The properties described above
are collectively referred to herein as the "Properties"). On November 10, 1997,
the Partnership closed on the sale of Swenson Business Park, and on December 19,
1997, the Partnership closed on the sale of Maitland Center Office Building.
See Item 7 for a discussion of both sales.
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.
(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 are the Registrant's objective during
its operational phase, while the preservation and appreciation of capital are
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.
No Property will be sold, financed or refinanced by the Registrant without
agreement of both General Partners. Proceeds from any 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
The Properties are subject to competition from similar types of properties
located in the same vicinity. The business of owning and operating commercial
office buildings in the area where the Properties are located is highly
competitive, and the Partnerships competes with a number of established
companies, some of which have greater resources than the Partnerships. For a
discussion of current commercial real estate market conditions in areas where
the Partnership's remaining two properties are located, see the "Message to
Investors" in the Partnership's Annual Report to Unitholders for the year
ended December 31, 1997 filed as an exhibit under Item 14.
(e) Employees
The Partnership has no employees.
Item 2. Properties
A description of the Partnership's remaining Properties and their material
leases is incorporated by reference to the "Message to Investors" in the
Partnership's Annual Report to Unitholders for the year ended December 31, 1997
filed as an exhibit under Item 14, 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 remaining 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
1997.
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, 1997, the number of holders of Units was 5,383.
(c) Distributions
The following distributions were paid to the Limited Partners for the two years
ended December 31, 1997 and December 31, 1996. On February 27, 1998, the
Partnership paid a special cash distribution to Limited Partners totaling
$183.33 per Unit representing the net proceeds received from the sales of the
Maitland and Swenson Properties. Quarterly cash distributions from operations
were suspended commencing in the second quarter of 1997 in consideration of
the Partnership's marketing efforts and the need to fund several major capital
improvements at the Properties to better position them for sale.
Cash Distributions Per Limited Partnership Unit
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1996 $4.00 $5.00 $5.00 $5.00 $ 19.00
1997 $3.00 $0.00 $0.00 $0.00 $ 3.00
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, 1997
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 has engaged real estate brokerage firms to assist with its
efforts in marketing for sale the Partnership's four properties. During 1997,
the Partnership completed the sale of two of the Properties as follows. On
November 10, 1997, the Partnership closed on the sale of Swenson Business Park -
Building B (the "Swenson Property"). The Swenson Property was sold for total
proceeds, before closing adjustments, of $5,464,855 to an unaffiliated buyer.
The transaction resulted in a gain on sale of approximately $2 million. On
December 19, 1997, the Partnership closed on the sale of Maitland Center Office
Building A (the "Maitland Property"). The Maitland Property was sold for net
proceeds of $8,952,658 to an unaffiliated buyer. The transaction resulted in
a gain on sale of approximately $3.6 million. The selling price of both
properties was determined by arm's length negotiations.
The Partnership is actively marketing Watkins Center and Dawson Business Center
for sale. Several purchase offers were received on the properties during 1997,
however, the bidders subsequently withdrew their offers. The General Partners
continue to market the properties for sale, and it is anticipated that both
properties will be sold during 1998. There can be no assurance that the
properties will be sold within this time frame, or that any sale, if completed,
will result in a particular price. It should be noted that the mortgage notes
secured by Watkins Center were payable in full on June 10, 1997. However, in
light of the Partnership's efforts to sell the property, the lender extended
the maturity date to June 10, 1998 in order to provide sufficient time in which
to sell the property. The General Partners will approach the lender regarding
a further extension of the maturity date, if necessary.
The Partnership's cash and cash equivalents balance totaled $15,182,204 at
December 31, 1997, compared with $301,658 at December 31, 1996. The increase
is primarily attributable to the net proceeds received from the sale of the
Swenson Property and the Maitland Property during the fourth quarter of 1997
which were subsequently distributed. The Partnership also maintained a
restricted cash balance of $195,538 at December 31, 1997, representing security
deposits and funds reserved for property tax payments.
Rent receivable, net of allowance for doubtful accounts, totaled $107,967 at
December 31, 1997, compared with $19,966 at December 31, 1996. The increase
is due to the timing of rental receipts, primarily at Watkins Center.
Distribution payable increased to $13,750,000 at December 31, 1997, compared
with $416,667 at December 31, 1996. The December 31, 1997 balance includes
cash distributions payable resulting from the sale of the Swenson and Maitland
Properties. This distribution was paid on February 27, 1998, in the amount of
$183.33 per Limited Partnership Unit. Quarterly cash distributions from
operations were suspended commencing in the second quarter of 1997 in
consideration of the Partnership's marketing efforts and the need to fund
several major capital improvements at the Properties to better position them
for sale.
A discussion of leasing activity at the Partnership's remaining Properties is
incorporated herein by reference to the sections entitled Message to Investors
contained in the Partnership's Annual Report to Unitholders for the year ended
December 31, 1997 filed as an exhibit under Item 14.
Results of Operations
1997 versus 1996
Partnership operations resulted in net income of $7,382,420 for the year ended
December 31, 1997, compared to net income of $96,543 for the year ended
December 31, 1996. Net income in 1997 includes a gain on sale of the Swenson
and Maitland Properties of $5,620,425. Excluding this gain, operating income
totaled $1,761,995. The increase from 1996 is primarily attributable to the
elimination of depreciation expense in 1997 as a result of reclassifying the
properties as "Real estate held for sale" commencing December 31, 1996. The
increase is also due to an increase in rental and interest income.
Rental income totaled $4,908,354 for the year ended December 31, 1997, compared
with $4,502,900 for the year ended December 31, 1996. The increase is
primarily due to higher rental income at Watkins Center as a result of new
tenants, and increased occupancy at the Dawson and Maitland Properties.
Interest income totaled $73,952 for the year ended December 31, 1997 compared
with $41,647 for the 1996 period. The increase is primarily due to the
Partnership's higher average cash balance in 1997 as a result of the sale of
the Swenson and Maitland Properties.
Property operating expenses totaled $1,841,368, largely unchanged from
$1,827,870 in 1996 as increases at Watkins and Dawson Centers were offset by
the sales of the Swenson and Maitland Properties.
Minority interest in consolidated venture totaled $(534,093) and $(4,828) for
the years ended December 31, 1997 and 1996, respectively. Minority interest
mainly reflects net income at Watkins Center Joint Venture in 1997, and to a
lesser extent, the sale of the Swenson and Maitland Properties.
As of December 31, 1997, the lease levels of the remaining Properties were
as follows: Watkins Center - 95%; Dawson Business Center - 98%.
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,
appraisal costs and additional postage and mailing fees associated with the
reinstatement of quarterly distributions. 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
uncollectable 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%.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to the Partnership's Annual Report to Unitholders
for the year ended December 31, 1997 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.
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
Rocco F. Andriola Director
Jeffrey C. Carter Director and President
Michael T. Marron Vice President and Chief Financial Officer
Rocco F. Andriola, 39, is a Managing Director of Lehman Brothers in its
Diversified Asset Group and has held such position since October 1996. Since
joining Lehman in 1986, Mr. Andriola has been involved in a wide range of
restructuring and asset management activities involving real estate and other
direct investment transactions. From June 1991 through September 1996, Mr.
Andriola held the position of Senior Vice President in Lehman's Diversified
Asset Group. From June 1989 through May 1991, Mr. Andriola held the position
of First Vice President in Lehman's Capital Preservation and Restructuring
Group. From 1986 to 1989, Mr. Andriola served as a Vice President in the
Corporate Transactions Group of Shearson Lehman Brothers' office of the general
counsel. Prior to joining Lehman, Mr. Andriola practiced corporate and
securities law at Donovan Leisure Newton & Irvine in New York. Mr. Andriola
received a B.A. from Fordham University, a J.D. from New York University School
of Law, and an LL.M in Corporate Law from New York University's Graduate
School of Law.
Jeffrey C. Carter, 52, is a Senior Vice President of Lehman Brothers in the
Diversified Asset Group. Mr. Carter joined Lehman Brothers in September 1988.
From 1972 to 1988, Mr. Carter held various positions with Helmsley-Spear
Hospitality Services, Inc. and Stephen W. Brener Associates, Inc. including
Director of Consulting Services at both firms. From 1982 through 1987, Mr.
Carter was President of Keystone Hospitality Services, an independent hotel
consulting and brokerage company. Mr. Carter received his B.S. degree in
Hotel Administration from Cornell University and an M.B.A. degree from Columbia
University.
Michael T. Marron, 34, is a Vice President of Lehman Brothers and has been a
member of the Diversified Asset Group since 1990 where he has actively managed
and restructured a diverse portfolio of syndicated limited partnerships.
Prior to joining Lehman Brothers, Mr. Marron was associated with Peat Marwick
Mitchell & Co. serving in both its audit and tax divisions from 1985 to 1989.
Mr. Marron received his B.S. degree from the State University of New York at
Albany and an M.B.A. from Columbia University.
HS Advisors II, Ltd.
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
Mark P. Mikuta President
Jerry L. Moore Executive Vice President
Julie R. Adie Vice President, Treasurer and Secretary
Mark P. Mikuta, 44, 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.
Jerry L. Moore, 48, is Chief Executive Officer of Goodman Segar Hogan Hoffler,
L.P. ("GSHH"). GSHH currently has over 325 employees and offices in
Washington, D.C., Richmond, Norfolk, Newport News, Raleigh/Durham and Atlanta.
Mr. Moore is responsible for management of existing operations of the company
and is charged with building GSHH's presence in existing and new markets.
Prior to GSHH, Mr. Moore was Senior Vice President of Dominion Land Management
Co., the real estate development unit of Dominion Capital, Inc. Dominion
Capital is a wholly owned subsidiary of Dominion Resources, Inc. Mr. Moore
received a B.A. degree from Austin College in 1971. He is a member of the
Urban Land Institute Small Scale Development Council; is on the Executive
Committee of GVA North Alliance; and is on the Board of Directors of the
Hampton Roads Economic Development Alliance.
Julie R. Adie, 43, 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.
Effective as of January 1, 1997, the Partnership began reimbursing certain
expenses incurred by CP1 Real Estate Services Inc., its affiliates and an
unaffiliated third party service provider in servicing the Partnership to the
extent permitted by the partnership agreement. In prior years, an affiliate of
CP1 Real Estate Services Inc. had voluntarily absorbed these expenses.
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, 1997.
(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 7 "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, 1997 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 of their 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.
Effective as of January 1, 1997, the Partnership began reimbursing certain
expenses incurred by CP1 Real Estate Services, Inc. and its affiliates in
servicing the Partnership to the extent permitted by the Partnership Agreement.
In prior years, affiliates of CP1 Real Estate Services, Inc. had voluntarily
absorbed these expenses. Disclosure relating to amounts paid to the General
Partners or their affiliates during the past three years is incorporated
herein by reference to Note 8 "Transactions with the General Partners and
Affiliates" of Notes to the Consolidated Financial Statements contained in the
Partnership's Annual Report to Unitholders for the year ended December 31, 1997,
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, 1997 and 1996 (1)
Consolidated Statements of Operations - For the years
ended December 31, 1997, 1996 and 1995 (1)
Consolidated Statements of Partners' Capital (Deficit) -
For the years ended December 31, 1997, 1996 and 1995 (1)
Consolidated Statements of Cash Flows - For the years
ended December 31, 1997, 1996 and 1995 (1)
Notes to Consolidated Financial Statements (1)
(a)(2) Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation F-1
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, 1997, 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, 1997.
(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 during the three months
ended December 31, 1997.
On January 2, 1998 the Partnership filed a Form 8-K reporting
that on December 19, 1997, the Partnership executed a sale of
Maitland Center Office Building A.
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.
COMMERCIAL PROPERTIES 1, L.P.
BY: HS Advisors II, Ltd.
General Partner
Hogan Stanton Investment, Inc.
General Partner
Date: March 26, 1998 BY: /s/Mark P. Mikuta
Mark P. Mikuta
President
BY: CP1 Real Estate Services Inc.
General Partner
Date: March 26, 1998 BY: /s/Jeffrey C. Carter
Jeffrey C. Carter
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 26, 1998 BY: /s/Jeffrey C. Carter
Jeffrey C. Carter
President and Director
Date: March 26, 1998 BY: /s/Rocco F. Andriola
Rocco F. Andriola
Director
Date: March 26, 1998 BY: /s/Michael T. Marron
Michael T. Marron
Vice President and Chief Financial Officer
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
BY: Hogan Stanton Investment, Inc.
General Partner of HS Advisors II, Ltd.
Date: March 26, 1998 BY: /s/Mark P. Mikuta
Mark P. Mikuta
President
Date: March 26, 1998 BY: /s/Jerry L. Moore
Jerry Moore
Executive Vice President
Date: March 26, 1998 BY: /s/Julie R. Adie
Julie R. Adie
Vice President, Treasurer and Secretary
EXHIBIT 13
1997 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 two office/warehouse properties located
in Norcross, Georgia. Provided below is a comparison of lease
levels at the properties as of December 31, 1997 and 1996.
Percentage Leased
Property Location 1997 1996
Watkins Center Norcross, GA 95% 94%
Dawson Business Center Norcross, GA 100% 89%
Contents
1 Message to Investors
3 Financial Highlights
4 Consolidated Financial Statements
7 Notes to the Consolidated Financial Statements
12 Report of Independent Auditors
13 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 1997 Annual Report for Commercial
Properties 1, L.P. (the "Partnership"). Included in this report is a
review of the Partnership's property sales and an update on the operations
and marketing of the Partnership's remaining properties, Watkins Center
and Dawson Business Center. Also included are financial highlights and
the Partnership's audited financial statements.
Sales Update
During the year, we completed the sale of two of the Partnership's four
properties. On November 10, 1997, the Partnership closed on the sale of
Swenson Business Park - Building B (the "Swenson Property") which was sold
for net cash proceeds of $5,464,854. In addition, the Partnership closed
on the sale of Maitland Center Office Building A (the "Maitland Property"),
on December 19, 1997 for net cash proceeds of $8,952,658. As discussed
later in this report, the proceeds from these sales were paid to Limited
Partners in a special cash distribution paid on February 27, 1998 in the
amount of $183.33 per Unit.
We have engaged a real estate brokerage firm to assist with our efforts in
marketing Watkins Center and Dawson Business Center. Several purchase
offers were received on the properties during 1997, however, the bidders
subsequently withdrew their offers. In addition, pursuant to the terms of
the joint venture agreements for these properties, the joint venture
partner (the "JV Partner") has the right of first refusal. Accordingly,
the Partnership must notify the JV Partner of any sale offer it intends to
accept and the JV Partner may elect to purchase the property at the same
price and conditions. We are currently attempting to obtain a waiver of
such right.
We continue to actively market both properties and it is anticipated that
they will be sold during 1998. However, there can be no assurance that the
properties will be sold within this time frame, or that the sales will
result in a particular price. Once the properties are sold, the General
Partners will distribute the net proceeds together with the Partnership's
remaining cash reserves (after payment of or provision for the Partnership's
liabilities and expenses), and dissolve the Partnership.
Market/Property Update
The market for industrial properties in greater Atlanta remained stable
during 1997, as the strong local economy stimulated demand for office/
warehouse space. In the Northeast/I-85 submarket, where both of the
Partnership's properties are located, the vacancy rate for industrial
properties was 6.5% at mid-year 1997. This represents an increase from
4.8% at year-end 1996, and reflects the increased competition from
newly-constructed properties in the Northeast/I-85 submarket. Competition
for tenants will likely intensify in the future as development projects are
completed, however, it is expected that operating conditions and property
values will remain stable in the near term.
Leasing activity at Watkins Center during 1997 consisted of 24 new leases
totaling 60,746 square feet and 21 lease renewals totaling 55,856 square
feet. In addition, two tenants renewed and expanded their leases totaling
6,770 square feet, respectively. Nineteen tenants representing 45,893
square feet vacated the property upon the expiration of their leases. As a
result, the property was 95% leased at December 31, 1997, compared to 94%
a year earlier. In the coming year, nine leases totaling 43,701 square
feet, or approximately 12% of the property's leasable area, are scheduled
to expire.
The mortgage notes secured by Watkins Center were payable in full on
June 10, 1997. However, in light of the Partnership's efforts to sell
the property, the lender extended the maturity date to June 10, 1998 in
order to provide sufficient time in which to sell the property. The
General Partners will approach the lender regarding a further extension
of the maturity date, if necessary.
At Dawson Business Center, the General Partners executed six new leases for
8,092 square feet during 1997. The property was 100% leased at December 31,
1997, up from 98% leased at December 31, 1996. During 1998, seven leases
totaling 10,863 square feet, or approximately 14% of the property's
leasable area, are scheduled to expire. The General Partners will continue
to negotiate renewals and aggressively market any leasable space at both
properties.
Cash Distributions
On February 27, 1998, the Partnership paid a special cash distribution to
Limited Partners totaling $183.33 per Unit representing your share of the
net proceeds received from the sales of the Maitland and the Swenson
Properties. Including this distribution, Limited Partners have received
cash distributions totaling $521.90 per original $500 Unit. This total
includes distributions of cash flow from operations in the amount of
$227.40 per Unit and return of capital payments in the amount of $294.50
per Unit. Return of capital payments have reduced the size of each Unit
from $500 to $205.50. As discussed in prior reports, quarterly cash
distributions from operations were suspended commencing in the second
quarter of 1997 in consideration of the Partnership's marketing efforts and
the need to fund several major capital improvements at the Properties to
better position them for sale.
General Information
As you are probably aware, several third parties have commenced tender
offers to purchase Units of the Partnership at prices which are below the
Partnership's estimate of net asset value per Unit. In response, we
recommended that Limited Partners reject these offers because we believe
that they do not reflect the underlying value of the Partnership's assets.
According to published industry sources, most of the investors who hold
units of limited partnerships similar to the Partnership have rejected
these types of tender offers due to their inadequacy.
Summary
We are pleased to have successfully completed the sale of the Swenson and
Maitland Properties, and anticipate that our marketing efforts will result
in a sale of Watkins Center and Dawson Center during 1998. Should the
properties be sold, the General Partners will pay a liquidating
distribution and liquidate the Partnership. In the interim, we will
continue to focus on leasing initiatives at both properties. We will keep
you apprised of significant developments 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/ Jeffrey C. Carter /s/ Mark P. Mikuta
Jeffrey C. Carter Mark P. Mikuta
President President
March 26, 1998
Financial Highlights
Selected Financial Data
For The Years Ended December 31, 1997 1996 1995 1994 1993
Dollars in thousands, except per
Unit data
Total income (including gain
on sale) $10,603 $4,545 $4,205 $3,277 $3,658
Operating income (loss) 1,762 97 (290) (383) (250)
Gain on sale of real estate assets 5,620 _ _ _ _
Net income (loss) 7,382 97 (290) (383) (250)
Total assets 26,700 19,713 22,512 22,919 23,628
Mortgage payable 4,578 4,796 4,992 5,170 5,331
Net cash from operations 2,031 1,847 1,320 373 968
Operating income per
Limited Partnership Unit 23.49 (.82) (4.47) (5.11) (3.61)
Net income (loss) per Unit 95.33 (.82) (4.47) (5.11) (3.61)
Cash distributions declared
per Limited Partnership Unit 3.00 19.00 19.18* _ 2.50
* 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, including gain on sale and net income increased
primarily due to the gain on the sale of the Swenson and Maitland
Properties. Operating income before the gain increased primarily as a
result of the elimination of depreciation expense in 1997 as a result of
reclassifying the properties as "Real estate held for sale" commencing
December 31, 1996.
* The increase in net cash from operations can be attributed primarily
to an increase in rental income, which reduced the Partnership's rents
receivable, prepaid leasing costs and deferred rent receivable
balances.
Consolidated Balance Sheets At December 31, At December 31,
1997 1996
Assets
Real estate held for sale $11,163,396 $19,106,578
Cash and cash equivalents 15,182,204 301,658
Restricted cash 195,538 203,626
Rent receivable, net of allowance
for doubtful accounts of $19,183
in 1997 and $16,960 in 1996 107,967 19,966
Other assets 50,809 80,783
Total Assets $26,699,914 $19,712,611
Liabilities and Partners' Capital
Liabilities:
Mortgage notes payable $4,577,848 $4,795,775
Distribution payable 13,750,000 416,667
Accounts payable and accrued expenses 107,192 128,984
Due to affiliates 6,500 12,335
Security deposits payable 183,381 198,977
Prepaid rent 4,124 5,517
Total Liabilities 18,629,045 5,558,255
Minority interest 1,371,485 837,392
Partners' Capital (Deficit):
General Partners (722,412) (929,816)
Limited Partners (75,000 units outstanding) 7,421,796 14,246,780
Total Partners' Capital 6,699,384 13,316,964
Total Liabilities and Partners' Capital $26,699,914 $19,712,611
Consolidated Statements of Partners' Capital (Deficit)
For the years ended December 31, 1997,
1996 and 1995
General Limited
Partners Partners Total
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
Net Income 232,404 7,150,016 7,382,420
Distributions (25,000) (13,975,000) (14,000,000)
Balance at December 31, 1997 $(722,412) $7,421,796 $6,699,384
Consolidated Statements of Operations
For the years ended December 31, 1997 1996 1995
Income
Rent $4,908,354 $4,502,900 $4,071,987
Interest 73,952 41,647 132,699
Total Income 4,982,306 4,544,547 4,204,686
Expenses
Property operating 1,841,368 1,827,870 1,637,509
Depreciation and amortization _ 1,780,187 1,718,858
Interest 459,255 474,760 499,347
General and administrative 349,294 330,066 262,764
Bad debt expense 36,301 30,293 384,353
Total Expenses 2,686,218 4,443,176 4,502,831
Income (Loss) before minority
interest 2,296,088 101,371 (298,145)
Minority interest (534,093) (4,828) 7,953
Operating income 1,761,995 96,543 (290,192)
Gain on sale of real estate assets 5,620,425 _ _
Net Income (Loss) $7,382,420 $ 96,543 $(290,192)
Net Income (Loss) Allocated:
To the General Partners $232,404 $158,334 $ 44,833
To the Limited Partners 7,150,016 (61,791) (335,025)
$7,382,420 $ 96,543 $(290,192)
Per limited partnership unit
(75,000 outstanding) $ 95.33 $ (.82) $ (4.47)
Consolidated Statements of Cash Flows
For the years ended December 31, 1997 1996 1995
Cash Flows From Operating Activities
Net Income (Loss) $7,382,420 $ 96,543 $(290,192)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation _ 1,638,155 1,593,814
Amortization _ 142,032 125,044
Accretion of discount on note
receivable _ _ (75,808)
Bad debt expense-loss on note
receivable _ _ 350,000
Minority interest 534,093 4,828 (7,953)
Gain on sale of real estate (5,620,425) _ _
Increase (decrease) in cash
arising from changes in operating
assets and liabilities
Restricted cash 8,088 (7,264) (33,393)
Rent receivable (97,921) 118,494 (56,967)
Prepaid leasing costs _ _ (296,611)
Deferred rent receivable _ _ (68,625)
Deferred costs allocable to assets
held for sale (173,754) (98,236) -
Other assets 29,974 6,782 12,044
Accounts payable and accrued
expenses (21,792) 8,743 (26,480)
Due to affiliates (5,835) (5,113) 11,044
Security deposits payable (4,104) (530) 29,328
Prepaid rent 289 (57,457) 54,679
Net cash provided by operating
activities 2,031,033 1,846,977 1,319,924
Cash Flows From Investing Activities
Proceeds from sale of real estate 14,421,813 _ _
Additions to real estate (687,706) (739,672) (1,320,011)
Collection of note receivable _ _ 1,150,000
Net cash provided by (used for)
investing activities 13,734,107 (739,672) (170,011)
Cash Flows From Financing Activities
Mortgage principal payments (217,927) (196,075) (177,837)
Cash distributions (666,667) (2,650,000) _
Net cash used for financing
activities (884,594) (2,846,075) (177,837)
Net increase (decrease) in cash and
cash equivalents 14,880,546 (1,738,770) 972,076
Cash and cash equivalents,
beginning of period 301,658 2,040,428 1,068,352
Cash and cash equivalents, end
of period $15,182,204 $301,658 $ 2,040,428
Supplemental Disclosure of Cash
Flow Information
Cash paid during the period
for interest $459,255 $474,760 $ 499,347
Supplemental Disclosure of Non
Cash Investing and Financing Activity
Effective December 31, 1996 the Partnership reclassified all real estate
investments together with prepaid leasing costs and deferred rent to real
estate held for sale.
Notes to the Consolidated Financial Statements
December 31, 1997, 1996 and 1995
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.
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 and prepaid leasing costs and deferred rent (as discussed
in Note 4) which had a carrying value of $19,106,578 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. During 1997, the Partnership signed
agreements with commercial real estate brokers to market the properties for
sale.
On November 10, 1997, the Partnership closed on the sale of Swenson Business
Park - Building B to an unaffiliated third party for net cash proceeds of
$5,464,855. The transaction resulted in a gain on sale of approximately $2
million, which is reflected in the Partnership's statement of operations for
the period ending December 31, 1997. The Partnership will distribute the net
proceeds from the sale in February 1998.
On December 19, 1997, the Partnership closed on the sale of Maitland Center
Office Building A. The property was sold for net cash proceeds of $8,952,658.
The transaction resulted in a gain on sale of approximately $3.6 million,
which is reflected in the Partnership's statement of operations for the period
ending December 31, 1997.
The General Partners anticipate that the remaining properties will be sold
during 1998. However, there can be no assurance that the General Partners
will be successful in selling either or both 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 or 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.
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 1996 and 1995 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, 1997, 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 Held for Sale
As of December 31, 1997, real estate held for sale consist of two properties
acquired, directly or indirectly, by the Partnership. Purchase price amounts
exclude acquisition fees and other closing costs.
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
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, Tennesse property (the "Property") totalling
$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 the 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 $8,680,223 at
December 31, 1997. The estimated fair value of the two mortgage notes at
December 31, 1997 is approximately equal to the outstanding principal. The
mortgage notes secured by Watkins Center were payable in full on June 10, 1997.
However, in light of the Partnership's efforts to sell the property, the lender
extended the maturity date to June 10, 1998 in order to provide sufficient
time in which to sell the property. The General Partner will approach the
lender regarding a further extension of the maturity date, if necessary.
Mortgage notes payable at December 31, 1997 and 1996 are as follows:
1997 1996
First mortgage note payable in monthly
installments of $23,278 including
interest at 9.375%, through December 31, 1997,
the entire unpaid principal is due June 10, 1998. $1,870,609 $1,965,120
First mortgage note payable in monthly
installments of $33,154, including interest
at 10.125%, through December 31, 1997,
the entire unpaid principal is due June 10, 1998. 2,707,239 2,830,655
$4,577,848 $4,795,775
7. Rental Income Under Operating Leases
Future minimum rental income to be received on operating leases as of
December 31, 1997 is as follows:
Year Amount
1998 $2,255,176
1999 1,826,304
2000 981,198
2001 445,972
2002 165,667
Thereafter 0
$5,674,317
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 1997, 1996, and 1995, 10%, 11% and 12% of consolidated rental
revenue was provided by a tenant occupying Maitland Center Office Building A
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 1997, 1996, and 1995, 16%, 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, 1997, 1996 and 1995.
Unpaid at
December 31, Earned
1997 1997 1996 1995
RE Services and affiliates
Out-of-pocket expenses $ _ $4,308 $6,365 $12,827
HS Advisors and affiliates
Out-of-pocket expenses _ _ 1,218 9,688
Property management fees (GSH) 6,500 186,366 183,598 154,608
$6,500 $190,674 $191,181 $177,123
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,
1997 1996 1995
Financial statement net income (loss) $7,382,420 $96,543 $(290,192)
Tax basis depreciation over financial
statement depreciation (1,308,992) 279,903 250,868
Gain on sale 1,983,272 _ _
Adjustment for deferred rent, free rent (81,631) (77,649) (13,862)
Adjustment for bad debt expense 5,394 16,960 (51,065)
Adjustment for amortization (357,472) _ _
Adjustment for minority interest (181,647) _ _
Minority interest 534,093 _ _
Other miscellaneous adjustments 380 5,141 (461)
Federal income tax basis net income (loss) $7,975,817 $320,898 $104,712)
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997,
in conformity with generally accepting accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
February 4, 1998
Net Asset Valuation
Comparison of Acquisition Costs to Appraised Value and
Determination of Net Asset Value Per $388.83 Unit at December 31,
1997 (Unaudited)
Acquisition Cost
(Purchase Price Partnership's
Plus General Share of
Partners' December 31,
Date of Acquisition 1997 Appraised
Property Acquisition Fees) Value (1)
Watkins Center (2) 05-26-82 $ 6,468,661 $ 10,422,152
Dawson Business Center 01-25-83 3,514,325 4,360,000
$ 9,982,986 $ 14,782,152
Cash and cash equivalents 15,182,204
Restricted cash 195,538
Accounts and rent receivable,
net of allowance for
doubtful accounts 107,967
Other assets 50,809
30,318,670
Less:
Total liabilities - net of mortgage
notes and distribution payable (301,197)
Partnership Net Asset Value $ 30,017,473
Net Asset Value Allocated:
Limited Partners $ 29,854,798
General Partners 162,675
$ 30,017,473
Net Asset Value Per Unit
(75,000 units outstanding) $ 398.06
(1) This represents the Partnership's share of the December 31, 1997
Appraised Values which were determined by an independent property
appraisal firm. The Partnership's share of the December 31, 1997
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,
1997 Appraised Value are net of the outstanding mortgage note balances
at the time of acquisition and at December 31, 1997, 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 4, 1998, included in the 1997 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
therein.
ERNST & YOUNG LLP
Boston, Massachusetts
February 4, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Dec-31-1997
<CASH> 15,182,204
<SECURITIES> 000
<RECEIVABLES> 127,150
<ALLOWANCES> 19,183
<INVENTORY> 000
<CURRENT-ASSETS> 15,536,518
<PP&E> 11,163,396
<DEPRECIATION> 000
<TOTAL-ASSETS> 26,699,914
<CURRENT-LIABILITIES> 18,629,045
<BONDS> 000
<COMMON> 000
000
000
<OTHER-SE> 6,699,384
<TOTAL-LIABILITY-AND-EQUITY> 26,699,914
<SALES> 000
<TOTAL-REVENUES> 4,982,306
<CGS> 000
<TOTAL-COSTS> 000
<OTHER-EXPENSES> 2,190,662
<LOSS-PROVISION> 36,301
<INTEREST-EXPENSE> 459,255
<INCOME-PRETAX> 1,761,995
<INCOME-TAX> 000
<INCOME-CONTINUING> 1,761,995
<DISCONTINUED> 000
<EXTRAORDINARY> 5,620,425
<CHANGES> 000
<NET-INCOME> 7,382,420
<EPS-PRIMARY> 95.33
<EPS-DILUTED> 95.33
</TABLE>
