1
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, 1998
-------------------------------------------
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) 526-3183
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, 1998
filed as an exhibit under Item 14.
<PAGE>
2
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.
(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:
o Capital appreciation;
o Distributions of Net Cash From Operations attributable to rental income;
o Preservation and protection of capital; and
o 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.
<PAGE>
3
(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 Partnership competes with a number of established
companies, some of which have greater resources than the Partnership. 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, 1998 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, 1998
filed as an exhibit under Item 14, Note 4 "Real Estate Investments" and Note 6
"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
1998.
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, 1998, the number of holders of Units was 5,233.
(c) Distributions
-------------
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. 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. Following the sale of the Partnership's remaining
Properties, 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.
<PAGE>
4
The following distributions were paid to the Limited Partners for the two years
ended December 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
Cash Distributions Per Limited Partnership Unit
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
1997 $ 3.00 $ 0.00 $ 0.00 $ 0.00 $ 3.00
1998 $183.33* $ 0.00 $ 0.00 $ 0.00 $183.33
<FN>
* Represents a special distribution of the net proceeds from the sales of the
Maitland and Swenson Properties.
</FN>
</TABLE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Selected Financial Data
For The Years Ended December 31,
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------
Dollars in thousands, except per Unit data
<S> <C> <C> <C> <C> <C>
Total income (including gain on sale) $ 2,960 $10,603 $ 4,545 $ 4,205 $ 3,277
Operating income (loss) 501 1,762 97 (290) (383)
Gain on sale of real estate assets -- 5,620 -- -- --
Net income (loss) 501 7,382 97 (290) (383)
Total assets 13,719 26,700 19,713 22,512 22,919
Mortgage payable 4,340 4,578 4,796 4,992 5,170
Net cash from operations 1,119 2,031 1,847 1,320 373
Operating income per
Limited Partnership Unit 6.01 23.49 (.82) (4.47) (5.11)
Net income (loss) per Unit 6.01 95.33 (.82) (4.47) (5.11)
Cash distributions declared per
Limited Partnership Unit 183.33* 3.00 19.00 19.18** --
- -----------------------------------------------------------------------------------------
<FN>
* Represents return of capital from the sales of the Maitland and Swenson Properties.
** Paid February 9, 1996. Includes $15.18 per Unit return of capital.
</FN>
</TABLE>
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.
To facilitate the ability to sell the remaining two Properties, the Partnership
entered into agreements with its joint venture partner in both Properties on
April 8, 1998, whereby the joint venture partner waived its right of first
refusal to buy each property. The joint venture partner was paid $25,000 for
each waiver.
<PAGE>
5
On September 24, 1998, the Partnership entered into an agreement to sell the
remaining Properties to an unaffiliated third party for a gross purchase price
of approximately $18.6 million. However, the buyer subsequently withdrew its
offer during its due diligence review of the properties and the agreement was
canceled. As a result, the General Partners have resumed efforts to actively
market the properties for sale. On February 9, 1999, the Partnership executed a
purchase and sale agreement with an unaffiliated buyer to purchase both
properties. While we currently anticipate that the properties will be sold by
March 31, 1999, there can be no assurance that the sales will occur within this
time frame. Once the properties are sold, we 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 subsequently
dissolve the Partnership.
It should be noted that the mortgage notes secured by Watkins Center were
payable in full on June 10, 1998. However, in light of the Partnership's efforts
to sell the property, the lender has extended the maturity date to April 30,
1999 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 $2,123,556 at
December 31, 1998, compared with $15,182,204 at December 31, 1997. The decrease
is primarily attributable to the payment of a special cash distribution on
February 27, 1998 of the net proceeds received from the sale of the Swenson and
Maitland properties. The Partnership's restricted cash balance, which primarily
consists of security deposits and real estate escrow, increased to $207,013 at
December 31, 1998, compared with $195,538 at December 31, 1997, due to an
increase in the real estate escrow account and security deposits at Watkins
Center. Rent receivable, net of allowance for doubtful accounts, totaled $14,956
at December 31, 1998 compared with $107,967 at December 31, 1997. The decrease
is due to the timing of rental receipts at the remaining Properties and a
reduction in tenant delinquencies.
Accounts payable and accrued expenses totaled $190,003 at December 31, 1998,
compared with $107,192 at December 31, 1997. The increase is primarily due to
the timing of payments for real estate taxes, audit fees, administrative and
other expenses.
Distribution payable decreased from $13,750,000 at December 31, 1997 to $0 at
December 31, 1998. 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. In order to fund required capital improvements at the
Properties and maintain adequate cash reserves, cash distributions were
suspended beginning with the 1997 second quarter distribution. Following the
sale of the Partnership's remaining Properties, 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.
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, 1998 filed as an exhibit under Item 14.
Market Risk
- -----------
Interest rate risk comprises the Partnership's principal market risk exposure.
The Partnership has no long-term debt, however, the first mortgage loan secured
by Watkins Center is subject to repricing if it is extended beyond its current
maturity in April 1999. As noted above, the General Partners are currently
marketing the Properties for sale, and it is anticipated that a sale of Watkins
Center will be completed prior to this time. Interest income from the
Partnership's cash and cash equivalents is also subject to interest rate risk in
that such funds consist of short-term, highly liquid investments invested at
short-term rates. Such risk is not considered material to the Partnership's
operations.
Year 2000 Initiatives
- ---------------------
The Year 2000 compliance issue concerns the ability of computerized information
systems to accurately calculate, store or use a date after 1999. This could
result in computer system failures or miscalculations causing disruptions of
operations. The Year 2000 issue affects almost all companies and organizations.
<PAGE>
6
As noted above, the Partnership's remaining properties are currently being
marketed for sale, and it is anticipated that the properties will be sold and
the Partnership dissolved prior to December 31, 1999. In the event that the
Partnership is not liquidated prior to December 31, 1999, potential Year 2000
issues relate primarily to outside vendors which provide property management and
the Partnership's administrative services including accounting, tax preparation
and transfer agent services. Such services are reliant on computer systems,
software products and equipment which may or may not be Year 2000 compliant. It
is anticipated that the cost of vendor compliance with Year 2000 problems will
be borne primarily by vendors. Although it is not possible at present to give an
estimate of the cost of this work to the Partnership, the General Partner does
not expect such costs to have a material adverse impact on the Partnership's
long term results of operations.
Results of Operations
- ---------------------
1998 versus 1997
- ----------------
The Partnership's operations resulted in net income of $501,135 for the year
ended December 31, 1998 compared with $7,382,420 for the year ended December 31,
1997. The decrease in net income is primarily attributable to a gain on the sale
of real estate assets totaling $5,620,425 in fiscal 1997, as a result of the
sale of the Swenson and Maitland properties. Excluding this gain, operating
income was $1,761,995 in fiscal 1997 compared with $501,135 in fiscal 1998. The
decrease in operating income is mainly due to the net effect of lower rental
income and property operating costs in the 1998 period, as a result of the sale
of the Maitland and Swenson properties, and higher general and administrative
expenses in fiscal 1998.
Rental income totaled $2,734,657 for the year ended December 31, 1998, compared
with $4,908,354 in fiscal 1997. The decrease is primarily attributable to the
sale of the Maitland and Swenson properties and, to a lesser extent, lower
average occupancy at Dawson Business Center. Interest income totaled $211,738
for the year ended December 31, 1998, compared with $73,952 in fiscal 1997. The
increase is primarily due to higher cash balances maintained by the Partnership
during 1998 from sale proceeds of the Maitland and Swenson properties.
Property operating expenses totaled $1,044,029 for the year ended December 31,
1998, compared with $1,841,368 in fiscal 1997. The decrease is primarily
attributable to the sale of the Maitland and Swenson Properties, as well as
lower repairs and maintenance expenses at the remaining properties.
General and administrative expenses for the year ended December 31, 1998 were
$530,342, compared with $349,294 in fiscal 1997. The increase is primarily due
to higher legal costs relating to the property sales and, to a lesser extent,
higher partnership servicing costs, which were partially offset by lower
administrative and postage expenses.
Minority interest in consolidated venture totaled $421,376 and $534,093 for the
years ended December 31, 1998 and 1997, respectively. Minority interest for both
years reflects net income at Watkins Center Joint Venture and Dawson Business
Center Joint Venture. Minority interest in 1997 also reflects net income at Beta
Building Associates Joint Venture, the Partnership which owned and operated the
Swenson property.
As of December 31, 1998, the lease levels of the remaining Properties were as
follows: Watkins Center - 92%; Dawson Business Center - 89%.
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.
<PAGE>
7
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%.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to the Partnership's Annual Report to Unitholders for
the year ended December 31, 1998 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
Michael T. Marron Director, President and Chief Financial Officer
William T. McDermott Vice President
<PAGE>
8
Rocco F. Andriola, 40, 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.
Michael T. Marron, 35, 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.
William T. McDermott, 35, is a Vice President of Lehman Brothers and has been a
member of the Diversified Asset Group since 1998. Mr. McDermott joined Lehman
Brothers in 1993 and held various positions within the firm before joining the
Diversified Asset Group. Prior to joining Lehman Brothers, Mr. McDermott was a
financial analyst with Cantor Fitzgerald Inc. from 1991 - 1993 and was
associated with Arthur Andersen & Co. serving in both its audit and bankruptcy
consulting divisions from 1985 to 1991. Mr. McDermott received his B.B.A. degree
from the University of Notre Dame and is a Certified Public Accountant.
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
Julie R. Adie Vice President, Treasurer and Secretary
Mark P. Mikuta, 45, 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.
Julie R. Adie, 44, 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."
<PAGE>
9
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. On
September 28, 1998 GSH sold its general partner and limited partner interests in
GSHH to The St. Joe Company, an unaffiliated company. The transactions did not
affect the ownership of the general partners.
Commencing 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,
1998.
(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,
1998 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.
<PAGE>
10
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 7 "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, 1998, filed as an
exhibit under Item 14.
To facilitate the ability to sell the Partnership's remaining two Properties,
the Partnership entered into agreements with its joint venture partner in both
Properties on April 8, 1998, whereby the joint venture partner waived its right
of first refusal to buy each property. The joint venture partner was paid
$25,000 for each waiver.
<PAGE>
11
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements:
--------------------
Consolidated Balance Sheets - At December 31, 1998 and 1997........(1)
Consolidated Statements of Operations - For the years ended
December 31, 1998, 1997 and 1996...............................(1)
Consolidated Statements of Partners' Capital (Deficit) - For
the years ended December 31, 1998, 1997 and 1996...............(1)
Consolidated Statements of Cash Flows - For the years ended
December 31, 1998, 1997 and 1996...............................(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, 1998, 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) 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,
1998.
(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, 1998.
<PAGE>
12
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 29, 1999 BY: /s/Mark P. Mikuta
-----------------
Name: Mark P. Mikuta
Title: President
BY: CP1 Real Estate Services Inc.
General Partner
Date: March 29, 1999 BY: /s/Michael T. Marron
--------------------
Name: Michael T. Marron
Title: Director, President and Chief Financial Officer
<PAGE>
13
SIGNATURES
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 29, 1999 BY: /s/Michael T. Marron
--------------------
Name: Michael T. Marron
Title: Director, President and Chief Financial Officer
Date: March 29, 1999 BY: /s/Rocco F. Andriola
--------------------
Name: Rocco F. Andriola
Title: Director
Date: March 29, 1999 BY: /s/William T. McDermott
-----------------------
Name: William T. McDermott
Title: Vice President
<PAGE>
14
SIGNATURES
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 29, 1999 BY: /s/Mark P. Mikuta
-----------------
Name: Mark P. Mikuta
Title: President
Date: March 29, 1999 BY: /s/Julie R. Adie
----------------
Name: Julie R. Adie
Title: Vice President, Treasurer and Secretary
Exhibit 13
Commercial Properties 1, L.P.
1998 Annual Report
<PAGE>
- --------------------------------------------------------------------------------
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. Watkins Center contains 362,419
leasable square feet and Dawson Business Center contains 75,703 leasable square
feet. Provided below is a comparison of lease levels at the properties as of
December 31, 1998 and 1997.
Percentage
Leased
Property Location 1998 1997
-------- -------- ---- ----
Watkins Center Norcross, GA 92% 95%
Dawson Business Center Norcross, GA 89% 98%
Contents
1 Message to Investors
3 Consolidated Financial Statements
6 Notes to the Consolidated Financial Statements
11 Report of Independent Auditors
12 Net Asset Valuation
<PAGE>
- --------------------------------------------------------------------------------
MESSAGE TO INVESTORS
- --------------------------------------------------------------------------------
We are pleased to present the 1998 Annual Report for Commercial Properties 1,
L.P. (the "Partnership"). Included in this report is 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 for the year ended December 31, 1998.
Marketing Update
As previously reported, we are actively marketing the Partnership's remaining
two properties for sale and have engaged a real estate brokerage firm to assist
in our marketing efforts. We are pleased to report that on February 9, 1999, the
Partnership executed a purchase and sale agreement with an unaffiliated buyer to
purchase both properties. While we currently anticipate that the properties will
be sold by March 31, 1999, there can be no assurance that the sales will occur
within this time frame. Once the properties are sold, we 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
subsequently dissolve the Partnership.
Leasing Update
Watkins Center - During 1998, 12 new leases totaling 20,976 square feet and 14
lease renewals totaling 64,894 square feet were executed by the Partnership.
Eighteen tenants representing 47,017 square feet vacated the property upon the
expiration of their leases. As a result, the property was 92% leased at the end
of 1998, compared to 95% one year earlier. In 1999, 18 leases totaling 45,832
square feet, or approximately 13% of the property's leasable area, are scheduled
to expire.
Dawson Business Center - We executed four new leases for 6,154 square feet
during 1998. In addition, three tenants renewed their leases totaling 3,304
square feet. However, seven tenants representing 14,309 square feet vacated the
property. Therefore, the property was 89% leased at the end of 1998 compared to
98% one year earlier. During 1999, eight leases totaling 15,398 square feet, or
approximately 20% of the property's leasable area, are scheduled to expire.
Atlanta Market Update
The metropolitan Atlanta industrial market softened slightly in 1998, as new
construction outpaced demand throughout the year. As a result of these
conditions, vacancy increased from 6.9% at year-end 1997 to 8% at year-end 1998.
In the Northeast/I-85 submarket, where both of the Partnership's properties are
located, the vacancy rate was 7.8% at year-end 1998, compared to 6.3% in the
first quarter of 1998. Market conditions are expected to remain competitive in
1999 as additional development projects are completed.
Cash Distributions
On February 27, 1998, the Partnership paid a special cash distribution totaling
$183.33 per Unit to Limited Partners, representing the net proceeds from the
sales of the Maitland Center Office Building A and Swenson Business Park -
Building B. Since inception, the Partnership has paid total cash distributions
of $521.90 per original $500 Unit, including $294.50 per Unit in return of
capital payments which have reduced the size of each Unit from $500 to $205.50.
Financial Highlights
Provided below is a review of Partnership operations for the year ended
December 31,
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------------------------
<S> <C> <C>
Total Income $2,959,806 $4,982,306
Property Operating Expenses 1,044,029 1,841,368
Net Income 501,135 7,382,420
Net Cash provided by Operating Activities 1,119,052 2,031,033
----------------------------------------------------------------------
</TABLE>
<PAGE>
o Total income and property operating expenses decreased due to the sale
of Maitland Center Office Building A and Swenson Business
Park-Building B in late 1997.
o The decline in net income is primarily attributable to the $5,620,425
gain on the sales of Maitland Center Office Building A and Swenson
Business Park-Building B in 1997.
o The decrease in net cash provided by operating activities is primarily
attributable to a decrease in total income as a result of the sale of
two of the Partnership's properties.
General Information
We will keep you updated with respect to the potential sales of Watkins Center
and Dawson Business Center in future reports. In the interim, questions
regarding the Partnership should be directed to your Financial Consultant or
Partnership Investor Services. All requests for a change of address or transfer
should be submitted in writing to the Partnership's administrative agent at P.O.
Box 7090, Troy, MI 48007-7090. Partnership Investor Services can be reached at
(617) 342-4225, and the Partnership's administrative agent can be reached at
(248) 637-7900.
Very truly yours,
CP 1 Real Estate Services Inc. Hogan Stanton Investment, Inc.
General Partner General Partner of HS Advisors II, Ltd.
Michael T. Marron Mark P. Mikuta
President President
March 29, 1999
<PAGE>
3
COMMERCIAL PROPERTIES 1, L.P.
AND CONSOLIDATED VENTURES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
At December 31, At December 31,
1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Real estate held for sale $11,352,896 $11,163,396
Cash and cash equivalents 2,123,556 15,182,204
Restricted cash 207,013 195,538
Rent receivable, net of allowance for doubtful
accounts of $14,072 in 1998 and $19,183 in 1997 14,956 107,967
Other assets 20,347 50,809
- -------------------------------------------------------------------------------------
Total Assets $13,718,768 $26,699,914
=====================================================================================
Liabilities and Partners' Capital
Liabilities:
Mortgage notes payable $ 4,339,648 $ 4,577,848
Distribution payable -- 13,750,000
Accounts payable and accrued expenses 190,003 107,192
Due to affiliates 4,800 6,500
Security deposits payable 187,794 183,381
Prepaid rent 3,143 4,124
-----------------------------
Total Liabilities 4,725,388 18,629,045
-----------------------------
Minority interest 1,792,861 1,371,485
-----------------------------
Partners' Capital (Deficit):
General Partners (672,299) (722,412)
Limited Partners (75,000 units outstanding) 7,872,818 7,421,796
-----------------------------
Total Partners' Capital 7,200,519 6,699,384
- -------------------------------------------------------------------------------------
Total Liabilities and Partners' Capital $13,718,768 $26,699,914
==========================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
For the years ended December 31, 1998, 1997 and 1996
General Limited
Partners Partners Total
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
Net Income 50,113 451,022 501,135
- -------------------------------------------------------------------------------------
Balance at December 31, 1998 $(672,299) $ 7,872,818 $ 7,200,519
=====================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
4
COMMERCIAL PROPERTIES 1, L.P.
AND CONSOLIDATED VENTURES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Rent $2,734,657 $4,908,354 $4,502,900
Interest 211,738 73,952 41,647
Miscellaneous income 13,411 -- --
------------------------------------------
Total Income 2,959,806 4,982,306 4,544,547
- -------------------------------------------------------------------------------------
Expenses
Property operating 1,044,029 1,841,368 1,827,870
Depreciation and amortization -- -- 1,780,187
Interest 438,984 459,255 474,760
General and administrative 530,342 349,294 330,066
Bad debt expense 23,940 36,301 30,293
------------------------------------------
Total Expenses 2,037,295 2,686,218 4,443,176
------------------------------------------
Income before minority interest 922,511 2,296,088 101,371
Minority interest (421,376) (534,093) (4,828)
- -------------------------------------------------------------------------------------
Operating income 501,135 1,761,995 96,543
Gain on sale of real estate assets -- 5,620,425 --
- -------------------------------------------------------------------------------------
Net Income $ 501,135 $7,382,420 $ 96,543
=====================================================================================
Net Income (Loss) Allocated:
To the General Partners $ 50,113 $ 232,404 $ 158,334
To the Limited Partners 451,022 7,150,016 (61,791)
- -------------------------------------------------------------------------------------
$ 501,135 $7,382,420 $ 96,543
=====================================================================================
Per limited partnership unit
(75,000 outstanding) $ 6.01 $ 95.33 $ (.82)
- -------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
5
COMMERCIAL PROPERTIES 1, L.P.
AND CONSOLIDATED VENTURES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Income $ 501,135 $ 7,382,420 $ 96,543
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation -- -- 1,638,155
Amortization -- -- 142,032
Minority interest 421,376 534,093 4,828
Gain on sale of real estate -- (5,620,425) --
Increase (decrease) in cash arising
from changes in operating assets
and liabilities
Restricted cash (11,475) 8,088 (7,264)
Rent receivable 93,011 (97,921) 118,494
Deferred costs allocable to assets
held for sale -- (173,754) (98,236)
Other assets 30,462 29,974 6,782
Accounts payable and accrued
expenses 82,811 (21,792) 8,743
Due to affiliates (1,700) (5,835) (5,113)
Security deposits payable 4,413 (4,104) (530)
Prepaid rent (981) 289 (57,457)
--------------------------------------------
Net cash provided by operating
activities 1,119,052 2,031,033 1,846,977
- -------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Proceeds from sale of real estate -- 14,421,813 --
Additions to real estate (189,500) (687,706) (739,672)
--------------------------------------------
Net cash provided by (used for)
investing activities (189,500) 13,734,107 (739,672)
- -------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Mortgage principal payments (238,200) (217,927) (196,075)
Cash distributions (13,750,000) (666,667) (2,650,000)
--------------------------------------------
Net cash used for financing activities (13,988,200) (884,594) (2,846,075)
- -------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (13,058,648) 14,880,546 (1,738,770)
Cash and cash equivalents,
beginning of period 15,182,204 301,658 2,040,428
- -------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 2,123,556 $15,182,204 $ 301,658
=====================================================================================
Supplemental Disclosure of Cash Flow
Information
Cash paid during the period for
interest $ 438,984 $ 459,255 $ 474,760
- -------------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
6
COMMERCIAL PROPERTIES 1, L.P.
AND CONSOLIDATED VENTURES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
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 General Partners expect to liquidate the Partnership in
1999.
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. On September 28, 1998 GSH sold its general partner
and limited partner interests in GSHH to The St. Joe Company, an unaffiliated
company. The transactions 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 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 and were no longer depreciated or amortized. 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.
<PAGE>
7
COMMERCIAL PROPERTIES 1, L.P.
AND CONSOLIDATED VENTURES
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.
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 are marketing the remaining properties for sale and
anticipate that they will be sold during 1999. 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.
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.
<PAGE>
8
COMMERCIAL PROPERTIES 1, L.P.
AND CONSOLIDATED VENTURES
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, 1998, the maximum
amount that the General Partners would be required to contribute is
approximately $373,000.
If upon 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 distributions
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, 1998, real estate held for sale consisted of two properties
acquired, directly or indirectly, by the Partnership. Purchase price amounts
exclude acquisition fees and other closing costs.
<TABLE>
<CAPTION>
Square Date
Property Name Feet Location Acquired Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
9
COMMERCIAL PROPERTIES 1, L.P.
AND CONSOLIDATED VENTURES
The joint venture partnership agreements substantially provide or provided 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. 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 $8,799,798 at December 31, 1998.
The estimated fair value of the two mortgage notes at December 31, 1998 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, and subsequently to April 30, 1999 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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
First mortgage note payable in monthly installments of
$23,278 including interest at 9.375%, through
April 30, 1999, the date the entire unpaid
principal is due. $1,762,055 $1,870,609
First mortgage note payable in monthly installments of
$33,154, including interest at 10.125%, through
April 30, 1999, the date the entire unpaid
principal is due. 2,577,593 2,707,239
- -------------------------------------------------------------------------------
$4,339,648 $4,577,848
========== ==========
</TABLE>
6. Rental Income Under Operating Leases
Future minimum rental income to be received on operating leases as of December
31, 1998 is as follows:
<TABLE>
<CAPTION>
Year Amount
--------------------------------------------------
<S> <C>
1999 $2,412,049
2000 1,649,576
2001 811,945
2002 226,347
2003 33,543
--------------------------------------------------
$5,133,460
==========
</TABLE>
<PAGE>
10
COMMERCIAL PROPERTIES 1, L.P.
AND CONSOLIDATED VENTURES
7. 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, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Unpaid at Earned
December 31, --------------------------------------
1998 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RE Services and affiliates
Out-of-pocket expenses $ -- $ 2,352 $ 4,308 $ 6,365
HS Advisors and affiliates
Out-of-pocket expenses -- 3,215 -- 1,218
Property management
fees (GSH) 4,800 139,973 186,366 183,598
- -------------------------------------------------------------------------------
$ 4,800 $145,540 $190,674 $191,181
=================================================
</TABLE>
To facilitate the ability to sell the remaining two Properties, the Partnership
entered into agreements with its joint venture partner in both Properties on
April 8, 1998, whereby the joint venture partner waived its right of first
refusal to buy each property. The joint venture partner was paid $25,000 for
each waiver.
8. Reconciliation of Financial Statement Net Income
to Federal Income Tax Basis Net Income
Reconciliation of financial statement net income to federal income tax basis net
income:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial statement net income $ 501,135 $ 7,382,420 $ 96,543
Tax basis depreciation over financial
statement depreciation (559,236) (1,308,992) 279,903
Gain on sale -- 1,983,272 --
Adjustment for deferred rent, free rent (1,099) (81,631) (77,649)
Adjustment for bad debt expense (5,111) 5,394 16,960
Adjustment for amortization (61,167) (357,472) --
Adjustment for minority interest (208,380) (181,647) --
Minority interest 421,376 534,093 --
Other miscellaneous adjustments 85 380 5,141
- -------------------------------------------------------------------------------
Federal income tax basis net income $ 87,603 $ 7,975,817 $ 320,898
===============================================================================
</TABLE>
<PAGE>
11
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
- -------------------------------------------------------------------------------
General and Limited 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, 1998 and 1997,
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, 1998. 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, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepting accounting principles.
/s/ERNST & YOUNG LLP
New York, New York
February 5, 1999
<PAGE>
12
- --------------------------------------------------------------------------------
NET ASSET VALUATION
- --------------------------------------------------------------------------------
Comparison of Acquisition Costs to Estimated Value and Determination
of Net Asset Value Per $205.50 Unit at December 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
Acquisition Cost
(Purchase Price Partnership's
Plus General Share of
Partners' December 31,
Date of Acquisition 1998 Estimated
Property Acquisition Fees) Value(1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Watkins Center(2) 05-26-82 $6,468,661 $ 9,574,000
Dawson Business Center 01-25-83 3,514,325 4,551,000
---------- -----------
$9,982,986 14,125,000
==========
Cash and cash equivalents 2,123,556
Restricted cash 207,013
Rent receivable, net of allowance
for doubtful accounts 14,956
Other assets 20,347
-----------
16,490,872
Less:
Total liabilities - net of mortgage notes 385,740
-----------
Partnership Net Asset Value(3) $16,105,132
===========
Net Asset Value Allocated:
Limited Partners $16,017,853
General Partners 87,279
-----------
$16,105,132
===========
Net Asset Value Per Unit
(75,000 units outstanding) $ 213.57
- -------------------------------------------------------------------------------
<FN>
(1) This represents the Partnership's share of the December 31, 1998 estimated
values for Watkins Center and Dawson Business Center which were determined
by the General Partners, with the assistance of the broker engaged to market
the properties. The Partnership's share of the December 31, 1998 estimated
value 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 Partnership's share of the December 31, 1998
estimated values are net of the outstanding mortgage loan balances at the
time of acquisition and at December 31, 1998, respectively.
(3) The Net Asset Value assumes a hypothetical sale on December 31, 1998 of the
Partnership's properties at their estimated values and the distribution of
the net proceeds to Limited Partners in the liquidation of the Partnership.
Real estate brokerage commissions and other costs associated with selling
the Partnership's properties are not determinable at this time and as such
are not included in the calculation. Since the Partnership would incur these
expenses in the sale of its properties cash available for the distribution
to the Partners would be less than the Net Asset Value. The current market
value of the Units may differ substantially from their Net Asset Value.
</FN>
</TABLE>
Limited Partners should note that properties' values are estimated and the
actual values realizable upon sale may be significantly different. The estimated
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 estimated
value of the Partnership's properties and the price at which Units of the
Partnership could be sold may 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.
<PAGE>
13
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1998
<TABLE>
<CAPTION>
Real Estate Assets held for Disposition
Dawson
Consolidated Ventures: Watkins Center Business Center Total
Location Norcross, GA Norcross, GA na
<S> <C> <C> <C>
Construction date 1977-1980 1982 na
Acquisition date 05-26-82 01-25-83 na
Life on which depreciation in
latest income statements is
computed (1) (1) (1)
Encumbrances $ 4,339,648 $ -- $ 4,339,648
Initial cost to Partnership:
Land 1,938,440 506,336 2,444,776
Buildings and improvements 12,920,230 3,010,736 15,930,966
Costs capitalized subsequent
to acquisition:
Land -- -- --
Buildings and improvements 1,954,611 386,947 2,341,558
Property leasing cost, net 174,355 41,624 215,979
Deferred rent 109,315 55,738 165,053
Gross amount at which carried
at close of period(2):
Land 1,938,440 506,336 2,444,776
Buildings and improvements 14,874,841 3,397,683 18,272,524
Property leasing cost, net 174,355 41,624 215,979
Deferred rent 109,315 55,738 165,053
-------------------------------------------------
17,096,951 4,001,381 21,098,332
-------------------------------------------------
Accumulated depreciation(3) $ 8,013,484 $1,731,952 $ 9,745,436
- --------------------------------------------------------------------------------------
<FN>
(1) Buildings and improvements - 40 years; personal property - 10 years.
(2) For Federal income tax purposes, the basis of the land, building and improvements
is $19,347,702.
(3) For Federal income tax purposes, the amount of accumulated depreciation is
$10,948 230.
</FN>
</TABLE>
A reconciliation of the carrying amount of real estate and accumulated
depreciation for the years ended December 31, 1998, 1997, and 1996 is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real estate investments:
Beginning of year $20,908,832 $ 34,384,913 $33,052,706
Additions 189,500 687,706 739,672
Net, prepaid leasing costs - reclassified -- -- 379,758
Deferred rent receivable - reclassified -- -- 215,389
Deletions -- (14,163,787) (2,612)
End of year $21,098,332 $ 20,908,832 $34,384,913
-------------------------------------------
Accumulated depreciation:
Beginning of year $ 9,745,436 $ 15,278,335 $13,642,791
Depreciation expense -- -- 1,638,156
Deletions -- (5,532,899) (2,612)
End of year $ 9,745,436 $ 9,745,436 $15,278,335
- -------------------------------------------------------------------------------------
</TABLE>
EXHIBIT 23
Consent of Independent Auditors
<PAGE>
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 5, 1999, included
in the 1998 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.
/s/ERNST & YOUNG LLP
New York, New York
February 5, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 2,123,556
<SECURITIES> 000
<RECEIVABLES> 29,028
<ALLOWANCES> 14,072
<INVENTORY> 000
<CURRENT-ASSETS> 2,138,512
<PP&E> 11,352,896
<DEPRECIATION> 000
<TOTAL-ASSETS> 13,718,768
<CURRENT-LIABILITIES> 4,725,388
<BONDS> 000
000
000
<COMMON> 000
<OTHER-SE> 7,200,519
<TOTAL-LIABILITY-AND-EQUITY> 13,718,768
<SALES> 000
<TOTAL-REVENUES> 2,959,806
<CGS> 000
<TOTAL-COSTS> 000
<OTHER-EXPENSES> 1,574,371
<LOSS-PROVISION> 23,940
<INTEREST-EXPENSE> 438,984
<INCOME-PRETAX> 000
<INCOME-TAX> 000
<INCOME-CONTINUING> 501,135
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> 501,135
<EPS-PRIMARY> 6.01
<EPS-DILUTED> 6.01
</TABLE>
