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: November 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-11763
COMMERCIAL PROPERTIES 2, L.P.
(formerly Hutton/GSH Commercial Properties 2)
Exact name of registrant as specified in its charter
Virginia 13-3130258
State or other jurisdiction of incorporation I.R.S.
Employer Identification No.
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) 526-3237
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 June 3, 1983 (included in
Amendment No. 2 to Registration Statement, No. 2-79072, of registrant
filed June 1, 1983) are incorporated by reference into Part III.
Portions of Parts I, II and IV are incorporated by reference to the
Registrant's Annual Report to Unitholders for the year ended
November 30, 1996 filed as an exhibit under Item 14.
PART I
Item 1. Business
(a) General Development of Business
Commercial Properties 2, L.P. (the "Registrant" or the "Partnership")
(formerly known as Hutton/GSH Commercial Properties 2) is a Virginia
limited partnership organized pursuant to a Certificate and Agreement
of Limited Partnership dated September 1, 1983, of which Real Estate
Services VII, Inc. ("RE Services"), formerly Hutton Real Estate
Services VII, Inc. (see Item 10. "Certain Matters Involving
Affiliates"), and HS Advisors III, Ltd. ("HS Advisors") are the
general partners (collectively, the "General Partners"). Commencing
June 3, 1983, the Registrant began offering through E.F. Hutton &
Company Inc. up to a maximum of 100,000 units of limited partnership
interests (the "Units") at $500 per Unit. The Units were registered
under the Securities Act of 1933, as amended, under Registration
Statement No. 2-79072, which Registration Statement was declared
effective on June 3, 1983. The offering of Units was terminated on
September 1, 1983. Upon the termination of the offering, the
Registrant had accepted subscriptions for 100,000 Units for an
aggregate of $50,002,000, including the General Partners' capital
contributions. As of November 30, 1996, all of the proceeds available
for investment in real estate have been invested.
Since the inception of operations, the Registrant has acquired and
disposed of an interest as the general partner in the following
limited partnerships: (i) 14800 Quorum Associates, Ltd., a Texas
limited partnership formed to own and operate the Quorum I Office
Building; and (ii) First Trade Center Office Associates, a Maryland
limited partnership formed to own and operate the Maryland Trade
Center Building II. The Registrant had also acquired interests in the
following joint ventures: (i) Two Financial Centre Associates Joint
Venture, an Arkansas joint venture partnership formed to own and
operate Two Financial Centre; (ii) Maitland Building C Joint Venture,
a Florida joint venture partnership formed to own and operate Maitland
Center Office Building C; and (iii) Gamma Building Associates Joint
Venture, a California joint venture partnership formed to own and
operate Swenson Business Park - Building C. For further descriptions
of the properties, see Note 5 "Real Estate Investments" of the Notes
to the Consolidated Financial Statements of the Partnership's Annual
Report to Unitholders for the year ended November 30, 1996 filed as an
exhibit under Item 14. (The three buildings described immediately
above are collectively referred to herein as the "Properties"). To
the extent that funds held as a working capital reserve have not been
expended (and have not otherwise been distributed to the limited
partners as a return of capital), the Registrant has invested such
funds in bank certificates of deposit, unaffiliated money market funds
or other highly liquid short-term investments where there is
appropriate safety of principal, in accordance with the Registrant's
investment objectives and policies.
(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
Incorporated by reference to Note 1 "Organization" of the Notes to the
Consolidated Financial Statements in the Partnership's Annual Report
to Unitholders for the year ended November 30, 1996 filed as an
exhibit under Item 14.
The Registrant's principal investment objectives with respect to the
Properties (in no particular order of priority) are:
1) Capital appreciation;
2) Distributions of net cash from operations attributable to rental
income; and
3) Preservation and protection of capital.
Distributions of net cash from operations will be the Registrant's
objective during its operational phase, while the preservation and
appreciation of capital will be the Registrant's long-term
objective. Future distributions will be made from rental
operations with respect to the Registrant's investment in the
Properties, as well as from interest on short-term investments and
net proceeds from sale of the Properties. 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
Properties are located, especially with regard to achievement of
capital appreciation.
From time to time the Registrant expects to sell its Properties,
taking into consideration such factors as market conditions, leasing
conditions, net sales proceeds to be realized, and the possible risks
of continued ownership. No property will be sold, financed or
refinanced by the Registrant without the agreement of both General
Partners. Proceeds from any future sale, financing or refinancing of
the Properties will be distributed to the partners to the extent there
is sufficient working capital to meet future operating expenses of the
Partnership. As part of the payment for Properties sold, the
Registrant may receive purchase money obligations secured 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 partners) until such obligations are realized in
cash, sold or otherwise liquidated.
On July 31, 1989, First Trade Center Office Associates Limited
Partnership sold the Maryland Trade Center II property to an
unaffiliated pension fund for an aggregate sale price of $22,400,000.
First Trade Center Office Associates was composed of the Registrant
and the developer of the property (the "Joint Venture Partners"). The
Registrant received proceeds in the amount of $17,427,548,
representing the total sales price net of closing costs and
distributions made to the Joint Venture Partner. In addition, the
Registrant received $208,982 which represented cash held at the
property level.
During 1989, the Registrant loaned $7,201,320 in the form of a demand
promissory note to the Two Financial Centre Associates Joint Venture ("TFC") in
which the Registrant is the managing venturer. The note was issued to enable
TFC to pay the mortgage on Two Financial Centre, which had been accelerated,
and to prevent foreclosure by the lender. On September 17, 1990, the demand
promissory note was reissued in the principal amount of $7,383,033 which
includes the original principal of $7,201,320 and accrued interest of $181,713.
Information pertaining to the loan to TFC is incorporated herein by reference
to Note 6 "Loan to Two Financial Centre Joint Venture" of the Notes to the
Consolidated Financial Statements of the Partnership's Annual Report to
Unitholders for the year ended November 30, 1996 filed as an exhibit under Item
14.
On April 4, 1991, the Registrant purchased the 2.5% joint venture
interest held by Boyle Investment Company, successor-in-interest to
Boyle Investment Company of Florida, Inc., in the Maitland Building C
Joint Venture. As a result of this transaction, the Maitland
property, previously owned by the Maitland Building C Joint Venture,
is now wholly-owned by the Partnership.
(d) Competition
Incorporated by reference to the section entitled Property Profiles &
Leasing Update in the Partnership's Annual Report to Unitholders for
the year ended November 30, 1996 filed as an exhibit under Item 14.
(e) Employees
The Registrant has no employees.
Item 2. Properties
Description of Properties and material leases is incorporated herein
by reference to the section entitled Property Profiles & Leasing
Update in the Partnership's Annual Report to Unitholders for the year
ended November 30, 1996 filed as an exhibit under Item 14 and Note 5
"Real Estate Investments" of the Notes to the Consolidated Financial
Statements.
Item 3. Legal Proceedings
The Registrant is not subject to any material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of Unitholders during the fourth
quarter of 1996.
PART II
Item 5. Market for Registrant's Limited Partnership Units and Related
Unitholder Matters
(a) Market Information
No established public trading market has developed for the Units, and
it is not anticipated that such a market will develop in the future.
(b) Holders
As of November 30, 1996, the number of holders of Units was 3,718.
(c) Distributions
Cash distributions paid to the Limited Partners for the two years
ended November 30, 1996 and 1995 are incorporated herein by reference
to the section entitled Message to Investors in the Partnership's
Annual Report to Unitholders for the year ended November 30, 1996
filed as an exhibit under Item 14.
Item 6. Selected Financial Data
(dollars in thousands, except per Unit data)
1996 1995 1994 1993 1992
Total Income $ 3,781 $ 3,605 $ 3,660 $ 3,345 $ 2,954
Net Income 740 597 674 396 90
Total Assets at Year End 20,369 22,201 23,169 25,905 29,076
Net Cash From Operations 2,266 1,878 1,983 1,438 1,247
Net Income per
Limited Partnership Unit: 7.33 5.91 6.67 3.92 .89
Cash Distributions per
Limited Partnership Unit: 27.00@ 315.75# 234.00* 17.00* 30.00*
* Represent returns of capital associated with the sale of the
Maryland Trade Center in 1989.
# Includes returns of capital associated with the sale of the
Maryland Trade Center in 1989 in the amount of $3.64 per Unit.
@ Includes a special cash distribution in the amount $10 per Unit
paid on August 15, 1996.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
The Registrant had cash and cash equivalents at November 30, 1996 of
$1,739,498 as compared with $2,461,901 at November 30, 1995. The
decrease is a result of the payment of cash distributions and capital
expenditures in the amounts of $2,727,273 and $260,828, respectively,
in excess of net cash provided by operations. Net cash provided by
operations totaled $2,265,698 for the year ended November 30, 1996 as
compared with $1,877,809 for the year ended November 30, 1995. The
increase is primarily attributable to an increase in rental income,
accounts payable and accrued expenses. The Registrant had a
restricted cash balance of $166,795 at November 30, 1996 which is
primarily made up of security deposits. Prepaid expenses decreased to
$312,834 at November 30, 1996 as compared with $396,567 for the
comparable period in 1995, primarily due to the amortization of leasing
commissions in 1996. Deferred rent receivable totaled $135,289 at
November 30, 1996 as compared with $168,625 at November 30, 1995. The
decrease is attributable to the straight-line amortization of base
rental income at Swenson Business Park. The Registrant expects
sufficient cash flow from operations to be generated by the Properties
to meet its current operating requirements.
Accounts payable and accrued expenses increased to $405,275 at
November 30, 1996 as compared to $256,461 a year earlier, primarily
due to the timing of real estate tax payments at Maitland Center
Office Building C.
A discussion of material leases at all of the Partnership's properties
is incorporated herein by reference to the sections entitled Message
to Investors and Property Profiles & Leasing Update contained in the
Partnership's Annual Report to Unitholders for the year ended November
30, 1996 filed as an exhibit under Item 14.
The Registrant paid cash distributions to the Limited Partners of $27
per Unit for the year ended November 30, 1996, including a distribution
of $4.25 per Unit for the fourth quarter of the 1996 fiscal year, which
was paid on January 15, 1997. Also included in this amount is a special
cash distribution in the amount of $10 per Unit paid by the Partnership
on August 15, 1996, which was funded from the Partnership's cash reserves.
Further details regarding cash distributions are incorporated herein by
reference to the section entitled Message to Investors contained in
the Partnership's Annual Report to Unitholders for the year ended
November 30, 1996 filed as an exhibit under Item 14.
On March 15, 1996, based upon, among other things, the advice of legal
counsel, Skadden, Arps, Slate, Meagher & Flom, the General Partners
adopted a resolution that states, among other things, if a Change of
Control (as defined below) occurs, the General Partners may distribute
the Partnership's cash balances not required for its ordinary course
day-to-day operations. "Change of Control" means any purchase or
offer to purchase more than 10% of the Units that is not approved in
advance by the General Partners. In determining the amount of the
distribution, the General Partners may take into account all material
factors. In addition, the Partnership will not be obligated to make
any distribution to any partner, and no partner will be entitled to
receive any distribution, until the General Partners have declared the
distribution and established a record date and distribution date for
the distribution.
Results of Operations
1996 Versus 1995
Partnership operations resulted in net income of $739,910 for the year
ended November 30, 1996 as compared to $596,558 for the year ended
November 30, 1995. The increase of $143,352 is primarily due to
higher rental income in 1996.
Rental income increased to $3,660,110 for the year ended November 30,
1996 from $3,450,755 for the same period in 1995, primarily due to
higher average occupancy at both Two Financial Centre and Maitland
Center Office Building C during 1996. Interest income decreased to
$116,034 for the year ended November 30, 1996 from $149,624 a year
earlier as a result of the Partnership's lower average cash balance
during 1996.
Property operating expenses totaled $1,447,759 for the year ended
November 30, 1996, relatively unchanged from $1,465,964 a year
earlier. Depreciation and amortization totaled $1,369,375 for the
year ended
November 30, 1996 versus $1,347,080 for the year ended November 30,
1995.
As of November 30, 1996, occupancy levels at each of the properties
were as follows: Two Financial Centre - 97%; Maitland Center Office
Building C - 100%; and Swenson Business Park, Building C - 100%.
1995 Versus 1994
Partnership operations resulted in net income of $596,558 for the year
ended November 30, 1995 as compared to $673,843 for the year ended
November 30, 1994. The decrease of $77,285 was primarily due to lower
rental income largely resulting from lower average occupancy at Two
Financial Centre in 1995. Interest income increased to $149,624 for
the year ended November 30, 1995 from $116,399 a year earlier as a
result of the Partnership's higher average cash balance during 1995.
Property operating expenses totaled $1,465,964 for the year ended
November 30, 1995, relatively unchanged from $1,427,276 a year
earlier. Depreciation and amortization totaled $1,347,080 for the
year ended November 30, 1995 versus $1,369,956 for the year ended
November 30, 1994.
As of November 30, 1995, occupancy levels at each of the properties
were as follows: Two Financial Centre - 95%; Maitland Center Office
Building C - 94%; and Swenson Business Park - Building C - 100%.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to the Partnership's Annual Report to
Unitholders for the year ended
November 30, 1996 filed as an exhibit under Item 14.
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. Real Estate Services
VII, Inc. and HS Advisors III Ltd., 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.
The directors and executive officers of Real Estate Services VII, Inc.
and HS Advisors III Ltd., are listed respectively below:
Real Estate Services VII, Inc.
Real Estate Services VII, Inc., formerly known as Hutton Real Estate
Services VII, Inc., is a Delaware corporation formed on August 2, 1982
and is an indirect, wholly-owned subsidiary of Lehman Brothers Inc.
("Lehman"). See the section captioned "Certain Matters Involving
Affiliates" below for a description of the sale of certain of Shearson
Lehman Brothers, Inc.'s ("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 Real Estate Services VII, Inc. are
set forth below. There are no family relationships between any
officer or director and any other officer or director.
Certain officers and directors of Real Estate Services VII, Inc. are
now serving (or in the past have served) as officers and 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 such real estate is
located and, consequently, the partnerships sought the protection of
the bankruptcy laws to protect the partnership's assets from loss
through foreclosure.
Name Office
Rocco F. Andriola Director, President, Chief Executive Officer,
Chief Operating Officer and Chief Financial Officer
Michael Marron Vice President
John H. Ng Vice President
Kenneth Zakin Director, Vice President
William Caulfield Vice President
Rocco F. Andriola, 38, 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, 33, 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 a B.S.
degree from the State University of New York at Albany in 1985 and is
a Certified Public Accountant.
John H. Ng, 46, is a Vice President of Lehman Brothers Inc. and has
been employed by Lehman since November 1977. He is an asset manager
of the Diversified Asset Group of Lehman and has held such position
since 1985. From 1980 to 1985, Mr. Ng served as Senior Financial
Analyst in the Corporate Planning and Development Department and from
1977 to 1980 he was an analyst in the Controller's Department. Prior
to joining Lehman, he served as a Teaching Assistant in Finance and
Economics at the University of Minnesota. Mr. Ng received an M.B.A.
with a concentration in Corporate Finance from the University of
Minnesota in 1977 and a B.A. magna cum laude in Economics with a
specialization in Monetary Economics from Moorhead State University in
1975.
Kenneth L. Zakin, 48, is a Senior Vice President of Lehman Brothers
and has held such title since November 1988. He is currently a senior
manager in Lehman's Diversified Asset Group and was formerly group
head of the Commercial Property Division of Shearson Lehman Brothers'
Direct Investment Management Group responsible for the management and
restructuring of limited partnerships owning commercial properties
throughout the United States. From January 1985 through November
1988, Mr. Zakin was a Vice President of Shearson Lehman Brothers Inc.
Mr. Zakin is a director of Lexington Corporate Properties, Inc. He is
a member of the Bar of the State of New York and previously practiced
as an attorney in New York City from 1973 to 1984 specializing in the
financing, acquisition, disposition, and restructuring of real estate
transactions. Mr. Zakin is a member of the Real Estate Lender's
Association and is currently an associate member of the Urban Land
Institute and a member of the New York District Council Advisory
Services Committee. He received a Juris Doctor degree from St. John's
University School of Law in 1973 and a B.A. degree from Syracuse
University in 1969.
William Caulfield, 36, is a Vice President of Lehman Brothers and is
responsible for investment management of commercial real estate in the
Diversified Asset Group. Prior to the Shearson/Hutton merger in 1988,
Mr. Caulfield was a Senior Analyst with E.F. Hutton since October 1986
in Hutton's Partnership Administration Group. Before joining Hutton,
Mr. Caulfield was a Business Systems Analyst at Eaton Corp. from 1985
to 1986. Prior to Eaton, he was an Assistant Treasurer with National
Westminster Bank USA. Mr. Caulfield holds a B.S. degree in Finance
from St. John's University and an M.B.A. from Long Island University -
C.W. Post Campus.
HS Advisors III, Ltd.
HS Advisors is a California limited partnership formed on August 11,
1982, the sole general partner of which is Hogan Stanton Investment,
Inc. ("HS Inc."), a wholly-owned subsidiary of Goodman Segar Hogan,
Inc. ("GSH"). 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
Donald T. Herrick, Jr. Vice President and Treasurer
Julie R. Adie Vice President and Secretary
Mark P. Mikuta, 43, is Senior Vice President of Goodman Segar Hogan,
Inc. and is Vice President and Controller of Dominion Capital, Inc., a
wholly-owned subsidiary of Dominion Resources. Mr. Mikuta joined
Dominion Resources in 1987. Prior to joining Dominion Resources, he
was an internal auditor with Virginia Commonwealth University in
Richmond, Virginia from 1980 - 1987 and an accountant with Coopers &
Lybrand from 1977 - 1980. Mr. Mikuta earned a bachelor of science
degree in accounting from the University of Richmond in 1977. He is a
Certified Public Accountant (CPA) and Certified Financial Planner
(CFP) in the state of Virginia and a member of the American Institute
of Certified Public Accountants.
Donald T. Herrick, Jr., 53, is President of Goodman Segar Hogan, Inc.
He is also President of Dominion Lands, Inc. and Vice President of
Dominion Capital, Inc., both of which are wholly-owned subsidiaries of
Dominion Resources, Inc. Mr. Herrick joined Dominion Resources in
1970. He earned a Bachelor of Business Administration degree from the
University of Michigan in 1965 and a Masters of Business
Administration from American University in 1969. Mr. Herrick has
completed all course work towards the M.A.I. designation.
Julie R. Adie, 42, is a Vice President of Goodman Segar Hogan, Inc.
and Senior Vice President of Goodman Segar Hogan Hoffler, L.P.
("GSHH"). She is responsible for investment management of a
commercial real estate portfolio for the company's Asset Management
Division. Prior to GSHH, Ms. Adie was an asset manager with Aetna
Real Estate Investors from 1986 to 1988. Ms. Adie practiced as an
attorney from 1978 through 1984 and is currently a member of the
Virginia Bar Association. She holds a B.A. Degree from Duke
University, a Juris Doctor from University of Virginia and an M.B.A.
from Dartmouth College.
Certain Matters Involving Affiliates
On July 31, 1993 Shearson 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. The transaction did not affect the ownership of the
General Partners. However, the assets acquired by Smith Barney
included the name "Hutton." Consequently, Hutton Real Estate Services
VII, Inc., a General Partner, changed its name to Real Estate Services
VII, Inc. Additionally, effective August 3, 1995, the Partnership
changed its name to Commercial Properties 2, 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 ("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 1% interest in GSHH.
The stockholders of GSHH Inc. are GSH with a 62% interest and H.K.
Associates, L.P., an affiliate of HK, with a 38% interest. The
remaining interests in GSHH are limited partnership interests owned by
GSH, HK and 23 employees of GSHH. The transaction did not affect the
ownership of the General Partners.
Item 11. Executive Compensation
Neither of the General Partners nor any of their directors and
officers received any compensation from the Registrant. See Item 13
below with respect to a description of certain transactions of the
General Partners and their affiliates with the Registrant.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
(a) Security Ownership of Certain 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 November 30, 1996.
(b) Security Ownership of Management
No officer or director of the General Partners beneficially owned or
owned of record directly or indirectly any Units of the Registrant as
of November 30, 1996.
(c) Changes In Control
None.
Item 13. Certain Relationships and Related Transactions
Pursuant to the Certificate and Agreement of Limited Partnership of
the Registrant, for the year ended November 30, 1996, $7,399 of the
Registrant's net income was allocated to the General Partners
($3,699.50 to RE Services and $3,699.50 to HS Advisors). 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 the material contained on pages 75
through 78 of the Prospectus of Registrant dated June 3, 1983 (the
"Prospectus"), contained in Amendment No. 2 to Registrant's
Registration Statement No. 2-79072, under the section captioned
"Profits and Losses and Cash Distributions," which section is
incorporated herein by reference thereto.
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. Services with respect to
which GSH is entitled to receive a management fee are described under
the section captioned "Investment Objectives and Policies - Management
of Properties" on page 36 of 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. First Data Investor
Services Group (formerly The Shareholder Services Group) ("FDISG")
provides partnership accounting and investor relations services for
the Registrant. Prior to May 1993, these services were provided by an
affiliate of one of the General Partners. The Registrant's transfer
agent and certain tax reporting services are provided by Service Data
Corporation ("SDC"). Both FDISG and SDC are unaffiliated companies.
Disclosure relating to amounts paid to the General Partners or their
affiliates during the past three years is incorporated herein by
reference to Note 4 "Transactions with Related Parties" of Notes to
the Consolidated Financial Statements contained in the Partnership's
Annual Report to Unitholders for the year ended November 30, 1996
filed as an exhibit under Item 14.
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on
Form 8-K
(a) The following documents are filed as part of this report:
Page
Number
(1) Financial Statements:
Report of Independent Auditors (1)
Consolidated Balance Sheets - At November 30, 1996 and 1995 (1)
Consolidated Statements of Partners' Capital (Deficit) -
For the years ended November 30, 1996, 1995 and 1994 (1)
Consolidated Statements of Operations -
For the years ended November 30, 1996, 1995 and 1994 (1)
Consolidated Statements of Cash Flows -
For the years ended November 30, 1996, 1995 and 1994 (1)
Notes to the Consolidated Financial Statements (1)
(2) Financial Statement Schedules:
Schedule III - Real Estate and Accumulated Depreciation F-1
No other schedules are presented because either the information
is not applicable or is included in the consolidated financial
statements or notes thereto.
(1) Incorporated by reference to the Partnership's Annual Report to
Unitholders for the year ended November 30, 1996, which is filed as
an exhibit under Item 14.
(a)(3) See Exhibit Index contained herein.
(4)(A)
Certificate and Agreement of Limited Partnership (included
as, and incorporated herein by reference to, Exhibit A to
the Prospectus of Registrant dated June 3, 1983, contained
in Amendment No. 2 to the Registration Statement, No.
2-79072, of Registrant filed June 1, 1983).
(4)(B)
Subscription Agreement and Signature Page (included as, and
incorporated herein by reference to, Exhibit 3.1 to
Amendment No. 1 to Registration Statement No. 2-79072 of
Registrant filed May 25, 1983).
(10)(A)
Funding Commitment relating to Maitland Center Office
Building C, and the exhibits thereto (included as, and
incorporated herein by reference to, Exhibit (10)(A) to the
Registrant's Annual Report on Form 10-K filed
February 28, 1984).
(10)(B)
Agreement for Purchase and Sale relating to Quorum I Office
Building, and the exhibits thereto (included as, and
incorporated herein by reference to, Exhibit 28 to the
Registrant's Current Report on Form 8-K filed on or about
February 22, 1984).
(10)(C)
Agreements relating to Maryland Trade Center Building II
(included as, and incorporated herein by reference to,
Exhibit (10)(C) to the Registrant's Annual Report on Form
10-K filed February 28, 1985 (the "1984 Annual Report")).
(10)(D)
Funding Commitment relating to Swenson Business Park
Building C (included as, and incorporated herein by
reference to, Exhibit (10)(D) to the 1984 Annual Report).
(10)(E)
Agreements relating to Two Financial Centre Office Building
(included as, and incorporated herein by reference to,
Exhibit (10)(E) to the 1984 Annual Report).
(13)
Annual Report to the Unitholders for the year ended November 30, 1996.
(27) Financial Data Schedule
(28)
Portions of Prospectus of Registrant dated June 3, 1983
(included as, and incorporated herein by reference to,
Exhibit (28) to the Registrant's Annual Report on Form 10-K
filed February 27, 1988).
(b)(3) Reports on Form 8-K:
No reports on Form 8-K were filed in the fourth quarter of
the fiscal year 1996.
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 2, L.P.
BY: HS Advisors III, Ltd.
General Partner
BY: Hogan Stanton Investment, Inc.
General Partner
Date: February 28, 1997
BY: /s/Mark P. Mikuta
Mark P. Mikuta
President
BY: Real Estate Services VII, Inc.
General Partner
Date: February 28, 1997
BY: /s/Rocco F. Andriola
Name: Rocco F. Andriola
Title: Director, President, Chief
Executive Officer, Chief
Operating Officer and Chief
Financial Officer
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.
REAL ESTATE SERVICES VII, INC.
A General Partner
Date: February 28, 1997
BY: /s/Rocco F. Andriola
Rocco F. Andriola
Director, President, Chief
Executive Officer, Chief
Operating Officer and Chief
Financial Officer
Date: February 28, 1997
BY: /s/Kenneth L. Zakin
Kenneth L. Zakin
Director, Vice President
Date: February 28, 1997
BY: /s/Michael T. Marron
Michael T. Marron
Vice President
Date: February 28, 1997
BY: /s/John H. Ng
John H. Ng
Vice President
Date: February 28, 1997
BY: /s/William Caulfield
William Caulfield
Vice President
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 III, LTD.
A General Partner
Date: February 28, 1997
BY: /s/Mark P. Mikuta
Mark P. Mikuta
President of Hogan Stanton
Investment, Inc., as general
partner of HS Advisors III, Ltd.
Date: February 28, 1997
BY: /s/Donald T. Herrick, Jr.
Donald T. Herrick, Jr.
Vice President and Treasurer of
Hogan Stanton Investment, Inc.,
as general partner of
HS Advisors III, Ltd.
Date: February 28, 1997
BY: /s/Julie R. Adie
Julie R. Adie
Vice President and Secretary of
Hogan Stanton Investments, Inc.
as general partner of HS Advisors III, Ltd.
Exhibit 13
1996 Annual Report
Commercial Properties 2, L.P.
Commercial Properties 2, L.P. is a limited partnership
formed in 1983 to acquire, operate and hold for
investment commercial real estate. The Partnership's
investments currently consist of two commercial office
buildings and a research and development facility.
Provided below is a comparison of lease levels at the
properties as of November 30, 1996 and 1995.
Percentage
Leased
Property Location 1996 1995
Swenson Business Park - Building C San Jose, CA 100% 100%
Two Financial Centre Little Rock, AR 97%* 95%
Maitland Center Office - Building C Orlando, FL 100% 94%
* As of December 31, 1996, the lease level at the property declined to 83%.
Contents
1 Message to Investors
3 Property Profiles & Leasing Update
5 Consolidated Financial Statements
8 Notes to the Consolidated Financial Statements
13 Report of Independent Auditors
14 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: FinancialCommunications
800-223-3464 800-223-3464
Message to Investors
We are pleased to present the 1996 Annual Report for Commercial
Properties 2, L.P. (the "Partnership"). Included in this report
is a review of national market conditions, an update of the
Partnership's operations, and its financial highlights. Please
refer to the Property Profiles & Leasing Update section of this
report for additional information regarding local market
conditions for each of the Partnership's properties, as well as
their operating performance and respective lease levels at
November 30, 1996.
National Market Overview and Property Sales
The commercial office market continued to recover throughout the
year, particularly in the suburban office sector. Suburban
office vacancy rates declined to approximately 11% at year-end
1996 versus approximately 15% a year earlier. Overall, the
demand for office space continues to increase, causing lower
vacancy rates and, in many regions of the country, enabling
property owners to increase rental rates. In addition, the
availability of financing for investment in this sector has risen
substantially.
In view of these ongoing improvements in the national real estate
and capital markets, we believe that the current favorable market
environment may present opportunities to sell the Partnership's
properties. Accordingly, in light of the properties' stable high
occupancy rates, improved conditions in the markets where the
properties are located, and the recent extension of the Asante
lease at the Swenson property, the General Partners have selected
real estate brokers to assist in marketing for sale two of the
Partnership's three remaining properties, Swenson Business Park -
Building C in San Jose, California, and Maitland Center Office
Building C in Orlando, Florida. However, there can be no
assurance that the Partnership's current marketing efforts will
result in a sale of either property or that any sale, if
completed, will result in any particular price.
Cash Distributions
The Partnership paid cash distributions to limited partners
totaling $27 per Unit for the year ended
November 30, 1996, including a fourth quarter cash distribution of
$4.25 per Unit which was paid on
January 15, 1997. Since its inception, the Partnership has paid
total cash distributions of $280.51 per original $500 Unit,
including $182.64 per Unit in return of capital payments which
have reduced the Unit size from $500 to $317.36. The timing and
amount of future cash distributions will be determined quarterly
and will depend on the adequacy of the Partnership's cash
reserves to meet its future operating expenses. Additionally, in
the event that one or two of the Partnership's properties are
sold, it is anticipated that the amount of cash distributions
will be reduced to reflect the reduction in the Partnership's
operating cash flow.
Cash Distributions Per Limited Partnership Unit
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1995 $3.00 $4.25 $4.25 $4.25 $15.75
1996 $4.25 $4.25 $14.25* $4.25 $27.00
* Includes a special cash distribution of $10 per Unit paid on August 15, 1996.
Selected Financial Highlights
Provided below is a comparison of selected financial highlights
for the 12 months ended November 30, 1996 and 1995, respectively:
1996 1995
Total income $3,780,952 $3,604,637
Property operating expenses 1,447,759 1,465,964
Net income 739,910 596,558
Net cash provided by operating activities 2,265,698 1,877,809
- - Total income increased due to higher rental income resulting from increased
average occupancy at both Two Financial Centre and Maitland Center Office
Building C.
- - The slight decrease in property operating expenses was primarily a result of
lower insurance costs at Two Financial Centre and lower maintenance costs at
Swenson Business Park - Building C.
- - The increase in net income and net cash provided by operating activities in
1996 resulted primarily from higher rental income.
General Information
As you are probably aware, several third parties have commenced
tender offers to purchase Units of the Partnership at inadequate
prices which are substantially 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. Please be assured that if any additional tender
offers are made for your Units, we will endeavor to provide you
with information regarding our position with respect to those
offers on a timely basis.
Summary
The General Partners believe that both of the properties
currently being marketed are likely to be sold in 1997, and that
the net sales proceeds will subsequently be distributed to all
partners. Additionally, efforts are being made to increase
occupancy at Two Financial Centre in order to improve the
property's marketability and appeal. We will keep you apprised
of significant developments in future reports.
Very truly yours,
Real Estate Services VII, Inc. Hogan Stanton Investment, Inc.
General Partner General Partner of HS Advisors III, Ltd.
/s/Rocco F. Andriola /s/Mark P. Mikuta
Rocco F. Andriola Mark P. Mikuta
President President
February 28, 1997
Property Profiles & Leasing Update
SWENSON BUSINESS PARK-BUILDING C San Jose, California
Situated within a 65-acre business park which is located just north of central
San Jose in California, Swenson Building C is a 90,145 square foot research
and development facility. The property provides an attractive location for
many high technology companies due to its easy access to the San Jose Airport
and Interstate 880.
Leasing Update
Asante Technologies, Inc. ("Asante"), which leases 100% of the property's
space, has exercised an option to extend its lease for an additional two years
to September 1999. Asante is a designer of local area network products. The
lease with Asante generated $639,849 or approximately 17% of the Partnership's
consolidated revenues for 1996. Asante subleases approximately 14,000 square
feet of its space for which the Partnership receives $2,000 of monthly rental
income in excess of the allocable portion of the primary lease. Asante remains
responsible for all lease obligations to the Partnership through the scheduled
expiration of its lease. Asante's financial performance improved during 1996.
Its net loss for the year ended September 28, 1996 was reduced to $457,000 from
$3.7 million a year earlier. While Asante remains current on its rental
payments to the Partnership, we will continue to closely monitor its financial
performance.
Market Update
The continued expansion of the high-technology and biotechnology industry
contributed to the Silicon Valley's stable population growth and low
unemployment rate during the year, making the region one of the strongest
economies in the United States. The demand for space within the area's
research and development sector continued to increase throughout 1996, leading
to a decline in vacancy rates at year-end 1996 to approximately 3.1% from
approximately 4.9% one year earlier. The San Jose market, located within the
Silicon Valley, benefited from this increased demand as economic conditions in
the area remained very strong. Vacancy rates for research and development
space in San Jose fell to 3.2% as of year-end 1996 from 4.8% a year earlier.
The area also experienced an increase in rental rates throughout the year,
which have contributed to significant increases in the values of most
properties. Consequently, we are currently marketing the property for sale.
However, there can be no assurance that the current marketing efforts will
result in a sale of the property or that any sale, if completed, will result in
any particular price.
TWO FINANCIAL CENTRE Little Rock, Arkansas
Situated in the Financial Centre Complex in West Little Rock, Two Financial
Centre is a 113,983 square foot, four-story brick office building. The
property is located near two interstate highways, I-630 and I-430, affording
easy access to downtown Little Rock and the Little Rock Regional Airport.
Leasing Update
During the year, the General Partners executed a new five-year lease
representing 5,388 square feet. Additionally, one tenant leasing 1,254 square
feet renewed its space for three years and another tenant leasing 450 square
feet renewed its space for one year. As a result, the property was 97% leased
at November 30, 1996, as compared to 95% for the same period in 1995. However,
in December 1996, two tenants leasing a total of 16,104 square feet, or
approximately 14% of the property's leasable area, vacated their spaces upon
the scheduled expiration of their leases. The property's leasing agent is
aggressively marketing such vacant space. During the upcoming year, five
leases totaling 10,653 square feet or approximately 9% of the property's
leasable space are scheduled to expire.
Two of the property's leases generated rental income in excess of 10% of the
Partnership's consolidated revenues for 1996. One of such leases, representing
31,729 square feet or 28% of the property's leasable area, is scheduled to
expire in July 1998, while the other lease, representing 29,972 square feet or
26% of the property's leasable area, is scheduled to expire in June 2000.
Rental income from these tenants for fiscal 1996 was $460,611 and $471,476,
respectively, or approximately 13% of the Partnership's consolidated rental
income.
Market Update
The Little Rock office market remained relatively stable during the year and
the area's overall vacancy rate for office properties remained at 10% for
year-end 1996 compared with a year earlier. The leasing environment in West
Little Rock, the submarket where Two Financial Centre is located, remained very
competitive during the year, primarily due to the construction of three new
commercial office buildings which were completed in late 1996 and early 1997.
Nevertheless, the West Little Rock office market improved during 1996 as
evidenced by a decrease in the area's overall vacancy rate for office
properties to 6% at year-end 1996 from 8% at the end of 1995. As a result,
rental rates increased and property values have begun to recover. In light of
the property's vacant space and current status of the market, the General
Partners currently do not anticipate marketing Two Financial Centre for sale
until its occupancy has improved. We will continue our efforts to lease the
vacant space at the property and determine the opportune time to begin
marketing the property for sale.
MAITLAND CENTER OFFICE BUILDING C Orlando, Florida
Maitland Center Office Building C is a 98,096 square foot, three- story brick
and glass office building located in Maitland Center Office Park, a 230-acre
development in northwest metropolitan Orlando.
Leasing Update
During 1996, the General Partners executed two new leases representing 3,076
square feet and one lease expansion for 1,155 square feet. Additionally, a
three-year lease renewal was executed with a major tenant occupying 15,479
square feet (approximately 16% of the property's leasable space) whose lease
was scheduled to expire in January 1996. However, one tenant leasing 1,155
square feet vacated its space during the year. Overall, the property was 100%
leased as of November 30, 1996, as compared with 94% leased one year earlier.
Three leases totaling 23,457 square feet are scheduled to expire during 1997.
One of these tenants, leasing 19,560 square feet, has indicated that it intends
to renew its lease and to possibly reduce its space. None of the property's
tenants generated rental income in excess of 10% of the Partnership's
consolidated rental income during 1996.
Market Update
The Orlando economy continued to be one of the strongest in the country in
1996. With increased population growth and tourism, Orlando's businesses have
flourished, which has in turn caused a further increase in demand for office
space. The overall vacancy rate in Orlando decreased to 7.6% at December 31,
1996 as compared to 10.4% the previous year. The Maitland Center submarket,
the largest submarket outside of downtown Orlando, also benefited greatly from
these improvements. Despite the relocation of several large companies out of
the Maitland submarket into build-to-suit facilities in 1996, the submarket's
vacancy rate remained relatively unchanged from a year earlier at 3.4%, and as
a result, rental rates have increased. Consequently, we are currently marketing
the property for sale. However, there can be no assurance that the current
marketing efforts will result in a sale of the property or that any sale, if
completed, will result in any particular price.
Consolidated Balance Sheets At November 30, At November 30,
1996 1995
Assets
Real estate, at cost:
Land $5,216,878 $5,216,878
Buildings and improvements 24,607,258 24,673,883
29,824,136 29,890,761
Less accumulated depreciation (11,944,782) (11,038,346)
17,879,354 18,852,415
Cash and cash equivalents 1,739,498 2,461,901
Restricted cash 166,795 174,919
Rent and other receivables, net of allowance for
doubtful accounts of $7,275 in 1996 and 1995 134,924 146,963
Prepaid expenses, net of accumulated amortization of
$1,182,166 in 1996 and $1,046,680 in 1995 312,834 396,567
Deferred rent receivable 135,289 168,625
Total Assets $20,368,694 $22,201,390
Liabilities and Partners' Capital (Deficit)
Liabilities:
Accounts payable and accrued expenses $405,275 $256,461
Due to affiliates 42,846 38,275
Distribution payable 429,293 429,293
Security deposits payable 157,126 155,844
Total Liabilities 1,034,540 879,873
Partners' Capital (Deficit):
General Partners (233,230) (213,356)
Limited Partners (100,000 units outstanding) 19,567,384 21,534,873
Total Partners' Capital 19,334,154 21,321,517
Total Liabilities and Partners' Capital $20,368,694 $22,201,390
Consolidated Statement of Partners' Capital (Deficit)
For the years ended November 30, 1996, 1995 and 1994
General Limited
Partners Partners Total
Balance at November 30, 1993 $(175,808) $25,252,176 $25,076,368
Net income 6,738 667,105 673,843
Distributions (34,343) (3,400,000) (3,434,343)
Balance at November 30, 1994 (203,413) 22,519,281 22,315,868
Net income 5,966 590,592 596,558
Distributions (15,909) (1,575,000) (1,590,909)
Balance at November 30, 1995 (213,356) 21,534,873 21,321,517
Net income 7,399 732,511 739,910
Distributions (27,273) (2,700,000) (2,727,273)
Balance at November 30, 1996 $(233,230) $19,567,384 $19,334,154
Consolidated Statements of Operations
For the years ended November 30, 1996 1995 1994
Income
Rental $3,660,110 $3,450,755 $3,538,864
Interest 116,034 149,624 116,399
Other 4,808 4,258 4,910
Total Income 3,780,952 3,604,637 3,660,173
Expenses
Property operating 1,447,759 1,465,964 1,427,276
Depreciation and amortization 1,369,375 1,347,080 1,369,956
General and administrative - other 185,513 164,227 167,532
General and administrative - affiliates 38,395 30,808 21,566
Total Expenses 3,041,042 3,008,079 2,986,330
Net Income $ 739,910 $ 596,558 $ 673,843
Net Income Allocated:
To the General Partners $ 7,399 $ 5,966 $ 6,738
To the Limited Partners 732,511 590,592 667,105
$ 739,910 $ 596,558 $ 673,843
Per limited partnership unit
(100,000 outstanding) $7.33 $5.91 $6.67
Consolidated Statements of Cash Flows
For the years ended November 30, 1996 1995 1994
Cash Flows From Operating Activities:
Net income $739,910 $596,558 $673,843
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,369,375 1,347,080 1,369,956
Increase (decrease) in cash arising
from changes in operating assets and
liabilities:
Restricted cash 8,124 (14,578) 25,918
Rent and other receivables 12,039 (45,933) (2,212)
Prepaid expenses (51,753) (100,797) (87,403)
Deferred rent receivable 33,336 68,724 (21,742)
Accounts payable and accrued expenses 148,814 31,985 21,109
Due to affiliates 4,571 2,833 (1,011)
Security deposits payable 1,282 (8,063) 4,536
Net cash provided by operating activities 2,265,698 1,877,809 1,982,994
Cash Flows From Investing Activities:
Additions to real estate (260,828) (349,375) (248,828)
Short-term investment - - 3,584,400
Net cash provided by (used
for) investing activities (260,828) (349,375) 3,335,572
Cash Flows From Financing Activities:
Cash distributions (2,727,273) (1,590,909) (3,434,343)
Net cash used for financing activities (2,727,273) (1,590,909) (3,434,343)
Net increase (decrease) in cash
and cash equivalents (722,403) (62,475) 1,884,223
Cash and cash equivalents, beginning of year 2,461,901 2,524,376 640,153
Cash and cash equivalents, end of year $1,739,498 $2,461,901 $2,524,376
Supplemental Schedule of Non-Cash
Investing Activities:
Write-off of fully depreciated
building improvements $327,453 $88,298 $893,963
Notes to the Consolidated Financial Statements
November 30, 1996, 1995 and 1994
1. Organization
Commercial Properties 2, L.P. (the "Partnership") 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 September 1, 1983 (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 Real
Estate Services VII, Inc., which is an affiliate of Lehman
Brothers Inc. (see below), and HS Advisors III, Ltd. ("HS
Advisors"), which is an affiliate of Goodman Segar Hogan, Inc.
("GSH"). The Partnership will continue until December 31, 2010,
unless terminated sooner 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 12, 1993, the Hutton
Real Estate Services VII Inc. General Partner changed its name to
Real Estate Services VII, Inc. ("Real Estate Services"), and
effective August 3, 1995, Hutton/GSH Commercial Properties 2,
L.P. changed its name to Commercial Properties 2, 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 ("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 1% interest in GSHH. The stockholders of GSHH Inc.
are GSH with a 62% stock interest and H.K. Associates, L.P., an
affiliate of HK, with a 38% percent stock interest. The
remaining 99% interests in GSHH are limited partnership interests
owned 50% by GSH and 49% by HK. The transaction did not affect
the ownership of the General Partners.
On March 15, 1996, based upon, among other things, the advice of
legal counsel, Skadden, Arps, Slate, Meagher & Flom, the General
Partners adopted a resolution that states, among other things, if
a Change of Control (as defined below) occurs, the General
Partners may distribute the Partnership's cash balances not
required for its ordinary course day-to-day operations. "Change
of Control" means any purchase or offer to purchase more than 10%
of the Units that is not approved in advance by the General
Partners. In determining the amount of the distribution, the
General Partners may take into account all material factors. In
addition, the Partnership will not be obligated to make any
distribution to any partner, and no partner will be entitled to
receive any distribution, until the General Partners have
declared the distribution and established a record date and date
for the distribution.
2. Significant Accounting Policies
Consolidation The consolidated financial statements include the
accounts of the Partnership and its ventures, Two Financial
Centre Joint Venture and Swenson Building C Joint Venture, and
Maitland Building C, which is a wholly-owned property.
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 office buildings and a research and development
facility, are recorded at cost less accumulated depreciation.
Cost includes the initial purchase price of the property plus
closing costs, acquisition and legal fees and capital
improvements. Depreciation is computed using the straight-line
method based on estimated useful lives of 10 to 25 years, except
for tenant improvements, which are depreciated over the terms of
the respective leases.
Leases Leases are accounted for as operating leases. Leasing
commissions are amortized over the terms of the respective
leases.
Deferred Rent Receivable Deferred rent receivable consists of
rental income which is 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 and/or general
increases in rents.
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 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Partnership adopted FAS 121
during the fourth fiscal quarter of 1995.
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.
However, in many instances current exchange prices are not
available for certain of the Partnership's financial instruments,
since no active market generally exists for such financial
instruments.
Fair value estimates are subjective and are dependent on a number
of significant assumptions based on management's judgement
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.
Cash and Cash Equivalents Cash and cash equivalents consist of
short-term highly liquid investments which have maturities of
three months or less from the date of purchase. The carrying
value approximates fair value because of the short maturity of
these instruments.
Restricted Cash Restricted cash represents cash held in
connection with tenant security deposits.
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.
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 amount 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.
Reclassifications Certain prior year amounts have been
reclassified in order to conform to the current year's
presentation.
3. The Partnership Agreement and Cash Distributions
The Partnership Agreement provides that the net cash from
operations, as defined, for each fiscal year will be distributed
on a quarterly basis 99% to the Limited Partners and 1% to the
General Partners until each Limited Partner has received a 9%
annual noncumulative return on his adjusted capital investment,
as defined. The net cash from operations will then be
distributed to the General Partners until the General Partners
have received 10% of the aggregate net cash from operations
distributed to all partners. Thereafter, net cash from
operations will be distributed 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 his adjusted
capital investment, as defined, and 10% 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 then be distributed 85% to the Limited
Partners and 15% to the General Partners.
Upon the dissolution and termination of the Partnership, the
General Partners will be required to contribute to the
Partnership an amount not to exceed 1% of the total capital
contributions from all of the Partners of the Partnership less
prior contributions of the General Partners. In no event shall
the General Partners be obligated to contribute more than the
negative balances in their respective capital accounts.
The Partnership paid cash distributions totaling $2,700,000 and
$27,273 to the Limited and General Partners, respectively,
representing $27 per Limited Partnership Unit for the year ended
November 30, 1996. An additional $429,293 has been accrued in
1996 for a distribution which was paid during the first quarter
of 1997. The Partnership paid cash distributions totaling
$1,575,000 and $15,909 to the Limited and General Partners
respectively, representing $15.75 per Limited Partnership Unit
for the year ended November 30, 1995. A portion of the 1995
distributions, in the amount of $3.64 per Unit, represented a
return of capital from the sale of Maryland Trade Center in 1989.
At November 30, 1995, the reserve balance from the sale of the
Maryland Trade Center property was fully distributed. The timing
and amount of future distributions will depend on several
factors, including the adequacy of cash reserves and cash flow
generated from operating activities.
Losses and all depreciation for any fiscal year shall be
allocated 99% to the Limited Partners and 1% to the General
Partners. Income before depreciation for any fiscal year and all
gains from sales will be allocated in substantially the same
manner as net cash from operations.
4. Transactions with Related Parties
The following is a summary of amounts paid or accrued to the
General Partners for the reimbursement of administrative salaries
and expenses that have been included in general and
administrative expenses for the years ended November 30, 1996,
1995 and 1994.
Unpaid at, Paid
-------------- ----------------------------
November 30,
1996 1996 1995 1994
Real Estate Services VII
and affiliates:
Out-of-pocket expenses $33,046 $5,615 $6,995 $4,248
HS Advisors III, Ltd.:
Administrative salaries
and expenses 9,800 40,148 29,652 27,804
$42,846 $45,763 $36,647 $32,052
5. Real Estate Investments
Since inception, the Partnership has acquired four commercial
office buildings and a research and development facility through
investments in joint ventures or limited partnerships with
unaffiliated co-venturers, of which three remain:
Square Date Purchase
Property Name Feet Location Acquired Price
Two Financial Centre 113,983 Little Rock, AR 3/29/84 $10,700,000
Maitland Building C 98,096 Orlando, FL 9/18/84 $8,770,000
Swenson Building C 90,145 San Jose, CA 5/06/85 $7,700,000
The joint venture agreements substantially provide that:
(a) Net cash from operations will be distributed 100% to
the Partnership until it has received an annual,
noncumulative return on its capital contribution, as
adjusted, ranging from 7% to 11%. Thereafter, any
remaining cash from operations will be shared in a ratio
relating to the various ownership interests of the
Partnership.
(b) Net proceeds from a sale or refinancing will be
distributed 100% to the Partnership until it has received
an annual, cumulative return ranging from 7% to 11% and an
amount equal to 110% to 120% of its adjusted capital
contribution. Any remaining balance will be shared in a
ratio relating to the various ownership interests of the
Partnership.
(c) Taxable income of the joint ventures and limited partnerships
will be allocated in substantially the same manner as net cash from
operations. For Swenson Building C, taxable losses will
generally be allocated to the Partnership in the same
manner as net cash from operations. For Two Financial
Centre, taxable losses will generally be allocated 100% to
the Partnership.
For financial statement purposes, net income and net losses are
allocated in the same manner as taxable income and taxable
losses.
6. Loan to Two Financial Centre Joint Venture
The Two Financial Centre Joint Venture ("TFC") has provided a
demand promissory note to the Partnership with a principal
balance of $7,383,033 which bears interest at 12% per annum,
resulting in annual interest of $885,960. Monthly payments of
interest only are due in arrears in the amount of $73,830. On
September 17, 1993, TFC issued to the Partnership a new demand
promissory note in the amount of $610,113 representing the unpaid
accrued interest as of September 17, 1993 on the original
principal balance of $7,383,033. The note bears interest at 8%
per annum, resulting in annual interest of $48,809. Monthly
interest of $4,067 is payable in arrears commencing October 17,
1993. As of November 30, 1996, accrued interest of $389,579
remains unpaid. Interest of $1,055,674, $584,648 and $761,058
has been paid by TFC to the Partnership during the fiscal years
ended November 30, 1996, 1995 and 1994, respectively. All
interest and principal activity and balances relating to the
demand promissory notes are eliminated in consolidation for
financial statement presentation purposes.
Based on borrowing rates currently available to the Partnership
for mortgage loans with similar terms and average maturities, the
fair value of long-term debt approximates carrying value.
7. Rental Income Under Operating Leases
Future minimum rental income to be received on noncancellable
operating leases as of November 30, 1996 is as follows:
1997 $3,055,613
1998 2,651,998
1999 1,783,525
2000 744,038
2001 268,601
Thereafter 198,193
$ 8,701,968
Lease terms range from one to ten years. The leases allow for
increases in certain property operating expenses to be passed on
to tenants.
Leases with two tenants of Two Financial Centre generated rental
revenue in excess of 10% of the Partnership's consolidated rental
revenues for the year ended November 30, 1996. The rental income
derived from these leases for 1996 was $460,611 and $471,476,
respectively, or 13% of the Partnership's 1996 consolidated
rental income.
Asante Technologies, Inc. ("Asante"), occupying 100% of the
Swenson Building C, generated rental revenue in excess of 10% of
the Partnership's consolidated rental revenues for the year ended
November 30, 1996. In addition to base rental payments, Asante
is required to pay as additional rent, real property taxes and
insurance. For the years ended November 30, 1996, 1995 and 1994,
Asante has contributed $639,849 each year or 17%, 19%, and 18%,
respectively, of the Partnership's consolidated rental income and
is current on its rent payments. In October 1996, Asante
exercised its option to extend its lease for an additional two
years to September 1999.
8. Reconciliation of Net Income to Taxable Loss
The net income reported in the financial statements for the years
ended November 30, 1996, 1995 and 1994 exceeded the taxable
income reported to the partners by $4,182, $34,074 and $249,093,
respectively.
These differences are primarily due to the use of different
methods of recording depreciation expense and rental income. The
Partnership uses accelerated methods of depreciating real estate
for tax purposes and the straight-line method for financial
statement purposes. Rental income is recorded when received or
receivable for tax purposes and on a straight-line basis for
financial statement purposes
Report of Independent Auditors
The Partners
Commercial Properties 2, L.P.
and Consolidated Ventures
We have audited the accompanying consolidated balance
sheets of Commercial Properties 2, L.P. and Consolidated
Ventures as of November 30, 1996 and 1995, and the
related consolidated statements of operations, partners'
capital (deficit), and cash flows for each of the three
years in the period ended November 30, 1996. These
financial statements and schedule 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 consolidated financial statements
referred to above present fairly, in all material
respects, the consolidated financial position of
Commercial Properties 2, L.P. and Consolidated Ventures
at November 30, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each
of the three years in the period ended November 30, 1996,
in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Boston, Massachusetts
January 15, 1997
Net Asset Valuation
Comparison of Acquisition Costs to Appraised Value and Determination of Net
Asset Value Per $317.36 Unit at November 30, 1996
(Unaudited)
Acquisition Cost
(Purchase Price Partnership's
Plus General Share of
Partners' November 30,
Date of Acquisition 1996 Appraised
Property Acquisition Fees) Value (1)
Two Financial Centre (2) 03-29-84 $4,611,600 $1,756,854
Maitland Center Office Building C (3) 09-18-84 8,367,320 7,600,000
Swenson Business Park-Building C (4) 05-06-85 8,059,590 8,900,000
$21,038,510 $18,256,854
Cash and cash equivalents 1,739,498
Interest and other receivables 134,924
Demand promissory note receivable (5) 7,993,146
Prepaid expenses 312,834
28,437,256
Less:
Accounts payable and accrued expenses (405,275)
Due to affiliates (42,846)
Distribution payable (429,293)
Partnership Net Asset Value (6) $27,559,842
Net Asset Value Allocated:
Limited Partners $27,284,244
General Partners 275,598
$27,559,842
Net Asset Value Per Unit
(100,000 units outstanding) $272.84
(1) This represents the Partnership's share of the November 30, 1996
appraised values which were determined by independent property
appraisal firms. The Partnership's share of the November 30, 1996
appraised value takes into account the allocation provision 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 November
30, 1996 appraised value are net of the outstanding mortgage loan
balance at the time of acquisition and the demand promissory note.
The Acquisition Cost of $4,611,600 for Two Financial Centre is
comprised of the acquisition fee paid to the General Partners and an
amount required to fund the completion of tenant improvements and
other capital items.
(3) The Acquisition Cost of $8,367,320 for Maitland Center Office
Building C is comprised of the acquisition fee paid to the General
Partners and an amount required to fund the completion of tenant
improvements and other capital items.
(4) The Acquisition Cost of $8,059,590 for Swenson Business Park -
Building C is comprised of the acquisition fee paid to the General
Partners and an amount required to fund the completion of tenant
improvements and other capital items.
(5) The current principal balance of the demand promissory notes
receivable from the Two Financial Centre Joint Venture is
$7,993,146.
(6) The Net Asset Value assumes a hypothetical sale on November 30,
1996 of all the remaining Partnership properties at their appraised
values and the distribution of the proceeds of such sale, together
with the Partnership's cash and the proceeds from temporary
investments, to the partners. Real estate brokerage commissions
payable to the General Partners or others are not determinable at
this time and have not been included in the determination. Since
the Partnership would incur real estate brokerage commissions and
other selling expenses in connection with the sale of its properties
and other assets, cash for distribution to the partners would be
less than the appraised Net Asset Value.
Limited partners should note that appraisals are 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. Because of the nature of
the Partnership's properties and the existing market for such
properties, there can be no assurance that the other properties
reviewed by the appraisers are comparable. The appraised value
does not reflect the actual costs which would be incurred in
selling the property. 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 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.
Schedule III - Real Estate and Accumulated Depreciation
November 30, 1996
Two Financial Maitland
Consolidated Ventures: Centre Building C Swenson C Total
Location Little Rock, AK Orlando, FL San Jose, CA na
Construction date 1981 1984 1985 na
Acquisition date 03-29-84 09-18-84 05-06-85 na
Life on which depreciation
in latest income statements
is computed (1) (1) (1) na
Encumbrances $ 7,993,146 na na $7,993,146
Initial cost to Partnership (2):
Land 1,560,092 1,395,606 2,261,180 5,216,878
Buildings and
improvements 9,583,430 6,526,619 5,650,552 21,760,601
Costs capitalized
subsequent to acquisition:
Land, buildings
and improvements 1,156,307 1,280,210 410,140 2,846,657
Gross amount at which
carried at close of period:
Land $1,560,092 $1,395,606 $2,261,180 $5,216,878
Buildings and
improvements 10,739,737 7,806,829 6,060,692 24,607,258
12,299,829 9,202,435 8,321,872 29,824,136
Accumulated depreciation (3) 5,458,997 3,688,897 2,796,888 11,944,782
(1) Buildings and improvements - 25 years; personal property - 10 years.
(2) Represents aggregate cost for both financial reporting and Federal income
tax purposes.
(3) The amount of accumulated depreciation for Federal income tax purposes
is $18,085,723.
A reconciliation of the carrying amount of real estate and accumulated
depreciation for the years ended November 30, 1996, 1995, and 1994 follows:
1996 1995 1994
Real estate investments:
Beginning of year $29,890,761 $29,629,684 $30,274,819
Additions 260,828 349,375 248,828
Dispositions (327,453) (88,298) (893,963)
End of year $29,824,136 $29,890,761 $29,629,684
Accumulated depreciation:
Beginning of year $11,038,346 $9,905,013 $9,582,110
Depreciation expense 1,233,889 1,221,631 1,216,866
Dispositions (327,453) (88,298) (893,963)
End of year $11,944,782 $11,038,346 $9,905,013
Consent of Independent Auditors
We consent to the incorporation by reference in
this Annual Report (Form 10-K) of Commercial
Properties 2, L.P. of our report dated
January 15, 1997, included in the 1996 Annual
Report to Shareholders of Commercial Properties 2,
L.P. and Consolidated Ventures.
Our audits also included the financial statement
schedule of Commercial Properties 2, L.P. and
Consolidated Ventures listed in Item 14(a). This
schedule is the responsibility of the
Partnership's management. Our responsibility is
to express an opinion based on our audits. In our
opinion, the financial statement schedule referred
to above, when considered in relation to the basic
financial statements taken as a whole, presents
fairly in all material respects the information
set forth herein.
ERNST & YOUNG LLP
Boston, Massachusetts
January 15, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1996
<PERIOD-END> November-30-1996
<CASH> 1,739,498
<SECURITIES> 000
<RECEIVABLES> 134,924
<ALLOWANCES> 000
<INVENTORY> 000
<CURRENT-ASSETS> 000
<PP&E> 29,824,136
<DEPRECIATION> (11,944,782)
<TOTAL-ASSETS> 20,368,694
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<COMMON> 000
000
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<OTHER-SE> 19,334,154
<TOTAL-LIABILITY-AND-EQUITY> 20,368,694
<SALES> 3,660,110
<TOTAL-REVENUES> 3,780,952
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<OTHER-EXPENSES> 3,041,042
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<INCOME-CONTINUING> 739,910
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