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, 1997
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, 1997 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, 1997, 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 in Dallas, Texas; (ii) First Trade Center Office Associates,
a Maryland limited partnership formed to own and operate the Maryland
Trade Center Building II; in Greenbelt, Maryland and (iii) Gamma
Building Associates Joint Venture, a California joint venture
partnership formed to own and operate Swenson Business Park - Building
C in San Jose, California. 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 in Little Rock, Arkansas; (ii) Maitland
Building C Joint Venture, a Florida joint venture partnership formed
to own and operate Maitland Center Office Building C in Maitland,
Florida. 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, 1997 filed as an exhibit under Item 14. (The
two buildings described immediately above are collectively referred to
herein as the "Properties").
(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, 1997 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 are the Registrant's
objective's during its operational phase, while the preservation
and appreciation of capital are the Registrant's long-term
objectives. Information regarding future distributions is
incorporated by referenced to the section entitled Message to
Investors in the Partnership's Annual Report to Unitholders for
the year ended November 30, 1997 filed as an exhibit under Item
14. 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.
The Registrant expects to sell its Properties in fiscal 1998, 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 Partner"). 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, 1997 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,
became wholly-owned by the Partnership.
On November 10, 1997, the Partnership closed on the sale of Swenson
Business Park - Building C (the "Swenson Property"). The Swenson
Property was sold for net proceeds of $10,351,554 to WW&LJ Gateways,
LTD. (the "Swenson Buyer"), which is unaffiliated with the
Partnership. A complete description of the sale of the property and
distribution of proceeds is referred to in Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations", contained herein.
On December 19, 1997, the Partnership closed on the sale of Maitland
Center Office Building C (the "Maitland Property"). The Maitland
Property was sold for net proceeds of $8,762,318 to CMD Realty
Investment Fund III, L.P., an Illinois limited partnership (the
"Maitland Buyer"), which is unaffiliated with the Partnership. A
complete description of the sale of the property and distribution of
proceeds is referred to in Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations", contained
herein.
The Partnership is in the process of selecting a real estate brokerage
firm to assist with the efforts in marketing for sale the
Partnership's sole remaining property, Two Financial Centre.
(d) Competition
Two Financial Centre is 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 Two
Financial Centre is 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 the Little Rock area, see
the section entitled Message to Investors in the Partnership's Annual
Report to Unitholders for the year ended November 30, 1997 filed as an
exhibit under Item 14.
(e) Employees
The Registrant has no employees.
Item 2. Properties
A description of the Partnership's remaining property, Two Financial
Centre, and its material leases is 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, 1997, filed as
an exhibit under Item 14, Note 5 "Real Estate Investments" and Note 7
"Rental Income Under Operating Leases" 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 1997.
PART II
Item 5. Market for Registrant's Limited Partnership Units and Related
Unitholder Matters
(a) Market Information
No established public trading market has developed for the Units, and
it is not anticipated that such a market will develop in the future.
(b) Holders
As of November 30, 1997, the number of holders of Units was 3,577.
(c) Distributions
Cash distributions paid to the Limited Partners for the two years
ended November 30, 1997 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, 1997 filed as an
exhibit under Item 14.
Item 6. Selected Financial Data
Incorporated by reference to the section entitled Financial Highlights
of the Partnership's Annual Report to Unitholders for the year ended
November 30, 1997 filed as an exhibit under Item 14.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
On November 10, 1997, the Partnership closed on the sale of Swenson
Business Park - Building C (the "Swenson Property"). The Swenson
Property was sold for net proceeds of $10,351,554 to WW&LJ Gateways,
LTD (the "Swenson Buyer"), which is unaffiliated with the Partnership.
The selling price was determined by arm's length negotiations between
the Partnership and the Swenson Buyer. The transaction resulted in a
gain on sale of $4,756,962, which is reflected in the Partnership's
statement of operations for the period ending November 30, 1997. On
December 19, 1997, the Partnership closed on the sale of Maitland
Center Office Building C (the "Maitland Property"). The Maitland
Property was sold for net proceeds of $8,762,318 to CMD Realty
Investment Fund III, L.P., an Illinois limited partnership (the
"Maitland Buyer"), which is unaffiliated with the Partnership. The
selling price was determined by arm's length negotiations between the
Partnership and the Maitland Buyer. The transaction resulted in a
gain on sale of approximately $3.2 million, which will be reflected in
the Partnership's statement of operations for the period ending
February 28, 1998.
In addition, the Partnership is in the process of selecting a real
estate brokerage firm to assist with the efforts in marketing for sale
the Partnership's sole remaining property, Two Financial Centre.
While it is currently anticipated that the property will be sold and
the Partnership liquidated in 1998, there can be no assurance that the
property will be sold within this time frame, or that any sale, if
completed, will result in a particular price.
The Partnership had cash and cash equivalents at November 30, 1997 of
$11,803,602 as compared with $1,739,498 at November 30, 1996. The
increase is primarily a result of the net proceeds received from the
sale of the Swenson Property on November 10, 1997, in excess of cash
distributions. Net cash provided by operations totaled $1,462,013 for
the year ended November 30, 1997 as compared with $2,265,698 for the
year ended November 30, 1996. The decrease is primarily attributable
to the sale of the Swenson Property and higher property operating and
general and administrative expenses. The Partnership had a restricted
cash balance of $65,600 at November 30, 1997 as compared with $166,795
for the year ended November 30, 1996. The decrease is primarily due
to the transfer of tenant security deposits in connection with the
sale of the Swenson Property. Prepaid expenses decreased to $16,811
at November 30, 1997 as compared with $312,834 at November 30, 1996,
primarily due to the reclassification of the Partnership's properties
to "Real estate assets held for disposition" and the subsequent sale
of the Swenson Property . Deferred rent receivable totaled $0 at
November 30, 1997 as compared with $135,289 at November 30, 1996. The
decrease is attributable to the reclassification of the Partnership's
properties to "Real estate assets held for disposition."
Accounts payable and accrued expenses decreased to $323,179 at
November 30, 1997 as compared to $405,275 a year earlier, primarily
due to the timing of payments.
A discussion of material leases at the Partnership's remaining
property, Two Financial Centre, is 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, 1997 filed as an exhibit under Item 14.
The Partnership paid or declared cash distributions to the Limited
Partners of $120.52 per Unit for the year ended November 30, 1997,
which includes net proceeds from the sale of the Swenson Property in
the amount of $103.52 per Unit. Subsequent to November 30, 1997, the
Partnership also paid a cash distribution to Limited Partners
resulting from the net proceeds from the sale of the Maitland Property
in the amount of $87.62 per Unit. 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, 1997 filed as an
exhibit under Item 14. Distribution payable at November 30, 1997 of
$10,780,847 represents an accrual of distribution proceeds from the
sale of the Swenson Property, as well as 1997 fourth quarter cash
flow.
Results of Operations
1997 Versus 1996
Partnership operations resulted in net income of $5,842,012 for the
year ended November 30, 1997 as compared to $739,910 for the year
ended November 30, 1996. The increase is primarily due to a gain on
the sale of the Swenson Property in 1997. Excluding the gain,
operating income totaled $1,085,050 in fiscal 1997 compared to
$739,910 for the year ended November 30, 1996. The increase is
primarily due to a decrease in depreciation expense, due to the
reclassification of the Partnership's properties to "Real estate
assets held for disposition", which was partially offset by a decrease
in total income and an increase in other expenses.
Rental income decreased to $3,471,538 for the year ended November 30,
1997 from $3,660,110 for the same period in 1996, primarily due to
lower occupancy levels at Two Financial Centre and Maitland Center
Office Building C and the sale of the Swenson Property in 1997.
Property operating expenses increased to $1,642,425 for the year ended
November 30, 1997, from $1,447,759 a year earlier, primarily due to
capital improvements being expensed due to the reclassification on the
Partnership's properties as "Real estate assets held for disposition."
Depreciation and amortization decreased to $490,359 for the year ended
November 30, 1997 versus $1,369,375 for the year ended November 30,
1996, due to the reclassification on the Partnership's properties as
"Real estate assets held for disposition."
General and administrative expenses (other) totaled $255,872 for the
year ended November 30, 1997 compared to $185,513 for the same period
in 1996. The increase is primarily due to higher partnership
servicing fees and legal costs associated with the sale of Swenson
Business Park - Building C in 1997 and the impending sale of Maitland
Centre Office Building C in December 1997.
General and administrative expenses (affiliates) for the year ended
November 30, 1997, totaled $156,766 compared with $38,395, for the
same period in 1996. During the 1997 period, certain expenses
incurred by Real Estate Services VII, Inc. and its affiliates in
servicing the Partnership, which were voluntarily absorbed by
affiliates of Real Estate Services VII, Inc. in prior periods, were
reimbursable to Real Estate Services VII, Inc. and its affiliates.
As of November 30, 1997, the occupancy level at Two Financial Centre
was 76%. As discussed above, Maitland Center Office Building C was
sold on December 19, 1997.
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, largely 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%.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to the Partnership's Annual Report to
Unitholders for the year ended November 30, 1997 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
Jeffrey C. Carter Director, President and Chief Financial Officer
Michael T. Marron Vice President
Rocco F. Andriola, 39, is a Managing Director of Lehman Brothers in
its Diversified Asset Group and has held such position since October
1996. Since joining Lehman in 1986, Mr. Andriola has been involved in
a wide range of restructuring and asset management activities
involving real estate and other direct investment transactions. From
June 1991 through September 1996, Mr. Andriola held the position of
Senior Vice President in Lehman's Diversified Asset Group. From June
1989 through May 1991, Mr. Andriola held the position of First Vice
President in Lehman's Capital Preservation and Restructuring Group.
From 1986 to 1989, Mr. Andriola served as a Vice President in the
Corporate Transactions Group of Shearson Lehman Brothers' office of
the general counsel. Prior to joining Lehman, Mr. Andriola practiced
corporate and securities law at Donovan Leisure Newton & Irvine in New
York. Mr. Andriola received a B.A. from Fordham University, a J.D.
from New York University School of Law, and an LL.M in Corporate Law
from New York University's Graduate School of Law.
Jeffrey C. Carter, 52, is a Senior Vice President of Lehman Brothers
in the Diversified Asset Group. Mr. Carter joined Lehman Brothers in
September 1988. From 1972 to 1988, Mr. Carter held various positions
with Helmsley-Spear Hospitality Services, Inc. and Stephen W. Brener
Associates, Inc. including Director of Consulting Services at both
firms. From 1982 through 1987, Mr. Carter was President of Keystone
Hospitality Services, an independent hotel consulting and brokerage
company. Mr. Carter received his B.S. degree in Hotel Administration
from Cornell University and an M.B.A. degree from Columbia University.
Michael T. Marron, 34, is a Vice President of Lehman Brothers and has
been a member of the Diversified Asset Group since 1990 where he has
actively managed and restructured a diverse portfolio of syndicated
limited partnerships. Prior to joining Lehman Brothers, Mr. Marron
was associated with Peat Marwick Mitchell & Co. serving in both its
audit and tax divisions from 1985 to 1989. Mr. Marron received a B.S.
degree from the State University of New York at Albany and an M.B.A.
degree from Columbia University and is a Certified Public Accountant.
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, 44, 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., 54, 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, 43, is a Vice President of Goodman Segar Hogan, Inc.
and Senior Vice President of Goodman Segar Hogan Hoffler, L.P.
("GSHH"). She is responsible for investment management of a
commercial real estate portfolio for the company's Asset Management
Division. Prior to GSHH, Ms. Adie was an asset manager with Aetna
Real Estate Investors from 1986 to 1988. Ms. Adie practiced as an
attorney from 1978 through 1984 and is currently a member of the
Virginia Bar Association. She holds a B.A. Degree from Duke
University, a Juris Doctor from University of Virginia and an M.B.A.
from Dartmouth College.
Certain Matters Involving Affiliates
On July 31, 1993 Shearson 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, 1997.
(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, 1997.
(c) Changes In Control
None.
Item 13. Certain Relationships and Related Transactions
Pursuant to the Certificate and Agreement of Limited Partnership of
the Registrant, $58,420 of the Registrant's net income was allocated
to the General Partners ($29,210 to RE Services and $29,210 to HS
Advisors) for the year ended November 30, 1997. 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.
Effective as of January 1, 1997, the Partnership began reimbursing
certain expenses incurred by Real Estate Services VII, Inc. and its
affiliates in servicing the Partnership to the extent permitted by the
Partnership Agreement. Such amounts totaled $120,933 for the fiscal
year ended November 30, 1997. In prior years, affiliates of Real
Estate Services VII, 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 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, 1997,
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, 1997 and 1996 (1)
Consolidated Statements of Partners'
Capital (Deficit) -For the years ended
November 30, 1997, 1996 and 1995 (1)
Consolidated Statements of Operations -
For the years ended November 30, 1997, 1996 and 1995 (1)
Consolidated Statements of Cash Flows -
For the years ended November 30, 1997, 1996 and 1995 (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, 1997, 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, 1997.
(23) Consent of Independent Auditors
(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:
On January 8, 1998 the Partnership filed a Form 8-K reporting
that on November 10, 1997, the Partnership executed a sale of
Swenson Business Park - Building C.
On January 2, 1998 the Partnership filed a Form 8-K reporting
that on December 19, 1997, the Partnership executed a sale of
Maitland Center Office Building C.
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 27, 1998 BY: /s/Mark P. Mikuta
Mark P. Mikuta
President
BY: Real Estate Services VII, Inc.
General Partner
Date:February 27, 1998 BY: /s/Jeffrey C. Carter
Jeffrey C. Carter
Director, President 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 27, 1998 BY: /s/Rocco F. Andriola
Rocco F. Andriola
Director
Date:February 27, 1998 BY: /s/Jeffrey C. Carter
Jeffrey C. Carter
Director, President and Chief
Financial Officer
Date:February 27, 1998
BY: /s/Michael T. Marron
Michael T. Marron
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 27, 1998
BY: /s/Mark P. Mikuta
Mark P. Mikuta
President of Hogan Stanton
Investment, Inc., as general
partner of HS Advisors III, Ltd.
Date:February 27, 1998 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 27, 1998 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
1997 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
investment currently consists of one commercial office
building, situated in the Financial Centre Complex in
West Little Rock, AR. Two Financial Centre is a
113,983 square foot, four-story brick office building
located near two interstate highways, I-630 and I-430,
affording easy access to downtown Little Rock and the
Little Rock Regional Airport.
Contents
1 Message to Investors
3 Financial Highlights
4 Consolidated Financial Statements
7 Notes to the Consolidated Financial Statements
12 Report of Independent Auditors
13 Net Asset Valuation
Administrative Inquiries Performance Inquiries/Form 10-Ks
Address Changes/Transfers First Data Investor Services Group
Service Data Corporation P.O. Box 1527
2424 South 130th Circle Boston, Massachusetts 02104-1527
Omaha, Nebraska 68144-2596 Attn: Financial Communications
800-223-3464 800-223-3464
Message to Investors
We are pleased to present the 1997 Annual Report for Commercial
Properties 2, L.P. (the "Partnership"). Included in this report
is a review of the Partnership's property sales and an update on
the operations and marketing of the Partnership's remaining
property, Two Financial Centre. Also included are financial
highlights and the Partnership's audited financial statements.
Sales/Marketing Update
During the calendar year, we completed the sale of two of the
Partnership's three properties. On November 10, 1997, the
Partnership closed on the sale of Swenson Business Park -
Building C (the "Swenson Property") which was sold for net
proceeds of $10,351,554. In addition, the Partnership closed on
the sale of Maitland Center Office Building C (the "Maitland
Property"), on December 19, 1997 for net proceeds of $8,762,318.
As discussed later in this report, the proceeds from these sales
were paid to Limited Partners along with the Partnership's cash
flow from operations for the fourth fiscal quarter of 1997, in a
special cash distribution paid on February 18, 1998 in the amount
of $195.39.
With regard to the Partnership's remaining property, Two
Financial Centre, we are in the process of engaging a real estate
brokerage firm to assist with our efforts in marketing the
property for sale. While we currently anticipate that the
property will be sold and the Partnership liquidated in 1998,
there can be no assurance that the property will be sold within
this time frame, or that any sale, if completed, will result in a
particular price. Once the property is sold, the General
Partners will distribute the net proceeds together with the
Partnership's remaining cash reserves (after payment of or
provision for, the Partnership's liabilities and expenses), and
dissolve the Partnership.
Property Update
Market conditions for office properties in Little Rock remained
healthy during 1997, with vacancy remaining at 10%, unchanged
from the previous year. These market conditions have encouraged
development in the commercial sector to gradually resume and in
1997, several single-tenant and multitenant office buildings were
completed in the Little Rock area. Although competition for
tenants will likely intensify in the future as additional
development projects are completed, it is expected that operating
conditions and property values will remain strong in the near
term.
During the year, the General Partners executed four new leases
totaling 10,496 square feet and four lease renewals totaling
5,557 square feet. However, five tenants representing 24,731
square feet, vacated the property upon the expiration of their
respective leases. Another tenant leasing 5,388 square feet paid
the Partnership a termination fee of $147,620 and vacated its
space prior to the scheduled expiration of its lease. As a
result, the property was 76% leased as of November 30, 1997 as
compared to 97% as of November 30, 1996. In December 1997, the
General Partners executed three new leases totaling 17,837 square
feet, and the property is currently 92% leased. In the year
ahead, six leases totaling 38,368 square feet, or approximately
34% of the property's leasable area, are scheduled to expire.
The General Partner will continue to negotiate renewals and
aggressively market any leasable space.
Cash Distributions
On February 18, 1998, the Partnership paid a special cash
distribution to Limited Partners totaling $195.39 per Unit. The
distribution reflected your share of the net proceeds received
from the sales of the Maitland Property in the amount of $87.62
per Unit, and the Swenson Property in the amount of $103.52 per
Unit, plus cash flow from operations generated during the three
months ended November 30, 1997 in the amount of $4.25 per Unit.
Including this distribution, Limited Partners have received cash
distributions totaling $488.65 per original $500 Unit. This
total includes distributions of cash flow from operations in the
amount of $114.87 per Unit and return of capital payments in the
amount of $373.78 per Unit. In light of the Partnership's
reduced cash flow, cash distributions will be suspended beginning
with the 1998 first quarter distribution which would have been
paid on or about April 15, 1998.
As discussed above, the General Partners are in the process of
engaging a brokerage firm to assist with our efforts in marketing
Two Financial Centre. Once the property is sold, the General
Partners will distribute the net proceeds together with the
Partnership's remaining cash reserves (after payment of or
provision for, the Partnership's liabilities and expenses), and
dissolve the Partnership.
Cash Distributions Per Limited Partnership Unit
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1996 $4.25 $4.25 $14.25(1) $ 4.25 $ 27.00
1997 $4.25 $4.25 $ 4.25 $107.77(2) $ 20.52
(1)Includes a special cash distribution of $10 per Unit paid
on August 15, 1996.
(2)Represents the fiscal 1997 portion of a special cash distribution
paid on February 18, 1998 in the total amount of $195.39 per Unit.
General Information
As you are probably aware, several third parties have commenced
tender offers to purchase Units of the Partnership at prices
which are below the Partnership's estimate of net asset value per
Unit. In response, we recommended that limited partners reject
these offers because we believe that they do not reflect the
underlying value of the Partnership's assets. According to
published industry sources, most of the investors who hold units
of limited partnerships similar to the Partnership have rejected
these types of tender offers due to their inadequacy.
Summary
We are pleased to have successfully completed the sale of the
Swenson and Maitland Properties, and hope that our marketing
efforts will result in a sale of Two Financial Centre during
1998. Should a sale be consummated, the General Partners will
pay one or more distributions to the Limited Partners and
liquidate the Partnership. In the interim, we will continue to
focus on improving occupancy at Two Financial Centre. 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/ Jeffrey C. Carter /s/ Mark P. Mikuta
Jeffrey C. Carter Mark P. Mikuta
President President
February 27, 1998
Financial Highlights
Selected Financial Data
For the years ended November 30, 1997 1996 1995 1994 1993
Dollars in thousands,
except per Unit data
Total Income $ 3,630 $ 3,781 $ 3,605 $ 3,660 $ 3,345
Operating Income 1,085 740 597 674 396
Gain on Sale of Real
Estate Assets 4,757 _ _ _ _
Net Income 5,842 740 597 674 396
Total Assets at Year End 24,377 20,369 22,201 23,169 25,905
Net Cash From Operations 1,462 2,266 1,878 1,983 1,438
Operating Income per
Limited Partnership Unit 10.74 7.33 5.91 6.67 3.92
Net Income per
Limited Partnership Unit: 57.84 7.33 5.91 6.67 3.92
Cash Distributions per
Limited Partnership Unit: 120.52(4) 27.00(3) 15.75(2) 34.00(1) 17.00(1)
(1) Represents returns of capital associated with the sale of the Maryland
Trade Center in 1989.
(2) Includes returns of capital associated with the sale of the Maryland
Trade Center in 1989 in the amount of $3.64 per Unit.
(3) Includes a special cash distribution in the amount $10 per Unit paid
on August 15, 1996.
(4) Includes the fiscal 1997 portion of a special cash distribution paid
on February 18, 1998 in the total amount of $195.39 per Unit.
- - Total income decreased primarily due to lower rental income
in 1997 resulting from lower occupancy at Two Financial Centre
and the sale of the Swenson Property. The decrease was partially
offset by an increase in other income due to the receipt of a fee
in connection with the cancellation of a purchase and sale
agreement for the Maitland property.
- - Operating income increased primarily due to the properties
being reclassified on the Consolidated Balance Sheet as "Real
estate assets held for disposition," resulting in a substantial
decrease in depreciation and amortization.
- - Net income increased primarily due to the gain recognized on
the sale of Swenson Business Park - Building C.
- - The decrease in net cash from operations can be attributed
primarily to higher property operating and general and
administrative expenses and the sale of Swenson Business Park -
Building C, which reduced the Partnership's accounts payable and
security deposits payable balances.
Consolidated Balance Sheets
At November 30, At November 30,
1997 1996
Assets
Real estate, at cost:
Land $ _ $ 5,216,878
Buildings and improvements _ 24,607,258
_ 29,824,136
Less accumulated depreciation _ (11,944,782)
_ 17,879,354
Real estate assets held for disposition 12,310,284 _
Cash and cash equivalents 11,803,602 1,739,498
Restricted cash 65,600 166,795
Rent and other receivables, net of
allowance for doubtful accounts of
$48,670 in 1997 and $7,275 in 1996 180,295 134,924
Prepaid expenses, net of accumulated
amortization of $1,230,450 in 1997
and $1,182,166 in 1996 16,811 312,834
Deferred rent receivable _ 135,289
Total Assets $ 24,376,592 $ 20,368,694
Liabilities and Partners' Capital (Deficit)
Liabilities:
Accounts payable and accrued expenses $ 323,179 $ 405,275
Due to affiliates 105,612 42,846
Distribution payable 10,780,847 429,293
Security deposits payable 59,514 157,126
Total Liabilities 11,269,152 1,034,540
Partners' Capital (Deficit):
General Partners (191,982) (233,230)
Limited Partners (100,000 units outstanding) 13,299,422 19,567,384
Total Partners' Capital 13,107,440 19,334,154
Total Liabilities and Partners' Capital $24,376,592 $20,368,694
Consolidated Statement of Partners' Capital (Deficit)
For the years ended November 30, 1997, 1996 and 1995
General Limited
Partners Partners Total
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
Net income 58,420 5,783,592 5,842,012
Distributions (17,172) (12,051,554) (12,068,726)
Balance at November 30, 1997 $ (191,982) $ 13,299,422 $ 13,107,440
Consolidated Statements of Operations
For the years ended November 30, 1997 1996 1995
Income
Rental $3,471,538 $3,660,110 $3,450,755
Interest 116,728 116,034 149,624
Other 42,206 4,808 4,258
Total Income 3,630,472 3,780,952 3,604,637
Expenses
Property operating 1,642,425 1,447,759 1,465,964
Depreciation and amortization 490,359 1,369,375 1,347,080
General and administrative-other 255,872 185,513 164,227
General and administrative-affiliates 156,766 38,395 30,808
Total Expenses 2,545,422 3,041,042 3,008,079
Operating income 1,085,050 739,910 596,558
Gain on sale of real estate assets 4,756,962 _ _
Net Income $5,842,012 $ 739,910 $ 596,558
Net Income Allocated:
To the General Partners $ 58,420 $ 7,399 $ 5,966
To the Limited Partners 5,783,592 732,511 590,592
$5,842,012 $ 739,910 $ 596,558
Per limited partnership unit
(100,000 outstanding) $57.84 $7.33 $5.91
Consolidated Statements of Cash Flows
For the years ended November 30, 1997 1996 1995
Cash Flows From Operating Activities:
Net income $5,842,012 $ 739,910 $ 596,558
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 442,075 1,233,889 1,221,631
Amortization 48,284 135,486 125,449
Gain on sale of real estate assets (4,756,962) _ _
Increase (decrease) in cash arising from
changes in operating assets and liabilities:
Restricted cash 91,395 8,124 (14,578)
Rent and other receivables (45,371) 12,039 (45,933)
Prepaid expenses (47,075) (51,753) (100,797)
Deferred rent receivable 4,597 33,336 68,724
Accounts payable and accrued expenses (82,096) 148,814 31,985
Due to affiliates 62,766 4,571 2,833
Security deposits payable (97,612) 1,282 (8,063)
Net cash provided by operating activities 1,462,013 2,265,698 1,877,809
Cash Flows From Investing Activities:
Proceeds from sale of real estate 10,351,554 _ _
Additions to real estate (32,291) (260,828) (349,375)
Net cash provided by (used for)
investing activities 10,319,263 (260,828) (349,375)
Cash Flows From Financing Activities:
Cash distributions (1,717,172) (2,727,273) (1,590,909)
Net cash used for financing activities (1,717,172) (2,727,273) (1,590,909)
Net increase (decrease) in cash and
cash equivalents 10,064,104 (722,403) (62,475)
Cash and cash equivalents, beginning
of year 1,739,498 2,461,901 2,524,376
Cash and cash equivalents, end of year $11,803,602 $1,739,498 $2,461,901
Supplemental Schedule of Non-Cash
Investing Activities:
Write-off of fully depreciated
building improvements $ 10,666 $ 327,453 $ 88,298
Supplemental Disclosure of Non-Cash
Operating Activities:
In connection with the General Partners' intent to sell the properties in 1997,
real estate held for investment, deferred rent receivable and prepaid leasing
commissions in the amounts of $17,469,570, $130,692 and $294,814, respectively,
were reclassified to "Real estate assets held for disposition." In connection
with the sale of Swenson Business Park-Building C, restricted cash, deferred
rent receivable, and prepaid leasing commissions in the amounts of $9,800,
$34,502, and $98,965 were netted against Gain on sale of real estate assets.
Notes to the Consolidated Financial Statements
November 30, 1997, 1996 and 1995
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 November 10, 1997, the Partnership closed on the sale of The
Swenson Property - Building C (the "Swenson Property"). The
Swenson Property was sold for net proceeds of $10,351,554 to
WW&LJ Gateways, LTD. (the "Swenson Buyer"), which is
unaffiliated with the Partnership. The selling price was
determined by arm's length negotiations between the Partnership
and the Swenson Buyer. The transaction resulted in a gain on
sale of $4,756,962, which is reflected in the Partnership's
statement of operations for the period ending November 30, 1997.
On December 19, 1997, the Partnership closed on the sale of
Maitland Center Office Building C (the "Maitland Property"). The
Maitland Property, classified as "real estate assets held for
disposition" at November 30, 1997, in the amount of approximately
$5.5 million, was sold for net proceeds of $8,762,318 to CMD
Realty Investment Fund III, L.P., an Illinois limited partnership
(the "Maitland Buyer"), which is unaffiliated with the
Partnership. The selling price was determined by arm's length
negotiations between the Partnership and the Maitland Buyer. The
transaction resulted in a gain on sale of approximately $3.2
million, which will be reflected in the Partnership's statement
of operations for the period ending February 28, 1998.
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.
Real Estate Assets Held for Disposition - Real estate assets held
for disposition are carried at the lower of carrying value or
fair market value less costs to sell. During the second quarter
of 1997, Swenson Business Park - Building C and Maitland Center
Office Building C, and during the third quarter of 1997, Two
Financial Centre real estate assets were reclassified as held for
disposition and were no longer depreciated.
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 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.
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 non-cumulative 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 refinancing shall generally 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. In
addition, if upon dissolution and termination of the Partnership
the sum of (i) the Limited Partners' Capital Contributions and
(ii) an amount equal to a 6% cumulative annual return with
respect to each Limited Partner's Adjusted Capital Value reduced
by any Net Cash From Operations distributed to such Limited
Partner, exceeds the aggregate distributions to the Limited
Partners of Net Proceeds From Sale or Refinancing, the General
Partners shall contribute to the Partnership for distribution to
the Limited Partners an amount equal to the lesser of such excess
or the aggregate distributions of Net Proceeds From Sale or
Refinancing to the General Partners.
The Partnership paid cash distributions totaling $1,275,000 and
$12,879 to the Limited and General Partners, respectively,
representing $12.75 per Limited Partnership Unit for the year
ended November 30, 1997. An additional $10,780,847 was accrued
in 1997 for a distribution, which was payable in February 1998,
and comprised of $429,293 representing cash flow from operations
for the three months ended November 30, 1997, and $10,351,554
representing net proceeds from the sale of Swenson Business Park
- - Building C. 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. 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, 1997,
1996 and 1995.
Unpaid at, Paid
November 30,
1997 1997 1996 1995
Real Estate Services VII
and affiliates:
Out-of-pocket expenses $ 93,046 $ 60,933 $ 5,615 $ 6,995
HS Advisors III, Ltd.:
Administrative salaries
and expenses 12,566 43,783 40,148 29,652
$105,612 $104,716 $ 45,763 $ 36,647
Effective as of January 1, 1997, the Partnership began
reimbursing certain expenses incurred by Real Estate Services
VII, Inc. and its affiliates in servicing the Partnership to the
extent permitted by the Partnership agreement. In prior years,
affiliates of Real Estate Services VII, Inc. had voluntarily
absorbed these expenses. For the year ended November 30, 1997,
such amounts paid or accrued totaled $120,933.
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 two remained as of November 30, 1997:
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
*Sold on December 19, 1997. Please refer to Note 1 "Organization."
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, non-
cumulative 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 Business
Park - 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.
For the year ended November 30, 1997, Two Financial Centre had a
loss from operations totaling approximately $438,000, and
Maitland Center Office Building C has income from operations
totaling approximately $324,900.
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, 1997, accrued interest of $712,210
remains unpaid. Interest of $612,143, $1,055,674 and $584,648
has been paid by TFC to the Partnership during the fiscal years
ended November 30, 1997, 1996 and 1995, 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 non cancelable
operating leases as of November 30, 1997 is as follows:
1998 $1,410,121
1999 593,905
2000 417,678
2001 359,562
2002 324,624
Thereafter 27,052
$3,132,942
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 at Two Financial Centre generated rental
revenue in excess of 10% of the Partnership's consolidated rental
revenues for the year ended November 30, 1997. One of the leases
is with the Federal Bureau of Investigation ("FBI"), which
occupies approximately 35% of the property's leasable space. The
lease is scheduled to expire on July 14, 1998. The General
Partners have approached the FBI regarding a renewal of its
lease, however, negotiations were still underway at the close of
the quarter. The second tenant is Blue Cross/Blue Shield, which
occupies approximately 33% of the property's leasable space
pursuant to a lease which is scheduled to expire on July 11,
2000. The rental income derived from these leases for 1997 was
$492,264 and $464,820 respectively, or 28% of the Partnership's
1997 consolidated rental income. The rental income derived from
these leases for 1996 was $460,611 and $471,476 respectively, or
25% of the Partnership's 1996 consolidated rental income. In
1995, the lease with the FBI generated rental income of
approximately $443,323, or 13% of the Partnership's 1995
consolidated rental income.
On November 26, 1997, Northern Telecom ("Nortel") entered into an
agreement with the Partnership to buyout its lease at Two
Financial Centre for the amount of $147,620. Nortel occupied
approximately 5% of the property's leasable space at November 30,
1997.
8. Reconciliation of Net Income to Taxable Loss
Taxable income reported to the partners for the year ended
November 30, 1997 exceeded net income reported in the financial
statements by $520,674. The net income reported in the financial
statements for the years ended November 30, 1996 and 1995
exceeded the taxable income reported to the partners by $4,182
and $34,074, 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, 1997 and 1996, and the
related consolidated statements of operations, partners'
capital (deficit), and cash flows for each of the three
years in the period ended November 30, 1997. These
financial statements are the responsibility of the
Partnership's management. Our responsibility is to
express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free
of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the 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, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each
of the three years in the period ended November 30, 1997,
in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Boston, Massachusetts
January 23, 1998
Net Asset Valuation
Comparison of Acquisition Costs to Appraised Value and Determination
of Net Asset Value Per $213.84 Unit at November 30, 1997
(Unaudited)
Acquisition Cost
(Purchase Price Partnership's
Plus General Share of
Partners' November 30,
Date of Acquisition 1997 Appraised
Property Acquisition Fees) Value(1)
Two Financial Centre (2)(4) 03-29-84 $ 4,611,600 $ 1,506,854
Maitland Center Office
Building C (3)(4) 09-18-84 8,367,320 9,013,000
$ 12,978,920 $ 10,519,854
Cash and cash equivalents 11,803,602
Rent and other receivables 180,295
Demand promissory note receivable 7,993,146
Prepaid expenses 16,811
30,513,708
Less:
Accounts payable and accrued expenses (323,179)
Due to affiliates (105,612)
Distribution Payable (10,780,847)
Partnership Net Asset Value (5) $19,304,070
Net Asset Value Allocated:
Limited Partners $19,111,029
General Partners 193,041
$19,304,070
Net Asset Value Per Unit
(100,000 units outstanding) $ 191.11
(1) This represents i) the Partnership's share of the November 30, 1997
appraised value of Two Financial Centre which was determined by an independent
property appraisal firm and ii) the purchase price of Maitland Center Office
Building C, which was under contract for sale at November 30, 1997. The
Partnership's share of the November 30, 1997 appraised value takes into
account the allocation provision of the joint venture agreement governing the
distribution of sales proceeds for the property. The sale of Maitland Center
Office Building C subsequently occurred on December 19, 1997.
(2) The Acquisition Cost is net of the outstanding mortgage loan balance at
the time of acquisition. The Partnership's share of the November 30, 1997
appraised value is net of 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) These properties are currently carried on the Partnership's
balance sheet as "Real estate assets held for disposition" and
therefore leasing commissions and the amortization of leasing
commissions are not considered in the calculation of Net Asset
Value. Additionally, on November 10, 1997, Swenson Business Park
Building C was sold and the proceeds have been reflected in cash
and cash equivalents.
(5) The Net Asset Value assumes a hypothetical sale on November 30,
1997 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. With respect to Two
Financial Centre, 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, 1997
Two Maitland
Consolidated Ventures: Financial Centre Building C Total
Location Little Rock, AR Orlando, FL na
Construction date 1981 1984 na
Acquisition date 03-29-84 09-18-84 na
Life on which depreciation in
latest income statements
is computed (1) (1) na
Encumbrances $ 7,993,146 - $ 7,993,146
Initial cost to Partnership (2):
Land 1,560,092 1,395,606 2,955,698
Buildings and improvements 9,583,430 6,526,619 16,110,049
Costs capitalized
subsequent to acquisition:
Land, buildings
and improvements 1,156,307 1,280,210 2,436,517
Deferred Rent 45,635 50,555 96,190
Leasing Commissions 129,950 65,899 195,849
Gross amount at which
carried at close of period:
Land $ 1,560,092 $ 1,395,606 $ 2,955,698
Buildings and improvements 10,759,709 7,819,148 18,578,857
Deferred Rent 45,635 50,555 96,190
Leasing Commissions 129,950 65,899 195,849
$ 12,495,386 $ 9,331,208 $ 21,826,594(4)
Accumulated depreciation (3) $ 5,715,288 $ 3,801,022 $ 9,516,310(4)
(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
$15,361,467.
(4) The sum of these numbers, $12,310,284, represents the amount of "Assets
held for disposition".
A reconciliation of the carrying amount of real estate and accumulated
depreciation for the years ended November 30, 1997, 1996, and 1995 follows:
1997 1996 1995
Real estate investments:
Beginning of year $29,824,136 $29,890,761 $29,629,684
Additions 32,291 260,828 349,375
Deferred Rent 96,190 - -
Leasing Commissions 195,849 - -
Dispositions (1) (8,321,872) (327,453) (88,298)
End of year $21,826,594 $29,824,136 $29,890,761
Accumulated depreciation:
Beginning of year $11,944,782 $11,038,346 $ 9,905,013
Depreciation expense 442,075 1,233,889 1,221,631
Dispositions (1) (2,870,547) (327,453) (88,298)
End of year $ 9,516,310 $11,944,782 $11,038,346
(1) Dispositions include assets associated with the sale of Swenson Business
Park - Building C.
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 23,
1998, included in the 1997 Annual Report to
Shareholders of Commercial Properties 2, L.P. and
Consolidated Ventures.
Our audit 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 therein.
ERNST & YOUNG LLP
Boston, Massachusetts
January 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1997
<PERIOD-END> Nov-30-1997
<CASH> 11,869,202
<SECURITIES> 000
<RECEIVABLES> 180,295
<ALLOWANCES> 000
<INVENTORY> 000
<CURRENT-ASSETS> 000
<PP&E> 12,310,284
<DEPRECIATION> 000
<TOTAL-ASSETS> 24,376,592
<CURRENT-LIABILITIES> 11,269,152
<BONDS> 000
<COMMON> 000
000
000
<OTHER-SE> 13,107,440
<TOTAL-LIABILITY-AND-EQUITY> 24,376,592
<SALES> 3,471,538
<TOTAL-REVENUES> 3,630,472
<CGS> 000
<TOTAL-COSTS> 000
<OTHER-EXPENSES> 2,545,422
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> 000
<INCOME-PRETAX> 000
<INCOME-TAX> 000
<INCOME-CONTINUING> 1,085,050
<DISCONTINUED> 000
<EXTRAORDINARY> 4,756,962
<CHANGES> 000
<NET-INCOME> 5,842,012
<EPS-PRIMARY> 57.84
<EPS-DILUTED> 57.84
</TABLE>
