UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission file number: 0-13341
COMMERCIAL PROPERTIES 3, L.P.
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(formerly Hutton/GSH Commercial Properties 3)
Exact name of registrant as specified in its charter
Virginia 11-2680561
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State or other jurisdiction of
incorporation or organization I.R.S. Employer Identification No.
3 World Financial Center, 29th Floor
New York, NY ATTN: Andre Anderson 10285
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Address of principal executive offices zip code
Registrant's telephone number, including area code: (212) 526-3237
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 December 13, 1983 (included in
Amendment No. 1 to Registration Statement No. 2-85936, of Registrant filed
December 13, 1983) are incorporated by reference to Part III.
Portions of Parts I, II and IV are incorporated by reference to the
Partnership's Annual Report to Unitholders for the year ended December 31, 1996
filed as an exhibit under Item 14.
PART I
Item 1. Business
(a) General Development of Business
Commercial Properties 3, L.P. (the "Registrant" or the "Partnership")
(formerly Hutton/GSH Commercial Properties 3), is a Virginia limited
partnership formed on April 19, 1984, of which Real Estate Services VII, Inc.
("RES"), 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 (the "General Partners"). Commencing December 13, 1983,
the Registrant began offering through E.F. Hutton & Company Inc., a former
affiliate of the Registrant, up to a maximum of 120,000 units of limited
partnership interest (the "Units") at $500 per Unit. The Units were registered
under the Securities Act of 1933, as amended (the "Act"), under Registration
Statement No. 2-85936, which Registration Statement was declared effective on
December 13, 1983.
The offering of Units was terminated on August 9, 1984. Upon termination of
the offering, the Registrant had accepted subscriptions for 109,378 Units for
an aggregate of $54,689,000. After deducting offering costs and initial
working capital reserves, approximately $46,000,000 was available for
investment in real estate. As of December 31, 1996, $44,995,452 of such
proceeds had been invested in an office and light industrial complex, one
limited partnership and two joint ventures, each of which owns a specific
office building, and $1,093,780 of uncommitted funds were distributed to the
Limited Partners as a return of capital on May 15, 1986. The Registrant also
distributed $437,512 in 1986 and $218,756 in 1985 to the Limited Partners as a
return of capital, which sums represented the excess of the initial working
capital reserves set aside for present and future operating requirements. To
the extent that funds committed for investment or 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 December 31, 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:
- - Capital appreciation;
- - Distributions of net cash from operations attributable to rental
income; and
- - Preservation and protection of capital.
- - Equity build-up through principal reduction of mortgage loans, if any,
on the Properties.
Distributions of net cash from operations will be the Registrant's objective
during its operational phase, while the preservation and appreciation of
capital will be the Registrant's long-term objective. Future distributions will
be made from rental operations with respect to the Registrant's investment in
the Properties, as well as from interest on short-term investments and return
of capital. The attainment of the Registrant's investment objectives will
depend on many factors, including future economic conditions in the United
States as a whole and, in particular, in the localities in which the
Registrant's Properties are located, especially with regard to achievement of
capital appreciation.
The Registrant expects to sell its Properties at such time or times as it deems
appropriate, taking into consideration such factors as market conditions for
these types of properties, leasing conditions, property cash flow and the
possible risks of continued ownership. No Property will be sold, financed or
refinanced by the Registrant without agreement of both General Partners.
Proceeds from any future sale, financing or refinancing of the Properties will
not be reinvested but will be distributed to the Limited Partners as a return
of capital, so that the Registrant, in effect, will be self-liquidating. As
partial payment for Properties sold, the Registrant may receive purchase money
obligations collateralized by mortgages or deeds of trust. In such cases, the
amount of such obligations will not be included in net proceeds from sale or
refinancing (distributable to the Limited Partners) until and to the extent the
obligations are realized in cash, sold or otherwise liquidated.
(d) Competition
Incorporated by reference to the section entitled "Property Profiles & Leasing
Update" in the Partnership's Annual Report to Unitholders for the year ended
December 31, 1996 filed as an exhibit under Item 14.
(e) Employees
The Registrant has no employees.
Item 2. Properties
Description of Properties and material leases incorporated by reference to the
section entitled "Property Profiles & Leasing Update" and Note 5 "Rental Income
Under Operating Leases" of the Notes to the Consolidated Financial Statements
in the Partnership's Annual Report to Unitholders for the year ended December
31, 1996 filed as an exhibit under Item 14.
Item 3. Legal Proceedings
The Registrant is presently appealing a $200,000 default judgment in connection
with a legal dispute with a former tenant at the Quorum II Office Building in
Dallas. Although the Registrant is confident that the Texas Court of Appeals
will dismiss the judgment, the Registrant was forced to purchase a security
bond for the entire amount and if the appeal is not successful then the
Registrant may be forced to pay $200,000 to the tenant in order to satisfy the
judgment.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of Unitholders during the fourth quarter of
1996.
PART II
Item 5. Market for Registrant's Limited Partnership Units and Related
Unitholder Matters
(a) Market Information
No established public trading market has developed for the Units, and it is not
anticipated that such a market will develop in the future.
(b) Holders
As of December 31, 1996, the number of holders of Units was 5,411.
(c) Distributions
Cash distributions paid to the Limited Partners for the two years ended
December 31, 1996 and December 31, 1995 are incorporated by reference to the
section entitled "Message to Investors" in the Partnership's Annual Report to
Unitholders for the year ended December 31, 1996 filed as an exhibit under Item
14.
Item 6. Selected Financial Data
Incorporated by reference to the section entitled "Financial Highlights" in the
Partnership's Annual Report to Unitholders for the year ended December 31,
1996, which is filed as an exhibit under Item 14.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Partnership had cash and cash equivalents totaling $1,228,502 at December
31, 1996, compared with $2,134,370 at December 31, 1995. The decrease is due
to the payment of cash distributions to partners totaling $3,078,650 and
additions to real estate assets totaling $386,746 in excess of the $2,559,528
net cash provided by operating activities. The Partnership had a restricted
cash balance of $232,330 at December 31, 1996, compared with $237,566 at
December 31, 1995. Tenant security deposits comprise the restricted cash
balance. Unexpended funds and working capital reserves are invested in
unaffiliated money market funds and interest on such invested balances accrues
to the benefit of the Partnership.
Accounts and rent receivable totaled $40,090 at December 31, 1996 compared to
$64,616 at December 31, 1995. The decrease is due primarily to the timing of
the receipt of rental payments. Prepaid leasing costs and other assets totaled
$563,611 at December 31, 1996 compared to $633,476 at December 31, 1995. The
decrease is primarily due to the amortization of leasing commissions. Deferred
rent receivable decreased to $205,718 at December 31, 1996 from $230,626 a year
earlier, due to the amortization of deferred rent associated with older leases
at all of the Partnership's properties.
Distribution payable decreased to $338,282 at December 31, 1996 from $563,804
at December 31, 1995 reflecting a decrease in the Partnership's quarterly cash
distribution.
The Registrant declared cash distributions to Limited Partners totaling $25.30
per Unit for the year ended December 31, 1996. Included in this total is a
cash distribution of $3.00 per Unit for the quarter ended December 31, 1996,
which was paid on February 14, 1997. The timing and amount of future
distributions will be determined quarterly and will depend on the adequacy of
Partnership cash flow and cash reserve requirements.
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 vs. 1995
Partnership operations resulted in a net income of $567,637 for the year ended
December 31, 1996, compared to a net loss of $3,631,162 in 1995. The change
from net loss in 1995 to net income in 1996 is primarily attributable to a
$3,928,998 loss recognized in 1995 on the write down of the Quorum II Office
Building to its estimated Fair Value pursuant to the requirements of FAS 121.
Rental income totaled $5,209,134 for the year ended December 31, 1996 compared
to $5,047,528 for the year ended December 31, 1995. The increase is due to
rental rate increases at three of the Partnership's four properties. Interest
income totaled $69,645 for the year ended December 31, 1996, compared to
$110,529 for the year ended December 31, 1995. The decrease is due primarily
to a lower average cash balance in 1996.
Property operating expenses totaled $2,291,679 for the year ended December 31,
1996, relatively unchanged from $2,283,025 for the year ended December 31,
1995. Depreciation and amortization decreased to $2,074,246 for the year ended
December 31, 1996 from $2,278,567 for the year ended December 31, 1995,
primarily due to a lower depreciable asset base in 1996. The Partnership
incurred bad debt expense of $33,361 for the year ended December 31, 1996
reflecting the uncollectibility of delinquent rent. The Partnership incurred
no bad debt expense in 1995.
For the year ended December 31, 1996, net income of $42,140 was allocated to
the co-venturer of Quorum II Office Building. This allocation resulted from
the property's net income, prior to depreciation expense, being in excess of
net cash distributed from operations.
As of December 31, 1996, lease levels at each of the properties were as
follows: Metro Park Executive Center - 81%; Fort Lauderdale Commerce Center -
85%; Three Financial Centre - 94 %; Quorum II Office Building - 84%.
1995 vs. 1994
Partnership operations resulted in a net loss of $3,631,162 for the year ended
December 31, 1995, compared to net loss of $331,534 for the corresponding
period in 1994. The increase in net loss was primarily attributable to a
$3,928,998 loss recognized on the write down of the Quorum II property. This
write down was recorded on the 1995 Financial Statements only and had no impact
on Limited Partners' tax basis capital accounts. See Note 2 "Significant
Accounting Policies - Accounting for Impairment", Note 4 "Real Estate
Investments" and Note 7 "Reconciliation of Financial Statement Net Loss to
Federal Income Tax Basis Net Loss" of the Notes to the Consolidated Financial
Statements in the Partnership's Annual Report to Unitholders for the year ended
December 31, 1996 filed as an exhibit under Item 14.
Rental income totaled $5,047,528 for the year ended December 31, 1995 compared
to $4,641,823 for the year ended December 31, 1994. The increase was due to
higher occupancy and rent escalations at three of the Partnership's four
properties. Interest income totaled $110,529 for the year ended December 31,
1995, compared to $49,446 for the year ended December 31, 1994. The increase
was due primarily to a larger average cash balance in 1995.
Property operating expenses totaled $2,283,025 for the year ended December 31,
1995, compared to $2,231,683 for the year ended December 31, 1994. The
increase was largely due to higher grounds maintenance expense at Fort
Lauderdale Commerce Center. Depreciation decreased to $2,278,567 for the year
ended December 31, 1995 from $2,388,925 for the year ended December 31, 1994,
primarily due to a lower depreciable asset base in 1995. The Partnership
incurred bad debt expense of $77,710 for the year ended December 31, 1994
reflecting the uncollectibility of delinquent rent. The Partnership incurred
no bad debt expense in 1995.
For the year ended December 31, 1995, net income of $50,022 was allocated to
the co-venturer of Three Financial Centre. This allocation resulted from the
property's net income, prior to depreciation expense, being in excess of net
cash distributed from operations.
As of December 31, 1995, lease levels at each of the properties were as
follows: Metro Park Executive Center - 78%; Fort Lauderdale Commerce Center -
88%; Three Financial Centre - 94 %; Quorum II Office Building - 98%.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to the Partnership's Annual Report to Unitholders for
the year ended December 31, 1996, which is 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. RES and HS Advisors, the 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.
Real Estate Services VII, Inc.
Real Estate Services VII, Inc., is a Delaware corporation formed on August 2,
1982 and is an affiliate of Lehman Brothers Inc. ("Lehman"). See the section
captioned "Certain Matters Involving Hutton Affiliates" below for a description
of the Hutton Group's acquisition by Shearson Lehman Brothers, Inc.
("Shearson") and the subsequent sale of certain of Shearson's 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 RES 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 RES 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 that 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 Financial Officer
Kenneth L. Zakin Director, Executive Vice President
William Caulfield Vice President
Michael Marron Vice President
Lawrence M. Ostow Vice President
John H. Ng Vice President
Moshe Braver 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 Brothers 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 1986-89, 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 Brothers, 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.
Kenneth L. Zakin, 49, is a Senior Vice President of Lehman Brothers and has
held such title since November 1988. He is currently a senior manager in
Lehman Brothers' Diversified Asset Group and was formerly group head of the
Commercial Property Division of Shearson Lehman Brothers' Direct Investment
Management Group responsible for the management and restructuring of limited
partnerships owning commercial properties throughout the United States. From
January 1985 through November 1988, Mr. Zakin was a Vice President of Shearson
Lehman Brothers Inc. Mr. Zakin was a director of Lexington Corporate
Properties, Inc. from 1993 to 1996. He is a member of the Bar of the State of
New York and previously practiced as an attorney in New York City from 1973 to
1984 specializing in the financing, acquisition, disposition, and restructuring
of real estate transactions. Mr. Zakin is a member of the Real Estate Lender's
Association and is currently an associate member of the Urban Land Institute
and a member of the New York District Council Advisory Services Committee. He
received a Juris Doctor degree from St. John's University School of Law in 1973
and a B.A. degree from Syracuse University in 1969.
William Caulfield, 37, is a Vice President of Lehman Brothers and is
responsible for investment management of commercial real estate in the
Diversified Asset Group. Prior to the Shearson/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.
Michael 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.
Lawrence M. Ostow, 29, is a Vice President of Lehman Brothers Inc. and is
responsible for the management of commercial real estate in the Diversified
Asset Group. Mr. Ostow joined Lehman Brothers in September 1992. Prior to
that, Mr. Ostow was a Senior Consultant with Arthur Andersen & Co. in the Real
Estate Services Group, beginning in July 1990. Mr. Ostow is a candidate for an
M.B.A. from the Stern School of Business in 1997 and earned a B.A. degree in
Economics from the University of Michigan in 1990.
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.
Moshe Braver, 43, is currently a Managing Director of Lehman Brothers and has
held such position since October 1985. During this time, he has held positions
with the Business Analysis Group, International and Capital Markets
Administration and currently, with the Diversified Asset Group. Mr. Braver
joined Shearson Lehman Brothers in August 1983 as Senior Vice President. Prior
to joining Shearson, Mr. Braver was employed by the accounting firm of Coopers
& Lybrand from January 1975 through August 1983 as an Audit Manager. He
received a Bachelor of Business Administration degree from Bernard Baruch
College in January 1975 and is a Certified Public Accountant.
HS Advisors III, Ltd.
HS Advisors, 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. 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 3, L.P., to delete any reference to "Hutton."
On August 1, 1993, Goodman Segar Hogan ("GSH") transferred all of its leasing,
management and sales operations to Goodman Segar Hogan Hoffler, L.P., a
Virginia limited partnership ("GSHH"). On that date, the leasing, management
and sales operations of a portfolio of properties owned by the principals of
Armada/Hoffler ("HK") were also obtained by GSHH. The General Partner of GSHH
is Goodman Segar Hogan Hoffler, Inc., a Virginia corporation ("GSHH Inc."),
which has a one percent interest in GSHH. The stockholders of GSHH Inc. are
GSH with a sixty-two percent stock interest and H.K. Associates, L.P., an
affiliate of HK, with a thirty-eight percent stock interest. The remaining
interests in GSHH are limited partnership interests owned by GSH, HK and 23
employees of GSHH. The transaction did not affect the ownership of the general
partners.
Item 11. Executive Compensation
Neither of the General Partners nor any of their directors and officers
received any compensation from the Registrant. See Item 13 below with respect
to a description of certain transactions of the General Partners and their
affiliates with the Registrant.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of 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
December 31, 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 December 31,
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 December 31, 1996, $120,389 of the Registrant's
income was allocated to the General Partners ($80,259 to RES and $40,130 to HS
Advisors). For a description of the allocation 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 45 through 48 of the
Prospectus of Registrant dated December 13, 1983 (the "Prospectus"), contained
in Amendment No. 1 to Registrant's Registration Statement No. 2-85936, under
the section captioned "Distributions and Allocations," 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. For such services GSH will be entitled to receive a management fee
as described under the section captioned "Investment Objectives and Policies -
Management of Properties" in the Prospectus, which section is incorporated
herein by reference thereto.
Pursuant to Section 12(g) of the Registrant's Certificate and Agreement of
Limited Partnership, the General Partners and certain affiliates may be
reimbursed by the Registrant for certain costs as described on page 16 of the
Prospectus, which description is incorporated herein by reference thereto.
First Data Investor Services Group (formerly "The Shareholder Services Group")
("FDISG") provides partnership accounting and investor relations services for
the Registrant. Prior to May 1993, these services were provided by an
affiliate of a general partner. The Registrant's transfer agent and certain
tax reporting services are provided by Service Data Corporation ("SDC"). Both
FDISG and SDC are unaffiliated companies. Disclosure relating to amounts paid
to the General Partners or their affiliates during the past three years is
incorporated by reference to Note 6 "Transactions With the General Partners and
Affiliates" of Notes to the Consolidated Financial Statements contained in the
Partnership's Annual Report to Unitholders for the year ended December 31, 1996
filed as an exhibit under Item 14.
PART IV
Item 14. Exhibits, Financial Statement 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 December 31, 1996 and 1995 (1)
Consolidated Statements of Partners' Capital (Deficit) -
For the years ended December 31, 1996, 1995 and 1994 (1)
Consolidated Statements of Operations -
For the years ended December 31, 1996, 1995 and 1994 (1)
Consolidated Statements of Cash Flows -
For the years ended December 31, 1996, 1995 and 1994 (1)
Notes to the Consolidated Financial Statements (1)
(2) Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation 12
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and
therefore have been omitted.
(1) Incorporated by reference to the Partnership's Annual Report to
Unitholders for the year ended December 31, 1996, which is filed as
exhibit 13.
(b) Reports on Form 8-K filed in the fourth quarter of calendar year 1996:
None.
(c) See Exhibit Index contained herein.
EXHIBIT INDEX
Exhibit No.
(4) (A) Certificate and Agreement of Limited Partnership (included as, and
incorporated herein by reference to, Exhibit A to the Prospectus of
Registrant dated December 13, 1983 (the "Prospectus"), contained in
Amendment No. 1 to Registration Statement, No. 2-85936, of the
Registrant filed December 13, 1983 (the "Registration Statement")).
(B) First Amendment to Certificate and Agreement of Limited Partnership
(included as, and incorporated herein by reference to, Exhibit 4(B)
of the Registrant's Annual Report on Form 10-K for the fiscal year
ended November 30, 1984 (the "1984 Annual Report")).
(C) Subscription Agreement and Signature Page (included as, and
incorporated herein by reference to, Exhibit 3.1 to the 1983
Registration Statement).
(10) (A) Agreements relating to Quorum II Office Building (included as, and
incorporated herein by reference to, Exhibit (10)(A) to the 1984
Annual Report).
(B) Agreements relating to Three Financial Centre Office Building
(included as, and incorporated herein by reference to, Exhibit
(10)(B) to the 1984 Annual Report).
(C) Agreements relating to Fort Lauderdale Commerce Center (included as,
and incorporated herein by reference to, Exhibit (10)(C) to the 1984
Annual Report).
(D) Agreements relating to Metro Park Executive Center (included as, and
incorporated herein by reference to, Exhibit (10)(D) to the 1984
Annual Report).
(13) Annual report to the Unitholders for the year ended December 31,
1996.
(27) Financial Data Schedule.
(28) Portions of Prospectus of Registrant dated December 13, 1983.
Schedule III - Real Estate and Accumulated Depreciation December 31, 1996
Fort Metro
Lauderdale Three Park Quorum II
Center Financial Executive Office
Consolidated Ventures: Commerce Centre Center Building Total
Location Ft. Lauderdale Little Rock Fort Myers Dallas
, FL , AR , FL , TX na
Construction date 1985 1984 1984 1985 na
Acquisition date 04-18-85 01-22-85 01-07-85 06-12-85 na
Life on which
depreciation in
latest income
statements is
computed 1-25 yrs 1-25 yrs 1-25 yrs 1-25 yrs na
Encumbrances
Initial cost to
Partnership:
Land $ 2,741,551 1,018,332 $ 548,643 $ 1,500,168 $ 5,808,694
Buildings and
improvements 12,613,916 10,419,160 5,315,077 3,098,584 31,446,737
Costs capitalized
subsequent to
acquisition:
Land, buildings
and improvements (289,578) (262,490) (197,249) 134,112 (615,205)
Gross amount at which
carried at close of
period(1):
Land $ 2,741,551 $ 1,018,332 $ 548,643 $ 1,500,168 $ 5,808,694
Buildings and
improvements 12,324,338 10,156,670 5,117,828 3,232,696 30,831,532
15,065,889 11,175,002 5,666,471 4,732,864 36,640,226
Accumulated
depreciation (2) $ 5,841,219 $ 4,934,366 $2,432,938 $ 338,390 $13,546,913
(1) For Federal income tax purposes, the basis of land, building and
improvements is $48,384,595.
(2) For Federal income tax purposes, the amount of accumulated depreciation is
$26,394,178.
A reconciliation of the carrying amount of real estate and accumulated
depreciation for the years ended December 31, 1996, 1995, and 1994 follows:
1996 1995 1994
Real estate investments:
Beginning of year $37,255,431 $46,187,232 $45,533,902
Additions 386,746 458,496 654,844
Write-down - (8,936,000) -
Deletions (1,001,951) (454,297) (1,514)
End of year $36,640,226 $37,255,431 $46,187,232
Accumulated depreciation:
Beginning of year $12,714,080 $16,113,296 $13,941,302
Depreciation expense 1,834,784 2,062,083 2,173,508
Deletions (1,001,951) (454,297) (1,514)
Write-down - (5,007,002) -
End of year $13,546,913 $12,714,080 $16,113,296
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 3, L.P.
Dated: March 21, 1997 BY: HS Advisors III, Ltd.
General Partner
Hogan Stanton Investment, Inc.
General Partner
BY: /s/Mark P. Mikuta
Name: Mark P. Mikuta
Title: President
Dated: March 21, 1997 BY: Real Estate Services VII, Inc.
General Partner
BY: /s/Rocco F. Andriola
Name: Rocco F. Andriola
Title: Director, President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capabilities and on the dates indicated.
REAL ESTATE SERVICES VII, INC.
A General Partner
Dated: March 21, 1997
BY: /s/Rocco F. Andriola
Rocco F. Andriola
Director, President and
Chief Financial Officer
Dated: March 21, 1997
BY: /s/William Caulfield
William Caulfield
Vice President
Dated: March 21, 1997
BY: /s/Kenneth L. Zakin
Kenneth L. Zakin
Vice President and Director
Dated: March 21, 1997
BY: /s/Michael T. Marron
Michael T. Marron
Vice President
Dated: March 21, 1997
BY: /s/Lawrence M. Ostow
Lawrence M. Ostow
Vice President
Dated: March 21, 1997
BY: /s/John H. Ng
John H. Ng
Vice President
Date: March 21, 1997
BY: /s/Moshe Braver
Moshe Braver
Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capabilities and on the dates indicated.
HS ADVISORS III, LTD.
A General Partner
Date: March 21, 1997
BY: /s/Mark P. Mikuta
Mark P. Mikuta
President of Hogan Stanton
Investment, Inc., as general
partner of HS Advisors III, Ltd.
Date: March 21, 1997
BY: /s/Donald T. Herrick, Jr.
Donald T. Herrick, Jr.
Vice President and Treasurer of
Hogan Stanton Investment, Inc.,
as general partner of
HS Advisors III, Ltd.
Date: March 21, 1997
BY: /s/Julie R. Adie
Julie R. Adie
Vice President and Secretary of
Hogan Stanton Investments, Inc.
as general partner of
HS Advisors III, Ltd.
EXHIBIT 13
Commercial Properties 3, L.P.
1996 Annual Report to Unitholders
Commercial Properties 3, L.P. (the "Partnership"), is a limited partnership
formed in 1984 to acquire, operate and hold for investment commercial real
estate properties. The Partnership's investments are comprised of three office
buildings located in Dallas, Texas; Little Rock, Arkansas; and Fort Myers,
Florida, and a combined office/warehouse and office/showroom property located
in Fort Lauderdale, Florida. Provided below is a comparison of lease levels at
the properties as of December 31, 1996 and 1995.
Percentage
Leased
Property Location 1996 1995
Metro Park Executive Center Fort Myers, FL 81% 78%
Fort Lauderdale Commerce Center Fort Lauderdale, FL 85% 88%
Three Financial Centre Little Rock, AR 94% 94%
Quorum II Office Building Dallas, TX 84% 98%
Administrative Inquiries Performance Inquiries/Form 10-Ks
Address Changes/Transfers First Data Investor Services Group
Service Data Corporation P.O. Box 1527
2424 South 130th Circle Boston, Massachusetts 02104-1527
Omaha, Nebraska 68144-2596 Attn: Financial Communications
800-223-3464 800-223-3464
Message to Investors
We are pleased to present the 1996 Annual Report for Commercial Properties 3,
L.P. (the "Partnership"). Included in this report is a review of national
market conditions, an update of Partnership operations, and financial
highlights for the year. Please refer to the Property Profiles & Leasing Update
section of this report for additional information regarding local market
conditions for each of the Partnership's properties, as well as their operating
performance and lease levels at December 31, 1996.
Market Overview
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, demand for office space continues to increase, bringing
about continually lower vacancy rates and, in many regions of the country,
enabling property owners to raise rental rates. Accordingly, the availability
of financing for investment in this sector has also improved. Conditions in
the markets where the Partnership's properties are located generally paralleled
those in the national market, and three of the Partnership's four properties
reported stable occupancy rates at year-end 1996.
In view of these ongoing improvements in the real estate and capital markets,
we believe that the current favorable environment may present opportunities to
sell the Partnership's properties. As a result, the General Partners
anticipate marketing for sale at least one of the properties in 1997 as various
leasing issues are resolved. It should be noted that there can be no assurance
that any of the Partnership's future marketing efforts will result in a sale of
a property.
Cash Distributions
The Partnership paid cash distributions to Limited Partners totaling $25.30 per
Unit for the year ended December 31, 1996, including a fourth quarter cash
distribution of $3.00 per Unit that was either credited to your brokerage
account or sent directly to you on February 14, 1997. Since inception, the
Partnership has paid total cash distributions of $161.81 per original $500
Unit, including $16 per Unit in return of capital payments which have reduced
the Unit size from $500 to $484. The timing and amount of future cash
distributions will be determined quarterly and will depend on the adequacy of
the Partnership's cash flow and cash reserve requirements.
Cash Distributions Per Limited Partnership Unit
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1995 $2.50 $2.50 $3.25 $5.00 $13.25
1996 $16.30* $3.00 $3.00 $3.00 $25.30
* Includes a special cash distribution of $13.30 per Unit paid
on March 29, 1996.
General Information
As you are probably aware, several third parties have commenced partial tender
offers to purchase units of the Partnership at prices which are substantially
below the Partnership's Net Asset Value. In response to these offers, we have
recommended that limited partners reject these offers because they do not
reflect the underlying value of the Partnership's assets. According to
published industry sources, most investors who hold units of limited
partnerships similar to the Partnership have rejected these types of tender
offers due to their inadequacy. Please be assured that if any additional
tender offers are made for your units, we will make every effort to provide you
with our position regarding those offers on a timely basis.
Summary
In the coming year the General Partners will explore opportunities to sell the
Partnership's properties. Additionally, we will continue to focus on leasing
vacant space and renewing any leases which are scheduled to expire in 1997 so
as to further improve the properties' sales opportunities. We will keep you
apprised of significant developments affecting your investment 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/Kenneth L. Zakin /s/Mark P. Mikuta
Kenneth L. Zakin Mark P. Mikuta
Executive Vice President President
March 21, 1997
Property Profiles & Leasing Update
METRO PARK EXECUTIVE CENTER Fort Myers, Florida
Metro Park Executive Center is situated in a suburban office park just east of
the Fort Myers central business district in the Edison Central submarket. The
property is one of five class "A" commercial office buildings located within
the office park. The property contains 60,597 leasable square feet of
commercial office space.
Leasing Update - The General Partners executed one new lease representing 1,212
square feet and two three-year lease renewals representing 3,933 square feet in
1996. In addition, a tenant occupying 4,773 square feet, whose lease expired
in December 1996, extended its lease for ten years. As a result, the property
was 81% leased at December 31, 1996, compared with 78% at year-end 1995. None
of the property's tenants generated rental income in excess of 10% of the
Partnership's consolidated rental income. Six leases totaling 24,844 square
feet or approximately 41% of the property's space are scheduled to expire
during 1997, including one lease for 16,517 square feet.
Fort Myers Market Update - The Fort Myers commercial office market improved
during 1996 and vacancy rates declined to approximately 12% for the fourth
quarter of 1996, down from approximately 14% for the fourth quarter of 1995.
While the Edison Central submarket was adversely impacted by the relocation of
several tenants during 1995 outside of the market, the area rebounded during
1996 as vacancy rates for commercial office space declined to approximately 15%
at year-end 1996 from approximately 17% at year-end 1995. Rental rates
increased slightly and are expected to rise further during the upcoming year.
FORT LAUDERDALE COMMERCE CENTER Fort Lauderdale, Florida
Fort Lauderdale Commerce Center contains 186,884 leasable square feet of
office/showroom and office/warehouse space. The property is located in the
Cypress Creek submarket in the north central section of Broward County,
approximately five miles north of the central business district of Fort
Lauderdale.
Leasing Update - During the year, the General Partners executed one new lease
representing 5,428 square feet and two lease renewals totaling 14,615 square
feet. One tenant, leasing a total of 6,425 square feet pursuant to two leases
originally scheduled to expire in July 1996, extended its leases until October
1997. Another tenant, leasing 6,000 square feet, who's lease expired during
the fourth quarter, vacated its space in December 1997. As a result, the
property was 85% leased at year- end 1996 compared with 88% at year-end 1995.
None of the property's tenants accounted for 10% or more of the Partnership's
consolidated rental income. The General Partners continue to aggressively
market the property's vacant space. During 1997, six leases representing
28,040 square feet or approximately 15% of the property's leasable space, are
scheduled to expire. These tenants have been contacted by the General Partners
to discuss the renewal of their leases, however, it is uncertain whether they
will renew.
Fort Lauderdale Market Update - The Broward County office market remained
stable during 1996, ranking among the top markets nationwide. Recent economic
indicators, such as the area's low 4% unemployment rate, have contributed to
the county's strong position. The vacancy rate for office/service space in
Broward County was relatively unchanged from the previous year, and decreased
slightly to 7% as of year-end 1996 compared with 7.5% as of year-end 1995. In
keeping with these strong conditions, rental rates increased by approximately
12% over the year and the use of rental concessions has been eliminated. The
Cypress Creek market, situated in north central Broward County, also benefited
from the relatively strong office environment and the vacancy rate for
office/service space decreased to 7.8% as of the 1995 fourth quarter, from
12.1% a year earlier. General market conditions are expected to remain healthy
in 1997.
THREE FINANCIAL CENTRE Little Rock, Arkansas
Three Financial Centre is a 123,833 leasable square foot, eight- story brick
office building situated in the Financial Centre Complex located in west Little
Rock. The property affords easy access to downtown Little Rock and the Little
Rock Regional Airport, and is located near two interstate highways, I-630 and
I- 430.
Leasing Update - At December 31, 1996, the property's lease level was 94%,
unchanged from December 31, 1995. During the year, the General Partners
executed two new leases totaling 2,858 square feet and two new short-term
leases totaling 1,284 square feet. The General Partners also re-leased 6,533
square feet of the property's vacant space to an existing tenant, which
expanded its space to a total of 12,240 square feet and extended its lease for
three years. Additionally, two tenants expanded their spaces by a total of
3,205 square feet and renewed their respective leases. However, three tenants
leasing a total of 10,580 square feet vacated the premises upon the expiration
of their leases during 1996. None of the property's tenants accounted for 10%
or more of the Partnership's consolidated rental income. A tenant leasing
4,747 square feet pursuant to a lease that expired on January 31, 1997, vacated
its space. No other leases are scheduled to expire during 1997.
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, unchanged from a year earlier. The leasing environment
in west Little Rock, the submarket where Three 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 year-end 1995. As a result,
rental rates increased and property values continued to rise.
As a result of the favorable market conditions combined with the property's
stabilized operations, the General Partners will evaluate potential sales
opportunities during 1997.
QUORUM II OFFICE BUILDING Dallas, Texas
Quorum II Office Building is located in the LBJ/Quorum submarket in
northwestern Dallas. The property contains 84,094 leasable square feet of
commercial office space and affords easy access to Loop 635, Dallas Parkway,
the Dallas North Tollway and Inwood Road.
Leasing Update - The General Partners executed two new leases totaling 7,290
square feet during 1996. Additionally, two tenants leasing a total of 10,622
square feet whose leases expired during the year, continue to occupy their
respective spaces on a month- to-month basis. However, a tenant leasing 14,175
square feet vacated its space upon the expiration of its lease in November
1996. As a result, the property was 84% leased at December 31, 1996 compared
with 98% at December 31, 1995. None of the property's tenants accounted for
10% or more of the Partnership's consolidated rental income. Seven leases
representing 28,251 square feet or approximately 34% of the property's leasable
area are scheduled to expire in 1997. These tenants have been contacted by the
General Partners to discuss the renewal of their leases, however, it is
uncertain whether they will renew or extend their terms.
Dallas Market Update - The Dallas commercial real estate market continued to
improve in 1996 driven primarily by the region's continued strong employment
growth. The area's healthy business climate, low tax rate and high quality of
life have led to a steady migration of companies to the region, increasing
demand for office space. The LBJ/Quorum submarket, where the property is
located, benefited from these conditions, as evidenced by a decrease in the
submarket's vacancy rate to 6% at year-end 1996, compared with 9% a year
earlier. Additionally, rental rates increased by approximately 10% in 1996 and
property values have risen.
Financial Highlights
For The Years Ended December 31,
(dollars in thousands except per Unit data)
1996 1995 1994 1993 1992
Total income $ 5,279 $ 5,158 $ 4,691 $ 4,211 $ 4,034
Net income (loss) 568 (3,631) (332) (910) (712)
Total assets 25,364 27,842 32,837 33,454 35,220
Net cash from operations 2,560 2,168 1,859 1,536 1,592
Net income (loss) per Unit 4.09 (32.87) (3.00) (8.24) (6.45)
Cash distributions per
Limited Partnership Unit 25.30(1) 13.25 5.50 4.00 14.00
(1) Includes a special cash distribution of $13.30 per Unit paid on March 29,
1996.
The above selected financial data should be read in conjunction with the
consolidated financial statements and related notes included in this report.
- - The change to net income in 1996 from net loss in 1995 is primarily
attributable to a $3,928,998 loss recognized in 1995 on the write down of the
Quorum II Office Building, implemented in compliance with Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The net
income is also attributable to lower depreciation and amortization and higher
rental income 1996.
- - Net cash from operations increased in 1996 primarily due to higher net
income.
Consolidated Balance Sheets At December 31, At December 31,
1996 1995
Assets
Property:
Land $ 5,808,694 $ 5,808,694
Buildings, building improvements and equipment 30,831,532 31,446,737
36,640,226 37,255,431
Less accumulated depreciation (13,546,913) (12,714,080)
23,093,313 24,541,351
Cash and cash equivalents 1,228,502 2,134,370
Restricted cash 232,330 237,566
Accounts and rent receivable, net of
allowance for doubtful accounts of
$5,444 in 1996 and $5,486 in 1995 40,090 64,616
Deferred rent receivable 205,718 230,626
Prepaid leasing costs and other assets,
net of accumulated amortization of $805,502
in 1996 and $900,609 in 1995 563,611 633,476
Total Assets $ 25,363,564 $ 27,842,005
Liabilities and Partners' Capital (Deficit)
Liabilities:
Accounts payable and accrued expenses $ 249,517 $ 257,185
Due to affiliates 5,941 8,479
Distributions payable 338,282 563,804
Security deposits payable 215,026 214,388
Total Liabilities 808,766 1,043,856
Minority Interest 263,477 221,337
Partners' Capital (Deficit):
General Partners (368,069) (402,866)
Limited Partners (109,378 units outstanding) 24,659,390 26,979,678
Total Partners' Capital 24,291,321 26,576,812
Total Liabilities and Partners' Capital $ 25,363,564 $ 27,842,005
Consolidated Statements of Partners' Capital (Deficit)
For the years ended December 31, 1996, 1995 and 1994
General Limited
Partners Partners Total
Balance at December 31, 1993 $(299,811) $32,953,585 $32,653,774
Net Loss (3,315) (328,219) (331,534)
Distributions (18,606) (601,579) (620,185)
Balance at December 31, 1994 (321,732) 32,023,787 31,702,055
Net Loss (36,312) (3,594,850) (3,631,162)
Distributions (44,822) (1,449,259) (1,494,081)
Balance at December 31, 1995 (402,866) 26,979,678 26,576,812
Net Income 120,389 447,248 567,637
Distributions (85,592) (2,767,536) (2,853,128)
Balance at December 31, 1996 $(368,069) $24,659,390 $24,291,321
Consolidated Statements of Operations
For the years ended December 31, 1996 1995 1994
Income
Rental $5,209,134 $ 5,047,528 $4,641,823
Interest 69,645 110,529 49,446
Total Income 5,278,779 5,158,057 4,691,269
Expenses
Property operating 2,291,679 2,283,025 2,231,683
Loss on write-down of real estate - 3,928,998 -
Depreciation and amortization 2,074,246 2,278,567 2,388,925
General and administrative 269,716 248,607 240,074
Bad debt 33,361 - 77,710
Total Expenses 4,669,002 8,739,197 4,938,392
Net income (loss) before minority interest 609,777 (3,581,140) (247,123)
Minority interest (42,140) (50,022) (84,411)
Net Income (Loss) $ 567,637 $(3,631,162) $ (331,534)
Net Income (Loss) Allocated:
To the General Partners $ 120,389 $ (36,312) $ (3,315)
To the Limited Partners 447,248 (3,594,850) (328,219)
$ 567,637 $(3,631,162) $ (331,534)
Per limited partnership unit
(109,378 outstanding) $4.09 $(32.87) $(3.00)
Consolidated Statements of Cash Flows
For the years ended December 31, 1996 1995 1994
Cash Flows From Operating Activities
Net Income (Loss) $ 567,637 $(3,631,162) $ (331,534)
Adjustments to reconcile net income(loss)
to net cash provided by operating
activities:
Minority interest 42,140 50,022 84,411
Loss on write-down of real estate - 3,928,998 -
Depreciation 1,834,784 2,062,083 2,173,508
Amortization 239,462 216,484 215,417
Increase (decrease) in cash arising
from changes in operating assets and
liabilities:
Restricted cash 5,236 (21,487) (3,925)
Accounts and rent receivable, net 24,526 (36,290) 112,971
Deferred rent receivable 24,908 4,620 (136,873)
Notes receivable - - 51,403
Prepaid leasing costs and other assets (169,597) (203,967) (237,210)
Accounts payable and accrued expenses (7,668) (210,984) (91,761)
Due to affiliates (2,538) (696) 5,139
Security deposits payable 638 9,923 17,235
Net cash provided by operating activities 2,559,528 2,167,544 1,858,781
Cash Flows From Investing Activities
Additions to real estate (386,746) (458,496) (504,597)
Net cash used for investing activities (386,746) (458,496) (504,597)
Cash Flows From Financing Activities
Cash distributions (3,078,650) (1,212,179) (451,044)
Net cash used for financing activities (3,078,650) (1,212,179) (451,044)
Net increase (decrease) in cash and cash
equivalents (905,868) 496,869 903,140
Cash and cash equivalents, beginning of
period 2,134,370 1,637,501 734,361
Cash and cash equivalents, end of period $ 1,228,502 $ 2,134,370 $ 1,637,501
Supplemental Schedule of Non-Cash
Investing Activity:
Additions to real estate assets
capitalized but unpaid at end of period $ - $ - $ 150,247
Notes to the Consolidated Financial Statements
December 31, 1996, 1995 and 1994
1. Organization
Commercial Properties 3, 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 April 19, 1984
(the "Partnership Agreement"). The Partnership was formed for the purpose of
acquiring and operating certain types of commercial real estate. The General
Partners of the Partnership are Real Estate Services VII, Inc. ("Real Estate
Services"), formerly Hutton Real Estate Services VII, Inc. , which is an
affiliate of Lehman Brothers Inc. ("Lehman Brothers") and HS Advisors III, Ltd.
("HS Advisors"), which is an affiliate of Goodman Segar Hogan, Inc. 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. The transaction did not
affect the ownership of the General Partners. However, the assets acquired by
Smith Barney included the name "Hutton." Consequently, effective October 22,
1993, the Hutton Real Estate Services VII, Inc. General Partner changed its
name to delete any reference to Hutton. Additionally, effective August 3,
1995, the Partnership changed its name to Commercial Properties 3, L.P., to
delete any reference to "Hutton."
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.
2. Significant Accounting Policies
Basis of Accounting - The accompanying financial statements have been prepared
on the accrual basis of accounting in accordance with generally accepted
accounting principles. Revenues are recognized as earned and expenses are
recorded as obligations are incurred.
Consolidation - The consolidated financial statements include the accounts of
the Partnership and its ventures, Metro Park Associates Joint Venture ("Metro
Park"), Three Financial Centre Joint Venture ("Three Financial Centre"), and
14850 Quorum Associates, Ltd. ("Quorum"). Intercompany accounts and
transactions between the Partnership and the ventures are eliminated in
consolidation.
Real Estate Investments - Real estate investments, which consist of commercial
buildings and capital improvements (the "Properties"), are recorded at cost,
which includes the initial purchase price of the property plus closing costs,
acquisition and legal fees and other miscellaneous acquisition costs.
Depreciation is computed using the straight-line method based upon the
estimated useful lives of 3 to 25 years except for tenant improvements which
are depreciated over the terms of the respective leases.
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. Pursuant to this
issuance, the Partnership implemented FAS 121 in the fourth quarter of 1995.
The effect of the adoption was the recognition of an impairment loss on the
Partnership's investments in real estate in 1995 in the amount of $3,928,998
(see note 4).
Cash Equivalents - Cash equivalents consist of short-term highly liquid
investments which have maturities of three months or less from the date of
purchase. The carrying amount approximates fair value because of the short
maturity of these instruments.
Restricted Cash - Restricted cash consists of amounts held for tenant security
deposits.
Concentration of Credit Risk - Financial instruments which potentially subject
the Partnership to a concentration of credit risk principally consist of cash
in excess of the financial institution's insurance limits. The Partnership
invests available cash with high credit quality financial institutions.
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 even though rent is not received until later periods as a result of
rental escalations.
Prepaid Leasing Costs - Leases are accounted for as operating leases. Leasing
commissions are amortized over the terms of the respective leases.
Income Taxes - No provision for income taxes has been made in the financial
statements of the Partnership since such taxes are the responsibility of the
individual partners rather than of the Partnership.
Fair Value of Financial Instruments - Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments "
("FAS 107"), requires that the Partnership disclose the estimated fair values
of its financial instruments. Fair values generally represent estimates of
amounts at which a financial instrument could be exchanged between willing
parties in a current transaction other than in forced liquidation. Fair value
estimates are subjective and are dependent on a number of significant
assumptions based on management's judgment regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. In addition, FAS 107 allows a wide
range of valuation techniques, therefore, comparisons between entities, however
similar, may be difficult.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications - Certain prior year amounts have been reclassified in order
to conform to the current year's presentation.
3. Partnership Agreement
The Partnership agreement provides that net cash from operations, as defined,
will be distributed on a quarterly basis as follows: 97% to the Limited
Partners and 3% 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. The balance of net cash from
operations, if any, will then be distributed 90% to the Limited Partners and
10% to the General Partners.
Net proceeds from sales or refinancings shall be distributed as follows: 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 a 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.
Losses and all depreciation for any fiscal year shall be allocated 99% to the
Limited Partners and 1% to the General Partners.
If income exceeds the amount of net cash from operations distributable to the
Partners for any fiscal year, the excess will be allocated (1) 100% to the
General Partners in an amount equal to the excess, if any, of General Partners'
deficit in their capital accounts, over an amount equal to 1% of the total
capital contributions to the Partnership as reduced by the amount of the
General Partners' capital contributions and (2) 99% to the Limited Partners and
1% to the General Partners. If income does not exceed the amount of net cash
from operations distributable to the Partners for any fiscal year, income will
be allocated 90% to the Limited Partners and 10% to the General Partners.
Upon the dissolution of the Partnership, the General Partners shall contribute
to the capital of the Partnership, an amount not to exceed 1% of the total
capital contributions made by all the Partners, less any prior capital
contributions made by the General Partners. In no event shall the General
Partners be obligated to contribute an amount in excess of any negative balance
in their respective capital accounts.
If as a result of the dissolution of the Partnership, the sum of the Limited
Partners' capital contribution plus an amount equal to a 6% cumulative annual
return on each Limited Partner's adjusted capital value less any distributions
made to each Limited Partner from net cash flow from operations, exceeds total
distributions to the Limited Partners of net proceeds from a sale or
refinancing, the General Partners will contribute to the Partnership for
distribution to the Limited Partners an amount equal to the lesser of such
excess or the aggregate distribution of net proceeds from a sale or refinancing
distributed to the General Partners.
4. Real Estate Investments
Since inception, the Partnership has acquired, directly or indirectly, the
following three commercial office buildings and an office and light industrial
complex. The purchase price amounts exclude acquisition fees and other closing
costs.
Net
Leasable
Square Date Type of Purchase
Property Name Feet Location Acquired Ownership Price
Metro Park Fort Myers, Joint
Executive Center 60,597 Florida 1/17/85 Venture $ 5,136,504
Three Financial Little Rock, Joint
Centre 123,833 Arkansas 1/22/85 Venture $10,452,005
Fort Lauderdale Fort Lauderdale, Fee
Commerce Center 186,884 Florida 4/18/85 Simple $12,843,569
Quorum II Dallas,
Office Building 84,094 Texas 6/12/85 (A) $12,995,384
(A) The Partnership is the General Partner in a Limited Partnership.
The Joint Venture and Limited Partnership agreements substantially provide
that:
i. Net cash from operations will be distributed 100% to the Partnership until
it has received an annual, noncumulative return on its adjusted capital
balance, as defined, of 10.5% for Three Financial Centre, 12% for
Metro Park, and 10% for Quorum. With regard to Three Financial Centre,
net cash from operations will then be distributed 100% to the co-venturer
until it has received an annual amount of $115,000. Thereafter, any
remaining net cash from operations will be distributed 80% to the
Partnership and 20% to the respective co- venturers.
ii. Net proceeds from a refinancing or other interim capital transaction of
the properties will be distributed 100% to the Partnership until it has
received 115% of its capital contribution and a cumulative return of
10.5% for Three Financial Centre, 12% for Metro Park, and 10% for
Quorum on its adjusted capital investment, as defined. With regard to
Three Financial Centre, net proceeds will then be distributed 100% to the
co-venturer until it has received $1,100,000. Thereafter, any remaining
net proceeds will be distributed in amounts ranging from 75% to 80% to
the Partnership and the balance to the respective co-venturers.
iii. Net proceeds from a sale of the properties will generally be distributed
to the venturers, pro rata in accordance with each venturer's capital
account balance.
iv. Income will be allocated in substantially the same manner as net cash from
operations. For Three Financial Centre and Metro Park, net income in
excess of net cash from operations distributed in such year shall be
allocated 80% to the Partnership and 20% to the co-venturers. Losses
and all depreciation will generally be allocated 100% to the Partnership.
During the fourth quarter of 1995, management evaluated its plans for the
Quorum II Office Building ("Quorum II"). At such time, management concluded
that it may not hold Quorum II for a period sufficient for rental rates to
improve and the Partnership to recover its December 31, 1995 carrying value. As
a consequence of this decision, and pursuant to the requirements of FAS 121,
the Partnership recognized an impairment loss of $3,928,998 to write down
Quorum II to it estimated fair value of $4.6 million as of December 31, 1995.
The loss is reflected as a loss on the write-down of real estate in the
accompanying consolidated statement of operations. Fair value was determined
using an independent appraisal of the operating property, which is consistent
with that used to determine the Partnership's Net Asset Value. Such appraisals
make use of a combination of certain generally accepted valuation techniques,
including direct capitalization, discounted cash flows and comparative sales
analysis.
5. Rental Income Under Operating Leases
Future minimum rental income to be received on noncancellable operating leases
as of December 31, 1996 is as follows:
1997 $ 3,640,026
1998 2,478,158
1999 1,529,119
2000 1,723,324
2001 526,642
Thereafter 328,211
$10,225,480
Generally, leases are for terms of 2 to 10 years and contain renewal options.
The leases allow for increases in certain property operating costs to be passed
on to the tenants.
6. Transactions with General Partners and Affiliates
The following is a summary of amounts earned by, or reimbursed to, the General
Partners and their affiliates for property management fees and out-of-pocket
expenses during the years ended December 31, 1996, 1995 and 1994:
Unpaid at Earned
December 31,
1996 1996 1995 1994
Real Estate Services and
affiliates
Out-of-pocket expenses $3,175 $12,895 $ - $20,951
HS Advisors and affiliates
Out of pocket expenses - 6,039 - 7,275
Property management fees (GSH) 2,766 32,219 31,815 30,291
$5,941 $51,153 $31,815 $58,517
7. Reconciliation of Financial Statement Net Loss to Federal Income Tax Basis
Net Income (Loss)
Years Ended December 31,
1996 1995 1994
Financial statement net income (loss) $ 567,637 $(3,631,162) $(331,534)
Tax basis depreciation over
financial statement depreciation (224,715) (8,921) (192,309)
Write-down of real estate - 3,928,998 -
Deferred rent 212 23,757 (82,128)
Minority interest adjustment (12,041) 3,343 10,133
Prepaid rent - (47,283) 48,674
Bad debt expense (42) - 134
Federal income tax basis
net income (loss) $ 331,051 $ 268,732 $(547,030)
Report of Independent Auditors
The Partners
Commercial Properties 3, L.P.
and Consolidated Ventures
We have audited the accompanying consolidated balance sheets of Commercial
Properties 3, L.P. and Consolidated Ventures as of December 31, 1996 and 1995,
and the related consolidated statements of operations, partners' capital
(deficit) and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above represent fairly, in
all material respects, the consolidated financial position of Commercial
Properties 3, L.P. and Consolidated Ventures at December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepting accounting principles.
As discussed in Note 2 to the financial statements, in 1995 the Partnership
changed its method of accounting for impairment of long-lived assets.
ERNST & YOUNG LLP
Boston, Massachusetts
February 3, 1997
Net Asset Valuation
Comparison of Acquisition Costs to Appraised Value and Determination of
Net Asset Value Per $484 Unit at December 31, 1996 (Unaudited)
Acquisition 1996 Appraised
Property Date of Acquisition Cost (1) Value (2)
Metro Park Executive Center 01-17-85 $ 5,543,159 $ 3,600,000
Three Financial Centre 01-22-85 11,378,512 11,800,000
Fort Lauderdale Commerce Center 04-18-85 14,125,050 11,400,000
Quorum II Office Building 06-12-85 13,939,093 6,200,000
$44,985,814 $33,000,000
Cash and cash equivalents 1,228,502
Accounts and rent receivable 40,090
34,268,592
Less:
Accounts payable and accrued expenses (249,517)
Due to affiliates (5,941)
Distribution payable (338,282)
Minority Interest (263,477)
Partnership Net Asset Value (3) $33,411,375
Net Asset Value Allocated:
Limited Partners $33,077,261
General Partners 334,114
$33,411,375
Net Asset Value Per Unit
(109,378 units outstanding) $ 302.41
(1) The acquisition cost of each property is comprised of fundings made
through December 31, 1996, the acquisition fee paid to the General
Partners and an amount estimated to fund the completion of tenant
improvements.
(2) This represents the Partnership's share of the December 31, 1996 Appraised
Values which were determined by an independent property appraisal firm.
The Partnership's share of the December 31, 1996 Appraised Values takes
into account the allocation provisions of the Joint Venture and Limited
Partnership Agreements governing the distribution of sales proceeds for
each of the above properties.
(3) The Net Asset Value assumes a hypothetical sale at December 31, 1996 of
all Partnership properties at their appraised values and the distribution
of the proceeds of such sales, 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 available for distribution to the Partners would be
less than the appraised Net Asset Value.
Limited Partners should note that appraisals are only estimates of current
value and actual values realizable upon sale may be significantly different. A
significant factor in establishing an appraised value is the actual selling
price for properties which the appraiser believes are comparable. Further, the
appraised value does not reflect the actual costs which would be incurred in
selling the 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 is likely to be significant. Fiduciaries of Limited
Partners which are subject to ERISA or other provisions of law requiring
valuation of Units should consider all relevant factors, including, but not
limited to Net Asset Value per Unit, in determining the fair market value of
the investment in the Partnership for such purposes.
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Commercial Properties 3, L.P. of our report dated February 3, 1997, included
in the 1996 Annual Report to Shareholders of Commercial Properties 3, L.P. and
Consolidated Ventures.
Our audit also included the financial statement schedule of Commercial
Properties 3, L.P. and Consolidated Ventures listed in Item 14(a). This
schedule is the responsibility of the Partnership's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
the financial statement schedule referred to above, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth herein.
ERNST & YOUNG LLP
Boston, Massachusetts
February 3, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Dec-31-1996
<CASH> 1,228,502
<SECURITIES> 000
<RECEIVABLES> 251,252
<ALLOWANCES> 5,444
<INVENTORY> 000
<CURRENT-ASSETS> 2,270,251
<PP&E> 36,640,226
<DEPRECIATION> 13,546,913
<TOTAL-ASSETS> 25,363,564
<CURRENT-LIABILITIES> 808,766
<BONDS> 000
<COMMON> 000
000
000
<OTHER-SE> 24,291,321
<TOTAL-LIABILITY-AND-EQUITY> 25,363,564
<SALES> 000
<TOTAL-REVENUES> 5,278,779
<CGS> 000
<TOTAL-COSTS> 000
<OTHER-EXPENSES> 4,669,002
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> 000
<INCOME-PRETAX> 567,637
<INCOME-TAX> 000
<INCOME-CONTINUING> 567,637
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> 567,637
<EPS-PRIMARY> 4.09
<EPS-DILUTED> 4.09
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