UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission file number: 0-13341
COMMERCIAL PROPERTIES 3, L.P.
(formerly Hutton/GSH Commercial Properties 3)
Exact name of registrant as specified in its charter
Virginia 11-2680561
State or other jurisdiction of
incorporation or organization I.R.S. Employer Identification No.
3 World Financial Center, 29th Floor 10285
New York, NY ATTN: Andre Anderson zip code
Address of principal executive offices
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, 1997
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.
("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 (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. Of such proceeds, $44,995,452 was invested in an
office and light industrial complex, one limited partnership and two joint
ventures, each of which owns a specific office building (the "Properties"), 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, 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:
Capital appreciation.
Distributions of net cash from operations attributable to rental income.
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 (see Item 7), 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
The Properties are subject to competition from similar types of properties
located in the same vicinity. The business of owning and operating commercial
office buildings in the area where the Properties are located is highly
competitive, and the Partnership competes with a number of established
companies, some of which have greater resources than the Partnership. For a
discussion of current commercial real estate market conditions in Little Rock,
Arkansas; Dallas, Texas; Fort Lauderdale and Fort Myers, Florida, see the
section entitled "Property Profiles & Leasing Update" in the Partnership's
Annual Report to Unitholders for the year ended December 31, 1997 filed as an
exhibit under Item 14.
(e) Employees
The 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, 1997 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
1997.
PART II
Item 5. Market for Registrant's Limited Partnership Units and Related
Unitholder Matters
(a) Market Information
No established public trading market has developed for the Units, and it is not
anticipated that such a market will develop in the future.
(b) Holders
As of December 31, 1997, the number of holders of Units was 5,181.
(c) Distributions
Cash distributions paid to the Limited Partners for the two years ended
December 31, 1997 and December 31, 1996 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, 1997 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,
1997, which is filed as an exhibit under Item 14.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The General Partners have commenced marketing the properties for sale and are
in the process of selecting real estate brokers to assist in their marketing
efforts. There can be no assurance as to when the properties will be sold, or
that any sale, if completed, will result in a particular price.
The Partnership had cash and cash equivalents totaling $1,273,014 at December
31, 1997, largely unchanged from $1,228,502 at December 31, 1996. The
Partnership also had restricted cash, which primarily consists of security
deposits, of $222,883 at December 31, 1997, also largely unchanged from a year
earlier.
Deferred rent receivable totaled $152,030 at December 31, 1997, compared to
$205,718 at December 31, 1996. The decrease is largely due to the amortization
of deferred rent associated with older leases at all of the Partnership's
properties. Prepaid leasing costs and other assets, net of accumulated
amortization, totaled $704,043 at December 31, 1997, compared to $563,611 at
December 31, 1996. The increase is largely due to the payment of leasing
commissions in connection with new and renewal leases.
Accounts payable and accrued expenses totaled $437,027 at December 31, 1997,
compared with $249,517 at December 31, 1996. The increase is largely due to
the timing of payments of real estate taxes for all four Properties, whereas
the balance for year-end 1996 represents the accrual for Three Financial Centre
only. Due to affiliates increased to $55,270 at December 31, 1997, from $5,941
at December 31, 1996, primarily reflecting the reimbursement of certain
expenses incurred in servicing the Partnership, as described below under
"Results of Operations."
A discussion of material leases at the Partnership's Properties, is
incorporated herein by reference to the section entitled "Property Profiles &
Leasing Update" contained in the Partnership's Annual Report to Unitholders for
the year ended December 31, 1997 filed as an exhibit under Item 14.
The Partnership paid distributions of net cash from operations to the Limited
Partners of $12.00 per Unit for the year ended December 31, 1997. Further
details regarding cash distributions 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 December 31, 1997 filed as an exhibit
under Item 14.
Results of Operations
1997 vs 1996
Partnership operations resulted in net income of $42,860 for the year ended
December 31, 1997, compared to $567,637 in 1996. The decrease in 1997 is
primarily attributable to lower rental income and higher property operating and
general and administrative expenses.
Rental income totaled $5,031,723 for the year ended December 31, 1997, compared
with $5,209,134 in 1996. The decrease is largely attributable to lower average
occupancy at Fort Lauderdale Commerce Center and Metro Park Executive Center.
Additionally, rental income was higher in 1996 due to the collection of a lease
cancellation fee of $60,000 in 1996, and to the accounting for rental
concessions associated with leasing activity at Three Financial Centre.
Property operating expenses totaled $2,392,473 for the year ended December 31,
1997, compared with $2,291,679 in 1996. The increase is primarily due to
various tenant and building improvements done at each of the Partnership's
properties. Depreciation and amortization totaled $2,089,050 for year ended
December 31, 1997, largely unchanged from $2,074,246 in 1996.
General and administrative expenses for the year ended December 31, 1997, were
$477,582 compared with $269,716 in 1996. As of January 1, 1997, certain
expenses incurred by Real Estate Services VII, Inc., its affiliates, and an
unaffiliated third party service provider 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. The increase is also due to higher legal costs relating to
litigation with a tenant at Quorum II and higher postage and printing costs due
to tender offer activity.
As of December 31, 1997, lease levels at each of the Properties were as
follows: Metro Park Executive Center - 86%; Fort Lauderdale Commerce Center
- -82%; Three Financial Centre 95%; and Quorum II Office Building - 91%.
1996 vs. 1995
Partnership operations resulted in 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%.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to the Partnership's Annual Report to Unitholders for
the year ended December 31, 1997, 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. RE Services 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 RE Services 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 RE Services 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
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 Inc. 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 1986-89, 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, Mr. Andriola practiced corporate and securities law at
Donovan Leisure Newton & Irvine in New York. Mr. Andriola received a B.A. from
Fordham University, a J.D. from New York University School of Law, and an LL.M
in Corporate Law from New York University's Graduate School of Law.
Jeffrey C. Carter, 52, is a Senior Vice President of Lehman Brothers in the
Diversified Asset Group. Mr. Carter joined Lehman Brothers in September 1988.
From 1972 to 1988, Mr. Carter held various positions with Helmsley-Spear
Hospitality Services, Inc. and Stephen W. Brener Associates, Inc. including
Director of Consulting Services at both firms. From 1982 through 1987, Mr.
Carter was President of Keystone Hospitality Services, an independent hotel
consulting and brokerage company. Mr. Carter received his B.S. degree in Hotel
Administration from Cornell University and an M.B.A. degree from Columbia
University.
Michael T. Marron, 34, is a Vice President of Lehman Brothers and has been a
member of the Diversified Asset Group since 1990 where he has actively managed
and restructured a diverse portfolio of syndicated limited partnerships. Prior
to joining Lehman Brothers, Mr. Marron was associated with Peat Marwick
Mitchell & Co. serving in both its audit and tax divisions from 1985 to 1989.
Mr. Marron received his B.S. degree from the State University of New York at
Albany and an M.B.A. from Columbia University.
HS Advisors 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
Jerry L. Moore Executive Vice President
Julie R. Adie Vice President, Treasurer and Secretary
Mark P. Mikuta, 44, is Senior Vice President of Goodman Segar Hogan, Inc. and
is 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.
Jerry L. Moore, 48, is Chief Executive Officer of Goodman Segar Hogan Hoffler,
L.P. ("GSHH"). GSHH currently has over 325 employees and offices in
Washington, D.C., Richmond, Norfolk, Newport News, Raleigh/Durham and Atlanta.
Mr. Moore is responsible for management of existing operations of the company
and is charged with building GSHH's presence in existing and new markets. Prior
to GSHH, Mr. Moore was Senior Vice President of Dominion Land Management Co.,
the real estate development unit of Dominion Capital, Inc. Dominion Capital is
a wholly owned subsidiary of Dominion Resources, Inc. Mr. Moore received a
B.A. degree from Austin College in 1971. He is a member of the Urban Land
Institute Small Scale Development Council; is on the Executive Committee of GVA
North Alliance; and is on the Board of Directors of the Hampton Roads Economic
Development Alliance.
Julie R. Adie, 43, is a Vice President of Goodman Segar Hogan, Inc. and Senior
Vice President of Goodman Segar Hogan Hoffler, L.P. ("GSHH"). She is
responsible for investment management of a commercial real estate portfolio for
the company's Asset Management Division. Prior to GSHH, Ms. Adie was an asset
manager with Aetna Real Estate Investors from 1986 to 1988. Ms. Adie practiced
as an attorney from 1978 through 1984 and is currently a member of the Virginia
Bar Association. She holds a B.A. Degree from Duke University, a Juris Doctor
from University of Virginia and an M.B.A. from Dartmouth College.
Certain Matters Involving Affiliates
On July 31, 1993, Shearson 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, 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 December 31,
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, for the year ended December 31, 1997, $67,729 of the Registrant's
income was allocated to the General Partners ($33,865.50 to RE Services and
$33,865.50 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. 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. 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, 1997
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, 1997 and 1996 (1)
Consolidated Statements of Partners' Capital (Deficit) -
For the years ended December 31, 1997, 1996 and 1995 (1)
Consolidated Statements of Operations -
For the years ended December 31, 1997, 1996 and 1995 (1)
Consolidated Statements of Cash Flows -
For the years ended December 31, 1997, 1996 and 1995 (1)
Notes to the Consolidated Financial Statements (1)
(2) Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation F-1
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, 1997, which is filed as
exhibit 13.
(b) Reports on Form 8-K filed in the fourth quarter of calendar year
1997:
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, 1997.
(23) Consent of Independent Auditors.
(27) Financial Data Schedule.
(28) Portions of Prospectus of Registrant dated December 13, 1983.
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.
BY: HS Advisors III, Ltd.
General Partner
Hogan Stanton Investment, Inc.
General Partner
Dated: March 26, 1998 BY: /s/Mark P. Mikuta
Name: Mark P. Mikuta
Title: President
BY: Real Estate Services VII, Inc.
General Partner
Dated: March 26, 1998 BY: /s/Jeffrey C. Carter
Name: Jeffrey C. Carter
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 26, 1998
BY: /s/Rocco F. Andriola
Name: Rocco F. Andriola
Title: Director
Dated: March 26, 1998
BY: /s/Jeffrey C. Carter
Name: Jeffrey C. Carter
Title: Director, President and Chief
Financial Officer
Dated: March 26, 1998
BY: /s/Michael T. Marron
Name: Michael T. Marron
Title: 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
Dated: March 26, 1998
BY: /s/Mark P. Mikuta
Mark P. Mikuta
President of Hogan Stanton
Investment, Inc., as general
partner of HS Advisors III, Ltd.
Dated: March 26, 1998
BY: /s/Jerry L. Moore
Jerry Moore
Executive Vice President of
Hogan Stanton Investment, Inc.,
as general partner of
HS Advisors III, Ltd.
Dated: March 26, 1998
BY: /s/Julie R. Adie
Julie R. Adie
Vice President, Secretary and
Treasurer of Hogan Stanton
Investments, Inc.
as general partner of HS Advisors
III, Ltd.
EXHIBIT 13
Commercial Properties 3, L.P.
1997 Annual Report to Unitholders Commercial Properties 3, L.P.
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 a
combined office/warehouse and office/ showroom property located in Fort
Lauderdale, Florida and three office buildings located in Dallas, Texas;
Little Rock, Arkansas and Fort Myers, Florida. Provided below is a
comparison of lease levels at the properties as of December 31, 1997 and
1996.
Percentage
Leased
Property Location 1997 1996
Metro Park Executive Center Fort Myers, FL 86% 81%
Fort Lauderdale Commerce Center Fort Lauderdale, FL 82% 85%
Three Financial Centre Little Rock, AR 95% 94%
Quorum II Office Building Dallas, TX 91% 84%
Contents
1 Message to Investors
3 Property Profiles & Leasing Update
5 Financial Highlights
6 Consolidated Financial Statements
9 Notes to the Consolidated Financial Statements
14 Report of Independent Auditors
15 Net Asset Valuation
Administrative Inquiries Performance Inquiries/Form 10-Ks
Address Changes/Transfers First Data Investor Services Group
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 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, 1997.
Market Overview
The commercial office market continued to improve during 1997, with a strong
economy increasing demand for office space in most areas of the country.
Vacancy rates for office properties nationwide declined to 11.4% at year-end
1997, compared with 13.1% a year earlier. Lease rates and property values also
showed steady improvement in many areas, including the areas where the
Partnership's properties are located. These favorable operating conditions,
however, have encouraged new development, and construction has increased in
many areas. Permitting activity is particularly high in the Dallas and Fort
Lauderdale markets where two of the Partnership's properties are located.
Competition for tenants will likely intensify in the future as these
development projects are completed, however, it is expected that operating
conditions and property values will remain stable in the near term.
In consideration of these strong operating conditions, the General Partners
have decided to begin marketing the properties for sale and are currently in
the process of selecting brokers to assist with their marketing efforts. In
addition, the Partnership continues to make capital improvements to better
position the properties in their respective markets. To fund these
improvements and maintain adequate cash reserves, it may be necessary to
suspend distributions in the future. It is important to note, however, that as
the properties are sold, the net sales proceeds will be distributed to the
partners.
Cash Distributions
The Partnership paid cash distributions to limited partners totaling $12.00 per
Unit for the year ended December 31, 1997, including a fourth quarter cash
distribution of $3.00 per Unit that was either credited to your brokerage
account or sent to you on February 25, 1998. Since inception, the Partnership
has paid total cash distributions of $173.81 per original $500 Unit, including
$16.00 per Unit in return of capital payments which have reduced the Unit size
from $500 to $484.
Cash Distributions Per Limited Partnership Unit
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1996 $16.30* $3.00 $3.00 $3.00 $25.30
1997 $3.00 $3.00 $3.00 $3.00 $12.00
* 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 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.
Summary
We will continue our efforts to sell the Partnership's properties, distribute
the net sales proceeds to the partners and subsequently dissolve the
Partnership. In the interim, we will continue to focus on leasing the vacant
space at all of the properties. We will keep you apprised of our progress in
these endeavors and other significant developments affecting your investment in
future reports.
Very truly yours,
Real Estate Services VII, Inc. Hogan Stanton Investment, Inc.
General Partner Ltd. General Partner of HS Advisors III,
/s/ Jeffrey C. Carter /s/ Mark P. Mikuta
Jeffrey C. Carter Mark P. Mikuta
President President
March 26, 1998
Property Profiles & Leasing Update
METRO PARK EXECUTIVE CENTER Fort Myers, Florida
The 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, contains 60,597 leasable square feet of commercial office space
and is one of five class "A" commercial office buildings located within the
office park.
Leasing Update The General Partners executed three new leases representing
1,856 square feet and three lease renewals during 1997, including a renewal for
16,517 square feet that was schedule to expire at year end. In addition, a
tenant occupying 725 square feet vacated its space. As a result, the property
was 86% leased at December 31, 1997 compared with 81% at year-end 1996. Three
leases totaling 7,812 square feet or approximately 13% of the property's space
are scheduled to expire during 1998.
Fort Myers Market Update
The Fort Myers commercial office market remained competitive during 1997.
Vacancy rates for the Edison Central submarket, which had been declining for
the past three years, increased during the year to 14% at year-end 1997,
compared with 11.9% at year-end 1996. Still recovering from the 1995
relocation of several large tenants to another market, the area experienced
negative absorption in 1997, and rental rates declined slightly from the
previous year. Although there has been no new speculative construction since
the late 1980s and none planned in the near future, conditions are likely to
remain competitive in 1998.
FORT LAUDERDALE COMMERCE CENTER Fort Lauderdale, Florida
The Fort Lauderdale Commerce Center is located in the Central Broward submarket
of Broward County, approximately five miles north of the central business
district of Fort Lauderdale. The property contains 186,884 leasable square feet
of office/showroom and office/warehouse space.
Leasing Update The General Partners executed four new leases representing
28,354 square feet and one lease renewal totaling 6,484 square feet during the
year. Four tenants, leasing a total of 26,621 square feet, vacated their space
in 1997. As a result, the property was 82% leased at year-end 1997 compared
with 85% at year-end 1996. During 1998, one lease representing 2,620 square
feet or approximately 1% of the property's leasable space, is scheduled to
expire.
Fort Lauderdale Market Update
The Broward County office market showed notable improvement from 1996 as
vacancies declined and rental rates rose, reflecting the strong influx of new
businesses to the area. Vacancy for the Central Broward submarket decreased
from 10.7% in the third quarter of 1996 to 8.5% in the third quarter of 1997.
Vacancy rates are expected to decrease even further in the coming year. These
healthy conditions have given rise to an increase in new office construction;
the Central Broward submarket gained 156,000 square feet in 1997, and Broward
County as a whole currently has 1.3 million square feet under construction.
Much of the new construction, however, is pre-leased or sold, and conditions
are expected to remain strong through 1998.
THREE FINANCIAL CENTRE Little Rock, Arkansas
Three Financial Centre affords easy access to downtown Little Rock, two
interstate highways, I-630 and I-430 and the Little Rock Regional Airport. The
property is a 123,833 leasable square foot, eight-story brick office building
situated in the Financial Centre Complex located in west Little Rock.
Leasing Update During the year, one tenant leasing 2,541 square feet expanded
its lease to a total of 3,569 square feet. Additionally, a lease which was
scheduled to expire on December 31, 1997, was renewed on a month-to-month
basis, and one tenant leasing 4,747 square feet vacated its space. At December
31, 1997, the property's lease level was 95%, up slightly from 94% a year
earlier. Eight leases representing 38,727 square feet are scheduled to expire
during 1998, representing 31% of the property's leasable area.
Market Update Although market conditions in Little Rock remained stable during
1997, the west Little Rock submarket continued to recover from the construction
of three new commercial office buildings which were completed in late 1996 and
early 1997. The area's overall vacancy rate for office properties climbed to
10.1% at year-end 1997 compared with 8% a year earlier. Until the new space is
leased, competition for tenants in the area is likely to remain strong.
QUORUM II OFFICE BUILDING Dallas, Texas
Quorum II Office Building contains 84,094 leasable square feet of commercial
office space and is located in the Quorum Business Park in the Far North Dallas
submarket of Dallas. The property affords easy access to Loop 635, the Dallas
North Tollway and Inwood Road.
Leasing Update During 1997, the General Partners executed two new leases
totaling 27,895 square feet. Additionally, one tenant leasing a total of 6,740
square feet, whose lease was to expire during the year, renewed and expanded
it's leasable space to 9,687 square feet. One tenant occupying 970 square feet
renewed their lease for an additional two years. However, four tenants leasing
44,604 square feet vacated their space during 1997. As a result, the property
was 91% leased at December 31, 1997 compared with 84% at December 31, 1996.
Five leases representing 27,552 square feet or approximately 33% of the
property's leasable area are scheduled to expire in 1998.
Dallas Market Update The Dallas commercial real estate market remained strong
in 1997, as the healthy business climate and low tax rates continued to attract
businesses to the area. The Far North Dallas submarket, where Quorum II is
located, exemplifies these favorable conditions, as reflected in its 9.4%
vacancy rate at year-end 1997 and a significant increase in average rental
rates. As a result of these strong conditions, construction is moderate with
approximately 2.5 million square feet under construction. Financial Highlights
For The Years Ended December 31,
(dollars in thousands except per Unit data)
1997 1996 1995 1994 1993
Total income $ 5,109 $ 5,279 $ 5,158 $ 4,691 $ 4,211
Net income (loss) 43 568 (3,631) (332) (910)
Total assets 24,464 25,364 27,842 32,837 33,454
Net cash from operations 2,194 2,560 2,168 1,859 1,536
Net income (loss) per Unit (.23) 4.09 (32.87) (3.00) (8.24)
Cash distributions per 1
Limited Partnership Unit 12.00 25.30 13.25 5.50 4.00
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 decrease in total income reflects lower rental income due to lower
average occupancy at Quorum II Office Building. Additionally, rental income
was higher in 1996 due to the collection of lease cancellation fees at Three
Financial Centre.
The decrease in net income and net cash from operations is primarily
attributable to lower overall occupancy and higher property operating and
general and administrative expenses.
Consolidated Balance Sheets At December 31, 1997 At December 31, 1996
Assets
Property:
Land $5,808,694 $5,808,694
Buildings, building improvements
and equipment 31,133,800 30,831,532
36,942,494 36,640,226
Less accumulated depreciation (14,910,677) (13,546,913)
22,031,817 23,093,313
Cash and cash equivalents 1,273,014 1,228,502
Restricted cash 222,883 232,330
Accounts and rent receivable,
net of allowance for doubtful accounts of
$5,444 in 1997 and 1996 80,601 40,090
Deferred rent receivable 152,030 205,718
Prepaid leasing costs and other assets,
net of accumulated amortization of
$664,496 in 1997 and $805,502 in 1996 704,043 563,611
Total Assets $24,464,388 $25,363,564
Liabilities and Partners' Capital (Deficit)
Liabilities:
Accounts payable and accrued expenses $437,027 $249,517
Due to affiliates 55,270 5,941
Distributions payable 338,282 338,282
Prepaid rent 58,937 _
Security deposits payable 222,883 215,026
Total Liabilities 1,112,399 808,766
Minority Interest 370,936 263,477
Partners' Capital (Deficit):
General Partners (340,932) (368,069)
Limited Partners
(109,378 units outstanding) 23,321,985 24,659,390
Total Partners' Capital 22,981,053 24,291,321
Total Liabilities and Partners' Capital $24,464,388 $25,363,564
Consolidated Statements of Partners' Capital (Deficit)
For the years ended December 31, 1997, 1996 and 1995
General Limited
Partners Partners Total
Balance at December 31, 1994 $(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
Net Income (Loss) 67,729 (24,869) 42,860
Distributions (40,592) (1,312,536) (1,353,128)
Balance at December 31, 1997 $(340,932) $23,321,985 $22,981,053
Consolidated Statements of Operations
For the years ended December 31, 1997 1996 1995
Income
Rental $5,031,723 $5,209,134 $ 5,047,528
Interest 77,701 69,645 110,529
Total Income 5,109,424 5,278,779 5,158,057
Expenses
Property operating 2,392,473 2,291,679 2,283,025
Loss on write-down of real estate _ _ 3,928,998
Depreciation and amortization 2,089,050 2,074,246 2,278,567
General and administrative 477,582 269,716 248,607
Bad debt _ 33,361 _
Total Expenses 4,959,105 4,669,002 8,739,197
Net income (loss) before
minority interest 150,319 609,777 (3,581,140)
Minority interest (107,459) (42,140) (50,022)
Net Income (Loss) $ 42,860 $567,637 $(3,631,162)
Net Income (Loss) Allocated:
To the General Partners $ 67,729 $ 120,389 $ (36,312)
To the Limited Partners (24,869) 447,248 (3,594,850)
$ 42,860 $ 567,637 $(3,631,162)
Per limited partnership unit
(109,378 outstanding) $ (.23) $ 4.09 $ (32.87)
Consolidated Statements of Cash Flows
For the years ended December 31, 1997 1996 1995
Cash Flows From Operating Activities
Net Income (Loss) $ 42,860 $567,637 $(3,631,162)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Minority interest 107,459 42,140 50,022
Loss on write-down of real estate _ _ 3,928,998
Depreciation 1,858,297 1,834,784 2,062,083
Amortization 230,753 239,462 216,484
Increase (decrease) in cash arising from
changes in operating assets and liabilities:
Restricted cash 9,447 5,236 (21,487)
Accounts and rent receivable, net (40,511) 24,526 (36,290)
Deferred rent receivable 53,688 24,908 4,620
Prepaid leasing costs and other assets (371,185) (169,597) (203,967)
Accounts payable and accrued expenses 187,510 (7,668) (210,984)
Due to affiliates 49,329 (2,538) (696)
Prepaid rent 58,937 _ _
Security deposits payable 7,857 638 9,923
Net cash provided by operating activities 2,194,441 2,559,528 2,167,544
Cash Flows From Investing Activities
Additions to real estate (796,801) (386,746) (458,496)
Net cash used for investing activities (796,801) (386,746) (458,496)
Cash Flows From Financing Activities
Cash distributions (1,353,128) (3,078,650) (1,212,179)
Net cash used for financing activities (1,353,128) (3,078,650) (1,212,179)
Net increase (decrease) in cash and
cash equivalents 44,512 (905,868) 496,869
Cash and cash equivalents,
beginning of period 1,228,502 2,134,370 1,637,501
Cash and cash equivalents, end of period $1,273,014 $1,228,502 $2,134,370
Notes to the Consolidated Financial Statements
December 31, 1997, 1996 and 1995
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."
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 escalation's.
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, 1997 is as
follows:
1998 $3,761,848
1999 2,833,601
2000 2,107,372
2001 1,278,908
2002 868,526
Thereafter 766,762
$11,617,017
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, 1997, 1996 and 1995:
Unpaid at
December 31, Earned
1997 1997 1996 1995
Real Estate Services and affiliates
Out-of-pocket expenses $ _ $ _ $12,895 $ _
Salary reimbursement 52,480 111,862 _ _
HS Advisors and affiliates
Out of pocket expenses _ 3,196 6,039 _
Property management fees (GSH) 2,790 37,995 32,219 31,815
$ 55,270 $153,053 $51,153 $31,815
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 the Real Estate Services VII, Inc. general
partner had voluntarily absorbed these expenses.
7. Reconciliation of Financial Statement Net Loss to Federal Income Tax Basis
Net Income (Loss):
Years Ended December 31,
1997 1996 1995
Financial statement net income (loss) $ 42,860 $ 567,637 $(3,631,162)
Tax basis depreciation over
financial statement depreciation (203,613) (224,715) (8,921)
Write-down of real estate _ _ 3,928,998
Deferred rent 53,688 212 23,757
Minority interest adjustment 107,459 (12,041) 3,343
Prepaid rent _ _ (47,283)
Bad debt expense _ (42) _
Federal income tax basis
net income (loss) $ 394 $ 331,051 $ 268,732
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, 1997 and 1996,
and the related consolidated statements of operations, partners' capital
(deficit) and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above represent fairly, in
all material respects, the consolidated financial position of Commercial
Properties 3, L.P. and Consolidated Ventures at December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepting accounting principles.
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, 1998
Net Asset Valuation
Comparison of Acquisition Costs to Appraised Value and
Determination of Net Asset Value Per $484 Unit at December 31, 1997
(Unaudited)
Date of Acquisition 1997 Appraised
Property Acquisition Cost (1) Value (2)
Metro Park Executive Center 01-17-85 $5,543,159 $3,400,000
Three Financial Centre 01-22-85 11,378,512 11,600,000
Fort Lauderdale Commerce Center 04-18-85 14,125,050 11,550,000
Quorum II Office Building 06-12-85 13,939,093 7,250,000
$44,985,814 $33,800,000
Cash and cash equivalents 1,273,014
Accounts and rent receivable 80,601
35,153,615
Less:
Accounts payable and accrued expenses (437,027)
Due to affiliates (55,270)
Prepaid rent (58,937)
Minority Interest (370,936)
Partnership Net Asset Value (3) $34,231,445
Net Asset Value Allocated:
Limited Partners $33,889,131
General Partners 342,314
$34,231,445
Net Asset Value Per Unit
(109,378 units outstanding) $ 309.83
(1) The acquisition cost of each property is comprised of fundings made
through December 31, 1997, 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, 1997 Appraised
Values which were determined by an independent property appraisal firm. The
Partnership's share of the December 31, 1997 Appraised Values takes into
account the allocation provisions of the Joint Venture 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, 1997 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.
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1997
Fort Lauderdale Three
Consolidated Ventures: Commerce Center Financial Centre
Location Ft. Lauderdale, FL Little Rock, AR
Construction date 1985 1984
Aquisition date 04-18-85 01-22-85
Life on which depreciation
is computed 1-25 yrs 1-25 yrs
Encumbrances _ _
Initial cost to Partnership:
Land $ 2,741,551 $ 1,018,332
Buildings and
improvements 12,613,916 10,419,160
Cost capitalized
subsequent to aquisition
Land, buildings
and improvements (289,578) (262,490)
Gross amount at which
carried at close of period(1):
Land $ 2,741,551 $ 1,018,332
Buildings and
improvements 12,226,730 10,174,626
14,968,281 11,192,958
Accumulated depreciation (2) $ 6,263,209 $ 5,431,736
(1) For Federal income tax purposes, the basis of land, building and
improvements is $49,181,397.
(2) For Federal income tax purposes, the amount of accumulated
depreciation is $28,456,087.
Consolidated Ventures: Metro Park Quorum II Total
Executive Center Office Building
Location Fort Myers, FL Dallas, TX na
Construction date 1984 1985 na
Aquisition date 01-07-85 06-12-85 na
Life on which depreciation
is computed 1-25 yrs 1-25 yrs na
Encumbrances _ _ _
Initial cost to Partnership:
Land $ 548,643 $1,500,168 $ 5,808,694
Buildings and
improvements 5,315,077 3,098,584 31,446,737
Cost capitalized
subsequent to aquisition
Land, buildings
and improvements (197,249) 134,112 (615,205)
Gross amount at which
carried at close of period(1):
Land $ 548,643 $1,500,168 $ 5,808,694
Buildings and
improvements 5,131,910 3,600,534 31,133,800
5,680,553 5,100,702 36,942,494
Accumulated depreciation (2) $ 2,591,642 624,090 $14,910,677
(1) For Federal income tax purposes, the basis of land, building and
improvements is $49,181,397.
(2) For Federal income tax purposes, the amount of accumulated
depreciation is $28,456,087.
A reconciliation of the carrying amount of real estate and accumulated
depreciation for the years ended December 31, 1997, 1996, and 1995 follows:
1997 1996 1995
Real estate investments:
Beginning of year $36,640,226 $37,255,431 $46,187,232
Additions 796,801 386,746 458,496
Write-down _ _ (8,936,000)
Deletions (494,533) (1,001,951) (454,297)
End of year $36,942,494 $36,640,226 $37,255,431
Accumulated depreciation:
Beginning of year $13,546,913 $12,714,080 $16,113,296
Depreciation expense 1,858,297 1,834,784 2,062,083
Deletions (494,533) (1,001,951) (454,297)
Write-down _ _ (5,007,002)
End of year $14,910,677 $13,546,913 $12,714,080
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, 1998, included
in the 1997 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 therein.
ERNST & YOUNG LLP
Boston, Massachusetts
February 3, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Dec-31-1997
<CASH> 1,273,014
<SECURITIES> 000
<RECEIVABLES> 80,601
<ALLOWANCES> 5,444
<INVENTORY> 000
<CURRENT-ASSETS> 1,576,498
<PP&E> 36,942,494
<DEPRECIATION> 14,910,677
<TOTAL-ASSETS> 24,464,388
<CURRENT-LIABILITIES> 1,112,399
<BONDS> 000
<COMMON> 000
000
000
<OTHER-SE> 22,981,053
<TOTAL-LIABILITY-AND-EQUITY> 24,464,388
<SALES> 000
<TOTAL-REVENUES> 5,109,424
<CGS> 000
<TOTAL-COSTS> 000
<OTHER-EXPENSES> 4,959,105
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> 000
<INCOME-PRETAX> 42,860
<INCOME-TAX> 000
<INCOME-CONTINUING> 42,860
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> 42,860
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
