HUTTON GSH COMMERCIAL PROPERTIES 3, 10-K, 1999-03-30

HUTTON GSH COMMERCIAL PROPERTIES 3
10-K, 1999-03-30
REAL ESTATE

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
- ----- THE SECURITIES EXCHANGE ACT OF 1934.

For the fiscal year ended December 31, 1998
-----------------

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 I.R.S. Employer
of incorporation or organization Identification No.

3 World Financial Center, 29th Floor
New York, NY Attn.: Andre Anderson 10285
- --------------------------------------- -----
Address of principal executive offices Zip code

Registrant's telephone number, including area code: (212) 526-3183

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

UNITS OF LIMITED PARTNERSHIP INTEREST
-------------------------------------
Title of Class

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.

Yes X No
----- -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
-----

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of Prospectus of Registrant dated 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, 1998
filed as an exhibit under Item 14.
<PAGE>
2

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.

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, 1998 filed as an exhibit under Item
14.

The Registrant's principal investment objectives with respect to the Properties
(in no particular order of priority) are:

1) Capital appreciation.

2) Distributions of net cash from operations attributable to rental income.

3) Preservation and protection of capital.

4) Equity build-up through principal reduction of mortgage loans, if any, on
the Properties.
<PAGE>
3

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 sold two of its Properties as of February 28, 1999, and is marketing
the remaining two properties for sale (see Item 7). 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 the markets
where the Partnership's two remaining Properties are located, see page 1 of the
Partnership's Annual Report to Unitholders for the year ended December 31, 1998
filed as an exhibit under Item 14.

(e) Employees
---------

The Registrant has no employees.

Item 2. Properties

On January 12, 1999, the Partnership closed on the sale of Quorum II Office
Building, and on February 9, 1999, the Partnership closed on the sale of Metro
Park Executive Center. See Item 7 for a discussion of both sales. A description
of the Partnership's two remaining Properties and their material leases is
incorporated by reference to the section entitled "Property Profiles and Leasing
Update" in the Partnership's Annual Report to Unitholders for the year ended
December 31, 1998 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
1998.
<PAGE>
4

PART II

Item 5. Market for Registrant's Limited Partnership
Units and Related Unitholder Matters

(a) Market Information
------------------

No established public trading market has developed for the Units, and it is not
anticipated that such a market will develop in the future.

(b) Holders
-------

As of December 31, 1998, the number of holders of Units was 4,981.

In consideration of the Partnership's marketing efforts and the need to fund
several capital improvements at the properties to better position them for sale,
cash distributions were suspended commencing with the 1998 third quarter
distribution which would have been paid in November. The General Partners intend
to distribute the net proceeds from the sale of Quorum II Office Building and
Metro Park Business Center (see Item 7) shortly. Once the remaining properties
are sold, the General Partners will distribute the net proceeds, together with
the Partnership's remaining cash reserves (after payment of a provision for the
Partnership's liabilities and expenses), and dissolve the Partnership.

The following distributions were paid to the Limited Partners for the two years
ended December 31, 1998 and December 31, 1997.

Cash Distributions Per Limited Partnership Unit

<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
1997 $ 3.00 $ 3.00 $ 3.00 $ 3.00 $12.00
1998 $ 5.00 $ 5.00 $ -- $ -- $10.00
</TABLE>

Item 6. Selected Financial Data

<TABLE>
<CAPTION>
For The Years Ended December 31,
(dollars in thousands except per Unit data)

1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total income $ 5,788 $ 5,109 $ 5,279 $ 5,158 $ 4,691
Net income (loss) 1,747 43 568 (3,631) (332)
Total assets 25,007 24,464 25,364 27,842 32,837
Net cash from operations 2,951 2,194 2,560 2,168 1,859
Net income (loss) per Unit 14.89 (.23) 4.09 (32.87) (3.00)
Cash distributions per
Limited Partnership Unit 10.00 12.00 25.30 1 13.25 5.50
- -------------------------------------------------------------------------------------
<FN>
1 Includes a special cash distribution of $13.30 per Unit paid on March 29,
1996.
</FN>
</TABLE>
<PAGE>
5

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations

Liquidity and Capital Resources
- -------------------------------
The General Partners are marketing the Properties for sale, and during 1998,
engaged real estate brokers to assist in their marketing efforts. Accordingly,
the Partnership's real estate assets, deferred rent receivable and prepaid
leasing costs are reclassified on the consolidated balance sheets at December
31, 1998 to "Real estate assets held for disposition," and the Partnership
suspended depreciation and amortization in accordance 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."

On January 12, 1999, the Partnership completed the sale of Quorum II Office
Building to an unaffiliated partnership, CMD Realty Investment Fund IV, L.P.
("CMD"), for a selling price of approximately $7,653,000, net of closing
adjustments and selling costs. The selling price was determined by arm's length
negotiations between the Partnership and CMD. The sale is expected to result in
a gain on sale of real estate in the amount of approximately $2,953,000, which
will be reflected in the Partnership's consolidated statement of operations for
the three months ended March 31, 1999.

On February 9, 1999, the Partnership completed the sale of Metro Park Business
Center to an unaffiliated partnership, Triad Properties Holdings, Ft. Myers,
Ltd., ("TPH"), for a selling price of approximately $3,853,000, net of closing
adjustments and selling costs. The selling price was determined by arm's length
negotiations between the Partnership and TPH. The sale is expected to result in
a gain on sale of real estate in the amount of approximately $634,000, which
will be reflected in the Partnership's consolidated statement of operations for
the three months ended March 31, 1999.

The General Partners are currently marketing the Partnership's remaining two
properties for sale. On December 24, 1998, the Partnership executed a purchase
and sale agreement with an unaffiliated buyer for Fort Lauderdale Commerce
Center. The buyer conducted its due diligence review, and closing on the sale of
the property is scheduled for March 31, 1999. While it is anticipated that the
properties will be sold and the Partnership dissolved during 1999, there can be
no assurance that the sales will occur within this time frame.

The Partnership had cash and cash equivalents totaling $2,246,926 at December
31, 1998, compared to $1,273,014 at December 31, 1997. The increase is primarily
due to net cash provided by operating activities exceeding cash used for
investing activities and distributions. The Partnership also had restricted cash
of $143,536 at December 31, 1998, down from $222,883 at December 31, 1997,
reflecting a decrease in tenant security deposits.

Accounts and rent receivable, net of allowance for doubtful accounts, totaled
$136,156 at December 31, 1998, compared to $80,601 at December 31, 1997. The
increase is mainly due to the timing of rental receipts at Quorum and Three
Financial Center.

Accounts payable and accrued expenses totaled $512,546 at December 31, 1998,
compared to $437,027 at December 31, 1997. The increase is largely due to the
accrual of real estate taxes for all four properties.

Prepaid rent decreased to $-0- at December 31, 1998, compared to $58,937 at
December 31, 1997, primarily due to the timing of rental payments.

The Partnership paid distributions of net cash from operations to the Limited
Partners of $10.00 per Unit for the year ended December 31, 1998. In
consideration of the Partnership's marketing efforts and the need to fund
several capital improvements at the properties to better position them for sale,
quarterly cash distributions were suspended commencing with the 1998 third
quarter distribution which would have been paid in November. The General Partner
intends to distribute the net proceeds from the sale of Quorum II Office
Building and Metro Park Business Center shortly. Once the remaining properties
are sold, the General Partners will distribute the net proceeds, together with
the Partnership's remaining cash reserves (after payment of a provision for the
Partnership's liabilities and expenses), and dissolve the Partnership.

A discussion of material leases at the Partnership's remaining Properties is
incorporated herein by reference to page 1 of the Partnership's Annual Report to
Unitholders for the year ended December 31, 1998 filed as an exhibit under Item
14.
<PAGE>
6

Market Risk
- -----------
The Partnership's principal market risk exposure is interest rate risk. The
Partnership has no long-term debt and its remaining Properties have no mortgage
debt. Accordingly, the Partnership's interest risk exposure is primarily limited
to interest earned on the Partnership's cash and cash equivalents which are
invested at short-term rates. Such risk is not considered material to the
Partnership's operations.

Year 2000 Initiatives
- ---------------------
The Year 2000 compliance issue concerns the ability of computerized information
systems to accurately calculate, store or use a date after 1999. This could
result in computer system failures or miscalculations causing disruptions of
operations. The Year 2000 issue affects almost all companies and organizations.

As noted above, the Partnership's remaining properties are currently being
marketed for sale, and it is anticipated that the properties will be sold and
the Partnership dissolved prior to December 31, 1999. In the event that the
Partnership is not liquidated prior to December 31, 1999, potential Year 2000
issues relate primarily to outside vendors which provide property management and
the Partnership's administrative services including accounting, tax preparation
and transfer agent services. Such services are reliant on computer systems,
software products and equipment which may or may not be Year 2000 compliant. It
is anticipated that the cost of vendor compliance with Year 2000 problems will
be borne primarily by vendors. Although it is not possible at present to give an
estimate of the cost of this work to the Partnership, the General Partner does
not expect such costs to have a material adverse impact on the Partnership's
long term results of operations.

Results of Operations
- ---------------------

1998 vs 1997
- ------------

Partnership operations resulted in net income of $1,747,214 for the year ended
December 31, 1998, compared to $42,860 in 1997. The increase in net income is
primarily attributable to higher rental income and a decrease in depreciation
expense due to the reclassification of the properties as "Real estate assets
held for disposition."

Rental income totaled $5,719,841 for the year ended December 31, 1998, compared
to $5,031,723 for the year ended December 31, 1997. The increase is attributable
to higher rental income at all four properties, particularly at Metro Park
Business Center and Quorum II Office Building, and an increase in average
occupancy at Three Financial Center. Interest income totaled $68,146 for the
year ended December 31, 1998, compared to $77,701 in 1997. The slight decrease
is primarily attributable to the Partnership's lower average cash balances in
1998.

Property operating expenses totaled $2,323,191 for the year ended December 31,
1998, largely unchanged from $2,392,473 in 1997, as reductions in operating
expenses at three of the properties were largely offset by an increase in
property tax expense at the Quorum property.

Depreciation and amortization expense totaled $1,077,837 for the year ended
December 31, 1998, compared with $2,089,050 in 1997. The Partnership suspended
depreciation and amortization on July 1, 1998, in accordance 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."

General and administrative expenses for the year ended December 31, 1998 totaled
$404,990, compared to $477,582 in 1997. The decrease is primarily due to lower
management and appraisal expenses.

As of December 31, 1998, lease levels at each of the Properties were as follows:
Metro Park Executive Center - 86%; Fort Lauderdale Commerce Center - 85%; Three
Financial Centre - 96%; and Quorum II Office Building - 83%.

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.
<PAGE>
7

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%.

Item 8. Financial Statements and Supplementary Data

Incorporated by reference to the Partnership's Annual Report to Unitholders for
the year ended December 31, 1998, 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.
<PAGE>
8

Name Office
---- ------
Rocco F. Andriola Director
Michael T. Marron Director, President and Chief Financial Officer
William T. McDermott Vice President

Rocco F. Andriola, 40, 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.

Michael T. Marron, 35, is a Vice President of Lehman Brothers and has been a
member of the Diversified Asset Group since 1990 where he has actively managed
and restructured a diverse portfolio of syndicated limited partnerships. Prior
to joining Lehman Brothers, Mr. Marron was associated with Peat Marwick Mitchell
& Co. serving in both its audit and tax divisions from 1985 to 1989. Mr. Marron
received his B.S. degree from the State University of New York at Albany and an
M.B.A. from Columbia University.

William T. McDermott, 35, is a Vice President of Lehman Brothers and has been a
member of the Diversified Asset Group since 1998. Mr. McDermott joined Lehman
Brothers in 1993 and held various positions within the firm before joining the
Diversified Asset Group. Prior to joining Lehman Brothers, Mr. McDermott was a
financial analyst with Cantor Fitzgerald Inc. from 1991 - 1993 and was
associated with Arthur Andersen & Co. serving in both its audit and bankruptcy
consulting divisions from 1985 to 1991. Mr. McDermott received his B.B.A. degree
from the University of Notre Dame and is a Certified Public Accountant.

HS Advisors III, Ltd.
- ---------------------
HS Advisors III, Ltd., a California limited partnership, was 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
Julie R. Adie Vice President, Treasurer and Secretary

Mark P. Mikuta, 45, 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.

Julie R. Adie, 44, is a Vice President of Goodman Segar Hogan, Inc. and Senior
Vice President of Goodman Segar Hogan Hoffler, L.P. ("GSHH"). She is responsible
for investment management of a commercial real estate portfolio for the
company's Asset Management Division. Prior to GSHH, Ms. Adie was an asset
manager with Aetna Real Estate Investors from 1986 to 1988. Ms. Adie practiced
as an attorney from 1978 through 1984 and is currently a member of the Virginia
Bar Association. She holds a B.A. degree from Duke University, a Juris Doctor
from University of Virginia and an M.B.A. from Dartmouth College.
<PAGE>
9

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. On
September 28, 1998, GSH sold its general partner and limited partner interests
in GSHH to The St. Joe Company, an unaffiliated company. The transactions did
not affect the ownership of the General Partners.

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,
1998.

(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,
1998.

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, 1998, $118,957 of the Registrant's
income was allocated to the General Partners ($59,478 to RE Services and $59,479
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.
<PAGE>
10

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.
Commencing January 1, 1997, the Partnership began reimbursing certain expenses
incurred by RE Services and its affiliates in servicing the Partnership to the
extent permitted by the Partnership Agreement. In prior years, affiliates of RE
Services 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, 1998
filed as an exhibit under Item 14.
<PAGE>
11

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:

Consolidated Balance Sheets -
At December 31, 1998 and 1997.............................. (1)

Consolidated Statements of Partners' Capital (Deficit) -
For the years ended December 31, 1998, 1997 and 1996....... (1)

Consolidated Statements of Operations -
For the years ended December 31, 1998, 1997 and 1996....... (1)

Consolidated Statements of Cash Flows -
For the years ended December 31, 1998, 1997 and 1996....... (1)

Notes to 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, 1998, which is filed as Exhibit 13.

(b) Reports on Form 8-K:

No Reports on Form 8-K were filed during the three months ended
December 31, 1998.

On January 26, 1999, the Partnership filed a Report on Form 8-K
reporting the sale of Quorum II Office Building on January 12, 1999.

On February 24, 1999, the Partnership filed a Report on Form 8-K
reporting the sale of Metro Park Business Center on February 9, 1999.

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, 1998.

(23) Consent of Independent Auditors.

(27) Financial Data Schedule.

(28) Portions of Prospectus of Registrant dated December 13, 1983.
<PAGE>
13

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 30, 1999 BY: /s/Mark P. Mikuta
-----------------
Name: Mark P. Mikuta
Title: President

BY: Real Estate Services VII, Inc.
General Partner

Dated: March 30, 1999 BY: /s/Michael T. Marron
--------------------
Name: Michael T. Marron
Title: Director, President and Chief
Financial Officer
<PAGE>
14

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capabilities and on the dates indicated.

REAL ESTATE SERVICES VII, INC.
A General Partner

Dated: March 30, 1999 BY: /s/Rocco F. Andriola
--------------------
Name: Rocco F. Andriola
Title: Director

Dated: March 30, 1999 BY: /s/Michael T. Marron
--------------------
Name: Michael T. Marron
Title: Director, President and Chief
Financial Officer

Dated: March 30, 1999 BY: /s/William T. McDermott
-----------------------
Name: William T. McDermott
Title: Vice President
<PAGE>
15

SIGNATURES

HS ADVISORS III, LTD.
A General Partner

Dated: March 30, 1999 BY: /s/Mark P. Mikuta
-----------------
Name: Mark P. Mikuta
Title: President of Hogan Stanton Investment,
Inc., as general partner of HS Advisors
III, Ltd.

Dated: March 30, 1999 BY: /s/Julie R. Adie
----------------
Name: Julie R. Adie
Title: Vice President, Secretary and Treasurer of
Hogan Stanton Investment, Inc.
as general partner of HS Advisors III, Ltd.

EXHIBIT 13

Commercial Properties 3, L.P.
1998 Annual Report to Unitholders
<PAGE>

- --------------------------------------------------------------------------------
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
current investments are comprised of a combined office/warehouse and
office/showroom property located in Fort Lauderdale, Florida and one
office building located in Little Rock, Arkansas. Provided below is
a comparison of lease levels at the properties as of December 31,
1998 and 1997.

Percentage
Leased

Property Location 1998 1997
-------- -------- ---- ----
Fort Lauderdale Commerce Center Fort Lauderdale, FL 85% 82%
Three Financial Centre Little Rock, AR 96% 95%

Contents

1 Message to Investors

3 Property Profiles & Leasing Update

4 Consolidated Financial Statements

7 Notes to the Consolidated Financial Statements

12 Report of Independent Auditors

13 Net Asset Valuation
<PAGE>
1

- --------------------------------------------------------------------------------
MESSAGE TO INVESTORS
- --------------------------------------------------------------------------------

We are pleased to present the 1998 Annual Report for Commercial Properties 3,
L.P. (the "Partnership"). This report includes a review of the early 1999 sales
of Quorum II Office Building and Metro Park Executive Center and an update on
our marketing efforts relating to Fort Lauderdale Commerce Center and Three
Financial Centre. The Property Profiles & Leasing Update section on page 3 of
this report provides information regarding local market conditions for the
Partnership's remaining properties, as well as their operating performance
during 1998. Also included are financial highlights and the Partnership's
audited financial statements for the year ended December 31, 1998.

Sales and Marketing Update
As previously reported, on January 12, 1999, the Partnership closed on the sale
of the Quorum II Office Building in Dallas, Texas to an unaffiliated purchaser
for approximately $7,653,598, net of closing adjustments and selling costs. In
addition, on February 9, 1999, the Partnership closed on the sale of Metro Park
Executive Center in Fort Meyers, Florida to an unaffiliated purchaser for
approximately $3,853,000, net of closing adjustments and selling costs. A
special cash distribution representing the net proceeds from the sales of these
properties will be distributed to the Limited Partners in the near future.

We are actively marketing the Partnership's remaining two properties for sale
and have engaged real estate brokerage firms to assist in our marketing efforts.
In December 1998, the Partnership executed a purchase and sale agreement with an
unaffiliated buyer for the Fort Lauderdale Commerce Center. The buyer has
completed its due diligence review, and the closing is currently scheduled for
March 31, 1999. While we currently anticipate that both properties will be sold
during 1999, there can be no assurance that the sales will occur within this
time frame. Once these remaining properties are sold, we will distribute the net
proceeds, together with the Partnership's remaining cash reserves (after payment
of, or provision for, the Partnership's liabilities and expenses), and
subsequently dissolve the Partnership.

Cash Distributions
During 1998, the Partnership paid cash distributions to Limited Partners
totaling $10 per Unit. Since inception, the Partnership has paid total cash
distributions of $183.81 per original $500 Unit, including $16 per Unit in
return of capital payments which have reduced the Unit size from $500 to $484.
In consideration of the Partnership's marketing efforts and the need to fund
several capital improvements at the properties to better position them for sale,
quarterly cash distributions were suspended commencing with the 1998 third
quarter distribution. As discussed above, as properties are sold, we will
distribute the net proceeds to the Limited Partners.

Financial Highlights
Provided below is a review of Partnership operations for the year ended December
31st of the indicated years:

<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------------
<S> <C> <C>
Total Income $5,787,987 $5,031,723
Property Operating Expenses 2,323,191 2,392,473
Net Income 1,747,214 42,860
Net Cash provided by Operating Activities 2,951,091 2,194,441
--------------------------------------------------------------------
</TABLE>

o Total income was higher in 1998 primarily due to increased rental income
at the Partnership's properties.

o Property operating expenses declined slightly for 1998 compared to 1997.
<PAGE>
2

o The increase in net income is primarily attributable to the higher rental
income discussed above, and a decrease in depreciation expense as a result
of the re-classification of the properties as "Real estate assets held for
disposition."

o Net cash provided by operating activities was greater in 1998 as
compared to 1997 due to an increase in rental income.

General Information
We are pleased to have successfully completed the sales of the Quorum II Office
Building and Metro Park Business Center earlier this year and will keep you
updated with respect to our efforts at the remaining two properties in future
reports. In the interim, questions regarding the Partnership should be directed
to your Financial Consultant or Partnership Investor Services. All requests for
a change of address or transfer should be submitted in writing to the
Partnership's administrative agent at P.O. Box 7090, Troy, MI 48007-7090.
Partnership Investor Services can be reached at (617) 342-4225, and the
Partnership's administrative agent can be reached at (248) 637-7900.

Very truly yours,

Real Estate Services VII, Inc. Hogan Stanton Investment, Inc.
General Partner General Partner of HS Advisors III, Ltd.

Michael T. Marron Mark P. Mikuta
President President

March 30, 1999
<PAGE>
3

- --------------------------------------------------------------------------------
PROPERTY PROFILES & LEASING UPDATE
- --------------------------------------------------------------------------------

FORT LAUDERDALE COMMERCE CENTER Fort Lauderdale, Florida

The Fort Lauderdale Commerce Center is located in the Central Broward sub-market
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 Two new leases, totaling 6,563 square feet were executed during
the year. One tenant, totaling 4,100 square feet, vacated its space in 1998. As
a result, the property was 85% occupied at year-end 1998 compared with 82% at
year-end 1997. During 1999, four leases, totaling 15,968 square feet or
approximately 8.5% of the property's leasable space, are scheduled to expire.

Market Update Vacancy rates within the Fort Lauderdale Commerce Center
submarket continued to improve during 1998 and averaged 8% through the third
quarter of 1998 compared to 10% for the corresponding period in 1997. Rental
rates have remained stable despite new construction in the various Broward
County submarkets. Rental rates in the submarket which includes the property
continue to remain among the highest in Broward County.

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 in
the Financial Centre Complex located in West Little Rock.

Leasing Update During the year we executed four new leases representing 16,424
square feet and one lease renewal totaling 10,563 square feet. The renewal
tenant reduced its space by 8,468 square feet. In addition, two tenants
representing 6,770 square feet vacated the property. As of December 31, 1998,
the property was 96% occupied, slightly higher than 95% one year earlier. Eight
leases representing 41,544 square feet are scheduled to expire during 1999,
representing 35% of the property's leasable area.

Market Update The Little Rock office market remained stable during the past
year with an overall 1998 average occupancy rate of 87%. Three Financial Centre
is located within the West Little Rock submarket, a prestigious submarket with
more than 4.4 million square feet. It is also one of the area's strongest
sub-markets, with a 1998 average occupancy rate of approximately 90%, despite
the addition in 1998 of three new office buildings representing about 75,000
square feet.
<PAGE>
4

COMMERCIAL PROPERTIES 3, L.P.
AND CONSOLIDATED VENTURES

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
At December 31, At December 31,
1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Property:
Land $ -- $ 5,808,694
Buildings, building improvements and equipment -- 31,133,800
------------------------------
-- 36,942,494
Less accumulated depreciation -- (14,910,677)
------------------------------
-- 22,031,817
Real estate assets held for disposition 22,429,538 --
Cash and cash equivalents 2,246,926 1,273,014
Restricted cash 143,536 222,883
Accounts and rent receivable, net of allowance
for doubtful accounts of $5,444 in 1998 and
$5,444 in 1997 136,156 80,601
Deferred rent receivable -- 152,030
Prepaid leasing costs and other assets, net of
accumulated amortization of $664,496 in 1997 51,093 704,043
- -------------------------------------------------------------------------------------
Total Assets $ 25,007,249 $ 24,464,388
=====================================================================================
Liabilities and Partners' Capital (Deficit)
Liabilities:
Accounts payable and accrued expenses $ 512,546 $ 437,027
Due to affiliates 47,930 55,270
Distributions payable -- 338,282
Prepaid rent -- 58,937
Security deposits payable 240,423 222,883
------------------------------
Total Liabilities 800,899 1,112,399
------------------------------
Minority Interest 605,691 370,936
------------------------------
Partners' Capital (Deficit):
General Partners (255,803) (340,932)
Limited Partners (109,378 units outstanding) 23,856,462 23,321,985
------------------------------
Total Partners' Capital 23,600,659 22,981,053
- -------------------------------------------------------------------------------------
Total Liabilities and Partners' Capital $ 25,007,249 $ 24,464,388
=====================================================================================
</TABLE>

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
For the years ended December 31, 1998, 1997and 1996
General Limited
Partners Partners Total
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
Net Income (Loss) 118,957 1,628,257 1,747,214
Distributions (33,828) (1,093,780) (1,127,608)
- -------------------------------------------------------------------------------------
Balance at December 31, 1998 $(255,803) $23,856,462 $23,600,659
=====================================================================================
</TABLE>

See accompanying notes to the consolidated financial statements.
<PAGE>
5

COMMERCIAL PROPERTIES 3, L.P.
AND CONSOLIDATED VENTURES

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Rental $ 5,719,841 $ 5,031,723 $ 5,209,134
Interest 68,146 77,701 69,645
-------------------------------------------
Total Income 5,787,987 5,109,424 5,278,779
- -------------------------------------------------------------------------------------
Expenses
Property operating 2,323,191 2,392,473 2,291,679
Depreciation and amortization 1,077,837 2,089,050 2,074,246
General and administrative 404,990 477,582 269,716
Bad debt -- -- 33,361
-------------------------------------------
Total Expenses 3,806,018 4,959,105 4,669,002
-------------------------------------------
Net income before minority interest 1,981,969 150,319 609,777
Minority interest (234,755) (107,459) (42,140)
-------------------------------------------
Net Income $ 1,747,214 $ 42,860 $ 567,637
=====================================================================================
Net Income (Loss) Allocated:
To the General Partners $ 118,957 $ 67,729 $ 120,389
To the Limited Partners 1,628,257 (24,869) 447,248
- -------------------------------------------------------------------------------------
$ 1,747,214 $ 42,860 $ 567,637
=====================================================================================
Per limited partnership unit
(109,378 outstanding) $ 14.89 $ (.23) $ 4.09
- -------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to the consolidated financial statements.
<PAGE>
6

COMMERCIAL PROPERTIES 3, L.P.
AND CONSOLIDATED VENTURES

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Income $ 1,747,214 $ 42,860 $ 567,637
Adjustments to reconcile net income
to net cash provided by operating
activities:
Minority interest 234,755 107,459 42,140
Depreciation 954,030 1,858,297 1,834,784
Amortization 123,807 230,753 239,462
Increase (decrease) in cash arising
from changes in operating assets and
liabilities:
Restricted cash 79,347 9,447 5,236
Accounts and rent receivable, net (55,555) (40,511) 24,526
Deferred rent receivable 50,521 53,688 24,908
Prepaid leasing costs and
other assets (209,810) (371,185) (169,597)
Accounts payable and accrued
expenses 75,519 187,510 (7,668)
Due to affiliates (7,340) 49,329 (2,538)
Prepaid rent (58,937) 58,937 --
Security deposits payable 17,540 7,857 638
-------------------------------------------
Net cash provided by operating
activities 2,951,091 2,194,441 2,559,528
- -------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Additions to real estate (511,289) (796,801) (386,746)
-------------------------------------------
Net cash used for investing activities (511,289) (796,801) (386,746)
- -------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Cash distributions (1,465,890) (1,353,128) (3,078,650)
-------------------------------------------
Net cash used for financing activities (1,465,890) (1,353,128) (3,078,650)
- -------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 973,912 44,512 (905,868)
Cash and cash equivalents,
beginning of period 1,273,014 1,228,502 2,134,370
-------------------------------------------
Cash and cash equivalents,
end of period $ 2,246,926 $ 1,273,014 $ 1,228,502
=====================================================================================
Supplemental Disclosure of Non-Cash Operating Activities:
In connection with the General Partners' intent to sell the Property, real estate
held for investment, deferred rent receivable and prepaid leasing commissions in the
amount of $21,403,550, $101,362, and $628,865, respectively, were reclassified to
"Real estate assets held for disposition" in June of 1998.
- -------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to the consolidated financial statements.
<PAGE>
7

COMMERCIAL PROPERTIES 3, L.P.
AND CONSOLIDATED VENTURES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996

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 General
Partners expect to liquidate the Partnership in 1999.

On July 31, 1993, Shearson Lehman Brothers Inc. sold certain of its domestic
retail brokerage and asset management businesses to Smith Barney, Harris Upham &
Co. Incorporated ("Smith Barney"). Subsequent to the sale, Shearson Lehman
Brothers Inc. changed its name to Lehman Brothers Inc. 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.

Real Estate Held for Disposition - During 1998, the Partnership engaged brokers
to market the Partnership's remaining Properties for sale. In view of the
anticipated sale of the Properties, the Partnership's real estate assets,
deferred rent receivable and prepaid leasing costs, which had a carrying value
of $22,429,538 at December 31, 1998, were reclassified as Real Estate Assets
Held for Disposition and were no longer depreciated or amortized.

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.
<PAGE>
8

COMMERCIAL PROPERTIES 3, L.P.
AND CONSOLIDATED VENTURES

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. During 1998 deferred rent receivable was reclassified as
real estate assets held for disposition and was no longer amortized.

Prepaid Leasing Costs - Leases are accounted for as operating leases. Leasing
commissions are amortized over the terms of the respective leases. During 1998
leasing commissions were reclassified as real estate assets held for disposition
and were no longer amortized.

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.
<PAGE>
9

COMMERCIAL PROPERTIES 3, L.P.
AND CONSOLIDATED VENTURES

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, provided, however, that the
deficit balance of the General Partners' capital account does not exceed the
amount they are required to contribute upon dissolution of the Partnership, as
discussed below.

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. In 1998,
income was allocated to the General Partners such that their deficit did not
increase beyond their obligations required by the Partnership Agreement, as
discussed below.

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.

<TABLE>
<CAPTION>
Net
Leasable
Square Date Type of Purchase
Property Name Feet Location Acquired Ownership Price
- -------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------------

<FN>
(A) The Partnership is the General Partner in a Limited Partnership.
</FN>
</TABLE>
<PAGE>
10

COMMERCIAL PROPERTIES 3, L.P.
AND CONSOLIDATED VENTURES

The Joint Venture and Limited Partnership agreements substantially provide or
provided that:

i. Net cash from operations will be distributed 100% to the Partnership until
it has received an annual, noncumulative 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 80% to the Partnership and 20% 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.

On February 9, 1999, the Partnership completed the sale of Metro Park Business
Center to an unaffiliated partnership, Triad Properties Holdings, Ft. Myers,
Ltd. ("TPH"), for a selling price of approximately $3,853,000, net of closing
adjustments and selling costs. The selling price was determined by arm's length
negotiations between the Partnership and TPH. The sale is expected to result in
a gain on sale of real estate in the amount of approximately $634,000, which
will be reflected in the Partnership's consolidated statement of operations for
the three months ended March 31, 1999.

The General Partners are currently marketing the Partnership's remaining two
properties for sale. While it is anticipated that the properties will be sold
and the Partnership dissolved during 1999, there can be no assurance that the
sales will occur within this time frame.

5. Rental Income Under Operating Leases
Future minimum rental income to be received on noncancelable operating leases as
of December 31, 1998 on the two remaining properties is as follows:

<TABLE>
<CAPTION>
-------------------------------------------
<S> <C>
1999 $2,505,782
2000 1,852,142
2001 885,088
2002 463,194
2003 286,577
Thereafter 115,616
-------------------------------------------
$6,108,399
==========
</TABLE>
<PAGE>
11

COMMERCIAL PROPERTIES 3, L.P.
AND CONSOLIDATED VENTURES

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, 1998, 1997 and 1996:

<TABLE>
<CAPTION>
Unpaid at Earned
December 31, --------------------------------
1998 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real Estate Services and affiliates
Out-of-pocket expenses $ -- $ -- $ -- $ 12,895
Salary reimbursement 34,100 59,283 111,862 --
HS Advisors and affiliates
Out of pocket expenses -- 1,504 3,196 6,039
Property management fees (GSH) 13,830 33,192 37,995 32,219
- -------------------------------------------------------------------------------------
$ 47,930 $ 93,979 $153,053 $ 51,153
--------------------------------------------
</TABLE>

Commencing 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)

<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial statement net income (loss) $ 1,747,214 $ 42,860 $ 567,637
Tax basis depreciation and amortization
over financial statement depreciation
and amortization (1,155,094) (203,613) (224,715)
Deferred rent 50,521 53,688 212
Minority interest 234,755 107,459 (12,041)
Bad debt expense -- -- (42)
- -------------------------------------------------------------------------------------
Federal income tax basis
net income $ 877,396 $ 394 $ 331,051
===========================================
</TABLE>
<PAGE>
12

- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------

General and Limited 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, 1998 and 1997,
and the related consolidated statements of operations, partners' capital
(deficit) and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above represent fairly, in
all material respects, the consolidated financial position of Commercial
Properties 3, L.P. and Consolidated Ventures at December 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepting accounting principles.

/s/ERNST & YOUNG LLP

New York, New York
February 5, 1999
<PAGE>
13

- --------------------------------------------------------------------------------
NET ASSET VALUATION
- --------------------------------------------------------------------------------

Comparison of Acquisition Costs to Estimated Value and
Determination of Net Asset Value Per $484 Unit at December 31, 1998 (Unaudited)

<TABLE>
<CAPTION>
Acquisition 1998 Estimated
Property Date of Acquisition Cost (1) Value
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Metro Park Executive Center(3) 01-17-85 $ 5,543,159 $ 3,853,000
Three Financial Centre(2) 01-22-85 11,378,512 9,825,000
Fort Lauderdale Commerce Center(2) 04-18-85 14,125,050 12,885,000
Quorum II Office Building(3) 06-12-85 13,939,093 7,653,000
----------- -----------
$44,985,814 34,216,000
===========
Cash and cash equivalents 2,246,926
Accounts and rent receivable 136,156
-----------
36,599,082
Less:
Accounts payable and accrued expenses (512,546)
Due to affiliates (47,930)
Minority Interest (605,691)
-----------
Partnership Net Asset Value(4) $35,432,915
===========

Net Asset Value Allocated:
Limited Partners $35,078,586
General Partners 354,329
-----------
$35,432,915
===========
Net Asset Value Per Unit
(109,378 units outstanding) $ 320.71
- ---------------------------------------------------------------------------------------

<FN>
(1) The acquisition cost of each property is comprised of fundings made through
December 31, 1998, 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, 1998 estimated
values which were determined by the General Partners, with the assistance of
the broker engaged to market the properties. The Partnership's share of the
December 31, 1998 estimated value takes into account the allocation
provisions of the joint venture and limited partnership agreements governing
the distribution of sales proceeds for each of the above properties.

(3) Estimated value is based on the actual net sales price of the property.

(4) The Net Asset Value assumes a hypothetical sale on December 31, 1998 of the
Partnership's properties at their estimated values and the distribution of
the net proceeds to Limited Partners in the liquidation of the Partnership.
Real estate brokerage commissions and other costs associated with selling
Three Financial Centre and Fort Lauderdale Commerce Center are not
determinable at this time and as such are not included in the calculation.
Since the Partnership would incur these expenses in the sale of its
remaining properties, cash available for the distribution to the Partners
would be less than the Net Asset Value. The current market value of the
Units may differ substantially from their Net Asset Value.
</FN>
</TABLE>

Limited Partners should note that properties' values are estimated and the
actual values realizable upon sale may be significantly different. The estimated
value does not reflect the actual costs which would be incurred in selling the
properties. As a result of these factors and the illiquid nature of an
investment in Units of the Partnership, the variation between the estimated
value of the Partnership's properties and the price at which Units of the
Partnership could be sold may be significant. Fiduciaries of Limited Partners
which are subject to ERISA or other provisions of law requiring valuations of
Units should consider all relevant factors, including, but not limited to Net
Asset Value per Unit, in determining the fair market value of the investment in
the Partnership for such purposes.
<PAGE>
F-1

Schedule III - Real Estate and Accumulated Depreciation
December 31, 1998

<TABLE>
<CAPTION>
Fort Lauderdale Three Metro Park Quorum II
Consolidated Ventures: Commerce Center Financial Centre Executive Center Office Building Total
- -----------------------------------------------------------------------------------------------------------------------------

Location Ft. Lauderdale, FL Little Rock, AR Fort Myers, FL Dallas, TX na

<S> <C> <C> <C> <C> <C>
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 (254,845) (140,595) (21,677) 615,469 198,352
Deferred rent 181,811 (151,449) 27,150 43,997 101,509
Leasing commissions 239,008 153,859 84,712 261,375 738,954

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 12,359,070 10,278,565 5,293,400 3,714,053 31,645,089
Deferred rent 181,811 (151,449) 27,150 43,997 101,509
Leasing commissions 239,008 153,859 84,712 261,375 738,954
-------------------------------------------------------------------------------------
15,521,440 11,299,307 5,953,905 5,519,593 38,294,245
-------------------------------------------------------------------------------------

Accumulated depreciation(2) $ 6,625,167 $ 5,686,253 $ 2,734,507 $ 818,780 $15,864,707
- -----------------------------------------------------------------------------------------------------------------------------

<FN>
(1) For Federal income tax purposes, the basis of land, building and improvements is $49,692,685.
(2) For Federal income tax purposes, the amount of accumulated depreciation is $30,534,290.
</FN>
</TABLE>

A reconciliation of the carrying amount of real estate and accumulated
depreciation for the years ended December 31, 1998, 1997 and 1996 follows:

<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real estate investments:
Beginning of year $36,942,494 $36,640,226 $37,255,431
Additions 1,351,751 796,801 386,746
Deletions -- (494,533) (1,001,951)
-------------------------------------------
End of year $38,294,245 $36,942,494 $36,640,226
-------------------------------------------

Accumulated depreciation:
Beginning of year $14,910,677 $13,546,913 $12,714,080
Depreciation expense 954,030 1,858,297 1,834,784
Deletions -- (494,533) (1,001,951)
-------------------------------------------
End of year $15,864,707 $14,910,677 $13,546,913
- -------------------------------------------------------------------------------------
</TABLE>

EXHIBIT 23

Consent of Independent Auditors
<PAGE>

Consent of Independent Auditors

We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Commercial Properties 3, L.P. of our report dated February 5, 1999, included
in the 1998 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.

/s/ERNST & YOUNG LLP

New York, New York
February 5, 1999

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 2,246,926
<SECURITIES> 000
<RECEIVABLES> 136,156
<ALLOWANCES> 5,444
<INVENTORY> 000
<CURRENT-ASSETS> 2,526,618
<PP&E> 22,429,538
<DEPRECIATION> 000
<TOTAL-ASSETS> 25,007,249
<CURRENT-LIABILITIES> 800,899
<BONDS> 000
000
000
<COMMON> 000
<OTHER-SE> 23,600,659
<TOTAL-LIABILITY-AND-EQUITY> 25,007,249
<SALES> 000
<TOTAL-REVENUES> 5,787,987
<CGS> 000
<TOTAL-COSTS> 000
<OTHER-EXPENSES> 3,806,018
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> 000
<INCOME-PRETAX> 1,747,214
<INCOME-TAX> 000
<INCOME-CONTINUING> 1,747,214
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> 1,747,214
<EPS-PRIMARY> 14.89
<EPS-DILUTED> 14.89

</TABLE>