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, 1999
-----------------
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 I.R.S. Employer Identification No.
incorporation or organization
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, 1999
filed as an exhibit under Item 14.
1
<PAGE>
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 owned 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 returns 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, 1999 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.
Distribution of net cash from operations is the Registrant's objective during
its operational phase, while the preservation and appreciation of capital is the
Registrant's long-term objective. 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 three of its Properties as of December
31, 1999, and the fourth Property was sold on January 31, 2000 (see Item 7).
2
<PAGE>
(d) Employees
---------
The Registrant has no employees.
Item 2. Properties
As of the filing date of this report, all of the Partnership's Properties had
been sold. On January 12, 1999, the Partnership closed on the sale of Quorum II
Office Building. On February 9, 1999, the Partnership closed on the sale of
Metro Park Executive Center. On April 14, 1999, the Partnership closed on the
sale of Ft. Lauderdale Commerce Center, and on January 31, 2000, the Partnership
sold its remaining Property, Three Financial Centre. See Item 7 for a discussion
of the sales.
Item 3. Legal Proceedings
The Registrant recently settled a legal dispute with a former tenant at the
Quorum II Office Building in Dallas for $70,000. The Registrant will be paying
such an amount in the first half of 2000. This settlement has been accepted by
the former tenant in full compromise and settlement of all causes of action.
Accordingly, the Registrant will have no additional liability.
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
1999.
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, 1999, the number of holders of Units was 4,761.
(c) Distributions
-------------
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 1998. The General Partners
distributed the net proceeds from the sales of Quorum II Office Building, Metro
Park Business Center and Ft. Lauderdale Commerce Center in September 1999. The
General Partners plan to distribute the net proceeds from the sale of Three
Financial Centre, which was completed on January 31, 2000, together with the
Partnership's remaining cash reserves (after payment of or provision for the
Partnership's liabilities and expenses), and terminate the Partnership during
the second quarter of 2000.
The following distributions were paid to the Limited Partners for the two years
ended December 31, 1999 and December 31, 1998.
3
<PAGE>
<TABLE>
<CAPTION>
Cash Distributions Per Limited Partnership Unit
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1998 $ 5.00 $ 5.00 $ -- $ -- $ 10.00
1999 $ -- $ -- $200.56 $ -- $200.56
</TABLE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
For The Years Ended December 31,
(dollars in thousands except per Unit data)
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total income $ 3,313 $ 5,788 $ 5,109 $ 5,279 $ 5,158
Operating income (loss) 1,572 1,747 43 568 (3,631)
Gain on sale of real estate assets 6,831 -- -- -- --
Net income (loss) 8,403 1,747 43 568 (3,631)
Total assets at year end 10,924 25,007 24,464 25,364 27,842
Net cash from operations 1,515 2,951 2,194 2,560 2,168
Net income (loss) per Unit 76.06 14.89 (.23) 4.09 (32.87)
Cash distributions per
Limited Partnership Unit 200.56(2) 10.00 12.00 25.30(1) 13.25
- ----------------------------------------------------------------------------------------------
<FN>
(1) Includes a special cash distribution of $13.30 per Unit paid on March 29, 1996.
(2) Represents a special cash distribution of the net sale proceeds from Quorum II Office
Building, Metro Park Business Center and Ft. Lauderdale Commerce Center paid on
September 22, 1999.
</FN>
</TABLE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources
- -------------------------------
On January 12, 1999, the Partnership completed the sale of Quorum to an
unaffiliated partnership for a selling price of $7,612,065, net of closing
adjustments and selling costs, resulting in a gain of $2,894,064, which is
reflected in the Partnership's consolidated statement of operations for the year
ended December 31, 1999.
On February 9, 1999, the Partnership completed the sale of Metro Park to an
unaffiliated partnership for a selling price of $3,797,438, net of closing
adjustments and selling costs, resulting in a gain of $565,698, which is
reflected in the Partnership's consolidated statement of operations for the year
ended December 31, 1999.
On April 14, 1999, the Partnership sold Ft. Lauderdale to an unaffiliated
partnership for a selling price of $12,465,291, net of closing adjustments and
selling costs, resulting in a gain of $3,371,728 which is reflected in the
Partnership's consolidated operations for the year ended December 31, 1999.
The selling prices were determined by arm's length negotiations between the
Partnership and the buyers.
As a result of these sales, on September 22, 1999 the Partnership paid a special
cash distribution to the Limited Partners in the amount of $21,936,419, or
$200.56 per Unit and $221,580 to the General Partners.
4
<PAGE>
On January 31, 2000, the Partnership sold its remaining Property, Three
Financial Centre, to an affiliate of the Joint Venture Partner, Three Financial
Centre LLC ("3FCLLC"), for a selling price of approximately $10,130,000, net of
closing adjustments and selling costs. The sale is expected to result in a gain
of approximately $4,100,000 which will be reflected in the Partnership's
consolidated operations for the three months ended March 31, 2000. The selection
of the buyer was a result of a competitive bidding process organized by the real
estate broker engaged to assist in selling the Property. The General Partners
plan to distribute the net proceeds from the sale, together with the
Partnership's remaining cash reserves (after payment of or provision for the
Partnership's liabilities and expenses), and terminate the Partnership during
the second quarter 2000.
In anticipation of the Partnership being dissolved, the minority interest
allocation has been conformed to the tax basis.
The Partnership's real estate has been recorded on the Partnership's December
31, 1999 balance sheet as "Real estate assets held for disposition." Real estate
assets held for disposition at December 31, 1999 totaled $5,974,046.
The Partnership had cash and cash equivalents totaling $4,785,516 at December
31, 1999, compared to $2,246,926 at December 31, 1998. The increase is primarily
due to the proceeds from the sale of three properties during 1999. The
Partnership also had restricted cash, which consists of security deposits of
$78,031 at December 31, 1999, compared to $143,536 at December 31, 1998. This
decrease resulted from the sale of Quorum, Metro Park and Ft. Lauderdale.
Accounts and rent receivable, net of allowance for doubtful accounts, totaled
$65,401 at December 31, 1999, compared to $136,156 at December 31, 1998. The
decrease is mainly due to the sale of three properties in 1999.
Prepaid expenses and other assets totaled $21,282 at December 31, 1999, compared
to $51,093 at December 31, 1998. The decrease is due to the sale of three
properties during 1999.
Accounts payable and accrued expenses totaled $233,207 at December 31, 1999,
compared to $512,546 at December 31, 1998. The decrease is largely due to a
decrease in real estate taxes payable resulting from the sale of Quorum, Metro
Park and Ft. Lauderdale and the timing of invoices and payments.
Security deposits totaled $78,031 at December 31, 1999, compared to $240,423
at December 31, 1998. The decrease is due to the sale of Quorum, Metro Park
and Ft. Lauderdale.
Market Risk
- -----------
The Partnership's principal market risk exposure is interest rate risk. The
Partnership has no long-term debt and its remaining Property has 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.
Results of Operations
- ---------------------
1999 vs 1998
- ------------
The Partnership's operations resulted in net income of $8,403,060 for the year
ended December 31, 1999, compared to a net income of $1,747,214 in fiscal 1998.
The increase is primarily attributable to the gain recognized on the sale of
Quorum, Metro Park and Ft. Lauderdale.
Rental income totaled $2,530,185 for the year ended December 31, 1999, compared
to $5,719,841 for the year ended December 31, 1998. The decrease is largely
attributable to the sale of Quorum, Metro Park and Ft. Lauderdale. Interest
income totaled $783,312 for the year ended December 31, 1999, compared to
$68,146 in fiscal 1998. The increase is primarily attributable to the proceeds
received from the sale of Quorum, Metro Park and Ft. Lauderdale.
Property operating expenses totaled $1,142,270 for the year ended December 31,
1999, compared to $2,323,191 in fiscal 1998. The decrease is primarily due to
the sale of Quorum, Metro Park and Ft. Lauderdale.
5
<PAGE>
Depreciation and amortization expense totaled $28,522 for the year ended
December 31, 1999, compared with $1,077,837 for the year ended December 31,
1998. For the year ended December 31, 1999, depreciation and amortization
represent the write-off of tenant improvements and leasing commissions related
to tenants who have vacated the Property. 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 totaled $454,088 for the year ended December
31, compared to $404,990 in fiscal 1998. The increase is primarily due to higher
administrative and marketing fees on the sale of Quorum, Metro Park and Ft.
Lauderdale.
As of December 31, 1999, Three Financial Centre was 85% leased.
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 Centre. 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%.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to the Partnership's Annual Report to Unitholders for
the year ended December 31, 1999, which is filed as an exhibit under Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
6
<PAGE>
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
---- ------
Michael T. Marron Director, President and Chief Financial Officer
Rocco F. Andriola Director, Vice President
Michael T. Marron, 36, is a Vice President of Lehman Brothers and has been a
member of the Diversified Asset Group since 1990 where he has actively
managed and restructured a diverse portfolio of syndicated limited
partnerships. Prior to joining Lehman Brothers, Mr. Marron was associated
with Peat Marwick Mitchell & Co. serving in both its audit and tax divisions
from 1985 to 1989. Mr. Marron received a B.S. degree from the State
University of New York at Albany and an M.B.A. degree from Columbia
University and is a Certified Public Accountant.
Rocco F. Andriola, 41, is a Managing Director of Lehman Brothers in its
Diversified Asset Group and has held such position since October 1996. Mr.
Andriola also serves as the Director of Global Corporate Services for
Lehman. Since joining Lehman in 1986, Mr. Andriola has been involved in a
wide range of restructuring and asset management activities involving real
estate and other direct investment transactions. From June 1991 through
September 1996, Mr. Andriola held the position of Senior Vice President in
Lehman's Diversified Asset Group. From June 1989 through May 1991, Mr.
Andriola held the position of First Vice President in Lehman's Capital
Preservation and Restructuring Group. From 1986 to 1989, Mr. Andriola served
as a Vice President in the Corporate Transactions Group of Shearson Lehman
Brothers' office of the general counsel. Prior to joining Lehman, Mr.
Andriola practiced corporate and securities law at Donovan Leisure Newton &
Irvine in New York. Mr. Andriola received a B.A. from Fordham University, a
J.D. from New York University School of Law, and an LL.M in Corporate Law
from New York University's Graduate School of Law.
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
7
<PAGE>
Mark P. Mikuta, 46, 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, 45, 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. 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,
1999.
(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,
1999.
8
<PAGE>
(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, 1999, $84,030 of the Registrant's
income was allocated to the General Partners ($42,015 to RE Services and $42,015
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.
On January 31, 2000, the Partnership sold its remaining Property, Three
Financial Centre, to an affiliate of the Joint Venture Partner, 3FCLLC, for a
selling price of approximately $10,130,000, net of closing adjustments and
selling costs. The selection of 3FCLLC was a result of a competitive bidding
process organized by the real estate broker engaged to assist in selling the
Property.
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, 1999
filed as an exhibit under Item 14.
9
<PAGE>
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:
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
(1) Financial Statements:
Consolidated Balance Sheets - At December 31, 1999 and 1998..... (4)
Consolidated Statements of Partners' Capital (Deficit) -
For the years ended December 31, 1999, 1998 and 1997.......... (4)
Consolidated Statements of Operations -
For the years ended December 31, 1999, 1998 and 1997.......... (5)
Consolidated Statements of Cash Flows -
For the years ended December 31, 1999, 1998 and 1997.......... (6)
Notes to the Consolidated Financial Statements.................. (7)
(2) Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation ........ F-1
</TABLE>
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, 1999, 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, 1999.
On February 14, 2000, the Partnership filed a Report on Form 8-K
reporting the sale of Three Financial Centre on January 31, 2000.
(c) See Exhibit Index contained herein.
10
<PAGE>
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, 1999.
(23) Consent of Independent Auditors.
(27) Financial Data Schedule.
(28) Portions of Prospectus of Registrant dated December 13, 1983.
11
<PAGE>
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
Date: March 30, 2000 BY: /s/Mark P. Mikuta
-----------------
Name: Mark P. Mikuta
Title: President
BY: Real Estate Services VII, Inc.
General Partner
Date: March 30, 2000 BY: /s/Michael T. Marron
--------------------
Name: Michael T. Marron
Title: Director, President and Chief
Financial Officer
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capabilities and on the dates indicated.
REAL ESTATE SERVICES VII, INC.
A General Partner
Date: March 30, 2000 BY: /s/Michael T. Marron
--------------------
Name: Michael T. Marron
Title: Director, President and Chief
Financial Officer
Date: March 30, 2000 BY: /s/Rocco F. Andriola
--------------------
Name: Rocco F. Andriola
Title: Director, Vice President
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capabilities and on the dates indicated.
HS ADVISORS III, LTD.
A General Partner
Date: March 30, 2000 BY: /s/Mark P. Mikuta
-----------------
Name: Mark P. Mikuta
Title: President of Hogan Stanton
Investment, Inc., as general
partner of HS Advisors III, Ltd.
Date: March 30, 2000 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.
14
EXHIBIT 13
Commercial Properties 3, L.P.
1999 Annual Report to Unitholders
<PAGE>
- --------------------------------------------------------------------------------
MESSAGE TO INVESTORS
- --------------------------------------------------------------------------------
Presented for your review is the 1999 Annual Report for Commercial Properties 3,
L.P. (the "Partnership"). As discussed in previous reports, the Partnership sold
three properties during 1999, Quorum II Office Building, Metro Park Executive
Center and Ft. Lauderdale Commerce Center. In addition, the Partnership's final
property, Three Financial Centre, was sold in January of this year. This report
includes an overview on the sale of this property and the Partnership's audited
financial statements for the year ended December 31, 1999.
Sale Update
We are pleased to report that Three Financial Centre was sold on January 31,
2000 for net sales proceeds of approximately $10,130,000. The buyer, an
affiliate of the joint venture partner, was selected following a competitive
bidding process organized by the real estate brokerage firm engaged to assist in
the sale of the property. A special cash distribution representing a majority of
the sales proceeds is expected to be paid to the Limited Partners in April. In
addition, the Partnership is expected to terminate during the second quarter of
this year following the expiration of the representations and warranties
associated with the sale. The Partnership's remaining cash reserves (after
payment of, or provision for, the Partnership's liabilities and expenses) will
be distributed to the Limited Partners following termination.
Cash Distributions
The Partnership paid a special cash distribution in the amount of $200.56 per
Unit in September 1999, resulting from the sale of three properties during the
first half of 1999. As discussed above, Limited Partners will receive a special
cash distribution resulting from the sale of the Partnership's final property in
the near future.
General Information
Additional information regarding the payment of your final cash distributions
and the termination of the Partnership will be included in future
correspondence. 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, 2000
<PAGE>
COMMERCIAL PROPERTIES 3, L.P.
AND CONSOLIDATED VENTURES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
At December 31, At December 31,
1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Real estate assets held for disposition $ 5,974,046 $ 22,429,538
Cash and cash equivalents 4,785,516 2,246,926
Restricted cash 78,031 143,536
Accounts and rent receivable, net of allowance for
doubtful accounts of $96,362 in 1999 and $5,444 in 1998 65,401 136,156
Prepaid expenses and other assets 21,282 51,093
- ------------------------------------------------------------------------------------------
Total Assets $ 10,924,276 $ 25,007,249
==========================================================================================
Liabilities and Partners' Capital (Deficit)
Liabilities:
Accounts payable and accrued expenses $ 233,207 $ 512,546
Due to affiliates 48,376 47,930
Prepaid rent 17,581 --
Security deposits payable 78,031 240,423
------------------------------
Total Liabilities 377,195 800,899
------------------------------
Minority Interest 701,361 605,691
------------------------------
Partners' Capital (Deficit):
General Partners (393,353) (255,803)
Limited Partners (109,378 units outstanding) 10,239,073 23,856,462
------------------------------
Total Partners' Capital 9,845,720 23,600,659
- ------------------------------------------------------------------------------------------
Total Liabilities and Partners' Capital $ 10,924,276 $ 25,007,249
==========================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
For the years ended December 31, 1999, 1998 and 1997
General Limited
Partners Partners Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 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
Net Income 84,030 8,319,030 8,403,060
Distributions (221,580) (21,936,419) (22,157,999)
- ------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ (393,353) $ 10,239,073 $ 9,845,720
==========================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements. 2
<PAGE>
COMMERCIAL PROPERTIES 3, L.P.
AND CONSOLIDATED VENTURES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Rental $ 2,530,185 $ 5,719,841 $ 5,031,723
Interest 783,312 68,146 77,701
-----------------------------------------
Total Income 3,313,497 5,787,987 5,109,424
- --------------------------------------------------------------------------------------
Expenses
Property operating 1,142,270 2,323,191 2,392,473
Depreciation and amortization 28,522 1,077,837 2,089,050
General and administrative 454,088 404,990 477,582
-----------------------------------------
Total Expenses 1,624,880 3,806,018 4,959,105
-----------------------------------------
Net income before minority interest 1,688,617 1,981,969 150,319
Minority interest (117,047) (234,755) (107,459)
-----------------------------------------
Income before gain on sale of real estate 1,571,570 1,747,214 42,860
Gain on sale of real estate 6,831,490 -- --
-----------------------------------------
Net Income $ 8,403,060 $ 1,747,214 $ 42,860
======================================================================================
Net Income (Loss) Allocated:
To the General Partners $ 84,030 $ 118,957 $ 67,729
To the Limited Partners 8,319,030 1,628,257 (24,869)
- --------------------------------------------------------------------------------------
$ 8,403,060 $1,747,214 $ 42,860
======================================================================================
Per limited partnership unit
(109,378 outstanding) $ 76.06 $ 14.89 $ (.23)
- --------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements. 3
<PAGE>
COMMERCIAL PROPERTIES 3, L.P.
AND CONSOLIDATED VENTURES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Income $ 8,403,060 $ 1,747,214 $ 42,860
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest 117,047 234,755 107,459
Depreciation 15,460 954,030 1,858,297
Amortization 13,062 123,807 230,753
Bad debt 90,918 -- --
Gain on sale of real estate (6,831,490) -- --
Increase (decrease) in cash arising from changes
in operating assets and liabilities:
Restricted cash 65,505 79,347 9,447
Accounts and rent receivable (20,163) (55,555) (40,511)
Deferred rent receivable 55,576 50,521 53,688
Prepaid expenses and other assets 29,811 (209,810) (371,185)
Accounts payable and accrued expenses (279,339) 75,519 187,510
Due to affiliates 446 (7,340) 49,329
Prepaid rent 17,581 (58,937) 58,937
Security deposits payable (162,392) 17,540 7,857
------------------------------------------
Net cash provided by operating activities 1,515,082 2,951,091 2,194,441
- ---------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Proceeds from sale of real estate 23,874,794 -- --
Additions to real estate -- (511,289) (796,801)
Additions to real estate held for disposition (671,910) -- --
------------------------------------------
Net cash provided by (used for) investing activities 23,202,884 (511,289) (796,801)
- ---------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Cash distributions (22,157,999) (1,465,890) (1,353,128)
Cash distributions to minority interest joint venture (21,377) -- --
------------------------------------------
Net cash used for financing activities (22,179,376) (1,465,890) (1,353,128)
- ---------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 2,538,590 973,912 44,512
Cash and cash equivalents, beginning of period 2,246,926 1,273,014 1,228,502
------------------------------------------
Cash and cash equivalents, end of period $ 4,785,516 $ 2,246,926 $ 1,273,014
===================================================================================================
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.
- ---------------------------------------------------------------------------------------------------
Supplemental Disclosure of Non-Cash Investing Activities:
Write-off of leasing commissions on vacated tenants $ 209,345 $ -- $ --
Write-off of tenant improvements on vacated tenants 56,014 -- --
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements. 4
<PAGE>
COMMERCIAL PROPERTIES 3, L.P.
AND CONSOLIDATED VENTURES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
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 2000.
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 was 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 Property for sale. In view of the
anticipated sale of the Property, 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.
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.
5
<PAGE>
COMMERCIAL PROPERTIES 3, L.P.
AND CONSOLIDATED VENTURES
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
accounting principles generally accepted in the United States 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.
6
<PAGE>
COMMERCIAL PROPERTIES 3, L.P.
AND CONSOLIDATED VENTURES
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 1999,
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 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>
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>
7
<PAGE>
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 12%
for Metro Park, and 10% for Quorum on its adjusted capital investment, as
defined. With regard to Three Financial Centre, net proceeds will be
distributed 93% to the Partnership and 7% 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 January 12, 1999, the Partnership completed the sale of Quorum II Office
Building to an unaffiliated partnership, for a selling price of $7,612,065, net
of closing adjustments and selling costs. The selling price was determined by
arm's length negotiations between the Partnership and the buyer. The sale
resulted in a gain on sale of real estate in the amount of $2,894,064, which has
been reflected in the Partnership's consolidated statement of operations for the
year ended December 31, 1999.
On February 9, 1999, the Partnership completed the sale of Metro Park Business
Center to an unaffiliated partnership, for a selling price of $3,797,438, net of
closing adjustments and selling costs. The selling price was determined by arm's
length negotiations between the Partnership and the buyer. The sale resulted in
a gain on sale of real estate in the amount of $565,698, which has been
reflected in the Partnership's consolidated statement of operations for the year
ended December 31, 1999.
On April 14, 1999, the Partnership completed the sale of Ft. Lauderdale Commerce
Center to an unaffiliated partnership, for a selling price of $12,465,291, net
of closing adjustments and selling costs. The sale resulted in a gain of
$3,371,728, which has been reflected in the Partnership's consolidated statement
of operations for the year ended December 31, 1999.
On January 31, 2000, the Partnership sold its remaining Property, Three
Financial Centre. See Note 8 "Subsequent Event."
5. Rental Income Under Operating Leases
Future minimum rental income to be received on noncancelable operating leases as
of December 31, 1999 on the remaining property is as follows:
8
<PAGE>
COMMERCIAL PROPERTIES 3, L.P.
AND CONSOLIDATED VENTURES
<TABLE>
<CAPTION>
--------------------------------------
<S> <C>
2000 $1,560,630
2001 1,002,290
2002 704,109
2003 539,718
2004 372,936
Thereafter 1,426,567
--------------------------------------
$5,606,250
==========
</TABLE>
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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Unpaid at Earned
December 31, -----------------------------------------
1999 1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real Estate Services and affiliates
Salary reimbursement $ 40,000 $ 59,876 $ 59,283 $ 111,862
HS Advisors and affiliates
Out of pocket expenses -- 524 1,504 3,196
Property management fees (GSH) 8,376 33,192 33,192 37,995
- ------------------------------------------------------------------------------------------
$ 48,376 $ 93,592 $ 93,979 $ 153,053
-----------------------------------------------------
</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
Income to Federal Income Tax Basis Net Income
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial statement net income $ 8,403,060 $ 1,747,214 $ 42,860
Tax basis depreciation and amortization over
financial statement depreciation and
amortization (796,012) (1,155,094) (203,613)
Deferred rent 17,581 50,521 53,688
Minority interest 117,047 234,755 107,459
Gain on sale 1,581,996 -- --
Adjustment for minority interest (302,897) -- --
Bad debt expense 90,918 -- --
- ------------------------------------------------------------------------------------------
Federal income tax basis
net income $ 9,111,693 $ 877,396 $ 394
=========================================
</TABLE>
9
<PAGE>
COMMERCIAL PROPERTIES 3, L.P.
AND CONSOLIDATED VENTURES
8. Subsequent Event
On January 31, 2000, the Partnership sold its remaining Property, Three
Financial Centre, to an affiliate of the Joint Venture Partner, Three Financial
Centre LLC ("3FCLLC"), for a selling price of approximately $10,130,000, net of
closing adjustments and selling costs. The sale is expected to result in a gain
of approximately $4,100,000 which will be reflected in the Partnership's
consolidated operations for the three months ended March 31, 2000. The selection
of the buyer was a result of a competitive bidding process organized by the real
estate broker engaged to assist in selling the Property. The General Partners
plan to distribute the net proceeds from the sale, together with the
Partnership's remaining cash reserves (after payment of or provision for the
Partnership's liabilities and expenses), and terminate the Partnership during
the second quarter 2000.
10
<PAGE>
- --------------------------------------------------------------------------------
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, 1999 and 1998,
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, 1999. Our audits also included the financial statement schedule
listed in the Index at Item 14(a)(2). 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, 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 2, 2000
11
<PAGE>
- --------------------------------------------------------------------------------
NET ASSET VALUATION
- --------------------------------------------------------------------------------
Comparison of Acquisition Costs to Estimated Value and
Determination of Net Asset Value Per $283.44 Unit at December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Acquisition 1999 Estimated
Property Date of Acquisition Cost(1) Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three Financial Centre (2)(3) 01-22-85 $11,378,512 $ 10,130,000
------------
Cash and cash equivalents 4,785,516
Accounts and rent receivable, net 65,401
Prepaid expense and other assets 21,282
------------
15,002,199
Less:
Accounts payable and accrued expenses 233,207
Prepaid rent 17,581
Due to affiliates 48,376
Minority Interest 701,361
------------
Partnership Net Asset Value(4) $ 14,001,674
============
Net Asset Value Allocated:
General Partners $ 140,017
Limited Partners 13,861,657
------------
$ 14,001,674
============
Net Asset Value Per Unit
(109,378 units outstanding) $ 126.73
- --------------------------------------------------------------------------------------
<FN>
(1) The acquisition cost of each property is comprised of fundings made through
December 31, 1999, 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, 1999 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, 1999 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, 1999 of the
Partnership's property at its estimated value and the distribution of the
net proceeds to Limited Partners in the liquidation of the Partnership.
However, the Net Asset Value does not reflect the expenses to be incurred
with the wind-down and termination of the Partnership. Therefore, the cash
available for distribution to the limited partners may be less than the Net
Asset Value.
</FN>
</TABLE>
Limited Partners should note that as a result of the illiquid nature of an
investment in Units of the Partnership, the variation between the estimated
value of the Partnership's property 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.
12
<PAGE>
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1999
<TABLE>
<CAPTION>
Three
Consolidated Ventures: Financial Centre
- -------------------------------------------------------------------------------
Location Little Rock, AR
<S> <C>
Construction date 1984
Acquisition date 01-22-85
Life on which depreciation
in latest income statements
is computed 1-25 yrs
Encumbrances --
Initial cost to Partnership:
Land $ 1,018,332
Buildings and
improvements 10,419,160
Costs capitalized
subsequent to acquisition:
Land, buildings
and improvements 12,789
Deferred rent (207,025)
Leasing commissions 376,489
Gross amount at which
carried at close of period(1):
Land $ 1,018,332
Buildings and
improvements 10,431,949
Deferred rent (207,025)
Leasing commissions 376,489
------------
11,619,745
------------
Accumulated depreciation (2) $ 5,645,699
- -------------------------------------------------------------------------------
<FN>
(1) For Federal income tax purposes, the basis of land, building and
improvements is $11,425,926.
(2) For Federal income tax purposes, the amount of accumulated depreciation is
$8,540,334.
</FN>
</TABLE>
A reconciliation of the carrying amount of real estate and accumulated
depreciation for the years ended December 31, 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Real estate investments:
Beginning of year $ 38,294,245 $ 36,942,494 $ 36,640,226
Additions 671,910 1,351,751 796,801
Deletions (27,221,757) -- (494,533)
Write offs (124,653) -- --
--------------------------------------------
End of year $ 11,619,745 $ 38,294,245 $ 36,942,494
--------------------------------------------
Accumulated depreciation:
Beginning of year $ 15,864,707 $ 14,910,677 $ 13,546,913
Depreciation expense 15,460 954,030 1,858,297
Deletions (10,234,468) -- (494,533)
--------------------------------------------
End of year $ 5,645,699 $ 15,864,707 $ 14,910,677
- -------------------------------------------------------------------------------
</TABLE>
F-1
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 2, 1999,
included in the 1999 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)(2). 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 2, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Dec-31-1999
<CASH> 4,785,516
<SECURITIES> 000
<RECEIVABLES> 161,763
<ALLOWANCES> 96,362
<INVENTORY> 000
<CURRENT-ASSETS> 4,928,948
<PP&E> 5,974,046
<DEPRECIATION> 000
<TOTAL-ASSETS> 10,924,276
<CURRENT-LIABILITIES> 377,195
<BONDS> 000
000
000
<COMMON> 000
<OTHER-SE> 9,845,720
<TOTAL-LIABILITY-AND-EQUITY> 10,924,276
<SALES> 000
<TOTAL-REVENUES> 3,313,497
<CGS> 000
<TOTAL-COSTS> 000
<OTHER-EXPENSES> 1,624,880
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> 000
<INCOME-PRETAX> 1,571,570
<INCOME-TAX> 000
<INCOME-CONTINUING> 1,571,570
<DISCONTINUED> 000
<EXTRAORDINARY> 6,831,490
<CHANGES> 000
<NET-INCOME> 8,403,060
<EPS-BASIC> 76.06
<EPS-DILUTED> 76.06
</TABLE>
