ANNUAL REPORT FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
FELLOW PARTNERS:
Now that we have initiated the liquidation phase of your real estate
portfolio, the amount of your distributions and the estimated value of a Fund
unit will be influenced more by sales than by operations. As a result, we
thought it appropriate to begin this report with your fourth quarter and
fiscal 1996 distributions from the Fund and the estimated unit value.
As we move forward in the process of liquidating the Fund's properties,
our primary focus will shift from the production of income to the strategic
positioning of the properties to maximize potential sales proceeds. Thus,
while we will continue to try to keep lease rates as high as possible, we may
place additional emphasis on longer-term leases with creditworthy, stable
tenants who are valued by prospective purchasers because of their lower risk.
It may take somewhat longer to obtain such tenants, but we believe this
strategy will help us obtain higher sales prices.
Cash Distributions
For the fourth quarter ended September 30, 1996, the per-unit distribution
from fiscal 1996 operations was $7.00, bringing the total for the year to
$21.25. In addition, the remainder of the proceeds withheld from the sale of
DuPont in 1990 are being paid to you. The $14.55 per unit from DuPont is in
addition to the $17.79 you received in May from the Spring Creek sale. As
indicated in the Statements of Operations on page 6, the cash distributed from
both operations and sales proceeds for 1996 was higher than for the prior two
years.
In 1990, the Fund began paying a fixed quarterly distribution from
operations for the first three quarters of each year in order to provide
limited partners with a more predictable income stream and the Fund with
sufficient reserves to cover projected capital needs. This planned rate was
evaluated periodically to determine if a change were warranted, and any
adjustment was made in the fourth quarter. As you know, the quarterly rate
during the first nine months of fiscal 1996 was $4.75 per unit. Because the
projected cash balances required to operate the portfolio going forward are
lower and because of improved 1996 operating results, we increased the fourth
quarter rate to $7.00.
In fiscal 1997, we will determine cash distributions from operations
each quarter based on: (1) net cash flows for the quarter; (2) money needed to
operate the properties and pay Fund expenses; (3) anticipated capital needed
to repair and maintain the properties and occupancy-related tenant
improvements; and (4) property dispositions. This will result in variable
quarterly distributions going forward.
Unit Valuation
As you know, at the end of each fiscal year we employ a third-party appraiser
to review and assess the analysis and assumptions used to prepare an estimated
current unit value. These valuations are not necessarily representative of the
value of your units when the Fund ultimately liquidates its holdings. Nor is
there any assurance that you could sell your units today at a price equal to
the current estimated value.
At September 30, 1996, the unit value of the Fund was $420. After
adjusting for our November distribution, the value per unit was $398, an
increase of 4.7% over our comparable valuation last year.
Results of Operations
For the 12 months ended September 30, 1996, the Fund's net income declined
only 8% from the prior year, excluding the effects of property writedowns.
Impairments recorded for The Business Park, Airport Perimeter, and Newport
Center, plus a valuation allowance at Van Buren, net of a recovery in Spring
Creek's value recorded prior to its disposition, totaled $3,115,000. This net
charge was offset to a limited extent by lower depreciation associated with
properties held for sale. Excluding the effect of these adjustments, the Fund
had net income of $512,000 for 1996 versus net income of $555,000 for 1995.
After the declines in property values, the Fund reported a net loss of
$2,603,000 in 1996 compared with net income of $8,000 in 1995.
At the property operating level, the higher average leased status at The
Business Park as well as increased rental rates at Royal Biltmore and Newport
Center had a positive effect on revenues. This more than offset the effect on
rental income of a decline in the average leased status at Montgomery and of
the absence of revenues from Spring Creek since its sale in April 1996.
While the leased status at Airport Perimeter declined by nine percentage
points over the course of the year, its average leased status (shown in the
table below) and contribution to income from operations was up slightly. Based
on recent communications with the Hartsfield International Airport Acquisition
Office, it appears that the Atlanta Airport will be expanded and that the Fund
will be forced, through condemnation proceedings, to sell this property within
the next 12 to 24 months. Because of the uncertainty surrounding the
condemnation, we do not believe it is in your best interests to put the
property on the market. While leases on 31% of the space expire in fiscal
1997, leasing activity in the submarket is positive, and Airport Perimeter is
receiving its share of interest. Since we do not anticipate any additional
value impairments on this property next year, there is a good chance that
Airport Perimeter will make an improved contribution to portfolio results in
fiscal 1997.
The impact of Montgomery's poor revenue performance was exacerbated by
an increase in bad debt expense plus associated legal fees and depreciation
resulting from the write-off of tenant improvements, primarily for those
tenants who were credit problems and vacated prior to their lease expirations.
We discussed our "full-floor" leasing strategy and the increasing interest in
the property in last quarter's report. Our concept was to pursue leases with
large users with sound credit in support of the disposition strategy. During
the most recent three-month period, there was no activity for 22,000 square
feet, which is the full-floor area, but we have been in contact with two
potential tenants who are each interested in approximately 11,000 square feet.
This would still fill our goal of large users, and we are continuing to talk
with these prospects to determine their level of interest and their financial
strength.
At Springdale, the average leased status remained at 100% throughout
both 1995 and 1996, and this industrial property's contribution to income from
operations was again positive. After September 30, however, one tenant left,
and the property is currently 92% leased. Based on the healthy market
environment in Southern California, LaSalle expects to re-lease the space in
the near future.
Leasing activity at Newport Center was brisk throughout the year, as
leases covering 50% of the total space were negotiated. At the end of
September, 93% of the space was leased, and LaSalle is optimistic about
prospects for this year because occupancy in the submarket has tightened and
rental rates have firmed.
Results at the two remaining properties in the portfolio - Royal
Biltmore and Van Buren - were favorably affected because their depreciation
expenses declined by $126,000 and $159,000, respectively. A property that is
being held for sale is no longer depreciated under applicable accounting
standards.
Disposition Update
Three offers on Royal Biltmore were received during the first week of October,
and each is currently under review. We have a signed letter of intent on Van
Buren and are negotiating a purchase and sale agreement, which we hope to sign
by December 31. However, the closing of the sale will depend on the timing of
registering three drywells on the site with the state. Van Buren is located in
an area of Phoenix with broad environmental implications, but the situation
does not seem to concern the prospective buyer. We have retained an
environmental attorney and consultant to assist in resolving the issue and
will report on the results early in 1997.
Outlook
Over the past 12 months, occupancy and rental rates in most of the regions
where your properties are located stabilized or improved. In LaSalle's
opinion, this trend should continue into next year. During the current fiscal
year, we will continue to poise the portfolio to take advantage of the more
favorable operating environment. In addition, we expect to begin actively
marketing several other properties in the coming year.
Sincerely,
James S. Riepe
Chairman
November 8, 1996
Real Estate Investments (Dollars in thousands)
______________________________________________________________________________
Leased Average Leased Contribution to
Status Status Net Income
_______ ________________ __________________
Gross Years Ended Years Ended
Property Leasable September September 30, September 30,
Name Area(Sq. Ft.) 30, 1996 1995 1996 1995 1996
________ _________ _________ ________ ________ ________ _______
Airport
Perimeter 120,986 71% 74% 73% $ (250) $(1,031)
Montgomery 116,348 68 76 71 86 (376)
Springdale 144,000 100 100 100 345 332
The Business
Park 157,153 97 88 96 (68) (1,120)
Newport
Center 62,411 93 94 90 182 (745)
________ ____ ____ ____ _____ _______
600,898 86 86 87 295 (2,940)
Held for Sale
Royal
Biltmore 71,443 96 98 98 155 343
Van Buren 173,878 92 91 92 87 36
________ ____ ____ ____ _____ _______
846,219 88 88 89 537 (2,561)
Properties
Sold - - - - (152) 411
Fund Expenses
Less Interest
Income - - - - (377) (453)
________ ____ ____ ____ _____ _______
Total 846,219 88% 88% 89% $ 8 $(2,603)
REAL ESTATE HOLDINGS
September 30, 1996
(In thousands)
Current
Property Date Accumulated Carrying
Name Type and Location Acquired Cost Depreciation Amount
_________ ______________________ _________ ________ ____________ _________
Airport
Perimeter Industrial 12/85 $ 2,210 - $ 2,210
College Park, Georgia
Montgomery Office 12/85 16,955 (6,964) 9,991
Gaithersburg, Maryland
Springdale Industrial 6/86 7,352 (2,555) 4,797
Santa Fe Springs, California
The Business
Park Office/Service 8/86 6,660 - 6,660
Gwinnett Co., Georgia
Newport
Center Office/Service 5/87 3,170 - 3,170
Deerfield Beach, Florida
________ ________ ________
$36,347 $(9,519) 26,828
________ ________ ________
________ ________ ________
Held for Sale
Royal
Biltmore Office 1/86 4,966
Phoenix, Arizona
Van Buren Industrial 7/86 3,999
________
Phoenix, Arizona
$ 35,793
________
________
BALANCE SHEETS
(In thousands)
September 30, September 30,
1996 1995
___________ ____________
Assets
Real Estate Property Investments
Land. . . . . . . . . . . . . . . . . . $ 6,759 $ 11,014
Buildings and Improvements. . . . . . . 29,588 54,237
________ ________
36,347 65,251
Less: Accumulated Depreciation
and Amortization. . . . . . . . . . . (9,519) (24,092)
________ ________
26,828 41,159
Held for Sale . . . . . . . . . . . . . 8,965 1,226
________ ________
35,793 42,385
Cash and Cash Equivalents. . . . . . . . 2,290 2,832
Accounts Receivable
(less allowances of $175 and $85) . . . 154 292
Other Assets . . . . . . . . . . . . . . 492 624
________ ________
$ 38,729 $ 46,133
________ ________
________ ________
Liabilities and Partners' Capital
Security Deposits and
Prepaid Rents . . . . . . . . . . . . . $ 418 $ 364
Accrued Real Estate Taxes. . . . . . . . 231 202
Accounts Payable and
Other Accrued Expenses. . . . . . . . . 266 281
________ ________
Total Liabilities. . . . . . . . . . . . 915 847
Partners' Capital. . . . . . . . . . . . 37,814 45,286
________ ________
$ 38,729 $ 46,133
________ ________
________ ________
The accompanying notes are an integral part of the financial statements.
STATEMENTS OF OPERATIONS
(In thousands except per-unit amounts)
Years Ended September 30,
1996 1995 1994
________ ________ ________
Revenues
Rental Income. . . . . . . . . . . . . . . $ 6,067 $ 5,927 $ 5,874
Interest Income. . . . . . . . . . . . . . 104 116 119
_______ _______ _______
6,171 6,043 5,993
_______ _______ _______
Expenses
Property Operating Expenses. . . . . . . . 1,878 1,681 1,933
Real Estate Taxes. . . . . . . . . . . . . 660 632 592
Depreciation and Amortization. . . . . . . 2,562 2,681 2,779
Decline (Recovery) of
Property Values . . . . . . . . . . . . . 3,115 547 (2)
Partnership Management Expenses. . . . . . 559 494 526
_______ _______ _______
8,774 6,035 5,828
_______ _______ _______
Net Income (Loss). . . . . . . . . . . . . $ (2,603) $ 8 $ 165
_______ _______ _______
_______ _______ _______
Activity per Limited Partnership Unit
Net Income (Loss). . . . . . . . . . . . . $ (25.85) $ 0.08 $ 1.64
_______ _______ _______
_______ _______ _______
Cash Distributions Declared
from Operations. . . . . . . . . . . . . $ 21.25 $ 21.00 $ 16.00
from Sales Proceeds. . . . . . . . . . . 32.34 9.00 34.00
_______ _______ _______
Total Distributions Declared . . . . . . . $ 53.59 $ 30.00 $ 50.00
_______ _______ _______
_______ _______ _______
Units Outstanding. . . . . . . . . . . . . 90,622 90,622 90,622
_______ _______ _______
_______ _______ _______
The accompanying notes are an integral part of the financial statements.
STATEMENTS OF PARTNERS' CAPITAL
(In thousands)
General Limited
Partner Partners Total
________ ________ ________
Balance,
September 30, 1993. . . . $(3,313) $54,857 $51,544
Net Income . . . . . . . . 16 149 165
Cash Distributions . . . . (286) (4,440) (4,726)
_______ _______ _______
Balance,
September 30, 1994. . . . (3,583) 50,566 46,983
Net Income . . . . . . . . 1 7 8
Cash Distributions . . . . (165) (1,540) (1,705)
_______ _______ _______
Balance,
September 30, 1995. . . . (3,747) 49,033 45,286
Net Loss . . . . . . . . . (260) (2,343) (2,603)
Cash Distributions . . . . (335) (4,534) (4,869)
_______ _______ _______
Balance,
September 30, 1996. . . . $(4,342) $42,156 $37,814
_______ _______ _______
_______ _______ _______
The accompanying notes are an integral part of the financial statements.
STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended September 30,
1996 1995 1994
________ ________ ________
Cash Flows from Operating Activities
Net Income (Loss). . . . . . . . . . . . . $ (2,603) $ 8 $ 165
Adjustments to Reconcile Net Income
(Loss) to Net Cash
Provided by Operating Activities
Depreciation and Amortization. . . . . . 2,562 2,681 2,779
Decline (Recovery)
of Property Values. . . . . . . . . . . 3,115 547 (2)
Other Changes in Assets
and Liabilities . . . . . . . . . . . . 171 (210) (373)
_______ _______ _______
Net Cash Provided by
Operating Activities . . . . . . . . . . 3,245 3,026 2,569
_______ _______ _______
Cash Flows from Investing Activities
Proceeds from Property Disposition . . . . 1,679 - 3,379
Investments in Real Estate . . . . . . . . (597) (1,092) (1,048)
_______ _______ _______
Net Cash Provided by (Used in)
Investing Activities. . . . . . . . . . . 1,082 (1,092) 2,331
_______ _______ _______
Cash Flows Used in Financing Activities
Cash Distributions . . . . . . . . . . . . (4,869) (1,705) (4,726)
_______ _______ _______
Cash and Cash Equivalents
Net Increase (Decrease) during Year. . . . (542) 229 174
At Beginning of Year . . . . . . . . . . . 2,832 2,603 2,429
_______ _______ _______
At End of Year . . . . . . . . . . . . . . $ 2,290 $ 2,832 $ 2,603
_______ _______ _______
_______ _______ _______
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
T. Rowe Price Realty Income Fund I, A No-Load Limited Partnership (the
"Partnership"), was formed on August 31, 1984, under the Maryland Revised
Uniform Limited Partnership Act for the purpose of acquiring, operating, and
disposing of existing income-producing commercial and industrial real estate
properties. T. Rowe Price Realty Income Fund I Management, Inc., is the sole
General Partner. A total of 90,622 limited partnership units were issued at
$1,000 per unit and remain outstanding as of September 30, 1996.
In accordance with provisions of the partnership agreement, income from
operations is allocated and related cash distributions are generally paid to
the General and Limited Partners at the rates of 10% and 90%, respectively.
Allocations to the General Partner are, in part, in lieu of separate
management fees. Sale or refinancing proceeds are in general allocated, first
4% to the General Partner, next to the Limited Partners in an amount equal to
their Adjusted Capital Contributions (as defined), next to the Limited
Partners to provide specific returns on their Adjusted Capital Contributions,
with any remaining proceeds allocated 85% to the Limited Partners and 15% to
the General Partner. Gains on property sales are generally allocated in the
same ratio as the distribution of sale proceeds. Cash distributions, if any,
are made quarterly based upon cash available for distribution, as defined in
the partnership agreement. Cash available for distribution will fluctuate as
changes in cash flows and adequacy of cash balances warrant.
The partnership agreement includes provisions limiting the maximum
contribution the General Partner can be required to fund upon the dissolution
and termination of the Partnership if, at that time, the General Partner's
capital account has a negative balance. The maximum contribution is
approximately $913,000. If after making such a contribution, the General
Partner's capital account still has a negative balance, a reallocation of
income equal to the remaining negative balance will be made to the General
Partner from the Limited Partners.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Partnership's financial statements are prepared in accordance with
generally accepted accounting principles which requires the use of estimates
and assumptions by the General Partner.
Depreciation is calculated on the straight-line method over the
estimated useful lives of buildings and improvements, which range from five to
40 years. Lease commissions and tenant improvements are capitalized and
amortized over the life of the lease using the straight-line method.
Cash equivalents consist of all short-term, highly liquid investments
including money market mutual funds. The cost of such investments approximates
fair value.
The Partnership uses the allowance method of accounting for doubtful
accounts. Provisions for uncollectible tenant receivables in the amounts of
$186,000, $20,000, and $96,000 were recorded in 1996, 1995 and 1994,
respectively. Bad debt expense is included in Property Operating Expenses.
The Partnership reviews its real estate property investments for
impairment whenever events or changes in circumstances indicate that the
property carrying amounts may not be recoverable. Such a review may result in
the Partnership recording a provision for impairment of the carrying value of
its real estate property investments whenever the estimated future cash flows
from a property's operations and sale are less than the property's net
carrying value. The General Partner believes that the estimates and
assumptions used in evaluating the carrying value of the Partnership's
properties are appropriate; however, changes in market conditions and
circumstances could occur in the near term which would cause these estimates
to change.
Rental income is recognized on a straight-line basis over the term of
each lease. Rental income accrued, but not yet billed, is included in Other
Assets and aggregates $276,000 and $435,000 at September 30, 1996 and 1995,
respectively.
Under provisions of the Internal Revenue Code and applicable state
taxation codes, partnerships are generally not subject to income taxes;
therefore, no provision has been made for such taxes in the accompanying
financial statements.
NOTE 3 - TRANSACTIONS WITH RELATED PARTIES AND OTHER
As discussed in Note 1, the General Partner receives 10% of distributable cash
from operations and a portion of the proceeds from property dispositions as
compensation for the services rendered in managing the affairs of the
Partnership. The General Partner earned $214,000, $211,000, and $161,000 from
operations in fiscal 1996, 1995, and 1994, respectively. In addition, the
General Partner earned $122,000, $34,000, and $128,000 in fiscal 1996, 1995,
and 1994 from property dispositions.
In accordance with the partnership agreement, certain operating expenses
are reimbursable to the General Partner. The General Partner's reimbursement
of such expenses totaled $162,000, $123,000, and $134,000 for communications
and administrative services performed on behalf of the Partnership during
fiscal 1996, 1995, and 1994, respectively.
An affiliate of the General Partner earned a normal and customary fee of
$4,000, $9,000, and $11,000 from the money market mutual funds in which the
Partnership made its interim cash investments during fiscal 1996, 1995, and
1994, respectively.
LaSalle Advisors Limited Partnership ("LaSalle") is the Partnership's
advisor and is compensated for its advisory services directly by the General
Partner. LaSalle is reimbursed by the Partnership for certain operating
expenses pursuant to its contract with the Partnership to provide real estate
advisory, accounting, and other related services to the Partnership. LaSalle's
reimbursement for such expenses during each of the last three years totaled
$150,000.
An affiliate of LaSalle earned $227,000, $205,000, and $200,000 in
fiscal 1996, 1995, and 1994, respectively, for property management fees and
leasing commissions on tenant renewals and extensions for several of the
Partnership's properties.
NOTE 4 - PROPERTY DISPOSITIONS
On January 31, 1994, the Partnership sold Corporate Square and received net
proceeds of $3,379,000. The net book value of this property at the time of
disposition was also $3,379,000, after accumulated depreciation and previously
recorded property valuation allowances. Therefore, no gain or loss was
recognized on the property sale.
On April 30, 1996, the Partnership sold Spring Creek and received net
proceeds of $1,679,000. The net book value of this property at the time of
disposition was also $1,679,000, after accumulated depreciation expense and
previously recorded property valuation allowances. Therefore, no gain or loss
was recognized on the property sale.
NOTE 5 - PROPERTY VALUATIONS
On October 1, 1995, the Partnership adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," which changed the Partnership's
method of accounting for its real estate property investments when
circumstances indicate that the carrying amount of a property may not be
recoverable. Measurement of an impairment loss on an operating property is now
based on the estimated fair value of the property, which becomes the
property's new cost basis, rather than the sum of expected future cash flows.
Properties held for sale continue to be reflected at the lower of historical
cost or estimated fair value less anticipated selling costs. In addition,
properties held for sale are no longer depreciated.
Based upon a review of current market conditions, estimated holding
period, and future performance expectations of each Partnership property, the
General Partner has determined that the net carrying value of certain
Partnership properties held for operations may not be fully recoverable.
Charges recognized for such impairments aggregated $3,189,000 in fiscal 1996,
$354,000 in fiscal 1995, and $365,000 in fiscal 1994.
The General Partner has approved a plan of disposition for and is
actively marketing the Royal Biltmore and Van Buren properties, the carrying
amounts of which are classified as held for sale in the accompanying September
30, 1996 balance sheet. Results of operations for Royal Biltmore, Van Buren
and properties sold are summarized below for each of the fiscal years ended
September 30:
1996 1995 1994
________ ________ ________
Recovery (Decline) of
Property Values. . . . . . . . . . $ 74,000 $(193,000) $ 368,000
Other Components of
Operating Income . . . . . . . . . 716,000 284,000 236,000
________ ________ ________
Results of Operations. . . . . . . . $ 790,000 $ 91,000 $ 604,000
________ ________ ________
________ ________ ________
NOTE 6 - LEASES
Future minimum rentals to be received by the Partnership under noncancelable
operating leases in effect as of September 30, 1996, are:
Fiscal Year (in thousands)
___________
1997 $ 4,794
1998 3,394
1999 1,946
2000 1,293
2001 650
Thereafter 818
_______
Total $ 12,895
_______
_______
NOTE 7 - RECONCILIATION OF FINANCIAL STATEMENT TO TAXABLE INCOME
As described in Note 2, the Partnership has not provided for an income tax
liability; however, certain timing differences exist between amounts reported
for financial reporting and federal income tax purposes. These differences are
summarized below for years ended September 30:
1996 1995 1994
________ ________ ________
(in thousands)
Book net income (loss) . . . . . . . $ (2,603) $ 8 $ 165
Allowances for
property valuations. . . . . . . . 3,115 547 (2)
Tax basis loss on
property sale. . . . . . . . . . . (1,296) - (3,133)
Other. . . . . . . . . . . . . . . . 152 58 32
________ ________ ________
Taxable income (loss). . . . . . . . $ (632) $ 613 $ (2,938)
________ ________ ________
________ ________ ________
NOTE 8 - SUBSEQUENT EVENT
The Partnership declared a quarterly cash distribution of $21.55 per unit to
Limited Partners of the Partnership as of the close of business on September
30, 1996. The distribution totals $2,078,000 and represents $7.00 per unit of
cash available for distribution from operations and $14.55 per unit from
previously retained proceeds from the sale of Dupont Business Park. The
Limited Partners will receive $1,953,000, and the General Partner will receive
$125,000.
INDEPENDENT AUDITORS' REPORT
To the Partners
T. Rowe Price Realty Income Fund I, A No-Load Limited Partnership:
We have audited the accompanying balance sheets of T. Rowe Price Realty Income
Fund I, A No-Load Limited Partnership, as of September 30, 1996 and 1995, and
the related statements of operations, partners' capital and cash flows for
each of the years in the three-year period ended September 30, 1996. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
from 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 present fairly,
in all material respects, the financial position of T. Rowe Price Realty
Income Fund I, A No-Load Limited Partnership as of September 30, 1996 and
1995, and the results of its operations and its cash flows for each of the
years in the three-year period ended September 30, 1996, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
October 23, 1996
