UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
or
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 0-13772
USAA Income Properties III Limited Partnership
(Exact name of registrant as specified in its charter)
Delaware 74-2356253
(State of Organization) (I.R.S. Employer Identification No.)
8000 Robert F. McDermott Fwy., IH 10 West, Suite 600,
San Antonio, Texas 78230-3884
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (210) 498-7391
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered pursuant to section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTERESTS
(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 such 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 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 ]
State the aggregate market value of the voting stock held by non-
affiliates of the registrant: Not Applicable
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the prospectus of the registrant dated May 6,
1985, as supplemented, filed pursuant to Rule 424(b) or (c) under
the Securities Act of 1933 are incorporated by reference in Parts
I and III.
<PAGE>
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security
Holders
PART II
Item 5. Market for the Registrant's Limited Partnership
Units and Related Security Holder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the General Partner
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedule
and Reports on Form 8-K
Signatures
Index to Exhibits
<PAGE>
PART I
Item 1. Business
USAA Income Properties III Limited Partnership (the
"Partnership") is a limited partnership formed February 22, 1985,
under the Uniform Limited Partnership Act of the State of Delaware
to invest in a diversified portfolio of income-producing real
properties such as shopping centers, office buildings, apartments,
industrial buildings and other similar income-producing real
property. The Partnership has four principal business objectives:
(i) to provide the limited partners with cash distributions which
will not constitute taxable income by reason of Partnership tax
deductions and possibly tax losses which may be used to offset
other taxable income, (ii) to preserve and protect the limited
partners' capital and related buying power, (iii) to obtain long-
term appreciation in the value of the properties, and (iv) to
provide a build-up of equity through the reduction of mortgage
loans on the properties. Defined terms used herein shall have the
meanings as set forth under the caption "Glossary" contained at
pages 71-74 of the Prospectus, dated May 6, 1985, filed pursuant to
rule 424(b), attached as Exhibit 99.a and incorporated herein by
reference.
The Partnership sold $55,774,500 in Units of Limited
Partnership Interest (111,549 Units at $500 per Unit) from the
commencement of the offering of Units on or about June 1, 1985,
through the completion of the offering on December 31, 1985.
Limited Partners are not required to make any additional capital
contributions.
Proceeds available to the Partnership for investment in
properties were used to acquire the following properties in fiscal
year 1986: Curlew Crossing (formerly Courtyard Shoppes) Shopping
Center, Parkview Plaza Office Buildings, and Ramada World
Headquarters Office Buildings. These properties comprise the
complete portfolio of the Partnership. See "Item 2 Properties."
Competitive conditions for the Partnership's properties in
1995 were as follows:
Curlew Crossing Shopping Center is located in Clearwater,
Florida in northern Pinellas County on North U.S. Highway 19. At
December 31, 1995, Curlew Crossing was 99% leased. The $11,000,000
mortgage on Curlew Crossing is payable monthly, interest only, with
the principal due March 31, 1996. The loan is expected to be extended
at a market rate by an affiliate of the General Partner.
Curlew Crossing will undergo a reconfiguration of the
parking lot on a portion of the property adjacent to Curlew Road.
This is a result of an additional lane being added to the highway.
This could affect the amount of parking at the center as well as
the desirability of the outparcel closest to the highway.
<PAGE>
Curlew Crossing is located in the North Pinellas County
retail market. This submarket experienced approximately 11,000
square feet of positive absorption during 1995 leaving the
occupancy rate at approximately 91%. In addition, overall Pinellas
County has approximately 289,000 square feet of leased but
unoccupied space which would effectively decrease the occupancy
rate to 89%.
The Parkview Plaza Office Buildings are located in the city
of Manhattan Beach, Los Angeles County, California, south of the
city of Los Angeles and the Los Angeles International Airport. The
two buildings on the site are leased to Hughes Aircraft Company, a
wholly-owned subsidiary of General Motors. The buildings are 100%
leased by Hughes Electro-Optical Division. Although the tenant has
vacated the property, a few subtenants remain. Hughes has hired a
management company to manage the property. Hughes continues to
service its lease obligation on a timely basis and is obligated to
do so until the lease expires in August 1996. Parkview Plaza will
experience a significant decrease in cash flow in 1996 as a result
of the expiration of the Hughes lease and the cash requirement for
tenant improvements and lease commissions needed to re-lease the
property. Marketing efforts are underway as a leasing team has
been selected. Later in 1996 as control of the daily operations
are assumed at the property, maintenance rehabilitation efforts
will begin. Current rental rates in the market surrounding the
property are lower than the rate currently being paid by Hughes.
This tenant provided approximately $6,679,000 of annual rental
income to the Partnership during 1995 and approximately $6,241,000
during 1994 and 1993 which represents approximately 69% of total
Partnership rental income for 1995, 67% for 1994 and 68% for 1993.
Parkview Plaza is located in the El Segundo/Manhattan Beach
submarket of the South Bay office market. Total rentable square
feet in this submarket was approximately 9.3 million square feet
with 1.9 million square feet available as of the end of 1995,
resulting in a vacancy rate of 20%. The vacancy rate as of the end
of 1994 was approximately 18%. This submarket has the largest
amount of office space and one of the lowest vacancy rates in the
South Bay market. The El Segundo/Manhattan Beach submarket is
attractive due to its close proximity to LAX airport.
Ramada World Headquarters Buildings are located in central
Phoenix, Arizona, approximately one mile north of Sky Harbor
International Airport, and four miles east of the downtown business
and financial center. This property is comprised of a complex of
three office buildings and was 100% leased by Ramada Executive
Corporation with a remaining two year term expiring in 1997.
Ramada vacated the property in 1992 and continued to meet its rent
obligations. On March 30, 1995, a twelve-year lease was signed
with Hospitality Franchise Systems, Inc. ("HFS"), the major
subtenant at this property, for the ten-story building which
contains approximately 100,000 square feet. Upon execution of the
lease, HFS contributed $3 million to be used toward the cost of
improvements to the property. Ramada was released from further
obligations on the property. The total cost of improvements, lease
commissions and other renovations will be approximately $5 million.
<PAGE>
The Partnership shall pay approximately $2 million of these costs
to be funded from the working capital reserve. The construction
process is currently underway. Improvements will include interior
and exterior refurbishment as well as elevator replacement. Until
the improvements to the property are substantially complete
(estimated to be August 1996), the basic rent due from HFS will be
at a reduced rate; however, HFS will pay all operating expenses
during this period. Upon substantial completion, the rent will
begin at approximately $14.61 per square foot. HFS will then pay
its proportionate share of operating expenses which exceed $7.00
per square foot each year. HFS provided approximately $1,246,000
of rental income to the Partnership during 1995 which represents
approximately 13% of total Partnership rental income for 1995.
The remaining two buildings are currently being marketed in their
existing condition. Management is evaluating the possibility of
renovating these two buildings in order to more successfully market
them for lease.
In the 44th Street Corridor where Ramada is located, year-
to-date 1995 absorption was a positive 72,742 square feet compared
to 69,642 square feet for 1994. Total inventory in this submarket
was approximately 1.3 million square feet with approximately
134,000 square feet available which equated to a 90% occupancy rate
as of the end of 1995 compared to 82% for 1994.
See "Item 2 Properties" for information pertaining to the
status of the Partnership's properties.
The Partnership has no employees; it has, however, entered
into an Advisory Agreement with USAA Real Estate Company
("Adviser"), which is a wholly-owned subsidiary of USAA Capital
Corporation, which is a wholly-owned subsidiary of United Services
Automobile Association ("USAA"). The Adviser is responsible for
managing the day-to-day operations of the Partnership.
The General Partner ("General Partner") of the Partnership
is USAA Properties III, Inc., a Texas corporation and a subsidiary
of the Adviser. The General Partner has the general responsibility
for management of the Partnership's business and oversees the
activities of the Adviser.
<PAGE>
Item 2. Properties
The Partnership owns the properties described below as of
December 31, 1995:
Location Description of Property
Clearwater, Florida Curlew Crossing Shopping Center: A
shopping center containing
approximately 207,090 net rentable
square feet, situated on 22.32 acres
including the ground under lease to
Home Depot. At December 31, 1995,
the property was 99% occupied and
average monthly cash rental was
approximately $114,000. The mortgage
payable on this property is
$11,000,000. The Partnership has
100% fee-simple ownership.
Manhattan Beach, California Parkview Plaza Office Buildings: Two
office buildings containing, in the
aggregate, 301,457 net rentable
square feet, situated on
approximately 5.13 acres of land. At
December 31, 1995, the property was
100% leased and average monthly cash
rental was approximately $569,000.
The mortgage payable on this property
is $16,818,182. The Partnership has
100% fee-simple ownership.
Phoenix, Arizona Ramada World Headquarters Buildings:
Three office buildings containing, in
the aggregate, 142,696 net rentable
square feet, situated on
approximately 7.4 acres of land. At
December 31, 1995 the property was
70% leased and average monthly cash
rental was approximately $51,000.
There is no debt on this property.
The Partnership has 100% fee-simple
ownership.
See notes 3, 4, 5, 6, 7, and 10 of Notes to Financial Statements in
Item 8, for further discussion relating to the properties and
encumbrances thereon.
<PAGE>
Item 3. Legal Proceedings
There are no material legal proceedings pending to which the
General Partner or the Partnership is a party or to which any of
the Partnership's properties are subject.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders
during the fourth quarter of the fiscal year covered by this report
through the solicitation of proxies or otherwise.
PART II
Item 5. Market for the Registrant's Limited Partnership Units and
Related Security Holder Matters
There is no established public trading market for the
Limited Partnership Units ("the Units"), and it is not anticipated
that a public market will develop. Upon request, Real Estate
Limited Partnership Investor Services, a department in USAA Real
Estate Company, may assist a Limited Partner desiring to transfer
his Units. The purchase price for the Units upon resale and all
other terms of a resale transaction are subject to negotiation
between the buyer and the seller. The limited market for the Units
may adversely affect the value of the Units.
As of December 31, 1995, there were 7,738 Limited Partners
of the Partnership, owning an aggregate of 111,549 Units.
During the year ended December 31, 1995, quarterly
distributions totaling $1,673,236 and $16,902 were distributed to
the Limited Partners and General Partner, respectively, for a total
of $1,690,138 in cash distributions.
During the year ended December 31, 1994, quarterly
distributions totaling $1,673,236 and $16,901 were distributed to
the Limited Partners and General Partner, respectively, for a total
of $1,690,137 in cash distributions.
Future cash distributions to Limited Partners are
anticipated. Due to cash flow requirements in 1996 to re-lease
Parkview Plaza and Ramada, distributions are anticipated to be
reduced in 1996.
<PAGE>
Item 6. Selected Financial Data
<TABLE>
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
SELECTED FINANCIAL DATA
Years Ended December 31, 1995, 1994, 1993, 1992 and 1991
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Rental Income 9,694,383 9,249,018 9,173,668 8,837,842 8,770,274
Interest Income 648,218 343,378 176,617 198,482 213,274
Net Income(Loss) 5,298,841 1,742,181 (9,269,345) (182,374) (4,850,693)
Net Income(Loss) per Limited
Partnership Unit (1) 47.03 15.46 (82.27) (1.62) (43.05)
Taxable Income (Loss) 3,641,563 20,548,728 413,731 (5,712,232) (2,292,436)
Taxable Income (Loss) per
Limited Partnerhip
Unit (1) 32.32 182.37 3.67 (50.70) (20.35)
Cash Distributions 1,690,138 1,690,137 2,230,981 2,811,261 2,704,218
Cash Distributions per
Limited Partnership Unit
Unit (2) 15.00 15.00 19.80 24.95 24.00
Total Assets at Period End 55,626,311 51,924,359 75,037,620 86,531,424 88,830,709
Total Mortgages Payable
at Period End 27,818,182 30,545,455 51,800,000 51,800,000 51,800,000
(1) Based on limited partnership units issued at period end and net income (loss)/
taxable income (loss) allocated to Limited Partners.
(2) Based on limited partnership units issued at each quarter end and cash
distributions allocated to Limited Partners.
The above selected financial data should be read in conjunction with the financial
statements and related notes appearing elsewhere in this report.
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
At December 31, 1995, the Partnership had cash of $573,020 and
temporary investments of $12,202,023. Included in the
Partnership's cash and cash equivalents was the working capital
reserve and funds held for current obligations of the Partnership.
Accounts receivable consisted primarily of tenant receivables.
Deferred charges and other assets included deferred rent resulting
from recognition of income as required by generally accepted
accounting principles, lease commissions and a land lease
receivable. Accounts payable included amounts due to affiliates
for reimbursable expenses and management fees, and amounts due to
third parties for expenses incurred for operations. Accrued
expenses and other liabilities consisted primarily of prepaid rent,
accrued property taxes, security deposits and a deposit held as a
contribution toward tenant improvement costs.
Parkview Plaza in Manhattan Beach, California is 100% leased to
Hughes Aircraft Company until August 1996. Hughes vacated the
buildings in 1993 with a few subtenants remaining. Hughes
continues to service its lease obligation on a timely basis and is
obligated to do so until the lease expires. The Partnership will
experience a significant decrease in cash flow in 1996 as a result
of the expiration of the Hughes lease. In addition, funds will be
required for tenant improvements and lease commissions as the
buildings are re-leased. It is anticipated that these expenditures
will be funded from the Partnership's working capital reserve.
Marketing efforts are underway as a leasing team has been selected.
Later in 1996 as control of the daily operations are assumed at the
property, maintenance rehabilitation efforts will begin. Current
rental rates in the market surrounding the property are lower than
the rate currently being paid by Hughes.
The Parkview Plaza mortgage loan matures on August 31, 1996. Prior
to loan maturity, management plans to pursue alternative financing
with third-party lenders; however, if third-party financing is not
obtained, it is anticipated that the loan will be refinanced by an
affiliate of the General Partner.
On March 30, 1995, a twelve-year lease was signed with Hospitality
Franchise Systems, Inc. ("HFS"), the major subtenant at the Ramada
property in Phoenix, Arizona, for the ten-story building which
contains approximately 100,000 square feet comprising 70% of the
net leaseable space at the property. Upon execution of the lease,
HFS contributed $3 million to be used toward the cost of
improvements to the property. Ramada was released from further
obligations on the property. The total cost of improvements, lease
commissions, and other renovations will be approximately $5
million. The Partnership shall pay approximately $2 million of
these costs to be funded from the working capital reserve. The
<PAGE>
construction process is currently underway. Improvements will
include interior and exterior refurbishment as well as elevator
replacement. Until the improvements to the property are
substantially complete (estimated to be August 1996), the basic
rent due from HFS will be at a reduced rate; however, HFS will pay
all operating expenses during this period. Upon substantial
completion, the rent will begin at approximately $14.61 per square
foot. HFS will then pay its proportionate share of operating
expenses which exceed $7.00 per square foot each year. The
remaining two buildings are currently being marketed in their
existing condition. Management is evaluating the possibility of
renovating these two buildings in order to more successfully market
them for lease.
The $11,000,000 mortgage on Curlew Crossing is due March 31, 1996.
The loan is expected to be extended at a market rate by an
affiliate of the General Partner. In accordance with the Florida
Department of Transportation, Curlew Crossing will undergo a
reconfiguration of the parking lot on a portion of the property
adjacent to Curlew Road. This is a result of an additional lane
being added to the highway. This could affect the amount of
parking at the center as well as the desirability of the outparcel
closest to the highway.
Total cash distributions to Partners for the year ended December
31, 1995 remained consistent with distributions for the year ended
December 31, 1994. Due to the expiration of the Hughes lease in
August 1996 and the lease transaction with HFS, tenant improvements
and lease commissions will be required at both Parkview Plaza and
Ramada, and will be funded from the Partnership's working capital
reserve. Based on current projections, distributions to Partners
are anticipated to be reduced in 1996.
Future liquidity is expected to result from cash generated from
operations of the properties, interest on temporary investments and
ultimately through the sale of the properties.
Results of Operations
For the three-year period ended December 31, 1995, income was
generated from rental income from the income-producing real estate
properties and interest income earned on the funds in temporary
investments.
Expenses incurred during the same period were associated with the
operation of the Partnership's properties, interest on the
mortgages payable and various other costs required for
administration of the Partnership.
During 1995, 1994 and 1993, lease agreements between the
Partnership and tenants at two properties were absolute triple net
leases. Under an absolute triple net lease, the lessee is required
to make all payments for expenses related to the use and occupation
of the leased premises, including real estate taxes and
assessments, property and liability insurance, repairs and
<PAGE>
maintenance, utilities and other operating costs associated with
the property. Accordingly, the Partnership receives rental income
and the lessee absorbs all such expenses.
Rental income increased for the year ended December 31, 1995 as
compared to December 31, 1994 due to the write-down of a deferred
rent receivable on Parkview Plaza in 1993. Rental income is
recognized under the operating method, whereby aggregate rentals
are reported on a straight-line basis as income over the life of
the lease. The deferred rent receivable remaining after the
original maturity date of the mortgage loan (March 31, 1995) was
written off in 1993; therefore, income recognized after March 31,
1995 was actual rent received. Rental income increased during 1994
as a result of an increase in occupancy at Curlew Crossing. The
remaining vacancy at the center was filled during 1993, bringing
the occupancy at Curlew Crossing to 100% by December 31, 1994.
The write-down on Parkview Plaza in 1994 caused the decrease in
depreciation as of December 31, 1995. Depreciation decreased for
the year ended December 31, 1994 as compared to December 31, 1993
as a result of the September 1993 investment property write-down on
Parkview Plaza. Other direct expenses were higher for 1995 as
compared to 1994. Contributing to this increase was an increase in
property insurance expense at Parkview Plaza and an increase in bad
debt expense at Curlew Crossing. Property tax expense was also
higher at Curlew Crossing due to a credit in 1994 resulting from a
tax protest. Other direct expenses were lower for the year ended
December 31, 1994 as compared to December 31, 1993. Expenses in
1993 included the write-down of Parkview Plaza deferred rent.
Investment property write-downs were recognized on Parkview Plaza
in 1994 and 1993.
An increase in interest rates and a higher cash reserve accounted
for the increase in interest income for the years ended December
31, 1995 and 1994.
General and administrative expenses decreased in 1995 as compared
to 1994 due to a decrease in printing charges and legal fees.
General and administrative expenses were higher in 1994 as compared
to 1993 primarily as a result of legal fees related to negotiations
with the third-party lender on the Parkview Plaza mortgage. The
management fee is based on cash flow from operations of the
Partnership adjusted for cash reserves and fluctuated accordingly.
The decrease in interest expense for 1995 as compared to 1994
reflected a decrease in the interest rate charged on the Parkview
Plaza mortgage loan attributable to the loan modifications in 1994
and a decrease in the loan balance from forgiveness of debt and
principal payments. Slightly offsetting this decrease was an
increase in interest paid on the Curlew Crossing mortgage. The
Curlew Crossing mortgage is based on the prime rate and the changes
in expense for this mortgage were a result of changes in the prime
rate. Interest expense decreased for the year ended December 31,
1994 due to a decrease in the interest rate charged on the Parkview
mortgage loan attributable to the loan modifications and a decrease
in the loan balance in October 1994, offset slightly by an increase
in interest paid on the Curlew Crossing mortgage.
<PAGE>
Inflation
An increase in inflation could affect the Partnership's investments
through increases in the costs of operating and maintaining the
properties and in various administrative costs of Partnership
operations. The adverse effect inflation may have on operating
expenses would be offset to some extent by increases in rental
rates charged tenants at the Partnership's properties. If high
occupancy levels are maintained at the properties, increases in
rental income should offset increasing property operating expenses
with minimal effect on operating income.
<PAGE>
Item 8. Financial Statements and Supplementary Data
<TABLE>
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<CAPTION>
1995 1994
<S> <C> <C>
ASSETS
Rental properties, net (notes 3, 4 and 7) $ 39,125,747 40,610,304
Temporary investments, at cost which approximates
market value:
USAA Mutual Fund, Inc. (note 8) -- 661,162
Money market fund 12,202,023 7,505,568
12,202,023 8,166,730
Cash 573,020 7,085
Cash and cash equivalents 12,775,043 8,173,815
Accounts receivable, net of allowance for doubtful
accounts of $12,000 for 1995 419,871 84,870
Deferred charges and other assets, at amortized cost 3,305,650 3,055,370
$ 55,626,311 51,924,359
LIABILITIES AND PARTNERS' EQUITY
Mortgages payable to affiliates (notes 7 and 8) $ 27,818,182 30,545,455
Accounts payable, including amounts due
to affiliates of $65,139 and $80,189 138,535 91,992
Accrued expenses and other liabilities 2,843,826 69,847
Total liabilities 30,800,543 30,707,294
Partners' equity:
General Partner:
Capital contribution 1,000 1,000
Cumulative net loss (17,819) (70,807)
Cumulative distributions (258,214) (241,312)
(275,033) (311,119)
Limited Partners (111,549 units):
Capital contributions, net of offering costs 52,428,030 52,428,030
Cumulative net loss (1,764,083) (7,009,936)
Cumulative distributions (25,563,146) (23,889,910)
25,100,801 21,528,184
Total Partners' equity 24,825,768 21,217,065
Commitment (note 12)
$ 55,626,311 51,924,359
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
Years Ended December 31, 1995, 1994 and 1993
<CAPTION>
<S> <C> <C> <C>
1995 1994 1993
INCOME
Rental income $ 9,694,383 9,249,018 9,173,668
Less direct expenses, including
depreciation of $1,477,439,
$2,324,394 and $2,588,740 (1,743,046) (2,533,232) (3,569,382)
Provision for investment property write-down (note 4) -- (21,164,478) (9,672,292)
Net operating income (loss) (note 6) 7,951,337 (14,448,692) (4,068,006)
Interest income (note 8) 648,218 343,378 176,617
Total income (loss) 8,599,555 (14,105,314) (3,891,389)
EXPENSES
General and administrative (note 8) 366,291 412,691 370,573
Management fee (note 8) 168,389 149,216 228,575
Interest (note 8) 2,766,034 4,390,598 4,778,808
Total expenses 3,300,714 4,952,505 5,377,956
Loss before extraordinary item 5,298,841 (19,057,819) (9,269,345)
Extraordinary gain on debt forgiveness (note 4) -- 20,800,000 --
Net income (loss) $ 5,298,841 1,742,181 (9,269,345)
Net income (loss) per limited partnership unit
before extraordinary item $ 47.03 (169.14) (82.27)
Extraordinary item -- 184.60 --
Net income (loss) per limited partnership unit $ 47.03 15.46 (82.27)
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
<CAPTION>
General Limited
Partner Partners Total
<S> <C> <C> <C>
Balances at December 31, 1992 $ (196,637) 32,861,984 32,665,347
Net loss (92,693) (9,176,652) (9,269,345)
Distributions (22,310) (2,208,671) (2,230,981)
Balances at December 31, 1993 (311,640) 21,476,661 21,165,021
Net income 17,422 1,724,759 1,742,181
Distributions (16,901) (1,673,236) (1,690,137)
Balances at December 31, 1994 (311,119) 21,528,184 21,217,065
Net income 52,988 5,245,853 5,298,841
Distributions (16,902) (1,673,236) (1,690,138)
Balances at December 31, 1995 $ (275,033) 25,100,801 24,825,768
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1994 and 1993
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5,298,841 1,742,181 (9,269,345)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 1,477,439 2,324,394 2,588,740
Amortization 84,471 57,759 70,027
Provision for investment property write-down -- 21,164,478 9,672,292
Gain on debt forgiveness -- (20,800,000) --
Decrease (increase) in accounts receivable (335,001) 169,410 (163,222)
Decrease (increase) in deferred charges
and other assets (334,751) 91,275 1,446,637
Increase (decrease) in accounts payable,
accrued expenses and other liabilities 2,820,522 (1,910,760) 6,522
Loss on early retirement of fixed assets -- -- 9,846
Other adjustments 7,118 -- --
Cash provided by operating activities 9,018,639 2,838,737 4,361,497
Cash flows used in investing activities -
Additions to rental properties -- (22,771) (201,239)
Cash flows from financing activities:
Repayment of mortgages payable (2,727,273) (454,545) --
Distributions to partners (1,690,138) (1,690,137) (2,230,981)
Cash used in financing activities (4,417,411) (2,144,682) (2,230,981)
Net increase in cash and cash equivalents 4,601,228 671,284 1,929,277
Cash and cash equivalents at beginning
of year 8,173,815 7,502,531 5,573,254
Cash and cash equivalents at end of year $ 12,775,043 8,173,815 7,502,531
See accompanying notes to financial statements.
</TABLE>
<PAGE>
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
1. Summary of Significant Accounting Policies and Other
USAA Income Properties III Limited Partnership is engaged
solely in the business of real estate investment; therefore,
presentation of information about industry segments is not
applicable.
The Partnership owns a shopping center in Clearwater, Florida
and office buildings in Phoenix, Arizona and Manhattan Beach,
California. The Partnership's revenue is subject to changes
in the economic environments of these areas.
The General Partner, USAA Properties III, Inc., is a wholly-
owned subsidiary of USAA Real Estate Company (Realco), which
is a wholly-owned subsidiary of USAA Capital Corporation,
which is a wholly-owned subsidiary of United Services
Automobile Association (USAA).
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
Rental properties are valued at cost. The carrying amount of
a property is not changed for temporary fluctuations in value
unless the carrying value is believed to be permanently
impaired. In 1995, the Partnership adopted the provisions of
Financial Accounting Standards Board Statement No. 121,
"Accounting for Impairment of Long-lived Assets and for Long-
lived Assets to be Disposed of," (Statement 121). Statement
121 provides guidance for determining impairment of long-
lived assets utilizing undiscounted future cash flows. Based
on the provisions of Statement 121, the Partnership's long-
lived assets, real estate and improvements, are not
considered impaired. The adoption of this Statement had no
financial statement impact.
Depreciation is provided over the estimated useful lives of
the properties using the straight-line method. The estimated
useful lives of the buildings and improvements are 30 years
(19 - 39 years for Federal income tax purposes).
Rental income is recognized under the operating method,
whereby aggregate rentals are reported on a straight-line
basis as income over the life of the lease. Rental income
<PAGE>
recognized was $874,036 more, $399,737 and $327,743 less than
the amount due per the lease agreements for the years ended
December 31, 1995, 1994 and 1993, respectively.
Deferred charges consist primarily of deferred rent resulting
from recognition of income as required by generally accepted
accounting principles.
A land lease receivable, arising from the sale of
improvements at a rental property, is being accounted for in
accordance with generally accepted accounting principles,
whereby the carrying amount of the receivable is reduced by a
portion of the payment received on the ground lease.
No provision or credit for income taxes has been made as the
liability for such taxes is that of the Partners rather than
the Partnership. The Partnership files its tax return on an
accrual basis.
For the purposes of the Statements of Cash Flows, all highly
liquid marketable securities that have a maturity at purchase
of three months or less, and money market mutual funds are
considered to be cash equivalents.
For financial reporting purposes, net income (loss) is
allocated 1% to the General Partner and 99% to the Limited
Partners. Net income (loss) per limited partnership unit is
based upon the limited partnership units outstanding at the
end of each year and the net income (loss) allocated to the
Limited Partners.
Cash distributions per limited partnership unit were $15.00
for 1995 and 1994 and $19.80 for 1993, and were based on the
limited partnership units outstanding at each quarter end and
the cash distributions allocated to Limited Partners.
2. Partnership Agreement
Pursuant to the terms of the Partnership Agreement, all
Distributable Cash shall be distributed in the ratio of 1% to
the General Partner and 99% to the Limited Partners within 60
days after the close of each fiscal quarter.
Generally, net taxable income or losses not arising from the
sale or refinancing of properties of the Partnership and
Distributable Cash are allocated 99% to the Limited Partners
and 1% to the General Partner. Cash Distributions from the
sale or refinancing of property are allocated first to the
Limited Partners until the Limited Partners shall receive an
amount equal to their adjusted capital contributions; second,
to the Limited Partners until the Limited Partners shall
receive a cumulative amount from cash distributions from
operations, sales or refinancings equal to 6% per annum of
their adjusted capital contributions; third, to all Partners,
<PAGE>
in an amount equal to their respective positive capital
account balances to the extent such balances exceed the
amounts provided for in the Partnership Agreement; and
fourth, the balance, 90% to the Limited Partners and 10% to
the General Partner.
Generally, all items of income, gain, loss, deduction and
credit from operations will be allocated 99% to the Limited
Partners and 1% to the General Partner. Net gain or net loss
from the sale or other disposition of a property shall be
allocated as described in the Partnership Agreement.
3. Rental Properties
Rental properties at December 31 consisted of the following:
1995 1994
Buildings and improvements $52,405,717 52,470,797
Land 8,961,025 8,961,025
61,366,742 61,431,822
Less accumulated depreciation (22,240,995) (20,821,518)
$39,125,747 40,610,304
4. Provision for Investment Property Write-Down
On October 31, 1994, after lengthy negotiations with the
third-party lender, the $40,800,000 non-recourse loan was
purchased from the lender for $20,000,000 by Las Colinas Management
Company (LCMC), an affiliate of the General Partner.
Effective with the loan acquisition, LCMC modified the terms
of the loan to the Partnership whereby $20,800,000 of the
loan balance was forgiven, resulting in a loan principal
balance of $20,000,000. The Partnership recognized an
extraordinary income item for the gain on debt forgiveness in
the amount of $20,800,000. Other modifications in loan terms
included extension of the loan maturity date from March 15,
1995 to August 31, 1996, the date of expiration of the
single-tenant lease at Parkview Plaza. Payment terms were
revised from semi-annual payments of interest-only to monthly
payments including principal of approximately $227,000 plus
interest at a floating rate based on the London Interbank
Offered Rate (LIBOR) plus .625%. On October 31, 1994, the
Partnership reimbursed LCMC for fees paid to the third-party
lender, legal fees and filing fees of approximately $693,000,
in addition to accrued interest of approximately $309,000 for
the period from September 16, 1994, the date of the previous
semi-annual interest payment, to October 31, 1994.
Under generally accepted accounting principles, a review of
an asset's value is required when events indicate that the
carrying amount of the asset may not be recoverable.
Acquisition of the loan by an affiliate of the General
Partner at a $20,800,000 discount resulted in a review of value of
<PAGE>
the Parkview Plaza property. Through analysis it was
determined that a permanent impairment in value had occurred
on Parkview Plaza. Accordingly, a provision for investment
property write-down was recorded at December 31, 1994 for
$21,164,478, the amount by which the carrying value of the
asset exceeded $20,000,000, the amount determined to be the
fair value of the property. An investment property write-
down of $9,672,292 was recognized during 1993, in addition to
a write-down of deferred rent of $827,708 for a total of
$10,500,000.
5. Minimum Future Rentals
Operating leases with tenants have remaining terms from eight
months to 27 years. Minimum future rentals are cash payments
to be received under non-cancelable leases over the lease
terms and do not necessarily represent rental income under
generally accepted accounting principles. Rental income
reported in the Statements of Operations is recognized under
the operating method, whereby aggregate rentals are reported
on a straight-line basis as income over the life of the
lease. Approximate minimum future rentals are as follows:
1996 $ 6,877,000
1997 2,903,000
1998 3,010,000
1999 3,001,000
2000 3,018,000
Thereafter 25,324,000
$44,133,000
6. Triple Net Leases
During 1995, 1994 and 1993, lease agreements between the
Partnership and tenants at two properties were absolute
triple net lease arrangements whereby the lessee was required to
make all payments for expenses related to the use and
occupation of the leased premises including real estate taxes
and assessments, property and liability insurance, repairs
and maintenance, utilities and other operating costs
associated with the property. Accordingly, net operating
income for 1995, 1994 and 1993 reflects only rental income
and excludes all expenses directly related to the operations
of the properties as payments for such expenses are made
directly by the respective lessees.
<PAGE>
7. Mortgages Payable
Mortgages payable to affiliates at December 31 consisted of
the following:
1995 1994
First mortgage note payable,
interest at the lesser of 12%,
or prime plus 2%, due March 31,
1996, interest only payable
monthly; secured by rental property
with a depreciated cost of approxi-
mately $7,960,000. $11,000,000 11,000,000
First mortgage note payable,
due August 31, 1996, monthly
principal payments of approximately
$227,000 plus interest at
one-month LIBOR plus .625%;
secured by rental property with a
depreciated cost of approximately
$19,205,000. 16,818,182 19,545,455
$27,818,182 30,545,455
Cash payments for interest expense were $2,420,902,
$5,422,625, and $4,778,808 for 1995, 1994, and 1993,
respectively.
8. Transactions with Affiliates
USAA Real Estate Company (the Adviser) may receive property
acquisition fees of up to 4% of the gross offering proceeds,
real estate brokerage commissions of up to 1% of the
aggregate selling prices of property sold and management
fees equal to 4% of Cash Receipts from Operations not to
exceed 9% of adjusted cash flow from the Partnership.
The Partnership had funds invested in USAA Mutual Fund, Inc.
and earned interest thereon at market rates.
An affiliate of the General Partner, Las Colinas Management
Company, receives monthly payments of principal of
$227,272.72 plus interest at one-month LIBOR plus .625%.
Quorum Real Estate Services Corporation (also known as USAA
Realty Company) an affiliate of the General Partner, provides
property management and leasing services for the properties
and may receive fees of up to 6% of the property cash
receipts for those services.
<PAGE>
A summary of transactions with affiliates follows:
<TABLE>
<CAPTION>
Reimbursement Interest Management Lease Interest
of Expenses (1) Income Fees Commissions Expense (2) Total
<S> <C> <C> <C> <C> <C> <C>
USAA Mutual
Fund, Inc.:
1995 $ -- (1,262) -- -- -- (1,262)
1994 -- (36,253) -- -- -- (36,253)
1993 -- (43,287) -- -- -- (43,287)
USAA Real Estate
Company:
1995 162,493 -- 168,389 -- 1,191,014 1,521,896
1994 174,407 -- 149,216 -- 1,005,973 1,329,596
1993 164,442 -- 228,575 -- 880,000 1,273,017
Las Colinas
Management
Company:
1995 -- -- -- -- 1,229,888 1,229,888
1994 -- -- -- -- 208,656 208,656
1993 -- -- -- -- -- --
Quorum Real Estate
Services Corporation:
1995 47,548 -- 46,628 22,816 -- 116,992
1994 41,652 -- 46,501 24,824 -- 112,977
1993 43,399 -- 45,535 20,975 -- 109,909
(1) Reimbursement of expenses represents amounts paid or accrued as reimbursement of expenses
incurred on behalf of the Partnership at actual cost and does not include any mark-up or
items normally considered as overhead.
(2) Represents interest expense at market rate on mortgage loans (note 7).
</TABLE>
<PAGE>
9. Income Taxes
A reconciliation of financial statement net income (loss) to
taxable income follows:
1995 1994 1993
Net income (loss) -
financial statement basis $ 5,298,841 1,742,181 (9,269,345)
Less:
Excess tax depreciation
over financial statement
depreciation (2,695,639) (1,849,019) (1,576,179)
Plus:
Increase (decrease) in
prepaid rent 569,123 (687,208) 59,114
Decrease in deferred rent
and land costs 525,592 147,025 627,743
Investment property write-down -- 21,164,478 9,672,292
Book bad debt expense in
excess of tax bad debt
expense 12,000 -- --
Allowance on deferred rent -- -- 827,708
Other reconciling items (68,354) 31,271 72,398
Taxable income $ 3,641,563 20,548,728 413,731
10. Major Customer Information
During 1995, the Partnership recorded approximately
$1,246,000 and $6,679,000 of rental income from two major
tenants which represented approximately 13% and 69%
respectively, of total rental income for 1995.
During 1994 and 1993, the Partnership recorded approximately
$1,652,000 and $6,241,000 of rental income from two major
tenants which represented approximately 18% and 67%
respectively, of total rental income for 1994 and 18% and 68%
respectively, for 1993.
11. Fair Value of Financial Instruments
The carrying amount of the land lease receivable approximates
fair value because of its terms.
The carrying amount of cash and cash equivalents approximates
fair value because of the short maturities of these
instruments.
The current fair value of the mortgages payable at December
31, 1995 and 1994 was approximately $27,395,000 and
$30,545,000, respectively, estimated by discounting the
future cash flows using interest rates currently being
offered for mortgage loans with similar characteristics and
maturities.
<PAGE>
12. Commitment
On March 30, 1995 a twelve-year lease was signed with
Hospitality Franchise Systems, Inc. ("HFS"), the major
subtenant at the Ramada property, for the ten-story building
which contains approximately 100,000 square feet. Upon
execution of this lease, HFS contributed $3 million to be
used toward the cost of improvements to the property. The
total cost of improvements, lease commissions and other
renovations will be approximately $5 million. The
Partnership shall pay approximately $2 million of these costs
to be funded from the working capital reserve.
<PAGE>
Independent Auditors' Report
The Partners
USAA Income Properties III Limited Partnership:
We have audited the accompanying balance sheets of USAA
Income Properties III Limited Partnership as of December 31, 1995
and 1994, and the related statements of operations, partners'
equity, and cash flows for each of the years in the three-year
period ended December 31, 1995. These financial statements are
the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of USAA Income Properties III Limited Partnership as of December
31, 1995 and 1994, and the results of its operations and its cash
flows for each of the years in the three-year period ended
December 31, 1995, in conformity with generally accepted
accounting principles.
/S/KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
San Antonio, Texas
January 29, 1996
<PAGE>
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant
The General Partner of the Partnership is USAA Properties
III, Inc., a Texas corporation.
As of January 1, 1996, the directors and executive officers
of the General Partner were as follows:
POSITION WITH
NAME GENERAL PARTNER
Edward B. Kelley Chairman, President,
Chief Executive Officer and
Director
T. Patrick Duncan Vice Chairman
Senior Vice President -
Real Estate Operations and
Director
Randal R. Seewald Vice President, Secretary,
Legal Counsel and Director
Martha J. Barrow Vice President -
Administration and
Finance/Treasurer
S. Wayne Peacock Vice President -
Portfolio Management
David A. Rosales Assistant Vice President -
Controller
Susan T. Wallace Assistant Vice President -
Acquisitions and Dispositions
David M. Holmes Assistant Vice President -
Capital Investments
John G. Meadows Assistant Vice President -
Southeast Real Estate Region
Stephen S. King Assistant Vice President -
Western Real Estate Region
All of the foregoing directors and executive officers have
been elected to serve one-year terms until the annual meeting of
the General Partner. All of the foregoing officers have served in
the capacities indicated since their election, with the exception
of Martha J. Barrow who was elected Vice President - Administration
and Finance/Treasurer, Randal R. Seewald's promotion to Vice
<PAGE>
President - Legal Counsel, Secretary and Director, S. Wayne
Peacock's promotion to Vice President - Portfolio Management all
effective February 18, 1995, and David M. Holmes who was named
Assistant Vice President - Capital Investments effective October
31, 1995.
There are no arrangements or understandings between or among
any of said directors or executive officers to be elected or
selected as such, nor are there any family relationships among any
of the foregoing directors and executive officers. The foregoing
directors and executive officers are also officers and/or directors
of various affiliated companies of the General Partner.
The age and business experience of each of the directors and
executive officers of the General Partner is as follows:
Edward B. Kelley, 55, joined USAA in April 1989 and is Vice
Chairman, President, Chief Executive Officer and Director of USAA
Real Estate Company and Chairman, President, Chief Executive
Officer and Director of USAA Real Estate Development Company, USAA
Real Estate Management Company, Quorum Real Estate Services
Corporation, USAA Properties Fund, Inc., USAA Investors I, Inc.,
USAA Investors II, Inc., USAA Properties II, Inc., USAA Properties
III, Inc., USAA Properties IV, Inc., La Paz, Inc., USAA Real Estate
Equities, Inc., Alhambra Gables One, Inc., L. A. Wilshire One,
Inc., USAA Real Estate - Midwest, Inc., and Las Colinas Management
Company. He also serves as Chief Executive Officer, President and
Director of Fiesta Texas Showpark, Inc., La Cantera Development
Company and La Cantera Hospitality, Inc. Mr. Kelley is also
Chairman of the Board, Chief Executive Officer and Director of USAA
Equity Advisors, Inc. Mr. Kelley serves as President and Director
of USAA Health Services, Inc. All of the previously named
companies are affiliates of the General Partner. He graduated from
St. Mary's University of San Antonio, Texas with a Bachelor of
Business Administration Degree in Finance in 1964 and was awarded
a Master of Business Administration Degree, in Finance, by Southern
Methodist University, Dallas, Texas in 1967. Mr. Kelley was
employed by Barshop Enterprises, Inc., of San Antonio, Texas from
July 1980 until April 1989 where he was President and an Advisory
Director of Barshop Enterprises, Inc. and its corporate
subsidiaries. The Barshop group of companies is engaged in the
development, management and ownership of commercial real estate
properties in San Antonio and other Texas cities. He is past
Chairman of the Board and a member of the Executive Committee of
the Greater San Antonio Chamber of Commerce; member of the Board of
Directors, Executive Committee, and past President of the San
Antonio chapter of the National Association of Industrial and
Office Parks; a member of the Board of Directors of the San Antonio
Economic Development Foundation, and past Chairman of the Board of
Trustees of St. Mary's University and its Executive Committee. Mr.
Kelley is a member of the Board of Directors and Executive
Committee, Vice President of the Board of Directors, and Chairman
of the 1994 Friends of Scouting Bexar County Campaign; member of
the Board of Trustees of St. Mary's University; member of the Board
of Trustees of the Baptist Children's Home of San Antonio and a
member of Board of Trustees for the United Way of San Antonio and
Bexar County.
<PAGE>
T. Patrick Duncan, 46, is Senior Vice President - Real
Estate Operations and Director of USAA Real Estate Company, USAA
Real Estate Equities, Inc. and USAA Health Services, Inc. He also
serves as Senior Vice President, Director and Vice Chairman of USAA
Real Estate Development Company, USAA Real Estate Management
Company, Quorum Real Estate Services Corporation, USAA Properties
Fund, Inc., USAA Investors I, Inc., USAA Investors II, Inc., USAA
Properties II, Inc., USAA Properties III, Inc., USAA Properties IV,
Inc., La Paz, Inc., USAA Equity Advisors, Inc., Alhambra Gables
One, Inc., L. A. Wilshire One, Inc., USAA Real Estate-Midwest,
Inc., and Las Colinas Management Company. All of the previously
named companies are affiliates of the General Partner. He is a
1972 graduate of the University of Arizona and was awarded the
Bachelor of Science Degree with a dual major in Accounting and
Finance. Prior to joining USAA in 1986, Mr. Duncan was an audit
manager with Deloitte Touche and Company and Comptroller of
Trammell Crow Company in Dallas, Texas. Mr. Duncan is a Certified
Public Accountant in the states of Texas and Arizona and holds a
Texas Real Estate Brokers License. He holds memberships in the
Texas and Arizona State Societies of Certified Public Accountants,
the International Council of Shopping Centers, the Urban Land
Institute, The National Association of Real Estate Investment
Trusts and the Pension Real Estate Association. Mr. Duncan serves
as Vice Chairman of the Board of Directors of the Daughters of
Charity.
Randal R. Seewald, 43, began his career with USAA in 1976,
and is currently Vice President, Director, Secretary and Legal
Counsel of USAA Real Estate Development Company, USAA Real Estate
Management Company, USAA Properties Fund, Inc., USAA Properties II,
Inc., USAA Properties III, Inc., USAA Properties IV, Inc., USAA
Investors I, Inc., USAA Investors II, Inc., Alhambra Gables One,
Inc., L. A. Wilshire One, Inc., USAA Real Estate-Midwest, Inc., La
Paz, Inc., USAA Equity Advisors, Inc., USAA Health Services, Inc.,
and Las Colinas Management Company. He is also Vice President,
Secretary and Legal Counsel of USAA Real Estate Company, Quorum
Real Estate Services Corporation and USAA Real Estate Equities,
Inc. Mr. Seewald serves as Vice President, Legal Counsel,
Treasurer and Secretary of Fiesta Texas Showpark, Inc., La Cantera
Development Company and La Cantera Hospitality, Inc. All of the
previously named companies are affiliates of the General Partner.
Mr. Seewald holds a Bachelor of Business Administration from Texas
A&M University and a J.D. from St. Mary's University School of Law.
He is a member of the State Bar of Texas, the American Bar
Association and the San Antonio Bar Association.
Martha J. Barrow, 48, is Vice President, Administration and
Finance, and Treasurer of USAA Real Estate Company, Alhambra Gables
One, Inc., L.A. Wilshire One, Inc., La Paz, Inc., Las Colinas
Management Company, Quorum Real Estate Services Corporation, USAA
Health Services, Inc., USAA Investors I, Inc., USAA Investors II,
Inc., USAA Properties Fund, Inc., USAA Properties II, Inc., USAA
Properties III, Inc., USAA Properties IV, Inc., USAA Real Estate-
Midwest, Inc., USAA Real Estate Development Company, USAA Real
<PAGE>
Estate Equities, Inc., and USAA Real Estate Management Company.
Ms. Barrow serves as President of USAA Equity Advisors, Inc. All
of the previously named companies are affiliates of the General
Partner. Ms. Barrow joined USAA in June 1983. Prior to joining
USAA, she served as a Tax Accountant of La Quinta Motor Inns, Inc.
and as Senior Accountant with NL Industries. She is a Certified
Public Accountant in the state of Texas and is a member of the
Texas Society of Certified Public Accountants. She is a license
holder for Securities Registration Series 7, Series 63, and Series
24. Ms. Barrow holds a Bachelor of Business Administration in
Accounting from Pan American and a Master of Business
Administration from St. Mary's University. She is active in the
promotion of activities with Northside Independent School District.
S. Wayne Peacock, 37, is Vice President, Portfolio
Management of USAA Real Estate Company, USAA Properties Fund, Inc.,
USAA Properties II, Inc., USAA Properties III, Inc., USAA
Properties IV, Inc., USAA Investors I, Inc., USAA Investors II,
Inc., Quorum Real Estate Services Corporation, USAA Real Estate
Equities, Inc., Alhambra Gables One, Inc., L. A. Wilshire One,
Inc., USAA Equity Advisors, Inc., USAA Real Estate Development
Company, and USAA Real Estate-Midwest, Inc. He is also a Director
of Quorum Real Estate Services Corporation. All of the previously
named companies are affiliates of the General Partner. Mr. Peacock
joined USAA in January 1992. Mr. Peacock has previous real estate
experience with Coldwell Banker and Merrill Lynch. He graduated in
1981 from Tulane University, New Orleans, Louisiana, where he
received a Bachelor of Arts degree in Economics. Mr. Peacock is a
Certified Commercial Investment Manager (CCIM). He holds
memberships in the San Antonio Board of Realtors and CCIM.
David A. Rosales, 39, is Assistant Vice President -
Controller for USAA Real Estate Company, Alhambra Gables One, Inc.,
L.A. Wilshire One, Inc., La Paz, Inc., Las Colinas Management
Company, USAA Equity Advisors, Inc., USAA Investors I, Inc., USAA
Investors II, Inc., USAA Properties Fund, Inc., USAA Properties II,
Inc., USAA Properties III, Inc., USAA Properties IV, Inc., USAA
Real Estate - Midwest, Inc., USAA Real Estate Development Company,
USAA Real Estate Equities, Inc., and USAA Real Estate Management
Company. He is also Assistant Vice President, Controller and
Director of Quorum Real Estate Services Corporation. All of the
previously named companies are affiliates of the General Partner.
Mr. Rosales joined USAA in September 1983. He holds a Bachelor of
Business Administration from St. Mary's University and a Master of
Business Administration from Our Lady of the Lake University. He
is a Certified Public Accountant in the state of Texas and holds
memberships in the Texas Society of CPAs, the San Antonio chapter
of CPAs and the American Institute of CPAs. Mr. Rosales also holds
membership in the National Association of Real Estate Companies.
He serves as Chairman of the Board of Communities in Schools-San
Antonio, Inc.
<PAGE>
Susan T. Wallace, 41, is Assistant Vice President -
Acquisitions and Dispositions for USAA Real Estate Company, USAA
Properties Fund, Inc., USAA Properties II, Inc., USAA Properties
III, Inc., USAA Properties IV, Inc., USAA Investors I, Inc., USAA
Investors II, Inc., USAA Equity Advisors, Inc., Alhambra Gables
One, Inc., L. A. Wilshire One, Inc., USAA Real Estate-Midwest,
Inc., and USAA Real Estate Equities, Inc. All of the previously
named companies are affiliates of the General Partner. Ms. Wallace
attended Bowling Green State University in Bowling Green, Ohio and
the University of Cincinnati in Cincinnati, Ohio. From December
1983 until September 1988 she served as Director with USAA Real
Estate Company where she was responsible for the identification of
equity investments and acquisition of the identified investments.
Prior to joining USAA Real Estate Company, she was Project Director
and Division Manager for Gibraltar Savings Association of Houston,
Texas. Ms. Wallace holds a Texas Real Estate License, is a
graduate of the Realtors Institute and is a member of the San
Antonio and Texas Board of Realtors, the National Association of
Realtors, the National Association of Real Estate Investment
Managers and the International Association of Corporate Real Estate
Executives. She also serves as President of the Affordable Housing
Investors Council.
David M. Holmes, 35, is Assistant Vice President, Capital
Investments for USAA Real Estate Company, USAA Properties Fund,
Inc., USAA Properties II, Inc., USAA Properties III, Inc., USAA
Properties IV, Inc., USAA Investors I, Inc., USAA Investors II,
Inc., USAA Equity Advisors, Inc., Alhambra Gables One, Inc., L. A.
Wilshire One, Inc., and USAA Real Estate-Midwest, Inc. All of the
previously named companies are affiliates of the General Partner.
Mr. Holmes joined USAA in May 1985. His responsibilities include
new property acquisition and capital market activities. He acts as
the primary contact for real estate securitization transactions and
coordinates contact with banking relationships, alliance partners
and other third party development or financing sources. Prior to
joining USAA, Mr. Holmes was a tax consultant with Touche Ross &
Company in San Antonio. He is a 1982 graduate of Trinity
University, San Antonio, Texas, where he received a Bachelor of
Business Administration with a concentration in Accounting and
Finance and is a Certified Public Accountant in the state of Texas.
He has served on the Board of Directors of Big Brothers and Sisters
of San Antonio and is a member of the Finance Committee of the San
Antonio Public Library.
John G. Meadows, 51, joined USAA Real Estate Company in
December 1984 as Executive Director of Real Estate Asset
Management. Currently he serves as Assistant Vice President of
Quorum Real Estate Services Corporation and Manager of Southeast
Region Property Management and Leasing, Assistant Vice President of
USAA Real Estate Company, USAA Real Estate Development Company,
USAA Properties Fund, Inc., USAA Investors I, Inc., USAA Investors
II, Inc., USAA Properties II, Inc., USAA Properties III, Inc., and
USAA Properties IV, Inc. All of the previously named companies are
affiliates of the General Partner. Prior to joining USAA, Mr.
Meadows was Assistant Vice President and Trust Officer of M Realty,
<PAGE>
the commercial real estate division of M Bank (formerly known as
Mercantile National Bank) Dallas, Texas. His responsibilities
included acquisitions, leasing management, and dispositions of two
open-ended co-mingled real estate investment funds, and leasing
management and disposition of all commercial properties held in
trust. He received a Bachelor of Science from Texas A&M in 1970
and a Masters Degree from Texas A&M in 1972 in Agricultural
Management. Mr. Meadows holds Real Estate Brokers licenses in
Texas and Florida.
Stephen S. King, 39, is Assistant Vice President - Western
Real Estate Region of USAA Real Estate Company, L.A. Wilshire One,
Inc., La Paz, Inc., USAA Investors I, Inc., USAA Properties III,
Inc., and USAA Properties IV, Inc. All of the previously named
companies are affiliates of the General Partner. Mr. King joined
USAA in July 1993. Prior to joining USAA, Mr. King had fifteen
years of professional real estate development, construction and
management experience. He graduated in 1978 from Texas A&M
University, where he received a Bachelor of Arts in Economics. Mr.
King is a member of the Institute of Real Estate Management (IREM),
the Building Owners and Managers Association (BOMA) and the
National Association of Realtors.
<PAGE>
Item 11. Executive Compensation
The directors and officers of the General Partner of the
Partnership receive no current or proposed remuneration from the
Partnership or the General Partner.
The General Partner is entitled to receive a share of cash
distributions, profits and losses and sales and refinancing
proceeds as described under the caption "Compensation and Fees" at
pages 11-14 and "Profits and Losses and Cash Distributions" at
pages 33-36 of the Prospectus, dated May 6, 1985, filed pursuant to
Rule 424(b). Copies of these pages are attached hereto as Exhibit
99.b and incorporated herein by reference. For the year ended
December 31, 1995, the General Partner received cash distributions
of $16,902.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
(a) Security Ownership of Certain Beneficial Owners
Name and
Address of Amount and
Title of Beneficial Nature of Beneficial Percent of
Class Owner Ownership(1) Class
Units of USAA Properties 6,000 Units 5.4%
Limited III, Inc. of Limited
Partnership (General Partner) Partnership
Interests (2)
8000 Robert F. McDermott
Fwy., IH 10 West,
Suite 600
San Antonio, Texas
(1) The Amended and Restated Agreement of Limited Partnership
provides that the General Partner will vote such Units in
the same proportion as all other Limited Partners in the
event a vote of Limited Partners is taken.
(2) USAA Properties III, Inc. is a wholly-owned subsidiary of
USAA Real Estate Company, which is a wholly-owned
subsidiary of USAA Capital Corporation, which is a wholly-
owned subsidiary of USAA.
(b) Security Ownership of Management
None of the officers and directors of the General Partner
of the Partnership beneficially own equity securities of the
registrant or any of its parents.
No arrangements are known to the Partnership which may
result in a change of control of the Partnership.
<PAGE>
Item 13. Certain Relationships and Related Transactions
The Partnership is permitted to engage in various
transactions involving the General Partner or its affiliates.
Pursuant to an Advisory Agreement, the Adviser, an
affiliate of the General Partner, can receive, in the aggregate,
property acquisition fees of up to 4% of the gross offering
proceeds; real estate brokerage commissions of up to 1% of the
selling prices of the properties sold and management fees equal to
4% of Cash Receipts from Operations not to exceed 9% of adjusted
cash flow from the Partnership.
An affiliate of the General Partner, USAA Investment
Management Company, received selling commissions equal to 4% of the
gross proceeds from sales of limited partnership units and an
expense allowance equal to 2% of the gross offering proceeds for
organizational and offering expenses. USAA Investment Management
Company may receive a maximum annual advisory fee of 1/2 of 1% of
the amount of any temporary investment in a money market fund or
mutual fund sponsored by USAA or any affiliate of USAA. A portion
of the Partnership's working capital reserve and other available
funds were invested in USAA Mutual Fund, Inc.
An affiliate of the General Partner, Las Colinas Management
Company, receives monthly payments of principal of $227,272.72 plus
interest at the one-month London Interbank Offered Rate (LIBOR)
plus .625%, in connection with the Parkview Plaza note payable.
An affiliate of the General Partner, Quorum Real Estate
Services Corporation (also known as USAA Realty Company), provides
property management and leasing services for the properties and may
receive fees of up to 6% of property cash receipts for those
services.
<PAGE>
A summary of transactions with affiliates follows for the years
ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
Reimbursement Interest Management Lease Interest
of Expenses (1) Income Fees Commissions Expense (2) Total
<S> <C> <C> <C> <C> <C> <C>
USAA Mutual
Fund, Inc.:
1995 $ -- (1,262) -- -- -- (1,262)
1994 -- (36,253) -- -- -- (36,253)
1993 -- (43,287) -- -- -- (43,287)
USAA Real Estate
Company:
1995 162,493 -- 168,389 -- 1,191,014 1,521,896
1994 174,407 -- 149,216 -- 1,005,973 1,329,596
1993 164,442 -- 228,575 -- 880,000 1,273,017
Las Colinas
Management
Company:
1995 -- -- -- -- 1,229,888 1,229,888
1994 -- -- -- -- 208,656 208,656
1993 -- -- -- -- -- --
Quorum Real Estate
Services Corporation:
1995 47,548 -- 46,628 22,816 -- 116,992
1994 41,652 -- 46,501 24,824 -- 112,977
1993 43,399 -- 45,535 20,975 -- 109,909
(1) Reimbursement of expenses represents amounts paid or accrued as reimbursement of expenses
incurred on behalf of the Partnership at actual cost and does not include any mark-up or
items normally considered as overhead.
(2) Represents interest expense at market rate on mortgage loans.
</TABLE>
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on
Form 8-K
The following documents are filed as part of this report.
(a) 1. Financial Statements
The following financial statements, notes to financial
statements and independent auditors' report are included in Part
II Item 8:
Balance Sheets as of December 31,
1995 and 1994
Statements of Operations for the
Years Ended December 31, 1995,
1994 and 1993
Statements of Partners' Equity for
the Years Ended December 31,
1995, 1994 and 1993
Statements of Cash Flows for the
Years Ended December 31, 1995,
1994 and 1993
Notes to Financial Statements
Independent Auditors' Report
2. Financial Statement Schedule
Real Estate and Accumulated
Depreciation as of December 31,
1995 (Schedule III)
Independent Auditors' Report
All other schedules have been omitted as the schedules
are not required under the related instructions, are not
applicable, or the information required thereby is set forth in
the financial statements or the notes thereto.
<PAGE>
Item 14.(a) 3. Exhibits
Exhibit
No. Description
3(a) Restated Certificate and Agreement of Limited
Partnership dated as of May 6, 1985, attached as
Exhibit A to the Partnership's Prospectus dated May 6,
1985, filed pursuant to Rule 424(b) (Regis. No. 2-96113),
and incorporated herein by this reference.
3(b) Certificate of Amendment to Restated Certificate and
Agreement of Limited Partnership of USAA Income
Properties III Limited Partnership dated February 14,
1990, attached as Exhibit 3(b) (Regis. No. 2-96113) to
the Partnership's Annual Report on Form 10-K for the
year ended December 31, 1989, and incorporated herein
by this reference.
27 Financial Data Schedules
99(a) "Glossary" (pages 71-74) contained in the Prospectus
dated May 6, 1985, filed as a part of Amendment No. 1
to the Registration Statement on Form S-11 (Regis. No.
2-96113).
99(b) "Compensation and Fees" (pages 11-14) and "Profits and
Losses and Cash Distributions" (pages 33-36) of the
Prospectus, dated May 6, 1985, filed as part of
Amendment No. 1 to the Registration Statement on Form
S-11 (Regis. No. 2-96113).
Item 14. (b) Reports filed on Form 8-K
No Current Reports on Form 8-K have been filed during the
last quarter covered by this Form 10-K.
<PAGE>
<TABLE>
SCHEDULE III USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
Real Estate and Accumulated Depreciation
December 31, 1995
<CAPTION>
Cost Capitalized
Initial Cost to Subsequent to
Partnership Acquisition
Buildings
Year of Date and Improve- Carrying
Construction Acquired Description Land Improvements ments Costs
<S> <C> <C> <C> <C> <C> <C>
1985 Mar. 31, 1986 Curlew Crossing
Shopping Center
Clearwater, FL $ 3,700,000 15,717,762 2,388,872 --
1985 Nov. 24, 1986 Parkview Plaza
Office Bldg.
Complex
Manhattan Beach, CA 6,500,000 60,062,552 --
1964- Dec. 5, 1986 Ramada World
1973 Headquarters Office
Bldg. Complex
Phoenix, AZ 4,000,000 11,443,225 4,734 --
$14,200,000 87,223,539 2,393,606 --
Gross Amount at Which
Carried at Close of
Period
<CAPTION>
Buildings Total InvestmentAccumulated Related
Year of Date and Properties Depreciation Mortgages
Construction Acquired Description Land Improvements (2)(4)(6)(7) (1)(3) Payable (5)(7)
<S> <C> <C> <C> <C> <C> <C> <C>
1985 Mar. 31, 1986 Curlew Crossing
Shopping Center
Clearwater, FL 2,401,613 7,812,414 10,214,027 2,254,216 11,000,000
1985 Nov. 24, 1986 Parkview Plaza
Office Bldg.
Complex
Manhattan Beach, CA 2,580,438 33,145,344 35,725,782 16,520,591 16,818,182
1964- Dec. 5, 1986 Ramada World
1973 Headquarters Office
Bldg. Complex
Phoenix, AZ 3,978,974 11,447,959 15,426,933 3,466,188 --
8,961,025 52,405,717 61,366,742 22,240,995 27,818,182
<PAGE>
SCHEDULE III (continued)
NOTES:
(1) Depreciation is based on a 30 year life, straight-line method for buildings and 5 year life,
straight-line method for personal property.
<S> <C> <C>
(2) Reconciliation of real estate:
Balance at December 31, 1992 $ 92,058,586
Additions during period-improvements 201,239
Deductions during period
Retirements $ (9,846)
Investment property write-down (6) (9,672,292) (9,682,138)
Balance at December 31, 1993 82,577,687
Additions during period-improvements 22,771
Deductions during period
Retirements (4,158)
Investment property write-down (7) (21,164,478) (21,168,636)
Balance at December 31, 1994 61,431,822
Deductions during period-retirements (65,080)
Balance at December 31, 1995 $ 61,366,742
(3) Reconciliation of accumulated depreciation:
Balance at December 31, 1992 $ 15,912,542
Depreciation during period 2,588,740
Balance at December 31, 1993 18,501,282
Depreciation during period 2,324,394
Deductions during period-retirements (4,158)
Balance at December 31, 1994 20,821,518
Depreciation during period 1,477,439
Deductions during period-retirements (57,962)
Balance at December 31, 1995 $ 22,240,995
(4) The aggregate cost of real estate owned by the Partnership at December 31, 1995 for Federal
Income Tax Purposes is $93,382,961.
(5) The investment property is pledged as security for the mortgage payable for which there is no
recourse to the Partnership.
(6) During 1993, it was determined that a permanent impairment of value was sustained at Parkview Plaza
and the property was written down.
(7) During 1994, it was determined that a permanent impairment of value was sustained at Parkview Plaza
and the property was written down. See note 4 in the Notes to Financial Statements.
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE PARTNERS
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP:
Under date of January 29, 1996, we reported on the balance sheets
of USAA Income Properties III Limited Partnership as of December
31, 1995 and 1994, and the related statements of operations,
partners' equity, and cash flows for each of the years in the
three-year period ended December 31, 1995. In connection with
our audits of the aforementioned financial statements, we also
have audited the related financial statement schedule as listed
in Item 14(a)2. This financial statement schedule is the
responsibility of the Partnership's management. Our
responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, such 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/KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
San Antonio, Texas
January 29, 1996
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, USAA INCOME PROPERTIES III
LIMITED PARTNERSHIP has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized:
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
(Registrant)
By: USAA INCOME PROPERTIES III, INC.,
General Partner
By: /s/Edward B. Kelley
Edward B. Kelley
Chairman, President,
Chief Operating Officer
and Director
Date: March 28, 1996
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 and in the capacities and on the dates
indicated.
/s/Edward B. Kelley Date: March 28, 1996
Edward B. Kelley
Director, Chairman of the Board,
President and Chief Operating Officer
of the General Partner
/s/T. Patrick Duncan Date: March 28, 1996
T. Patrick Duncan
Director, Vice Chairman,
Senior Vice President - Real Estate
Operations of the General Partner
/s/Randal R. Seewald Date: March 28, 1996
Randal R. Seewald
Director, Vice President,
Secretary and Legal Counsel
<PAGE>
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
No. Description Page
3(a) Restated Certificate and Agreement
of Limited Partnership dated as
of May 6, 1985, attached as
Exhibit A to the Partnership's
Prospectus dated May 6, 1985, filed
pursuant to Rule 424(b) (Regis. No.
2-96113), and incorporated herein by
this reference. --
3(b) Certificate of Amendment to Restated
Certificate and Agreement of Limited
Partnership of USAA Income Properties
III Limited Partnership dated
February 14, 1990, attached as Exhibit
3(b) (Regis. No. 2-96113) to the
Partnership's Annual Report on Form 10-K
for the year ended December 31, 1989, and
incorporated herein by this reference. --
27 Financial Data Schedules
99(a) "Glossary" (pages 71-74) contained in the
Prospectus dated May 6, 1985, filed as
a part of Amendment No. 1 to the
Registration Statement on Form S-11
(Regis. No. 2-96113).
99(b) "Compensation and Fees" (pages 11-14) and
"Profits and Losses and Cash Distributions"
(pages 33-36) of the Prospectus, dated
May 6, 1985, filed as part of Amendment
No. 1 to the Registration Statement on
Form S-11 (Regis. No. 2-96113).
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 12,775,043
<SECURITIES> 0
<RECEIVABLES> 431,871
<ALLOWANCES> 12,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 61,366,742
<DEPRECIATION> 22,240,995
<TOTAL-ASSETS> 55,626,311
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 24,825,768
<TOTAL-LIABILITY-AND-EQUITY> 55,626,311
<SALES> 0
<TOTAL-REVENUES> 9,694,383
<CGS> 0
<TOTAL-COSTS> 1,743,046
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,766,034
<INCOME-PRETAX> 5,298,841
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,298,841
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,298,841
<EPS-PRIMARY> 47.03
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995 DEC-31-1995
<PERIOD-END> MAR-31-1995 JUN-30-1995 SEP-30-1995
<CASH> 12,866,182 11,508,499 12,053,001
<SECURITIES> 0 0 0
<RECEIVABLES> 96,537 293,246 202,547
<ALLOWANCES> 0 0 7,300
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 0 0 0
<PP&E> 40,240,736 39,864,049 39,494,898
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 55,193,258 54,655,670 54,929,033
<CURRENT-LIABILITIES> 0 0 0
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 0 0 0
<OTHER-SE> 21,731,740 22,862,689 23,860,074
<TOTAL-LIABILITY-AND-EQUITY> 55,193,258 54,655,670 54,929,033
<SALES> 0 0 0
<TOTAL-REVENUES> 2,311,185 4,778,495 7,251,811
<CGS> 0 0 0
<TOTAL-COSTS> 589,824 883,664 1,315,825
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 701,625 1,406,346 2,094,045
<INCOME-PRETAX> 937,210 2,490,693 3,910,612
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 937,210 2,490,693 3,910,612
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 937,210 2,490,693 3,910,612
<EPS-PRIMARY> 8.32 22.10 34.71
<EPS-DILUTED> 0 0 0
</TABLE>
EXHIBIT 99.a
GLOSSARY
The following terms are defined in Article III of the
Partnership Agreement, and such definitions, as a matter of law,
will govern all relations between the Limited Partners and the
Partnership. However, to aid investors in more clearly
understanding the way such terms are used in the Partnership
Agreement and in this Prospectus, certain additional and somewhat
less technical definitions are set forth below:
"Acquisition Expenses" means all expenses (other than
Acquisition Fees) related to the selection and acquisition of
properties, whether or not acquired, including but not limited to
legal fees and expenses, travel and communications expenses,
costs of appraisals, non-refundable option payments on property
not acquired, accounting fees and expenses, title insurance and
miscellaneous expenses.
"Acquisition Fees" means the total of all fees and
commissions paid by any party in connection with the purchase or
development of a property by the Partnership. Included in the
computation of such fees or commissions shall be any real estate
commission, selection fee, development fee, non-recurring
management fee, or any fee of a similar nature, however
designated, except that Acquisition Fees shall not include
development fees paid to non-affiliated parties in connection
with actual development of a property after the acquisition
thereof by the Partnership. As used in the preceding sentence,
the term "development fees" shall mean fees paid for the
packaging of the Partnership's properties, including negotiating
and approving plans, and undertaking to assist in obtaining
necessary variances and financing for a specific property, either
initially or at a later date.
"Adjusted Capital Contributions" means, for each fiscal
quarter, an amount equal to the Limited Partners' Capital
Contributions as reduced by all distributions of Sale or
Refinancing Proceeds made to the Limited Partners, including any
such distributions for such fiscal quarter, except for any
distributions of Sale or Refinancing Proceeds required to
compensate for a deficiency in the amount of Distributable Cash
distributed to the Limited Partners pursuant to Section 6.3(ii)
of the Partnership Agreement (but not reduced by any
distributions of Distributable Cash).
"Adjusted Cash Flow" means, with respect to any fiscal
period, all Gross Revenues less payments for Operating Cash
Expenses (other than the Management Fee payable to the Adviser
and expenses payable out of the Capital Contributions of the
Partners or other sources not included in determining Gross
Revenues), debt service on Partnership indebtedness, capital
expenditures with respect to properties and any amounts set aside
for restoration or creation of Reserves.
<PAGE>
"Capital Account" means, with respect to each Partner, the
account established for each Partner which will initially equal
the Capital Contribution of such Partner and throughout the
existence of the Partnership will be (a) increased by the amount
of Taxable Income and tax exempt income allocated to such Partner
and (b) reduced by the amount of Tax Losses and other deductions
allocated to such Partner and the amount of Distributable Cash
and Sale or Refinancing Proceeds distributed to such Partner.
"Capital Contribution" means the total amount of money
contributed to the Partnership (prior to the deduction of any
selling commissions or expenses) by any Partner or all the
Partners reduced, in the case of the Limited Partners, by any
return of uninvested funds pursuant to Section 5.3A of the
Partnership Agreement (but not reduced by any reductions in the
related Capital Account or by any tax basis adjustments).
"Cash Receipts from Operations" means, with respect to any
fiscal period, all cash receipts (after deduction of all
applicable sales, use, excise and similar taxes, if any) from
operation of the properties in the ordinary course of business,
without deduction for depreciation or the Management Fee payable
to the Adviser or any other expenses of the Partnership. In the
event the Partnership enters into any general partnership or
other joint venture, Cash Receipts from Operations shall include
the Partnership's pro rata share of all cash receipts from
operations in the ordinary course of business of such general
partnership or other joint venture without deduction for
depreciation or any other expenses of such general partnership or
other joint venture.
"Competitive Brokerage Commission" means a real estate
brokerage commission paid for the purchase or sale of a property
which is reasonable, customary and competitive in light of the
size, type and location of the property.
"Distributable Cash" means, with respect to any fiscal
period, Adjusted Cash Flow and any portion of Reserves deemed by
the General Partner not to be required for the Partnership's
operations (to the extent such Reserves are derived from
operations), reduced by an amount equal to the Management Fee.
"Front-End Fees" means fees and expenses paid by any Person
for any services rendered during the Partnership's organization
or acquisition phase, including Organization and Offering
Expenses, Acquisition Fees, Acquisition Expenses and any other
similar fees.
"General Partner" means USAA Properties III, Inc., a Texas
corporation.
"Gross Revenues" means all cash receipts (after deduction of
all applicable sales, use, excise and similar taxes, if any) of
the Partnership, without deduction for any item of expense, but
excluding all Capital Contributions and cash receipts
constituting Sale or Refinancing Proceeds (subject to Section
7.4F of the Partnership Agreement).
<PAGE>
"Investment in Properties" means the amount of Capital
Contributions actually paid or allocated to the purchase,
development, construction or improvement of properties acquired
by the Partnership (including the purchase of properties, working
capital reserves allocable thereto (except that reserves in
excess of 4% of the gross proceeds of the offering of the Units
shall not be included) and other cash payments such as interest
and taxes, but excluding Front-End Fees).
"IRS" means the United States Internal Revenue Service.
"Management Fee" means the fee payable to the Adviser in an
amount equal to 4% of the Cash Receipts from Operations, but not
to exceed for any fiscal year 9% of Adjusted Cash Flow, in
consideration of services rendered under the Advisory Agreement.
"Operating Cash Expenses" means, with respect to any fiscal
period, except to the extent paid with cash withdrawn from
reserves therefor, the amount of cash disbursed in such period in
order to generate Gross Revenues during such period, including
all operating expenses other than the Management Fee (such as but
not limited to advertising expenses incurred in connection with
the management of Partnership properties and promotional,
management, salary, utility, repair and maintenance, accounting,
statistical or bookkeeping services, computing or accounting
equipment use, travel and telephone expenses).
"Organization and Offering Expenses" means all expenses
incurred in connection with the formation of the Partnership, the
registration and qualification of the Units under Federal and
state securities laws, and the offering and sale of the Units,
including, without limitation, the selling commissions payable in
connection with the sale of the Units and the non-accountable
expense allowance payable to USAA Investment Management to cover
advertising and other expenses incurred in connection with the
offering and sale of the Units.
"Partnership" means USAA Income Properties III Limited
Partnership, a Delaware limited partnership.
"Partnership Agreement" means the Restated Certificate and
Agreement of Limited Partnership of the Partnership, a form of
which appears as Exhibit A to this Prospectus.
"Reserves" means, with respect to any fiscal period, funds
set aside or amounts allocated during such period to reserves
which shall be maintained in amounts deemed sufficient by the
General Partner for working capital and to pay taxes, insurance,
debt service, repairs, replacements or renewals, or other costs
or expenses, incident to the ownership or operation of the
Partnership's properties.
<PAGE>
"Sale or Refinancing" means any Partnership transaction
(other than the receipt of Capital Contributions) not in the
ordinary course of its business, including, without limitation,
sales, exchanges or other dispositions of real or personal
property, condemnations, recoveries of damage awards and
insurance proceeds (other than business or rental interruption
insurance proceeds) not reinvested in the repair or
reconstruction of properties or any mortgage refinancings or
borrowings in addition to borrowings initially made to finance
the purchase of properties, but excluding: (i) the disposition of
a property by transfer back to the seller or an affiliate
thereof, whether in the form of a rescission, exchange or resale
or pursuant to an option or other similar arrangement entered
into at or prior to the time of taking title to the property, if
the proceeds from such transfer back are reinvested in another
property and (ii) the disposition of a property within two years
after termination of the offering of the Units contemplated by
Section 4.3 of the Partnership Agreement if the proceeds of such
disposition are reinvested in other properties as permitted by
Section 7.4F of the Partnership Agreement.
"Sale or Refinancing Proceeds" means all cash receipts (plus
any Reserves previously established from Capital Contributions
with respect to the property which is the subject of the Sale or
Refinancing deemed by the General Partner no longer to be
required for the Partnership's operations because of such Sale or
Refinancing) arising from a Sale or Refinancing less the
following:
(i) the amount of cash necessary for the payment of all
debts and obligations of the Partnership (including non-
recourse debts) related to the particular Sale or
Refinancing, excluding the real estate brokerage commission
payable to the Adviser under Section 7.3A(iv) of the
Partnership Agreement but including any other real estate
brokerage commission not payable to an affiliate of the
General Partner;
(ii) the amount of cash paid or to be paid by the
Partnership in connection with such Sale or Refinancing
(which shall include, with regard to damage recoveries or
insurance or condemnation proceeds, cash paid or to be paid
in connection with repairs, replacements or renewals, in the
discretion of the General Partner, relating to damage to or
partial condemnation of the affected property);
(iii) the amount of cash considered appropriate by the
General Partner to provide Reserves to pay taxes, insurance,
debt service, repairs, replacements or renewals or other
costs or expenses of the Partnership (including costs of
improvements or additions in connection with any property)
or in connection with any refinancing of any property, to
provide for the purchase of the underlying land in
connection with any property; and
<PAGE>
(iv) any amount of cash considered appropriate by the
General Partner to be used to purchase from any partner or
co-venturer an interest in a property which is jointly
owned.
"Selling Price" means the total gross contract price
receivable by the Partnership from the purchaser upon the sale of
a property, without reduction for any mortgage or other
indebtedness to which the property may be subject, or any fees or
expenses which may be attributable to such sale.
"Taxable Income" or "Tax Losses", respectively, means the
ordinary income or losses of the Partnership for each fiscal year
or portion thereof (including the Partnership's share of income
or loss of any general partnership or other joint venture which
owns a particular property) as determined for Federal income tax
purposes, as well as, where the context requires, related Federal
tax items such as capital gain or loss and depreciation recapture
(including gains or losses arising from a Sale or Refinancing),
it being understood that losses for Federal income tax purposes
include all amounts treated as a return of capital for Federal
income tax purposes by reason of tax basis adjustments.
"Unit" means the interest of a Limited Partner represented
by a Capital Contribution of $500.
EXHIBIT 99.b
COMPENSATION AND FEES
The following table shows all types of compensation, fees,
profits or distributions that have been, may or will be received by
the General Partner and its affiliates in connection with this
offering and the operation of the Partnership. Such fees were
determined by the General Partner and its affiliates in connection
with the organization of the Partnership and the offering of the
Units made hereby, and not by arm's length negotiations. See
"Conflicts of Interest" and "Summary of the Partnership Agreement."
Person Receiving Form of Method and Amount
Compensation Compensation(1) of Compensation
OFFERING AND ACQUISITION PHASE
USAA Investment Selling commissions 4% of the gross proceeds
Management Company as the Sales Agent in of the offering ($20
("USAA Investment the offering of the per Unit sold), or
Management" or the Units. $2,600,000 in the event
"Sales Agent") 130,000 Units are sold
($2,990,000 in the event
149,500 Units are sold).
USAA Investment Non-accountable 2% of the gross
Management expense allowance. proceeds of the offering,
or $1,300,000 in the
event 130,000 Units sold
($1,495,000 in the event
149,500 Units are sold).
USAA Financial Acquisition Fees to A maximum of 4% of the
Services Company be received on all gross proceeds of the
(the "Adviser") Partnership acquisi- offering, or $2,600,000
tions of properties in the event 130,000
for finding and Units are sold
recommending such ($2,990,000 in the
properties to the event 149,500 Units are
General Partner (see sold).
footnotes under
<PAGE>
Person Receiving Form of Method and Amount
Compensation Compensation(1) of Compensation
"Estimated Use of
Proceeds" and the
Glossary).
USAA Investment Management fees An annual fee of up to
Management relating to any 1/2 of 1% of the amount
interim investment of any preliminary
in a money market investment in a money
fund sponsored by market fund sponsored
USAA or any affiliate by USAA or any
of USAA paid by the affiliate of USAA.
fund in which the (See "Investment
investment is made. Objectives and Policies
- Preliminary
Investments").
OPERATIONAL PHASE
USAA Properties General Partner's An aggregate of 1% of
III, Inc. (the distributive share. Distributable Cash,
"General Partner") Taxable Income and Tax
Losses.(2)(3)
Adviser Management Fee for 4% of Cash Receipts from
managing the Part- Operations, but in any
nership's business. event not in excess of
9% of Adjusted Cash
Flow.(2)(3)
LIQUIDATION PHASE
Adviser Subordinated real A real estate brokerage
estate commissions commission not to exceed
upon sales of the lesser of 1% of the
properties. aggregate Selling Prices
of the properties sold
or 50% of the Competitive
Brokerage Commission,
subordinated to (i) the
repayment to the Limited
<PAGE>
Person Receiving Form of Method and Amount
Compensation Compensation(1) of Compensation
Partners of an amount
equal to their Adjusted
Capital Contributions;
(ii) the payment to the
Limited Partners of a
cumulative annual cash
return equal to 6% of
their average Adjusted
Capital Contributions for
all fiscal years; and
(iii) the payment to all
Partners of an amount
equal to their respective
positive Capital Account
balances to the extent
such balances exceed the
amounts provided for in
the preceding clauses (i)
and (ii). (2)
General Partner General Partner's An aggregate of 10% of
share of Sale or all Sale or Refinancing
Refinancing Proceeds. Proceeds remaining after
(i) the repayment to the
Limited Partners of an
amount equal to their
Adjusted Capital
Contributions; (ii) the
payment to the Limited
Partners of a cumulative
annual cash return equal
to 6% of their Adjusted
Capital Contributions for
all fiscal years; (iii)
the payment to all
Partners of an amount
equal to their respective
positive Capital Account
balances to the extent
such balances exceed the
<PAGE>
Person Receiving Form of Method and Amount
Compensation Compensation(1) of Compensation
amounts provided for in
the preceding clauses (i)
and (ii); and (iv)
payment to the Adviser
of the real estate
brokerage commissions
described above. (2)
(1) The Partnership is required by law to commit not less than a
specified percentage of the gross proceeds of this offering to
Investment in Properties. The percentage required to be
committed to Investment in Properties must be at least equal
to the greater of (a) 80% of the gross proceeds of the
offering reduced by .1625% for each 1% of indebtedness
encumbering the Partnership's properties (the percent of
indebtedness encumbering Partnership properties is calculated
by dividing the aggregate indebtedness encumbering Partnership
properties by the aggregate purchase price of such properties)
or (b) 67% of the gross proceeds of the offering. As an
example to illustrate the foregoing limitation, assume that
the Partnership acquires properties subject to aggregate
indebtedness (including, in the case of an acquisition of
property by a general partnership or other joint venture, all
the indebtedness to which such property is subject) equal to
60% of their purchase prices. The minimum percentage of gross
proceeds of the offering required to be committed to
Investment in Properties in such a case would be 70.25%,
computed as follows: 80% - (60% x .1625) = 70.25%. As
indicated under the "Estimated Use of Proceeds" table
appearing above, however, it is anticipated that the
Partnership's Investment in Properties will be well in excess
of the amount required under these rules.
(2) The actual amount for this item is not now determinable
because it depends upon the actual results of operations of
the Partnership.
(3) Cash Receipts from Operations consists of all cash receipts
from operations of the Partnership's properties in the
ordinary course of business (and such receipts of general
partnerships or other joint ventures in which the Partnership
has invested) without deduction for depreciation, the
Management Fee, or any other expenses. Adjusted Cash Flow
consists of Gross Revenues (essentially all Partnership
revenues) less all Operating Cash Expenses, including any
adjustments to Reserves, other than the Management Fee.
Distributable Cash consists of Adjusted Cash Flow less the
Management Fee. See the Glossary.
<PAGE>
It is anticipated that the Partnership's properties will be
managed by unaffiliated management firms. The Adviser presently
manages properties for USAA but neither it nor its affiliates
provide property management services for properties owned by an
Prior USAA Partnership. The Partnership Agreement permits the
Partnership to obtain property management services from the General
Partner, the Adviser, or another affiliate of the General Partner
and in the event such services are provided the compensation
therefor will be limited to the lesser of the competitive fee for
similar services in the same geographic area or (i) 5% of gross
revenues from each residential property, (ii) 6% of gross revenues
from each industrial and commercial property if leasing and related
services are performed, (iii) 3% of gross revenues from each
industrial and commercial property if no leasing and related
services are performed and (iv) 1% of gross revenues from each
industrial and commercial property leased on a long-term (10 years
or more) net basis (except for a one-time initial leasing fee of 3%
of the gross revenues on each lease payable over the first five
full years of the original term of the lease). The actual amount
of such compensation is not now determinable.
The General Partner may elect to obtain insurance brokerage
services from affiliates in connection with obtaining insurance on
the Partnership's properties provided (i) the cost of providing
such services, including the cost of the insurance, is no greater
than the lowest quote obtained from two unaffiliated insurance
agencies and the coverage and terms are likewise comparable and
(ii) the entity providing the services is independently engaged in
the business of providing such services to non-affiliates and
derives at least 75% of its insurance brokerage service gross
revenue from other than affiliates.
As indicated in the table of compensation and fees appearing
above, the Partnership will provide USAA Investment Management with
a non-accountable expense allowance equal to 2% of the gross
proceeds of the offering to cover expenses incurred in connection
with the formation of the Partnership and the offering and sale of
the Units. In addition, the General Partner and its affiliates
will be reimbursed by the Partnership for: (i) the actual cost to
the General Partner or such affiliates of goods and materials used
for or by the Partnership and obtained from entities which are not
affiliated with the General Partner; (ii) salaries and related
salary expenses for certain services which could be performed
directly for the Partnership by independent parties (subject to
limitations set forth in the Partnership Agreement) and (iii) the
cost of Partnership reports and communications to Limited Partners.
No reimbursement under (ii) or (iii) above shall be permitted for
services for which the General Partner or any of its affiliates
receives a separate fee. The following items shall also be
excluded from the allowable reimbursement: (i) Acquisition
Expenses, (ii) the salaries, fringe benefits, travel expenses and
other administrative items incurred or allocated to persons
controlling the General Partner or affiliates and (iii) any
overhead expenses of the General Partner or its affiliates, such as
rent, depreciation, utilities, capital equipment and other
<PAGE>
administrative items. The Partnership's annual report to Limited
Partners will include a breakdown of reimbursements made to the
General Partner and its affiliates. The foregoing reimbursements
for expenses will be made to the General Partner and its affiliates
regardless of whether any distributions are made to the Limited
Partners.
PROFITS AND LOSSES AND CASH DISTRIBUTIONS
DISTRIBUTIONS OF CASH FROM OPERATIONS
Distributable Cash will be paid in the ratio of 1% to the
General Partner and 99% to the Limited Partners. Distributable
Cash is defined in the Partnership Agreement to mean generally the
Partnership's net cash flow, after adjustments for Reserves, and
after payment of all Operating Cash Expenses including the
Management Fee payable to the Adviser. Thus, the Management Fee
payable to the Adviser will reduce the amount of Distributable Cash
available for distribution to the Partners in any year. There can
be no assurance that there will be any cash return to the Limited
Partners. See the Glossary and the definitions in Article III of
the Partnership Agreement.
Distributable Cash, when available, will be distributed to the
Limited Partners on a quarterly basis. Distributions will be made
to the persons recognized as holders of the Units on the last day
of the applicable fiscal quarter in proportion to the number of
Units held by them. To the extent feasible, the quarterly
distributions will be equal in amount for the first three quarters
of each fiscal year, based upon the General Partner's estimate of
Distributable Cash which will be available for the full year.
Distributions of cash may be from funds included in Reserves to the
extent not needed for operations.
The share of Distributable Cash payable to the General
Partner, in relation to the share of Distributable Cash payable to
the Limited Partners, is disproportionate to the Partners' relative
cash contributions of capital to the Partnership.
DISTRIBUTIONS FROM SALE OR REFINANCING OF PROPERTIES
Sale or Refinancing Proceeds, if any, will be paid: (i)
first, to the Limited Partners in an amount equal to the Limited
Partners' Adjusted Capital Contributions; (ii) second, to the
Limited Partners in an amount equal to the difference between a
cumulative annual cash return of 6% based upon the Limited
Partners' average annual Adjusted Capital Contributions and an
amount equal to all Distributable Cash plus any Sale or Refinancing
Proceeds previously received; and (iii) third, to all the Partners
in an amount equal to their respective positive Capital Account
balances to the extent such balances, if any, exceed the amounts
provided for in the preceding clauses (i) and (ii). Thereafter,
<PAGE>
subject to the payment of real estate brokerage commissions to the
Adviser equal to the lesser of 1% of the Selling Prices of all
properties sold or 50% of the Competitive Brokerage Commissions on
such properties, any remaining Sale or Refinancing Proceeds will be
distributed 90% to the Limited Partners and 10% to the General
Partner. The Partnership will be obligated to pay to the Adviser,
out of subsequent distributions of Sale or Refinancing Proceeds,
all or any portion of any real estate brokerage commissions to the
extent that any distribution of any prior Sale or Refinancing
Proceeds shall be insufficient to pay them in full. Each Limited
Partner's cumulative annual cash return of 6% cited in (ii) above
will be calculated commencing as of the end of the calendar quarter
in which such Limited Partner makes his Capital Contribution.
Until all properties are liquidated and a final distribution
is made of Sale or Refinancing Proceeds, the cumulative 6% return
discussed above will be offset and reduced by all distributions of
Distributable Cash and Sale or Refinancing Proceeds throughout the
life of the Partnership. Any distribution of Sale or Refinancing
Proceeds made in order to satisfy such 6% cumulative return
requirement, to the extent it may turn out to be excessive on the
basis of the Partnership's final accounting, will be treated as a
partial return of Limited Partners' Capital Contributions.
However, the amount returnable as Limited Partners' Capital
Contributions will not be reduced to the extent that prior
distributions of cash from operations should exceed such 6% return.
It should be noted that the Limited Partners' preferential
right to a return of their Capital Contributions out of Sale or
Refinancing Proceeds will not be affected by any reduction required
to be made in the basis of their Units for tax purposes. See
"Income Tax Consequences - Tax Basis for the Units."
The share of Sale or Refinancing Proceeds payable to the
General Partner, in relation to the share of Sale or Refinancing
Proceeds payable to the Limited Partners, is disproportionate to
the Partners' relative cash contributions of capital to the
Partnership.
If Sale or Refinancing Proceeds are distributed, the date on
which any assignment of Units was made will determine whether such
proceeds will be paid to the assignor or the assignee. See
"Taxable Income and Tax Losses" below.
TAXABLE INCOME AND TAX LOSSES
The Partnership's Taxable Income and Tax Losses from current
operations (which are defined in the Partnership Agreement to mean
income and loss as determined for Federal income tax purposes) as
well as any tax-exempt income will be allocated, with respect to
operations for each taxable year, 99% to the Limited Partners and
1% to the General Partner. These allocations are in proportion to
the shares of Distributable Cash to which the General Partner and
Limited Partners are entitled with respect to each taxable year
<PAGE>
(although the amount of Distributable Cash available in each year
may be different from the amount of Taxable Income and Tax Losses
so allocated).
Taxable Income, tax-exempt income and Tax Losses from current
operations will be apportioned among Limited Partners based upon a
weighted average which takes account of the number of days that
each Limited Partner was a Limited Partner and the ratio that each
Limited Partner's number of the Units bears to the total number of
Units.
Taxable Income from a Sale or Refinancing will be allocated
among the Partners in proportion to the amounts of Sale or
Refinancing Proceeds to which they are entitled, after allocating
such Taxable Income to bring all Partners' negative Capital
Accounts to zero. Tax Losses from a Sale or Refinancing will be
allocated 99% to the Limited Partners and 1% to the General
Partner, after allocating such Tax Losses to bring all Partners'
positive Capital Accounts to zero. However, in no event will the
General Partner be allocated less than 1% of Taxable Income or Loss
from a Sale or Refinancing.
Sale or Refinancing Proceeds, if any, arising from the Sale or
Refinancing of a property will be distributed, and all related
Taxable Income or Tax Losses will be allocated, to the persons
recognized as holders of the Units on the date on which the Sale or
Refinancing occurred in proportion to the numbers of Units held by
them.
Taxable Income, tax-exempt income and Tax Losses from current
operations for any year will be allocated between a transferor and
a transferee of Units based upon the number of days during the year
that each is recognized as a holder of Units, without regard to
whether Partnership operations during the portion of the year that
the transferor or transferee held the Units produced profits or
losses or cash distributions. For this purpose and for purposes of
allocating Sale or Refinancing Proceeds transfers will be effective
the day after the transfer is approved by the transfer committee of
the General Partner, but in no event later than the last day of the
calendar quarter following receipt of notice of the assignment and
required documentation.
The share of Taxable Income and Tax Losses allocable to the
General Partner, in relation to the share of Taxable Income and Tax
Losses allocable to the Limited Partners, is disproportionate based
upon their cash contributions of capital to the Partnership.
TAX TREATMENT OF DISTRIBUTIONS
It is expected that the Partnership will report less Taxable
Income during its initial years of operation than it has
Distributable Cash, primarily because of deductions for
depreciation. As a result, some or all distributions of
Distributable Cash in the Partnership's initial years would be
<PAGE>
treated for tax purposes as a return of capital which is non-
taxable. No assurances may be given in this regard, however, since
it is possible that Taxable Income may exceed Distributable Cash
even in the early years of operations if the amount of borrowed
money (i.e., leverage) is low, and if no accelerated depreciation
is taken.
PARTNERSHIP ACCOUNTING
In order to carry out provisions of the Partnership Agreement
giving Limited Partners the right to a cumulative return of their
original Capital Contributions before any proceeds from the sale or
refinancing of properties are distributed to the General Partner,
separate records will be kept by the Partnership showing, for each
Partner, his original Capital Contribution and his Adjusted Capital
Contribution. The Adjusted Capital Contribution of each Partner
will basically represent his original Capital Contribution reduced
by the cumulative amount of all cash distributions made to him of
Sale or Refinancing Proceeds. (Adjusted Capital Contributions will
not be reduced by reason of any distributions of Distributable
Cash, and will bear no relation to tax basis for the Units.) See
the Glossary and Articles III and VI of the Partnership Agreement.
In addition, in order to give effect to the provisions of the
Partnership Agreement governing the treatment of Sale or
Refinancing Proceeds, as summarized above, separate records will
also be kept showing a Capital Account for each Partner.
Initially, the Capital Account of each Partner will be the amount
of his original Capital Contribution. The Capital Account of each
Partner will be reduced to the extent of Tax Losses and other
deductions allocated and Distributable Cash distributed to such
Partner, but increased to the extent of Taxable Income and any tax-
exempt income allocated to each Partner. Reductions of a Limited
Partner's Capital Account in this manner need not affect his
preferential right to a return of his Capital Contribution out of
Sale or Refinancing Proceeds.
The Partnership will apply to the Internal Revenue Service for
permission to use a fiscal year beginning on November 1 and ending
on October 31 of each year. If the Service does not authorize the
Partnership to use such a fiscal year, the Partnership will use a
calendar year as its fiscal year.
