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 (NO FEE REQUIRED)
For the fiscal year ended December 31, 1996
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
<PAGE>
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 Schedules
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, Manhattan Towers (formerly 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 1996 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, 1996, Curlew Crossing was 92% occupied. The
$11,000,000 mortgage on Curlew Crossing matured on March 31,
1996. The lender, USAA Real Estate Company (the Adviser),
renewed the loan for a period of two years at an annual interest
rate of 8.25% to reflect market rates at the time of maturity.
This rate is a decrease from the 10.25% paid in March 1996 which
was based on the lesser of 12% or prime rate plus two percent.
Interest is payable monthly with the principal due March 31,
1998.
<PAGE>
In April 1996, the Partnership received $220,400 as a
result of land condemned at Curlew Crossing by the Florida
Department of Transportation ("FDOT"). This represented a good
faith estimate of the value of the land actually taken. The land
was condemned in connection with the widening of Curlew Road.
Contrary to early concerns regarding the extent and nature of the
condemnation, no parking, access or structure at Curlew was
included in the taking. During 1996, the tenant of two out
parcels, containing approximately 15,700 square feet, claimed the
right to terminate its respective leases based upon the FDOT
taking. The Partnership has initiated legal action against the
defaulted tenant and is currently seeking a summary declaration
by the Court regarding the continuing nature of the leases as
well as recovery of the rent and other sums due under the leases.
Following the adjudication of this tenant related action, a final
determination will be made regarding the total damages due from
the FDOT to the Partnership as a result of the condemnation.
Resolution of both the tenant action and condemnation proceeding
are anticipated by the third quarter of 1997.
Curlew Crossing is located in the North Pinellas County
retail market. This submarket had approximately 85,000 square
feet of positive absorption for the year ended 1996 leaving the
occupancy rate at approximately 92%. Total inventory in this
submarket was approximately 11 million square feet with
approximately 881,000 square feet vacant.
The Manhattan Towers (formerly 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 were triple net leased to Hughes Aircraft Company, a wholly-
owned subsidiary of General Motors through August 1996. Control
of the daily operations at the property were assumed by the
Partnership upon expiration of the Hughes lease. As part of the
marketing campaign to re-lease the property, the name of the
property was changed from Parkview Plaza to Manhattan Towers.
Along with this name change, the property will undergo repairs
and renovations to the lobby area, corridors and parking lot, as
well as exterior landscaping and signage. The cost of these
renovations is estimated to be $2.7 million to be funded from the
working capital reserve of the Partnership. In addition,
subterranean water damage was discovered in the parking garage.
Engineers and other consultants were hired to assess the damage
and determine the appropriate remediation. The cost of the
repairs to the parking garage is estimated to be $1.1 million to
be funded from the working capital reserve of the Partnership.
Manhattan Towers will experience a significant decrease in cash
flow in 1997 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. Current rental
rates in the market surrounding the property are lower than the
rate that was paid by Hughes. Hughes provided approximately
$4,869,000 of annual rental income to the Partnership during
<PAGE>
1996, approximately $6,679,000 during 1995 and approximately
$6,241,000 during 1994 which represents approximately 62% of
total Partnership rental income for 1996, 69% for 1995 and 67%
for 1994.
Since the expiration of the Hughes lease in August 1996,
significant leasing activity has occurred. Hughes Aircraft
Company negotiated a one-year lease for 79,647 square feet at an
annual rental rate of $12 gross per square foot with an
expiration date of August 31, 1997. The previous annual rental
rate was at approximately $22.64 net per square foot for the
entire 301,457 square feet of net leasable area.
Other leases signed have terms from three to five years
at an annual rental rate of $13.80 per square foot. One of the
five year leases provided for an allowance for tenant
improvements at $6.00 per square foot for a total of $74,274 to
be paid out of the working capital reserve of the Partnership.
A sixty-two month lease was signed during the fourth
quarter for 11,553 square feet. This lease commenced February
1, 1997 and ends March 31, 2002. The lease provides for an
annual rental rate of $19.20 per square foot. An allowance for
tenant improvements was provided for a total of approximately
$404,000 to be paid from the working capital reserve of the
Partnership.
As of December 31, 1996, these leases at Manhattan Towers
total 145,796 of the 301,457 square feet, or 48%, of the total
leasable area of property. Rental rates for these new leases are
lower than the previous rate charged to Hughes, reflecting the
current market conditions in the area surrounding the property.
One of the two buildings at this property remains vacant. Several
large prospects have expressed interest in leasing the vacant
building.
The Manhattan Towers mortgage loan matured on August 31,
1996. The lender, Las Colinas Management Company, an affiliate
of the General Partner, renewed the loan for a period of two
years at an annual interest rate of 9.57% to reflect market rates
at the time of maturity. The loan was converted to monthly
interest only payments with the principal of $15,000,000 due
September 30, 1998.
Manhattan Towers is located in the El Segundo/Manhattan
Beach submarket of the South Bay office market. Total rentable
square feet in this submarket was approximately 9.4 million
square feet with 1.9 million square feet available as of the end
of 1996. The vacancy rate remained stable at approximately 20%
at the end of 1996 and 1995. Total inventory in the overall
South Bay office market was approximately 29.9 million square
feet with approximately 6.8 million square feet vacant, resulting
in a vacancy rate of approximately 23% at the end of 1996.
<PAGE>
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. At December 31, 1996, 70% of
the property, the ten-story building, was leased to Hospitality
Franchise Systems, Inc. ("HFS"). Substantial completion of
tenant improvements for HFS occurred October 31, 1996. The
Partnership funded approximately $1.2 million related to its
commitment for improvements from the working capital reserve of
the Partnership. During the tenant improvement phase, the base
rent due from HFS was at a reduced rate and HFS was responsible
for all operating expenses of the property. Upon substantial
completion of the improvements, the rental rate increased to
approximately $14.61 per square foot annually and HFS will pay
its proportionate share of operating expenses which exceed $7.00
per square foot annually. HFS provided approximately $1,644,000
of rental income to the Partnership during 1996 and approximately
$1,246,000 during 1995, which represents approximately 21% of
total Partnership rental income for 1996 and 13% for 1995.
During the fourth quarter, a small parcel of land
adjacent to the Ramada property was purchased for approximately
$72,000. The Partnership purchased the property to be used for
additional parking. Market interest in the area surrounding the
Ramada property has been increasing. In order to more
successfully market the vacancy, the remaining two buildings at
the Ramada property are scheduled for renovation which will begin
in March 1997. Renovations will include improvements to comply
with the Americans With Disabilities Act, heating and air
conditioning and exterior renovations. The total cost of
renovations will be approximately $900,000 to be paid from the
working capital reserve of the Partnership.
Ramada is located in the East Phoenix submarket of the
Phoenix office market. Total rentable square feet in this office
submarket was approximately 5 million square feet with
approximately 468,000 square feet available at the end of 1996.
This equated to a vacancy rate of approximately 9%.
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.
<PAGE>
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, 1996:
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, 1996,
the property was 92% occupied and
average monthly cash rental was
approximately $78,000. The mortgage
payable on this property is
$11,000,000. The Partnership has
100% fee-simple ownership.
Manhattan Beach, California Manhattan Towers 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, 1996, the property
was 48% leased and average monthly
cash rental was approximately
$423,000. The mortgage payable on
this property is $15,000,000. 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, 1996 the property was
70% leased and average monthly cash
rental was approximately $70,000.
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, 1996, there were 7,717 Limited
Partners of the Partnership, owning an aggregate of 111,549
Units.
During the year ended December 31, 1996, quarterly
distributions totaling $1,087,603 and $10,985 were distributed to
the Limited Partners and General Partner, respectively, for a
total of $1,098,588 in cash distributions.
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.
Future cash distributions to Limited Partners are
currently anticipated.
<PAGE>
Item 6. Selected Financial Data
<TABLE>
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
SELECTED FINANCIAL DATA
Years Ended December 31, 1996, 1995, 1994, 1993 and 1992
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Rental Income $ 7,930,447 9,694,383 9,249,018 9,173,668 8,837,842
Interest Income 592,123 648,218 343,378 176,617 198,482
Net Income(Loss) 3,280,065 5,298,841 1,742,181 (9,269,345) (182,374)
Net Income(Loss) per Limited
Partnership Unit (1) 29.11 47.03 15.46 (82.27) (1.62)
Taxable Income (Loss) (379,232) 3,641,563 20,548,728 413,731 (5,712,232)
Taxable Income (Loss) per
Limited Partnerhip
Unit (1) (3.37) 32.32 182.37 3.67 (50.70)
Cash Distributions 1,098,588 1,690,138 1,690,137 2,230,981 2,811,261
Cash Distributions per
Limited Partnership
Unit (2) 9.75 15.00 15.00 19.80 24.95
Total Assets at Period End 53,766,170 56,380,807 51,924,359 75,037,620 86,531,424
Total Mortgages Payable
at Period End 26,000,000 27,818,182 30,545,455 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, 1996, the Partnership had cash of $118,000 and
temporary investments of $9,301,147. Included in the
Partnership's cash and cash equivalents were the working capital
reserve and funds held for current obligations of the
Partnership. Accounts receivable consisted 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
prepaid expenses. 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 security deposits, prepaid rent and accrued property
taxes.
The $11,000,000 mortgage on Curlew Crossing matured on March 31,
1996. The lender, USAA Real Estate Company ("the Adviser"),
renewed the loan for a period of two years at an annual interest
rate of 8.25% to reflect market rates at the time of maturity.
This rate is a decrease from the 10.25% paid in March 1996 which
was based on the lesser of 12% or prime rate plus two percent.
Interest is payable monthly with the principal due March 31,
1998.
In April 1996, the Partnership received $220,400 as a result of
land condemned at Curlew Crossing by the Florida Department of
Transportation ("FDOT"). This represented a good faith estimate
of the value of the land actually taken. The land was condemned
in connection with the widening of Curlew Road. Contrary to
early concerns regarding the extent and nature of the
condemnation, no parking, access or structure at Curlew was
included in the taking. During 1996, the tenant of two out
parcels, containing approximately 15,700 square feet, has claimed
the right to terminate its respective leases based upon the FDOT
taking. The Partnership has initiated legal action against the
defaulted tenant and is currently seeking a summary declaration
by the Court regarding the continuing nature of the leases as
well as recovery of the rent and other sums due under the leases.
Following the adjudication of this tenant related action, a final
determination will be made regarding the total damages due from
the FDOT to the Partnership as a result of the condemnation.
Resolution of both the tenant action and condemnation proceeding
are anticipated by the third quarter of 1997.
Substantial completion of the improvements for Hospitality
Franchise Systems, Inc. ("HFS") at the Ramada property in
Phoenix, Arizona occurred October 31, 1996. The Partnership
funded approximately $1.2 million related to its commitment for
improvements from the working capital reserve of the Partnership.
<PAGE>
During the tenant improvement phase, the base rent due from HFS
was at a reduced rate and HFS was responsible for all operating
expenses of the property. Upon substantial completion of the
improvements, the rental rate increased to approximately $14.61
per square foot annually and HFS will pay its proportionate share
of operating expenses which exceed $7.00 per square foot
annually.
During the fourth quarter, a small parcel of land adjacent to the
Ramada property was purchased for approximately $72,000. The
Partnership purchased the property to be used for additional
parking. Market interest in the area surrounding the Ramada
property has been increasing. As a result of this interest, the
remaining two buildings at the Ramada property are scheduled for
renovation which will begin in March 1997. Renovations will
include improvements to comply with the Americans With
Disabilities Act, and heating, air conditioning and exterior
renovations. The total cost of renovations will be approximately
$900,000 to be paid from the working capital reserve of the
Partnership.
The Manhattan Towers Buildings in Manhattan Beach, California
were 100% leased to Hughes Aircraft Company until August 31,
1996. Control of the daily operations was assumed upon
expiration of the Hughes lease. As part of the marketing
campaign to re-lease the property, the name of the property was
changed from Parkview Plaza to Manhattan Towers. Along with this
name change, the property will undergo repairs and renovations to
the lobby area, corridors and parking lot, as well as exterior
landscaping and signage. The cost of these renovations is
estimated to be $2.7 million to be funded from the working
capital reserve of the Partnership. In addition, subterranean
water damage was discovered in the parking garage. Engineers and
other consultants were hired to assess the damage and determine
the appropriate remediation. The cost of the repairs to the
parking garage is estimated to be $1.1 million and will be funded
from the working capital reserve of the Partnership.
Since the expiration of the Hughes lease in August 1996,
significant leasing activity has occurred. Hughes Aircraft
Company negotiated a one-year lease for 79,647 square feet at an
annual rate of $12 gross per square foot with an expiration date
of August 31, 1997. The previous annual rental rate was
approximately $22.64 net per square foot for the entire 301,457
square feet of net leasable area.
Other leases signed have terms from three to five years at an
annual rental rate of $13.80 per square foot. One of the five
year leases provided for an allowance for tenant improvements at
$6.00 per square foot for a total of $74,274 to be paid out of
the working capital reserve of the Partnership.
<PAGE>
A sixty-two month lease was signed during the fourth quarter for
11,553 square feet. This lease commenced February 1, 1997 and
ends March 31, 2002. The lease provides for an annual rental
rate of $19.20 per square foot. An allowance for tenant
improvements was provided for a total of approximately $404,000
to be paid from the working capital reserve of the Partnership.
As of December 31, 1996, these leases at Manhattan Towers total
145,796 of the 301,457 square feet, or 48%, of the total leasable
area of the property. Rental rates for these new leases are
lower than the previous rate charged to Hughes, reflecting the
current market conditions in the area surrounding the property.
One of the two buildings at this property remains vacant. Several
large tenant prospects have expressed interest in leasing the
vacant building.
The Manhattan Towers mortgage loan matured on August 31, 1996.
The lender, Las Colinas Management Company, an affiliate of the
General Partner, renewed the loan for a period of two years at an
annual interest rate of 9.57% to reflect market rates at the time
of maturity. The loan was converted to monthly interest only
payments with the principal of $15,000,000 due September 30,
1998. This change in payment terms of the mortgage loan resulted
in a decrease in monthly debt service payments of approximately
$190,000.
During the year ended December 31, 1996, quarterly distributions
totaling $1,087,603 and $10,985 were distributed to the Limited
Partners and General Partner, respectively, for a total of
$1,098,588 in cash distributions. Total cash distributions to
Partners for the year ended December 31, 1996 decreased as
compared to the year ended December 31, 1995 to reserve cash for
the renovations, tenant improvements and lease commissions
required to re-lease Manhattan Towers upon expiration of the
Hughes lease. Due to the expiration of the Hughes lease in
August 1996, the two remaining vacant buildings at Ramada and the
vacancy at Curlew Crossing, tenant improvements and lease
commissions will be required at all of the Partnership properties
and will be funded from the Partnership's working capital
reserve. Management evaluates reserves and the availability of
funds for distribution to Partners on a continuing basis based on
anticipated leasing activity and cash flows available from the
Partnership investments.
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, 1996, income was
generated from rental income from the income-producing real
estate properties and interest income earned on the funds in
temporary investments.
<PAGE>
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 and 1994, 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
maintenance, utilities and other operating costs associated with
the property. Accordingly, the Partnership receives rental
income and the lessee absorbs all such expenses.
Rental properties increased at December 31, 1996 as compared to
December 31, 1995 due primarily to improvements at Ramada for
HFS, offset by depreciation. The decrease in cash and cash
equivalents was due to payment for tenant improvements for HFS.
Deferred charges and other assets decreased at December 31, 1996
primarily due to amortizing deferred charges. Other deposits
held decreased as a result of using the deposit held as a
contribution toward tenant improvements for HFS. Accrued
expenses and other liabilities decreased at December 31, 1996 due
to a decrease in prepaid rent.
Rental income decreased for the year ended December 31, 1996 as
compared to December 31, 1995 primarily as a result of the
expiration of the Hughes lease at Manhattan Towers. Hughes
provided monthly rent revenue of $568,748. 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 Manhattan Towers 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.
Depreciation expense increased for the year ended December 31,
1996 due to two months of depreciation on the tenant improvements
for HFS. The write-down on Manhattan Towers in 1994 caused the
decrease in depreciation as of December 31, 1995. Other direct
expenses increased for 1996 as compared to 1995 as a result of
assuming control of the operations at both Manhattan Towers and
Ramada. Prior to the Hughes lease expiration on August 31, 1996,
at Manhattan Towers, Hughes was responsible for all operating
expenses under their triple net lease. Prior to substantial
completion of the tenant improvements at Ramada for HFS on
October 31, 1996, HFS was responsible for all operating expenses.
Operating expenses for Manhattan Towers accounted for
approximately $500,000 of the increase in other direct expenses
at December 31, 1996. Operating expenses for the Ramada property
accounted for approximately $100,000 of the increase. The
default by a tenant at Curlew Crossing caused an increase in
<PAGE>
property taxes and bad debt expense. Other direct expenses were
higher for 1995 as compared to 1994. Contributing to this
increase was an increase in property insurance expense at
Manhattan Towers 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.
The gain on disposal of rental property at December 31, 1996 was
a result of the land condemnation at Curlew Crossing. See
"Liquidity and Capital Resources". An investment property
write-down was recognized on Manhattan Towers in 1994.
Interest income decreased for the year ended December 31, 1996 as
compared to the year ended December 31, 1995 due to lower cash
balances. An increase in interest rates and a higher cash
reserve accounted for the increase in interest income for the
year ended December 31, 1995.
General and administrative expenses increased for the year ended
1996 as compared to the year ended 1995. An increase in legal
expenses accounted for approximately half of the increase. Legal
fees were incurred as a result of the default by a tenant and the
land condemnation at Curlew Crossing and new leases at Manhattan
Towers. Lease commissions at Manhattan Towers accounted for the
remaining increase in general and administrative expenses.
General and administrative expenses decreased in 1995 as compared
to 1994 due to a decrease in printing charges and legal fees.
The management fee is based on cash flow from operations of the
Partnership adjusted for cash reserves and fluctuated
accordingly. The decrease in management fees for the year ended
1996 was primarily caused by the expiration of the Hughes lease
at Manhattan Towers.
Interest expense decreased for the year ended December 31, 1996
as compared to the year ended December 31, 1995. The interest
rate on the Curlew Crossing mortgage loan was decreased to 8.25%
as compared to the 10.5% paid December 31, 1995. Interest
expense on the Manhattan Towers loan decreased due to principal
balance reductions through August 31, 1996. The decrease in
interest expense for 1995 as compared to 1994 reflected a
decrease in the interest rate charged on the Manhattan Towers
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.
<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, 1996 AND 1995
<CAPTION>
1996 1995
<S> <C> <C>
ASSETS
Rental properties, net (notes 3, 4 and 7) $ 39,262,249 39,125,747
Temporary investments, at cost which approximates
market value -
Money market fund 9,301,147 12,202,023
Cash 118,000 573,020
Cash and cash equivalents 9,419,147 12,775,043
Accounts receivable, net of allowance for doubtful
accounts of $90,000 and $12,000 555,959 419,871
Deferred rent 2,882,064 1,841,535
Deferred charges and other assets, at amortized cost 1,646,751 2,218,611
$ 53,766,170 56,380,807
LIABILITIES AND PARTNERS' EQUITY
Mortgages payable to affiliates (notes 7 and 8) $ 26,000,000 27,818,182
Accounts payable, including amounts due
to affiliates of $101,194 and $65,139 414,274 138,535
Other deposits held 18,485 2,761,130
Accrued expenses and other liabilities 326,166 837,192
Total liabilities 26,758,925 31,555,039
Partners' equity:
General Partner:
Capital contribution 1,000 1,000
Cumulative net earnings 14,982 (17,819)
Cumulative distributions (269,199) (258,214)
(253,217) (275,033)
Limited Partners (111,549 units):
Capital contributions, net of offering costs 52,428,030 52,428,030
Cumulative net earnings 1,483,181 (1,764,083)
Cumulative distributions (26,650,749) (25,563,146)
27,260,462 25,100,801
Total Partners' equity 27,007,245 24,825,768
$ 53,766,170 56,380,807
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
INCOME
Rental income $ 7,930,447 9,694,383 9,249,018
Less direct expenses, including
depreciation of $1,509,109
$1,477,439 and $2,324,394 (2,543,615) (1,743,046) (2,533,232)
Gain on disposal of rental property 157,852 -- --
Provision for investment property write-down (note 4) -- -- (21,164,478)
Net operating income (loss) (note 6) 5,544,684 7,951,337 (14,448,692)
Interest income (note 8) 592,123 648,218 343,378
Total income (loss) 6,136,807 8,599,555 (14,105,314)
EXPENSES
General and administrative (note 8) 459,834 366,291 412,691
Management fee (note 8) 60,523 168,389 149,216
Interest (note 8) 2,336,385 2,766,034 4,390,598
Total expenses 2,856,742 3,300,714 4,952,505
Income (loss) before extraordinary item 3,280,065 5,298,841 (19,057,819)
Extraordinary gain on debt forgiveness (note 4) -- -- 20,800,000
Net income $ 3,280,065 5,298,841 1,742,181
Net income (loss) per limited partnership unit
before extraordinary item $ 29.11 47.03 (169.14)
Extraordinary item -- -- 184.60
Net income per limited partnership unit $ 29.11 47.03 15.46
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
General Limited
Partner Partners Total
<S> <C> <C> <C>
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
Net income 32,801 3,247,264 3,280,065
Distributions (10,985) (1,087,603) (1,098,588)
Balances at December 31, 1996 $ (253,217) 27,260,462 27,007,245
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,280,065 5,298,841 1,742,181
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,509,109 1,477,439 2,324,394
Amortization 105,325 84,471 57,759
Provision for investment property write-down -- -- 21,164,478
Gain on debt forgiveness -- -- (20,800,000)
Decrease (increase) in accounts receivable (136,088) (335,001) 169,410
Decrease (increase) in deferred charges
and other assets (573,994) (334,751) 91,275
Increase (decrease) in accounts payable,
accrued expenses and other liabilities (2,977,932) 2,820,522 (1,910,760)
Gain on disposal of rental property (157,852) -- --
Loss on early retirement of fixed assets 10,598 -- --
Other adjustments -- 7,118 --
Cash provided by operating activities 1,059,231 9,018,639 2,838,737
Cash flows from investing activities:
Additions to rental properties (1,718,757) -- (22,771)
Proceeds from disposal of rental properties 220,400 -- --
Cash used in investing activities (1,498,357) -- (22,771)
Cash flows from financing activities:
Repayment of mortgages payable (1,818,182) (2,727,273) (454,545)
Distributions to partners (1,098,588) (1,690,138) (1,690,137)
Cash used in financing activities (2,916,770) (4,417,411) (2,144,682)
Net increase (decrease) in cash and cash equivalents (3,355,896) 4,601,228 671,284
Cash and cash equivalents at beginning
of year 12,775,043 8,173,815 7,502,531
Cash and cash equivalents at end of year $ 9,419,147 12,775,043 8,173,815
See accompanying notes to financial statements.
</TABLE>
<PAGE>
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
1. Organization, 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.
The assessment for and measurement of impairment is based
upon the undiscounted cash flows and fair value,
respectively, of the individual properties. Based on the
provisions of Statement 121, the Partnership's long-lived
assets, real estate and improvements are not considered
impaired. The adoption of Statement 121 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).
<PAGE>
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
recognized was $1,048,477 more, $874,036 more and $399,737
less than the amount due per the lease agreements for the
years ended December 31, 1996, 1995 and 1994, respectively.
Deferred rent results 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, was accounted for in
accordance with generally accepted accounting principles,
whereby the carrying amount of the receivable was 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 $9.75
for 1996 and $15.00 for 1995 and 1994, and were based on the
limited partnership units outstanding at each quarter end and
the cash distributions allocated to Limited Partners.
Certain 1995 balances have been reclassified to conform to
the 1996 presentation.
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
<PAGE>
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,
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:
1996 1995
Buildings and improvements $54,041,957 52,405,717
Land 8,970,396 8,961,025
63,012,353 61,366,742
Less accumulated depreciation (23,750,104) (22,240,995)
$39,262,249 39,125,747
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 Manhattan Towers. 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.
<PAGE>
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 the Manhattan Towers property. Through analysis it
was determined that a permanent impairment of value had
occurred on Manhattan Towers. 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.
5. Minimum Future Rentals
Operating leases with tenants have remaining terms from eight
months to 26 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 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.
Approximate minimum future rentals are as follows:
1997 $ 4,076,000
1998 3,600,000
1999 3,411,000
2000 3,049,000
2001 3,039,000
Thereafter 20,979,000
$38,154,000
6. Triple Net Leases
During 1995 and 1994, 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 and 1994 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:
1996 1995
First mortgage note payable,
interest at 8.25%, due March 31,
1998, interest only payable
monthly; secured by rental property
with a depreciated cost of
approximately $7,590,000. $11,000,000 11,000,000
First mortgage note payable,
interest at 9.57%, due September 30,
1998, interest only payable monthly;
secured by rental property with a
depreciated cost of approximately
$18,842,000. 15,000,000 16,818,182
$26,000,000 27,818,182
Cash payments for interest expense were $2,105,667,
$2,420,902 and $5,422,625 for 1996, 1995 and 1994,
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.
Through January 1995, 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, received monthly payments of principal of
$227,272.72 plus interest at one-month LIBOR plus .625%
through August 31, 1996. The mortgage loan was converted to
interest only payments at an interest rate of 9.57%.
<PAGE>
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.
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.:
1996 $ -- -- -- -- -- --
1995 -- (1,262) -- -- -- (1,262)
1994 -- (36,253) -- -- -- (36,253)
USAA Real Estate
Company:
1996 200,417 -- 60,523 -- 964,529 1,225,469
1995 162,493 -- 168,389 -- 1,191,014 1,521,896
1994 174,407 -- 149,216 -- 1,005,973 1,329,596
Las Colinas
Management
Company:
1996 -- -- -- -- 1,141,138 1,141,138
1995 -- -- -- -- 1,229,888 1,229,888
1994 -- -- -- -- 208,656 208,656
Quorum Real Estate
Services Corporation:
1996 85,876 -- 63,446 30,541 -- 179,863
1995 47,548 -- 46,628 22,816 -- 116,992
1994 41,652 -- 46,501 24,824 -- 112,977
(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 to taxable
income (loss) follows:
1996 1995 1994
Net income -
financial statement basis $ 3,280,065 5,298,841 1,742,181
Adjusted by:
Excess tax depreciation
over financial statement
depreciation (2,677,702) (2,695,639) (1,849,019)
Increase (decrease) in
prepaid rent (521,993) 569,123 (687,208)
Decrease (increase) in deferred
rent and land costs (557,275) 525,592 147,025
Investment property write-down -- -- 21,164,478
Book bad debt expense in
excess of tax bad debt
expense 78,000 12,000 --
Other reconciling items 19,673 (68,354) 31,271
Taxable income (loss) $ (379,232) 3,641,563 20,548,728
10. Major Customer Information
During 1996, the Partnership recorded approximately
$1,644,000 and $4,869,000 of rental income from two major
tenants which represented approximately 21% and 62%
respectively of total rental income for 1996.
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, 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.
11. Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents approximates
fair value because of the short maturities of these
instruments.
<PAGE>
The carrying amount of the mortgages payable at December 31,
1996 approximates fair value since these two mortgages
payable were re-negotiated during 1996 to interest rates
currently being offered for mortgage loans with similar
characteristics and maturities.
The current fair value of the mortgages payable at December
31, 1995 was approximately $27,395,000, estimated by
discounting the future cash flows using interest rates
currently being offered for mortgage loans with similar
characteristics and maturities.
<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, 1996
and 1995, and the related statements of income, partners' equity,
and cash flows for each of the years in the three-year period
ended December 31, 1996. These financial statements are the
responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free 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, 1996 and 1995, and the results of its operations and its cash
flows for each of the years in the three-year period ended
December 31, 1996, in conformity with generally accepted
accounting principles.
/S/KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
San Antonio, Texas
February 3, 1997
<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, 1997, 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
Stephen S. King Assistant Vice President -
Western 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.
<PAGE>
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, 56, 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; past 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; past 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, as well as the
President of the Alamo Area Council of Boy Scouts of America;
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; member of the Board of Directors of the San Antonio
Economic Development Foundation; member of Board of Trustees for
the United Way of San Antonio and Bexar County; and a member of
the Board of Directors of the American Industrial Properties REIT
(AIP).
<PAGE>
T. Patrick Duncan, 47, 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 and holds a Texas Real
Estate Brokers License. He holds memberships in the Texas and
Arizona State Boards of Accounting, 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 Managers and the
Pension Real Estate Association. Mr. Duncan serves on the Board
of Trustees and is Chairman of the Finance Committee of the
Daughters of Charity; and Board member of the North San Antonio
Chamber of Commerce, as well as Chairman of its Governmental
Affairs Council. Mr. Duncan is a Board member of Meridian
Industrial Trust and American Industrial Trust, two public REITs
traded on the New York Stock Exchange. Mr. Duncan serves on
various committees of these two entities.
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., Quorum Real
Estate Services Corporation, 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 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, the San Antonio Bar Association, and the American
Corporate Counsel Association.
<PAGE>
Martha J. Barrow, 49, 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 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 her 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 and the American
Institute of Certified Public Accounts. 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 University and an Master of Business
Administration from St. Mary's University. She is a member of
the National Association of Real Estate Investment Managers
(NAREIM), the National Council of Real Estate Investment
Fiduciaries (NCREIF), and the American Real Estate Society
(ARES).
S. Wayne Peacock, 38, 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, 40, 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
<PAGE>
Development Company, USAA Real Estate Equities, Inc., and USAA
Real Estate Management Company. He is also Assistant Vice
President, Controller 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 an 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 memberships in the National
Association of Real Estate Companies and the National Council of
Real Estate Investments Fiduciaries. He serves as Chairman of
the Board of Communities in Schools-San Antonio, Inc.
Susan T. Wallace, 42, is Assistant Vice President, Real
Estate 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., 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.
Ms. Wallace serves on the Board of Governors for the Affordable
Housing Investors Council.
David M. Holmes, 36, 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. Mr. Holmes currently oversees over 2 million
square feet of office and industrial development. He also 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
<PAGE>
for 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. He
has served on the Board of Directors of Big Brothers and Sisters
of San Antonio and as a member of the Finance Committee of the
San Antonio Public Library.
Stephen S. King, 40, is Assistant Vice President -
Western 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 licensed California Broker, a member of the
Institute of Real Estate Management (IREM), the Building Owners
and Managers Association (BOMA), the National Association of
Realtors, and the Lincoln Club of Orange County.
<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, 1996, the General Partner received cash
distributions of $10,985.
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 6,323 Units 5.7%
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, received 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 Manhattan
Towers note payable through August 1996. The mortgage loan was
then converted to interest only payments at an annual interest
rate of 9.57% with the principal of $15,000,000 due September 30,
1998.
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, 1996, 1995 and 1994.
<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.:
1996 $ -- -- -- -- -- --
1995 -- (1,262) -- -- -- (1,262)
1994 -- (36,253) -- -- -- (36,253)
USAA Real Estate
Company:
1996 200,417 -- 60,523 -- 964,529 1,225,469
1995 162,493 -- 168,389 -- 1,191,014 1,521,896
1994 174,407 -- 149,216 -- 1,005,973 1,329,596
Las Colinas
Management
Company:
1996 -- -- -- -- 1,141,138 1,141,138
1995 -- -- -- -- 1,229,888 1,229,888
1994 -- -- -- -- 208,656 208,656
Quorum Real Estate
Services Corporation:
1996 85,876 -- 63,446 30,541 -- 179,863
1995 47,548 -- 46,628 22,816 -- 116,992
1994 41,652 -- 46,501 24,824 -- 112,977
(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 Schedules 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,
1996 and 1995
Statements of Income for the
Years Ended December 31, 1996,
1995 and 1994
Statements of Partners' Equity for
the Years Ended December 31,
1996, 1995 and 1994
Statements of Cash Flows for the
Years Ended December 31, 1996,
1995 and 1994
Notes to Financial Statements
Independent Auditors' Report
2. Financial Statement Schedules
Valuation and Qualifying Accounts
for the Years Ended December 31,
1996, 1995 and 1994 (Schedule II)
Real Estate and Accumulated
Depreciation as of December 31,
1996 (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 Schedule
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 II USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
Valuation and Qualifying Accounts
Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
Balance Additions Balance
at Beginning charged to costs at end
Description of period and expenses Deductions of period
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts
1996 $ 12,000 78,387 387 90,000
1995 $ -- 12,118 118 12,000
1994 $ -- 131 131 --
</TABLE>
<PAGE>
<TABLE>
SCHEDULE III USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
Real Estate and Accumulated Depreciation
December 31, 1996
<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 2,394,250 --
1985 Nov. 24, 1986 Manhattan Towers
Office Bldg.
Complex
Manhattan Beach, CA 6,500,000 60,062,552 432,558 --
1964- Dec. 5, 1986 Ramada World
1973 Headquarters Office
Bldg. Complex
Phoenix, AZ 4,000,000 11,443,225 1,213,637 --
$14,200,000 87,223,539 4,040,445 --
<CAPTION>
Gross Amount at Which
Carried at Close of
Period
Buildings Total Investment Accumulated Related
Year of Date and Properties Depreciation Mortgages
Construction Acquired Description Land Improvements (2)(4)(6) (1)(3) Payable (5)
<S> <C> <C> <C> <C> <C> <C> <C>
1985 Mar. 31, 1986 Curlew Crossing
Shopping Center
Clearwater, FL 2,339,065 7,807,193 10,146,258 2,556,035 11,000,000
1985 Nov. 24, 1986 Manhattan Towers
Office Bldg.
Complex
Manhattan Beach, CA 2,580,438 33,577,902 36,158,340 17,316,013 15,000,000
1964- Dec. 5, 1986 Ramada World
1973 Headquarters Office
Bldg. Complex
Phoenix, AZ 4,050,893 12,656,862 16,707,755 3,878,056 --
8,970,396 54,041,957 63,012,353 23,750,104 26,000,000
<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. Tenant improvements are amortized over the life
of the related lease using the straight-line method.
<S> <C> <C>
(2) Reconciliation of real estate:
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
Additions during period-improvements 1,718,757
Deductions during period-retirements (73,146)
Balance at December 31, 1996 $ 63,012,353
(3) Reconciliation of accumulated depreciation:
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
Depreciation during period 1,509,109
Balance at December 31, 1996 $ 23,750,104
(4) The aggregate cost of real estate owned by the Partnership at December 31, 1996 for Federal
income tax purposes is $95,052,180.
(5) The investment property is pledged as security for the mortgage payable for which there is no
recourse to the Partnership.
(6) During 1994, it was determined that a permanent impairment of value was sustained at Manhattan Towers
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 February 3, 1997, we reported on the balance sheets
of USAA Income Properties III Limited Partnership as of December
31, 1996 and 1995, and the related statements of income,
partners' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996. In connection with
our audits of the aforementioned financial statements, we also
have audited the related financial statement schedules as listed
in Item 14(a)2. These financial statement schedules are the
responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial
statement schedules based on our audits.
In our opinion, such financial statement schedules, 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 MARKWICK LLP
KPMG PEAT MARWICK LLP
San Antonio, Texas
February 3, 1997
<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 25, 1997
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 25, 1997
Edward B. Kelley
Director, Chairman of the Board,
President and Chief Operating Officer
of the General Partner
/s/T. Patrick Duncan Date: March 25, 1997
T. Patrick Duncan
Director, Vice Chairman,
Senior Vice President - Real Estate
Operations of the General Partner
/s/Randal R. Seewald Date: March 25, 1997
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 Schedule
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-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 9,419,147
<SECURITIES> 0
<RECEIVABLES> 555,959
<ALLOWANCES> 90,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 63,012,353
<DEPRECIATION> 23,750,104
<TOTAL-ASSETS> 53,766,170
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 27,007,245
<TOTAL-LIABILITY-AND-EQUITY> 53,766,170
<SALES> 0
<TOTAL-REVENUES> 7,930,447
<CGS> 0
<TOTAL-COSTS> 2,543,615
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,336,385
<INCOME-PRETAX> 3,280,065
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,280,065
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,280,065
<EPS-PRIMARY> 29.11
<EPS-DILUTED> 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
<PAGE>
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.
"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.
<PAGE>
"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).
"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.
<PAGE>
"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.
"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);
<PAGE>
(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
(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
<PAGE>
Person Receiving Form of Method and Amount
Compensation Compensation(1) of Compensation
balances to the extent
such balances exceed the
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 administrative items. The
<PAGE>
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, subject to the payment of real estate
<PAGE>
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
<PAGE>
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 (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.
<PAGE>
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
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.
