ANNUAL REPORT
FOR THE PERIOD ENDED
DECEMBER 31, 1995
FELLOW PARTNERS:
Before we discuss the effects of property valuation adjustments and the June
1995 sale of Sullyfield Circle on the Fund's performance relative to 1994, we
want to summarize the operating activities at the properties currently in the
portfolio.
Rental income was flat compared with 1994, as the effect of declines in
average leased status at Oakbrook Corners, Bonnie Lane, and Fairchild was
offset by the higher average leased status at Regal Row and higher rental
rates at Glenn Avenue. Total revenues were up $98,000, however, because of the
increase in interest income. Overall expenses for the portfolio properties
declined by $600,000, primarily because of improved bad debt experience and
lower charge-offs for tenant improvements. As a result, operating income from
continuing properties increased approximately $700,000.
The sale of Sullyfield Circle in June 1995 resulted in less rental
income than in 1994, lower operating expenses, and a negative valuation
adjustment compared to a significant recovery in 1994. The net effect of these
changes on 1995 net income was a decrease of $524,000. Other valuation
adjustments will be covered in the individual property discussions.
Tierrasanta and Atlantic were the two big contributors to the decline in
expenses and rise in net income relative to 1994. At Tierrasanta, there was a
$550,000 value impairment recorded in 1994, but none was made this year.
Atlantic benefited from collection of delinquent rent from a large tenant and
from lower tenant improvement write-offs in 1995. In addition, Coronado did
not have as large a charge for leasehold improvements as it did in the prior
year.
A major tenant at Bonnie Lane who was behind in its rent has made
substantial progress toward becoming current and contributed to the decline in
the overall portfolio's property operating costs. Even though Bonnie Lane's
average leased status, and therefore its rental income, was off, other
expenses associated with the property declined more, so Bonnie Lane had a
positive effect on net income.
Business Plaza's contribution to net income in 1995, although positive,
was $237,000 less than in 1994 when an upward property valuation adjustment
was made.
The Fund's cash position declined in 1995, primarily because of the
larger cash distributions paid to you in 1995.
Cash Distributions
For the fourth quarter of 1995, you received a per-unit distribution of
$21.05, of which $11.43 was from operations and $9.62 was from previously
withheld proceeds from sale of one of the Coronado buildings. Your total
distribution for the year was $78.47 per unit and included $31.17 from the
Sullyfield sale as well as the remaining proceeds from Coronado.
For the first quarter of 1996, we plan to pay a distribution from
operations of $6.50 per unit compared to $8.75 for the prior-year period.
There are several reasons for the lower cash payout. First, we will not have
Sullyfield or Regal Row (which was sold on February 14), and these properties
contributed $404,000 to 1995 net income. Second, because of the uncertainty
surrounding renewal of the AMCC lease, a portion of operating cash flows is
being retained. As the year progresses, we will reevaluate the quarterly
distribution rate based on the AMCC situation as well as the ongoing property
operations and report on any changes which may be appropriate.
Unit Valuation
As we do at every year end, we employed a third-party appraiser to review and
assess the analysis and assumptions used in determining an estimated current
unit value. These interim valuations are not necessarily representative of the
value of your units when the Fund ultimately liquidates its holdings, nor
could you sell your units today at a price equal to the current estimated
value.
The estimated unit value as of December 31, 1995, was $519.00 per unit,
up $25.00 from $494.00 in 1994. The latter amount has been adjusted for the
distributions made during 1995. After adjusting the 1995 amount for the
February 1996 distribution, the estimated unit value will be $504.00.
Outlook
We completed our goal of selling one property during 1995, and another settled
February 14th of this year. In addition to existing vacancies, there are a
number of leasing challenges this year, particularly at Atlantic and Glenn
Avenue where leases covering 73% of each property's space expire in 1996.
Suffice it to say that we will be focused on renewals as well as attracting
new tenants in 1996.
As the Advisor's Report indicates, the overall real estate market
continues to show signs of improvement, and we hope that your portfolio will
follow suit.
Sincerely,
James S. Riepe
Chairman
February 15, 1996
INVESTMENT ADVISOR'S REPORT
As discussed in recent reports, the real estate market is slowly improving,
with some segments such as industrial recovering more rapidly than others such
as office properties. The absence of meaningful new construction combined with
continued net positive absorption in all segments has begun to attract not
only opportunistic capital but also some institutional capital into the real
estate sector, which is a favorable development.
The results of Russell-NCREIF Index, which measures income returns and
changes in values for real estate investments, reflect the general state of
the market. From 1991 through 1993 property values experienced average annual
declines of approximately 10%. This rate slowed as values decreased by 4% and
1% for the 12 months ended September 30, 1994 and 1995, respectively. Income
returns of 9% during each of those two years more than offset the value
declines, resulting in positive total returns for the index for the first time
since September 1990.
The index also identifies returns by product type and by geographical
region. As anticipated, because of the weak operating environment, office
buildings have not performed as well as other product types, with value
declines of approximately 3% for the 12 months ended September 30, 1995. This
is an improvement, however, over the average 14% per year drop over the last
four years. Industrial properties, on the other hand, appreciated in value by
3% for the 12 months ended September 30, 1995. In that same period, other real
estate product types, such as retail and multi-family, performed better than
they had in prior years.
Property values in geographic regions depend significantly on the local
economy. The South, where values in general depreciated less than 1% for the
12 months ended September 30, 1995, continues to outperform other regions, but
even its recovery has been prolonged due to the depressed energy business.
Value declines in the East and Midwest have moderated, and the Western region
has experienced a dramatic improvement recently. In 1994, property values in
the West were down significantly but, for the 12 months ended September 30,
1995, declined only around 1%. In analyzing this information, it is clear that
the multi-family and industrial segments are heavily influencing the results,
since the office segment in the West declined approximately 5%. We continue to
see increased leasing activity and improved economics for owners.
We are encouraged by the positive annual returns of the Russell-NCREIF
Index for the past two years. We are even more heartened, however, by the
performance of Realty Income Fund II's portfolio, which experienced an
increase in value as opposed to a decrease in the the Russell-NCREIF Index.
Property Highlights
We signed leases covering 24% of the portfolio's square footage and increased
the number of 100% leased properties from three to four by year-end.
Nevertheless, overall occupancy did not increase, as the leased status at
three properties dropped by nine or more percentage points. The biggest
improvements occurred at Tierrasanta, where occupancy was up 23 percentage
points, and at South Point and Regal Row, where occupancy climbed eight
percentage points at each. In general, occupancy and rental rates in the
markets where your properties operate are stable to rising.
Real Estate Investments
__________________________________________
Gross % Leased
Leasable ___________________
Area Prior Current 1996 Lease
Property (Sq. Ft.) Year-End Year-End Expirations
________ ________ ________ ________ __________
Atlantic 187,800 96% 92% 73%
Coronado 95,700 100 100 0
Oakbrook Corners 123,900 70 61 0
Baseline 100,200 89 88 33
Business Plaza 66,300 93 82 15
AMCC 100,000 100 100 0
Bonnie Lane 119,600 92 89 8
Glenn Avenue 82,000 100 100 73
Regal Row 217,300 86 94 33
South Point 48,400 61 69 19
Tierrasanta 104,200 77 100 38
Fairchild Corporate
Center 104,800 85 73 31
_________ _____ _____ _____
Fund Total 1,350,200 88% 88% 30%
Atlantic: One new and two renewal tenants signed long-term leases
totaling 9% of the total space. Unfortunately, this activity did not offset
the loss of one tenant toward the end of the year due to credit problems.
Thus, although the property averaged 96% leased over the 12 months, it ended
the year lower. During 1996, our concentration will be focused on renewing the
tenant who represents 46% of the property and 6% of the portfolio's total
space. We have had renewal discussions with this tenant, but we will only
agree to terms which are favorable for the Fund given current market
conditions. Thus, we cannot yet make any statements regarding the probable
outcome of the negotiations. Overall occupancy in the Atlanta industrial
submarket where Atlantic is located has continued to improve to around 96%.
Even though 16 new speculative distribution buildings have been completed and
another 31 buildings are under construction, market rental rates have remained
somewhat level.
Coronado: The parent company of the single tenant at this Anaheim,
California, property emerged from bankruptcy during the year, and rental
payments are current.
Oakbrook Corners: As expected, we lost one tenant when its lease expired
during the year. Only one new, but smaller, tenant was acquired for one of the
vacancies. Thus, occupancy declined during 1995. This property is somewhat
unique in that each vacant space is an entire building, so it is especially
challenging to find suitable tenants. We changed leasing agents during the
fourth quarter in an effort to mount a more aggressive marketing campaign, and
we have one very strong prospect for one building's 27,000 square feet. We
also have someone interested in the other building which is vacant. We will
report to you on our success or failure regarding these potential transactions
next quarter.
Baseline: Activity was very brisk at this Tempe, Arizona, property
during the year. In total, 19 new, renewal, and/or expansion leases were
signed. These gains were offset by the loss of several tenants with short-term
leases whom we chose not to renew and one tenant who was experiencing
financial difficulties. We wanted to take advantage of improving market
conditions and have been attempting to sign longer term leases at higher rates
and stagger the expiration schedule.
Business Plaza: As anticipated we lost a tenant whose lease for 11% of
this Ft. Lauderdale property expired. Additionally, two other tenants vacated
when their leases expired, two tenants who were poor credit risks left, and
one tenant renewed for less space. Thus, even though we signed five new
tenants and renewed four others, occupancy declined significantly.
AMCC: The single tenant at this San Diego property continues to evaluate
its future space needs. During the year, they discussed options for revising
the lease and extending the expiration date beyond 1997. However, it now
appears unlikely that we will be able to reach a mutually satisfactory
agreement. Thus, we are analyzing whether your interests will best be served
by selling or re-leasing the property.
Bonnie Lane: The lease with a tenant representing 23% of this suburban
Chicago property was renewed. In return for a seven-year extension, the Fund
agreed to install sprinklers in the building, and that process is underway.
Additionally, two new leases for 19% of the property were signed. However, due
to the loss of one financially troubled tenant upon its lease expiration,
occupancy declined slightly.
Glenn Avenue: This other suburban Chicago industrial property remained
100% leased through the year. Leases representing almost three quarters of the
space will expire in 1996, so our focus will be on renewals as the year
progresses.
Regal Row: Leases covering 47% of this Dallas industrial project were
signed during 1995, bringing the leased status up by eight percentage points.
Rental rates on these leases were up modestly over the prior year's levels.
South Point: One short-term expansion, two new, and four renewal leases
for 19% of this Tempe, Arizona, shopping center more than offset the loss of
one tenant who did not renew. We continue to be optimistic about our
negotiations with a prospective tenant who would represent over 30% of the
center. To improve our negotiating position, we have received some zoning
variances but are still working with the city and potential tenant to reach a
mutually satisfactory agreement. If we are successful, the lease could be
signed during the next two to three months. The tenant, however, would not
begin paying rent until around the last quarter of 1996. Moreover, significant
tenant improvement costs would be incurred.
Tierrasanta: Although we lost one financially troubled tenant during the
year, we were able to re-lease its space, bringing the leased status to 100%
by year-end. In total, three new leases for 31,000 square feet and one
renewal/expansion were signed at this San Diego property. One lease with a
tenant who occupies 38% of the space expires in 1996, and we are actively
working with this tenant on renewal terms. It is too early to predict an
outcome of the negotiations.
Fairchild Corporate Center: The leased status declined at this Orange
County, California, office property primarily due to the loss on the last day
of the year of a tenant representing 9% of the space. Additionally, over the
course of the year, two tenants who leased a total of 6% of the property left
for financial reasons and three other tenants vacated upon their lease
expirations. On the positive side, we completed the first phase of renovating
the two buildings, renamed the property, and overall activity has picked up.
Three new tenants were signed for 16% of the site, and six existing tenants
renewed and/or expanded for another 8% of the property.
Disposition Highlights
In June 1995, the Fund completed its second disposition when Sullyfield Circle
was sold for a contract price of $2,775,000 before closing costs of $153,000.
Additionally, we have sold Regal Row, the industrial property in Dallas,
Texas, which we began marketing during the second quarter. Gross proceeds were
approximately $3.5 million; we will give you more information in next
quarter's report.
Outlook
As expected, 1995 was a turning point for the Fund. All of the markets in
which our properties compete improved, Sullyfield Circle was sold, and
operating cash flow at the existing properties rose. Looking at 1996, we have
several prospects for some of the larger vacant spaces. As a result, we are
optimistic that both market rental rates and occupancy will continue to creep
upward and be reflected ultimately in stronger operating results for the Fund
in 1996.
LaSalle Advisors
February 15, 1996
REAL ESTATE HOLDINGS
December 31, 1995
(In thousands)
Accumu- Valu-
Date lated ation Current
Property Type and Ac- Total Depre- Allow- Carrying
Name Location quired Cost* ciation ances Amount
________ ________ ______ ______ _______ _______ ______
Atlantic Industrial 10/86 $5,405 $(1,837) $0 $3,568
Gwinnett Co.,
Georgia
Coronado Industrial 11/86 4,424 (909) 0 3,515
Anaheim,
California
Oakbrook
Corners Business Park 11/86 9,545 (3,349) 0 6,196
Gwinnett Co.,
Georgia
Baseline Business Park 12/86 7,461 (2,630) 0 4,831
Tempe, Arizona
Business
Plaza Office 12/86 7,155 (3,357) 0 3,798
Ft. Lauderdale,
Florida
AMCC R&D/Office 9/87 11,284 (2,622) 0 8,662
San Diego,
California
Bonnie
Lane Industrial 11/87 4,136 (846) 0 3,290
Elk Grove,
Illinois
Glenn
Avenue Industrial 11/87 2,903 (601) 0 2,302
Wheeling,
Illinois
South
Point Retail 4/88 2,208 (842) 0 1,366
Tempe, Arizona
Tierra-
santa Business Park 4/88 3,451 (857) 0 2,594
San Diego,
California
Fairchild
Corporate Office 5/88 1,742 (199) 0 1,543
Center Irvine,
California
_______ _______ _______ _______
$59,714 $(18,049) $0 $41,665
_______ _______ _______
_______ _______ _______
Held for Sale
Regal Row Industrial 12/87 $6,913 $(1,421) $(1,992) 3,500
Dallas, Texas _______ _______ _______ _______
_______ _______ _______
$45,165
_______
_______
*Includes original purchase price, subsequent improvements, and, in the case
of Baseline, Business Plaza, South Point, Tierrasanta, and Fairchild Corporate
Center, reductions for permanent impairments.
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, December 31,
1995 1994
____________ ____________
Assets
Real Estate Property Investments
Land. . . . . . . . . . . . . . . . . . $ 14,544 $ 14,544
Buildings and Improvements. . . . . . . 45,170 45,130
________ ________
59,714 59,674
Less: Accumulated Depreciation
and Amortization . . . . . . . . . . . . (18,049) (17,260)
________ ________
41,665 42,414
Properties Held for Sale. . . . . . . . 3,500 5,953
________ ________
45,165 48,367
Cash and Cash Equivalents. . . . . . . . . 4,782 4,819
Accounts Receivable
(less allowances of $165 and $327) . . . . 172 249
Other Assets . . . . . . . . . . . . . . . 410 335
________ ________
$ 50,529 $ 53,770
________ ________
________ ________
Liabilities and Partners' Capital
Security Deposits and Prepaid Rents. . . . $ 493 $ 522
Accrued Real Estate Taxes. . . . . . . . . 502 432
Accounts Payable and Other
Accrued Expenses . . . . . . . . . . . . . 433 279
________ ________
Total Liabilities. . . . . . . . . . . . . 1,428 1,233
Partners' Capital. . . . . . . . . . . . . 49,101 52,537
________ ________
$ 50,529 $ 53,770
________ ________
________ ________
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per-unit amounts)
Years Ended December 31,
1995 1994 1993
_______ _______ _______
Revenues
Rental Income. . . . . . . . . . . $ 6,717 $ 6,834 $ 6,647
Interest Income. . . . . . . . . . 247 149 81
_______ _______ _______
6,964 6,983 6,728
_______ _______ _______
Expenses
Property Operating Expenses. . . . 1,103 1,399 1,570
Real Estate Taxes. . . . . . . . . 991 877 994
Depreciation and
Amortization . . . . . . . . . . . 2,362 2,979 2,327
Decline (Recovery) of
Property Values. . . . . . . . . . (682) (860) 9,515
Management Fee to
General Partner. . . . . . . . . . 346 269 168
Partnership Management
Expenses . . . . . . . . . . . . . 452 457 484
_______ _______ _______
4,572 5,121 15,058
_______ _______ _______
Net Income (Loss) from
Operations before
Real Estate Sold. . . . . . . . 2,392 1,862 (8,330)
Gain on Real Estate Sold . . . . . - - 188
_______ _______ _______
Net Income (Loss). . . . . . . . . $ 2,392 $ 1,862 $ (8,142)
_______ _______ _______
_______ _______ _______
Activity per Limited Partnership
Unit
Net Income (Loss). . . . . . . . . $ 28.16 $ 21.92 $ (95.84)
_______ _______ _______
_______ _______ _______
Cash Distributions Declared
from Operations. . . . . . . . . $ 37.68 $ 35.50 $ 20.00
from Sale Proceeds . . . . . . . 40.79 - 12.00
_______ _______ _______
Total Distributions
Declared . . . . . . . . . . . . . $ 78.47 $ 35.50 $ 32.00
_______ _______ _______
_______ _______ _______
Units Outstanding. . . . . . . . . 84,099 84,099 84,101
_______ _______ _______
_______ _______ _______
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(In thousands)
General Limited
Partner Partners Total
________ ________ ________
Balance, December 31, 1992 . . . . $ (163) $ 64,153 $ 63,990
Net Loss . . . . . . . . . . . . . (81) (8,061) (8,142)
Cash Distributions . . . . . . . . (17) (2,691) (2,708)
_______ _______ _______
Balance, December 31, 1993 . . . . (261) 53,401 53,140
Net Income . . . . . . . . . . . . 19 1,843 1,862
Redemption of Units. . . . . . . . - (1) (1)
Cash Distributions . . . . . . . . (25) (2,439) (2,464)
_______ _______ _______
Balance, December 31, 1994 . . . . (267) 52,804 52,537
Net Income . . . . . . . . . . . . 24 2,368 2,392
Cash Distributions . . . . . . . . (32) (5,796) (5,828)
_______ _______ _______
Balance, December 31, 1995 . . . . $ (275) $ 49,376 $ 49,101
_______ _______ _______
_______ _______ _______
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
1995 1994 1993
_______ _______ _______
Cash Flows from Operating Activities
Net Income (Loss). . . . . . . . . $ 2,392 $ 1,862 $ (8,142)
Adjustments to Reconcile Net Income
(Loss) to Net Cash Provided by
Operating Activities
Depreciation and
Amortization . . . . . . . . . . 2,362 2,979 2,327
Decline (Recovery) of
Property Values. . . . . . . . . (682) (860) 9,515
Gain on Real Estate Sold. . . . - - (188)
Other Changes in Assets
and Liabilities. . . . . . . . . 59 104 165
_______ _______ _______
Net Cash Provided by
Operating Activities . . . . . . . 4,131 3,877 3,677
_______ _______ _______
Cash Flows from Investing Activities
Proceeds from
Property Disposition . . . . . . . 2,622 - 1,818
Investments in Real Estate . . . . (962) (805) (1,469)
_______ _______ _______
Net Cash Provided by (Used in)
Investing Activities . . . . . . . 1,660 (805) 349
_______ _______ _______
Cash Flows from Financing Activities
Cash Distributions . . . . . . . . (5,828) (2,464) (2,708)
Redemption of Units. . . . . . . . - (1) -
_______ _______ _______
Net Cash Used in
Financing Activities . . . . . . . (5,828) (2,465) (2,708)
_______ _______ _______
Cash and Cash Equivalents
Net Increase (Decrease)
during Year. . . . . . . . . . . . (37) 607 1,318
At Beginning of Year . . . . . . . 4,819 4,212 2,894
_______ _______ _______
At End of Year . . . . . . . . . . $ 4,782 $ 4,819 $ 4,212
_______ _______ _______
_______ _______ _______
The accompanying notes are an integral part of the consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
T. Rowe Price Realty Income Fund II, America's Sales-Commission-Free Real
Estate Limited Partnership (the "Partnership"), was formed on January 7, 1986,
under the Delaware Revised Uniform Limited Partnership Act for the purpose of
acquiring, operating, and disposing of existing income-producing commercial
and industrial real estate properties. T. Rowe Price Realty Income Fund II
Management, Inc., is the sole General Partner. The initial offering resulted
in the sale of 84,144 limited partnership units at $1,000 per unit.
In accordance with provisions of the partnership agreement, income from
operations is allocated and related cash distributions are generally paid to
the General and Limited Partners at the rates of 1% and 99%, respectively.
Sale or refinancing proceeds are generally allocated first to the Limited
Partners in an amount equal to their capital contributions, next to the
Limited Partners to provide specified returns on their adjusted capital
contributions, next 3% to the General Partner, with any remaining proceeds
allocated 85% to the Limited Partners and 15% to the General Partner. Gain on
property sold is generally allocated first between the General Partner and
Limited Partners in an amount equal to the depreciation previously allocated
from the property and then in the same ratio as the distribution of sale
proceeds. Cash distributions, if any, are made quarterly based upon cash
available for distribution, as defined in the partnership agreement. Cash
available for distribution will fluctuate as changes in cash flows and
adequacy of cash balances warrant.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Partnership's financial statements are prepared in accordance with
generally accepted accounting principles which requires the use of estimates
and assumptions by the General Partner. Certain 1993 and 1994 amounts have
been reclassified to conform with the 1995 presentation.
The accompanying consolidated financial statements include the accounts
of the Partnership and its pro-rata share of the accounts of T. Rowe
Price-Pacific (AMCC), a California limited partnership, South Point Partners,
Tierrasanta 234, and Fairchild 234, which are California general partnerships,
in which the Partnership has 90%, 50%, 30%, and 24% interests, respectively.
The other partners in these ventures, except for T. Rowe Price-Pacific, are
affiliates of the Partnership. All intercompany accounts and transactions have
been eliminated in consolidation.
Depreciation is calculated primarily on the straight-line method over
the estimated useful lives of buildings and improvements, which range from
five to 40 years. Lease commissions and tenant improvements are capitalized
and amortized over the life of the lease using the straight-line method.
Cash equivalents consist of money market mutual funds, the cost of which
approximates fair value.
The Partnership uses the allowance method of accounting for doubtful
accounts. Provisions for (recoveries of) uncollectible tenant receivables in
the amounts of ($101,000), $162,000, and $144,000 were recorded in 1995, 1994,
and 1993, respectively. Bad debt expense is included in Property Operating
Expenses.
The Partnership will review its real estate property investments for
impairment whenever events or changes in circumstances indicate that the
property carrying amounts may not be recoverable. Such a review results in the
Partnership recording a provision for impairment of the carrying value of its
real estate property investments whenever the estimated future cash flows from
a property's operations and projected sale are less than the property's net
carrying value. The General Partner believes that the estimates and
assumptions used in evaluating the carrying value of the Partnership's
properties are appropriate; however, changes in market conditions and
circumstances could occur in the near term which would cause these estimates
to change.
Rental income is recognized by the Partnership on a straight-line basis
over the term of each lease. Rental income accrued, but not yet billed, is
included in Other Assets and aggregates $300,000 and $287,000 at December 31,
1995 and 1994, respectively.
Under provisions of the Internal Revenue Code and applicable state
taxation codes, partnerships are generally not subject to income taxes;
therefore, no provision has been made for such taxes in the accompanying
consolidated financial statements.
NOTE 3 - TRANSACTIONS WITH RELATED PARTIES AND OTHER ENTITIES
As compensation for services rendered in managing the affairs of the
Partnership, the General Partner earns a partnership management fee equal to
9% of net operating proceeds. The General Partner earned partnership
management fees of $346,000, $269,000, and $168,000 in 1995, 1994, and 1993,
respectively. In addition, the General Partner's share of cash available for
distribution from operations, as discussed in Note 1, totaled $31,000,
$28,000, and $17,000 in 1995, 1994, and 1993, respectively.
In accordance with the partnership agreement, certain operating expenses
are reimbursable to the General Partner. The General Partner's reimbursement
of such expenses totaled $107,000, $108,000, and $117,000 for communications
and administrative services performed on behalf of the Partnership during
1995, 1994, and 1993, respectively.
An affiliate of the General Partner earned a normal and customary fee of
$20,000, $16,000, and $12,000 from the money market mutual funds in which the
Partnership made its interim cash investments during 1995, 1994, and 1993,
respectively.
LaSalle Advisors Limited Partnership ("LaSalle") is the Partnership's
advisor and is compensated for its advisory services directly by the General
Partner. LaSalle is reimbursed by the Partnership for certain operating
expenses pursuant to its contract with the Partnership to provide real estate
advisory, accounting, and other related services to the Partnership. LaSalle's
reimbursement for such expenses during each of the last three years totaled
$150,000.
An affiliate of LaSalle earned $121,000, $125,000, and $122,000 in 1995,
1994, and 1993, respectively, as property manager for several of the
Partnership's properties.
NOTE 4 - FAIRCHILD CORPORATE CENTER
Fairchild Corporate Center, formerly known as Brinderson Plaza, was acquired
outright on February 1, 1994 by a corporation, the stockholders of which are
the Partnership and certain other affiliated partnerships. The previously
established valuation allowance for this property was reduced $4,000 and the
remaining allowance of $698,000 (including $90,000 arising in 1993) was
reclassified as a reduction in the carrying value of the property. Prior to
February 1, 1994, the Partnership's underlying investment in Fairchild, in the
form of a mortgage loan and minority equity interest, was accounted for as an
in-substance foreclosed property in the Partnership's financial statements.
NOTE 5 - PROPERTY VALUATIONS AND DISPOSITIONS
During the first quarter of 1993, the Partnership sold the smaller of the two
buildings at the Coronado Industrial property and received net proceeds of
$1,818,000. The net book value of this property at the time of disposition was
$1,630,000.
On June 29, 1995, the Partnership sold Sullyfield Circle and received
net proceeds of $2,622,000. Because the carrying value of this property had
been written down to approximate its market value, no gain or loss was
recognized on this property disposition.
The General Partner has an agreement to sell Regal Row, the carrying
amount of which is classified as held for sale in the accompanying balance
sheets. If there is a successful conclusion to the due diligence process
undertaken by the prospective buyer, the transaction could close in early
1996. The carrying value of this property at December 31, 1995 is $3,500,000,
which approximates the estimated net proceeds from the pending disposition.
Because properties held for sale also continue operating until the time
of sale, the Partnership has historically continued to recognize depreciation
expense. Reductions in valuation allowances in 1995 and 1994 have arisen, in
large part, because of the depreciation expense recognized on the properties
held for sale. Results of operations for the Coronado building, Sullyfield
Circle and Regal Row are included in the accompanying financial statements for
the past three years as summarized below:
1995 1994 1993
________ ________ __________
Recovery (Decline) of
Property Values. . . . . . $234,000 $823,000 $(4,068,000)
Other Components of
Operating Income . . . . . 170,000 158,000 238,000
________ ________ __________
Results of (Loss from)
Operations . . . . . . . . $404,000 $981,000 $(3,830,000)
________ ________ __________
________ ________ __________
Based upon a review of current market conditions, estimated holding
period, and future performance expectations of each property, the General
Partner has determined that the net carrying value of other operating
properties may not be fully recoverable from future operations and
disposition. Charges recognized for impairments of property carrying values
were $550,000 for Tierrasanta in 1994 and $793,000 for Baseline in 1993.
Because the Business Plaza and South Point properties were not being
actively marketed for sale, the carrying values of these properties were
assessed and, accordingly, valuation allowances totalling $3,533,000 at
December 31, 1995 were reclassified as permanent impairments of the
properties' carrying values. Valuation allowances (recoveries) for these
properties were ($448,000) in 1995, ($583,000) in 1994 and $4,564,000 in 1993.
On January 1, 1996, the Partnership adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which changes
the Partnership's current method of accounting for its real estate property
investments when circumstances indicate that the carrying amount of a property
may not be recoverable. Measurement of an impairment loss on an operating
property will now be based on the estimated fair value of the property rather
than the sum of expected future cash flows. Properties held for sale will
continue to be reflected at the lower of historical cost or estimated fair
value less anticipated selling costs. In addition, properties held for sale
will no longer be depreciated. No adjustment of the carrying values of the
Partnership's real estate property investments was required at January 1, 1996
as a result of adopting SFAS No. 121.
NOTE 6 - LEASES
Future minimum rentals to be received by the Partnership under noncancelable
operating leases in effect as of December 31, 1995, are:
Fiscal Year (in thousands)
__________
1996 $ 4,325
1997 3,136
1998 1,629
1999 957
2000 539
Thereafter 1,163
_______
Total $ 11,749
_______
_______
NOTE 7 - RECONCILIATION OF FINANCIAL STATEMENT TO TAXABLE INCOME
As described in Note 2, the Partnership has not provided for an income tax
liability; however, certain timing differences exist between amounts reported
for financial reporting and federal income tax purposes. These differences are
summarized below for years ended December 31:
1995 1994 1993
________ ________ ________
(in thousands)
Book net income (loss) . . . . . $ 2,392 $ 1,862 $ (8,142)
Allowances for:
Uncollectible accounts
receivable . . . . . . . . . (161) 182 36
Property valuations. . . . . . (682) (860) 9,515
Normalized and
prepaid rents . . . . . . . . (81) (182) 15
Interest income. . . . . . . . . 301 302 247
Depreciation . . . . . . . . . . 18 609 (58)
Accrued expenses . . . . . . . . (11) (8) 14
Loss on property sale. . . . . . (2,111) - -
Difference in recognition
of net income of
properties held
through investment
partnerships . . . . . . . . . (50) - (27)
________ ________ ________
Taxable income (loss). . . . . . $ (385) $ 1,905 $ 1,600
________ ________ ________
________ ________ ________
NOTE 8 - SUBSEQUENT EVENT
The Partnership declared a quarterly cash distribution of $21.05 per unit to
Limited Partners of the Partnership as of the close of business on December
31, 1995. The distribution totals $1,780,000 and represents $11.43 per unit of
cash available for distribution from operations for the period October 1, 1995
through December 31, 1995 and $9.62 per unit from previously retained proceeds
from the sale of the smaller of the two buildings at the Coronado Industrial
property. The Limited Partners will receive $1,770,000, and the General
Partner will receive $10,000.
INDEPENDENT AUDITORS' REPORT
To the Partners
T. Rowe Price Realty Income Fund II,
America's Sales-Commission-Free Real Estate Limited Partnership:
We have audited the accompanying consolidated balance sheets of T. Rowe Price
Realty Income Fund II, America's Sales-Commission-Free Real Estate Limited
Partnership and its consolidated ventures as of December 31, 1995 and 1994,
and the related consolidated statements of operations, partners' capital and
cash flows for each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial
statements are free from material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of T. Rowe
Price Realty Income Fund II, America's Sales-Commission-Free Real Estate
Limited Partnership and its consolidated ventures as of December 31, 1995 and
1994, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1995, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
January 19, 1996
