T. Rowe Price Real Estate Group, Inc., 100 East Pratt Street,
Baltimore, MD 21202
James S. Riepe
President
December 20, 1996
Fellow Partner:
In previous correspondence, we mentioned that an
unaffiliated third party intended to offer a higher price than
earlier offers for your units of T. Rowe Price Realty Income Fund
II. This has now taken place with the latest tender offer from
Lido Associates. Under SEC rules, we are required to respond to
limited partners each time a tender offer is made. Again, we
apologize for repeating some of the information contained in
recent letters but would like you to be aware of certain facts:
Under applicable law, we were required to provide the
names and addresses of the Fund s limited partners and the number
of units held by each;
Lido s offer is higher than the earlier offers but
still well below our estimate of the fair market value of your
units;
After adjusting for distributions of sales proceeds
from Regal Row and part of the Coronado property, as well as from
Fairchild, the estimated per unit value of your fund based on our
December 31, 1995 valuation is $448. We believe Lido
inappropriately reduced the Fund s estimated unit value by $16
following a writedown of one of the properties for financial
statement purposes only. In fact, a lower property valuation had
already been factored in;
Lido, on the other hand, is offering only $324 per
unit, significantly less than our estimated valuation. For those
who elect to sell, Lido s offer will be reduced by the amount of
any distributions in the first and possibly second quarter of
1997, depending on when units are sold;
We cannot assure that you will ultimately receive the
exact amount of the estimated unit value, but we believe our
property valuation process has been sound, particularly when
prior estimates are compared with the actual prices of properties
sold. The five T. Rowe Price Real Estate Funds sold seven
complete properties during the past three years, none below the
estimated range used in the prior year s unit valuation, and four
above the range.
It is not surprising that all these discounted offers
have been made after we announced our intention to liquidate the
Fund s investments by the end of 1998, as market conditions
permit. Lido states clearly that it hopes to purchase units at a
discount and profit as we liquidate properties at market value
over the next couple of years.
While our disposition plan remains intact, we will
continue to monitor market conditions to take any actions that we
believe are in the best interests of limited partners, including
an accelerated liquidation of the Fund s portfolio if it is
appropriate. It is worth noting that four of the Fund s
properties are currently being marketed for sale.
One of Lido s main arguments for accepting its offer is
liquidity. While those with pressing needs for liquidity may find
some appeal in cashing out now, the price you will pay by
selling for a discounted amount could be significant since we are
in the disposition phase, and cash distributions will generally
be paid as properties are sold. Regular distributions of income
earned on each property held will also be made.
Whether or not you accept this offer is your decision,
of course. From our perspective, we want you to be as
well-informed as possible about the current and prospective value
of your investment. Over the past few years, you have weathered
the downtown in the commercial real estate market, but now
conditions have improved. Based on our outlook for this market,
we believe that limited partners will realize a higher value for
their units by holding them until the fund is fully liquidated.
For further details concerning our response to Lido Associates
offer, we refer you to the enclosed statement filed with the
Securities and Exchange Commission.
Sincerely,
James S. Riepe
The Annual Report to Limited Partners for the Year
ended December 31, 1995 should be inserted here as Exhibit 9.c.1
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
AGREEMENT FOR DELIVERY AND USE OF LIST OF LIMITED PARTNERS
This Agreement for Delivery and Use of List of Limited
Partners ("Agreement") is entered into as of October, 1996 by and
between T. Rowe Price Realty Income Fund II Management, Inc., a
Maryland corporation (the "General Partner" ) Ray Wirta, an
individual (the "Limited Partner" ) and Koll Real Estate
Services, a Delaware corporation ("Koll" ) with respect to a list
of limited partners of T. Rowe Price Realty Income Fund II,
America s Sales-Commission-Free Real Estate Limited Partnership,
a Delaware Limited Partnership (the "Partnership").
WHEREAS the General Partner is the general partner of
the Partnership, and the Limited Partner is a limited partner of
the Partnership; and
WHEREAS the Limited Partner has requested a list
("List") of the names, addresses, and number of units of limited
partnership interest ("Units") held by each of the limited
partners in the Partnership; and
WHEREAS the Limited Partner has represented that he is
requesting the list for the purpose of making a tender offer,
regardless of whether any others make such offers, for Units
exclusively in concert with Koll and affiliates of Koll which are
controlled by Koll ("Koll Affiliates" ); and
WHEREAS General Partner believes that it is necessary
to establish reasonable standards, including certain restrictions
to be placed on the use of the List by Limited Partner, Koll and
the Koll Affiliates, in order to protect the Partnership and the
limited partners from harm and preclude interference with the
orderly dissolution and liquidation of the Partnership by the
General Partner as publicly disclosed by the General Partner;
THEREFORE, in consideration of the representations,
promises, and covenants of Limited Partner and Koll as contained
herein, General Partner hereby agrees to deliver the list to
Limited Partner on magnetic floppy disk, and Limited Partner and
Koll jointly and severally represent, promise and covenant on
behalf of themselves and their affiliates and the Koll Affiliates
that they will use the List only in accordance with the
following:
1. Limited Partner, Koll and the Koll Affiliates
(collectively "Offerors") shall utilize the list only
for the purpose of making a single written offer by
Offerors, and any amendments thereto, to limited
partners to purchase Units ("Tender Offer"), whether
such Tender Offer shall constitute a tender offer or
not, and shall solicit each limited partner no more
than once in connection with such Tender Offer.
Offerors will keep the List confidential and will not
disclose it to anyone, including any affiliated or
unaffiliated persons or entities, other than a
professional mailing house, information agent, or
depository in connection with the Tender Offer. The
Tender Offer will be transmitted by Offerors within 30
days after delivery of the List to Limited Partner and
Koll.
2. Offerors shall simultaneously copy the General
Partner by fax on any Tender Offer and any amendment
thereto.
3. After the expiration of the Tender Offer, Limited
Partner shall return the List to the General Partner
and destroy it in a manner which cannot be retrieved
any and all copies thereof and works derived therefrom,
whether in written, electronic, or other form, and
deliver an affidavit to the General Partner that
Offerors have complied with the provisions of this
section 3.
4. Offerors will not make and will not cause to be made
more than one unsolicited telephone call to each
limited partner in connection with the Tender Offer,
provided that an additional phone call may be made in
connection with any material amendment to the Tender
Offer. An unsolicited telephone call shall be deemed
made when Offerors or their agent call a limited
partner and either speak with an individual or leave a
message for the limited partner.
5. Offerors will not purchase Units which, when taken
together with all other Units beneficially owned by all
Offerors, affiliates of Offerors, or any person or
entity participating in the purchasing group
(collectively the Group ) cause the members of the
Group to be the beneficial owners of 46% or more of the
outstanding Units.
6. Any Tender Offer shall include the following
disclosure:
A. That the price being offered by Offerors for
Units was determined based on an estimate by
Offerors of the current net asset value of the
Units, to which a discount was then applied by
Limited Partner.
B. The existence of third-party resale services,
the range of prices paid for Units in secondary
market sales for the year preceding the
transmission of the Tender Offer, and a statement
as to the source of such information.
C. The most recent estimated unit value published
by the General Partner prior to the transmission
of the Tender Offer.
D. That the General Partner disclosed in its
quarterly report to limited partners for the
quarter ended June 30, 1996 a plan of disposition
for the properties owned by the Partnership.
E. The identity of all persons or entities for
whose benefit, directly or indirectly, the
Tender Offer is made.
7. In any vote of the limited partners subsequent to
the date hereof, Offerors will vote any and all Units
owned by it, directly or indirectly, pro rata to the
vote of all other limited partners.
8. From and at all times after the date of this
agreement none of the Offerors will, either
individually or in concert with others, attempt to
remove the General Partner from its position as general
partner of the Partnership, provided that a vote by one
or more of Offeror in accordance with the provisions of
section 7 hereof shall not constitute a breach of this
section 8.
9. From and at all times after the date of this
agreement none of the Offerors will act, either
individually or in concert with others, to effect a
change in control of the Partnership, provided that a
vote by one or more of Offerors in accordance with the
provisions of section 7 hereof shall not constitute a
breach of this section 9.
10. Offerors will not transfer any interest, direct or
indirect, in all or any of the Units acquired by either
of them in the Tender Offer unless the transferee or
transferees agree in writing for the benefit of the
Partnership and the General Partner, in a form
reasonably satisfactory to the Partnership and the
General Partner, to abide by and comply with all of the
terms, promises and covenants made by Offerors herein,
provided however that the Offerors may collectively
transfer no more than 5% of the Units and section 10
shall not apply to such transfer. For purposes of the
preceding sentence, the transfer of less than 5% of
such units may be made in one or more transactions so
long as all such transfers, when added together, do not
exceed 5%.
11. In the event the transfer of Units presented for
transfer within a tax year of the Partnership could
cause the Partnership to be treated as a publicly
traded partnership for federal tax purposes, the
General Partner will accept such transfers only after
receiving an opinion of reputable counsel satisfactory
to the General Partner that the recognition of such
transfers will not cause the Partnership to be treated
as a publicly traded partnership under the Internal
Revenue Code of 1986, as amended.
12. This Agreement shall be governed by and construed
in accordance with Delaware law without regard to
choice of law rules.
Agreed and accepted,
T. ROWE PRICE REALTY INCOME FUND II MANAGEMENT, INC..
BY: /s/Lucy B. Robins
TITLE: Vice President
DATE: November 1, 1996
RAY WIRTA
/s/Ray Wirta
KOLL REAL ESTATE SERVICES
BY: /s/Ray Wirta
TITLE:
DATE: November 6, 1996
T. Rowe Price Realty Income Fund II, America s Sales-Commission-
Free Real Estate Limited Partnership
Amended and Restated Agreement of Limited Partnership
Section 5.3. Deficiency in General Partner s Capital
Account. In the event that, immediately prior to the dissolution
of the Partnership referred to in Article 19, the General Partner
shall have a deficiency in its capital account as determined in
accordance with tax accounting principles, then the General
Partner shall contribute in cash to the capital of the
Partnership an amount equal to whichever is the lesser of (a) the
deficiency in the General Partner s capital account or (b) the
excess of 1.01% of the Capital Contributions over the capital
previously contributed by the General Partner.
T. Rowe Price Realty Income Fund II, America s Sales-Commission-
Free Real Estate Limited Partnership
Amended and Restated Agreement of Limited Partnership
Section 21. Indemnification
Section 21.1 Agreement to Indemnify. To the maximum extent
permitted by law, the Partnership, its receiver or its trustee,
shall indemnify, save harmless and pay all judgments and claims
against the Sponsor, from any liability, loss or damage incurred
by them or by the Partnership by reason of any act performed or
omitted to be performed by them in connection with the business
of the Partnership, including costs and attorneys fees (which
attorneys fees may be paid as incurred) and any amount expended
in the settlement of any claim of liability, loss or damage,
provided that, (a) if such liability, loss, damage or claim
arises out of any action or inaction of a Sponsor, such actions
or inactions must have occurred while such parties were engaged
in activities which could have been engaged in by the General
Partner in its capacity as such; (b) if such liability, loss,
damage or claim arises out of any action or inaction of a
Sponsor, the Sponsor must have determined, in good faith, that
such course of conduct was in, or not opposed to, the best
interests of the Partnership; (c) such conduct did not constitute
negligence or misconduct; and (d) any such indemnification shall
be recoverable only from the assets of the Partnership and not
from the assets of the Limited Partners. All judgments against
the Partnership and Sponsor, wherein the General Partner is
entitled to indemnification, must first be satisfied from
Partnership assets before the Sponsor is responsible for these
obligations. Nothing contained herein shall constitute a waiver
by any Limited Partner of any right which he may have against any
party under federal or state securities laws.
Section 21.2 Limitations. Notwithstanding Paragraph 21.1, a
Sponsor shall not be indemnified pursuant to Paragraph 21.1 from
any liability, loss or damage incurred by them in connection with
(a) any claim or settlement involving allegations that the
Securities Act of 1933 or state securities laws were violated by
a Sponsor unless: (A) there has been a successful adjudication on
the merits, (B) such claims have been dismissed with prejudice on
the merits by a court of competent jurisdiction, or (C) a court
of competent jurisdiction approves a settlement of the claims,
after being advised as to the current position of both the
Securities and Exchange Commission and the California
Commissioner of Corporations regarding indemnification for
violations of securities law; or (b) any liability imposed by
law, including liability for negligence or misconduct.
