SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Consent Solicitation Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant /x/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Consent Solicitation Statement
/ / Confidential, For Use of Commission Only (as permitted by
Rule 14a-6(e)(2))
/x/ Definitive Consent Solicitation Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
T. ROWE PRICE REALTY INCOME FUND II,
AMERICA'S SALES-COMMISSION-FREE REAL ESTATE LIMITED PARTNERSHIP
(Name of Registrant as Specified in Its Charter)
(Names of Person(s) Filing Consent Solicitation Statement, if
Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required
/x/ Fee computed on table below per Exchange Act Rules 14a-
6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction
applies:
Units of Limited Partnership Interest ("Units")
(2) Aggregate number of securities to which transaction
applies:
84,099 Units
(3) Per unit price or other underlying value of
transaction computed pursuant to Exchange Act Rule
0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
The filing fee of $6,088.16 has been calculated in
accordance with Rule 0-11 under the Exchange Act and is
equal to 1/50 of 1% of $30,440,820 (the aggregate
amount of the cash to be received by the Registrant).
(4) Proposed maximum aggregate value of transaction:
$34,990,820
(5) Total fee paid:
$6,088.16
/x/ Fee paid previously with preliminary materials:
The fee of $6,088.16 was paid in full upon the filing
of the Registrants's preliminary consent solicitation
materials with the Commission on June 6, 1997
(Commission File No. 0-15575).
/ / Check box if any part of the fee is offset as
provided by Exchange Act Rule 0-11(a)(2) and
identify the filing for which the offsetting fee
was paid previously. Identify the previous filing
by registration statement number, of the form or
schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement no.:
(3) Filing Party:
(4) Date Filed:
July 21, 1997
T. Rowe Price Realty Income Fund II Management, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Attention: Mr. James S. Riepe, President
Gentlemen:
We understand that T. Rowe Price Realty Income Fund II,
America s Sales-Commission-Free Real Estate Limited Partnership
(the "Fund") and Glenborough Realty Trust Incorporated and
Glenborough Properties, L.P. (collectively, the "Acquiror") have
entered into an agreement dated as of April 11, 1997 (the
"Agreement"), which provides that the Fund will sell all of its
real estate assets (the "Properties") to the Acquiror for cash
consideration of $30,440,820 (the "Sale").
In connection with the Sale, we have been requested to
provide our opinion to T. Rowe Price Realty Income Fund II
Management, Inc., the general partner of the Fund (the "General
Partner") regarding the fairness to the Fund and the limited
partners, from a financial point of view, of the consideration to
be received by the Fund in the Sale.
In conducting our analysis and arriving at the opinion set
forth below, we have, among other things:
(i) reviewed the Agreement;
(ii) reviewed and analyzed the audited financial statements
of the Fund for the years ended December 31, 1995 and
1996;
(iii)reviewed and analyzed the unaudited consolidated
financial statements of the Properties for the three
months ended March 31, 1997;
(iv) reviewed and analyzed certain internal information
concerning the business and operations of the Fund and
the Properties furnished to us by the General Partner
and by LaSalle Advisors Limited ("LaSalle"), including
unaudited cash-basis projections for the Properties for
the years ending December 31, 1997 through 2007;
(v) reviewed and analyzed certain publicly available
information concerning the Fund, the Properties and the
Acquiror;
(vi) reviewed and analyzed certain publicly available
information concerning the terms of selected merger and
acquisition transactions that we deemed relevant to our
inquiry;
(vii)reviewed and analyzed certain selected market purchase
price data that we deemed relevant to our inquiry;
(viii)held meetings and discussions with certain directors,
officers and employees of the General Partner and
LaSalle concerning the operations, financial condition
and future prospects of the Properties; and
(ix) conducted such other financial studies, analyses and
investigations, including visits to certain of the
Properties, and considered such other information as we
deemed appropriate.
In connection with our review, we relied, without
independent verification, on the accuracy and completeness of all
information that was publicly available, supplied or otherwise
communicated to Legg Mason by the General Partner and LaSalle.
Legg Mason assumed that the financial projections (and the
assumptions and bases thereof) examined by it were reasonably
prepared and reflected the best currently available estimates and
good faith judgments of the General Partner and LaSalle as to the
future performance of the Properties. Legg Mason has not made an
independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of the Fund (including the Properties),
nor has Legg Mason been furnished with any such independent
evaluations or appraisals. Our opinion is necessarily based upon
financial, economic, market and other conditions and
circumstances existing and disclosed to us as of the date hereof.
Additionally, our opinion does not compare the relative merits of
the Sale with those of any other transactions or business
strategies available to the Fund as alternatives to the Sale, and
we were not requested to, nor did we, solicit the interest of any
other party in acquiring the Properties.
We have acted as financial advisor to the General Partner
and will receive a fee for our services. It is understood that
this opinion is provided to the General Partner in its evaluation
of the Sale and our opinion does not constitute a recommendation
to any limited partner of the Fund as to whether such limited
partner should approve the Sale. This letter is not to be quoted
or referred to, in whole or in part, in any registration
statement, prospectus, or in any other document used in
connection with the offering or sale of securities, nor shall
this letter be used for any other purposes, without the prior
written consent of Legg Mason; provided that this opinion may be
included in its entirety in any filing made by the Fund with the
Securities and Exchange Commission with respect to the Sale and
as an appendix to the Fund s consent solicitation statement
furnished to limited partners in connection with the Sale.
Based upon and subject to the foregoing, we are of the
opinion that, as of the date hereof, the consideration to be
received by the Fund in the Sale is fair to the Fund and its
limited partners from a financial point of view.
Very truly yours,
Legg Mason Wood Walker,Incorporated
By:________________________________
Jeff M. Rogatz
Managing Director
T. ROWE PRICE REALTY INCOME FUND II,
AMERICA'S SALES-COMMISSION-FREE
REAL ESTATE LIMITED PARTNERSHIP
100 East Pratt Street
Baltimore, Maryland 21202
NOTICE OF CONSENT SOLICITATION
To The Limited Partners of T. Rowe Price Realty Income Fund II,
America's Sales-Commission-Free Real Estate Limited Partnership
NOTICE IS HEREBY GIVEN to limited partners ("Limited
Partners") holding units of limited partnership interest
("Units") in T. Rowe Price Realty Income Fund II, America's
Sales-Commission-Free Real Estate Limited Partnership, a Delaware
Limited Partnership ("Fund") that T. Rowe Price Realty Income
Fund II Management, Inc. (the "General Partner") is soliciting
written consents to approve a single proposal consisting of (i)
the sale of substantially all of the assets of the Fund (the
"Sale"), which currently consist of interests in eight
properties, as contemplated by the Purchase and Sale Agreements
and Joint Escrow Instructions, dated as of April 11, 1997, with
Glenborough Realty Trust Incorporated and Glenborough Properties,
L.P. as the buyers, and (ii) the complete liquidation and
dissolution of the Fund (the "Liquidation" and, together with the
Sale, the "Transaction") in the manner described in the
accompanying Consent Solicitation Statement.
The Liquidation will result in: (a) the distribution to the
Partners of all net Sale proceeds and other net assets of the
Fund after completion of the Sale; and (b) the possible transfer
to the General Partner of all liabilities of the Fund, including
contingent liabilities, and sufficient assets to provide for the
payment of all transferred liabilities (in order to terminate the
Fund by December 31, 1997 and eliminate the need for the taxable
Limited Partners to receive Schedules K-1 with respect to 1998),
all as more fully described in the accompanying Consent
Solicitation Statement.
The Transaction must be approved by Limited Partners holding
a majority of the outstanding Units. Only Limited Partners of
record at the close of business July 2, 1997 are entitled to
notice of the solicitation of consents and to give their consent
to the Transaction. In order to be valid, all consents must be
received before 10:00 A.M., New York City time, on September 11,
1997 (unless such date or time is extended). The vote will be
obtained through the solicitation of written consents, and no
meeting of Limited Partners will be held. A consent may be
revoked by written notice of revocation or by a later dated
consent containing different instructions at any time on or
before the expiration of the time by which the consent card must
be received.
Your Approval is Important--Please read the Consent
Solicitation Statement carefully and then complete, sign and date
the enclosed consent card and return it in the accompanying self-
addressed, postage-paid envelope. Any consent card which is
signed and does not specifically disapprove the Transaction will
be treated as approving the Transaction. Your prompt response
will be appreciated.
Dated: July 28, 1997 T. ROWE PRICE REALTY INCOME
FUND II MANAGEMENT, INC.
/s/James S. Riepe
By: _________________________
James S. Riepe
Chairman of the Board
and President
T. ROWE PRICE REALTY INCOME FUND II,
AMERICA'S SALES-COMMISSION-FREE
REAL ESTATE LIMITED PARTNERSHIP
100 East Pratt Street
Baltimore, Maryland 21202
CONSENT SOLICITATION STATEMENT
This Consent Solicitation Statement is being furnished to
limited partners ("Limited Partners") holding units of limited
partnership interest ("Units") in T. Rowe Price Realty Income
Fund II, America's Sales-Commission-Free Real Estate Limited
Partnership, a Delaware limited partnership ("Fund"), in
connection with the solicitation of written consents ("Consents")
by T. Rowe Price Realty Income Fund II Management, Inc. ("General
Partner") to approve a single proposal consisting of (i) the sale
of substantially all of the assets of the Fund (the "Sale"),
which currently consist of interests in eight properties, as
contemplated by the Purchase and Sale Agreements and Joint Escrow
Instructions, dated as of April 11, 1997 ("Purchase and Sale
Agreements"), with Glenborough Realty Trust Incorporated and
Glenborough Properties, L.P. as the buyers ("Purchaser"), and
(ii) the complete liquidation and dissolution of the Fund (the
"Liquidation" and, together with the Sale, the "Transaction") in
the manner described under the caption "THE TRANSACTION--The
Liquidation."
The Liquidation will result in: (a) the distribution to the
Partners of all net Sale proceeds and other net assets of the
Fund after completion of the Sale; and (b) the possible transfer
to the General Partner of all liabilities of the Fund, including
contingent liabilities, and sufficient assets to provide for the
payment of all transferred liabilities (in order to terminate the
Fund by December 31, 1997 and eliminate the need for the taxable
Limited Partners to receive Schedules K-1 with respect to 1998).
See "THE TRANSACTION--The Liquidation."
Under the terms of the Limited Partnership Agreement, dated
as of January 7, 1986, as amended as of March 10, 1986 (the
"Partnership Agreement"), the disposition of all the Fund's
interests in real property and other assets of the Fund, and the
receipt of the final payment of the sale price for all of its
assets results in the automatic dissolution and termination of
the Fund. Because the Sale would result in the disposition of
all of the Fund's remaining real estate assets, the General
Partner would not ordinarily be required to obtain the consent of
the Limited Partners to effectuate the subsequent dissolution and
termination of the Fund. The Partnership Agreement does,
however, prohibit the General Partner from engaging in certain
"affiliated" transactions, including certain transactions between
the General Partner and the Fund. Because the proposed form of
the Liquidation involves the transfer of certain assets and
liabilities of the Fund to the General Partner, the General
Partner is seeking approval of both the Sale and the Liquidation
in a single proposal to the Limited Partners. Approval of the
Transaction will have the effect of amending the Partnership
Agreement to the extent necessary to permit the General Partner
to effect the Liquidation.
This Consent Solicitation Statement, the attached Notice of
Consent Solicitation and the accompanying consent card are first
being mailed to Limited Partners on or about July 28, 1997.
The date of this Consent Solicitation Statement is July 28, 1997.
TABLE OF CONTENTS
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ACTION BY CONSENT . . . . . . . . . . . . . . . . . . . . . . . 4
General . . . . . . . . . . . . . . . . . . . . . . . . . 4
Matters to be Considered . . . . . . . . . . . . . . . . . 4
Record Date . . . . . . . . . . . . . . . . . . . . . . . 4
Action by Consent . . . . . . . . . . . . . . . . . . . . 4
Recommendation of General Partner . . . . . . . . . . . . 5
THE TRANSACTION . . . . . . . . . . . . . . . . . . . . . . . . 5
Description of the Fund . . . . . . . . . . . . . . . . . 5
Background of the Disposition Plan . . . . . . . . . . . . 5
Background of the Sale . . . . . . . . . . . . . . . . . . 6
Description of the Properties to be Sold . . . . . . . . . 7
Annual Valuation . . . . . . . . . . . . . . . . . . . . 10
Fairness Opinion . . . . . . . . . . . . . . . . . . . . 11
Recommendation of the General Partner . . . . . . . . . 14
Failure to Approve the Transaction . . . . . . . . . . . 16
Terms of the Purchase and Sale Agreements . . . . . . . 17
The Liquidation . . . . . . . . . . . . . . . . . . . . 20
BENEFITS OF THE TRANSACTION TO AND POSSIBLE
CONFLICTS OF THE GENERAL PARTNER AND ITS AFFILIATES . . . . . 20
CERTAIN FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE SALE 21
General . . . . . . . . . . . . . . . . . . . . . . . . 21
Taxation Prior to Liquidation . . . . . . . . . . . . . 21
Taxation of Liquidation . . . . . . . . . . . . . . . . 22
Capital Gains . . . . . . . . . . . . . . . . . . . . . 23
Passive Loss Limitations . . . . . . . . . . . . . . . . 23
Certain State Income Tax Considerations . . . . . . . . 23
Tax Conclusion . . . . . . . . . . . . . . . . . . . . . 23
NO APPRAISAL RIGHTS . . . . . . . . . . . . . . . . . . . . . 24
MARKET FOR THE FUND'S LIMITED PARTNERSHIP INTERESTS
AND RELATED SECURITY HOLDER MATTERS . . . . . . . . . . . . . 24
SELECTED HISTORICAL FINANCIAL DATA . . . . . . . . . . . . . 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . 27
Results of Operations . . . . . . . . . . . . . . . . . 27
Liquidity and Capital Resources . . . . . . . . . . . . 28
Reconciliation of Financial and Tax Results . . . . . . 29
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . 30
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF . . . . . . . 31
LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . 31
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . 31
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . 33
APPENDIX I--Opinion of Legg Mason Wood Walker, Incorporated . A-1
SUMMARY
The following is a summary of certain information contained
elsewhere in this Consent Solicitation Statement. References are
made to, and this summary is qualified in its entirety by, the
more detailed information contained in this Consent Solicitation
Statement. Unless otherwise defined herein, terms used in this
summary have the respective meanings ascribed to them elsewhere
in this Consent Solicitation Statement. Limited Partners are
urged to read this Consent Solicitation Statement in its
entirety.
The Partnership
T. Rowe Price Realty Income
Fund II, America's Sales-
Commission-Free Real Estate
Limited Partnership The Fund owns, directly and
through a joint venture
partnership, interests in
eight commercial properties
(collectively "Properties" and
individually a "Property")
consisting of four industrial
buildings, three business
parks and one office building.
The principal offices of the
Fund are located at 100 East
Pratt Street, Baltimore,
Maryland 21202, and its
telephone number is 1-800-962-
8300.
The Purchaser
Glenborough Realty Trust
Incorporated and Glenborough
Properties, L.P. Glenborough Realty Trust
Incorporated is a Maryland
corporation whose shares trade
on the New York Stock
Exchange.
Glenborough Realty Trust
Incorporated is the general
partner of Glenborough
Properties, L.P., a Delaware
limited partnership. The
principal offices of the
Purchaser are located at 400
South El Camino Real, San
Mateo, California 94402.
The Transaction
General The Transaction is a single
proposal to be approved by the
Limited Partners and consists
of (i) the Sale of all eight
Properties to the Purchaser
for an aggregate purchase
price of $34,990,820 (of which
the Fund's aggregate interest
therein is $30,440,820),
subject to certain adjustments
at or prior to closing, and
(ii) the Liquidation of the
Fund.
Background of the
Transaction In 1996, the General Partner,
based upon its belief that the
real estate markets were
improving and the fact that
the Fund was approaching the
end of its expected duration,
indicated its intention to
dispose of all the Fund's
Properties by the end of 1998.
In January 1997, the Purchaser
contacted the Fund and
indicated its desire to
purchase the Fund's
Properties. After a series of
negotiations, the Fund and the
Purchaser entered into an
agreement for the Fund to sell
its Properties to the
Purchaser, subject to certain
contingencies. See "THE
TRANSACTION--Background of the
Disposition Plan" and "--
Background of the Sale."
Recommendation of the
General Partner The General Partner has
carefully considered the
Transaction and has concluded
that the Transaction is in the
best interests of the Fund and
the Limited Partners.
Accordingly, the General
Partner approved the
Transaction and is
recommending that the Limited
Partners consent to it.
Security Ownership
and Voting of the
General Partner At the Record Date, the
General Partner and its parent
owned 25 Units (less than 1%
of the outstanding Units), and
all officers and directors of
the General Partner, as a
group, beneficially owned 30
Units (less than 1% of the
outstanding Units). T. Rowe
Price Trust Company, as
custodian for participants in
the T. Rowe Price Funds
Individual Retirement
Accounts, as custodian for
participants in various
403(b)(7) plans, and as
custodian for various profit
sharing and money purchase
plans, is the registered owner
of 24,284 Units (29% of the
outstanding Units). T. Rowe
Price Trust Company has no
beneficial interest in such
accounts and no control over
investment decisions with
respect to such accounts, nor
any other accounts for which
it may serve as trustee or
custodian with respect to an
investment in the Fund. The
General Partner, its parent
and all officers and directors
of the General Partner intend
to consent to the Transaction.
See "VOTING SECURITIES AND
PRINCIPAL HOLDERS THEREOF."
Opinion of Financial
Consultant Legg Mason Wood Walker,
Incorporated ("Legg Mason")
acted as a financial
consultant to the General
Partner in connection with the
Sale. The General Partner has
received a fairness opinion
from Legg Mason that the Sale
is fair, from a financial
point of view, to the Fund and
the Limited Partners. See
"THE TRANSACTION--Fairness
Opinion."
Consummation of the
Sale The Sale will be consummated
as promptly as practicable
after obtaining the requisite
approval of the Limited
Partners to the Transaction
and the satisfaction or, where
permissible, waiver of all
conditions to the Sale.
No Appraisal Rights If the Transaction is approved
by Limited Partners owning a
majority of the outstanding
Units, dissenting Limited
Partners will not have
appraisal rights in connection
with the Transaction. See "NO
APPRAISAL RIGHTS."
Certain Federal and State
Income Tax Consequences Assuming that the Sale occurs
in 1997, as anticipated, the
Sale of the Properties will
result in the allocation of
taxable gains and losses among
the Limited Partners. The
Sale proceeds distributed to
the Limited Partners in 1997
are expected to exceed the
Limited Partners' income tax
liability attributed to the
Sale. See "CERTAIN FEDERAL
AND STATE INCOME TAX
CONSEQUENCES OF THE SALE."
Final Distributions
and Liquidation Following the consummation of
the Sale, the General Partner
will determine the amount of
assets that it believes will
be sufficient to provide for
the payment of the Fund's
recorded liabilities. The
balance of the Fund's assets
will then be promptly
distributed to the Limited
Partners and General Partner
in accordance with the
Partnership Agreement. It is
expected that all such net
assets will be distributed no
later than the quarter
following the closing of the
Sale. The liabilities and the
assets required to satisfy
such liabilities will then be
transferred to the General
Partner, in order to terminate
the Fund by December 31, 1997
and eliminate the need for the
taxable Limited Partners to
receive Schedules K-1 for
1998. See "THE TRANSACTION--
The Liquidation."
Action by Written Consent
Termination of Consent
Solicitation Consents must be received by
September 11, 1997, at 10:00
A.M., New York City time
(unless such date or time is
extended).
Record Date; Units
Entitled to Consent Limited Partners of record at
the close of business on July
2, 1997 are entitled to
approve the Transaction by
written Consent. At such date
there were outstanding 84,099
Units, each of which will
entitle the record owner
thereof to one vote.
Purpose of the Action Written Consents are being
solicited to approve the
Transaction, which consists of
(i) the Sale of substantially
all of the assets of the Fund,
and (ii) the Liquidation of
the Fund.
Vote Required The Transaction must be
approved by Limited Partners
holding a majority of all
outstanding Units.
ACTION BY CONSENT
General
This Consent Solicitation Statement is being furnished
on behalf of the Fund to the Limited Partners of the Fund in
connection with the solicitation of Consents by T. Rowe Price
Realty Income Fund II Management, Inc., as the General Partner.
This Consent Solicitation Statement, the attached
Notice of Consent Solicitation and accompanying consent card are
first being mailed to Limited Partners on or about July 28, 1997.
Matters to be Considered
Consents are being solicited to approve the
Transaction, which consists of (i) the Sale of substantially all
of the assets of the Fund, and (ii) the Liquidation of the Fund.
Such Liquidation will result in: (a) the distribution to the
Partners of all net Sale proceeds and other net assets of the
Fund after completion of the Sale; and (b) the possible transfer
to the General Partner of all liabilities of the Fund, including
contingent liabilities, and sufficient assets to provide for the
payment of all transferred liabilities in order to terminate the
Fund by December 31, 1997 and eliminate the need for the taxable
Limited Partners to receive Schedules K-1 with respect to 1998.
See "THE TRANSACTION--The Liquidation."
Record Date
The close of business on July 2, 1997 ("Record Date")
has been fixed by the General Partner for determining the Limited
Partners entitled to receive notice of the solicitation of
Consents and to give their Consent to the Transaction. On the
Record Date, there were 84,099 outstanding Units entitled to vote
held of record by 13,121 Limited Partners.
Action by Consent
Pursuant to the terms of the Partnership Agreement, the
approval of Limited Partners owning a majority of the outstanding
Units is required to effect the sale of all or substantially all
of the assets of the Fund in a single sale or in multiple sales
in the same 12-month period. "Substantially All of the Assets"
is defined by the Partnership Agreement to mean properties
representing 66 2/3% or more of the original purchase price of
all of the Properties as of the most recently completed calendar
quarter. The Partnership agreement also prohibits certain
"affiliated" transactions between the General Partner and the
Fund. Since the Transaction would result, among other things, in
the Sale of substantially all of the assets of the Fund, as well
as the transfer of certain assets and liabilities of the Fund to
the General Partner pursuant to the Liquidation, the approval of
the Transaction by the Limited Partners owning a majority of the
outstanding Units is required to effect the Transaction. Such
approval will be obtained through the solicitation of written
Consents from Limited Partners, and no meeting of Limited
Partners will be held to vote on the Transaction. Under Delaware
law and under the Partnership Agreement, any matter upon which
the Limited Partners are entitled to act may be submitted for a
vote by written consent without a meeting. Any Consent given
pursuant to this solicitation may be revoked by the person giving
it at any time before 10:00 A.M., New York City time, on
September 11, 1997 (unless such date or time is extended), by
sending a written notice of revocation or a later dated Consent
containing different instructions to the Secretary of the General
Partner before such date. Any written notice of revocation or
subsequent Consent should be sent to T. Rowe Price Realty Income
Fund II Management, Inc., P.O. Box 89000, Baltimore, MD 21289-
0270.
In addition to solicitation by use of the mails,
officers, directors and employees of the General Partner or its
affiliates may solicit Consents in person or by telephone,
facsimile or other means of communication. Such officers,
directors and employees will not receive additional compensation
for such services but may be reimbursed for reasonable out-of-
pocket expenses in connection with such solicitation.
Arrangements have been made with custodians, nominees and
fiduciaries for the forwarding of consent solicitation materials
to beneficial owners of Units held of record by such custodians,
nominees and fiduciaries and the Fund will reimburse such
custodians, nominees and fiduciaries for reasonable expenses
incurred in connection therewith. All costs and expenses of the
solicitation of Consents, including the costs of preparing and
mailing this Consent Solicitation Statement, will be borne by the
Fund. The aggregate expenses anticipated to be incurred by the
Fund relating to this solicitation, including legal fees, are
expected to be approximately $95,000.
Recommendation of General Partner
The General Partner has approved the Transaction and
recommends that Limited Partners consent to it. See "THE
TRANSACTION--Recommendation of the General Partner".
THE TRANSACTION
Description of the Fund
The Fund was formed in January 1986 for the primary
purpose of acquiring a portfolio of income producing commercial
properties on an unleveraged basis and subsequently operating and
holding such properties for investment. The Fund was structured
as a self-liquidating partnership with a finite life, which would
distribute its cash flow during its operating stage and its
proceeds of sale during its liquidating stage, whereupon the Fund
would be liquidated and dissolved. It was anticipated that the
properties would be held for approximately seven to ten years
after acquisition although, depending on economic and market
factors, they could be held for shorter or longer periods in the
complete discretion of the General Partner. The interests in the
Properties were purchased between 1986 and 1988 and have now been
held for their anticipated holding period.
The Fund owns, directly and through a joint venture
partnership, interests in eight commercial properties consisting
of four industrial buildings, three business parks and one office
building. One of the business parks, Tierrasanta, is owned by a
joint venture, 30% of which is held by the Fund and 70% of which
is held by two affiliated funds. The other seven Properties are
held directly by the Fund. The Fund owned six additional
properties or interests therein that have been sold prior to the
date of this Consent Solicitation Statement.
Background of the Disposition Plan
In 1996, the General Partner disclosed its intention to
dispose of all of the Fund's Properties by the end of 1998. This
decision was based upon the General Partner's belief that the
real estate market was improving, as well as the fact that the
Fund was nearing the end of its anticipated life. Over the past
few years, the ability to sell properties generally has been
enhanced by further improvements in the national real estate
market. Pension funds, real estate investment trusts ("REITs")
and other institutional buyers have increased their purchasing
activity in recent years compared to the early 1990's when these
same institutional buyers were largely out of the market. Lower
interest rates have also improved the market for selling
properties as entrepreneurial buyers who require debt financing
to purchase properties are able to borrow funds at more
advantageous rates.
More specifically, with respect to the Fund's
Properties, improvements in the real estate capital markets and
in the operating performance of certain Properties has enhanced
the prospects for selling these Properties or the prices at which
they can expect to be sold. During the late 1980's and early
1990's, the Fund's Properties experienced adverse operating
results and decreases in value due to a nationwide slump in real
estate values as well as difficult local market conditions,
especially in the California market (where two of the Properties
are located), Florida (where one of the Properties is located)
and the Arizona industrial market (where one of the Properties is
located). Improvements in the real estate capital markets and in
the local real estate markets have caused rents to increase and
concessions to tenants (such as free rent and tenant
improvements) to decrease. As a result of improved occupancy and
property cash flow and the improvement in the real estate capital
markets, the Properties located in these areas are better
positioned for sale now than they were during the past several
years. See "THE TRANSACTION--Description of Properties to be
Sold" for more details concerning these Properties.
Accordingly, the General Partner determined that the
Fund should investigate opportunities for selling the Properties.
The Fund had previously sold one of the two industrial buildings
which comprised the Coronado Property in 1993, its Sullyfield
Circle industrial property in June 1995 and its Regal Row
industrial property in February 1996. In August 1996, a joint
venture in which the Fund had an interest sold Fairchild
Corporate Center, an office property. In January 1997, the Fund
sold its AMCC R&D property. In late 1996, the Fund began to
market its two industrial Properties in Illinois, Bonnie Lane and
Glenn Avenue (the "Midwest Industrial Properties"), and a
shopping center in Arizona, South Point Plaza, in which it had a
50% interest. The shopping center was sold in April 1997. The
Midwest Industrial Properties are being sold as part of the Sale.
With respect to the Fairchild Corporate Center, the Fund owned a
24% interest in a general partnership, Fairchild 234, which owned
a note secured by a deed of trust on Fairchild Corporate Center.
Fairchild Corporate Center was sold as a result of Fairchild 234
advertising the property for auction as part of the process of
foreclosing on the deed of trust. Several favorable offers were
received in response and the property was sold to one of the
offerors without proceeding with the foreclosure. Marketing was
generally conducted through local real estate brokers in the
areas where the Properties were located or through brokers who
had relationships with large national buyers; LaSalle Advisors
Limited Partnership ("LaSalle"), the real estate adviser to the
Fund, managed the sales.
Background of the Sale
In January 1997, the Fund was contacted by the agent of
an unidentified buyer (which was later disclosed to be the
Purchaser), who expressed an interest in purchasing all of the
remaining real estate assets of the Fund and of the four other
public real estate funds sponsored by T. Rowe Price Associates,
Inc. ("Associates"). The four entities affiliated with the Fund
are sometimes hereinafter referred to as "Affiliated Funds" and,
together with the Fund, the "Funds." Later in January, after
telephone discussions between this third party and
representatives of the Fund, the Purchaser contacted the Fund and
identified itself as the potential buyer. Thereafter, in
February 1997, the Fund entered into a confidentiality agreement
with the Purchaser and its third party representative and
forwarded certain business and financial information to the
Purchaser for its review. The Purchaser then submitted an offer
for six of the Fund's Properties, including its interest in the
Tierrasanta Property, at a price of $23,678,000. The Midwest
Industrial Properties were then under letter of intent to a
different buyer at a price of $6,730,891.
On March 7, 1997, the Fund made a counteroffer to sell
all five of its 100% owned Properties to the Purchaser for
$22,806,000, and the Affiliated Funds made a counteroffer to sell
the Tierrasanta Property to the Purchaser for $6,750,000 (the
Fund's interest in this price equates to $2,025,000). On March
10, 1997, the Purchaser made a counteroffer to purchase the five
100% owned Properties for $22,121,820, subject to negotiation of
additional terms of the sale, which the Fund accepted on March
12, 1997. In addition, after further negotiations, on March 12,
1997 the Purchaser made and the Funds accepted, subject to
negotiation of additional terms of the sale, an offer to purchase
the Tierrasanta Property at a price of $5,250,000. Thus, total
consideration to the Fund, including its portion of the sales
proceeds for the Tierrasanta Property, was $23,696,820.
LaSalle, on behalf of the Fund, thereafter received
indications of interest from third parties to purchase
Tierrasanta at prices ranging from $6.8 million to $7.3 million.
However, all of these offers would have involved substantial due
diligence by the offerors, and possible downward price
adjustment. The Fund gave the Purchaser an opportunity to
increase its offer for Tierrasanta and on April 8, 1997, the
Purchaser increased its offer for Tierrasanta to $6.5 million.
The Funds then accepted the Purchaser's offer on April 11, 1997.
In early March 1997, the prospective purchaser of the
Midwest Industrial Properties informed the Fund that it had
elected not to proceed with the purchase, based on the extent of
necessary deferred maintenance identified during its due
diligence process, which the Fund estimated would cost $216,000.
The Fund had previously received other offers for the Midwest
Industrial Properties ranging from $5,850,000 to $6,730,000. The
Purchaser had previously indicated an interest in purchasing the
Midwest Industrial Properties and, when the initial purchaser
withdrew its offer, the Fund invited the Purchaser to make an
offer for these Properties. After additional negotiations, on
April 11, 1997 the Fund agreed to include the Midwest Industrial
Properties in the sale to the Purchaser for an additional
$6,369,000. A key factor in the Fund's decision to sell the
Midwest Industrial Properties to the Purchaser instead of one of
the other offerors was the Purchaser's agreement to purchase
these Properties without any subsequent price adjustment because
of deferred maintenance. In addition, the Fund had a greater
degree of confidence in the Purchaser's ability to consummate the
sale than it had with respect to some of the other offerors, and
transaction costs would be lower if these Properties were
included in the sale to the Purchaser, resulting in a net price
equal to or better than that which would have been produced by
the other offers. Thus, the total aggregate purchase price for
all of the Properties is $34,990,820, and the Fund's interest
therein is $30,440,820.
The Purchase and Sale Agreements for the Properties
were executed on April 11, 1997, and the Purchaser deposited
$349,908.20 (the "Escrow Deposit"), representing 1% of the
aggregate purchase price for all of the Properties, in an escrow
account.
Description of the Properties to be Sold
Atlantic Business Center
This Property, in which the Fund holds a 100% interest,
consists of three warehouse/industrial buildings with a total of
188,000 square feet of space. It was built in 1974 and is
located in Gwinnett County, Georgia, 20 miles northeast of
downtown Atlanta, in the suburban area known as the "Peachtree
Corridor."
The Northeast/I-85 industrial submarket in which this
project competes consists of approximately 1,300 buildings
totaling approximately 84 million square feet. Although
absorption levels in the submarket were impressive throughout
1996, there are several trends emerging in the region that
indicate a potential softening. The first trend is the rising
vacancy levels in the service market where the rate has increased
from 5.8 percent at year-end 1995 to 8.1 percent at year-end
1996. Vacant speculative deliveries remain the primary force
behind these rising levels. A second trend is the performance of
the distribution sector in the region. There remains a
substantial amount of second generation space such as Atlantic
Business Center that is being vacated as businesses relocate to
the newer, larger facilities. As a result, the vacancy level for
the distribution sector has risen from 3.9 percent at year-end
1995 to 5.6 percent as of year-end 1996.
Leases covering 67% of the space in Atlantic Business
Center expire between May 1997 and December 1998, and it is
estimated that capital improvements, leasing commissions and
tenant improvements over the same period would be approximately
$220,000.
Coronado
The Fund owns a 100% interest in the Coronado Property,
which is a 96,000 square foot industrial building in Anaheim,
California. This building was built in 1975 and has a mezzanine
area that can be used as office or storage space and additional
office space on the ground floor. The building is leased to a
single tenant, a textile distributor, until the year 2003. The
lease includes periodic rental rate increases and requires the
tenant to be responsible for all property expenses.
The building's 100% leased status is above the 94%
overall rate for the North Orange County submarket as of December
1996. Total competitive inventory in this submarket is
approximately 101 million square feet. The gross absorption in
this submarket rose to approximately 7.5 million square feet
during 1996, versus 6.7 million during the same period in 1995.
Market rental rates ranged from $3.84 to $4.68 per square foot
per year net of taxes, insurance and utilities in 1994, and in
1996 ranged from $4.08 to $5.16 per square foot. Little if any
new speculative construction is believed planned for this area.
Oakbrook Corners
The Fund owns a 100% interest in Oakbrook Corners
Business Park ("Oakbrook Corners"), which consists of eight
office/showroom buildings containing 124,000 square feet of
space. The Property was built in 1984 and is located in the
Northeast/I-85 Industrial Submarket, which is in Gwinnett County,
Georgia 15 miles northeast of downtown Atlanta. The Oakbrook
Corners neighborhood is primarily developed with office/service
buildings similar to the Fund's Property. The buildings at the
Property range in size from 11,000 to 27,000 square feet. Each
building has one or more loading doors of either the roll-up or
overhead type. Market conditions for this Property are generally
the same as those affecting Atlantic Business Center.
Leases covering 61% of the space in Oakbrook Corners
expire between May 1997 and December 1998, and it is estimated
that capital improvements, leasing commissions and tenant
improvements over the same period would be approximately
$230,000.
Baseline
The Baseline Business Park ("Baseline") in Tempe,
Arizona, which is 100% owned by the Fund, consists of eight
multi-tenant service-industrial/retail buildings, containing
100,000 square feet of space. The Baseline Property was built in
1984 and is located in a suburban area containing similar
comparable projects, together with multi-tenant residential
housing and light manufacturing facilities. The eight one-story
buildings that comprise the Baseline property range in size from
11,000 to 14,000 square feet, and are leased to a total of
approximately 60 tenants.
Activity was brisk at this Property during 1996, and
leasing efforts resulted in a total of 28,445 square feet of
gross leasing to ten new tenants, against 12 expiring leases
covering 22,249 square feet. Partially because the Fund wanted
to take advantage of improving market conditions, it chose not to
renew several short-term tenants upon their lease expirations.
Instead, it has been attempting to sign longer term leases and
stagger the lease expiration schedule. Thus, the leasing gains
during the year were offset by the loss of six tenants totaling
11,985 square feet whose leases were not renewed upon lease
expiration. Four tenants whose leases cover 5,656 square feet
renewed and/or expanded. Accordingly, the Property's lease
status increased to 96% by year-end 1996 versus 88% in 1995.
The Baseline Property is part of the Tempe
Industrial/Office submarket. Baseline competes directly against
eight projects totaling approximately 819,000 square feet. They
are experiencing an approximate 4% vacancy rate reflecting no
material change from the previous year's level. Effective and
nominal rental rates have begun to increase and as of year-end
1996 ranged between $6.00 and $9.60 per square foot, full
service. There are no known projects planned or under
construction similar to or which may compete with Baseline. The
average occupancy rate in the market where Baseline is located
has increased from approximately 90% in 1994 to 96% at the end of
1996.
Leases covering 50% of Baseline expire between May 1997
and December 1998, and it is estimated that capital improvements,
leasing commissions and tenant improvements over the same period
would be approximately $170,000.
Business Plaza
This Property consists of two one-story office
buildings in Fort Lauderdale, Florida with 66,000 square feet of
space. It was built in 1984 and is 100% owned by the Fund. It
is located in an established office park in an area known as
Cypress Creek near the Broward County Executive Airport. This
submarket competes for tenants with three other areas: Fort
Lauderdale, Boca Raton, and Deerfield Beach.
The Cypress Creek office market consists of
approximately 4 million square feet in 48 competitive buildings.
Average market occupancy in 1994 was only 86%, but with recorded
net absorption of approximately 52,000 square feet in 1995 and
approximately 148,000 square feet in 1996, overall occupancy rate
was approximately 93% at year-end 1996. Demand for space in the
Cypress Creek submarket has continued to increase, as evidenced
by a $1.00-$2.00 per square foot increase in market rental rates
at year-end 1996 over 1995. Despite the fact that there is no
new speculative office construction planned in the submarket for
the near-term, it is anticipated that a continued rise in rental
rates could trigger new development. Developers have been taking
steps to begin construction in other parts of Broward County.
Leases covering 43% of the space at Business Plaza
expire between May 1997 and December 1998, and it is estimated
that capital improvements, leasing commissions and tenant
improvements over the same period would be approximately $70,000.
Bonnie Lane
The Fund owns a 100% interest in this two-building
multi-tenant manufacturing/distribution project in Elk Grove
Village, Illinois. The buildings have 65,000 and 55,000 square
feet of space, respectively. Bonnie Lane was built in 1981.
A lease with a tenant representing 13,200 square feet
or 11% of this suburban Chicago Property was signed during 1996,
increasing occupancy from 89% at year end 1995 to 100% at year
end 1996. The western O'Hare suburban Chicago industrial
submarket in which Bonnie Lane is located consists of
approximately 160 million square feet of space in all types of
industrial projects. This submarket is a part of the larger west
and northwest Chicago suburban industrial market which
experienced net positive absorption of approximately 738,000
square feet during 1996. Speculative construction has continued,
but it is primarily in outlying areas due to the limited supply
of available land. The range of net rental rates in the market
for comparable space increased from approximately $3.50 to $4.75
net per square foot per year in 1995 to $3.75 to $5.00 per square
foot by year end 1996.
Glenn Avenue
The Fund holds a 100% interest in this 82,000 square
foot multi-tenant warehouse, distribution and light manufacturing
project, which was built in 1980. The site is in Wheeling,
Illinois, a northwest Chicago suburb.
During 1996, this industrial Property remained 100%
leased as five tenants renewed leases covering 73% of the space
in the Property. This Property competes in the west and
northwest Chicago suburban industrial market, which is discussed
above in connection with the Bonnie Lane Property.
Leases covering 36% of the space at Glenn Avenue expire
between May 1997 and December 1998, and it is estimated that
capital improvements, leasing commissions and tenant improvements
over the same period would be approximately $62,000.
Tierrasanta
The Fund owns a 30% interest in Tierrasanta 234, a
joint venture with T. Rowe Price Realty Income Fund III,
America's Sales-Commission-Free Real Estate Limited Partnership
and T. Rowe Price Realty Income Fund IV, America's Sales-
Commission-Free Real Estate Limited Partnership, two of the
Affiliated Funds. Tierrasanta 234 owns a 100% interest in
Tierrasanta Research Park in San Diego, California. The project,
built in 1984 and acquired in 1988, contains four buildings
utilized for research and development purposes, for a total of
104,000 square feet of space. It is located in the Kearny Mesa
market area, north of San Diego, which is part of the larger
"Interstate 15" commercial corridor.
Tierrasanta is part of the Kearny Mesa research and
development ("R&D")/office market. The Property competes against
both R&D and office buildings. Overall activity in the submarket
was good in 1996, with approximately 1,475,000 square feet of
gross absorption for the year in R&D space, and slightly higher
rents than at year-end 1995. The vacancy rate in the market at
year-end 1994 was approximately 13%, improving to approximately
10% in 1995 and 6% in 1996.
Rental rates in this submarket at year-end for R&D
space range between $6.60 and $9.00 per square foot net of
expenses, with tenant improvements ranging between $5.00 and
$15.00 per square foot. Office rents are ranging between $10.80
and $16.20 per square foot with tenant improvements ranging
anywhere from $7.00 to $20.00 per square foot. There continue to
be several 15,000 to 25,000 square foot buildings available for
lease in the Kearny Mesa submarket which compete directly with
the Tierrasanta vacancy.
Leases covering 32% of the space in Tierrasanta expire
between May 1997 and December 1998, and it is estimated that the
Fund's share of capital improvements, leasing commissions and
tenant improvements over the same period would be approximately
$170,000.
Annual Valuation
At the end of each year, commencing in 1990, the
General Partner establishes an estimated value of the Fund's
portfolio of Properties ("Property Valuation"). In order to
establish the Property Valuation, a range of values is first
established for each of the Fund's Properties. This range is
primarily based on the discounting of expected future cash flows
for the Properties, taking into account current and anticipated
market rental rates and discount rates in the market where the
Property is located, as well as conditions at the Property
itself. Based on the range of values established for each
Property, the General Partner establishes a range for the
estimated current value of the Properties in the aggregate. The
Fund's analysis is primarily based on data provided by LaSalle.
The Fund also retains an independent appraiser to review the data
provided by LaSalle, including LaSalle's assumptions as to market
rates and projected future rental rates, and its application of
these assumptions to the Properties. The appraiser also reviews
the reasonableness of the aggregate market value range. Based
upon the range of values established for the Properties as a
group, the General Partner selects a figure within this range
which then constitutes the Property Valuation.
Once the Property Valuation is established, the General
Partner uses the Property Valuation, along with the Fund's other
assets and liabilities, to prepare an estimated unit value ("Unit
Valuation") by dividing the aggregate net value by the number of
Units outstanding at the end of the year. The Unit Valuation is
not necessarily representative of the value of the Units when the
Fund liquidates because, among other reasons, the Unit Valuation
includes only an estimate of the value and the costs of selling
the Properties and does not take into account the ongoing costs
of operating the Properties and the Fund until liquidation. Nor
does the Unit Valuation necessarily represent the value at which
a Limited Partner could sell his or her Units currently because
of the lack of liquidity of the Units. In addition, this
valuation process does not take into account the possibility
that, as a result of the terms of the Fund's Partnership
Agreement, liquidating distributions per Unit to Taxable Limited
Partners (generally, those Limited Partners who are subject to
federal income tax) may vary from those to Tax-Exempt Limited
Partners (Limited Partners such as those who invested in the Fund
from an individual retirement account). At December 31, 1996,
the Unit Valuation was $487. Adjusted for the February
distribution of $16 and the distributions in connection with the
AMCC and South Point Plaza sales of $93.50 and $17.28 per Unit,
respectively, the adjusted Unit Valuation is $360. The sales
price under the Purchase and Sale Agreements after deducting
expenses of the Transaction to the Fund, is estimated to average
approximately $358 per Unit. However, the expected distribution
as a result of the Sale is anticipated to range from $251 to $566
per Unit, depending on whether the Limited Partner is a Taxable
Limited Partner or a Tax-Exempt Limited Partner and the admission
date of the Limited Partner. See "CERTAIN FEDERAL AND STATE
INCOME TAX CONSEQUENCES OF THE SALE--Taxation Prior to
Liquidation." Additional net assets from current and prior
operations are also expected to be distributed to Limited
Partners in conjunction with the Transaction.
Limited Partners who purchased their Units during the
initial public offering of the Units may not receive aggregate
distributions, including distributions from the Sale, equal to
the amount that they originally invested in the Fund.
Fairness Opinion
The General Partner requested Legg Mason to render it
an opinion as to whether the consideration to be received by the
Fund from the Sale is fair to the Fund and the Limited Partners,
from a financial point of view. The General Partner retained
Legg Mason based upon Legg Mason's prominence as an investment
banking and financial advisory firm with experience in the
valuation of businesses, their properties and their securities in
connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of securities, private
placements and valuations for corporate purposes especially with
respect to REITs and other real estate companies.
On July 21, 1997, Legg Mason delivered its written
opinion to the General Partner (the "Fairness Opinion") that, as
of the date of such opinion, based on Legg Mason's review and
subject to the limitations described below, the consideration to
be received by the Fund from the Sale is fair to the Fund and the
Limited Partners, from a financial point of view. The Fairness
Opinion does not constitute a recommendation to any Limited
Partner as to whether such Limited Partner should approve the
Sale. Additionally, the Fairness Opinion does not compare the
relative merits of the Sale with those of any other transactions
or business strategies available to the Fund as alternatives to
the Sale, and Legg Mason was not requested to, and did not,
solicit the interest of any other party in acquiring the
Properties.
THE FULL TEXT OF THE FAIRNESS OPINION (WHICH CONTAINS A
DESCRIPTION OF THE ASSUMPTIONS AND QUALIFICATIONS MADE, MATTERS
CONSIDERED AND LIMITATIONS IMPOSED ON THE REVIEW AND ANALYSIS) IS
SET FORTH IN APPENDIX I AND SHOULD BE READ IN ITS ENTIRETY. THE
FUND IMPOSED NO CONDITIONS OR LIMITATIONS ON THE SCOPE OF LEGG
MASON'S INVESTIGATION OR THE METHODS OR PROCEDURES TO BE FOLLOWED
IN RENDERING THE FAIRNESS OPINION.
In rendering the Fairness Opinion, Legg Mason, among
other things: (i) reviewed the Purchase and Sale Agreements; (ii)
reviewed and analyzed certain consolidated historic and projected
financial and operating data of the Fund and the Properties,
including certain audited and unaudited financial statements for
the Fund and unaudited cash-basis projections for the Properties,
as provided by the General Partner and LaSalle; (iii) reviewed
and analyzed certain other internal information concerning the
business and operations of the Fund and the Properties furnished
to it by the General Partner and LaSalle; (iv) reviewed and
analyzed certain publicly available information concerning the
Fund, the Properties and the Purchaser; (v) reviewed and analyzed
certain publicly available information concerning the terms of
selected merger and acquisition transactions that Legg Mason
deemed relevant to its inquiry; (vi) reviewed and analyzed
certain selected market purchase price data that Legg Mason
considered relevant to its inquiry; (vii) held meetings and
discussions with certain directors, officers and employees of the
General Partner and LaSalle concerning the operations, financial
condition and future prospects of the Properties; and (viii)
conducted such other financial studies, analyses and
investigations, including visits to certain of the Properties,
and considered such other information as it deemed appropriate.
In preparing its opinion, Legg Mason relied, without
independent verification, on the accuracy and completeness of all
information that was publicly available, supplied or otherwise
communicated to Legg Mason by the General Partner and LaSalle.
Legg Mason assumed that the financial projections (and the
assumptions and bases thereof) examined by it were reasonably
prepared and reflected the best currently available estimates and
good faith judgments of the General Partner and LaSalle as to the
future performance of the Properties. Legg Mason did not make an
independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of the Fund (including the Properties),
nor was Legg Mason furnished with any such independent
evaluations or appraisals. The Fairness Opinion is based upon
financial, economic, market and other conditions and
circumstances existing and disclosed to it as of the date of its
opinion.
The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant
quantitative methods of financial analyses and the application of
those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to partial analysis or
amenable to summary description. Accordingly, Legg Mason
believes that its analysis must be considered as a whole and that
considering any portion of the analysis and of the factors
considered, without considering all analyses and factors, could
create a misleading or incomplete picture of the process
underlying the Fairness Opinion. Any estimates contained in
these analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be
significantly more or less favorable than as set forth therein.
In addition, analyses relating to the values of real estate
properties are not appraisals and may not reflect the prices at
which such properties may actually be sold. Accordingly, such
analyses and estimates are inherently subject to substantial
uncertainty and Legg Mason does not assume responsibility for any
future variations from such analyses or estimates. The following
paragraphs summarize the significant quantitative and qualitative
analyses performed by Legg Mason in arriving at the Fairness
Opinion.
Analyses and Conclusions
As background for its analyses, Legg Mason held
extensive discussions with the General Partner and LaSalle
regarding the history, current business operations, financial
condition and future prospects of the Properties.
In valuing the Properties, Legg Mason considered a
variety of valuation methodologies, including (i) a discounted
cash flow analysis; (ii) an analysis of certain transactions
pursuant to which selected REIT's have acquired a portfolio of
industrial or office properties; and (iii) an analysis of certain
publicly available market purchase price data for industrial and
office properties in the markets in which the Properties are
located.
For purposes of its analysis, Legg Mason relied upon
audited financial statements for the Fund for the year ended
December 31, 1996, unaudited financial statements for the Fund
for the three months ended March 31, 1997 and unaudited cash-
basis projections for the Properties for the years ending
December 31, 1997 through 2007, inclusive, as provided by the
General Partner and LaSalle.
In connection with rendering its opinion, Legg Mason
performed a variety of financial and comparative analyses,
including those summarized below, and relied most heavily on the
discounted cash flow analysis. Legg Mason's opinion is directed
only to the fairness to the Fund and to the Limited Partners,
from a financial point of view, of the consideration to be
received by the Fund from the Sale, and does not address any
other aspect of the Sale. The summary set forth below does not
purport to be a complete description of the analyses used by Legg
Mason in rendering its Fairness Opinion.
Discounted Cash Flow Analysis. Legg Mason analyzed the
financial terms of the Sale using a discounted cash flow
analysis. The discounted cash flow approach assumes, as a basic
premise, that the intrinsic value of any business or property is
the current value of the future cash flow that the business or
property will generate for its owners. To establish a current
implied value under this approach, future cash flow must be
estimated and an appropriate discount rate determined. Legg
Mason used projections and other information provided by the
General Partner and LaSalle to estimate the free cash flows,
defined as total projected cash revenue (including base rent and
expense recoveries net of certain free rent and vacancy
allowances) minus total projected cash property expenses
(including utility expense, repair and maintenance expense,
property management fees, insurance, real estate taxes, tenant
improvements, leasing commissions and capital improvements)
("Free Cash Flows") for the nine months ending December 31, 1997
through the year ending December 31, 2007, inclusive.
The Free Cash Flows were then discounted to the
present, using discount rates ranging from 11.2% to 14.2% (12.5%
midpoint) and growth rates applied to the average of the Free
Cash Flows for the years ending December 31, 2005 through 2007
ranging from 4.0% to 5.5%. These discount rates reflected Legg
Mason's assessment of real estate investments in general, and the
specific risks of the Properties, in particular. Legg Mason's
calculations resulted in a range of aggregate imputed values of
the Properties of $22.8 million to $36.3 million, with a mean of
$28.2 million.
Given that the consideration of $30,440,820 to be
received by the Fund from the Sale is within the aggregate values
of the Properties derived from discounted cash flow analysis,
Legg Mason believes that this analysis supports the fairness to
the Fund and the Limited Partners, from a financial point of
view, of the consideration to be received from the Sale.
Selected Comparable Acquisition Analysis. Legg Mason
also analyzed selected transactions (the "Comparable Industrial
Acquisitions") in which certain office/industrial REIT's (the
"Acquiring Industrial Companies") acquired a portfolio of
industrial properties (the "Target Industrial Portfolios"). Legg
Mason compared the purchase price paid in each Comparable
Industrial Acquisition with the latest twelve months or reported
period, on an annualized basis, revenues, EBITDA and funds from
operations of the Target Industrial Portfolios and calculated the
following range of multiples: a range of purchase price to Target
Industrial Portfolio revenues of 6.0x to 8.7x, with a mean of
7.4x; a range of purchase price to Target Industrial Portfolio
EBITDA of 9.0x to 11.8x, with a mean of 10.4x; and a range of
purchase price to Target Industrial Portfolio funds from
operations of 8.3x to 11.8x, with a mean of 10.3x. Applying the
applicable range of these acquisition multiples to the industrial
Properties' revenues, EBITDA and funds from operations for the
trailing twelve month period ended March 31, 1997, as adjusted to
reflect management's pro forma adjustments and certain additional
adjustments that Legg Mason deemed appropriate, yielded an
implied aggregate range of values of the industrial Properties of
approximately $20.4 million to $31.7 million, with a mean of
$26.1 million.
Legg Mason also analyzed selected transactions (the
"Comparable Office Acquisitions") in which certain
office/industrial REITs (the "Acquiring Office Companies")
acquired a portfolio of office properties (the "Target Office
Portfolios"). Legg Mason compared the purchase price paid in
each Comparable Office Acquisition with the latest twelve months
or reported period, on an annualized basis, revenues, EBITDA and
funds from operations of the Target Office Portfolios and
calculated the following range of multiples: a range of purchase
price to Target Office Portfolio revenues of 2.2x to 10.0x, with
a mean of 5.8x; a range of purchase price to Target Office
Portfolio EBITDA of 6.3x to 15.1x, with a mean of 10.6x; and a
range of purchase price to Target Office Portfolio funds from
operations of 0.7x to 17.3x, with a mean of 11.0x. Applying the
applicable range of these acquisition multiples to the office
Property's revenues, EBITDA and funds from operations for the
trailing twelve month period ended March 31, 1997, as adjusted to
reflect management's pro forma adjustments and certain additional
adjustments that Legg Mason deemed appropriate, yielded an
implied range of values for the office Property of approximately
$0.2 million to $6.4 million, with a mean of $3.5 million. Legg
Mason then combined the respective ranges of valuations of the
industrial Properties and the office Property, which yielded an
implied aggregate range of values of the Properties of
approximately $20.6 million to $38.2 million, with a mean of
$29.5 million.
Given that the consideration of $30,440,820 to be
received by the Fund from the Sale is within the aggregate values
for the Properties derived from the range of acquisition
multiples of the Comparable Industrial Acquisitions and the
Comparable Office Acquisitions, Legg Mason believes that this
analysis supports the fairness to the Fund and the Limited
Partners, from a financial point of view, of the consideration to
be received from the Sale.
Selected Comparable Market Purchase Price Analysis.
Legg Mason also compared certain financial information relating
to the Properties to certain publicly available information on
current purchase prices of industrial and office buildings in
particular markets in which the Properties are located.
Legg Mason analyzed the purchase capitalization rate
(calculated by dividing property net operating income for the
applicable trailing twelve month period by the purchase price
paid) for the Atlanta, Georgia; Chicago, Illinois; Phoenix,
Arizona; and Los Angeles and San Diego, California industrial
markets as well as for the Ft. Lauderdale, Florida office market.
Legg Mason believes that these markets closely resemble the
respective markets in which the Properties are located and are an
appropriate basis for the comparison of values.
Applying this selected data to the applicable
Properties' net operating income for the twelve months ended
March 31, 1997, as adjusted to reflect management's pro forma
adjustments and certain additional adjustments that Legg Mason
deemed appropriate, yielded an aggregate value of the Properties
of $30.9 million.
Given that the consideration of $30,440,820 to be
received by the Fund from the Sale is approximately equal to the
aggregate value for the Properties derived from the prevailing
purchase capitalization rates, Legg Mason believes that this
analysis supports the fairness to the Fund and the Limited
Partners, from a financial point of view, of the consideration to
be received from the Sale.
Pursuant to an engagement letter dated May 12, 1997,
Legg Mason will receive $35,000 for its services in rendering the
Fairness Opinion. Legg Mason will also be reimbursed for certain
of its expenses, in an amount not to exceed $5,000 without the
prior consent of the General Partner. The Fund and the General
Partner have agreed to indemnify Legg Mason, its affiliates and
each of its directors, officers, employees, agents, consultants
and attorneys, and each person or firm, if any, controlling Legg
Mason or any of the foregoing, against certain liabilities,
including liabilities under federal securities law, that may
arise out of Legg Mason's engagement.
Legg Mason has, from time to time, provided securities
brokerage services to Associates and its affiliates, and may do
so in the future, but the compensation paid by Associates and its
affiliates to Legg Mason is not material, constituting less than
1% of Legg Mason's total 1996 commission revenue, and less than
1% of such commissions paid by Associates and its affiliates in
1996. Legg Mason has also been retained by the Affiliated Funds
for separate fees to render opinions in connection with the sale
by such Affiliated Funds of substantially all of their properties
to the Purchaser.
Recommendation of the General Partner
The General Partner believes that the Transaction is in
the best interests of the Fund and the Limited Partners, and,
therefore, recommends that the Limited Partners approve the
Transaction.
In reaching its recommendation, the General Partner
considered the following factors with respect to the Transaction:
(i) In a sale of all of the Properties in one
transaction, all negotiations, including those relating to price
and any adjustments to price as a result of the Purchaser's due
diligence, are conducted on a portfolio level rather than
Property by Property, which is more efficient and is anticipated
to result in fewer price adjustments;
(ii) The purchase price was achieved by arm's length
negotiations and exceeds the Property Valuation;
(iii) The Fairness Opinion of Legg Mason that the Sale
is fair to the Fund and the Limited Partners from a financial
point of view;
(iv) Prior to entering into the Purchase and Sale
Agreements, the General Partner made inquiries regarding the
Purchaser and determined that the Purchaser has a reputation for
completing purchases it contracts to make and for doing so in a
timely and expeditious manner;
(v) The terms and conditions of the Purchase and Sales
Agreements described under "Terms of the Purchase and Sale
Agreements," in particular: (a) the Purchaser's obligations are
not subject to obtaining financing; (b) the Purchaser will
forfeit its $349,908.20 Escrow Deposit if it fails to consummate
the Transaction other than for the due diligence reasons
discussed under "Terms of the Purchase and Sale Agreements--
Condition of the Properties; Purchaser's Review of the
Properties;" (c) it is unlikely that there will be any
significant adjustment to the purchase price because the
Purchaser had early access to information and because of the
timing of the due diligence review; and (d) the Fund can
terminate the Purchase and Sale Agreements if a more favorable
unsolicited offer is received for the Fund's wholly-owned
Properties, although the Fund would then forfeit the Escrow
Deposit and pay an additional $600,000 to the Purchaser;
(vi) No brokerage commissions are required to be paid
by the Fund in connection with the Sale;
(vii) Selling all of the Properties at one time will
result in lower aggregate sale costs;
(viii) Selling all of the Properties at one time will
eliminate the need for the Fund to incur the ongoing
administrative and other expenses of continuing to operate the
Fund and certain Properties during an extended sales period;
(ix) The Sale and Liquidation will result in the more
accelerated return of capital to the Limited Partners;
(x) The Sale and Liquidation is anticipated to result
in the opportunity for the Taxable Limited Partners to receive
their final Schedules K-1 for 1997 and avoid future inconvenience
and expense from the requirement to reflect such schedules in
their income tax returns in subsequent years; and
(xi) Since the announcement of the Sale, the Fund has
received several expressions of interest to purchase individual
properties in its portfolio, but no other purchaser has expressed
an interest in purchasing the Fund's portfolio as a whole.
The General Partner considered the following additional
factors with respect to the disposition of the Properties in
general:
(i) The fact that the Properties have now been held for
their originally anticipated holding period;
(ii) The General Partner's belief that current market
conditions are favorable for a sale of the Properties due to the
favorable interest rate environment, the increased availability
of investor capital and the improvement in certain of the
marketplaces in which the Fund's Properties are located, as well
as the likelihood that speculative construction will commence in
several of these markets in the near future, as discussed under
the caption "THE TRANSACTION--Description of Properties to be
Sold;"
(iii) The liquidity the Transaction will provide to
Limited Partners that the retention of Units does not provide.
At present, there is no established public trading market for
Units and liquidity is limited to sporadic sales that occur
within an informal secondary market and occasional tender offers
for Units, which are generally at a substantial discount to the
Unit Valuation;
(iv) The age and physical condition of the Properties,
anticipated lease expirations and the anticipated need for
substantial expenditures on capital improvements and tenant
improvements in the near term if the Fund continued to hold the
Properties through the end of 1998;
(v) The historic as well as the present levels of
distributions to the Limited Partners (which have been lower than
originally anticipated); and
(vi) Retaining the Properties will continue to subject
the Fund to the risks inherent in the ownership of property such
as fluctuations in occupancy rates, operating expenses and rental
rates, which in turn may be affected by general and local
economic conditions, the supply and demand for properties of the
type owned by the Fund and federal and local laws and regulations
affecting the ownership and operation of real estate. More
particularly, the Fund would be subject to the risks of
prospective lease expirations over the next few years,
particularly at Atlantic Business Center and Oakbrook Corners,
which may require substantial cash expenditures to fund tenant
improvement costs and leasing commissions in order to attract and
retain tenants.
The primary disadvantages of disposing of the Properties
pursuant to the Sale are as follows:
(i) The Fund will not benefit from possible improvements in
economic and market conditions which could produce increased cash
flow and enhance the sales price of the Properties. The concern
in continuing to hold the Properties in an improving market is
that the market conditions which led to this improvement may
encourage an increasing supply of new properties which could
eventually lead to oversupply of the properties and weakening of
prices;
(ii) The sale of all of the Properties at one time may
not result in as high an aggregate sales price as if they were
sold individually; and
(iii) Although not anticipated, the Liquidation may
result in additional compensation to the General Partner equal to
the amount of assets transferred to the General Partner less the
amount necessary to satisfy the ultimate liabilities of the Fund.
The General Partner also examined the alternative of
disposing of the Properties individually or in smaller groups
over the next 18 months. Based upon the General Partner's
analysis as set forth above, the General Partner concluded that
the Sale is a superior alternative to this strategy. The General
Partner also considered liquidating the Fund in the ordinary
course following the Sale, without assuming the outstanding
liabilities of the Fund and receiving a commensurate amount of
assets to satisfy such liabilities. However, such form of
liquidation would likely result in additional administrative
expenses incurred by the continuation of the Fund into 1998, and
the receipt by Taxable Limited Partners of Schedules K-1 for such
period. Since it is unlikely that the Liquidation proposed as
part of the Transaction will result in compensation to the
General Partner (the transfer of assets and liabilities will be
based on a balance sheet prepared in accordance with Generally
Accepted Accounting Principles), the General Partner concluded
that the Liquidation was in the best interests of the Limited
Partners. See "THE TRANSACTION--Liquidation."
Limited Partners who purchased their Units during the
initial public offering of the Units may not receive aggregate
distributions, including distributions from the Sale, equal to
the amount that they originally invested in the Fund.
Failure to Approve the Transaction
If the Limited Partners fail to approve the Transaction,
the Fund will continue to operate the Properties and attempt to
sell the Properties in single or multiple sales, which may
include sales to the Purchaser, in order to complete the
liquidation of the Fund before the end of 1998. Such sales
could, under certain circumstances, require the consent of the
Limited Partners.
If the Transaction is not approved, the sale of Tierrasanta
(the Property held by a joint venture in which the Fund has a 30%
interest) may nevertheless be consummated because the sale of the
Fund's interest in this Property does not require the approval of
the Limited Partners. Moreover, the consummation of such sale
may be required under the agreement governing such joint venture.
Under such joint venture agreement, if the Fund chooses not
to sell the Property, but either of the other two joint venture
partners chooses to sell the Property, the Fund will have the
right to buy out the interests of the venture partners proposing
the sale. If the Fund fails to buy such joint venture interests,
the sale of the Property will be consummated without the Fund's
consent. The General Partner does not anticipate that the Fund
would purchase the joint venture interests in such a case.
Terms of the Purchase and Sale Agreements
The following is a summary of the material terms of the
Purchase and Sale Agreements and Joint Escrow Instructions, dated
as of April 11, 1997, by and between the Fund and Purchaser and,
with respect to Tierrasanta, between the joint venture and the
Purchaser. This summary does not purport to be complete and
reference is made to the Purchase and Sale Agreements, which are
incorporated herein by reference. Copies of the Purchase and Sale
Agreements will be provided to Limited Partners upon written
request to T. Rowe Price Services, Inc., P.O. Box 89000,
Baltimore, Maryland 21289-0270, or by calling (800) 962-8300.
Capitalized terms used but not defined herein have the meaning
ascribed to them in the Purchase and Sale Agreements.
The Purchase and Sale Agreements provide for the Sale by
the Fund to Purchaser of the Properties. The purchase price
("Purchase Price") for all of the Properties is $34,990,820 (of
which the Fund's aggregate interest therein is $30,440,820),
payable as follows: (i) $349,908.20 of the Purchase Price, the
Escrow Deposit, was deposited by Purchaser into an escrow account
contemporaneously with the execution of the Purchase and Sale
Agreements; and (ii) the balance of the Purchase Price, subject
to adjustment as described below, is payable by Purchaser at the
Closing. The Closing Date is scheduled for the first business
day that is five days after the latest to occur of: (a) the
approval of the Transaction by a majority of the Limited Partners
of the Fund; (b) the expiration of the last of the Due Diligence
Periods (as described below); and (c) the receipt of the Fairness
Opinion.
Condition of the Properties; Purchaser's Review of the
Properties
The Purchaser is purchasing the Properties on an "As Is,"
"Where Is" and "With All Faults Basis" without any representation
by the Fund as to the condition of the Properties or their
fitness for any purpose except as specifically described below.
The Purchase and Sale Agreements provide that, prior to
Closing, the Purchaser has three periods (collectively, the "Due
Diligence Periods") during which it has the opportunity to review
and analyze certain aspects of the Properties and certain limited
rights to cancel the Purchase and Sale Agreements. During the
period that commenced April 11, 1997 and expired May 1, 1997
("Financial Due Diligence Period"), the Purchaser had the
opportunity to review all of the Fund's Records and request other
information concerning the Properties. The Purchaser had the
right, by written notice to the Fund, to terminate the Agreement
and have the entire Escrow Deposit refunded to it. Because the
Fund did not receive such a notice from the Purchaser during the
Financial Due Diligence Period, 50% of the Escrow Deposit became
non-refundable on May 1, 1997.
Additionally, pursuant to the Purchase and Sale Agreements,
the Fund provided the Purchaser with an ASTM Phase I
Environmental Report (each an "Environmental Report" and
collectively, the "Environmental Reports") with respect to each
Property. The Purchaser had a 30-day period (the "Environmental
Due Diligence Period"), commencing on the date that it received
all such Environmental Reports, to review and analyze the
Environmental Reports and terminate the Purchase and Sale
Agreements by written notice to the Fund and have 50% of the
Escrow Deposit refunded to it. Because the Fund did not receive
written notice from the Purchaser terminating the Purchase and
Sale Agreements prior to June 23, 1997, the date on which the
Environmental Due Diligence Period expired, the entire Escrow
Deposit became non-refundable, subject to the provisions for
title review described below.
Finally, the Purchase and Sale Agreements provide for a
time period (the "Title Due Diligence Period") for the Purchaser
to review the state of title to the Properties. For each
Property, the Purchaser was provided with a preliminary title
insurance commitment and a current ALTA survey (collectively, the
"Title Review Material"). Upon receipt of the Title Review
Material, the Purchaser provided the Fund with written notice of
the matters revealed by the Title Review Material of which the
Purchaser disapproved (the "Disapproved Exceptions"). Except for
certain monetary liens, the Fund has no obligation to remove any
Disapproved Exceptions. Within ten days of the receipt of
Purchaser's notice of Disapproved Exceptions, the Fund provided
the Purchaser with a response specifying which Disapproved
Exceptions it would remove prior to Closing. Although the Fund
did not agree to remove all Disapproved Exceptions, the Purchaser
did not elect to terminate the Purchase and Sale Agreements.
Consequently, as of the date hereof, the Escrow Deposit is non-
refundable.
Conditions Precedent to Closing
The obligations of the Fund to close under the Purchase and
Sale Agreements are subject to (i) the approval of the
Transaction by a majority of the Limited Partners, (ii) the
validity of the Fund's representations and warranties on the
Closing Date, (iii) the absence of a fire or other insured
casualty for which the Fund has elected to terminate the Purchase
and Sale Agreements in accordance with their terms, and (iv) the
receipt of the Fairness Opinion.
The obligations of the Purchaser to close under the
Purchase and Sale Agreements are subject to (i) the Purchaser
having received an estoppel certificate with respect to 90% of
the Major Tenants (defined as a tenant leasing 10,000 square feet
of more of space) from either the tenant or the Fund, (ii) the
absence of a casualty or condemnation for which the Purchaser has
elected to terminate the Purchase and Sale Agreements in
accordance with their terms, (iii) the willingness of the Title
Company to issue title insurance policies insuring the
Purchaser's ownership of the Properties, and the (iii) the
absence of Material Inaccuracies (defined as an inaccuracy
resulting in an aggregate loss to the Purchaser in excess of
$284,908.20, or, in the case of Tierrasanta, $65,000) in the
Fund's representations and warranties.
Casualty to or Condemnation of the Properties
If, prior to the Closing, any one Property is damaged due
to a fire or other insured casualty and the cost of repairing
such damage is in excess of $100,000 (or, in the case of
Tierrasanta, $150,000), then the Purchaser may elect to terminate
the Purchase and Sale Agreements with respect to such Property
and the Purchase Price shall be reduced by the market value of
such Property under the Fund's casualty insurance policy prior to
the casualty.
If, prior to Closing, any one Property is damaged due to
fire or other insured casualty and either: (i) the cost of
repairing such damage is $100,000 or less (or, in the case of
Tierrasanta, $150,000), or (ii) the cost of repairing such damage
is in excess of $100,000 (or, in the case of Tierrasanta,
$150,000) and the Purchaser has not elected to terminate the
Purchase and Sale Agreements with respect to such damaged
Property, the Closing shall occur as scheduled, the Fund shall
assign to the Purchaser the proceeds of all casualty insurance
with respect to such damage and the Purchase Price shall be
reduced by the amount of the deductible under Fund's casualty
insurance.
If, prior to Closing, more than 10% of any one Property is
condemned or taken by eminent domain and, as a consequence, the
Property cannot be operated consistently with its use prior to
such taking, then the Purchaser may elect to terminate the
Purchase and Sale Agreements with respect to such Property and
the Purchase Price shall be reduced by the allocated value of the
affected Property. If, prior to Closing, a portion of any one
Property is taken by eminent domain and either the Purchaser does
not elect to terminate the Purchase and Sale Agreements with
respect to the affected Property or the taking is not of a
character that would permit the Purchaser to make such election,
the Closing shall occur as scheduled without reduction in the
Purchase Price and the Fund shall assign to the Purchaser all
awards, if any, resulting from such condemnation.
Operation of the Properties Prior to Closing
Prior to the Closing, the Fund shall operate and maintain
the Properties in substantially the same manner as they were
operated prior to execution of the Purchase and Sale Agreements,
provided, however, that during the pendency of the Purchase and
Sale Agreements, the Fund shall not, without the prior consent of
the Purchaser, (i) enter into any material agreement affecting
the Properties or any one of them, (ii) waive a material
obligation of a tenant, (iii) materially modify any Tenant Lease
or Service Contracts, or (iv) perform any physical alterations to
the Properties costing in the aggregate in excess of $50,000.
Representations and Warranties
The Purchase and Sale Agreements contain various
representations and warranties of the Fund relating to, among
other things: (i) due organization and authority to enter into
the Purchase and Sale Agreements, (ii) the absence of conflicts
under any documents to which it is party and of violations of
agreements and instruments by which it is bound, (iii) the
absence of legal proceedings, governmental investigations and
violations of law, and (iv) the accuracy of the rent roll and
schedule of service contracts provided to the Purchaser.
The Purchase and Sale Agreements also contain various
representations and warranties of the Purchaser relating to,
among other things: (i) due organization and authority to perform
its obligations under the Purchase and Sale Agreements, (ii) the
absence of conflicts under any documents to which it is party and
of violations of agreements and instruments by which it is bound,
and (iii) the confidential nature of the transaction.
Default and Damages
The Purchase and Sale Agreements provide that the
Purchaser's sole recourse for any uncured breach (a "Default") by
the Fund of any representation or warranty, or any other matter
related to the Purchase and Sale Agreements prior to the Closing
shall be to terminate the Purchase and Sale Agreements and
receive a refund of the Escrow Deposit together with a
reimbursement of out-of-pocket expenses of up to $105,000
($15,000 with respect to Tierrasanta), provided, however, the
Purchaser shall have no such right to terminate the Purchase and
Sale Agreements and receive a refund of the Escrow Deposit and
reimbursement of out-of-pocket expenses unless all such Defaults
by the Fund in the aggregate materially and adversely affect the
value of any one Property by at least $100,000 or the value of
all the Properties by at least $700,000 (or, in the case of
Tierrasanta, $150,000).
In the event that a Default by the Fund is first discovered
by the Purchaser after the Closing, Purchaser shall have no
remedy for such Default unless such Default (i) relates to a
matter expressly stated in the Purchase and Sale Agreements to
survive the Closing, and (ii) Purchaser brings a claim with
respect to such Default prior to the earlier of (a) October 31,
1997 or (b) 90 days following the Closing. In addition, the Fund
shall have no liability to Purchaser based upon any inaccuracy in
the Fund's representations and warranties contained in the
Purchase and Sale Agreements unless the same results in damage to
Purchaser of more than $284,908.20 (or, in the case of
Tierrasanta, $65,000) and the Fund's aggregate liability to
Purchaser for all such inaccuracies is $2,200,000 (or, in the
case of Tierrasanta, $500,000).
Proration
All items of income and expense will be apportioned and
adjusted between the Fund and the Purchaser as of 12:00 midnight,
Eastern Standard time, of the day preceding the Closing Date.
Termination
The Purchase and Sale Agreements may be terminated by the
Fund if it receives a more favorable offer for the purchase of
the wholly-owned Properties from a bona fide third party. In the
event of a termination of the Purchase and Sale Agreements as a
result of a more favorable offer, the Escrow Deposit of
$284,908.20 with respect to such Properties would be returned to
the Purchaser and the Fund would pay the Purchaser a topping fee
of $600,000 when, and if, the Fund actually closes on such more
favorable offer. The Purchase and Sale Agreements prohibit the
Fund from actively seeking a more favorable offer, but allow the
Fund to negotiate in good faith in the event that it receives an
unsolicited offer.
The Liquidation
Following the consummation of the Sale, the General Partner
will prepare a balance sheet (the "Balance Sheet") in accordance
with Generally Accepted Accounting Principles ("GAAP"), setting
forth the total amount of assets and liabilities of the Fund,
which will be audited by the Fund's independent auditors. The
General Partner shall then determine the amount of net assets
("Net Assets") of the Fund by deducting all of such liabilities
reflected on the Balance Sheet from the total assets of the Fund
at such time. Promptly thereafter, such Net Assets, which will
include net proceeds from the Sale, shall be distributed to the
Limited Partners and the General Partner in accordance with the
terms of the Partnership Agreement by utilizing the cash proceeds
derived from the Sale and any other cash held by the Fund. If
necessary, in order to avoid a distribution in kind to the
Limited Partners, the General Partner will provide additional
cash to the Fund, in exchange for non-cash assets of the Fund of
equal value, to facilitate a cash distribution to the Partners
equal to the total amount of Net Assets.
The General Partner has determined that it is in the best
interests of the Limited Partners to terminate the Fund by
December 31, 1997, if possible, in order to eliminate the need
for the Fund to prepare, and the Taxable Limited Partners to
receive, Schedules K-1 with respect to 1998. In order to make
reasonable provision to pay all outstanding liabilities of the
Fund prior to the end of 1997, the General Partner has agreed to
assume all liabilities of the Fund, subject to its receipt of
sufficient assets of the Fund to satisfy such liabilities set
forth on the Balance Sheet. Although unlikely, if the amount
necessary to satisfy the liabilities proves to be less than the
assets transferred to the General Partner for such purpose, the
General Partner would receive additional compensation in an
amount equal to the difference between such assets and
liabilities.
BENEFITS OF THE TRANSACTION TO AND POSSIBLE
CONFLICTS OF THE GENERAL PARTNER AND ITS AFFILIATES
The General Partner does not anticipate receiving any fees
or distributions in connection with the Sale of the Properties.
In accordance with the Partnership Agreement, following the
consummation of the Sale, the General Partner may receive a 9%
management fee, as well as a General Partner distribution of 1%
of certain monies which were derived from operations in prior
periods and are still held by the Fund at the time of
Liquidation. However, the General Partner is entitled to these
monies, regardless of whether or not the Sale is consummated.
The Sale of all of the Properties at one time may, however,
accelerate the timing for the receipt of these monies by the
General Partner.
There was a potential conflict created by the Sale because
the Purchaser simultaneously offered to purchase substantially
all of the assets of all of the Funds. Associates is the
indirect parent company and controls the General Partner of the
Fund, as well as all of the general partners and the investment
manager, as the case may be, of the Affiliated Funds. The
apparent conflict was addressed by insisting that the Purchaser
negotiate and sign separate contracts with each of the selling
entities. In order to further confirm the fairness of these
third party contracts, each of the general partners or board of
directors of the Affiliated Funds, as the case may be, has
obtained a fairness opinion from Legg Mason that the
consideration to be received by the respective Affiliated Fund
from the sale to the Purchaser of such Affiliated Fund's
properties or interests therein is fair, from a financial
viewpoint, to the Affiliated Fund and its limited partners or
stockholders, as the case may be.
There is also a potential conflict for the General Partner
in recommending the Sale because a mutual fund sponsored by
Associates owns 1.8% of the outstanding shares of Glenborough
Realty Trust Incorporated, the value of which could be enhanced
by the consummation of the Sale. As of July 16, 1997, this
holding constituted less than 1% of the net asset value of the
fund and is not considered by Associates to be material to the
fund.
Conversely, the General Partner will be adversely affected
by the Sale because the 9% management fee and the 1% of cash from
operations which it presently receives will be eliminated (it
received $298,000 and $30,000, respectively, during 1996).
Further, in connection with the Liquidation, the General Partner
may be obligated to contribute to the Fund for distribution to
the Limited Partners an amount not in excess of the negative
balance in the General Partner's capital account. However, the
consummation of the Sale will also eliminate any liability of the
General Partner for liabilities of the Fund which could arise
from continued operation of the Fund. See "THE TRANSACTION--The
Liquidation."
CERTAIN FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE SALE
General
The Transaction, if approved, will have certain tax
implications to the Limited Partners that must be considered.
The following summarizes the material estimated federal income
tax consequences to Taxable Limited Partners arising from the
Transaction and provides a general overview of certain state
income tax considerations. This summary is based upon the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury
regulations, court decisions and published positions of the
Internal Revenue Service (the "Service"), each as in effect on
the date of this Consent Solicitation Statement. There can be no
assurance that the Service will agree with the conclusions stated
herein or that future legislation or administrative changes or
court decisions will not significantly modify the federal or
state income tax law regarding the matters described herein,
potentially with retroactive effect. This summary is not
intended to, and should not, be considered an opinion respecting
the federal or state income tax consequences of the Transaction.
Taxation Prior to Liquidation
A partnership is not a taxable entity and incurs no federal
income tax liability. Instead, each Partner is required to take
into account in computing his or her income tax liability his or
her allocable share of the Fund's items of income, gain, loss,
deduction and credit (hereinafter referred to as "income or
loss") in accordance with the Partnership Agreement. If the
allocation of income or loss in the Partnership Agreement does
not have "substantial economic effect" as defined in Code Section
704(b), the law requires the Fund's income or loss to be
allocated in accordance with the Limited Partners' or Partners'
economic interests in the Fund. The distribution of cash
attributable to Fund income is generally not a separate taxable
event.
For tax purposes, the Fund will realize and recognize gain
or loss separately for each Property (and in some cases, for each
building which is part of a Property). The amount of gain for tax
purposes recognized with respect to an asset, if any, will be an
amount equal to the excess of the amount realized (i.e., cash or
consideration received reduced by the expenses of the Sale) over
the Fund's adjusted tax basis for such asset. Conversely, the
amount of loss recognized with respect to an asset, if any, will
be an amount equal to the excess of the Fund's adjusted tax basis
over the amount realized by the Fund for such asset. The
"adjusted tax basis" of a Property is its cost (including
nondeductible capital expenditures made by the Fund at the time
of purchase) or other basis with certain additions or
subtractions for expenditures, transactions or recoveries of
capital during the period of time from acquisition of the
Property until the sale or other disposition. To determine the
gain or loss on the sale or other disposition of a Property the
unadjusted basis must be (i) increased to include the cost of
capital expenditures such as improvements, betterments,
commissions and other nondeductible charges; and (ii) decreased
by depreciation and amortization.
Each Limited Partner must report his or her allocable share
of these gains and losses in the year in which the Properties are
sold. Actual gain or loss amounts may vary from the estimates set
forth below. Each Limited Partner's allocable share of any
Section 1245 gain, Section 1231 gain or loss and Fund net taxable
income or loss from operations will be reflected on his or her
applicable Schedule K-1 (as determined in accordance with the
allocation provisions contained in the Partnership Agreement
discussed below).
Under Section 702(a)(3) of the Code, a partnership is
required to separately state, and the Partners are required to
account separately for, their distributive share of all gains and
losses. Accordingly, each Limited Partner's allocable share of
any Section 1231 gain or loss and depreciation recapture realized
by the Fund as a result of the Transaction would be reportable by
such Limited Partner on his or her individual tax return.
Section 1231 gains are those gains arising from the sale or
exchange of "Section 1231 Property" which means (i) depreciable
assets used in a trade or business or (ii) real property used in
a trade or business and held for more than one year. Conversely,
Section 1231 losses are those losses arising from the sale or
exchange of Section 1231 Property. If Section 1231 losses exceed
Section 1231 gains, such losses would be treated as ordinary
losses by the Partners.
To the extent that Section 1231 gains for any taxable year
exceed certain Section 1231 losses for the year, subject to
certain exceptions (such as depreciation recapture, as discussed
below), such gains and losses shall be treated as long-term
capital gains. However, Section 1231 gains will be treated as
ordinary income to the extent of prior Section 1231 losses from
any source that were treated as ordinary in any of the previous
five years.
Under Sections 1245 and 1250 of the Code, a portion of the
amount allowed as depreciation expense with respect to Section
1231 Property may be "recaptured" as ordinary income upon sale or
other disposition rather than as long-term capital gains
("Section 1245 gains" and "Section 1250 gains", respectively).
The Fund does not anticipate that it would have Section 1250
gains as a result of the Transaction, and believes that Section
1245 gains, if any, will be de minimis.
In general, under Section 11.4.4 of the Partnership
Agreement, gain from a "Terminating Sale" is allocated among
Partners having negative capital account balances in proportion
to and to the extent of their respective negative capital account
balances prior to making distributions of the sale proceeds. A
"Terminating Sale" means the earlier of the sale of the Fund's
last three properties or the sale of the Fund's properties which
causes the aggregate acquisition cost of all Fund properties
which have been sold to exceed 66 2/3% of the original
acquisition cost of all Fund properties. Thereafter, any gain
generally will be allocated among the Partners until the capital
account balance of each Partner equals the Partner's "Adjusted
Capital Contribution," which is defined as the Partner's original
capital contribution less the portion of such contribution
previously returned to the Partner. However, if such gain is
insufficient to bring the capital account balance of each Limited
Partner up to his or her Adjusted Capital Contribution, such gain
will be allocated so as to equalize, to the extent possible, the
capital accounts of the Limited Partners on a per-unit basis.
The per-unit capital account balances of the Limited
Partners vary. In particular, the capital account balances of
Taxable Limited Partners are lower than the balances of Tax-
Exempt Limited Partners. This variance is primarily the result
of special allocations of depreciation for tax purposes to the
Taxable Limited Partners during the life of the Fund. This
disproportionate allocation was mandated by the Fund's
Partnership Agreement and enabled the Taxable Limited Partners to
shelter a portion of their Fund income from federal income taxes.
In addition, the per-unit capital accounts of Limited Partners
may vary as a result of different admission dates to the Fund.
In accordance with the Partnership Agreement, distributions
in liquidation are determined based on positive capital account
balances for the Limited Partners. The Fund expects to recognize
taxable gains of approximately $2.1 million and taxable losses of
approximately $5.0 million as a result of the Sale. The net gain
from the Sale will not be sufficient to completely equalize the
per-unit capital account balances of the Limited Partners.
Limited Partners with higher per-unit capital account balances
will receive a per-unit distribution in excess of that paid to
Limited Partners with lower per-unit capital account balances.
Thus, the expected distribution as a result of the Sale is
anticipated to range from $251 to $566 per Unit, depending on
whether the Limited Partner is a Taxable Limited Partner or a
Tax-Exempt Limited Partner and the admission date of the Partner.
Taxation of Liquidation
After allocating income or loss to the Partners, with the
concomitant tax basis adjustments, the distribution of proceeds
from the Transaction will reduce each Limited Partner's federal
income tax basis in his or her Unit. To the extent that the
amount of the distribution is in excess of that basis, such
excess will be taxed as a long-term or short-term capital gain
depending on a Limited Partner's holding period. Upon the
subsequent termination of the Fund, most Limited Partners will
likely have basis remaining for their Units. The amount of such
remaining basis will give rise, in the year of the termination,
to a long-term or short-term capital loss, depending on the
Limited Partner's holding period.
Capital Gains
Net long-term capital gains of individuals, trusts and
estates will be taxed at a maximum rate of 28%, unless the rate
applicable to long-term capital gains is decreased by
legislation, while ordinary income (such as Section 1245 gain or
Section 1250 gain) will be taxed at a maximum rate of up to
39.6%. The amount of net capital loss that can be utilized to
offset income will be limited to the sum of net capital gains
from other sources recognized by the Limited Partner during the
tax year, plus $3,000 ($1,500 in the case of a married individual
filing a separate return). The excess amount of such net
long-term capital loss may be carried forward and utilized in
subsequent years subject to the same limitations.
Passive Loss Limitations
Limited Partners who are individuals, trusts, estates, or
personal service corporations are subject to the passive activity
loss limitations rules. A Limited Partner's allocable share of
Fund income or loss is treated as derived from a passive
activity, except to the extent of the Fund's portfolio income.
Portfolio income includes such items as interest and dividends.
A Limited Partner's allocable share of any Fund gain realized on
the Sale will be characterized as passive activity income. Such
passive activity income may be offset by passive activity losses
from other passive activity investments. Moreover, because the
Transaction will terminate the Limited Partner's interest in the
passive activity, a Limited Partner's allocable share of any Fund
loss realized on the sale of its investments, or loss realized by
the Limited Partner upon liquidation of his or her Units, will
not be subject to the loss limitations.
Certain State Income Tax Considerations
Because each state's tax law varies, it is impossible to
predict the tax consequences to the Limited Partners in all the
state tax jurisdictions in which they are subject to tax.
Accordingly, the following is a general summary of certain common
(but not necessarily uniform) principles of state income
taxation. State income tax consequences to each Limited Partner
will depend upon the provisions of the state tax laws to which
the Limited Partner is subject. The Fund will generally be
treated as engaged in business in each of the states in which the
Properties are located, and the Limited Partners would generally
be treated as doing business in such states and therefore subject
to tax in such state. Most states modify or adjust the taxpayer's
federal taxable income to arrive at the amount of income
potentially subject to state tax. Resident individuals generally
pay state tax on 100% of such state-modified income, while
corporations and other taxpayers generally pay state tax only on
that portion of state-modified income assigned to the taxing
state under the state's own apportionment and allocation rules.
Tax Conclusion
The discussion set forth above is only a summary of the
material federal income tax consequences to the Taxable Limited
Partners of the Properties and of certain state income tax
considerations. It does not address all potential tax
consequences that may be applicable to the Tax-Exempt Limited
Partners and to certain other categories of Limited Partners,
such as non-United States persons, corporations, insurance
companies, subchapter S corporations, partnerships or financial
institutions. It also does not address the state, local or
foreign tax consequences of the transactions. ACCORDINGLY,
LIMITED PARTNERS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING
THE SPECIFIC INCOME TAX CONSEQUENCES OF THE TRANSACTION TO THEM,
INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL
AND FOREIGN TAX LAWS.
NO APPRAISAL RIGHTS
If Limited Partners owning a majority of the outstanding
Units on the Record Date consent to the Transaction, such
approval will bind all Limited Partners. The Partnership
Agreement and the Delaware Revised Uniform Limited Partnership
Act, under which the Fund is governed, do not give rights of
appraisal or similar rights to Limited Partners who dissent from
the consent of the majority in approving or disapproving the
Transaction. Accordingly, dissenting Limited Partners do not
have the right to have their Units appraised or to have the value
of their Units paid to them if they disapprove of the action of a
majority in interest of the Limited Partners.
MARKET FOR THE FUND'S LIMITED PARTNERSHIP INTERESTS
AND RELATED SECURITY HOLDER MATTERS
At July 2, 1997, there were 13,121 Limited Partners. There
is no active public trading market for the Units. However,
during the period commencing in the third quarter of 1996, two
bidders, neither of whom is affiliated with the General Partner
or LaSalle, made tender offers for the Units at prices of $210
and $324 per Unit, subject to adjustment for certain
distributions by the Fund. The Fund has made material
distributions of property sale proceeds since these offers were
made. As of July 2, 1997, sales of 292 Units to the firm making
offers at $210 have been presented for processing, and the firm
making offers at $324 has presented 879 Units for processing. In
addition, in June 1997, a third unaffiliated bidder commenced a
tender offer for Units at a price of $120 per Unit, subject to
adjustment for certain distributions by the Fund. As of July 2,
1997, this bidder had not presented any Units for processing.
In 1987 Congress adopted certain rules concerning "publicly
traded partnerships". The effect of being classified as a
publicly traded Fund would be that income produced by the Fund
would be classified as portfolio income rather than passive
income. On November 29, 1995, the Internal Revenue Service
adopted final regulations ("Final Regulations") describing when
interests in Funds will be considered to be publicly traded. The
Final Regulations do not take effect with respect to existing
Funds until the year 2006. Due to the nature of the Fund's
income and to the low volume of transfers of Units, it is not
anticipated that the Fund will be treated as a publicly traded
Fund under currently applicable rules and interpretations or
under the Final Regulations. However, in the event the transfer
of Units presented for transfer within a tax year of the Fund
could cause the Fund to be treated as a "publicly traded Fund"
for federal tax purposes, the General Partner will accept such
transfers only after receiving from the transferor or the
transferee an opinion of reputable counsel satisfactory to the
General Partner that the recognition of such transfers will not
cause the Fund to be treated as a "publicly traded Fund" under
the Code. The General Partner is closely monitoring this
situation in light of the recent tender offers.
Cash distributions declared to the Limited Partners during
the two most recent fiscal years are as follows:
Distribution for the Amount of
Quarter Ended Distributions
per Unit
March 31, 1995 $ 8.75
June 30, 1995 $39.92
September 30, 1995 $ 8.75
December 31, 1995 $21.05
March 31, 1996 $49.45
June 30, 1996 $ 6.50
September 30, 1996 $34.41
December 31, 1996 $16.00
All of the foregoing distributions were paid from net cash
flows from operating activities, with the exception of the
distribution for the quarter ended June 30, 1995, which included
a distribution of $31.17 per unit representing the sale proceeds
of Sullyfield Circle, the distribution for the quarter ended
December 31, 1995, which included $9.62 per unit representing the
balance of the 1993 sale proceeds of one of the buildings in the
Coronado property, the distribution for the quarter ended March
31, 1996,which included $42.95 representing the proceeds of the
sale of Regal Row, and the distribution for the quarter ended
September 30, 1996, which included a distribution of $27.91 per
unit representing the proceeds of the sale of Fairchild Corporate
Center. In the second quarter of 1997, the Fund distributed
$93.50 per Unit, representing the proceeds of the sale of AMCC,
and $17.28 per Unit, representing the Fund's share of the
proceeds of the sale of South Point Plaza. No other
distributions have been made or declared for 1997.
There are no material legal restrictions on the Fund's
present or future ability to make distributions in accordance
with the provisions of the Partnership Agreement. Reference is
made to "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," below, for a discussion of
the Fund's plans regarding future distributions.
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data for each
of the years in the five-year period ended December 31, 1996 has
been derived from the Fund's financial statements audited by the
Fund's independent auditors. The following selected historical
financial data for the three-month periods ended March 31, 1997
and 1996 are unaudited and, in the opinion of the General
Partner, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of such
data. Financial data for the three-month period ended March 31,
1997 are not necessarily indicative of the results of operations
to be expected for the entire year. The selected financial data
set forth below should be read in conjunction with "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and the audited and unaudited financial statements
and related notes thereto appearing elsewhere herein.
(Dollar amounts in thousands, except per-unit data)
Year ended December 31,
1992 1993 1994 1995 1996
Total
assets $65,241 $54,365 $53,770 $50,529 $40,192
Total
revenues $6,710 $6,728 $6,983 $6,964 $6,189
Net
income
(loss)(1) $(1,818) $(8,142) $1,862 $2,392 $(720)
Net income
(loss) per
Unit(1) $(21.40) $(95.84) $21.92 $28.16 $(8.48)
Cash dis-
tributions
declared
per Unit:
From
operations $20.00 $20.00 $35.50 $37.68 $35.50
From sale
proceeds --- $12.00 --- $40.79 $70.86
3 months ended (unaudited)
March 31, 1996 March 31, 1997
Total assets $49,048 $39,206
Total revenues $ 1,623 $ 1,418
Net income
(loss)(1) $ 609 $ 572
Net income (loss)
per Unit(1) $ 7.17 $ 6.73
Cash Distri-
butions declared
per Unit: $ 6.50 ---
From
operations $ 42.95 $ 93.50
From sale
proceeds
(1) The figures for Net Income (loss) and Net income (loss) per
Unit include a gain on real estate sold of $188 ($2.21 per
Unit) for 1993 and $699 ($8.23 per Unit) for 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months ended March 31, 1997 compared to Three Months
ended March 31, 1996
Net income of $572,000 for the first three months of 1997 was
$37,000 less than for the comparable 1996 period. The absence of
operating income from Regal Row after its sale in 1996, and from
AMCC after its sale in January, 1997 resulted in a decrease in
income from operations of $197,000. However, this was
substantially offset by increased income from operations at
Oakbrook Corners, Bonnie Lane, and Glenn Avenue. The increased
average leased status along with lower depreciation expense at
Oakbrook Corners and Bonnie Lane resulted in the higher income at
these Properties, while higher rental rates and tenant
reimbursements fueled the gain at Glenn Avenue. Fund expenses
rose during the first quarter of 1997, primarily as a result of
necessary costs incurred in responding to the recent tender
offers for Units.
Year ended December 31, 1996 compared to Year ended December
31, 1995
The Fund had a net loss of $720,000 in 1996 compared with net
income of $2,392,000 in 1995. The change in property valuation
adjustments of $3,850,000 accounted for much of the difference,
which was partly offset by a $699,000 gain on the sale of
Fairchild Corporate Center. Net income before the gain on the
property sale declined $3,811,000, due largely to downward
valuation adjustments for Oakbrook Corners, Baseline,
Tierrasanta, and AMCC. While conditions in the markets where
these Properties are located were generally improving, the
shortened anticipated holding period due to the Fund's
disposition plans caused it to adjust the carrying values
downward.
Income from operations before valuation adjustments was up
$39,000 over 1995. Revenues from rental income and interest
income resulted in total gross revenues of $6,189,000 for the
year compared with $6,964,000 a year earlier. However, this
comparison was affected by the absence of a full year's rental
income from Regal Row and Fairchild Corporate Center, the two
properties sold in 1996. Results were helped by a decline of
$814,000 in operating expenses before valuation adjustments
primarily due to the property sales.
Leases representing 21% of the portfolio's leasable square
footage are scheduled to expire in 1997. These leases
represented approximately 24% of the portfolio's rental income
for 1996. This amount of potential lease turnover is normal for
the types of properties in the portfolio, which typically lease
to tenants under three to five year leases. The overall
portfolio occupancy was 94% as of the end of 1996. Management
anticipates that occupancy levels will remain generally level in
1997. In most markets, new leases are generally expected to
reflect level to higher market rental rates in comparison to the
rates of expiring leases. To the extent that the Fund sells one
or more properties during the year, cash flow from operations
would be expected to decline, while cash flow from sales would
increase substantially.
The Coronado Property is the only single-tenant property in
the Fund's portfolio. The tenant accounted for less than 10% of
the Fund's revenues in 1996 and appears to be financially sound.
Year ended December 31, 1995 compared to Year ended December
31, 1994
Excluding Sullyfield Circle, rental income from continuing
operations was flat in 1995 compared to 1994, as the effect of
declines in average leased status at Oakbrook Corners, Bonnie
Lane, and Fairchild Corporate Center 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
continuing 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 in 1995 than in 1994, lower operating expenses, and
a 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.
Tierrasanta and Atlantic were the two largest contributors to
the decline in expenses and rise in net income in 1995 relative
to 1994. At Tierrasanta, there was a $550,000 value impairment
recorded in 1994, but none was made in 1995. Atlantic benefitted
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 made
substantial progress toward becoming current and contributed to
the decline in the portfolio's overall property operating costs.
Even though Bonnie Lane's average leased status, and therefore
its rental income, was down, other expenses associated with the
property declined more, so Bonnie Lane had a positive effect on
1995 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 of $511,000 was made.
Liquidity and Capital Resources
The Fund sold 84,144 Units for a total of $84,144,000,
including the contribution of $5,000 from the original Limited
Partner in connection with its initial public offering, which
terminated on July 31, 1986. No additional Units have since been
sold. After deduction of organizational and offering costs of
$4,746,000, the Fund had $79,398,000 available for investment and
cash reserves.
The Fund originally purchased twelve properties or interests
therein on an all-cash basis and made an investment in an
interest in a participating mortgage loan, completing the initial
acquisition phase of its business plan. Through December 31,
1996 the Fund sold four property investments: a portion of the
Coronado property, the Sullyfield Circle property, the Regal Row
property, and Fairchild Corporate Center, in which the Fund had a
24% interest. In January of 1997 the Fund sold the AMCC
property. South Point Plaza, in which the Fund had a 50%
interest, was sold in April 1997. The Fund's carrying value for
the remaining eight Properties, after accumulated depreciation,
amortization and valuation allowances, was $26,694,000 as of
March 31, 1997.
The Fund expected to incur capital expenditures during 1997
totaling approximately $1.1 million for tenant improvements,
lease commissions, and other major repairs and improvements. In
the first quarter of 1997, the Fund incurred $206,000 of such
expenses. Under the terms of the Purchase and Sale Agreements,
the Fund has agreed to operate and maintain the Properties in
substantially the same manner as they were operated prior to the
execution of the Purchase and Sale Agreements provided that the
Fund has agreed that it will not, without the prior consent of
Purchaser perform, any physical alterations to the Properties
costing in the aggregate in excess of $50,000. Subsequent to the
execution of the Purchase and Sale Agreements, the Fund and
Purchaser agreed that the Fund will perform approximately
$316,000 of specified capital work on the Properties, the bulk of
which is for replacement of the roof at the Coronado Property.
The Fund maintains cash balances to fund its operating and
investing activities, including the costs of tenant improvements
and leasing commissions, costs which must be disbursed prior to
the collection of any resultant revenues. The General Partner
believes that cash balances and cash generated from operating
activities in 1997 will be adequate to fund the Fund's current
investing and operating needs. The Fund has suspended
distributions pending competition of the Sale.
As of December 31, 1996, the Fund maintained cash and cash
equivalents aggregating $3,667,000, a decrease of $1,115,000 from
the prior year end. This decrease resulted from lower net cash
provided by operating activities, primarily due to the sale of
Fairchild Corporate Center. Net cash provided by investing
activities increased by $3,234,000 due to the Regal Row and
Fairchild Corporate Center sales in 1996. Net cash used in
financing activities increased by $3,567,000 due primarily to the
distribution of the proceeds of the Regal Row and Fairchild
Corporate Center dispositions. As of March 31, 1997, the Fund
maintained cash and cash equivalents of $10,561,000. The
increase in the Fund's cash position compared with the same
period in 1996 resulted from proceeds received from the
disposition of the AMCC Property, which were distributed to the
Partners in April 1997.
Reconciliation of Financial and Tax Results
For 1996, the Fund's book net loss was $720,000, and its
taxable net loss was $3,738,000. The losses for tax purposes on
the sales of Regal Row and Fairchild Corporate Center accounted
for the majority of the difference. For 1995, the Fund's book
net income was $2,392,000, and its taxable net loss was $385,000.
The loss for tax purposes on the sale of Sullyfield Circle
accounted for the majority of the difference. For 1994, the
Fund's book net income was $1,862,000 and its taxable net income
was $1,905,000, as substantial depreciation expense was more than
offset by a negative property valuation allowance. For a
complete reconciliation see Note 7 to the Fund's year-end
financial statements, which note is hereby incorporated by
reference herein.
BUSINESS
The Fund 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 properties, as well as equity-
related investments. On March 17, 1986, the Fund commenced an
offering of $100,000,000 of Limited Partnership Units ($1,000 per
Unit) pursuant to a Registration Statement of Form S-11 under the
Securities Act of 1933, as amended. The gross proceeds from the
offering, combined with the contribution of $5,000 from the
original Limited Partner (T. Rowe Price Real Estate Group, Inc.),
totaled $84,144,000. The offering terminated on July 31, 1986,
and no additional Units were sold. Forty-five Units have been
redeemed by the Fund on a "hardship" basis; there were 84,099
Units outstanding as of July 2, 1997, held by 13,121 Limited
Partners.
In December of 1991, LaSalle entered into a contract with the
Fund and the General Partner to perform day-to-day management and
real estate advisory services for the Fund under the supervision
of the General Partner and its Affiliates. LaSalle's duties
under the contract include disposition and asset management
services, including recordkeeping, contracting with tenants and
service providers, and preparation of financial statements and
other reports for management use. The General Partner continues
to be responsible for overall supervision and administration of
the Fund's operations, including setting policies and making all
disposition decisions, and the General Partner and its Affiliates
continue to provide administrative, advisory, and oversight
services to the Fund. Compensation to LaSalle from the Fund
consists of accountable expense reimbursements, subject to a
fixed maximum amount per year. All other compensation to LaSalle
is paid out of compensation and distributions paid to the General
Partner by the Fund.
The Fund is engaged solely in the business of real estate
investment; therefore, presentation of information about industry
segments is not applicable. In 1996, 1995 and 1994, only one
investment, the Fund's interest in the AMCC Property, produced
15% or more of the Fund's revenue related to real estate
activity, providing 22% of such revenue in 1996, and 20% in 1995
and 1994. Only one tenant produced 10% or more of the Fund's
revenue related to real estate activity in any period: Applied
Micro Circuit Corporation (the sole tenant in the AMCC Property)
so contributed in 1996, 1995, and 1994. The AMCC property was
sold in early 1997, and exclusive of revenues produced by this
property in 1996, no property produced 15% or more of the Fund's
remaining revenue related to real estate activity in 1996.
During 1996, the Fund reviewed its portfolio and operating
plans with the intent to dispose of all its operating properties
by the end of 1998, and to thereafter distribute all of the
Fund's net assets to the Partners. For a description of the
Fund's current plan for disposing of its operating properties,
see "THE TRANSACTION--Background of the Disposition Plan" and "--
Background of the Sale."
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
On the Record Date, there were 84,099 Units issued and
outstanding and entitled to vote held of record by 13,121 Limited
Partners. At the Record Date, the General Partner and its parent
owned 25 Units (less than 1% of the outstanding Units), and all
officers and directors of the General Partner, as a group,
beneficially owned 30 Units (less than 1% of the outstanding
Units). T. Rowe Price Trust Company, as custodian for
participants in the T. Rowe Price Funds Individual Retirement
Accounts, as custodian for participants in various 403(b)(7)
plans, and as custodian for various profit sharing and money
purchase plans, is the registered owner of 24,284 Units (29% of
the outstanding Units). T. Rowe Price Trust Company has no
beneficial interest in such accounts and no control over
investment decisions with respect to such accounts, nor any other
accounts for which it may serve as trustee or custodian with
respect to an investment in the Fund. The General Partner, its
parent, and all officers and directors of the General Partner
intend to consent to the Transaction.
LITIGATION
The Fund is not currently involved in any pending legal
proceedings, other than ordinary routine litigation incidental to
the business of the Fund, which management believes are,
individually or in the aggregate, material to the Fund's
financial condition or results of operations.
AVAILABLE INFORMATION
The Fund is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and, in accordance therewith, files reports, statements and other
information with the Securities and Exchange Commission (the
"Commission"). Such reports, statements and other information
can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and should be available at the
Commission's regional offices at 500 West Madison, 14th Floor,
Chicago, Illinois 60661-2511 and 7 World Trade Center, 13th
Floor, New York, New York 10048. Copies of such material can be
obtained from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
Such material may also be accessed on the World Wide Web through
the Commission's Internet address at "http://www.sec.gov".
The Commission permits the Fund to "incorporate by reference"
information into this Consent Solicitation Statement, which means
that the Fund can disclose important information to Limited
Partners by referring them to another document filed separately
with the Commission. The information incorporated by reference
is deemed to be a part of this Consent Solicitation Statement,
except for any information superseded by information in this
Consent Solicitation Statement.
The following documents, which have been filed with the
Securities and Exchange Commission, contain important information
about the Fund and its financial condition and are hereby
incorporated herein by reference:
(i) The Fund's Annual Report on Form 10-K for the year
ended December 31, 1996 (Commission File No. 0-15575).
(ii) All other reports filed pursuant to Section 13(a) or
15(d) of the Exchange Act since December 31, 1996, including the
Fund's Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1997.
The Fund also hereby incorporates by reference all additional
reports filed pursuant to Section 13(a) or 15(d) of the Exchange
Act that it may file with the Commission between the date of this
Consent Solicitation Statement and the date of action by Consent.
A Limited Partner of the Fund may obtain any of the documents
incorporated by reference through the Fund or the Commission.
Documents incorporated by reference are available from the Fund
without charge, excluding all exhibits unless such exhibits have
been specifically incorporated by reference in this Consent
Solicitation Statement. Limited Partners may obtain documents
incorporated by reference in this Consent Solicitation Statement
by requesting them in writing or by telephone from T. Rowe Price
Realty Income Fund II, P.O. Box 89000, Baltimore, Maryland 21289-
0270, telephone number 1-800-962-8300.
If you would like to request documents from the Fund, please
do so by September 3, 1997 to receive them before the action by
Consent.
T. ROWE PRICE REALTY INCOME
FUND II MANAGEMENT, INC.
General Partner
/s/James S. Riepe
By: James S. Riepe
Chairman of the Board
and President
Baltimore, Maryland
July 28, 1997
INDEX TO FINANCIAL STATEMENTS
Financial Statements Page No.
Independent Auditors' Report . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets at
December 31, 1996 and 1995 . . . . . . . . . . . . . F-2
Consolidated Statements of Operations
for each of the three years in the
period ended December 31, 1996 . . . . . . . . . . . F-3
Consolidated Statements of Partners' Capital
for each of the three years
in the period ended December 31, 1996 . . . . . . . . F-4
Consolidated Statements of Cash Flows
for each of the three years in the
period ended December 31, 1996 . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . . . . . . . F-6
Condensed Consolidated Balance Sheets at
March 31, 1997 and December 31, 1996
(unaudited) . . . . . . . . . . . . . . . . . . . F-10
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1997
and March 31, 1996 (unaudited) . . . . . . . . . . F-11
Condensed Consolidated Statement of Partners'
Capital for the three months ended
March 31, 1997 (unaudited) . . . . . . . . . . . . F-12
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1997
and March 31, 1996 (unaudited) . . . . . . . . . . F-13
Notes to Condensed Consolidated Financial
Statements (unaudited) . . . . . . . . . . . . . . F-14
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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
January 30, 1997
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, December 31,
1996 1995
_________ _________
Assets
Real Estate Property Investments
Land . . . . . . . . . . . . . . $ 8,443 $14,544
Buildings and Improvements . . . 19,352 45,170
________ ________
27,795 59,714
Less: Accumulated Depreciation
and Amortization (6,625) (18,049)
________ ________
21,170 41,665
Held for Sale 14,860 3,500
________ ________
36,030 45,165
Cash and Cash Equivalents 3,667 4,782
Accounts Receivable (less allowances of
$22 and $165) 162 172
Other Assets 333 410
________ ________
$ 40,192 $50,529
________ ________
________ ________
Liabilities and Partners' Capital
Security Deposits and Prepaid Rents $ 505 $ 493
Accrued Real Estate Taxes 394 502
Accounts Payable and Other Accrued
Expenses 307 433
________ ________
Total Liabilities 1,206 1,428
Partners' Capital 38,986 49,101
________ ________
$ 40,192 $50,529
________ ________
________ ________
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,
1996 1995 1994
_________ __________________
Revenues
Rental Income . . . . . . . $ 5,944 $ 6,717 $ 6,834
Interest Income . . . . . . 245 247 149
_______ _______ _______
6,189 6,964 6,983
_______ _______ _______
Expenses
Property Operating Expenses 1,113 1,103 1,399
Real Estate Taxes . . . . . 747 991 877
Depreciation and
Amortization . . . . . . 1,781 2,362 2,979
Decline (Recovery) of Property
Values . . . . . . . . . 3,168 (682) (860)
Management Fee to General
Partner . . . . . . . . 298 346 269
Partnership Management
Expenses . . . . . . . . 501 452 457
_______ _______ _______
7,608 4,572 5,121
_______ _______ _______
Income (Loss) from Operations
before Real Estate Sold (1,419) 2,392 1,862
Gain on Real Estate Sold . 699 - -
_______ _______ _______
Net Income (Loss) . . . . . $ (720) $ 2,392 $ 1,862
_______ _______ _______
_______ _______ _______
Years Ended December 31,
1996 1995 1994
_________ __________________
Activity per Limited Partnership
Unit
Net Income (Loss) . . . . . $ (8.48) $ 28.16 $ 21.92
_______ _______ _______
_______ _______ _______
Cash Distributions Declared
from Operations . . . . $ 35.50 $ 37.68 $ 35.50
from Sale Proceeds . . . 70.86 40.79 -
_______ _______ _______
Total Distributions
Declared . . . . . . . . $ 106.36 $ 78.47 $ 35.50
_______ _______ _______
_______ _______ _______
Units Outstanding . . . . 84,099 84,099 84,099
_______ _______ _______
_______ _______ _______
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, 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
Net Loss . . . . . . . . . (7) (713) (720)
Cash Distributions . . . . (26) (9,369) (9,395)
_______ _______ _______
Balance, December 31, 1996 $ (308) $39,294 $38,986
_______ _______ _______
_______ _______ _______
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
1996 1995 1994
_______ _______ _______
Cash Flows from Operating Activities
Net Income (Loss) . . . . . . $ (720) $ 2,392 $ 1,862
Adjustments to Reconcile Net Income
(Loss) to Net Cash Provided by
Operating Activities
Depreciation and
Amortization . . . . . . 1,781 2,362 2,979
Decline (Recovery) of
Property Values . . . . 3,168 (682) (860)
Gain on Real Estate
Sold . . . . . . . . . . (699) - -
Change in Accounts Receivable,
Net of Allowances . . . 6 (11) 68
Change in Other Assets . . 72 (125) (180)
Change in Security Deposits and
Prepaid Rents . . . . . 12 (29) 50
Change in Accrued Real Estate
Taxes . . . . . . . . . (108) 70 (47)
Change in Accounts Payable and
Other Accrued
Expenses . . . . . . . . (126) 154 5
_______ _______ _______
Net Cash Provided by Operating
Activities . . . . . . . . . 3,386 4,131 3,877
_______ _______ _______
Cash Flows from Investing Activities
Proceeds from Property
Dispositions . . . . . . . . 5,959 2,622 -
Investments in Real Estate . . (1,065) (962) (805)
_______ _______ _______
Net Cash Provided by (Used in)
Investing Activities . . . . 4,894 1,660 (805)
_______ _______ _______
Years Ended December 31,
1996 1995 1994
_______ _______ _______
Cash Flows Used in Financing
Activities
Cash Distributions . . . . . . (9,395) (5,828) (2,464)
Redemption of Units . . . . . . - - (1)
_______ _______ _______
Net Cash Used in Financing
Activities . . . . . . . . . (9,395) (5,828) (2,465)
_______ _______ _______
Cash and Cash Equivalents
Net Change during Year . . . . (1,115) (37) 607
At Beginning of Year . . . . . 4,782 4,819 4,212
_______ _______ _______
At End of Year . . . . . . . . $ 3,667 $ 4,782 $ 4,819
_______ _______ _______
_______ _______ _______
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.
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, and Tierrasanta 234, which are
California general partnerships, in which the Partnership has
90%, 50%, and 30% interests, respectively. They also include the
Partnership's pro-rata share of the accounts of Fairchild 234, a
California general partnership in which the Partnership had a 24%
interest prior to disposition of the property on August 28, 1996.
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 $29,000, ($101,000), and
$162,000 were recorded in 1996, 1995, and 1994, respectively. Bad
debt expense (recoveries) 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 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 $280,000 and $300,000 at
December 31, 1996 and 1995, respectively.
Under provisions of the Internal Revenue Code and applicable
state taxation codes, partnerships are generally not subject to
income taxes; therefore, no provision has been made for such
taxes in the accompanying consolidated financial statements.
NOTE 3 - TRANSACTIONS WITH RELATED PARTIES
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 $298,000, $346,000,
and $269,000 in 1996, 1995, and 1994, respectively. In addition,
the General Partner's share of cash available for distribution
from operations, as discussed in Note 1, totaled $30,000,
$31,000, and $28,000 in 1996, 1995, and 1994, 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 $117,000,
$107,000, and $108,000 for communications and administrative
services performed on behalf of the Partnership during 1996,
1995, and 1994, respectively.
An affiliate of the General Partner earned a normal and customary
fee of $10,000, $20,000, and $16,000 from the money market mutual
funds in which the Partnership made its interim cash investments
during 1996, 1995, and 1994, respectively.
LaSalle Advisors Limited Partnership ("LaSalle") is the
Partnership's advisor and is compensated for its advisory
services directly by the General Partner. LaSalle is reimbursed
by the Partnership for certain operating expenses pursuant to its
contract with the Partnership to provide real estate advisory,
accounting, and other related services to the Partnership.
LaSalle's reimbursement for such expenses during each of the last
three years totaled $150,000.
An affiliate of LaSalle earned $131,000, $129,000, and $145,000
in 1996, 1995, and 1994, respectively, for property management
fees and leasing commissions on tenant renewals and extensions at
several of the Partnership's properties.
NOTE 4 - PROPERTIES HELD FOR SALE AND DISPOSITIONS
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.
On February 14, 1996, the Partnership sold Regal Row and received
net proceeds of $3,612,000. The net book value of this property
at the date of disposition was also $3,612,000, after accumulated
depreciation expense and previously recorded property valuation
allowances. Therefore, no gain or loss was recognized on the
property sale.
On August 28, 1996, Fairchild Corporate Center, an office
property in which the Partnership had a 24% interest was sold.
The Partnership received net proceeds of $2,347,000. The net
book value of the Partnership's interest at the date of sale was
$1,648,000, after deduction of accumulated depreciation and
previously recorded impairments. Accordingly, the Partnership
recognized a $699,000 gain on the sale of this property.
The Partnership began actively marketing its two midwest
industrial properties, Bonnie Lane and Glenn Avenue in late 1996,
and has subsequently signed a letter of intent with a prospective
buyer. In late 1996, the Partnership also began marketing South
Point Plaza, a shopping center in which the Partnership has a 50%
interest. The Partnership has classified the carrying amounts of
these three properties as held for sale in the accompanying
December 31, 1996 balance sheet.
The Partnership began actively marketing the AMCC property in
June 1996, and classifies it as held for sale in the accompanying
December 31, 1996 balance sheet at an amount equal to its
estimated net sales proceeds. The disposition of AMCC was
completed in early 1997.
Results of operations for properties held for sale at December
31, 1996, and properties sold during the past three years, are
summarized below:
1996 1995 1994
_________ __________ ________
Recovery (Decline) of $(679,000) $ 343,000 $ 899,000
Property Values
Other Components of 1,471,000 1,417,000 1,386,000
Operating Income
__________ __________ _________
Results of Operations $ 792,000 $1,760,000 $2,285,000
__________ __________ _________
__________ __________ _________
NOTE 5 - PROPERTY VALUATIONS
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 changed the Partnership's method of
accounting for its real estate property investments when
circumstances indicate that the carrying amount of a property may
not be recoverable. Measurement of an impairment loss on an
operating property will now be based on the estimated fair value
of the property, which becomes the property's new cost basis,
rather than the sum of expected future cash flows. Properties
held for sale 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 are no longer
depreciated.
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 certain Partnership properties held for
operations may not be fully recoverable. Charges recognized for
such impairments aggregated $2,489,000 in 1996 and $550,000 in
1994.
Because the Business Plaza property was not then being actively
marketed for sale, its carrying value was assessed and,
accordingly, a net valuation allowance of $1,957,000 at December
31, 1995 was reclassified as a permanent impairment of the
property's carrying value. Valuation recoveries for this
property were $339,000 in 1995 and $511,000 in 1994.
NOTE 6 - LEASES
Future minimum rentals (in thousands) to be received by the
Partnership under noncancelable operating leases in effect at
December 31, 1996, are:
1997 $ 4,493
1998 2,777
1999 1,655
2000 1,051
2001 730
Thereafter 1,089
_______
Total $ 11,795
_______
_______
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 (in
thousands) exist between amounts reported for financial reporting
and federal income tax purposes. These differences are
summarized below for the last three years:
1996 1995 1994
_________ __________ ________
Book net income (loss) . . $ (720) $ 2,392 $ 1,862
Allowance for
doubtful accounts . . . (142) (161) 182
Property valuation
allowance and losses
on dispositions . . . . (2,732) (2,793) (860)
Normalized and
prepaid rents . . . . . 78 (81) (182)
Interest income . . . . . . - 301 302
Depreciation . . . . . . . (214) 18 609
Other items . . . . . . . . (8) (61) (8)
________ ________ ________
Taxable income (loss) . . . $(3,738) $ (385) $ 1,905
________ ________ ________
________ ________ ________
NOTE 8 - SUBSEQUENT EVENT
The Partnership declared a quarterly cash distribution of $16.00
per unit to Limited Partners of the Partnership as of the close
of business on December 31, 1996. The Limited Partners will
receive $1,346,000, and the General Partner will receive $14,000.
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(In thousands)
March 31, December 31,
1997 1996
___________ ___________
Assets
Real Estate Property
Investments
Land . . . . . . . . . . $ 8,443 $ 8,443
Buildings and Improvements 19,537 19,352
________ ________
27,980 27,795
Less: Accumulated
Depreciation and
Amortization . . . . . . (6,858) (6,625)
. . . . . . . . . . . . ________ ________
. . . . . . . . . . . . 21,122 21,170
Properties Held for Sale 7,039 14,860
________ _______
28,161 36,030
Cash and Cash
Equivalents 10,561 3,667
Accounts Receivable
(less allowances of
$28 and $22) 196 162
Other Assets 288 333
________ ________
$39,206 $40,192
________ ________
________ ________
Liabilities and Partners' Capital
Security Deposits and
Prepaid Rents $ 397 $ 505
Accrued Real Estate
Taxes 392 394
Accounts Payable and
Other Accrued Expenses 219 307
________ ________
Total Liabilities 1,008 1,206
Partners' Capital 38,198 38,986
________ ________
$39,206 $40,192
________ ________
________ ________
See accompanying notes to condensed consolidated financial
statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In thousands except per-unit amounts)
Three Months Ended
March 31,
1997 1996
____ ____
Revenues
Rental
Income . . . . . . . . . $ 1,318 $ 1,545
Interest
Income . . . . . . . . . 100 78
________ ________
1,418 1,623
________ ________
Expenses
Property Operating
Expenses . . . . . . . . 241 267
Real Estate Taxes . . . . . . 175 218
Depreciation and
Amortization . . . . . . 242 470
Recovery of Property
Values, Net . . . . . . . (30) (112)
Management Fee to
General Partner . . . . . 57 55
Partnership Management
Expenses . . . . . . . . 161 116
________ ________
846 1,014
________ ________
Net Income . . . . . . . . . $ 572 $ 609
________ ________
________ ________
Three Months Ended
March 31,
1997 1996
____ ____
Activity per Limited
Partnership Unit
Net Income . . . . . . . . . $ 6.73 $ 7.17
________ ________
________ ________
Cash Distributions Declared
from Sale Proceeds . . . $ 93.50 $ 42.95
from Operations . . . . . - 6.50
________ ________
Total Distributions Declared $ 93.50 $ 49.45
________ ________
________ ________
Units Outstanding . . . . . . 84,099 84,099
________ ________
________ ________
See accompanying notes to condensed consolidated financial
statements.
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
Unaudited
(In thousands)
General Limited
Partner Partners Total
_______ _______ ______
Balance,
December 31,
1996 . . . . . . . $ (308)$ 39,294 $ 38,986
Net Income . . . . . 6 566 572
Cash Distri-
butions . . . . . (14) (1,346) (1,360)
_______ _______ _______
Balance, March 31,
1997 . . . . . . . $ (316)$ 38,514 $ 38,198
_______ _______ _______
_______ _______ _______
See accompanying notes to condensed consolidated financial
statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
Three Months Ended
March 31,
1997 1996
________ ________
Cash Flows from Operating
Activities
Net Income . . . . . . . . . . $ 572 $ 609
Adjustments to Reconcile
Net Income to Net Cash
Provided by Operating Activities
Depreciation and
Amortization . . . . . . . 242 470
Recovery of Property
Values, Net . . . . . . . (30) (112)
Increase in Accounts
Receivable, Net of
Allowances . . . . . . . . (34) (9)
Decrease in Other Assets . . 45 41
Decrease in Security
Deposits and Prepaid
Rent . . . . . . . . . . . (108) (79)
Decrease in Accrued Real
Estate Taxes . . . . . . . (2) (117)
Decrease in Accounts
Payable and Other
Accrued Expenses . . . . . (88) (114)
________ ________
Net Cash Provided by
Operating Activities . . . . 597 689
________ ________
Cash Flows from Investing
Activities
Proceeds from Property
Disposition . . . . . . . . 7,863 3,612
Investments in Real Estate . . (206) (178)
________ ________
Net Cash Provided by
Investing Activities . . . . 7,657 3,434
________ ________
Cash Flows Used in
Financing Activities
Cash Distributions . . . . . . (1,360) (1,780)
________ ________
Three Months Ended
March 31,
1997 1996
________ ________
Cash and Cash Equivalents
Net Increase during Period . . 6,894 2,343
At Beginning of Year . . . . . 3,667 4,782
________ ________
At End of Period . . . . . . . $ 10,561 $ 7,125
________ ________
________ ________
See accompanying notes to condensed consolidated financial
statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
The unaudited interim condensed consolidated financial statements
reflect all adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the interim
periods presented. All such adjustments are of a normal,
recurring nature.
The unaudited interim financial information contained in the
accompanying condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements
contained in the 1996 Annual Report to Partners.
NOTE 1 - TRANSACTIONS WITH RELATED PARTIES AND OTHER
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 a partnership management fee of $57,000 during the
first three months of 1997.
In accordance with the partnership agreement, certain operating
expenses are reimbursable to the General Partner. The General
Partner's reimbursement of such expenses totaled $37,000 for
communications and administrative services performed on behalf of
the Partnership during the first three months of 1997.
An affiliate of the General Partner earned a normal and customary
fee of $5,000 from the money market mutual funds in which the
Partnership made its interim cash investments during the first
three months of 1997.
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 the first three
months of 1997 totaled $38,000.
An affiliate of LaSalle earned $31,000 in the first three months
of 1997 for property management fees and leasing commissions on
tenant renewals and extensions for several of the Partnership's
properties.
NOTE 2 - REAL ESTATE PROPERTY INVESTMENTS
On January 23, 1997, the AMCC property was sold and the
Partnership received net proceeds of $7,863,000. The net book
value of the Partnership's interest in this property at the date
of disposition was also $7,863,000, after accumulated
depreciation expense and previously recorded property valuation
allowances. Therefore, no gain or loss was recognized on the
property sale. Results of operations for this property during the
first quarter of 1997 include a $95,000 recovery of property
value prior to its sale.
In April 1997, South Point Plaza, a shopping center in which the
Partnership had a 50% interest, was sold and the Partnership
received net proceeds of $ 1,452,930. The net book value of the
Partnership's interest in this property at the date of
disposition was also $1,452,930 after accumulated depreciation
expense and previously recorded property valuation allowances.
Therefore, no gain or loss was recognized on the property sale.
Results of operations for this property during the first quarter
of 1997 include a $65,000 decline of property value.
The Partnership began actively marketing its two midwest
industrial properties, Bonnie Lane and Glenn Avenue in 1996, and
classifies them as held for sale in the accompanying balance
sheets.
On April 11, 1997, the Partnership and its consolidated ventures
entered into contracts with a buyer for the sale of all property
investments, including the two midwest industrial properties. The
total sales price is $30,441,000 before selling expenses. The
transactions are subject to further due diligence by the buyer
and the approval of the Limited Partners which could result in
changes to or the cancellation of the contracts. If the
transactions are closed, the Partnership will have sold all of
its real estate property investments and will begin liquidation.
NOTE 3 - SUBSEQUENT DISTRIBUTIONS
The Partnership declared a cash distribution of $93.50 per unit
to the Limited Partners of the Partnership as of the close of
business on March 31, 1997. The distribution of $7,863,000 to the
Limited Partners is 100% of the Partnership's share of the AMCC
sales proceeds.
Legg Mason Wood Walker, Incorporated
111 South Calvert Street
Baltimore, MD 21203-1476
July 21, 1997
T. Rowe Price Realty Income Fund II Management, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Attention: Mr. James S. Riepe, President
Gentlemen:
We understand that T. Rowe Price Realty Income Fund II,
America s Sales-Commission-Free Real Estate Limited Partnership
(the "Fund") and Glenborough Realty Trust Incorporated and
Glenborough Properties, L.P. (collectively, the "Acquiror") have
entered into an agreement dated as of April 11, 1997 (the
"Agreement"), which provides that the Fund will sell all of its
real estate assets (the "Properties") to the Acquiror for cash
consideration of $30,440,820 (the "Sale").
In connection with the Sale, we have been requested to
provide our opinion to T. Rowe Price Realty Income Fund II
Management, Inc., the general partner of the Fund (the "General
Partner") regarding the fairness to the Fund and the limited
partners, from a financial point of view, of the consideration to
be received by the Fund in the Sale.
In conducting our analysis and arriving at the opinion set
forth below, we have, among other things:
(i) reviewed the Agreement;
(ii)reviewed and analyzed the audited financial statements
of the Fund for the years ended December 31, 1995 and 1996;
(iii)reviewed and analyzed the unaudited consolidated
financial statements of the Properties for the three months ended
March 31, 1997;
(iv)reviewed and analyzed certain internal information
concerning the business and operations of the Fund and the
Properties furnished to us by the General Partner and by LaSalle
Advisors Limited ("LaSalle"), including unaudited cash-basis
projections for the Properties for the years ending December 31,
1997 through 2007;
(v) reviewed and analyzed certain publicly available
information concerning the Fund, the Properties and the Acquiror;
(vi)reviewed and analyzed certain publicly available
information concerning the terms of selected merger and
acquisition transactions that we deemed relevant to our inquiry;
(vii)reviewed and analyzed certain selected market purchase
price data that we deemed relevant to our inquiry;
(viii)held meetings and discussions with certain directors,
officers and employees of the General Partner and LaSalle
concerning the operations, financial condition and future
prospects of the Properties; and
(ix) conducted such other financial studies, analyses and
investigations, including visits to certain of the Properties,
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without
independent verification, on the accuracy and completeness of all
information that was publicly available, supplied or otherwise
communicated to Legg Mason by the General Partner and LaSalle.
Legg Mason assumed that the financial projections (and the
assumptions and bases thereof) examined by it were reasonably
prepared and reflected the best currently available estimates and
good faith judgments of the General Partner and LaSalle as to the
future performance of the Properties. Legg Mason has not made an
independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of the Fund (including the Properties),
nor has Legg Mason been furnished with any such independent
evaluations or appraisals. Our opinion is necessarily based upon
financial, economic, market and other conditions and
circumstances existing and disclosed to us as of the date hereof.
Additionally, our opinion does not compare the relative merits of
the Sale with those of any other transactions or business
strategies available to the Fund as alternatives to the Sale, and
we were not requested to, nor did we, solicit the interest of any
other party in acquiring the Properties.
We have acted as financial advisor to the General Partner
and will receive a fee for our services. It is understood that
this opinion is provided to the General Partner in its evaluation
of the Sale and our opinion does not constitute a recommendation
to any limited partner of the Fund as to whether such limited
partner should approve the Sale. This letter is not to be quoted
or referred to, in whole or in part, in any registration
statement, prospectus, or in any other document used in
connection with the offering or sale of securities, nor shall
this letter be used for any other purposes, without the prior
written consent of Legg Mason; provided that this opinion may be
included in its entirety in any filing made by the Fund with the
Securities and Exchange Commission with respect to the Sale and
as an appendix to the Fund s consent solicitation statement
furnished to limited partners in connection with the Sale.
Based upon and subject to the foregoing, we are of the
opinion that, as of the date hereof, the consideration to be
received by the Fund in the Sale is fair to the Fund and its
limited partners from a financial point of view.
Very truly yours,
Legg Mason Wood Walker,Incorporated
By:/s/Jeff M. Rogatz
Jeff M. Rogatz
Managing Director
T. ROWE PRICE REALTY INCOME FUND II,
AMERICA S SALES-COMMISSION-FREE REAL ESTATE LIMITED PARTNERSHIP
100 East Pratt Street
Baltimore, Maryland 21202
WRITTEN CONSENT
This written consent to approve a transaction consisting
of (i) the sale of substantially all of the assets (the "Sale")
of T. Rowe Price Realty Income Fund II, America s
Sales-Commission-Free Real Estate Limited Partnership, a Delaware
limited partnership (the "Fund"), consisting of interests in
eight properties, as contemplated by the Purchase and Sale
Agreements and Joint Escrow Instructions, dated as of April 11,
1997, with Glenborough Realty Trust Incorporated and Glenborough
Properties, L.P. as the buyers, and (ii) the complete liquidation
and dissolution of the Fund (the "Liquidation" and, together with
the Sale, the "Transaction") in the manner described in the
accompanying Consent Solicitation Statement is solicited by T.
Rowe Price Realty Income Fund II Management, Inc., the General
Partner of the Fund (the "General Partner"). The Sale and
Liquidation are being consented to as one proposal to approve the
Transaction. All written consents must be received by the Fund
and delivered to the General Partner before 10:00 a.m. New York
City time on September 11, 1997 to be valid, unless such date or
time is extended. All signed written consents will be counted
FOR the Transaction unless otherwise marked. The General Partner
recommends a vote FOR the Transaction.
/ / FOR THE TRANSACTION
/ / AGAINST THE TRANSACTION
/ / ABSTAIN FROM CONSENTING TO THE TRANSACTION
(Please date and sign on reverse side.)
Please mark, sign, date and return the consent card promptly
using the enclosed envelope to T. Rowe Price Realty Income Fund
II.
CONSENT NUMBER
UNITS
Dated: , 1997
Signature
Dated: , 1997
Signature
Please sign EXACTLY as YOUR name appears HEREIN. If signing as
attorney, executor, administrator, trustee or guardian, indicate
such capacity. All joint tenants must sign. If a corporation,
please sign in full corporate name by president or other
authorized officer. If a partnership or other entity, please sign
in partnership or entity name by authorized person.
The General Partner requests that you fill in the date and sign
the consent and return it in the enclosed envelope. IF THE
CONSENT IS NOT DATED IN THE ABOVE SPACE, IT IS DEEMED TO BE DATED
ON THE DAY ON WHICH IT WAS MAILED BY THE FUND.
