ANNUAL REPORT
FOR THE PERIOD ENDED
DECEMBER 31, 1995
FELLOW PARTNERS:
While it appears from the statements of operations on page 8 that the Fund's
performance improved significantly over 1994, income was actually down
$210,000 when the effect of value impairments, primarily at Scripps Terrace
and Tierrasanta, are backed out of last year's numbers. Before discussing
operations at the properties owned by the Fund for the full 12 months of 1994
and 1995, we want to point out that the change in River Run's portfolio status
had the most notable impact on the year-over-year comparison.
In the fourth quarter of 1995, we took over ownership of River Run and
began accounting for it as a property rather than as a loan. This meant that
its rental income and property level operating expenses, rather than interest,
were included in the Fund's results. Inclusion of its fourth quarter rental
income caused that revenue category to be up for the full year over 1994. The
benefit, however, was more than offset by the decrease in interest income from
the River Run loan and the increase in expenses related to the property,
particularly the loan loss provision and uncollectible interest, related to
River Run. We believe that, over the long term, the Fund's ownership of River
Run will prove to be more beneficial than these early results indicate. This
assumes, of course, no major deterioration in the local economy and that we
are successful in our leasing efforts.
Turning to the other properties in the portfolio, the lower average
leased status at Fairchild and Clark Avenue drove the overall decline in
rental income. The absence of Beinoris, which was sold last year, also had a
negative effect on the revenue comparison. We have initiated a renovation
program at Fairchild and are seeing more interest in the building, which we
hope will translate into signed leases. Uncertainty over the plans of a major
employer in Clark Avenue's market clouds the outlook for this property, but we
find some comfort in the fact that none of its leases is scheduled to expire
this year.
The most noteworthy expense item which had a positive effect on the net
income comparison with last year, other than higher valuation impairments in
1994, was depreciation. Higher tenant improvement charge-offs in 1994 at Wood
Dale, Tierrasanta, Scripps Terrace, Winnetka, Clark Avenue, and Riverview led
to the decrease in depreciation versus 1994.
Slightly lower cash from operations and increased cash used in investing
activities (particularly for the improvements at Westbrook Commons and
Fairchild Corporate Center) led to the decrease in the Fund's cash position
during 1995.
Distributions
Your distribution for the fourth quarter of 1995 was $6.37 per unit, bringing
the total for the year to $11.11. Of the fourth quarter amount, $2.37 was from
1995 operations and $4.00 was distributed from prior-year operations. The
initial uncertainty surrounding the ability of the River Run owner to continue
the loan payments and the potential costs of foreclosure caused us to maintain
a relatively high cash position. Now that we own the property, we no longer
need to retain as much cash.
Unit Valuation
As we do at each year-end, we employed a third-party appraiser to review and
assess the analysis and assumptions used in determining an estimated current
unit value. These interim valuations are not necessarily representative of the
value of your units when the Fund ultimately liquidates its holdings, nor
could you sell your units today at a price equal to the current estimated
value.
The estimated unit value at year-end 1995 was $158.00, unchanged from
the 1994 amount. The $158.00 included the $4.00 just distributed from prior
years' operations, so, as of February 14, the estimated value per unit was
reduced by that amount and is now $154.00.
The first quarter 1996 distribution has been set at $2.00 per unit.
Assuming no unexpected developments or property dispositions, we expect to pay
the same amount for the second and third quarters as well. In the fourth
quarter, we will adjust the distribution based on the Fund's operations and
cash needs.
Outlook
As the Advisor's Report indicates, we hope that a number of initiatives taken
in 1995 will bear fruit in 1996. The modernization at Westbrook Commons and
renovations at Fairchild were undertaken to enhance the attractiveness of
these properties to existing as well as prospective tenants. Barring local
market deterioration, we expect these efforts will begin to be rewarded in
1996.
Sincerely,
James S. Riepe
Chairman
February 15, 1996
INVESTMENT ADVISOR'S REPORT
As discussed in recent reports, the real estate market is slowly improving,
with some segments such as industrial recovering more rapidly than others such
as office properties. The absence of meaningful new construction combined with
continued net positive absorption in all segments has begun to attract not
only opportunistic capital but also some institutional capital into the real
estate sector, which is a favorable development.
The results of Russell-NCREIF Index, which measures income returns and
changes in values for real estate investments, reflect the general state of
the market. From 1991 through 1993 property values experienced average annual
declines of approximately 10%. This rate slowed as values decreased by 4% and
1% for the 12 months ended September 30, 1994 and 1995, respectively. Income
returns of 9% during each of those two years more than offset the value
declines, resulting in positive total returns for the index for the first time
since September 1990.
The index also identifies returns by product type and by geographical
region. As anticipated, because of the weak operating environment, office
buildings have not performed as well as other product types, with value
declines of approximately 3% for the 12 months ended September 30, 1995. This
is an improvement, however, over the average 14% per year drop over the last
four years. Industrial properties, on the other hand, appreciated in value by
3% for the 12 months ended September 30, 1995. In that same period, other real
estate product types, such as retail and multi-family, performed better than
they had in prior years.
Property values in geographic regions depend significantly on the local
economy. The South, where values in general depreciated less than 1% for the
12 months ended September 30, 1995, continues to outperform other regions, but
even its recovery has been prolonged due to the depressed energy business.
Value declines in the East and Midwest have moderated, and the Western region
has experienced a dramatic improvement recently. In 1994, property values in
the West were down significantly but, for the 12 months ended September 30,
1995, declined only around 1%. In analyzing this information, it is clear that
the multi-family and industrial segments are heavily influencing the results,
since the office segment in the West declined approximately 5%. We continue to
see increased leasing activity and improved economics for owners.
We are encouraged by the positive annual returns of the Russell-NCREIF
Index for the past two years. We are even more heartened, however, by the
performance of Realty Income Fund III's portfolio, whose value remained stable
as opposed to a decrease in the Russell-NCREIF Index.
Property Highlights
Activity during 1995 for new, renewal, and expansion leases totaled 21% of the
Fund's square footage. However, the gains were offset, primarily by the loss
of three fairly sizable tenants at two properties, so occupancy was unchanged
from the prior-year level. In general, occupancy and rental rates in the
markets where your properties operate are stable to rising.
Real Estate Investments
__________________________________________
Gross % Leased
Leasable ___________________
Area Prior Current 1996 Lease
Property (Sq. Ft.) Year-End Year-End Expirations
_________________________ _______ ________ __________
Scripps Terrace 56,800 81% 82% 35%
Winnetka 188,300 94 100 19
South Point 48,400 61 69 19
Tierrasanta 104,200 77 100 38
Wood Dale 89,700 100 89 30
Clark Avenue 40,000 100 72 0
Riverview 113,700 91 96 22
Westbrook Commons121,600 97 96 6
Fairchild Corporate
Center 104,800 85 73 31
River Run 92,800 100 90 1
_________ _____ _____ _____
Fund Total 960,300 90% 90% 21%
Scripps Terrace: One new 6,300 square-foot lease more than offset the
loss of a tenant when its lease expired at this San Diego, California, office
project. We are actively negotiating with the three tenants whose leases
covering 35% of the total space expire this year.
Winnetka: Even though one sizable tenant vacated upon its lease
expiration, a renewal was quickly negotiated with an existing tenant who
expanded into the space. We also leased the remaining unoccupied space,
bringing this suburban Minneapolis industrial project to 100% leased by
year-end.
South Point: One short-term expansion, two new, and four renewal leases
for 19% of this Tempe, Arizona, shopping center more than offset the loss of
one tenant who did not renew. We continue to be optimistic about our
negotiations with a prospective tenant who would represent over 30% of the
center. To improve our negotiating position, we have received some zoning
variances but are still working with the city and potential tenant to reach a
mutually satisfactory agreement. If we are successful, the lease could be
signed during the next two to three months. The tenant, however, would not
begin paying rent until around the last quarter of 1996. Moreover, significant
tenant improvement costs would be incurred.
Tierrasanta: Although we lost one financially troubled tenant during the
year, we were able to re-lease its space, bringing the leased status to 100%
by year-end. In total, three new leases for 31,000 square feet and one
renewal/expansion were signed at this San Diego property. One lease with a
tenant who occupies 38% of the space expires in 1996, and we are actively
working with this tenant on renewal terms. It is too early to predict an
outcome of the negotiations.
Wood Dale: Two tenants renewed their leases for three or more years and
one extended its lease into 1996 for a total of 27,400 square feet. One
tenant, however, who occupied 9,500 square feet, vacated upon its lease
expiration near the end of the year. Thus, this suburban Chicago industrial
property experienced a decline in occupancy during the fourth quarter and from
the December 1994 level.
Clark Avenue: The only activity which occurred at this King of Prussia,
Pennsylvania, office property during the year was the loss of a financially
troubled tenant who occupied 28% of the property one month before its lease
expired. Although we have had interest from a couple of prospective tenants,
we do not believe that a signed lease is imminent. Market occupancy improved
slightly, but the future of local Lockheed Martin operations, which dominate
the office market, is still uncertain, and rental rates remain flat despite
the lower vacancies.
Riverview: This St. Paul, Minnesota, industrial project had an eventful
year. Three tenants representing 18% of the space renewed and/or expanded
their leases, and one new tenant was signed. This activity more than offset
the loss of two tenants who vacated when their leases expired, and the
property's leased status increased by five percentage points over last year.
Westbrook Commons: One new and six renewal leases were signed during the
year, generally at higher rates than on the prior leases, at this suburban
Chicago retail center. However, one tenant did not renew, and two tenants left
because of credit issues, causing occupancy to decline slightly. During the
year, we initiated a strategy to update the appearance of the center in order
to make it more attractive to prospective tenants. The property's face lift
has made a substantial difference.
Fairchild Corporate Center: The leased status declined at this Orange
County, California, office property primarily due to the loss on the last day
of the year of a tenant representing 9% of the space. Additionally, over the
course of the year, two tenants who leased a total of 6% of the property left
for financial reasons and three other tenants vacated upon their lease
expirations. On the positive side, we completed the first phase of renovating
the two buildings, renamed the property, and overall activity has picked up.
Three new tenants were signed for 16% of the site, and six existing tenants
renewed and/or expanded for another 8% of the property.
River Run: At this South Florida retail center, the signing of new and
renewal leases representing 3% of the total space was not enough to offset the
effect of three tenants who did not renew their leases and three others who
defaulted and were forced to vacate. As you may recall, the Fund foreclosed on
its loan for this property and officially took ownership on October 10. As the
new owner, we are in the process of repositioning the property to meet the
needs of the surrounding communities. As a result, occupancy may decline
further in the near term as we focus on improving both tenant creditworthiness
and mix.
Outlook
We believe 1995 was a turning point for Realty Income Fund III. We gained
control of River Run, all of the markets except King of Prussia showed signs
of improvement, and renovations were commenced at one property and completed
at another. We hope 1996 will continue in a favorable vein and that operating
results will improve during the year ahead.
LaSalle Advisors
February 15, 1996
REAL ESTATE HOLDINGS
December 31, 1995
(In thousands)
Accumu- Current
Type and Date Total lated De- Carrying
Property Name Location Acquired Cost*preciation Amount
_________________________ ____________________________________
Scripps Business Park 2/88 $4,354 $(1,030) $ 3,324
Terrace San Diego,
California
Winnetka Industrial 3/88 5,794 (1,643) 4,151
Crystal,
Minnesota
South Point Retail 4/88 2,213 (841) 1,372
Tempe,
Arizona
Tierrasanta Business Park 4/88 3,454 (859) 2,595
San Diego,
California
Fairchild Office
Corporate Irvine, 5/88 4,063 (465) 3,598
Center California
Wood Dale Industrial 9/88 3,657 (658) 2,999
Wood Dale,
Illinois
Clark Avenue R&D/Office 10/88 4,242 (733) 3,509
King of Prussia,
Pennsylvania
Riverview Industrial 12/88 4,184 (870) 3,314
St. Paul,
Minnesota
River Run Retail 6/89 7,700 (42) 7,658
Miramar,
Florida
Westbrook Retail 12/90 5,659 (690) 4,969
Commons Westchester,
Illinois
_______ _______ _______
$45,320 $(7,831) $37,489
_______ _______ _______
_______ _______ _______
*Includes original purchase price, subsequent improvements, and, in the case
of South Point, Tierrasanta, Scripps Terrace, and Fairchild Corporate Center,
reductions for permanent impairments.
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,December 31,
1995 1994
__________ __________
Assets
Real Estate Property Investments
Land. . . . . . . . . . . . . . . . . $ 12,181 $10,332
Buildings and Improvements. . . . . . 33,139 26,475
________ ________
45,320 36,807
Less: Accumulated Depreciation
and Amortization. . . . . . . . . . . (7,831) (7,037)
________ ________
37,489 29,770
Participating Mortgage Loan and Deferred Interest
(less allowance of $1,736 in 1994) . . . - 7,840
Cash and Cash Equivalents. . . . . . . . 3,436 3,663
Accounts Receivable (less allowances
of $230 and $238). . . . . . . . . . . . 529 434
Other Assets . . . . . . . . . . . . . . 279 178
________ ________
$ 41,733 $41,885
________ ________
________ ________
Liabilities and Partners' Capital
Security Deposits and Prepaid Rents. . . $ 391 $ 385
Accrued Real Estate Taxes. . . . . . . . 433 441
Accounts Payable and
Other Accrued Expenses . . . . . . . . . 335 238
________ ________
Total Liabilities. . . . . . . . . . . . 1,159 1,064
Partners' Capital. . . . . . . . . . . . 40,574 40,821
________ ________
$ 41,733 $41,885
________ ________
________ ________
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per-unit amounts)
Years Ended December 31,
1995 1994 1993
_______ _______ _______
Revenues
Rental Income. . . . . . . . . . . . . $5,502 $5,369 $5,220
Interest Income from Participating
Mortgage Loan. . . . . . . . . . . . . 429 858 897
Other Interest Income. . . . . . . . . 163 130 94
_______ ______________
6,094 6,357 6,211
_______ ______________
Expenses
Property Operating Expenses. . . . . . 1,284 1,249 1,511
Real Estate Taxes. . . . . . . . . . . 1,002 936 1,000
Depreciation and Amortization. . . . . 1,266 1,572 1,138
Decline (Recovery) of
Property Values. . . . . . . . . . . . (109) 1,385 1,968
Provision for Loan Loss and
Uncollectible Interest . . . . . . . . 202 - -
Management Fee to General Partner. . . 282 342 297
Partnership Management Expenses. . . . 384 374 406
_______ ______________
4,311 5,858 6,320
_______ ______________
Net Income (Loss) from Operations before
Real Estate Sold. . . . . . . . . . 1,783 499 (109)
Gain on Real Estate Sold . . . . . . . - 80 -
_______ ______________
Net Income (Loss). . . . . . . . . . . $1,783 $ 579 $(109)
_______ ______________
_______ ______________
Activity per Limited Partnership Unit
Net Income (Loss). . . . . . . . . . . $ 6.96 $ 2.26 $(0.43)
_______ ______________
_______ ______________
Cash Distributions Declared
from Operations. . . . . . . . . . . $11.11 $13.53 $11.74
from Sale Proceeds . . . . . . . . . - 3.92 -
_______ ______________
Total Distributions Declared . . . . . $11.11 $17.45 $11.74
_______ ______________
_______ ______________
Units Outstanding. . . . . . . . . . . 253,599 253,605253,613
_______ ______________
_______ ______________
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(In thousands)
General Limited
Partner Partners Total
________ ________________
Balance, December 31, 1992 . . . $ (127) $47,875 $47,748
Net Loss . . . . . . . . . . . . (1) (108) (109)
Cash Distributions . . . . . . . (30) (2,932) (2,962)
_______ _______ _______
Balance, December 31, 1993 . . . (158) 44,835 44,677
Net Income . . . . . . . . . . . 6 573 579
Redemption of Units. . . . . . . - (1) (1)
Cash Distributions . . . . . . . (34) (4,400) (4,434)
_______ _______ _______
Balance, December 31, 1994 . . . (186) 41,007 40,821
Net Income . . . . . . . . . . . 18 1,765 1,783
Redemption of Units. . . . . . . - (1) (1)
Cash Distributions . . . . . . . (20) (2,009) (2,029)
_______ _______ _______
Balance, December 31, 1995 . . . $ (188) $40,762 $40,574
_______ _______ _______
_______ _______ _______
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
1995 1994 1993
_______ _______ _______
Cash Flows from Operating Activities
Net Income (Loss). . . . . . . . . . . $1,783 $ 579 $(109)
Adjustments to Reconcile Net Income
(Loss) to Net Cash Provided
by Operating Activities
Depreciation and Amortization . . . 1,266 1,572 1,138
Decline (Recovery) of
Property Values . . . . . . . . . . (109) 1,385 1,968
Change in Loan Loss Provision . . . 202 - -
Other Changes in Assets
and Liabilities . . . . . . . . . . (163) (276) 88
_______ ______________
Net Cash Provided by
Operating Activities . . . . . . . . . 2,979 3,260 3,085
_______ ______________
Cash Flows from Investing Activities
Proceeds from Property Disposition . . - 994 -
Investments in Real Estate . . . . . . (1,176) (665) (691)
_______ ______________
Net Cash Provided by (Used in)
Investing Activities . . . . . . . . . (1,176) 329 (691)
_______ ______________
Cash Flows from Financing Activities
Cash Distributions . . . . . . . . . . (2,029) (4,434)(2,962)
Redemption of Units. . . . . . . . . . (1) (1) -
_______ ______________
Net Cash Used in
Financing Activities . . . . . . . . . (2,030) (4,435)(2,962)
_______ ______________
Cash and Cash Equivalents
Net Decrease during Year . . . . . . . (227) (846) (568)
At Beginning of Year . . . . . . . . . 3,663 4,509 5,077
_______ ______________
At End of Year . . . . . . . . . . . . $3,436 $3,663 $4,509
_______ ______________
_______ ______________
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 III, America's Sales-Commission-Free Real
Estate Limited Partnership (the "Partnership"), was formed on October 20,
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 III Management, Inc., is the sole General Partner. The initial offering
resulted in the sale of 253,641 limited partnership units at $250 per unit.
In accordance with provisions of the partnership agreement, income from
operations is allocated and related cash distributions are generally paid to
the General and Limited Partners at the rates of 1% and 99%, respectively.
Sale or refinancing proceeds are generally allocated first to the Limited
Partners in an amount equal to their capital contributions, next to the
Limited Partners to provide specified returns on their adjusted capital
contributions, next 3% to the General Partner, with any remaining proceeds
allocated 85% to the Limited Partners and 15% to the General Partner. Gain on
property sold is generally allocated first between the General Partner and
Limited Partners in an amount equal to the depreciation previously allocated
from the property and then in the same ratio as the distribution of sale
proceeds. Cash distributions, if any, are made quarterly based upon cash
available for distribution, as defined in the partnership agreement. Cash
available for distribution will fluctuate as changes in cash flows and
adequacy of cash balances warrant.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Partnership's financial statements are prepared in accordance with
generally accepted accounting principles which requires the use of estimates
and assumptions by the General Partner. Certain 1993 and 1994 amounts have
been reclassified to conform with the 1995 presentation.
The accompanying consolidated financial statements include the accounts
of the Partnership and its pro-rata share of the accounts of South Point
Partners, Tierrasanta 234, Fairchild 234, and Penasquitos 34 (Westbrook
Commons), all of which are California general partnerships, in which the
Partnership has 50%, 30%, 56%, and 50% interests, respectively. The other
partners in these ventures 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 uncollectible tenant receivables in the amounts of
$192,000, $89,000, and $469,000 were recorded in 1995, 1994, and 1993,
respectively. Bad debt expense is included in Property Operating Expenses.
The Partnership will review its real estate property investments for
impairment whenever events or changes in circumstances indicate that the
property carrying amounts may not be recoverable. Such a review results in the
Partnership recording a provision for impairment of the carrying value of its
real estate investments whenever the estimated future cash flows from a
property's operations and projected sale are less than the property's net
carrying value. The General Partner believes that the estimates and
assumptions used in evaluating the carrying value of the Partnership's
properties are appropriate; however, changes in market conditions and
circumstances could occur in the near term which would cause these estimates
to change.
Rental income is recognized by the Partnership on a straight-line basis
over the term of each lease. Rental income accrued, but not yet billed, is
included in Other Assets and aggregates $205,000 and $132,000 at December 31,
1995 and 1994, respectively.
Under provisions of the Internal Revenue Code and applicable state
taxation codes, partnerships are generally not subject to income taxes;
therefore, no provision has been made for such taxes in the accompanying
consolidated financial statements.
NOTE 3 - TRANSACTIONS WITH RELATED PARTIES AND OTHER ENTITIES
As compensation for services rendered in managing the affairs of the
Partnership, the General Partner earns a partnership management fee equal to
9% of net operating proceeds. The General Partner earned partnership
management fees of $282,000, $342,000, and $297,000 in 1995, 1994, and 1993,
respectively. In addition, the General Partner's share of cash available for
distribution from operations, as discussed in Note 1, totaled $28,000,
$34,000, and $30,000 in 1995, 1994, and 1993, respectively.
In accordance with the partnership agreement, certain operating expenses
are reimbursable to the General Partner. The General Partner's reimbursement
of such expenses totaled $77,000, $74,000, and $82,000 for communications and
administrative services performed on behalf of the Partnership during 1995,
1994, and 1993, respectively.
An affiliate of the General Partner earned a normal and customary fee of
$12,000, $15,000, and $16,000 from the money market mutual funds in which the
Partnership made its interim cash investments during 1995, 1994, and 1993,
respectively.
LaSalle Advisors Limited Partnership ("LaSalle") is the Partnership's
advisor and is compensated for its advisory services directly by the General
Partner. LaSalle is reimbursed by the Partnership for certain operating
expenses pursuant to its contract with the Partnership to provide real estate
advisory, accounting, and other related services to the Partnership. LaSalle's
reimbursement for such expenses during each of the last three years totaled
$120,000.
An affiliate of LaSalle earned $54,000, $37,000, and $7,000 in 1995,
1994, and 1993, respectively, as property manager for several of the
Partnership's properties.
NOTE 4 - PROPERTY DISPOSITION
In September 1994, the Partnership sold the smallest of the three Wood Dale
industrial buildings, the Benoiris Building, and received net proceeds of
$994,000. The net book value of this property at the time of disposition was
$914,000, after accumulated depreciation expense. Results of operations at
this building were immaterial to the Funds' results of operations in 1994 and
1993.
NOTE 5 - FAIRCHILD CORPORATE CENTER
Fairchild Corporate Center, formerly known as Brinderson Plaza, was acquired
outright on February 1, 1994 by a corporation, the stockholders of which are
the Partnership and certain other affiliated partnerships. The previously
established valuation allowance for this property was reduced $9,000 and the
remaining allowance of $1,629,000 (including $210,000 arising in 1993) was
reclassified as a reduction in the carrying value of the property. Prior to
February 1, 1994, the Partnership's underlying investment in Fairchild, in the
form of a mortgage loan and minority equity interest, was accounted for as an
in-substance foreclosed property in the Partnership's financial statements.
NOTE 6 - PARTICIPATING MORTGAGE LOAN
In July 1995, the Partnership began consensual foreclosure on the
participating mortgage loan secured by the River Run Shopping Center and
ceased the accrual of interest income. At September 30, 1995, the carrying
value of the loan was reduced to $7,700,000, the estimated fair value of the
underlying property, and additional loan losses of $118,000 were recognized.
On October 10, 1995, the Partnership purchased the property and, in connection
therewith, reclassified the participating mortgage loan as an investment in
real estate.
NOTE 7 - PROPERTY VALUATIONS
Based upon a review of current market conditions, estimated holding period,
and future performance expectations of each property, the General Partner has
determined that the net carrying value of other operating properties may not
be fully recoverable from future operations and disposition. Charges
recognized for impairments of the carrying values of Scripps Terrace and
Tierrasanta aggregated $1,467,000 in 1994.
Because the South Point property was not being actively marketed for
sale, its carrying value was assessed and, accordingly, the property's net
valuation allowance of $1,576,000 at December 31, 1995 was reclassified as a
permanent impairment of the its carrying value. Valuation allowances
(recoveries) for this property were ($109,000) in 1995, ($73,000) in 1994 and
$1,758,000 in 1993. Because this property continued to operate at the time the
valuation allowance was established, the Partnership continued to recognize
depreciation expense which, in large part, contributed to the valuation
recoveries in 1995 and 1994.
On January 1, 1996, the Partnership adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which changes
the Partnership's current method of accounting for its real estate property
investments when circumstances indicate that the carrying amount of a property
may not be recoverable. Measurement of an impairment loss on an operating
property will now be based on the estimated fair value of the property rather
than the sum of expected future cash flows. Properties held for sale will
continue to be reflected at the lower of historical cost or estimated fair
value less anticipated selling costs. In addition, properties held for sale
will no longer be depreciated. No adjustment of the carrying values of the
Partnership's real estate property investments was required at January 1, 1996
as a result of adopting SFAS No. 121.
NOTE 8 - LEASES
Future minimum rentals to be received by the Partnership under noncancelable
operating leases in effect as of December 31, 1995, are:
Fiscal Year (in thousands)
__________
1996 $ 3,985
1997 3,166
1998 2,597
1999 1,947
2000 1,478
Thereafter 9,175
_______
Total $ 22,348
_______
_______
NOTE 9 - RECONCILIATION OF FINANCIAL STATEMENT TO TAXABLE INCOME
As described in Note 2, the Partnership has not provided for an income tax
liability; however, certain timing differences exist between amounts reported
for financial reporting and federal income tax purposes. These differences are
summarized below for years ended December 31:
1995 1994 1993
________ ________ ________
(in thousands)
Book net income (loss) . . $1,783 $ 579 $ (109)
Allowances for:
Uncollectible accounts
receivable . . . . . . . (4) 71 117
Property valuations. . . (109) 1,385 1,968
Normalized and
prepaid rents. . . . . . . (23) (103) 56
Interest income. . . . . . 661 633 691
Depreciation . . . . . . . (283) 353 (62)
Accrued expenses . . . . . 16 (1) 9
Provision for loan loss. . (1,956) - -
________ ________ ________
Taxable income . . . . . . $ 85 $2,917 $ 2,670
________ ________ ________
________ ________ ________
NOTE 10 - SUBSEQUENT EVENT
The Partnership declared a quarterly cash distribution of $6.37 per unit to
Limited Partners of the Partnership as of the close of business on December
31, 1995. The distribution totals $1,632,000 and represents cash available for
distribution from operations for the period October 1, 1995 through December
31, 1995. The Limited Partners will receive $1,616,000, and the General
Partner will receive $16,000.
INDEPENDENT AUDITORS' REPORT
To the Partners
T. Rowe Price Realty Income Fund III,
America's Sales-Commission-Free Real Estate Limited Partnership:
We have audited the accompanying consolidated balance sheets of T. Rowe Price
Realty Income Fund III, America's Sales-Commission-Free Real Estate Limited
Partnership and its consolidated ventures as of December 31, 1995 and 1994,
and the related consolidated statements of operations, partners' capital and
cash flows for each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free from material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of T. Rowe
Price Realty Income Fund III, America's Sales-Commission-Free Real Estate
Limited Partnership and its consolidated ventures as of December 31, 1995 and
1994, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1995, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
January 22, 1996
