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 III,
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:
253,599 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 $7,197.46 has been calculated in
accordance with Rule 0-11 under the Exchange Act and is
equal to 1/50 of 1% of $35,987,280 (the aggregate
amount of the cash to be received by the Registrant).
(4) Proposed maximum aggregate value of transaction:
$48,137,280.
(5) Total fee paid:
$7,197.46
/x/ Fee paid previously with preliminary materials:
The fee of $7,197.46 was paid in full upon the filing
of the Registrant's preliminary consent solicitation
materials with the Commission on June 23, 1997
(Commission File No. 0-16542).
/ / 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:
T. Rowe Price Realty Income Fund III,
America s Sales-Commission-Free Real Estate Limited Partnership
100 East Pratt Street, Baltimore, MD 21202
James S. Riepe
Chairman of the Board and President
of T. Rowe Price Realty Income Fund III
Management, Inc., General Partner
July 28, 1997
Fellow Partner:
We are writing to request your consent to sell T. Rowe Price
Realty Income Fund III s interests in its eight remaining
properties to Glenborough Realty Trust Incorporated and to
complete the liquidation of the Fund. A majority of the Fund s
outstanding units must consent to the proposal for the
transaction to proceed.
The enclosed materials discuss the transaction in detail, but we
would like to summarize our reasons for recommending that you
consent to proceeding with the sale.
The Fund has held the properties for the period anticipated
when the Fund was organized, and current market conditions
appear favorable for a sale.
The Fund expects to benefit substantially by selling
properties together instead of individually. Benefits
include lower aggregate sales costs, more modest adjustments
to the sale price, and faster liquidation of the Fund.
The price offered by Glenborough should allow the Fund to
liquidate its investments for an amount that exceeds our
most recent estimated aggregate property value.
The General Partner has obtained a "Fairness Opinion" from
Legg Mason s corporate finance division, indicating that the
sale is fair to the Fund and to its Limited Partners from a
financial point of view.
The enclosed materials contain a complete discussion of the
advantages and disadvantages of the transaction under the heading
"THE TRANSACTION-Recommendation of the General Partner." After
carefully weighing the facts and circumstances associated with
the Glenborough transaction as well as alternative courses of
action, we concluded that the bulk property sale to Glenborough
and subsequent liquidation of the Fund is an outstanding
opportunity to maximize value for investors.
Therefore, we recommend that you approve the proposed transaction
by signing and returning the enclosed consent card in the
accompanying postage-paid envelope. Your participation is
extremely important, and your early response could save your Fund
the substantial costs associated with a follow-up mailing. If you
have any questions, please feel free to call one of our real
estate representatives at 1-800-962-8300.
Sincerely,
/s/James S. Riepe
James S. Riepe
T. ROWE PRICE REALTY INCOME FUND III,
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 III,
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 III, America's
Sales-Commission-Free Real Estate Limited Partnership, a Delaware
Limited Partnership ("Fund") that T. Rowe Price Realty Income
Fund III 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 on 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 III MANAGEMENT, INC.
/s/James S. Riepe
By: James S. Riepe
Chairman of the Board and
President
T. ROWE PRICE REALTY INCOME FUND III,
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 III, 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 III 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 October 20, 1986, as amended and restated as of January 5,
1987, as subsequently amended (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 will
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 will involve 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 . . . . . . . . . . . . . . . . 23
Capital Gains Tax . . . . . . . . . . . . . . . . . . . 23
Passive Loss Limitations . . . . . . . . . . . . . . . . 23
Certain State Income Tax Considerations . . . . . . . . 23
Tax Conclusion . . . . . . . . . . . . . . . . . . . . . 24
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 III, America's Sales-
Commission-Free Real Estate
Limited Partnership The Fund owns, directly and through
joint venture partnerships,
interests in eight commercial
properties (collectively
"Properties" and individually a
"Property") consisting of three
industrial parks, two business
parks, two shopping centers and one
industrial 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
$48,137,280 (of which the Fund's
aggregate interest therein is
$35,987,280), 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 parent of
the General Partner owned 100 Units
(less than 1% of the outstanding
Units), and all officers and
directors of the General Partner,
as a group, beneficially owned 124
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
77,627 Units (31% 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 parent of the General
Partner 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
253,599 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 III 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 253,599 outstanding Units entitled to
vote held of record by 10,216 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 III 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 $90,000.
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 October 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. While it was anticipated that
the properties would be held for approximately seven to ten
years, 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 1988 and 1990 and have now been held for their
anticipated holding period.
The Fund owns, directly and through joint venture
partnerships, interests in eight commercial properties consisting
of three industrial parks, two business parks, two shopping
centers and one office building. One of the retail centers,
Westbrook Commons, is owned by Penasquitos 34, a joint venture in
which the Fund and an affiliated fund each own a 50% interest.
The Westbrook Commons Property was acquired as part of a tax-
deferred exchange in 1990 after Penasquitos 34 sold Rancho
Penasquitos, a retail center located in San Diego, California.
One of the business parks, Tierrasanta, is owned by Tierrasanta
234, a joint venture in which the Fund owns a 30% interest and
two affiliated funds own a 30% interest and a 40% interest,
respectively. The Fund directly owns a 100% interest in the
other six Properties. The Fund owned three 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 southern California market (where two of the
Properties are located) and the suburban Philadelphia market
(where one of the Properties is located). Improvements in the
real estate capital market 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 its Beinoris Building, the smallest
of its Wood Dale industrial buildings, in September 1994. With
respect to the Fairchild Corporate Center, the Fund owned a 56%
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 when Fairchild 234 advertised
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 in August 1996 to one of the
offerors without proceeding with the foreclosure. In late 1996,
the Fund began to market its three industrial Properties in
Illinois and Minnesota, Wood Dale, Winnetka, and Riverview (the
"Midwest Industrial Properties"), and South Point Plaza, a
shopping center in Arizona, 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. Generally,
marketing was 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 five of the Fund's Properties, including its interests in the
Tierrasanta and Westbrook Commons Properties, at a price of
$21,893,000. The Midwest Industrial Properties were then under
letter of intent to a different buyer at a price of $14,344,109.
On March 7, 1997, the Fund made a counteroffer to sell
its Scripps Terrace, Clark Avenue, and River Run Properties to
the Purchaser for $13,924,000 and the Affiliated Funds made
counteroffers to sell to the Purchaser the Tierrasanta Property
for $6,750,000 and the Westbrook Commons Property to the
Purchaser for $15,200,000. On March 10, 1997, the Purchaser made
a counteroffer to purchase the Scripps Terrace, Clark Avenue, and
River Run Properties for $13,506,280, subject to negotiation of
additional terms of sale, which the Fund accepted on March 12,
1997. After further negotiations, on March 12, 1997 the
Purchaser made and the Funds accepted, subject to negotiation of
additional terms of sale, an offer to purchase the Tierrasanta
Property at a price of $5,250,000 and the Westbrook Commons
Property for $15,200,000.
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 Funds gave the Purchaser an opportunity to
increase its offer for Tierrasanta and on April 8, 1997, the
Purchaser increased its offer for Tierrasanta to $6,500,000. The
Funds accepted the Purchaser's new offer for Tierrasanta 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 $880,000.
The Fund had previously received other offers for the Midwest
Industrial Properties ranging from $12,165,000 to $13,970,945.
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 Purchaser for an additional
$12,931,000. 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 the Properties is $48,137,280 and the Fund's interest therein
is $35,987,280.
The Purchase and Sale Agreements for the Properties
were executed on April 11, 1997, and the Purchaser deposited
$481,373 (the "Escrow Deposit"), representing 1% of the aggregate
purchase price for the Properties, in an escrow account.
Description of the Properties to be Sold
Scripps Terrace
This Property, in which the Fund holds a 100% interest,
consists of two one-story research and development/office/service
buildings with a total of 57,000 square feet of space. The
Property was built in 1985 and is located in the center of the
Scripps Ranch planned community in the I-15 Corridor in suburban
San Diego, California.
The Scripps Ranch/Scripps Mesa industrial submarket in
which this project competes consists of approximately 1,300
buildings totaling approximately 1.7 million square feet. Net
absorption in 1996 in the Scripps Ranch/Scripps Mesa submarket
totaled approximately 19,621 square feet. Vacancy in this
submarket has declined steadily in recent years, from
approximately 15% in 1993, to approximately 7% at year-end 1996.
Average effective rents have remained generally level over this
period. Scripps Terrace was 90% leased on average in the three
months ended March 31, 1997, up from 82% in the comparable 1996
period, in both cases generally at market rates. There continues
to be limited demand for space in multi-tenant properties such as
Scripps Terrace.
Leases covering 32% of the space in Scripps Terrace
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
$130,000.
Winnetka
The Fund owns a 100% interest in the Winnetka
Industrial Park Property, which consists of two multi-tenant
industrial buildings with a total of 188,000 square feet of
space. It was built in 1982 and is located in Crystal,
Minnesota, a suburb of Minneapolis.
As of May 1997, the building was still 100% leased
which is above the 97% overall rate for the North Twin Cities'
West/Northwest Suburban office/warehouse submarket as of December
1996. Total competitive inventory in this submarket is
approximately 7.7 million square feet. The gross absorption in
this submarket rose to approximately 106,000 square feet during
1996. In 1996, average market rental rates for space comparable
to Winnetka increased slightly to $7.22 per square foot net of
taxes, insurance and utilities ("NNN") for the office portion of
the industrial buildings from $7.20 NNN in 1995. The average
market rate for the warehouse portion of the industrial buildings
increased from $3.59 NNN in 1995 to $3.69 NNN in 1996. The high
occupancy rate in the submarket has spurred speculative
construction. At present, approximately 20 new buildings are
under construction in the nearby suburb of Plymouth. These
buildings are expected to compete directly with the Winnetka
property. Winnetka was 100% leased on average in the three
months ended March 31, 1997 and 1996, in both cases generally at
market rates.
No leases in Winnetka expire between May 1997 and
December 1998, but it is estimated that capital improvements,
over the same period would be approximately $400,000, primarily
for the replacement of a roof.
Wood Dale
The Fund owns a 100% interest in two multi-tenant
industrial warehouse/manufacturing/distribution buildings built
in 1980 in Wood Dale, Illinois, ("Wood Dale") a suburb of Chicago
located immediately west of O'Hare Airport. The buildings are
located in close proximity to each other and contain a total of
90,000 square feet.
The western suburban Chicago industrial submarket
consists of approximately 160 million square feet of space in all
types of industrial projects. The net absorption in the larger
west/northwest suburban Chicago industrial market was 738,000
square feet in 1996. 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. Speculative construction is underway.
Wood Dale was 82% leased on average for the three months ended
March 31, 1997, down from 90% in the comparable period in 1996,
in both cases generally at market rates.
Leases covering 12% of the space in Wood Dale 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 $40,000.
Clark Avenue
The Fund owns a 100% interest in a 40,000 square foot
office/industrial building in King of Prussia, Pennsylvania
("Clark Avenue"), a northwestern suburb of Philadelphia. The
Clark Avenue Property was built in 1980.
The King of Prussia office submarket has an inventory
of approximately 10.8 million square feet. The submarket had a
vacancy rate of approximately 10.5% at the end of 1996,
representing a decrease from 12% at year-end 1995 and 15% at
year-end 1994. Net absorption recorded through the end of 1996
was approximately 200,000 square feet. The rental rates have
remained stable in the submarket. There was no new construction
activity in the King of Prussia submarket in 1996 and none is
planned for 1997. Nevertheless, conditions in the larger
Philadelphia industrial market are not strong, and the King of
Prussia submarket is experiencing tenants downsizing and
departing for other markets. Clark Avenue was 100% leased at
March 31, 1997, resulting in an average leased status of 81% for
the three months ended March 31, 1997, compared with 72% in the
comparable 1996 period. The newly leased space was leased at
market rates.
One lease covering 8% of Clark Avenue expires between
May 1997 and December 1998. It is estimated that capital
improvements, leasing commissions and tenant improvements over
the same period would be minimal.
Riverview
The Fund owns a 100% interest in this Property which
consists of three multi-tenant industrial
warehouse/distribution/light manufacturing buildings located in
the Riverview Industrial Park ("Riverview") near St. Paul,
Minnesota. It was built in 1972 and contains 114,000 square feet
of space.
In 1996 the St. Paul/Midway/Suburban submarket had a
vacancy rate of approximately 4% on a total inventory of
approximately 11.3 million square feet. Net absorption totaled
74,300 square feet at year-end 1996. During 1996, the average
rent was $7.50 NNN for the office portion of the market and $3.25
NNN for the warehouse portion. Riverview's average leased status
for the three months ended March 31, 1997 was 100%, up from 96%
for the three months ended March 31, 1996. In both periods,
leases were generally executed at market rates.
Leases covering 26% of the space at Riverview 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.
River Run
The Fund owns a 100% interest in River Run Shopping
Center located in Miramar, Florida, which was built in 1988 and
contains 93,000 square feet of space.
In 1996, River Run signed three new leases totaling
4,275 square feet and one 975 square foot renewal lease
representing in total over 5% of this south Florida retail
Property. Occupancy at River Run increased from 90% at year-end
1995 to 93% at year-end 1996. The southwest Broward County non-
regional mall submarket contains approximately 4.5 million square
feet of retail space. The directly competitive market consists
of four retail centers totaling 650,000 square feet. The vacancy
rate within this smaller submarket is approximately 4%. Leasing
activity in the area continues to improve. New housing
construction which is underway in the area should positively
impact the retail center within the foreseeable future. Rental
rates for new leases in the submarket have increased in 1996 on
average up to $2.00 NNN per square foot per year to $12.00 to
$16.00 per year. River Run's average leased status was 93% in
the three months ended March 31, 1997. Rents are generally at
market rates.
Leases covering 2% of the space at River Run expire
between May 1997 and December 1998, but Fund Management
anticipates some additional vacancy over this period due to
credit issues. It is estimated that capital improvements,
leasing commissions and tenant improvements over the same period
would be approximately $50,000.
Tierrasanta
The Fund owns a 30% interest in Tierrasanta 234, a
joint venture with T. Rowe Price Realty Income Fund II, America's
Sales-Commission-Free Real Estate Limited Partnership ("RIF II")
and T. Rowe Price Realty Income Fund IV, America's Sales-
Commission-Free Real Estate Limited Partnership ("RIF IV"), 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.
Westbrook Commons
The Fund owns a 50% interest in Penasquitos 34, a joint
venture in which RIF IV also owns a 50% interest. Penasquitos 34
owns a 100% interest in Westbrook Commons Shopping Center, a
neighborhood shopping center in the Village of Westchester,
Illinois, a Chicago suburb. The Property was built in 1984 and
contains 122,000 rentable square feet of space.
The Westchester market in which Westbrook Commons is
located continues to remain a stable and relatively healthy
environment for retailers. The vacancy rate for the competitive
centers within a three-mile radius of Westbrook Common is
approximately 2%, down from 7% at year-end 1994. Westbrook
Common's average leased status for the three months ended March
31, 1997 was 98%, up 4% from the year-ago period. Leases at the
Property are generally at market rates.
Leases covering 20% of the space in Westbrook Commons
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 $130,000.
Annual Valuation
At the end of each year, commencing in 1991, 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 $145. Adjusted for the distribution in
connection with the South Point Plaza sale of $5.73 per Unit, the
adjusted Unit Valuation is $139. The sales price under the
Purchase and Sale Agreements after deducting expenses of the
Transaction to the Fund, is estimated to average approximately
$140 per Unit. However, the expected distribution as a result of
the Sale is anticipated to range from $134 to $150 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. Additional net assets from current and
prior operations are also expected to be distributed to Limited
Partners in conjunction with the Transaction. See "CERTAIN
FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE SALE--Taxation
prior to Liquidation."
Fairness Opinion
The General Partner requested Legg Mason Wood Walker,
Incorporated ("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 its
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, office or retail properties; and (iii) an analysis of
certain publicly available market purchase price data for
industrial, office and retail 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 imputed aggregate values of
the Properties of $27.7 million to $43.8 million, with a mean of
$34.2 million.
Given that the consideration of $35,987,280 to be
received by the Fund from the Sale is within the aggregate values
of the Properties derived from a 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 $16.8 million to $27.6 million, with a mean of
$21.8 million.
Legg Mason also analyzed selected transactions (the
"Comparable Retail Acquisitions") in which certain retail REITs
(the "Acquiring Retail Companies") acquired a portfolio of retail
properties (the "Target Retail Portfolios"). Legg Mason compared
the purchase price paid in each Comparable Retail Acquisition
with the latest twelve months or reported period, on an
annualized basis, revenues, EBITDA and funds from operations of
the Target Retail Portfolios and calculated the following range
of multiples: a range of purchase price to Target Retail
Portfolio revenues of 5.1x to 8.4x, with a mean of 6.8x; a range
of purchase price to Target Retail Portfolio EBITDA of 8.3x to
15.2x, with a mean of 10.4x; and a range of purchase price to
Target Retail Portfolio funds from operations of 5.4x to 15.6x,
with a mean of 9.0x. Applying the applicable range of these
acquisition multiples to the office 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 retail Properties of approximately $7.9 million to
$23.2 million, with a mean of $14.7 million. Legg Mason then
combined the respective ranges of valuations of the industrial
Properties and the retail Properties, which yielded an implied
aggregate range of values of the Properties of approximately
$24.7 million to $47.1 million, with a mean of $36.5 million.
Given that the consideration of $35,987,280 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 Retail 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 retail buildings in
particular markets in which the Properties are located.
Legg Mason analyzed the prevailing purchase
capitalization rate (calculated by dividing property net
operating income for the applicable trailing twelve month period
by the purchase price paid) for the Minneapolis and St. Paul,
Minnesota; Chicago, Illinois; San Diego, California; and
Philadelphia, Pennsylvania industrial markets; and the Chicago,
Illinois and Ft. Lauderdale, Florida retail markets. 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 $37.6 million.
Legg Mason noted that the aggregate value of the
Properties derived from the prevailing purchase price
capitalization rate analysis exceeds the consideration of
$35,987,280 to be received by the Fund in the Sale by
approximately 4.0%. However, Legg Mason also noted that several
of the Properties were constructed over fifteen years ago,
contained significant vacancy as of March 31, 1997 and are
budgeted to require significant capital improvements in the near
term. Further, the Discounted Cash Flow and Selected Comparable
Acquisition Analyses discussed above support the fairness to the
Fund and the Limited Partners, from a financial point of view, of
the consideration to be received from the Sale. Legg Mason
therefore concluded that this analysis did not preclude it from
rendering its Fairness Opinion.
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 also has been retained by the other 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 $481,373 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 with respect to the wholly-owned Properties if a more
favorable unsolicited offer is received for these Properties,
although the Fund would then forfeit the Escrow Deposit of
$264,373 with respect to these Properties 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; and
(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.
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 to 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; 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 Riverview, 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
1998. 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--The Liquidation."
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 to the
Purchaser of Tierrasanta (the Property held by a joint venture in
which the Fund has a 30% interest) and/or Westbrook Commons (the
Property held by a joint venture in which the Fund has a 50%
interest) may nevertheless be consummated because the sale of the
Fund's interests in either or both of such Properties does not
require the approval of the Limited Partners. Moreover, the
consummation of such sales may be required under the terms of the
agreements governing such joint ventures.
Under each of the joint venture agreements governing
Tierrasanta and Westbrook Commons, if the Fund chooses not to
sell a Property, but either of the other two joint venture
partners (in the case of Tierrasanta) or the single other joint
venture partner (in the case of Westbrook Commons) 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 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 and Westbrook Commons, between the
joint ventures in which the Fund owns interests 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 aggregate
purchase price ("Purchase Price") for all of the Properties is
$48,137,280 (of which the Fund's aggregate interest therein is
$35,987,280) payable as follows: (i) $481,373 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 the
Limited Partners holding a majority of the outstanding Units; (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, 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 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 Partnership 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 the
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 the Limited Partners holding a majority of the
outstanding Units, (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
amounts ranging from $65,000 to $264,373, depending on the
Property in question) 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 amounts ranging from $100,000 to
$300,000, depending on the Property in question, 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 less than amounts ranging from $100,000
to $300,000, depending on the Property in question, or (ii) the
cost of repairing such damage is in excess of amounts ranging
from $100,000 to $300,000, depending on the Property in question,
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 Agreement 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 Agreement 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 a Purchase and Sale Agreement prior to the Closing
shall be to terminate such Purchase and Sale Agreement and
receive a refund of the Escrow Deposit set forth in that Purchase
and Sale Agreement, together with a reimbursement of out-of-
pocket expenses of up to $90,000, $15,000, and $15,000 with
respect to the wholly-owned Properties, Tierrasanta and Westbrook
Commons, respectively, 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 wholly-owned Property by at least $100,000, or a default by
the applicable selling entity adversely affects the value of
Tierrasanta or Westbrook Commons by at least $150,000 or
$300,000, respectively.
In the event that a Default is first discovered by the
Purchaser after the Closing, the 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) the 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 or other
selling entity shall have no liability to the Purchaser based
upon any inaccuracy in its representations and warranties
contained in the Purchase and Sale Agreements unless the same
results in damage to the Purchaser of more than $264,373, $65,000
and $152,000, with respect to the wholly-owned Properties,
Tierrasanta and Westbrook Commons, respectively, and the Fund's
or other selling entity's aggregate liability to the Purchaser
for all such inaccuracies is $1,300,000, $500,000 and $1,500,000,
with respect to the wholly-owned Properties, Tierrasanta and
Westbrook Commons, respectively.
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 Agreement for the wholly-owned
Properties may be terminated by the Fund if it receives a more
favorable offer for the purchase of such Properties from a bona
fide third party. In the event of a termination of such Purchase
and Sale Agreement as a result of a more favorable offer for
these Properties, the Escrow Deposit of $264,373 with respect to
these 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 Agreement prohibits the Fund from actively
seeking a more favorable offer, but allows 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,
during the operating stage of the Fund, the General Partner was
entitled to receive a 9% management fee, as well as a General
Partner distribution of 1% of certain monies which were derived
from operations. Any amounts which are due to the General
Partner with respect to prior periods may be paid following the
consummation of the Sale. However, the General Partner is
entitled to these monies, regardless of whether 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 $164,000 and $20,000, respectively, for
these fees 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 for 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 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 substantially 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 $6.3 million
and taxable losses of approximately $3.6 million as a result of
the Sale. Management of the Fund believes that 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 $134 to $150 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 a Limited Partner and may
not be applicable to 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 10,216 Limited Partners.
There is no active public trading market for the Units. However,
during the period commencing in the third quarter of 1996, three
bidders, none of whom is affiliated with the General Partner or
LaSalle, made tender offers for the Units, at prices of $60, $107
and $90 per Unit, subject to adjustment for certain distributions
by the Fund. The Fund has made material distributions of
property sale proceeds since certain of these offers were made.
See "THE TRANSACTION--Annual Valuation." As of July 2, 1997,
sales of 2,941 Units to the firms making offers have been
presented 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 $ 1.58
June 30, 1995 $ 1.58
September 30, 1995 $ 1.58
December 31, 1995 $ 6.37
March 31, 1996 $ 2.00
June 30, 1996 $ 2.00
September 30, 1996 $23.60
December 31, 1996 $ 2.00
All of the foregoing distributions were paid from net
cash flows from operating activities, with the exception of the
distribution for the quarter ended September 30, 1996, which
included a distribution of $21.60 per Unit representing the
proceeds of the sale of Fairchild Corporate Center, and the
distribution for the quarter ended December 31, 1995, which
included $.75 per Unit from proceeds of the initial public
offering of Units which had been retained as part of cash
balances. Cumulatively, the Fund has distributed $4.63 per Unit
from the unexpended proceeds of its public offering.
In the second quarter of 1997, the Fund also
distributed $5.73 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 months
ended March 31, 1997 are not 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 $48,843 $45,780 $41,885 $41,733 $33,952
Total
revenues $6,078 $6,211 $6,357 $6,094 $6,280
Net income
(loss)(1) $(1,268) $(109) $579 $1,783 $906
Net income
(loss) per
Unit(1) $(4.95) $(0.43) $2.26 $6.96 $3.54
Cash dis-
tributions
declared
per Unit:
From
operations $11.04 $11.74 $13.53 $10.36 $8.00
As return
of capital $.49 --- --- $.75 ---
From sale
proceeds --- --- $3.92 --- $21.60
3 months ended (unaudited)
March 31, 1996 March 31, 1997
Total assets $40,511 $33,954
Total revenues $ 1,630 $ 1,433
Net income (loss)(1) $ 470 $ 498
Net income (loss) per
Unit(1) $ 1.83 $ 1.94
Cash distributions
declared per Unit:
From operations $ 2.00 ---
As return of capital --- ---
From sale proceeds --- ---
(1) The figures for Net Income (loss) and Net income (loss) per
Unit include a gain on real estate sold of $80 ($.31 per
Unit) in 1994 and $1,630 ($6.36 per Unit) in 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 $498,000 for the first three months of 1997
was $28,000 more than for the comparable 1996 period. Revenues
declined $197,000 due primarily to the sale of Fairchild
Corporate Center in 1996, as well as to lower occupancy at
Tierrasanta caused by the loss of a major tenant. However,
expenses declined $225,000, resulting in the net income gain.
The drop in expenses was attributable to the disposition of
Fairchild Corporate Center and also to lower bad debt expenses at
Winnetka and River Run. Since Winnetka, Riverview, Wood Dale,
and South Point Plaza were classified as held for sale, there was
no depreciation expense on these properties. Fund expenses rose
during the 1997 period, primarily as a result of necessary costs
incurred in responding to the recent tender offers for Units.
At the property level, the Fund signed new, renewal, and
expansion leases covering 7.8% of the portfolio's square footage
during the quarter, resulting in a slight increase in the Fund's
leased status from 89% at the end of December to 90% at the end
of March. The Fund's average leased status declined by two
percentage points compared with the year-ago period, primarily
because of the loss of a major tenant at Tierrasanta last August,
as mentioned above. The major improvement during the 1997
quarter occurred at Clark Avenue where a new tenant signed a
lease for 28% of the property, lifting leased status there to
100% and average leased status for the quarter to 81%, nine
percentage points higher than in 1996.
Year ended December 31, 1996 compared to Year ended December
31, 1995
The Fund had a loss of $724,000 from operations in 1996,
before the gain on the Fairchild Corporate Center sale, compared
with net income of $1,783,000 in 1995. This difference was
primarily due to downward property valuation adjustments at
Scripps Terrace, Tierrasanta, and Clark Avenue totaling
$2,750,000, which were partly offset by an increased contribution
to income of $327,000 from River Run. This latter property's
contribution increased as a result of the Fund's acquisition of
the asset through foreclosure late in 1995. While conditions in
the markets where these properties are located are generally
improving, the shortened anticipated holding period due to the
Partnership's disposition plans caused it to adjust the carrying
values downward.
The sale of Fairchild Corporate Center in 1996 had a
negative effect on operating earnings amounting to $45,000
because of the loss of the property's income for four months of
the year. However, the Fund realized a gain of $1,630,000 on the
sale.
Revenues totaled $6,280,000 for the year compared with
$6,094,000 a year earlier. This comparison was negatively
affected by the absence of a full year's rental income from the
Fairchild Corporate Center but was positively affected by an
increased contribution to income from River Run. Results were
helped by a decline of $166,000 in operating expenses before
valuation adjustments during 1996.
Year ended December 31, 1995 compared to Year ended December
31, 1994
While the Fund's statements of operations appeared to show
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 the 1994 numbers. The change in River Run's status
from a loan to an owned property had the most notable impact on
the year-to-year comparison.
In the fourth quarter of 1995, the Fund took ownership of
River Run and began accounting for it as an owned 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 provisions and uncollectible interest.
The lower average leased status at Fairchild Corporate
Center and Clark Avenue drove the overall decline in rental
income. The absence of Beinoris, which was sold in 1994, also
had a negative effect on the revenue comparison.
The most noteworthy expense item which had a positive effect
on the net income comparison with 1994, 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.
Liquidity and Capital Resources
The Fund sold 253,641 Units for a total of $63,410,000,
including the contribution of $25,000 from the original Limited
Partner, as part of its public offering of Units, which
terminated on June 30, 1987. No additional units have since been
sold by the Fund. After deduction of organizational and offering
costs of $3,805,000, the Fund had $59,605,000 available for
investment and cash reserves.
The Fund purchased eight properties or interests therein on
an all-cash basis, and made an investment in two participating
mortgage loans, completing the acquisition phase of its business
plan. The properties subject to the mortgage loans were
subsequently acquired in satisfaction of the outstanding loan
balances. The Westbrook Commons Property, in which the Fund has
a 50% interest, was acquired as part of a tax-deferred exchange
in 1990 after the Fund and an Affiliated Fund sold Rancho
Penasquitos, a retail center located in San Diego, California.
Through March 31, 1997 the Fund had sold a portion of the Wood
Dale property and Fairchild Corporate Center, in which the Fund
had a 56% interest. In April of 1997 the Fund sold South Point
Plaza, in which the Fund had a 50% interest. The remaining
Properties are reflected in the March 31, 1997 financial
statements as investments in real estate of $29,220,000 after
accumulated depreciation, amortization, and valuation allowances
recognized in prior years.
The Fund expected to incur capital expenditures during 1997
totaling approximately $900,000 for tenant improvements, lease
commissions, and other major repairs and improvements. In the
first quarter of 1997, the Fund incurred $186,000 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 $90,000
of specified capital work on the Properties.
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 completion of the Sale.
As of December 31, 1996, the Fund maintained cash and cash
equivalents aggregating $2,468,000, a decrease of $968,000 from
the prior year end. This decrease resulted primarily from
additional capital improvements during the year. Net cash
provided by investing activities increased by $5,572,000 due to
the Fairchild Corporate Center sale in 1996. Net cash used in
financing activities increased by $6,604,000 due primarily to the
distribution of the proceeds of the Fairchild Corporate Center
disposition. As of March 31, 1997, the Fund maintained cash and
cash equivalents of $2,383,000, essentially unchanged in the
quarter.
Reconciliation of Financial and Tax Results
For 1996, the Fund's book net income was $906,000, and its
taxable loss was $5,759,000. The loss for tax purposes on the
Fairchild Corporate Center sale was the primary reason for the
difference. For 1995, the Fund's book net income was $1,783,000,
and its taxable net income was $85,000. The provision for loan
loss in connection with River Run was the primary difference.
For 1994, the Fund's book net income was $579,000 and its taxable
net income was $2,917,000. The valuation allowances in
connection with Tierrasanta and Scripps Terrace and the
continuation of the accrual of interest on the Brinderson loan
for tax purposes were the primary differences. For a complete
reconciliation see Note 8 to the Fund's year-end financial
statements, which note is hereby incorporated by reference
herein.
BUSINESS
The Fund 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 properties, as well as equity-
related investments. On January 5, 1987, the Fund commenced an
offering of $100,000,000 of Limited Partnership Units ($250 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 $25,000 from the
original Limited Partner (T. Rowe Price Real Estate Group, Inc.),
totaled $63,410,000. The offering terminated on June 30, 1987,
and no additional Units were sold. Forty-two Units have been
redeemed by the Fund on a "hardship" basis. There were 253,599
Units outstanding as at July 2, 1997, and 10,216 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, three of the Fund's
properties produced 15% or more of the Fund's revenues from
operations: River Run (20%), Winnetka (18%), and Westbrook
Commons (17%). In 1995, two of the Fund's properties produced
15% or more of the Fund's revenues from operations: Westbrook
Commons (21%) and Winnetka (19%). In 1994, three of the Fund's
properties produced 15% or more of the Fund's revenues from
operations: Westbrook Commons (20%), Winnetka (19%), and
Fairchild Corporate Center (16%). In none of these periods did
any single tenant produce more than 10% of the Fund's revenue.
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 253,599 Units issued and
outstanding and entitled to vote. At the Record Date, the parent
of the General Partner owned 100 Units (less than 1% of the
outstanding Units), and all officers and directors of the General
Partner, as a group, beneficially owned 124 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 77,627 Units
(31% 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 serves as trustee or custodian with respect
to an investment in the Fund. The parent of the General Partner
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. 0-16542).
(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 III, 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 III 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 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, 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 III, 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 . . . . . . . . . . . . . . $ 6,882 $ 12,181
Buildings and Improvements . . . 13,112 33,139
________ ________
19,994 45,320
Less: Accumulated Depreciation and
Amortization . . . . . . . . . (1,059) (7,831)
________ ________
18,935 37,489
Held for Sale . . . . . . . . . . 11,786 -
________ ________
30,721 37,489
Cash and Cash Equivalents . . . . . 2,468 3,436
Accounts Receivable (less allowances of
$131 and $230) . . . . . . . . . 445 529
Other Assets . . . . . . . . . . . 318 279
________ ________
$33,952 $ 41,733
________ ________
________ ________
Liabilities and Partners' Capital
Security Deposits and Prepaid Rents $ 439 $ 391
Accrued Real Estate Taxes . . . . . 450 433
Accounts Payable and Other
Accrued Expenses . . . . . . . . 217 335
________ ________
Total Liabilities . . . . . . . . . 1,106 1,159
Partners' Capital . . . . . . . . . 32,846 40,574
________ ________
$33,952 $ 41,733
________ ________
________ ________
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 . . . . . . . $ 6,091 $ 5,502 $ 5,369
Interest Income from
Participating Mortgage
Loan . . . . . . . . . . - 429 858
Other Interest Income . . . 189 163 130
_______ _______ _______
6,280 6,094 6,357
_______ _______ _______
Expenses
Property Operating Expenses 1,329 1,284 1,249
Real Estate Taxes . . . . . 1,083 1,002 936
Depreciation and
Amortization . . . . . . 1,268 1,266 1,572
Decline (Recovery) of Property
Values . . . . . . . . . 2,750 (109) 1,385
Provision for Loan Loss . . - 202 -
Management Fee to General
Partner . . . . . . . . 164 282 342
Partnership Management
Expenses . . . . . . . . 410 384 374
_______ _______ _______
7,004 4,311 5,858
_______ _______ _______
Income (Loss) from Operations
before Real Estate
Sold . . . . . . . . . . (724) 1,783 499
Gain on Real Estate Sold . 1,630 - 80
_______ _______ _______
Net Income . . . . . . . . $ 906 $ 1,783 $ 579
_______ _______ _______
_______ _______ _______
Years Ended December 31,
1996 1995 1994
_________ __________________
Activity per Limited
Partnership Unit
Net Income . . . . . . . . $ 3.54 $ 6.96 $ 2.26
_______ _______ _______
_______ _______ _______
Cash Distributions Declared
from Operations . . . . . $ 8.00 $ 10.36 $ 13.53
from Sale Proceeds . . . 21.60 - 3.92
as Return of Capital . . - .75 -
_______ _______ _______
Total Distributions Declared $ 29.60 $ 11.11 $ 17.45
_______ _______ _______
_______ _______ _______
Units Outstanding . . . . . 253,599 253,599 253,605
_______ _______ _______
_______ _______ _______
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 $ (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
Net Income . . . . . . . . 9 897 906
Cash Distributions . . . . (19) (8,615) (8,634)
_______ _______ _______
Balance, December 31, 1996 $ (198) $33,044 $32,846
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) . . . . $ 906 $ 1,783 $ 579
Adjustments to Reconcile Net
Income to Net Cash Provided
by Operating Activities
Depreciation and
Amortization . . . . . 1,268 1,266 1,572
Decline (Recovery) of
Property Values . . . 2,750 (109) 1,385
Change in Loan Loss
Provision . . . . . . - 202 -
Gain on Real Estate Sold (1,630) - (80)
Change in Accounts
Receivable, Net of
Allowances . . . . . . 77 (95) (95)
Increase in Other Assets (48) (101) (62)
Change in Accounts Payable and
Other Accrued
Expenses . . . . . . . (118) 35 (52)
Other Changes in Assets
and Liabilities . . . 65 (2) 13
_______ _______ _______
Net Cash Provided by Operating
Activities . . . . . . . 3,270 2,979 3,260
_______ _______ _______
Cash Flows from Investing
Activities
Proceeds from Property
Dispositions . . . . . . 5,477 - 994
Investments in Real Estate (1,081) (1,176) (665)
_______ _______ _______
Net Cash Provided by
(Used in)
Investing Activities . . 4,396 (1,176) 329
_______ _______ _______
Years Ended December 31,
1996 1995 1994
_________ __________________
Cash Flows Used in Financing
Activities
Cash Distributions . . . . (8,634) (2,029) (4,434)
Redemption of Units . . . . - (1) (1)
_______ _______ _______
Net Cash Used in Financing
Activities . . . . . . . (8,634) (2,030) (4,435)
_______ _______ _______
Cash and Cash Equivalents
Net Decrease during
Year . . . . . . . . . . (968) (227) (846)
At Beginning of Year . . . 3,436 3,663 4,509
_______ _______ _______
At End of Year . . . . . . $ 2,468 $ 3,436 $ 3,663
_______ _______ _______
_______ _______ _______
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.
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, and
Penasquitos 34 (Westbrook Commons), all of which are California
general partnerships, in which the Partnership has 50%, 30%, and
50% 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 56%
interest prior to disposition of the property on August 28, 1996.
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 $143,000, $192,000, and $89,000
were recorded in 1996, 1995, and 1994, respectively. Bad debt
expense is included in Property Operating Expenses.
The Partnership will review its real estate property investments
for impairment whenever events or changes in circumstances
indicate that the property carrying amounts may not be
recoverable. Such a review results in the Partnership recording
a provision for impairment of the carrying value of its real
estate property investments whenever the estimated future cash
flows from a property's operations and projected sale are less
than the property's net carrying value. The General Partner
believes that the estimates and assumptions used in evaluating
the carrying value of the Partnership's properties are
appropriate; however, changes in market conditions and
circumstances could occur in the near term which would cause
these estimates to change.
Rental income is recognized 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 $262,000 and $205,000 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 $164,000, $282,000,
and $342,000 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 $20,000,
$28,000, and $34,000 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 $90,000,
$77,000, and $74,000 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 $4,000, $12,000, and $15,000 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 $120,000.
An affiliate of LaSalle earned $87,000, $61,000, and $37,000 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
In September 1994, the Partnership sold the smallest of the three
Wood Dale industrial buildings, the Beinoris 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. Accordingly, the Partnership
recognized a gain of $80,000.
On August 28, 1996, Fairchild Corporate Center, an office
property in which the Partnership had a 56% interest was sold.
The Partnership received net proceeds of $5,477,000. The net
book value of the Partnership's interest at the date of sale was
$3,847,000, after deduction of accumulated depreciation, and
previously recorded impairments. Accordingly, the Partnership
recognized a $1,630,000 gain on the sale of this property.
The Partnership began actively marketing its three midwest
industrial properties, Wood Dale, Winnetka, and Riverview, 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 four properties as held for sale in
the accompanying December 31, 1996, balance sheet. 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 $(29,000) $ 109,000 $ 82,000
Other Components of
Operating Income 961,000 967,000 729,000
_________ _________ ________
Results of Operations $ 932,000 $1,076,000 $ 811,000
NOTE 5 - FORECLOSURE OF 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 property. 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 6 - 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 is now 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 $2,721,000 in 1996 and $1,467,000 in
1994.
NOTE 7 - LEASES
Future minimum rentals (in thousands) to be received by the
Partnership under noncancelable operating leases in effect at
December 31, 1996, are:
1997 $ 3,729
1998 3,349
1999 2,447
2000 1,709
2001 1,041
Thereafter 8,464
_______
Total $ 20,739
_______
_______
NOTE 8 - 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
the last three years:
1996 1995 1994
_________ __________ ________
(in thousands)
Book net income
(loss) . . . . . . . . . $ 906 $ 1,783 $ 579
Allowance for
doubtful accounts . . . (97) (4) 71
Property valuation
allowance and losses
on dispositions . . . . (6,540) (109) 1,385
Normalized and
prepaid rents . . . . . 7 (23) (103)
Interest income . . . . . . - 661 633
Depreciation . . . . . . . (23) (283) 353
Provisions for
loan loss . . . . . . . - (1,956) -
Other items . . . . . . . . (12) 16 (1)
________ ________ ________
Taxable income (loss) . . . ($5,759) $ 85 $ 2,917
NOTE 9 - SUBSEQUENT EVENT
The Partnership declared a quarterly cash distribution of $2.00
per unit to Limited Partners of the Partnership as of the close
of business on December 31, 1996. The Limited Partners will
receive $507,000, and the General Partner will receive $5,000.
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(In thousands)
March 31, December 31,
1997 1996
__________ ___________
Assets
Real Estate Property
Investments Land $6,882 $6,882
Buildings and Improvements 13,196 13,112
_________ __________
20,078 19,994
Less: Accumulated
Depreciation and
Amortization (1,198) (1,059)
________ ________
18,880 18,935
Properties Held for Sale 11,807 11,786
________ ________
30,687 30,721
Cash and Cash Equivalents 2,383 2,468
Accounts Receivable (less
allowances of $59 and $131) 579 445
Other Assets 305 318
________ ________
$ 33,954 $ 33,952
________ _______
________ _______
Liabilities and Partners'
Capital
Security Deposits and
Prepaid Rents $ 412 $ 439
Accrued Real Estate Taxes 538 450
Accounts Payable and
Other Accrued Expenses 172 217
________ ________
Total Liabilities 1,122 1,106
Partners' Capital 32,832 32,846
________ ________
$ 33,954 $ 33,952
________ ________
________ ________
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 . . $1,402 $ 1,584
Interest Income . 31 46
. . . . . . ________ _____
. . . . . . 1,433 1,630
Expenses
Property Operating Expenses 254 420
Real Estate Taxes 266 291
Depreciation and Amortization 155 348
Decline of Property Value 65 -
Management Fee to General
Partner . . . . 52 12
Partnership Management
Expenses . . 143 89
________ ______
935 1,160
________ ______
Net Income . . . $ 498 $470
. . . . . . ________ ______
________ ______
Activity per Limited
Partnership Unit
Net Income . . . $ 1.94 $1.83
________ ________
________ ________
Cash Distributions
Declared from
Operations . - $2.00
________ ________
________ ________
Units Outstanding 253,599 253,599
________ ________
________ ________
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 . . . . . . . $ (198)$ 33,044 $ 32,846
Net Income . . . . . 5 493 498
Cash Distributions . (5) (507) (512)
_______ _______ _______
Balance, March 31,
1997 . . . . . . . $ (198)$ 33,030 $32,832
_______ _______ _______
_______ _______ _______
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 . . . . . . . . . . $ 498 $ 470
Adjustments to Reconcile Net Income
to Net Cash
Provided by Operating Activities
Depreciation and Amortization 155 348
Decline of Property Value . 65 -
Change in Accounts Receivable,
Net of Allowances . . . . (134) 122
Change in Other Assets . . . 13 (77)
Decrease in Security Deposits
and Prepaid Rent . . . . . (27) (34)
Increase in Accrued
Real Estate Taxes . . . . 88 96
Decrease in Accounts Payable and
Other Accrued Expenses . . (45) (134)
________ ________
Net Cash Provided by Operating
Activities . . . . . . . . . 613 791
________ ________
Cash Flows Used in
Investing Activities
Investments in Real Estate . . (186) (190)
________ ________
Cash Flows Used in
Financing Activities
Cash Distributions . . . . . . (512) (1,620)
________ ________
Cash and Cash Equivalents
Net Decrease during Period . . (85) (1,019)
At Beginning of Year . . . . . 2,468 3,436
________ ________
At End of Period . . . . . . . $ 2,383 $ 2,417
________ ________
________ ________
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 $52,000 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 $29,000 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 $1,000 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 $30,000.
An affiliate of LaSalle earned $12,000 in the first three months
of 1997 as property manager for several of the Partnership's
properties.
NOTE 2 - REAL ESTATE PROPERTY INVESTMENTS
In early 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 three midwest
industrial properties, Wood Dale, Winnetka, and Riverview 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
properties in which the Partnership holds an interest, including
the three midwest industrial properties. The total sales price
for the Partnership's interests is $35,987,000 before selling
expenses. The transactions are subject to further due diligence
by the buyer and 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.
Legg Mason Wood Walker, Incorporated
111 South Calvert Street
Baltimore, MD 21203-1476
July 21, 1997
T. Rowe Price Realty Income Fund III 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 III,
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 $35,987,280 (the "Sale").
In connection with the Sale, we have been requested to
provide our opinion to T. Rowe Price Realty Income Fund III
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
ROWE PRICE REALTY INCOME FUND III,
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 III, 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 III 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
III.
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.
