UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1995
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-17094
USAA Real Estate Income Investments II Limited Partnership
(Exact name of registrant as specified in its charter)
Texas 74-2473951
(State of Organization) (I.R.S. Employer Identification No.)
8000 Robert F. McDermott Fwy., IH 10 West, Suite 600,
San Antonio, Texas 78230-3884
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (210) 498-7391
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTERESTS
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ X ]
State the aggregate market value of the voting stock held by non-
affiliates of the registrant: Not Applicable
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the prospectus of the registrant dated February
11, 1988, as supplemented, filed pursuant to Rule 424(b) or (c)
under the Securities Act of 1933 are incorporated by reference in
Parts I and III.
<PAGE>
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security
Holders
PART II
Item 5. Market for Registrant's Limited Partnership
Interests and Related Security Holder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the
Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedule and
Reports on Form 8-K
Signatures
Index to Exhibits
<PAGE>
PART I
Item 1. Business
USAA Real Estate Income Investments II Limited Partnership,
(the Partnership) is a limited partnership formed in August 1987
under the Texas Revised Limited Partnership Act. The Partnership
has three principal business objectives: (i) preserve and protect
the Partnership's capital; (ii) provide the Limited Partners with
quarterly distributions of Net Cash from Operations; and (iii)
obtain long-term appreciation in the value of the Properties. The
Partnership was formed to (i) invest in a diversified portfolio of
income-producing multi-family residential and commercial properties
and/or (ii) make one or more participating first mortgage loans.
Pursuant to the agreement of the Partnership, to the extent
possible (i) all acquisitions of real property are made for cash
and (ii) all participating first mortgage loans earn fixed interest
and contain participation rights in the underlying property's cash
flow and net proceeds of sale or refinancing and other items, or
both.
Defined terms contained herein shall have the meaning set
forth in the Glossary contained in the Partnership's Prospectus
dated February 11, 1988, filed pursuant to Rule 424(b) attached
hereto as Exhibit 99.a.
The Partnership sold $13,570,500 of Limited Partnership
Interests (27,141 Interests at $500 per Interest) from the
commencement of the offering of its Interests February 11, 1988
through the termination of the offering, January 30, 1989.
Proceeds available to the Partnership for investment were
used to acquire the Continental Plastic Containers Buildings on
April 21, 1989. The Partnership also invested in the Combined
Capital Resources Joint Venture (the joint venture), the owner of
a participating first mortgage loan secured by Sequoia Plaza -
Building I. The joint venture's investment in the mortgage loan
was converted to ownership of the underlying property in August
1991 through foreclosure on the mortgage loan. The Partnership
purchased its final property, Bowater Communication Papers Building
on July 24, 1989.
Competitive conditions for the Partnership's properties and
the property owned by the joint venture for the fiscal year ended
June 30, 1995 were as follows:
Continental Plastic Containers Buildings (Continental
Buildings) are a manufacturing and distribution facility made up of
two industrial bulk warehouse buildings. These buildings are 100%
leased to Continental Plastic Containers, Inc., a wholly-owned
subsidiary of Continental Can Company, Inc. which manufactures and
distributes metal cans, plastic bottles and packaging equipment.
One of the primary strengths of this property is its location in
Elk Grove Village, Illinois which is within one-half mile of O'Hare
International Airport, accessible to interstate highways and 15
miles from the Chicago, Illinois city limits.
<PAGE>
On March 24, 1995, Continental Plastic Containers, Inc.
renewed and extended the lease at the Continental Buildings for
fifteen years with an expiration of July 2010. As part of this
renewal, the Partnership has agreed to construct an addition of
approximately 45,200 square feet to the existing building.
Construction of the addition is underway with final completion
estimated to be in December 1995. The cost of these improvements
is estimated to be $1,700,000 to be funded from the working capital
reserve. In order to avoid borrowing to fund the construction of
the addition and maintain working capital at an adequate level for
operations, distributions to partners were reduced to $7.00 per
unit for the distribution for the quarter ended March 31, 1995.
The Continental Buildings are located in the Northwest Cook
County submarket of the Chicago Metropolitan Area market. This
submarket has a total inventory of 120 million square feet. The
available space as of June 1995 was 9 million square feet which was
down as compared to 9.5 million square feet as of June 1994. This
equated to an occupancy rate of approximately 93% as of June 1995
for the Northwest Cook County submarket.
Bowater Communication Papers Building (Bowater) is a
111,720 square foot industrial warehouse building in Lakeland,
Florida and is 100% leased under a triple net lease to Bowater
Communication Papers, Inc. which expires in 1999. Bowater
Communication Papers, Inc. is a manufacturer of continuous business
forms, including computer stock and word processing forms. Under
terms of the lease with Bowater Communication Papers, the lease
rate on the Partnership property will increase each year by the
rate of the Consumer Price Index, up to a maximum of 5.5% per year,
through the lease expiration in 1999. The annual rate of $3.79 per
square foot was increased to $3.91 per square foot in July 1995.
Bowater is located within the West Quadrant of the Lakeland
market. Total inventory of industrial/warehouse space in the
Lakeland market totaled approximately 19.5 million square feet with
approximately 1.2 million square feet available. This resulted in
an occupancy rate of 94% as of July 1995 in the Lakeland market.
Within the West Quadrant submarket, total inventory of
industrial/warehouse space was approximately 8.2 million square
feet with approximately .8 million square feet available. This
equated to an occupancy rate of 90% as of July 1995 in the West
Quadrant submarket.
Sequoia Plaza - Building I (Sequoia), Arlington, Virginia
was acquired on August 20, 1991 through foreclosure on the
underlying mortgaged property. This transaction converted the
asset held by Combined Capital Resources Joint Venture, a joint
venture between the Partnership and USAA Real Estate Equities,
Inc., from a mortgage loan to real property. The building is a
149,696 square foot office building located near the intersection
of Route 50 and Washington Boulevard with access to Washington,
D.C. via the Potomac river bridges, the George Washington Memorial
Parkway and Interstate Highways 95 and 66. In addition, the
<PAGE>
building is located within nine minutes from Rosslyn, Virginia,
three minutes from the Pentagon and eight minutes from the
Washington, D.C. National Airport. Sequoia, which was 99% leased
as of June 30, 1995, is 89% occupied by Logicon, Inc., a publicly-
held company which provides electronic systems and high-technology
services to government and industry. Logicon, Inc.'s lease expires
in April 2008.
The Northern Virginia market, where Sequoia is located,
compiled over 1.1 million square feet of positive leasing activity
during the first half of the year. The overall occupancy for
Arlington County was at 95.7% as of June 1995.
See "Item 2. Properties" for information pertaining to the
status of the Partnership's properties.
The Partnership is engaged solely in the business of real
estate investment; therefore, presentation of information about
industry segments is not applicable.
The Partnership has no employees.
The General Partner ("General Partner") of the Partnership
is USAA Investors II, Inc., a Texas corporation. The General
Partner maintains general responsibility for management of the
Partnership's business.
<PAGE>
Item 2. Properties
The Partnership owns the properties described below. Also
described is the property owned by the joint venture which was
acquired through foreclosure on the mortgage loan in August 1991.
Location Description of Property
Elk Grove Village, Illinois Continental Plastic Containers
Buildings. Two buildings
comprising a manufacturing and
distribution facility containing
163,090 net rentable square feet
situated on approximately 9.37
acres. As of June 30, 1995 the
property was 100% leased and
annual rent revenue was $3.94
per square foot. The
Partnership has 100% fee-simple
ownership.
Lakeland, Florida Bowater Communication Papers
Building. An industrial
warehouse building with 111,720
net rentable square feet. As of
June 30, 1995 the property was
100% leased and annual rent
revenue was $3.79 per square
foot. The Partnership has 100%
fee-simple ownership.
Arlington, Virginia Sequoia Plaza - Building I. A
four-story office building
containing 149,696 net rentable
square feet situated on
approximately 3 acres. As of
June 30, 1995 the property was
99% leased and average annual
rent revenue was $24.23 per
square foot. This building is
100% owned in fee-simple by
Combined Capital Resources Joint
Venture, which is 7.275% owned
by the Partnership.
See notes 3, 4, 5, 7 and 9 of Notes to Financial Statements in Item
8, for further discussion relating to the properties.
<PAGE>
Item 3. Legal Proceedings
There are no material legal proceedings pending to which
the General Partner or the Partnership is a party or to which any
of the Partnership's properties are subject.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders
during the fourth quarter of the fiscal year covered by this report
through the solicitation of proxies or otherwise.
PART II
Item 5. Market for the Registrant's Limited Partnership Interests
and Related Security Holder Matters
There is no established public market for the Limited
Partnership Interests ("the Interests"), and it is not anticipated
that a public market will develop. Upon request, Real Estate
Investor Services, a department in USAA Real Estate Company, may
assist an investor desiring to transfer his Interests. The
purchase price for the Interests upon resale and any other terms of
a resale transaction will be subject to negotiation between the
buyer and the seller. The limited market for the Interests could
affect the value of the Interests.
As of June 30, 1995, there were 1,672 Limited Partners of
the Partnership owning an aggregate of 27,141 Interests.
During the year ended June 30, 1995, quarterly
distributions totaling $902,438 and $100,271 were distributed to
the Limited Partners and General Partner, respectively, for a total
of $1,002,709 in cash distributions. The return of capital portion
of 1995 distributions was $118,037 and $13,115 for the Limited
Partners and General Partner, respectively.
During the year ended June 30, 1994, quarterly
distributions totaling $949,935 and $105,549 were distributed to
the Limited Partners and General Partner, respectively, for a total
of $1,055,484 in cash distributions. The return of capital portion
of 1994 distributions was $186,558 and $20,729 for the Limited
Partners and General Partner, respectively.
During the year ended June 30, 1993, quarterly
distributions totaling $949,935 and $105,547 were distributed to
the Limited Partners and General Partner, respectively, for a total
of $1,055,482 in cash distributions. The return of capital portion
of 1993 distributions was $197,107 and $21,900 for the Limited
Partners and General Partner, respectively.
Future cash distributions to Limited Partners are
anticipated.
<PAGE>
Item 6. Selected Financial Data
<TABLE>
SELECTED FINANCIAL DATA
FOR THE YEARS ENDED JUNE 30, 1995, 1994, 1993, 1992 AND 1991
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Rental Income $ 1,028,693 1,019,000 1,005,381 995,020 976,682
Equity in Earnings
of Joint Venture 153,787 148,848 144,569 118,785 209,488
Interest Income 98,629 56,798 53,642 80,374 115,325
Net Income 871,557 848,197 836,475 834,025 935,198
Net Income per Limited
Partnership Interest(1) 28.90 28.13 27.74 27.66 31.01
Cash Distributions 1,002,709 1,055,484 1,055,482 1,055,484 1,055,484
Cash Distributions per
Limited Partnership
Interest(2) 33.25 35.00 35.00 35.00 35.00
Total Assets at Period End 12,494,486 12,577,901 12,778,758 12,986,924 13,180,495
(1) Based on limited partnership interests issued at period end.
(2) Cash distributions were based on the limited partnership interests
outstanding at the end of each quarter and the cash distributions
allocated to the Limited Partners.
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1995, the Partnership had cash of $48,582 and temporary
investments of $1,958,789. Included in the Partnership's cash and
cash equivalents was the working capital reserve. Accounts
receivable consisted of amounts due from a tenant. Deferred
charges and other assets included an acquisition fee paid to USAA
Investors II, Inc. on the joint venture interest, deferred rent
resulting from recognition of income as required by generally
accepted accounting principles and prepaid insurance. Accounts
payable consisted primarily of amounts due to affiliates for
reimbursable expenses. Accrued expenses and other liabilities
consisted of prepaid rent, property tax accruals and a security
deposit.
On August 20, 1991, the Combined Capital Resources Joint Venture
(the joint venture) acquired the Sequoia Plaza - Building I, the
underlying mortgaged property by foreclosure. This transaction
converted the joint venture's investment from a mortgage loan to
real property. As the fair value of the asset approximated the
mortgage, no loss was recorded on this transaction. This event did
not have a material negative impact on the Partnership's cash flow
but reduced the equity in earnings from the joint venture due to
depreciation expense on the property.
Total cash distributions to partners for the year ended June 30,
1995 decreased as compared to the year ended June 30, 1994.
Distributions were reduced to $7.00 per unit as of the quarter
ended March 31, 1995. Distributions were decreased in order to
avoid borrowing to fund the construction of the addition at the
Continental Plastic Buildings and maintain working capital at an
adequate level for operations. Management will continue to monitor
Partnership cash requirements.
On March 24, 1995, Continental Plastic Containers, Inc. renewed and
extended the lease at the Continental Plastic Buildings for fifteen
years with an expiration of July 2010. As part of the renewal, the
Partnership has agreed to construct an addition of approximately
45,200 square feet to the existing building. The cost of these
improvements is estimated to be $1,700,000 to be funded from the
working capital reserve.
Future liquidity is expected to result from the temporary
investment of working capital funds, cash generated from the
operations of the properties and ultimately through the liquidation
of such properties.
<PAGE>
During the past few years, the crisis in the financial service
industry has contributed to a depressed real estate market. The
Resolution Trust Corporation (RTC) was established to assist the
Savings and Loan industry in the disposition of real estate
acquired through defaulted loans. The RTC and financial
institutions have flooded the real estate market with properties
offered at deep discounts. These discounts have had a general
depressing effect on real estate values. The Partnership has only
indirectly been adversely affected by these market conditions. The
Partnership's strategy of investing in triple-net leased properties
with long term leases and credit worthy tenants has provided a
hedge against the current real estate market.
RESULTS OF OPERATIONS
For the three-year period ended June 30, 1995, income was generated
from rental income from the income-producing rental properties,
interest income earned on the funds in temporary investments and
earnings from the joint venture interest.
Expenses incurred during each of the years in the three-year period
ended June 30, 1995 were associated with the operations of the
Partnership's properties and various other costs required for the
administration of the Partnership.
Rental properties at June 30, 1995 decreased from June 30, 1994 due
to depreciation offset slightly by preliminary building addition
costs at Continental Plastic. The investment in the joint venture
decreased by the amount of distributions received from the joint
venture offset by increases as a result of equity in earnings of
the joint venture which were derived from the net income of the
Sequoia Plaza - Building I property. Accounts receivable decreased
due to payment of reimbursable expenses by a tenant. Accrued
expenses and other liabilities at June 30, 1995 increased from June
30, 1994 as a result of an increase in prepaid rent.
Rental income increases for each of the years in the three-year
period ended June 30, 1995 were attributable to rent increases
based on CPI (Consumer Price Index) at Bowater. Equity in earnings
were higher in 1995 and 1994 as compared to 1993 due to increased
net income of the joint venture.
A higher cash balance and an increase in interest rates resulted in
an increase in interest income for 1995 as compared to 1994. A
higher cash balance accounted for the increase in interest income
for 1994 as compared to 1993.
General and administrative expenses for 1995 increased as compared
to 1994 due to an increase in state filing fees and higher charges
for the preparation of federal and state returns. The increase in
general and administrative expenses for 1994 as compared to 1993
was due to expenses incurred to market the Continental Plastic
Buildings for sale.
<PAGE>
INFLATION
An increase in inflation could affect the Partnership's investments
through increases in the costs of operating and maintaining the
properties and in various administrative costs of Partnership
operations. The adverse effect inflation may have on operating
expenses would be offset to some extent by contractual increases in
rental rates and tenant reimbursement of expenses incurred at the
Partnership's properties. If high occupancy levels are maintained
at the properties, increases in rental income should offset
increasing property operating expenses with a minimal effect on
operating income. Inflationary trends may also enhance the
ultimate selling price of the Partnership's properties.
<PAGE>
Item 8. Financial Statements and Supplementary Data
<TABLE>
BALANCE SHEETS
JUNE 30, 1995 AND 1994
<CAPTION>
1995 1994
<S> <C> <C>
ASSETS
Rental properties, net (note 3) $ 8,059,941 8,234,295
Investment in joint venture (note 4) 2,190,057 2,221,783
Temporary investments, at cost
which approximates market value:
USAA Mutual Fund, Inc. -- 11,367
Money market fund 1,958,789 1,809,143
1,958,789 1,820,510
Cash 48,582 3,644
Cash and cash equivalents 2,007,371 1,824,154
Accounts receivable 6,000 15,000
Deferred charges and other assets 231,117 282,669
$ 12,494,486 12,577,901
LIABILITIES AND PARTNERS' EQUITY
Accounts payable, including amounts due
to affiliates of $7,290 and $6,937 $ 9,904 20,014
Accrued expenses and other liabilities 164,480 106,633
Total liabilities 174,384 126,647
Partners' equity:
General Partner:
Capital contribution 1,000 1,000
Cumulative net income 582,789 495,633
Cumulative distributions (626,505) (526,234)
(42,716) (29,601)
Limited Partners (27,141 interests):
Capital contributions, net of offering
costs 12,756,270 12,756,270
Cumulative net income 5,245,089 4,460,688
Cumulative distributions (5,638,541) (4,736,103)
12,362,818 12,480,855
Total Partners' equity 12,320,102 12,451,254
Commitment (note 9)
$ 12,494,486 12,577,901
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1995, 1994 AND 1993
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
INCOME
Rental income (notes 5 and 7) $ 1,028,693 1,019,000 1,005,381
Equity in earnings of joint venture (note 4) 153,787 148,848 144,569
Less direct expenses, including depreciation
of $239,039, $238,615, and $237,406 (245,292) (247,792) (245,565)
Net operating income 937,188 920,056 904,385
Interest income (note 6) 98,629 56,798 53,642
Total income 1,035,817 976,854 958,027
EXPENSES
General and administrative (note 6) 164,260 128,657 121,552
Net income $ 871,557 848,197 836,475
Net income per limited partnership interest $ 28.90 28.13 27.74
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1995, 1994 AND 1993
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
<S> <C> <C> <C>
Balances at June 30, 1992 $ 13,028 12,864,520 12,877,548
Net income 83,647 752,828 836,475
Cash distributions (105,547) (949,935) (1,055,482)
Balances at June 30, 1993 (8,872) 12,667,413 12,658,541
Net income 84,820 763,377 848,197
Cash distributions (105,549) (949,935) (1,055,484)
Balances at June 30, 1994 (29,601) 12,480,855 12,451,254
Net income 87,156 784,401 871,557
Cash distributions (100,271) (902,438) (1,002,709)
Balances at June 30, 1995 $ (42,716) 12,362,818 12,320,102
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1995, 1994 AND 1993
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 871,557 848,197 836,475
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 239,039 238,615 237,406
Amortization 2,528 2,528 2,528
Earnings from joint venture (153,787) (148,848) (144,569)
Distributions from joint venture 185,513 161,868 156,413
Decrease (increase) in accounts receivable 9,000 (15,000) --
Decrease in deferred charges and
other assets 49,024 46,896 9,206
Increase in accounts payable, accrued
expenses and other liabilities 47,737 6,430 10,841
Cash provided by operating activities 1,250,611 1,140,686 1,108,300
Cash flows used in investing activities -
Additions to rental properties (64,685) (38,857) --
Cash flows used in financing activities -
Distributions to partners (1,002,709) (1,055,484) (1,055,482)
Net increase in cash and cash
equivalents 183,217 46,345 52,818
Cash and cash equivalents at beginning of
period 1,824,154 1,777,809 1,724,991
Cash and cash equivalents at end of period $ 2,007,371 1,824,154 1,777,809
See accompanying notes to financial statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
1. Organization and Summary of Significant Accounting Policies
USAA Real Estate Income Investments II Limited Partnership is
engaged solely in the business of real estate investment;
therefore, presentation of information about industry
segments is not applicable.
The General Partner, USAA Investors II, Inc., is a wholly-
owned subsidiary of USAA Real Estate Company, which is a
wholly-owned subsidiary of USAA Capital Corporation, which is
a wholly-owned subsidiary of United Services Automobile
Association (USAA).
Rental properties are valued at cost. The carrying amount of
a property is not changed for temporary fluctuations in value
unless the carrying value is believed to be permanently
impaired. In 1995, the Partnership adopted the provisions of
Financial Accounting Standards Board Statement No. 121,
"Accounting for Impairment of Long-lived Assets and for Long-
lived Assets to be Disposed of," (Statement 121). Statement
121 provides guidance for determining impairment of long-
lived assets utilizing undiscounted future cash flows. Based
on the provisions of Statement 121, the Partnership's long-
lived assets, real estate and improvements, are not
considered impaired. The adoption of this Statement had no
financial statement impact.
The Partnership's investment in Combined Capital Resources
Joint Venture is accounted for on the equity method. The
Partnership has a 7.275% interest and USAA Real Estate
Equities, Inc. has a 92.725% interest. Both partners have
joint control of the joint venture.
For purposes of the Statement of Cash Flows, all highly
liquid marketable securities that have a maturity at purchase
of three months or less and money market mutual funds are
considered to be cash equivalents.
Depreciation is provided over the estimated useful lives of
the properties using the straight-line method. The estimated
lives of the buildings and improvements are 30 years (31.5
years for Federal income tax purposes).
Acquisition fees related to the investment in joint venture
are being amortized over the remaining life of the building
(note 4).
<PAGE>
Rental income is recognized under the operating method,
whereby aggregate rentals are reported on the straight-line
basis over the life of the lease. Rental income recognized
was $48,746 less than the amount per lease agreements for the
years ended June 30, 1995 and 1994 and $3,896 less for 1993.
Deferred charges consisted primarily of deferred rent
resulting from recognition of income as required by generally
accepted accounting principles.
No provision or credit for income taxes has been made as the
liability for such taxes is that of the Partners rather than
the Partnership. The Partnership files its tax return each
calendar year on an accrual basis.
For financial reporting purposes, net income is allocated 10%
to the General Partner and 90% to the Limited Partners. Net
income per limited partnership interest is based upon the
limited partnership interests outstanding at the end of the
period and net income allocated to the Limited Partners.
Cash distributions per limited partnership interest were
$33.25 for the year ended June 30, 1995 and $35.00 for the
years ended June 30, 1994 and 1993 and were based on the
limited partnership interests outstanding at each quarter end
and the cash distributions allocated to Limited Partners.
2. Partnership Agreement
Pursuant to the terms of the Partnership Agreement, Net Cash
from Operations shall be allocated and paid 10% to the
General Partner and 90% to the Limited Partners. Any Net
Cash from Operations received by a Limited Partner shall
count toward his 6% cumulative Preferred Return (10% as to
that portion of Partnership funds invested in mortgage
loans), as defined in the Partnership Agreement. Net Proceeds
from Sales or Refinancings shall be allocated and paid 1% to
the General Partner and 99% to the Limited Partners until the
Limited Partners have been returned their Original Invested
Capital plus their Preferred Return. Second, Net Proceeds
from Sales or Refinancings shall be allocated and paid to the
General Partner in payment of any unpaid Subordinated
Disposition Fee. Third, Net Proceeds from Sales or
Refinancings shall be allocated and paid 90% to the Limited
Partners and 10% to the General Partner.
Generally, all items of income, gain, loss, deduction and
credit from operations will be allocated 90% to the Limited
Partners and 10% to the General Partner. Net gain or net
loss from the sale or other disposition of a Property shall
be allocated as described in the Partnership Agreement.
<PAGE>
3. Rental Properties
Rental properties at June 30 consisted of the following:
1995 1994
Buildings and improvements $ 7,217,190 7,152,505
Land 2,276,850 2,276,850
9,494,040 9,429,355
Less accumulated depreciation (1,434,099) (1,195,060)
$ 8,059,941 8,234,295
4. Investment in Joint Venture
On September 28, 1988, the Partnership entered into the
Combined Capital Resources Joint Venture (the joint venture)
with USAA Real Estate Company (REALCO), an affiliate of the
General Partner, for the ownership and operation of income-
producing properties and participating first mortgage loans.
The joint venture is structured in a manner which grants
joint control of the joint venture to both partners, but
which gives REALCO the responsibility of conducting the
ordinary and usual day-to-day management of the joint venture
property.
The initial joint venture investment was a participating
first mortgage on the Sequoia Plaza - Building I in an amount
of $30,927,000 which was originally extended by REALCO on May
23, 1988. On June 30, 1989, the Partnership invested
$2,250,000 in this participating first mortgage which was
paid directly to REALCO with the understanding that such sum
would be the Partnership's capital contribution to the joint
venture and would reduce REALCO's contribution. As a
result, REALCO's contribution became $28,677,000. REALCO's
joint venture interest is 92.725% and the Partnership's joint
venture interest is 7.275%.
On March 27, 1990, REALCO sold its joint venture interest to
USAA Real Estate Equities, Inc, a real estate investment
trust, which is majority-owned by REALCO. All other terms
and conditions contained in the joint venture agreement
remain as originally written and amended.
On August 20, 1991, the Combined Capital Resources Joint
Venture acquired the underlying mortgaged property through
foreclosure. This transaction converted the joint venture's
investment from a mortgage loan to real property. As the
fair value of the asset approximated the mortgage loan and
other receivables, no loss was recorded on this transaction.
This event did not have a material negative impact on the
Partnership's cash flow but has reduced the equity in
earnings from the joint venture due to depreciation expense
on the property.
<PAGE>
The following is the summary financial information for the
Combined Capital Resources Joint Venture as of June 30, 1995
and 1994 and for the three years ended June 30, 1995.
<TABLE>
ASSETS
<CAPTION>
1995 1994
<S> <C> <C>
Cash $ 295,132 194,001
Property, net 28,216,158 28,974,653
Other receivables 82,861 42,592
Deferred rent and other assets 1,553,308 1,353,549
$30,147,459 30,564,795
LIABILITIES AND EQUITY
Accounts payable $ 41,996 23,418
Equity:
USAA Real Estate Equities, Inc. 27,915,406 28,319,594
USAA Real Estate Income
Investments II 2,190,057 2,221,783
Total equity 30,105,463 30,541,377
$30,147,459 30,564,795
</TABLE>
<TABLE>
OPERATIONS
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Revenues (a) $ 4,068,973 3,984,432 3,791,496
Operating expenses (971,684) (959,213) (823,188)
Other expenses (218,975) (230,694) (214,369)
Depreciation (764,227) (749,064) (765,373)
Net income $ 2,114,087 2,045,461 1,988,566
Equity in net income:
USAA Real Estate
Equities, Inc. $ 1,960,300 1,896,613 1,843,997
USAA Real Estate Income
Investments II 153,787 148,848 144,569
$ 2,114,087 2,045,461 1,988,566
Cash distributions:
USAA Real Estate
Equities, Inc. $ 2,364,487 2,063,132 1,993,587
USAA Real Estate Income
Investments II 185,513 161,868 156,413
$ 2,550,000 2,225,000 2,150,000
(a) For the years ended June 30, 1995, 1994 and 1993, the joint
venture recorded $3,560,658 of revenue, from a single
tenant which represented 88%, 89% and 94%, respectively, of
total revenue.
</TABLE>
<PAGE>
5. Minimum Future Rentals
Minimum future rentals are cash payments to be received
under non-cancelable leases over the lease terms and do not
necessarily represent rental income under generally accepted
accounting principles. Rental income reported in the
Statements of Income is recognized under the operating
method, whereby aggregate rentals are reported as income
over the life of the lease. The Partnership's rental
properties are leased for four to fifteen years under
triple-net leases whereby the tenants pay all operating
expenses. Approximate minimum future rentals are as
follows:
1996 $ 1,137,000
1997 1,178,000
1998 1,178,000
1999 1,178,000
2000 746,000
Thereafter 9,390,000
$ 14,807,000
6. Transactions with Affiliates
USAA Investors II, Inc. (the General Partner) may receive, in
the aggregate, property acquisition fees and loan origination
and commitment fees of up to 5% of the gross offering
proceeds; real estate brokerage commissions of up to 2% of
the selling prices of properties sold; 10% of all
distributions of Net Cash from Operations and an annual
mortgage servicing fee of up to 1/4 of 1% of amounts funded
by the Partnership in mortgage loans which are serviced by
the General Partner.
The Partnership has funds invested in USAA Mutual Fund, Inc.
and earns interest thereon at market rates.
Quorum Real Estate Services Corporation (also known as USAA
Realty Company), an affiliate of the General Partner,
provides property management and leasing services for the
properties and may receive a fee up to 6% of property cash
receipts for those services.
<PAGE>
A summary of transactions with affiliates follows for the
three years ended June 30, 1995, 1994 and 1993:
Reimbursement of Management Interest
Expenses (1) Fees Income Total
USAA
Mutual Fund,
Inc.:
1995 $ -- -- (316) (316)
1994 -- -- (2,298) (2,298)
1993 -- -- (41,091) (41,091)
USAA Real
Estate
Company:
1995 89,155 -- -- 89,155
1994 71,289 -- -- 71,289
1993 80,770 -- -- 80,770
Quorum
Real Estate
Services Corp.:
1995 2,823 12,299 -- 15,122
1994 3,562 11,380 -- 14,942
1993 2,087 10,903 -- 12,990
(1) Reimbursement of expenses represents amounts paid or accrued
as reimbursement of expenses incurred on behalf of the
Partnership at actual cost and does not include any mark-up
or items normally considered as overhead.
7. Major Customer Information
The Partnership owns two single-tenant industrial complexes.
The lease agreements between the Partnership and these
tenants (a manufacturer of plastic bottles and a
manufacturer of business forms) are absolute triple net
lease arrangements whereby the lessee is required to make
all payments for expenses related to the use and occupation
of the leased premises including real estate taxes and
assessments, property and liability insurance, repairs and
maintenance, utilities and other operating costs associated
with the property. Accordingly, net operating income for
1995, 1994 and 1993 reflects only rental income and excludes
all expenses directly related to the operations of the
properties as payments for such expenses are made directly
by the respective lessees.
<PAGE>
For the year ended June 30, 1995, the Partnership recorded
$593,829 and $434,864 of rental income from two single
tenants which represents 58% and 42%, respectively, of the
total rental income.
For the year ended June 30, 1994, the Partnership recorded
$593,829 and $425,171 of rental income from two single
tenants which represents 58% and 42%, respectively, of total
rental income.
For the year ended June 30, 1993, the Partnership recorded
$593,829 and $411,552 of rental income from two single
tenants which represents 59% and 41%, respectively, of total
rental income.
8. Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts
payable and accrued expenses and other liabilities approximate
fair value because of the short-term nature of these
instruments.
9. Commitment
In 1995 the Partnership completed negotiations with a tenant
to expand the facilities under lease and to extend the term
of the lease. The original lease expiration has been
extended from April 1998 to July 2010. The Partnership has
committed to funding approximately $1.7 million to provide
approximately 45,200 square feet of additional area. The
expansion is expected to be completed in December 1995,
utilizing existing working capital to fund the construction.
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE PARTNERS
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP:
We have audited the accompanying balance sheets of USAA Real
Estate Income Investments II Limited Partnership as of June 30,
1995 and 1994 and the related statements of income, partners'
equity, and cash flows for each of the years in the three-year
period ended June 30, 1995. These financial statements are the
responsibility of the Partnership's management. Our
responsibility is to express an opinion on these 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 financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of USAA Real Estate Income Investments II Limited Partnership as
of June 30, 1995 and 1994, and the results of its operations and
its cash flows for each of the years in the three-year period
ended June 30, 1995, in conformity with generally accepted
accounting principles.
/s/KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
San Antonio, Texas
August 4, 1995
<PAGE>
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not Applicable.
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant
The General Partner of the Partnership is USAA Investors
II, Inc., a Texas corporation.
As of January 1, 1995, the directors and executive
officers of the General Partner were as follows:
POSITION WITH
NAME GENERAL PARTNER
Edward B. Kelley Chairman, President,
Chief Executive Officer and
Director
T. Patrick Duncan Vice Chairman
Senior Vice President -
Real Estate Operations and
Director
Randal R. Seewald Vice President, Secretary,
Legal Counsel and Director
Martha J. Barrow Vice President -
Administration and
Finance/Treasurer
S. Wayne Peacock Vice President -
Asset Management and Leasing
David A. Rosales Assistant Vice President -
Controller
Susan T. Wallace Assistant Vice President -
Real Estate Investments
John G. Meadows Assistant Vice President -
Southeast Real Estate Region
All of the foregoing directors and executive officers
have been elected to serve one-year terms until the annual
meeting of the General Partner. All of the foregoing officers
have served in the capacities indicated since their election with
the exception of T. Patrick Duncan who was named Vice Chairman,
Senior Vice President - Real Estate Operations and Director;
Randal R. Seewald who was named Vice President, Secretary, Legal
Counsel and Director; Martha J. Barrow who was named Vice
President - Administration and Finance/Treasurer; and S. Wayne
Peacock who was named Vice President - Asset Management and
Leasing. These changes in capacity were effective February 18,
1995.
<PAGE>
There are no arrangements or understandings between or
among any of said directors or executive officers to be elected
or selected as such, nor are there any family relationships among
any of the foregoing directors and executive officers. The
foregoing directors and executive officers are also officers
and/or directors of various affiliated companies of the General
Partner.
The age and business experience of each of the directors
and executive officers of the General Partner is as follows:
Edward B. Kelley, 55, joined USAA in April 1989 and is
Vice Chairman, President, Chief Executive Officer and Director of
USAA Real Estate Company and Chairman, President, Chief Executive
Officer and Director of USAA Real Estate Development Company,
USAA Real Estate Management Company, Quorum Real Estate Services
Corporation, USAA Properties Fund, Inc., USAA Investors I, Inc.,
USAA Investors II, Inc., USAA Properties II, Inc., USAA
Properties III, Inc., USAA Properties IV, Inc., La Paz, Inc.,
USAA Real Estate Equities, Inc., Alhambra Gables One, Inc., L. A.
Wilshire One, Inc., USAA Real Estate - Midwest, Inc., and Las
Colinas Management Company. He also serves as Chief Executive
Officer, President and Director of Fiesta Texas Showpark, Inc.,
La Cantera Development Company and La Cantera Hospitality, Inc.
Mr. Kelley is also Chairman of the Board, Chief Executive Officer
and Director of USAA Equity Advisors, Inc. Mr. Kelley serves as
President and Director of USAA Health Services, Inc. All of the
previously named companies are affiliates of the General Partner.
He graduated from St. Mary's University of San Antonio, Texas
with a Bachelor of Business Administration in Finance in 1964 and
was awarded a Master of Business Administration, in Finance, by
Southern Methodist University, Dallas, Texas in 1967. Mr. Kelley
was employed by Barshop Enterprises, Inc., of San Antonio, Texas
from July 1980 until April 1989 where he was President and an
Advisory Director of Barshop Enterprises, Inc. and its corporate
subsidiaries. The Barshop group of companies is engaged in the
development, management and ownership of commercial real estate
properties in San Antonio and other Texas cities. He is past
Chairman of the Board and a member of the Executive Committee of
the Greater San Antonio Chamber of Commerce; member of the Board
of Directors, Executive Committee, and past President of the San
Antonio chapter of the National Association of Industrial and
Office Parks; a member of the Board of Directors of the San
Antonio Economic Development Foundation, and past Chairman of the
Board of Trustees of St. Mary's University and its Executive
Committee. Mr. Kelley is a member of the Board of Directors and
Executive Committee, Vice President of the Board of Directors,
and Chairman of the 1994 Friends of Scouting Bexar County
Campaign; member of the Board of Trustees of St. Mary's
University; member of the Board of Trustees of the Baptist
Children's Home of San Antonio; member of the Board of Directors
of the San Antonio Economic Development Foundation; and a member
of Board of Trustees for the United Way of San Antonio and Bexar
County.
<PAGE>
T. Patrick Duncan, 45, is Senior Vice President - Real
Estate Operations and Director of USAA Real Estate Company, USAA
Real Estate Equities, Inc. and USAA Health Services, Inc. He
also serves as Senior Vice President, Director and Vice Chairman
of USAA Real Estate Development Company, USAA Real Estate
Management Company, Quorum Real Estate Services Corporation, USAA
Properties Fund, Inc., USAA Investors I, Inc., USAA Investors II,
Inc., USAA Properties II, Inc., USAA Properties III, Inc., USAA
Properties IV, Inc., La Paz, Inc., USAA Equity Advisors, Inc.,
Alhambra Gables One, Inc., L. A. Wilshire One, Inc., USAA Real
Estate-Midwest, Inc., and Las Colinas Management Company. All of
the previously named companies are affiliates of the General
Partner. He is a 1972 graduate of the University of Arizona and
was awarded the Bachelor of Science with a dual major in
Accounting and Finance. Prior to joining USAA in 1986, Mr.
Duncan was an audit manager with Deloitte Touche and Company and
Comptroller of Trammell Crow Company in Dallas, Texas. Mr.
Duncan is a Certified Public Accountant and holds a Texas Real
Estate Brokers License. He holds memberships in the Texas and
Arizona State Boards of Accounting, the Texas and Arizona State
Societies of Certified Public Accountants, the American Institute
of Certified Public Accountants, the International Council of
Shopping Centers, the Urban Land Institute, the National
Association of Real Estate Investment Managers and the Pension
Real Estate Association. Mr. Duncan serves as Vice Chairman of
the Board of Directors of the Daughters of Charity.
Randal R. Seewald, 42, began his career with USAA in
1976, and is currently Vice President, Director, Secretary and
Legal Counsel of USAA Real Estate Development Company, USAA Real
Estate Management Company, USAA Properties Fund, Inc., USAA
Properties II, Inc., USAA Properties III, Inc., USAA Properties
IV, Inc., USAA Investors I, Inc., USAA Investors II, Inc.,
Alhambra Gables One, Inc., L. A. Wilshire One, Inc., USAA Real
Estate-Midwest, Inc., La Paz, Inc., USAA Equity Advisors, Inc.,
USAA Health Services, Inc., and Las Colinas Management Company.
He is also Vice President, Secretary and Legal Counsel of USAA
Real Estate Company, Quorum Real Estate Services Corporation and
USAA Real Estate Equities, Inc. Mr. Seewald serves as Vice
President, Legal Counsel, Treasurer and Secretary of Fiesta Texas
Showpark, Inc., La Cantera Development Company and La Cantera
Hospitality, Inc. All of the previously named companies are
affiliates of the General Partner. Mr. Seewald holds a Bachelor
of Business Administration from Texas A&M University and a J.D.
from St. Mary's University School of Law. He is a member of the
State Bar of Texas, the American Bar Association and the San
Antonio Bar Association.
Martha J. Barrow, 47, is Vice President, Administration
and Finance and Treasurer of USAA Real Estate Company, Alhambra
Gables One, Inc., L.A. Wilshire One, Inc., La Paz, Inc., Las
Colinas Management Company, Quorum Real Estate Services
Corporation, USAA Health Services, Inc., USAA Investors I, Inc.,
USAA Investors II, Inc., USAA Properties Fund, Inc., USAA
Properties II, Inc., USAA Properties III, Inc., USAA Properties
<PAGE>
IV, Inc., USAA Real Estate-Midwest, Inc., USAA Real Estate
Development Company, USAA Real Estate Equities, Inc., and USAA
Real Estate Management Company. Ms. Barrow serves as President
of USAA Equity Advisors, Inc. All of the previously named
companies are affiliates of the General Partner. Ms. Barrow
joined USAA in June of 1983. Prior to her joining USAA, she
served as a Tax Accountant of La Quinta Motor Inns, Inc. and as
Senior Accountant with NL Industries. She is a Certified Public
Accountant and is a member of the Texas Society of Certified
Public Accountants. She is a license holder for Securities
Registration Series 7, Series 63, and Series 24. Ms. Barrow
received her Bachelor of Business Administration in Accounting
from Pan American University in 1970 and is nearing completion of
requirements for a Master of Business Administration from St.
Mary's University. She is active in the promotion of activities
with Northside Independent School District.
S. Wayne Peacock, 36, is Vice President, Portfolio
Management of USAA Real Estate Company, USAA Properties Fund,
Inc., USAA Properties II, Inc., USAA Properties III, Inc., USAA
Properties IV, Inc., USAA Investors I, Inc., USAA Investors II,
Inc., Quorum Real Estate Services Corporation, USAA Real Estate
Equities, Inc., Alhambra Gables One, Inc., L. A. Wilshire One,
Inc., USAA Equity Advisors, Inc., USAA Real Estate Development
Company, and USAA Real Estate-Midwest, Inc. He is also a
Director of Quorum Real Estate Services Corporation. All of the
previously named companies are affiliates of the General Partner.
Mr. Peacock joined USAA in January of 1992. Mr. Peacock has
previous real estate experience with Coldwell Banker and Merrill
Lynch. He graduated in 1981 from Tulane University, New Orleans,
Louisiana, where he received a Bachelor of Arts in Economics.
Mr. Peacock is a Certified Commercial Investment Manager (CCIM).
He holds memberships in the San Antonio Board of Realtors and
CCIM.
David A. Rosales, 38, is Assistant Vice President -
Controller for USAA Real Estate Company, Alhambra Gables One,
Inc., L.A. Wilshire One, Inc., La Paz, Inc., Las Colinas
Management Company, USAA Equity Advisors, Inc., USAA Investors I,
Inc., USAA Investors II, Inc., USAA Properties Fund, Inc., USAA
Properties II, Inc., USAA Properties III, Inc., USAA Properties
IV, Inc., USAA Real Estate - Midwest, Inc., USAA Real Estate
Development Company, USAA Real Estate Equities, Inc., and USAA
Real Estate Management Company. He is also Assistant Vice
President, Controller and Director of Quorum Real Estate Services
Corporation. All of the previously named companies are
affiliates of the General Partner. Mr. Rosales joined USAA in
September 1983. He holds a Bachelor of Business Administration
from St. Mary's University and a Master of Business
Administration from Our Lady of the Lake University. He is a
Certified Public Accountant in the state of Texas and holds
memberships in the Texas Society of CPAs, the San Antonio chapter
of CPAs and the American Institute of CPAs. Mr. Rosales also
holds membership in the National Association of Real Estate
Companies. He serves as Chairman of the Board of Communities in
Schools-San Antonio, Inc.
<PAGE>
Susan T. Wallace, 41, is Assistant Vice President, Real
Estate Investments for USAA Real Estate Company, USAA Properties
Fund, Inc., USAA Properties II, Inc., USAA Properties III, Inc.,
USAA Properties IV, Inc., USAA Investors I, Inc., USAA Investors
II, Inc., USAA Equity Advisors, Inc., Alhambra Gables One, Inc.,
L. A. Wilshire One, Inc., USAA Real Estate-Midwest, Inc., and
USAA Real Estate Equities, Inc. All of the previously named
companies are affiliates of the General Partner. Ms. Wallace
attended Bowling Green State University in Bowling Green, Ohio
and the University of Cincinnati in Cincinnati, Ohio. From
December 1983 until September 1988 she served as Director with
USAA Real Estate Company where she was responsible for the
identification of equity investments and acquisition of the
identified investments. Prior to joining USAA Real Estate
Company, she was Project Director and Division Manager for
Gibraltar Savings Association of Houston, Texas. Ms. Wallace
holds a Texas Real Estate License, is a graduate of the Realtors
Institute and is a member of the San Antonio and Texas Board of
Realtors, the National Association of Realtors, the National
Association of Real Estate Investment Managers and the
International Association of Corporate Real Estate Executives.
She also serves as President of the Affordable Housing Investors
Council.
John G. Meadows, 51, joined USAA Real Estate Company in
December 1984 as Executive Director of Real Estate Asset
Management. Currently he serves as Assistant Vice President of
Quorum Real Estate Services Corporation and Manager of Southeast
Region Property Management and Leasing, Assistant Vice President
of USAA Real Estate Company, USAA Real Estate Development
Company, USAA Properties Fund, Inc., USAA Investors I, Inc., USAA
Investors II, Inc., USAA Properties II, Inc., USAA Properties
III, Inc., and USAA Properties IV, Inc. All of the previously
named companies are affiliates of the General Partner. Prior to
joining USAA, Mr. Meadows was Assistant Vice President and Trust
Officer of M Realty, the commercial real estate division of M
Bank (formerly known as Mercantile National Bank) Dallas, Texas.
His responsibilities included acquisitions, leasing management,
and dispositions of two open-ended co-mingled real estate
investment funds, and leasing management and disposition of all
commercial properties held in trust. He received a Bachelor of
Science from Texas A&M in 1970 and a Masters Degree from Texas
A&M in 1972 in Agricultural Management. Mr. Meadows holds Real
Estate Brokers licenses in Texas and Florida.
<PAGE>
Item 11. Executive Compensation
The directors and officers of the General Partner of the
Partnership receive no current or proposed remuneration from the
Partnership or the General Partner.
The General Partner is entitled to receive a share of cash
distributions, profits and losses and sales and refinancing
proceeds as described under the captions "Management
Compensation" at pages 13-17 and "Income and Losses and Cash
Distributions" at pages 54-57 of the Prospectus dated February
11, 1988, filed pursuant to Rule 424(b). Copies of these pages
are attached hereto as Exhibit 99.b. Cash distributions of
$100,271 were paid to the General Partner during the year ended
June 30, 1995.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
(a) Security Ownership of Certain Beneficial Owners
Name and
Address of Amount and
Title of Beneficial Nature of Beneficial Percent of
Class Owner Ownership (1) Class
Units of USAA Investors II, 6,644 Units of 24%
Limited Inc. (General Limited Partnership
Partnership Partner) (2) Interests
Interests 8000 Robert F. McDermott
Fwy., IH 10 West,
Suite 600,
San Antonio, Texas
(1) The Amended and Restated Agreement of Limited
Partnership provides that the General Partner will vote
such Interests in the same proportions as all other
Limited Partners in the event a vote of Limited
Partners is taken.
(2) USAA Investors II, Inc. is a wholly-owned subsidiary of
USAA Real Estate Company, which is a wholly-owned
subsidiary of USAA Capital Corporation, which is a
wholly-owned subsidiary of United Services Automobile
Association (USAA).
(b) Security Ownership of Management
None of the officers and directors of the General Partner of
the Partnership beneficially own equity securities of the
registrant or any of its parents.
No arrangements are known to the Partnership which may
result in a change of control of the Partnership.
<PAGE>
Item 13. Certain Relationships and Related Transactions
The Partnership is permitted to engage in various
transactions involving the General Partner or its affiliates.
The General Partner can receive, in the aggregate,
property acquisition fees of up to 5% of the gross offering
proceeds; real estate brokerage commissions of up to 2% of the
selling prices of properties sold; 10% of all distributions of
Net Cash from Operations as its management fee and an annual
mortgage servicing fee of up to 1/4 of 1% of amounts funded by
the Partnership in mortgage loans which are serviced by the
General Partner.
An affiliate of the General Partner, USAA Investment
Management Company, received selling commissions equal to 2% of
the gross offering proceeds for organizational and offering
expenses. A portion of the Partnership's working capital reserve
and other available funds are invested in USAA Mutual Fund, Inc.
An affiliate of the General Partner, Quorum Real Estate
Services Corporation (also known as USAA Realty Company),
provides property management and leasing services for the
properties and may receive a fee up to 6% of property cash
receipts for those services.
A summary of transactions with affiliates follows for
the years ended June 30, 1995, 1994 and 1993:
Reimbursement of Management Interest
Expenses (1) Fees Income Total
USAA
Mutual Fund,
Inc.:
1995 $ -- -- (316) (316)
1994 -- -- (2,298) (2,298)
1993 -- -- (41,091) (41,091)
USAA Real
Estate
Company:
1995 89,155 -- -- 89,155
1994 71,289 -- -- 71,289
1993 80,770 -- -- 80,770
Quorum
Real Estate
Services Corp.:
1995 2,823 12,299 -- 15,122
1994 3,562 11,380 -- 14,942
1993 2,087 10,903 -- 12,990
(1) Reimbursement of expenses represents amounts paid or
accrued as reimbursement of expenses incurred on behalf
of the Partnership at actual cost and does not include
any mark-up or items normally considered as overhead.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on
Form 8-K
The following documents are filed as part of this
report:
(a) 1. Financial Statements
The following financial statements, notes to financial
statements and independent auditors' report are included in Part
II Item 8:
Balance Sheets as of June 30, 1995
and 1994
Statements of Income for the years
ended June 30, 1995, 1994 and 1993
Statements of Partners' Equity for the
years ended June 30, 1995, 1994 and 1993
Statements of Cash Flows for the years
ended June 30, 1995, 1994 and 1993
Notes to Financial Statements
Independent Auditors' Report
2. Financial Statement Schedule
Real Estate and Accumulated Depreciation
as of June 30, 1995 (Schedule III)
Independent Auditors' Report
All other schedules have been omitted as the schedules are
not required under the related instructions, are not applicable
or the information required thereby is set forth in the financial
statements or the notes thereto.
<PAGE>
Item 14.(a) 3. Exhibits
Exhibit
No. Description
3(a) Amended and Restated Agreement of
Limited Partnership dated as of
February 11, 1988, incorporated as
Exhibit A to the Partnership's Prospectus
dated February 11, 1988, filed pursuant
to Rule 424(b) Registration No. 33-16479,
and incorporated herein by this reference.
27 Financial Data Schedule
99(a) "Glossary" pages 103-106 contained in the
Prospectus dated February 11, 1988, filed
pursuant to Rule 424(b) Registration
No. 33-16479.
99(b) "Management Compensation" at pages 13-17 and
"Income and Losses and Cash Distributions"
at pages 54-57 of the Prospectus dated
February 11, 1988, filed pursuant to Rule
424(b) Registration No. 33-16479.
Item 14.(b) Reports filed on Form 8-K
During the quarter ended June 30, 1995, there were
no Current Reports on Form 8-K filed.
<PAGE>
<TABLE>
SCHEDULE III USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
Real Estate and Accumulated Depreciation
June 30, 1995
<CAPTION>
Cost Capitalized
Initial Cost to Subsequent to
Partnership Acquisition
Buildings
Year of Date and Improve- Carrying
Description Construction Acquired Land Improvements ments Costs
<S> <C> <C> <C> <C> <C> <C>
Continental Plastic 1963 & 1969 April 21, 1989
Containers Building;
Manufacturing and
Distribution facility;
Elk Grove Village,
Illinois $1,800,000 3,270,910 123,550 --
Bowater Communication 1989 July 24, 1989
Papers Building;
Industrial Warehouse;
Lakeland, Florida 480,000 3,775,200 44,380 --
$2,280,000 7,046,110 167,930 --
Gross Amount at Which
Carried at Close of
Period
<CAPTION>
Total
Buildings Investment Accumulated
and Properties Depreciation
Description Land Improvements (2)(4)(5) (1)(3)
<S> <C> <C> <C> <C>
Continental Plastic
Containers Building;
Manufacturing and
Distribution facility;
Elk Grove Village,
Illinois 1,800,000 3,394,460 5,194,460 681,701
Bowater Communication
Papers Building;
Industrial Warehouse;
Lakeland, Florida 476,850 3,822,730 4,299,580 752,398
2,276,850 7,217,190 9,494,040 1,434,099
<PAGE>
SCHEDULE III (continued)
NOTES:
(1) Depreciation is based on a 30-year life, straight-line method for buildings and 5-year
life,straight-line method for personal property. Tenant improvements are amortized
over the life of the related lease using the straight-line method.
<S> <C>
(2) Reconciliation of real estate:
Balance at June 30, 1992 $ 9,390,498
Additions during period-improvements --
Balance at June 30, 1993 9,390,498
Additions during period-improvements 42,007
Deductions during period (5) (3,150)
Balance at June 30, 1994 9,429,355
Additions during period-improvements 64,685
Balance at June 30, 1995 $ 9,494,040
(3) Reconciliation of accumulated depreciation:
Balance at June 30, 1992 $ 719,039
Additions during period-depreciation 237,406
Balance at June 30, 1993 956,445
Additions during period-depreciation 238,615
Balance at June 30, 1994 1,195,060
Additions during period-depreciation 239,039
Balance at June 30, 1995 $ 1,434,099
(4) The aggregate cost of real estate owned by the Partnership at June 30, 1995 for Federal
Income Tax Purposes is $9,495,922.
(5) During fiscal 1994, a portion of land at Bowater was deeded to the City of Lakeland as
part of the wastewater project in which the property was connected to the city sewer
system.
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Partners
USAA Real Estate Income Investments II Limited Partnership:
Under date of August 4, 1995 we reported on the balance sheets of
USAA Real Estate Income Investments II Limited Partnership as of
June 30, 1995 and 1994, and the related statements of income,
partners' equity, and cash flows for each of the years in the
three-year period ended June 30, 1995. In connection with our
audits of the aforementioned financial statements, we also have
audited the related financial statement schedule as listed in Item
14(a)2. The financial statement schedule is the responsibility of
the Partnership's management. Our responsibility is to express an
opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered
in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set
forth therein.
/s/KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
San Antonio, Texas
August 4, 1995
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
By: USAA INVESTORS II, INC.,
General Partner
September 25, 1995 By: /s/Edward B. Kelley
Edward B. Kelley
Chairman, President,
Chief Operating Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
/s/Edward B. Kelley September 25, 1995
Edward B. Kelley
Director, Chairman of the Board,
President and Chief Operating Officer
of the General Partner
/s/T. Patrick Duncan September 25, 1995
T. Patrick Duncan
Director, Vice Chairman,
Senior Vice President - Real Estate
Operations of the General Partner
/s/Randal R. Seewald September 25, 1995
Randal R. Seewald
Director, Vice President,
Secretary and Legal Counsel
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JUN-30-1995
<CASH> 2,007,371
<SECURITIES> 0
<RECEIVABLES> 6,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 8,059,941
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,494,486
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 12,320,102
<TOTAL-LIABILITY-AND-EQUITY> 12,494,486
<SALES> 0
<TOTAL-REVENUES> 1,182,480
<CGS> 0
<TOTAL-COSTS> 245,292
<OTHER-EXPENSES> 164,260
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 871,557
<INCOME-TAX> 0
<INCOME-CONTINUING> 871,557
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 871,557
<EPS-PRIMARY> 28.90
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 99(a)
GLOSSARY
As used in this Prospectus, the following definitions of
terms are applicable:
"Acquisition Expenses": Include, without limitation, legal
fees and expenses, travel and communication expenses, costs of
appraisals, accounting fees and expenses, title insurance,
mortgage fees, acquisition fees and brokerage commissions paid to
third parties, non-refundable option payments on property not
acquired, and miscellaneous expenses related to selection and
acquisition of properties, or investment in mortgage loans,
whether or not acquired.
"Acquisition Fees": The total of all fees and commissions
paid by any party in connection with the making or investing in
mortgage loans or the purchase or development of property by the
Partnership, except a development fee paid to a person not
affiliated with a sponsor in connection with the actual
development of a project after acquisition of the land by the
program. Included in the computation of such fees or commissions
shall be any real estate commission, selection fee, development
fee, nonrecurring management fee, or any fee of a similar nature,
however designated.
"Additional Limited Partner(s)": All those who are admitted
to the Partnership as limited partners after the Initial Limited
Partner.
"Affiliate": (i) any person directly or indirectly
controlling, controlled by, or under common control with, another
person, (ii) a person owning or controlling 10% or more of the
outstanding voting securities or beneficial interests of such
other person, (iii) any officer, director, partner, trustee or
any other person acting in a substantially similar capacity of
such person, and (iv) if such other person is an officer,
director, partner, trustee or holder of 10% or more of the voting
securities or beneficial interests of such person, any other
entity for which such person acts in any capacity.
"Average Annual Unreturned Invested Capital:" The total of
all the Limited Partners' Original Invested Capital reduced by
the total of all distributions of Net Proceeds from Sales or
Refinancings (but not below zero) to Limited Partners, as
reflected on the Partnership's books and records, weighted on a
daily average basis for the period.
"Capital Contribution": The gross amount of investment in
the Partnership by all Limited Partners.
<PAGE>
"Code": The Internal Revenue Code of 1986, as amended.
"Final Closing Date": January 31, 1989, or such other date
designated by the General Partner for the purchase of the last
Interest by a subscriber, but in no event later than one year
from the date of the Prospectus.
"Front-End Fees": Fees and expenses paid by any party for
any services rendered during the organization or acquisition
phase of the offering, including Organizational and Offering
Expenses, Acquisition Fees, Acquisition Expenses, and Mortgage
Loan Origination and Acquisition Fees and Expenses.
"General Partner": USAA Investors II, Inc. or its
successor.
"Gross Revenues": All Partnership revenues from whatever
source derived, exclusive of (i) Partners' capital contributions
and (ii) proceeds from the borrowing of funds by the Partnership,
the sale of Properties or Mortgage Loans, the refinancing of
Properties or the payment of principal on Mortgage Loans.
"Initial Admittance Date": The date on which the first
Additional Limited Partner is admitted to the Partnership.
"Initial Limited Partner": USAA Real Estate Company, who
shall withdraw from the Partnership as a Limited Partner on the
Initial Admittance Date.
"Interest": The limited partnership interest in the
Partnership acquired by the payment to the Partnership of $500
per interest purchased, upon an initial minimum purchase of 5
interests and additional purchases in increments of 1 interest.
"Investment In Properties": The amount of Capital
Contributions used to make or invest in mortgage loans or the
amount actually paid or allocated to the purchase, development
construction or improvement of properties acquired by the program
(including the purchase of properties, working capital reserves
allocable thereto (except that working capital reserves in excess
of 5% shall not be included), and other cash payments such as
interest and taxes but excluding Front-End Fees).
"Limited Partners": All persons who are admitted to the
Partnership as limited partners.
"Loan Origination and Commitment Fees": Means a fee charged
by the General Partner or an Affiliate, not in excess of 4% of
the Mortgage Loan, of an applicant for extention of a Mortgage
Loan, by the Partnership for the receipt and processing of the
applicant's Mortgage Loan application.
<PAGE>
"MAI Appraiser": An independent appraiser who is a member
in good standing of the American Institute of Real Estate
Appraisers ("MAI") and who has had experience in appraising
property that is comparable to the particular property involved.
"Management Fee": The fee payable to the General Partner in
an amount equal to 10% of Net Cash from Operations in
consideration of management services rendered.
"Mortgage Loan" or "Mortgage Loans": One or more of the
mortgage loans actually made by the Partnership.
"Mortgage Loan Servicing Fee": The fees and other
compensation payable by the Partnership to the General Partner or
its Affiliates on account of its services to the Partnership in
collecting principal and interest and other payments to which the
Partnership is entitled on the Mortgage Loans, the administration
and supervision of the rights and participations of the
Partnership under its Mortgage Loans, the supervision of legal
proceedings where such payments are delinquent or in arrears and
otherwise supervising and monitoring the Partnership and the
Mortgage Loans made by the Partnership.
"Net Cash from Operations": Cash receipts from Gross
Revenues after deducting (i) operating expense (without deduction
for depreciation), (ii) amounts set aside for reasonable reserves
plus any earnings thereon, (iii) payments on the Partnership's
other current obligations (other than the Management Fee),
including the Mortgage Loan Servicing Fee and (iv) any earnings
or interest on Partnership funds prior to investment of such
funds in the Properties or the Mortgage Loans (except in the
event the Partnership is dissolved and terminated, in which case
such earnings and interest shall constitute Net Cash from
Operations).
"Net Proceeds from Sales or Refinancings": Cash receipts
realized by the Partnership from sales of the Properties or
Mortgage Loans, the refinancing of Properties or the payment of
principal on any Mortgage Loans after (i) amounts set aside for
reasonable reserves and (ii) payments on the Partnership's other
current obligations.
"Nonrecourse Deductions": Partnership losses or deductions
attributable to Nonrecourse Liabilities which for each
Partnership taxable year shall equal in the aggregate for the
Partnership the net increase, if any, in the amount of
Partnership Minimum Gain during that taxable year. The
Nonrecourse Deductions for a Partnership taxable year shall
consist first of depreciation or cost recovery deductions with
respect to items of Partnership property subject to one or more
Nonrecourse Liabilities of the Partnership to the extent of the
increase in Partnership Minimum Gain attributable to the
Nonrecourse Liabilities to which each such item of property is
subject, with the remainder of such Nonrecourse Deductions, if
any, made up of a pro rata portion of the Partnership's other
items of deduction or loss for that taxable year. If, however,
<PAGE>
such depreciation or cost recovery deductions exceed the net
increase in Partnership Minimum Gain, a proportional share of
each such deduction shall constitute a Nonrecourse Deduction. If
the net increase in Partnership Minimum Gain during a Partnership
taxable year exceeds the total amount of items of Partnership
loss or deduction for such taxable year then an amount of
Partnership loss and deduction for the Partnership's next
succeeding taxable year (or years) equal to such excess shall
constitute Nonrecourse Deductions, as if there had been a net
increase in Partnership Minimum Gain during such succeeding
taxable year (or years) in the amount of such excess.
"Nonrecourse Liability": A liability of the Partnership (or
portion thereof) with respect to which none of the Partners (or
any person related to a Partner) has any economic risk of loss
(other than through their interest as Partners in the
Partnership's assets subject to the liability).
"Organizational and Offering Expenses": Expenses incurred
in connection with the organization of the Partnership and the
offering of the Interests including selling commissions, legal
fees, accounting fees, escrow fees, printing costs, filing and
qualification fees, reimbursement of expenses incurred by the
General Partner or its Affiliates, and other disbursements in
connection with the sale and distribution of Interests.
"Original Invested Capital": An amount equal to $500 per
Interest.
"Partner": A General Partner or any Limited Partner.
"Partnership": The partnership formed and continued under
the Amended and Restated Agreement of Limited Partnership
attached as Exhibit A.
"Partnership Minimum Gain": The amount determined by
computing, with respect to each Nonrecourse Liability, the amount
of gain, if any, that would be realized by the Partnership if it
disposed of (in a taxable transaction) the Property subject to
such liability in full satisfaction thereof, and by then
aggregating the amounts so computed.
"Partner's Share of Partnership Minimum Gain": As to any
Partner at the end of any Partnership taxable year, the amount
equal to the aggregate Nonrecourse Deductions allocated to such
Partner (and such Partner's predecessors in interest) up to that
time, less such Partners (and such predecessor's) aggregate share
of the net decreases in Partnership Minimum Gain up to that time.
A Partner's share of the net decrease in Partnership Minimum Gain
during a Partnership taxable year equals an amount that bears the
same relation to the net decrease in Partnership Minimum Gain
during such year as such Partner's Share of Partnership Minimum
Gain at the end of the prior taxable year of the Partnership
bears to the amount of Partnership Minimum Gain at the end of
such prior year.
<PAGE>
"Preferred Return": The cumulative non-compounded preferred
return to each Limited Partner equal to 6% per annum in the case
of investments in properties or (10% per annum as to that portion
of the Partnership funds invested in mortgage loans, weighted on
a daily average basis for the period) on his Average Annual
Unreturned Invested Capital payable from either distributions of
Net Cash from Operations or Net Proceeds from Sales or
Refinancings or both. Such cumulative preferred return shall be
calculated from the date the owner of such Interests is admitted
as a Limited Partner.
"Property" or "Properties": One or more of the properties
actually acquired by the Partnership.
"Prospectus": The prospectus contained in the Registration
Statement filed with the Securities and Exchange Commission.
"Purchase Price": The price paid upon the purchase or sale
of a Property, including the amount of Acquisition Fees and all
liens and mortgages on the Property, but excluding points and
prepaid interest.
"Qualified Trust": Any employee benefit plan or other
entity subject to the provisions of Title I of ERISA or described
in Code Section 4975(e)(1) (other than a plan described in Code
Sections 4975(g)(2) or 4975(g)(3)), including an individual
retirement account defined in Code Section 408(a).
"Registration Statement": The Partnership's Registration
Statement on Form S-11 filed with the Securities and Exchange
Commission and as amended from time to time.
"Retirement Plan": An employee pension or profit-sharing
plan established under section 401 of the Internal Revenue Code
Individual Retirement Accounts established under Section 408 of
the Internal Revenue Code and H.R. 10 Plans.
"Sales Agent": USAA Investment Management Company, an
Affiliate of the General Partner.
"Subordinated Disposition Fee": The fee payable to the
General Partner or an Affiliate of the General Partner in
connection with its services rendered in the sale or transfer of
a Property.
"Taxable Entity": A person or entity that is not a Tax-
Exempt Entity.
"Taxable Limited Partner": A Limited Partner that is a
Taxable Entity on the date that he or it is admitted to the
Partnership.
"Tax-Exempt Entity": A person or entity that is a tax-
exempt entity within the meaning of Code Section 168(h)(2)(A) as
in effect after December 31, 1986, including (i) the United
<PAGE>
States, any State or political subdivision thereof, any
possession of the United States, or any agency or instrumentality
of any of the foregoing, (ii) an organization (other than a
cooperative described in Code Section 521) which is exempt from
tax imposed by Chapter 1 of Subtitle A of the Code, and (iii) any
foreign person or entity.
"Tax-Exempt Limited Partner": A Limited Partner that is a
Tax-Exempt Entity on the date that he or it is admitted to the
Partnership.
EXHIBIT 99(b)
MANAGEMENT COMPENSATION
The following table sets forth the types and estimates of the
amounts of all fees, compensation, income, distributions and other
payments that the General Partner and its Affiliates will or may
receive in connection with the operations of the Partnership. In
addition, the General Partner or its Affiliates may receive a
property management fee and an Affiliate may receive fees for
insurance brokerage services. See the discussion following the
table set forth below. ALTHOUGH THE GENERAL PARTNER BELIEVES THE
FOLLOWING FEES ARE REASONABLE AND COMPETITIVE, SUCH FEES,
COMPENSATION, INCOME, DISTRIBUTIONS AND OTHER PAYMENTS WERE NOT
DETERMINED BY ARM'S-LENGTH BARGAINING. See "Conflicts of
Interest."
Form of Entity Receiving Method of Determination
Compensation Compensation & Estimated Dollar Amount
OFFERING STAGE
Selling
Commissions(1) USAA Investment $20 per Interest sold. The
Management actual amount payable to
Company (the the Sales Agent assuming
"Sales Agent") all 92,000 Interests are
sold will be $1,840,000.
Reimbursement of The Sales Agent A nonaccountable expense
Organizational allocation of 2% of the
and Offering gross offering proceeds
Expenses (2) for Organizational and
Offering Expenses equal
to $800,000 if 80,000
Interests are sold and
$920,000 if 92,000
Interests are sold.
Annual Advisory USAA Investment An annual advisory fee
Fees for Management based on the amount of
Investment of Company offering proceeds
Offering Proceeds invested in a money
in Money Market market fund sponsored
Funds(3) or administered by
<PAGE>
Form of Entity Receiving Method of Determination
Compensation Compensation & Estimated Dollar Amount
investment companies
registered under the
Investment Company Act
of 1940 and which are
Affiliates of the
General Partner. Dollar
amount is not
determinable at this
time.(6)
ACQUISITION STAGE
Acquisition Fees The General Acquisition Fees (inclusive
and Expenses(4) Partner of Loan Origination and
commitment fees) shall
be an amount customarily
charged by others
rendering similar
services as an
ongoing public activity,
provided that the total
of all Acquisition Fees
payable to the General
Partner shall not exceed,
with respect to
all Properties, 5% of the
gross offering
proceeds ($2,000,000 if
80,000 Interests are
sold, $2,300,000 if
92,000 Interests are
sold). The General
Partner shall be
reimbursed for
Acquisition Expenses
incurred in an amount up
to 2% of the gross
offering proceeds. The
General Partner shall pay
all Acquisition Expenses
<PAGE>
Form of Entity Receiving Method of Determination
Compensation Compensation & Estimated Dollar Amount
to the extent such
Acquisition Expenses
exceed 2% of the gross
offering proceeds.
OPERATIONAL STAGE
Reimbursement of The General Actual cost of goods and
Partnership Partner or its materials used for and
Operational Affiliates by the Partnership and
Expenses(5) obtained from an entity
that is not an Affiliate
of the General Partner.
Dollar amount is not
determinable at this
time(6).
Interest and Other The General An amount not in excess of
Similar Charges Partner or an the amounts that would
or Fees (7) Affiliate be charged by unrelated
lending institutions on
comparable loans for the
same purpose and in the
same locality but never
in excess of 2% above the
prime rate quoted from
time to time by Chase
Manhattan Bank of New
York City, New York, such
amount charged not to
exceed 12% per annum.
Dollar amount is not
determinable at this
time.(6)
Distributive The General The General Partner will
Share of Net Partner receive 10% of all
Cash from distributions of Net Cash
Operations(8) from Operations as its
Management Fee. Dollar
amount is not
<PAGE>
Form of Entity Receiving Method of Determination
Compensation Compensation & Estimated Dollar Amount
determinable at this
time.(6)
Mortgage Loan The General An annual fee of 1/4 of 1%
Servicing Fee Partner of amounts funded by the
Partnership in Mortgage
Loans which are serviced
by the General Partner.
Actual amount to be
received depends upon the
funds invested in
mortgages and is not
determinable at this
time.(6)(9)
LIQUIDATION STAGE
Subordinated The General An amount not to exceed the
Disposition Partner lesser of (i) one-half
Fee(10) of the competitive real
estate commission
applicable at the date
of sale, or (ii) 2% of
the sales price of a
Property. Dollar amount
is not determinable at
this time.(6)
Distributive Share The General The General Partner will
of Net Proceeds Partner receive, other than as
from Sales or a part of the liquidation
Refinancings(8) of the Partnership, 1%
of all Net Proceeds from
Sales or Refinancings
until the Limited
Partners have been
returned their Original
Invested Capital plus
<PAGE>
Form of Entity Receiving Method of Determination
Compensation Compensation & Estimated Dollar Amount
their Preferred Return
from either Net Cash from
Operations or Net
Proceeds from Sales or
Refinancings.
Thereafter, Net Proceeds
from Sales or
Refinancings shall be
allocated (i) first to
the General Partner so
that it will receive any
unpaid Subordinated
Disposition Fees, and
(ii) then 90% to the
Limited Partners and 10%
to the General Partner.
Upon liquidation of the
Partnership the General
Partner shall receive an
amount equal to the
positive balance, if any,
in its capital account.
See "Income and Losses
and Cash Distributions."
Dollar amount is not
determinable at this
time.(6)
<PAGE>
(1) See "The Offering."
(2) The Sales Agent shall receive a nonaccountable expense
allocation for Organizational and Offering Expenses in an
amount equal to 2% of gross offering proceeds. The Sales
Agent shall pay all Organizational and Offering Expenses
excluding selling commissions in excess of such amount.
(3) The Partnership may invest offering proceeds, including
working capital reserves, from time to time in a money market
fund sponsored by USAA Investment Management Company for which
the advisory fee shall be paid annually. See "Investment
Objectives and Policies--Preliminary Investments." On an
annualized basis, this Advisory Fee is equal to 1/2% of the
registered investment company's first $50,000,000 Annual Net
Assets; 2/5% of the registered investment company's Annual Net
Assets over $50,000,000 but not over $100,000,000; and 3/10%
of that portion of the registered investment company's Annual
net Assets over $100,000,000.
(4) At a minimum, an amount equal to 87% of the Limited Partners'
capital contributions (including a 3% working capital reserve)
will be committed to investment in properties. For purposes
hereof, capital contributions are deemed to be committed to
investment in properties to the extent such capital
contributions are used to make or invest in mortgage loans or
are actually paid or allocated to the purchase, development,
construction or improvement of properties acquired by the
Partnership (including the funding of working capital reserves
(except that working capital reserves in excess of 5% of gross
offering proceeds shall not be included) and other cash
payments such as interest and taxes but excluding Front-End
Fees.) The remaining capital contributions not committed to
investment in properties are available for the payment of
Front-End Fees consisting of Organizational and Offering
Expenses, Acquisition Fees and Acquisition Expenses, and real
estate broker commissions. See "Estimated Use of Proceeds."
(5) The General Partner or its Affiliates may be reimbursed for
(a) the actual cost of goods and materials used for or by the
Partnership and obtained from an entity that is not an
Affiliate of the General Partner; (b) salaries and related
salary expenses for services which could be performed directly
for the Partnership by independent parties, including legal,
accounting, transfer agent, data processing, duplicating and
administration of investor accounts; and (c) the cost of
Partnership reports and communications to investors. No
reimbursement shall be permitted for services for which the
General Partner or Affiliates receive a separate fee or for
(i) salaries, related salary expenses, traveling expenses, and
other administrative items incurred by any Controlling Persons
or which are not directly attributable to the rendering of
services to the Partnership and (ii) any indirect expenses
incurred in performing services for the Partnership, such as
rent or depreciation, utilities, capital equipment, and other
<PAGE>
administrative items. "Controlling Person" for this purpose
shall mean any person, regardless of title, who performs
executive or senior management functions for the General
Partner or Affiliates similar to those of directors, executive
management and senior management, or any person who either
holds 5% or more equity interest in the General Partner or
Affiliates or has the power to direct or cause the direction
of the General Partner or Affiliates, whether through the
ownership of voting securities, by contract, or otherwise, or,
in the absence of a specific role or title, any person having
the power to direct or cause the direction of the management
level employees and policies of the General Partner or
Affiliates. It is not intended that every person who carries
a title such as vice president, senior vice president,
secretary or treasurer be included in the definition of
Controlling Person. In no event shall any amount charged to
the Partnership as a reimbursable expense by the General
Partner exceed the lesser of the actual cost of such services,
or 90% of the amount which the Partnership would be required
to pay to independent parties for comparable services in the
same geographic location. Reimbursements are also allowable
for certain Organizational and Offering Expenses and
expenditures incurred in connection with the acquisition of
the Properties by the Partnership.
(6) Any prediction of such dollar amount would necessarily involve
assumptions of future events that cannot be determined at this
time.
(7) The Partnership Agreement permits the General Partner or any
Affiliate of the General Partner to make a loan to the
Partnership if the interest and other similar charges or fees
on any such loan are not in excess of the amounts which would
be charged by unaffiliated lending institutions on comparable
loans for the same purpose in the same locality but not in
excess of 2% above the prime rate quoted from time to time
during the term of the loan by Chase Manhattan Bank of New
York City, New York, such amount charged not to exceed 12% per
annum.
(8) See "Income and Losses and Cash Distributions."
(9) The General Partner is entitled to receive an annual Mortgage
Loan Servicing Fee equal to 1/4 of 1% of the maximum amount
funded or to be funded by the Partnership in Mortgage Loans.
(10) Subordinated Disposition Fees payable to the General Partner
for services in connection with the sale of Properties shall
be cumulative but shall be paid only after the Limited
Partners have been returned their Original Invested Capital
plus their Preferred Return from either Net Cash from
Operations or Net Proceeds from Sales or Refinancings. If an
unaffiliated broker participates in the sale of one or more of
the Properties, the subordination requirement will apply only
<PAGE>
to the fee, if any, earned by the General Partner. The total
of all real estate fees payable to all parties in connection
with the sale of one or more of the Properties, including the
Subordinated Disposition Fee, shall not exceed the lesser of
a competitive real estate fee which is reasonable, customary
and competitive in light of the size, type and location of the
Properties or 6% of the sales price of the Properties.
An Affiliate of the General Partner may provide insurance
brokerage services in connection with obtaining insurance on the
Properties so long as the cost of providing such service, including
cost of the insurance, is no greater than the lowest quote obtained
from two unaffiliated insurance agencies and the coverage and terms
are likewise comparable. In no event may such services be provided
by any such Affiliate unless it is independently engaged in the
business of providing such services to parties unaffiliated with
the General Partner and at least 75% of its insurance brokerage
service gross revenue is derived from parties unaffiliated with the
General Partner.
It is contemplated as of the date hereof that the Properties
will be managed by unaffiliated management firms, and by Affiliates
of the General Partner as necessary, or by operating partners in
situations where the partnership is a partner or joint venturer.
Affiliates of the General Partner are presently engaged in
providing property management services for prior RealCo sponsored
partnerships and may in the future provide such services to the
Partnership for some or all of the Properties. The Partnership
Agreement permits the Partnership to obtain property management
services from the General Partner or one or more Affiliates of the
General Partner and in the event such services are provided the
compensation therefor will not exceed the lesser of the rates
prevailing for comparable services in the same geographic area or
(i) 5% of gross revenues from each residential property (included
in such 5% are fees for leasing and related services), (ii) 6% of
gross revenues from each industrial and commercial property if
leasing and related services are performed, (iii) 3% of gross
revenues from each industrial and commercial property if no leasing
and related services are performed, and (iv) 1% of gross revenues
from each industrial and commercial property leased on a long-term
(10 years or more) net basis (except for a one-time initial leasing
fee of 3% of the gross revenues in each lease payable over the
first five full years of the original term of the lease). The
actual amount of such compensation, if any, is not determinable at
this time.
Front-End Fees consisting of Organizational and Offering
Expenses, Acquisition Fees and Acquisition Expenses shall in no
event exceed 13% of the gross offering proceeds.
<PAGE>
INCOME AND LOSSES AND CASH DISTRIBUTIONS
NET CASH FROM OPERATIONS
The Partnership Agreement prohibits the reinvestment (or
investment) of Net Cash from Operations available for distribution,
except as a temporary investment pending distribution to Partners.
The availability of Net Cash from Operations is subject to (i)
payment of the Partnership's operating expenses (without deduction
for depreciation), (ii) amounts set aside to maintain a reasonable
working capital reserve (see "Investment Objectives and Policies--
Working Capital Reserve") and (iii) payment of the Partnership's
other current obligations, including the Mortgage Loan Servicing
Fee. See "Management Compensation" for details on calculation of
the Mortgage Loan Servicing Fee.
Distribution of Net Cash from Operations will be made 10% to
the General Partner as the Management Fee and 90% to the Limited
Partners. Any Net Cash from Operations received by a Limited
Partner shall count toward his 6% cumulative Preferred Return (10%
per annum as to that portion of Partnership funds invested in
mortgage loans, weighted on a daily average basis for the period.)
Distributions of Net Cash from Operations to Limited Partners will
be made quarterly, at the discretion of the General Partner and,
except for the first distribution, will be apportioned to the
Limited Partners of record on the last day of the calendar quarter
immediately preceding such distribution in proportion to the number
of Interests owned by each Limited Partner as of that date. The
first distribution of Net Cash from Operations will be apportioned
to each Limited Partner of record on the last day of the calendar
quarter immediately preceding such distribution in the ratio that
(i) the number of Interests held by each such Limited Partner
multiplied by the number of days that such Interests were
outstanding through the last day of the calendar quarter
immediately preceding such distribution bears to (ii) the sum for
all Interests of the product computed in (i). The ultimate amount
of any of such distributions will depend upon attaining and
thereafter maintaining operating income and expenses of Properties
at levels permitting such distributions.
NET PROCEEDS FROM SALES OR REFINANCINGS
During the two-year period commencing on the date of this
Prospectus, any cash received on the sale or refinancing of any
Property or the prepayment of any Mortgage Loan may, in the
discretion of the General Partner, either be distributed or
reinvested in other properties or used to make mortgage loans.
Thereafter, Net Proceeds from Sales or Refinancings will not be
invested or reinvested in any property or investment other than the
Properties and/or the Mortgage Loans, except as a temporary
investment pending distribution to Partners. Net Proceeds from
Sales or Refinancings, other than as part of the liquidation of the
Partnership, will be distributed as follows:
(i) First, 1% to the General Partner and 99% to the
Limited Partners until the Limited Partners have been returned
their Original Invested Capital from Net Proceeds from Sales
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or Refinancings, plus their Preferred Return from either
distributions of Net Cash from Operations or Net Proceeds from
Sales or Refinancings;
(ii) Second, to the General Partner until it has received
all unpaid Subordinated Disposition Fees; and
(iii) Third, 90% to the Limited Partners and 10% to the
General Partner. However, distributions in liquidation of the
Partnership will be made in proportion to and in an amount
equal to the Partners' positive capital account balances. For
a discussion of the calculation of Subordinated Disposition
Fees, see "Management Compensation."
Distribution of Net Proceeds from Sales or Refinancings, if
any, will be in such amounts and at such times as the General
Partner may determine. The amount of each distribution of Net
Proceeds from Sales or Refinancings to Limited Partners will be
apportioned and paid to the Limited Partners of record as of the
last day of the calendar month in which such Net Proceeds from
Sales or Refinancings were received by the Partnership as follows:
(i) First, an amount equal to the unreturned Original
Invested Capital of all Limited Partners shall be distributed
in proportion to the unreturned Original Invested Capital of
each such Limited Partner;
(ii) Second, an amount equal to the unpaid Preferred
Return of all Limited Partners shall be distributed in
proportion to the unpaid Preferred Return of each such Limited
Partner;
(iii) Third, the balance shall be distributed in
proportion to the number of Interests owned by each Limited
Partner, except that Net Proceeds from Sales or Refinancings
from the disposition of the last of the Properties and
Mortgage Loans generally will be apportioned in proportion to
each Limited Partner's positive capital account balance.
ALLOCATION OF INCOME AND LOSSES
On and after the Initial Admittance Date, except as otherwise
provided herein, all items of income, gain, loss, deduction and
credit from operations will be allocated 10% to the General Partner
and 90% to the Limited Partners.
Net gain from the sale or other disposition of a Property or
Mortgage Loan is generally allocated as follows:
(i) First, to the Partners in an amount up to and in
proportion with any negative balances in their respective
capital accounts in excess of each respective Partner's Share
of Partnership Minimum Gain as of the end of the taxable year
for which the allocation is made;
(ii) Second, 99% to the Limited Partners and 1% to the
General Partner for all taxable years ending before the
Limited Partners have been returned their Original Invested
Capital and have been paid to their Preferred Return. For the
taxable year during which distributions of Net Proceeds from
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Sales or Refinancings to Limited Partners are sufficient to
return to the Limited Partners their Original Invested
Capital, plus their Preferred Return, net gain is allocated
99% to the Limited Partners and 1% to the General Partner in
the minimum amount necessary, if any, so that the capital
account balances of the Limited Partners equal the amounts of
their respective unreturned Original Invested Capital plus
their unpaid Preferred Return less their respective Partner's
Share of Partnership Minimum Gain as of the end of such
taxable year;
(iii) Third, to the Partners in the minimum amount
necessary, if any, so that the aggregate balance in the
capital accounts of the Limited Partners in excess of an
amount equal to the excess of the sum of their unreturned
Original Invested Capital and their unpaid Preferred Return
over the aggregate of the Limited Partners' Share of
Partnership Minimum Gain as of the end of the taxable year for
which the allocation is made, and the balance in the capital
account of the General Partner in excess of 1.01% of an amount
equal to the excess of the sum of the Limited Partners'
unreturned Original Invested Capital and their unpaid
Preferred Return over the aggregate of the Limited Partners'
Share of Partnership Minimum Gain as of the end of the taxable
year for which the allocation is made, is in the ratio of 90
to 10; and
(iv) Fourth, 90% to the Limited Partners and 10% to the
General Partner.
To the extent ordinary income from recapture of depreciation
is incurred upon the sale or other disposition of a Property, such
ordinary income shall be allocated, to the extent possible, to the
Partners as a portion of their net gain allocated to the extent
such Partners received the benefit of the depreciation deduction
resulting in such ordinary income from recapture of depreciation.
Net loss from the sale or other disposition of a Property or
Mortgage Loan is generally allocated between the Limited Partners
and the General Partner as follows:
(i) First, if any gain has been allocated pursuant to
subparagraph (ii) or (iii) of the preceding paragraph, then
100% to the General Partner in the minimum amount necessary,
if any, so that the aggregate balance in the capital accounts
of the Limited Partners in excess of an amount equal to the
excess of the sum of their unreturned Original Invested
Capital and their unpaid Preferred Return over the aggregate
of the Limited Partners' Share of Partnership Minimum Gain as
of the end of the taxable year for which the allocation is
made, and the balance in the capital account of the General
Partner in excess of 1.01% of an amount equal to the excess of
the sum of the Limited Partners' unreturned Original Invested
Capital and their unpaid Preferred Return over the aggregate
of the Limited Partners' Share of Partnership Minimum Gain as
of the end of the taxable year for which the allocation is
made, is in the ratio of 90 to 10;
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(ii) Second, if any gain has been allocated pursuant to
subparagraph (iii) or (iv) of the preceding paragraph, then
10% to the General Partner and 90% to the Limited Partners
until the aggregate balance in the capital accounts of the
Limited Partners is equal to the excess of the sum of their
unreturned Original Invested Capital and their unpaid
Preferred Return over the aggregate of the Limited Partners'
Share of Partnership Minimum Gain as of the end of the taxable
year for which the allocation is made; and
(iii) Third, 1% to the General Partner and 99% to the
Limited Partners.
Special rules apply to the allocation of income, gain, loss and
deductions in certain circumstances. See Section 9.4 of the
Partnership Agreement.
Except for Interests which are transferred during a taxable
year, in general, income, gain, loss, deduction and credit
allocated to the Limited Partners shall be computed annually and
apportioned to the Limited Partners of record at the end of each
taxable year in proportion to the number of Interests owned by each
Limited Partner as of that date. Allocations to Limited Partners
attributable to periods before the Final Closing Date shall be
computed by an interim closing of the books as of the end of the
day immediately preceding each admittance date of Additional
Limited Partners and at the end of any taxable year during such
periods and shall be apportioned to the Limited Partners of record
as of the end of the day immediately preceding each such admittance
date of Additional Limited Partners or on the last day of such
taxable year in proportion to the number of Interests owned by each
such Limited Partner as of each such date. Allocations of gain and
loss resulting from a sale of a Property shall be apportioned to
those Limited Partners of record on the date the Partnership
recognizes such gain or loss and who are entitled to allocations of
gain or loss under Section 9.4 of the Partnership Agreement. In
the event of a transfer of an Interest, each item of Partnership
income, gain, loss, deduction and credit attributable to the
transferred Interest is generally allocated on an equal daily basis
to the owner of such Interest on the basis of the number of days
that such person was the owner of such Interest; except that net
gain or net loss from the sale or other disposition of a Property
is allocated to the owner of the Interest as of the date that such
net gain or net loss is recognized by the Partnership.
There are circumstances in which a Limited Partner in any year
may be allocated more taxable income than he would receive in
distributions of cash. See "Federal Income Tax Aspects--Taxable
Income in Excess of Cash Distributions."
The General Partner may amend the provisions of the
Partnership Agreement as appropriate as a result of the
promulgation of final Treasury Regulations under Sections 704 and
706 of the Code, if in the opinion of counsel such an amendment is
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advisable to reflect allocations among the Limited Partners and the
General Partner consistent with those regulations. See "Federal
Income Tax Aspects--Allocations of Income and Loss." For a more
detailed description of the allocations under the Partnership
Agreement, see Article IX of the Partnership Agreement.
CAPITAL ACCOUNTS
Each Partner shall have a capital account which shall be
increased by the amount of such Partner's capital contribution to
the Partnership and the amount of any income or gain allocated to
such Partner and shall be decreased by the amount of any
syndication cost, other nondeductible and deductible expense, loss
or deduction allocated to such Partner and the amount of all
distributions to such Partner. The capital accounts shall be
established and maintained in accordance with federal income tax
principles as set forth in Treasury Regulations.
The General Partner is required to contribute, immediately
prior to the termination of the Partnership, cash equal to the
lesser of (i) the deficit balance in its capital account or (ii)
the excess of 1.01% of all Limited Partners' Original Invested
Capital over the amount of capital previously contributed by the
General Partner. A deficit in a Partner's capital account is not
considered an asset of the Partnership.
SOURCES AND CHARACTER OF CERTAIN DISTRIBUTIONS
See "Investment Objectives and Policies--Working Capital
Reserve" for information pertaining to the characterization of
distributions from the working capital or other reserve as Net
Proceeds from Sales or Refinancings in the event there is a
distribution from the working capital or other reserve that results
in the reduction of such reserve below 3% of gross proceeds from
the offering, the amount initially reserved therefor.
