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 [NO FEE REQUIRED]
For the fiscal year ended June 30, 1997
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 INTEREST
(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 Registration No. 33-16479,
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
General Partner of 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 Schedules 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 invest in a
diversified portfolio of income-producing multi-family
residential and commercial properties and/or make one or more
participating first mortgage loans. Pursuant to the agreement of
the Partnership, to the extent possible all acquisitions of real
property are made for cash and 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.
Certain capitalized terms not otherwise defined herein
shall have the meanings set forth in the Glossary contained in
the Partnership's Prospectus dated February 11, 1988, filed
pursuant to Rule 424(b) or (c) attached hereto as Exhibit 99.a
and incorporated herein by reference.
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
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, CST Office Products Building
(formerly the 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, 1997 were as follows:
The Partnership owns two single-tenant industrial
complexes. The lease agreements between the Partnership and
these tenants (a manufacturer in the packaging industry 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.
<PAGE>
The Continental Plastic Containers Buildings
("Continental Buildings") are a manufacturing and distribution
facility made up of two industrial bulk warehouse buildings. 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. These buildings are
100% leased under a triple net lease to Continental Plastic
Containers, Inc., a wholly-owned subsidiary of Plastic
Containers, Inc. which manufactures materials and containers used
in the packaging industry. The tenant provided $856,263 of
annual rental income to the Partnership for the fiscal year ended
1997, $677,739 in 1996 and $593,829 in 1995 which represented
approximately 61% of total Partnership rental income for 1997,
56% for 1996 and 53% for 1995.
The Continental Buildings are located in the Northwest
Cook County submarket of the Chicago Metropolitan Area Industrial
market. Occupancy remained stable in the Northwest Cook County
submarket from 1996 to 1997. Total inventory of leasable
industrial space as of June 30, 1997 was approximately 90.2
million square feet with approximately 7.1 million square feet
available for lease or an occupancy rate of approximately 92%.
This compares to total inventory of approximately 89 million
square feet as of June 30, 1996 with approximately 7.3 million
square feet available or an occupancy rate of approximately 92%.
CST Office Products Building ("CST Building") is a
111,720 square foot industrial warehouse building in Lakeland,
Florida and is 100% leased under a triple net lease to CST Office
Products, Inc. ("CST") which expires in 1999. CST is a
manufacturer of continuous computer stock forms and various other
office products. Under terms of the lease with CST, 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 rental
rate of $4.02 per square foot was increased to $4.10 per square
foot in July 1997. The tenant provided approximately $547,220 of
annual rental income to the Partnership for the fiscal year ended
1997, $532,581 in 1996 and $536,194 in 1995 which represented
approximately 39% of total Partnership rental income for fiscal
1997, 44% for 1996 and 47% for 1995.
At the beginning of the fiscal year, Bowater
Communication Papers, Inc., the tenant at the Lakeland, Florida
property, changed its name to Star Forms Incorporated. Star
Forms was later sold to CST Office Products, Inc.
During the second fiscal quarter, the Partnership entered
into a contract to sell the CST Building subject to a due
diligence period. During the due diligence period specified in
the contract, the potential buyer attempted to arrange for
financing but was unable. Accordingly, the contract with the
potential buyer was canceled during April 1997.
<PAGE>
The CST Building is located within the Polk submarket of
the Tampa Bay Business Park market. Total inventory of leasable
space in the Polk submarket totaled approximately 6.4 million
square feet with approximately half a million square feet
available as of March 31, 1997. This resulted in an occupancy
rate of approximately 92%.
Sequoia Plaza I ("Sequoia"), located in 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 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, 1997, is 89% leased by
Logicon, Inc., a publicly held company that provides electronic
systems and high-technology services to government and industry.
Logicon, Inc.'s lease expires in April 2008. On August 4, 1997,
Logicon completed a merger with Northrop Grumman Corporation in
which Logicon will be operated as a wholly-owned subsidiary.
Sequoia is located in the Arlington County submarket of
the Northern Virginia office market. Total supply of office
space in the Northern Virginia office market as of March 31, 1997
was approximately 101 million square feet with approximately 6
million square feet available or an occupancy rate of
approximately 94%. This reflected an increase in occupancy that
was approximately 91% with approximately 9 million square feet
available at March 31, 1996.
Total supply of office space in Arlington County as of
March 31, 1997 was approximately 27.6 million square feet with
approximately 1 million square feet available, equating to an
occupancy rate of approximately 96%. The occupancy rate was
approximately 95% as of March 31, 1996 with approximately 1.3
million square feet available out of a total inventory of
approximately 26.3 million square feet.
On June 10, 1997, the Partnership signed a letter of intent
with American Industrial Properties REIT [NYSE: IND] (the
"Trust") contemplating the merger of four real estate limited
partnerships, including the Partnership, into the Trust. The
four real estate limited partnerships are USAA Real Estate Income
Investments I Limited Partnership, USAA Real Estate Income
Investments II Limited Partnership, USAA Income Properties III
Limited Partnership and USAA Income Properties IV Limited
Partnership (collectively, the "RELPs"). Each of the RELPs is
affiliated with USAA Real Estate Company, which currently owns
approximately 13.66% of the outstanding shares of the Trust.
<PAGE>
On July 7, 1997, the Trust signed definitive merger
agreements with each of the RELPs pursuant to which the RELPs
will be merged into the Trust (the "Merger"). According to the
Merger Agreement, the Trust will issue an aggregate of 22,064,147
shares of beneficial interest at $2.625 per share (for a total
value of $57,918,385) in exchange for the limited partnership
interests in the RELPs. The number of Shares to be issued to
each RELP will be equal to the net asset value for each RELP (as
agreed by the Trust and each RELP) divided by $2.625. The number
of Shares to be received by a Limited Partner in each RELP will
be computed in accordance with such partner's percentage interest
in the RELP. The general partner of each RELP has waived any
right it may have to receive Shares to which it may be entitled
in exchange for its general partnership interest.
The Merger, which has been approved by the Trust's Board of
Trust Managers and the Board of Directors of each of the general
partners of the RELPs, is subject to due diligence by both
parties and certain other conditions, including approval by the
shareholders of the Trust and the limited partners of each of the
RELPs. Accordingly, there can be no assurance that the merger
will ultimately be consummated. The Merger is a taxable
transaction to the partners in the RELPs and will be subject to
the completion of a joint proxy statement/prospectus filed on
Form S-4 with the Securities and Exchange Commission. No date
has been scheduled for the shareholder meeting for the Trust or
limited partner meetings for each of the RELPs to vote on the
proposed transaction. Prudential Securities, Inc., on behalf of
the Trust, and Houlihan, Lokey, Howard & Zukin on behalf of the
RELPs, have rendered opinions to their respective parties that
the transaction is fair from a financial point of view. See Item
3: Legal Proceedings.
The 7.275% joint venture interest in Combined Capital
Resources Joint Venture (the "joint venture"), the owner of
Sequoia Plaza I, will not be included in the Merger. USAA Real
Estate Company ("Realco") or an affiliate of Realco will purchase
the joint venture interest for $2.25 million if the Limited
Partners of the Partnership approve the Merger. This purchase
price was determined using the January 1, 1997 external appraisal
of Sequoia Plaza I at a total value of $29.7 million and adjusted
by an appreciation factor.
See "Item 2. Properties" for information pertaining to
the status of the Partnership's properties.
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 208,290 net rentable
square feet situated on
approximately 9.37 acres. As
of June 30, 1997 the property
was 100% leased and annual rent
revenue was $3.61 per net
rentable square foot. The
Partnership has 100% fee-simple
ownership.
Lakeland, Florida CST Office Products Building.
An industrial warehouse
building with 111,720 net
rentable square feet situated
on approximately 8.75 acres.
As of June 30, 1997 the
property was 100% leased and
annual rent revenue was $4.02
per square foot. The
Partnership has 100% fee-simple
ownership.
Arlington, Virginia Sequoia Plaza I. A four-story
office building containing
149,696 net rentable square feet
situated on approximately 3
acres. As of June 30, 1997 the
property was 99% leased and
average annual rent revenue was
$24.08 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 and 7 of Notes to Financial Statements in
Item 8, for further discussion relating to the properties of
the Partnership.
<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.
On August 20, 1997, a purported class action lawsuit
(the "Lawsuit"), which was filed in the Superior Court of
the State of Arizona, was served upon USAA Real Estate
Company, USAA Properties I, Inc. ("RELP GP I"), USAA
Properties II, Inc. ("RELP GP II"), USAA Properties III,
Inc. ("RELP GP III"), USAA Properties IV, Inc. ("RELP GP
IV", together with RELP GP I, RELP GP II and RELP GP III,
the "RELP GPs"), certain other affiliated entities and the
individual members of the boards of directors of each of the
RELP GPs. American Industrial Properties REIT (the "Trust")
was also named as a defendant. The suit alleges among other
things, breaches of fiduciary duty in connection with the
transactions contemplated by merger agreements entered into
by USAA Real Estate Income Investments I Limited
Partnership, USAA Real Estate Income Investments II Limited
Partnership, USAA Income Properties III Limited Partnership
and USAA Income Properties IV Limited Partnership
(collectively the "RELPS") and the Trust, dated as of June
30, 1997, whereby each RELP would be merged with and into
the Trust (collectively, the "Merger").
The Lawsuit seeks, among other things, to enjoin the
consummation of the Merger and damages, including attorneys'
fees and expenses. The defendants believe that the
plantiffs' claims are without merit and intend to defend
vigorously against the Lawsuit.
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.
<PAGE>
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 limited market for the
Interests could affect the value of the 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.
As of June 30, 1997, there were 1,675 Limited
Partners of the Partnership owning an aggregate of 27,141
Interests.
During the fiscal year ended June 30, 1997,
quarterly distributions totaling $949,936 and $105,549 were
distributed to the Limited Partners and General Partner,
respectively, for a total of $1,055,485 in cash
distributions. The return of capital portion of 1997
distributions was $32,364 and $3,597 for the Limited
Partners and General Partner, respectively.
During the fiscal year ended June 30, 1996,
quarterly distributions totaling $759,948 and $84,438 were
distributed to the Limited Partners and General Partner,
respectively, for a total of $844,386 in cash distributions.
During the fiscal 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.
Future cash distributions to Limited Partners are
currently anticipated.
<PAGE>
Item 6. Selected Financial Data
<TABLE>
SELECTED FINANCIAL DATA
FOR THE YEARS ENDED JUNE 30, 1997, 1996, 1995, 1994 AND 1993
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Rental Income $ 1,403,483 1,210,320 1,130,023 1,125,692 1,081,136
Equity in Earnings
of Joint Venture 151,093 147,059 153,787 148,848 144,569
Interest Income 38,954 74,952 98,629 56,798 53,642
Net Income 1,019,524 946,456 871,557 848,197 836,475
Net Income per Limited
Partnership Interest (1) 33.81 31.38 28.90 28.13 27.74
Cash Distributions 1,055,485 844,386 1,002,709 1,055,484 1,055,482
Cash Distributions per
Limited Partnership
Interest (2) 35.00 28.00 33.25 35.00 35.00
Total Assets at Period End 12,532,387 12,708,177 12,494,486 12,577,901 12,778,758
(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, 1997, the Partnership had cash of $33,288 and
temporary investments of $848,892. Included in the
Partnership's cash and cash equivalents was the working
capital reserve. Deferred charges and other assets included
an acquisition fee paid to USAA Investors II, Inc. on the
joint venture interest and deferred rent resulting from
recognition of income as required by generally accepted
accounting principles. Accounts payable included amounts
due to affiliates for reimbursable expenses and amounts due
to third parties for expenses incurred for operations.
Accrued expenses and other liabilities consisted primarily
of prepaid rent, accrued property taxes and a security
deposit.
Total cash distributions to Partners for the year ended June
30, 1997 increased as compared to the year ended June 30,
1996. Management evaluates reserves and the availability of
funds for distribution to Partners on a continuing basis
based on anticipated leasing activity and cash flows
available from the Partnership investments.
At the beginning of the fiscal year, Bowater Communication
Papers, Inc., the tenant at the Lakeland, Florida property,
changed its name to Star Forms Incorporated. Star Forms was
later sold to CST Office Products, Inc. This lease expires
in 1999.
During the second fiscal quarter, the Partnership entered
into a contract to sell the CST Building subject to a due
diligence period. During the due diligence period specified
in the contract, the potential buyer attempted to arrange
for financing but was unable. Accordingly, the contract
with the potential buyer was canceled during April 1997.
In August 1997, the major tenant, Logicon, at the Sequoia
Plaza I property in Arlington, Virginia, completed a merger
with Northrop Grumman Corporation in which Logicon will be
operated as a wholly-owned subsidiary. Logicon occupies
approximately 89% of the leasable space at Sequoia Plaza I
with a lease expiration in April 2008.
On June 10, 1997, the Partnership signed a letter of intent
with American Industrial Properties REIT [NYSE: IND] (the
"Trust") contemplating the merger of four real estate
limited partnerships, including the Partnership, into the
Trust. The four real estate limited partnerships are USAA
Real Estate Income Investments I Limited Partnership, USAA
Real Estate Income Investments II Limited Partnership, USAA
Income Properties III Limited Partnership and USAA Income
Properties IV Limited Partnership (collectively, the
"RELPs"). Each of the RELPs is affiliated with USAA Real
Estate Company, which currently owns approximately 13.66% of
the outstanding shares of the Trust.
<PAGE>
On July 7, 1997, the Trust signed definitive merger
agreements with each of the RELPs pursuant to which the
RELPs will be merged into the Trust (the "Merger").
According to the Merger Agreement, the Trust will issue an
aggregate of 22,064,147 shares of beneficial interest at
$2.625 per share (for a total value of $57,918,385) in
exchange for the limited partnership interests in the RELPs.
The number of Shares to be issued to each RELP will be equal
to the net asset value for each RELP (as agreed by the Trust
and each RELP) divided by $2.625. The number of Shares to
be received by a Limited Partner in each RELP will be
computed in accordance with such partner's percentage
interest in the RELP. The general partner of each RELP has
waived any right it may have to receive Shares to which it
may be entitled in exchange for its general partnership
interest.
The Merger, which has been approved by the Trust's Board of
Trust Managers and the Board of Directors of each of the
general partners of the RELPs, is subject to due diligence
by both parties and certain other conditions, including
approval by the shareholders of the Trust and the limited
partners of each of the RELPs. Accordingly, there can be no
assurance that the merger will ultimately be consummated.
The Merger is a taxable transaction to the partners in the
RELPs and will be subject to the completion of a joint proxy
statement/prospectus filed on Form S-4 with the Securities
and Exchange Commission. No date has been scheduled for the
shareholder meeting for the Trust or limited partner
meetings for each of the RELPs to vote on the proposed
transaction. Prudential Securities, Inc., on behalf of the
Trust, and Houlihan, Lokey, Howard & Zukin on behalf of the
RELPs, have rendered opinions to their respective parties
that the transaction is fair from a financial point of view.
The Partnership has a 7.275% interest in the Combined
Capital Resources Joint Venture (the "joint venture"), the
owner of Sequoia Plaza I. The joint venture interest will
not be included in the Merger but will be purchased by USAA
Real Estate Company ("Realco") or an affiliate of Realco for
$2.25 million if the Merger is approved by the Limited
Partners of the Partnership. This purchase price was
determined using the January 1, 1997 external appraisal of
Sequoia Plaza I at a total value of $29.7 million and
adjusted by an appreciation factor.
On August 20, 1997, a purported class action lawsuit (the
"Lawsuit"), which was filed in the Superior Court of the
State of Arizona, was served upon USAA Real Estate Company,
USAA Properties I, Inc. ("RELP GP I"), USAA Properties II,
Inc. ("RELP GP II"), USAA Properties III, Inc. ("RELP GP
III"), USAA Properties IV, Inc. ("RELP GP IV", together with
RELP GP I, RELP GP II and RELP GP III, the "RELP GPs"),
<PAGE>
certain other affiliated entities and the individual members
of the boards of directors of each of the RELP GPs. The
Trust was also named as a defendant. The suit alleges among
other things, breaches of fiduciary duty in connection with
the transactions contemplated by merger agreements entered
into by the RELPS and the Trust, dated as of June 30, 1997,
whereby each RELP would be merged with and into the Trust.
The Lawsuit seeks, among other things, to enjoin the
consummation of the Merger and damages, including attorneys'
fees and expenses. The defendants believe that the
plantiffs' claims are without merit and intend to defend
vigorously against the Lawsuit.
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.
RESULTS OF OPERATIONS
For each of the years in the three-year period ended June
30, 1997, 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, 1997 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, 1997 decreased from June 30,
1996 due to depreciation. 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 I property. The
increase in deferred charges and other assets at June 30,
1997 was due to an increase in deferred rent at Continental
Plastic Buildings. Accounts payable decreased at June 30,
1997 as a result of timing in the payment of building costs
associated with the addition at the Continental Plastic
Buildings. Accrued expenses and other liabilities at June
30, 1997 decreased from June 30, 1996 as a result of a
decrease in prepaid rent.
Rental income was higher for the fiscal years ended June 30,
1997 and 1996 as compared to the fiscal year ended June 30,
1995 primarily as a result of Continental Plastic Containers
occupying the building addition and paying an increased
rental rate since March 1, 1996.
<PAGE>
Lower cash balances caused the decrease in interest income
for the fiscal years ended June 30, 1997 and 1996 as
compared to the fiscal year ended June 30, 1995. The cash
was used to fund the building addition at the Continental
Plastic Buildings.
Direct expenses increased for the fiscal year ended 1997 as
compared to the fiscal year ended 1996 due to loading dock
repairs at the CST Building. Direct expenses decreased for
the fiscal year ended 1996 as compared to the fiscal year
ended 1995 as a result of sewer connection fees incurred in
1995 at the CST Building.
Depreciation increased for each of the years in the three-
year period ended June 30, 1997 due to the building addition
at Continental Plastic Buildings.
General and administrative expenses were higher for the
fiscal year ended June 30, 1997 due to lease commissions
paid at Continental Plastic on the lease renewal. A
decrease in state filing fees caused the decrease in general
and administrative expenses for the fiscal year ended 1996.
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.
<PAGE>
Item 8. Financial Statements and Supplementary Data
<TABLE>
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
BALANCE SHEETS
JUNE 30, 1997 AND 1996
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS
Rental properties, net (note 3) $ 9,177,883 9,493,829
Investment in joint venture (note 4) 2,139,009 2,147,966
Temporary investments, at cost
which approximates market value -
Money market fund 848,892 804,821
Cash 33,288 30,737
Cash and cash equivalents 882,180 835,558
Deferred charges and other assets 333,315 230,824
$ 12,532,387 12,708,177
LIABILITIES AND PARTNERS' EQUITY
Accounts payable, including amounts due
to affiliates of $6,722 and $7,981 $ 16,822 113,426
Accrued expenses and other liabilities 129,354 172,579
Total liabilities 146,176 286,005
Partners' equity:
General Partner:
Capital contribution 1,000 1,000
Cumulative net income 779,387 677,435
Cumulative distributions (816,492) (710,943)
(36,105) (32,508)
Limited Partners (27,141 interests):
Capital contributions, net of offering
costs 12,756,270 12,756,270
Cumulative net income 7,014,471 6,096,899
Cumulative distributions (7,348,425) (6,398,489)
12,422,316 12,454,680
Total Partners' equity 12,386,211 12,422,172
$ 12,532,387 12,708,177
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
INCOME
Rental income (notes 5 and 7) $ 1,403,483 1,210,320 1,130,023
Equity in earnings of joint venture (note 4) 151,093 147,059 153,787
Interest income, $316 from affiliate in 1995 (note 6) 38,954 74,952 98,629
Total income 1,593,530 1,432,331 1,382,439
EXPENSES
Direct expenses, $15,751, $15,126 and $15,122
to affiliate (note 6) 96,681 91,298 107,583
Depreciation 315,104 262,935 239,039
General and administrative, $118,196, $83,473
and $89,155 to affiliates (note 6) 162,221 131,642 164,260
Total expenses 574,006 485,875 510,882
Net income $ 1,019,524 946,456 871,557
Net income per limited partnership interest $ 33.81 31.38 28.90
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
<S> <C> <C> <C>
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
Net income 94,646 851,810 946,456
Cash distributions (84,438) (759,948) (844,386)
Balances at June 30, 1996 (32,508) 12,454,680 12,422,172
Net income 101,952 917,572 1,019,524
Cash distributions (105,549) (949,936) (1,055,485)
Balances at June 30, 1997 $ (36,105) 12,422,316 12,386,211
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,019,524 946,456 871,557
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 315,104 262,935 239,039
Amortization 2,528 2,528 2,528
Earnings from joint venture (151,093) (147,059) (153,787)
Distributions from joint venture 160,050 189,150 185,513
Decrease in accounts receivable -- 6,000 9,000
(Increase) decrease in deferred charges and
other assets (105,019) (2,235) 49,024
(Decrease) increase in accounts payable, accrued
expenses and other liabilities (139,829) 111,621 47,737
Other adjustments 842 -- --
Cash provided by operating activities 1,102,107 1,369,396 1,250,611
Cash flows used in investing activities -
Additions to rental properties -- (1,696,823) (64,685)
Cash flows used in financing activities -
Distributions to partners (1,055,485) (844,386) (1,002,709)
Net increase (decrease) in cash and cash equivalents 46,622 (1,171,813) 183,217
Cash and cash equivalents at beginning of period 835,558 2,007,371 1,824,154
Cash and cash equivalents at end of period $ 882,180 835,558 2,007,371
See accompanying notes to financial statements.
</TABLE>
<PAGE>
USAA REAL ESTATE INCOME INVESTMENTS II
LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
1. Organization, Summary of Significant Accounting Policies and
Other
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 Partnership owns industrial buildings in Lakeland,
Florida and Elk Grove Village, Illinois and an equity
investment in an office building in Arlington, Virginia.
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).
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
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. The assessment for and measurement of impairment is
based upon the undiscounted cash flows and fair value,
respectively, of the individual properties. 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.
<PAGE>
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).
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 $104,047 and $2,185 more than the amount per lease
agreements for the years ended June 30, 1997 and 1996,
respectively. Rental income recognized was $48,746 less
than the amount per lease agreements for the year ended June
30, 1995.
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
$35.00 for the year ended June 30, 1997, $28.00 for the year
ended June 30, 1996 and $33.25 for the year ended June 30,
1995 and were based on the limited partnership interests
outstanding at each quarter end and the cash distributions
allocated to Limited Partners.
Certain 1996 and 1995 balances have been reclassified to
conform to the 1997 presentation.
<PAGE>
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.
3. Rental Properties
Rental properties at June 30 consisted of the following:
1997 1996
Buildings and improvements $ 8,913,171 8,914,013
Land 2,276,850 2,276,850
11,190,021 11,190,863
Less accumulated depreciation (2,012,138) (1,697,034)
$ 9,177,883 9,493,829
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
was structured in a manner which granted joint control
of the joint venture to both partners, but which gave
REALCO the responsibility of conducting the ordinary
and usual day-to-day management of the joint venture
property.
<PAGE>
The initial joint venture investment was a
participating first mortgage on Sequoia Plaza 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 remained 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.
The following is the unaudited summary financial
information for the Combined Capital Resources Joint
Venture as of June 30, 1997 and 1996 and for the three
years ended June 30, 1997.
<PAGE>
1997 1996
ASSETS
Cash $ 474,762 487,379
Property, net 26,888,892 27,501,449
Other receivables 21,500 123,058
Deferred rent and other assets, net 2,046,589 1,766,585
$ 29,431,743 29,878,471
LIABILITIES AND EQUITY
Accounts Payable $ 27,975 54,276
Equity:
USAA Real Estate Equities, Inc. 27,264,759 27,676,229
USAA Real Estate Income Investments II
Limited Partnership 2,139,009 2,147,966
Total equity 29,403,768 29,824,195
$ 29,431,743 29,878,471
1997 1996 1995
OPERATIONS
Revenues (a) $ 4,023,186 3,946,260 4,068,973
Operating expenses (921,397) (939,074) (971,684)
Other expenses (244,192) (225,152) (218,975)
Depreciation (780,718) (760,608) (764,227)
Net income $ 2,076,879 2,021,426 2,114,087
EQUITY IN NET INCOME
USAA Real Estate Equities, Inc. $ 1,925,786 1,874,367 1,960,300
USAA Real Estate Income Investments II
Limited Partnership 151,093 147,059 153,787
$ 2,076,879 2,021,426 2,114,087
CASH DISTRIBUTIONS
USAA Real Estate Equities, Inc. $ 2,039,950 2,410,850 2,364,487
USAA Real Estate Income Investments II
Limited Partnership 160,050 189,150 185,513
$ 2,200,000 2,600,000 2,550,000
(a) For the years ended June 30, 1997, 1996 and 1995, the
joint venture recorded $3,560,658 of revenue from a
single tenant which represented 89%, 90% and 88%,
respectively, of total revenue.
<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 two to fourteen years
under triple-net leases whereby the tenants pay all
operating expenses. Approximate minimum future rentals
are as follows:
1998 $ 1,208,000
1999 1,208,000
2000 754,000
2001 784,000
2002 854,000
Thereafter 8,023,000
$ 12,831,000
For the years ended June 30, 1997, 1996 and 1995,
the Partnership received $113,467, $101,239 and
$88,139, respectively of contingent rental income.
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.
Through January 1995, the Partnership had funds invested
in USAA Mutual Fund, Inc. and earned 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, 1997,
1996 and 1995:
<TABLE>
<CAPTION>
Reimbursement Management Lease Interest
of Expenses (1) Fees Commissions Income Total
<S> <C> <C> <C> <C> <C>
USAA Mutual
Fund, Inc.:
1997 $ -- -- -- -- --
1996 -- -- -- -- --
1995 -- -- -- (316) (316)
USAA Real Estate
Company:
1997 78,288 -- -- -- 78,288
1996 71,029 -- -- -- 71,029
1995 89,155 -- -- -- 89,155
Quorum Real Estate
Services Corporation:
1997 3,255 12,496 39,908 -- 55,659
1996 3,016 12,110 12,444 -- 27,570
1995 2,823 12,299 -- -- 15,122
(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.
</TABLE>
<PAGE>
7. Major Customer Information
The Partnership owns two single-tenant industrial
complexes. The lease agreements between the Partnership
and these tenants (a manufacturer in the packaging
industry 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 1997, 1996 and 1995 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.
For the years ended June 30, 1997, 1996 and 1995, the
Partnership recorded $547,220, $532,581 and $536,194 of
rental income from a single tenant, a manufacturer of
business forms, which represents 39%, 44% and 47%,
respectively of total rental income.
Continental Plastic Containers, Inc. ("CPC") is the
single tenant at the Continental Plastic Buildings in
Elk Grove Village, Illinois. CPC is a manufacturer in
the packaging industry and a wholly-owned subsidiary of
Plastic Containers, Inc. ("PCI"). PCI is the corporate
guarantor for the lease between the Partnership and
CPC. PCI is a public company currently filing periodic
reports with the Securities Exchange Commission. The
following is the summary financial information for CPC
as of December 31, 1996 and 1995 and for the three
years ended December 31, 1996.
<PAGE>
1996 1995
ASSETS
Cash and cash equivalents $ 10,522,000 -
Investment securities 1,000,000 -
Property, net 98,778,000 137,637,000
Other receivables, net 27,029,000 32,673,000
Inventories 18,727,000 19,317,000
Other assets, net 42,999,000 23,677,000
$199,055,000 213,304,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 38,838,000 57,319,000
Long-term obligations 129,002,000 105,212,000
Other liabilities 23,155,000 19,417,000
Total liabilities 190,995,000 181,948,000
Stockholders' Equity 8,060,000 31,356,000
Total liabilities and
stockholders' equity $199,055,000 213,304,000
1996 1995 1994
OPERATIONS
Net sales $262,200,000 271,088,000 222,980,000
Cost of goods sold (219,210,000) (231,845,000) (185,696,000)
Other income (expenses) (48,525,000) (41,950,000) (41,353,000)
Income tax benefit 1,896,000 2,526,000 1,637,000
Extraordinary iterm - loss on
early extinguishment of debt (7,305,000) (230,000) (217,000)
Cumulative effect of accounting change - - (475,000)
Net loss $(10,944,000) (411,000) (3,124,000)
For the years ended June 30, 1997, 1996 and 1995, the
Partnership recorded $856,263, $677,739 and $593,829 of rental
income from this single tenant which represented 61%, 56% and
53%, respectively of total rental income.
<PAGE>
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. Proposed Merger Transaction
On June 10, 1997, the Partnership signed a letter of intent
with American Industrial Properties REIT [NYSE: IND] (the
"Trust") contemplating the merger of four real estate
limited partnerships, including the Partnership, into the
Trust. The four real estate limited partnerships are USAA
Real Estate Income Investments I Limited Partnership, USAA
Real Estate Income Investments II Limited Partnership, USAA
Income Properties III Limited Partnership and USAA Income
Properties IV Limited Partnership (collectively, the
"RELPs"). Each of the RELPs is affiliated with USAA Real
Estate Company, which currently owns approximately 13.66% of
the outstanding shares of the Trust.
On July 7, 1997, the Trust signed definitive merger
agreements with each of the RELPs pursuant to which the
RELPs will be merged into the Trust (the "Merger").
According to the Merger Agreement, the Trust will issue an
aggregate of 22,064,147 shares of beneficial interest at
$2.625 per share (for a total value of $57,918,385) in
exchange for the limited partnership interests in the RELPs.
The number of Shares to be issued to each RELP will be equal
to the net asset value for each RELP (as agreed by the Trust
and each RELP) divided by $2.625. The number of Shares to
be received by a Limited Partner in each RELP will be
computed in accordance with such partner's percentage
interest in the RELP. The general partner of each RELP has
waived any right it may have to receive Shares to which it
may be entitled in exchange for its general partnership
interest.
The Merger, which has been approved by the Trust's Board of
Trust Managers and the Board of Directors of each of the
general partners of the RELPs, is subject to due diligence
by both parties and certain other conditions, including
approval by the shareholders of the Trust and the limited
partners of each of the RELPs. Accordingly, there can be no
assurance that the merger will ultimately be consummated.
The Merger is a taxable transaction to the partners in the
RELPs and will be subject to the completion of a joint proxy
statement/prospectus filed on Form S-4 with the Securities
and Exchange Commission. No date has been scheduled for the
shareholder meeting for the Trust or limited partner
meetings for each of the RELPs to vote on the proposed
transaction. Prudential Securities, Inc., on behalf of the
Trust, and Houlihan, Lokey, Howard & Zukin on behalf of the
RELPs, have rendered opinions to their respective parties
that the transaction is fair from a financial point of view.
<PAGE>
The Partnership has a 7.275% interest in the Combined
Capital Resources Joint Venture (the "joint venture"), the
owner of Sequoia Plaza I. The joint venture interest will
not be included in the Merger but will be purchased by USAA
Real Estate Company ("Realco") or an affiliate of Realco for
$2.25 million if the Merger is approved by the Limited
Partners of the Partnership. This purchase price was
determined using the January 1, 1997 external appraisal of
Sequoia Plaza I at a total value of $29.7 million and
adjusted by an appreciation factor.
10. Subsequent Event
On August 20, 1997, a purported class action lawsuit (the
"Lawsuit"), which was filed in the Superior Court of the
State of Arizona, was served upon USAA Real Estate Company,
USAA Properties I, Inc. ("RELP GP I"), USAA Properties II,
Inc. ("RELP GP II"), USAA Properties III, Inc. ("RELP GP
III"), USAA Properties IV, Inc. ("RELP GP IV", together with
RELP GP I, RELP GP II and RELP GP III, the "RELP GPs"),
certain other affiliated entities and the individual members
of the boards of directors of each of the RELP GPs. The
Trust was also named as a defendant. The suit alleges among
other things, breaches of fiduciary duty in connection with
the transactions contemplated by merger agreements entered
into by the RELPS and the Trust, dated as of June 30, 1997,
whereby each RELP would be merged with and into the Trust.
The Lawsuit seeks, among other things, to enjoin the
consummation of the Merger and damages, including attorneys'
fees and expenses. The defendants believe that the
plantiffs' claims are without merit and intend to defend
vigorously against the Lawsuit.
<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,
1997 and 1996 and the related statements of income, partners'
equity, and cash flows for each of the years in the three-year
period ended June 30, 1997. 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, 1997 and 1996, and the results of its operations and
its cash flows for each of the years in the three-year period
ended June 30, 1997, in conformity with generally accepted
accounting principles.
/s/KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
San Antonio, Texas
July 25, 1997, except for
Note 10 as to which the
date is August 20, 1997
<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 General Partner
of Registrant
The General Partner of the Partnership is USAA Investors
II, Inc., a Texas corporation.
As of June 30, 1997, 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 -
Finance and Administration
/Treasurer
S. Wayne Peacock Vice President -
Portfolio Management
Susan T. Wallace Vice President -
Dispositions and
Co-Investments
David A. Rosales Assistant Vice President -
Controller
David M. Holmes Assistant Vice President -
Capital Investments
All of the foregoing directors and executive officers
have been elected to serve one-year terms until the annual
meeting of the General Partner.
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.
<PAGE>
The age and business experience of each of the directors
and executive officers of the General Partner is as follows:
Edward B. Kelley, 57, 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 Degree in Finance in
1964 and was awarded a Master of Business Administration Degree,
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; past 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; and past
member of the Board of Directors of the San Antonio Economic
Development Foundation. Mr. Kelley is a member of the Board of
Directors and Executive Committee as well as the President of the
Alamo Area Council of Boy Scouts of America; 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
Board of Trustees for the United Way of San Antonio and Bexar
County; and a member of the Board of Directors of the American
Industrial Properties REIT (AIP); member of the Board of the San
Antonio Sports Foundation; past Board member of the Baptist
Memorial Hospital System, La Quinta Motor Inns and Laredo
National Bank.
<PAGE>
T. Patrick Duncan, 47, 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 Degree 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 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 on the Board
of Trustees and is Chairman of the Finance Committee of the
Daughters of Charity; and Board member of the North San Antonio
Chamber of Commerce, as well as Chairman of its Governmental
Affairs Council. Mr. Duncan is a Board member of Meridian
Industrial Trust and American Industrial Properties REIT, two
public REITs traded on the New York Stock Exchange. Mr. Duncan
serves on various committees of these two entities.
Randal R. Seewald, 44, 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., Quorum Real
Estate Services Corporation, 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 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, the San Antonio Bar Association, and the American
Corporate Counsel Association.
<PAGE>
Martha J. Barrow, 49, is Vice President, Finance and
Administration, 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
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 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 in the state of Texas and is a member of the Texas
Society of Certified Public Accountants and the American
Institute of Certified Public Accounts. She is a license holder
for Securities Registration Series 7, Series 63, and Series 24.
Ms. Barrow holds a Bachelor of Business Administration in
Accounting from Pan American University and an Master of Business
Administration from St. Mary's University. She is a member of
the National Association of Real Estate Investment Managers
(NAREIM), the National Council of Real Estate Investment
Fiduciaries (NCREIF), and the American Real Estate Society
(ARES).
S. Wayne Peacock, 38, 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 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 degree in
Economics. Mr. Peacock is a Certified Commercial Investment
Manager (CCIM). He holds memberships in the San Antonio Board of
Realtors and CCIM. He is active with the Alamo Council of Boy
Scouts of America.
Susan T. Wallace, 43, is Vice President, Dispositions and
Co-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, the University
<PAGE>
Cincinnati and earned her Bachelor of Business Administration
degree from the University of the Incarnate Word in San Antonio,
Texas. 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. Ms. Wallace serves on the
Board of Governors for the Affordable Housing Investors Council.
David A. Rosales, 40, 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 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 memberships in the National
Association of Real Estate Companies and the National Council of
Real Estate Investments Fiduciaries. He is the past Chairman of
the Board as well as a current Board member of Communities in
Schools-San Antonio, Inc.
David M. Holmes, 37, is Assistant Vice President,
Capital 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., and USAA Real Estate-Midwest, Inc. All
of the previously named companies are affiliates of the General
Partner. Mr. Holmes joined USAA in May 1985. Prior to joining
USAA, Mr. Holmes was a tax consultant for Touche Ross & Company
in San Antonio. He is a 1982 graduate of Trinity University, San
Antonio, Texas, where he received a Bachelor of Business
Administration with a concentration in Accounting and Finance and
is a Certified Public Accountant. He has served on the Board of
Directors of Big Brothers and Sisters of San Antonio and as a
member of the Finance Committee of the San Antonio Public
Library.
<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) or (c). Copies of these
pages are attached hereto as Exhibit 99.b and incorporated herein
by reference. Cash distributions of $105,549 were paid to the
General Partner during the year ended June 30, 1997.
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, 6,681 Units of 24.6%
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).
<PAGE>
(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 other than
that of the potential merger of the Partnership with AIP as
discussed in Item 1.
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.
Through January 1995, the Partnership had funds
invested in USAA Mutual Fund, Inc. and earned interest
thereon at market rates.
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.
<PAGE>
A summary of transactions with affiliates follows
for the fiscal years ended June 30, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Reimbursement Management Lease Interest
of Expenses (1) Fees Commissions Income Total
<S> <C> <C> <C> <C> <C>
USAA Mutual
Fund, Inc.:
1997 $ -- -- -- -- --
1996 -- -- -- -- --
1995 -- -- -- (316) (316)
USAA Real Estate
Company:
1997 78,288 -- -- -- 78,288
1996 71,029 -- -- -- 71,029
1995 89,155 -- -- -- 89,155
Quorum Real Estate
Services Corporation:
1997 3,255 12,496 39,908 -- 55,659
1996 3,016 12,110 12,444 -- 27,570
1995 2,823 12,299 -- -- 15,122
(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.
</TABLE>
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules 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, 1997
and 1996
Statements of Income for the years
ended June 30, 1997, 1996 and 1995
Statements of Partners' Equity for the
years ended June 30, 1997, 1996 and 1995
Statements of Cash Flows for the years
ended June 30, 1997, 1996 and 1995
Notes to Financial Statements
Independent Auditors' Report
2. Financial Statement Schedule
Real Estate and Accumulated Depreciation
as of June 30, 1997 (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), Regis. 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) Regis.
No. 33-16479. Filed herewith.
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) Regis. No. 33-16479. Filed herewith.
Item 14.(b) Reports filed on Form 8-K
A Current Report on Form 8-K was filed June 13,
1997 regarding the agreement signed between the Partnership
and American Industrial Properties REIT (the "Trust")
contemplating a merger of the Partnership into the Trust.
<PAGE>
<TABLE>
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP SCHEDULE III
Real Estate and Accumulated Depreciation
June 30, 1997
<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 Buildings; & 1996
Manufacturing and
distribution facility;
Elk Grove Village,
Illinois $ 1,800,000 3,270,910 1,819,531 --
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 1,863,911 --
<CAPTION>
Gross Amount at Which
Carried at Close of
Period
Buildings Total Investment Accumulated
Year of Date and Properties Depreciation
Description Construction Acquired Land Improvements (2)(5) (1)(3)
<S> <C> <C> <C> <C> <C> <C>
Continental Plastic 1963, 1969, April 21, 1989
Containers Buildings; & 1996
Manufacturing and
Distribution facility;
Elk Grove Village,
Illinois $ 1,800,000 5,090,441 6,890,441 1,003,879
Bowater Communication 1989 July 24, 1989
Papers Building;
industrial Warehouse;
Lakeland, Florida 476,850 3,822,730 4,299,580 1,008,259
$ 2,276,850 8,913,171 11,190,021 2,012,138
<PAGE>
SCHEDULE III (continued)
<CAPTION>
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, 1994 $ 9,429,355
Additions during period-improvements 64,685
Balance at June 30, 1995 9,494,040
Additions during period-improvements 1,696,823
Balance at June 30, 1996 11,190,863
Deductions during period (842)
Balance at June 30, 1997 $ 11,190,021
(3) Reconciliation of accumulated depreciation:
Balance at June 30, 1994 $ 1,195,060
Additions during period-depreciation 239,039
Balance at June 30, 1995 1,434,099
Additions during period-depreciation 262,935
Balance at June 30, 1996 1,697,034
Additions during period-depreciation 315,104
Balance at June 30, 1997 $ 2,012,138
(4) The aggregate cost of real estate owned by the Partnership at June 30, 1997 for Federal
Income Tax Purposes is $11,190,021.
(5) During fiscal 1996, approximately 45,200 square feet of additional leasable area was added
to the Continental Plastic Buildings.
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Partners
USAA Real Estate Income Investments II Limited Partnership:
Under date of July 25, 1997, except for Note 10 as to which the
date is August 20, 1997, we reported on the balance sheets of
USAA Real Estate Income Investments II Limited Partnership as of
June 30, 1997 and 1996, and the related statements of income,
partners' equity, and cash flows for each of the years in the
three-year period ended June 30, 1997. 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
July 25, 1997, except for
Note 10 as to which the date
is August 20, 1997
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, USAA REAL ESTATE INCOME
INVESTMENTS II LIMITED PARTNERSHIP has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized:
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
(Registrant)
By: USAA INVESTORS II, INC.,
General Partner
By:/s/Edward B. Kelley
Edward B. Kelley
Chairman, President,
Chief Operating Officer
and Director
Date: September 23, 1997
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 Date: September 23, 1997
Edward B. Kelley
Director, Chairman of the Board,
President and Chief Operating Officer
of the General Partner
/s/T. Patrick Duncan Date: September 23, 1997
T. Patrick Duncan
Director, Vice Chairman,
Senior Vice President - Real Estate
Operations of the General Partner
/s/Randal R. Seewald Date: September 23, 1997
Randal R. Seewald
Director, Vice President,
Secretary and Legal Counsel
of the General Partner
<PAGE>
USAA REAL ESTATE INCOME INVESTMENTS II, LIMITED PARTNERSHIP
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
No. Description Page
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), Regis. 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) Regis.
No. 33-16479. Filed herewith.
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) Regis. No. 33-16479. Filed herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 882,180
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 11,190,021
<DEPRECIATION> 2,012,138
<TOTAL-ASSETS> 12,532,387
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 12,386,211
<TOTAL-LIABILITY-AND-EQUITY> 12,532,387
<SALES> 0
<TOTAL-REVENUES> 1,403,483
<CGS> 0
<TOTAL-COSTS> 411,785
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,019,524
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,019,524
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,019,524
<EPS-PRIMARY> 33.81
<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
<PAGE>
items of deduction or loss for that taxable year. If, however,
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.
<PAGE>
"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
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)
(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.
<PAGE>
(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 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
<PAGE>
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 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
<PAGE>
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.
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
<PAGE>
"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 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."
<PAGE>
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 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;
<PAGE>
(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;
(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
<PAGE>
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 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.
<PAGE>
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.
