<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1998 or
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[ ] 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
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Commission file number 0-17876
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Wells Real Estate Fund II-OW
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(Exact name of registrant as specified in its charter)
Georgia 58-1754703
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3885 Holcomb Bridge Road Norcross, Georgia 30092
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 449-7800 Securities
registered pursuant to Section 12 (b) of the Act:
Title of each class Name of exchange on which registered
NONE NONE
Securities registered pursuant to Section 12 (g) of the Act:
CLASS A UNITS
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(Title of Class)
CLASS B UNITS
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(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
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Aggregate market value of the voting stock held by non-affiliates:
Not Applicable
<PAGE>
PART I
ITEM 1. BUSINESS
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General
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Wells Real Estate Fund II-OW (the "Partnership") is a Georgia public limited
partnership having Leo F. Wells, III and Wells Capital, Inc., a non-public
Georgia limited partnership, as General Partners. The Partnership was formed on
October 13, 1987, for the purpose of acquiring, developing, constructing,
owning, operating, improving, leasing and otherwise managing for investment
purposes income-producing commercial or industrial properties.
On November 6, 1987, the Partnership commenced a public offering of its limited
partnership units pursuant to a Registration Statement filed on Form S-11 under
the Securities Act of 1933. The Partnership terminated its offering on
September 7, 1988, and received gross proceeds of $1,922,000 representing
subscriptions from 219 Limited Partners, composed of two classes of limited
partnership interests, Class A and Class B limited partnership units.
The Partnership owns equity interests in properties through its ownership in the
following joint ventures: (i) Fund II-Fund II-OW Joint Venture, a joint venture
between the Partnership and Wells Real Estate Fund II (the "Fund II-Fund II-OW
Joint Venture"); (ii) Fund II-Fund III Joint Venture, a joint venture between
the Fund II-Fund II-OW Joint Venture and Wells Real Estate Fund III, L.P. (the
"Fund II-Fund III Joint Venture"); (iii) Fund II-III-VI-VII Associates, a joint
venture among the Fund II-Fund III Joint Venture, Wells Real Estate Fund VI,
L.P., and Wells Real Estate Fund VII, L.P. (the "Fund II, III, VI, VII Joint
Venture"); (iv) Fund I-Fund II Joint Venture, a joint venture between the Fund
II-Fund II-OW Joint Venture and Wells Real Estate Fund I ("the Tucker Joint
Venture"); and (v) Fund I, II, II-OW, VI, VII Associates, a joint venture among
Wells Real Estate Fund I, the Fund II-Fund II-OW Joint Venture, Wells Real
Estate Fund VI, L.P., and Wells Real Estate Fund VII, L.P. (the "Fund I, II, II-
OW, VI, VII Joint Venture").
As of December 31, 1998 the Partnership owned interests in the following
properties through its ownership of the foregoing joint ventures: (i) a two-
story office building located in Charlotte, North Carolina ("First Union at
Charlotte"); (ii) a four-story office building located in metropolitan Houston,
Texas (the "Atrium"); (iii) a restaurant located in Fulton County, Georgia ("the
Brookwood Grill"); (iv) an office/retail center currently being developed in
Fulton County, Georgia ("Holcomb Bridge Road"); (v) a retail shopping and
commercial office complex located in Tucker, Georgia ("Heritage Place at
Tucker"); and (vi) a shopping center located in Cherokee County, Georgia
("Cherokee Commons"). All of the foregoing properties were acquired on an all
cash basis.
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Employees
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The Partnership has no direct employees. The employees of Wells Capital, Inc.,
a General Partner of the Partnership, perform a full range of real estate
services including leasing and property management, accounting, asset management
and investor relations for the Partnership. See Item 11 - "Compensation of
General Partner and Affiliates" - for a summary of the fees paid to the General
Partners and their affiliates during the fiscal year ended December 31, 1998.
Insurance
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Wells Management Company, Inc., an affiliate of the General Partner, carries
comprehensive liability and extended coverage with respect to all the properties
owned directly or indirectly by the Partnership. In the opinion of management
of the registrant, the properties are adequately insured.
Competition
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The Partnership will experience competition for tenants from owners and managers
of competing projects which may include the General Partners and their
affiliates. As a result, the Partnership may be required to provide free rent,
reduced charges for tenant improvements and other inducements, all of which may
have an adverse impact on results of operations. At the time the Partnership
elects to dispose of its properties, the Partnership will also be in competition
with sellers of similar properties to locate suitable purchasers for its
properties.
ITEM 2. PROPERTIES
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The Partnership owns all of its properties through a joint venture (the "Fund
II-Fund II-OW Joint Venture") formed on March 1, 1988, between the Partnership
and Wells Real Estate Fund II ("Well Fund II"). Wells Fund II is a Georgia
public limited partnership affiliated with the Partnership through common
general partners. The investment objectives of Wells Fund II are substantially
identical to those of the Partnership. As of December 31, 1998, the
Partnership's equity interest in the Fund II-Fund II-OW Joint Venture was
approximately 5% and the equity interest of Wells Fund II was approximately 95%.
The Partnership does not have control over the operations of the joint ventures;
however, it does exercise significant influence. Accordingly, investment in
joint ventures is recorded on the equity method.
Of the six properties owned by the joint venture, three are retail shopping
centers, two are office buildings and one is a restaurant. As of December 31,
1998, these properties were 97% occupied, up from 96% at December 31, 1997, and
from 64% at December 31, 1996.
The following table shows lease expirations during each of the next ten years
for all leases as of December 31, 1998, assuming no exercise of renewal options
or termination rights:
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<TABLE>
<CAPTION>
Partnership's Percentage of
Share of Total
Annualized Annualized Annualized
Gross Base Gross Base Percentage of Gross Base
Year of Lease Number of Square Feet Rent (1) Rent (1) Total Square Rent
Expiration Leases Expiring Expiring Expiring Expiring Feet Expiring Expiring
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999 14 22,406 328,600 68,518 6.33% 7.13%
2000 13 31,438 457,242 111,910 8.88% 9.92%
2001(2) 21 114,193 1,165,351 562,627 32.24% 25.29%
2002(3) 15 166,809 2,351,468 656,748 47.10% 51.03%
2003 2 7,358 96,483 22,963 2.08% 2.09%
2004 2 2,416 39,848 10,107 0.68% 0.86%
2005 0 0 0 0 0.00% 0.00%
2006 1 5,935 122,294 9,661 1.68% 2.65%
2007 1 3,600 46,793 13,570 1.02% 1.02%
2008
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69 354,155 4,608,079 1,456,105 100.00% 100.00%
</TABLE>
(1) Average monthly gross rent over the life of the lease, annualized.
(2) Expiration of First Union Bank with 70,752 square feet at the First Union
project.
(3) Expiration of Boeing Company lease with 119,040 square feet at the Atrium.
The following describes the properties in which the Partnership owns an interest
as of December 31, 1997:
The First Union Property/Fund II-Fund II-OW Joint Venture
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On May 9, 1988, the Fund II-Fund II-OW Joint Venture acquired a two-story
building containing approximately 70,752 net leasable square feet, located on a
9.54 acre tract of land located in Charlotte, Mecklenburg County, North Carolina
(the "First Union Property") for a purchase price of $8,550,000.
On May 1, 1994, First Union Bank assumed occupancy of the First Union Property
under a lease which expires April 30, 2001. The principal terms of the lease
provide for First Union's sole tenancy of the project as a regional operations
center for the initial term of seven years. Because First Union Bank invested
approximately $1 million on tenant improvements at the First Union Property, a
lower rental rate was accepted for the first five years of the lease term.
The annual base rent during the initial term is $412,705 payable in equal
monthly installments of $34,392.08 during the first two years, annual base rent
of $454,651 payable in equal monthly installments of $37,887.58 during the third
year, annual base rent of $489,650 payable in equal monthly installments of
$40,804.17 during the fourth year and annual base rent of $524,625
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payable in equal monthly installments of $43,718.75 during the fifth year.
Rental rates during the remaining two years of the lease term will be determined
by market rates.
The occupancy rates at the Charlotte Property as of December 31 were 100% in
1998 1997, and 1996.
The average effective annual rental per square foot at the First Union Property
was $6.49 for 1998 and 1997, $6.51 for 1996, $5.83 for 1995, $3.88 for 1994, and
$28.12 for 1993. The higher effective annual rental rate for 1993 is due to the
payment of $425,000 in lease termination fees by IBM.
The Atrium/Fund II - Fund III Joint Venture
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On April 3, 1989, the Fund II-Fund II-OW Joint Venture formed a joint venture
(the "Fund II-Fund III Joint Venture") with Wells Real Estate Fund III, L.P.
("Wells Fund III"), a public Georgia limited partnership affiliated with the
Partnership through common general partners. The investment objectives of Wells
Fund III are substantially identical to those of the Partnership.
In April 1989, the Fund II-Fund III Joint Venture acquired a four-story office
building located on a 5.6 acre tract of land adjacent to the Johnson Space
Center in metropolitan Houston, in the City of Nassau Bay, Harris County, Texas,
know as "The Atrium at Nassau Bay" (the "Atrium").
The funds used by the Fund II-Fund III Joint Venture to acquire the Atrium were
derived from capital contributions made to the Fund II-Fund III Joint Venture by
the Fund II-Fund II-OW Joint Venture and Wells Fund III in the amounts of
$8,327,856 and $2,538,000, respectively, for total initial capital contributions
of $10,865,856. As of December 31, 1997, the Fund II-Fund II-OW Joint Venture
and Wells Fund III had made total capital contributions to the Fund II-Fund III
Joint Venture of approximately $8,330,000 and $4,448,000, respectively, for the
acquisition and development of the Atrium.
The Atrium was first occupied in 1987 and contains approximately 119,000 net
leasable square feet. Each floor of the Atrium was originally under a separate
lease to Lockheed Engineering and Science Company, Inc., a wholly-owned
subsidiary of the Lockheed Company, each of which leases had terms of
approximately eight years and expired June 30, 1996, and upon which date
Lockheed vacated the property.
On March 3, 1997, a lease was signed with The Boeing Company for the entire
Atrium building. The lease is for a period of five years with an option to
renew for an additional five year term. The rental rate for the first three
years of the lease term is $12.25 per square foot and $12.50 per square foot for
the final two years of initial lease term. The rate for the optional five year
term will be determined based upon then current market rates. Upon 150 day
prior written notice, Boeing has the right to cancel its lease in the event that
NASA or another prime contractor were to cancel or substantially reduce its
contract. In addition, there is a no-cause cancellation provision at the end of
the first three year period. If this no-cause cancellation is exercised, Boeing
would be required to
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pay unamortized, up-front tenant improvement costs. The lease also provides that
tenant will pay certain operating expenses in excess of $5.50 per square foot on
an annual basis.
Boeing began the move-in phase of its occupancy on April 15, 1997, and occupied
The Atrium and began paying rent on May 15, 1997. The total cost of completing
the required tenant improvements and outside broker commissions of approximately
$1.4 million was funded out of reserves and cash flows of the Partnership, Wells
Fund II-OW and Wells Fund III. As of December 31, 1997, the Partnership had
contributed approximately $21,744, Wells Fund II had contributed approximately
$387,752, Wells Fund III had contributed approximately $659,810, and the Fund II
Fund III Joint Venture had contributed $330,694 to fund the tenant improvements
and outside broker commissions required. The ownership percentages in The
Atrium have been adjusted as a result of these additional capital contributions,
and as of December 31, 1998, the Fund II - Fund II-OW Joint Venture holds an
equity interest in The Atrium of approximately 61%, and Wells Fund III holds an
equity interest of approximately 39% in the project.
The Brookwood Grill Property/Fund II - Fund III Joint Venture
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On January 31, 1990, the Fund II-Fund II-OW Joint Venture acquired a 5.8 acre
tract of undeveloped real property at the intersection of Warsaw Road and
Holcomb Bridge Road in Roswell, Fulton County, Georgia (the "Holcomb Bridge Road
Property"). The Fund II - Fund II-OW Joint Venture paid $1,848,561, including
acquisition expenses, for the 5.8 acre tract of undeveloped property.
On September 20, 1991, the Fund II-Fund II-OW Joint Venture contributed
approximately 1.5 acres of the Holcomb Bridge Road Property (the "Brookwood
Grill Property"), along with its interest as landlord under the lease agreement
referred to below, as a capital contribution to the Fund II-Fund III Joint
Venture. As of September 20, 1991, the Fund II-Fund II-OW Joint Venture had
expended approximately $2,128,000 for the land acquisition and development of
the Brookwood Grill Property.
As of September 20, 1991, a lease agreement was entered into with the Brookwood
Grill of Roswell, Inc. for the development of approximately 1.5 acres and the
construction of a 7,440 square foot restaurant. This Roswell site, which opened
early in March 1992, is the second location in the Atlanta area for what is
anticipated as a southeastern chain of restaurants similar in concept to
Houston's, Ruby Tuesday, and Friday's. This chain is principally owned by David
Rowe, an Atlanta real estate developer of Kroger shopping centers, and several
operating partners formerly with Houston's. The terms of the lease call for an
initial term of 9 years and 11 months, with two additional 10-year option
periods. The agreement calls for a base rental of $217,006 per year for Years 1
through 5, with a 15% increase over the remainder of the initial term. Rental
rates for all option periods will be based on the prevailing market values and
rates for those periods. The Fund II-Fund III Joint Venture has expended
approximately $1,100,000 for the development and construction of the restaurant
building together with parking areas, driveways, landscaping and other
improvements. In addition to the base rent described above, the tenant is
required to pay "additional rent" in amounts equal to a 12% per annum return on
all amounts expended for such improvements.
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The occupancy rate for the Brookwood Grill, a sole tenant, was 100% for 1998,
1997, 1996, 1995, and 1994. The average effective rental per square foot at the
Brookwood Grill is $30.26 for 1998 and 1997, $30.29 for 1996, $30.21 for 1995,
1994 and 1993.
As of December 31, 1998, the Fund II-Fund II-OW Joint Venture and Wells Fund III
had made total contributions to the Fund II-Fund III Joint Venture of
approximately $2,128,000 and $1,330,000, respectively, for the acquisition and
development of the Brookwood Grill. The Fund II-Fund II-OW Joint Venture holds
an approximately 62% equity interest in the Brookwood Grill Property, and Wells
Fund III holds an approximately 38% equity interest in the project.
On January 10, 1995, the remaining 4.3 undeveloped acres of land comprising the
Holcomb Bridge Road Property was contributed to a new joint venture, Fund II,
III, VI, and VII Associates by Fund II-Fund III Joint Venture. This property is
described below.
Holcomb Bridge Road Property/Fund II, III, VI and VII Associates
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On January 10, 1995, Fund II-Fund III Joint Venture, Wells Real Estate Fund VI ,
L.P. ("Wells Fund VI"), a Georgia public limited partnership having Leo F.
Wells, III and Wells Partners, L.P., a Georgia limited partnership, as general
partners, and Wells Real Estate Fund VII, L.P. ("Wells Fund VII"), a Georgia
public limited partnership having Leo F. Wells, III and Wells Partners, L.P., a
Georgia limited partnership, as general partners, entered into a Joint Venture
Agreement known as Fund II, III, VI and VII Associates ("Fund II, III, VI and
VII Joint Venture"). Wells Partners, L.P. is a private limited partnership
having Wells Capital, Inc., a General Partner of the Partnership, as its sole
general partner. The investment objectives of Wells Fund VI and Wells Fund VII
are substantially identical to those of the Partnership.
In January 1995, the Fund II-Fund III Joint Venture contributed to the Fund II-
III-VI-VII Joint Venture approximately 4.3 acres of land at the intersection of
Warsaw Road and Holcomb Bridge Road in Roswell, Fulton County, Georgia (the
"Holcomb Bridge Road Property") including land improvements. Development is
substantially complete on two buildings containing a total of approximately
49,500 square feet. Fifteen tenants occupied the Holcomb Bridge Road Property
as of December 31, 1998 and 1997, for an occupancy rate of 94% and 63% for
1996. The average effective annual rental was $17.41 for 1998, $13.71 for 1997
and $9.87 per square foot for 1996.
As of December 31, 1998, Fund II and Fund III Joint Venture had contributed
$1,729,116 in land and improvements for an equity interest of approximately
24.1%, Wells Fund VI had contributed $1,817,179 for an equity interest of
approximately 26.9%, and Wells Fund VII had contributed $3,496,604 for an
equity interest of approximately 49.0%. The total cost to develop the Holcomb
Bridge Road Property is currently estimated to be approximately $5,478,649. It
The Partnership is not obligated to provide any additional funding for the
Holcomb Bridge Road Property.
7
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Tucker Property/Fund I - Fund II Joint Venture
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The Tucker Property consists of a retail shopping center and a commercial office
building complex located in Tucker, DeKalb County, Georgia (the "Tucker
Property"). The retail shopping center at the Tucker Property contains
approximately 29,858 net leasable square feet. The commercial office space at
the Tucker Property, which is divided into seven separate buildings, contains
approximately 67,465 net leasable square feet.
On January 9, 1987, the Partnership acquired an interest in the Tucker Property
which was acquired by a joint venture (the "Tucker Joint Venture") originally
between the Partnership and Wells Real Estate Fund I ("Wells Fund I"). Wells
Fund I is a Georgia public limited partnership affiliated with the Partnership
through common general partners. The investment objectives of Wells Fund I are
substantially identical to those of the Partnership. Upon the formation of the
Fund II-Fund II-OW Joint Venture in March 1988, the Partnership contributed its
joint venture interest in the Tucker Joint Venture to the Fund II-Fund II-OW
Joint Venture as a part of its capital contribution. On January 1, 1991, the
Cherokee Joint Venture, which is defined below, was merged into the Tucker Joint
Venture forming a new joint venture (the "Tucker-Cherokee Joint Venture"). As
described below, the Cherokee Joint Venture was also a joint venture between the
Fund II-Fund II-OW Joint Venture and Wells Fund I. Under the terms of the
Amended and Restated Joint Venture Agreement of Fund I and Fund II Tucker-
Cherokee, the percentage interest of the Fund II-Fund II-OW Joint Venture in the
Tucker Project remained unchanged as a result of the merger of the Tucker Joint
Venture into the Tucker-Cherokee Joint Venture.
On August 1, 1995, Wells Fund I and the Fund II-Fund-II-OW Joint Venture entered
into another amendment to effect the contribution of the Cherokee Project to the
Fund I, II, II-OW, VI, VII Joint Venture, as described below. As a result, the
name of the joint venture owning the Tucker Property was changed back to "Fund I
and Fund II Tucker", and is therefore no longer merged with the Cherokee Joint
Venture. The Partnership's percentage interest in the Tucker Project remained
unchanged as a result of the transaction.
Both Wells Fund I and the Fund II-Fund II-OW Joint Venture have funded the cost
of completing the Tucker Property through capital contributions which have been
paid as progressive stages of construction were completed. As of December 31,
1998, Wells Fund I had contributed a total of $6,399,854, and the Fund II-Fund
II-OW Joint Venture had contributed a total of $4,826,015 for the acquisition
and development of the Tucker Property. As of December 31, 1998, Wells Fund I
had an approximately 55% equity interest in the Tucker Property and the Fund II-
Fund II-OW Joint Venture had an approximately 45% equity interest in the Tucker
Property. As of December 31, 1998, the Tucker Property was 94% occupied by 35
tenants.
There are no tenants in the project occupying ten percent or more of the
rentable square footage. The principal businesses, occupations, and professions
carried on in the building are typical retail shopping/commercial office
services.
The occupancy rate at the Tucker Property was 94% in 1998, 85% in 1997, 77% in
1996, 83% in 1995, 96% in 1994, and 89% in 1993.
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The average effective annual rental per square foot at the Tucker Property
was$12.76 for 1998, $11.08 for 1997, $13.78 for 1996, $12.61 for 1995, $12.63
for 1994, and $11.37 for 1993.
Cherokee Property/Fund I, II, II-OW, VI, VII Joint Venture
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The Cherokee Property consists of a retail shopping center known as "Cherokee
Commons Shopping Center" located in metropolitan Atlanta, Cherokee County,
Georgia (the "Cherokee Property"). The Cherokee Property consists of
approximately 103,755 net leasable square feet.
On June 30, 1987, the Partnership acquired an interest in the Cherokee Property
through a joint venture (the "Cherokee Joint Venture") between the Wells Fund I
and Wells Fund II-Fund II-OW Joint Venture. On January 1, 1991, the Cherokee
Joint Venture merged with the Tucker Joint Venture to form the Tucker-Cherokee
Joint Venture. As described above, the Tucker Joint Venture was also a joint
venture between the Wells Fund I and the Fund II-Fund II-OW Joint Venture.
Under the terms of the Amended and Restated Joint Venture Agreement of Fund I
and Fund II Tucker-Cherokee, the Fund II Fund II-OW Joint Venture's percentage
interest in the Cherokee Property remained unchanged as a result of the merger
of the Cherokee Joint Venture into the Tucker-Cherokee Joint Venture.
On August 1, 1995, the Fund II-Fund II-OW Joint Venture, Wells Fund I, Wells
Real Estate Fund VI, L.P. ("Wells Fund VI"), a Georgia public limited
partnership having Leo F. Wells, III and Wells Partners, L.P., a Georgia limited
partnership, as general partners, and Wells Real Estate Fund VII, L.P. ("Wells
Fund VII"), a Georgia public limited partnership having Leo F. Wells, III and
Wells Partners, L.P., a Georgia limited partnership, as general partners entered
into a joint venture agreement known as Fund I, II, II-OW, VI, VII Associates
(the "Fund I, II, II-OW, VI, VII Joint Venture"), which was formed to own and
operate the Cherokee Project. Wells Partners, L.P. is a private limited
partnership having Wells Capital, Inc., a General Partner, as its sole general
partner. The investment objectives of Wells Fund I, Wells Fund VI and Wells
Fund VII are substantially identical to those of the Partnership.
As of December 31, 1998, Wells Fund I had contributed property with a book value
of $2,139,900, the Fund II-Fund II-OW Joint Venture had contributed property
with a book value of $4,860,100, Wells Fund VI had contributed cash in the
amount of $953,798 and Wells Fund VII had contributed cash in the amount of
$953,798 to the Fund I, II, II-OW, VI, VII Joint Venture. As of December 31,
1998, the equity interests in the Fund I, II, II-OW, VI, VII Joint Venture were
approximately as follows: Wells Fund I - 24%, Fund II-Fund II-OW Joint Venture
- - 54%, Wells Fund VI - 11% and Wells Fund VII - 11%.
The Cherokee Property is anchored by a 67,115 square foot lease with Kroger
Food/Drug which expires in 2011. Kroger's original lease was for 45,528 square
feet. In 1994, Kroger expanded to the current 67,115 square feet which is
approximately 65% of the total rentable square feet in the property. Kroger, a
retail grocery chain, is the only tenant occupying ten percent or more of the
rentable square footage. The other tenants in the shopping center provide
typical retail shopping services.
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The Kroger lease provides for an annual rent of $392,915 which increased to
$589,102 on August 16, 1995 due to the expansion from 45,528 square feet to
67,115 square feet. The lease expires March 31, 2011 with Kroger entitled to
five successive renewals each for a term of five years at the same rental rate
as the original lease.
The occupancy rate at the Cherokee Property was 91% in 1998, 94% in 1997, 93% in
1996, 94% in 1995, 91% in 1994, and 89% in 1993.
The average effective annual rental per square foot at the Cherokee Property was
$8.78 for 1998, $8.49 for 1997, $8.59 for 1996, $7.50 for 1995, $5.33 for 1994,
and $6.47 for 1993.
ITEM 3. LEGAL PROCEEDINGS
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There were no material pending legal proceedings or proceedings known to be
contemplated by governmental authorities involving the Partnership during 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of the Limited Partners during 1998.
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PART II
ITEM 5. MARKET FOR PARTNERSHIP UNITS AND RELATED SECURITY HOLDER MATTERS
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As of February 28, 1999, the Partnership had 6,062 outstanding Class A Units
held by a total of 181 Limited Partners and 1,626 outstanding Class B Units held
by a total of 41 Limited Partners. The capital contribution per unit is $250.
There is no established public trading market for the Partnership's limited
partnership units, and it is not anticipated that a public trading market for
the units will develop. Under the Partnership Agreement, the General Partners
have the right to prohibit transfers of units.
The General Partners have estimated the investment value of properties held by
the Partnership as of December 31, 1998 to be $154.48 per Class A Unit and
$322.98 per Class B Unit based on market conditions existing in early December,
1998. This value was confirmed as reasonable by an independent MAI appraiser,
David L. Beal Company, although no actual MAI appraisal was performed due to the
inordinate expense involved with such an undertaking. The valuation does not
include any fractional interest valuation.
Class A Unit holders are entitled to an annual 8% non-cumulative distribution
preference over Class B Unit holders as to cash distributions from Net Cash from
Operations, defined in the Partnership Agreement as Cash Flow, less adequate
cash reserves for other obligations of the Partnership for which there is no
provision, but are initially allocated none of the depreciation, amortization,
cost recovery and interest expense. These items are allocated to Class B Unit
holders until their capital account balances have been reduced to zero.
Cash distributions from Net Cash from Operations to the Limited Partners is
distributed on a quarterly basis unless Limited Partners elect to have their
cash distributions paid monthly. Cash distributions made to the Limited
Partners for the two most recent fiscal years were as follows:
<TABLE>
<CAPTION>
Per Class A Per Class A Per Class B
Unit Unit Unit
Distribution for Total Cash Investment Return of Return of
Quarter Ended Distributed Income Capital Capital General Partner
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
March 31, 1997 $ 0 $0.00 $0.00 $0.00 $ 0.00
June 30, 1997 $ 0 $0.00 $0.00 $0.00 $ 0.00
September 30, 1997 $18,444 $3.04 $0.89 $0.00 $ 0.00
December 31, 1997 $18,109 $2.99 $2.99 $0.00 $ 0.00
March 31, 1998 $21,481 $ .41 $3.13 $0.00 $ 0.00
June 30, 1998 $22,621 $3.73 $0.00 $0.00 $ 0.00
September 30, 1998 $21,636 $3.57 $0.00 $0.00 $ 0.00
December 31, 1998 $18,870 $ .00 $3.11 $0.00 $ 0.00
</TABLE>
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The fourth quarter distributions of cash available for distribution were accrued
for accounting purposes in 1998 and were not actually paid until February 1999.
ITEM 6. SELECTED FINANCIAL DATA
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The following sets forth a summary of the selected financial data for the fiscal
years ended December 31, 1998, 1997, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Assets $1,255,377 $1,334,105 $1,379,623 $1,462,240 $1,524,192
Total (Loss) Revenues 5,190 (18,601) 6,273 56,702 28,120
Net (Loss) Income 5,190 (18,601) 6,273 56,452 28,120
Net Income
allocated to
General Partners 0 0 0 0 0
Net (Loss) Income
allocated to Class
A Limited Partners 5,190 (18,601) 68,549 107,511 71,081
Net Loss
allocated to Class
B Limited Partners 0 0 (62,276) (51,059) (42,961)
Net (Loss) Income
per Class A Limited
Partner Unit .86 (3.07) 11.31 17.74 11.73
Net Loss
per Class B Limited
Partner Unit 0 0 (38.30) (31.40) (26.42)
Cash Distribution
per Class A
Limited Partner Unit 13.96 6.03 11.61 17.37 14.02
Cash Distribution
per Class B Limited
Partner Unit 0 0 0 0 0
</TABLE>
Cash distributions per unit were comprised of $13.96 paid from net cash from
operations and $0.00 paid from capital, in 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
- ----------------------------------------------------------------------------
RESULTS OF OPERATION
--------------------
The following discussion and analysis should be read in conjunction with the
selected financial data and the accompanying financial statements of the
Partnership and notes thereto.
12
<PAGE>
This Report contains forward-looking statements, within the meaning of Section
27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of
1934, including discussion and analysis of the financial condition of the
Partnership, anticipated capital expenditures required to complete certain
projects, amounts of cash distributions anticipated to be distributed to Limited
Partners in the future and certain other matters. Readers of this Report should
be aware that there are various factors that could cause actual results to
differ materially from any forward-looking statement made in the Report, which
include construction costs which may exceed estimates, construction delays,
lease-up risks, inability to obtain new tenants upon the expiration of existing
leases, and the potential need to fund tenant improvements or other capital
expenditures out of operating cash flow.
Results of Operations and Changes in Financial Conditions
- ---------------------------------------------------------
General
- -------
As of December 31, 1998, the developed properties owned by the Fund II-Fund II-
OW Joint Venture were 97% occupied, as compared to 64% in 1996, and 96% in 1997
The decrease in the occupied percentages for 1996 compared to 1997 is due to the
vacancy of the Atrium for the last six months of 1996.
Gross revenues of the Partnership were $5,190 for the year ended December 31,
1998 compared to ($18,601) for the year ended December 31, 1997, and $6,273 for
the fiscal year ended December 31, 1996. The decrease in gross revenues for
fiscal year 1997 from fiscal year 1996 is due primarily to the vacancy of the
Atrium for the first four and a half months of 1997 and the lower rental rate
being paid by Boeing Company, the new tenant. All administrative expenses of the
Partnership are incurred at the joint venture level
The Partnership made cash distributions to Limited Partners holding Class A
Units of $13.96 per Unit for fiscal year ended December 31, 1998, $6.03 per Unit
for fiscal year ended December 31, 1997, and $11.61 per Unit for fiscal year
ended December 31, 1996. The Partnership made no cash distributions to Limited
Partners holding Class B Units for fiscal year ended 1998, 1997, or 1996.
13
<PAGE>
Property Operations
- -------------------
As of December 31, 1998, the Partnership's percentage ownership in properties
was as follows: 5.3% in the First Union Property, 3.25% in The Atrium, 3.31% in
the Brookwood Grill Property, 0.79% in the Holcomb Bridge Road Property, 2.38%
in the Tucker Property and 2.90% in the Cherokee Property.
As of December 31, 1998, the Partnership owned interests in the following
properties through the Fund II - Fund II-OW Joint Venture:
First Union Property/Fund II - Fund II-OW Joint Venture
- -------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31
------------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Rental Income $ 458,867 $ 460,920 $ 458,867
------------- ------------- ---------------
Expenses:
Depreciation 367,667 367,667 367,667
Management and
leasing expenses 27,532 27,532 27,532
Other operating expenses 33,287 30,636 36,864
------------- ------------- ---------------
428,486 425,835 432,063
------------- ------------- ---------------
Net income $ 30,381 $ 33,032 $ 28,857
============= ============= ===============
Occupied % 100.00% 100.00% 100.00%
Partnership Ownership % 5.30% 5.30% 5.30%
Cash generated to the
Fund II-Fund II-OW
Joint Venture* $ 467,262 $ 437,023 $ 396,681
Net income generated
to the Fund II-Fund II-OW
Joint Venture* $ 30,381 $ 33,032 $ 28,857
</TABLE>
The Partnership holds a 5% ownership in the Fund II-Fund II-OW Joint Venture.
For more detailed financial information regarding the historical operations of
the First Union at Charlotte Property, refer to the Financial Statements, as of
December 31, 1998, 1997 and 1996, regarding the First Union at Charlotte
Property commencing at page F-44 of this Annual Report on Form 10-K.
14
<PAGE>
Rental income and expenses remained stable for 1998, 1997 and 1996. Cash
generated to the Joint Venture increased for the year ended 1998 due to the
increase in rental income billed to the tenant The lease with First Union is one
in which the tenant is directly responsible for primarily all operational
expenses including real estate taxes.
For comments on the general conditions to which the property may be subject, see
Item 1, Business, page 1. For additional information on the property, tenants,
etc., see Item 2, Properties, page 3.
The Atrium/Fund II-Fund III Joint Venture
- -----------------------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31
------------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Rental Income $ 1,470,144 $ 924,769 $1,048,583
Interest Income 0 2,617 24,188
Other Income 13,280 8,638 0
------------- ------------- ----------
1,483,424 936,024 1,072,771
Expenses:
Depreciation 866,778 795,829 674,479
Management and
leasing expenses 186,102 111,576 71,381
Other operating expenses 713,955 841,456 158,405
------------- ------------- ----------
1,766,835 1,748,861 904,265
------------- ------------- ----------
Net (loss) income $ (283,411) $ (812,837) $ 168,506
============= ============= ==========
Occupied % 100.00% 100.00% 0.00%
Partnership Ownership % 3.25% 3.25% 3.50%
Cash distributed to the
Fund II-Fund II-OW
Joint Venture* $ 405,758 $ 124,481 $ 398,911
Net (loss) income allocated
to the Fund II-Fund II-OW
Joint Venture* $ (173,731) $ (509,625) $ 110,540
</TABLE>
* The Partnership holds a 5% ownership in the Fund II-Fund II-OW Joint Venture.
For allocations to the Partnership, see footnotes in the audited financial
statements.
Rental revenue increased from $924,769 in 1997 to $1,470,144 in 1998 primarily
due to Atrium leased in May 1997. Other income increased in 1998 due to a one-
time adjustment for unused credits on the original tenant build out of The
Atrium and a $5,000 reimbursement for the sale of office systems components
which were unusable by the new tenant. Depreciation and management and leasing
expenses have increased in 1998 compared to 1997 due to the
15
<PAGE>
depreciation of tenant improvements made for the Boeing Company and amortization
of the leasing commission paid to acquire the Boeing lease.
The real estate taxes were $148,006 for 1998, $140,366 for 1997, and $150,105
for 1996.
For comments on the general conditions to which the property may be subject, see
Item 1, Business, page 1. For additional information on the property, tenants,
etc., see Item 2, Properties, page 3.
The Brookwood Grill Property/Fund II - Fund III Joint Venture
- -------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31
------------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Rental Income $ 225,100 $ 225,106 $ 225,359
Equity in Income (Loss) of
Joint Venture 78,791 27,213 (19,378)
------------- ------------- -------------
303,891 252,319 205,981
Expenses:
Depreciation 54,012 54,014 54,014
Management and
leasing expenses 23,349 28,464 27,004
Other operating expenses (24,632) 23,887 109,478
------------- ------------- -------------
52,729 106,365 190,496
------------- ------------- -------------
Net income $ 251,162 $ 145,954 $ 15,485
============= ============= =============
Occupied % 100.00% 100.00% 100.00%
Partnership Ownership %
in the Fund II - Fund III
Joint Venture 3.31% 3.30% 3.30%
Cash distributed to the
Fund II-Fund II-OW
Joint Venture* $ 270,886 $ 190,653 $ 66,498
Income allocated to the
Fund II-Fund II-OW
Joint Venture* $ 156,599 $ 91,002 $ 9,655
</TABLE>
* The Partnership holds a 5% ownership in the Fund II - Fund II-OW Joint
Venture. For allocations to the Partnership, see footnotes in the audited
financial statements.
Although rental income remained relatively stable, total revenues increased for
1998, as compared to 1997, due to the increased equity in income from the Fund
ii, iii, vi, vii Joint
16
<PAGE>
Venture, as the Holcomb Bridge Property become 100% occupied. Operating expenses
decreased in 1998, compared to 1997, due primarily to a change in the rental
agreement of billing water reimbursements to the tenant which will result in the
tenant being charged for a greater share of the total bill and the property had
to reimburse 880.
Real estate taxes were $16,270 for 1998, $25,771 for 1997 and $33,494 for 1996.
It is projected that no additional funding will be required to complete tenant
build-out by the Partnership or Wells Fund VI.
For comments on the general competitive condition to which the property may be
subject, see Item 1, Business, page 2. For additional information on tenants,
etc., refer to Item 2, Properties, page 3.
Holcomb Bridge Road Property/Fund II, III, VI, VII Joint Venture
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended Nine Months Ended
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues:
Rental income $ 862,360 $ 679,268 $ 255,062
Expenses:
Depreciation 376,290 325,974 181,798
Management & leasing expenses 97,701 48,962 28,832
Other operating expenses 60,799 195,567 101,600
----------- ------------- --------------
534,790 570,503 312,230
----------- ------------- --------------
Net income (loss) $ 327,570 $ 108,765 $ (57,168)
=========== ============= ==============
Occupied % 94.% 94.12% 62.90%
Partnership's Ownership % in the
Fund II, III, VI, VII Joint Venture*
.79% .80% .80%
Cash distribution to the
Fund II-Fund III Joint Venture* $ 179,198 $ 109,242 $ 19,494
Net income (loss) allocated to the
Fund II-Fund III Joint Venture* $ 78,791 $ 27,213 $ (19,378)
</TABLE>
*The Partnership holds a 3.30% ownership in the Fund II-Fund III Joint Venture.
17
<PAGE>
Since the Holcomb Bridge Road Property was under construction and not occupied
until first quarter, 1996, comparative income and expense figures for the years
ended December 31, 1997 and 1996, are not available.
Rental income increased in 1998 compared to 1997 due primarily to increased
tenant occupancy late in the 4th quarter. Operating expenses decreased in 1998
compared to 1997, due primarily to decreased property taxes and water/sewer
reimbursement paid by Fulton County Water.
As of December 31, 1998, the Fund II-Fund III Joint Venture contributed
$1,729,116 in land and land improvements for an equity interest of approximately
24.1%, Wells Fund VI had contributed $1,817,179 for an equity interest of
approximately 26.9%, and Wells Fund VII had contributed $3,496,604 for an equity
interest of approximately 49.0% in the Fund II, III, VI, VII Joint Venture. The
total cost to develop the Holcomb Bridge Road Property is currently $5,478,649,
excluding land.
Real estate taxes were $52,162 for 1998, $85,230 for 1997 and $37,191 for 1996.
The Partnership's ownership percentage in the Fund II, III, VI, VII Joint
Venture decreased to 79% in 1998, as compared to 80% in 1997, due to additional
funding by Wells Fund VI and Wells Fund VII.
For comments on the general competitive conditions to which the property may be
subject, see Item 1, Business, page 2. For additional information on the
property, tenants, etc., see Item 2, Properties, page 3.
18
<PAGE>
Tucker Property/Fund I - Fund II Joint Venture
- ----------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31
------------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Rental Income $ 1,242,332 $ 1,077,916 $ 1,065,598
Interest Income 1,159 624
------------- ------------- -------------
1,242,332 1,079,075 1,066,222
Expenses:
Depreciation 440,099 419,928 419,137
(Gain) Loss on
Real Estate Assets 0 (45,943) 61,985
Management and
leasing expenses 164,378 122,452 118,542
Other operating expenses 532,985 532,859 501,724
------------- ------------- -------------
1,137,462 1,029,296 1,101,388
------------- ------------- -------------
Net income (loss) $ 104,870 $ 49,779 $ (35,166)
============= ============= =============
Occupied % 93.94% 84.83% 77.00%
Partnership Ownership % 2.38% 2.40% 2.40%
Cash Distribution to the
Fund II-Fund II-OW
Joint Venture* $ 170,937 $ 123,264 $ 194,473
Net Income (Loss) Allocated to
Fund II - Fund II-OW
Joint Venture* $ 47,097 $ 22,356 $ (15,793)
</TABLE>
Rental income increased in 1998 compared to 1997 and in 1997 as compared to 1996
due primarily to increased tenant occupancy at the property. In 1997, a loss on
retirement of assets of $51,000 was offset by insurance reimbursements for fire
damage which occurred in 1996 and wind storm damage in 1997. Operating expenses
increased in 1997 compared to 1996 due primarily to an increase in heating and
air conditioning repairs, painting expense and maintenance. The increase in
depreciation, management, and leasing expenses in 1998 compared to 1997 was the
result of increased occupancy which resulted in increased tenant improvements.
Net income increased in 1998 compared to 1997 and 1997 to 1996 due primarily to
increased rental income and the insurance reimbursement discussed above.
The property was 94% leased as of December 31, 1998, as compared to 85% as of
December 31, 1997, and 74% as of December 31, 1996. Real estate taxes were
$93,697 in 1998 $108,836 in 1997, and $111,947 in 1996.
19
<PAGE>
For comments on the general conditions to which the property may be subject, see
Item 1, Business, Page 2. For additional information on the property, tenants,
etc., see Item 2, Properties, page 3.
Cherokee Property/Fund I, II, II-OW, VI and VII Joint Venture
- -------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31
------------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Rental Income $ 909,831 $ 880,652 $ 890,951
Interest Income 84 67 73
------------- ------------- -------------
909,915 880,719 981,024
Expenses:
Depreciation 444,660 440,882 429,419
Management and
leasing expenses 82,517 78,046 48,882
Other operating expenses 84,676 138,294 180,841
------------- ------------- -------------
611,853 657,222 659,142
------------- ------------- -------------
Net income $ 298,062 $ 223,497 $ 231,882
============= ============= =============
Occupied % 91.32% 94.41% 93.00%
Partnership Ownership % 2.90% 2.90% 2.90%
Cash distributed to
the Fund II-Fund II-OW
Joint Venture* $ 403,744 $ 331,435 $ 409,039
Net income allocated
to the Fund II-Fund II-OW
Joint Venture $ 162,626 $ 121,942 $ 126,517
</TABLE>
Rental income decrease in 1997 compared to 1996 due to decreased occupancy at
the property for the first three quarters of 1997. Rental income increased in
1998 over 1997 due primarily to a one time adjustment made to the straight line
rent schedule. The increase in occupancy in 1997 is due to a new 1,200 square
foot lease executed in 1997. Operating expenses of the property decreased to
$84,676 in 1998 from $138,294 in 1997, and decreased from $180,841 in 1996. The
decrease in operating expenses in 1998 as compared to 1997 is due to decreased
expenditures, for tenant improvements, common area expenses and legal fees. Net
income of the property increased to $298,062 in 1998 and decreased to $223,497
in 1997 from $231,882 in 1996 due to the reason discussed above.
20
<PAGE>
Real estate taxes were $77,311 for 1998 and $67,259 for 1997 and $63,696 for
1996.
For comments on the general conditions to which the property may be subject, see
Item 1, Business, page 2. For additional information on the property, tenants,
etc., see Item 2, Properties, page 3.
Liquidity and Capital Resources
- -------------------------------
During its offering, which terminated on September 7, 1988, the Partnership
raised a total of $1,922,000 through the sale of 7,688 Units. No additional
Units will be sold by the Partnership. As of December 31, 1998, the Partnership
contributed an aggregate of $1,537,600 in capital contributions to the Fund II-
Fund II-OW Joint Venture, after incurring approximately $384,000 in offering
costs, commissions and acquisitions and advisory fees.
Since the Partnership is an investment partnership formed for the purpose of
acquiring, owning and operating income-producing real property and has invested
all of its funds available for investment, it is unlikely that the Partnership
will acquire interests in any additional properties, and the Partnership's
capital resources are anticipated to remain relatively stable over the holding
period of its investments.
Net cash provided by investing activities increased in 1998 to $83,846 from
$25,575 in 1997 due to the Boeing lease in the Atrium. Cash and cash equivalents
decreased to $669 in 1998 due to payment of taxes and investments.
Partnership distributions paid to Limited Partners increased to $83,845 in 1998
from $26,916 in 1997 to $88,743 in 1996.
The Partnership's cash distribution to Class A Unit holders paid and payable
through the fourth quarter of 1998 have been paid from Net Cash from Operations.
The Partnership anticipates that distributions will continue to be paid on a
quarterly basis from Net Cash from Operations. No cash distributions were paid
to Class B Unit holders for 1998.
The Partnership expects to meet liquidity requirements and budget demands
through cash flow from operations. The Partnership is unaware of any known
demands, commitments, events or capital expenditures other than that which is
required for the normal operation of its properties that will result in the
Partnership's liquidity increasing or decreasing in any material way.
21
<PAGE>
Inflation
- ---------
Real estate has not been affected significantly by inflation in the past three
years due to the relatively low inflation rate. There are provisions in the
majority of the tenant leases to protect the Partnership from the impact of
inflation. These leases contain common area maintenance charges (CAM charges),
real estate tax and insurance reimbursements on a per square foot basis, or in
some cases, annual reimbursement of operating expenses above a certain per
square foot allowance. These provisions should reduce the Partnership's exposure
to increases in costs and operating expenses resulting from inflation. In
addition, a number of the Partnership's leases are for terms of less than five
years which may permit the Partnership to replace existing leases with new
leases at higher base rental rates if the existing leases are below market rate.
There is no assurance, however, that the Partnership would be able to replace
existing leases with new leases at higher base rentals.
Year 2000 Compliance
- --------------------
The Partnership is presently reviewing the potential impact of Year 2000
compliance issues on its information systems and business operations. A full
assessment of Year 2000 compliance issues was begun in late 1997 and is expected
to be completed by March 31, 1999. Renovations and replacements of equipment
have been and are being made as warranted as the assessment progresses. The
costs incurred by the Partnership and its affiliates thus far for renovations
and replacements have been immaterial. Some testing of systems has begun and all
testing is expected to be complete by June 30, 1999.
As to the status of the Partnership's information technology systems, it is
presently believed that all major systems and software packages with the
exception of the accounting and property management package are Year 2000
compliant. The Partnership's affiliated entities are purchasing the upgrade for
the accounting and property management package system; however, it is not slated
to be available until the end of the first quarter of 1999. At the present time,
it is believed that all major non-information technology systems are Year 2000
compliant. The cost to upgrade any non-compliant systems is believed to be
immaterial.
The Partnership is in the process of confirming with the Partnership's vendors,
including third-party service providers such as banks, that their systems will
be Year 2000 compliant. Based on the information received thus far, the primary
third-party service providers with which the Partnership has relationships have
confirmed their Year 2000 readiness.
The Partnership relies on computers and operating systems provided by equipment
manufacturers, and also on application software designed for use with its
accounting, property management and investment portfolio tracking. The
Partnership has preliminarily determined that any costs, problems or
uncertainties associated with the potential consequences of Year 2000 issues are
not expected to have a material impact on the future operations or financial
condition of the Partnership. The Partnership will perform due diligence as to
the Year 2000 readiness of each property owned by the Partnership and each
property contemplated for purchase by the Partnership.
The Partnership's reliance on embedded computer systems (i.e., microcontrollers)
is limited to facilities related matters, such as office security systems and
environmental control systems.
22
<PAGE>
The Partnership is currently formulating contingency plans to cover any areas of
concern. Alternate means of operating the business are being developed in the
unlikely circumstance that the computer and phone systems are rendered
inoperable. An off-site facility from which the Partnership could operate is
being sought as well as alternate means of communication with key third-party
vendors. A written plan is being developed for testing and dispensation to each
staff member of the Advisor of the Partnership.
Management believes that the Partnership's risk of Year 2000 problems is
minimal. In the unlikely event there is a problem, the worst case scenarios
would include the risks that the elevator or security systems within the
Partnership's properties would fail or the key third-party vendors upon which
the Partnership relies would be unable to provide accurate investor information.
In the event that the elevator shuts down, the Partnership has devised a plan
for each building whereby the tenants will use the stairs until the elevators
are fixed. In the event that the security system shuts down, the Partnership has
devised a plan for each building to hire temporary on-site security guards. In
the event that a third-party vendor has Year 2000 problems relating to investor
information, the Partnership intends to perform a full system back-up of all
investor information as of December 31, 1999 so that the Partnership will have
accurate hard-copy investor information.
Item 8. Financial Statements and Supplementary Data
- -------------------------------------------------------
The Financial Statements of the Registrant and supplementary data are detailed
under Item 14(a) and filed as part of the report on the pages indicated.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ---------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
There were no disagreements with the Partnership's accountants or other
reportable events during 1998.
23
<PAGE>
PART III
ITEM 10. GENERAL PARTNERS OF THE PARTNERSHIP
- -----------------------------------------------
Wells Capital, Inc. Wells Capital, Inc. ("Capital") is a Georgia corporation
formed in April 1984. The executive offices of Capital are located at 3885
Holcomb Bridge Road, Norcross, Georgia 30092. Leo F. Wells, III is the sole
Director and the President of Capital.
Leo F. Wells, III. Mr. Wells is a resident of Atlanta, Georgia, is 55 years of
age and holds a Bachelor of Business Administration Degree in Economics from the
University of Georgia. Mr. Wells is the President and sole Director of Capital.
Mr. Wells is the President of Wells & Associates, Inc., a real estate brokerage
and investment company formed in 1976 and incorporated in 1978, for which he
serves as principal broker. Mr. Wells is also currently the sole Director and
President of Wells Management Company, Inc., a property management company he
founded in 1983. In addition, Mr. Wells is the President and Chairman of the
Board of Wells Investment Securities, Inc., Wells & Associates, Inc., Wells
Management Company, Inc. and Wells Investment Securities, Inc. which are
affiliates of the General Partners. From 1980 to February 1985, Mr. Wells served
as Vice-President of Hill-Johnson, Inc., a Georgia corporation engaged in the
construction business. From 1973 to 1976, he was associated with Sax Gaskin Real
Estate Company and from 1970 to 1973, he was a real estate salesman and property
manager for Roy D. Warren & Company, an Atlanta real estate company.
ITEM 11. COMPENSATION OF GENERAL PARTNERS AND AFFILIATES
- -----------------------------------------------------------
The following table summarizes the compensation and fees paid to the General
Partners and their affiliates during the year ended December 31, 1998:
<TABLE>
<CAPTION>
( B ) ( C )
( A ) Capacities in which served Form of
Name of Individual or Number in Group Compensation Cash Compensation
- ---------------------------------------------- ---------------------------------------- ------------------------------
<S> <C> <C>
Wells Management Company, Inc. Property Manager-Management and $10,264 (1)
Leasing Fees
Wells Capital, Inc. General Partner -0-
Leo F. Wells, III General Partner -0-
</TABLE>
(1) The majority of these fees are not paid directly by the Partnership but are
paid by the joint venture entities which own properties for which the
property management and leasing services relate and include management and
leasing fees which were accrued for accounting purposes in 1998 but not
actually paid until January, 1999.
24
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------
No Limited Partner is known by the Partnership to own beneficially more than 5%
of the outstanding units of the Partnership.
Set forth below is the security ownership of management as of February 28, 1999.
<TABLE>
<CAPTION>
(2) (3)
(1) Name and Address of Amount and Nature of (4)
Title of Class Beneficial Owner Beneficial Ownership Percent of Class
-------------- --------------- -------------------- ----------------
<S> <C> <C> <C>
Class A Units Leo F. Wells, III 1 Unit (IRA, 401 (k)) and Less than 1%
Profit Sharing
Class B Units Leo F. Wells, III 4 Units (401 (k)) Less than 1%
</TABLE>
The General Partner did not receive any distribution from cash flows or sale
proceeds in 1998.
No arrangements exist which would, upon operation, result in a change in control
of the Partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ----------------------------------------------------------
The compensation and fees paid or to be paid by the Partnership to the General
Partners and their affiliates in connection with the operation of the
Partnership are as follows:
Interest in Partnership Cash Flow and Net Sale Proceeds
- -------------------------------------------------------
The General Partners will receive a subordinated participation in distributions
from cash available for distribution equal to 10% of the total distributions for
such year payable only after the Limited Partners receive distributions from
cash available for distribution equal to 8% of their adjusted capital accounts
in each fiscal year. In addition, after Limited Partners receive their
distributions equal to 8% of their adjusted capital contributions and the
General Partners receive their distributions equal to 10% of the total
distributions for such year, the General Partners will receive a participation
of 10% of the additional distributions from cash available for a distribution,
9% of which shall be paid to the General Partners as a Partnership Management
Fee. The General Partners will also receive a return of their adjusted capital
contributions plus a 12% cumulative return on their adjusted capital
contributions. The General Partners did not receive any distributions from net
cash flow from operations or net sale proceeds for the year ended December 31,
1998.
25
<PAGE>
Property Management and Leasing Fees
- ------------------------------------
Wells Management Company, Inc., an affiliate of the General Partners, will
receive compensation for supervising the management of the Partnership
properties equal to 6%(3% management and 3% leasing) of rental income. In no
event will such fees exceed the sum of (i) 6% of the gross receipts of each
property, plus (ii) a separate one-time fee for initial rent-up or leasing-up of
development properties in an amount not to exceed the fee customarily charged in
arm's-length transactions by others rendering similar services in the same
geographic area for similar properties. With respect to properties leased on a
net basis for a period of ten years or longer, property management fees will not
exceed 1% of gross revenues from such leases, plus a one-time initial leasing
fee of 3% of the gross revenues which are payable over the first five years of
the term of such net leases. Management and leasing fees are not paid directly
by the Partnership but by the joint venture entities which own the properties.
The Partnership's share of these fees which were paid to Wells Management
Company, Inc. totalled $10,264 for the year ended December 31, 1998.
Real Estate Commissions
- -----------------------
In connection with the sale of Partnership properties, the General Partners or
their affiliates may receive commissions not exceeding the lesser of (A) 50% of
the commissions customarily charged by other brokers in arm's-length
transactions involving comparable properties in the same geographic area or (B)
3% of the gross sales price of the property, and provided that payments of such
commissions will be made only after Limited Partners have received prior
distributions totaling 100% of their capital contributions plus a 6% cumulative
return on their adjusted capital contributions. No real estate commissions were
paid to the General Partners or affiliates for the year ended December 31, 1998.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- ----------------------------------------------------------------------------
(a)1. The Financial Statements are contained on Pages F-2 through F-51 of
this Annual Report on Form 10-K, and the list of the Financial
Statements contained herein is set forth on page F-1, which is hereby
incorporated by reference.
(a)2. Financial Statement Schedule III Information with respect to this item
begins on Page S-1 of this Annual Report on Form 10-K.
(a)3. The Exhibits filed in response to Item 601 of Regulation S-K are listed
on the Exhibit Index attached hereto.
(b) No reports on Form 8-K were filed with the Commission during the fourth
quarter of 1998.
(c) The Exhibits filed in response to Item 601 of Regulation S-K are listed
on the Exhibit Index attached hereto.
(d) See (a)2 above.
27
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Financial Statements Page
- -------------------- ----
<S> <C>
Independent Auditors' Report F-2
Balance Sheets as of December 31, 1998 and 1997 F-3
Statements of Income for the Years ended
December 31, 1998, 1997, and 1996 F-4
Statements of Partners' Capital for the Years ended
December 31, 1998, 1997, and 1996 F-5
Statements of Cash Flows for the Years ended
December 31, 1998, 1997, and 1996 F-6
Notes to Financial Statements for December 31, 1998,
1997, and 1996 F-7-F-39
Audited Financial Statements -- The First Union Property F-40-F-48
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wells Real Estate Fund II-OW:
We have audited the accompanying balance sheets of Wells Real Estate Fund II-OW
(a Georgia public limited partnership) as of December 31, 1998 and 1997 and the
related statements of (loss) income, partners' capital, and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements and the schedule referred to below are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements and schedule 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 and schedule 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 Wells Real Estate FundaII-OW as
of December 31, 1998 and 1997 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule III--Real Estate Investments and
Accumulated Depreciation as of December 31, 1998 is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth herein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
January 27, 1999
F-2
<PAGE>
WELLS REAL ESTATE FUND II-OW
(A GEORGIA PUBLIC LIMITED PARTNERSHIP)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
INVESTMENT IN JOINT VENTURE $1,235,838 $1,315,255
CASH AND CASH EQUIVALENTS 669 741
DUE FROM AFFILIATE 18,870 18,109
----------- ------------
Total assets $1,255,377 $1,334,105
=========== ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable $ 164 $ 237
Partnership distributions payable 18,974 18,213
----------- ------------
Total liabilities 19,138 18,450
=========== ============
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL
Limited partners:
Class A 1,236,239 1,315,655
Class B 0 0
----------- ------------
Total partners' capital 1,236,239 1,315,655
----------- ------------
Total liabilities and partners' capital $1,255,377 $1,334,105
=========== ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ----------
<S> <C> <C> <C>
REVENUES:
Equity in income (loss) of joint venture $5,190 $(18,610) $ 6,273
Interest income 0 9 0
---------- --------- ----------
5,190 (18,601) 6,273
EXPENSES 0 0 0
---------- --------- ----------
NET INCOME (LOSS) $5,190 $(18,601) $ 6,273
---------- --------- ----------
NET INCOME (LOSS) ALLOCATED TO CLASS A LIMITED PARTNERS $5,190 $(18,601) $ 68,549
========== ========= ==========
NET LOSS ALLOCATED TO CLASS B LIMITED PARTNERS $ 0 $ 0 $(62,276)
========== ========= ==========
NET INCOME (LOSS) PER CLASS A LIMITED PARTNER UNIT $ 0.86 $ (3.07) $ 11.31
========== ========= ==========
NET LOSS PER CLASS B LIMITED PARTNER UNIT $ 0.00 $ 0.00 $ (38.30)
========== ========= ==========
CASH DISTRIBUTION PER CLASS A LIMITED PARTNER UNIT $13.96 $ 6.03 $ 11.61
========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
Limited Partners Total
-------------------------------------
Class A Class B Partners'
-------------------------------------
Units Amount Units Amount Capital
------ ---------- -------- --------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 6,062 $1,372,620 1,626 $ 62,276 $1,434,896
Net income (loss) 0 68,549 0 (62,276) 6,273
Partnership distributions 0 (70,360) 0 0 (70,360)
------ ---------- -------- -------- ----------
BALANCE, December 31, 1996 6,062 1,370,809 1,626 0 1,370,809
Net loss 0 (18,601) 0 0 (18,601)
Partnership distributions 0 (36,553) 0 0 (36,553)
------ ---------- -------- -------- ----------
BALANCE, December 31, 1997 6,062 1,315,655 1,626 0 1,315,655
Net income 0 5,190 0 0 5,190
Partnership distributions 0 (84,606) 0 0 (84,606)
------ ---------- -------- -------- ----------
BALANCE, December 31, 1998 6,062 $1,236,239 1,626 $ 0 $1,236,239
====== ========== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
WELLS REAL ESTATE FUND II-OW
(A GEORGIA PUBLIC LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,190 $(18,601) $ 6,273
----------- ---------- ----------
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Equity in (income) loss of joint venture (5,190) 18,610 (6,273)
Changes in assets and liabilities:
Accounts payable (73) (1) (147)
----------- ---------- ----------
Total adjustments (5,263) 18,609 (6,420)
Net cash (used in) provided by operating activities (73) 8 (147)
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in joint venture 0 (21,744) 0
Distributions received from joint venture 83,846 47,319 90,073
----------- ---------- ----------
Net cash provided by investing activities 83,846 25,575 90,073
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners in excess of accumulated earnings (73,220) (13,888) 0
Distributions to partners from accumulated earnings (10,625) (13,028) (88,743)
----------- ---------- ----------
Net cash used in financing activities (83,845) (26,916) (88,743)
----------- ---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (72) (1,333) 1,183
CASH AND CASH EQUIVALENTS, beginning of year 741 2,074 891
----------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of year $ 669 $ 741 $ 2,074
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Wells Real Estate Fund II-OW (the "Partnership") is a public limited
partnership organized on October 13, 1987 under the laws of the state of
Georgia. The general partners are Leo F. Wells, III and Wells Capital,
Inc. (the "Company"). The Partnership has two classes of limited
partnership interests, Class A and Class B units. Limited partners may
vote to, among other things, (a)amend the partnership agreement, subject
to certain limitations, (b) change the business purpose or investment
objectives of the Partnership, and (c) remove a general partner. A
majority vote on any of the above described matters will bind the
Partnership, without the concurrence of the general partners. Each limited
partnership unit has equal voting rights regardless of class.
The Partnership was formed to acquire and operate commercial real
properties, including properties which are either to be developed,
currently under development or construction, newly constructed, or have
operating histories. The Partnership owns an interest in several
properties through a joint venture between the Partnership and Wells Real
Estate Fund II ("Wells Fund II"), referred to as "Fund II and II-OW."
Through its investment in Fund II and II-OW, the Partnership owns
interests in the following properties: (i) a retail shopping and
commercial office complex located in Tucker, Georgia, Heritage Place at
Tucker ("Tucker"); (ii) a shopping center located in Cherokee County,
Georgia, the Cherokee Commons Shopping Center ("Cherokee Commons");
(iii)a four-story office building located in metropolitan Houston, Texas,
the Atrium at Nassau Bay ("The Atrium"); (iv) a restaurant located in
Fulton County, Georgia, and (v) two retail and office buildings in Fulton
County, Georgia. Fund II and II-OW joint venture owns 100% of the First
Union Property. All remaining properties are owned by Fund II and II-OW
through investments in joint ventures with other Wells Real Estate Funds.
Use of Estimates and Factors Affecting the Partnership
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
F-7
<PAGE>
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.
The carrying values of real estate assets are based on management's
current intent to hold the real estate assets as long-term investments.
The success of the Partnership's future operations and the ability to
realize the investment in its assets will be dependent on the
Partnership's ability to maintain rental rates, occupancy, and an
appropriate level of operating expenses in future years. Management
believes that the steps it is taking will enable the Partnership to
realize its investment in its assets.
Income Taxes
The Partnership is not subject to federal or state income taxes, and
therefore, none have been provided for in the accompanying financial
statements. The partners are required to include their respective shares
of profits and losses in their individual income tax returns.
Distribution of Net Cash From Operations
Cash available for distribution is distributed on a cumulative
noncompounded basis to limited partners quarterly. In accordance with the
partnership agreement, distributions are paid first to limited partners
holding Class A units until they have received an 8% per annum return on
their adjusted capital contributions, as defined. Cash available for
distribution is then distributed to limited partners holding Class B units
until they have received an 8% per annum return on their adjusted capital
contributions, as defined. Excess cash available for distribution will be
distributed to the general partners until each has received 10% of total
distributions to limited partners for the year. Any remaining cash
available for distribution is distributed 90% to the limited partners and
10% to the general partners.
Distribution of Sales Proceeds
Upon sales of properties, the net sales proceeds are distributed in the
following order:
o To limited partners until each limited partner has received
100% of his adjusted capital contribution, as defined
o To limited partners holding Class B units until they receive
an amount equal to the net cash available for distribution
received by the limited partners holding Class A units
o To all limited partners until they receive a cumulative 12%
per annum return on their adjusted capital contributions, as
defined
o To all limited partners until they receive an amount equal to
their respective cumulative distributions, as defined
o To all general partners until they have received 100% of
their capital contributions, as defined
F-8
<PAGE>
PAGE>
. Thereafter, 85% to the limited partners and 15% to the
general partners
Allocation of Net Income, Net Loss, and Gain on Sale
Net income is defined as net income recognized by the Partnership,
excluding deductions for depreciation and amortization. Net income, as
defined, of the Partnership will be allocated each year in the same
proportions that net cash from operations is distributed to the partners.
To the extent that the Partnership's net income in any year exceeds net
cash from operations, it will be allocated 99% to the limited partners and
1% to the general partners.
Net loss, depreciation, and amortization deductions for each fiscal year
will be allocated as follows: (a) 99% to the limited partners holding
Class B units and 1% to the general partners until their capital accounts
are reduced to zero, (b) then to any partner having a positive balance in
his capital account in an amount not to exceed such positive balance, and
(c) thereafter to the general partners.
Gain on the sale or exchange of the Partnership's properties will be
allocated generally in the same manner that the net proceeds from such
sale are distributed to partners after the following allocations are made,
if applicable: (a) allocations made pursuant to a qualified income offset
provision in the partnership agreement, (b) allocations to partners having
negative capital accounts until all negative capital accounts have been
restored to zero, and (c) allocations to Class B limited partners in
amounts equal to deductions for depreciation and amortization previously
allocated to them with respect to the specific partnership property sold
but not in excess of the amount of gain on sale recognized by the
Partnership with respect to the sale of such property.
Investment in Joint Venture
Basis of Presentation. The Partnership does not have control over the
operations of the joint venture; however, it does exercise significant
influence. Accordingly, the Partnership's investment in the joint venture
is recorded using the equity method of accounting. The joint ventures in
which Fund II and II-OW hold an ownership interest follow the same
accounting policies as the Partnership.
Real Estate Assets. Real estate assets held by Fund II and II-OW are
stated at cost less accumulated depreciation. Major improvements and
betterments are capitalized when they extend the useful life of the
related asset. All repairs and maintenance are expensed as incurred.
Management continually monitors events and changes in circumstances which
could indicate that carrying amounts of real estate assets may not be
recoverable. When events or changes in circumstances are present which
indicate that the carrying amounts of real estate assets may not be
recoverable, management assesses the recoverability of real estate assets
by determining whether the carrying value of such real estate assets will
be recovered through the future cash flows expected from the use of the
asset and its eventual disposition. Management has determined that there
has been no impairment in the carrying value of real estate assets held by
Fund II and II-OW or its affiliated joint ventures as of December 31,
1998.
F-9
<PAGE>
Depreciation is calculated using the straight-line method over 25 years.
Revenue Recognition. All leases on real estate assets held by the joint
venture are classified as operating leases, and the related rental income
is recognized on a straight-line basis over the terms of the respective
leases.
Partners' Distributions and Allocations of Profit and Loss. Cash available
for distribution and allocations of profit and loss to the Partnership by
Fund II and II-OW are made in accordance with the terms of the individual
joint venture agreement. Generally, these items are allocated in
proportion to the partners' respective ownership interests. Cash is paid
from the joint venture to the Partnership on a quarterly basis.
Deferred Lease Acquisition Costs. Costs incurred to procure operating
leases are capitalized and amortized on a straight-line basis over the
terms of the related leases.
Cash and Cash Equivalents
For the purposes of the statements of cash flows, the Partnership
considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Cash equivalents
include cash and short-term investments. Short-term investments are stated
at cost, which approximates fair value, and consist of investments in
money market accounts.
Per Unit Data
Net (loss) income per unit with respect to the Partnership for the years
ended December 31, 1998, 1997, and 1996 is computed based on the average
number of units outstanding during the period.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year financial statement presentation.
2. RELATED-PARTY TRANSACTIONS
Due from affiliate at December 31, 1998 and 1997 represents the
Partnership's share of cash to be distributed from Fund II and II-OW for
the fourth quarters of 1998 and 1997.
The Partnership entered into a property management agreement with Wells
Management Company, Inc. ("Wells Management"), an affiliate of the general
partners. In consideration for supervising the management of the
Partnership's properties, the Partnership will generally pay Wells
Management management and leasing fees equal to (a) 3% of the gross
revenues for management and 3% of the gross revenues for leasing
(aggregate maximum of 6%) plus a separate fee for the one-time lease-up of
newly constructed properties in an amount not to exceed the fee
customarily charged in arm's-length transactions by others rendering
similar services in the same geographic area for similar properties or
(b) in the case of industrial and commercial properties, which are leased
on a
F-10
<PAGE>
long-term net basis (ten or more years), 1% of the gross revenues except
for initial leasing fees equal to 3% of the gross revenues over the first
five years of the lease term.
The Partnership incurred management and leasing fees and lease acquisition
costs, at the joint venture level, of $10,264, $10,784, and $9,255 for the
years ended December 31, 1998, 1997, and 1996, respectively, which were
paid to Wells Management.
The Company performs certain administrative services for the Partnership,
such as accounting and other Partnership administration, and incurs the
related expenses. Such expenses are allocated among the various Wells Real
Estate Funds based on time spent on each fund by individual administrative
personnel. In the opinion of management, such allocation is a reasonable
estimation of such expenses.
The general partners are also general partners of other Wells Real Estate
Funds. As such, there may exist conflicts of interest where the general
partners in the capacity as general partners of other Wells Real Estate
Funds may be in competition with the Partnership for tenants in similar
geographic markets.
3. INVESTMENT IN JOINT VENTURE
On March 1, 1988, the Partnership entered into a joint venture agreement
with Wells Fund II. The joint venture, Fund II and II-OW, was formed for
the purpose of investing in commercial real properties. Fund II and II-OW
owns the First Union Property directly and has investments in several
other joint ventures. The Partnership's ownership percentage interest in
Fund II and II-OW was approximately 5% at December 31, 1998 and 1997.
The following is a rollforward of the Partnership's investment in joint
venture for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Investment in joint venture, beginning of year $1,315,255 $1,370,408
Equity in income (loss) of joint venture 5,190 (18,610)
Contributions to joint venture 0 21,744
Distributions from joint venture (84,607) (58,287)
---------- ----------
Investment in joint venture, end of year $1,235,838 $1,315,255
========== ==========
</TABLE>
F-11
<PAGE>
Following are the financial statements for Fund II and II-OW:
<TABLE>
<CAPTION>
Fund II and II-OW
(A Georgia Joint Venture)
Balance Sheets
December 31, 1998 and 1997
Assets
1998 1997
------------- -------------
<S> <C> <C>
Real estate assets, at cost:
Land $ 1,367,856 $ 1,367,856
Building and improvements, less accumulated depreciation of
$2,623,785 in 1998 and $2,256,118 in 1997 5,147,333 5,515,000
------------- -------------
Total real estate assets 6,515,189 6,882,856
Investment in joint ventures 16,676,111 17,734,845
Cash and cash equivalents 94,367 84,392
Due from affiliates 267,581 248,623
Accounts receivable 23,184 84,207
Prepaid expenses and other assets 42,828 61,183
------------- -------------
Total assets $23,619,260 $25,096,106
============= =============
Liabilities and Partners' Capital
Liabilities:
Partnership distributions payable $ 355,370 $ 341,034
Due to affiliates 8,988 4,561
------------- -------------
Total liabilities 364,358 345,595
------------- -------------
Partners' capital:
Wells Real Estate Fund II 22,019,064 23,435,256
Wells Real Estate Fund II-OW 1,235,838 1,315,255
------------- -------------
Total partners' capital 23,254,902 24,750,511
------------- -------------
Total liabilities and partners' capital $23,619,260 $25,096,106
============= =============
</TABLE>
F-12
<PAGE>
<TABLE>
<CAPTION>
Fund II and II-OW
(A Georgia Joint Venture)
Statements of Income (Loss)
for the Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996
-------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Rental income $458,867 $ 458,867 $ 460,920
Equity in income (loss) of joint ventures 192,591 (274,325) 230,919
Interest income 481 443 409
-------- ----------- -----------
651,939 184,985 692,248
-------- ----------- -----------
Expenses:
Depreciation 367,667 367,667 367,667
Partnership administration 79,843 56,296 79,845
Legal and accounting 43,175 49,649 64,863
Management and leasing fees 45,887 45,887 45,887
Operating costs 11,703 6,575 10,349
Computer costs 5,906 9,377 5,500
-------- ----------- -----------
554,181 535,451 574,111
-------- ----------- -----------
Net income (loss) $ 97,758 $ (350,466) $ 118,137
======== =========== ===========
Net income (loss) allocated to Wells Real Estate Fund II $ 92,568 $ (331,856) $ 111,864
======== =========== ===========
Net income (loss) allocated to Wells Real Estate
Fund II-OW $ 5,190 $ (18,610) $ 6,273
======== =========== ===========
</TABLE>
F-13
<PAGE>
<TABLE>
<CAPTION>
Fund II and II-OW
(A Georgia Joint Venture)
Statement of Partners' Capital
for the Years Ended December 31, 1998, 1997, and 1996
Wells Real Wells Real Total
Estate Estate Partners'
Fund II Fund II-OW Capital
------------ -------------- -------------
<S> <C> <C> <C>
Balance, December 31, 1995 $25,561,588 $ 1,434,495 $26,996,083
Net income 111,864 6,273 118,137
Partnership distributions (1,254,695) (70,360) (1,325,055)
------------ -------------- -------------
Balance, December 31, 1996 24,418,757 1,370,408 25,789,165
Net loss (331,856) (18,610) (350,466)
Partnership contributions 387,751 21,744 409,495
Partnership distributions (1,039,396) (58,287) (1,097,683)
------------ -------------- -------------
Balance, December 31, 1997 23,435,256 1,315,255 24,750,511
Net income 92,568 5,190 97,758
Partnership distributions (1,508,760) (84,607) (1,593,367)
------------ -------------- -------------
Balance, December 31, 1998 $22,019,064 $ 1,235,838 $23,254,902
============ ============== =============
</TABLE>
F-14
<PAGE>
<TABLE>
<CAPTION>
Fund II and II-OW
(A Georgia Joint Venture)
Statements of Cash Flows
for the Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996
----------- --------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 97,758 $(350,466) $ 118,137
----------- --------- -----------
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 367,667 367,667 367,667
Equity in (income) loss of joint ventures (192,591) 274,325 (230,919)
Changes in assets and liabilities:
Accounts receivable 61,023 30,353 (19,358)
Prepaid expenses and other assets 18,355 18,355 18,356
Due to affiliates 4,427 (1,147) 1,092
----------- --------- -----------
Total adjustments 258,881 689,553 136,838
----------- --------- -----------
Net cash provided by operating activities 356,639 339,087 254,975
----------- --------- -----------
Cash flows from investing activities:
Distributions received from joint ventures 1,232,367 601,045 1,404,281
Investment in joint venture 0 (409,495) 0
----------- --------- -----------
Net cash provided by investing activities 1,232,367 191,550 1,404,281
----------- --------- -----------
Cash flows from financing activities:
Contributions received from partners 0 409,495 0
Distributions to joint venture partners (1,579,031) (891,134) (1,696,281)
----------- --------- -----------
Net cash used in financing activities (1,579,031) (481,639) (1,696,281)
----------- --------- -----------
Net increase (decrease) in cash and cash
equivalents 9,975 48,998 (37,025)
Cash and cash equivalents, beginning of year 84,392 35,394 72,419
----------- --------- -----------
Cash and cash equivalents, end of year $ 94,367 $ 84,392 $ 35,394
=========== ========= ===========
</TABLE>
Fund II and II-OW's investment and percentage ownership in other joint ventures
at December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------ --------------------------
Amount Percent Amount Percent
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Fund I and II Tucker $ 4,156,811 45% $ 4,280,651 45%
Fund I, II, II-OW, VI, and VII
Associates--Cherokee 4,295,663 55 4,536,781 54
Fund II and III Associates--The Atrium 6,181,461 63 6,760,950 61
Fund II and III Associates--Brookwood
Grill 2,042,176 62 2,156,463 62
----------- -----------
$16,676,111 $17,734,845
=========== ===========
</TABLE>
The following are descriptions of the joint ventures in which Fund II and
II-OW has investments.
F-15
<PAGE>
Fund I and II Tucker
Tucker and Cherokee Commons were previously held in joint ventures between
Wells Real Estate Fund I ("Fund I") and Fund II and II-OW. The joint
ventures were formed for the purpose of owning, developing, and operating
Cherokee Commons and Tucker. In 1991, the Tucker and Cherokee Commons
joint ventures were merged into a new joint venture, the Fund I and II
Tucker-Cherokee Joint Venture. Under the terms of the joint venture
agreement, the ownership interests of Fund I and Fund II and II-OW in each
individual property remained unchanged.
On August 1, 1995, the Fund I and II Tucker-Cherokee joint venture
assigned its ownership in Cherokee Commons to the Fund I, II, II-OW, VI,
and VII Associates--Cherokee joint venture. Upon the assignment of
Cherokee Commons, the joint venture was renamed Fund I and II Tucker.
Tucker is a retail shopping center containing approximately 29,858 square
feet and a commercial office building complex containing approximately
67,465 square feet in Tucker, DeKalb County, Georgia.
In 1996, one of the tenants in Tucker experienced a fire. In 1996, Fund I
and II Tucker received an initial insurance settlement of $143,944 for
damages to the building. The loss on real estate assets of $61,985 is
included in the following statement of loss. In 1997, $104,895 was
received as an insurance settlement for the fire damages discussed above
and storm damages that occurred in 1997. In addition, a loss from the
retirement of real estate assets of $58,952 was incurred. The resulting
net gain on real estate assets of $45,943 is included in the following
statement of income. Additional insurance proceeds of $27,319 related to
these damages were received in 1998 and are reflected as a gain on real
estate assets in the following statement of income.
F-16
<PAGE>
Following are the financial statements for Fund I and II Tucker:
<TABLE>
<CAPTION>
Fund I and II Tucker
(A Georgia Joint Venture)
Balance Sheets
December 31, 1998 and 1997
Assets
1998 1997
----------- -----------
<S> <C> <C>
Real estate assets,at cost:
Land $3,260,887 $3,260,887
Building and improvements, less accumulated depreciation of
$2,913,652 in 1998 and $2,473,553 in 1997 6,040,015 6,083,701
Construction in progress 26,731 280,330
----------- -----------
Total real estate assets 9,327,633 9,624,918
Cash and cash equivalents 49,380 12,684
Accounts receivable 96,362 79,715
Prepaid expenses and other assets 122,181 104,596
----------- -----------
Total assets $9,595,556 $9,821,913
=========== ===========
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $ 64,964 $ 74,018
Partnership distributions payable 66,558 16,060
Due to affiliates 548,632 481,228
----------- -----------
Total liabilities 680,154 571,306
----------- -----------
Partners' capital:
Wells Real Estate Fund I 4,758,591 4,969,956
Fund II and II-OW 4,156,811 4,280,651
----------- -----------
Total partners' capital 8,915,402 9,250,607
----------- -----------
Total liabilities and partners' capital $9,595,556 $9,821,913
=========== ===========
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
Fund I and II Tucker
(A Georgia Joint Venture)
Statements of Income (Loss)
for the Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income $1,242,332 $1,077,916 $1,065,598
Interest income 0 1,159 624
---------- ---------- ----------
1,242,332 1,079,075 1,066,222
---------- ---------- ----------
Expenses:
Operating costs, net of reimbursements
515,791 496,258 463,229
Depreciation 440,099 419,928 419,137
Management and leasing fees 164,378 122,452 118,542
(Gain) loss on real estate assets (27,319) (45,943) 61,985
Property administration 32,420 28,665 30,724
Legal and accounting 12,093 7,936 4,386
Computer costs 0 0 3,385
---------- ---------- ----------
1,137,462 1,029,296 1,101,388
---------- ---------- ----------
Net income (loss) $ 104,870 $ 49,779 $ (35,166)
========== ========== ==========
Net income (loss) allocated to Wells Real Estate
Fund I $ 57,773 $ 27,423 $ (19,373)
========== ========== ==========
Net income (loss) allocated to Fund II and II-OW $ 47,097 $ 22,356 $ (15,793)
========== ========== ==========
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
Fund I and II Tucker
(A Georgia Joint Venture)
Statements of Partners' Capital
for the Years Ended December 31, 1998, 1997, and 1996
Wells Real Fund II Total
Estate and Partners'
Fund I II-OW Capital
----------- ----------- ------------
<S> <C> <C> <C>
Balance, December 31, 1995 $5,457,282 $4,591,825 $10,049,107
Net loss (19,373) (15,793) (35,166)
Partnership distributions (290,352) (194,473) (484,825)
----------- ----------- ------------
Balance, December 31, 1996 5,147,557 4,381,559 9,529,116
Net income 27,423 22,356 49,779
Partnership distributions (205,024) (123,264) (328,288)
----------- ----------- ------------
Balance, December 31, 1997 4,969,956 4,280,651 9,250,607
Net income 57,773 47,097 104,870
Partnership distributions (269,138) (170,937) (440,075)
----------- ----------- ------------
Balance, December 31, 1998 $4,758,591 $4,156,811 $ 8,915,402
=========== =========== ============
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
Funds I and II Tucker
(A Georgia Joint Venture)
Statements of Cash Flows
for the Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 104,870 $ 49,779 $ (35,166)
---------- ---------- -----------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 440,099 419,928 419,137
(Gain) loss on real estate assets (27,319) (45,943) 61,985
Changes in assets and liabilities:
Accounts receivable (16,647) (5,244) 24,751
Prepaid expenses and other assets (17,585) (54,616) 5,052
Accounts payable and accrued expenses (9,054) 31,831 (13,972)
Due to affiliates 67,404 58,435 46,643
---------- ---------- -----------
Total adjustments 436,898 404,391 543,596
---------- ---------- -----------
Net cash provided by operating activities
541,768 454,170 508,430
---------- ---------- -----------
Cash flows from investing activities:
Investment in real estate (142,814) (346,550) (63,491)
Insurance proceeds 27,319 104,895 143,944
---------- ---------- -----------
Net cash (used in) provided by investing
activities (115,495) (241,655) 80,453
---------- ---------- -----------
Cash flows from financing activities:
Distributions to joint venture partners (389,577) (423,108) (505,628)
---------- ---------- -----------
Net increase (decrease) in cash and cash equivalents 36,696 (210,593) 83,255
Cash and cash equivalents, beginning of year 12,684 223,277 140,022
---------- ---------- -----------
Cash and cash equivalents, end of year $ 49,380 $ 12,684 $ 223,277
========== ========== ===========
</TABLE>
Fund I, II, II-OW, VI, and VII Associates--Cherokee
In August 1995, Cherokee Commons was transferred to a new joint venture
between Fund I, Fund II and II-OW, Wells Real Estate Fund VI, L.P.
("Fund VI"), and Wells Real Estate Fund VII, L.P. ("Fund VII"). The joint
venture, Fund I, II, II-OW, VI, and VII Associates--Cherokee, was formed
for the purpose of owning and operating Cherokee Commons, a retail
shopping center containing approximately 103,755 square feet located in
Cherokee County, Georgia. Percentage ownership interests in Fund I, II,
II-OW, VI, and VII Associates--Cherokee were determined at the time of
formation based on contributions. Under the terms of the joint venture
agreement, Fund VI and Fund VII each contributed approximately $1 million
to the new joint venture in return for a 10.7% ownership interest.
Fund I's ownership interest in the Cherokee joint venture changed from
30.6% to 24%, and Fund II and II-OW joint venture's ownership interest
changed from 69.4% to 55.6%. The $2 million in cash contributed to
Cherokee was used to fund an expansion of the property for an existing
tenant.
F-20
<PAGE>
Following are the financial statements for Fund I, II, II-OW, VI, and VII
Associates--Cherokee:
<TABLE>
<CAPTION>
Fund I, II, II-OW, VI, and VII Associates--Cherokee
(A Georgia Joint Venture)
Balance Sheets
December 31, 1998 and 1997
Assets
1998 1997
---------- ----------
<S> <C> <C>
Real estate assets, at cost:
Land $1,219,704 $1,219,704
Building and improvements, less accumulated depreciation of
$2,717,809 in 1998 and $2,273,149 in 1997 6,500,995 6,939,884
---------- ----------
Total real estate assets 7,720,699 8,159,588
Cash and cash equivalents 222,814 153,159
Accounts receivable 35,517 92,516
Prepaid expenses and other assets 90,979 99,869
---------- ----------
Total assets $8,070,009 $8,505,132
========== ==========
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $ 107,129 $ 36,851
Partnership distributions payable 130,838 194,123
Due to affiliates 109,267 93,940
---------- ----------
Total liabilities 347,234 324,914
---------- ----------
Partners' capital:
Wells Real Estate Fund I 1,741,492 1,863,173
Fund II and II-OW 4,295,663 4,536,781
Wells Real Estate Fund VI 844,160 891,482
Wells Real Estate Fund VII 841,460 888,782
---------- ----------
Total partners' capital 7,722,775 8,180,218
---------- ----------
Total liabilities and partners' capital $8,070,009 $8,505,132
========== ==========
</TABLE>
F-21
<PAGE>
<TABLE>
<CAPTION>
Fund I, II, II-OW, VI and VII Associates--Cherokee
(A Georgia Joint Venture)
Statements of Income
for the Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996
-------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income $909,831 $ 880,652 $ 890,951
Interest income 84 67 73
-------- ---------- ----------
909,915 880,719 891,024
-------- ---------- ----------
Expenses:
Depreciation 444,660 440,882 429,419
Operating costs, net of reimbursements 35,715 70,017 126,367
Property administration 22,934 26,260 42,868
Management and leasing fees 82,517 78,046 48,882
Legal and accounting 7,363 9,385 8,362
Computer costs 0 0 3,244
Bad debt expense 18,664 0 0
Loss on real estate assets 0 32,632 0
-------- ---------- ----------
611,853 657,222 659,142
-------- ---------- ----------
Net income $298,062 $ 223,497 $ 231,882
======== ========== ==========
Net income allocated to Wells Real Estate Fund I $ 71,604 $ 53,691 $ 55,705
======== ========== ==========
Net income allocated to Fund II and II-OW $162,626 $ 121,942 $ 126,517
======== ========== ==========
Net income allocated to Wells Real Estate Fund VI $ 31,916 $ 23,932 $ 24,830
======== ========== ==========
Net income allocated to Wells Real Estate Fund VII
$ 31,916 $ 23,932 $ 24,830
======== ========== ==========
</TABLE>
F-22
<PAGE>
<TABLE>
<CAPTION>
Fund I, II, II-OW, VI and VII Associates--Cherokee
(A Georgia Joint Venture)
Statements of Partners' Capital
for the Years Ended December 31, 1998, 1997, and 1996
Wells Real Fund II Wells Real Wells Real Total
Estate and Estate Estate Partners'
Fund I II-OW Fund VI Fund VII Capital
----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $2,103,666 $5,028,796 $ 980,277 $ 977,577 $9,090,316
Net income 55,705 126,517 24,830 24,830 231,882
Partnership distributions (189,008) (409,039) (72,510) (72,510) (743,067)
----------- ------------ ----------- ------------ ------------
Balance, December 31, 1996 1,970,363 4,746,274 932,597 929,897 8,579,131
Net income 53,691 121,942 23,932 23,932 223,497
Partnership distributions (160,881) (331,435) (65,047) (65,047) (622,410)
----------- ------------ ----------- ------------ ------------
Balance, December 31, 1997 1,863,173 4,536,781 891,482 888,782 8,180,218
Net income 71,604 162,626 31,916 31,916 298,062
Partnership distributions (193,285) (403,744) (79,238) (79,238) (755,505)
----------- ------------ ----------- ------------ ------------
Balance, December 31, 1998 $1,741,492 $4,295,663 $ 844,160 $ 841,460 $7,722,775
=========== ============ =========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
Fund I, II, II-OW, VI, and VII Associates--Cherokee
(A Georgia Joint Venture)
Statements of Cash Flows
for the Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 298,062 $ 223,497 $ 231,882
--------- ---------- ----------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 444,660 440,882 429,419
Loss on real estate assets 0 32,632 0
Changes in assets and liabilities:
Accounts receivable 56,999 1,386 43,062
Prepaid expenses and other assets 8,890 (21,342) 14,106
Accounts payable and accrued expenses 70,278 13,721 (4,624)
Due to affiliates 15,327 15,565 9,613
--------- ---------- ----------
Total adjustments 596,154 482,844 491,576
--------- ---------- ----------
Net cash provided by operating activities
894,216 706,341 723,458
--------- ---------- ----------
Cash flows from investing activities:
Investment in real estate (5,771) (83,424) (28,231)
--------- ---------- ----------
Cash flows from financing activities:
Distributions to joint venture partners (818,790) (541,104) (834,237)
--------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 69,655 81,813 (139,010)
Cash and cash equivalents, beginning of year 153,159 71,346 210,356
--------- ---------- ----------
Cash and cash equivalents, end of year $ 222,814 $ 153,159 $ 71,346
========= ========== ==========
</TABLE>
F-23
<PAGE>
FUND II AND III ASSOCIATES
On April 3, 1989, Fund II and II-OW entered into a joint venture agreement
with Wells Real Estate Fund III, L.P. ("Fund III"). The new joint venture,
Fund II and III Associates, was formed for the purpose of investing in
commercial and industrial real properties. In April 1989, Fund II and III
Associates acquired The Atrium. In 1991, Fund II and II-OW contributed its
interest in a parcel of land known as the 880 Property located in Roswell,
Georgia, to Fund II and III Associates. The property is a 5.8-acre tract
of land. A restaurant was developed on 1.5 acres of the 880 Property and
is currently operating as the Brookwood Grill restaurant ("Fund II and III
Associates--Brookwood Grill"). The remaining 4.3 acres of the 880 Property
was transferred at cost to the Fund II, III, VI, and VII Associates joint
venture during 1995. Fund II and III Associates' investment in this
transferred parcel of the 880 Property was $1,507,807 and $1,608,215 at
December 31, 1998 and 1997, respectively, which represented a 24% interest
for each year.
The Atrium was fully occupied from inception through June 1996, at which
time the previous tenant's lease expired. In March 1997, a lease was
signed with a new tenant for the entire building and the new tenant began
paying rent in May 1997. The lease term is for five years with an option
to renew for an additional five years. There is a no-cause cancellation
provision at the end of the first three-year period. If this no-cause
cancellation is exercised, the tenant would be required to pay
unamortized, up-front tenant improvement costs. The cost of completing the
required tenant improvements and outside broker commissions was funded out
of reserves and contributions by Fund II and II-OW and Fund III.
F-24
<PAGE>
Following are the financial statements for Fund II and III Associates--The
Atrium:
FUND II AND III ASSOCIATES--THE ATRIUM
(A GEORGIA JOINT VENTURE)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
Assets
<TABLE>
<CAPTION>
1998 1997
-------------- ----------------
<S> <C> <C>
Real estate assets, at cost:
Land $1,504,743 $ 1,504,743
Building and improvements, less accumulated depreciation of
$5,433,962 in 1998 and $4,567,184 in 1997 7,938,061 8,804,839
-------------- ----------------
Total real estate assets 9,442,804 10,309,582
Cash and cash equivalents 128,882 281,285
Accounts receivable 18,114 18,950
Prepaid expenses and other assets 302,888 392,633
-------------- ----------------
Total assets $9,892,688 $11,002,450
============== ================
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 4,587 $ 151,366
Partnership distributions payable 137,224 151,044
Due to affiliates 0 3,829
-------------- ----------------
Total liabilities 141,811 306,239
-------------- ----------------
Partners' capital:
Fund II and II-OW 6,181,461 6,760,950
Wells Real Estate Fund III 3,569,416 3,935,261
-------------- ----------------
Total partners' capital 9,750,877 10,696,211
-------------- ----------------
Total liabilities and partners' capital $9,892,688 $11,002,450
============== ================
</TABLE>
F-25
<PAGE>
FUND II AND III ASSOCIATES--THE ATRIUM
(A GEORGIA JOINT VENTURE)
STATEMENTS OF (LOSS) INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- ----------------
<S> <C> <C> <C>
Revenues:
Rental income $1,470,144 $ 924,769 $1,048,583
Interest income 0 2,617 24,188
Other income 13,280 8,638 0
-------------- -------------- ----------------
1,483,424 936,024 1,072,771
-------------- -------------- ----------------
Expenses:
Depreciation 866,778 795,829 674,479
Operating costs, net of reimbursements 699,550 614,932 85,183
Management and leasing fees 186,102 111,576 71,381
Property administration 11,095 27,325 59,934
Legal and accounting 3,310 17,408 11,878
Computer costs 0 107 1,410
Loss on real estate assets 0 181,684 0
-------------- -------------- ----------------
1,766,835 1,748,861 904,265
-------------- -------------- ----------------
Net (loss) income $ (283,411) $ (812,837) $ 168,506
============== ============== ================
Net (loss) income allocated to Fund II and II-OW $ (173,731) $ (509,625) $ 110,540
============== ============== ================
Net (loss) income allocated to Wells Real Estate
Fund III $ (109,680) $ (303,212) $ 57,966
============== ============== ================
</TABLE>
F-26
<PAGE>
FUND II AND III ASSOCIATES--THE ATRIUM
(A GEORGIA JOINT VENTURE)
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
FUND II WELLS REAL TOTAL
AND ESTATE PARTNERS'
II-OW FUND III CAPITAL
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance, December 31, 1995 $7,273,932 $3,815,165 $11,089,097
Net income 110,540 57,966 168,506
Partnership distributions (398,911) (209,185) (608,096)
--------------- --------------- ---------------
Balance, December 31, 1996 6,985,561 3,663,946 10,649,507
Net loss (509,625) (303,212) (812,837)
Partnership contributions 409,495 659,810 1,069,305
Partnership distributions (124,481) (85,283) (209,764)
--------------- --------------- ---------------
Balance, December 31, 1997 6,760,950 3,935,261 10,696,211
Net loss (173,731) (109,680) (283,411)
Partnership distributions (405,758) (256,165) (661,923)
--------------- --------------- ---------------
Balance, December 31, 1998 $6,181,461 $3,569,416 $9,750,877
=============== =============== ===============
</TABLE>
F-27
<PAGE>
FUND II AND III ASSOCIATES--THE ATRIUM
(A GEORGIA JOINT VENTURE)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- -------------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $(283,411) $ (812,837) $168,506
------------- -------------- -----------
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation 866,778 795,829 674,479
Loss on real estate assets 0 181,684 0
Changes in assets and liabilities:
Accounts receivable 836 (18,950) 113,362
Prepaid expenses and other assets 89,745 (357,417) 0
Accounts payable (146,779) (37,394) (338,991)
Due to affiliates (3,829) 3,829 (6,802)
------------- -------------- -----------
Total adjustments 806,751 567,581 442,048
------------- -------------- -----------
Net cash provided by (used in) operating
activities 523,340 (245,256) 610,554
------------- -------------- -----------
Cash flows from investing activities:
Investment in real estate assets 0 (932,156) (35,038)
------------- -------------- -----------
Cash flows from financing activities:
Contributions from joint venture partners 0 1,069,305 0
Distributions to joint venture partners (675,743) (58,720) (973,577)
------------- -------------- -----------
Net cash (used in) provided by financing
activities (675,743) 1,010,585 (973,577)
------------- -------------- -----------
Net decrease in cash and cash equivalents (152,403) (166,827) (398,061)
Cash and cash equivalents, beginning of year 281,285 448,112 846,173
------------- -------------- -----------
Cash and cash equivalents, end of year $128,882 $ 281,285 $448,112
============= ============== ===========
</TABLE>
F-28
<PAGE>
Following are the financial statements for Fund II and III
Associates--Brookwood Grill:
FUND II AND III ASSOCIATES--BROOKWOOD GRILL
(A GEORGIA JOINT VENTURE)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
Assets
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Real estate assets, at cost:
Land $ 745,223 $ 745,223
Building and improvements, less accumulated
depreciation of $329,731 in 1998 and $275,717 in
1997 943,082 997,096
---------------- ----------------
Total real estate assets 1,688,305 1,742,319
Investment in joint venture 1,507,807 1,608,215
Cash and cash equivalents 73,956 54,321
Due from affiliate 50,479 32,092
Accounts receivable 67,018 89,757
Prepaid expenses and other assets 17,480 23,048
---------------- ----------------
Total assets $3,405,045 $3,549,752
================ ================
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 1,200 $ 3,879
Due to affiliate 3,894 5,381
Partnership distributions payable 124,772 82,012
---------------- ----------------
Total liabilities 129,866 91,272
---------------- ----------------
Partners' capital:
Fund II and II-OW 2,042,176 2,156,463
Wells Real Estate Fund III 1,233,003 1,302,017
---------------- ----------------
Total partners' capital 3,275,179 3,458,480
---------------- ----------------
Total liabilities and partners' capital $3,405,045 $3,549,752
================ ================
</TABLE>
F-29
<PAGE>
FUND II AND III ASSOCIATES--BROOKWOOD GRILL
(A GEORGIA JOINT VENTURE)
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- -------------- -----------
<S> <C> <C> <C>
Revenues:
Rental income $225,100 $225,106 $225,359
Equity in income (loss) of joint venture 78,791 27,213 (19,378)
------------- -------------- -----------
303,891 252,319 205,981
------------- -------------- -----------
Expenses:
Operating costs, net of reimbursements (31,540) 15,233 92,450
Depreciation 54,014 54,014 54,014
Management and leasing fees 23,348 28,464 27,004
Property administration 3,708 3,875 12,454
Legal and accounting 3,200 4,672 3,164
Computer costs 0 107 1,410
------------- -------------- -----------
52,730 106,365 190,496
------------- -------------- -----------
Net income $251,161 $145,954 $ 15,485
============= ============== ===========
Net income allocated to Fund II and II-OW $156,599 $ 91,002 $ 9,655
============= ============== ===========
Net income allocated to Wells Real Estate Fund III $ 94,562 $ 54,952 $ 5,830
============= ============== ===========
</TABLE>
FUND II AND III ASSOCIATES--BROOKWOOD GRILL
(A GEORGIA JOINT VENTURE)
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
FUND II WELLS REAL TOTAL
AND ESTATE PARTNERS'
II-OW FUND III CAPITAL
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance, December 31, 1995 $2,312,957 $1,396,514 $3,709,471
Net income 9,655 5,830 15,485
Partnership distributions (66,498) (40,154) (106,652)
--------------- --------------- ---------------
Balance, December 31, 1996 2,256,114 1,362,190 3,618,304
Net income 91,002 54,952 145,954
Partnership distributions (190,653) (115,125) (305,778)
--------------- --------------- ---------------
Balance, December 31, 1997 2,156,463 1,302,017 3,458,480
Net income 156,599 94,562 251,161
Partnership distributions (270,886) (163,576) (434,462)
--------------- --------------- ---------------
Balance, December 31, 1998 $2,042,176 $1,233,003 $3,275,179
--------------- --------------- ---------------
</TABLE>
F-30
<PAGE>
FUND II AND III ASSOCIATES--BROOKWOOD GRILL
(A GEORGIA JOINT VENTURE)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $251,161 $145,954 $ 15,485
------------- ------------ -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 54,014 54,014 54,014
Equity in (income) loss of joint venture (78,791) (27,213) 19,378
Changes in assets and liabilities:
Accounts receivable 22,739 24,229 (9,262)
Prepaid expenses and other assets 5,568 5,568 5,568
Accounts payable (2,679) (16,161) 18,860
Due to affiliates (1,487) (1,163) 465
------------- ------------ -----------
Total adjustments (636) 39,274 89,023
------------- ------------ -----------
Net cash provided by operating activities 250,525 185,228 104,508
------------- ------------ -----------
Cash flows from investing activities:
Distributions received from joint venture 160,812 89,622 7,022
------------- ------------ -----------
Cash flows from financing activities:
Distributions to joint venture partners (391,702) (229,631) (136,320)
------------- ------------ -----------
Net increase (decrease) in cash and cash equivalents 19,635 45,219 (24,790)
Cash and cash equivalents, beginning of year 54,321 9,102 33,892
------------- ------------ -----------
Cash and cash equivalents, end of year $ 73,956 $ 54,321 $ 9,102
============= ============ ===========
</TABLE>
FUND II, III, VI, AND VII ASSOCIATES
On January 1, 1995, the Fund II and III Associates joint venture entered
into a joint venture agreement with Fund VI and Fund VII. The joint
venture, Fund II, III, VI, and VII Associates, was formed for the purpose
of acquiring, developing, operating, and selling real properties. During
1995, Fund II and III Associates contributed a 4.3-acre tract of land from
its 880 Property to the Fund II, III, VI, and VII Associates joint
venture. During 1996, 1997, and 1998, Fund VI and Fund VII made
contributions to the joint venture. Ownership percentage interests were
recomputed accordingly. Development was substantially completed in 1996 on
two retail and office buildings containing a total of approximately 49,500
square feet.
F-31
<PAGE>
The following are the financial statements for Fund II, III, VI, and VII
Associates:
FUND II, III, VI, AND VII ASSOCIATES
(A GEORGIA JOINT VENTURE)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
Assets
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Real estate assets, at cost:
Land $1,325,242 $1,325,242
Building and improvements, less accumulated
depreciation of $884,062 in 1998 and $507,772 in
1997 4,773,062 5,025,276
Construction in progress 41,263 59,564
---------------- ----------------
Total real estate assets 6,139,567 6,410,082
Cash and cash equivalents 308,788 219,391
Accounts receivable 111,460 54,524
Prepaid expenses and other assets 233,965 269,568
---------------- ----------------
Total assets $6,793,780 $6,953,565
================ ================
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $ 192,072 $ 170,776
Partnership distributions payable 209,716 131,907
---------------- ----------------
401,788 302,683
---------------- ----------------
Partners' capital:
Fund II and III Associates 1,507,807 1,608,215
Wells Real Estate Fund VI 1,682,380 1,789,811
Wells Real Estate Fund VII 3,201,805 3,252,856
---------------- ----------------
Total partners' capital 6,391,992 6,650,882
---------------- ----------------
Total liabilities and partners' capital $6,793,780 $6,953,565
================ ================
</TABLE>
F-32
<PAGE>
FUND II, III, VI, AND VII ASSOCIATES
(A GEORGIA JOINT VENTURE)
STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ -----------
<S> <C> <C> <C>
Revenues:
Rental income $872,978 $679,268 $255,062
Other income 36,000 0 0
------------- ------------ -----------
908,978 679,268 255,062
------------- ------------ -----------
Expenses:
Depreciation 376,290 325,974 181,798
Operating costs, net of reimbursements 85,983 122,261 75,018
Management and leasing fees 97,701 99,834 28,832
Legal and accounting 6,509 4,885 14,928
Property administration 14,926 17,321 10,286
Computer costs 0 228 1,368
------------- ------------ -----------
581,409 570,503 312,230
------------- ------------ -----------
Net income (loss) $327,569 $108,765 $ (57,168)
============= ============ ===========
Net income (loss) allocated to Fund II and III Associates $ 78,791 $ 27,213 $ (19,378)
============= ============ ===========
Net income (loss) allocated to Wells Real Estate Fund VI $ 87,914 $ 28,409 $ (10,193)
============= ============ ===========
Net income (loss) allocated to Wells Real Estate Fund VII $160,864 $ 53,143 $ (27,597)
============= ============ ===========
</TABLE>
F-33
<PAGE>
FUND II, III, VI, AND VII ASSOCIATES
(A GEORGIA JOINT VENTURE)
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
FUND II WELLS WELLS REAL TOTAL
AND III REAL ESTATE ESTATE PARTNERS'
ASSOCIATES FUND VI FUND VII CAPITAL
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $1,729,116 $1,028,210 $2,521,739 $5,279,065
Partnership contributions 0 761,259 835,646 1,596,905
Partnership distributions (19,494) (19,329) (37,237) (76,060)
Net loss (19,378) (10,193) (27,597) (57,168)
-------------- --------------- -------------- --------------
Balance, December 31, 1996 1,690,244 1,759,947 3,292,551 6,742,742
Partnership contributions 0 116,675 121,576 238,251
Partnership distributions (109,242) (115,220) (214,414) (438,876)
Net income 27,213 28,409 53,143 108,765
-------------- --------------- -------------- --------------
Balance, December 31, 1997 1,608,215 1,789,811 3,252,856 6,650,882
Partnership contributions 0 4,600 154,049 158,649
Partnership distributions (179,199) (199,945) (365,964) (745,108)
Net income 78,791 87,914 160,864 327,569
-------------- --------------- -------------- --------------
Balance, December 31, 1998 $1,507,807 $1,682,380 $3,201,805 $6,391,992
============== =============== ============== ==============
</TABLE>
F-34
<PAGE>
FUND II, III, VI, AND VII ASSOCIATES
(A GEORGIA JOINT VENTURE)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $327,569 $108,765 $ (57,168)
------------- ------------ ---------------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 376,290 325,974 181,798
Changes in assets and liabilities:
Accounts receivable (56,936) 12,810 (67,334)
Prepaid expenses and other assets 35,603 (123,748) (104,792)
Accounts payable and accrued expenses 21,296 (34,194) 88,532
------------- ------------ ---------------
Total adjustments 376,253 180,842 98,204
------------- ------------ ---------------
Net cash provided by operating activities 703,822 289,607 41,036
------------- ------------ ---------------
Cash flows from investing activities:
Decrease in construction payables 0 0 (358,467)
Investment in real estate (102,122) (620,059) (1,736,082)
------------- ------------ ---------------
Net cash used in investing activities (102,122) (620,059) (2,094,549)
------------- ------------ ---------------
Cash flows from financing activities:
Contributions from joint venture partners 154,996 230,699 1,434,308
Distributions to joint venture partners (667,299) (356,559) (26,470)
------------- ------------ ---------------
Net cash (used in) provided by financing
activities (512,303) (125,860) 1,407,838
------------- ------------ ---------------
Net increase (decrease) in cash and cash equivalents 89,397 (456,312) (645,675)
Cash and cash equivalents, beginning of year 219,391 675,703 1,321,378
------------- ------------ ---------------
Cash and cash equivalents, end of year $308,788 $219,391 $ 675,703
============= ============ ===============
Supplemental disclosure of noncash activities:
Deferred project costs contributed $ 3,653 $ 7,552 $ 162,597
============= ============ ===============
</TABLE>
F-35
<PAGE>
4. INCOME TAX BASIS NET INCOME AND PARTNERS' CAPITAL
The Partnership's income tax basis net income for the years ended December
31, 1998, 1997, and 1996 is calculated as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Financial statement net income (loss) $ 5,190 $(18,601) $ 6,273
Increase (decrease) in net income (loss) resulting from:
Depreciation expense for financial reporting
purposes in excess of amounts for income
tax purposes 35,189 32,988 27,841
Expenses deductible when paid for income
tax purposes, accrued for financial
reporting purposes 1,713 1,552 1,052
Rental income recognized for income tax
purposes less than amounts for financial
reporting purposes 1,485 457 3,650
Loss on retirement for income tax purposes 0 (775) 0
Involuntary conversion for income tax
purposes 0 (760) 0
Meals and entertainment 5 46 0
----------- ----------- ----------
Income tax basis net income $43,852 $ 14,907 $38,816
=========== =========== ==========
</TABLE>
F-36
<PAGE>
The Partnership's income tax partners' capital at December 31, 1998,
1997, and 1996 computed as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Financial statement partners' capital $1,236,239 $1,315,655 $1,370,809
Increase (decrease) in partners' capital
resulting from:
Depreciation expense for financial
reporting purposes in excess of
amounts for income tax purposes 102,346 67,157 34,169
Joint venture change in ownership (1,427) (1,427) (1,427)
Accumulated expenses deductible
when paid for income tax
purposes, accrued for financial
reporting purposes 29,595 27,882 26,330
Accumulated rental income accrued
for financial reporting in excess
of amounts for income tax
purposes (6,080) (7,565) (8,022)
Partnership distributions payable 18,974 18,213 8,576
Other (3,184) (3,189) (1,700)
------------ ------------ ------------
Income tax basis partners' capital $1,376,463 $1,416,726 $1,428,735
============ ============ ============
</TABLE>
5. RENTAL INCOME
The future minimum rental income due from the Partnership's respective
ownership interest in the joint ventures under noncancelable operating
leases at December 31, 1998 is as follows:
Year ended December 31:
1999 $154,622
2000 154,413
2001 112,307
2002 46,467
2003 20,284
Thereafter 133,415
--------
$621,508
========
Three significant tenants contributed approximately 34%, 17%, and 12% of
rental income, which is included in equity in income of joint ventures for
the year ended December 31, 1998. In addition, three significant tenants
will contribute approximately 34%, 26%, and 17% of future minimum rental
income.
F-37
<PAGE>
The future minimum rental income due Fund II and II-OW for the First Union
Property under noncancelable operating leases at December 31, 1998 is as
follows:
Year ending December 31:
1999 $ 788,059
2000 919,776
2001 306,592
--------------
$2,014,427
==============
One tenant at the First Union Property contributed 100% of rental income
for the year ended December 31, 1998 and will contribute 100% of future
minimum rental income.
The future minimum rental income due Fund I and II Tucker under
noncancelable operating leases at December 31, 1998 is as follows:
Year ending December 31:
1999 $1,022,295
2000 802,081
2001 470,129
2002 268,924
2003 36,342
Thereafter 131,800
--------------
$2,731,571
==============
One tenant contributed 11% of rental income for the year ended December
31, 1998 and will contribute approximately 21% of future minimum rental
income.
The future minimum rental income due Fund I, II, II-OW, VI, and VII
Associates--Cherokee under noncancelable operating leases at December 31,
1998 is as follows:
Year ending December 31:
1999 $ 883,301
2000 824,544
2001 737,386
2002 694,469
2003 636,952
Thereafter 4,424,471
--------------
$8,201,123
==============
One tenant contributed approximately 65% of rental income for the year
ended December 31, 1998 and will contribute approximately 88% of future
minimum rental income.
F-38
<PAGE>
The future minimum rental income due Fund II and III Associates--The
Atrium under noncancelable operating leases at December 31, 1998 is as
follows:
Year ending December 31:
1999 $1,458,240
2000 1,478,080
2001 1,488,000
2002 496,000
--------------
$4,920,320
==============
One tenant at The Atrium contributed 100% of rental income for the year
ended December 31, 1998 and will contribute 100% of future minimum rental
income.
The future minimum rental income due Fund II and III Associates--Brookwood
Grill under noncancelable operating leases at December 31, 1998 is as
follows:
Year ending December 31:
1999 $249,550
2000 249,550
2001 249,550
2002 20,796
------------
$769,446
============
One tenant contributed 100% of rental income for the year ended December
31, 1998 and will contribute 100% of future minimum rental income.
The future minimum rental income due Fund II, III, VI, and VII Associates
under noncancelable operating leases at December 31, 1998 is as follows:
Year ending December 31:
1999 $ 733,044
2000 701,474
2001 654,767
2002 335,261
2003 121,668
Thereafter 263,613
--------------
$2,809,827
==============
Four significant tenants contributed approximately 15%, 14%, 13%, and 12%
of rental income for the year ended December 31, 1998. In addition, two
significant tenants will contribute approximately 31% and 14% of future
minimum rental income.
6. COMMITMENTS AND CONTINGENCIES
Management, after consultation with legal counsel, is not aware of any
significant litigation or claims against the Partnership or the Company.
In the normal course of business, the Partnership or the Company may
become subject to such litigation or claims.
F-39
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wells Real Estate Fund II
and Wells Real Estate Fund II-OW:
We have audited the accompanying balance sheets of the First UNION PROPERTY as
of December 31, 1998 and 1997 and the related statements of income, partners'
capital, and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the property'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 The First Union Property as of
December 31, 1998 and 1997 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
January 27, 1999
F-2
<PAGE>
THE FIRST UNION PROPERTY
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
REAL ESTATE ASSETS:
Land $1,367,856 $1,367,856
Building and improvements, less accumulated depreciation of $2,623,785 in
1998 and $2,256,118 in 1997 5,147,333 5,515,000
---------- ----------
Total real estate assets 6,515,189 6,882,856
CASH AND CASH EQUIVALENTS 116,860 103,238
ACCOUNTS RECEIVABLE 23,184 84,208
PREPAID EXPENSES AND OTHER ASSETS 42,828 61,183
---------- ----------
Total assets $6,698,061 $7,131,485
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Payable to joint venture partners $ 118,125 $ 111,427
Due to affiliate 1,315 4,561
---------- ----------
Total liabilities 119,440 115,988
---------- ----------
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Wells Real Estate Fund II 6,244,136 6,657,813
Wells Real Estate Fund II-OW 334,485 357,684
---------- ----------
Total partners' capital 6,578,621 7,015,497
---------- ----------
Total liabilities and partners' capital $6,698,061 $7,131,485
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
THE FIRST UNION PROPERTY
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Rental income $458,867 $458,867 $460,920
-------- -------- --------
EXPENSES:
Depreciation 367,667 367,667 367,667
Legal and accounting 4,050 5,600 6,750
Management and leasing fees 45,887 45,887 45,887
Operating costs 10,878 6,574 10,349
Computer costs 0 107 1,410
-------- -------- --------
428,482 425,835 432,063
-------- -------- --------
NET INCOME $ 30,385 $ 33,032 $ 28,857
======== ======== ========
NET INCOME ALLOCATED TO WELLS REAL ESTATE FUND II $ 28,772 $ 31,278 $ 27,383
======== ======== ========
NET INCOME ALLOCATED TO WELLS REAL ESTATE FUND II-OW
$ 1,613 $ 1,754 $ 1,474
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
THE FIRST UNION PROPERTY
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
Wells Real Wells Real Total
Estate Estate Partners'
Fund II Fund II-OW Capital
========== ========== ==========
<S> <C> <C> <C>
BALANCE, December 31, 1995 $7,390,416 $397,987 $7,788,403
Net income 27,383 1,474 28,857
Distributions (377,447) (20,325) (397,772)
---------- ---------- ----------
BALANCE, December 31, 1996 7,040,352 379,136 7,419,488
Net income 31,278 1,754 33,032
Distributions (413,817) (23,206) (437,023)
---------- ---------- ----------
BALANCE, December 31, 1997 6,657,813 357,684 7,015,497
Net income 28,772 1,613 30,385
Distributions (442,449) (24,812) (467,261)
---------- ---------- ----------
BALANCE, December 31, 1998 $6,244,136 $334,485 $6,578,621
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
THE FIRST UNION PROPERTY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
========= ========== =========
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 30,385 $ 33,032 $ 28,857
--------- --------- ---------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 367,667 367,667 367,667
Changes in assets and liabilities:
Accounts receivable 61,024 30,352 (19,358)
Prepaid expenses and other assets 18,355 18,355 18,356
Due to affiliate (3,246) (1,147) 1,092
--------- --------- ---------
Total adjustments 443,800 415,227 367,757
--------- --------- ---------
Net cash provided by operating activities 474,185 448,259 396,614
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to joint venture partners (460,563) (433,059) (406,211)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
13,622 15,200 (9,597)
CASH AND CASH EQUIVALENTS, beginning of year 103,238 88,038 97,635
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 116,860 $ 103,238 $ 88,038
========= ========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
THE FIRST UNION PROPERTY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
The First Union Property ("First Union") is a two-story office building
located in Charlotte, North Carolina. The property is owned by Fund II and
II-OW, a joint venture between Wells Real Estate Fund II ("Fund II") and
Wells Real Estate Fund II-OW ("Fund II-OW"). Fund II owns 95% of Fund II and
II-OW and Fund II-OW owns 5% of Fund II and II-OW at December 31, 1998 and
1997. Allocation of net income and distributions are made in accordance with
ownership percentages.
Use of Estimates
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.
Income Taxes
First Union is not deemed to be a taxable entity for federal income tax
purposes.
Real Estate Assets
Real estate assets held by First Union are stated at cost, less accumulated
depreciation. Major improvements and betterments are capitalized when they
extend the useful life of the related asset. All repairs and maintenance are
expensed as incurred.
Management continually monitors events and changes in circumstances which
could indicate that carrying amounts of real estate assets may not be
recoverable. When events or changes in circumstances are present which
indicate that the carrying amounts of real estate assets may not be
recoverable, management assesses the recoverability of real estate assets by
determining whether the carrying value of such real estate assets will be
recovered through the future cash flows expected from the use of the asset
and its eventual disposition. Management has determined that there has been
no impairment in the carrying value of First Union as of December 31, 1998.
Depreciation is calculated using the straight-line method over 25 years.
F-7
<PAGE>
Revenue Recognition
The lease on First Union is classified as an operating lease, and the related
rental income is recognized on a straight-line basis over the term of the
lease.
Deferred Lease Acquisition Costs
Costs incurred to procure operating leases are capitalized and amortized on a
straight-line basis over the terms of the related leases.
Cash and Cash Equivalents
For the purposes of the statements of cash flows, First Union considers all
highly liquid investments purchased with an original maturity of three months
or less to be cash equivalents. Cash equivalents include cash and short-term
investments. Short-term investments are stated at cost, which approximates
fair value, and consist of investments in money market accounts.
2. RENTAL INCOME
The future minimum rental income due First Union under noncancelable
operating leases at December 31, 1998 is as follows:
Year ended December 31:
1999 $ 788,059
2000 919,776
2001 306,592
----------
$2,014,427
==========
One tenant at First Union contributed 100% of rental income for the year
ended December 31, 1998 and represents 100% of the future minimum rental
income above.
3. RELATED-PARTY TRANSACTIONS
Fund II and II-OW entered into a property management agreement with Wells
Management Company, Inc. ("Wells Management"), an affiliate of Fund II and
II-OW. In consideration for supervising the management of First Union, Fund
II and II-OW will generally pay Wells Management management and leasing fees
equal to (a) 3% of the gross revenues for management and 3% of the gross
revenues for leasing (aggregate maximum of 6%) plus a separate fee for the
one-time initial lease-up of newly constructed properties in an amount not to
exceed the fee customarily charged in arm's-length transactions by others
rendering similar services in the same geographic area for similar properties
or (b) in the case of commercial properties which are leased on a long-term
net basis (ten or more years), 1% of the gross revenues except for initial
leasing fees equal to 3% of the gross revenues over the first five years of
the lease term.
F-8
<PAGE>
First Union incurred management and leasing fees and lease acquisition costs
of $45,887 for each of the three years ended December 31, 1998, 1997, and
1996, which were paid to Wells Management.
F-9
<PAGE>
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
SCHEDULE III--REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Initial Cost
------------ Costs of
Buildings and Capitalized
Description Encumbrances Land Improvements Improvements
- ------------------------------------ -------------- ------------ --------------- --------------
<S> <C> <C> <C> <C>
THE CHARLOTTE PROPERTY (a) None $1,282,500 $ 7,267,500 $ 588,974
880 PROPERTY (b) None 1,325,242 0 5,698,385
THE ATRIUM AT NASSAU BAY (c) None 1,367,000 10,983,000 2,526,766
CHEROKEE COMMONS (d) None 1,142,663 6,462,837 2,833,007
HERITAGE PLACE AT TUCKER (e) None 2,756,378 0 9,484,907
880 PROPERTY--BROOKWOOD GRILL (f) None 523,319 0 1,494,717
----------- ------------- -----------
Total $8,397,102 $24,713,337 $22,633,208
=========== ============= ===========
<CAPTION>
Gross Amount at Which Carried at December 31, 1998
--------------------------------------------------
Buildings and Construction Accumulated
Description Land Improvements in Progress Total Depreciation
- ------------------------------------ ----------- -------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
THE CHARLOTTE PROPERTY (a) $1,367,856 $ 7,771,118 $ 0 $ 9,138,974 $ 2,623,784
880 PROPERTY (b) 1,325,242 5,657,122 41,263 7,023,627 884,062
THE ATRIUM AT NASSAU BAY (c) 1,504,743 13,372,023 0 14,876,766 5,433,962
CHEROKEE COMMONS (d) 1,219,704 9,218,803 0 10,438,507 2,717,803
HERITAGE PLACE AT TUCKER (e) 3,260,887 8,953,667 26,731 12,241,285 2,913,652
880 PROPERTY--BROOKWOOD GRILL (f) 745,223 1,272,813 0 2,018,036 329,729
----------- -------------- ------------- ----------- ------------
Total $9,423,655 $46,245,546 $67,994 $55,737,195 $14,902,992
=========== ============== ============= =========== ============
<CAPTION>
Life on Which
Date of Date Depreciation Is
Description Construction Acquired Computed (g)
- ------------------------------------ ------------ -------- ---------------
<S> <C> <C> <C>
THE CHARLOTTE PROPERTY (a) 1987 5/09/89 20 to 25 years
880 PROPERTY (b) 1996 1/31/90 20 to 25 years
THE ATRIUM AT NASSAU BAY (c) 1988 4/03/89 12 to 25 years
CHEROKEE COMMONS (d) 1986 6/09/87 20 to 25 years
HERITAGE PLACE AT TUCKER (e) 1987 9/04/86 20 to 25 years
880 PROPERTY--BROOKWOOD GRILL (f) 1991 3/27/91 20 to 25 years
Total
</TABLE>
(a) The Charlotte Property is a two-story office building located in Charlotte,
North Carolina. It is owned by Fund II and II-OW. The Partnership owned a
5% interest in Fund II and II-OW at December 31, 1998.
(b) The 880 Property is a 4.3-acre tract of real property under development
located in Fulton County, Georgia. It is owned by Fund II, III, VI, and VII
Associates. The Partnership owns a 5% interest in the Fund II and II-OW
joint venture, which owned a 14% interest in Fund II, III, VI, and VII
Associates at December 31, 1998.
(c) The Atrium at Nassau Bay is a four-story office building located in
Houston, Texas. It is owned by Fund II and III Associates--The Atrium. The
Partnership owns a 5% interest in the Fund II and II-OW joint venture,
which owned a 63% interest in Fund II and III Associates at December 31,
1998.
(d) Cherokee Commons is a retail shopping center located in Cherokee County,
Georgia. It is owned by Fund I, II, II-OW, VI, and VII Associates--
Cherokee. The Partnership owns a 5% interest in the Fund II and II-OW joint
venture, which owned a 55% interest in Fund I, II, II-OW, VI, and VII
Associates--Cherokee at December 31, 1998.
(e) Heritage Place at Tucker is a center offering retail, shopping, and
commercial office space located in Tucker, Georgia. It is owned by Fund I
and II--Tucker. The Partnership owns a 5% interest in the Fund II and II-OW
joint venture, which owned a 45% interest in Fund I and II--Tucker at
December 31, 1998.
(f) The 880 Property--Brookwood Grill is a 7,440-square-foot restaurant located
in Fulton County, Georgia. It is owned by Fund II and III Associates. The
Partnership owns a 5% interest in the Fund II and II-OW joint venture,
which owned a 62% interest in the 880 Property--Brookwood Grill at
December 31, 1998.
(g) Depreciation lives used for buildings were 40 years through September 1995,
changed to 25 years thereafter. Depreciation lives used for land
improvements are 12 to 20 years.
S-1
<PAGE>
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
SCHEDULE III--REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
December 31, 1998
Accumulated
Cost Depreciation
------------ ----------------
BALANCE at December 31, 1996 $53,875,834 $10,058,938
1997 additions 1,989,779 2,404,063
1997 deductions (382,775) (109,508)
------------ ----------------
BALANCE at December 31, 1997 55,482,838 12,353,493
1998 additions 254,357 2,549,499
------------ ----------------
BALANCE at December 31, 1998 $55,737,195 $14,902,992
============ ================
S-2
<PAGE>
EXHIBIT INDEX
(Wells Real Estate Fund II-OW)
The following documents are filed as exhibits to this report. Those
exhibits previously filed and incorporated herein by reference are identified
below by an asterisk. For each such asterisked exhibit, there is shown below the
description of the previous filing. Exhibits which are not required for this
report are omitted.
<TABLE>
Exhibit Sequential
Number Description of Document Page Number
- ------ ----------------------- -----------
<S> <C> <C>
*4 Restated and Amended Certificate and N/A
Agreement of Limited Partnership of
Wells Real Estate Fund II-OW (Registration
Statement of Wells Real Estate Fund II-OW,
Exhibit B to the Prospectus, File No.
33-17977)
*10(a) Management Agreement between Registrant N/A
and Wells Management Company, Inc. (Exhibit
to Form 10-K of Wells Real Estate Fund
II-OW for the fiscal year ended December 31,
1990, File No. 0-17876)
*10(b) Leasing and Tenant Coordination Agreement N/A
between Registrant and Wells Management
Company, Inc. (Exhibit to Form 10-K of
Wells Real Estate Fund II-OW for the fiscal
year ended December 31, 1990, File No. 0-17876)
*10(c) Purchase Agreement for the acquisition N/A
of Heritage Place at Tucker dated
April 25, 1986 (Exhibit 10(f) to Form 10-K
of Wells Real Estate Fund I for the
fiscal year ended December 31, 1990,
File No. 0-14463)
*10(d) Joint Venture Agreement of Fund I and N/A
Fund II Tucker dated January 9, 1987
(Exhibit 10(g) to Form 10-K of Wells Real
Estate Fund I for the fiscal year ended
December 31, 1990, File No. 0-14463)
</TABLE>
<PAGE>
<TABLE>
Exhibit Sequential
Number Description of Document Page Number
- ------ ----------------------- -----------
<S> <C> <C>
*10(e) Purchase Agreement for the acquisition N/A
of the Cherokee Commons Shopping Center
dated December 31, 1986 (Exhibit 10(h) to
Form 10-K of Wells Real Estate Fund I
for the fiscal year ended December 31,
1990, File No. 0-14463)
*10(f) Joint Venture Agreement of Fund I and N/A
Fund II Cherokee dated June 27, 1987
(Exhibit 10(i) to Form 10-K of Wells Real
Estate Fund I for the fiscal year ended
December 31, 1990, File No. 0-14463)
*10(g) Fund II - Fund II-OW Joint Venture N/A
Agreement dated March 1, 1988 (Exhibit
10(g) to Form 10-K of Wells Real Estate
Fund II for the fiscal year ended
December 31, 1990, File No. 0-16518)
*10(h) Lease with IBM dated March 17, 1987 N/A
(Exhibit 10(h) to Form 10-K of Wells Real
Estate Fund II for the fiscal year
ended December 31, 1990, File No. 0-16518)
*10(i) Purchase Agreement for the Acquisition N/A
of the Atrium at Nassau Bay dated
March 1, 1989 (Exhibit 10(i) to Form 10-K
of Wells Real Estate Fund II for the
fiscal year ended December 31, 1990,
File No. 0-16518)
*10(j) Joint Venture Agreement of Fund II and N/A
Fund III Associates dated March 1, 1989
(Exhibit to Post-Effective Amendment
No. 2 to Registration Statement of
Wells Real Estate Fund III, L.P.,
File No. 33-24063)
</TABLE>
<PAGE>
<TABLE>
Exhibit Sequential
Number Description of Document Page Number
- ------ ----------------------- -----------
<S> <C> <C>
*10(k) First Amendment to Joint Venture Agreement N/A
of Fund II and Fund III Associates dated
April 1, 1989 (Exhibit 10(k) to Form 10-K of
Wells Real Estate Fund II for the fiscal
year ended December 31, 1990, File No.
0-16518)
*10(l) Leases with Lockheed Engineering and N/A
Sciences Company, Inc. (Exhibit 10(l) to
Form 10-K of Wells Real Estate Fund II
for the fiscal year ended December 31,
1990, File No. 0-16518)
*10(m) Cost Sharing Agreement between Registrant, N/A
Wells Fund II and the Fund II - Fund
II-OW Joint Venture dated January 1,
1990 (Exhibit 10(m) to Form 10-K of Wells Real
Estate Fund II for the fiscal year ended
December 31, 1990, File No. 0-16518)
*10(n) Amended and Restated Joint Venture Agreement N/A
of Fund I and Fund II Tucker-Cherokee dated
January 1, 1991 (Exhibit 10(j) to Form 10-K
of Wells Real Estate Fund I for the fiscal
year ended December 31, 1991, File No. 0-14463)
*10(o) Amended and Restated Joint Venture Agreement N/A
of Fund II and Fund III Associates (Exhibit
10(o) to Form 10-K of Wells Real Estate Fund
II for the fiscal year ended December 31, 1991,
File No. 0-16518)
*10(p) Land and Building Lease Agreement between Fund N/A
II and Fund II-OW and Brookwood Grill of
Roswell, Inc. (Exhibit 10(p) to Form 10-K of
Wells Real Estate Fund II for the fiscal year
ended December 31, 1991, File No. 0-16518)
</TABLE>
<PAGE>
<TABLE>
Exhibit Sequential
Number Description of Document Page Number
- ------ ----------------------- -----------
<S> <C> <C>
*10(q) Assignment and Assumption of Lease dated N/A
September 20, 1991 between Fund II and
Fund II-OW and Fund II and Fund III
Associates (Exhibit 10(q) to Form 10-K of
Wells Real Estate Fund II for the fiscal
year ended December 31, 1991, File No.
0-16518)
*10(r) Lease Modification Agreement No. 3 with N/A
The Kroger Co. dated December 21, 1993
(Exhibit 10(k) to Form 10-K of Wells Real
Estate Fund I for the fiscal year ended
December 31, 1993, File No. 0-14463)
*10(s) Lease Agreement with First Union National N/A
Bank of N.C. dated March 31, 1994, and
First Amendment to Lease Agreement dated
April 14, 1994 (Exhibit 10(s) to Form 10-K
of Wells Real Estate Fund II for the fiscal
year ended December 31, 1994, File No.
0-16518)
*10(t) Joint Venture Agreement of Fund II, III, N/A
VI and VII Associates dated January 10,
1995 (Exhibit to Form 10-K of Wells Real
Estate Fund VI, L.P. for the fiscal year
ended December 31, 1995, File No. 0-23656)
*10(u) Joint Venture Agreement of Fund I, II, N/A
II-OW, VI and VII Associates dated
August 1, 1995 (Exhibit to Form 10-K of
Wells Real Estate Fund VI, L.P. for the
fiscal year ended December 31, 1995,
File No. 0-23656)
*10(v) First Amendment to Amended and Restated N/A
Joint Venture Agreement of Fund I and
Fund II Tucker (formerly Fund I and Fund II
Tucker-Cherokee) dated August 1, 1995
(Exhibit 10(m) to Form 10-K of Wells Real
Estate Fund I for the fiscal year ended
December 31, 1995, File No. 0-14463)
</TABLE>
<PAGE>
<TABLE>
Exhibit Sequential
Number Description of Document Page Number
- ------ ----------------------- -----------
<S> <C> <C>
*10(w) Custodial Agency Agreement between Wells N/A
Real Estate Fund II-OW and NationsBank of
Georgia, N.A. dated January 10, 1995
(Exhibit to Form 10-K of Wells Real Estate
Fund II-OW for the fiscal year ended
December 31, 1995, File No. 0-17876)
*10(x) Amended and Restated Custodial Agency N/A
Agreement between Wells Real Estate Fund
II-OW and NationsBank of Georgia, N.A.
dated August 1, 1995 (Exhibit to Form
10-K of Wells Real Estate Fund II-OW
for the fiscal year ended December 31,
1995, File No. 0-17876)
</TABLE>
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