ANNUAL REPORT
FOR THE PERIOD ENDED
DECEMBER 31, 1995
FELLOW PARTNERS:
Net income from operations in 1995 was $1,044,000, an increase of $526,000
from 1994. Properties held throughout both years contributed $675,000 over
last year's operations. Metropolitan contributed $149,000 to net income before
its sale in 1994 but nothing this year. The effect of increased bad debt
expense in 1995 at Goshen Plaza, Kent Sea Park, and Tierrasanta was more than
offset by not having any valuation adjustments this year compared with
$730,000 in 1994.
The absence of operations at Metropolitan accounted for a decline of
$379,000 in revenues and $230,000 in expenses relative to 1994. Proceeds from
the sale of Metropolitan in June 1994 contributed a gain of $577,000 to net
income in 1994.
The leased status of the portfolio at the end of 1995 was the same as it
was in 1994, but the average for the year was lower, primarily driven by
Goshen Plaza and Fairchild Corporate Center. Even so, revenue gains at other
properties offset the effect of the declines at these two properties.
Within the expense categories, management fees experienced a sharp drop
from 1994 primarily because there was less cash available for distribution in
1995
The cash position declined from the beginning of year level. Cash from
operating activities declined by $325,000 during the year, and capital
improvements increased $343,000. Proceeds from dividend reinvestments net of
redemptions increased $540,000.
Distributions
The Fund declared a fourth-quarter distribution from operations of $0.47 per
unit, bringing the total for the year to $1.88.
We plan to distribute $0.40 per unit from operations in the first
quarter of 1996. While we hope to maintain this rate throughout the year, we
will evaluate it in each subsequent quarter based on operations, the cash
needs of the Fund, and/or any dispositions.
Unit Valuation
As we do at each year-end, we employed a third-party appraiser to review and
assess the analysis and assumptions used in determining an estimated current
unit value. These interim valuations are not necessarily representative of the
value of your units when the Fund ultimately liquidates its holdings, nor
could you sell your units today at a price equal to the current estimated
value.
At the end of 1995, the estimated value was $31.00 per unit, unchanged
from last year's amount after deducting the February 1995 payment from cash
reserves. Basically, the estimated fair values of the properties were up
slightly, but no one property changed, either up or down, to any meaningful
extent.
Outlook
With the exception of Goshen Plaza, we are optimistic about the prospects for
the portfolio in 1996. We have received an attractive unsolicited offer to
purchase the Burnham Building, and we are in the process of evaluating whether
to accept it. Renovations undertaken at Fairchild appear to be contributing to
increased interest in the property, and the modernization project at Westbrook
Commons has made a real difference in the center's appearance. In addition,
most of the markets in which the properties operate seem to be improving, and
we hope the more favorable environment will have an impact on your portfolio.
Sincerely,
James S. Riepe
Chairman
February 15, 1996
INVESTMENT ADVISOR'S REPORT
As discussed in recent reports, the real estate market is slowly improving,
with some segments such as industrial recovering more rapidly than others such
as office properties. The absence of meaningful new construction combined with
continued net positive absorption in all segments has begun to attract not
only opportunistic capital but also some institutional capital into the real
estate sector, which is a favorable development.
The results of Russell-NCREIF Index, which measures income returns and
changes in values for real estate investments, reflect the general state of
the market. From 1991 through 1993 property values experienced average annual
declines of approximately 10%. This rate slowed as values decreased by 4% and
1% for the 12 months ended September 30, 1994 and 1995, respectively. Income
returns of 9% during each of those two years more than offset the value
declines, resulting in positive total returns for the index for the first time
since September 1990.
The index also identifies returns by product type and by geographical
region. As anticipated, because of the weak operating environment, office
buildings have not performed as well as other product types, with value
declines of approximately 3% for the 12 months ended September 30, 1995. This
is an improvement, however, over the average 14% per year drop over the last
four years. Industrial properties, on the other hand, appreciated in value by
3% for the 12 months ended September 30, 1995. In that same period, other real
estate product types, such as retail and multi-family, performed better than
they had in prior years.
Property values in geographic regions depend significantly on the local
economy. The South, where values in general depreciated less than 1% for the
12 months ended September 30, 1995, continues to outperform other regions, but
even its recovery has been prolonged due to the depressed energy business.
Value declines in the East and Midwest have moderated, and the Western region
has experienced a dramatic improvement recently. In 1994, property values in
the West were down significantly but, for the 12 months ended September 30,
1995, declined only around 1%. In analyzing this information, it is clear that
the multi-family and industrial segments are heavily influencing the results,
since the office segment in the West declined approximately 5%. We continue to
see increased leasing activity and improved economics for owners.
We are encouraged by the positive annual total returns of the
Russell-NCREIF Index for the past two years. We are also heartened by the
performance of Realty Income Fund IV's portfolio, which experienced a slight
increase in value compared to a modest decline in the Russell-NCREIF Index.
Property Highlights
The primary improvement at the property level occurred at Tierrasanta where
occupancy was 23 percentage points over the previous year. However, this gain
was offset primarily by declines at Goshen Plaza and Fairchild Corporate
Center. In general, occupancy and rental rates in the markets where your
properties operate are stable to rising.
Real Estate Investments
__________________________________________
Gross % Leased
Leasable ___________________
Area Prior Current 1996 Lease
Property (Sq. Ft.) Year-End Year-End Expirations
________ ________ ________ ________ __________
Tierrasanta 104,200 77% 100% 38%
Goshen Plaza 45,500 93 75 9
Westbrook Commons 121,600 97 96 6
Burnham Building 71,200 100 100 0
Kent Sea Park 138,200 100 97 21
Fairchild Corporate
Center 104,800 85 73 31
_________ _____ _____ _____
Fund Total 585,500 92% 92% 19%
Tierrasanta: Although we lost one financially troubled tenant during the
year, we were able to re-lease its space, bringing the leased status to 100%
by year-end. In total, three new leases for 31,000 square feet and one
renewal/expansion were signed at this San Diego property. One lease with a
tenant who occupies 38% of the space expires in 1996, and we are actively
working with this tenant on renewal terms. It is too early to predict an
outcome of the negotiations.
Goshen Plaza: One new and one renewal lease representing 2,600 square
feet, or 6% of the total space, was signed during the year at this Montgomery
Village, Maryland, retail center. Four financially troubled tenants who
occupied 9,400 square feet left, however, causing occupancy to decline
substantially. The lost tenants included the restaurant which occupied 4,200
square feet. We are aggressively marketing these spaces, and have generated
considerable activity, but do not foresee any imminent lease signings.
Occupancy in the market rose approximately two percentage points during the
year, while average rental rates have increased almost 15%. We hope some of
this favorable market environment will translate into better results at Goshen
in 1996.
Westbrook Commons: One new and six renewal leases were signed during the
year, generally at higher rates than on the prior leases, at this suburban
Chicago retail center. However, one tenant did not renew, and two tenants left
because of credit issues, causing occupancy to decline slightly. During the
year, we initiated a strategy to update the appearance of the center in order
to make it more attractive to prospective tenants. The property's face lift
has made a substantial difference.
Burnham Building: This South Florida industrial property remains fully
occupied by a single tenant (and its sub-tenants) under a long-term lease.
IBM, which has been a dominant factor in this market, continued to reduce its
commitment to space in the area. Even so, the market appeared to stabilize as
the year progressed, and available industrial space has become somewhat
scarce.
Kent Sea Park: We signed two new tenants during the year at this Seattle
area industrial project, but overall occupancy dropped slightly because we
were unable to re-lease all of the space vacated by a tenant with financial
difficulties. Occupancy in the submarket improved modestly - from 95% to 96% -
during the year, fueling a start in speculative construction. Approximately
one million square feet of speculative space should be available early in
1996, while another three million square feet in speculative and/or
build-to-suit properties are in the planning stages. Market rental rates have
increased around 5% for typical industrial space during the past 12 months.
Fairchild Corporate Center: The leased status declined at this Orange
County, California, office property primarily due to the loss on the last day
of the year of a tenant representing 9% of the space. Additionally, over the
course of the year, two tenants who leased a total of 6% of the property left
for financial reasons and three other tenants vacated upon their lease
expirations. On the positive side, we completed the first phase of renovating
the two buildings, renamed the property, and overall activity has picked up.
Three new tenants were signed for 16% of the site, and six existing tenants
renewed and/or expanded for another 8% of the property.
Outlook
The year 1996 looks fairly promising except for Goshen Plaza. All of the
markets in which the properties compete are showing signs of improving
occupancy and/or rental rates. In addition, renovations were started and/or
completed at two of the properties, and we believe these expenditures will
make each property more attractive to potential tenants as well as to those
who are considering renewal. Thus, we face the coming year with optimism that
operating results can improve over 1995.
LaSalle Advisors
February 15, 1996
REAL ESTATE HOLDINGS
December 31, 1995
(In thousands)
Accumu- Current
Property Type and Date Total lated De- Carrying
Name Location Acquired Cost* preciation Amount
____________________________________________________________
Tierrasanta Business Park 5/88 $4,592 $(1,142) $3,450
San Diego,
California
Fairchild
Corporate Office 7/88 1,451 (166) 1,285
Center Irvine,
California
Goshen PlazaRetail 11/90 7,138 (896) 6,242
Gaithersburg,
Maryland
Westbrook Retail 12/90 5,645 (688) 4,957
Commons Westchester,
Illinois
Burnham
Building Warehouse 1/91 2,589 (304) 2,285
Boca Raton,
Florida
Kent Sea ParkBusiness Park8/91 5,382 (652) 4,730
Kent, Washington
_______ _______ _______
$26,797 $(3,848) $22,949
______________ _______
______________ _______
*Includes original purchase price, subsequent improvements, and, in the case
of Tierrasanta and Fairchild Corporate Center, reductions for permanent
impairments.
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,December 31,
1995 1994
_______________________
Assets
Real Estate Property Investments
Land. . . . . . . . . . . . . . . . $ 8,502 $8,502
Buildings and Improvements. . . . . 18,295 17,771
________ ________
26,797 26,273
Less: Accumulated Depreciation
and Amortization. . . . . . . . . . . (3,848) (3,171)
________ ________
22,949 23,102
Cash and Cash Equivalents. . . . . . . 1,733 2,327
Accounts Receivable (less allowances of
$367 and $123) . . . . . . . . . . . . 623 622
Other Assets . . . . . . . . . . . . . 280 155
________ ________
$25,585 $26,206
________ ________
________ ________
Liabilities and Partners' Capital
Security Deposits and Prepaid Rents. . $ 200 $ 197
Accrued Real Estate Taxes. . . . . . . 353 326
Accounts Payable and
Other Accrued Expenses . . . . . . . . 234 320
Minority Interest. . . . . . . . . . . 688 688
________ ________
Total Liabilities. . . . . . . . . . . 1,475 1,531
Partners' Capital. . . . . . . . . . . 24,110 24,675
________ ________
$25,585 $26,206
________ ________
________ ________
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per-unit amounts)
Years Ended December 31,
1995 1994 1993
_______ _______ _______
Revenues
Rental Income. . . . . . . . . . . $3,616 $3,950 $4,177
Interest Income. . . . . . . . . . 90 162 53
_______ _______ _______
3,706 4,112 4,230
_______ _______ _______
Expenses
Property Operating Expenses. . . . 940 823 837
Real Estate Taxes. . . . . . . . . 589 635 642
Depreciation and Amortization. . . 786 873 819
Decline of Property Values . . . . - 730 75
Management Fee to General Partner. 85 267 192
Partnership Management Expenses. . 262 266 273
Amortization of Organization Costs - - 34
_______ _______ _______
2,662 3,594 2,872
_______ _______ _______
Net Income from Operations before
Real Estate Sold. . . . . . . . 1,044 518 1,358
Gain on Real Estate Sold . . . . . - 577 -
_______ _______ _______
Net Income . . . . . . . . . . . . $1,044 $1,095 $1,358
_______ _______ _______
_______ _______ _______
Activity per Limited Partnership Unit
Net Income . . . . . . . . . . . . $1.35 $1.45 $1.80
_______ _______ _______
_______ _______ _______
Cash Distributions Declared
from Operations. . . . . . . . . $1.88 $2.62 $2.57
as Return of Capital . . . . . . - 0.78 -
from Sale Proceeds . . . . . . . - 7.85 -
_______ _______ _______
Total Distributions Declared . . . $1.88 $11.25 $2.57
_______ _______ _______
_______ _______ _______
Weighted Average Number of
Units Outstanding. . . . . . . . . 766,443 747,028 747,595
_______ _______ _______
_______ _______ _______
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(In thousands)
General Limited
PartnerPartners Total
________________________
Balance, December 31, 1992 . . . . $ (40) $31,700 $31,660
Net Income . . . . . . . . . . . . 14 1,344 1,358
Reinvestments in Units . . . . . . - 887 887
Redemptions of Units . . . . . . . - (653) (653)
Cash Distributions . . . . . . . . (21) (2,092) (2,113)
_______ _______ _______
Balance, December 31, 1993 . . . . (47) 31,186 31,139
Net Income . . . . . . . . . . . . 8 1,087 1,095
Reinvestments in Units . . . . . . - 792 792
Redemptions of Units . . . . . . . - (632) (632)
Cash Distributions . . . . . . . . (19) (7,700) (7,719)
_______ _______ _______
Balance, December 31, 1994 . . . . (58) 24,733 24,675
Net Income . . . . . . . . . . . . 10 1,034 1,044
Reinvestments in Units . . . . . . - 999 999
Redemptions of Units . . . . . . . - (299) (299)
Cash Distributions . . . . . . . . (24) (2,285) (2,309)
_______ _______ _______
Balance, December 31, 1995 . . . . $ (72) $24,182 $24,110
_______ _______ _______
_______ _______ _______
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
1995 1994 1993
_______ _______ _______
Cash Flows from Operating Activities
Net Income . . . . . . . . . . . . $1,044 $1,095 $1,358
Adjustments to Reconcile
Net Income to Net Cash
Provided by Operating Activities
Depreciation and Amortization . 786 873 819
Decline of Property Values. . . - 730 75
Gain on Real Estate Sold. . . . - (577) -
Change in Accounts Receivable,
Net of Allowances. . . . . . . . (1) (139) 55
Increase in Other Assets. . . . (125) (27) (37)
Other Changes in
Assets and Liabilities . . . . . (56) 18 78
_______ _______ _______
Net Cash Provided by
Operating Activities . . . . . . . 1,648 1,973 2,348
_______ _______ _______
Cash Flows from Investing Activities
Proceeds from Property Disposition - 5,870 -
Investments in Real Estate . . . . (633) (290) (339)
_______ _______ _______
Net Cash Provided by (Used in)
Investing Activities . . . . . . . (633) 5,580 (339)
_______ _______ _______
Cash Flows from Financing Activities
Cash Distributions . . . . . . . . (2,309) (7,719) (2,113)
Reinvestments in Units . . . . . . 999 792 887
Redemptions of Units . . . . . . . (299) (632) (653)
_______ _______ _______
Net Cash Used in Financing Activities(1,609)(7,559) (1,879)
_______ _______ _______
Cash and Cash Equivalents
Net Increase (Decrease) during Year (594) (6) 130
At Beginning of Year . . . . . . . 2,327 2,333 2,203
_______ _______ _______
At End of Year . . . . . . . . . . $1,733 $2,327 $2,333
_______ _______ _______
_______ _______ _______
The accompanying notes are an integral part of the consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
T. Rowe Price Realty Income Fund IV, America's Sales-Commission-Free Real
Estate Limited Partnership (the "Partnership"), was formed on November 17,
1987, under the Delaware Revised Uniform Limited Partnership Act for the
purpose of acquiring, operating, and disposing of existing income-producing
commercial and industrial real estate properties. T. Rowe Price Realty Income
Fund IV Management, Inc., is the sole General Partner. The initial offering
resulted in the sale of 692,598 limited partnership units at $50 per unit.
The Partnership has a reinvestment plan whereby the Limited Partners may
elect to have their cash distributions automatically reinvested in additional
units of the Partnership, or fractions thereof, instead of receiving cash
payments. The reinvestment price per unit is the estimated fair market value
of the unit as determined by the General Partner in accordance with the
partnership agreement. As of December 31, 1995, 154,299 units had been
purchased under this plan for total reinvestment of $6,526,000.
The Partnership also has a redemption plan whereby Limited Partners may
request that the Partnership redeem their units. Since September 30, 1992, the
redemption price of a unit has been equal to 90% of the estimated fair market
value of a unit as determined by the General Partner in accordance with the
partnership agreement. As of December 31, 1995, 74,691 units had been redeemed
under this plan for a total of $2,724,000.
In accordance with provisions of the partnership agreement, income from
operations is allocated and related cash distributions are generally paid to
the General and Limited Partners at the rates of 1% and 99%, respectively.
Sale or refinancing proceeds are generally allocated first to the Limited
Partners in an amount equal to their capital contributions, next to the
Limited Partners to provide specified returns on their adjusted capital
contributions, next 3% to the General Partner, with any remaining proceeds
allocated 85% to the Limited Partners and 15% to the General Partner. Gain on
property sold is generally allocated first between the General Partner and
Limited Partners in an amount equal to the depreciation previously allocated
from the property and then in the same ratio as the distribution of sale
proceeds. Cash distributions, if any, are made quarterly based upon cash
available for distribution, as defined in the partnership agreement. Cash
available for distribution will fluctuate as changes in cash flows and
adequacy of cash balances warrant.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Partnership's financial statements are prepared in accordance with
generally accepted accounting principles which requires the use of estimates
and assumptions by the General Partner.
The accompanying consolidated financial statements include the accounts
of the Partnership and its pro-rata share of the accounts of Tierrasanta 234,
Fairchild 234, and Penasquitos 34 (Westbrook Commons), all of which are
California general partnerships, in which the Partnership has 40%, 20%, and
50% interests, respectively. The other partners in these ventures are
affiliates of the Partnership. Additionally, the accounts of Goshen Road
Limited Partnership, a Maryland limited partnership in which the Partnership
has a 90% controlling general partnership interest have been consolidated. All
intercompany accounts and transactions have been eliminated in consolidation.
The Partnership will review its real estate property investments for
impairment whenever events or changes in circumstances indicate that the
property carrying amounts may not be recoverable. Such a review results in the
Partnership recording a provision for impairment of the carrying value of its
real estate investments whenever the estimated future cash flows from a
property's operations and projected sale are less than the property's net
carrying value. The General Partner believes that the estimates and
assumptions used in evaluating the carrying value of the Partnership's
properties are appropriate; however, changes in market conditions and
circumstances could occur in the near term which would cause these estimates
to change.
Depreciation is calculated primarily on the straight-line method over
the estimated useful lives of buildings and improvements, which range from
five to 40 years. Lease commissions and tenant improvements are capitalized
and amortized over the life of the lease using the straight-line method.
Organization costs were amortized over a five-year period.
Cash equivalents consist of money market mutual funds, the cost of which
approximates fair value.
The Partnership uses the allowance method of accounting for doubtful
accounts. Provisions for uncollectible tenant receivables in the amounts of
$269,000, $102,000, and $65,000 were recorded in 1995, 1994, and 1993,
respectively. Bad debt expense is included in Property Operating Expenses.
Rental income is recognized by the Partnership on a straight-line basis
over the term of each lease. Rental income accrued, but not yet billed, is
included in Other Assets and aggregates $192,000 and $106,000 at December 31,
1995 and 1994, respectively.
Under provisions of the Internal Revenue Code and applicable state
taxation codes, partnerships are generally not subject to income taxes;
therefore, no provision has been made for such taxes in the accompanying
consolidated financial statements.
NOTE 3 - TRANSACTIONS WITH RELATED PARTIES AND OTHER ENTITIES
As compensation for services rendered in managing the affairs of the
Partnership, the General Partner earns a partnership management fee equal to
9% of net operating proceeds. The General Partner earned partnership
management fees of $85,000, $267,000, and $192,000 in 1995, 1994, and 1993,
respectively. In addition, the General Partner's share of cash available for
distribution from operations, as discussed in Note 1, totaled $15,000,
$20,000, and $21,000 in 1995, 1994, and 1993, respectively.
In accordance with the partnership agreement, certain operating expenses
are reimbursable to the General Partner. The General Partner's reimbursement
of such expenses totaled $58,000, $55,000, and $57,000 for communications and
administrative services performed on behalf of the Partnership during 1995,
1994, and 1993, respectively.
An affiliate of the General Partner earned a normal and customary fee of
$6,000, $17,000, and $5,000 from the money market mutual funds in which the
Partnership made its interim cash investments during 1995, 1994, and 1993,
respectively.
LaSalle Advisors Limited Partnership ("LaSalle") is the Partnership's
advisor and is compensated for its advisory services directly by the General
Partner. LaSalle is reimbursed by the Partnership for certain operating
expenses pursuant to its contract with the Partnership to provide real estate
advisory, accounting, and other related services to the Partnership. LaSalle's
reimbursement for such expenses during each of the last three years totaled
$80,000.
An affiliate of LaSalle earned $71,000, $61,000, and $31,000 in 1995,
1994, and 1993, respectively, as property manager for several of the
Partnership's properties.
The General Partner and LaSalle are entitled to an acquisition fee for
services rendered in connection with the purchase of properties and the
investment in participating mortgage loans. Such fee represents 2% of the
Limited Partners' capital contributions and is paid separately, with respect
to each investment on a pro-rata basis. In 1993, the General Partner and
LaSalle each earned $43,000 for the Metropolitan Industrial acquisition after
certain economic contingencies arising at the time of acquisition in 1992 were
satisfied.
NOTE 4 - PROPERTY DISPOSITION
In June 1994, the Partnership sold Metropolitan Industrial and received net
proceeds of $5,870,000. The net book value of this property at the time of
disposition was $5,293,000, after accumulated depreciation expense. Results of
operations at the property were $149,000 in 1994 and $417,000 in 1993.
NOTE 5 - FAIRCHILD CORPORATE CENTER
Fairchild Corporate Center, formerly known as Brinderson Plaza, was acquired
outright on February 1, 1994 by a corporation, the stockholders of which are
the Partnership and certain other affiliated partnerships. The previously
established valuation allowance for this property was reduced $3,000 and the
remaining allowance of $582,000 (including $75,000 arising in 1993) was
reclassified as a reduction in the carrying value of the property. Prior to
February 1, 1994, the Partnership's underlying investment in Fairchild, in the
form of a mortgage loan and minority equity interest, was accounted for as an
in-substance foreclosed property in the Partnership's financial statements.
NOTE 6 - PROPERTY VALUATIONS
Based upon a review of current market conditions, estimated holding period,
and future performance expectations of each property, the General Partner
determined that the net carrying value of Tierrasanta may not be fully
recoverable from future operations and disposition and recognized an
impairment charge of $733,000 in 1994.
On January 1, 1996, the Partnership adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which changes
the Partnership's current method of accounting for its real estate property
investments when circumstances indicate that the carrying amount of a property
may not be recoverable. Measurement of an impairment loss on an operating
property will now be based on the estimated fair value of the property rather
than the sum of expected future cash flows. Properties held for sale will
continue to be reflected at the lower of historical cost or estimated fair
value less anticipated selling costs. No adjustment of the carrying values of
the Partnership's real estate property investments was required at January 1,
1996 as a result of adopting SFAS No. 121.
NOTE 7 - LEASES
Future minimum rentals to be received by the Partnership under noncancelable
operating leases in effect as of December 31, 1995, are:
Fiscal Year (in thousands)
__________
1996 $2,332
1997 1,871
1998 1,485
1999 998
2000 693
Thereafter 3,878
_______
Total $11,257
_______
_______
NOTE 8 - RECONCILIATION OF FINANCIAL STATEMENT TO TAXABLE INCOME
As described in Note 2, the Partnership has not provided for an income tax
liability; however, certain timing differences exist between amounts reported
for financial reporting and federal income tax purposes. These differences are
summarized below for years ended December 31:
1995 1994 1993
________________ ________
(in thousands)
Book net income. . . . . . . . . $1,044 $1,095 $1,358
Allowances for:
Uncollectible accounts
receivable . . . . . . . . . 246 74 43
Property valuations. . . . . . - 730 75
Normalized and
prepaid rents . . . . . . . . (93) (65) (3)
Interest income. . . . . . . . . 252 254 206
Depreciation . . . . . . . . . . 7 85 (42)
Accrued expenses . . . . . . . . (42) (6) 7
________________________
Taxable income . . . . . . . . . $1,414 $2,167 $1,644
________________________
________________________
NOTE 9 - SUBSEQUENT EVENT
The Partnership declared a quarterly cash distribution of $.47 per unit to
Limited Partners of the Partnership as of the close of business on December
31, 1995. The Limited Partners will receive $363,000, and the General Partner
will receive $4,000.
INDEPENDENT AUDITORS' REPORT
To the Partners
T. Rowe Price Realty Income Fund IV,
America's Sales-Commission-Free Real Estate Limited Partnership:
We have audited the accompanying consolidated balance sheets of T. Rowe Price
Realty Income Fund IV, America's Sales-Commission-Free Real Estate Limited
Partnership and its consolidated ventures as of December 31, 1995 and 1994,
and the related consolidated statements of operations, partners' capital and
cash flows for each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free from material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of T. Rowe
Price Realty Income Fund IV, America's Sales-Commission-Free Real Estate
Limited Partnership and its consolidated ventures as of December 31, 1995 and
1994, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1995, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
January 17, 1996
The Fund is currently considering whether to continue or terminate the
Reinvestment Plan. The following information is provided in order to enable
the Fund to register additional Units later this year should management decide
to continue the plan.
MARKET FOR THE FUND'S LIMITED PARTNERSHIP INTERESTS AND RELATED SECURITY
HOLDER MATTERS
On February 15, 1996, there were 4,739 Limited Partners. There is no public
market for the Units, and it is not anticipated that a public market for the
Units will develop. T. Rowe Price Investment Services, Inc. ("Investment
Services"), an affiliate of the General Partner, provides certain information
to investors which may assist Limited Partners desiring to sell their Units,
but provides only ministerial services in connection with such transactions.
Since this arrangement does not constitute a market for the Units, it is
possible that no prospective purchaser will be willing to pay the price
specified by a prospective seller.
The Fund has a reinvestment plan, whereby the Limited Partners may elect to
have their cash distributions automatically reinvested in additional Units of
the Fund, or fractions thereof, instead of receiving cash payments. The price
of the Units sold under the plan was initially set at $50 per Unit. The Fund's
Partnership Agreement provides that after the first year of the plan, the
General Partner is to determine the fair market value of the Units to be sold
pursuant to the plan; for 1994, the General Partner initially determined this
value to be $39. After the proceeds of the Metropolitan Industrial sale were
distributed in November, 1994, the price was reduced to $32. For 1995 it was
$31, after a $1 per Unit distribution from retained cash balances generated
primarily from the reinvestment plan. As of February 15, 1996, 159,176 Units
had been purchased under the plan for a total investment of $6,677,000. Eleven
thousand five hundred and fifteen additional Units are available for sale
under the Fund's current registration statement. The Fund will either file a
registration statement later this year to enable it to continue to sell Units
pursuant to the reinvestment plan, or terminate the plan.
The Fund also has a redemption plan, whereby Limited Partners have the
opportunity to present some or all of their Units to the Fund for redemption,
and to have those Units redeemed provided the Fund then has sufficient
proceeds from the reinvestment plan available for this purpose. Under the
redemption plan, the redemption price per Unit is 90% of the estimated fair
market value of a Unit as determined from time to time. Completed redemption
requests must be received in good order by the Fund at least 60 days prior to
the end of a quarter for the Units to qualify for redemption at the end of
that quarter. In addition, redemptions will only be permitted if at least one
of the following conditions is satisfied: (i) total redemptions and transfers
(other than Excluded Transfers, as defined below) during the Fund's fiscal
year do not exceed 5% of the Units outstanding; (ii) total redemptions and
transfers (other than Excluded Transfers) during the Fund's fiscal year do not
exceed 10% of the Units outstanding and total transfers (other than
redemptions and Excluded Transfers) do not exceed 2% of Units outstanding; or
(iii) the General Partner has received an opinion of counsel satisfactory to
the General Partner or a favorable Internal Revenue Service ("IRS") ruling
that such transfer will not result in the Fund being classified as a "publicly
traded partnership" for such year. As of February 15, 1996, 79,752 Units had
been redeemed for a total of $2,861,000. The plan may be terminated by the
General Partner at any time. If the reinvestment plan is discontinued the
redemption program may also be terminated.
In 1987, the IRS adopted certain rules concerning "publicly traded
partnerships." The effect of being classified as a publicly traded partnership
would be that income produced by the Fund would be classified as portfolio
income rather than passive income. On November 29, 1995, the IRS adopted final
regulations ("Final Regulations"), describing when interests in partnerships
will be considered to be publicly traded. The Final Regulations do not take
effect with respect to existing partnerships until the year 2006. Due to the
nature of the Partnership's income and to the low volume of transfers of
Units, it is not anticipated that the Partnership will be treated as a
publicly traded partnership under currently applicable rules and
interpretations or under the Final Regulations.
Distributions declared to the Limited Partners during the two most recent
fiscal years are as follows:
Distribution for the Amount of
Quarter Ended Distributions per Unit
_________________ ____________________
March 31, 1994 $0.60
June 30, 1994 0.60
September 30, 1994 8.45
December 31, 1994 1.60
March 31, 1995 0.47
June 30, 1995 0.47
September 30, 1995 0.47
December 31, 1995 0.47
All of the foregoing distributions were paid from cash flows from operating
activities, with the following exceptions. The distribution for the quarter
ended September 30, 1994, included $7.85 per Unit consisting of the proceeds
of the sale of the Metropolitan Industrial property. The distributions for
1994 included $0.31 from prior-years' operations, and the distribution for the
quarter ended December 31, 1994, included $0.78 from the proceeds of the
reinvestment plan.
There are no material legal restrictions on the Fund's present or future
ability to make distributions in accordance with the provisions of the
Agreement of Limited Partnership. Reference is made to Management's Discussion
and Analysis of Financial Condition and Results of Operations, below, for a
discussion of the Fund's ability to continue to make future distributions.
At the end of 1995, the Fund conducted its annual formal unit valuation. The
valuation of the Fund's properties was performed by the General Partner, and
then reviewed by an independent professional appraiser to assess the analysis
and assumptions utilized. The estimated investment value of limited
partnership Units resulting from this process was $31 per Unit. Units cannot
currently be sold at a price equal to this estimated value, and this valuation
is not necessarily representative of the value of the Units when the Fund
ultimately liquidates its holdings.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Liquidity and Capital Resources
The Fund originally sold 692,598 Units in connection with the public offering
of Units, for a total of $34,630,000, including the contribution of $25,000
from the Initial Limited Partner. After deduction of organizational and
offering costs of $2,078,000, the Fund had $32,552,000 available for
investment and cash reserves.
The public offering of Units was terminated on September 30, 1988, and
additional Units will be sold only in connection with the Fund's reinvestment
plan. As of February 15, 1996, additional capital in the amount of $6,677,000
has been raised from cash distributions reinvested and 159,176 Units were
issued in connection therewith. Of this amount $2,861,000 has been used to
redeem Units. The amount of additional capital to be raised from this source
in the future will depend on whether the General Partner elects to continue
the reinvestment plan, as well as the size of the Fund's cash distributions
per Unit and the number of Units held by investors who elect to participate in
the plan. There are no organizational or offering expenses associated with
such proceeds. This capital will be used, to the extent necessary, to
repurchase Units in connection with the Fund's redemption plan; the balance
will be available for investment in real estate or for cash reserves.
The Fund owns six properties or interests therein acquired on an all-cash
basis (including one originally recorded as a loan). The Fund has sold one
property, the Metropolitan Industrial property, and on February 1, 1994,
acquired an ownership interest in Fairchild Corporate Center (formerly known
as Brinderson Plaza), which was previously classified as an in-substance
foreclosed property that originated as a participating mortgage loan. The
acquisition cost of the Fund's real estate investments and subsequent
improvements thereto was $34,693,000. The Fund has sold one property,
Metropolitan, with a cost basis, including capital improvements, of
$5,532,000. The Fund has also recorded provisions for loan loss, permanent
value impairment, and valuation allowances of $3,052,000. On the Fund's
balance sheet, investments in real estate also include an unaffiliated
partner's minority interest in Goshen Plaza of $688,000. Therefore, the net
investment in real estate before deduction for depreciation for financial
reporting purposes is $26,797,000 as of December 31, 1995.
The Fund expects to incur capital expenditures during 1996 totaling
approximately $550,000, including $300,000 for tenant improvements and lease
commissions, and $250,000 for other major repairs and improvements. With 19%
of the square footage in the Fund's portfolio expiring in 1996, the Fund
anticipates spending slightly more on leasing commissions and tenant
improvements than in 1995. As of December 31, 1995, the Fund maintained cash
and cash equivalents aggregating $1,733,000, approximately $600,000 less than
last year. Net cash provided by operating activities decreased, and
expenditures for capital improvements increased due to increased leasing
activity.
The Fund maintains cash balances to fund its operating and investing
activities including the costs of tenant improvements and leasing commissions,
costs which must be disbursed prior to the collection of any resultant
revenues. The General Partner believes that 1995 year-end cash balances and
cash generated from operating activities in 1996 will be adequate to fund its
current investing and operating needs. The Fund's ability to continue to pay a
quarterly distribution at recent historical levels will depend on results of
operations and the General Partner's determination of the level of cash or
cash equivalents which it is deemed appropriate for the Fund to maintain.
OPERATIONS
1995 v. 1994
A discussion of the Fund's 1995 results of operations and distributions paid
appears in the Chairman's Letter on page 1 of this Annual Report. The Fund's
net income of $1,044,000 for 1995 equates to $1.35 per share compared with
$1,095,000, or $1.45 per share, in 1994.
Leases representing 19% of the portfolio's leasable square footage are
scheduled to expire in 1996. These leases represent approximately 36% of the
portfolio's rental income for 1995. This amount of potential lease turnover is
normal for the types of properties in the portfolio, which typically leases to
tenants under three to five year leases. The Burnham property is the only
single-tenant property in the Fund's portfolio. The tenant in this property
accounted for less than 10% of the Fund's revenue in 1995, and its lease does
not expire until 2000. In addition, the Fund has received an unsolicited offer
to purchase the property, which is in the early stages of negotiation.
1994 v. 1993
Excluding the effect of a permanent value impairment in connection with the
Tierrasanta property and the sale of the Metropolitan Industrial property, the
overall performance of the Fund's portfolio improved in 1994. Rental revenues
from the remaining properties were up $189,000 over their 1993 levels, and
comparable operating expenses were only slightly higher, resulting in an
increase in income from property operations, excluding valuation adjustments,
of $98,000.
The major reason for the decline in net income relative to 1993 was the
$733,000 permanent value impairment recorded in connection with the
Tierrasanta property. The other non-operating event which influenced the
year-over-year change in net income was the $577,000 gain on the sale of the
Metropolitan Industrial property in June of 1994. Unfortunately, the gain was
not enough to offset the effects of the valuation adjustment and the loss of
$284,000 of operating income from the Metropolitan Industrial property versus
the prior year, so net income declined from $1,358,000 in 1993 to $1,095,000
in 1994.
The absence of Metropolitan in the portfolio for half of the year resulted in
a $416,000 decline in rental income and a $148,000 decline in expenses. In
addition, because the proceeds of the sale were held by the Fund for
approximately half of 1994, interest income was up by over $100,000. Rental
income from the remaining properties benefited from higher rental rates at
Westbrook Commons and an increase in the average occupancy at Goshen Plaza.
The tenant reimbursement component of rental revenues was also up at both
locations, although the overall effect on net income was offset by
corresponding expenses at the properties.
Cash available for distribution was higher in 1994 and resulted in an increase
in the management fee to the General Partner as well as in the distributions
to the Limited Partners from the Fund's operations.
Reconciliation of Financial and Tax Results
For 1995, the Fund's book net income was $985,000 and its taxable income was
$1,414,000. Interest on the loan secured by Fairchild Corporate Center, which
was recognized only for tax purposes, and bad debt expense, which was
recognized only for book purposes, were the primary differences between the
two. For 1994, the Fund's book net income was $1,095,000, and its taxable
income was $2,167,000. The allowance for permanent value impairment in
connection with the Tierrasanta property was the primary difference between
the two. For a complete reconciliation see Note 8 to the Fund's financial
statements, which note is hereby incorporated by reference herein.
