QUARTERLY REPORT
FOR THE PERIOD ENDED
SEPTEMBER 30, 1996
FELLOW PARTNERS:
Your portfolio's year-to-date operating results were affected favorably by the
gain on the sale of Fairchild and by higher rental income and greater income
from operations at Tierrasanta and Kent Sea Park. The average leased status
improved at both of these properties, and rental rates were also up at Kent
Sea Park. The business park in Kent, Washington, is a popular product in a
healthy market, so demand for space at the property should remain strong in
the near term.
At Tierrasanta, however, as we anticipated, a tenant that occupied 38%
of the total space did not renew its lease, which expired at the end of
August. There is interest in the property, but we want to caution that the
costs associated with re-leasing, including making the buildings more
accessible to the physically challenged, may be high.
Continuing their first-half performance, Goshen Plaza and Westbrook
Commons suffered from a lower average leased status. At Westbrook, the effect
of the lower occupancy was exacerbated by slight increases in all expense
categories except bad debt by the timing of operating expense recoveries,
which will ultimately be passed along to tenants. On a positive note, Goshen
is now 88% leased, up 12 percentage points from the June 30, 1996, level and
more in line with market occupancy conditions.
The Fund's cash position increased significantly over last year,
primarily because of the inclusion of the proceeds from the sale of Fairchild,
which will be distributed to you in November. Cash distributed to limited
partners was less than in the first nine months of 1995, thus favorably
affecting the relative cash balance positions.
Cash Distributions
Cash from operations again allowed us to make the planned $0.40 per-unit
distribution for the third quarter. After the year ends, we will evaluate this
amount and, if deemed appropriate, make a change in the fourth quarter.
An additional $2.53 per unit is being paid to you for the Fund's 20%
share of the Fairchild sale proceeds. As you may remember, Realty Income Funds
II and III owned the other 80% of that property. As we move forward in the
process of liquidating the Fund's properties, our primary focus will shift
from the production of income to the strategic positioning of the properties
to maximize potential sales proceeds.
Outlook
With the exception of Tierrasanta, occupancy at the Fund's properties remained
stable or improved relative to their June 30, 1996, levels. In LaSalle's
opinion, this trend should continue into next year. We are aggressively
pursuing the re-leasing of Tierrasanta, but we want to caution, as we did in
the June report, that it may take a while because of competitive conditions in
that submarket.
We will also continue to poise the rest of the properties to take
advantage of their more favorable operating environments. In addition, we will
be closely analyzing each property to determine the optimum time to begin an
active marketing program.
Sincerely,
James S. Riepe
Chairman
November 8, 1996
Real Estate Investments (Dollars in thousands)
____________________________________________________________________________
Leased Average Leased Contribution to
Status Status Net Income
_______ ________________ __________________
Gross Nine Months Ended Nine Months Ended
Property Leasable September September 30, September 30,
Name Area(Sq. Ft.) 30, 1996 1995 1996 1995 1996
________ _________ _________ ________ ________ ________ _______
Tierra-
santa 104,236 62% 76% 96% $ 70 $ 138
Goshen
Plaza 45,546 88 87 78 133 22
Westbrook
Commons 121,558 97 98 95 338 263
Burnham
Building 71,168 100 100 100 144 135
Kent Sea
Park 138,157 100 98 100 222 253
________ ____ ____ ____ _____ ______
480,665 90 92 96 907 811
Properties
Sold - - - - 33 585
Fund Expenses
Less Interest
Income - - - - (162) (177)
________ ____ ____ ____ _____ ______
Total 480,665 90% 92% 96% $778 $1,219
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(In thousands)
September 30, December 31,
1996 1995
___________ ____________
Assets
Real Estate Property Investments
Land. . . . . . . . . . . . . . . . . . $ 7,918 $ 8,502
Buildings and Improvements. . . . . . . 17,615 18,295
________ ________
25,533 26,797
Less: Accumulated Depreciation
and Amortization . . . . . . . . . . . (4,168) (3,848)
________ ________
21,365 22,949
Cash and Cash Equivalents. . . . . . . . 3,725 1,733
Accounts Receivable
(less allowances of $303 and $367). . . 516 623
Other Assets . . . . . . . . . . . . . . 263 280
________ ________
$ 25,869 $ 25,585
________ ________
________ ________
Liabilities and Partners' Capital
Security Deposits and Prepaid Rents. . . $ 182 $ 200
Accrued Real Estate Taxes. . . . . . . . 327 353
Accounts Payable and
Other Accrued Expenses. . . . . . . . . 301 234
Minority Interest. . . . . . . . . . . . 688 688
________ ________
Total Liabilities. . . . . . . . . . . . 1,498 1,475
Partners' Capital. . . . . . . . . . . . 24,371 24,110
________ ________
$ 25,869 $ 25,585
________ ________
________ ________
See the accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In thousands except per-unit amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
_______ _______ _______ _______
Revenues
Rental Income. . . . . . . . . $ 842 $ 888 $2,558 $2,651
Interest Income. . . . . . . . 32 22 73 69
________ ________ ________ ________
874 910 2,631 2,720
________ ________ ________ ________
Expenses
Property Operating
Expenses. . . . . . . . . . . 223 243 636 626
Real Estate Taxes. . . . . . . 134 138 425 421
Depreciation and
Amortization. . . . . . . . . 175 211 566 573
Management Fee to
General Partner . . . . . . . 31 36 134 108
Partnership Management
Expenses. . . . . . . . . . . 74 62 233 214
________ ________ ________ ________
637 690 1,994 1,942
________ ________ ________ ________
Income from Operations before
Gain on Real Estate Sold. . . 237 220 637 778
Gain on Real Estate Sold . . . 582 - 582 -
________ ________ ________ ________
Net Income . . . . . . . . . . $ 819 $ 220 $1,219 $ 778
________ ________ ________ ________
________ ________ ________ ________
Activity per Limited
Partnership Unit
Net Income . . . . . . . . . . $ 1.04 $ 0.28 $ 1.56 $ 1.01
________ ________ ________ ________
________ ________ ________ ________
Cash Distributions Declared
from Operations. . . . . . . $ 0.40 $ 0.47 $ 1.20 $ 1.41
from Sale Proceeds . . . . . 2.53 - 2.53 -
________ ________ ________ ________
Total Distributions
Declared. . . . . . . . . . . $ 2.93 $ 0.47 $ 3.73 $ 1.41
________ ________ ________ ________
________ ________ ________ ________
Weighted Average Number
of Units Outstanding. . . . . 779,979 768,999 772,471 764,673
________ ________ ________ ________
________ ________ ________ ________
See the accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
Unaudited
(In thousands)
General Limited
Partner Partners Total
________ ________ ________
Balance,
December 31, 1995 . . . . $ (72) $24,182 $24,110
Net Income . . . . . . . . 12 1,207 1,219
Reinvestments
in Units. . . . . . . . . - 421 421
Redemptions of Units . . . - (394) (394)
Cash Distributions . . . . (4) (981) (985)
_______ _______ _______
Balance,
September 30, 1996. . . . $ (64) $24,435 $24,371
_______ _______ _______
_______ _______ _______
See the accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
Nine Months Ended
September 30,
1996 1995
___________ ___________
Cash Flows from Operating Activities
Net Income . . . . . . . . . . . . . . . $ 1,219 $ 778
Adjustments to Reconcile Net Income
to Net Cash Provided by
Operating Activities
Depreciation and Amortization. . . . . 566 573
Gain on Real Estate Sold . . . . . . . (582) -
Other Changes in Assets
and Liabilities . . . . . . . . . . . 141 55
________ ________
Net Cash Provided by
Operating Activities. . . . . . . . . . 1,344 1,406
________ ________
Cash Flows from Investing Activities
Proceeds from Property Disposition . . . 1,956 -
Investments in Real Estate . . . . . . . (350) (375)
________ ________
Net Cash Provided by (Used in)
Investing Activities. . . . . . . . . . 1,606 (375)
________ ________
Cash Flows from Financing Activities
Cash Distributions . . . . . . . . . . . (985) (1,943)
Reinvestments in Units . . . . . . . . . 421 840
Repurchases of Units . . . . . . . . . . (394) (228)
________ ________
Net Cash Used in
Financing Activities. . . . . . . . . . (958) (1,331)
________ ________
Cash and Cash Equivalents
Net Increase (Decrease)
during Period . . . . . . . . . . . . . 1,992 (300)
At Beginning of Year . . . . . . . . . . 1,733 2,327
________ ________
At End of Period . . . . . . . . . . . . $ 3,725 $ 2,027
________ ________
________ ________
See the accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
The unaudited interim condensed consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. All such
adjustments are of a normal, recurring nature.
The unaudited interim financial information contained in the
accompanying condensed consolidated financial statements should be read in
conjunction with the financial statements contained in the 1995 Annual Report
to Partners.
NOTE 1 - TRANSACTIONS WITH RELATED PARTIES AND OTHER
As compensation for services rendered in managing the affairs of the
Partnership, the General Partner earns a partnership management fee equal to
9% of net operating proceeds. The General Partner earned a partnership
management fee of $134,000 during the first nine months of 1996. In addition,
the General Partner's share of cash available for distribution from operations
totaled $9,000 for the first nine months of 1996.
In accordance with the partnership agreement, certain operating expenses
are reimbursable to the General Partner. The General Partner's reimbursement
of such expenses totaled $48,000 for communications and administrative
services performed on behalf of the Partnership during the first nine months
of 1996.
An affiliate of the General Partner earned a normal and customary fee of
$3,000 from the money market mutual funds in which the Partnership made its
interim cash investments during the first nine months of 1996.
LaSalle Advisors Limited Partnership ("LaSalle") is the Partnership's
advisor and is compensated for its advisory services directly by the General
Partner. LaSalle is reimbursed by the Partnership for certain operating
expenses pursuant to its contract with the Partnership to provide real estate
advisory, accounting and other related services to the Partnership. LaSalle's
reimbursement for such expenses during the first nine months of 1996 totaled
$60,000.
An affiliate of LaSalle earned $63,000 in the first nine months of 1996
as property manager for several of the Partnership's properties.
NOTE 2 - PROPERTY DISPOSITIONS
On August 28, 1996, Fairchild Corporate Center, an office property in which
the Partnership had a 20% interest, was sold. The Partnership has subsequently
received net proceeds of $1,956,000. The net book value of the Partnership's
interest at the date of sale was $1,374,000, after deduction of accumulated
depreciation, and previously recorded permanent impairments. Accordingly, the
Partnership recognized a $582,000 gain on the sale of this property in the
third quarter.
Income from operations for this property, before the gain on real estate
sold, was $3,000 and $33,000 for the nine months ended September 30, 1996 and
1995, respectively.
NOTE 3 - SUBSEQUENT EVENT
The Partnership declared a quarterly cash distribution of $2.93 per unit to
Limited Partners of the Partnership as of the close of business on September
30, 1996. The distribution totals $2,268,000 and represents $0.40 per unit
from operations and $2.53 per unit from Fairchild Corporate Center sale
proceeds. The Limited Partners will receive $2,265,000, and the General
Partner will receive $3,000.
