<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File No. 0-17809
-------------------------------------------------------------
COPLEY REALTY INCOME PARTNERS 3; A LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Massachusetts 04-3005973
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Franklin Street, 25th Floor
Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(617) 261-9000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
No voting stock is held by nonaffiliates of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
PART I
Item 1. Business.
Copley Realty Income Partners 3; A Limited Partnership (the
"Partnership") was organized under the Uniform Limited Partnership Act of the
Commonwealth of Massachusetts on February 17, 1988, to invest primarily in newly
constructed and existing income-producing real properties.
The Partnership was initially capitalized with contributions of
$2,000 in the aggregate from Third Income Corp. (the "Managing General Partner")
and GCOP Associates Limited Partnership (the "Associate General Partner")
(collectively, the "General Partners") and $10,000 from Copley Real Estate
Advisors, Inc. (the "Initial Limited Partner"). The Partnership filed a
Registration Statement on Form S-11 (the "Registration Statement") with the
Securities and Exchange Commission on February 23, 1988, with respect to a
public offering of 40,000 units of limited partnership interest at a price of
$1,000 per unit (the "Units") with an option to sell up to an additional 60,000
Units (an aggregate of $100,000,000). The Registration Statement was declared
effective on May 23, 1988.
The first sale of Units occurred on October 13, 1988, at which
time the Initial Limited Partner withdrew its contribution from the Partnership.
Investors were admitted to the Partnership thereafter at monthly closings; the
offering terminated and the last group of initial investors was admitted to the
Partnership on June 6, 1989. As of June 6, 1989, a total of 27,641 Units had
been sold, a total of 1,703 investors had been admitted as limited partners (the
"Limited Partners") and a total of $27,140,580 had been contributed to the
capital of the Partnership. The remaining 72,359 Units were de-registered on
June 27, 1989.
As of December 31, 1997, the Partnership is invested in the two
real property investments described below. In addition, The Partnership sold one
property during 1997. The Partnership has no current plan to renovate, improve
or further develop any of its real property. In the opinion of the Managing
General Partner of the Partnership, the properties are adequately covered by
insurance. The principal terms of the sale of the Partnership's investment are
set forth in the following table:
<TABLE>
<CAPTION>
Investment Month/Year of Sale Net Sale Proceeds Distribution/Unit Distribution
Month/Year
<S> <C> <C> <C> <C>
Investment Three 7/97 $5,715,415 $200.00 7/97
</TABLE>
The Partnership has no employees. Services are performed for the
Partnership by the Managing General Partner and affiliates of the Managing
General Partner.
A. Industrial Building in Brea, California ("Brea West")
On April 28, 1989, the Partnership acquired a 60% interest in
a joint venture formed with an affiliate of The Muller Company. The Partnership
committed to contribute $8,250,000 to the capital of the joint venture, all of
which was funded. On December 20, 1990, the Partnership increased its investment
in the joint venture by committing to make a deficit loan to the venture in the
maximum amount of $900,000, of which $828,799 was funded. Because the
Partnership's joint venture partner was unable to fund its share of deficits,
the Partnership assumed 100% ownership of the joint venture's assets, effective
June 30, 1991. The property consists primarily of approximately 7.51 acres of
land in Brea, California and a 184,000 square foot industrial facility located
thereon. As of December 31, 1997, the facility was 100% leased to one tenant
until May 2008.
<PAGE>
B. Industrial Building in Simi Valley, California ("Shasta Way")
On September 29, 1989, the Partnership acquired a 34.8%
interest in a joint venture formed with Copley Realty Income Partners 4; A
Limited Partnership, an affiliate of the Partnership (the "Affiliate") with a
25.2% interest, and an affiliate of The Hewson Company (the "Developer"). As of
December 31, 1997, the Partnership had contributed $7,111,757 to the capital of
the joint venture out of a maximum commitment of $7,612,500. Effective January
1, 1996, the joint venture was restructured resulting in the withdrawal of the
Developer, and the increase of the ownership interests of the Partnership and
its Affiliate to 58% and 42%, respectively. The joint venture agreement entitled
the Partnership and the Affiliate to receive a preferred return on their
respective invested capital at the rate of 10% per annum. The joint venture
agreement also entitles the Partnership to receive 58% of remaining cash flow
and 58% of sale and refinancing proceeds following the return of the
Partnership's and the Affiliate's equity.
The joint venture owns approximately 12.13 acres of land in
Simi Valley, California and in June 1991 completed construction thereon of a
235,080 square foot industrial building. As of December 31, 1997, the facility
was 100% leased to one tenant until December 1998. The lease includes two five-
year renewal options.
<PAGE>
Item 2. Properties.
The following table sets forth the annual realty taxes for the
Partnership's properties and information regarding tenants who occupy 10% or
more of gross leasable area (GLA) in the Partnership's properties:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Estimated
1998 Annual
Property Annual Number of Contract
Realty Tenants with 10% Name(s) of Square Feet of Rent Lease
Taxes or More of GLA Tenant(s) Each Tenant Per S. F. Expiration
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Industrial Building in Brea, CA $81,568 1 Nature's Best 184,000 $4.50 5/2008
Industrial Building in Simi
Valley, CA $106,243 1 Bugle Boy 235,080 $4.87 12/1998
Industries
- -----------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Renewal Line of Business
Options of Principal Tenants
- --------------------------------------------------------------------------------
<S> <C> <C>
Industrial Building in Brea, CA None Health Food Distributor
Industrial Building in Simi
Valley, CA Two 5-year options Apparel Manufacturer
</TABLE>
<PAGE>
The following table sets forth for each of the last five years the
gross leasable areas, occupancy rates, rental revenue and net effective rent for
the Partnership's properties:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Net
Rental Effective
Gross-Leasable Year-End Revenue Rent
Property Area Occupancy Recognized ($/sf/yr)*
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Industrial Building in
Brea, CA
1993 184,000 100% $ 977,076 $5.31
1994 184,000 100% $ 995,209 $5.41
1995 184,000 100% $1,001,985 $5.45
1996 184,000 100% $1,023,187 $5.56
1997 184,000 100% $ 951,224 $5.17
Industrial Building in
Simi Valley, CA
1993 235,080 80% $863,430 $6.12
1994 235,080 100% $1,157,494 $5.28
1995 235,080 100% $1,163,851 $4.95
1996 235,080 100% $1,208,205 $5.14
1997 235,080 100% $1,205,152 $5.13
- ---------------------------------------------------------------------------------
</TABLE>
* Net Effective Rent calculation is based on average occupancy during the
respective year.
<PAGE>
Set forth below is a schedule of lease expirations for each of the
next ten years for the Partnership's properties based on the annual contract
rent in effect at December 31, 1997:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TENANT AGING REPORT
Property # of Lease Total Total Percentage of
Expirations Square Feet Annual Gross Annual
Contract Rent* Rental
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Industrial Building in
Brea, CA
1998 0 0 $0 0%
1999 0 0 $0 0%
2000 0 0 $0 0%
2001 0 0 $0 0%
2002 0 0 $0 0%
2003 0 0 $0 0%
2004 0 0 $0 0%
2005 0 0 $0 0%
2006 0 0 $0 0%
2007** 0 0 $0 0%
Industrial Building in
Simi Valley, CA
1998 1 235,080 $1,188,000 100%
1999 0 0 $0 0%
2000 0 0 $0 0%
2001 0 0 $0 0%
2002 0 0 $0 0%
2003 0 0 $0 0%
2004 0 0 $0 0%
2005 0 0 $0 0%
2006 0 0 $0 0%
2007 0 0 $0 0%
</TABLE>
- ------------------------------
* Does not include expenses paid by tenants.
** Sole tenant's lease expires May, 2008.
<PAGE>
The following table sets forth for each of the Partnership's
properties the: (i) federal tax basis, (ii) rate of depreciation, (iii) method
of depreciation, (iv) life claimed, and (v) accumulated depreciation, with
respect to each property or component thereof for purposes of depreciation:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Depreciable Assets
Rate of Life Accumulated
Entity / Property Tax Basis Depreciation Method in years Depreciations
<S> <C> <C> <C> <C> <C>
Brea West
- -------------------------
Building & Improvements $ 5,673,186 3.17% SL 31.5 $ 1,274,915
Land Improvements 70,337 6.67% SL 15 29,155
----------- ----- -----------
Total Depreciable Assets 5,743,523 1,304,070
Shasta Way
- -------------------------
Building & Improvements 6,643,803 3.17% SL 31.5 1,287,465
----------- ----- -----------
Total Depreciable Assets 6,643,803 1,287,465
Total Depreciable Assets $12,387,326 $ 2,591,535
=========== ===========
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
SL = Straight-Line
<PAGE>
Following is information regarding the competitive market
conditions for each of the Partnership's properties. This information has been
gathered from sources deemed reliable. However, the Partnership has not
independently verified the information and, as such, cannot guarantee its
accuracy or completeness:
A. Industrial Building in Brea, CA.
The property is located within the Orange County industrial
market. Brea is a desirable industrial location due to its close proximity to
Los Angeles County and the central portion of Orange County. The North Orange
County market has approximately 7.6 million square feet of space available, an
increase which is primarily due to the completion of more than 35 new industrial
buildings, adding over 2.6 million square feet of new space to the market. In
addition, another 54 buildings should be completed by year-end 1998, adding
approximately twice the square footage added during 1997. Average asking rental
rates over the last year have increased 19%, with average vacancy in the county
of 7.11%.
B. Industrial Building in Simi Valley, CA.
The property is located within the greater Los Angeles
industrial market. During 1997, the supply and demand balance in the Los Angeles
industrial market remained in equilibrium while the years of supply grew from
2.2 years in 1996 to 2.7 years in 1997. Industrial demand in the Los Angeles
County metropolitan area during 1997 was 1.8%, a decrease from the 3.1% recorded
in 1996. The 1997 industrial vacancy rate at year-end 1997 was 6.7%, an
improvement from the 8.2% rate recorded at the close of 1996. Also indicative of
the metro area's improving economy is a falling jobless rate, which recently
declined to 6.3%.
Item 3. Legal Proceedings.
The Partnership is not a party to, nor are any of its properties
subject to, any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this Annual Report on Form 10-K.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
There is no active market for the Units. Trading in the Units is
sporadic and occurs solely through private transactions.
As of December 31, 1997, there were 1,752 holders of Units.
The Partnership's Amended and Restated Agreement of Limited
Partnership dated October 13, 1988, as amended to date (the "Partnership
Agreement"), requires that any Distributable Cash (as defined therein) be
distributed quarterly to the Partners in specified proportions and priorities.
There are no restrictions on the Partnership's present or future ability to make
distributions of Distributable Cash. For the year ended 1997, cash distributions
paid in 1997, or distributed after year end with respect to 1997 to the Limited
Partners as a group totaled $7,225,081, including $5,528,200 ($200 per limited
partnership unit), representing proceeds from the sale of one property. For the
year ended December 31, 1996, cash distributions paid in 1996, or distributed
after year end with respect to 1996 to the Limited Partners as a group totaled
$1,658,460.
Largely due to the capital distribution mentioned above, total
cash distributions exceeded net income in 1997 and, therefore, resulted in a
reduction of partners' capital. Regular cash distributions from operations also
exceeded cash provided by operating activities in 1997. Reference is made to the
Partnership's Statement of Partners' Capital (Deficit) and Statement of Cash
Flows in Item 8 hereof.
<PAGE>
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
For Year For Year For Year For Year For Year
Ended or Ended or Ended or Ended or Ended or
As of: As of: As of: As of: As of:
12/31/97 (2) 12/31/96 12/31/95 12/31/94 (1) 12/31/93
------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $ 1,673,318 $ 1,993,178 $ 1,749,606 $ 1,650,992 $ 1,411,498
Net Income (Loss) $ 2,303,492 $ 1,058,287 $ 1,025,324 $(1,451,876) $ 681,269
Net Income (Loss)
per Limited
Partnership Unit $ 82.50 $ 37.90 $ 36.72 $ (52.00) $ 24.40
Total Assets $14,687,268 $19,622,775 $ 20,250,786 $20,750,350 $23,600,717
Total Cash
Distributions
per Limited
Partnership Unit,
including amounts
distributed after
year end with
respect to such
year $ 261.39 $ 60.00 $ 57.50 $ 50.00 $ 50.00
------------ ----------- ------------- ----------- -----------
</TABLE>
(1) Net Income (Loss) in 1994 includes a charge of $2,400,000 related to
impairment of the carrying value of an investment.
(2) Net Income in 1997 includes a gain from the sale of one property of
$1,490,313. Cash Distributions include a return of capital of $200.00 per
Limited Partnership Unit.
<PAGE>
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Liquidity and Capital Resources
The Partnership completed its offering of units of limited partnership
interest in June 1989 and a total of 27,641 units were sold. The Partnership
received proceeds of $24,458,317, net of selling commissions and other offering
costs, which have been used for investments in real estate, related acquisition
costs, or were retained as working capital reserves.
On July 22, 1997, the South Bay property was sold to the sole tenant
which exercised the purchase option under its lease for gross consideration of
$5,850,000. The Partnership received net proceeds of $5,715,415, after closing
costs, and recognized a gain of $1,490,313 ($53.38 per limited partnership unit)
on the sale. A disposition fee of $29,250 was accrued but not paid to AEW Real
Estate Advisors, Inc. ("AEW"). On July 24, 1997, the Partnership made a capital
distribution of $5,528,200 ($200 per limited partnership unit) from the proceeds
of the sale. This distribution reduced the adjusted capital contribution to $800
per unit.
At December 31, 1997, the Partnership had $2,300,625 in cash, cash
equivalents, and short-term investments, of which $390,883 was used for cash
distributions to partners on January 29, 1998; the remainder is being retained
for working capital reserves. The source of future liquidity and cash
distributions to partners will be cash generated by the Partnership's real
estate and short-term investments. Distributions of cash from operations
relating to all four quarters of 1996 were made at the annualized rate of 6.0%
on a capital contribution of $1,000 per unit. The annualized distribution rate
for the first two quarters of 1997 was increased to 6.5%, and then increased
again, to 7.0%, for the third and fourth quarters. The third quarter 1997
distribution was based on the weighted average adjusted capital contribution.
The fourth quarter 1997 distribution was based on the adjusted capital
contribution of $800. The two increases in the distribution rate this year were
due to increased cash flow from Shasta Way, combined with the reduction in the
adjusted capital contribution as a result of the South Bay sale.
The carrying value of real estate investments in the financial
statements at December 31, 1997 is at depreciated cost, or if the investment's
carrying value is determined not to be recoverable through expected undiscounted
future cash flows, the carrying value is reduced to estimated fair market value.
The fair market value of such investments is further reduced by the estimated
costs of sale for properties held for sale. Carrying value may be greater or
less than current appraised value. At December 31, 1997, the aggregate appraised
value of the Partnership's investments was approximately $2,400,000 greater than
their aggregate carrying value. The current appraised value of real estate
investments has been estimated by the Managing General Partner and is generally
based on a combination of traditional appraisal approaches performed by AEW and
independent appraisers. Because of the subjectivity inherent in the valuation
process, the current appraised value may differ significantly from that which
could be realized if the real estate were actually offered for sale in the
marketplace.
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Partnership's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions or
engage in normal business operations. The Managing General Partner and its
affiliates are assessing the modifications or replacements of its software that
may be required due to the Year 2000 Issue.
<PAGE>
The Managing General Partner and its affiliates do not believe that the cost of
either modifying existing software or converting to new software will be
significant or that the Year 2000 Issue will pose significant operational
problems.
Results of Operations
Form of Real Estate Investments
The Brea West investment is a wholly-owned property. The South Bay
investment was structured as a joint venture with a real estate
management/development firm. Effective January 1, 1996, however, the venture was
restructured and the venture partner's ownership interest was assigned to the
Partnership. Accordingly, as of that date, this investment was accounted for as
a wholly-owned property. The South Bay investment was sold on July 22, 1997, as
discussed above. The Shasta Way investment had been structured as a joint
venture with a real estate management/development firm and an affiliate of the
Partnership. As of January 1, 1996, the ownership was restructured, and the
management/development firm's interest was assigned to the Partnership and its
affiliate in proportion to their respective ownership interests. The
Partnership's ownership percentage increased to 58%.
Operating Factors
The Brea West property was 100% leased to a single tenant at December
31, 1997, 1996 and 1995. Base rent increased in October 1995, in accordance with
the terms of the lease agreement. A new 11-year lease was signed with the tenant
at Brea West which commenced on September 1, 1997 at a slightly lower rental
rate.
The South Bay property was 100% leased to a single tenant through the
sale date of July 22, 1997. The lease term began in May, 1994 for 83% of the
building for the first year, and 100% of the building thereafter through
September, 2001.
The Shasta Way venture completed the construction of its industrial
facility in 1991. A lease was executed for 80% of the building commencing April
1, 1993, and as of May 1, 1994, the tenant leased the entire building through
December 31, 1998.
Three tenants each contributed more than 10% of the rental revenue from
the Partnership's investments (collectively 100%) for 1997. The two sole tenants
at Brea West and Shasta Way were current with regard to lease payments at
December 31, 1997; management is not aware of any impairment in the tenants'
ability to continue to perform in accordance with the terms of their respective
leases.
Investment Results
1997 Compared to 1996
Aggregate operating results from real estate investments were $965,851
and $1,222,744 in 1997 and 1996, respectively. The decline was primarily due to
the sale of the South Bay property in July 1997, resulting in decreased
operating income of approximately $158,000. In addition, at Brea West, write-
offs of tenant concessions and lease commissions related to the old lease, as
well as lower rental revenue under the new lease, accounted for approximately
$85,000 of the decrease in operating results between the two years.
<PAGE>
Interest on cash equivalents and short-term investments increased by
$14,000 or 13%, due to higher average invested balances, as well as higher
short-term yields.
Cash provided by operations decreased by approximately $306,000 between
1996 and 1997. The difference is attributable to the decrease in operating
results discussed above, and to the funding of $163,000 in commissions related
to the new lease at Brea West. These decreases were partially offset by the
timing of distributions from Shasta Way.
1996 Compared 1995
Aggregate real estate operating results were $1,222,744 and $1,176,705
in 1996 and 1995, respectively. Operating income increased at each of the three
properties. Brea West increased by $10,000, as an increase in rental income was
partially offset by an increase in repairs and maintenance expenses. South Bay
increased by $18,000 due to a decrease in operating expenses. At Shasta Way,
operating income increased by $16,000, primarily due to a rental increase in
October 1995, partially offset by higher accounting fees.
Interest on cash equivalents and short-term investments decreased by
$12,000 or 10%, primarily due to a decrease in short-term yields, partially
offset by higher average invested balances.
Cash flow provided by operations increased by approximately $171,000
primarily due to improved investment results and the timing of cash
distributions from Shasta Way and South Bay, as well as changes in property
working capital.
Portfolio Expenses
General and Administrative expenses primarily consist of appraisal,
printing, accounting, legal and servicing agent fees. These expenses decreased
approximately $2,000, or 2% between 1996 and 1997, primarily due to a decrease
in appraisal fees partially offset by increases in franchise taxes, and investor
servicing fees. General and administrative expenses decreased $6,000, or 5%
between 1995 and 1996, primarily due to decreases in legal and professional
fees. The Partnership management fee is 9% of distributable cash flow from
operations after any increase or decrease in working capital reserves, as
determined by the Managing General Partner. Management fees increased in 1996
and 1997 due to the increases in distributable cash flow.
Inflation
By their nature, real estate investments tend not be adversely affected
by inflation. Inflation may result in appreciation in the value of the
Partnership's real estate investments over time, if rental rates and replacement
costs increase. Declines in real property values during the period of
Partnership operations, due to market and economic conditions, have overshadowed
the positive effect inflation may have on the value of the Partnership's
investments.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
See the Financial Statements of the Partnership included as a part
of this Annual Report on Form 10-K.
Item 9 Disagreements on Accounting and Financial Disclosure.
The Partnership has had no disagreements with its accountants on
any matters of accounting principles or practices or financial statement
disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant.
(a) and (b) Identification of Directors and Executive Officers.
The following table sets forth the names of the directors and executive officers
of the Managing General Partner and the age and position held by each of them as
of December 31, 1997.
<TABLE>
<CAPTION>
Name Position(s) with the Managing General Partner Age
<S> <C> <C>
Wesley M. Gardiner, Jr. President, Chief Executive Officer and Director 39
Pamela J. Herbst Vice President and Director 42
J. Grant Monahon Vice President and Director 52
James J. Finnegan Vice President 37
Karin J. Lagerlund Treasurer and Principal Financial and Accounting Officer 33
</TABLE>
(c) Identification of Certain Significant Employees.
None.
(d) Family Relationships.
None.
(e) Business Experience.
The Managing General Partner was incorporated in Massachusetts
on February 17, 1988. The background and experience of the executive officers
and directors of the Managing General Partner are as follows:
Wesley M. Gardiner, Jr. joined AEW Real Estate Advisors, Inc. ("AEW"),
formerly known as Copley Real Estate Advisors, Inc., in 1990 and has been a Vice
President at AEW since January, 1994. AEW is a subsidiary of AEW Capital
Management, L.P. ("AEW Capital Management"). From 1982 to 1990, he was employed
by Metric Realty, a nationally-known real estate investment advisor and
syndication firm, as a portfolio manager responsible for several public and
private limited partnerships. His career at AEW has included asset management
responsibility for the company's Georgia and Texas holdings. Presently, Mr.
Gardiner has overall responsibility for all the partnerships advised by AEW
whose securities are registered under the Securities and Exchange Act of 1934.
He received a B.A. in Economics from the University of California at San Diego.
<PAGE>
Pamela J. Herbst directs AEW Capital Management's Portfolio Advisory
Services, with oversight responsibility for the asset and portfolio management
areas. Ms. Herbst is a member of AEW Capital Management's Investment Policy
Group and Management Committee. She came to AEW Capital Management in December
1996 as a result of the firm's merger with Copley Real Estate Advisors, Inc.,
where she held various senior level positions in asset and portfolio management,
acquisitions, and corporate operations since 1982. Ms. Herbst is a graduate of
the University of Massachusetts (B.A.) and Boston University (M.B.A.).
J. Grant Monahon is AEW Capital Management's General Counsel and a
member of the firm's Management Committee and Investment Policy Group. He has
over 25 years of experience in real estate law and investments. Prior to joining
AEW Capital Management in 1987, Mr. Monahon was a partner with a major Boston
law firm. As the head of that firm's real estate finance department, he
represented a wide variety of institutional clients, both domestic and
international, in complex equity and debt transactions. He is the former
Chairman of the General Counsel section of the National Association of Real
Estate Investment Managers. Mr. Monahon is a graduate of Dartmouth College
(B.A.) and Georgetown University Law Center (J.D.).
James J. Finnegan is the Assistant General Counsel of AEW Capital
Management. Mr. Finnegan served as Vice President and Assistant General Counsel
of Aldrich, Eastman & Waltch, L.P., a predecessor to AEW Capital Management. Mr.
Finnegan has over ten years of experience in real estate law, including seven
years of experience in private practice with major New York City and Boston law
firms. Mr. Finnegan also serves as AEW's securities and regulatory compliance
officer. Mr. Finnegan is a graduate of the University of Vermont (B.A.) and
Fordham University School of Law (J.D.).
Karin J. Lagerlund directs the Advisory Services Portfolio Accounting
Group at AEW Capital Management, overseeing portfolio accounting, performance
measurement and client financial reporting for AEW's private equity investment
portfolios. Ms. Lagerlund is a Certified Public Accountant and has over ten
years experience in real estate consulting and accounting. Prior to joining AEW
Capital Management in 1994, she was an Audit Manager at EY/Kenneth Leventhal
LLP. Ms. Lagerlund is a graduate of Washington State University (B.A.).
(f) Involvement in Certain Legal Proceedings.
None.
Item 11. Executive Compensation.
Under the Partnership Agreement, the General Partners and their
affiliates are entitled to receive various fees, commissions, cash
distributions, allocations of taxable income or loss and expense reimbursements
from the Partnership. See Notes 1 and 6 of Notes to Financial Statements.
<PAGE>
The following table sets forth the amounts of the fees and cash
distributions and reimbursements of out-of-pocket expenses which the Partnership
paid to or accrued for the account of the General Partners and their affiliates
for the year ended December 31, 1997. Cash distributions to General Partners
include amounts distributed after year-end with respect to 1997.
<TABLE>
<CAPTION>
Receiving Entity Type of Compensation Amount of Compensation
and Reimbursement
<S> <C> <C>
AEW Real Estate Advisors, Inc. Management Fees and Reimbursement of
Expenses $ 181,519
General Partners Share of Distributable Cash 17,140
New England Securities Corporation Servicing Fees and Reimbursement of
Expenses 2,834
Back Bay Advisors, L.P. Servicing Fee 1,726
----------
TOTAL $ 203,219
==========
</TABLE>
For the year ended December 31, 1997, the Partnership allocated $3,782
of taxable income to the General Partners.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) Security Ownership of Certain Beneficial Owners.
As of December 31, 1997, Alexander Hamilton Life Insurance Company
of America, whose address is 2700 Sanders Road, Prospect Heights, IL., 60070,
owned 5,000 Units, approximately 18% of the total number of Units outstanding.
No other person or group is known by the Partnership to be the beneficial owner
of more than 5% of the outstanding Units at December 31, 1997. Under the
Partnership Agreement, the voting rights of the Limited Partners are limited
and, in some circumstances, are subject to the prior receipt of certain opinions
of counsel or judicial decisions.
Except as expressly provided in the Partnership Agreement, the
right to manage the business of the Partnership is vested exclusively in the
Managing General Partner.
(b) Security Ownership of Management.
The General Partners of the Partnership owned no Units at
December 31, 1997.
(c) Changes in Control.
There exists no arrangement known to the Partnership, the
operation of which may at a subsequent date result in a change in control of the
Partnership.
Item 13. Certain Relationships and Related Transactions.
The Partnership has no relationships or transactions to report
other than as reported in Item 11, above.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements--The Financial Statements listed on
the accompanying Index to Financial Statements and Schedule and Financial
Statements Index No. 2 are filed as part of this Annual Report.
(2) Financial Statement Schedules--The Financial Statement
Schedule listed on the accompanying Index to Financial Statements and Schedule
is filed as part of this Annual Report.
(3) Exhibits--The Exhibits listed in the accompanying Exhibit
Index are filed as a part of this Annual Report and incorporated in this Annual
Report as set forth in said Index.
(b) Reports on Form 8-K. No Current Reports on Form 8-K were filed
during the fourth quarter of 1997.
<PAGE>
Copley Realty Income Partners 3;
A Limited Partnership
Financial Statements
* * * * * * *
December 31, 1997
<PAGE>
COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Report of Independent Accountants
Financial Statements
Balance Sheets - December 31, 1997 and 1996
Statements of Operations - For the Years Ended December 31,
1997, 1996 and 1995
Statement of Partners' Capital (Deficit) - For the Years Ended
December 31, 1997, 1996 and 1995
Statements of Cash Flows - For the Years Ended December 31,
1997, 1996 and 1995
Notes to Financial Statements
Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation at
December 31, 1997, 1996 and 1995
<PAGE>
Report of Independent Accountants
To the Partners
Copley Realty Income Partners 3;
A Limited Partnership
In our opinion, based on our audits and the reports of other auditors for the
years ended December 31, 1997, 1996 and 1995, the financial statements listed in
the accompanying index present fairly, in all material respects, the financial
position of Copley Realty Income Partners 3; A Limited Partnership (the
"Partnership") at December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of Third Income Corp., the Managing
General Partner of the Partnership; our responsibility is to express an opinion
on these financial statements based on our audits. We did not audit the
financial statements of the Partnership's Shasta Way joint venture investee for
the years ended December 31, 1996 and 1995 which results of operations are
recorded using the equity method of accounting in the Partnership's financial
statements. Equity in joint venture income for Shasta Way was $328,348 and
$312,772 for the years ended December 31, 1996 and 1995, respectively. We also
did not audit the financial statements of the Partnership's investment in South
Bay Associates for the years ended December 31, 1996 and 1995. Operating income
for this investment totalled $431,682 for the year ended December 31, 1996 and
equity in joint venture income was $315,789 for the year ended December 31,
1995. We also did not audit the financial statements of Brea West, a wholly-
owned property, for the years ended December 31, 1996 and 1995, which statements
reflect operating income of $891,127 and $880,763 for the years then ended.
Those statements were audited by other auditors whose reports thereon have been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for the equity in joint venture income for Shasta Way for the
years ended December 31, 1996 and 1995, for the operating income and equity in
joint venture income for South Bay Associates for the years ended December 31,
1996 and 1995, and for operating income for Brea West for the years ended
December 31, 1996 and 1995, is based solely on the reports of the other
auditors. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by the
Managing General Partner, and evaluating the overall financial statement
presentation. We believe that our audits and the reports of other auditors for
the years ended December 31, 1997, 1996 and 1995 provide a reasonable basis for
the opinion expressed above.
/s/ Price Waterhouse LLP
- --------------------------
Boston, Massachusetts
March 23, 1998
<PAGE>
COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1997 1996
----------------- ------------------
<S> <C> <C>
Assets
Real estate investments:
Joint ventures $ 5,071,717 $ 5,531,652
Property, net 7,314,926 11,789,227
----------------- ------------------
12,386,643 17,320,879
Cash and cash equivalents 2,101,633 1,798,785
Short-term investments 198,992 503,111
----------------- ------------------
$ 14,687,268 $ 19,622,775
================= ==================
Liabilities and Partners' Capital
Accounts payable $ 50,345 $ 45,692
Accrued management fee 38,659 41,420
Deferred disposition fee 29,250 -
----------------- ------------------
Total liabilities 118,254 87,112
----------------- ------------------
Partners' capital (deficit):
Limited partners ($800 and $1,000 per unit,
respectively; 100,000 units authorized;
27,641 units issued and outstanding) 14,610,376 19,582,641
General partners (41,362) (46,978)
----------------- ------------------
Total partners' capital 14,569,014 19,535,663
----------------- ------------------
$ 14,687,268 $ 19,622,775
================= ==================
</TABLE>
(See accompanying notes to financial statements)
<PAGE>
COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------
1997 1996 1995
------------------- ----------------- ------------------
<S> <C> <C> <C>
Investment Activity
Property rentals $ 1,234,451 $ 1,559,843 $ 1,003,979
Property operating expenses (195,179) (237,034) (123,216)
Depreciation and amortization (393,374) (428,413) (332,619)
------------------- ----------------- ------------------
645,898 894,396 548,144
Joint venture earnings 319,953 328,348 628,561
------------------ ----------------- ------------------
Total real estate operations 965,851 1,222,744 1,176,705
Gain on sale of property 1,490,313 -- --
------------------ ----------------- ------------------
Total real estate activity 2,456,164 1,222,744 1,176,705
Interest on cash equivalents
and short-term investments 118,914 104,987 117,066
------------------ ----------------- ------------------
Total investment activity 2,575,078 1,327,731 1,293,771
------------------ ----------------- ------------------
Portfolio Expenses
Management fee 169,519 165,680 158,777
General and administrative 102,067 103,764 109,670
------------------ ----------------- ------------------
271,586 269,444 268,447
------------------ ----------------- ------------------
Net Income $ 2,303,492 $ 1,058,287 $ 1,025,324
================== ================= ==================
Net income per limited
partnership unit $ 82.50 $ 37.90 $ 36.72
================== ================= ==================
Cash distributions per limited
partnership unit $ 262.39 $ 60.00 $ 55.00
================== ================= ==================
Number of limited partnership
units outstanding during the year 27,641 27,641 27,641
================== ================= ==================
</TABLE>
(See accompanying notes to financial statements)
<PAGE>
COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------------------
1997 1996
------------------------------------ -----------------------------------
General Limited General Limited
Partners Partners Partners Partners
-------------- ---------------- -------------- -----------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ (46,978) $ 19,582,641 $ (40,809) $ 20,193,397
Cash distributions (17,419) (7,252,722) (16,752) (1,658,460)
Net income 23,035 2,280,457 10,583 1,047,704
-------------- ---------------- -------------- -----------------
Balance at end of year $ (41,362) $ 14,610,376 $ (46,978) $ 19,582,641
=============== ================ ============== =================
Year Ended December 31,
------------------------------------
1995
------------------------------------
General Limited
Partners Partners
---------------- -----------------
<S> <C> <C>
Balance at beginning of year $ (35,706) $ 20,698,581
Cash distributions (15,356) (1,520,255)
Net income 10,253 1,015,071
---------------- -----------------
Balance at end of year $ (40,809) $ 20,193,397
================ =================
</TABLE>
(See accompanying notes to financial statements)
<PAGE>
COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------
1997 1996 1995
------------------ ------------------ -------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,303,492 $ 1,058,287 $ 1,025,324
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 393,374 428,413 332,619
Equity in joint venture net income (319,953) (328,348) (628,561)
Cash distributions from joint ventures 772,792 694,437 939,499
Gain on sale of property (1,490,313) - -
Decrease (increase) in investment
income receivable 4,492 (681) (6,439)
Increase (decrease) in operating
liabilities 1,892 (11,085) 10,723
Decrease (increase) in other net assets (107,829) 22,751 19,149
----------------- ------------------ -------------------
Net cash provided by operating
activities 1,557,947 1,863,774 1,692,314
----------------- ------------------ -------------------
Cash flows from investing activities:
Net proceeds from sale of property 5,686,165 - -
Deferred disposition fee 29,250 - -
Investment in property - (186,836) -
Investment in joint ventures - - (68,687)
Decrease (increase) in short-term
investments, net 299,627 101,879 (597,870)
----------------- ------------------ -------------------
Net cash provided by (used in)
investing activities 6,015,042 (84,957) (666,557)
Cash flows from financing activity:
Distributions to partners (7,270,141) (1,675,212) (1,535,611)
----------------- ------------------ -------------------
Net cash used in financing activity (7,270,141) (1,675,212) (1,535,611)
----------------- ------------------ -------------------
Net increase (decrease) in cash and cash
equivalents 302,848 103,605 (509,854)
Cash and cash equivalents
Beginning of year 1,798,785 1,695,180 2,205,034
----------------- ------------------ -------------------
End of year $ 2,101,633 $ 1,798,785 $ 1,695,180
================= ================== ===================
</TABLE>
<PAGE>
Non-cash transaction:
Effective January 1, 1996, the Partnership's joint venture investment
in South Bay/CRIP 3 Associates was converted to a wholly-owned property. The
carrying value of this investment at conversion was $4,180,704.
(See accompanying notes to financial statements)
<PAGE>
COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
General
Copley Realty Income Partners 3; A Limited Partnership (the
"Partnership") is a Massachusetts limited partnership organized for the purpose
of investing primarily in newly constructed and existing income-producing real
properties. The Partnership commenced operations in October 1988, and acquired
the two real estate investments it currently owns prior to the end of 1989. It
intends to dispose of its investments within nine years of their acquisition,
and then liquidate.
The Managing General Partner of the Partnership is Third Income Corp.,
a wholly-owned subsidiary of AEW Real Estate Advisors, Inc. ("AEW"), formerly
known as Copley Real Estate Advisors ("Copley"). The associate general partner
is GCOP Associates Limited Partnership, a Massachusetts limited partnership.
Subject to the Managing General Partner's overall authority, the business of the
Partnership is managed by AEW pursuant to an advisory contract.
On December 10, 1996, Copley's parent, New England Investment
Companies, Limited Partnership ("NEIC"), a publicly traded master limited
partnership, acquired certain assets subject to then existing liabilities from
Aldrich, Eastman & Waltch, Inc. and its affiliates and principals (collectively,
"the AEW Operations"). Simultaneously, a new entity, AEW Capital Management L.P.
was formed, into which NEIC contributed its interests in Copley and its
affiliates. As a result, the AEW Operations were combined with Copley to form
the business operations of AEW Capital Management, L.P. At year end 1997, NEIC
completed a restructuring plan under which it contributed all of its operations
to a newly formed private partnership, NEIC Operating Partnership, L.P., in
exchange for a general partnership interest in the newly formed entity. As such,
at December 31, 1997, AEW Capital Management, L.P. is wholly owned by NEIC
Operating Partnership, L.P. AEW is a subsidiary of AEW Capital Management, L.P.
Prior to August 30, 1996, New England Mutual Life Insurance Company
("The New England") was NEIC's principal unit holder and owner of all the
outstanding stock of NEIC's general partner. On August 30, 1996, The New England
merged with and into Metropolitan Life Insurance Company ("Met Life"). Met Life
is the surviving entity and, therefore, through a wholly-owned subsidiary,
became the owner of the units of partnership interest previously owned by The
New England and of the stock of NEIC's general partner.
Management
AEW, as advisor, is entitled to receive stipulated fees from the
Partnership in consideration of services performed in connection with the
management of the Partnership and acquisition and disposition of Partnership
investments in real property. Partnership management fees are 9% of
distributable cash flow from operations, as defined, before deducting such fees.
AEW is also reimbursed for expenses incurred in connection with administering
the Partnership ($12,000 in 1997, $12,000 in 1996, and $11,646 in 1995).
Acquisition fees were based on 3% of the gross proceeds from the offering and
paid at the time commitments were initially funded. Disposition fees are limited
to the lesser of 3% of the selling price of the property, or 50% of the standard
real estate commission customarily charged by an independent real estate broker.
Payments of disposition fees are subject to the prior receipt by the limited
partners of their capital contributions plus a stipulated return thereon.
<PAGE>
New England Securities Corporation, an indirect subsidiary of Met Life,
is engaged by the Partnership to act as its unit holder servicing agent. Fees
and out-of-pocket expenses for such services totaled $2,834, $2,702 and $2,437
in 1997, 1996 and 1995, respectively. Fees to Back Bay Advisors, L.P., a wholly-
owned subsidiary of NEIC, for short-term investment advisory services totaled
$1,726, $1,808 and $1,795 in 1997, 1996 and 1995, respectively.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Managing General Partner to make
estimates affecting the reported amounts of assets and liabilities, and of
revenues and expenses. In the Partnership's business, certain estimates require
an assessment of factors not within management's control, such as the ability of
tenants to perform under long-term leases and the ability of the properties to
sustain their occupancies in changing markets. Actual results, therefore, could
differ from those estimates.
Real Estate Joint Ventures
Investments in joint ventures, including loans made to joint ventures
which are in substance real estate investments, are stated at cost, plus (minus)
equity in undistributed joint venture income (losses). Allocations of joint
venture income (losses) were made to the Partnership's venture partners as long
as they had substantial economic equity in the project. Currently, the
Partnership records an amount equal to 100% of the operating results of the
property, after the elimination of all inter-entity transactions, except for the
venture which includes an affiliate of the Partnership, which has substantial
economic equity in the project. Joint ventures are consolidated with the
accounts of the Partnership if, and when, the venture partner no longer shares
in the control of the business.
Property
Property includes land and buildings and improvements, which are stated
at cost less accumulated depreciation, plus other operating assets and
liabilities. The Partnership's initial carrying value of a property previously
owned by a joint venture equals the Partnership's carrying value of the
predecessor investment on the conversion date.
Capitalized Costs, Depreciation and Amortization
Maintenance and repair costs are expensed as incurred; significant
improvements and renewals are capitalized. Depreciation is computed using the
straight-line method based on the estimated useful lives of the buildings and
improvements.
Acquisition fees have been capitalized as part of the cost of real
estate investments. Amounts not related to land are being amortized using the
straight-line method over the estimated useful lives of the underlying real
property.
Leases
Leases are accounted for as operating leases. Leasing commissions are
amortized over the terms of the respective leases. Rental income is recognized
on a straight-line basis over the terms of the respective leases.
<PAGE>
Realizability of Real Estate Investments
The Partnership considers a real estate investment to be impaired when
it determines the carrying value of the investment is not recoverable through
expected undiscounted cash flows from the operations and disposition of the
property. The impairment loss is based on the excess of the investment's
carrying value over its estimated fair market value. For investments being held
for disposition, the impairment loss also includes estimated costs of sale.
Investments held for disposition are not depreciated during the holding period.
The carrying value of an investment may be more or less than its
current appraised value. At December 31, 1997 and 1996, the appraised value of
each investment exceeded its carrying value; the aggregate excess was
approximately $2,400,000 and $1,700,000, respectively.
The current appraised value of real estate investments has been
estimated by the Managing General Partner and is generally based on a
combination of traditional appraisal approaches performed by AEW and independent
appraisers. Because of the subjectivity inherent in the valuation process, the
current appraised value may differ significantly from that which could be
realized if the real estate were actually offered for sale in the marketplace.
Cash Equivalents and Short-Term Investments
Cash equivalents are stated at cost, plus accrued interest. The
Partnership considers all highly liquid debt instruments purchased with a
maturity of ninety days or less to be cash equivalents; otherwise, they are
classified as short-term investments.
The Partnership has the positive intent and ability to hold all short-
term investments to maturity; therefore, short-term investments are carried at
cost plus accrued interest, which approximates market value. At December 31,
1997 and 1996, all investments are in commercial paper with less than two months
and one month, respectively, remaining to maturity.
Income Taxes
A partnership is not liable for income taxes and, therefore, no
provision for income taxes is made in the financial statements of the
Partnership. A proportionate share of the Partnership's income is reportable on
each partner's tax return.
Per Unit Computations
Per unit computations are based on the number of units of limited
partnership interest outstanding during the year. The actual per unit amount
will vary by partner depending on the date of admission to, or withdrawal from,
the Partnership.
Effective January 1, 1998, the Partnership adopted FAS 128 "Earnings
per Share," which simplifies the standards of reporting earnings per share (EPS)
previously found in APB No. 15. It provides guidance on the computation and
disclosure of basic and diluted EPS and requires restatement of prior periods
for comparative purposes. The adoption of FAS 128 did not have a material impact
on the Partnership's financial statements.
<PAGE>
NOTE 3 - REAL ESTATE JOINT VENTURES
The Partnership had invested in two real estate joint ventures
organized as general partnerships with a real estate management/development firm
and, in one case, with an affiliate of the Partnership. The ownership of both
ventures was restructured in 1996, as described below. The Partnership made
capital contributions to the ventures, which are subject to preferential cash
distributions at a specified rate and to priority distributions with respect to
sale or refinancing proceeds. The Partnership also made a mortgage loan to one
of the ventures. The joint venture agreements provide for the funding of cash
flow deficits by the venture partners in proportion to ownership interests, and
for the dilution of ownership share in the event a venture partner does not
contribute proportionately.
The respective real estate management/development firm is responsible
for day-to-day development and operating activities, although overall authority
and responsibility for the business is shared by the venturers. The real estate
management/development firms, or their affiliates, also provide various services
to the joint ventures for a fee.
The following is a summary of cash invested in joint ventures,
net of returns of capital and excluding investment acquisition fees:
<TABLE>
<CAPTION>
December 31,
Rate of Ownership -------------------------------
Investment/Location Return/Interest Interest 1997 1996
- ------------------- --------------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Shasta Way
Simi Valley, CA 10.0% (C) 58% $ 6,726,051 $ 6,726,051
</TABLE>
(C) Capital contribution
Shasta Way
On September 29, 1989, the Partnership entered into a joint venture
with an affiliate of the Partnership, and with an affiliate of The Hewson
Company, to construct and operate an industrial facility in Simi Valley,
California. The Partnership committed to make capital contributions of up to
$7,612,500, of which $7,111,757 was funded at December 31, 1997 and 1996. The
venture owns land on which it completed construction of an industrial building
in 1991. Effective January 1, 1996, the joint venture was restructured, and the
Hewson Company interest was assigned to the Partnership and its affiliate in
proportion to their respective ownership interests. The Partnership's ownership
percentage increased from 34.8% to 58%; its affiliate's interest was increased
to 42%.
The aggregate minimum rents due to the venture under a non-cancelable
lease are: 1998 - $1,188,000.
South Bay Associates
Effective January 1, 1996, this joint venture was restructured and the
joint venture partner's ownership interest was assigned to the Partnership. The
investment was accounted for as a wholly-owned property through the date of sale
on July 27, 1997. (See Note 4).
<PAGE>
Summarized Financial Information
The following summarized financial information is presented in the aggregate for
the joint ventures:
<TABLE>
<CAPTION>
Assets and Liabilities
December 31,
---------------------------------------------------
1997 1996
-------------------- --------------------
<S> <C> <C>
Assets
Real property, at cost less
accumulated depreciation
of $2,132,388 and $1,709,771 $ 7,565,996 $ 7,988,613
Other 165,813 515,758
-------------------- --------------------
7,731,809 8,504,371
Liabilities 81,052 74,585
-------------------- --------------------
Net assets $ 7,650,757 $ 8,429,786
==================== ====================
Results of Operations
Year ended December 31,
------------------------------------------------------------------
1997 1996 1995
--------------- ----------------- ---------------
<S> <C> <C> <C>
Revenue
Rental income $ 1,205,152 $ 1,208,205 $ 1,696,790
Other 5,914 3,636 4,934
--------------- ----------------- ---------------
1,211,066 1,211,841 1,701,724
--------------- ----------------- ---------------
Expenses
Depreciation and amortization 460,785 460,785 529,694
Operating expenses 196,910 183,211 314,583
--------------- ----------------- ---------------
657,695 643,996 844,277
--------------- ----------------- ---------------
Net income $ 553,371 $ 567,845 $ 857,447
=============== ================= ===============
</TABLE>
Liabilities and expenses exclude amounts owed and attributable to the
Partnership and (with respect to one joint venture) its affiliate on behalf of
their various financing arrangements with the joint ventures.
Amounts for 1997 and 1996 relate only to the Shasta Way joint venture.
<PAGE>
NOTE 4 - INVESTMENT IN PROPERTY
The following is a summary of the Partnership's investment in property:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1997 1996
------------------ ------------------
<S> <C> <C>
Land $ 2,991,854 $ 5,771,144
Buildings and improvements 5,978,755 9,601,263
Accumulated depreciation (1,960,425) (1,758,213)
Investment valuation allowance - (2,400,000)
Deferred costs, net 375,329 445,638
Other net assets (liabilities) (70,587) 129,395
------------------ ------------------
Net carrying value $ 7,314,926 $ 11,789,227
================== ==================
</TABLE>
The net carrying value at December 31, 1997 is comprised solely of the
Brea West property. The net carrying value at December 31, 1996 was comprised of
Brea West and South Bay at $7,561,745 and $4,227,482, respectively.
South Bay Associates
On May 18, 1989, the Partnership entered into a joint venture with an
affiliate of South Bay Construction and Development Co. Inc., to acquire and
operate a research and development facility in San Jose, California. The
Partnership invested $7,028,247 in the joint venture in the form of capital
contributions and a mortgage loan. Effective January 1, 1996, the joint venture
was restructured and the joint venture partner's ownership interest was assigned
to the Partnership. The carrying value of the joint venture investment at
conversion ($4,180,704) was allocated to land, building and improvements, an
investment valuation allowance, and other net operating assets.
On July 22, 1997, the South Bay property was sold to the sole tenant
which exercised the purchase option under its lease for gross consideration of
$5,850,000. The Partnership received net proceeds of $5,715,415, after closing
costs, and recognized a gain of $1,490,313 ($53.38 per limited partnership unit)
on the sale. A disposition fee of $29,250 was accrued but not paid to AEW. On
July 24, 1997, the Partnership made a capital distribution of $5,528,200 ($200
per limited partnership unit) from the proceeds of the sale.
Brea West
On April 28, 1989, the Partnership entered into a joint venture
agreement to construct and operate an industrial facility in Brea, California.
The Partnership contributed $9,078,799 to the capital of the venture. The
venture partner was unable to fund its proportionate share of the cost overruns
and, effective June 30, 1991, the venture partner's ownership share was reduced
to zero and the property became wholly-owned by the Partnership.
The building is being depreciated over 30 years. Tenant improvements
are being depreciated over the original lease term. Minimum annual future rent
payments are as follows: 1998 - $914,958; 1999 - $914,958; 2000 - $944,964;
2001 - $890,100; 2002 - $912,352; thereafter - $4,644,728.
<PAGE>
NOTE 5 - INCOME TAXES
The Partnership's income for federal income tax purposes differs from
that reported in the accompanying statement of operations as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------
1997 1996 1995
---------------- ----------------- ----------------
<S> <C> <C> <C>
Net income per financial
statements $ 2,303,492 $ 1,058,287 $ 1,025,324
Timing differences:
Joint venture earnings (losses) (85,995) 167,259 156,936
Rental revenue 79,451 24,517 19,318
Expenses 11,090 7,096 10,456
Depreciation 79,040 73,015 76,416
Loss on sale (2,008,862) - -
---------------- ----------------- ----------------
Taxable income $ 378,216 $ 1,330,174 $ 1,288,450
=============== ================= ================
</TABLE>
NOTE 6 - PARTNERS' CAPITAL
Allocation of net income (losses) from operations and distributions of
distributable cash from operations, as defined, are in the ratio of 99% to the
limited partners and 1% to the general partners. Cash distributions are made
quarterly .
Net sales proceeds and financing proceeds will be allocated first to
limited partners to the extent of their contributed capital plus a stipulated
return thereon, as defined, second to pay disposition fees, and then 85% to the
limited partners and 15% to the general partners. Income from sales will be
allocated in proportion to the distribution of related proceeds, provided that
the general partners are allocated at least 1%. Income or losses from sales, if
there are no residual proceeds after the repayment of the related debt, will be
allocated 99% to the limited partners and 1% to the general partners.
NOTE 7 - SUBSEQUENT EVENT
Distributions of cash from operations relating to the quarter ended
December 31, 1997 were made on January 29, 1998 in the aggregate amount of
$390,883 ($14.00 per limited partnership unit).
<PAGE>
COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Initial Cost to Costs Capitalized
the Partnership Subsequent to Acquisition
------------------------------------ ----------------------------------
Encum- Buildings & Other Carrying Improve-
Description brances Land Improvements (Net) Costs ments Other
- ---------------- ------------ ----------- -------------- --------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
A single-story industrial
building on 7.51 acres in Notes A & B $2,917,098 $5,974,055 $(81,193) $74,756 $ 4,700 $ 353,790
Brea, California
A single-story industrial Notes B
building on 6.7 acres and C $1,699,290 $2,115,672 $365,742 $0 $186,836 $(259,815)
in San Jose, California
---------- ---------- -------- ------- -------- ---------
Total Wholly-Owned $4,616,388 $8,089,727 $284,549 $74,756 $191,536 $ 93,975
=========== ========== ======== ======= ======== =========
58% Interest in Hewson Shasta
Way Joint Venture. Owner of
an industrial building on 12.13 --------------------------------------------------------See Note C------------------------
acres in Simi Valley, California
</TABLE>
<TABLE>
<CAPTION>
Gross amount at which
Carried at Close of Period
--------------------------------------
Buildings & Accumulated Date of
Description Land Improvements Other Total Depreciation Sales Construction
- ---------------- -------------- -------------- -------- ------------ ---------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
A single-story industrial
building on 7.51 acres in $2,991,854 $5,978,755 $304,742 $ 9,275,351 $1,960,425 $ 0 1990
Brea, California
A single-story industrial
building on 6.7 acres $1,699,290 $2,302,508 $105,927 $ 4,107,725 $ 118,242 $(3,989,483) 1976
in San Jose, California
---------- ---------- -------- ----------- ---------- -----------
Total Wholly-Owned $4,691,144 $8,281,263 $410,669 $13,383,076 $2,078,667 $(3,989,483)
========== ========== ======== =========== ========== ============
58% Interest in Hewson Shasta
Way Joint Venture. Owner of
an industrial building on 12.13 --------------------------------------- $ 5,071,717 N/A $ 0 1991
acres in Simi Valley, California ----------- -----------
Total Joint Ventures $ 5,071,717 $ 0
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Date Date Depreciable
Description Acquired Sold Life
- ---------------- ------------- ----------- ---------------
<S> <C> <C> <C>
A single-story industrial
building on 7.51 acres in 06/30/91 30 Years
Brea, California
A single-story industrial
building on 6.7 acres 05/18/89 07/22/97 30 Years
in San Jose, California
Total Wholly-Owned
58% Interest in Hewson Shasta
Way Joint Venture. Owner of
an industrial building on 12.13 09/29/89 31.5 Years
acres in Simi Valley, California
</TABLE>
Note (A) South Bay/CRIP 3 investment restructured from joint venture to
wholly-owned property effective 1/1/96.
<PAGE>
COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP
SCHEDULE III - NOTE B
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995, 1996 & 1997
<TABLE>
<CAPTION>
Reconciliation of Real 1995
Estate Owned 1995 1995 INVESTMENT
BALANCE CAPITALIZED OTHER VALUATION BALANCE
DESCRIPTION AT 12/31/94 IMPROVEMENTS NET ASSETS ALLOWANCE AT 12/31/95
- ------------------------ -------------- -------------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Brea West $ 9,555,442 $ 0 $ (19,149) $0 $ 9,536,293
----------- -------- --------- -- -----------
$ 9,555,442 $ 0 $ (19,149) $0 $ 9,536,293
=========== ======== ========= == ===========
1996
1996 1996 INVESTMENT
BALANCE CAPITALIZED OTHER VALUATION BALANCE
AT 12/31/95 IMPROVEMENTS NET ASSETS ALLOWANCE AT 12/31/96
-------------- -------------- ------------ ----------- --------------
Brea West $ 9,536,293 $ 0 $ (26,221) $0 $ 9,510,072
South Bay/CRIP 3 4,180,704(A) 186,836 (40,904) 0 4,326,636
----------- -------- --------- -- -----------
$13,716,997 $186,636 $ (67,125) $0 $13,836,708
=========== ======== ========= == ===========
1997
1997 1997 INVESTMENT
BALANCE CAPITALIZED OTHER VALUATION BALANCE
AT 12/31/96 IMPROVEMENTS NET ASSETS ALLOWANCE AT 12/31/97
-------------- -------------- ------------ ----------- --------------
Brea West $ 9,510,072 $ 0 $ 86,768 $0 $ 9,596,840
South Bay/CRIP 3 4,326,636 0 (196,509) 0 4,130,127
----------- -------- --------- -- -----------
$13,836,708 $ 0 $(109,741) $0 $13,726,967
=========== ======== ========= == ===========
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Real ACCUMULATED ACCUMULATED
Estate Owned DEPRECIATION 1995 DEPRECIATION
& AMORTIZATION DEPRECIATION & AMORTIZATION
BALANCE & AMORTIZATION BALANCE 1995 BALANCE (NET)
DESCRIPTION AT 12/31/94 EXPENSE AT 12/31/95 SALES AT 12/31/95
- ------------------------ -------------- -------------- ----------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Brea West $ 1,304,001 $322,163 $1,626,164 $ 0 $ 7,910,129
----------- -------- ---------- --------- -----------
$ 1,304,001 $322,163 $1,626,164 $ 0 $ 7,910,129
=========== ======== ========== ========= ===========
ACCUMULATED ACCUMULATED
DEPRECIATION 1996 DEPRECIATION
& AMORTIZATION DEPRECIATION & AMORTIZATION
BALANCE & AMORTIZATION BALANCE 1996 BALANCE (NET)
AT 12/31/95 EXPENSE AT 12/31/96 SALES AT 12/31/96
-------------- -------------- ----------------- ----------- --------------
Brea West $ 1,626,164 $322,163 $1,948,327 $ 0 $ 7,561,745
South Bay/CRIP 3 0 99,154 99,154 0 4,227,482
----------- -------- ---------- ---------- -----------
$ 1,626,164 $421,317 $2,047,481 $ 0 $11,789,227
=========== ======== ========== ========== ===========
ACCUMULATED ACCUMULATED
DEPRECIATION 1997 DEPRECIATION
& AMORTIZATION DEPRECIATION & AMORTIZATION
BALANCE & AMORTIZATION BALANCE 1997 BALANCE (NET)
AT 12/31/96 EXPENSE AT 12/31/97 SALES AT 12/31/97
-------------- -------------- ----------------- ------------ --------------
Brea West $ 1,948,327 $333,587 $2,281,914 $ 0 $ 7,314,926
South Bay/CRIP 3 99,154 52,691 151,845 (3,978,282) 0
----------- -------- ---------- ----------- -----------
$ 2,047,481 $386,278 $2,433,759 $(3,978,282) $ 7,314,926
=========== ======== ========== =========== ===========
(A) Carrying value at conversion date (1/1/96)
</TABLE>
<PAGE>
COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP
SCHEDULE III - NOTE C
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995, 1996 & 1997
<TABLE>
<CAPTION>
1995
1995 1995 AMORTIZATION OF
PERCENT OF BALANCE CASH INVESTMENT EQUITY IN ACQUISITION
DESCRIPTION OWNERSHIP AT 12/31/94 IN JOINT VENTURE INCOME (LOSS) FEES
- ------------------------ -------------- ------------ ---------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
South Bay / CRIP 3 71.07% $ 4,173,588 $ 68,687 $ 315,789 $ (3,360)
Shasta Way Associates 34.8% 6,120,287 0 312,772 (7,096)
------------ ---------------- -------------- -----------------
$ 10,293,875 $ 68,687 $ 628,561 $ (10,456)
============ ================ ============== =================
1995 CASH 1995 CONVERSION
DISTRIBUTIONS INVESTMENT TO
FROM VALUATION WHOLLY-OWNED BALANCE
JOINT VENTURE ALLOWANCE PROPERTY AT 12/31/95
-------------- ------------ ---------------- -----------
$ (374,000) $ 0 $ 0 $ 4,180,704
(565,499) 0 0 5,860,464
-------------- ------------ ---------------- -----------
$ (939,499) $ 0 $ 0 $10,041,168
============== ============ ================ ===========
1996
1996 1996 AMORTIZATION OF
PERCENT OF BALANCE CASH INVESTMENT EQUITY IN ACQUISITION
DESCRIPTION OWNERSHIP AT 12/31/95 IN JOINT VENTURE INCOME (LOSS) FEES
- ------------------------ -------------- ------------ ---------------- -------------- -----------------
South Bay / CRIP 3 100% $ 4,180,704 $ 0 $ 0 $ 0
Shasta Way Associates 58% 5,860,464 0 328,348 (7,096)
------------ ---------------- -------------- -----------------
$ 10,041,168 $ 0 $ 328,348 $ (7,096)
============ ================ ============== =================
1996 CASH 1996 CONVERSION
DISTRIBUTIONS INVESTMENT TO
FROM VALUATION WHOLLY-OWNED BALANCE
JOINT VENTURE ALLOWANCE PROPERTY AT 12/31/96
-------------- ------------ ---------------- -----------
$ 0 $ 0 $ (4,180,704)(A) $ 0
(650,064) 0 0 5,531,652
-------------- ------------ ---------------- -----------
$ (650,064) $ 0 $ (4,180,704) $ 5,531,652
============== ============ ================ ===========
1997
1997 1997 AMORTIZATION OF
PERCENT OF BALANCE CASH INVESTMENT EQUITY IN ACQUISITION
DESCRIPTION OWNERSHIP AT 12/31/96 IN JOINT VENTURE INCOME (LOSS) FEES
- ------------------------ -------------- ------------ ---------------- -------------- -----------------
Shasta Way Associates 58% $ 5,531,662 $ 0 $ 319,953 $ (7,096)
------------ ---------------- -------------- -----------------
$ 5,531,662 $ 0 $ 319,953 $ (7,096)
============ ================ ============== =================
1997 CASH 1997 CONVERSION
DISTRIBUTIONS INVESTMENT TO
FROM VALUATION WHOLLY-OWNED 1997 BALANCE
JOINT VENTURE ALLOWANCE PROPERTY SALES AT 12/31/97
-------------- ------------ ---------------- ----------- -----------
$ (772,792) $ 0 $ 0 $ 0 $ 5,071,717
-------------- ------------ ---------------- ----------- -----------
$ (772,792) $ 0 $ 0 $ 0 $ 5,071,717
============== ============ ================ =========== ===========
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
INDEX NO. 2
Independent Auditor's Report and Financial Statements
of Shasta Way Associates
Report of Independent Auditors from Ernst & Young LLP
Balance Sheets - December 31, 1997 and 1996
Statements of Operations - For the Years ended
December 31, 1997, 1996 and 1995
Statements of Changes in Partners' Capital - For the Years
ended December 31, 1997, 1996 and 1995
Statements of Cash Flows - For the Years ended December 31,
1997, 1996 and 1995
Notes to Financial Statements
<PAGE>
FINANCIAL STATEMENTS
SHASTA WAY ASSOCIATES
(A CALIFORNIA GENERAL PARTNERSHIP)
December 31, 1997 and 1996
<PAGE>
Shasta Way Associates
(A California General Partnership)
Financial Statements
December 31, 1997 and 1996
Contents
Report of Independent Auditors...............................................1
Financial Statements
Balance Sheets...............................................................2
Statements of Operations.....................................................3
Statements of Partners' Capital..............................................4
Statements of Cash Flows.....................................................5
Notes to Financial Statements................................................6
<PAGE>
[ERNST & YOUNG LETTERHEAD Appears Here]
Report of Independent Auditors
To the Partners
Shasta Way Associates
We have audited the accompanying balance sheets of Shasta Way Associates (a
California general partnership) as of December 31, 1997 and 1996, and the
related statements of operations, partners' capital, and cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Shasta Way Associates at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Phoenix, Arizona
January 20, 1998
1
<PAGE>
Shasta Way Associates
(A California General Partnership)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1997 1996
------------------ ------------------
<S> <C> <C>
ASSETS
Cash $ 8,718 $ 166,413
Tenant receivables 116,212 270,294
Rental property
Land 2,977,867 2,977,867
Buildings 6,803,913 6,803,913
Accumulated depreciation (2,146,952) (1,721,687)
------------------ ------------------
7,634,828 8,060,093
------------------ ------------------
Other assets - net of accumulated amortization of $181,717 in 1997 and
$315,164 in 1996 40,883 79,051
================== ==================
$ 7,800,641 $ 8,575,851
================== ==================
Liabilities and partners' capital
Security deposit $ 62,400 $ 62,400
Accounts payable and accrued expenses 18,652 12,185
Due to partners
CRIP 3 1,802,692 1,694,054
CRIP 4 1,305,250 1,226,586
Partners' capital 4,611,647 5,580,626
------------------ ------------------
$ 7,800,641 $ 8,575,851
================== ==================
</TABLE>
See accompanying notes. 2
<PAGE>
Shasta Way Associates
(A California General Partnership)
Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1997 1996 1995
------------------- ------------------ ------------------
<S> <C> <C> <C>
Revenues
Rental income $1,045,432 $1,045,432 $1,012,427
Tenant reimbursements 159,720 162,773 151,424
Interest and other income 5,914 3,636 3,992
------------------- ------------------ ------------------
1,211,066 1,211,841 1,167,843
------------------- ------------------ ------------------
Expenses
Rental operating expenses 184,831 160,800 155,744
General and administrative 12,079 22,411 11,272
Depreciation and amortization 463,433 463,433 462,485
Guaranteed payments
CRIP 3 881,430 868,326 844,281
CRIP 4 638,272 628,733 611,374
------------------- ------------------ ------------------
2,180,045 2,143,703 2,085,156
------------------- ------------------ ------------------
Net loss $ (968,979) $ (931,862) $ (917,313)
=================== ================== ==================
</TABLE>
See accompanying notes. 3
<PAGE>
Shasta Way Associates
(A California General Partnership)
Statements of Partners' Capital
<TABLE>
<CAPTION>
Copley Copley
Hewson Realty Realty
Shasta Way Income Income
L.P. Partners 3 Partners 4 Total
---------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Partners' capital - (deficit)
December 31, 1994 $ (604,984) $ 4,660,174 $ 3,374,611 $ 7,429,801
Net loss - 1995 - (532,041) (385,272) (917,313)
---------------- ----------------- ----------------- ----------------
Partners' capital - (deficit)
December 31, 1995 (604,984) 4,128,133 2,989,339 6,512,488
Transfer of interest 604,984 (350,891) (254,093) -
Net loss - 1996 - (540,480) (391,382) (931,862)
---------------- ----------------- ----------------- ----------------
Partners' capital -
December 31, 1996 - 3,236,762 2,343,864 5,580,626
Net loss - 1997 - (562,008) (406,971) (968,979)
================ ================= ================= ================
Partners' capital -
December 31, 1997 $ - $ 2,674,754 $ 1,936,893 $ 4,611,647
================ ================= ================= ================
</TABLE>
See accompanying notes. 4
<PAGE>
Shasta Way Associates
(A California General Partnership)
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------------
1997 1996 1995
------------------- ------------------ ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (968,979) $ (931,862) $ (917,313)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization 463,433 463,433 462,485
Decrease (increase) in tenant receivables 154,082 151,238 74,093
Increase (decrease) in accounts payable and
accrued expenses 6,467 4,014 (672)
Increase in due to partners 187,302 376,259 480,655
------------------- ------------------ ------------------
Total adjustments 811,284 994,944 1,016,561
------------------- ------------------ ------------------
Net cash (used in) provided by investing
activities (157,695) 63,082 99,248
------------------- ------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to rental property - - (9,482)
------------------- ------------------ ------------------
Net (decrease) increase in cash (157,695) 63,082 89,766
Cash at beginning of year 166,413 103,331 13,565
------------------- ------------------ ------------------
Cash at end of year $ 8,718 $ 166,413 $ 103,331
=================== ================== ==================
</TABLE>
See accompanying notes. 5
<PAGE>
Shasta Way Associates
(A California General Partnership)
Notes to Financial Statements
December 31, 1997 and 1996
1. ORGANIZATION AND OTHER MATTERS
Shasta Way Associates, formerly Hewson Shasta Way Associates (the Partnership),
was formed September 29, 1989 as a California general partnership for the
purpose of developing and operating a commercial industrial property in Simi
Valley, California. The percentage ownership interests through December 31, 1995
were as follows:
Hewson Shasta Way L.P., a California limited
partnership (Hewson) 40.0%
Copley Realty Income Partners 3 (CRIP 3) 34.8%
Copley Realty Income Partners 4 (CRIP 4) 25.2%
CRIP 3 and CRIP 4 were committed to contribute an aggregate of approximately
$13,125,000 to the Partnership; subsequently, the Partnership Agreement provides
for pro rata contributions by all partners. CRIP 3 and CRIP 4 contributed
$7,111,757 and $5,149,893, respectively, through December 31, 1997.
CRIP 3 and CRIP 4 are entitled to preferential cash payments to the extent of a
stipulated return on their invested capital (Note 4). Prior to 1992, for
financial reporting purposes, income and losses were allocated to the partners
in accordance with their respective ownership interests, based on the long-term
substance of the business enterprise and the requirement for all partners to
fund capital, as described above. For the years ended December 31, 1995 and
1994, losses were allocated entirely to CRIP 3 and CRIP 4.
On January 1, 1996, the partners executed an Amended and Restated Statement of
Partnership Agreement whereby Hewson transferred all of its right, title and
interest in and to the Partnership to CRIP 3 and CRIP 4. The percentage
ownership interests are as follows:
Copley Realty Income Partners 3 (CRIP 3) 58.0%
Copley Realty Income Partners 4 (CRIP 4) 42.0%
Beginning January 1, 1996, income and losses are allocated to CRIP 3 and CRIP 4
in accordance with the ownership interests.
6
<PAGE>
Shasta Way Associates
(A California General Partnership)
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES
RENTAL PROPERTY
Rental properties are stated at cost. In 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." SFAS No. 121
requires that real estate assets be evaluated for impairment if impairment
indicators are present. An impairment writedown to fair value would occur only
if the estimated undiscounted cash flows from the asset were less than the
carrying amount of the asset. At December 31, 1997, the Partnership does not
hold any assets that meet the impairment criteria of SFAS No. 121.
INCOME RECOGNITION
The Partnership's rental property is leased to a tenant under an operating
lease. The lease includes a provision whereby the tenant is not responsible for
rental payments for specified occupancy periods. Rental income is recognized
over the lease term on a straight-line basis. Included in tenant receivables are
$98,760 and $197,519 of deferred rent receivable at December 31, 1997 and 1996,
respectively.
INCOME TAXES
Federal and state income taxes are not payable by the Partnership, since the
partners report their proportionate share of taxable income or loss on their
separate tax returns.
DEPRECIATION AND AMORTIZATION
Depreciation is provided on the straight-line method over the estimated lives of
the assets, which are 31.5 years for the building and the term of the tenant's
lease for tenant improvements.
Included in other assets are leasing commissions, which are amortized over the
term of the related tenant's lease.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
7
<PAGE>
Shasta Way Associates
(A California General Partnership)
Notes to Financial Statements (continued)
3. RENTAL PROPERTY
At December 31, 1989 the rental property under development consisted of
approximately 12 acres of land, with two existing buildings. During 1990, the
existing buildings were demolished and construction of a 235,080 square-foot
industrial building commenced. Construction was completed in June 1991.
The Partnership's property is being leased to a tenant under an operating lease
which expires in December 1998. The lease provides for the tenant to reimburse
the Partnership for operating expenses.
Approximately $1,188,000 of minimum lease payments are due in 1998.
4. RELATED PARTY TRANSACTIONS
Under the terms of the Partnership agreement, as amended, Hewson Properties,
Inc. (HPI), an affiliate of Hewson, was paid a development overhead fee of
$272,428. CRIP 3 and CRIP 4 were paid development overhead fees of $48,370 and
$35,026, respectively. These fees were paid beginning on the first day of the
month following the start of demolition of the existing buildings and were
capitalized to the rental property.
The Partnership agreement provides that CRIP 3 and CRIP 4 will be paid
guaranteed payments of 10% per annum on invested capital (as defined). The
cumulative unpaid guaranteed payments are included in due to partners in the
accompanying balance sheets.
Included in rental operating expenses are $40,339, $40,783 and $36,933 of
management fees paid to HPI in 1997, 1996 and 1995, respectively. These fees are
paid at a rate of 3% of gross rental income received.
8
<PAGE>
Shasta Way Associates
(A California General Partnership)
Notes to Financial Statements (continued)
5. IMPACT OF YEAR 2000 (Unaudited)
Management of the Partnership is assessing the modifications or replacements of
its software that may be necessary for its computer systems to function properly
with respect to the dates in the year 2000 and thereafter. Management does not
believe that the cost of either modifying existing software or converting to new
software will be significant or that the year 2000 issue will pose significant
operational problems for its computer systems.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP
Date: March 27, 1998 By: /s/ Wesley M. Gardiner, Jr.
---------------------------
Wesley M. Gardiner, Jr.
President of the
Managing General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Wesley M. Gardiner, Jr. President, Chief March 27, 1998
- -------------------------------- Executive Officer and
Wesley M. Gardiner, Jr. Director
/s/ Pamela J. Herbst Vice President and March 27, 1998
- -------------------------------- Director
Pamela J. Herbst
/s/ J. Grant Monahon Vice President and March 27, 1998
- -------------------------------- Director
J. Grant Monahon
/s/ James J. Finnegan Vice President March 27, 1998
- --------------------------------
James J. Finnegan
/s/ Karin J. Lagerlund Treasurer and Principal
- -------------------------------- Financial and Accounting March 27, 1998
Karin J. Lagerlund Officer
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit Number Page Number
10A. Joint Venture Agreement of South Bay/CRIP 3 *
Associates Joint Venture dated as of March 27, 1989
by and between Copley Realty Income Partners 3; A
Limited Partnership and SBC and D Co., Inc.
10B. General Partnership Agreement of Brea West *
Associates dated as of April 28, 1989 between BW
Partners and Copley Realty Income Partners 3; A
Limited Partnership.
10C. First Amendment to Brea West Associates General *
Partnership Agreement dated as of April 28, 1989
by and between Copley Realty Income Partners 3; A
Limited Partnership and BW Partners.
10D. Pledge and Security Agreement for Brea West *
Associates dated as of April 28, 1989 by and
among BW Partners, Copley Realty Income Partners
3; A Limited Partnership, and Tar Partners.
10E. General Partnership Agreement of Hewson Shasta Way *
Associates dated as of September 29, 1989 between
Hewson/Shasta Way L.P., Copley Realty Income Partners
3; A Limited Partnership and Copley Realty
Income Partners 4; A Limited Partnership.
10F. Purchase Agreement and Escrow Instruction and *
Railroad Spur Agreement dated as of May 17, 1991 by
and between NI Industries, Inc., a Delaware
corporation, and Brea West Associates
10G. Agreement for Dissolution, Distribution and *
Winding-Up of Brea West Associates dated
May 31, 1991 by and between BW Partners, a
California general partnership, and the
Registrant
10H. Incentive Property Management Agreement *
effective as of May 31, 1991 by and between
TRI-Partners, a California general partnership,
and the Registrant
10I. Lease between South Bay/CRIP 3, a California *
general partnership ("Landlord"), and Media Arts
Group, Inc., a Delaware Corporation ("Tenant)" dated
February 7, 1994.
<PAGE>
10J. First Amendment to Lease by and between *
South Bay/CRIP 3, a California
general partnership ("Landlord"), and Media Arts Group,
Inc., a Delaware Corporation ("Tenant)" dated
April 15, 1994.
10K. Second Amendment to Lease by and between *
South Bay/CRIP 3, a California
general partnership ("Landlord"), and Media Arts Group,
Inc., a Delaware Corporation ("Tenant)" dated
June 23, 1994.
10L. Promissory Note dated May 1, 1994 by and between *
South Bay/CRIP III Associates Joint Venture,
a California general partnership, as Holder,
and CXR Telcom Corporation, a Delaware
Corporation, as Maker.
10M. Assignment and Assumption and Indemnity Agreement dated *
January 1, 1996, by and between Hewson/Shasta Way L.P., a
California limited partnership ("Assignor"), Copley Realty
Income Partners 3; a Limited Partnership, a Massachusetts
limited partnership ("CRIP 3"), and Copley Realty Income
Partners 4; a Limited Partnership, a Massachusetts limited
partnership ("CRIP 4").
10N. First Amendment to General Partnership Agreement dated *
January 1, 1996, as amended to date (the "Partnership
Agreement") of Hewson Shasta Way Associates, a California
general partnership, by and among Hewson/Shasta Way L.P.,
a California limited partnership, Copley Realty Income
Partners 3; a Limited Partnership, a Massachusetts limited
partnership ("CRIP 3"), and Copley Realty Income Partners 4;
a Limited Partnership, a Massachusetts limited partnership
("CRIP 4").
27. Financial Data Schedule
- --------------------------------------------
* Previously filed and incorporated herein by reference
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,101,633
<SECURITIES> 198,992
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,300,625
<PP&E> 12,386,643
<DEPRECIATION> 1,960,425
<TOTAL-ASSETS> 14,687,268
<CURRENT-LIABILITIES> 118,254
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 14,569,014
<TOTAL-LIABILITY-AND-EQUITY> 14,687,268
<SALES> 1,554,404
<TOTAL-REVENUES> 3,163,631
<CGS> 195,179
<TOTAL-COSTS> 195,179
<OTHER-EXPENSES> 664,960
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,303,492
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,303,492
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,303,492
<EPS-PRIMARY> 82.50
<EPS-DILUTED> 82.50
</TABLE>
