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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
---------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
+---+ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
| X | EXCHANGE ACT OF 1934
+---+
For the fiscal year ended December 31, 1998
OR
+---+ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
| | EXCHANGE ACT OF 1934
+---+
Commission file number: 0-15796
CORPORATE REALTY INCOME FUND I, L.P.
(Exact name of registrant as specified in its charter)
Delaware 13-3311993
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
475 Fifth Avenue, NY, NY 10017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212)696-0197
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Depositary Units of Limited Partnership Interest
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[ ]
Documents Incorporated by Reference in Part IV of this Form 10-K
None.
CORPORATE REALTY INCOME FUND I, L. P.
Annual Report on Form 10-K
December 31, 1998
Table of Contents
Page
----
PART I
Item 1. Business.................................................................................................1
Item 2. Properties...............................................................................................6
Item 3. Legal Proceedings.......................................................................................14
Item 4. Submission of Matters to a Vote of Security-Holders.....................................................14
PART II ..........................................................................................................15
Item 5. Market for Registrant's Securities and Related Security-Holder Matters..................................15
Item 6. Selected Financial Data.................................................................................17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................17
Item 7.A Quantitative and Qualitative Disclosures About
Market Risk.............................................................................................21
Item 8. Financial Statements and Supplementary Data.............................................................21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................22
PART III .........................................................................................................23
Item 10. Directors and Executive Officers of the Registrant......................................................23
Item 11. Executive Compensation..................................................................................25
Item 12. Security Ownership of Certain Beneficial Owners and Management..........................................26
Item 13. Certain Relationships and Related Transactions..........................................................26
PART IV .....................................................................................................28
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................28
PART I
Item 1. Business.
General
Corporate Realty Income Fund I, L.P. ("Registrant") is a Delaware limited
partnership organized on November 25, 1985 pursuant to the Delaware Revised
Uniform Limited Partnership Act. The general partners of Registrant are 1345
Realty Corporation, a Delaware corporation (the "Corporate General Partner"),
and Robert F. Gossett, Jr. (the "Individual General Partner") (collectively, the
"General Partners"). The limited partners of Registrant are hereinafter
collectively referred to as the "Limited Partners."
Registrant's business consists of owning and leasing to others the
properties described in Item 2 below. Registrant's properties are leveraged as
described below.
On March 26, 1986, Registrant commenced an offering (the "Offering") of
$80,000,000 of depositary units of limited partnership interest (the "Units").
Registrant terminated the Offering in September 1987, having issued 3,200,000
Units ($80,000,000) and received net proceeds from the Offering (after deduction
for organization and offering expenses of $5,948,103) aggregating $74,051,897.
Since the Offering, Registrant has invested aggregate funds in excess of
$115,000,000 (including more than $47,000,000 of financing proceeds) in
acquiring and improving its properties, which currently number seven.
Rental revenue from the following tenants at Registrant's properties each
accounted for more than 10% of Registrant's total rental revenue for each of the
years ended December 31, 1996, 1997 and 1998:
a. For 1996, GTE Directories Corporations ("GTE") as tenant in the
Directory Building (25%); The Austin Company ("Austin") as a tenant in the
Tumi Building (formerly, the Austin Place Building) (29%); and James River
Corporation of Nevada, Inc. ("James River") as a tenant in the James River
Warehouse (16%) (the James River Warehouse was sold in February 1997).
b. For 1997, GTE as tenant in the Directory Building (16%); and Austin
as a tenant in the Tumi Building (10%).
c. For 1998, GTE as tenant in the Directory Building (14%).
1
Fleet Bank Loan
Registrant's properties are subject to the lien of a first mortgage
line-of-credit loan (the "Loan") from Fleet Bank, National Association (the
"Bank"). On September 25, 1998, the terms of the Loan were amended to increase
the maximum principal amount from $44,000,000 to $49,000,000, to revise the
allocation of the Loan among Registrant's properties and to clarify the debt
service coverage ratio and the permitted distributions to Registrant's partners.
As of March 25, 1999, the outstanding principal balance of the Loan was
$44,644,800.
The Loan is evidenced by a Secured Promissory Note, a Loan Agreement, an
Environmental Compliance and Indemnification Agreement, a First Amendment of
Loan Agreement and Note, a Second Amendment of Loan Agreement, and a Third
Amendment of Loan Agreement and Second Amendment of Note (collectively, the
"Loan Agreements"). The Loan is secured by a first mortgage lien, an assignment
of rents, a security agreement, and a fixture filing on and from each of
Registrant's properties, including the improvements, equipment, furnishings,
proceeds, books and records, and all payments related thereto, which consists of
the following seven properties: the American Color Building (formerly the GE
Medical Systems Office Building); the Directory Building; the Tumi Building
(formerly the Austin Place Building); the Flatiron Building; the Marathon Oil
Building; 475 Fifth Avenue; and the Alamo Towers.
The Loan matures on September 24, 2000 and the Bank is not required to fund
any advances after September 30, 1999. The Loan requires payment of a front-end
fee in an amount equal to one and one-half percent (1.5%) of the amount of the
total loan commitment, which amounts have aggregated approximately $711,000 to
date, of which approximately $51,000 were paid in 1998. In addition, for each
six month period ending September 30 and March 31, Registrant must pay an unused
loan commitment fee equal to one-half percent (0.5%) of the difference between
the average maximum loan commitment for the period and the average outstanding
principal balance of the Loan for such period. In 1998, Registrant paid
approximately $6,708 in such fees.
2
The Loan bears interest on each advance of funds from the date of such
advance at the Bank's Peg Rate, plus one-half percent (0.5%) per annum or, if
Registrant so chooses, at the LIBOR rate (offered rates for Eurodollar deposits)
or other market rate offered to the Bank (any such rate, a "Fixed Rate"), plus
two percent (2.0%) per annum. The Peg Rate is the rate announced from time to
time by the Bank as a means of pricing some of its loans to customers (not
necessarily the lowest rate actually charged to any customer class or category).
Registrant may elect to pay interest based on a Fixed Rate on the whole or a
portion of the outstanding principal amount, upon notice to the Bank, but only
in amounts of at least $1,000,000 and in additional integral multiples of
$100,000. As of March 25, 1999, the Peg Rate was 7.75% (interest using this rate
would be at 8.25%) and the 180-day Fixed Rate was 4.96344% (interest using this
rate would be at 6.96344%). The aggregate outstanding balance of the Loan as of
March 25, 1999 bears interest at rates ranging from 8.25% (on $22,594,880) to
6.96344% (on $22,049,920).
The Loan requires monthly payments of interest plus principal payments
equal to 1/500th of the then outstanding principal balance. The Loan may be
prepaid at any time, on notice, in whole or in part (a minimum of $1,000,000 and
additional integral multiples of $100,000). Any such prepayment will be without
premium or penalty with respect to funds bearing interest based on the Peg Rate
or, if the prepayment is made on the last day of the applicable interest period,
with respect to funds bearing interest based on a Fixed Rate; however, a
prepayment at any other time of funds bearing interest based on a Fixed Rate
will require payment of a breakage fee, which guarantees the Bank a fixed rate
yield maintenance tied to United States Treasury obligations for the period from
the date of prepayment to the end of the applicable interest period. Amounts
repaid to the Bank may be reborrowed by Registrant provided, however, that
amounts repaid in monthly amortization payments and amounts repaid on account of
475 Fifth Avenue may not be reborrowed.
Any payments not received by the Bank within 10 days after the due date
will incur a late charge equal to four percent (4%) of the amount of such
payment. Overdue amounts, whether at maturity, by acceleration, or otherwise
will bear interest at a rate equal to four percent (4%) above the otherwise
applicable interest rate.
The Loan Agreements contain continuing covenants regarding Registrant's
financial condition and the conduct of its operations. Registrant's debt service
coverage ratio (the ratio of the sum of cash from operations plus certain fees
paid to the General Partners to a constant loan amortization payment) cannot be
less than 1.40 to 1.0 and its loan to value ratio (the ratio of the outstanding
principal balance of the Loan to the appraised value of its properties) cannot
exceed fifty-five percent (55%).
3
In addition, Registrant must maintain a liquid net worth (cash, short-term
investments, marketable securities, and any unused borrowing capacity under the
Loan) of at least $2,000,000. The Loan Agreements also provide that Registrant
may distribute to its partners up to 90% of the sum of its operating net income
plus depreciation and amortization, plus or minus any step rent adjustments.
Compliance with this distribution provision is tested as of the last day of each
fiscal quarter for the preceding 12 consecutive calendar months. Registrant must
also obtain the Bank's consent, not to be unreasonably withheld or delayed, to
any lease of 10,000 or more rentable square feet (5,000 square feet for 475
Fifth Avenue and Alamo Towers). Registrant may not incur unsecured debt owing to
the General Partners in amounts in excess of $3,000,000.
The Bank's mortgage lien against any of Registrant's properties will be
released only upon payment of an amount equal to 110% of the loan amount
allocated to such property. In addition, such lien will be released only if
Registrant's remaining properties satisfy the debt service coverage ratio and
loan to value ratio.
Upon the occurrence of an event of default under the Loan Agreements (which
includes the failure to make any payment within 10 days of the due date thereof
and a failure to comply with its financial covenants which continues for 60
days), the Bank may enforce one or more of its remedies, including the right to
(i) declare all principal and interest on the Loan to be due and payable
immediately, (ii) require any or all of Registrant's properties (including all
equipment, fixtures, agreements, and other rights and interests relating
thereto) to be sold at auction to the highest bidder, and (iii) collect any and
all rents from the properties.
Registrant has also agreed to indemnify and hold harmless the Bank and its
officers, directors, employees, agents, representatives, contractors and
subcontractors, and their respective successors and assigns from and against any
and all claims, liability, costs, and expenses arising out of the presence
and/or clean-up of hazardous materials on or affecting Registrant's properties.
Financing Policies
The General Partners expect to approximate Registrant's original intention
of a loan to value ratio of 50%. Accordingly, it is expected that Registrant's
total borrowings will approximate 50% of the sum of (i) the appraised values of
its five remaining original properties plus (ii) the purchase price of
additional properties acquired by Registrant. Registrant is not limited by its
Partnership Agreement as to borrowing for any individual property; the aggregate
borrowings on all properties may not exceed an amount equal to the sum of (x)
60% of the aggregate purchase price of all properties which are not
4
refinanced plus (y) 80% of the aggregate value of all refinanced properties. As
of March 15, 1999, Registrant had a loan to value ratio of approximately 50%.
The Loan has enabled Registrant to acquire additional properties, but has
increased the risk of loss on its properties. Registrant may acquire additional
properties, the purchase of which would be funded out of the proceeds of sale of
one or more of Registrant's current properties. Registrant has no current
agreements to sell any of its existing properties. To be profitable,
Registrant's properties must generate cash flow in amounts sufficient to not
only cover operating expenses but also to pay all financing costs.
Registrant's objectives in making its investments continue to be to (i)
preserve and protect Registrant's capital; (ii) provide long term capital
appreciation, generating long term capital gains for federal income tax purposes
upon sale of the properties; (iii) build up equity through the reduction of
mortgage loans encumbering the properties; and (iv) provide cash distributions
from operations which may be partially tax-sheltered. There is no assurance that
these objectives will be achieved.
Competition
The Directory Building is fully leased to a single tenant on a net lease or
substantially equivalent basis and does not face competition from other
properties during the terms of such lease. However, upon termination of this
lease, and for any of Registrant's other properties, Registrant does, and will
continue to, compete with other properties for tenants. Depending upon market
conditions and occupancy rates at the time and place of any vacancies in
Registrant's properties, there is currently and there may be, in the future,
intense competition in obtaining tenants to fill such vacancies. Furthermore,
such competition has resulted and may result, because of reduced rental rates
and required concessions to tenants, in decreases in the rental revenue received
by Registrant and capital outlays necessary to fund tenant improvements. See
Item 2 - "Properties" for a discussion of market conditions in the areas in
which Registrant currently competes for tenants.
Employees
Registrant currently employs 16 persons (two of whom are part-time
employees). The business of Registrant is managed by the General Partners. See
Item 10 - "Directors and Executive Officers of the Registrant" and Item 13 -
"Certain Relationships and Related Transactions."
5
Item 2. Properties.
American Color Building
(formerly GE Medical Systems Office Building)
On July 10, 1986, Registrant acquired the American Color Building, located
in Monterey Park, California, for approximately $4,182,000, inclusive of
acquisition fees. Registrant owns fee title to the American Color Building and
its 90,000 square feet of underlying land, subject to the lien of the Loan (See
Item 1. - "Business-Fleet Bank Loan"). The property was built in 1985 and
contains 20,250 net rentable square feet, of which approximately 60% has been
office space and the remainder is warehouse space. The building contains an
unusually high percentage of office space for a mixed use property, but
Registrant prefers to avoid reconfiguring the space, both to avoid the
construction cost and to obtain the higher rates for office space. Because of
tenant improvements to be made in connection with the U.S. Census Bureau lease
described below, the percentage of office space will increase to approximately
71%.
Registrant leases 9,650 square feet (approximately 55% of which is office
space) to American Color Graphics, Inc. for an initial five year term which
expires on July 31, 2002, with a five year renewal option. Annual net rent is
$86,850 ($9.00 per square foot) to February 29, 2000. The annual rent for the
period from March 1, 2000 to July 31, 2002 is $86,850, increased by the
cumulative increase in the Consumer Price Index from August 1, 1997 to March 1,
2000 (but not more than a three percent increase). The tenant also reimburses
Registrant for its proportionate share of operating expenses. Registrant
expended approximately $75,000 in 1998 in tenant improvements in connection with
the American Color lease.
In October 1998, General Electric Company ("GE") terminated its lease for
10,600 square feet in the building, upon payment of a lease cancellation fee of
approximately $105,000. This fee represented GE's lease obligations for the then
remaining lease term of one year. GE had paid a net rent of $9.00 per square
foot, plus reimbursement of its proportionate share of operating expenses.
In March 1999, Registrant executed a lease with the General Services
Administration (for the U.S. Census Bureau) for the 10,600 square feet
previously occupied by GE. The lease provides for a 17 month term commencing
July 1, 1999 at a gross rent of $21.15 per square foot. Registrant is obligated
to expend approximately $51,000 in tenant improvements in connection with this
lease.
Market conditions in the Monterey Park area have improved in recent years
from those prevailing at the time GE executed its initial lease for the
building. The vacancy rate for commercial properties in such area approximates
35% for office buildings and
6
23% for mixed (office and industrial) space. The American Color Building is
situated next to a 200,000 square foot Public Storage facility which, like the
American Color Building, consists of a front office with warehouse space in the
rear. Such facility is currently approximately 96% occupied; net rents
approximate $6.36 per square foot. Gross rents approximate $21.00 per square
foot for office space and $13.00 per square foot for mixed office/warehouse
space in this area.
The Directory Building (formerly, the IBM Building)
On October 27, 1986, Registrant acquired the Directory Building, located in
Las Colinas, Texas, for a purchase price of approximately $24,580,000, inclusive
of acquisition fees. Registrant owns fee title to the Directory Building and its
6.67 acres of underlying land, subject to the lien of the Loan. The Directory
Building was built in 1982 and contains approximately 152,100 net rentable
square feet (reduced from 154,300 square feet during IBM's tenancy).
The building is 100% leased to GTE pursuant to a lease dated as of April
20, 1994, as subsequently amended by amendments dated as of July 29, 1994 and as
of February 22, 1995. The initial term of the lease expires on September 30,
2000, subject to a five-year renewal option at a rate equal to 95% of the then
market rate.
The amended lease requires approximate monthly rent of $173,800 through
September 30, 2000. GTE must also pay additional rent equal to excess electric
charges and operating expenses over base levels.
Registrant did not incur any significant capital expenditures at the
building during 1998. In connection with the GTE lease, Registrant has expended
approximately $2,628,000 for tenant improvements, none of which was in 1998.
The Las Colinas office market includes approximately 15,479,500 leasable
square feet, of which approximately 89.4% was leased as of December 31, 1998.
Weighted average rental rates for new leases at such properties range from
approximately $23.73 to $24.38 per square foot.
Tumi Building
(formerly Austin Place Building)
On December 30, 1986, Registrant acquired the Tumi Building, a two-wing
office building located in South Plainfield, New Jersey, for a purchase price of
approximately $16,473,000, inclusive of acquisition fees. Registrant owns fee
title to the Tumi Building and its underlying five acres of land, subject to the
lien of the Loan. The property was built in 1986 and contains approximately
106,600 net rentable square feet for use as a multi-tenant facility (reduced
from 108,000 square feet as a
7
single tenant facility).
As of March 25, 1999, the property is approximately 76.0% leased, with
45,700 square feet leased to Tumi, Inc. (as discussed below) and the remainder
at an average current rent of approximately $18.89 per square foot. One of such
leases has been extended past expiration pending negotiation of an expansion
(approximately 4,100 square feet) and such other leases expire in February 2004
(approximately 9,600 square feet) and May 31, 2007 (approximately 21,650 square
feet).
On March 9, 1999, Gdynia America Line, Inc., a tenant occupying
approximately 21,650 square feet (20.3%) in the Tumi Building filed for
protection under Chapter 11 of the U.S. Bankruptcy Code. Polish Ocean Lines, a
Polish corporation owned by the Polish Government, is jointly and severally
obligated under this lease. The lease expires in May 2007 and requires rental
rates of $20.60 per square foot until May 2002 and $19.75 per square foot
thereafter. The tenant owes Registrant approximately $258,000 for pre-petition
rent, as to which Registrant is an unsecured creditor. There is no assurance
that the lease will be affirmed in the bankruptcy proceeding or that Registrant
will be able to collect any amounts due from Polish Ocean Lines, the financial
condition of which presently is not ascertainable. If the lease is rejected, the
Tumi Building will have vacant space comprising approximately 43.7% of the total
net rentable square feet.
South Plainfield is included in the Route 287 submarket (approximately
6,850,000 square feet of which 14% is vacant), the Somerset County area
(approximately 8,750,000 square feet, of which 6% is vacant), and the Central
New Jersey Profit Center (approximately 44,850,000 square feet, of which 8% is
vacant). Average rents for office space in such area approximate $20.55 to
$23.58 per square foot. Registrant has expended approximately $2,205,000 for
tenant improvements, all of which was incurred before 1998. Registrant
anticipates expending approximately $148,000 in tenant improvements in 1999 for
tenants other than Tumi.
In October 1998, The Austin Company ("Austin") and Registrant executed a
lease termination agreement pursuant to which Austin was released from its lease
for 45,700 square feet in consideration of its execution and delivery of a
senior note in the original amount of approximately $3,802,425 (representing its
base rent obligation less the basic rent obligation under Tumi's lease for such
space). On December 31, 1998, after monthly payments aggregating approximately
$387,400, Registrant accepted, pursuant to the terms of the senior note, a
discounted prepayment of the note in the amount of $2,950,000.
8
Tumi's lease is for 45,700 square feet and expires on January 19, 2009. It
requires rent payments equal to $9.00 per square foot until January 2002, $15.00
per square foot from February 2002 to January 2006, and $17.00 per square foot
from February 2006 to January 2009. The lease includes two 5-year renewal terms,
the first at a base rent of $20.00 per square foot and the second at a then fair
market rental. Tumi is also obligated to pay for its electric current
consumption and its proportionate share (42.3%) of increases in operating
expenses, taxes, and insurance over base year 1999 levels. Registrant has
approved an approximate $1,100,000 budget for tenant improvements to be made by
Tumi, of which Registrant is obligated to fund not more than $350,000 in
connection with this lease.
Flatiron Building (formerly, the Cadnetix Building)
On January 5, 1988, Registrant acquired the Flatiron Building, located in
Flatiron Industrial Park, Boulder, Colorado, for approximately $9,003,000,
inclusive of acquisition fees. Registrant owns fee title to the Flatiron
Building and its 5 acres of underlying land, subject to the lien of the Loan.
The property contains approximately 96,070 net rentable square feet for use as a
multi-tenant facility (reduced from 102,000 square feet as a single tenant
facility).
As of March 29, 1999, Registrant has rented approximately 97% of the space
in the building to various tenants pursuant to leases providing for an average
current net rent of approximately $10.71 per square foot (exclusive of
expenses). Such leases expire in 1999 (approximately 31,822 square feet), in
2000 (approximately 4,801 square feet), in 2001 (approximately 17,181 square
feet), in 2002 (approximately 16,237 square feet), and in 2003 (approximately
22,463 square feet). On March 9, 1998, Mobile Storage Technologies (formerly,
Integral Peripherals Inc.), a tenant then with an aggregate of approximately
54,135 square feet of space (56.3%) in the Flatiron Building filed for
protection under Chapter 11 of the U.S. Bankruptcy Code. Such space was leased
pursuant to three separate leases, at net rental rates ranging from $7.42 to
$9.84 per square foot, all of which expired on October 31, 1998. This tenant
emerged from its bankruptcy proceeding, having paid its rent obligations to
Registrant in full, and renewed a lease for approximately 31,822 square feet at
a net rental rate of $8.97 per square foot.
The Flatiron Building is zoned IG (Industrial General), which permits
office use by manufacturers and industrial users (including software
developers), but does not permit general office use by service providers such as
attorneys and accountants. Registrant does not believe that such classification
will adversely affect its ability to fully lease this building at market rates,
and such classification does not affect any existing tenants.
Market conditions in the Boulder area remain favorable for
9
owners of commercial buildings. The market for the Boulder area contains
approximately 7.0 million square feet of commercial space of which approximately
5.3% is vacant. Average rents for office space in such area approximate $15.00
per square foot, exclusive of expenses. Registrant has expended approximately
$455,000, none of which was in 1998, for tenant improvements for the Flatiron
Building. Registrant is obligated to fund approximately $206,100 in tenant
improvements in 1999.
Marathon Oil Building (formerly, the Tenneco Building)
On March 21, 1988, Registrant acquired the Marathon Oil Building (formerly,
the Tenneco Building), an office building located in Oklahoma City, Oklahoma,
for approximately $10,736,000, inclusive of acquisition fees. Registrant owns
fee title to the Marathon Oil Building with its 6.1 acres of underlying land,
subject to the lien of the Loan. The property contains 90,925 net rentable
square feet on two floors, plus a 10,016 square foot basement.
Marathon and its former affiliate, Koch Midstream Services Company
("Koch"), lease 62,625 square feet (including 4,344 in the basement) and 24,704
square feet (including 567 in the basement), respectively, in the building.
Marathon's lease expires in 2001, subject to two five-year renewal options;
Koch's lease also expires in 2001, but without any renewal option.
Annual rent under such leases is approximately $750,600 ($8.75 per square
foot, plus $6.00 per square foot for basement space). Marathon and Koch must
also pay additional rent equal to their proportionate share of any increases in
operating costs of the building after 1996. Registrant has funded tenant
improvements of approximately $350,000 for Marathon and Delhi, none of which was
expended in 1998.
Registrant has leased approximately an additional 5,600 square feet in the
building for a five-year term ending in December 2001 at a rent of $11.00 per
square foot. Registrant has funded tenant improvements of approximately $74,000
in connection with this lease, none of which was expended in 1998. The remaining
space (approximately 3.2% of the office space, plus approximately 51% of the
basement) is vacant and Registrant is seeking a tenant for such space; however,
the space is difficult to rent and would require significant tenant
improvements.
Market conditions in the northwest section of Oklahoma City have continued
recent improvements from the declines experienced after Registrant acquired the
building. Such market contains approximately 4.8 million square feet of
commercial space of which approximately 7.5% is vacant. Average rents for
commercial space range from $8.00 to $19.50 per square foot, with a weighted
average rate of $13.60 per square foot.
10
475 Fifth Avenue
On December 6, 1996, Registrant purchased the land, building and other
improvements commonly known as 475 Fifth Avenue, and situated in New York, New
York, for approximately $27,440,000, including capitalized costs and related
costs. The property contains a multi-tenant office building comprised of
approximately 237,700 square feet and is located on the southeast corner of 41st
Street and Fifth Avenue in New York City; Registrant owns fee title to 475 Fifth
Avenue, subject to the lien of the Loan.
475 Fifth Avenue is a 23-story office building with approximately 20,000
square feet of retail space on the first floor and basement, 212,600 square feet
of office space, and 5,100 square feet of basement storage space. As of March
15, 1999, approximately 93% of the rentable square footage in the building was
leased (including approximately 93% of the office space, 100% of the retail
space, and 80% of the basement space), at an average current rent (base rent
plus electric charges and prior year adjustments) of approximately $31.42 per
square foot (approximately $30.41 per square foot of office space and $65.08 per
square foot of retail space). Following is a schedule of the expirations of such
leases.
11
================================================================================
Avg. Current
Approximate Base Rent/
Expiration Year Square Feet % of Total Sq. Ft.
- - --------------------------------------------------------------------------------
1999 8,461 3.6% $ 30.97
- - --------------------------------------------------------------------------------
2000 9,226 4.0% $ 27.04
- - --------------------------------------------------------------------------------
2001 19,155 8.2% $ 36.15
- - --------------------------------------------------------------------------------
2002 4,007 1.7% $ 31.69
- - --------------------------------------------------------------------------------
2003 8,699 3.7% $ 31.02
- - --------------------------------------------------------------------------------
2004 22,454 9.7% $ 40.64
- - --------------------------------------------------------------------------------
2005 32,687 14.1% $ 37.66
- - --------------------------------------------------------------------------------
2006 16,535 7.1% $ 29.42
- - --------------------------------------------------------------------------------
2007 5,636 2.4% $ 29.45
- - --------------------------------------------------------------------------------
2008 47,399 20.4% $ 26.64
- - --------------------------------------------------------------------------------
2009 40,236 17.3% $ 31.74
- - --------------------------------------------------------------------------------
2012 2,947 1.3% $125.19
================================================================================
Registrant's leases generally provide for a base rent, inclusive of an
electricity charge, plus additional rent in the form of operating expense and
real estate tax escalation factors. In 1997, Registrant commenced a capital
improvement program, designed to increase rental rates and the value of the
building. Registrant has budgeted capital improvements to be made at 475 Fifth
Avenue aggregating approximately $3,200,000 over the next 10 years, including
the following: mechanical and electrical systems, including replacement of
vacuum heating pumps, installation of a new hot water heating system, and
upgrading electric closets and electric service (approximately $1,600,000);
structural repairs, including roofing and facade repairs (approximately
$500,000); elevator repairs and refurbishment, including replacement of controls
(approximately $410,000); and improvements to comply with building codes and
Americans with Disabilities Act requirements, including fire alarm and smoke
detection (approximately $675,000). In 1998, Registrant funded capital
improvements aggregating approximately $613,300. Certain of such improvements
can only be made as tenancies expire. During 1998, Registrant expended
approximately $2,747,300 in tenant improvements at 475 Fifth Avenue. Capital
improvements and tenant improvements have been, and are expected in the future
to be, funded from working capital and loan drawdowns and from anticipated
increases in rental income.
475 Fifth Avenue is situated in the Grand Central district of the New York
City midtown market. Such district includes 82
12
buildings with approximately 44,200,000 aggregate rentable square feet, of which
approximately 10.4% is currently vacant. Asking rents in this district average
approximately $43.11 per square foot. The entire midtown market includes 341
buildings with approximately 186,700,000 aggregate rentable square feet, an
approximate 8.1% vacancy rate, and average asking rents of approximately $39.37
per square foot.
Alamo Towers
On March 17, 1997, Registrant purchased the land, building and other
improvements commonly known as the Alamo Towers, and situated in San Antonio,
Texas, for approximately $12,002,000, including capitalized closing and related
costs. The Alamo Towers contains a multi-tenant office building comprised of
approximately 196,000 square feet. Registrant owns fee title to the Alamo
Towers, subject to the lien of the Loan.
The Alamo Towers is an office building consisting of two stand-alone
8-story towers with approximately 186,000 square feet of office space and 8,000
square feet of basement space. As of March 1, 1999, approximately 83% of the
rentable square footage of office space in the Alamo Towers was leased, at an
average current base rent of approximately $11.93 per square foot. Following is
a schedule of expiration of such leases.
================================================================================
Avg. Current
Approximate Base Rent/
Expiration Year Square Feet % of Total Sq. Ft.
- - --------------------------------------------------------------------------------
1999 55,855 30.5% $12.76
- - --------------------------------------------------------------------------------
2000 25,322 13.8% $14.14
- - --------------------------------------------------------------------------------
2001 47,549 25.9% $13.73
- - --------------------------------------------------------------------------------
2002 11,867 6.5% $14.33
- - --------------------------------------------------------------------------------
2003 4,626 2.5% $14.75
- - --------------------------------------------------------------------------------
2004 6,889 3.8% $13.50
================================================================================
Registrant has begun to refurbish the two tower lobbies at an estimated
cost of $400,000 of which approximately $50,000 has been paid to date. The
building's lack of a covered parking garage is seen as a competitive
disadvantage which Registrant intends to remedy. Construction of such a garage
is expected to cost approximately $5,000,000, which Registrant may finance by
drawdowns on the Loan, from proceeds from the sales of any properties, and/or
from proceeds of mortgage loans which it may obtain on one or more of its
properties. Depending upon the availability of financing, of which there can be
no assurance,
13
construction would commence later this year and is expected to take six to eight
months to complete. Registrant may also install sprinklers on all floors of the
towers, at an estimated cost of $250,000, but any such installation is unlikely
to occur in the near future. Registrant has expended approximately $196,000 in
tenant improvements to the Alamo Towers, including approximately $81,000 in
1998.
The San Antonio office market includes approximately 19,815,000 aggregate
rentable square feet, of which approximately 10.7% is currently vacant. Asking
rents in this market now average $15.90 per square foot. The north-central San
Antonio market includes approximately 6,955,000 aggregate rentable square feet,
of which approximately 8.2% is vacant and for which asking rents average
approximately $17.76 per square foot. Class B buildings, including the Alamo
Towers, feature an approximate 8.9% vacancy rate and an average asking rental
rate of $16.50 per square foot.
Item 3. Legal Proceedings.
Registrant does not know of any material legal proceedings, other than
ordinary immaterial routine litigation incidental to its business, pending
against or involving Registrant or any of its properties.
Item 4. Submission of Matters to a Vote of Security-Holders.
There were no matters submitted to a vote of Limited Partners or holders of
the Units ("Unitholders") and none were required to be submitted during the
fourth quarter of the fiscal year covered by this report through the
solicitation of proxies or otherwise.
14
PART II
Item 5. Market for Registrant's Securities and Related Security-Holder Matters.
The Units of Registrant are not traded in any established public trading
market. Because of certain provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), as described below, the General Partners have not applied
to include the Units for quotation or listing on any national or regional stock
exchange or any other established securities market.
Registrant has administered a Unit Repurchase Plan since 1995, pursuant to
which Registrant, in its discretion, has purchased outstanding Units. Any such
purchases are made at prices no higher than the lowest current independent offer
quotation. During 1998, Registrant repurchased 8,680 Units at a price of $10.75
per Unit. Registrant is limited by the terms of the Loan to an aggregate of
$3,000,000 in Unit repurchases. In addition, repurchases both divert funds
otherwise available for capital improvements and require a monthly reallocation
of Unitholders' interests. For these reasons, Registrant limits future
repurchases, if any, to the final one or two months of a calendar year. To
provide an alternative outlet for Unit sales, the General Partners and their
affiliates have, during any periods of suspension in Registrant's Unit
Repurchase Plan, purchased Units on the same terms and conditions as under the
Unit Repurchase Plan.
Provisions found in Section 7704 of the Code have an adverse impact on
investors in a "publicly traded partnership" ("PTP"). A PTP is a partnership
whose interests are traded on an established securities market or readily
tradeable on a secondary market (or the substantial equivalent thereof). If
Registrant were classified as a PTP, (i) Registrant may be taxed as a
corporation or (ii) income derived from an investment in Registrant would be
treated as non-passive income.
The IRS has established alternative safe harbors that allow interests in a
partnership to be transferred or redeemed in certain circumstances without
causing the partnership to be characterized a PTP. Although the Units are not
listed or quoted for trading on an established securities market, it is possible
that transfers of Units could occur in a secondary market in sufficient amount
and frequency to cause Registrant to be treated as a PTP. To the extent that any
proposed transfer of Units in secondary market transactions would exceed a safe
harbor volume limitation, the proposed transfer will be restricted pursuant to a
policy adopted by Registrant. Such a restriction could impair the ability of an
investor to liquidate its investment quickly and thus, possibly prevent the
reclassification of Registrant as a corporation pursuant to Code Section 7704.
It is anticipated that Registrant's policy will remain in effect until such
time,
15
if ever, as further clarification of Code Section 7704 permits Registrant to
lessen the scope of its policy.
The General Partners, if so authorized, will take such steps as are
necessary, if any, to prevent the reclassification of Registrant as a PTP.
As of December 31, 1998, there were 2,947 Unitholders of record.
The following represents per Unit cash distributions to investors for the
fiscal years ended December 31, 1998 and 1997.
Distribution
Quarter Ended Per Unit Payment Date
- - ------------- -------- ------------
December 31, 1998 $ 0.30 February 1999
September 30, 1998 $ 0.30 November 1998
June 30, 1998 $ 0.30 August 1998
March 31, 1998 $ 0.30 May 1998
December 31, 1997 $ 0.30 February 1998
September 30, 1997 $ 0.30 November 1997
June 30, 1997 $ 0.30 August 1997
March 31, 1997 $ 0.30 May 1997
There are no material legal restrictions upon Registrant's present or
future ability to make distributions in accordance with the provisions of
Registrant's Agreement of Limited Partnership, as amended through the date of
this report. However, the Loan Agreements limit distributions to 90% of the sum
of cash from operations, depreciation and amortization. See, however, Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of economic conditions affecting Registrant's
ability to make distributions in the future.
16
Item 6. Selected Financial Data.
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
Operating
Revenues $ 19,752,206 $ 14,958,799 $ 9,142,369 $ 9,827,431 $ 8,957,620
Net Income $ 1,930,984 $ (420,892) $ 677,914 $ 2,008,688 $ 2,450,563
Net Income
per Unit (1) $ 0.64 $ (0.14) $ 0.22 $ 0.62 $ 0.76
Total Assets $ 105,748,365 $ 100,946,968 $ 102,983,279 $ 74,460,139 $ 76,388,992
Long-Term
Obligations $ 46,930,800 $ 41,578,800 $ 39,955,200 $ 7,800,000 $ 7,800,000
Distributions
per Unit(1)(2) $ 1.20 $ 1.20 $ 1.20 $ 1.20 $ 1.00
- - ----------
(1) Per Unit numbers are based on 3,200,000 Units for 1994 and a weighted
average number of Units of 2,986,460, 3,022,492, 3,087,170, and 3,184,222,
for 1998, 1997, 1996, and 1995, respectively.
(2) Each year's distributions include funds distributed after the end of the
year which are attributable to that year.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
At December 31, 1998, Registrant had cash and receivables of approximately
$4,850,000 as contrasted to accounts payable and accrued expenses of
approximately $2,980,000. Registrant measures its liquidity by its ability to
generate sufficient cash flow from operations to meet its current operating and
debt service requirements on a short-term and long-term basis. Registrant's
operations have provided this liquidity and are expected to continue to do so.
To the extent additional funds are required, the Loan provides a source of
additional capital.
17
Registrant has been investing capital in acquiring additional properties
and improving its existing and additional properties with a view to increasing
its revenues from real estate operations and ultimately realizing appreciation
in property values. Capital resources have been employed since the beginning of
1998 to make the following capital improvements: approximately $613,300 in
capital improvements and $2,747,300 in tenant improvements at 475 Fifth Avenue;
and approximately $76,100 in capital improvements and $80,200 in tenant
improvements at Alamo Towers. Registrant may also require capital to fund
additional tenant improvements as tenancies turn over at its properties as well
as further capital improvements at 475 Fifth Avenue (estimated at $3,250,000)
and Alamo Towers (estimated at $5,400,000). These additional capital
improvements are expected to be made over several years, as tenancies expire.
Gdynia America Line, Inc., which leases approximately 20% of the Tumi
Building, pursuant to a lease expiring in May 2007, has filed for protection
under Chapter 11 of the U.S. Bankruptcy Code. To the extent all or a portion of
such space is unproductive for any length of time, Registrant will face an
additional capital demand. However, this tenant's rental payments constituted
only approximately three percent of Registrant's aggregate 1998 property
revenues, so any effect is expected to be limited.
During 1998, Registrant received the following fees in connection with
early termination of leases: approximately $105,000 from GE with respect to the
American Color Building; approximately $3,734,000 from two tenants, including
Austin, at the Tumi Building; approximately $197,000 from a tenant at 475 Fifth
Avenue; and approximately $131,000 from several tenants at Alamo Towers.
Registrant has already re-leased most of such space, so that the lease
termination fees generally represent additional revenues to Registrant; however,
the Austin termination fee represents the difference between rent under Austin's
lease and rent under the Tumi lease. Accordingly, Registrant received a
prepayment of the above-market portion of the Austin lease rent.
To date, Registrant has funded its capital requirements from the Loan and,
previously, out of working capital and through reductions in distributions to
partners. Registrant's quarterly distribution to partners for each of the four
quarters of 1998 was $0.30 per Unit. Registrant intends to maintain this level
of distributions through 1999 and, if possible, thereafter. However, to the
extent Registrant's sources of capital are inadequate for its requirements,
Registrant may need to reduce or suspend distributions to partners, incur
additional indebtedness, and/or dispose of one or more of its properties.
The Loan has provided Registrant with available capital to acquire
properties, fund improvements and leasing commissions, repurchase outstanding
Units, and otherwise fund capital
18
requirements. The cost of such financing ultimately must be offset by increased
property revenues or Registrant's operations and capital will be compromised.
Upon maturity of the Loan in 2000, Registrant anticipates satisfying the Loan
out of the proceeds of a refinancing or a sale of assets.
Registrant has used working capital reserves provided from the net proceeds
of the Offering, loan proceeds, and any undistributed cash from operations as
its primary source of liquidity. Registrant generally intends to distribute its
distributable cash from operations to Unitholders. However, such distributions
are subject to suspension or reduction to meet capital requirements and are also
limited by the Loan Agreements to 90% of cash from operations plus depreciation
and amortization.
Results of Operations
1998 versus 1997
Rental revenues increased by 4.2% from 1997 to 1998, primarily because of
increased occupancy and rental rates at 475 Fifth Avenue. In addition,
Registrant received $4,167,685 in lease cancellation fees in 1998 with respect
to the American Color, Tumi, 475 Fifth Avenue, and Alamo Towers buildings. As a
result, total revenues increased by 32.0% from 1997 to 1998.
Interest expense in 1998 increased by 3.5% in 1998 from 1997, primarily as
a result of additional drawdowns under the Loan aggregating $6,400,000.
Depreciation increased by 7.1% in 1998 primarily because of capital improvements
made at 475 Fifth Avenue and Alamo Towers during 1997 and 1998. Amortization
increased by 17.7% primarily because of additional financing costs related to
the Fleet Bank loan. Management fees increased by 34.7% in 1998 from 1997
primarily due to property management fees computed as a percentage of
Registrant's increased rental revenues. Professional fees increased by 50.4%
from 1997 to 1998 primarily because of legal fees incurred in connection with
amending the Loan, negotiating lease buyouts, and increased leasing activity.
The 93.3% increase in general and administrative expenses in 1998 from 1997 is
primarily attributable to the write-off of deferred rent receivable upon early
lease terminations of approximately $815,300 in 1998 and $158,900 in 1997.
Registrant realized income from real estate operations of $1,930,984 in
1998 as compared to a net loss of $1,333,393 in 1997. After adjusting for
non-cash items (principally depreciation and amortization), operations generated
cash flows of approximately $5,467,000 in 1998 and $2,708,000 in 1997 (a 101.9%
increase).
The recognition of net income and significant increase in net cash provided
by operating activities is largely due to
19
realization of Registrant's capital improvement program at 475 Fifth Avenue,
which has increased occupancy and rental rates. Registrant intends to continue
its capital improvement program at 475 Fifth Avenue, and implement its program
at Alamo Towers, in 1999. Leasing its vacant space at Alamo Towers
(approximately 17% of office space) and re-leasing space covered by expiring
leases will provide additional rental revenues with little additional operating
expenses.
1997 versus 1996
Rental revenues increased significantly (61.8%) from 1996 to 1997,
reflecting a full year's operations at 475 Fifth Avenue and the acquisition of
Alamo Towers, more than offsetting the sale of the James River Warehouse, plus
the leasing in 1997 of previously vacant space in the American Color Building
and the Marathon Oil Building.
Interest expense in 1997 increased substantially (232.2%) from 1996,
reflecting a full year's expense of the Fleet Bank loan ($42,600,000 in
aggregate advances) as compared to the PNC Bank loan ($7,800,000 line of
credit). Depreciation increased in 1997 by 19.6% because of the excess of
property acquisitions (475 Fifth Avenue and Alamo Towers) over dispositions
(James River Warehouse) and because of capital improvements made at 475 Fifth
Avenue, Alamo Towers, and the Directory Building. Amortization increased by
53.6% from 1996 to 1997 primarily because of financing costs related to the
Fleet Bank loan. The net effect of the acquisition of 475 Fifth Avenue and Alamo
Towers as contrasted to the disposition of the James River Warehouse is
primarily responsible for the 136.4% increase in property operation expenses in
1997. Management fees increased by 78.3% in 1997 primarily due to property
management fees computed s a percentage of Registrant's increased rental
revenues. General and administrative expenses decreased by 7.6% primarily
because of the absence in 1997 of due diligence expenses incurred in 1996 in
investigating property acquisitions which were not ultimately consummated.
Registrant realized a net loss from real estate operations of $1,333,393 in
1997 as compared to net income of $677,914 in 1996. A $912,501 gain from the
sale of the James River Warehouse in 1997 reduced the net loss to $420,892.
After adjusting for non-cash items (principally depreciation and amortization),
operations generated cash flows of approximately $2,710,000 in 1997 and
$3,620,000 in 1996 (a 25.2% decrease). The $912,501 gain from the sale of the
James River Warehouse increased cash flows in 1997 to approximately $3,620,000,
the level achieved in 1996.
The net loss from real estate operations in 1997 was primarily attributable
to the inability of operations at 475 Fifth Avenue and Alamo Towers to offset
the financing costs of the Loan.
20
Inflation
In the past, inflation has not had a material impact on Registrant's
operations or financial condition, as certain leases of Registrant's properties
provide for increases in rents based on changes in the consumer price index, and
other leases provide lease payments that escalate over time. Registrant's
properties with performing leases are protected by arrangements whereby the
tenants pay to Registrant an amount equal to all or a portion of the operating
costs of the properties, with Registrant's share of expenses, if any, subject to
a predetermined limit. These arrangements help to insulate Registrant from the
effects of any increases in operating costs. However, to the extent that there
is vacant space or nonperforming leases at any of the Registrant's properties,
Registrant lacks this protection against inflation, particularly with regards to
increased expenses that are not reimbursed.
Year 2000 Considerations
Registrant has contacted its significant suppliers, large customers and
financial institutions to ensure that those parties have appropriate plans to
remediate Year 2000 issues where their systems interface with Registrant's
systems or otherwise impact its operations. Registrant has also conducted a
review of any impact on operation of its buildings and taken any steps it deems
necessary to prepare for Year 2000.
Registrant has replaced its own computer software system, other than
accounting software which has been purchased and which is scheduled to be
installed in early 1999. While Registrant believes its planning efforts are
adequate to address its Year 2000 concerns, there can be no guarantee that the
systems of other companies on which Registrant's systems and operations rely
will be converted on a timely basis and will not have a material effect on
Registrant. The cost of the Year 2000 initiatives is not expected to be material
to Registrant's results of operation or financial position.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Registrant does not invest in any market risk sensitive instruments, for
trading purposes or for other purposes.
Item 8. Financial Statements and Supplementary Data.
See list of Financial Statements and Financial Statement Schedules at page
F-2, filed as part of this report.
21
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
22
PART III
Item 10. Directors and Executive Officers of the Registrant.
Registrant has no officers or directors. The General Partners manage and
control substantially all of Registrant's affairs and have general
responsibility and ultimate authority in all matters affecting Registrant's
business.
The Individual General Partner is Robert F. Gossett, Jr. The Corporate
General Partner is 1345 Realty Corporation. All of the outstanding capital stock
of 1345 Realty Corporation is owned by the Individual General Partner and his
wife.
The directors and executive officers of the Corporate General Partner are
as follows:
Officer/
Director
Name Age Position Since
---- --- -------- --------
Robert F. Gossett, Jr. 55 President, Treasurer
and Director 1994
Pauline G. Gossett 55 Secretary 1994
Information with respect to the Individual General Partner and with respect
to the above officers and directors is set forth below:
Robert F. Gossett, Jr., the Individual General Partner since 1985, is
Managing Director of Vance Capital Corporation (1981 to present), a real estate
management and finance company. Between 1978 and 1981, Mr. Gossett served as
Executive Vice President and Director of Loeb Capital Corporation. From 1974
until 1978, he was a Vice President of Oppenheimer Properties, Inc. and, between
1969 and 1974, was associated with the Investment Banking Division of Merrill,
Lynch, Pierce, Fenner & Smith, Inc. He received a B.A. degree from the
University of Texas, a J.D. degree from Georgetown University, and an M.B.A.
degree from the University of Pennsylvania. He is a member of the Texas Bar.
Pauline G. Gossett, the Secretary of the Corporate General Partner, is a
stockholder and Director of Vance Capital Corporation (1981 to present). Mrs.
Gossett received an Associate of Arts degree from Briarcliff College. Mrs.
Gossett is the wife of Robert F. Gossett, Jr.
23
Registrant employs the following employees who make significant
contributions to the business of Registrant:
Officer/
Employee
Name Age Position Since
---- --- -------- --------
James N. Walsh 45 Property Manager 1997
John R. Anthis, Jr. 58 Property Manager 1997
Wallis J. Hoskins 45 Property Manager 1993
Madeline Matlak 33 Fund Administrator 1994
James N. Walsh is the Property Manager for 475 Fifth Avenue. Mr. Walsh has
been designated a Real Property Administrator (RPA) by the Building Owners and
Managers Association. From 1989 to 1997, he was a building manager, comptroller,
and leasing manager for 584 Operating Corp., the owner of an office building in
New York, New York which is similarly sized to 475 Fifth Avenue. Prior thereto,
Mr. Walsh served for four years as an assistant comptroller and construction
accountant for the residential division of Cadillac Fairview. He also acted for
four years as a project accountant for residential properties owned by Olympia &
York. Mr. Walsh received a B.B.A. degree in accounting from Iona College.
John R. Anthis, Jr. is the Property Manager for Alamo Towers. Mr. Anthis
has been designated a Real Property Administrator (RPA, 1983) by the Building
Owners and Managers Association (San Antonio BOMA Manager of the Year,
1986-1987) and a Certified Property Manager (CPM, 1988) and is a licensed real
estate broker in Texas. Mr. Anthis was a member of the Board of Directors of the
Texas State Building Owners and Managers Association (1978 to 1980 and 1982 to
1990; President 1988 to 1989), the San Antonio Building Owners and Managers
Association (1979 to 1982 and 1984 to 1986; President 1978 to 1979), and San
Antonio Institute of Real Estate Management (1992 to present; President in
1995). From 1995 to 1997, he was a sales representative and a branch manager for
Associated Building Services, a commercial real estate cleaning company in San
Antonio. Mr. Anthis was General Manager of Homart Development Co. from 1987 to
1994, managing a 200,000 square foot office building and parking garage. From
1975 to 1986, he was a Vice President for Bank Alamo (and its pre-merger
predecessor, San Antonio Bank & Trust Co.), managing office buildings and
parking garages. Mr. Anthis also served as a Manager for Koger Properties, Inc.
from 1973 to 1975, leasing a 14 building office park. Mr. Anthis served in the
U.S. Army from 1963 to 1969, earning the Bronze Star Medal-Meritorious Service.
He received a B.S. degree in Civil Engineering from Texas A&M University and an
M.B.A. degree in Management from Georgia State University.
24
Wallis J. Hoskins is the Property Manager for the Austin Place Building.
For the 20 years prior thereto he was employed by The Prudential Insurance
Company of America, from 1981 to 1992 as a facilities manager for company-owned
buildings and from 1973 to 1980 as a claims approver.
Madeline Matlak is the Fund Administrator of the Registrant. Mrs. Matlak
was formerly employed as a Fund Administrator in the Direct Investment
Department of Smith Barney, Inc. (1989 through 1994).
Based solely upon its review of copies of Forms 3, 4, and 5 received by it
during 1998, and written representations from reporting persons that no other
Forms 5 were required for such persons for 1998, Registrant believes that all
filing requirements applicable to its General Partners and the directors and
officers of the Corporate General Partner pursuant to Section 16(a) of the
Securities Exchange Act of 1934, as amended, for 1998 and prior years were
complied with on a timely basis except as previously reported and except as
follows: each of Robert F. Gossett, Jr. and Pauline G. Gossett filed one
statement on Form 5 to make a late report of Form 4 transactions. Each such Form
5 reported five purchases of Units made in October 1998.
Item 11. Executive Compensation.
Registrant is not required to and did not pay remuneration to the officers
and directors of the Corporate General Partner. However, the General Partners
and/or their affiliates receive compensation for services performed for
Registrant.
Summary Compensation Table
Share of
Adjusted Cash Management Leasing Expense
Name Year from Operations Fees Commissions Reimbursement
- - ---- ---- --------------- ---------- ----------- -------------
Corporate General
Partner 1998 $29,005 $1,086,137 $ -0- $ 44,000
Individual General
Partner 1998 $ 7,251 $ 271,534 $ -0- $ 11,000
Corporate General
Partner 1997 $29,419 $ 806,602 $ -0- $ 48,298
Individual General
Partner 1997 $ 7,355 $ 201,650 $ -0- $ 12,074
Corporate General
Partner 1996 $30,071 $ 452,415 $ 88,467 $132,829
Individual General
Partner 1996 $ 7,518 $ 113,104 $ 22,117 $ 33,207
See Item 13 - "Certain Relationships and Related Transactions" for a discussion
of the above compensation.
25
Item 12. Security Ownership of Certain Beneficial Owners and Management.
As of March 22, 1999 no person was known by Registrant to be the beneficial
owner of more than five percent (5%) of the outstanding Units of Registrant.
The following table sets forth information as of March 22, 1999 with
respect to the beneficial ownership of Units of Registrant by (i) each of the
General Partners, (ii) each of the directors and executive officers of the
Corporate General Partner, and (iii) all General Partners and executive officers
and directors of the Corporate General Partner, as a group.
Amount and
Name of Nature of
Beneficial Beneficial Percent
Owner Ownership of Class
----- --------- --------
1345 Realty Corporation(1) -0- 0%
Robert F. Gossett, Jr.(2) 29,458 1.0%
Pauline G. Gossett(3) 29,458 1.0%
All General Partners and
Directors and Executive
Officers as a group
(3 persons) 58,916 2.0%
Robert F. Gossett, Jr., the Individual General Partner and an officer and
director of the Corporate General Partner, and Pauline G. Gossett, an officer of
the Corporate General Partner, own all of the outstanding capital stock of the
Corporate General Partner.
Item 13. Certain Relationships and Related Transactions.
Registrant has and will continue to have certain relationships with the
General Partners and their affiliates as discussed below.
- - ----------
(1) 1345 Realty Corporation is the Corporate General Partner.
(2) Mr. Gossett is the Individual General Partner and the President of the
Corporate General Partner. Consists of Mr. Gossett's 25% proportionate interest
in Vance, Teel & Company, Ltd. He disclaims beneficial ownership of the
remaining 75% proportionate interest owned by his wife, Pauline Gossett, and his
two adult children.
(3) Ms. Gossett is the Secretary of the Corporate General Partner. Consists of
Ms. Gossett's 25% proportionate interest in Vance, Teel & Company, Ltd. She
disclaims beneficial ownership of the remaining 75% proportionate interest owned
by her husband, Robert F. Gossett, Jr., and her two adult children.
26
The General Partners received $36,256 ($29,005 to the Corporate General
Partner and $7,251 to the Individual General Partner) as their allocable share
(1%) of adjusted cash from operations with respect to the year ended December
31, 1998. For the year ended December 31, 1998, $19,310 (1%) of Registrant's net
income was allocated to the General Partners ($15,448 to the Corporate General
Partner and $3,862 to the Individual General Partner).
The General Partners or their affiliates are also entitled to receive: a
partnership management fee for managing the affairs of Registrant, equal to 7%
of adjusted cash from operations less the asset management fee; an asset
management fee for managing Registrant's funds which are not invested in
properties, equal to 0.5% per annum of the average amount of outstanding funds
during each calendar month which are not otherwise invested in properties; and a
property management fee for property management services for Registrant's
properties, equal to the normal and competitive fees customarily charged by
unaffiliated parties rendering similar services in the same geographic area, not
to exceed 1% of the annual gross revenues for leases with terms of ten years or
more or 6% of the annual gross revenues for replacement leases. During the year
ended December 31, 1998, the General Partners earned and were paid an aggregate
of $1,357,671 of such management fees ($1,086,137 to the Corporate General
Partner and $271,534 to the Individual General Partner). At December 31, 1998,
all of such fees had been paid.
The General Partners are also entitled to receive leasing commissions in
connection with leasing, releasing or leasing related services performed on
behalf of the Registrant in connection with the negotiation of tenant leases.
Such fees are computed at a rate equal to 3% of the gross revenue for the first
five years of each lease signed where the General Partners performed such
leasing services. During the year ended December 31, 1998, no such fees were
paid to the General Partners.
During the year ended December 31, 1998, the General Partners were also
entitled to reimbursement for expenses incurred in connection with Registrant's
operations aggregating $55,000 ($44,000 to the Corporate General Partner and
$11,000 to the Individual General Partner).
During the year ended December 31, 1998, the Individual General Partner
made loans to Registrant totaling $2,395,678 to fund capital improvements and
tenant improvements. Such loans were repaid in full, without interest or other
consideration, in September 1998 from the proceeds of drawdowns under the terms
of the amended Loan.
27
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1), (2) See page F-2
Sequential
Page
Number
----------
(a)(3) Exhibits:
3. Certificate of Limited Partnership,
incorporated by reference to Exhibit 4 to
Registration Statement No. 33-2258 (the
"Registration Statement").
4. (a) Amended and Restated Agreement of Limited
Partnership dated as of July 24, 1995,
incorporated by reference to Exhibit 4 to
Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995.
10.(a) Property Management Agreement, incorporated
by reference to Exhibit 10B to the
Registration Statement.
(b) Management Agreement dated January 5, 1988 by
and between Registrant and Colorado
Management Group, incorporated by reference
to Exhibit 10(e) to Registrant's Current
Report on Form 8-K Dated January 5, 1988.
(c) Lease dated as of April 20, 1994 between
Registrant and GTE.(1)
(d) Amendment No. 1 to Lease dated as of July 29,
1994 between Registrant and GTE.(1)
- - -------
(1) Incorporated by reference to Exhibits 10 (y), (z), and (aa) to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994.
(2) Incorporated by reference to Exhibits 10(i), (j), (k), (l), (m), (n), (o),
(p), (q), (r), (s), (t), (u), (v), (w) and (cc) to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996.
28
Sequential
Page
Number
----------
(e) Amendment No. 2 to Lease dated as of February
22, 1995 between Registrant and GTE.(1)
(f) Secured Promissory Note dated September 26,
1996, made by Registrant.(2)
(g) Loan Agreement dated as of September 26, 1996
between Registrant and Fleet Bank, N.A.(2)
(h) Environmental Compliance and Indemnification
Agreement dated __________, 1996, made by
Registrant.(2)
(i) First Amendment of Loan Agreement and Note
dated December __, 1996 between Registrant
and Fleet Bank, N.A.(2)
(j) Deed of Trust, Assignment of Rents, Security
Agreement and Fixture Filing dated September
26, 1996, made by Registrant with respect to
the American Color Building.(2)
(k) First Amendment to Deed of Trust dated
December __, 1996, made by Registrant with
respect to the American Color Building.(2)
(l) Deed of Trust, Assignment of Rents, Security
Agreement and Fixture Filing dated September
26, 1996, made by Registrant with respect to
the Flatiron Building.(2)
29
Sequential
Page
Number
----------
(m) First Amendment to Deed of Trust dated
December __, 1996, made by Registrant with
respect to the Flatiron Building.(2)
(n) Mortgage, Assignment of Leases and Rents and
Security Agreement dated September 26, 1996,
made by Registrant with respect to the Tumi
Building.(2)
(o) First Amendment to Mortgage dated December
__, 1996, made by Registrant with respect to
the Tumi Building.(2)
(p) Mortgage, Assignment of Leases and Rents and
Security Agreement dated December __, 1996,
made by Registrant with respect to 475 Fifth
Avenue.(2)
(q) Mortgage, Assignment of Leases and Rents,
Security Agreement and Fixture Filing dated
September 26, 1996, made by Registrant with
respect to the Marathon Oil Building.(2)
(r) First Amendment to Mortgage dated December
__, 1996, made by Registrant with respect to
the Marathon Oil Building.(2)
(s) Deed of Trust, Assignment of Rents, Security
Agreement and Fixture Filing dated September
26, 1996, made by Registrant with respect to
the Directory Building.(2)
(t) First Amendment to Deed of Trust dated
December __, 1996, made by Registrant with
respect to the Directory Building.(2)
30
Sequential
Page
Number
----------
(u) Second Amendment of Loan Agreement dated
March 17, 1997 among Fleet Bank, First
American Bank Texas SSB, and Registrant.(2)
(v) Third Amendment of Loan Agreement and Second
Amendment of Note among Fleet Bank, First
American Bank Texas SSB, and Registrant.
27. Financial Data Schedule.
(b) Reports on Form 8-K: No reports on Form 8-K
were filed during the last quarter of the
period covered by this report.
31
Corporate Realty Income Fund I, L.P.
List of Financial Statements and Financial Statement Schedules
The following financial statements of Corporate Realty Income Fund I, L.P. are
included in Item 8:
Report of Independent Auditors - Ernst & Young LLP .................... F-3
Report of Independent Auditors - KPMG LLP ............................. F-4
Financial Statements
Balance Sheets as of December 31, 1998 and 1997 ....................... F-5
Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 .................................... F-6
Statements of Changes in Partners' Capital for the years ended
December 31, 1998, 1997 and 1996 .................................... F-7
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 .................................... F-8
Notes to Financial Statements ......................................... F-9
Schedule III - Real Estate and Accumulated Depreciation ............... F-20
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted since
(1) the information required is disclosed in the financial statements and notes
thereto; (2) the schedules are not required under the related instructions; or
(3) the schedules are inapplicable.
Report of Independent Auditors
To the Partners of
Corporate Realty Income Fund I, L.P.
We have audited the accompanying balance sheets of Corporate Realty Income Fund
I, L.P. (a Delaware limited partnership) as of December 31, 1998 and 1997 and
the related statements of operations, changes in partners' capital and cash
flows for the years then ended. We also have audited the financial statement
schedule listed on the Index at Item 14 (a). These financial statements and the
financial statement schedule are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements 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 Corporate Realty Income Fund I,
L.P. as of December 31, 1998 and 1997 and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
/s/ Ernst & Young LLP
New York, New York
January 25, 1999
F-3
Independent Auditors' Report
The Partners
Corporate Realty Income Fund I, L.P.:
We have audited the accompanying statements of operations, changes in partners'
capital, and cash flows of Corporate Realty Income Fund I, L.P. (a Delaware
limited partnership) for the year ended December 31, 1996. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Corporate
Realty Income Fund I, L.P. for the year ended December 31, 1996, in conformity
with generally accepted accounting principles.
/s/KPMG LLP
New York, New York
February 5, 1997
F-4
Corporate Realty Income Fund I, L.P.
(A Delaware Limited Partnership)
Balance Sheets
December 31,
1998 1997
------------------------------
Assets
Real estate, at cost:
Land $ 19,875,846 $ 19,875,846
Buildings and improvements 95,541,299 92,162,859
Equipment and furniture 78,029 78,029
------------------------------
115,495,174 112,116,734
Less accumulated depreciation 21,669,758 18,592,878
------------------------------
93,825,416 93,523,856
Cash and cash equivalents at cost, which
approximates market value 4,115,435 855,840
Accounts receivable 737,617 478,380
Due from general partners 95,016 158,248
Note receivable, net of unamortized discount
of $50,024 in 1998 524,379 2,628
Deferred rent receivable 2,638,615 2,955,384
Deferred financing costs, net of accumulated
amortization of $927,224 in 1998 and
$507,542 in 1997 829,552 1,015,084
Lease commissions, net of accumulated
amortization of $1,637,425 in 1998
and $1,866,901 in 1997 2,726,566 1,844,392
Deposits and other assets 255,769 113,156
------------------------------
Total assets $ 105,748,365 $ 100,946,968
==============================
Liabilities and partners' capital
Accounts payable and accrued expenses $ 2,983,261 $ 1,986,273
Mortgage loan payable 46,930,800 41,578,800
Other liabilities 1,382,043 1,141,712
------------------------------
Total liabilities 51,296,104 44,706,785
Commitments and contingencies
Partners' capital:
General partners:
Capital contributions 1,000 1,000
Net income 395,236 375,926
Cash distributions (567,200) (530,944)
------------------------------
(170,964) (154,018)
------------------------------
Limited partners: ($25 per unit; 4,000,000
units authorized, 2,983,531 and 2,992,211
issued and outstanding in 1998 and 1997,
respectively):
Capital contributions, net of offering costs 71,724,856 71,818,166
Net income 39,128,241 37,216,567
Cash distributions (56,229,872) (52,640,532)
------------------------------
54,623,225 56,394,201
------------------------------
Total partners' capital 54,452,261 56,240,183
------------------------------
Total liabilities and partners' capital $ 105,748,365 $ 100,946,968
==============================
See accompanying notes
F-5
Corporate Realty Income Fund I, L.P.
(A Delaware Limited Partnership)
Statements of Operations
For the year ended December 31,
1998 1997 1996
------------------------------------------------------------
Revenue:
Rental $ 15,513,474 $ 14,885,474 $ 9,101,611
Lease cancellation 4,167,685 -- --
Interest and other income 71,047 73,325 40,758
------------------------------------------------------------
19,752,206 14,958,799 9,142,369
------------------------------------------------------------
Expenses:
Interest 3,320,457 3,207,254 965,540
Depreciation 3,304,509 3,084,463 2,578,638
Amortization 997,515 847,297 551,760
Property operations 7,336,498 7,321,229 3,097,440
Management fees 1,357,671 1,008,252 565,519
Professional fees 307,208 204,301 207,379
General and administrative 1,197,364 619,396 498,179
------------------------------------------------------------
17,821,222 16,292,192 8,464,455
------------------------------------------------------------
Income (loss) from real estate operations 1,930,984 (1,333,393) 677,914
Gain on sale of real estate -- 912,501 --
------------------------------------------------------------
Net income (loss) $ 1,930,984 $ (420,892) $ 677,914
============================================================
Net (income) loss allocated:
General partners $ 19,310 $ (4,209) $ 6,779
Limited partners 1,911,674 (416,683) 671,135
------------------------------------------------------------
$ 1,930,984 $ (420,892) $ 677,914
============================================================
Net income (loss) per unit of limited
partnership interest $ 0.64 $ (0.14) $ 0.22
============================================================
See accompanying notes.
F-6
Corporate Realty Income Fund I, L.P.
(A Delaware Limited Partnership)
Statements of Changes in Partners' Capital
General Limited
Total Partners Partners
--------------------------------------------------
Partners' capital (deficit) at
December 31, 1995 $ 64,877,949 $ (82,225) $ 64,960,174
Redemption of units (911,364) -- (911,364)
Cash distributions to partners (3,758,923) (37,589) (3,721,334)
Net income 677,914 6,779 671,135
--------------------------------------------------
Partners' capital (deficit) at
December 31, 1996 60,885,576 (113,035) 60,998,611
Redemption of units (547,120) -- (547,120)
Cash distributions to partners (3,677,381) (36,774) (3,640,607)
Net loss (420,892) (4,209) (416,683)
--------------------------------------------------
Partners' capital (deficit) at
December 31, 1997 56,240,183 (154,018) 56,394,201
Redemption of units (93,310) -- (93,310)
Cash distributions to partners (3,625,596) (36,256) (3,589,340)
Net income 1,930,984 19,310 1,911,674
--------------------------------------------------
Partners' capital (deficit) at
December 31, 1998 $ 54,452,261 $ (170,964) $ 54,623,225
==================================================
See accompanying notes.
F-7
Corporate Realty Income Fund I, L.P.
(A Delaware Limited Partnership)
Statements of Cash Flows
For the year ended December 31,
1998 1997 1996
------------------------------------------------------
Operating activities
Net income (loss) $ 1,930,984 $ (420,892) $ 677,914
------------------------------------------------------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 4,302,024 3,931,760 3,130,398
Gain on sale of real estate -- (912,501) --
Decrease (increase) in deferred rent receivable 316,769 (10,221) (160,361)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (259,237) (46,491) 5,302
Decrease (increase) in due from general partners 63,232 (58,451) (55,009)
(Increase) decrease in note receivable (521,751) 7,684 7,382
Increase in deposits (142,000) -- (38,600)
Increase in lease commissions (1,460,007) (765,788) (310,302)
(Increase) decrease in other assets (613) (2,425) 2,635
Increase (decrease) in accounts payable and
accrued expenses 996,988 787,736 (258,492)
Increase in other liabilities 240,331 197,746 618,805
------------------------------------------------------
Total adjustments 3,535,736 3,129,049 2,941,758
------------------------------------------------------
Net cash provided by operating activities 5,466,720 2,708,157 3,619,672
------------------------------------------------------
Investing activities
Proceeds from sale of real estate -- 12,475,923 --
Acquisition of real estate (3,606,069) (13,753,264) (27,928,966)
------------------------------------------------------
Net cash (used in) investing activities (3,606,069) (1,277,341) (27,928,966)
------------------------------------------------------
Financing activities
Deferred financing costs (234,150) -- (1,547,126)
Proceeds from mortgage loan payable 6,400,000 2,600,000 42,000,000
Repayments of mortgage loan payable (1,048,000) (976,400) (9,844,800)
Redemption of units (93,310) (547,120) (911,364)
Cash distributions to partners (3,625,596) (3,677,381) (3,758,923)
------------------------------------------------------
Net cash provided by (used in) financing
activities 1,398,944 (2,600,901) 25,937,787
------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents
3,259,595 (1,170,085) 1,628,493
Cash and cash equivalents at beginning of
year 855,840 2,025,925 397,432
------------------------------------------------------
Cash and cash equivalents at end of year $ 4,115,435 $ 855,840 $ 2,025,925
======================================================
See accompanying notes.
F-8
Corporate Realty Income Fund I, L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements
December 31, 1998
1. Organization
Corporate Realty Income Fund I, L.P. (the "Partnership") was formed as a limited
partnership on November 25, 1985 under the laws of the State of Delaware. The
Partnership was formed for the purpose of acquiring and owning income-producing
commercial and industrial real estate properties for lease to others. The
Partnership will terminate on December 31, 2010 or sooner, in accordance with
the Partnership Agreement.
The general partners of the Partnership are 1345 Realty Corporation, the
corporate general partner, and Robert F. Gossett, Jr., the individual general
partner.
On November 30, 1994, all of the outstanding capital stock of the corporate
general partner was acquired by the individual general partner in a transaction
which was effective as of July 1, 1994. As a result of this acquisition, the
entire interest of the general partners is controlled by the individual general
partner.
The initial capital was $1,025 representing capital contributions of $1,000 by
the general partners and $25 by the original limited partner. The Partnership
commenced operations on June 2, 1986 with the acceptance of subscriptions for
1,082,640 Depositary Units of limited partnership interest (the "Units"). The
Partnership has authorized the issuance of up to 4,000,000 Units. The
Partnership sold 3,200,000 Units, representing $80,000,000, which completed the
offering. Upon the first admittance of the additional limited partners and
unitholders, the original limited partner withdrew from the Partnership.
Offering costs incurred in connection with the initial offering are
nonamortizable and have been deducted from limited partners' capital.
During 1998 and 1997, 8,680 and 50,895 units, respectively, were redeemed from
unitholders and canceled.
F-9
Corporate Realty Income Fund I, L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements (continued)
2. Significant Accounting Policies
Real Estate and Depreciation
Costs directly related to the acquisition and improvement of real estate are
capitalized. Ordinary repairs and maintenance are expensed as incurred.
Depreciation of buildings for financial reporting purposes is computed under the
straight-line method over an estimated economic useful life of forty years.
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," requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
the Partnership's assets, which are held for use, are measured by a comparison
of the carrying amount of an asset to future net cash flow expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by which the carrying amount of the
assets exceeds the fair value. Assets to be disposed of are reported at the
lower of carrying amount or fair value less costs to sell. No impairment losses
were required on any of the properties owned by the Partnership.
Deferred Financing Costs
Deferred financing costs are being amortized using the straight-line method over
the term of the loan agreement.
Deferred Rent
Rental income is recognized on the straight-line basis over the entire term of
the lease including rent-free periods. Accordingly, rental income for the years
ended December 31, 1998, 1997 and 1996, includes approximately $498,500,
$169,200 and $160,400, respectively, of the excess of income on the
straight-line basis over the actual amount billed.
During 1998, the Partnership wrote-off deferred rent receivable of approximately
$815,300, of which approximately $750,300 and $65,000 related to tenants
vacating the
F-10
Corporate Realty Income Fund I, L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements (continued)
2. Significant Accounting Policies (continued)
Deferred Rent (continued)
Austin Place Building and 475 Fifth Avenue, respectively, prior to the
expiration of their lease terms. During 1997, upon the sale of the James River
Building, deferred rent receivable of approximately $158,900 was written-off.
Such write-offs are included in general and administrative expense in the
accompanying statements of operations.
Income Taxes
No provision for income taxes has been made since all items of income or losses
and tax benefits are passed through to the individual partners.
Cash Equivalents
The Partnership considers all highly liquid financial instruments with a
maturity of three months or less when purchased to be cash equivalents. Cash
equivalents, which consist principally of money market funds, are carried at
cost which approximates market value.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," defines
fair value of a financial instrument as the amount at which the instrument could
be exchanged in a current transaction between willing parties. The Partnership's
accounts receivable and note receivable, deposits, accounts payable and accrued
expenses, interest payable and mortgage loan payable are carried at cost, which
approximates fair value.
Adoption of Recently Issued Accounting Standards
SFAS No. 131 "Disclosure about Segments of an Enterprise and Related
Information", ("Statement 131") is effective for financial statements issued for
periods beginning after December 15, 1997. Statement 131 requires disclosures
about segments of an enterprise and related information regarding the different
types of business activities in which an enterprise engages and the different
economic environments in which it operates.
F-11
Corporate Realty Income Fund I, L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements (continued)
2. Significant Accounting Policies (continued)
Adoption of Recently Issued Accounting Standards (continued)
The Partnership is engaged in owning and managing office properties and has one
reportable segment, office real estate. The primary sources of revenue are
tenant rents and escalations and reimbursement revenue. Real estate property
operating expenses primarily consist of security, maintenance and utility costs.
Use of Estimates
The general partners have made a number of estimates and assumptions relating to
the reporting of assets and liabilities and the disclosure of contingent assets
and liabilities to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ from those
estimates.
Reclassifications
Certain 1997 amounts have been reclassified to conform with the current year
presentation.
3. Partnership Agreement
The Partnership Agreement provides that profits, losses and distributions shall
be allocated 99% to the limited partners and 1% to the general partners.
Sale or refinancing proceeds will generally be distributed 99% to the limited
partners and 1% to the general partners until the limited partners have received
an amount which, when added to all prior distributions of cash, will equal their
original invested capital plus an 8% per annum cumulative noncompounded return.
Thereafter, after payment of the subordinated disposition fee, proceeds will be
distributed 75% to the limited partners and 25% to the general partners.
F-12
Corporate Realty Income Fund I, L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements (continued)
3. Partnership Agreement (continued)
The Partnership Agreement further provides that net income shall be allocated to
each calendar month of the year and shall be apportioned on a monthly basis to
the holders of interests in the ratio in which the number of interests owned by
each limited partner or unitholder on the first day of the month bears to the
total number of interests owned by the limited partners and unitholders as of
that date.
4. Investments in Real Estate
American Color Building
On July 10, 1986, the Partnership purchased the American Color Building
(formerly the GE Medical Systems Office Building), an office building located in
Monterey Park, California, and the 90,000 square feet of underlying land. The
property contains approximately 20,250 square feet of net rentable area.
The terms of the agreement with the seller provided for a purchase price,
including acquisition fees, of approximately $4,182,000.
The building was fully leased to GE through October 21, 1995. In October 1995,
GE renewed its lease with respect to 52% of the rentable area of the building
for a term which was due to expire in October 2000. During 1998, the Partnership
earned a lease cancellation fee of approximately $105,000 as GE terminated its
lease prior to the end of its lease term. The remaining 48% of the building is
leased to American Color Graphics, Inc. for a term which expires in July 2002.
The Directory Building
On October 27, 1986, the Partnership purchased the Directory Building (formerly
the IBM building), an office building located in Las Colinas, Texas, and the
6.67 acres of underlying land. The property contains approximately 152,100
square feet of net rentable area.
The terms of the agreement with the seller provided for a purchase price,
including acquisition fees, of approximately $24,580,000.
F-13
Corporate Realty Income Fund I, L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements (continued)
4. Investments in Real Estate (continued)
The Directory Building (continued)
As of December 31, 1998, the building was 100% leased to GTE Directories
Corporation for a term which expires on September 30, 2000. Rent from the tenant
represented 14%, 16%, and 25% of the Partnership's total rental revenue in 1998,
1997, and 1996, respectively.
Tumi Building
On December 30, 1986, the Partnership purchased the Tumi Building (formerly the
Austin Place Building), an office building located in South Plainfield, New
Jersey, and the five acres of underlying land. The property contains
approximately 106,600 square feet of net rentable area.
The terms of the agreement with the seller provided for a purchase price,
including acquisition fees, of approximately $16,473,000.
As of December 31, 1998, the building was approximately 73% leased to various
tenants under leases with terms ranging from four to fifteen years.
During 1998 two tenants, The Austin Company and PNC Mortgage, paid lease
cancellation fees of approximately $3,337,000 and $397,000, respectively, to
terminate their leases prior to the end of their lease terms. Rent from The
Austin Company represented 10% and 29% of the Partnership's total rental revenue
in 1997 and 1996, respectively.
James River Building
On October 16, 1987, the Partnership purchased the James River Building
(formerly the Crown Zellerbach building) located in Woodland, California (a
suburb of Sacramento), and the 21 acres of underlying land. The building
contains approximately 570,000 square feet of net rentable area.
F-14
Corporate Realty Income Fund I, L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements (continued)
4. Investments in Real Estate (continued)
James River Building (continued)
The terms of the agreement with the seller provided for a purchase price,
including acquisition fees, of $14,551,456. The building was net leased to James
River Corporation of Nevada, Inc. for a term which expires in January, 2002. On
February 28, 1997, the land and building were sold to an unrelated party for
$12,875,000.
Rent from the tenant, James River Corporation of Nevada, Inc., represented 16%
of the Partnership's total rental revenue in 1996.
Flatiron Building
On January 5, 1988, the Partnership purchased the Flatiron Building (formerly
the Cadnetix Building) located in Boulder, Colorado, and the five acres of
underlying land. The building contains approximately 96,000 square feet of net
rentable area.
The terms of the agreement with the seller provided for a purchase price,
including acquisition fees, of approximately $9,003,000.
As of December 31, 1998, the building was approximately 94% leased to various
tenants under leases with terms ranging from one to eight years.
Marathon Oil Building
On March 21, 1988, the Partnership purchased the Marathon Oil Building (formerly
the Tenneco Oil Building) located in Oklahoma City, Oklahoma, and the 6.1 acres
of underlying land. The building contains approximately 90,925 net rentable
square feet plus a 10,016 square foot basement.
The terms of the agreement with the seller provided for a purchase price,
including acquisition fees, of approximately $10,736,000.
F-15
Corporate Realty Income Fund I, L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements (continued)
4. Investments in Real Estate (continued)
Marathon Oil Building (continued)
As of December 31, 1998, the building was approximately 93% leased to various
tenants under leases with terms of five years. The Marathon Oil Company leases
62,600 square feet of space pursuant to a five-year lease which expires in
February, 2001, and a lease with a former affiliate of Marathon with respect to
24,700 square feet of space which expires in February, 2001. Approximately 5,600
square feet of the remaining space is leased to another tenant for a term of
five years.
475 Fifth Avenue
On December 6, 1996 the Partnership purchased an office building and the
underlying land located at 475 Fifth Avenue, New York, New York. The building
contains approximately 240,000 net rentable square feet.
The terms of the agreement with the seller provided for a purchase price,
including capitalized closing and related costs, of approximately $27,440,000.
As of December 31, 1998, the building was approximately 92% leased to various
tenants under operating leases with remaining terms ranging from one to fifteen
years.
During 1998, the Partnership earned a lease cancellation fee of approximately
$197,000 from a tenant who terminated its lease prior to the end of its lease
term.
Alamo Towers
On March 17, 1997, the Partnership purchased an office building and the
underlying land located in San Antonio, Texas, for a purchase price, including
capitalized closing and related costs, of approximately $12,002,000. The
building contains approximately 196,000 net rentable square feet.
F-16
Corporate Realty Income Fund I, L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements (continued)
4. Investments in Real Estate (continued)
Alamo Towers (continued)
As of December 31, 1998, the building was approximately 83% leased to various
tenants under operating leases with remaining terms ranging from one to seven
years.
During 1998, the Partnership earned lease cancellation fees aggregating
approximately $131,000 from several tenants who terminated leases prior to the
end of their respective lease terms.
5. Leases
Minimum future rentals from tenants under noncancellable operating leases as of
December 31, 1998 are approximately as follows:
Year ending December 31:
1999 $11,861,000
2000 10,634,000
2001 7,961,000
2002 7,101,000
2003 6,757,000
Thereafter 25,069,000
-----------
Total $69,383,000
===========
In addition to the minimum lease amounts, the leases provide for escalation
charges to the tenants for operating expenses, electric and real estate taxes.
For the years ended December 31, 1998, 1997, and 1996, escalation charges
amounting to approximately $2,152,000, $2,735,000 and $1,765,000, respectively,
have been included in rental income.
F-17
Corporate Realty Income Fund I, L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements (continued)
6. Transactions With General Partners and Affiliates
The general partners or their affiliates receive a property management fee equal
to either 1% for a long-term net lease or 6% for other types of leases on the
gross revenue from the property, and a partnership management fee equal to 7% of
adjusted cash from operations, as defined, and reimbursement of administrative
expenses. The general partners also receive leasing commissions in connection
with leasing, re-leasing or leasing related services performed on behalf of the
Partnership in connection with the negotiation of tenant leases. Such
commissions are computed at a rate equal to 3% of the gross revenues for the
first five years of each lease signed where the general partners have performed
such leasing services.
Following is a summary of the fees earned and reimbursable expenses for the
years ended December 31, 1998, 1997 and 1996:
1998 1997 1996
--------------------------------------
Partnership management fees $ 254,544 $257,664 $263,577
Property management fees 1,103,127 750,588 301,942
Administrative expenses 55,000 60,372 166,036
During 1996, leasing commissions of $110,584 were billed to the Partnership by
the general partners and recorded by the Partnership as deferred leasing
commissions. There were no leasing commissions billed by the general partner in
1998 and 1997.
7. Loan Payable
On September 26, 1996, the Partnership entered into a $24,000,000 senior secured
revolving credit facility with Fleet Bank, N.A. (the "Mortgage"). The purpose of
the Mortgage was to refinance the existing $7,800,000 secured revolving line of
credit with PNC Bank, N.A., to provide working capital for tenant improvements
and leasing commissions with respect to the properties owned by the Partnership,
and to provide funds for the acquisition of additional properties. On December
6, 1996, the Partnership amended the Mortgage, increasing the principal amount
to $44,000,000. On September 25, 1998, the Partnership further amended the
Mortgage to increase its existing line of credit by $5,000,000.
F-18
Corporate Realty Income Fund I, L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements (continued)
7. Loan Payable (continued)
The terms of the Mortgage, as amended, provide for a term of four years and
maximum gross borrowings of $49,000,000. Borrowings under the Mortgage, which
are secured by the properties owned by the Partnership, bear interest monthly at
a rate, selected at the option of the Partnership at the time of the associated
borrowing, based on (i) the lender's Peg Rate (as defined in the loan agreement)
plus .50% or (ii) the applicable LIBOR rate or other market rate offered to the
bank plus 2%. The Mortgage requires monthly amortization of principal in an
amount equal to 1/500th of the outstanding principal amount of the Mortgage on
the first day of the applicable month with a final payment of the then
outstanding balance at maturity. The Mortgage may be prepaid at any time.
Borrowings under the Mortgage are secured by all of the properties of the
Partnership. Upon the sale of any property, the Partnership is required to repay
principal on the total indebtedness under the Mortgage in an amount equal to
110% of that portion of outstanding balance of the loan attributable to the sold
property, as defined in the Mortgage agreement. The Mortgage requires the
Partnership to comply with certain covenants, including but not limited to,
maintenance of certain financial ratios. In addition, the Mortgage provides that
the Partnership may distribute to its partners up to 90% of the sum of its
operating net income plus depreciation and amortization.
At December 31, 1998, $46,930,800 was outstanding under the Mortgage at varying
interest rates, ($44,832,800 at 7.63% and $2,098,000 at 8.25% at December 31,
1998).
In connection with the Mortgage, the Partnership incurred fees and expenses of
$1,756,776, which have been capitalized and are being amortized over the term of
the loan agreement.
8. Supplemental Disclosure of Cash Flow Information
1998 1997 1996
------------------------------------
Cash paid during the year for interest $ 3,289,728 $3,154,925 $789,306
====================================
F-19
Corporate Realty Income Fund I, L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements (continued)
9. Employee Savings Plan
During 1997, the Partnership established an employee savings plan (the "Plan")
in accordance with Section 401(K) of the Internal Revenue Code. The Plan permits
eligible employees to make contributions through salary reductions. For the
periods ended December 31, 1998 and 1997, the Partnership had not made any
contributions to the Plan.
10. Earnings per Limited Partnership Unit
Basic earnings per limited partnership unit amounts were computed based on
2,986,460, 3,022,492 and 3,087,170 weighted average limited partnership units
outstanding in 1998, 1997 and 1996, respectively.
For the three years ended December 31, 1998, there were no partnership unit
equivalents and, in accordance with the provisions of SFAS No. 128, dilutive
earnings per limited partnership unit for the three years ended December 31,
1998, were computed based on the weighted average limited partnership units
outstanding.
11. Commitments
During 1998, the Partnership committed to expend approximately $1,026,000 for
future tenant allowances which had not yet been incurred at December 31, 1998.
F-20
Corporate Realty Income Fund I, L.P.
(a Delaware Limited Partnership)
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1998
Costs
Capitalized
Subsequent to Gross Amount at Which
Initial Cost (B) Acquisition Carried at Close of Period
--------------------------------------------------------------------------------
Encumbrances Building and Building and Building and
Description (A) Land Improvements Improvements Land Improvements
- - -----------------------------------------------------------------------------------------------------------------------------
Office Building
Monterey Park, CA $ 811,903 $ 1,762,126 $ 2,459,141 $ 89,239 $ 1,762,126 $ 2,548,380
Office Building
Las Colinas, TX 7,607,483 4,925,745 19,702,979 2,755,710 4,925,745 22,458,689
Office Building
So. Plainfield, NJ 6,086,925 3,147,912 13,378,294 2,103,178 3,147,912 15,481,472
Office Building
San Antonio, TX 6,298,113 2,408,000 9,636,883 360,650 2,408,000 9,997,533
Office Building
Boulder, CO 4,669,615 1,080,369 7,922,716 455,415 1,080,369 8,378,131
Office Building
Oklahoma City, OK 1,783,370 1,063,694 9,713,348 427,350 1,063,694 10,140,698
Office Building
New York, NY 19,673,391 5,488,000 21,951,998 4,662,427 5,488,000 26,614,425
----------------------------------------------------------------------------------------------------
$ 46,930,800 $ 19,875,846 $ 84,765,359 $ 10,853,969 $ 19,875,846 $ 95,619,328
====================================================================================================
Accumulated Life on Which
Total Depreciation Date of Depreciation is
Description (C) (D) Construction Date Acquired Computed
- - ------------------------------------------------------------------------------------------------------
Office Building
Monterey Park, CA $ 4,310,506 $ 776,077 1985 July, 1986 5 to 40 years
Office Building
Las Colinas, TX 27,384,434 7,871,609 1982 October, 5 to 40 years
1986
Office Building December,
So. Plainfield, NJ 18,629,384 5,504,771 1986 1986 5 to 40 years
Office Building
San Antonio, TX 12,405,533 485,998 1975/1980 March, 1997 5 to 40 years
Office Building
Boulder, CO 9,458,500 2,635,010 1987 January, 5 to 40 years
1988
Office Building
Oklahoma City, OK 11,204,392 2,857,744 1986 March, 1988 5 to 40 years
Office Building December,
New York, NY 32,102,425 1,538,549 1925 1996 5 to 40 years
----------------------------
$115,495,174 $ 21,669,758
============================
F-21
Corporate Realty Income Fund I, L.P.
(a Delaware Limited Partnership)
Schedule III - Real Estate and Accumulated Depreciation (continued)
December 31, 1998
Notes:
(A) Encumbrances represent a loan secured by a deed of trust given with respect
to all of the properties of the Partnership.
(B) The initial cost to the Partnership represents the original purchase price
of the properties net of purchase price adjustments, including amounts
incurred subsequent to acquisition which were contemplated. The initial
cost includes the purchase price paid by the Partnership and acquisition
fees and expenses. There is no difference between costs for financial
reporting purposes and costs for federal income tax purposes.
(C) Reconciliation Summary of Transactions - Real Estate Owned
Year Ended December 31,
1998 1997 1996
-----------------------------------------------
Balance at beginning of year $ 112,116,734 $ 112,971,546 $ 85,042,580
Net additions during the year 3,606,069 13,753,264 27,928,966
Cost of real estate sold -- (11,563,422) --
Write off fully depreciated assets (227,629) (3,044,654) --
-----------------------------------------------
Balance at close of year $ 115,495,174 $ 112,116,734 $ 112,971,546
===============================================
The aggregate cost of land, buildings and improvements for federal income tax
purposes at December 31, 1998 was approximately $104,583,000.
(D) Reconciliation Summary of Transactions - Accumulated Depreciation
Year Ended December 31,
1998 1997 1996
-----------------------------------------------
Balance at beginning of year $ 18,592,878 $ 18,553,069 $ 15,974,431
Depreciation charged to expense 3,304,509 3,084,463 2,578,438
Write-off of fully depreciated assets (227,629) (3,044,654) --
-----------------------------------------------
Balance at close of year $ 21,669,758 $ 18,592,878 $ 18,553,069
===============================================
F-22
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.
CORPORATE REALTY INCOME FUND I, L.P.
(Registrant)
By: 1345 REALTY CORPORATION
as Corporate General Partner
Dated: March 30, 1999 By: /s/ Robert F. Gossett, Jr.
----------------------------------
ROBERT F. GOSSETT, JR.,
President
Dated: March 30, 1999 By: /s/ Robert F. Gossett, Jr.
----------------------------------
ROBERT F. GOSSETT, JR.
Individual 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 (with respect to the Corporate General Partner)
and on the dates indicated.
1345 REALTY CORPORATION
Dated: March 30, 1999 By: /s/ Robert F. Gossett, Jr.
----------------------------------
Robert F. Gossett, Jr.
President, Director
Dated: March 30, 1999 By: /s/ Pauline G. Gossett
----------------------------------
Pauline G. Gossett
Secretary