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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended December 31, 2000 or
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[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from to __________________ to _______________________
Commission file number 0-17876
WELLS REAL ESTATE FUND II-OW
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(Exact name of registrant as specified in its charter)
Georgia 58-1754703
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
6200 The Corners Parkway, Norcross, Georgia 30092
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area (770) 449-7800
code Securities registered pursuant to Section 12 (b) of the Act: ------------------------------------------------
Title of each class Name of exchange on which registered
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NONE NONE
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Securities registered pursuant to Section 12 (g) of the Act:
CLASS A UNITS
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(Title of Class)
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CLASS B UNITS
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
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Aggregate market value of the voting stock held by nonaffiliates: Not Applicable
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PART I
ITEM 1. BUSINESS
General
Wells Real Estate Fund II-OW (the "Partnership") is a Georgia public limited
partnership having Leo F. Wells, III and Wells Capital, Inc., a Georgia
corporation, as General Partners. The Partnership was formed on October 13,
1987, for the purpose of acquiring, developing, constructing, owning, operating,
improving, leasing and otherwise managing for investment purposes income-
producing commercial or industrial properties.
On November 6, 1987, the Partnership commenced a public offering of its limited
partnership units pursuant to a Registration Statement filed on Form S-11 under
the Securities Act of 1933. The Partnership terminated its offering on September
7, 1988, and received gross proceeds of $1,922,000 representing subscriptions
from 219 Limited Partners, composed of two classes of limited partnership
interests, Class A and Class B limited partnership units.
The Partnership owns equity interests in properties through its ownership in the
following joint ventures: (i) Fund II-Fund II-OW Joint Venture, a joint venture
between the Partnership and Wells Real Estate Fund II (the "Fund II-Fund II-OW
Joint Venture"); (ii) Fund II-Fund III Joint Venture, a joint venture between
the Fund II-Fund II-OW Joint Venture and Wells Real Estate Fund III, L.P. (the
"Fund II-Fund III Joint Venture"); (iii) Fund II-III-VI-VII Associates, a joint
venture among the Fund II-Fund III Joint Venture, Wells Real Estate Fund VI,
L.P., and Wells Real Estate Fund VII, L.P. (the "Fund II, III, VI, VII Joint
Venture"); (iv) Fund I-Fund II Joint Venture, a joint venture between the Fund
II-Fund II-OW Joint Venture and Wells Real Estate Fund I ("the Tucker Joint
Venture"); and (v) Fund I, II, II-OW, VI, VII Associates, a joint venture among
Wells Real Estate Fund I, the Fund II-Fund II-OW Joint Venture, Wells Real
Estate Fund VI, L.P., and Wells Real Estate Fund VII, L.P. (the "Fund I, II, II-
OW, VI, VII Joint Venture").
As of December 31, 2000 the Partnership owned interests in the following
properties through its ownership of the foregoing joint ventures: (i) a two-
story office building located in Charlotte, North Carolina ("First Union at
Charlotte"); (ii) a four-story office building located in metropolitan Houston,
Texas (the "Atrium"); (iii) a restaurant located in Fulton County, Georgia ("the
Brookwood Grill"); (iv) an office/retail center in Fulton County, Georgia
("Holcomb Bridge Road"); (v) a retail shopping and commercial office complex
located in Tucker, Georgia ("Heritage Place at Tucker"); and (vi) a shopping
center located in Cherokee County, Georgia ("Cherokee Commons"). All of the
foregoing properties were acquired on an all cash basis.
Employees
The Partnership has no direct employees. The employees of Wells Capital, Inc., a
General Partner of the Partnership, perform a full range of real estate services
including leasing and property management, accounting, asset management and
investor relations for the Partnership. See Item 11--"Compensation of General
Partners and Affiliates" for a summary of the fees paid to the General Partners
and their affiliates during the fiscal year ended December 31, 2000.
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Insurance
Wells Management Company, Inc., an affiliate of the General Partners, carries
comprehensive liability and extended coverage with respect to all the properties
owned directly or indirectly by the Partnership. In the opinion of management,
the properties are adequately insured.
Competition
The Partnership will experience competition for tenants from owners and managers
of competing projects which may include the General Partners and their
affiliates. As a result, the Partnership may be required to provide free rent,
reduced charges for tenant improvements, and other inducements, all of which may
have an adverse impact on results of operations. At the time the Partnership
elects to dispose of its properties, the Partnership will also be in competition
with sellers of similar properties to locate suitable purchasers for its
properties.
ITEM 2. PROPERTIES
The Partnership owns all of its properties through a joint venture (the "Fund
II-Fund II-OW Joint Venture") formed on March 1, 1988, between the Partnership
and Wells Real Estate Fund II ("Well Fund II"). Wells Fund II is a Georgia
public limited partnership affiliated with the Partnership through common
general partners. The investment objectives of Wells Fund II are substantially
identical to those of the Partnership. As of December 31, 2000, the
Partnership's equity interest in the Fund II-Fund II-OW Joint Venture was
approximately 5% and the equity interest of Wells Fund II was approximately 95%.
The Partnership does not have control over the operations of the joint ventures;
however, it does exercise significant influence. Accordingly, investment in
joint ventures is recorded on the equity method.
Of the six properties owned by the joint venture, three are retail shopping
centers, two are office buildings and one is a restaurant. As of December 31,
2000, these properties were 98% occupied. As of December 31, 1999, these
properties were 97% occupied. As of December 31, 1998, these properties were 95%
occupied.
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The following table shows lease expirations during each of the next ten years
for all leases as of December 31, 2000, assuming no exercise of renewal options
or termination rights:
Partnership Percentage Percentage
Number Share of of Total of Total
Year of of Square Annualized Annualized Square Annualized
Lease Leases Feet Gross Base Gross Base Feet Gross Base
Expiration Expiring Expiring Rent (1) Rent (1) Expiring Rent
- ------------- ---------- ----------- ------------ -------- --------- -----------
2001(2) 17 105,196 $ 1,407,088 $ 56,240 31.0% 30.1%
2002(3) 18 164,079 2,232,883 59,368 48.4 47.7
2003 15 24,222 325,979 8,308 7.1 7.0
2004 12 25,641 387,017 7,712 7.7 8.3
2005 2 4,540 61,629 1,575 1.3 1.3
2006 1 5,935 127,575 1,008 1.7 2.7
2007 1 3,600 46,793 1,357 1.1 1.0
2008 1 2,400 27,384 652 0.7 0.6
2009 0 0 0 0 0.0 0.0
2010 1 3,531 61,969 1,475 1.0 1.3
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68 339,144 $ 4,678,317 $137,695 100.0% 100.0%
=========== ============ ============ ========== ============ ===========
(1) Average monthly gross rent over the life of the lease,
annualized.
(2) Expiration of First Union Bank with 70,752 square feet at
the First Union project.
(3) Expiration of Boeing Company lease with 119,040 square feet
at the Atrium.
The following describes the properties in which the Partnership owns an interest
as of December 31, 2000:
The First Union Property/Fund II-Fund II-OW Joint Venture
On May 9, 1988, the Fund II-Fund II-OW Joint Venture acquired a two-
story building containing approximately 70,752 net leaseable square
feet, located on a 9.54 acre tract of land located in Charlotte,
Mecklenburg County, North Carolina (the "Charlotte Property") for a
purchase price of $8,550,000.
On May 1, 1994, First Union Bank assumed occupancy of the First Union
Property under a lease which expires April 30, 2001. The principal
terms of the lease provide for First Union's sole tenancy of the
project as a regional operations center for the initial term of seven
years. Because First Union Bank invested approximately $1 million on
tenant improvements at the First Union Property, a lower rental rate
was accepted for the first five years of the lease term.
The annual base rent during the initial term is $412,705 payable in
equal monthly installments of $34,392 during the first two years,
annual base rent of $454,651 payable in equal monthly installments of
$37,887 during the third year, annual base rent of $489,650 payable in
equal monthly installments of $40,804 during the fourth year and
annual base rent of $524,625 payable in equal monthly installments of
$43,718 during the fifth year. Rental rates during the remaining two
years of the lease term will be determined by market rates which is
$844,071 payable in equal monthly installments of $70,339 for the last
two years.
The occupancy rates at the Charlotte Property as of December 31 were
100% in 2000, 1999, and 1998.
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The average effective annual rental per square foot at the First Union
Property was $11.93 for 2000, $10.14 for 1999, $6.49 for 1998 and
1997, and $6.51 for 1996.
The Atrium/Fund II--Fund III Joint Venture
On April 3, 1989, the Fund II-Fund II-OW Joint Venture formed a joint
venture (the "Fund II-Fund III Joint Venture") with Wells Real Estate
Fund III, L.P. ("Wells Fund III"), a public Georgia limited
partnership affiliated with the Partnership through common general
partners. The investment objectives of Wells Fund III are
substantially identical to those of the Partnership.
In April 1989, the Fund II-Fund III Joint Venture acquired a four-
story office building located on a 5.6 acre tract of land adjacent to
the Johnson Space Center in metropolitan Houston, in the City of
Nassau Bay, Harris County, Texas, know as "The Atrium at Nassau Bay"
(the "Atrium").
The funds used by the Fund II-Fund III Joint Venture to acquire the
Atrium were derived from capital contributions made to the Fund II-
Fund III Joint Venture by the Fund II-Fund II-OW Joint Venture and
Wells Fund III in the amounts of $8,327,856 and $2,538,000,
respectively, for total initial capital contributions of $10,865,856.
As of December 31, 2000, the Fund II-Fund II-OW Joint Venture and
Wells Fund III had made total capital contributions to the Fund II-
Fund III Joint Venture of approximately $8,330,000 and $4,448,000,
respectively, for the acquisition and development of the Atrium.
The Atrium was first occupied in 1987 and contains approximately
119,000 net leaseable square feet. Each floor of the Atrium was
originally under a separate lease to Lockheed Engineering and Science
Company, Inc., a wholly-owned subsidiary of the Lockheed Company, each
of which leases had terms of approximately eight years and expired
June 30, 1996, and upon which date Lockheed vacated the property.
On March 3, 1997, a lease was signed with The Boeing Company for the
entire Atrium building. The lease is for a period of five years with
an option to renew for an additional five year term. The rental rate
for the first three years of the lease term is $12.25 per square foot
and $12.50 per square foot for the final two years of initial lease
term. The rate for the optional five year term will be determined
based upon then current market rates. Upon 150 day prior written
notice, Boeing has the right to cancel its lease in the event that
NASA or another prime contractor were to cancel or substantially
reduce its contract. In addition, there is a no-cause cancellation
provision at the end of the first three year period. This no-cause
cancellation was not exercised. The lease also provides that tenant
will pay certain operating expenses in excess of $5.50 per square foot
on an annual basis.
Boeing began the move-in phase of its occupancy on April 15, 1997, and
occupied the Atrium and began paying rent on May 15, 1997. The total
cost of completing the required tenant improvements and outside broker
commissions of approximately $1.4 million was funded out of reserves
and cash flows of the Partnership, Wells Fund II-OW and Wells Fund
III. As of December 31, 2000, the Partnership had contributed
approximately $21,744, Wells Fund II had contributed approximately
$387,752, Wells Fund III had contributed approximately $659,810, and
the Fund II - Fund III Joint Venture had contributed $330,694 to Fund
the tenant improvements and outside broker commissions required. As of
December 31, 2000, the Fund II- Fund II-OW Joint Venture holds
approximately 61%, and Wells Fund III holds approximately 39%.
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The occupancy rate at the Atrium property was 100% as of December 31,
2000, 1999, and 1998. The average effective rental per square foot at
the Atrium is $12.34 for 2000, $12.35 for 1999 and 1998, $7.77 for
1997, and $8.81 for 1996.
The Brookwood Grill Property/Fund II - Fund III Joint Venture
On January 31, 1990, the Fund II-Fund II-OW Joint Venture acquired a
5.8 acre tract of undeveloped real property at the intersection of
Warsaw Road and Holcomb Bridge Road in Roswell, Fulton County, Georgia
(the "Holcomb Bridge Road Property"). The Fund II - Fund II-OW Joint
Venture paid $1,848,561, including acquisition expenses, for the 5.8
acre tract of undeveloped property.
On September 20, 1991, the Fund II-Fund II-OW Joint Venture
contributed approximately 1.5 acres of the Holcomb Bridge Road
Property (the "Brookwood Grill Property"), along with its interest as
landlord under the lease agreement referred to below, as a capital
contribution to the Fund II-Fund III Joint Venture. As of September
20, 1991, the Fund II-Fund II-OW Joint Venture had expended
approximately $2,128,000 for the land acquisition and development of
the Brookwood Grill Property.
As of September 20, 1991, a lease agreement was entered into with the
Brookwood Grill of Roswell, Inc. for the development of approximately
1.5 acres and the construction of a 7,440 square foot restaurant. This
restaurant, which opened early in March 1992, is similar in concept to
Houston's, Ruby Tuesday, and Friday's. It is principally owned by
David Rowe, an Atlanta real estate developer of Kroger shopping
centers, and several operating partners, formerly with Houston's. The
terms of the lease call for an initial term of 9 years and 11 months,
with two additional 10-year option periods. In January 2001, the
tenant renewed a ten-year lease with a base rental of $286,983 per
year for years one through five, and $330,030 per year for years six
through ten. The Fund II-Fund III Joint Venture has expended
approximately $1,100,000 for the development and construction of the
restaurant building together with parking areas, driveways,
landscaping, and other improvements. In addition to the base rent
described above, the tenant is required to pay additional rent in
amounts equal to a 12% per annum return on all amounts expended for
such improvements.
The occupancy rate for the Brookwood Grill, a sole tenant, was 100% as
of December 31, 2000, 1999, and 1998. The average effective rental per
square foot at the Brookwood Grill is $30.22 for 2000 and 1999, $30.26
for 1998 and 1997, and $30.29 for 1996.
As of December 31, 1999, the Fund II-Fund II-OW Joint Venture and
Wells Fund III had made total contributions to the Fund II-Fund III
Joint Venture of approximately $2,128,000 and $1,330,000,
respectively, for the acquisition and development of the Brookwood
Grill. The Fund II-Fund II-OW Joint Venture holds an approximately 62%
equity interest in the Brookwood Grill Property, and Wells Fund III
holds an approximately 38% equity interest in the project.
On January 10, 1995, the remaining 4.3 undeveloped acres of land
comprising the Holcomb Bridge Road Property was contributed to a new
joint venture, Fund II, III, VI, and VII Associates by Fund II-Fund
III Joint Venture. This property is described below.
Holcomb Bridge Road Property/Fund II, III, VI and VII Associates
On January 10, 1995, Fund II-Fund III Joint Venture, Wells Real Estate
Fund VI , L.P. ("Wells Fund VI"), a Georgia public limited partnership
having Leo F. Wells, III and Wells Partners,
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L.P., a Georgia limited partnership, as general partners, and Wells
Real Estate Fund VII, L.P. ("Wells Fund VII"), a Georgia public
limited partnership having Leo F. Wells, III and Wells Partners, L.P.,
a Georgia limited partnership, as general partners, entered into a
Joint Venture Agreement known as Fund II, III, VI and VII Associates
("Fund II, III, VI and VII Joint Venture"). Wells Partners, L.P. is a
private limited partnership having Wells Capital, Inc., a General
Partner of the Partnership, as its sole general partner. The
investment objectives of Wells Fund VI and Wells Fund VII are
substantially identical to those of the Partnership.
In January 1995, the Fund II-Fund III Joint Venture contributed to the
Fund II-III-VI-VII Joint Venture approximately 4.3 acres of land at
the intersection of Warsaw Road and Holcomb Bridge Road in Roswell,
Fulton County, Georgia (the "Holcomb Bridge Road Property") including
land improvements for the development and construction on two
buildings with a total of 49,534 square feet. Fourteen tenants
occupied the Holcomb Bridge Road Property as of December 31, 2000 for
an occupancy rate of 92% in 2000, 100% in 1999, and 94% in 1998. The
average effective annual rental per square foot at the Holcomb Bridge
Property was $17.55 for 2000, $19.36 for 1999, $17.63 for 1998, $13.71
for 1997, and $9.87 for 1996.
As of December 31, 2000, Fund II and Fund III Joint Venture had
contributed $1,729,116 in land and improvements for an equity interest
of approximately 24.1%, Wells Fund VI had contributed $1,929,541 for
an equity interest of approximately 26.9%, and Wells Fund VII had
contributed $3,525,041 for an equity interest of approximately 49.0%.
The total cost to develop the Holcomb Bridge Road Property was
$5,454,582, excluding land.
Tucker Property/Fund I - Fund II Joint Venture
The Tucker Property consists of a retail shopping center and a
commercial office building complex located in Tucker, DeKalb County,
Georgia (the "Tucker Property"). The retail shopping center at the
Tucker Property contains approximately 29,858 net leaseable square
feet. The commercial office space at the Tucker Property, which is
divided into seven separate buildings, contains approximately 67,465
net leaseable square feet.
On January 9, 1987, the Partnership acquired an interest in the Tucker
Property which was acquired by a joint venture (the "Tucker Joint
Venture") originally between the Partnership and Wells Real Estate
Fund I ("Wells Fund I"). Wells Fund I is a Georgia public limited
partnership affiliated with the Partnership through common general
partners. The investment objectives of Wells Fund I are substantially
identical to those of the Partnership. Upon the formation of the Fund
II-Fund II-OW Joint Venture in March 1988, the Partnership contributed
its joint venture interest in the Tucker Joint Venture to the Fund II-
Fund II-OW Joint Venture as a part of its capital contribution. On
January 1, 1991, the Cherokee Joint Venture, which is defined below,
was merged into the Tucker Joint Venture forming a new joint venture
(the "Tucker-Cherokee Joint Venture"). As described below, the
Cherokee Joint Venture was also a joint venture between the Fund II-
Fund II-OW Joint Venture and Wells Fund I. Under the terms of the
Amended and Restated Joint Venture Agreement of Fund I and Fund II
Tucker-Cherokee, the percentage interest of the Fund II-Fund II-OW
Joint Venture in the Tucker Project remained unchanged as a result of
the merger of the Tucker Joint Venture into the Tucker-Cherokee Joint
Venture.
On August 1, 1995, Wells Fund I and the Fund II-Fund-II-OW Joint
Venture entered into another amendment to effect the contribution of
the Cherokee Project to the Fund I, II, II-OW, VI, VII Joint Venture,
as described below. As a result, the name of the joint venture owning
the Tucker Property was changed back to "Fund I and Fund II Tucker,"
and is therefore no longer merged
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with the Cherokee Joint Venture. The Partnership's percentage interest
in the Tucker Project remained unchanged as a result of the
transaction.
Both Wells Fund I and the Fund II-Fund II-OW Joint Venture have funded
the cost of completing the Tucker Property through capital
contributions which have been paid as progressive stages of
construction were completed. As of December 31, 2000, Wells Fund I had
contributed a total of $6,194,634, and the Fund II-Fund II-OW Joint
Venture had contributed a total of $4,764,585 for the acquisition and
development of the Tucker Property. As of December 31, 2000, Wells
Fund I had an approximate 55% equity interest in the Tucker Property
and the Fund II-Fund II-OW Joint Venture had an approximate 45% equity
interest in the Tucker Property. As of December 31, 2000, the Tucker
Property was 89% occupied by 36 tenants.
There are no tenants in the property occupying ten percent or more of
the rentable square footage. The principal businesses, occupations,
and professions carried on in the building are typical retail
shopping/commercial office services.
The occupancy rate at the Tucker Property was 89% in 2000, 87% in
1999, and 94% in 1998.
The average effective annual rental per square foot at the Tucker
Property was $14.29 for 2000, $14.11 for 1999, $12.76 for 1998, $11.08
for 1997, and $13.78 for 1996.
This property is currently being marketed for sale by The First
Fidelity Companies. The management team is considering separating the
retail and creating a condominium for the office buildings. The legal
and site work have been completed so that the management team can
market this property to investors. The Partnership's goal is to have
this property sold by the end of 2002.
Cherokee Property/Fund I, II, II-OW, VI, VII Joint Venture
The Cherokee Property consists of a retail shopping center known as
"Cherokee Commons Shopping Center" located in metropolitan Atlanta,
Cherokee County, Georgia (the "Cherokee Property"). The Cherokee
Property consists of approximately 103,755 net leaseable square feet.
On June 30, 1987, the Partnership acquired an interest in the Cherokee
Property through a joint venture (the "Cherokee Joint Venture")
between the Wells Fund I and Wells Fund II-Fund II-OW Joint Venture.
On January 1, 1991, the Cherokee Joint Venture merged with the Tucker
Joint Venture to form the Tucker-Cherokee Joint Venture. As described
above, the Tucker Joint Venture was also a joint venture between the
Wells Fund I and the Fund II-Fund II-OW Joint Venture. Under the terms
of the Amended and Restated Joint Venture Agreement of Fund I and Fund
II Tucker-Cherokee, the Fund II-Fund II-OW Joint Venture's percentage
interest in the Cherokee Property remained unchanged as a result of
the merger of the Cherokee Joint Venture into the Tucker-Cherokee
Joint Venture.
On August 1, 1995, the Fund II-Fund II-OW Joint Venture, Wells Fund I,
Wells Real Estate Fund VI, L.P. ("Wells Fund VI"), a Georgia public
limited partnership having Leo F. Wells, III and Wells Partners, L.P.,
a Georgia limited partnership, as general partners, and Wells Real
Estate Fund VII, L.P. ("Wells Fund VII"), a Georgia public limited
partnership having Leo F. Wells, III and Wells Partners, L.P., a
Georgia limited partnership, as general partners entered into a joint
venture agreement known as Fund I, II, II-OW, VI, VII Associates (the
"Fund I, II, II-OW, VI, VII Joint Venture"), which was formed to own
and operate the Cherokee Project. Wells Partners, L.P. is a private
limited partnership having Wells Capital, Inc., a General Partner, as
its
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sole general partner. The investment objectives of Wells Fund I, Wells
Fund VI, and Wells Fund VII are substantially identical to those of
the Partnership.
As of December 31, 2000, Wells Fund I had contributed property with a
book value of $2,139,900, the Fund II-Fund II-OW Joint Venture had
contributed property with a book value of $4,860,100, Wells Fund VI
had contributed cash in the amount of $953,798 and Wells Fund VII had
contributed cash in the amount of $953,798 to the Fund I, II, II-OW,
VI, VII Joint Venture. As of December 31, 2000, the equity interests
in the Fund I, II, II-OW, VI, VII Joint Venture were approximately as
follows: Wells Fund I--24%, Fund II-Fund II-OW Joint Venture--54%,
Wells Fund VI--11% and Wells Fund VII--11%.
The Cherokee Property is anchored by a 67,115 square foot lease with
Kroger Food/Drug which expires in 2011. Kroger's original lease was
for 45,528 square feet. In 1994, Kroger expanded to the current 67,115
square feet which is approximately 65% of the total rentable square
feet in the property. Kroger, a retail grocery chain, is the only
tenant occupying ten percent or more of the rentable square footage.
The other tenants in the shopping center provide typical retail
shopping services.
The Kroger lease provides for an annual rent of $392,915 which
increased to $589,102 on August 16, 1995 due to the expansion from
45,528 square feet to 67,115 square feet. The lease expires March 31,
2011 with Kroger entitled to five successive renewals each for a term
of five years at the same rental rate as the original lease.
The occupancy rate at the Cherokee Property was 98% in 2000, 97% in
1999, and 91% in 1998.
The average effective annual rental per square foot at the Cherokee
Property was $9.31 for 2000, $9.11 for 1999, $8.78 for 1998, $8.49 for
1997, and $8.59 for 1996.
This property is currently being marketed for sale by CB Richard
Ellis. The marketing piece is being broadly distributed to investors
throughout the country. The Partnership's goal is to have this
property sold by the end of 2002.
ITEM 3. LEGAL PROCEEDINGS
There were no material pending legal proceedings or proceedings known to be
contemplated by governmental authorities involving the Partnership during 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Limited Partners during 2000.
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PART II
ITEM 5. MARKET FOR PARTNERSHIP'S UNITS AND RELATED SECURITY HOLDER MATTERS
As of February 28, 2001, the Partnership had 6,062 outstanding Class A Units
held by a total of 179 Limited Partners and 1,626 outstanding Class B Units held
by a total of 41 Limited Partners. The capital contribution per unit is $250.
There is no established public trading market for the Partnership's limited
partnership units, and it is not anticipated that a public trading market for
the units will develop. Under the Partnership Agreement, the General Partners
have the right to prohibit transfers of units.
The General Partners have estimated the investment value of properties held by
the Partnership as of December 31, 2000 to be $158.82 per Class A Unit and
$358.59 per Class B Unit based on market conditions existing in early December
2000. The methodology used for this valuation was to estimate the amount a
holder of Partnership Unites would receive if the Partnership's properties were
all sold in the ordinary course of business as of December 31, 2000, and the
proceeds from such sales (without reduction for selling expenses), together with
Partnership funds held as of such date, were distributed in a liquidation of the
Partnership. This value was confirmed as reasonable by an independent MAI
appraiser, David L. Beal Company, although no actual MAI appraisal was performed
due to the inordinate expense involved with such an undertaking. The valuation
does not include any fractional interest valuation.
Class A Unit holders are entitled to an annual 8% non-cumulative distribution
preference over Class B Unit holders as to cash distributions from Net Cash from
Operations, defined in the Partnership Agreement as Cash Flow, less adequate
cash reserves for other obligations of the Partnership for which there is no
provision, but are initially allocated none of the depreciation, amortization,
cost recovery and interest expense. These items are allocated to Class B Unit
holders until their capital account balances have been reduced to zero.
Cash distributions from Net Cash from Operations to the Limited Partners is
distributed on a quarterly basis unless Limited Partners elect to have their
cash distributions paid monthly. Cash distributions made to the Limited
Partners for the two most recent fiscal years were as follows:
Per Class A Per Class A Per Class B Per Class B
Distribution Total Unit Unit Unit Unit
for Quarter Cash Investment Return of Return of General
Ended Distributed Income Capital Capital Partner
- ---------------------- --------------- --------------- -------------- ------------- ---------------
March 31, 1999 $22,662 $0.59 $3.14 $0.00 $0.00
June 30, 1999 20,864 0.67 2.78 0.00 0.00
September 30, 1999 24,665 1.38 2.69 0.00 0.00
December 31, 1999 26,535 0.82 3.56 0.00 0.00
March 31, 2000 26,527 1.43 2.95 0.00 0.00
June 30, 2000 27,474 1.20 3.33 0.00 0.00
September 30, 2000 27,474 0.96 3.57 0.00 0.00
December 31, 2000 26,342 1.05 3.30 0.00 0.00
The fourth quarter distributions of cash available for distribution were accrued
for accounting purposes in 2000 and were not actually paid until February 2001.
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ITEM 6. SELECTED FINANCIAL DATA
The following sets forth a summary of the selected financial data for the fiscal
years ended December 31, 2000, 1999, 1998, 1997, and 1996:
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- -----------
Total assets $1,109,652 $1,189,195 $1,255,377 $1,334,105 $1,379,623
Total revenues 28,101 20,918 5,190 (18,601) 6,273
Net income (loss) 28,101 20,918 5,190 (18,601) 6,273
Net income (loss) allocated to Class A
limited partners 28,101 20,918 5,190 (18,601) 68,549
Net loss allocated to Class B limited
partners 0 0 0 0 (62,276)
Net income (loss) allocated to Class A
limited partner unit $ 4.64 $ 3.45 $ 0.86 $ (3.07) $ 11.31
Net loss per Class B limited partner
unit 0.00 0.00 0.00 0.00 (38.30)
Cash distribution per Class A limited
partner unit 17.79 15.63 13.96 6.03 11.61
Cash distribution per Class B limited
partner unit 0.00 0.00 0.00 0.00 0.00
Cash distributions per unit were comprised of $4.64 paid from net cash from
operations and $13.15 paid from capital in 2000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL AND CONDITIONS
RESULTS OF OPERATION
The following discussion and analysis should be read in conjunction with the
selected financial data and the accompanying financial statements of the
Partnership and notes thereto.
This Report contains forward-looking statements, within the meaning of Section
27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of
1934, including discussion and analysis of the financial condition of the
Partnership, anticipated capital expenditures required to complete certain
projects, amounts of cash distributions anticipated to be distributed to Limited
Partners in the future and certain other matters. Readers of this Report should
be aware that there are various factors that could cause actual results to
differ materially from any forward-looking statement made in this Report, which
include construction costs which may exceed estimates, construction delays,
lease-up risks, inability to obtain new tenants upon the expiration of existing
leases, and the potential need to fund tenant improvements or other capital
expenditures out of operating cash flow.
Results of Operations and Changes in Financial Conditions
General
As of December 31, 2000, the properties owned by the Fund II-Fund II-OW Joint
Venture were 97% occupied, as compared to 97% in 1999, and 95% in 1998.
Gross revenues of the Partnership were $28,101 for the year ended December 31,
2000 compared to $20,918 for the year ended December 31, 1999, and $5,190 for
the fiscal year ended December 31, 1998. The increase in gross revenues is
primarily due to increased rental renewal rates in April 1999 for First Union at
Charlotte.
-11-
Administrative expenses of the Partnership are incurred at the joint venture
level.
The Partnership made cash distributions to Limited Partners holding Class A
units of $17.79 per unit for fiscal year ended December 31, 2000, $15.63 per
unit for fiscal year ended December 31, 1999, and $13.96 per unit for fiscal
year ended December 31, 1998. The Partnership made no cash distributions to
Limited Partners holding Class B units for fiscal year ended 2000, 1999, and
1998.
Property Operations
As of December 31, 2000, the Partnership's percentage ownership in properties
was as follows: 5.3% in the First Union Property, 3.26% in the Atrium, 3.31% in
the Brookwood Grill Property, 0.79% in the Holcomb Bridge Road Property, 2.38%
in the Tucker Property and 2.90% in the Cherokee Property.
As of December 31, 2000, the Partnership owned interests in the following
properties through the Fund II-Fund II-OW Joint Venture:
First Union Property/Fund II - Fund II-OW Joint Venture
For the Year Ended December 31
---------------------------------------------
2000 1999 1998
------------ ------------ --------------
Revenues:
Rental income $844,071 $717,676 $458,867
------------ ------------ --------------
Expenses:
Depreciation 367,667 367,667 367,667
Management and leasing expenses 69,128 61,295 45,887
Other operating expenses 16,105 17,797 14,932
------------ ------------ --------------
452,900 446,759 428,486
------------ ------------ --------------
Net income $391,171 $270,917 $ 30,381
============ ============ ==============
Occupied percentage 100% 100% 100%
============ ============ ==============
Partnership ownership percentage 5.3% 5.3% 5.3%
============ ============ ==============
Cash generated to the Fund II-Fund II-OW Joint Venture* $777,192 $677,542 $467,262
============ ============ ==============
Net income allocated to the Fund II-Fund II-OW Joint Venture* $391,171 $270,917 $ 30,381
============ ============ ==============
*The Partnership holds a 5% ownership in the Fund II-Fund II-OW Joint Venture.
Rental income and net income increased, as compared to 1999 and 1998, due
primarily to increased rental renewal rates in April 1999. Management and
leasing expenses increased due primarily to increased rental income.
Real estate taxes and all operational expenses for the building are the
responsibility of the tenant.
For comments on the general conditions to which the property may be subject, see
Item 1, Business, page 1. For additional information on the property, tenants,
etc., see Item 2, Properties, page 3.
-12-
The Atrium/Fund II-Fund III Joint Venture
For the Year Ended December 31
-----------------------------------------------
2000 1999 1998
----------- ----------- ------------
Revenues:
Rental income $ 1,468,784 $ 1,470,144 $ 1,470,144
Other income 0 4,000 13,280
----------- ----------- ------------
1,468,784 1,474,144 1,483,424
----------- ----------- ------------
Expenses:
Depreciation 877,240 867,720 866,778
Management and leasing expenses 185,035 179,762 186,102
Other operating expenses 743,835 720,594 713,955
----------- ----------- ------------
1,806,110 1,768,076 1,766,835
----------- ----------- ------------
Net loss $ (337,326) $ (293,932) $ (283,411)
=========== =========== ============
Occupied percentage 100% 100% 100%
=========== =========== ============
Partnership ownership percentage 3.3% 3.3% 3.3%
=========== =========== ============
Cash distributed to the Fund II-Fund II-OW Joint Venture* $ 354,232 $ 385,541 $ 405,758
=========== =========== ============
Net loss allocated to the Fund II-Fund II-OW Joint Venture* $ (206,781) $ (180,180) $ (173,731)
=========== =========== ============
*The Partnership holds a 5% ownership in the Fund II-Fund II-OW Joint Venture.
Rental income remained relatively stable in 2000, as compared to 1999 and 1998.
Management and leasing expenses increased, as compared to 1999, due to a change
in estimated fees recorded in 1998, which resulted in decreased fees in 1999.
Other operating expenses increased due primarily to increased expenditures in
electricity, HVAC repairs, plumbing repairs, and glass maintenance in the
building. As a result, net income and cash distribution to the Fund II-Fund II-
OW Joint Venture decreased.
The Atrium property incurred property taxes of $187,536 for 2000, $175,360 for
1999, and $148,006 for 1998.
For comments on the general competitive conditions to which the property may be
subject, see Item 1, Business, page 2. For additional information on the
property, tenants, etc. see Item 2, Properties, page 3.
-13-
The Brookwood Grill Property/Fund II-Fund III Joint Venture
For the Year Ended December 31
---------------------------------------------
2000 1999 1998
------------ ----------- ----------
Revenues:
Rental income $224,801 $224,801 $225,100
Equity in income of joint venture 55,489 81,669 78,791
------------ ----------- ----------
280,290 306,470 303,891
------------ ----------- ----------
Expenses:
Depreciation 54,014 54,014 54,012
Management and leasing expenses 25,320 30,096 23,349
Other operating expenses 6,513 (460) (24,632)
------------ ----------- ----------
85,847 83,650 52,729
------------ ----------- ----------
Net income $194,443 $222,820 $251,162
============ =========== ==========
Occupied percentage 100% 100% 100%
============ =========== ==========
Partnership ownership percentage in the Fund II-Fund III Joint
Venture 3.3% 3.3% 3.3%
============ =========== ==========
Cash distributed to the Fund II-Fund II-OW Joint Venture* $236,064 $253,723 $270,886
============ =========== ==========
Income allocated to the Fund II-Fund II-OW Joint Venture* $121,235 $138,928 $156,599
============ =========== ==========
*The Partnership holds a 5% ownership in the Fund II-Fund II-OW Joint Venture.
Although rental income remained relatively stable in 2000, 1999, and 1998 total
revenues decreased in 2000 due to the decrease in equity income from Fund II,
III, VI, VII Joint Venture, as the Holcomb Bridge Property decreased its
occupancy rate.
Management and leasing expenses decreased in 2000, as compared to 1999, due to a
change in estimated fees recorded in 1999. Other operating expenses increased
due primarily to appraisal fees for this property and increased administrative
salaries.
The Brookwood Grill Property incurred property taxes of $17,973 for 2000,
$18,055 for 1999, and $16,270 for 1998.
This property is currently being marketed for sale by CB Richard Ellis. The
marketing piece is being broadly distributed to investors throughout the
country. The Partnership's goal is to have this property sold by the end of
2002.
For comments on the general competitive conditions to which the property may be
subject, see Item 1, Business, page 2. For additional information on the
property, tenants, etc., see Item 2, Properties, page 3.
-14-
Holcomb Bridge Road Property/Fund II, III, VI, VII Joint Venture
For the Year Ended December 31
-------------------------------------------
2000 1999 1998
---------- ----------- -------------
Revenues:
Rental income $869,390 $953,952 $872,978
Other income 0 23,843 36,000
---------- ----------- -------------
869,390 977,795 908,978
---------- ----------- -------------
Expenses:
Depreciation 355,293 415,165 376,290
Management and leasing expenses 111,567 129,798 97,701
Other operating expenses 171,997 93,534 107,418
---------- ----------- -------------
638,857 638,497 581,409
---------- ----------- -------------
Net income $230,533 $339,298 $327,569
========== =========== =============
Occupied percentage 92% 100% 94%
========== =========== =============
Partnership ownership percentage in the Fund II, III, VI, VII
Joint Venture 0.8% 0.8% 0.8%
========== =========== =============
Cash distribution to the Fund II-Fund III Joint Venture* $156,763 $182,886 $179,198
========== =========== =============
Net income allocated to the Fund II-Fund III Joint Venture* $ 55,489 $ 81,669 $ 78,791
========== =========== =============
*The Partnership holds a 3.30% ownership in the Fund II-Fund III Joint Venture.
Rental income decreased in 2000, as compared to 1999 and 1998, due to decreased
occupancy. Depreciation expense was higher in 1999, as compared to 1998 and
2000, due to increased tenant improvement for new tenants for 1999 and some
tenant improvement becoming fully depreciated in 1999. Other operating expenses
increased due to appraisal fees for this property and a bad debt recorded in
this year.
The Holcomb Bridge Property incurred property taxes of $52,887 for 2000, $53,896
for 1999, and $52,162 for 1998.
This property is currently being marketed for sale by CB Richard Ellis. The
marketing piece is being broadly distributed to investors throughout the
country. The Partnership's goal is to have this property sold by the end of
2002.
For comments on the general competitive conditions to which the property may be
subject, see Item 1, Business, page 2. For additional information on the
property, tenants, etc., see Item 2, Properties, page 3.
-15-
Tucker Property/Fund I--Fund II Joint Venture
For the Year Ended December 31
-------------------------------------------------
2000 1999 1998
------------- ----------- -------------
Revenues:
Rental income 1,390,599 $1,373,213 $ 1,242,332
Interest income 601 447 0
------------- ----------- -------------
1,391,200 1,373,660 1,242,332
------------- ----------- -------------
Expenses:
Depreciation 491,806 491,385 440,099
Management and leasing expenses 121,946 158,270 164,378
Other operating expenses 506,139 498,849 532,985
------------- ----------- -------------
1,119,891 1,148,504 1,137,462
------------- ----------- -------------
Net income $ 271,309 $ 225,156 $ 104,870
============= =========== =============
Occupied percentage 89% 87% 94%
============= =========== =============
Partnership ownership percentage 2.4% 2.4% 2.4%
============= =========== =============
Cash distribution to the Fund II-Fund II-OW Joint Venture* $ 285,191 $ 199,737 $ 170,937
============= =========== =============
Net income allocated to the Fund II-Fund II-OW Joint
Venture* $ 121,845 $ 101,117 $ 47,097
============= =========== =============
*The Partnership holds a 5% ownership in the Fund II-Fund II-OW Joint Venture.
Rental income increased in 1999, compared to 1998, even though occupancy
decreased due to increased rental renewal rates and the decrease in occupancy
moving slowly downward throughout the year. The rental income increase in 2000,
as compared to 1999, was due to increased tenant occupancy at the property. The
increase in depreciation expense for 1999 was due to capitalized building
repairs. The management and leasing expenses decreased in 2000, as compared to
1999, due to an adjustment of the estimated tenant billings. Other operating
expenses decreased for 1999, as compared to 1998, due to significant variable
expenses for those years. Expenses were higher in 1998 due to sewer and main
water line repairs. The cash distribution increased in 2000, as compared to
1999, due to a decrease in capital expenditures in 2000.
Real estate taxes were $111,946 in 2000, $91,970 in 1999, and $93,697 in 1998.
This property is currently being marketed for sale by The First Fidelity
Companies. The management team is considering separating the retail and creating
a condominium for the office buildings. The legal and site work has been
completed so that the management team can market this property to investors. The
Partnership's goal is to have this property sold by the end of 2002.
For comments on the general conditions to which the property may be subject, see
Item 1, Business, page 2. For additional information on the property, tenants,
etc., see Item 2, Properties, page 3.
-16-
Cherokee Commons Shopping Center/Fund I, II, II-OW, VI, and VII Joint Venture
For the Year Ended December 31
---------------------------------------------
2000 1999 1998
------------ ---------- -------------
Revenues:
Rental income $965,305 $945,222 $909,831
Interest income 78 68 84
------------ ---------- -------------
965,383 945,290 909,915
------------ ---------- -------------
Expenses:
Depreciation 442,250 447,969 444,660
Management and leasing expenses 74,422 94,149 82,517
Other operating expenses 54,089 68,089 84,676
------------ ---------- -------------
570,761 610,207 611,853
------------ ---------- -------------
Net income $394,622 $335,083 $298,062
============ ========== =============
Occupied percentage 98% 97% 91%
============ ========== =============
Partnership ownership percentage 2.9% 2.9% 2.9%
============ ========== =============
Cash distributed to the Fund II-Fund II-OW Joint Venture* $453,678 $425,382 $403,744
============ ========== =============
Net income allocated to the Fund II-Fund II-OW Joint Venture* $215,310 $182,825 $162,626
============ ========== =============
*The Partnership holds a 5% ownership in the Fund II-Fund II-OW Joint Venture.
Rental income increased in 2000, as compared to 1999 and 1998, due to an
increase in occupancy and rental renewals. Management and leasing expenses
decreased in 2000, as compared to 1999, due to decreased leasing commission.
Management and leasing expenses increased in 1999, as compared to 1998, due to
an increase in occupancy and rental renewal rates. Depreciation expense
decreased in 2000, as compared to 1999, due to some tenant improvements becoming
fully depreciated in 1999. Operating expenses decreased in 2000, as compared to
1999, due to a reimbursable tenant improvement write-off in 1999, and decreased
in 1999, as compared to 1998, due to differences and adjustments of CAM billings
to tenants offset by increased expenses for tenant improvements, HVAC repairs,
and a partial demolition of a tenant suite in 1999. Tenants are billed an
estimated amount for the current year common area maintenance which is ten
reconciled the next year and the difference is billed to the tenant.
Real estate taxes were $82,048 for 2000, $87,411 for 1999, and $77,311 for 1998.
For comments on the general conditions to which the property may be subject, see
Item 1, Business, page 2. For additional information on the property, tenants,
etc., see Item 2, Properties, page 3.
-17-
Liquidity and Capital Resources
During its offering, which terminated on September 7, 1988, the Partnership
raised a total of $1,921,600 through the sale of 7,688 units. No additional
units will be sold by the Partnership. As of December 31, 2000, the Partnership
contributed an aggregate of $1,537,600 in capital contributions to the Fund II -
Fund II-OW Joint Venture, after incurring approximately $384,000 in offering
costs, commissions and acquisitions and advisory fees.
Since the Partnership is an investment partnership formed for the purpose of
acquiring, owning and operating income-producing real property and has invested
all of its funds available for investment, it is unlikely that the Partnership
will acquire interests in any additional properties, and the Partnership's
capital resources are anticipated to remain relatively stable over the holding
period of its investments.
Net cash provided by investing activities increased from $90,167 to $104,801 in
2000, and net cash used in financing activities increased from $87,200 to
$108,010 in 2000 due to the increase in distributions from joint ventures as net
income increased.
The Partnership's cash distribution to Class A Unit holders paid and payable
through the fourth quarter of 2000 have been paid from Net Cash from Operations
and a Return of Capital. The Partnership anticipates that distributions will
continue to be paid on a quarterly basis from such sources. No cash
distributions were paid to Class B Unit holders for 2000.
The Partnership expects to meet liquidity requirements and budget demands
through cash flow from operations. The Partnership is unaware of any known
demands, commitments, events or capital expenditures other than that which is
required for the normal operation of its properties that will result in the
Partnership's liquidity increasing or decreasing in any material way.
The Partnership has recently made the decision to begin selling its properties.
At this time, two properties have been identified that will be offered for sale
within the next several months. The Partnership's goal is to have all Fund II-OW
properties sold by the end of 2002. As the properties are sold, all proceeds
will be returned to limited partners in accordance with the Partnership's
prospectus. Management estimates that the net realizable value of each of the
properties exceeds the carrying value of the corresponding real estate assets;
consequently, no impairment loss has been recorded. In the event that the net
sales proceeds are less than the carrying value of the property sold, the
Partnership would recognize a loss on the sale. Management is not contractually
or financially obligated to sell any of its properties, and it is management's
current intent to fully realize the Partnership's investment in real estate. The
success of the partnership's future operations and the ability to realize the
investment in its assets will be dependent on the Partnership's ability to
maintain rental rates, occupancy, and an appropriate level of operating expenses
in future years. Management believes that the steps that it is taking will
enable the Partnership to realize its investment in its assets.
Inflation
Real estate has not been affected significantly by inflation in the past three
years due to the relatively low inflation rate. There are provisions in the
majority of tenant leases executed by the Partnership to protect the Partnership
from the impact of inflation. Most leases contain common area maintenance
charges ("CAM charges"), real estate tax and insurance reimbursements on a per
square foot bases, or in some cases, annual reimbursement of operating expenses
above a certain per square foot allowance. These provisions should reduce the
Partnership's exposure to increases in costs and operating expenses resulting
from inflation. In addition, a number of the Partnership's leases are for terms
of less than five years which may permit the Partnership to replace existing
leases with new leases at higher base rental rates if
-18-
the existing leases are below market rate. There is no assurance, however, that
the Partnership would be able to replace existing leases with new leases at
higher base rentals.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements of the Registrant and supplementary data are detailed
under Item 14(a) and filed as part of the report on the pages indicated.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with the Partnership's accountants or other
reportable events during 2000.
-19-
PART III
ITEM 10. GENERAL PARTNERS OF THE PARTNERSHIP
Wells Capital, Inc.
Wells Capital, Inc. ("Capital") is a Georgia corporation formed in April 1984.
The executive offices of Capital are located at 6200 The Corners Parkway,
Norcross, Georgia 30092. Leo F. Wells, III is the sole Director and the
President of Capital.
Leo F. Wells, III.
Mr. Wells is a resident of Atlanta, Georgia, is 57 years of age and holds a
Bachelor of Business Administration Degree in Economics from the University of
Georgia. Mr. Wells is the President and sole Director of Wells Capital. Mr.
Wells is the President of Wells & Associates, Inc., a real estate brokerage and
investment company formed in 1976 and incorporated in 1978, for which he serves
as principal broker. Mr. Wells is also currently the sole Director and President
of Wells Management Company, Inc., a property management company he founded in
1983. In addition, Mr. Wells is the President and Chairman of the Board of Wells
Investment Securities, Inc., Wells & Associates, Inc., and Wells Management
Company, Inc. which are affiliates of the General Partners. From 1980 to
February 1985, Mr. Wells served as Vice-President of Hill-Johnson, Inc., a
Georgia corporation engaged in the construction business. From 1973 to 1976, he
was associated with Sax Gaskin Real Estate Company and from 1970 to 1973, he was
a real estate salesman and property manager for Roy D. Warren & Company, an
Atlanta real estate company.
ITEM 11. COMPENSATION OF GENERAL PARTNERS AND AFFILIATES
The following table summarizes the compensation and fees paid to the General
Partners and their affiliates during the year ended December 31, 2000:
(C)
-----------------
(A) (B) Cash
Name of Individual Capacities in Which Served -----------------
or Number in Group Form of Compensation Compensation
- ---------------------------------- ------------------------------------- ------------------
Property Manager-Management
Wells Management Company, Inc. And Leasing Fees $12,565(1)
General Partner-Partnership
Wells Capital, Inc. Cash Flow Distributions 0
General Partner-Partnership
Leo F. Wells, III Cash Flow Distributions 0
(1) The majority of these fees are not paid directly by the
Partnership but are paid by the joint venture entities which own
properties to which the property management and leasing services
relate and include management and leasing fees.
-20-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No Limited Partner is known by the Partnership to own beneficially more than 5%
of the outstanding units of the Partnership.
Set forth below is the security ownership of management as of December 31, 2000:
(2) (3)
(1) Name and Address of Amount and Nature of (4)
Title of Class Beneficial Owner Beneficial Ownership Percent of Class
- -------------------------- ----------------------------- ------------------------------ ------------------------
0 Units (IRA, 401 (k) and
Class A units Leo F. Wells, III Profit Sharing) Less than 1%
0 Units (401 (k) and Profit
Class B units Leo F. Wells, III Sharing) Less than 1%
The General Partners did not receive any distributions from cash flows or sale
proceeds in 2000.
No arrangements exist which would, upon implementation, result in a change in
control of the Partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following are compensation and fees paid or to be paid by the Partnership to
the General Partners and their affiliates in connection with the operation of
the Partnership.
Interest in Partnership Cash Flow and Net Sale Proceeds
The General Partners will receive a subordinated participation in net cash flow
from operations equal to 10% of net cash flow after the Limited Partners have
received preferential distributions equal to 9% of their adjusted capital
accounts in each fiscal year. In addition, after the Limited Partners receive
their distributions equal to 9% of their capital contributions and the General
Partners receive their distributions equal to 10% of the total distributions for
such year, the General Partners will receive a participation of 10% of the
additional distributions from cash available for distribution, 9% of which shall
be paid to the General Partners as a Partnership Management Fee. The General
Partners will also receive a participation in net sale proceeds and net
financing proceeds equal to 15% of the residual proceeds available for
distribution after the Limited Partners have received a return of their adjusted
capital contributions plus a 15% cumulative return on their adjusted capital
contributions. The General Partners received no partnership cash flow or net
sale proceeds during 2000.
Property Management and Leasing Fees
Wells Management Company, Inc., an affiliate of the General Partners, will
receive compensation for supervising the management of the Partnership
properties equal to 6% (3% management and 3% leasing) of rental income. In no
event will such fees exceed the sum of (i) 6% of the gross receipts of each
property, plus (ii) a separate one-time fee for initial rent-up or leasing-up of
development properties in an amount not to exceed the fee customarily charged in
arm's-length transactions by others rendering similar services in the same
geographic area for similar properties. With respect to properties leased on a
net basis for a period of ten years or longer, property management fees will not
exceed 1% of gross revenues
-21-
from such leases, plus a one-time initial leasing fee of 3% of the gross
revenues which are payable over the first five years of the term of such net
leases. Management and leasing fees are not paid directly by the Partnership but
by the joint venture entities which own the properties. The Partnership's share
of these fees which were paid to Wells Management Company, Inc. totaled $12,565
for the year ended December 31, 2000.
Real Estate Commissions
In connection with the sale of Partnership properties, the General Partners or
their affiliates may receive commissions not exceeding the lesser of (A) 50% of
the commissions customarily charged by other brokers in arm's-length
transactions involving comparable properties in the same geographic area or (B)
3% of the gross sales price of the property, and provided that payments of such
commissions will be made only after Limited Partners have received prior
distributions totaling 100% of their capital contributions plus a 6% cumulative
return on their adjusted capital contributions. During 2000, no real estate
commissions were paid to the General Partners or their affiliates.
(THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.)
-22-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. The financial statements are contained on pages F-2 through F-46 of this
Annual Report on Form 10-K, and the list of the financial statements
contained herein is set forth on page F-1, which is hereby incorporated
by reference.
(a)2. The Exhibits filed in response to Item 601 of Regulation S-K are listed
on the Exhibit Index attached hereto.
(b) No reports on Form 8-K were filed with the commission during the year of
2000.
(c) The exhibits filed in response to Item 601 of Regulation S-K are listed
on the Exhibit Index attached hereto.
(d) See (a) 2 above.
(THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK)
-23-
SIGNATURES
Pursuant to the requirements of Sections 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 this 27th day of March
2001.
Wells Real Estate Fund II-OW
(Registrant)
By: /s/Leo F. Wells, III
------------------------------------
Leo F. Wells, III
Individual General Partner and as
President and Chief Financial Officer of
Wells Capital, Inc., the Corporate
General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following person on behalf of the registrant and in
the capacity as and on the date indicated.
Signature Title Date
- --------------------------------- --------------------------------- ---------------------------------
/s/Leo F. Wells, III
- ---------------------------------
Leo F. Wells, III Individual General Partner, March 27, 2001
President and Sole Director of Wells
Capital, Inc., the Corporate General
Partner
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRARS WHICH HAVE NOT BEEN REGISTERED PURSUANT TO
SECTION 12 OF THE ACT.
No annual report or proxy material relating to an annual or other meeting of
security holders has been sent to security holders.
-24-
INDEX TO FINANCIAL STATEMENTS
Financial Statements Page
- ------------------------------------------------------------------------------------------ ------
Independent Auditors' Report F2
Balance Sheets as of December 31, 2000 and 1999 F3
Statements of Income (Loss) for the Years ended December 31, 2000, 1999, and 1998 F4
Statements of Partners' Capital for the Years Ended December 31, 2000, 1999, and 1998 F5
Statements of Cash Flows for the Years Ended December 31, 2000, 1999, and 1998 F6
Notes to Financial Statements for December 31, 2000, 1999, and 1998 F7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wells Real Estate Fund II-OW:
We have audited the accompanying balance sheets of WELLS REAL ESTATE FUND II-OW
(a Georgia public limited partnership) as of December 31, 2000 and 1999 and the
related statements of income, partners' capital, and cash flows for each of the
three years in the period ended December 31, 2000. These financial statements
are the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 Wells Real Estate Fund II-OW as
of December 31, 2000 and 1999 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
January 30, 2001
F-2
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
ASSETS
2000 1999
---------- ----------
INVESTMENT IN JOINT VENTURE $1,082,280 $1,159,995
CASH AND CASH EQUIVALENTS 1,127 3,865
DUE FROM AFFILIATE 26,245 25,335
---------- ----------
Total assets $1,109,652 $1,189,195
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable $ 630 $ 264
Partnership distributions payable 26,342 26,536
---------- ----------
Total liabilities 26,972 26,800
---------- ----------
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL
Limited partners:
Class A--6,062 units 1,082,680 1,162,395
Class B--1,626 units 0 0
---------- ----------
Total partners' capital 1,082,680 1,162,395
---------- ----------
Total liabilities and partners' capital $1,109,652 $1,189,195
========== ==========
The accompanying notes are an integral part of these balance sheets.
F-3
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
------- ------- ------
REVENUES:
Equity in income of joint venture $27,996 $20,789 $5,190
Interest income 105 0 0
Other income 0 129 0
------- ------- ------
28,101 20,918 5,190
EXPENSES 0 0 0
------- ------- ------
NET INCOME $28,101 $20,918 $5,190
======= ======= ======
NET INCOME ALLOCATED TO CLASS A LIMITED PARTNERS $28,101 $20,918 $5,190
======= ======= ======
NET INCOME PER CLASS A LIMITED PARTNER UNIT $ 4.64 $ 3.45 $ 0.86
======= ======= ======
CASH DISTRIBUTION PER CLASS A LIMITED PARTNER UNIT $ 17.79 $ 15.63 $13.96
======= ======= ======
The accompanying notes are an integral part of these statements.
F-4
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
Limited Partners Total
---------------------------------------
Class A Class B Partners'
--------------------- ----------------
Units Amount Units Amount Capital
--------- ---------- ------- ------ ----------
BALANCE, December 31, 1997 6,062 $1,315,655 1,626 $ 0 $1,315,655
Net income 0 5,190 0 0 5,190
Partnership distributions 0 (84,606) 0 0 (84,606)
--------- ---------- ------- ------ ----------
BALANCE, December 31, 1998 6,062 1,236,239 1,626 0 1,236,239
Net income 0 20,918 0 0 20,918
Partnership distributions 0 (94,762) 0 0 (94,762)
--------- ---------- ------- ------ ----------
BALANCE, December 31, 1999 6,062 1,162,395 1,626 0 1,162,395
Net income 0 28,101 0 0 28,101
Partnership distributions 0 (107,816) 0 0 (107,816)
--------- ---------- ------- ------ ----------
BALANCE, December 31, 2000 6,062 $1,082,680 1,626 $ 0 $1,082,680
========= ========== ======= ====== ==========
The accompanying notes are an integral part of these statements.
F-5
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
---------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 28,101 $20,918 $ 5,190
---------- -------- ---------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in income of joint venture (27,996) (20,789) (5,190)
Changes in accounts payable 366 100 (73)
---------- -------- ---------
Total adjustments (27,630) (20,689) (5,263)
---------- -------- ---------
Net cash provided by (used in) operating
activities 471 229 (73)
---------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Distributions received from joint venture 104,801 90,167 83,846
---------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners in excess of accumulated earnings (81,298) (76,671) (73,220)
Distributions to partners from accumulated earnings (26,712) (10,529) (10,625)
---------- -------- ---------
Net cash used in financing activities (108,010) (87,200) (83,845)
---------- -------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,738) 3,196 (72)
CASH AND CASH EQUIVALENTS, beginning of year 3,865 669 741
---------- -------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 1,127 $ 3,865 $ 669
========== ======== =========
The accompanying notes are an integral part of these statements.
F-6
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Wells Real Estate Fund II-OW (the "Partnership") is a public limited
partnership organized on October 13, 1987 under the laws of the state of
Georgia. The general partners are Leo F. Wells, III and Wells Capital, Inc.
(the "Company"). The Partnership has two classes of limited partnership
interests, Class A and Class B units. Limited partners may vote to, among
other things, (a) amend the partnership agreement, subject to certain
limitations, (b) change the business purpose or investment objectives of
the Partnership, and (c) remove a general partner. A majority vote on any
of the above described matters will bind the Partnership, without the
concurrence of the general partners. Each limited partnership unit has
equal voting rights regardless of class.
The Partnership was formed to acquire and operate commercial real
properties, including properties which are either to be developed,
currently under development or construction, newly constructed, or have
operating histories. The Partnership owns an interest in several properties
through a joint venture between the Partnership and Wells Real Estate Fund
II ("Wells Fund II"), referred to as "Fund II and II-OW."
Through its investment in Fund II and II-OW, the Partnership owns interests
in the following properties: (i) a retail shopping and commercial office
complex located in Tucker, Georgia, Heritage Place at Tucker ("Tucker");
(ii) a shopping center located in Cherokee County, Georgia, the Cherokee
Commons Shopping Center ("Cherokee Commons"); (iii) a four-story office
building located in metropolitan Houston, Texas, the Atrium at Nassau Bay
("The Atrium"); (iv) a restaurant located in Fulton County, Georgia, and
(v) two retail and office buildings in Fulton County, Georgia. Fund II and
II-OW joint venture owns 100% of the First Union Property. All remaining
properties are owned by Fund II and II-OW through investments in joint
ventures with other Wells Real Estate Funds.
Use of Estimates and Factors Affecting the Partnership
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
The Partnership recently began considering selling its properties.
Management estimates that the net realizable value of each of the
properties exceeds the carrying value of the corresponding real estate
assets; consequently, no impairment loss has been recorded. In the event
that the net sales proceeds are less than the carrying value of the
property sold, the Partnership would recognize a loss on the sale.
Management is not contractually or financially obligated to sell any of its
properties, and it is management's current intent to fully realize the
Partnership's investment in real estate. The success of the Partnership's
future operations and the ability to realize the investment in its assets
will be dependent on the Partnership's ability to maintain rental rates,
occupancy, and an appropriate level of operating
F-7
expenses in future years. Management believes that the steps that it is
taking will enable the Partnership to realize its investment in its assets.
Income Taxes
The Partnership is not subject to federal or state income taxes, and
therefore, none have been provided for in the accompanying financial
statements. The partners are required to include their respective shares of
profits and losses in their individual income tax returns.
Distribution of Net Cash From Operations
Cash available for distribution is distributed on a cumulative
noncompounded basis to limited partners quarterly. In accordance with the
partnership agreement, distributions are paid first to limited partners
holding Class A units until they have received an 8% per annum return on
their adjusted capital contributions, as defined. Cash available for
distribution is then distributed to limited partners holding Class B units
until they have received an 8% per annum return on their adjusted capital
contributions, as defined. Excess cash available for distribution will be
distributed to the general partners until each has received 10% of total
distributions to limited partners for the year. Any remaining cash
available for distribution is distributed 90% to the limited partners and
10% to the general partners.
Distribution of Sales Proceeds
Upon sales of properties, the net sales proceeds are distributed in the
following order:
. To limited partners until each limited partner has received 100%
of his adjusted capital contribution, as defined
. To limited partners holding Class B units until they receive an
amount equal to the net cash available for distribution received
by the limited partners holding Class A units
. To all limited partners until they receive a cumulative 12% per
annum return on their adjusted capital contributions, as defined
. To all limited partners until they receive an amount equal to
their respective cumulative distributions, as defined
. To all general partners until they have received 100% of their
capital contributions, as defined
. Thereafter, 85% to the limited partners and 15% to the general
partners
Allocation of Net Income, Net Loss, and Gain on Sale
Net income is defined as net income recognized by the Partnership,
excluding deductions for depreciation and amortization. Net income, as
defined, of the Partnership will be allocated each year in the same
proportions that net cash from operations is distributed to the partners.
To the extent that the Partnership's net income in any year exceeds net
cash from operations, it will be allocated 99% to the limited partners and
1% to the general partners.
Net loss, depreciation, and amortization deductions for each fiscal year
will be allocated as follows: (a) 99% to the limited partners holding Class
B units and 1% to the general partners until their capital accounts are
reduced to zero, (b) then to any partner having a positive balance in his
capital account in an amount not to exceed such positive balance, and (c)
thereafter to the general partners.
Gain on the sale or exchange of the Partnership's properties will be
allocated generally in the same manner that the net proceeds from such sale
are distributed to partners after the following allocations are made, if
applicable: (a) allocations made pursuant to a qualified income offset
provision in the
F-8
partnership agreement, (b) allocations to partners having negative capital
accounts until all negative capital accounts have been restored to zero,
and (c) allocations to Class B limited partners in amounts equal to
deductions for depreciation and amortization previously allocated to them
with respect to the specific partnership property sold but not in excess of
the amount of gain on sale recognized by the Partnership with respect to
the sale of such property.
Investment in Joint Venture
Basis of Presentation
The Partnership does not have control over the operations of the
joint venture; however, it does exercise significant influence.
Accordingly, the Partnership's investment in the joint venture is
recorded using the equity method of accounting. The joint ventures
in which Fund II and II-OW hold an ownership interest follow the
same accounting policies as the Partnership.
Real Estate Assets
Real estate assets held by Fund II and II-OW are stated at cost
less accumulated depreciation. Major improvements and betterments
are capitalized when they extend the useful life of the related
asset. All repairs and maintenance are expensed as incurred.
Management continually monitors events and changes in circumstances
which could indicate that carrying amounts of real estate assets
may not be recoverable. When events or changes in circumstances are
present which indicate that the carrying amounts of real estate
assets may not be recoverable, management assesses the
recoverability of real estate assets by determining whether the
carrying value of such real estate assets will be recovered through
the future cash flows expected from the use of the asset and its
eventual disposition. Management has determined that there has been
no impairment in the carrying value of real estate assets held by
Fund II and II-OW or its affiliated joint ventures as of December
31, 2000.
Depreciation is calculated using the straight-line method over 25
years.
Revenue Recognition
All leases on real estate assets held by the joint venture are
classified as operating leases, and the related rental income is
recognized on a straight-line basis over the terms of the
respective leases.
Partners' Distributions and Allocations of Profit and Loss
Cash available for distribution and allocations of profit and loss
to the Partnership by Fund II and II-OW are made in accordance with
the terms of the individual joint venture agreement. Generally,
these items are allocated in proportion to the partners' respective
ownership interests. Cash is paid from the joint venture to the
Partnership on a quarterly basis.
Deferred Lease Acquisition Costs
Costs incurred to procure operating leases are capitalized and
amortized on a straight-line basis over the terms of the related
leases.
Cash and Cash Equivalents
For the purposes of the statements of cash flows, the Partnership considers
all highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents. Cash equivalents include cash and
short-term investments. Short-term investments are stated at cost, which
approximates fair value, and consist of investments in money market
accounts.
F-9
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year financial statement presentation.
2. RELATED-PARTY TRANSACTIONS
Due from affiliate at December 31, 2000 and 1999 represents the
Partnership's share of cash to be distributed from Fund II and II-OW for
the fourth quarters of 2000 and 1999.
The Partnership entered into a property management agreement with Wells
Management Company, Inc. ("Wells Management"), an affiliate of the general
partners. In consideration for supervising the management of the
Partnership's properties, the Partnership will generally pay Wells
Management management and leasing fees equal to (a) 3% of the gross
revenues for management and 3% of the gross revenues for leasing (aggregate
maximum of 6%) plus a separate fee for the one-time lease-up of newly
constructed properties in an amount not to exceed the fee customarily
charged in arm's-length transactions by others rendering similar services
in the same geographic area for similar properties or (b) in the case of
industrial and commercial properties, which are leased on a long-term net
basis (ten or more years), 1% of the gross revenues except for initial
leasing fees equal to 3% of the gross revenues over the first five years of
the lease term.
The Partnership incurred management and leasing fees and lease acquisition
costs, at the joint venture level, of $12,565, $12,033, and $10,264 for the
years ended December 31, 2000, 1999, and 1998, respectively, which were
paid to Wells Management.
The Company performs certain administrative services for the Partnership,
such as accounting and other Partnership administration, and incurs the
related expenses. Such expenses are allocated among the various Wells Real
Estate Funds based on time spent on each fund by individual administrative
personnel. In the opinion of management, such allocation is a reasonable
estimation of such expenses.
The general partners are also general partners of other Wells Real Estate
Funds. As such, there may exist conflicts of interest where the general
partners in the capacity as general partners of other Wells Real Estate
Funds may be in competition with the Partnership for tenants in similar
geographic markets.
3. INVESTMENT IN JOINT VENTURE
On March 1, 1988, the Partnership entered into a joint venture agreement
with Wells Fund II. The joint venture, Fund II and II-OW, was formed for
the purpose of investing in commercial real properties. Fund II and II-OW
owns the First Union Property directly and has investments in several other
joint ventures. The Partnership's ownership percentage interest in Fund II
and II-OW was approximately 5% at December 31, 2000 and 1999.
The following is a rollforward of the Partnership's investment in joint
venture for the years ended December 31, 2000 and 1999:
2000 1999
------------ ------------
Investment in joint venture, beginning of year $1,159,995 $1,235,838
Equity in income of joint venture 27,996 20,789
Distributions from joint venture (105,711) (96,632)
---------- ----------
Investment in joint venture, end of year $1,082,280 $1,159,995
========== ==========
F-10
Following are the financial statements for Fund II and II-OW:
Fund II and II-OW
(A Georgia Joint Venture)
Balance Sheets
December 31, 2000 and 1999
Assets
2000 1999
----------- -----------
Real estate assets, at cost:
Land $ 1,367,856 $ 1,367,856
Building and improvements, less accumulated depreciation of
$3,359,119 in 2000 and $2,991,452 in 1999 4,411,999 4,779,666
----------- -----------
Total real estate assets 5,779,855 6,147,522
Investment in joint ventures 14,576,863 15,654,420
Cash and cash equivalents 144,731 162,241
Due from affiliates 352,673 312,901
Accounts receivable 0 2,149
Prepaid expenses and other assets 8,234 24,473
----------- -----------
Total assets $20,862,356 $22,303,706
=========== ===========
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $ 5,089 $ 0
Partnership distributions payable 494,260 477,122
----------- -----------
Total liabilities 499,349 477,122
----------- -----------
Partners' capital:
Wells Real Estate Fund II 19,280,727 20,666,589
Wells Real Estate Fund II-OW 1,082,280 1,159,995
Total partners' capital 20,363,007 21,826,584
----------- -----------
Total liabilities and partners' capital $20,862,356 $22,303,706
=========== ===========
F-11
Fund II and II-OW
(A Georgia Joint Venture)
Statements of Income
for the Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
----------- ----------- -----------
Revenues:
Rental income $ 844,071 $ 717,676 $ 458,867
Equity in income of joint ventures 251,609 242,690 192,591
Interest income 11,806 367 481
----------- ----------- -----------
1,107,486 960,733 651,939
----------- ----------- -----------
Expenses:
Depreciation 367,667 367,667 367,667
Partnership administration 83,868 88,859 88,632
Legal and accounting 45,824 42,899 43,175
Management and leasing fees 69,128 61,295 45,887
Operating costs 1,484 366 2,914
Computer costs 12,273 8,148 5,906
----------- ----------- -----------
580,244 569,234 554,181
----------- ----------- -----------
Net income $ 527,242 $ 391,499 $ 97,758
=========== =========== ===========
Net income allocated to Wells Real Estate Fund II $ 499,246 $ 370,710 $ 92,568
=========== =========== ===========
Net income allocated to Wells Real Estate Fund II-OW $ 27,996 $ 20,789 $ 5,190
=========== =========== ===========
Fund II and II-OW
(A Georgia Joint Venture)
Statements of Partners' Capital
for the Years Ended December 31, 2000, 1999, and 1998
Wells Real Wells Real Total
Estate Estate Partners'
Fund II Fund II-OW Capital
----------- ----------- -----------
Balance, December 31, 1997 $23,435,256 $ 1,315,255 $24,750,511
Net income 92,568 5,190 97,758
Partnership distributions (1,508,760) (84,607) (1,593,367)
----------- ----------- -----------
Balance, December 31, 1998 22,019,064 1,235,838 23,254,902
Net income 370,710 20,789 391,499
Partnership distributions (1,723,185) (96,632) (1,819,817)
----------- ----------- -----------
Balance, December 31, 1999 20,666,589 1,159,995 21,826,584
Net income 499,246 27,996 527,242
Partnership distributions (1,885,108) (105,711) (1,990,819)
----------- ----------- -----------
Balance, December 31, 2000 $19,280,727 $ 1,082,280 $20,363,007
=========== =========== ===========
F-12
Fund II and II-OW
(A Georgia Joint Venture)
Statements of Cash Flows
for the Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
----------- ----------- ------------
Cash flows from operating activities:
Net income $ 527,242 $ 391,499 $ 97,758
----------- ----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 367,667 367,667 367,667
Equity in income of joint ventures (251,609) (242,690) (192,591)
Changes in assets and liabilities:
Accounts receivable 2,149 21,035 61,023
Prepaid expenses and other assets 16,239 18,355 18,355
Accounts payable 5,089 0 0
Due to affiliates 0 (8,988) 4,427
----------- ----------- -----------
Total adjustments 139,535 155,379 258,881
----------- ----------- -----------
Net cash provided by operating activities 666,777 546,878 356,639
----------- ----------- -----------
Cash flows from investing activities:
Distributions received from joint ventures 1,289,394 1,219,061 1,232,367
----------- ----------- -----------
Cash flows from financing activities:
Distributions to joint venture partners (1,973,681) (1,698,065) (1,579,031)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (17,510) 67,874 9,975
Cash and cash equivalents, beginning of year 162,241 94,367 84,392
----------- ----------- -----------
Cash and cash equivalents, end of year $ 144,731 $ 162,241 $ 94,367
=========== =========== ===========
The following is a rollforward of Fund II and II-OW investment in joint
venture for the years ended December 31, 2000 and 1999.
2000 1999
----------- -----------
Investment in joint venture, beginning of year $15,654,420 $16,676,111
Equity in income of joint venture 251,609 242,690
Distributions from joint venture (1,329,166) (1,264,381)
----------- -----------
Investment in joint venture, end of year $14,576,863 $15,654,420
=========== ===========
Fund II and II-OW's investment and percentage ownership in other joint
ventures at December 31, 2000 and 1999 are summarized as follows:
2000 1999
---------------------- ----------------------
Amount Percent Amount Percent
----------- ------- ----------- -------
Fund I and II Tucker $ 3,894,846 45% $ 4,058,192 45%
Fund I, II, II-OW, VI, and VII
Associates--Cherokee 3,814,737 54 4,053,105 54
Fund II and III Associates--The Atrium 5,054,727 61 5,615,740 61
Fund II and III Associates-- Brookwood
Grill 1,812,553 62 1,927,383 62
----------- -----------
$14,576,863 $15,654,420
=========== ===========
The following are descriptions of the joint ventures in which Fund II and
II-OW has investments.
F-13
Fund I and II Tucker
Tucker and Cherokee Commons were previously held in joint ventures between
Wells Real Estate Fund I ("Fund I") and Fund II and II-OW. The joint
ventures were formed for the purpose of owning, developing, and operating
Cherokee Commons and Tucker. In 1991, the Tucker and Cherokee Commons joint
ventures were merged into a new joint venture, the Fund I and II Tucker-
Cherokee Joint Venture. Under the terms of the joint venture agreement, the
ownership interests of Fund I and Fund II and II-OW in each individual
property remained unchanged.
On August 1, 1995, the Fund I and II Tucker-Cherokee joint venture assigned
its ownership in Cherokee Commons to the Fund I, II, II-OW, VI, and VII
Associates--Cherokee joint venture. Upon the assignment of Cherokee
Commons, the joint venture was renamed Fund I and II Tucker. Tucker is a
retail shopping center containing approximately 29,858 square feet and a
commercial office building complex containing approximately 67,465 square
feet in Tucker, DeKalb County, Georgia.
In 1996, one of the tenants in Tucker experienced a fire. In 1996, Fund I
and II Tucker received an initial insurance settlement of $143,944 for
damages to the building. In 1997, an additional $104,895 was received as a
final insurance settlement for the fire damages discussed above and storm
damages that occurred in 1997. In addition, a loss from the retirement of
real estate assets of $58,952 was incurred. Additional insurance proceeds
of $27,319 related to these damages were received in 1998 and are reflected
as a gain on real estate assets in the following statement of income.
F-14
Following are the financial statements for Fund I and II Tucker:
Fund I and II Tucker
(A Georgia Joint Venture)
Balance Sheets
December 31, 2000 and 1999
Assets
2000 1999
---------- ----------
Real estate assets, at cost:
Land $3,260,887 $3,260,887
Building and improvements, less accumulated depreciation of
$3,896,844 in 2000 and $3,405,038 in 1999 5,459,417 5,835,882
Construction in progress 0 0
---------- ----------
Total real estate assets 8,720,304 9,096,769
Cash and cash equivalents 117,239 123,617
Accounts receivable 222,778 125,772
Prepaid expenses and other assets 110,525 115,865
---------- ----------
Total assets $9,170,846 $9,462,023
========== ==========
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $ 69,099 $ 67,797
Partnership distributions payable 236,990 165,750
Due to affiliates 632,762 588,344
---------- ----------
Total liabilities 938,851 821,891
---------- ----------
Partners' capital:
Wells Real Estate Fund I 4,337,149 4,581,940
Fund II and II-OW 3,894,846 4,058,192
---------- ----------
Total partners' capital 8,231,995 8,640,132
---------- ----------
Total liabilities and partners' capital $9,170,846 $9,462,023
========== ==========
F-15
Fund I and II Tucker
(A Georgia Joint Venture)
Statements of Income
for the Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
---------- ---------- ----------
Revenues:
Rental income $1,390,599 $1,373,213 $1,242,332
Interest income 601 447 0
---------- ---------- ----------
1,391,200 1,373,660 1,242,332
---------- ---------- ----------
Expenses:
Operating costs, net of reimbursements 434,738 464,001 515,791
Depreciation 491,806 491,386 440,099
Management and leasing fees 121,946 158,269 164,378
Partnership administration 37,480 29,109 32,420
Legal and accounting 6,824 5,739 12,093
Gain on real estate assets 0 0 (27,319)
Bad debt expense 27,097 0 0
---------- ---------- ----------
1,119,891 1,148,504 1,137,462
---------- ---------- ----------
Net income $ 271,309 $ 225,156 $ 104,870
========== ========== ==========
Net income allocated to Wells Real Estate Fund I $ 149,464 $ 124,039 $ 57,773
========== ========== ==========
Net income allocated to Fund II and II-OW $ 121,845 $ 101,117 $ 47,097
========== ========== ==========
Fund I and II Tucker
(A Georgia Joint Venture)
Statements of Partners' Capital
for the Years Ended December 31, 2000, 1999, and 1998
Wells Real Fund II Total
Estate and Partners'
Fund I II-OW Capital
---------- ---------- ----------
Balance, December 31, 1997 $4,969,956 $4,280,651 $9,250,607
Net income 57,773 47,097 104,870
Partnership distributions (269,138) (170,937) (440,075)
---------- ---------- ----------
Balance, December 31, 1998 4,758,591 4,156,811 8,915,402
Net income 124,039 101,117 225,156
Partnership distributions (300,690) (199,736) (500,426)
---------- ---------- ----------
Balance, December 31, 1999 4,581,940 4,058,192 8,640,132
Net income 149,464 121,845 271,309
Partnership distributions (394,255) (285,191) (679,446)
---------- ---------- ----------
Balance, December 31, 2000 $4,337,149 $3,894,846 $8,231,995
========== ========== ==========
F-16
Funds I and II Tucker
(A Georgia Joint Venture)
Statements of Cash Flows
for the Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
--------- --------- ---------
Cash flows from operating activities:
Net income $ 271,309 $ 225,156 $ 104,870
--------- --------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 491,806 491,386 440,099
Gain on real estate assets 0 0 (27,319)
Changes in assets and liabilities:
Accounts receivable (97,006) (29,410) (16,647)
Prepaid expenses and other assets 5,340 6,316 (17,585)
Accounts payable and accrued expenses 1,302 2,833 (9,054)
Due to affiliates 44,418 39,712 67,404
--------- --------- ---------
Total adjustments 445,860 510,837 436,898
--------- --------- ---------
Net cash provided by operating activities 717,169 735,993 541,768
--------- --------- ---------
Cash flows from investing activities:
Investment in real estate (115,341) (260,522) (142,814)
Insurance proceeds 0 0 27,319
--------- --------- ---------
Net cash used in investing activities (115,341) (260,522) (115,495)
--------- --------- ---------
Cash flows from financing activities:
Distributions to joint venture partners (608,206) (401,234) (389,577)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (6,378) 74,237 36,696
Cash and cash equivalents, beginning of year 123,617 49,380 12,684
--------- --------- ---------
Cash and cash equivalents, end of year $ 117,239 $ 123,617 $ 49,380
========= ========= =========
Fund I, II, II-OW, VI, and VII Associates--Cherokee
In August 1995, Cherokee Commons was transferred to a new joint venture
between Fund I, Fund II and II-OW, Wells Real Estate Fund VI, L.P. ("Fund
VI"), and Wells Real Estate Fund VII, L.P. ("Fund VII"). The joint venture,
Fund I, II, II-OW, VI, and VII Associates--Cherokee, was formed for the
purpose of owning and operating Cherokee Commons, a retail shopping center
containing approximately 103,755 square feet located in Cherokee County,
Georgia. Percentage ownership interests in Fund I, II, II-OW, VI, and VII
Associates--Cherokee were determined at the time of formation based on
contributions. Under the terms of the joint venture agreement, Fund VI and
Fund VII each contributed approximately $1 million to the new joint venture
in return for a 10.7% ownership interest. Fund I's ownership interest in
the Cherokee joint venture changed from 30.6% to 24%, and Fund II and II-OW
joint venture's ownership interest changed from 69.4% to 54.6%. The $2
million in cash contributed to Cherokee was used to fund an expansion of
the property for an existing tenant.
F-17
Following are the financial statements for Fund I, II, II-OW, VI, and VII
Associates--Cherokee:
Fund I, II, II-OW, VI, and VII Associates--Cherokee
(A Georgia Joint Venture)
Balance Sheets
December 31, 2000 and 1999
Assets
2000 1999
---------- ----------
Real estate assets, at cost:
Land $1,219,704 $1,219,704
Building and improvements, less accumulated depreciation of
$3,606,079 in 2000 and $3,163,829 in 1999 5,624,924 6,067,174
---------- ----------
Total real estate assets 6,844,628 7,286,878
Cash and cash equivalents 214,940 206,540
Accounts receivable 31,356 27,703
Prepaid expenses and other assets 100,866 89,846
---------- ----------
Total assets $7,191,790 $7,610,967
========== ==========
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $ 23,716 $ 16,295
Refundable security deposits 23,839 18,562
Partnership distributions payable 197,191 192,184
Due to affiliates 137,334 122,272
---------- ----------
Total liabilities 382,080 349,313
---------- ----------
Partners' capital:
Wells Real Estate Fund I 1,498,120 1,618,133
Fund II and II-OW 3,814,737 4,053,105
Wells Real Estate Fund VI 749,777 796,558
Wells Real Estate Fund VII 747,076 793,858
---------- ----------
Total partners' capital 6,809,710 7,261,654
---------- ----------
Total liabilities and partners' capital $7,191,790 $7,610,967
========== ==========
F-18
Fund I, II, II-OW, VI and VII Associates--Cherokee
(A Georgia Joint Venture)
Statements of Income
for the Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
-------- -------- --------
Revenues:
Rental income $965,305 $945,222 $909,831
Interest income 78 68 84
-------- -------- --------
965,383 945,290 909,915
-------- -------- --------
Expenses:
Depreciation 442,250 447,969 444,660
Operating costs, net of reimbursements 24,557 37,583 35,715
Partnership administration 23,352 24,882 22,934
Management and leasing fees 74,422 94,149 82,517
Legal and accounting 6,180 5,624 7,363
Bad debt expense 0 0 18,664
-------- -------- --------
570,761 610,207 611,853
-------- -------- --------
Net income $394,622 $335,083 $298,062
======== ======== ========
Net income allocated to Wells Real Estate Fund I $ 94,800 $ 80,496 $ 71,604
======== ======== ========
Net income allocated to Fund II and II-OW $215,310 $182,825 $162,626
======== ======== ========
Net income allocated to Wells Real Estate Fund VI $ 42,256 $ 35,881 $ 31,916
======== ======== ========
Net income allocated to Wells Real Estate Fund VII $ 42,256 $ 35,881 $ 31,916
======== ======== ========
Fund I, II, II-OW, VI and VII Associates--Cherokee
(A Georgia Joint Venture)
Statements of Partners' Capital
for the Years Ended December 31, 2000, 1999, and 1998
Wells Real Fund II Wells Real Wells Real Total
Estate and Estate Estate Partners'
Fund I II-OW Fund VI Fund VII Capital
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 $1,863,173 $4,536,781 $ 891,482 $ 888,782 $8,180,218
Net income 71,604 162,626 31,916 31,916 298,062
Partnership distributions (193,285) (403,744) (79,238) (79,238) (755,505)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1998 1,741,492 4,295,663 844,160 841,460 7,722,775
Net income 80,496 182,825 35,881 35,881 335,083
Partnership distributions (203,855) (425,383) (83,483) (83,483) (796,204)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1999 1,618,133 4,053,105 796,558 793,858 7,261,654
Net income 94,800 215,310 42,256 42,256 394,622
Partnership distributions (214,813) (453,678) (89,037) (89,038) (846,566)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2000 $1,498,120 $3,814,737 $ 749,777 $ 747,076 $6,809,710
========== ========== ========== ========== ==========
F-19
Fund I, II, II-OW, VI, and VII Associates--Cherokee
(A Georgia Joint Venture)
Statements of Cash Flows
for the Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
--------- --------- ---------
Cash flows from operating activities:
Net income $ 394,622 $ 335,083 $ 298,062
--------- --------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 442,250 447,969 444,660
Changes in assets and liabilities:
Accounts receivable (3,653) 7,814 56,999
Prepaid expenses and other assets (11,020) 1,133 8,890
Accounts payable, accrued expenses, and
refundable security deposits 12,694 (72,272) 70,278
Due to affiliates 15,062 13,005 15,327
--------- --------- ---------
Total adjustments 455,333 397,649 596,154
--------- --------- ---------
Net cash provided by operating activities 849,955 732,732 894,216
--------- --------- ---------
Cash flows from investing activities:
Investment in real estate 0 (14,148) (5,771)
--------- --------- ---------
Cash flows from financing activities:
Distributions to joint venture partners (841,555) (734,858) (818,790)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 8,400 (16,274) 69,655
Cash and cash equivalents, beginning of year 206,540 222,814 153,159
--------- --------- ---------
Cash and cash equivalents, end of year $ 214,940 $ 206,540 $ 222,814
========= ========= =========
Fund II and III Associates
On April 3, 1989, Fund II and II-OW entered into a joint venture agreement
with Wells Real Estate Fund III, L.P ("Fund III"). The new joint venture,
Fund II and III Associates, was formed for the purpose of investing in
commercial and industrial real properties. In April 1989, Fund II and III
Associates acquired The Atrium. In 1991, Fund II and II-OW contributed its
interest in a parcel of land known as the 880 Property located in Roswell,
Georgia, to Fund II and III Associates. The property is a 5.8-acre tract of
land. A restaurant was developed on 1.5 acres of the 880 Property and is
currently operating as the Brookwood Grill restaurant ("Fund II and III
Associates--Brookwood Grill"). The remaining 4.3 acres of the 880 Property
was transferred at cost to the Fund II, III, VI, and VII Associates joint
venture during 1995. Fund II and III Associates' investment in this
transferred parcel of the 880 Property was $1,305,317 and $1,406,591 at
December 31, 2000 and 1999, respectively, which represented a 24% interest
for each year.
The Atrium was fully occupied from inception through June 1996, at which
time the previous tenant's lease expired. In March 1997, a lease was signed
with a new tenant for the entire building and the new tenant began paying
rent in May 1997. The lease term is for five years with an option to renew
for an additional five years. There is a no-cause cancellation provision at
the end of the first three-year period. If this no-cause cancellation is
exercised, the tenant would be required to pay unamortized, up-front tenant
improvement costs. The cost of completing the required tenant improvements
and outside broker commissions was funded out of reserves and contributions
by Fund II and II-OW and Fund III.
F-20
Following are the financial statements for Fund II and III Associates--The
Atrium:
Fund II and III Associates--The Atrium
(A Georgia Joint Venture)
Balance Sheets
December 31, 2000 and 1999
Assets
2000 1999
---------- ----------
Real estate assets, at cost:
Land $1,504,743 $1,504,743
Building and improvements, less accumulated depreciation of
$7,113,487 in 2000 and $6,301,682 in 1999 6,274,702 7,093,742
---------- ----------
Total real estate assets 7,779,445 8,598,485
Cash and cash equivalents 240,314 89,170
Accounts receivable 23,202 30,018
Prepaid expenses and other assets 123,399 213,143
---------- ----------
Total assets $8,166,360 $8,930,816
========== ==========
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 104,321 $ 1,801
Partnership distributions payable 149,227 101,012
---------- ----------
Total liabilities 253,548 102,813
---------- ----------
Partners' capital:
Fund II and II-OW 5,054,727 5,615,740
Wells Real Estate Fund III 2,858,085 3,212,263
---------- ----------
Total partners' capital 7,912,812 8,828,003
---------- ----------
Total liabilities and partners' capital $8,166,360 $8,930,816
========== ==========
F-21
Fund II and III Associates--The Atrium
(A Georgia Joint Venture)
Statements of Loss
for the Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
---------- ---------- ----------
Revenues:
Rental income $1,468,784 $1,470,144 $1,470,144
Other income 0 4,000 13,280
---------- ---------- ----------
1,468,784 1,474,144 1,483,424
---------- ---------- ----------
Expenses:
Depreciation 877,240 867,720 866,778
Operating costs, net of reimbursements 723,744 692,066 699,550
Management and leasing fees 185,035 179,762 186,102
Partnership administration 14,841 23,278 11,095
Legal and accounting 5,250 5,250 3,310
---------- ---------- ----------
1,806,110 1,768,076 1,766,835
---------- ---------- ----------
Net loss $ (337,326) $ (293,932) $ (283,411)
========== ========== ==========
Net loss allocated to Fund II and II-OW $ (206,781) $ (180,180) $ (173,731)
========== ========== ==========
Net loss allocated to Wells Real Estate Fund III $ (130,545) $ (113,752) $ (109,680)
========== ========== ==========
Fund II and III Associates--The Atrium
(A Georgia Joint Venture)
Statements of Partners' Capital
for the Years Ended December 31, 2000, 1999, and 1998
Fund II Wells Real Total
and Estate Partners'
II-OW Fund III Capital
---------- ---------- -----------
Balance, December 31, 1997 $6,760,950 $3,935,261 $10,696,211
Net loss (173,731) (109,680) (283,411)
Partnership distributions (405,758) (256,165) (661,923)
---------- ---------- -----------
Balance, December 31, 1998 6,181,461 3,569,416 9,750,877
Net loss (180,180) (113,752) (293,932)
Partnership distributions (385,541) (243,401) (628,942)
---------- ---------- -----------
Balance, December 31, 1999 5,615,740 3,212,263 8,828,003
Net loss (206,781) (130,545) (337,326)
Partnership distributions (354,232) (223,633) (577,865)
---------- ---------- -----------
Balance, December 31, 2000 $5,054,727 $2,858,085 $ 7,912,812
========== ========== ===========
F-22
Fund II and III Associates--The Atrium
(A Georgia Joint Venture)
Statements of Cash Flows
for the Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
---------- ---------- ----------
Cash flows from operating activities:
Net loss $ (337,326) $ (293,932) $ (283,411)
---------- ---------- ----------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 877,240 867,720 866,778
Changes in assets and liabilities:
Accounts receivable 6,816 (11,904) 836
Prepaid expenses and other assets 89,744 89,745 89,745
Accounts payable 102,520 (2,786) (146,779)
Due to affiliates 0 0 (3,829)
---------- ---------- ----------
Total adjustments 1,076,320 942,775 806,751
---------- ---------- ----------
Net cash provided by operating activities 738,994 648,843 523,340
---------- ---------- ----------
Cash flows from investing activities:
Investment in real estate assets (58,200) (23,401) 0
---------- ---------- ----------
Cash flows from financing activities:
Distributions to joint venture partners (529,650) (665,154) (675,743)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 151,144 (39,712) (152,403)
Cash and cash equivalents, beginning of year 89,170 128,882 281,285
---------- ---------- ----------
Cash and cash equivalents, end of year $ 240,314 $ 89,170 $ 128,882
========== ========== ==========
Supplemental disclosure of noncash activities:
Write-off of fully depreciated fixed assets $ 65,435 $ 0 $ 0
========== ========== ==========
F-23
Following are the financial statements for Fund II and III Associates--
Brookwood Grill:
Fund II and III Associates--Brookwood Grill
(A Georgia Joint Venture)
Balance Sheets
December 31, 2000 and 1999
Assets
2000 1999
---------- ----------
Real estate assets, at cost:
Land $ 745,223 $ 745,223
Building and improvements, less accumulated depreciation of
$437,759 in 2000 and $383,745 in 1999 835,054 889,068
---------- ---------
Total real estate assets 1,580,277 1,634,291
Investment in joint venture 1,305,317 1,406,591
Cash and cash equivalents 57,515 65,627
Due from affiliate 69,758 60,193
Accounts receivable 38,714 41,060
Prepaid expenses and other assets 6,344 11,912
---------- ----------
Total assets $3,057,925 $3,219,674
========== ==========
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 4,580 $ 0
Due to affiliate 917 2,405
Partnership distributions payable 145,528 126,201
---------- ----------
Total liabilities 151,025 128,606
---------- ----------
Partners' capital:
Fund II and II-OW 1,812,553 1,927,383
Wells Real Estate Fund III 1,094,347 1,163,685
---------- ----------
Total partners' capital 2,906,900 3,091,068
---------- ----------
Total liabilities and partners' capital $3,057,925 $3,219,674
========== ==========
F-24
Fund II and III Associates--Brookwood Grill
(A Georgia Joint Venture)
Statements of Income
for the Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
-------- -------- --------
Revenues:
Rental income $224,801 $224,801 $225,100
Equity in income of joint venture 55,489 81,669 78,791
-------- -------- --------
280,290 306,470 303,891
-------- -------- --------
Expenses:
Depreciation 54,014 54,014 54,014
Operating costs, net of reimbursements (13,375) (11,565) (31,540)
Management and leasing fees 25,320 30,096 23,348
Partnership administration 14,019 5,853 3,708
Legal and accounting 5,869 5,252 3,200
-------- -------- --------
85,847 83,650 52,730
-------- -------- --------
Net income $194,443 $222,820 $251,161
======== ======== ========
Net income allocated to Fund II and II-OW $121,235 $138,928 $156,599
======== ======== ========
Net income allocated to Wells Real Estate Fund III $ 73,208 $ 83,892 $ 94,562
======== ======== ========
Fund II and III Associates--Brookwood Grill
(A Georgia Joint Venture)
Statements of Partners' Capital
for the Years Ended December 31, 2000, 1999, and 1998
Fund II Wells Real Total
and Estate Partners'
II-OW Fund III Capital
---------- ---------- ----------
Balance, December 31, 1997 $2,156,463 $1,302,017 $3,458,480
Net income 156,599 94,562 251,161
Partnership distributions (270,886) (163,576) (434,462)
---------- ---------- ----------
Balance, December 31, 1998 2,042,176 1,233,003 3,275,179
Net income 138,928 83,892 222,820
Partnership distributions (253,721) (153,210) (406,931)
---------- ---------- ----------
Balance, December 31, 1999 1,927,383 1,163,685 3,091,068
Net income 121,235 73,208 194,443
Partnership distributions (236,065) (142,546) (378,611)
---------- ---------- ----------
Balance, December 31, 2000 $1,812,553 $1,094,347 $2,906,900
========== ========== ==========
F-25
Fund II and III Associates--Brookwood Grill
(A Georgia Joint Venture)
Statements of Cash Flows
for the Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
--------- --------- ---------
Cash flows from operating activities:
Net income $ 194,443 $ 222,820 $ 251,161
--------- --------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 54,014 54,014 54,014
Equity in income of joint venture (55,489) (81,669) (78,791)
Changes in assets and liabilities:
Accounts receivable 2,346 25,958 22,739
Prepaid expenses and other assets 5,568 5,568 5,568
Accounts payable 4,580 (1,200) (2,679)
Due to affiliates (1,488) (1,489) (1,487)
--------- --------- ---------
Total adjustments 9,531 1,182 (636)
--------- --------- ---------
Net cash provided by operating activities 203,974 224,002 250,525
--------- --------- ---------
Cash flows from investing activities:
Distributions received from joint venture 147,198 173,171 160,812
--------- --------- ---------
Cash flows from financing activities:
Distributions to joint venture partners (359,284) (405,502) (391,702)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (8,112) (8,329) 19,635
Cash and cash equivalents, beginning of year 65,627 73,956 54,321
--------- --------- ---------
Cash and cash equivalents, end of year $ 57,515 $ 65,627 $ 73,956
========= ========= =========
Fund II, III, VI, and VII Associates
On January 1, 1995, the Fund II and III Associates joint venture entered
into a joint venture agreement with Fund VI and Fund VII. The joint
venture, Fund II, III, VI, and VII Associates, was formed for the purpose
of acquiring, developing, operating, and selling real properties. During
1995, Fund II and III Associates contributed a 4.3-acre tract of land from
its 880 Property--Holcomb Bridge to the Fund II, III, VI, and VII
Associates joint venture. During 1996, 1997, and 1998, Fund VI and Fund VII
made contributions to the joint venture. Ownership percentage interests
were recomputed accordingly. Development was substantially completed in
1996 on two retail and office buildings containing a total of approximately
49,500 square feet.
F-26
The following are the financial statements for Fund II, III, VI, and VII
Associates:
Fund II, III, VI, and VII Associates
(A Georgia Joint Venture)
Balance Sheets
December 31, 2000 and 1999
Assets
2000 1999
---------- ----------
Real estate assets, at cost:
Land $1,325,242 $1,325,242
Building and improvements, less accumulated depreciation of
$1,654,520 in 2000 and $1,299,227 in 1999 4,063,639 4,418,932
---------- ----------
Total real estate assets 5,388,881 5,744,174
Cash and cash equivalents 88,044 189,404
Accounts receivable 151,886 162,464
Prepaid expenses and other assets 158,872 213,443
---------- ----------
Total assets $5,787,683 $6,309,485
========== ==========
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $ 82,072 $ 87,926
Partnership distributions payable 154,874 250,075
---------- ----------
236,946 338,001
---------- ----------
Partners' capital:
Fund II and III Associates 1,305,317 1,406,591
Wells Real Estate Fund VI 1,456,417 1,569,430
Wells Real Estate Fund VII 2,789,003 2,995,463
---------- ----------
Total partners' capital 5,550,737 5,971,484
---------- ----------
Total liabilities and partners' capital $5,787,683 $6,309,485
========== ==========
F-27
Fund II, III, VI, and VII Associates
(A Georgia Joint Venture)
Statements of Income
for the Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
-------- -------- --------
Revenues:
Rental income $869,390 $953,952 $872,978
Other income 0 23,843 36,000
-------- -------- --------
869,390 977,795 908,978
-------- -------- --------
Expenses:
Depreciation 355,293 415,165 376,290
Operating costs, net of reimbursements 70,693 68,691 85,983
Management and leasing fees 111,567 129,798 97,701
Legal and accounting 4,513 4,952 6,509
Partnership administration 22,646 19,891 14,926
Bad debt expense 74,145 0 0
-------- -------- --------
638,857 638,497 581,409
-------- -------- --------
Net income $230,533 $339,298 $327,569
======== ======== ========
Net income allocated to Fund II and III Associates $ 55,489 $ 81,669 78,791
======== ======== ========
Net income allocated to Wells Real Estate Fund VI $ 61,921 $ 91,135 87,914
======== ======== ========
Net income allocated to Wells Real Estate Fund VII $113,123 $166,494 $160,864
======== ======== ========
Fund II, III, VI, and VII Associates
(A Georgia Joint Venture)
Statements of Partners' Capital
for the Years Ended December 31, 2000, 1999, and 1998
Fund II Wells Wells Real Total
and III Real Estate Estate Partners'
Associates Fund VI Fund VII Capital
---------- ----------- ---------- ----------
Balance, December 31, 1997 $1,608,215 $1,789,811 $3,252,856 $6,650,882
Partnership contributions 0 4,600 154,049 158,649
Net income 78,791 87,914 160,864 327,569
Partnership distributions (179,199) (199,945) (365,964) (745,108)
---------- ---------- ---------- ----------
Balance, December 31, 1998 1,507,807 1,682,380 3,201,805 6,391,992
Net income 81,669 91,135 166,494 339,298
Partnership distributions (182,885) (204,085) (372,836) (759,806)
---------- ---------- ---------- ----------
Balance, December 31, 1999 1,406,591 1,569,430 2,995,463 5,971,484
Net income 55,489 61,921 113,123 230,533
Partnership distributions (156,763) (174,934) (319,583) (651,280)
---------- ---------- ---------- ----------
Balance, December 31, 2000 $1,305,317 $1,456,417 $2,789,003 $5,550,737
========== ========== ========== ==========
F-28
Fund II, III, VI, and VII Associates
(A Georgia Joint Venture)
Statements of Cash Flows
for the Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net income $230,533 $339,298 $327,569
-------- -------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 355,293 415,165 376,290
Changes in assets and liabilities:
Accounts receivable 10,578 (51,004) (56,936)
Prepaid expenses and other assets 54,571 20,522 35,603
Accounts payable and accrued expenses (5,854) (104,146) 21,296
-------- -------- --------
Total adjustments 414,588 280,537 376,253
-------- -------- --------
Net cash provided by operating activities 645,121 619,835 703,822
-------- -------- --------
Cash flows from investing activities:
Investment in real estate 0 (19,772) (102,122)
-------- -------- --------
Cash flows from financing activities:
Contributions from joint venture partners 0 0 154,996
Distributions to joint venture partners (746,481) (719,447) (667,299)
-------- -------- --------
Net cash used in financing activities (746,481) (719,447) (512,303)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (101,360) (119,384) 89,397
Cash and cash equivalents, beginning of year 189,404 308,788 219,391
-------- -------- --------
Cash and cash equivalents, end of year $ 88,044 $189,404 $308,788
======== ======== ========
Supplemental disclosure of noncash activities:
Deferred project costs contributed to joint venture $ 0 $ 0 $ 3,653
======== ======== ========
4. INCOME TAX BASIS NET INCOME AND PARTNERS' CAPITAL
The Partnership's income tax basis net income for the years ended December
31, 2000, 1999, and 1998 is calculated as follows:
2000 1999 1998
------- ------- -------
Financial statement net income (loss) $28,101 $20,918 $ 5,190
Increase (decrease) in net income (loss) resulting from:
Depreciation expense for financial reporting
purposes in excess of amounts for income tax
purposes 33,612 35,061 35,189
Expenses deductible when paid for income tax
purposes, accrued for financial reporting purposes 1,352 1,149 1,713
Rental income recognized for income tax purposes
(less than) in excess of amounts for financial
reporting purposes 116 (349) 1,485
Loss on retirement for income tax purposes 0 0 0
Involuntary conversion for income tax purposes 0 0 0
Meals and entertainment 38 52 5
------- ------- -------
Income tax basis net income $63,219 $56,831 $43,582
======= ======= =======
F-29
The Partnership's income tax partners' capital at December 31, 2000, 1999,
and 1998 computed as follows:
2000 1999 1998
---------- ---------- ----------
Financial statement partners' capital $1,082,680 $1,162,395 $1,236,239
Increase (decrease) in partners' capital resulting
from:
Depreciation expense for financial reporting
purposes in excess of amounts for income
tax purposes 171,019 137,407 102,346
Joint venture change in ownership (1,427) (1,427) (1,427)
Accumulated expenses deductible when paid
for income tax purposes, accrued for
financial reporting purposes 32,096 30,744 29,595
Accumulated rental income accrued for
financial reporting in excess of amounts
for income tax purposes (6,313) (6,429) (6,080)
Partnership distributions payable 26,342 26,536 18,974
Other (3,095) (3,133) (3,184)
---------- ---------- ----------
Income tax basis partners' capital $1,301,302 $1,346,093 $1,376,463
========== ========== ==========
5. RENTAL INCOME
The future minimum rental income due from the Partnership's respective
ownership interest in the joint venture under noncancelable operating
leases at December 31, 2000 is as follows:
Year ending December 31:
2001 $138,610
2002 75,982
2003 38,724
2004 28,228
2005 23,809
Thereafter 100,227
--------
$405,580
========
Three tenants contributed approximately 28%, 26%, and 10% of rental income.
In addition, two tenants will contribute approximately 43% and 17% of
future minimum rental income.
The future minimum rental income due Fund II and II-OW for the First Union
Property under noncancelable operating leases at December 31, 2000 is as
follows:
Year ending December 31:
2001 $281,357
One tenant at the First Union Property contributed 100% of rental income
for the year ended December 31, 2000 and will contribute 100% of future
minimum rental income.
F-30
The future minimum rental income due Fund I and II Tucker under
noncancelable operating leases at December 31, 2000 is as follows:
Year ending December 31:
2001 $1,105,038
2002 842,503
2003 463,520
2004 206,361
2005 122,848
Thereafter 344,503
----------
$3,084,773
==========
One tenant contributed 10% of rental income for the year ended December 31,
2000 and will contribute approximately 19% of future minimum rental income.
The future minimum rental income due Fund I, II, II-OW, VI, and VII
Associates--Cherokee under noncancelable operating leases at December 31,
2000 is as follows:
Year ending December 31:
2001 $ 951,376
2002 908,795
2003 819,757
2004 689,164
2005 653,219
Thereafter 3,159,986
----------
$7,182,297
==========
One tenant contributed approximately 61% of rental income for the year
ended December 31, 2000 and will contribute approximately 84% of future
minimum rental income.
The future minimum rental income due Fund II and III Associates--The Atrium
under noncancelable operating leases at December 31, 2000 is as follows:
Year ending December 31:
2001 $1,488,000
2002 620,000
----------
$2,108,000
==========
One tenant at The Atrium contributed 100% of rental income for the year
ended December 31, 2000 and will contribute 100% of future minimum rental
income.
The future minimum rental income due Fund II and III Associates--Brookwood
Grill under noncancelable operating leases at December 31, 2000 is as
follows:
Year ending December 31:
2001 $249,550
2002 25,995
========
$275,545
========
One tenant contributed 100% of rental income for the year ended December
31, 2000 and will contribute 100% of future minimum rental income.
F-31
The future minimum rental income due Fund II, III, VI, and VII Associates
under noncancelable operating leases at December 31, 2000 is as follows:
Year ending December 31:
2001 $ 816,533
2002 539,270
2003 255,097
2004 219,315
2005 127,850
Thereafter 21,308
----------
$1,979,377
==========
Three tenants contributed approximately 15%, 14%, and 13% of rental income
for the year ended December 31, 2000. In addition, four tenants will
contribute approximately 33%, 13%, 13%, and 11% of future minimum rental
income.
6. QUARTERLY RESULTS (UNAUDITED)
Presented below is a summary of the unaudited quarterly financial
information for the years ended December 31, 2000 and 1999:
2000 Quarters Ended
-------------------------------------------------
March 31 June 30 September 30 December 31
--------- --------- -------------- ------------
Revenues $8,632 $7,300 $5,825 $6,344
Net income 8,632 7,300 5,825 6,344
Net income allocated to Class A limited
partners 8,632 7,300 5,825 6,344
Net income per Class A limited partner
unit outstanding $ 1.42 $ 1.21 $ 0.96 $ 1.05
Cash distribution per Class A limited
partner unit outstanding 4.38 4.53 4.53 4.35
1999 Quarters Ended
-------------------------------------------------
March 31 June 30 September 30 December 31
--------- --------- -------------- ------------
Revenues $3,551 $4,037 $8,376 $4,954
Net income 3,551 4,037 8,376 4,954
Net income allocated to Class A limited
partners 3,551 4,037 8,376 4,954
Net income per Class A limited partner
unit $ 0.59 $ 0.66 $ 1.38 $ 0.82
Cash distribution per Class A limited
partner unit 3.73 3.45 4.07 4.38
7. COMMITMENTS AND CONTINGENCIES
Management, after consultation with legal counsel, is not aware of any
significant litigation or claims against the Partnership or the Company. In
the normal course of business, the Partnership or the Company may become
subject to such litigation or claims.
F-32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wells Real Estate Fund II,
Wells Real Estate Fund II-OW, and
Wells Real Estate Fund III, L.P.:
We have audited the accompanying balance sheets of THE ATRIUM BUILDING as of
December 31, 2000 and 1999 and the related statements of loss, partners'
capital, and cash flows for each of the three years in the period ended December
31, 2000. These financial statements are the responsibility of the building's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Atrium Building as of
December 31, 2000 and 1999 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000 in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
January 30, 2001
F-33
THE ATRIUM BUILDING
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
ASSETS
2000 1999
---------- ----------
REAL ESTATE ASSETS:
Land $1,504,743 $1,504,743
Building and improvements, less accumulated depreciation of $7,113,487 in
2000 and $6,301,681 in 1999 6,274,702 7,093,742
---------- ----------
Total real estate assets 7,779,445 8,598,485
CASH AND CASH EQUIVALENTS 240,314 89,170
ACCOUNTS RECEIVABLE 23,202 30,018
PREPAID AND OTHER ASSETS, net 123,399 213,143
---------- ----------
Total assets $8,166,360 $8,930,816
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
$ 149,227 $ 101,012
Distributions payable to partners 104,321 1,801
Accounts payable ---------- ----------
Total liabilities 253,548 102,813
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 4)
PARTNERS' CAPITAL:
Wells Real Estate Fund II 4,631,085 5,162,262
Wells Real Estate Fund II-OW 423,642 453,477
Wells Real Estate Fund III, L.P. 2,858,085 3,212,264
---------- ----------
Total partners' capital 7,912,812 8,828,003
---------- ----------
Total liabilities and partners' capital $8,166,360 $8,930,816
========== ==========
The accompanying notes are an integral part of these balance sheets.
F-34
THE ATRIUM BUILDING
STATEMENTS OF LOSS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
---------- ----------- -----------
REVENUES:
Rental income $1,468,784 $ 1,470,144 $ 1,470,144
---------- ----------- -----------
EXPENSES:
Depreciation 877,240 867,719 866,778
Operating costs, net of reimbursements 738,585 711,346 697,365
Management and leasing fees 185,035 179,762 186,102
Legal and accounting 5,250 5,250 3,310
---------- ----------- -----------
1,806,110 1,764,077 1,753,555
---------- ----------- -----------
NET LOSS $ (337,326) $ (293,933) $ (283,411)
========== =========== ===========
NET LOSS ALLOCATED TO WELLS REAL ESTATE FUND II $ (195,784) $ (170,613) $ (164,506)
========== =========== ===========
NET LOSS ALLOCATED TO WELLS REAL ESTATE FUND II-OW $ (10,997) $ (9,568) $ (9,225)
========== =========== ===========
NET LOSS ALLOCATED TO WELLS REAL ESTATE FUND III, L.P. $ (130,545) $ (113,752) $ (109,680)
========== =========== ===========
The accompanying notes are an integral part of these statements.
F-35
THE ATRIUM BUILDING
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
Wells Real Wells Real Wells Real Total
Estate Estate Estate Partners'
Fund II Fund II-OW Fund III, L.P. Capital
------------ ------------- -------------- -------------
BALANCE, December 31, 1997 $6,246,662 $514,288 $3,935,260 $10,696,210
Net loss (164,506) (9,225) (109,680) (283,411)
Distributions (384,212) (21,546) (256,164) (661,922)
------------ ------------- -------------- -------------
BALANCE, December 31, 1998 5,697,944 483,517 3,569,416 9,750,877
Net loss (170,613) (9,568) (113,752) (293,933)
Distributions (365,069) (20,472) (243,400) (628,941)
------------ ------------- -------------- -------------
BALANCE, December 31, 1999 5,162,262 453,477 3,212,264 8,828,003
------------ ------------- -------------- -------------
Net loss (195,784) (10,997) (130,545) (337,326)
Distributions (335,393) (18,839) (223,633) (577,865)
------------ ------------- -------------- -------------
BALANCE, December 31, 2000 $4,631,085 $423,641 $2,858,086 $ 7,912,812
============ ============= ============== =============
The accompanying notes are an integral part of these statements.
F-36
THE ATRIUM BUILDING
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
---------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (337,326) $(293,933) $(283,411)
---------- --------- ---------
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 877,240 867,719 866,778
Changes in assets and liabilities:
Accounts receivable 6,816 (11,904) 836
Prepaid expenses and other assets, net 89,744 89,745 89,745
Accounts payable 102,520 (2,786) (146,779)
Due to affiliates 0 0 (3,829)
---------- --------- ---------
Total adjustments 1,076,320 942,774 806,751
---------- --------- ---------
Net cash provided by operating activities 738,994 648,841 523,340
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate assets (58,200) (23,400) 0
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to partners (529,650) (665,153) (675,743)
---------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 151,144 (39,712) (152,403)
CASH AND CASH EQUIVALENTS, beginning of year 89,170 128,882 281,285
---------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 240,314 $ 89,170 $ 128,882
========== ========= =========
The accompanying notes are an integral part of these statements.
F-37
THE ATRIUM BUILDING
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
The Atrium Building ("Atrium") is a four-story office building located in
Houston, Harris County, Texas. The building is owned by Fund II and III
Associates, a joint venture between Wells Real Estate Fund II ("Fund II"),
Wells Real Estate Fund II-OW ("Fund II-OW"), and Wells Real Estate Fund
III, L.P. ("Fund III). Fund II owns 58% of Atrium, Fund II-OW owns 3% of
Atrium, and Fund III owns 39% of Atrium at December 31, 2000. Allocation of
net loss and distributions are made in accordance with ownership
percentages.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Income Taxes
Atrium is not deemed to be a taxable entity for federal income tax
purposes.
Real Estate Assets
Real estate assets are stated at cost, less accumulated depreciation. Major
improvements and betterments are capitalized when they extend the useful
life of the related asset. All repairs and maintenance are expensed as
incurred.
Management continually monitors events and changes in circumstances which
could indicate that carrying amounts of real estate assets may not be
recoverable. When events or changes in circumstances are present which
indicate that the carrying amounts of real estate assets may not be
recoverable, management assesses the recoverability of real estate assets
by determining whether the carrying value of such real estate assets will
be recovered through the future cash flows expected from the use of the
asset and its eventual disposition. Management has determined that there
has been no impairment in the carrying value of Atrium as of December 31,
2000.
Depreciation is calculated using the straight-line method over 25 years.
Revenue Recognition
The lease on Atrium is classified as an operating lease, and the related
rental income is recognized on a straight-line basis over the term of the
lease.
F-38
Deferred Lease Acquisition Costs
Costs incurred to procure operating leases are capitalized and amortized on
a straight-line basis over the terms of the related leases.
Cash and Cash Equivalents
For the purposes of the statements of cash flows, Atrium considers all
highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents. Cash equivalents include cash and
short-term investments. Short-term investments are stated at cost, which
approximates fair value, and consist of investments in money market
accounts.
2. RENTAL INCOME
The future minimum rental income due to Atrium under noncancelable
operating leases at December 31, 2000 is as follows:
Year ending December 31:
2001 $1,488,000
2002 620,000
----------
$2,108,000
==========
One tenant contributed 100% of rental income for the year ended December
31, 2000 and represents 100% of the future minimum rental income above.
This tenant has the option to renew an additional five-year lease term upon
the expiration of the current lease during 2002.
3. RELATED-PARTY TRANSACTIONS
Fund II and II-OW and Fund III entered into a property management agreement
with Wells Management Company, Inc. ("Wells Management"), an affiliate of
Fund II and II-OW and Fund III. In consideration for supervising the
management of Atrium, Fund II and II-OW and Fund III will generally pay
Wells Management management and leasing fees equal to (a) 3% of the gross
revenues for management and 3% of the gross revenues for leasing (aggregate
maximum of 6%) plus a separate fee for the one-time initial lease-up of
newly constructed properties in an amount not to exceed the fee customarily
charged in arm's-length transactions by others rendering similar services
in the same geographic area for similar properties or (b) in the case of
commercial properties which are leased on a long-term net basis (ten or
more years), 1% of the gross revenues except for initial leasing fees equal
to 3% of the gross revenues over the first five years of the lease term.
Atrium incurred management and leasing fees of $95,290, $90,018, and
$186,102, for the years ended December 31, 2000, 1999, and 1998,
respectively, which were paid to Wells Management.
4. COMMITMENTS AND CONTINGENCIES
Management, after consultation with legal counsel, is not aware of any
significant litigation or claims against Atrium or its partners. In the
normal course of business, Atrium or its partners may become subject to
such litigation or claims.
F-39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wells Real Estate Fund II
and Wells Real Estate Fund II-OW:
We have audited the accompanying balance sheets of THE FIRST UNION PROPERTY as
of December 31, 2000 and 1999 and the related statements of income, partners'
capital, and cash flows for each of the three years in the period ended December
31, 2000. These financial statements are the responsibility of the property's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The First Union Property as of
December 31, 2000 and 1999 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000 in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
January 30, 2001
F-40
THE FIRST UNION PROPERTY
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
ASSETS
2000 1999
------------ ------------
REAL ESTATE ASSETS:
Land $1,367,856 $1,367,856
Building and improvements, less accumulated depreciation of
$3,359,119 in 2000 and $2,991,452 in 1999 4,411,999 4,779,666
------------ ------------
Total real estate assets 5,779,855 6,147,522
CASH AND CASH EQUIVALENTS 140,391 193,979
ACCOUNTS RECEIVABLE 0 2,149
PREPAID EXPENSES AND OTHER ASSETS 6,118 24,473
------------ ------------
Total assets $5,926,364 $6,368,123
============ ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accrued payables $ 625 $ 0
Distributions payable to partners 139,764 196,127
------------ ------------
Total liabilities 140,389 196,127
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 4)
PARTNERS' CAPITAL:
Wells Real Estate Fund II 5,493,579 5,859,102
Wells Real Estate Fund II-OW 292,396 312,894
------------ ------------
Total partners' capital 5,785,975 6,171,996
------------ ------------
Total liabilities and partners' capital $5,926,364 $6,368,123
============ ============
The accompanying notes are an integral part of these balance sheets.
F-41
THE FIRST UNION PROPERTY
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
-------- -------- --------
REVENUES:
Rental income $844,071 $717,676 $458,867
-------- -------- --------
EXPENSES:
Depreciation 367,667 367,667 367,667
Legal and accounting 3,375 3,375 4,050
Management and leasing fees 69,128 61,295 45,887
Operating costs 12,730 13,797 10,878
Computer costs 0 625 0
-------- -------- --------
452,900 446,759 428,482
-------- -------- --------
NET INCOME $391,171 $270,917 $ 30,385
======== ======== ========
NET INCOME ALLOCATED TO WELLS REAL ESTATE FUND II $370,400 $256,531 $ 28,772
======== ======== ========
NET INCOME ALLOCATED TO WELLS REAL ESTATE FUND II-OW $ 20,771 $ 14,386 $ 1,613
======== ======== ========
The accompanying notes are an integral part of these statements.
F-42
THE FIRST UNION PROPERTY
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
Wells Real Wells Real Total
Estate Estate Partners'
Fund II Fund II-OW Capital
--------------- --------------- ---------------
BALANCE, December 31, 1997 $6,657,813 $357,684 $7,015,497
Net income 28,772 1,613 30,385
Distributions (442,449) (24,812) (467,261)
------------ ---------- ------------
BALANCE, December 31, 1998 6,244,136 334,485 6,578,621
Net income 256,531 14,386 270,917
Distributions (641,565) (35,977) (677,542)
------------ ---------- ------------
BALANCE, December 31, 1999 5,859,102 312,894 6,171,996
Net income 370,400 20,771 391,171
Distributions (735,923) (41,269) (777,192)
------------ ---------- ------------
BALANCE, December 31, 2000 $5,493,579 $292,396 $5,785,975
============ ========== ============
The accompanying notes are an integral part of these statements.
F-43
THE FIRST UNION PROPERTY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 391,171 $ 270,917 $ 30,385
--------- --------- ---------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 367,667 367,667 367,667
Changes in assets and liabilities:
Accounts receivable 2,149 21,035 61,024
Prepaid expenses and other assets 18,355 18,355 18,355
Accrued payables 625 0 0
Due to affiliate 0 (1,315) (3,246)
--------- --------- ---------
Total adjustments 388,796 405,742 443,800
--------- --------- ---------
Net cash provided by operating activities 779,967 676,659 474,185
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to partners (833,555) (599,540) (460,563)
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (53,588) 77,119 13,622
CASH AND CASH EQUIVALENTS, beginning of year 193,979 116,860 103,238
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 140,391 $ 193,979 $ 116,860
========= ========= =========
The accompanying notes are an integral part of these statements.
F-44
THE FIRST UNION PROPERTY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
The First Union Property ("First Union") is a two-story office building
located in Charlotte, North Carolina. The property is owned by Fund II and
Fund II-OW, a joint venture between Wells Real Estate Fund II ("Fund II")
and Wells Real Estate Fund II-OW ("Fund II-OW"). Fund II owns 95% of Fund
II and Fund II-OW and Fund II-OW owns 5% of Fund II and Fund II-OW at
December 31, 2000. Allocation of net income and distributions are made in
accordance with ownership percentages.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Income Taxes
First Union is not deemed to be a taxable entity for federal income tax
purposes.
Real Estate Assets
Real estate assets held by First Union are stated at cost, less accumulated
depreciation. Major improvements and betterments are capitalized when they
extend the useful life of the related asset. All repairs and maintenance
are expensed as incurred.
Management continually monitors events and changes in circumstances which
could indicate that carrying amounts of real estate assets may not be
recoverable. When events or changes in circumstances are present which
indicate that the carrying amounts of real estate assets may not be
recoverable, management assesses the recoverability of real estate assets
by determining whether the carrying value of such real estate assets will
be recovered through the future cash flows expected from the use of the
asset and its eventual disposition. Management has determined that there
has been no impairment in the carrying value of First Union as of December
31, 2000.
Depreciation is calculated using the straight-line method over 25 years.
Revenue Recognition
The lease on First Union is classified as an operating lease, and the
related rental income is recognized on a straight-line basis over the term
of the lease.
F-45
Deferred Lease Acquisition Costs
Costs incurred to procure operating leases are capitalized and amortized on
a straight-line basis over the terms of the related leases.
Cash and Cash Equivalents
For the purposes of the statements of cash flows, First Union considers all
highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents. Cash equivalents include cash and
short-term investments. Short-term investments are stated at cost, which
approximates fair value, and consist of investments in money market
accounts.
2. RENTAL INCOME
The future minimum rental income due to First Union under noncancelable
operating leases at December 31, 2000 is as follows:
Year ended December 31:
2001 $281,357
One tenant at First Union contributed 100% of rental income for the year
ended December 31, 2000 and represents 100% of the future minimum rental
income above. The lease for this tenant expires on April 30, 2001.
Management is currently negotiating with prospective tenants to lease 100%
of the space at this property effective May 1, 2001.
3. RELATED-PARTY TRANSACTIONS
Fund II and Fund II-OW entered into a property management agreement with
Wells Management Company, Inc. ("Wells Management"), an affiliate of Fund
II and Fund II-OW. In consideration for supervising the management of First
Union, Fund II and Fund II-OW will generally pay Wells Management
management and leasing fees equal to (a) 3% of the gross revenues for
management and 3% of the gross revenues for leasing (aggregate maximum of
6%) plus a separate fee for the one-time initial lease-up of newly
constructed properties in an amount not to exceed the fee customarily
charged in arm's-length transactions by others rendering similar services
in the same geographic area for similar properties or (b) in the case of
commercial properties which are leased on a long-term net basis (ten or
more years), 1% of the gross revenues except for initial leasing fees equal
to 3% of the gross revenues over the first five years of the lease term.
First Union incurred management and leasing fees and lease acquisition
costs of $50,773, $61,295, and $45,887, respectively, for the years ended
December 31, 2000, 1999, and 1998, respectively, which were paid to Wells
Management.
4. COMMITMENTS AND CONTINGENCIES
Management, after consultation with legal counsel, is not aware of any
significant litigation or claims against First Union and its partners. In
the normal course of business, First Union and its partners may become
subject to such litigation or claims.
F-46
EXHIBIT INDEX
-------------
(Wells Real Estate Fund II-OW)
The following documents are filed as exhibits to this report. Those
exhibits previously filed and incorporated herein by reference are identified
below by an asterisk. For each such asterisked exhibit, there is shown below the
description of the previous filing. Exhibits which are not required for this
report are omitted.
Exhibit
Number Description of Document
- ------- -----------------------
*4 Restated and Amended Certificate and Agreement of Limited
Partnership of Wells Real Estate Fund II-OW (Registration
Statement of Wells Real Estate Fund II-OW, Exhibit B to the
Prospectus, File No. 33-17977)
*10(a) Management Agreement between Registrant and Wells Management
Company, Inc. (Exhibit to Form 10-K of Wells Real Estate Fund II-
OW for the fiscal year ended December 31, 1990, File No. 0-17876)
*10(b) Leasing and Tenant Coordination Agreement between Registrant and
Wells Management Company, Inc. (Exhibit to Form 10-K of Wells
Real Estate Fund II-OW for the fiscal year ended December 31,
1990, File No. 0-17876)
*10(c) Purchase Agreement for the acquisition of Heritage Place at
Tucker dated April 25, 1986 (Exhibit 10(f) to Form 10-K of Wells
Real Estate Fund I for the fiscal year ended December 31, 1990,
File No. 0-14463)
*10(d) Joint Venture Agreement of Fund I and Fund II Tucker dated
January 9, 1987 (Exhibit 10(g) to Form 10-K of Wells Real Estate
Fund I for the fiscal year ended December 31, 1990, File No.
0-14463)
*10(e) Purchase Agreement for the acquisition of the Cherokee Commons
Shopping Center dated December 31, 1986 (Exhibit 10(h) to Form
10-K of Wells Real Estate Fund I for the fiscal year ended
December 31, 1990, File No. 0-14463)
*10(f) Joint Venture Agreement of Fund I and Fund II Cherokee dated June
27, 1987 (Exhibit 10(i) to Form 10-K of Wells Real Estate Fund I
for the fiscal year ended December 31, 1990, File No. 0-14463)
*10(g) Fund II - Fund II-OW Joint Venture Agreement dated March 1, 1988
(Exhibit 10(g) to Form 10-K of Wells Real Estate Fund II for the
fiscal year ended December 31, 1990, File No. 0-16518)
1
*10(h) Lease with IBM dated March 17, 1987 (Exhibit 10(h) to Form 10-K
of Wells Real Estate Fund II for the fiscal year ended December
31, 1990, File No. 0-16518)
*10(i) Purchase Agreement for the Acquisition of the Atrium at Nassau
Bay dated March 1, 1989 (Exhibit 10(i) to Form 10-K of Wells Real
Estate Fund II for the fiscal year ended December 31, 1990, File
No. 0-16518)
*10(j) Joint Venture Agreement of Fund II and Fund III Associates dated
March 1, 1989 (Exhibit to Post-Effective Amendment No. 2 to
Registration Statement of Wells Real Estate Fund III, L.P., File
No. 33-24063)
*10(k) First Amendment to Joint Venture Agreement of Fund II and Fund
III Associates dated April 1, 1989 (Exhibit 10(k) to Form 10-K of
Wells Real Estate Fund II for the fiscal year ended December 31,
1990, File No. 0-16518)
*10(l) Leases with Lockheed Engineering and Sciences Company, Inc.
(Exhibit 10(l) to Form 10-K of Wells Real Estate Fund II for the
fiscal year ended December 31, 1990, File No. 0-16518)
*10(m) Cost Sharing Agreement between Registrant, Wells Fund II and the
Fund II- Fund II-OW Joint Venture dated January 1, 1990 (Exhibit
10(m) to Form 10-K of Wells Real Estate Fund II for the fiscal
year ended December 31, 1990, File No. 0-16518)
*10(n) Amended and Restated Joint Venture Agreement of Fund I and Fund
II Tucker-Cherokee dated January 1, 1991 (Exhibit 10(j) to Form
10-K of Wells Real Estate Fund I for the fiscal year ended
December 31, 1991, File No. 0-14463)
*10(o) Amended and Restated Joint Venture Agreement of Fund II and Fund
III Associates (Exhibit 10(o) to Form 10-K of Wells Real Estate
Fund II for the fiscal year ended December 31, 1991, File No.
0-16518)
*10(p) Land and Building Lease Agreement between Fund II and Fund II-OW
and Brookwood Grill of Roswell, Inc. (Exhibit 10(p) to Form 10-K
of Wells Real Estate Fund II for the fiscal year ended December
31, 1991, File No. 0-16518)
*10(q) Assignment and Assumption of Lease dated September 20, 1991
between Fund II and Fund II-OW and Fund II and Fund III
Associates (Exhibit 10(q) to Form 10-K of Wells Real Estate Fund
II for the fiscal year ended December 31, 1991, File No. 0-16518)
2
*10(r) Lease Modification Agreement No. 3 with The Kroger Co. dated
December 21, 1993 (Exhibit 10(k) to Form 10-K of Wells Real
Estate Fund I for the fiscal year ended December 31, 1993, File
No. 0-14463)
*10(s) Lease Agreement with First Union National Bank of N.C. dated
March 31, 1994, and First Amendment to Lease Agreement dated
April 14, 1994 (Exhibit 10(s) to Form 10-K of Wells Real Estate
Fund II for the fiscal year ended December 31, 1994, File No. 0-
16518)
*10(t) Joint Venture Agreement of Fund II, III, VI and VII Associates
dated January 10, 1995 (Exhibit to Form 10-K of Wells Real Estate
Fund VI, L.P. for the fiscal year ended December 31, 1995, File
No. 0-23656)
*10(u) Joint Venture Agreement of Fund I, II, II-OW, VI and VII
Associates dated August 1, 1995 (Exhibit to Form 10-K of Wells
Real Estate Fund VI, L.P. for the fiscal year ended December 31,
1995, File No. 0-23656)
*10(v) First Amendment to Amended and Restated Joint Venture Agreement
of Fund I and Fund II Tucker (formerly Fund I and Fund II Tucker-
Cherokee) dated August 1, 1995 (Exhibit 10(m) to Form 10-K of
Wells Real Estate Fund I for the fiscal year ended December 31,
1995, File No. 0-14463)
*10(w) Custodial Agency Agreement between Wells Real Estate Fund II-OW
and NationsBank of Georgia, N.A. dated January 10, 1995 (Exhibit
to Form 10-K of Wells Real Estate Fund II-OW for the fiscal year
ended December 31, 1995, File No. 0-17876)
*10(x) Amended and Restated Custodial Agency Agreement between Wells
Real Estate Fund II-OW and NationsBank of Georgia, N.A. dated
August 1, 1995 (Exhibit to Form 10-K of Wells Real Estate Fund
II-OW for the fiscal year ended December 31, 1995, File No.
0-17876)
10(y) Amendment to Amended and Restated Certificate and Agreement of
Limited Partnership of Wells Real Estate Fund II-OW dated January
1, 2000 (filed herewith)
3