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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-15796
CORPORATE REALTY INCOME FUND I, L. P.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3311993
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
475 Fifth Avenue, New York, NY 10017
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 212-696-0701
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Depositary Units of Limited Partnership
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Documents Incorporated by Reference in this Form 10-K
None.
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CORPORATE REALTY INCOME FUND I, L. P.
Annual Report on Form 10-K
December 31, 2001
TABLE OF CONTENTS
PAGE
----
PART I........................................................................1
Item 1. Business.............................................................1
Item 2. Properties...........................................................6
Item 3. Legal Proceedings....................................................13
Item 4. Submission of Matters to a Vote of Security Holders..................13
PART II.......................................................................14
Item 5. Market for Registrant's Securities and Related Security Holder
Matters..............................................................14
Item 6. Selected Financial Data..............................................16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........20
Item 8. Financial Statements and Supplementary Data .........................21
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................22
PART III......................................................................23
Item 10. Directors and Executive Officers of the Registrant...................23
Item 11. Executive Compensation...............................................24
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters......................................25
Item 13. Certain Relationships and Related Transactions.......................26
ITEM IV.......................................................................28
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....28
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PART I
Item 1. Business.
General
Corporate Realty Income Fund I, L.P. ("Registrant") is a Delaware limited
partnership organized on November 25, 1985 pursuant to the Delaware Revised
Uniform Limited Partnership Act. The general partners of Registrant are 1345
Realty Corporation, a Delaware corporation (the "Corporate General Partner"),
and Robert F. Gossett, Jr. (the "Individual General Partner") (collectively, the
"General Partners"). The limited partners of Registrant are hereinafter
collectively referred to as the "Limited Partners."
Registrant organized two subsidiaries in March 1999 in connection with the
financing of its property at 475 Fifth Avenue, New York, New York. One
subsidiary, 475 Fifth Avenue Limited Partnership (the "Subsidiary Partnership"),
a Delaware limited partnership, owns 475 Fifth Avenue. The other subsidiary, 475
Fifth-GP, Inc. (the "Subsidiary Corporation"), a Delaware corporation, is the
sole general partner of the Subsidiary Partnership. Registrant is the sole
limited partner of the Subsidiary Partnership, with a 99% interest in all items
of income, gain, loss, and deduction, and the sole shareholder of the Subsidiary
Corporation.
Registrant's business consists of owning and leasing to others the
properties described in Item 2 below. Registrant's properties are leveraged as
described below.
On March 26, 1986, Registrant commenced an offering (the "Offering") of
$80,000,000 of depositary units of limited partnership interest (the "Units").
Registrant terminated the Offering in September 1987, having issued 3,200,000
Units ($80,000,000) and received net proceeds from the Offering (after deduction
for organization and offering expenses of $5,948,103) aggregating $74,051,897.
Since the Offering, Registrant has invested aggregate funds in excess of
$100,000,000 (including $40,000,000 of financing proceeds) in acquiring and
improving its properties, which currently number six.
Rental revenue from the following tenant at Registrant's properties each
accounted for more than 10% of Registrant's total rental revenue for each of the
years ended December 31, 1999, 2000 and 2001:
a. For 1999, GTE Directories Corporation ("GTE") as tenant in the
Directory Building (16%).
b. For 2000, GTE as tenant in the Directory Building (18%).
c. For 2001, GTE as tenant in the Directory Building (20%).
475 Fifth Avenue Loan
On August 9, 1999, the Subsidiary Partnership obtained a first mortgage
loan (the "475 Loan") from Heller Financial, Inc. ("Heller") in the amount of
$32,000,000. On such date, Registrant paid down approximately $23,381,000 of the
Fleet Loan (see "Fleet Bank Loan" below) to release the lien of the Fleet Loan
from 475 Fifth Avenue and subject the property to the lien of the 475 Loan. The
balance of proceeds borrowed by the Subsidiary Partnership from Heller after
payment of loan broker fees and costs of approximately $329,000 and other
closing costs of approximately $505,000, were used to provide cash to fund
capital improvements and leasing costs at 475 Fifth Avenue and to augment
working capital. As of March 18, 2002, the outstanding principal balance of the
475 Loan was approximately $31,423,355.
The 475 Loan is evidenced by a Consolidated and Restated Promissory Note, a
Mortgage Consolidation, Assignment of Rents, Security Agreement and Fixture
Filing, and a Hazardous Substance Indemnification Agreement (collectively, the
"475 Loan Agreements").
The 475 Loan matures on September 1, 2009 and bears interest at a rate of
8.27% per annum. The 475 Loan requires monthly payments of interest plus
principal payments based on a 30-year amortization schedule. The monthly
payments amount to $240,855.
No prepayments are permitted, in whole or in part, prior to the fourth loan
year (commencing September 2, 2002). From September 2, 2002, the Subsidiary
Partnership may prepay the 475 Loan, in full but not in part, on the first day
of any calendar month and upon at least 30 days' prior written notice, upon
payment of all accrued and unpaid interest and any fees and costs, together with
an additional payment equal to the greater of (i) an amount equal to one percent
(1%) of the then outstanding principal amount or (ii) a yield maintenance amount
equal to the present value of a series of monthly amounts assumed to be paid
from the date of prepayment through the maturity date of the 475 Loan. The yield
maintenance amount preserves for the holder of the 475 Loan Agreements (the
"Holder") a fixed yield tied to a United States Treasury obligation with a term
equal to that remaining on the 475 Loan on the date of prepayment.
Any payments not received by the Holder within 10 days after the due date
will incur a late charge equal to five percent (5%) of the amount of such
payment. Overdue amounts, whether at maturity, by acceleration, or otherwise
will bear interest at a rate equal to five percent (5%) above the otherwise
applicable interest rate.
The 475 Loan is secured by a first mortgage lien, an assignment of rents, a
security agreement, and a fixture filing on 475 Fifth Avenue, including the
improvements, machinery, equipment, mechanical systems, personal property,
management contracts, permits, certificates, licenses, agreements, trademarks,
trade names, books and records, and any monies on deposit with or for the
benefit of the Holder relating to this property. This loan also is secured by an
assignment of Registrant's management agreement with the Subsidiary Partnership.
Heller sold the 475 Loan pursuant to a mortgage-backed securitized plan as
of February 10, 2000. The 475 Loan is currently serviced by Midland Loan
Services.
The 475 Loan currently has three separate reserves:
1. The first, a property tax reserve, requires monthly payments sufficient
to enable all real estate taxes against 475 Fifth Avenue to be paid before they
become due and payable. The property tax reserve has a balance of approximately
$499,203 as of March 18, 2002;
2. The second, a replacement reserve, was funded with $200,000 of the
proceeds of the 475 Loan. This reserve is to be utilized to fund capital
improvements reasonably approved in advance by Heller. The replacement reserve
accrues interest for the Subsidiary Partnership's benefit at a "non-personal
money market rate." If the balance of this reserve falls below $200,000, the
Subsidiary Partnership must make monthly deposits of $4,000 until the balance of
the replacement reserve equals $200,000. As of March 18, 2002, the Subsidiary
Partnership had not utilized any funds from the replacement reserve and the
balance in this account was approximately $214,586;
3. The third, a repair reserve, was funded with $1,967,000 of the proceeds
of the 475 Loan and combined with an additional repair reserve of $533,000. This
reserve is utilized to fund capital improvements determined in the Subsidiary
Partnership's sole discretion. The capital improvements
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reserve accrues interest for the Subsidiary Partnership's benefit at a
"non-personal money market rate." As of March 18, 2002, the Subsidiary
Partnership had funded capital improvements aggregating approximately $2,264,365
from the repair reserve. The balance in this account was approximately $366,952.
The 475 Loan Agreements require the Holder's prior written consent to the
execution or material modification or amendment of any lease of 15,000 or more
rentable square feet at 475 Fifth Avenue.
An event of default under the 475 Loan Agreements includes the following:
1. the failure to make any payment within 10 days of the due date thereof;
2. any sale or transfer of 475 Fifth Avenue or any interest therein or any
controlling interest therein;
3. the imposition of any lien against 475 Fifth Avenue; and
4. filing of any petition under the United States Bankruptcy Code or any
similar law or regulation by or against Registrant, the Subsidiary Partnership,
or the Subsidiary Corporation.
Upon the occurrence of an event of default under the 475 Loan Agreements,
the Holder may enforce one or more of its remedies, including the following:
1. the right to declare all principal, interest, and other amounts due
under the 475 Loan to be due and payable immediately;
2. the right to require that 475 Fifth Avenue (including all equipment,
fixtures, agreements, and other rights and interests relating thereto) be sold
at auction to the highest bidder; and
3. to take possession of, manage, and collect the rents from the property.
The Subsidiary Partnership and Robert F. Gossett, Jr., the Individual
General Partner of Registrant, have agreed to indemnify and hold harmless the
Holder and its officers, directors, employees, shareholders, agents, and
affiliates from and against any and all liabilities, obligations, deficiencies,
demands, claims, actions, assessments, losses, costs, expenses, interest, fines,
penalties, and damages resulting from or arising out of or by virtue of the
presence of hazardous materials on or from 475 Fifth Avenue. Mr. Gossett also
has assumed joint and several liability to pay the Holder for certain losses,
damages, costs, and expenses incurred by the Holder in connection with the 475
Loan .
Fleet Bank Loan
Registrant's properties, other than 475 Fifth Avenue, are subject to the
lien of a first mortgage line-of-credit loan (the "Fleet Loan") from Fleet
National Bank ("Fleet"). On August 9, 1999, the Fleet Loan was divided into the
following two notes: a note in the amount of $22,594,880 and secured by a
mortgage on 475 Fifth Avenue, which note was repaid in full to Fleet and which
mortgage was consolidated with and into Heller's mortgage on that property; and,
a note in the amount of $26,405,120 and secured by Registrant's five other
properties. On October 12, 2000 Registrant entered into an Amended and Restated
Loan Agreement providing for maximum gross borrowings of $25,000,000. Registrant
obtained an advance of approximately $19,641,440 on October 12, 2000 under the
amended Fleet Loan, which included the outstanding balance of approximately
$13,141,440 under the Fleet Loan immediately prior to the amendment. During
2001, Registrant obtained
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additional advances aggregating $5,300,000 so that as of March 18, 2002, the
outstanding principal balance of the Fleet Loan was approximately $24,237,835.
The Fleet Loan is evidenced by an Amended and Restated Promissory Note, an
Amended and Restated Loan Agreement, and an Environmental Compliance and
Indemnification Agreement (collectively, the "Fleet Loan Agreements"). The Fleet
Loan is secured by a first mortgage lien, an assignment of rents, a security
agreement, and a fixture filing on and from each of Registrant's properties,
other than 475 Fifth Avenue, including the improvements, equipment, furnishings,
proceeds, books and records, and all payments related thereto, which consists of
the following five properties: the Monterey Park Building (formerly the American
Color Building and the GE Medical Systems Office Building); the Directory
Building; the Tumi Building (formerly the Austin Place Building); the Marathon
Oil Building; and the Alamo Towers.
The Fleet Loan has an initial maturity date of September 30, 2003 which,
subject to Registrant's compliance with certain financial covenants, may be
extended by Registrant for two additional one year periods. Upon exercising each
extension, Registrant must pay an extension fee equal to 0.25% of the then
outstanding principal balance. Registrant incurred fees and expenses aggregating
$609,259 upon amending the Fleet Loan, including a loan facility fee of
$250,000.
Registrant may borrow additional amounts during the term of the Fleet Loan
up to an aggregate of $25,000,000, which amount is permanently reduced by
required monthly payments of principal and by any prepayments or other
repayments of principal made by Registrant. As of the date of this Report,
available amounts for borrowing under the Fleet Loan had been reduced to
approximately $58,000.
The Fleet Loan bears interest on each advance of funds from the date of
such advance at Fleet's Prime Rate, plus one-half percent (0.5%) per annum or,
if Registrant so chooses, at the LIBOR rate (offered rates for Eurodollar
deposits) (any such rate, a "Fixed Rate"), plus two percent (2.0%) per annum.
The Prime Rate is the rate announced from time to time by Fleet as a means of
pricing some of its loans to customers (not necessarily the lowest rate actually
charged to any customer class or category). Registrant may elect to pay interest
based on a Fixed Rate on the whole or a portion of the outstanding principal
amount, upon notice to Fleet, but only in amounts of at least $1,000,000 and in
additional integral multiples of $100,000. As of March 18, 2002, the Prime Rate
was 4.75% (interest using this rate would be at 5.25%) and the 30-day Fixed Rate
was 1.9% (interest using this rate would be at 3.9%). The entire aggregate
outstanding balance of the Fleet Loan as of March 18, 2002 bears interest at the
rate of 3.9%.
The Fleet Loan requires monthly payments of interest plus principal
payments equal to 1/500th of the then outstanding principal balance. The Fleet
Loan may be prepaid at any time, on notice, in whole or in part (a minimum of
$1,000,000 and additional integral multiples of $100,000). Any such prepayment
will be without premium or penalty with respect to funds bearing interest based
on the Prime Rate or, if the prepayment is made on the last day of the
applicable interest period, with respect to funds bearing interest based on a
Fixed Rate; however, a prepayment at any other time of funds bearing interest
based on a Fixed Rate will require payment of a breakage fee, which guarantees
Fleet a fixed rate yield maintenance tied to United States Treasury obligations
for the period from the date of prepayment to the end of the applicable interest
period.
Any payments not received by Fleet within 10 days after the due date will
incur a late charge equal to four percent (4%) of the amount of such payment.
Overdue amounts, whether at maturity, by acceleration, or otherwise will bear
interest at a rate equal to four percent (4%) above the otherwise applicable
interest rate.
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The Fleet Loan Agreements contain continuing covenants regarding
Registrant's financial condition and the conduct of its operations. Registrant's
debt service coverage ratio (the ratio of projected net income from operations
of Registrant's properties, adjusted for depreciation, amortization, fees paid
to the General Partners, and step rent receivables, to projected loan
amortization payments) cannot be less than 1.50 to 1.0 and its loan to value
ratio (the ratio of the outstanding principal balance of the Fleet Loan to the
appraised value of the secured properties) cannot exceed fifty-five percent
(55%). In addition, Registrant must maintain a liquid net worth (cash,
short-term investments, and marketable securities) of at least $1,000,000 and
its total liabilities may not exceed sixty percent (60%) of the appraised value
of the secured properties. The Fleet Loan Agreements also provide that
Registrant may distribute to its partners up to 90% of the sum of its cumulative
net income from real estate operations, adjusted for depreciation, amortization
and write-off of step rent receivables. Compliance with this distribution
provision is tested as of the last day of each fiscal quarter for the period
from and including January 1, 2001 through the date as of which compliance is
tested. As of December 31, 2001, Registrant had exceeded this distribution
limitation by approximately $548,000 and expects to continue to exceed this
limitation unless and until it can generate sufficient additional rental revenue
from its properties. If Fleet were to force Registrant to comply with this
provision, Registrant would need to reduce its distributions to Unitholders or
risk a default under the Fleet Loan. Registrant must also obtain Fleet's
consent, not to be unreasonably withheld or delayed, to any lease of 10,000 or
more rentable square feet.
Fleet's mortgage lien against any of Registrant's secured properties will
be released only upon payment of an amount equal to 110% of the loan amount
allocated to such property (or 100% of the gross sales price or principal amount
of refinancing, if greater, for Alamo Towers and the Directory Building). In
addition, such lien will be released only if Registrant's remaining properties
satisfy the debt service coverage ratio and loan to value ratio.
Upon the occurrence of an event of default under the Fleet Loan Agreements
(which includes the failure to make any payment within 10 days of the due date
thereof and a failure to comply with its financial covenants which continues for
30 days), Fleet may enforce one or more of its remedies, including the right to
(i) declare all principal and interest on the Fleet Loan to be due and payable
immediately, (ii) require any or all of Registrant's secured properties
(including all equipment, fixtures, agreements, and other rights and interests
relating thereto) to be sold at auction to the highest bidder, and (iii) collect
any and all rents from the properties.
Registrant has also agreed to indemnify and hold harmless Fleet and its
officers, directors, employees, agents, representatives, contractors and
subcontractors, and their respective successors and assigns from and against any
and all claims, liability, costs, and expenses arising out of the presence
and/or clean-up of hazardous materials on or affecting Registrant's secured
properties.
Financing Policies
The General Partners expect to approximate Registrant's original intention
of a loan to value ratio of 50%. Accordingly, it is expected that Registrant's
total borrowings will approximate 50% of the sum of (i) the appraised values of
its six properties plus (ii) the purchase price of additional properties
acquired by Registrant. Registrant is not limited by its Partnership Agreement
as to borrowing for any individual property; the aggregate borrowings on all
properties may not exceed an amount equal to the sum of (x) 60% of the aggregate
purchase price of all properties which are not refinanced plus (y) 80% of the
aggregate value of all refinanced properties. As of December 31, 2001,
Registrant had a loan to appraised value ratio of approximately 54%.
The Fleet Loan and the 475 Loan have enabled Registrant to acquire and
improve properties, but have increased the risk of loss on its properties.
Registrant may acquire additional properties, the
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purchase of which would be funded out of the proceeds of sale of one or more of
Registrant's current properties. Registrant has no current agreements to sell
any of its existing properties. To be profitable, Registrant's properties must
generate cash flow in amounts sufficient to not only cover operating expenses
but also to pay all financing costs.
Registrant's objectives in making its investments continue to be to (i)
preserve and protect Registrant's capital; (ii) provide long term capital
appreciation, generating long term capital gains for federal income tax purposes
upon sale of the properties; (iii) build up equity through the reduction of
mortgage loans encumbering the properties; and (iv) provide cash distributions
from operations which may be partially tax-sheltered. There is no assurance that
these objectives will be achieved.
Competition
The Directory Building is fully leased to a single tenant and does not face
competition from other properties during the term of such lease. The Monterey
Park Building is also now fully leased to a single tenant on a net lease or
substantially equivalent basis. However, upon termination of these leases, and
for any of Registrant's other properties, Registrant does, and will continue to,
compete with other properties for tenants. Depending upon market conditions and
occupancy rates at the time and place of any vacancies in Registrant's
properties, there is currently and there may be, in the future, intense
competition in obtaining tenants to fill such vacancies. Furthermore, such
competition has resulted and may result, because of reduced rental rates and
required concessions to tenants, in decreases in the rental revenue received by
Registrant and capital outlays necessary to fund tenant improvements. See Item 2
- - "Properties" for a discussion of market conditions in the areas in which
Registrant currently competes for tenants.
Employees
Registrant currently employs 16 persons (two of whom are part-time
employees). The business of Registrant is managed by the General Partners. See
Item 10 - "Directors and Executive Officers of the Registrant" and Item 13 -
"Certain Relationships and Related Transactions."
Item 2. Properties.
Monterey Park Building
(formerly American Color Building and GE Medical Systems Office Building)
On July 10, 1986, Registrant acquired the Monterey Park Building, located
in Monterey Park, California, for approximately $4,182,000, inclusive of
acquisition fees. Registrant owns fee title to the Monterey Park Building and
its 90,000 square feet of underlying land, subject to the lien of the Fleet Loan
(See Item 1. - "Business-Fleet Bank Loan"). The property was built in 1985 and
contains 22,250 net rentable square feet (increased from 20,250 square feet for
previous tenancies). The property had been a unique combination of office space
(approximately 71%) and warehouse space, but the building has been reconfigured
solely for use as office, design and development space for use pursuant to a net
lease for the entire premises.
The building is 100% leased to LightCross, Inc. pursuant to a lease dated
as of November 17, 2000. The initial term of the lease is ten (10) years from
September 1, 2001, subject to two five-year renewal options.
The lease requires approximate annual net rent of $433,915 for the first
two years ($19.50 per square foot), increasing to $446,197 in the third and
fourth years ($20.05 per square foot), $458,970 in the fifth and sixth years
($20.63 per square foot), $472,254 in the seventh and eighth years ($21.22 per
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square foot), and $486,070 in the ninth and tenth years ($21.85 per square
foot). The lease shall require payment of a fair market rental during any
renewal periods. This lease is a net lease and, except for certain structural
and mechanical conditions, the tenant is responsible for all costs, expenses,
and obligations relating to the premises and the use, operation, occupancy,
management, maintenance, and repair of the building, including insurance and
real estate taxes. LightCross is expected to be a large user of electricity.
Electric rates in this area have risen greatly, the effect of which could
adversely affect LightCross's financial condition.
During 2001, Registrant expended approximately $1,533,000 in capital
improvements and tenant improvements in connection with this lease. The
improvements include enclosing the rear loading bays, converting warehouse space
to office space, building a new entrance area, improving distribution of
electricity, and contributing to the tenant's construction of a dust-free "clean
room." In addition, the tenant expended approximately $800,000 to make further
improvements to the premises.
For the year ended December 31, 2001, Registrant paid approximately $37,000
in real property taxes with respect to the Monterey Park Building. At December
31, 2001, such taxes were imposed at a rate of 1.2522% on an assessed value of
$3,100,000.
The tenant has been granted a right of first offer to purchase the Monterey
Park Building on the same terms and conditions on which Registrant may be
willing to sell the building to a third party.
The Monterey Park area includes approximately 2,135,000 square feet of
office space. The vacancy rate for commercial properties in such area
approximates 4.4% for office buildings. Net rents (like the LightCross lease)
for office space approximate $15.60 to $16.20 per square foot and gross rents
approximate $19.80 to $24.60 per square foot in this area. Registrant obtained
rents from LightCross in excess of those otherwise available in the Monterey
Park area in consideration of agreeing to pay for construction of the "clean
room" at an approximate cost of $800,000.
The Directory Building (formerly, the IBM Building)
On October 27, 1986, Registrant acquired the Directory Building, located in
Las Colinas, Texas, for a purchase price of approximately $24,580,000, inclusive
of acquisition fees. Registrant owns fee title to the Directory Building and its
6.67 acres of underlying land, subject to the lien of the Fleet Loan. The
Directory Building was built in 1982 and contains approximately 152,100 net
rentable square feet (reduced from 154,300 square feet during IBM's tenancy).
The building is 100% leased to GTE pursuant to a lease dated as of April
20, 1994, as subsequently amended by amendments dated as of July 29, 1994 and as
of February 22, 1995 and as extended by an Extension Agreement and Supplement
dated as of March 31, 2000. The renewed initial term of the lease expires on
September 30, 2003, subject to two (2) five-year renewal options at a rate equal
to the then market rate.
The renewed lease requires approximate monthly rent of $259,873 through
September 30, 2003 ($20.50 per square foot). GTE must also pay additional rent
equal to excess electric charges and operating expenses over base levels.
Registrant has agreed to cap most operating expenses at cumulative increases of
five percent (5%) per annum for purposes of this lease.
Registrant incurred approximately $66,000 in capital expenditures at the
building during 2001. Registrant has expended an aggregate of approximately
$3,348,000 in capital expenditures and tenant improvements at the building.
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For the year ended December 31, 2001, Registrant paid approximately
$437,000 in real property taxes with respect to the Directory Building. At
December 31, 2001, such taxes were imposed at an aggregate rate of 2.727725% on
an assessed value of $16,025,940.
The Las Colinas office market includes approximately 18,365,000 square feet
of office space, of which approximately 13,105,000 square feet constitute Class
"A" office space and 6,190,000 square feet constitute Class "B" office space. As
of November 2001, approximately 75.3% of office space (80.2% of Class "A" office
space and 69.6% of Class "B" office space) was leased. Average asking rents were
approximately $22.01 per square foot for available Class "A" space and $18.04
for available Class "B" space. The Directory Building is considered to be Class
"B+" space.
Tumi Building
(formerly Austin Place Building)
On December 30, 1986, Registrant acquired the Tumi Building, a two-wing
office building located in South Plainfield, New Jersey, for a purchase price of
approximately $16,473,000, inclusive of acquisition fees. Registrant owns fee
title to the Tumi Building and its underlying five acres of land, subject to the
lien of the Fleet Loan. The property was built in 1986 and contains
approximately 107,900 net rentable square feet for use as a multi-tenant
facility (reduced from 108,000 square feet as a single tenant facility, but
subsequently increased from 106,600 square feet due to tenant expansion into
common areas).
As of March 15, 2002, the property is approximately 75.7% leased, with
45,700 square feet leased to Tumi, Inc. (as discussed below) and the remainder
at an average current rent of approximately $18.15 per square foot. Such other
leases expire in October and November 2005 (approximately 17,400 square feet)
and June 2006 (approximately 18,600 square feet).
Tumi's lease is for 45,700 square feet and expires on January 19, 2009. It
requires rent payments equal to $16.00 per square foot until January 2006 and
$17.00 per square foot from February 2006 to January 2009. The lease includes
two 5-year renewal terms, the first at a base rent of $20.00 per square foot and
the second at a then fair market rental. Tumi is also obligated to pay for its
electric current consumption and its proportionate share (42.3%) of increases in
operating expenses, taxes, and insurance over base year 1999 levels.
Registrant has also entered into a five year lease with AT&T Wireless PCS,
LLC to permit installation and operation of a cellular telephone tower on the
roof of the Tumi Building. The lease provides for annual rental payments of
$19,800, five automatic five-year renewal periods and a three percent (3%)
increase in rental payments at the commencement of each renewal period.
On March 9, 1999, Gdynia America Line, Inc., a tenant occupying
approximately 21,650 square feet (20.3%) in the Tumi Building filed for
protection under Chapter 11 of the U.S. Bankruptcy Code. Polish Ocean Lines, a
Polish corporation partially owned by the Polish Government, is jointly and
severally obligated under this lease. On or about April 30, 1999, the lease,
with a term expiring in May 2007 and annual rental payments of approximately
$446,000, was rejected in the bankruptcy proceeding. In July 2000, Registrant
obtained a judgment in an action in the Superior Court of New Jersey Law
Division; Middlesex County against Polish Ocean Lines in the approximate amount
of $618,600. On May 4, 2001, the amount of this judgment was increased to
approximately $4,389,400. Registrant is pursuing enforcement of its judgment in
Poland, but there can be no assurance as to its ability to collect any of the
judgment against Polish Ocean Lines. This space in the Tumi Building remains
vacant.
-8-
For the year ended December 31, 2001, Registrant paid approximately
$226,000 in real property taxes with respect to the Tumi Building. At December
31, 2001, such taxes were imposed at a rate of 1.81% on an assessed value of
$6,500,000.
South Plainfield is located in Middlesex County (approximately 17,058,000
square feet of office space, of which approximately 13,128,000 is Class A and
3,385,000 is Class B). Vacancies in Middlesex County approximate 17.3%,
including 19.1% in Class A space and 10.3% in Class B space. Average asking
rents for office space in the Middlesex County approximate $24.31 per square
foot, including $25.47 for Class A space and $19.21 for Class B space.
Registrant has expended approximately $3,110,000 for capital expenditures and
tenant improvements, all of which were incurred prior to 2001.
Marathon Oil Building (formerly, the Tenneco Building)
On March 21, 1988, Registrant acquired the Marathon Oil Building (formerly
the Tenneco Building), an office building located in Oklahoma City, Oklahoma,
for approximately $10,736,000, inclusive of acquisition fees. Registrant owns
fee title to the Marathon Oil Building with its 6.1 acres of underlying land,
subject to the lien of the Fleet Loan. The property contains approximately
90,925 net rentable square feet on two floors, plus a 10,016 square foot
basement.
Marathon Oil Company leases approximately 65,700 square feet (including
approximately 4,300 in the basement) in the building. Marathon renewed its lease
to extend the term from February 2001 for an additional five-year term that
expires in February 2006. The lease is subject to an additional renewal option
for another five-year term. Marathon's lease also was amended in February 2001
to expand its space by approximately 700 square feet.
Annual rent under Marathon's lease is approximately $716,488 ($11.25 per
square foot, plus $6.00 per square foot for basement space), increasing to
approximately $793,201 ($12.50 per square foot, plus $6.00 per square foot for
basement space) in the third year and $869,915 ($13.75 per square foot, plus
$6.00 per square foot for basement space) in the fourth and fifth years.
Marathon must also pay additional rent equal to its proportionate share of any
increases in operating costs of the building after 1996.
Registrant has leased approximately an additional 9,340 square feet in the
building (plus 340 square feet of basement space) at an average current rent of
approximately $13.50 per square foot (plus $5.00 per square foot for basement
space). These leases expire in December 2004 (approximately 5,640 square feet
plus 340 square feet of basement) and May 2006 (approximately 3,700 square
feet). The remaining space (approximately 24.7% of the space) is vacant and
Registrant is seeking tenants for such space.
For the year ended December 31, 2001, Registrant paid approximately $57,000
in real property taxes with respect to the Marathon Oil Building. At December
31, 2001, such taxes were imposed at a rate of 1.1% on an assessed value of
$5,218,680.
Market conditions in the northwest section of Oklahoma City featured
reduced demand and rental rates attributable to a weakening economy and the
addition of Class A office space. Such market contains approximately 5,058,000
square feet of commercial space of which approximately 15.2% is vacant. Average
rents for commercial space range from $8.50 to $18.50 per square foot, with an
average rate of $14.31 per square foot. Registrant has expended approximately
$519,250 on capital and tenant improvements at this building, $78,000 of which
was spent in 2001.
-9-
475 Fifth Avenue
On December 6, 1996, Registrant purchased the land, building and other
improvements commonly known as 475 Fifth Avenue, and situated in New York, New
York, for approximately $27,440,000 including capitalized costs and related
costs. The property contains a multi-tenant office building comprised of
approximately 241,000 square feet and is located on the southeast corner of 41st
Street and Fifth Avenue in New York City; the Subsidiary Partnership owns fee
title to 475 Fifth Avenue, subject to the lien of the 475 Loan.
475 Fifth Avenue is a 23-story office building with approximately 20,000
square feet of retail space on the first floor and basement, 216,300 square feet
of office space, and 5,100 square feet of basement storage space. As of March
15, 2002, approximately 78.4% of the rentable square footage of office and
retail space in the building was leased (including approximately 84.3% of the
office space and 14.7% of the retail space), at an average current rent (base
rent plus electric charges and prior year adjustments) of approximately $36.51
per square foot (approximately $34.86 per square foot of office space and
$138.14 per square foot of retail space). Following is a schedule of the
expirations of such leases.
=======================================================================================
Approximate Avg. Current
Expiration Year Square Feet % of Total Rent/Sq. Ft.
- ---------------------------------------------------------------------------------------
2002 10,790 4.6% $32.16
- ---------------------------------------------------------------------------------------
2003 11,416 4.8% $37.69
- ---------------------------------------------------------------------------------------
2004 17,782 7.5% $39.46
- ---------------------------------------------------------------------------------------
2005 16,634 7.0% $37.17
- ---------------------------------------------------------------------------------------
2006 22,243 9.4% $30.47
- ---------------------------------------------------------------------------------------
2007 14,537 6.2% $47.64
- ---------------------------------------------------------------------------------------
2008 47,399 20.1% $27.85
- ---------------------------------------------------------------------------------------
2009 37,625 15.9% $36.45
- ---------------------------------------------------------------------------------------
2010 3,833 1.6% $51.00
- ---------------------------------------------------------------------------------------
2016 2,947 1.2% $138.14
=======================================================================================
During 2001, two retail tenants occupying an aggregate of approximately
16,740 square feet (plus 1,900 square feet of storage space) and paying
aggregate annual rents of approximately $1,000,000 vacated 475 Fifth Avenue. One
of such tenants (paying approximately $240,000 in annual rent) had its lease
rejected in bankruptcy proceedings and paid rent through December 2001. The
other retail tenant (paying $750,000 in annual rent) ceased paying rent after
September 2001 and vacated the building in December 2001 upon forfeiture of a
security deposit in the approximate amount of $91,670.
During 2001, Registrant also experienced vacancies aggregating
approximately 29,950 square feet (with aggregate annual rents of approximately
$1,200,000) at 475 Fifth Avenue. One of such leases (for 14,470 square feet and
annual rents of approximately $607,000) was terminated early in exchange for a
fee in the approximate amount of $720,000.
-10-
Registrant's leases generally provide for a base rent, inclusive of an
electricity charge, plus additional rent in the form of a porter's wage and real
estate tax escalation factors; Registrant may increase the electricity charge if
a review demonstrates that Registrant's cost of obtaining such electricity
exceeds the charge imposed on tenants. Certain tenants (leasing approximately
20% to 25% of the space in the building) have leases that provide for a base
rent, inclusive of an electricity charge, plus additional rent in the form of
operating expense and real estate tax escalation factors.
In 1997, Registrant commenced a capital improvement program, designed to
increase rental rates and the value of the building. In connection with
obtaining the 475 Loan, a capital reserve schedule was prepared for 475 Fifth
Avenue, detailing improvements aggregating approximately $1,840,000 over a
12-year period. Registrant has completed the following improvements at 475 Fifth
Avenue: roof replacement and masonry restoration above the 19th floor; elevator
modernization, including mechanical cables and security system; drain and drain
line replacement; installation of a new electrical panel on one side of the
building; continuing installation of hot water heating and sprinkler systems and
upgrading of electric service and closets on floors as vacancies occur; lobby
and entrance renovation; renovating restrooms to comply with Americans with
Disabilities Act ("ADA") requirements on floors as vacancies occur; construction
and enclosing of basement staircases to conform with building code requirements;
and demolition of vacant retail space to prepare it for marketing. Registrant
intends to make the following additional improvements: masonry restoration on
the lower floors of the building; continuation of hot water heating and
sprinkler system installation, upgrading of electric service and closets, and
renovating restrooms to comply with ADA on floors as vacancies occur; installing
the main sprinkler distribution system; installation of a new electrical panel
on the other side of the building; completion of elevator interior redecoration;
and continuing window replacement. Registrant estimates that such additional
improvements, planned to be made over the next several years, will cost
approximately $1,900,000. In 2001, Registrant expended capital improvements and
tenant improvements aggregating approximately $1,783,000 at 475 Fifth Avenue.
Certain capital improvements can only be made as tenancies expire. Capital
improvements and tenant improvements have been, and are expected in the future
to be, funded from working capital, the repair reserve under the 475 Loan, and
from increases in rental income, if any.
For the year ended December 31, 2001, Registrant paid approximately
$1,293,000 in real property taxes with respect to 475 Fifth Avenue. At December
31, 2001, such taxes were imposed at a rate of 9.768% on an assessed value of
$13,503,000.
475 Fifth Avenue is situated in the Grand Central district of the New York
City midtown market. Such district includes approximately 51,920,000 aggregate
rentable square feet (vacancy rate of approximately 8.7%), of which
approximately 45,460,000 are Class A buildings (8.9% vacancy rate) and 6,460,000
are Class B buildings (6.9% vacancy rate). Asking rents in this district average
approximately $50.44 per square foot ($51.88 for Class A buildings and $40.47
for Class B buildings). The entire midtown market includes approximately
250,496,000 aggregate rentable square feet (194,356,000 in Class A buildings and
56,140,000 in Class B buildings), an approximate 6.1% vacancy rate (5.5% for
Class A buildings and 8.0% for Class B buildings), and average asking rents of
approximately $51.13 per square foot ($54.94 for Class A buildings and $37.70
for Class B buildings).
Alamo Towers
On March 17, 1997, Registrant purchased the land, building and other
improvements commonly known as the Alamo Towers, and situated in San Antonio,
Texas for approximately $12,002,000, including capitalized closing and related
costs. The Alamo Towers contains a multi-tenant office building comprised of
approximately 193,000 square feet (reduced from approximately
-11-
196,000 square feet when Registrant acquired the property). Registrant owns fee
title to the Alamo Towers, subject to the lien of the Fleet Loan.
The Alamo Towers is an office building consisting of two stand-alone
8-story towers with approximately 184,600 square feet of office space and 8,300
square feet of basement space. As of March 1, 2002, approximately 83.2% of the
rentable square footage of office space in the Alamo Towers was leased, at an
average current rent (base rent plus escalation adjustments) of approximately
$15.03 per square foot. Following is a schedule of expiration of such leases.
===============================================================================
Approximate Avg. Current
Expiration Year Square Feet % of Total Rent/Sq.Ft.
- -------------------------------------------------------------------------------
2002 33,580 18.2% $15.79
- -------------------------------------------------------------------------------
2003 17,124 9.3% $15.91
- -------------------------------------------------------------------------------
2004 32,151 17.5% $15.56
- -------------------------------------------------------------------------------
2005 16,701 9.1% $14.99
- -------------------------------------------------------------------------------
2006 45,806 24.9% $13.78
- -------------------------------------------------------------------------------
2007 7,766 4.2% $15.05
===============================================================================
The Alamo Towers has yet to achieve sustainable increases in occupancy
rates, primarily because of the absence of a covered parking garage.
Registrant's planned significant capital improvements for this building, delayed
in large part because of the capital improvements made at 475 Fifth Avenue,
began implementation in earnest in 2001. Registrant completed renovation of the
lobby in the West Tower and added granite to the entrances and stairs in both
towers. In 2001, Registrant completed payment for the relocation of the
building's mechanical plant and replacement of all heating, ventilation, and air
conditioning equipment. Registrant also upgraded the fire alarm panels in both
towers and is continuing to separate the heating and air conditioning systems in
tenant spaces (to better regulate the temperature) as vacancies occur. In 2001,
Registrant also upgraded the parking lot surface and lighting.
Registrant plans to construct a covered parking garage in 2002, depending
upon the availability of funds. Registrant likely will need to sell one of its
properties to finance this construction. The planned garage has been scaled back
to a 550 car garage at an estimated cost of $3,250,000 (as contrasted to a 1,000
car garage at a cost of $6,000,000). The garage construction is tentatively
scheduled to commence in the summer of 2002 and is expected to take six to eight
months to complete. In the future, Registrant may need to replace the roof
(estimated at $400,000), recaulk the glass walls and windows (estimated at
$200,000), install sprinklers on all floors (estimated at $250,000), and upgrade
restrooms to comply with ADA (estimated at $500,000 to $600,000), but these
improvements are unlikely to occur in the near future. In 2001, Registrant
expended approximately $2,158,000 in tenant improvements and capital
improvements to the Alamo Towers.
For the year ended December 31, 2001, Registrant paid approximately
$300,000 (with a discount) in real property taxes with respect to the Alamo
Towers. At December 31, 2001, such taxes were imposed at a rate of 3.015365% on
an assessed value of $10,000,000.
The San Antonio office market includes approximately 21,990,000 aggregate
rentable square feet (including approximately 7,410,000 square feet of Class A
space and 10,770,000 square feet of
-12-
Class B space), of which approximately 14.1% is currently vacant (8.7% of Class
A space and 15.2% of Class B space). Asking rents in this market now average
$17.86 per square foot ($21.10 for Class A space and $16.69 for Class B space).
The north-central San Antonio market includes approximately 8,030,000 aggregate
rentable square feet (including approximately 3,140,000 square feet of Class A
space and 4,420,000 square feet of Class B space), of which approximately 12.6%
is vacant (10.3% of Class A space and 12.9% of Class B space) and for which
asking rents average approximately $18.46 per square foot ($20.75 for Class A
space and $17.36 for Class B space). The Alamo Towers is located in the
north-central market and is classified as Class B space.
Item 3. Legal Proceedings.
Except for its action against Polish Ocean Lines, Inc., Registrant does not
know of any material legal proceedings, other than ordinary immaterial routine
litigation incidental to its business, pending against or involving Registrant
or any of its properties. The action against Polish Ocean Lines, Inc. is
attributable to the rejection of its subsidiary's lease for space in the Tumi
Building. See "Item 2. Properties - Tumi Building." In July 2000, Registrant
obtained a judgment in the approximate amount of $618,600 in the Superior Court
of New Jersey Law Division; Middlesex County. In May 2001, the amount of this
judgment was increased to approximately $4,389,400. Registrant is pursuing
enforcement of this judgment in Poland.
Item 4. Submission of Matters to a Vote of Security-Holders.
There were no matters submitted to a vote of Limited Partners or
Unitholders and none were required to be submitted during the fourth quarter of
the fiscal year covered by this report through the solicitation of proxies or
otherwise.
-13-
PART II
Item 5. Market for Registrant's Securities and Related Security-Holder Matters.
The Units of Registrant are not traded in any established public trading
market. Because of certain provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), as described below, the General Partners have not applied
to include the Units for quotation or listing on any national or regional stock
exchange or any other established securities market.
Registrant has administered a Unit Repurchase Plan since 1995, pursuant to
which Registrant, in its discretion, has purchased outstanding Units. Any such
purchases are made at prices no higher than the lowest current independent offer
quotation. During 2001, Registrant did not repurchase any Units. Repurchases
both divert funds otherwise available for capital improvements and require a
monthly reallocation of Unitholders' interests. For these reasons, Registrant
limits future repurchases, if any, to the final one or two months of a calendar
year. To provide an alternative outlet for Unit sales, the General Partners and
their affiliates have, during any periods of suspension in Registrant's Unit
Repurchase Plan, purchased Units on the same terms and conditions as under the
Unit Repurchase Plan.
Provisions found in Section 7704 of the Code have an adverse impact on
investors in a "publicly traded partnership" ("PTP"). A PTP is a partnership
whose interests are traded on an established securities market or readily
tradeable on a secondary market (or the substantial equivalent thereof). If
Registrant were classified as a PTP, (i) Registrant may be taxed as a
corporation or (ii) income derived from an investment in Registrant would be
treated as non-passive income.
The IRS has established alternative safe harbors that allow interests in a
partnership to be transferred or redeemed in certain circumstances without
causing the partnership to be characterized a PTP. Although the Units are not
listed or quoted for trading on an established securities market, it is possible
that transfers of Units could occur in a secondary market in sufficient amount
and frequency to cause Registrant to be treated as a PTP. To the extent that any
proposed transfer of Units in secondary market transactions would exceed a safe
harbor volume limitation, the proposed transfer will be restricted pursuant to a
policy adopted by Registrant. Such a restriction could impair the ability of an
investor to liquidate its investment quickly and thus, possibly prevent the
reclassification of Registrant as a corporation pursuant to Code Section 7704.
It is anticipated that Registrant's policy will remain in effect until such
time, if ever, as further clarification of Code Section 7704 permits Registrant
to lessen the scope of its policy.
The General Partners, if so authorized, will take such steps as are
necessary, if any, to prevent the reclassification of Registrant as a PTP.
As of March 19, 2002, there were 2,536 Unitholders of record.
-14-
The following represents per Unit cash distributions to investors for the
fiscal years ended December 31, 2001 and 2000.
Distribution
Quarter Ended Per Unit Payment Date
- ------------- -------- ------------
December 31, 2001 $ 0.30 March 2002
September 30, 2001 $ 0.30 November 2001
June 30, 2001 $ 0.30 August 2001
March 31, 2001 $ 0.30 May 2001
December 31, 2000 $ 0.30 February 2001
September 30, 2000 $ 0.30 November 2000
June 30, 2000 $ 0.30 August 2000
March 31, 2000 $ 0.30 May 2000
There are no material legal restrictions upon Registrant's present or
future ability to make distributions in accordance with the provisions of
Registrant's Agreement of Limited Partnership, as amended through the date of
this report. However, the Fleet Loan Agreements limit distributions to 90% of
the sum of its cumulative net income from real estate operations, adjusted for
depreciation, amortization, and write-off of step rent receivables. See,
however, Item 7 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a discussion of economic conditions affecting
Registrant's ability to make distributions in the future.
-15-
Item 6. Selected Financial Data
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
2001 2000 1999 1998 1997
------------- ------------- ------------- ------------- -------------
Operating
Revenues $16,984,791 $15,554,869 $16,695,999 $19,752,206 $14,958,799
Net
(Loss)/Income $(1,676,547) $1,808,954 $(2,828,104) $1,930,984 $(420,892)
Net (Loss)/Income
Per Unit (1) $(0.56) $0.60 $(0.94) $0.64 $(0.14)
Total Assets $100,532,466 $102,145,141 $107,255,707 $105,748,365 $100,946,968
Long-Term
Obligations $55,879,036 $51,335,864 $55,539,288 $46,930,800 $41,578,800
Distributions
Per Unit
(1)(2) $1.20 $1.20 $1.20 $1.20 $1.20
(1) Per Unit numbers are based on 2,983,531 Units for 2001, 2000 and 1999 and a
weighted average number of Units of 2,986,460 and 3,022,492 for 1998 and
1997, respectively.
(2) Each year's distributions include funds distributed after the end of the
year which are attributable to that year.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
At December 31, 2001, Registrant had cash and receivables of approximately
$1,475,000 as contrasted to accounts payable and accrued expenses of
approximately $2,430,000. Registrant measures its liquidity by its ability to
generate sufficient cash flow from operations to meet its current operating and
debt service requirements on a short-term and long-term basis. Registrant's
operations have provided this liquidity and are expected to continue to do so.
To the extent additional funds are required, Registrant likely will need to sell
assets as its borrowing capacity under the Fleet Loan is nearly exhausted.
In June 2000, Registrant sold the Flatiron Building for $13,050,000,
exclusive of closing costs of approximately $473,000. From the sale proceeds,
the sum of $434,466 was placed into escrow pending resolution of the bankruptcy
of one of the tenants in the building. In 2001, Registrant recognized
approximately $103,000 of the amount held in escrow.
-16-
In October 2000, the Fleet Loan was amended to provide for maximum gross
borrowings of $25,000,000 and to extend the maturity date to September 30, 2003
(subject to two additional one year extension options). Registrant has drawn
down an aggregate of approximately $24,941,000 under the amended Fleet Loan.
Registrant can only borrow approximately an additional $58,000 under the Fleet
Loan. Registrant may draw funds from its replacement reserve (currently
approximately $214,586) and its repair reserve (currently approximately
$366,952) under the 475 Fifth Loan, to fund certain improvements at 475 Fifth
Avenue.
Registrant has been investing capital in improving its properties with a
view to increasing its revenues from real estate operations and ultimately
realizing appreciation in property values. Capital resources have been expended
since the beginning of 2001 to make the following capital and tenant
improvements: approximately $1,783,000 at 475 Fifth Avenue; $0 at the Tumi
Building; approximately $1,533,000 at the Monterey Park Building; approximately
$66,000 at the Directory Building; approximately $78,000 at the Marathon Oil
Building; and approximately $2,158,000 at Alamo Towers. Registrant may also
require capital to fund additional tenant improvements as tenancies turn over at
its properties as well as further capital improvements at 475 Fifth Avenue
(estimated at $2,055,000) and Alamo Towers (estimated at $4,200,000). These
additional capital improvements are expected to be made over several years.
In March 1999, Gdynia America Line, Inc., which leased approximately 20% of
the Tumi Building pursuant to a lease expiring in May 2007, filed for protection
under Chapter 11 of the U.S. Bankruptcy Code. Polish Ocean Lines, a Polish
corporation partially owned by the Polish Government, is jointly and severally
obligated under this lease. On or about April 30, 1999, the lease, which
required annual rental payments of approximately $446,000, was rejected in the
bankruptcy proceeding. In July 2000, Registrant obtained a judgment in the
approximate amount of $618,600 against Polish Ocean Lines for amounts then due
under the lease. In May 2001, the amount of such judgment was increased to
approximately $4,389,400. There can be no assurance that Registrant will be
successful in collecting any damages from Polish Ocean Lines. This space in the
Tumi Building remains vacant.
During 2001, two retail tenants paying aggregate annual rents of
approximately $1,000,000 vacated 475 Fifth Avenue. One of such tenants had its
lease rejected in bankruptcy proceedings and the other retail tenant's lease was
terminated upon forfeiture of a security deposit in the approximate amount of
$91,670. In addition, office tenants paying aggregate annual rents of
approximate $1,200,000 vacated 475 Fifth Avenue during 2001. Registrant realized
lease cancellation income of approximately $576,000 in 2001, consisting of an
early termination fee in the approximate amount of $720,000 from a tenant in 475
Fifth Avenue, net of a write-off of deferred rent receivable of approximately
$144,000. The loss of rental payments from these terminated leases and the
tenant improvement allowances that Registrant expects to pay to replacement
tenants will place demands on Registrant's liquidity and capital resources.
To date, Registrant has funded its capital requirements from the 475 Loan,
the Fleet Loan and working capital. As discussed above, Registrant has very
limited remaining borrowing capacity under its loans. Registrant's quarterly
distribution to partners for each of the four quarters of 2001 was $0.30 per
Unit. Registrant expects that it will be unable to maintain this level of
distributions commencing with the distributions attributable to the first
quarter of 2002. The exact amount by which distributions will be reduced has yet
to be determined. The level of distributions in the future will be dependent
upon numerous factors, including securing replacement tenants at 475 Fifth
Avenue and, possibly, the funding of additional capital improvements from the
proceeds of the sale of one or more of Registrant's properties.
-17-
Registrant has used working capital reserves provided from the net proceeds
of the Offering, loan proceeds, and any undistributed cash from operations as
its primary source of liquidity. Registrant generally intends to distribute its
distributable cash from operations to Unitholders. However, such distributions
are subject to suspension or reduction to meet capital requirements and are also
limited by the Fleet Loan Agreements to 90% of the sum of its cumulative net
income from real estate operations, adjusted for depreciation, amortization, and
write-off of step rent receivables.
Results of Operations
2001 versus 2000
Rental revenues increased by 6.9% from 2000 to 2001, primarily because of
new leases and rent increases in the New York, New Jersey, and Las Colinas,
Texas properties, the commencement of rent payments from LightCross at the
Monterey Park Building, and the delay in feeling the effects of lease
terminations at the New York building. Lease cancellation income in 2001, which
consisted of $720,000 in cash received from the termination of a lease at 475
Fifth Avenue, less a step rent write-off, increased by 462.0% from the amounts
received in 2000. As a result, total revenues increased by 9.2% from 2000 to
2001.
Interest expense in 2001 decreased by 7.7% from 2000, because larger loan
balances were more than offset by lower interest rates. Depreciation increased
by 1.4% in 2001 primarily because of capital improvements made at 475 Fifth
Avenue, the Monterey Park Building, and Alamo Towers. Amortization increased by
10.9% primarily because of the amortization of deferred costs related to the
Fleet Loan refinancing and commissions paid pertaining to new and renewed leases
and the write-off of leasing commissions on leases that were terminated early.
Property operating expenses increased by 4.1% in 2001 primarily because of
increases in real estate taxes at the two Texas properties, utilities and other
operating costs associated with increased occupancy at certain properties
despite the reduction attributable to the sale of the Colorado building, and the
reimbursement in 2001 of real property taxes attributable to the period prior to
the sale of the Colorado property. Management fees increased by 15.7% in 2001
from 2000 because of property management fees computed as a percentage of
Registrant's increased revenues from rental revenues. Professional fees
decreased by 44.9% from 2000 to 2001 primarily because of the legal fees
incurred by Registrant in 2000 in connection with obtaining a judgment against
Polish Ocean Lines with respect to the Tumi Building. General and administrative
expenses increased by 17.1% from 2000 to 2001 primarily because of the payment
in 2001 of Colorado tax on gain from the sale of the Flatiron Building, which
more than offset non-recurring costs paid in 2000 to change the Registrant's
transfer agent. The 53.0% decrease in bad debt expense is attributable to lower
rent balances written-off for tenants that moved out in 2001 as compared to
those vacating space in 2000.
Registrant's loss from real estate operations decreased by 46.1% in 2001 as
compared to 2000. After adjusting for non-cash items (depreciation, amortization
and bad debt expense), operations generated cash flows of approximately
$2,946,970 in 2001 and $1,415,002 in 2000 (a 108.3% increase). These cash flows
are not computed in accordance with generally accepted accounting principles
("GAAP") and contrast to net cash provided by operating activities (computed in
accordance with GAAP) of $1,897,372 in 2001 and $461,698 in 2000. Registrant
realized a gain on sale of real estate of $103,333 in 2001 as contrasted to
$5,111,393 in 2000, in both cases from the sale of the Flatiron Building.
Accordingly, Registrant realized a net loss of $1,676,547 in 2001 as contrasted
to net income of $1,808,954 in 2000.
The significant reduction in Registrant's loss from real estate operations
and increase in net cash provided by operations reflect new leases and higher
rents attributable to Registrant's extensive capital improvement program,
principally at 475 Fifth Avenue and Alamo Towers, Texas, as well as the benefits
of interest rate decreases under the Fleet Loan. However, the effects of the
recession of
-18-
2001, the events of September 11, 2001, and the loss of retail and office
tenants at 475 Fifth Avenue will challenge Registrant's operations in 2002.
2000 versus 1999
Rental revenues decreased by 1.8% from 1999 to 2000, primarily because the
absence of revenues from the Flatiron Building after its sale in June 2000 more
than offset increased occupancy and rental rates at 475 Fifth Avenue and
increased rent payments under the renewed GTE lease for the Directory Building.
In addition, lease cancellation fees decreased by 69.0% from the significant
amounts received in 1999 with respect to the Monterey Park Building and 475
Fifth Avenue. Registrant's interest and other income decreased from 1999 to 2000
by 64.9% principally because of a loan break-up fee, reimbursement of real
estate taxes with respect to 475 Fifth Avenue and write-offs of payables to
former tenants of the Tumi Building, all of which occurred in 1999. As a result,
total revenues decreased by 6.8% from 1999 to 2000.
Interest expense in 2000 increased by 16.6% from 1999, both because of
larger loan balances (the 475 Loan was funded in mid-1999) and higher interest
rates. Depreciation increased by 1.0% in 2000 primarily because capital
improvements made from 1997 through 2000 (primarily at 475 Fifth Avenue and
Alamo Towers) more than offset the impact of selling the Flatiron Building in
June 2000. Amortization decreased by 45.4% primarily because of the write-off in
1999 of leasing commissions on leases that were terminated early and financing
costs under the Fleet Loan following partial prepayment of the loan. Property
operating expenses increased by 1.6% in 2000 primarily because of higher
occupancy and increased electric rates at 475 Fifth Avenue and Alamo Towers.
Management fees decreased by 6.3% in 2000 from 1999 primarily due to property
management fees computed as a percentage of Registrant's decreased rental
revenues. Professional fees increased by 95.9% from 1999 to 2000 primarily
because of legal fees incurred in connection with litigation against Polish
Ocean Lines for amounts due under the Gdynia lease at the Tumi Building, the
payment in 2000 of legal fees attributable to prior years, and increased
auditing fees. The 77.1% decrease in bad debt expense reflects the relative
absence of significant early terminations as contrasted to 1999, including the
write-off of unpaid rent and deferred rent receivable from the Gdynia lease in
the Tumi Building. The 5.5% increase in general and administrative expenses in
2000 from 1999 is primarily attributable to costs associated with changing
Registrant's transfer agent, increased expenses incurred in preparing
unitholders' tax information, and salary increases to Registrant's employees.
Registrant's loss from real estate operations increased by 16.8% in 2000 as
compared to 1999. After adjusting for non-cash items (depreciation,
amortization, and bad debt expense), operations generated cash flows of
approximately $1,415,022 in 2000 and $3,574,475 in 1999 (a 60.4% decrease).
These cash flows are not computed in accordance with GAAP and contrast to net
cash provided by operating activities (computed in accordance with GAAP) of
$461,698 in 2000 and $467,101 in 1999. Registrant realized a gain on sale of
real estate of $5,111,393 in 2000 from the sale of the Flatiron Building.
Accordingly, Registrant realized net income of $1,808,954 in 2000 as contrasted
to a net loss of $2,828,104 in 1999.
The recognition of a loss from real estate operations was largely due to
the interest expense associated with Registrant's capital improvement program at
475 Fifth Avenue and Alamo Towers, which increased occupancy and rental rates.
-19-
Inflation
In the past, inflation has not had a material impact on Registrant's
operations or financial condition, as certain leases of Registrant's properties
provide for increases in rents based on changes in the consumer price index, and
other leases provide lease payments that escalate over time. Registrant's
properties with performing leases are protected by arrangements whereby the
tenants pay to Registrant an amount equal to all or a portion of the operating
costs of the properties, with Registrant's share of expenses, if any, subject to
a predetermined limit. These arrangements help to insulate Registrant from the
effects of any increases in operating costs. However, to the extent that there
is vacant space or nonperforming leases at any of the Registrant's properties,
Registrant lacks this protection against inflation, particularly with regards to
increased expenses that are not reimbursed.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.
Interest Rates
Registrant's primary market risk exposure is to changes in interest rates
on its mortgage loan borrowings.
Registrant has obtained the 475 Loan, a fixed rate debt instrument, to
manage its exposure to fluctuations in market interest rates. Registrant has
also obtained the Fleet Loan, a variable rate debt instrument, to enable it to
draw down funds as needed for capital improvements, tenant improvements, and
leasing commissions on its diverse portfolio of properties. Approximately 44%
and 38% of Registrant's outstanding debt was subject to variable rates at
December 31, 2001 and 2000, respectively. In addition, the average interest rate
on Registrant's debt decreased from 8.44% at December 31, 2000 to 6.44% at
December 31, 2001. Registrant does not have any other material market-sensitive
financial instruments. It is not Registrant's policy to engage in hedging
activities for previously outstanding debt instruments or for speculative or
trading purposes.
The table below provides information about Registrant's debt instruments
that are sensitive to changes in interest rates. For debt obligations, the table
presents principal cash flows and related weighted average interest rates by
expected maturity dates. Weighted average variable rates are based on rates in
effect at the reporting date.
-20-
Expected Maturity Date
----------------------------------------------------------------------------------------------
There- Fair
2002 2003 2004 2005 2006 After Total Value
---- ---- ---- ---- ---- ------- ----- -----
(in thousands)
Secured Variable $579 $23,805 $ -- $ -- $ -- $ -- $24,384 $24,384
Average
Interest rate 4.08% 4.08% -- -- -- -- 4.08%
Secured Fixed $259 $282 $299 $333 $362 $29,960 $31,495 $32,354
Average
interest rate 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27%
Registrant believes that the interest rates given in the table for fixed
rate borrowings are above the rates Registrant could currently obtain for
instruments of similar terms and maturities. The fair values of such instruments
are estimated using discounted cash flow analyses, based on borrowing rates for
similar types of borrowing arrangements at December 31, 2001 (estimated at 7.77%
per annum).
A change of 1% in the index rate to which Registrant's variable rate debt
is tied would change the annual interest incurred by Registrant by approximately
$244,000, based upon the balances outstanding on variable rate instruments at
December 31, 2001.
Item 8. Financial Statements and Supplementary Data
See list of Financial Statements and Financial Statement Schedules at page
F-2, filed as part of this report.
-21-
Quarterly Results of Operations (Unaudited)
2001
----------------------------------------------------------------
Three Months Ended
----------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(Thousands of dollars, except per unit data)
Total revenues $4,023 $4,090 $4,669 $4,203
Total expenses 4,435 4,463 4,676 5,191
Loss from real estate (412) (373) (7) (988)
operations before gain on
sale of real estate
Gain on sale of real 103 -- -- --
estate
Net loss (309) (373) (7) (988)
Net loss per Unit (0.10) (0.12) -- (0.33)
2000
-----------------------------------------------------------------
Three Months Ended
-----------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(Thousands of dollars, except per unit data)
Total revenues $4,023 $3,955 $3,599 $3,978
Total expenses 4,624 4,520 4,418 5,295
Loss from real estate
operations before gain on (601) (565) (819) (1,317)
sale of real estate
Gain on sale of
real estate -- 5,111 -- --
Net (loss) income (601) 4,546 (819) (1,317)
Net (loss) income
Per Unit (0.20) 1.51 (0.27) (0.44)
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
-22-
PART III
Item 10. Directors and Executive Officers of the Registrant
Registrant has no officers or directors. The General Partners manage and
control substantially all of Registrant's affairs and have general
responsibility and ultimate authority in all matters affecting Registrant's
business.
The Individual General Partner is Robert F. Gossett, Jr. The Corporate
General Partner is 1345 Realty Corporation. All of the outstanding capital stock
of 1345 Realty Corporation is owned by the Individual General Partner and his
wife.
The directors and executive officers of the Corporate General Partner are
as follows:
Officer/
Director
Name Age Position Since
---- --- -------- --------
Robert F. Gossett, Jr. 58 President, Treasurer
and Director 1994
Pauline G. Gossett 58 Secretary 1994
Information with respect to the Individual General Partner and with respect
to the above officers and directors is set forth below:
Robert F. Gossett, Jr., the Individual General Partner since 1985, is
Managing Director of Vance Capital Corporation (1981 to present), a real estate
management and finance company. Between 1978 and 1981, Mr. Gossett served as
Executive Vice President and Director of Loeb Capital Corporation. From 1974
until 1978, he was a Vice President of Oppenheimer Properties, Inc. and, between
1969 and 1974, was associated with the Investment Banking Division of Merrill,
Lynch, Pierce, Fenner & Smith, Inc. He received a B.A. degree from the
University of Texas, a J.D. degree from Georgetown University, and an M.B.A.
degree from the University of Pennsylvania. He is a member of the Texas Bar.
Pauline G. Gossett, the Secretary of the Corporate General Partner, is a
stockholder and Director of Vance Capital Corporation (1981 to present). Mrs.
Gossett received an Associate of Arts degree from Briarcliff College. Mrs.
Gossett is the wife of Robert F. Gossett, Jr.
Registrant employs the following employees who make significant
contributions to the business of Registrant:
Employee
Name Age Position Since
---- --- -------- ----
James N. Walsh 48 Property Manager 1997
Wallis J. Hoskins 48 Property Manager 1993
Veronica Rios 37 Property Manager 1999
Madeline Matlak 36 Fund Administrator 1994
-23-
James N. Walsh is the Property Manager for 475 Fifth Avenue. Mr. Walsh has
been designated a Real Property Administrator (RPA) by the Building Owners and
Managers Association. From 1989 to 1997, he was a building manager, comptroller,
and leasing manager for 584 Operating Corp., the owner of an office building in
New York, New York which is similarly sized to 475 Fifth Avenue. Prior thereto,
Mr. Walsh served for four years as an assistant comptroller and construction
accountant for the residential division of Cadillac Fairview. He also acted for
four years as a project accountant for residential properties owned by Olympia &
York. Mr. Walsh received a B.B.A. degree in accounting from Iona College.
Wallis J. Hoskins is the Property Manager for the Austin Place Building.
For the 20 years prior thereto he was employed by The Prudential Insurance
Company of America, from 1981 to 1992 as a facilities manager for company-owned
buildings and from 1973 to 1980 as a claims approver.
Veronica Rios is the Property Manager for Alamo Towers. Ms. Rios has been
designated a Real Property Administrator (RPA) by the Building Owners and
Managers Association. From 1995 to 1999, she was a property manager for three
office buildings owned by Mission City Properties in San Antonio. Ms. Rios was a
property manager from 1993 to 1995 for several office, office/warehouse, and
rental properties owned by the Bonner Group in San Antonio. Prior thereto, from
1989 to 1993, she was employed in various office, accounting, and property
management capacities by Commercial Real Estate Associates in San Antonio.
Madeline Matlak is the Fund Administrator of the Registrant. Mrs. Matlak
was formerly employed as a Fund Administrator in the Direct Investment
Department of Smith Barney, Inc. (1989 through 1994).
Based solely upon its review of copies of Forms 3, 4, and 5 received by it
during 2001, and written representations from reporting persons that no other
Forms 5 were required for such persons for 2001, Registrant believes that all
filing requirements applicable to its General Partners and the directors and
officers of the Corporate General Partner pursuant to Section 16(a) of the
Securities Exchange Act of 1934, as amended, for 2001 and prior years were
complied with on a timely basis except as previously reported.
Item 11. Executive Compensation
Registrant is not required to and did not pay remuneration to the officers
and directors of the Corporate General Partner. However, the General Partners
and/or their affiliates receive compensation for services performed for
Registrant.
-24-
Summary Compensation Table
Share of
Adjusted Cash Management Leasing Expense
Year From Operations Fees Commissions Reimbursement
---- --------------- ---------- ----------- -------------
Corporate General
Partner 2001 $28,931 $953,191 $ -0- $54,240
Individual General
Partner 2001 $7,233 $238,298 $ -0- $13,560
Corporate General
Partner 2000 $28,931 $824,040 $ -0- $56,000
Individual General
Partner 2000 $7,233 $206,010 $ -0- $14,000
Corporate General
Partner 1999 $28,822 $879,765 $ -0- $44,000
Individual General
Partner 1999 $7,205 $219,941 $ -0- $11,000
See Item 13 - "Certain Relationships and Related Transactions" for a discussion
of the above compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information as of February 28, 2002 as to
persons known by Registrant to be the beneficial owner of more than five percent
(5%) of the outstanding Units of Registrant.
Name and Address Amount and Percent
Of Nature of Of
Beneficial Owner Beneficial Ownership Class
---------------- -------------------- -----
Vance, Teel & Company, Ltd.(1)
406 E. 85th Street 370,427 12.4%
New York, New York 10028
- -------------
(1)Each of Robert F. Gossett, Jr., the Individual General Partner and the
President of the Corporate General Partner, and Pauline G. Gossett, the
Secretary of the Corporate General Partner, own a 25% proportionate interest in
Vance, Teel & Company, Ltd.
-25-
The following table sets forth information as of February 28, 2002 with
respect to the beneficial ownership of Units of Registrant by (i) each of the
General Partners, (ii) each of the directors and executive officers of the
Corporate General Partner, and (iii) all General Partners and executive officers
and directors of the Corporate General Partner, as a group.
Amount and
Name of Nature of
Beneficial Beneficial Percent
Owner Ownership of Class
1345 Realty Corporation(1) -0- 0%
Robert F. Gossett, Jr.(2) 92,606.75 3.1%
Pauline G. Gossett(3) 92,606.75 3.1%
All General Partners and
Directors and Executive
Officers as a group
(3 persons) 185,213.5 6.2%
Robert F. Gossett, Jr., the Individual General Partner and an officer and
director of the Corporate General Partner, and Pauline G. Gossett, an officer of
the Corporate General Partner, own all of the outstanding capital stock of the
Corporate General Partner.
Item 13. Certain Relationships and Related Transactions
Registrant has and will continue to have certain relationships with the
General Partners and their affiliates as discussed below.
The General Partners received $36,164 ($28,931 to the Corporate General
Partner and $7,233 to the Individual General Partner) as their allocable share
(1%) of adjusted cash from operations with respect to the year ended December
31, 2001. For the year ended December 31, 2001, $16,765 (1%) of Registrant's net
loss was allocated to the General Partners ($13,412 to the Corporate General
Partner and $3,353 to the Individual General Partner).
The General Partners or their affiliates are also entitled to receive: a
partnership management fee for managing the affairs of Registrant, equal to 7%
of adjusted cash from operations less the asset management fee; an asset
management fee for managing Registrant's funds which are not invested in
properties, equal to 0.5% per annum of the average amount of outstanding funds
during each calendar month which are not otherwise invested in properties; and a
property management fee for property management services for Registrant's
properties, equal to the normal and competitive fees customarily
- --------
(1) 1345 Realty Corporation is the Corporate General Partner.
(2) Mr. Gossett is the Individual General Partner and the President of the
Corporate General Partner. Consists of Mr. Gossett's 25% proportionate interest
in Vance, Teel & Company, Ltd. He disclaims beneficial ownership of the
remaining 75% proportionate interest owned by his wife, Pauline Gossett, and his
two adult children.
(3) Ms. Gossett is the Secretary of the Corporate General Partner. Consists of
Ms. Gossett's 25% proportionate interest in Vance, Teel & Company, Ltd. She
disclaims beneficial ownership of the remaining 75% proportionate interest owned
by her husband, Robert F. Gossett, Jr., and her two adult children.
-26-
charged by unaffiliated parties rendering similar services in the same
geographic area, not to exceed 1% of the annual gross revenues for net leases
with terms of ten years or more or 6% of the annual gross revenues for
replacement leases. During the year ended December 31, 2001, the General
Partners earned and were paid an aggregate of $1,191,489 of such management fees
($953,191 to the Corporate General Partner and $238,298 to the Individual
General Partner).
The General Partners are also entitled to receive leasing commissions in
connection with leasing, releasing or leasing related services performed on
behalf of the Registrant in connection with the negotiation of tenant leases.
Such fees are computed at the following rates: (i) in the case of a property
leased long-term (10 or more years) net (or similar) basis, 1% of annual gross
revenues; and (ii) in the case of other properties, a fee, not to exceed the
competitive rate charged by others rendering similar services in the same
geographical area, not greater than 6% of annual gross revenues where the
General Partners or their affiliates perform leasing, re-leasing and related
leasing services, or 3% of annual gross revenues where they do not perform any
such services. If a long-term net (or similar) lease is terminated for any
reason and the General Partners or their affiliates perform leasing, re-leasing
or leasing related services, they will be entitled to a leasing fee of 3% of the
gross revenue for the first five years of each replacement lease signed. During
the year ended December 31, 2001, no such fees were paid to the General
Partners.
During the year ended December 31, 2001, the General Partners were also
entitled to reimbursement for expenses incurred in connection with Registrant's
operations aggregating $67,800 ($54,240 to the Corporate General Partner and
$13,560 to the Individual General Partner).
-27-
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1), (2) See page F-2.
Sequential
Page
Number
------
(a)(3) Exhibits:
3. Certificate of
Limited Partnership,
incorporated by
reference to Exhibit
4 to Registration
Statement No.
33-2258 (the
"Registration
Statement").
4.(a) Amended and Restated
Agreement of Limited
Partnership dated as
of July 24, 1995,
incorporated by
reference to Exhibit
4 to Registrant's
Quarterly Report on
Form 10-Q for the
quarter ended
September 30, 1995.
10.(a) Property Management
Agreement,
incorporated by
reference to Exhibit
10B to the
Registration
Statement.
(b) Lease dated as of
April 20, 1994
between Registrant
and GTE with respect
to the Directory
Building.(1)
(c) Amendment No. 1 to
Lease dated as of
July 29, 1994
between Registrant
and GTE.(1)
(d) Amendment No. 2 to
Lease dated as of
February 22, 1995
between Registrant
and GTE.(1)
(e) Extension Agreement
and Supplement dated
as of March 31, 2000
between Registrant
and GTE.(2)
- -------------
(1) Incorporated by reference to Exhibits 100(y), (z), and (aa) to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994.
(2) Incorporated by reference to Exhibit 10(e) to Registrant's Annual Report on
Form 10-K for the year ended
-28-
(f) Environmental
Compliance and
Indemnification
Agreement dated
______, 1996, made
by Registrant.(3)
(g) Deed of Trust,
Assignment of Rents,
Security Agreement
and Fixture Filing
dated September 26,
1996, made by
Registrant with
respect to the
Monterey Park
Building.(3)
(h) First Amendment to
Deed of Trust dated
December __, 1996,
made by Registrant
with respect to the
Monterey Park
Building.(3)
(i) Mortgage, Assignment
of Leases and Rents
and Security
Agreement dated
September 26, 1996,
made by Registrant
with respect to the
Tumi Building.(3)
(j) First Amendment to
Mortgage dated
December __, 1996,
made by Registrant
with respect to the
Tumi Building.(3)
(k) Mortgage, Assignment
of Leases and Rents,
Security Agreement
and Fixture Filing
dated September 26,
1996, made by
Registrant with
respect to the
Marathon Oil
Building.(3)
(l) First Amendment to
Mortgage dated
December __, 1996,
made by Registrant
with respect to the
Marathon Oil
Building.(3)
- --------------------------------------------------------------------------------
December 31, 2000.
(3) Incorporated by reference to Exhibits 10 (k), (m), (n), (q), (r), (t), (u),
(v), and (w) to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996.
-29-
(m) Deed of Trust,
Assignment of Rents,
Security Agreement
and Fixture Filing
dated September 26,
1996, made by
Registrant with
respect to the
Directory Building.(3)
(n) First Amendment to
Deed of Trust dated
December __, 1996,
made by Registrant
with respect to the
Directory Building.(3)
(o) Amended and Restated
Loan Agreement dated
as of October 12,
2000 between
Registrant and Fleet
National Bank.(4)
(p) Amended and Restated
Secured Promissory
Note dated October
12, 2000, made by
Registrant.(4)
(q) Second Amendment to
Deed of Trust,
Assignment of Rents,
Security Agreement
and Fixture Filing
dated as of October
12, 2000 made by
Registrant with
respect to the
Directory Building.(4)
(r) Second Amendment to
Deed of Trust,
Assignment of Rents,
Security Agreement
and Fixture Filing
dated as of October
12, 2000 made by
Registrant with
respect to Alamo
Towers.(4)
(s) Third Amendment to
Deed of Trust,
Assignment of Rents,
Security Agreement
and Fixture Filing
dated as of October
12, 2000 made by
Registrant with
respect to the
Monterey Park
Building.(4)
- -------------
(4) Incorporated by reference to Exhibits 10 (o), (p), (q), (r), (s), (t), and
(u) to Registrant's Annual Report on Form 10-K for the year ended December 31,
2000.
-30-
(t) Third Amendment to
Mortgage, Assignment
of Leases and Rents
and Security
Agreement dated as
of October 12, 2000
made by Registrant
with respect to the
Tumi Building.(4)
(u) Third Amendment to
Mortgage, Assignment
of Leases and Rents,
Security Agreement
and Fixture Filing
dated as of October
12, 2000 made by
Registrant with
respect to the
Marathon Oil
Building.(4)
(v) Splitter Agreement
dated as of August
9, 1999 between
Fleet Bank and
Registrant.(5)
(w) Demand Note dated
August 9, 1999 made
by Registrant.(5)
(x) Assignment of
Mortgages and Note
dated as of August
9, 1999 made by
Registrant with
respect to 475 Fifth
Avenue. (5)
(y) Consolidated and
Restated Promissory
Note dated August 9,
1999 made by 475
Fifth Avenue Limited
Partnership.(5)
(z) Mortgage
Consolidation,
Assignment of Rents,
Security Agreement
and Fixture Filing
made as of August 9,
1999 by 475 Fifth
Avenue Limited
Partnership to and
for the benefit of
Heller Financial,
Inc.(5)
(aa) Letter Agreement
dated August 9, 1999
made by Robert F.
Gossett, Jr. to and
for the benefit of
Heller.(5)
- -------------
(5) Incorporated by reference to Exhibits 10 (v), (w), (x), (y), (z), (aa),
(bb), and (cc) to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999.
-31-
(bb) Manager's Agreement,
Subordination and
Consent to
Assignment dated as
of August 9, 1999
made by Registrant
to and for the
benefit of Heller.(5)
(cc) Hazardous Substance
Indemnification
Agreement dated as
of August 9, 1999
made by 475 Fifth
Avenue Limited
Partnership and
Robert F. Gossett,
Jr. to and for the
benefit of Heller.(5)
(dd) Lease dated as of
November 17, 2000
between Registrant
and LightCross, Inc.
with respect to the
Monterey Park
Building.(6)
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the
last quarter of the period covered by this report.
- -------------
(6) Incorporated by reference to Exhibit 10 (dd) to Registrant's Annual Report
on Form 10-K for the year ended December 31, 2000.
-32-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CORPORATE REALTY INCOME FUND I, L.P.
(Registrant)
By: 1345 REALTY CORPORATION
as Corporate General Partner
Dated: March 27, 2002 By: /s/ Robert F. Gossett, Jr.
---------------------------------
ROBERT F. GOSSETT, JR.,
President
Dated: March 27, 2002 By: /s/ Robert F. Gossett, Jr.
---------------------------------
ROBERT F. GOSSETT, JR.
Individual General Partner
-33-
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities (with respect to the Corporate General Partner)
and on the dates indicated.
1345 REALTY CORPORATION
Dated: March 27, 2002 By: /s/ Robert F. Gossett, Jr.
---------------------------------
Robert F. Gossett, Jr.
President, Director
Dated: March 27, 2002 By: /s/ Pauline G. Gossett
---------------------------------
Pauline G. Gossett
Secretary
-34-
Corporate Realty Income Fund I, L.P.
and Subsidiaries
List of Consolidated Financial Statements and Consolidated Financial
Statement Schedules
The following consolidated financial statements of Corporate Realty Income Fund
I, L.P. and Subsidiaries are included in Item 8:
Report of Independent Auditors - Ernst & Young LLP .........................F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2001 and 2000 ...............F-3
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999 .........................................F-4
Consolidated Statements of Changes in Partners' Capital for the
years ended December 31, 2001, 2000 and 1999 .............................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 .........................................F-6
Notes to Consolidated Financial Statements .................................F-7
Schedule III - Real Estate and Accumulated Depreciation.....................F-21
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted since
(1) the information required is disclosed in the consolidated financial
statements and notes thereto; (2) the schedules are not required under the
related instructions; or (3) the schedules are inapplicable.
Report of Independent Auditors
To the Partners of
Corporate Realty Income Fund I, L.P.
We have audited the accompanying consolidated balance sheets of Corporate Realty
Income Fund I, L.P. (a Delaware limited partnership) and subsidiaries (the
"Partnership") as of December 31, 2001 and 2000 and the related consolidated
statements of operations, changes in partners' capital and cash flows for each
of the three years in the period ended December 31, 2001. Our audits also
included the financial statement schedule listed in the Index at Item 14 (a).
These financial statements and schedule are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements and schedule 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 consolidated financial position of Corporate Realty
Income Fund I, L.P. and subsidiaries at December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Ernst & Young
New York, New York
February 4, 2002
F-2
Corporate Realty Income Fund I, L.P.
and Subsidiaries
Consolidated Balance Sheets
December 31,
2001 2000
-------------------------------
Assets
Real estate, at cost:
Land $18,795,477 $18,795,477
Buildings and improvements 99,031,250 94,703,273
Equipment and furniture 262,607 242,302
-------------------------------
118,089,334 113,741,052
Less accumulated depreciation 27,462,963 25,197,692
-------------------------------
90,626,371 88,543,360
Cash and cash equivalents 1,077,273 2,411,748
Accounts receivable, net of allowance for doubtful accounts of
$252,228 and $134,679 in 2001 and 2000 398,089 440,796
Due from general partners -- 273,252
Note receivable, net of unamortized discount of $11,195 and $20,463 in
2001 and 2000 240,485 184,723
Deferred rent receivable 2,546,931 2,523,954
Deferred financing costs, net of accumulated amortization of $448,464
and $1,918,751 in 2001 and 2000 994,815 1,281,303
Lease commissions, net of accumulated amortization of $1,426,842 and
$1,973,860 in 2001 and 2000 2,634,446 2,864,780
Escrow deposits 1,196,814 2,823,307
Deposits and other assets 817,242 797,918
-------------------------------
Total assets $100,532,466 $102,145,141
===============================
Liabilities and partners' capital
Accounts payable and accrued expenses $ 2,430,003 $ 2,965,347
Mortgage loans payable 55,879,036 51,335,864
Other liabilities 1,302,330 1,629,885
-------------------------------
Total liabilities 59,611,369 55,931,096
Commitments and contingencies
Partners' capital:
General partners:
Capital contributions 1,000 1,000
Net income 368,280 385,045
Cash distributions (675,555) (639,391)
-------------------------------
(306,275) (253,346)
-------------------------------
Limited partners: ($25 per unit; 4,000,000 units authorized,
2,983,531 issued and outstanding in 2001 and 2000)
Capital contributions, net of offering costs 71,724,856 71,724,856
Net income 36,459,500 38,119,282
Cash distributions (66,956,984) (63,376,747)
-------------------------------
41,227,372 46,467,391
-------------------------------
Total partners' capital 40,921,097 46,214,045
-------------------------------
Total liabilities and partners' capital $100,532,466 $102,145,141
===============================
See accompanying notes.
F-3
Corporate Realty Income Fund I, L.P.
and Subsidiaries
Consolidated Statements of Operations
For the years ended December 31,
2001 2000 1999
-----------------------------------------------
Revenue:
Rental $16,149,439 $15,109,228 $15,387,502
Lease cancellation 575,923 102,469 330,062
Interest and other income 259,429 343,172 978,435
-----------------------------------------------
16,984,791 15,554,869 16,695,999
-----------------------------------------------
Expenses:
Interest 4,019,262 4,356,650 3,736,687
Depreciation 3,535,432 3,486,070 3,452,891
Amortization 1,062,902 958,010 1,753,623
Property operations 8,062,211 7,742,251 7,622,547
Management fees - affiliate 1,191,489 1,030,050 1,099,706
Professional fees 372,768 675,940 345,000
Bad debt expense 128,516 273,381 1,196,065
General and administrative 392,091 334,956 317,584
-----------------------------------------------
18,764,671 18,857,308 19,524,103
-----------------------------------------------
Loss from real estate operations (1,779,880) (3,302,439) (2,828,104)
Gain on sale of real estate 103,333 5,111,393 --
-----------------------------------------------
Net (loss) income $(1,676,547) $ 1,808,954 $(2,828,104)
===============================================
Net (loss) income allocated:
General partners $(16,765) $18,090 $(28,281)
Limited partners (1,659,782) 1,790,864 (2,799,823)
-----------------------------------------------
$(1,676,547) $1,808,954 $(2,828,104)
===============================================
Net (loss) income per unit of limited partnership
interest - basic and diluted $(0.56) $0.60 $(0.94)
===============================================
See accompanying notes.
F-4
Corporate Realty Income Fund I, L.P.
and Subsidiaries
Consolidated Statements of Changes in Partners' Capital
General Limited
Total Partners Partners
-----------------------------------------------
Partners' capital (deficit) at
December 31, 1998 $54,452,261 $(170,964) $54,623,225
Cash distributions to partners (3,602,666) (36,027) (3,566,639)
Net loss (2,828,104) (28,281) (2,799,823)
-----------------------------------------------
Partners' capital (deficit) at
December 31, 1999 48,021,491 (235,272) 48,256,763
Cash distributions to partners (3,616,400) (36,164) (3,580,236)
Net income 1,808,954 18,090 1,790,864
-----------------------------------------------
Partners' capital (deficit) at
December 31, 2000 46,214,045 (253,346) 46,467,391
Cash distributions to partners (3,616,401) (36,164) (3,580,237)
Net loss (1,676,547) (16,765) (1,659,782)
-----------------------------------------------
Partners' capital (deficit) at
December 31, 2001 $40,921,097 $(306,275) $41,227,372
===============================================
See accompanying notes.
F-5
Corporate Realty Income Fund I, L.P.
and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended December 31,
2001 2000 1999
-----------------------------------------------
Operating activities
Net (loss) income $(1,676,547) $ 1,808,954 $(2,828,104)
-----------------------------------------------
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization 4,598,334 4,444,080 5,206,514
Gain on sale of real estate (103,333) (5,111,393) --
(Increase) decrease in deferred rent receivable (22,977) (142,531) 159,032
Changes in operating assets and liabilities:
Decrease in accounts receivable 42,707 137,684 159,137
Change in due to/from general partners 273,252 (336,786) 158,550
(Increase) decrease in note receivable (55,762) 59,920 279,736
Decrease (increase) in escrow deposits-
operating 166,668 523,848 (885,658)
Increase in lease commissions (546,080) (1,505,194) (497,390)
(Increase) decrease in deposits and other
assets (19,324) 8,657 (550,806)
(Decrease) increase in accounts payable and
accrued expenses (535,344) 410,859 (383,687)
(Decrease) increase in other liabilities (224,222) 163,600 (350,223)
-----------------------------------------------
Total adjustments 3,573,919 (1,347,256) 3,295,205
-----------------------------------------------
Net cash provided by operating activities 1,897,372 461,698 467,101
-----------------------------------------------
Investing activities
Decrease (increase) in escrow deposits -
investing 1,459,825 (46,008) (1,981,024)
Proceeds from sale of real estate -- 12,142,626 --
Acquisition of real estate (5,618,443) (5,039,804) (3,450,996)
-----------------------------------------------
Net cash (used in) provided by investing
activities (4,158,618) 7,056,814 (5,432,020)
-----------------------------------------------
Financing activities
Deferred financing costs -- (609,259) (834,019)
Proceeds from mortgage loan payable 5,300,000 19,641,440 35,000,000
Repayments of mortgage loan payable (756,828) (23,844,864) (26,391,512)
Cash distributions to partners (3,616,401) (3,616,400) (3,602,666)
-----------------------------------------------
Net cash provided by (used in) financing
activities 926,771 (8,429,083) 4,171,803
-----------------------------------------------
Net (decrease) increase in cash and cash equivalents (1,334,475) (910,571) (793,116)
Cash and cash equivalents at beginning of year 2,411,748 3,322,319 4,115,435
-----------------------------------------------
Cash and cash equivalents at end of year $ 1,077,273 $ 2,411,748 $ 3,322,319
===============================================
See accompanying notes.
F-6
Corporate Realty Income Fund I, L.P.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001
1. Organization
Corporate Realty Income Fund I, L.P. ("CRIF") was formed as a limited
partnership on November 25, 1985 under the laws of the State of Delaware. CRIF
was formed for the purpose of acquiring and owning income-producing commercial
and industrial real estate properties for lease to others. CRIF will terminate
on December 31, 2010 or sooner, in accordance with the Partnership Agreement.
During 1999, in connection with refinancing a portion of its debt, CRIF formed a
wholly-owned subsidiary to which it transferred ownership of its New York City
property.
The general partners of CRIF are 1345 Realty Corporation, the corporate general
partner, and Robert F. Gossett, Jr., the individual general partner.
On November 30, 1994, all of the outstanding capital stock of the corporate
general partner of CRIF was acquired by the individual general partner in a
transaction which was effective as of July 1, 1994. As a result of this
acquisition, the entire interest of the general partners is controlled by the
individual general partner.
The initial capital was $1,025 representing capital contributions of $1,000 by
the general partners and $25 by the original limited partner. The Partnership
commenced operations on June 2, 1986 with the acceptance of subscriptions for
1,082,640 Depositary Units of limited partnership interest (the "Units"). The
Partnership has authorized the issuance of up to 4,000,000 Units. The
Partnership sold 3,200,000 Units, representing $80,000,000, which completed the
offering. Upon the first admittance of the additional limited partners and
unitholders, the original limited partner withdrew from the Partnership.
Offering costs incurred in connection with the initial offering are
nonamortizable and have been deducted from limited partners' capital.
There were no unit redemptions during 2001, 2000 and 1999.
F-7
Corporate Realty Income Fund I, L.P.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of CRIF and its
wholly-owned subsidiaries (collectively, the "Partnership"). All significant
intercompany accounts and transactions have been eliminated.
Real Estate and Depreciation
Costs directly related to the acquisition and improvement of real estate are
capitalized. Ordinary repairs and maintenance are expensed as incurred.
Depreciation of buildings, improvements, and equipment and furniture for
financial reporting purposes is computed under the straight-line method over the
estimated economic useful life of the assets which range from five to forty
years.
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
the Partnership's assets, which are held for use, are measured by a comparison
of the carrying amount of an asset to future net cash flow expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by which the carrying amount of the
assets exceeds the fair value. Assets to be disposed of are reported at the
lower of carrying amount or fair value less costs to sell. No impairment losses
were required on any of the properties owned by the Partnership.
Deferred Financing Costs
Deferred financing costs are being amortized over the term of the loan
agreements.
Lease Commissions
Leasing commissions are capitalized and amortized over the term of the related
leases.
F-8
Corporate Realty Income Fund I, L.P.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
Deferred Rent
Rental income is recognized on the straight-line basis over the entire term of
the lease including rent-free periods. Accordingly, rental income for the years
ended December 31, 2001, 2000 and 1999, includes approximately $186,457,
$221,900 and $615,300, respectively, of the excess of income on the
straight-line basis over the actual amount billed.
During 2001, the Partnership wrote off deferred rent receivable of approximately
$163,500, of which approximately $144,000 related to one tenant vacating 475
Fifth Avenue prior to the expiration of the lease term. During 2000, the
Partnership wrote off deferred rent receivable of approximately $79,400, of
which approximately $76,700 and $2,700 related to tenants vacating 475 Fifth
Avenue and Alamo Towers, respectively, prior to the expiration of their lease
terms. During 1999, the Partnership wrote-off deferred rent receivable of
approximately $774,400, of which approximately $407,200, $338,200 and $29,000
related to tenants vacating the Tumi Building, 475 Fifth Avenue, and the
Monterey Park Building, respectively, prior to the expiration of their lease
terms.
Income Taxes
No provision for income taxes has been made since all items of income or losses
and tax benefits are passed through to the individual partners.
Cash Equivalents
The Partnership considers all highly liquid financial instruments with a
maturity of three months or less when purchased to be cash equivalents. Cash
equivalents, which consist principally of money market funds, are carried at
cost which approximates market value.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," defines
fair value of a financial instrument as the amount at which the instrument could
be exchanged
F-9
Corporate Realty Income Fund I, L.P.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
Fair Value of Financial Instruments (continued)
in a current transaction between willing parties. The Partnership's accounts
receivable and note receivable, deposits, accounts payable and accrued expenses,
interest payable and variable rate mortgage loan payable are carried at cost,
which approximates fair value.
The fair value of the Partnership's fixed rate long term borrowings are
estimated using discounted cash flow analyses, based on current borrowing rates
for similar types of borrowing arrangements. The carrying amount and fair value
of the Partnership's fixed rate long-term debt at December 31, 2001 is
$31,495,092 and $32,354,182, respectively.
Segments
SFAS No. 131 "Disclosure about Segments of an Enterprise and Related
Information", ("Statement 131") requires disclosures about segments of an
enterprise and related information regarding the different types of business
activities in which an enterprise engages and the different economic
environments in which it operates.
The Partnership is engaged in owning and managing office properties and has one
reportable segment, office real estate. The primary sources of revenue are
tenant rents and escalations and reimbursement revenue. Real estate property
operating expenses primarily consist of real estate taxes, security, maintenance
and utility costs.
Recently Issued Accounting Pronouncement
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (FAS 144), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and
the accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations for a disposal of a segment of a business. FAS 144 is
effective for fiscal years beginning after December 15, 2001, with
F-10
Corporate Realty Income Fund I, L.P.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
earlier application encouraged. The Company will adopt FAS 144 as of January 1,
2002 and it does not expect that the adoption of the Statement will have a
significant impact on the Company's financial position and results of
operations.
Use of Estimates
The general partners have made a number of estimates and assumptions relating to
the reporting of assets and liabilities and the disclosure of contingent assets
and liabilities to prepare these consolidated financial statements in conformity
with accounting principles generally accepted in the United States. Actual
results could differ from those estimates.
3. Partnership Agreement
The Partnership Agreement provides that profits, losses and distributions shall
be allocated 99% to the limited partners and 1% to the general partners.
Sale or refinancing proceeds will generally be distributed 99% to the limited
partners and 1% to the general partners until the limited partners have received
an amount which, when added to all prior distributions of cash, will equal their
original invested capital plus an 8% per annum cumulative noncompounded return.
Thereafter, after payment of the subordinated disposition fee, as defined in the
agreement, proceeds will be distributed 75% to the limited partners and 25% to
the general partners.
The Partnership Agreement further provides that net income shall be allocated to
each calendar month of the year, and shall be apportioned on a monthly basis to
the holders of interests, in the ratio in which the number of interests owned by
each limited partner or unitholder on the first day of the month bears to the
total number of interests owned by the limited partners and unitholders as of
that date.
4. Investments in Real Estate
Monterey Park Building
On July 10, 1986, the Partnership purchased the Monterey Park Building (formerly
the American Color Building), an office building located at 2630 Corporate
Place, Monterey
F-11
Corporate Realty Income Fund I, L.P.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Investments in Real Estate (continued)
Monterey Park Building (continued)
Park, California, and the 90,000 square feet of underlying land. The property
contains approximately 22,250 square feet of net rentable area.
The terms of the agreement with the seller provided for a purchase price,
including capitalized closing and related costs, of approximately $4,182,000.
During 1999, a tenant, American Color Graphics vacated the property and paid a
lease cancellation fee of approximately $140,000. During 2000, the building was
approximately 45% leased to one tenant under a lease which expired in November
2000. In November 2000, the Partnership entered into a 10 year net lease with
Lightcross for the entire building. The tenant occupied the premises in August
2001.
The Directory Building
On October 27, 1986, the Partnership purchased the Directory Building (formerly
the IBM building), an office building located in Las Colinas, Texas, and the
6.67 acres of underlying land. The property contains approximately 152,100
square feet of net rentable area.
The terms of the agreement with the seller provided for a purchase price,
including capitalized closing and related costs, of approximately $24,580,000.
As of December 31, 2001, the building was 100% leased to GTE Directories
Corporation for a term, which expires on September 30, 2003. Rent from the
tenant represented 20%, 18%, and 16% of the Partnership's total rental revenue
in 2001, 2000 and 1999, respectively.
Tumi Building
On December 30, 1986, the Partnership purchased the Tumi Building (formerly the
Austin Place Building), an office building located in South Plainfield, New
Jersey, and
F-12
Corporate Realty Income Fund I, L.P.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Investments in Real Estate (continued)
Tumi Building (continued)
the five acres of underlying land. The property contains approximately 107,900
square feet of net rentable area.
The terms of the agreement with the seller provided for a purchase price,
including capitalized closing and related costs, of approximately $16,473,000.
In March 1999, Gdynia America Line, Inc. ("Gdynia"), a tenant who had occupied
approximately 20% of the Tumi Building, filed for protection under Chapter 11 of
the U.S. Bankruptcy Code. The lease was rejected in bankruptcy proceedings and
the Partnership is currently pursuing amounts from Polish Ocean Lines, a Polish
corporation partially owned by the Polish government, that is jointly and
severally obligated under Gdynia's lease.
As of December 31, 2001, the building was approximately 76% leased to various
tenants under leases with remaining terms ranging from four to seven years.
Flatiron Building
On January 5, 1988, the Partnership purchased the Flatiron Building (formerly
the Cadnetix Building) located in Boulder, Colorado, and the five acres of
underlying land. The building contains approximately 96,000 square feet of net
rentable area.
The terms of the agreement with the seller provided for a purchase price,
including capitalized closing and related costs, of approximately $9,003,000.
On June 30, 2000, the Partnership sold the Flatiron Building for $13,050,000 and
recognized a gain of approximately $5,111,000, net of closing costs of
approximately $473,000. Proceeds from the sale of $10,000,000 were used to
partially pay down the Mortgage (Note 7).
An escrow account of $434,466 was established from the proceeds of the sale
which will be released to the Partnership if and when it finds a replacement for
a tenant who applied
F-13
Corporate Realty Income Fund I, L.P.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Investments in Real Estate (continued)
Flatiron Building (continued)
for bankruptcy protection. As of December 31, 2001, a balance of $254,000
remains in the escrow. The recognition of gain on sale, to the extent held in
such escrow, has been deferred.
Marathon Oil Building
On March 21, 1988, the Partnership purchased the Marathon Oil Building (formerly
the Tenneco Oil Building) located in Oklahoma City, Oklahoma, and the 6.1 acres
of underlying land. The building contains approximately 90,925 net rentable
square feet plus a 10,016 square foot basement.
The terms of the agreement with the seller provided for a purchase price,
including capitalized closing and related costs, of approximately $10,736,000.
As of December 31, 2001, the building was approximately 75% leased to various
tenants under leases with remaining terms ranging from three years to five
years. The Marathon Oil Company leases approximately 65,700 square feet of space
pursuant to a lease, which expires in February, 2006. Approximately 9,300 square
feet of the remaining space is leased to two tenants.
475 Fifth Avenue
On December 6, 1996 the Partnership purchased an office building and the
underlying land, approximately one third of an acre, located at 475 Fifth
Avenue, New York, New York (the "New York Building"). The building contains
approximately 240,000 net rentable square feet.
The terms of the agreement with the seller provided for a purchase price,
including capitalized closing and related costs, of approximately $27,440,000.
As of December 31, 2001, the building was approximately 92% leased to various
tenants under operating leases with remaining terms ranging from one to fourteen
years.
F-14
Corporate Realty Income Fund I, L.P.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Investments in Real Estate (continued)
475 Fifth Avenue (continued)
During 2001, the Partnership recognized lease cancellation income of
approximately $576,000, net of write off of deferred rent receivable of
approximately $144,000. For the years ended December 31, 2000 and 1999, $70,000
and $190,000, respectively, were earned from tenants that terminated their
leases prior to the end of their lease terms.
Alamo Towers
On March 17, 1997, the Partnership purchased an office building and the thirteen
acre underlying land located in San Antonio, Texas, for a purchase price,
including capitalized closing and related costs, of approximately $12,002,000.
The building contains approximately 193,000 net rentable square feet.
As of December 31, 2001, the building was approximately 81% leased to various
tenants under operating leases with remaining terms ranging from one to six
years.
During 2000 the partnership earned lease cancellation fees aggregating
approximately $32,000 from tenants that terminated leases prior to the end of
their respective lease terms.
5. Leases
Minimum future rentals from tenants under noncancellable operating leases as of
December 31, 2001 are approximately as follows:
2002 $ 13,652,000
2003 12,608,000
2004 9,838,000
2005 8,435,000
2006 5,873,000
Thereafter 15,144,000
----------------
Total $ 65,550,000
================
F-15
Corporate Realty Income Fund I, L.P.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Leases (continued)
In addition to the minimum lease amounts, the leases provide for escalation
charges to the tenants for operating expenses, electric and real estate taxes.
For the years ended December 31, 2001, 2000 and 1999, escalation charges
amounting to approximately $1,421,000, $1,846,000 and $2,034,000, respectively,
have been included in rental income.
6. Transactions With General Partners and Affiliates
The general partners or their affiliates receive a property management fee equal
to either 1% for a long-term net lease with a term of ten years or more or 6%
for other types of leases on the gross revenue from the property, and a
partnership management fee equal to 7% of adjusted cash from operations, as
defined, and reimbursement of administrative expenses. The general partners also
receive leasing commissions in connection with leasing, re-leasing or leasing
related services performed on behalf of the Partnership in connection with the
negotiation of tenant leases. Such commissions are computed at a rate equal to
3% of the gross revenues for the first five years of each lease signed where the
general partners have performed such leasing services.
Following is a summary of the fees earned and reimbursable expenses for the
years ended December 31, 2001, 2000 and 1999:
2001 2000 1999
--------------------------------------------
Partnership management fees $253,148 $106,508 $250,908
Property management fees 938,341 923,542 848,798
Administrative expenses 67,800 70,000 55,000
There were no leasing commissions billed by the general partner in 2001, 2000
and 1999.
7. Loans Payable
On September 26, 1996, the Partnership entered into a $24,000,000 senior secured
revolving credit facility (the "Mortgage"). The purpose of the Mortgage was to
refinance the existing $7,800,000 secured revolving line of credit, to provide
working capital for
F-16
Corporate Realty Income Fund I, L.P.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Loans Payable (continued)
tenant improvements and leasing commissions with respect to the properties owned
by the Partnership, and to provide funds for the acquisition of additional
properties. On December 6, 1996, the Partnership amended the Mortgage,
increasing the principal amount to $44,000,000. On September 25, 1998, the
Partnership further amended the Mortgage. The terms of the Mortgage, as amended,
provided for a term of four years and provided for maximum gross borrowings of
$49,000,000. On August 9, 1999, the Partnership divided the Mortgage into two
notes. One note, in the amount of $22,594,880, was secured by the New York
Building, and the second note in the amount of $26,405,120 was secured by the
six other properties owned by the Partnership.
The loan secured by the New York Building was repaid in 1999. As a result of the
Mortgage borrowing capacity reduction, approximately $251,000 of unamortized
loan fees were written off during 1999.
On October 12, 2000, the Partnership entered into an Amended and Restated Loan
Agreement in connection with the Mortgage (the "New Mortgage"). The terms of the
New Mortgage provide for maximum gross borrowings of $25,000,000, of which
$19,641,440 was advanced on October 12, 2000. The loan commitment is permanently
reduced by required monthly principal payments and any prepayments. The New
Mortgage provides for an initial maturity date of September 30, 2003, however,
the Partnership has the option to extend the maturity date for two additional
one year periods provided that certain conditions are met. The New Mortgage is
secured by the properties owned by the Partnership, other than the New York
Building.
Borrowings under the New Mortgage bear interest monthly at a rate, selected at
the option of the Partnership at the time of the associated borrowing, based on
(i) the prime rate plus .50% or (ii) the applicable LIBOR rate plus 2%. The New
Mortgage requires monthly amortization of principal in an amount equal to
1/500th of the outstanding principal on the first day of the applicable month
with a final payment of the then outstanding balance due at maturity. Borrowings
bearing interest based upon the prime rate can be prepaid any time without
penalty. The LIBOR based advances can be prepaid at the end of the interest
periods without penalty, and during the interest period subject to a penalty.
Upon the sale of any property, the Partnership is required to repay principal on
the total indebtedness under the New Mortgage in an amount equal to 110% of that
F-17
7. Loans Payable (continued)
portion of the outstanding balance of the loan attributable to the sold
property, as defined in the New Mortgage agreement, or 100% of the sales price,
if greater, for Alamo Towers and the Directory Building. The New Mortgage
requires the Partnership to comply with certain covenants, including but not
limited to, maintenance of certain financial ratios.
In addition, the New Mortgage provides that the Partnership may distribute to
its partners up to 90% of the sum of its cumulative net income from real estate
operations, adjusted for depreciation, amortization, and write-offs of deferred
rent receivables. Compliance with this distribution provision is tested as of
the last day of each fiscal quarter for the period from and including January 1,
2001, through the date as of which compliance is tested. As of December 31,
2001, the Partnership had exceeded this distribution limitation by approximately
$548,000 and expects to continue to exceed this limitation unless and until it
can generate sufficient additional rental revenue from its properties. If Fleet
were to force the Partnership to comply with this provision, the Partnership
would need to reduce its distributions to Unitholders or risk a default under
the Fleet Loan.
At December 31, 2001, $24,383,944 was outstanding under the New Mortgage at an
interest rate of approximately 4.0% based on (ii) above.
In connection with obtaining the New Mortgage, the Partnership incurred fees and
expenses of $609,259, which have been capitalized and are being amortized over
the term of the loan agreement.
On August 9, 1999, the Partnership obtained a $32,000,000 fixed rate mortgage
(the "New York Loan"). The loan is secured by the New York Building, matures on
September 1, 2009, and bears interest on the outstanding balance, payable
monthly, at a fixed rate of 8.27%. The terms of the note require monthly
principal and interest payments of $240,855. In connection with the New York
Loan, the Partnership incurred fees aggregating approximately $834,000. These
fees have been deferred and are being amortized over the term of the New York
Loan. As of December 31, 2001, the outstanding balance of the loan was
$31,495,092. The New York Loan may not be prepaid prior to September 2, 2002.
Thereafter, the New York Loan can be prepaid in full and not in part, subject to
a prepayment penalty. Pursuant to the New York Loan
F-18
Corporate Realty Income Fund I, L.P.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Loans Payable (continued)
agreement, the Partnership had approximately $1,197,000 included in escrow
deposits on December 31, 2001 in restricted funds for capital improvements,
repairs and replacements, and real estate taxes.
Minimum future principal payments pursuant to the Partnership's loan agreements
as of December 31, 2001 are as follows:
2002 $ 838,229
2003 24,087,136
2004 299,029
2005 332,652
2006 361,641
Thereafter 29,960,349
--------------
Total $ 55,879,036
==============
8. Supplemental Disclosure of Cash Flow Information
2001 2000 1999
------------------------------------------
Cash paid during the year for interest $4,083,149 $4,388,197 $3,653,401
==========================================
9. Employee Savings Plan
During 1997, the Partnership established an employee savings plan (the "Plan")
in accordance with Section 401(K) of the Internal Revenue Code. The Plan permits
eligible employees to make contributions through salary reductions. For the
years ended December 31, 2001, 2000 and 1999, the Partnership made contributions
of $25,000, $0, and $0, respectively to the Plan.
10. Earnings and Distributions per Limited Partnership Unit
Basic earnings per limited partnership unit amounts were computed based on
2,983,531 (2001, 2000 and 1999) weighted average limited partnership units
outstanding.
F-19
Corporate Realty Income Fund I, L.P.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Earnings and Distributions per Limited Partnership Unit (continued)
For the three years ended December 31, 2001, there were no partnership unit
equivalents and, in accordance with the provisions of SFAS No. 128, dilutive
earnings per limited partnership unit for the three years ended December 31,
2001, were computed based on the weighted average limited partnership units
outstanding.
Distributions per limited partnership unit were $1.20 for the years ended
December 31, 2001, 2000 and 1999.
F-20
Corporate Realty Income Fund I, L.P.
and Subsidiaries
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2001
Costs
Capitalized
Subsequent to Gross Amount at Which
Initial Cost (B) Acquisition Carried at Close of Period
------------------------------------------------------------------------------------
Building Building Building
Encumbrances and and and
Description (A) Land Improvements Improvements Land Improvements
- -----------------------------------------------------------------------------------------------------------------------------
Office Building
Monterey Park, $ 1,194,813 $ 1,762,126 $ 2,459,141 $ 1,593,359 $ 1,762,126 $ 4,052,500
CA
Office Building
Las Colinas, TX 8,778,220 4,925,745 19,702,979 3,348,026 4,925,745 23,051,005
Office Building
So. Plainfield, 5,778,995 3,147,912 13,378,294 2,019,437 3,147,912 15,397,731
NJ
Office Building
San Antonio, TX 6,437,361 2,408,000 9,636,883 5,854,580 2,408,000 15,491,463
Office Building
Oklahoma City, 2,194,555 1,063,694 9,713,348 519,250 1,063,694 10,232,598
OK
Office Building
New York, NY 31,495,092 5,488,000 21,951,998 9,116,562 5,488,000 31,068,560
----------- ----------- ----------- ----------- ----------- -----------
$55,879,036 $18,795,477 $76,842,643 $22,451,214 $18,795,477 $99,293,857
=========== =========== =========== =========== =========== ===========
Accumulated Life on Which
Total Depreciation Date of Date Depreciation
Description (C) (D) Construction Acquired Is Computed
- --------------------------------------------------------------------------------------------------------
Office Building
Monterey Park, $ 5,814,626 $ (1,008,090) 1985 7/10/1986 5 to 40 years
CA
Office Building
Las Colinas, TX 27,976,750 (10,159,402) 1982 10/27/1986 5 to 40 years
Office Building
So. Plainfield, 18,545,643 (6,070,257) 1986 12/30/1986 5 to 40 years
NJ
Office Building
San Antonio, TX 17,899,463 (1,648,153) 1975/1 3/17/1997 5 to 40 years
Office Building
Oklahoma City, 11,296,292 (3,750,726) 1986 3/21/1988 5 to 40 years
OK
Office Building
New York, NY 36,556,560 (4,826,335) 1927 12/6/1996 5 to 40 years
------------ ------------
$118,089,334 $(27,462,963)
============ ============
F-21
Corporate Realty Income Fund I, L.P.
and Subsidiaries
Schedule III - Real Estate and Accumulated Depreciation (continued)
December 31, 2001
Notes:
(A) Encumbrances represents loans secured by deeds of trust given with respect
to all of the properties of the Partnership.
(B) The initial cost to the Partnership represents the original purchase price
of the properties net of purchase price adjustments, including amounts
incurred subsequent to acquisition which were contemplated. The initial
cost includes the purchase price paid by the Partnership and acquisition
fees and expenses.
(C) Reconciliation Summary of Transactions - Real Estate Owned
For the years ended December 31,
2001 2000 1999
-----------------------------------------------
Balance at beginning of year $113,741,052 $118,185,492 $115,495,174
Net additions during the year 5,618,443 5,039,804 3,450,996
Cost of real estate sold -- (9,395,006) --
Write off fully depreciated assets (1,270,161) (89,238) (760,678)
-----------------------------------------------
Balance at close of year $118,089,334 $113,741,052 $118,185,492
===============================================
The aggregate cost of land, buildings and improvements for federal income
tax purposes at December 31, 2001 was approximately $119,982,000.
(D) Reconciliation Summary of Transactions - Accumulated Depreciation
For the years ended December 31,
2001 2000 1999
-----------------------------------------------
Balance at beginning of year $25,197,692 $24,361,971 $21,669,758
Depreciation charged to expense 3,535,432 3,486,070 3,452,891
Accumulated depreciation of real estate
sold -- (2,561,111) --
Write-off of fully depreciated assets (1,270,161) (89,238) (760,678)
-----------------------------------------------
Balance at close of year $27,462,963 $25,197,692 $24,361,971
===============================================
F-22