SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-15796
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Corporate Realty Income Fund I, L.P.
------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3311993
- ----------------------- -----------------
(State of organization) (I.R.S. Employer
identification No.)
475 Fifth Avenue, New York, New York 10017
- ------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 696-0772
--------------
Former name, former address and former fiscal year, if changed since last
report.
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 |_|
CORPORATE REALTY INCOME FUND I, L.P.
and SUBSIDIARIES
Index
Page No.
--------
Part I Financial information 3
Item 1 Financial Statements 3
Consolidated Balance Sheets --
September 30, 2002 and December 31, 2001 4
Consolidated Statements of Operations --
For the three months ended September 30, 2002 and 2001 5
Consolidated Statements of Operations --
For the nine months ended September 30, 2002 and 2001 6
Consolidated Statements of Cash Flows --
For the nine months ended September 30, 2002 and 2001 7
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures about Market Risk 13
Item 4 Controls and Procedures 14
Part II Other information 15
Item 6 Exhibits and Reports on Form 8-K 15
Signatures 16
2
Part I. Financial Information
Item 1. Financial Statements
The summarized financial information contained herein is unaudited; however, in
the opinion of management, all adjustments necessary for a fair presentation of
such financial information have been included.
3
CORPORATE REALTY INCOME FUND I, L.P.
and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2002 and December 31, 2001
September 30, December 31,
2002 2001
------------- -------------
(Unaudited)
ASSETS
Real estate, at cost:
Land $ 18,795,477 $ 18,795,477
Buildings and improvements 100,260,697 99,031,250
Equipment and furniture 262,607 262,607
------------- -------------
119,318,781 118,089,334
Less accumulated depreciation (29,891,421) (27,462,963)
------------- -------------
89,427,360 90,626,371
Cash and cash equivalents 1,373,432 1,077,273
Accounts receivable, net of allowance for doubtful
accounts of $134,680 in 2002 and $252,228 in 2001 255,095 398,089
Notes receivable, net of unamortized discount of
$5,966 in 2002 and $11,195 in 2001 153,742 240,485
Step rent receivables 2,602,469 2,546,931
Deferred financing costs, net of accumulated amortization
of $663,333 in 2002 and $448,464 in 2001 779,946 994,815
Lease commissions and legal fees, net of accumulated amortization
of $1,806,731 in 2002 and $1,426,842 in 2001 2,298,056 2,634,446
Escrow cash 886,236 1,196,814
Deposits and other assets 519,113 817,242
------------- -------------
Total assets $ 98,295,449 $ 100,532,466
============= =============
LIABILITIES AND PARTNERS' CAPITAL
Mortgage loan payable $ 55,252,751 $ 55,879,036
Accounts payable and accrued expenses 2,632,443 2,430,003
Due to general partners 778,888 --
Other liabilities 1,253,319 1,302,330
------------- -------------
Total liabilities 59,917,401 59,611,369
------------- -------------
Partners' Capital:
General partners:
Capital contributions 1,000 1,000
Net income 351,891 368,280
Cash distributions (684,596) (675,555)
------------- -------------
(331,705) (306,275)
------------- -------------
Limited partners: ($25 per unit; 4,000,000 units
authorized, 2,983,531 issued and
outstanding in 2002 and 2001)
Capital contributions, net of offering costs 71,724,856 71,724,856
Net income 34,836,940 36,459,500
Cash distributions (67,852,043) (66,956,984)
------------- -------------
38,709,753 41,227,372
------------- -------------
Total partners' capital 38,378,048 40,921,097
------------- -------------
Total liabilities and partners' capital $ 98,295,449 $ 100,532,466
============= =============
See accompanying notes to financial statements.
4
CORPORATE REALTY INCOME FUND I, L.P.
and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended September 30, 2002 and 2001
(Unaudited)
2002 2001
----------- -----------
Income:
Rental $ 4,044,907 $ 4,040,340
Lease cancellation -- 575,923
Interest and other income 64,521 52,786
----------- -----------
4,109,428 4,669,049
----------- -----------
Expenses:
Interest 896,103 972,131
Depreciation 809,486 735,027
Amortization 224,732 348,621
Property operating 2,069,162 2,160,363
Management fees 281,226 323,344
Bad debt expense 89,858 0
General and administrative 173,826 136,784
----------- -----------
4,544,393 4,676,270
----------- -----------
Net loss $ (434,965) (7,221)
=========== ===========
Net loss allocated:
To the general partners $ (4,350) $ (72)
To the limited partners (430,615) (7,149)
----------- -----------
$ (434,965) $ (7,221)
=========== ===========
Net loss per unit of limited partnership interest $ (0.14) $ (0.00)
=========== ===========
Distribution per unit of limited partnership interest $ -- $ 0.30
=========== ===========
See accompanying notes to financial statements.
5
CORPORATE REALTY INCOME FUND I, L.P.
and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the nine months ended September 30, 2002 and 2001
(Unaudited)
2002 2001
------------ ------------
Income:
Rental $ 11,586,020 $ 11,983,938
Lease cancellation -- 575,923
Interest and other income 127,971 222,045
------------ ------------
11,713,991 12,781,906
------------ ------------
Expenses:
Interest 2,669,786 3,085,103
Depreciation 2,428,458 2,215,781
Amortization 674,196 760,365
Property operating 5,868,039 6,124,964
Management fees 805,446 899,444
Bad debt expenses 392,144 10,968
General and administrative 514,871 477,842
------------ ------------
13,352,940 13,574,467
------------ ------------
Loss from real estate operations (1,638,949) (792,561)
Gain on sale of real estate -- 103,333
------------ ------------
Net loss $ (1,638,949) $ (689,228)
============ ============
Net loss allocated:
To the general partners $ (16,390) $ (6,892)
To the limited partners (1,622,559) (682,336)
------------ ------------
$ (1,638,949) $ (689,228)
============ ============
Net loss per unit of limited partnership interest $ (0.54) $ (0.23)
============ ============
Distribution per unit of limited partnership interest $ 0.30 $ 0.90
============ ============
See accompanying notes to financial statements.
6
CORPORATE REALTY INCOME FUND I, L.P.
and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2002 and 2001
(Unaudited)
2002 2001
----------- -----------
Cash flows from operating activities:
Net loss $(1,638,949) $ (689,228)
----------- -----------
Adjustments to reconcile loss
to net cash provided by operating activities:
Depreciation and amortization 3,102,654 2,976,146
Gain from sale of real estate -- (103,333)
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 142,994 55,657
Due from general partners -- 55,850
Notes receivable 86,743 (30,962)
Step rent receivables (55,538) 40,869
Lease commissions and legal fees (122,937) (411,995)
Escrow deposits 310,578 891,648
Other assets 298,129 277,699
Increase (decrease) in:
Accounts payable and accrued expenses 202,440 439,204
Other liabilities (49,011) (103,990)
----------- -----------
Total adjustments 3,916,052 4,086,793
----------- -----------
Net cash provided by operating activities 2,277,103 3,397,565
----------- -----------
Cash flows from investing activities:
Acquisition of real estate (1,229,447) (5,010,438)
----------- -----------
Cash used in investing activities (1,229,447) (5,010,438)
----------- -----------
Cash flows from financing activities:
Due to general partners 778,888 --
Mortgage proceeds -- 4,300,000
Mortgage principal repayments (626,285) (552,686)
Cash distributions to partners (904,100) (2,712,301)
----------- -----------
Net cash (used in)/ provided by financing activities (751,497) 1,035,013
----------- -----------
Net increase/(decrease) in cash and cash equivalents 296,159 (577,860)
Cash and cash equivalents at beginning of period 1,077,273 2,411,748
----------- -----------
Cash and cash equivalents at end of period $ 1,373,432 $ 1,833,888
=========== ===========
See accompanying notes to financial statements.
7
CORPORATE REALTY INCOME FUND I, L.P.
and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
1. General
The accompanying unaudited condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management of Corporate Realty Income Fund I, L.P. and subsidiaries (the
"Partnership" or the "Registrant"), all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine months ended September 30,
2002 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2002.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Registrant's annual report on Form 10-K for
the year ended December 31, 2001.
In August 1999, the Partnership established two wholly-owned subsidiaries
namely, 475 Fifth Avenue L.P. and 475 Fifth - GP, Inc. 475 Fifth Avenue L.P.,
the interest of which is 99% owned by Registrant and 1% owned by 475 Fifth - GP,
Inc. (The General Partner), acquired ownership of the New York building and
related operations.
The consolidated financial statements include the accounts of the
Partnership and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated.
2. Recently Issued Accounting Pronouncement
In October 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." Statement No. 144 provides accounting guidance for financial accounting
and reporting for the impairment or disposal of long-lived assets. Statement No.
144 supersedes Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-lived Assets to be disposed of". It also supersedes the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions related to the disposal of a segment of a business.
Statement No. 144 is effective for fiscal years beginning after December 15,
2001. The Partnership adopted Statement No. 144 on January 1, 2002. The adoption
of this statement did not have a material effect on the results of operations or
the financial position of the Partnership.
In April 2002, the FASB issued Statement No. 145, which rescinded Statement
No.4, "Reporting Gains and Losses from Extinguishment of Debt". Statement No.
145 is effective for fiscal years beginning after May 15, 2002. The Company will
adopt Statement No. 145 on January 1, 2003.
8
CORPORATE REALTY INCOME FUND I, L.P.
and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
3. Rental Income
In accordance with FASB No. 13, "Accounting for Leases," the Partnership
recognizes rental income on a straight-line basis over the fixed term of the
lease period. Step rent receivables represent unbilled future rentals. The
following reconciles rental income billed to rental income recognized.
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
----------- ----------- ----------- -----------
Rental income billed $ 3,902,264 $ 4,018,008 $11,368,707 $11,880,731
Step rent receivables 142,643 22,332 217,313 103,207
----------- ----------- ----------- -----------
Rental income recognized $ 4,044,907 $ 4,040,340 $11,586,020 $11,983,938
=========== =========== =========== ===========
4. Leases
Minimum future rentals under noncancellable operating leases as of
September 30, 2002 are approximately as follows:
Year ending December 31
-----------------------
2003 $12,697,000
2004 9,914,000
2005 9,086,000
2006 6,551,000
2007 7,138,000
Thereafter 9,853,000
-----------
Total $55,239,000
===========
In addition to the minimum lease amounts, the leases provide for escalation
charges to the tenants for operating expenses and real estate taxes. Escalation
charges have been included in rental income. For the three and nine months ended
September 30, 2002 and 2001, escalation charges amounted to $411,804 and
$1,115,907 in 2002 and $373,251 and $1,070,217 in 2001 respectively.
5. Transactions with General Partners and Affiliates
Fees incurred and reimbursable expenses for the three and nine months ended
September 30, 2002 are:
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
-------- -------- -------- --------
Partnership management fees $ 51,836 63,287 $166,959 189,861
Property management fees 229,390 260,057 638,487 709,583
6. Supplemental Disclosure of Cash Flow Information
Cash paid for interest during the nine months ended September 30, 2002 and
2001 amounted to $2,686,762 and $3,131,052, respectively.
9
CORPORATE REALTY INCOME FUND I, L.P.
and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
7. Deferred Gain on Sale of Colorado Building
On June 30, 2000, Registrant sold its real property in Boulder, Colorado
for $13,050,000 realizing a gain of approximately $5,111,000. Proceeds from the
sale were used to partially pay-off the Fleet Loan by $10,000,000.
An escrow account for $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 for bankruptcy protection. Recognition of
gain on sale, to the extent held in such escrow, has been deferred. Through
September 30, 2002, $103,333 has been recognized (all recorded in 2001). An
agreement between the Partnership and the purchaser also calls for the
Partnership to indemnify the purchaser for the nonpayment of rent by the tenant
applying for bankruptcy protection. Through September 30, 2002, disbursements
aggregating approximately $146,000 were made from the escrow account in relation
to such obligation. In addition, the Partnership earned interest income of
approximately $28,000 since the escrow account was established.
8. Contingencies
In March 1999, Gdynia American 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 was pursuing amounts from Polish Ocean Lines, a
Polish corporation owned by the Polish government and/or certain Polish
institutions and organizations, who is jointly and severally obligated under
this lease. On May 4, 2001, the Partnership obtained a judgement in the
approximate amount of $4,389,400 against Polish Ocean Lines for amounts due
under the lease. Such amount has not been recognized in income as there can be
no assurance as to the Partnership's ability to collect any of this judgement.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
At September 30, 2002, Registrant had cash and receivables of approximately
$1,629,000 as contrasted to accounts payable and accrued expenses of
approximately $2,632,000. 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 its line-of-credit loan (the "Fleet
Loan") is exhausted.
In June 2000, Registrant sold its real property in Boulder, Colorado 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. An agreement between the
Partnership and the purchaser also calls for the Partnership to indemnify the
purchaser for the nonpayment of rent by the tenant applying for bankruptcy
protection. Through September 30, 2002, disbursements aggregating approximately
$146,000 were made from the escrow account in relation to such obligation. In
addition, the Partnership earned interest income of approximately $28,000 since
the escrow account was established.
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.
Because the Fleet Loan requires monthly amortization of the outstanding
principal balance, which amounts permanently reduce the maximum gross borrowings
under the loan, Registrant has availed itself of the maximum amount allowed
under the Fleet Loan. Registrant may draw funds from its replacement reserve
(currently approximately $201,000) under the 475 Fifth Loan to fund certain
improvements at 475 Fifth Avenue.
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 judgement in the
approximate amount of $618,600 against Polish Ocean Lines for amounts then due
under the lease. On May 4, 2001, the amount of such judgment was increased to
approximately $4,389,400. There can be no assurance as to the Registrant's
ability to collect any of its judgment against Polish Ocean Lines. This space in
the Tumi Building remains vacant.
Registrant has agreed to reduce the base rent payable by Tumi, Inc. at its
New Jersey property by $264,000 for the 12 month period commencing September 1,
2002 in consideration of a two-year extension of the lease.
During the early part of 2002, 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 $91,000. One replacement tenant has entered into an approximate five
year lease at an initial base rent of approximately $298,000. The rent abatement
period under such lease ended in July 2002. In addition, office tenants paying
aggregate annual rents of approximately $1,200,000 vacated 475 Fifth Avenue
during 2001. During the nine months ended September 30, 2002, Registrant funded
approximately $1,229,000 of building and tenant improvements in New York and San
Antonio. Registrant continues to invest capital in improving its properties with
the goal of increasing revenues from real estate operations and realizing
appreciation in property values; however, Registrant recently has delayed such
expenditures when possible because of decreases in revenues from real estate
operations experienced during the past 12 months. Registrant will require
capital to fund additional tenant improvements as and when it leases vacant
space and as tenancies turn over at its properties as well as further capital
improvements at 475 Fifth Avenue (estimated at $1,700,000) and Alamo Towers
(estimated at $3,250,000). These additional capital improvements are expected to
be made over several years.
To date, Registrant has funded its capital requirements from the 475 Loan,
the Fleet Loan and working capital. As discussed above, Registrant has exhausted
its borrowing capacity under the Fleet Loan and has limited funds available
under the 475 Fifth Loan. Registrant has made no distribution attributable to
the quarters ended March 31, June 30, and will not make a distribution
attributable to the quarter ended September 30, 2002. Registrant expects to
resume distributions when it is able to re-lease the vacant retail spaces at 475
Fifth Avenue, although the level of distributions may be less than the $0.30 per
Unit amount previously paid to Unitholders.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Registrant has used working capital reserves provided from loan proceeds
and any undistributed cash from operations as its primary source of liquidity.
Registrant generally intends to distribute its available 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 rent and step rent
receivables. As of September 30, 2002, adjusted net income from real estate
operations exceeded cumulative distributions to Unitholders since January 1,
2001 by approximately $282,000.
Critical Accounting Policies
Management has selected the following accounting policies which it believes
are significant in order to understand the Partnership's activities, financial
position and operating results.
Real Estate and Depreciation and Amortization. Costs directly related to
the acquisition, development and improvement of real estate are capitalized.
Ordinary repairs and maintenance are expensed as incurred.
The Partnership reviews its real estate assets 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 as the
amount 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.
Tenant improvements and leasing commissions related to commercial
properties are capitalized and amortized over the terms of the related leases.
Depreciation is computed under the straight-line method over the estimated
economic useful life of the assets, which range from five to forty years.
Financing costs are amortized over the term of the loan agreements.
Income recognition. Commercial properties are leased under operating
leases. Rental income is recognized on a straight-line basis over the terms of
the respective leases including rent-free periods. Rental income is recognized
monthly as it is earned.
Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Results of Operations
Nine Months Ended September 30, 2002 versus 2001
Rental income in 2002 decreased by 3.3% from 2001, primarily as a result of
lease cancellations and terminations in the New York property. During the nine
months ended September 30, 2001, Registrant realized lease cancellation income
of $575,923 from the early termination of a lease in the New York property.
Registrant received no such income during 2002. Other income in 2002 decreased
by 42.4% from 2001 because Registrant recovered a bad debt in 2001 from a
delinquent New York tenant.
Interest expense decreased by 13.5% in 2002 primarily because of the
lowering of variable interest rates. Depreciation increased by 9.6% in 2002 from
2001 as a result of the depreciation of building and tenant improvements
completed at the New York and San Antonio properties. Amortization decreased by
11.3% because of the write-off in 2001 of commissions related to a canceled
lease in the New York property. Bad debt expense in 2002 increased significantly
from that of 2001 as a result of the write-off of rent and step rent receivables
from former New York and San Antonio tenants. Property operating costs decreased
by 4.2 % in 2002 as a result of vacancies in the New York property and the
reduction in utilities cost in the New York, San Antonio, South Plainfield and
Oklahoma City properties. Management fees decreased by 10.5% in 2002 from 2001
due to the decrease in rental income. General and administrative expenses
increased by 7.7% in 2002 from 2001
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
due to increases in salaries, fringe benefits, transfer agent and tax
preparation costs.
Registrant had a net loss of $1,638,949 from real estate operations during
the nine months ended September 30, 2002 as compared to a loss of $792,561 from
real estate operations for the same period of 2001 (a 106.8% increase) as a
result of the lease cancellation income received in 2001 and the decrease in
rental income. After adjusting for non-cash items (depreciation, amortization
and bad debt expense), operations generated cash flows of $1,855,849 in 2002 and
$2,194,553 in 2001 (a 15.4% decrease). These cash flows are not computed in
accordance with accounting principles generally accepted in the United States
("GAAP") and contrast to net cash provided by operating activities (computed in
accordance with GAAP) of $2,277,103 in 2002 and $3,397,565 in 2001. Registrant
realized an additional gain on sale of real estate in 2001 of $103,333 from the
release of escrowed proceeds from the sale which occurred in 2000 of the
Colorado building. As a result of the increased loss from real estate operations
and the additional gain on sale of real estate in 2001, Registrant's net loss
increased by 137.8% from 2001 to 2002.
The increase in Registrant's loss from real estate operations and decrease
in cash flows (on a non-GAAP basis) are primarily attributable to the loss of
retail and office tenants at 475 Fifth Avenue.
Three Months Ended September 30, 2002 versus 2001
Rental income in 2002 increased by 0.1% from 2001; however, after excluding
step rent receivables, rental income in 2002 decreased by 2.9% from 2001,
primarily as a result of lease cancellations and terminations in the New York
property. During the three months ended September 30, 2001, Registrant realized
lease cancellation income of $575,923 from the early termination of a lease in
the New York property. Registrant received no such income during 2002. Interest
and other income increased by 22.2% in 2002 from 2001 due to higher cash
balances and interest income earned from the Colorado escrow account.
Interest expense decreased by 7.8% in 2002 primarily because of the
lowering of variable interest rates. Depreciation increased by 10.1% in 2002
from 2001 as a result of the depreciation of building and tenant improvements
completed at the New York and San Antonio properties. Amortization decreased by
35.5% because of the write-off in 2001 of commissions paid pertaining to a
canceled lease in the New York property. Bad debt expense in 2002 pertains to
the write-off of the uncollected balance of a former San Antonio tenant.
Property operating costs decreased by 4.2% from 2001 to 2002 as a result of
vacancies in the New York property and the reduction in utilities cost in the
New York, San Antonio, South Plainfield and Oklahoma City properties. Management
fees decreased by 13.0% from 2001 to 2002 due to the decrease in rental income.
General and administrative expenses increased by 27.1% in 2002 from 2001 due to
increases in salaries, fringe benefits and tax preparation and consulting costs.
Registrant had net loss of $434,965 during the three months ended September
30, 2002 as compared to a net loss of $7,221 for the same period of 2001 as a
result of the lease cancellation income received in 2001. After adjusting for
non-cash items (depreciation, amortization and bad debt expense), operations
generated cash flows of $689,111 in 2002 and $1,076,427 in 2001 (a 36.0%
decrease). These cash flows are not computed in accordance with GAAP.
The increase in Registrant's net loss from real estate operations and
decrease in cash flows (on a non-GAAP basis) are primarily attributable to the
loss of retail and office tenants at 475 Fifth Avenue.
Item 3: 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 obtained the 475 Loan, a fixed rate debt instrument, to manage
its exposure to fluctuations in market interest rates. Registrant previously
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. As of September 30, 2002,
Registrant had approximately $23,948,000 of outstanding debt subject to variable
rates (approximately 43% of outstanding debt) and approximately $31,304,000 of
fixed rate indebtedness (approximately 57% of outstanding debt). The average
interest rate on Registrant's debt decreased from 6.44% at December 31, 2001 to
6.34% at September 30, 2002. Registrant does not have any other material
market-sensitive financial instruments. It is not Registrant's policy to engage
in
13
hedging activities for previously outstanding debt instruments or for
speculative or trading purposes.
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
$239,000, based upon the balances outstanding on variable rate instruments at
September 30, 2002.
Item 4: Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer has
evaluated the effectiveness of our disclosure controls and procedures, as such
term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date"). Based on
such evaluation, such officer has concluded that, as of the Evaluation Date, our
disclosure controls and procedures are effective in alerting him on a timely
basis to material information relating to us, including our consolidated
subsidiaries, that is required to be included in our reports filed or submitted
under the Exchange Act.
(b) Changes in Internal Controls
Since the Evaluation Date, there have not been any significant changes in
our internal controls or in other factors that could significantly affect such
controls.
14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this report:
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(b) No reports on Form 8-K were filed during the quarter for which this report
is filed
15
SIGNATURES
Pursuant to the requirements 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
Date: November 13, 2002 By: Robert F. Gossett, Jr.
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President
Date: November 13, 2002 By: Pauline G. Gossett
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Secretary