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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

  x   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2005 or

 

  ¨   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 0-30287

 


 

WELLS REAL ESTATE FUND XII, L.P.

(Exact name of registrant as specified in its charter)

 


 

Georgia   58-2438242
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification Number)
6200 The Corners Pkwy.,
Norcross, Georgia
  30092-3365
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code   (770) 449-7800

 


(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  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨     No  x

 



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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain statements contained in this Form 10-Q of Wells Real Estate Fund XII, L.P. (the “Partnership”) other than historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Specifically, among others, we consider statements concerning projections of future operating results and cash flows, our ability to meet future obligations, and the amount and timing of future distributions to limited partners to be forward-looking statements.

 

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date that this report is filed with the Securities and Exchange Commission. Neither the Partnership nor the general partners make any representations or warranties (expressed or implied) about the accuracy of any such forward-looking statements. Actual results could differ materially from any forward-looking statements contained in this Form 10-Q, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Any such forward-looking statements are subject to known and unknown risks, uncertainties and other factors and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations; provide distributions to limited partners; and maintain the value of our real estate properties, may be significantly hindered. Some of the risks and uncertainties, although not all risks and uncertainties, which could cause actual results to differ materially from those presented in certain forward-looking statements follow:

 

General economic risks

 

    Adverse changes in general or local economic conditions; and

 

    Adverse economic conditions affecting the particular industry of one or more tenants in properties owned by our joint ventures.

 

Enterprise risks

 

    Our dependency on Wells Capital, Inc. (“Wells Capital”) and its affiliates and their key personnel for various administrative services; and

 

    Wells Capital’s ability to attract and retain high quality personnel who can provide acceptable service levels and generate economies of scale over time.

 

Real estate risks

 

    Ability to achieve appropriate occupancy levels resulting in rental amounts sufficient to cover operating costs;

 

    Supply of or demand for similar or competing rentable space, which may adversely impact retaining or obtaining new tenants upon lease expiration at acceptable rental amounts;

 

    Tenant ability or willingness to satisfy obligations relating to our existing lease agreements;

 

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    Increases in property operating expenses, including property taxes, insurance, and other costs not recoverable from tenants;

 

    Ability to secure adequate insurance at reasonable and appropriate rates to avoid uninsured losses or losses in excess of insured amounts;

 

    Discovery of previously undetected environmentally hazardous or other undetected adverse conditions at our properties;

 

    Ability to fund foreseen and unforeseen capital expenditures, including those related to tenant build-out projects, tenant improvements, and lease-up costs, out of operating cash flow or net property sale proceeds; and

 

    Ability to sell a property when desirable at an acceptable return, including the ability of the purchaser to satisfy any and all closing conditions.

 

Other operational risks

 

    Our reliance on Wells Management Company, Inc. (“Wells Management”) or third parties to manage our properties;

 

    Increases in our administrative operating expenses, including increased expenses associated with operating as a public company in the current regulatory environment;

 

    Ability to comply with governmental, tax, real estate, environmental, and zoning laws or regulations and funding the related costs of compliance; and

 

    Actions of our joint venture partners including potential bankruptcy, business interests differing from ours, or other actions that may adversely impact the operations of joint ventures.

 

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WELLS REAL ESTATE FUND XII, L.P.

 

 

TABLE OF CONTENTS

 

              Page No.

PART I.

 

FINANCIAL INFORMATION

    
   

Item 1

   Financial Statements     
         Balance Sheets—March 31, 2005 (unaudited) and December 31, 2004    5
         Statements of Operations for the Three Months Ended March 31, 2005 (unaudited) and 2004 (unaudited)    6
         Statements of Partners’ Capital for the Year Ended December 31, 2004 and Three Months Ended March 31, 2005 (unaudited)    7
         Statements of Cash Flows for the Three Months Ended March 31, 2005 (unaudited) and 2004 (unaudited)    8
         Condensed Notes to Financial Statements (unaudited)    9
   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    13
   

Item 3

   Quantitative and Qualitative Disclosures about Market Risk    22
   

Item 4.

   Controls and Procedures    22

PART II.

  OTHER INFORMATION     
   

Item 1.

   Legal Proceedings    23
   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    23
   

Item 3.

   Defaults Upon Senior Securities    23
   

Item 4.

   Submission of Matters to a Vote of Security Holders    23
   

Item 5.

   Other Information    23
   

Item 6.

   Exhibits    23

 

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WELLS REAL ESTATE FUND XII, L.P.

 

 

BALANCE SHEETS

 

ASSETS

 

    

March 31,
2005

(unaudited)


   December 31,
2004


Investments in joint ventures

   $ 25,778,678    $ 25,918,247

Cash and cash equivalents

     1,997,974      1,885,089

Due from affiliate

     0      1,010

Due from joint ventures

     585,443      575,686
    

  

Total assets

   $ 28,362,095    $ 28,380,032
    

  

LIABILITIES AND PARTNERS’ CAPITAL

 

LIABILITIES:

             

Accounts payable and accrued expenses

   $ 62,975    $ 35,707

Due to affiliates

     7,081      3,135

Partnership distributions payable

     533,609      440,857
    

  

Total liabilities

     603,665      479,699

PARTNERS’ CAPITAL:

             

Limited partners:

             

Cash Preferred—2,944,050 and 2,939,050 units issued and outstanding as of March 31, 2005 and December 31, 2004, respectively

     25,931,837      25,907,456

Tax Preferred—617,069 and 622,069 units issued and outstanding as of March 31, 2005 and December 31, 2004, respectively

     1,826,593      1,992,877

General partners

     0      0
    

  

Total partners’ capital

     27,758,430      27,900,333
    

  

Total liabilities and partners’ capital

   $ 28,362,095    $ 28,380,032
    

  

 

See accompanying notes.

 

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WELLS REAL ESTATE FUND XII, L.P.

 

 

STATEMENTS OF OPERATIONS

(unaudited)

 

    

Three Months Ended

March 31,


 
     2005

    2004

 

EQUITY IN INCOME OF JOINT VENTURES

   $ 445,874     $ 413,146  

EXPENSES:

                

Partnership administration

     49,716       15,726  

Legal and accounting

     11,598       8,794  

Other general and administrative

     263       282  
    


 


Total expenses

     61,577       24,802  

INTEREST AND OTHER INCOME

     7,409       0  
    


 


NET INCOME

   $ 391,706     $ 388,344  
    


 


NET INCOME (LOSS) ALLOCATED TO LIMITED PARTNERS:

                

CASH PREFERRED

   $ 541,972     $ 666,570  
    


 


TAX PREFERRED

   $ (150,266 )   $ (278,226 )
    


 


NET INCOME (LOSS) PER WEIGHTED-AVERAGE LIMITED PARTNER UNIT:

                

CASH PREFERRED

   $ 0.18     $ 0.23  
    


 


TAX PREFERRED

   $ (0.24 )   $ (0.44 )
    


 


WEIGHTED-AVERAGE LIMITED PARTNER UNITS OUTSTANDING:

                

CASH PREFERRED

     2,944,050       2,924,050  
    


 


TAX PREFERRED

     617,069       637,069  
    


 


 

See accompanying notes.

 

 

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WELLS REAL ESTATE FUND XII, L.P.

 

 

STATEMENTS OF PARTNERS’ CAPITAL

 

FOR THE YEAR ENDED DECEMBER 31, 2004 AND

FOR THE THREE MONTHS ENDED MARCH 31, 2005 (unaudited)

 

     Limited Partners

    General
Partners


   Total
Partners’
Capital


 
     Cash Preferred

    Tax Preferred

      
     Units

    Amounts

    Units

    Amounts

      

BALANCE, December 31, 2003

   2,934,050     $ 25,536,652     627,069     $ 2,354,951     $ 0    $ 27,891,603  

Cash preferred conversion elections

   (35,000 )     (305,626 )   35,000       305,626       0      0  

Tax preferred conversion elections

   40,000       125,888     (40,000 )     (125,888 )     0      0  

Net income (loss)

   0       2,489,975     0       (541,812 )     0      1,948,163  

Distributions of operating cash flows ($0.66 per Cash Preferred Unit)

   0       (1,939,433 )   0       0       0      (1,939,433 )
    

 


 

 


 

  


BALANCE, December 31, 2004

   2,939,050       25,907,456     622,069       1,992,877       0      27,900,333  

Tax preferred conversion elections

   5,000       16,018     (5,000 )     (16,018 )     0      0  

Net income (loss)

   0       541,972     0       (150,266 )     0      391,706  

Distributions of operating cash flows ($0.18 per Cash Preferred Unit)

   0       (533,609 )   0       0       0      (533,609 )
    

 


 

 


 

  


BALANCE, March 31, 2005

   2,944,050     $ 25,931,837     617,069     $ 1,826,593     $ 0    $ 27,758,430  
    

 


 

 


 

  


 

See accompanying notes.

 

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WELLS REAL ESTATE FUND XII, L.P.

 

 

STATEMENTS OF CASH FLOWS

(unaudited)

 

     Three Months Ended
March 31,


 
     2005

    2004

 

CASH FLOWS FROM OPERATING ACTIVITIES:

                

Net income

   $ 391,706     $ 388,344  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Equity in income of joint ventures

     (445,874 )     (413,146 )

Operating distributions received from joint ventures

     575,686       852,640  

Changes in operating assets and liabilities:

                

Due from affiliate

     1,010       0  

Due to affiliates

     3,946       1,377  

Accounts payable and accrued expenses

     27,268       11,428  
    


 


Total adjustments

     162,036       452,299  
    


 


Net cash provided by operating activities

     553,742       840,643  

CASH FLOWS FROM FINANCING ACTIVITIES:

                

Operating distributions paid to limited partners

     (440,857 )     (660,160 )
    


 


NET INCREASE IN CASH AND CASH EQUIVALENTS

     112,885       180,483  

CASH AND CASH EQUIVALENTS, beginning of period

     1,885,089       14,922  
    


 


CASH AND CASH EQUIVALENTS, end of period

   $ 1,997,974     $ 195,405  
    


 


SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

                

Partnership distributions payable

   $ 533,609     $ 621,361  
    


 


 

See accompanying notes.

 

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WELLS REAL ESTATE FUND XII, L.P.

 

 

CONDENSED NOTES TO FINANCIAL STATEMENTS

 

MARCH 31, 2005 (unaudited)

 

1. ORGANIZATION AND BUSINESS

 

Wells Real Estate Fund XII, L.P. (the “Partnership”) is a Georgia public limited partnership with Leo F. Wells, III and Wells Partners, L.P. (“Wells Partners”), a Georgia non-public limited partnership, serving as its general partners (collectively, the “General Partners”). Wells Capital, Inc. (“Wells Capital”) serves as the corporate general partner of Wells Partners. Wells Capital is a wholly-owned subsidiary of Wells Real Estate Funds, Inc. Leo F. Wells, III is the president and sole director of Wells Capital and the sole owner of Wells Real Estate Funds, Inc. The Partnership was formed on September 15, 1998 for the purpose of acquiring, developing, constructing, owning, operating, improving, leasing and managing income-producing commercial properties for investment purposes. Upon subscription, limited partners elect to treat their units as Cash Preferred Units or Tax Preferred Units. Thereafter, the limited partners have the right to change their prior elections to have some or all of their units treated as Cash Preferred Units or Tax Preferred Units one time during each quarterly accounting period. The limited partners may vote to, among other things: (a) amend the Partnership agreement, subject to certain limitations; (b) change the business purpose or investment objectives of the Partnership; (c) add or remove a general partner; (d) elect a new general partner; (e) dissolve the Partnership; and (f) approve a sale involving all or substantially all of the Partnership’s assets, subject to certain limitations. The majority vote on any of the matters described above will bind the Partnership without the concurrence of the General Partners. Each limited partnership unit has equal voting rights regardless of class.

 

The Partnership was formed to acquire and operate commercial real estate properties, including properties, which are either to be developed, are currently under construction, are newly constructed, or have operating histories.

 

On September 15, 1998, the Partnership was organized under the laws of the state of Georgia. On March 22, 1999, the Partnership commenced an offering of up to $70,000,000 of Cash Preferred or Tax Preferred limited partnership units ($10.00 per unit) pursuant to a Registration Statement filed on Form S-11 under the Securities Act of 1933. The Partnership commenced active operations upon receiving and accepting subscriptions for 125,000 units on June 1, 1999. The offering was terminated on March 21, 2001, at which time the Partnership had sold approximately 2,688,861 Cash Preferred Units and 872,258 Tax Preferred Units to 1,227 and 106 Cash Preferred and Tax Preferred Limited Partners, respectively, for total limited partner Capital Contributions of $35,611,192.

 

The Partnership owns interests in all of its real estate assets through joint ventures with other entities affiliated with the General Partners. During the periods presented, the Partnership owned interests in the following joint ventures (the “Joint Ventures”) and properties:

 

Joint Venture    Joint Venture Partners    Properties

The Wells Fund XI–Fund XII–REIT Joint Venture

(“Fund XI-XII-REIT Associates”)

  

•   Wells Real Estate Fund XI, L.P.

•   Wells Real Estate Fund XII, L.P.

•   Wells Operating Partnership, L.P.(1)

  

1. 111 Southchase Boulevard

A two-story manufacturing and office building located in Fountain Inn, South Carolina

2. 20/20 Building

A three-story office building located in Leawood, Kansas

3. Johnson Matthey Building (2)

A one-story office building and warehouse located in Wayne, Pennsylvania

4. Gartner Building (3)

A two-story office building located in Ft. Myers, Florida

 

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Joint Venture    Joint Venture Partners    Properties

Wells Fund XII-REIT Joint Venture Partnership

(“Fund XII-REIT Associates”)

  

•   Wells Real Estate Fund XII, L.P.

•   Wells Operating Partnership, L.P. (1)

  

5. Siemens Building

A three-story office building located in Troy, Michigan

6. AT&T Oklahoma Building (3)

A one-story office building and a two-story office building located in Oklahoma City, Oklahoma

7. Comdata Building

A three-story office building located in Brentwood, Tennessee

 

  (1)   Wells Operating Partnership, L.P. (“Wells OP”) is a Delaware limited partnership with Wells Real Estate Investment Trust, Inc. (“Wells REIT”) serving as its general partner; Wells REIT is a Maryland corporation that qualifies as a real estate investment trust.
  (2)   This property was sold in October 2004.
  (3)   These properties were sold in April 2005.

 

Wells Real Estate Fund XI, L.P. is affiliated with the Partnership through common general partners. Each of the properties described above was acquired on an all-cash basis. For further information regarding the Joint Ventures and foregoing properties, refer to the Partnership’s Form 10-K for the year ended December 31, 2004.

 

On October 5, 2004, Fund XI-XII-REIT Associates sold the Johnson Matthey Building to an unrelated third party for a gross sale price of $10,000,000. As a result of the sale, the Partnership received net sale proceeds of approximately $1,653,000 and was allocated a gain of approximately $413,000.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The financial statements of the Partnership have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, including the instructions to Form 10-Q and Article 10 of Regulation S-X, and in accordance with such rules and regulations, do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of the General Partners, the statements for the unaudited interim periods presented include all adjustments that are of a normal and recurring nature and necessary to fairly present the results for these periods. Results for interim periods are not necessarily indicative of full-year results. For further information, refer to the financial statements and footnotes included in the Partnership’s Form 10-K for the year ended December 31, 2004.

 

Distribution of Net Cash from Operations

 

Cash from operations, if available, is generally distributed quarterly to the limited partners as follows:

 

    First, to all Cash Preferred limited partners until each limited partner has received distributions equal to a 10% per annum return on his respective net capital contributions, as defined.

 

    Second, to the General Partners until the General Partners receive distributions equal to 10% of the total cumulative distributions paid by the Partnership to date.

 

    Third, to the Cash Preferred limited partners and the General Partners allocated on a basis of 90% and 10%, respectively.

 

No distributions will be made to the limited partners holding Tax Preferred Units.

 

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Distribution of Sale Proceeds

 

Upon the sale of properties, the net sale proceeds will be distributed in the following order:

 

    In the event that the particular property sold is sold for a price that is less than the original property purchase price, to the limited partners holding Cash Preferred Units until each limited partner has received an amount equal to the excess of the original property purchase price over the price for which the property was sold, limited to the amount of depreciation, amortization, and cost recovery deductions taken by the limited partners holding Tax Preferred Units with respect to such property;

 

    To limited partners holding units which at any time have been treated as Tax Preferred Units until each limited partner has received an amount necessary to equal the net cash available for distribution received by the limited partners holding Cash Preferred Units on a per-unit basis;

 

    To limited partners on a per-unit basis until each limited partner has received 100% of his net capital contributions, as defined;

 

    To all limited partners on a per-unit basis until each limited partner has received a cumulative 10% per annum return on his net capital contributions, as defined;

 

    To limited partners on a per-unit basis until each limited partner has received an amount equal to his preferential limited partner return (defined as the sum of a 10% per annum cumulative return on net capital contributions for all periods during which the units were treated as Cash Preferred Units and a 15% per annum cumulative return on net capital contributions for all periods during which the units were treated as Tax Preferred Units);

 

    To the General Partners until they have received 100% of their capital contributions, as defined;

 

    Then, if limited partners have received any excess limited partner distributions (defined as distributions to limited partners over the life of their investment in the Partnership in excess of their net capital contributions, as defined, plus their preferential limited partner return), to the General Partners until they have received distributions equal to 20% of the sum of any such excess limited partner distributions plus distributions made to the General Partners pursuant to this provision; and

 

    Thereafter, 80% to the limited partners on a per-unit basis and 20% to the General Partners.

 

Allocations of Net Income, Net Loss, and Gain on Sale

 

For the purpose of determining allocations per the partnership agreement, net income is defined as Net Income recognized by the Partnership, excluding deductions for depreciation, amortization, and cost recovery and the gain on the sale of assets. Net Income, as defined, of the Partnership is generally allocated each year in the same proportion that net cash from operations is distributed to the partners holding Cash Preferred Units and the General Partners. To the extent the Partnership’s Net Income in any year exceeds net cash from operations, it will be allocated 99% to the limited partners holding Cash Preferred Units and 1% to the General Partners.

 

Net loss, depreciation, amortization, and cost recovery deductions for each fiscal year will be allocated as follows: (a) 99% to the limited partners holding Tax Preferred Units and 1% to the General Partners until their capital accounts are reduced to zero; (b) then to any partner having a positive balance in his capital account in an amount not to exceed such positive balance; and (c) thereafter to the General Partners.

 

Gains on the sale or exchange of the Partnership’s properties will be allocated generally in the same manner that the net proceeds from such sale are distributed to partners after the following allocations are made, if applicable: (a) allocations made pursuant to the qualified income offset provisions of the partnership agreement; (b) allocations to partners having negative capital accounts until all negative capital accounts have been restored to zero; and (c) allocations to limited partners holding Tax Preferred Units in amounts equal to the deductions for depreciation, amortization, and cost recovery previously allocated to them with respect to the specific partnership property sold, but not in excess of the amount of gain on sale recognized by the Partnership with respect to the sale of such property.

 

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Reclassifications

 

Certain prior year amounts have been reclassified to conform with the current year financial statement presentation.

 

3. RELATED-PARTY TRANSACTIONS

 

Management and Leasing Fees

 

Wells Management Company, Inc. (“Wells Management”), an affiliate of the General Partners, receives compensation for the management and leasing of the Partnership’s properties owned through the Joint Ventures equal to the lesser of (a) of the gross revenues collected monthly, 2.5% for management services and 2% for leasing services, plus a separate competitive fee for the one-time initial lease-up of newly constructed properties in an amount not to exceed the fee customarily charged in arm’s-length transactions by others rendering similar services in the same geographic area for similar properties or (b) in the case of commercial properties which are leased on a long-term net basis (ten or more years), the maximum property management fee from such leases shall be 1% of the gross revenues generally paid over the life of the leases except for a one-time initial leasing fee of 3% of the gross revenues on each lease payable over the first five full years of the original lease term. Management and leasing fees are paid by the Joint Ventures and, accordingly, included in equity in income of joint ventures in the accompanying statements of operations. The Partnership’s share of management and leasing fees and lease acquisition costs incurred through the Joint Ventures is $40,798 and $43,612 for the three months ended March 31, 2005 and 2004, respectively.

 

Administration Reimbursements

 

Wells Capital, the general partner of Wells Partners, one of our General Partners, and Wells Management perform certain administrative services for the Partnership, relating to accounting, property management, and other partnership administration, and incur the related expenses. Such expenses are allocated among other entities affiliated with the General Partners based on time spent on each fund by individual administrative personnel. In the opinion of the General Partners, this allocation is a reasonable estimation of such expenses. The Partnership reimbursed Wells Capital and Wells Management for administrative expenses of $21,800 and $16,931 for the three months ended March 31, 2005 and 2004, respectively. As of December 31, 2004, overpayments to Wells Capital for administrative reimbursements of $1,010 are recorded as due from affiliate in the accompanying balance sheet. As of December 31, 2004, administrative reimbursements due to Wells Management of $3,135 are included in due to affiliates in the accompanying balance sheet. As of March 31, 2005, administrative reimbursements due to Wells Management and Wells Capital of $7,081 are included in due to affiliates in the accompanying balance sheet.

 

4. INVESTMENTS IN JOINT VENTURES

 

Basis of Presentation

 

The Partnership owned interests in seven properties during the periods presented through its ownership in the Joint Ventures. The Partnership does not have control over the operations of the Joint Ventures; however, it does exercise significant influence. Approval by the Partnership, as well as the other Joint Venture partners, is required for any major decision or any action that would materially affect the Joint Ventures, or their real property investments. Accordingly, the Partnership’s investments in the Joint Ventures are recorded using the equity method of accounting, whereby original investments are recorded at cost and subsequently adjusted for contributions, distributions, and net income (loss) attributable to the Partnership. For further information regarding investments in the Joint Ventures, refer to the financial statements and footnotes included in the Partnership’s Form 10-K for the year ended December 31, 2004.

 

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Summary of Operations

 

Condensed financial information for the Joint Ventures for the three months ended March 31, 2005 and 2004, respectively, is presented below:

 

    Total Revenues

 

Income (Loss) From
Continuing

Operations


 

Income From
Discontinued

Operations


  Net Income (Loss)

   

Three Months Ended

March 31,


  Three Months Ended
March 31,


 

Three Months Ended

March 31,


 

Three Months Ended

March 31,


    2005

  2004

  2005

    2004

  2005

  2004

  2005

    2004

Fund XI-XII-REIT Associates

  $ 12,013   $ 272,273   $ (226,426 )   $ 32,744   $ 183,781   $ 263,992   $ (42,645 )   $ 296,736

Fund XII-REIT Associates

    1,068,418     1,064,051     671,701       533,821     335,593     271,810     1,007,294       805,631
   

 

 


 

 

 

 


 

    $ 1,080,431   $ 1,336,324   $ 445,275     $ 566,565   $ 519,374   $ 535,802   $ 964,649     $ 1,102,367
   

 

 


 

 

 

 


 

 

5. SUBSEQUENT EVENT

 

On April 13, 2005, Fund XI-XII-REIT Associates and Fund XII-REIT Associates sold the Gartner Building and the AT&T Oklahoma Building, respectively, to an unrelated third party. The gross sales price, excluding closing costs, for the Gartner Building and the AT&T Oklahoma Building is approximately $12.5 million and $21.4 million, respectively. As a result of the sale, the Partnership received net sale proceeds of approximately $11.7 million and was allocated a gain of approximately $4.0 million. The Partnership holds equity interests of approximately 17% in Fund XI-XII-REIT Associates, which is the sole owner of the Gartner Building, and approximately 45% in Fund XII-REIT Associates, which is the sole owner of the AT&T Oklahoma Building. The gain recognized from the sales of the Gartner Building and the AT&T Oklahoma Building may be adjusted as additional information becomes available in subsequent periods.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with the accompanying financial statements and notes thereto. See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I, as well as the notes to our financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations provided in our Annual Report on Form 10-K for the year ended December 31, 2004.

 

Overview

 

Management believes that the Partnership typically operates through the following five key life cycle phases. The time spent in each phase is dependent upon various economic, industry, market, and other internal/external factors. Some overlap naturally exists in the transition from one phase to the next.

 

    Fund-raising phase

The period during which the Partnership is raising capital through the sale and issuance of limited partner units to the public;

 

    Investing phase

The period during which the Partnership invests the capital raised during the fund-raising phase, less upfront fees, into the acquisition of real estate assets;

 

    Holding phase

The period during which real estate assets are owned and operated by the Partnership during the initial lease terms of the tenants. Strategic dispositions could occur during this phase in order to capitalize on market conditions;

 

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    Positioning-for-sale phase

The period during which the leases in place at the time of acquisition expire and, thus, the Partnership expends time, effort, and funds to re-lease such space to existing and/or new tenants. Following the holding phase, the Partnership continues to own and operate the real estate assets, evaluate various options for disposition, and market the real estate assets for sale; and

 

    Disposition-and-liquidation phase

The period during which the Partnership sells its real estate investments, distributes net sale proceeds to the partners, liquidates, and terminates the Partnership.

 

Portfolio Overview

 

We are currently in the holding phase of our life cycle. The Partnership now owns interests in four properties, having sold the Gartner Building and AT&T Oklahoma Building after the close of the quarter. Two of the remaining properties are 100% leased to tenants in the beginning to middle of their lease terms. The 111 Southchase Boulevard property is 100% vacant, and Sprint exercised an early lease termination option at the 20/20 Building effective in May 2004. Our focus at this time involves leasing these two vacant properties in the portfolio and maximizing operating performance in the remaining assets in order to deliver what we believe will be the best overall performance for our investors. While ongoing operations are the primary focus during this phase, we could complete strategic asset sales if the sales capitalize on short-term market or property characteristics and meet the overall objectives of the Partnership.

 

The start of 2005 has brought a number of positive events. After the close of the quarter, the Gartner Building and AT&T Oklahoma Building were sold as part of a larger package sale, and this transaction reflected a significant increase over the initial purchase prices of both assets. We also have announced the first distribution of net sale proceeds to the limited partners, scheduled for the second quarter 2005, totaling approximately $1,450,000 from the sale of the Johnson Matthey Building.

 

While the property sales have delivered positive results, we do face some near-term leasing issues with the two vacant properties. These leasing challenges may impact operating performance, but we are aggressively working with existing and potential tenants in these markets to minimize any negative effects to the extent possible.

 

The first quarter 2005 annualized operating distribution rate to the Cash-Preferred unit holders was 7.25%, an increase from the prior quarter. The General Partners anticipate that operating distributions may decline in the near term, given the reduced cash flows from the property sales and several potential capital issues, including: (i) re-leasing costs for the 20/20 Building and 111 Southchase Boulevard; and (ii) other capital improvements at the Comdata Building and the 20/20 Building.

 

Property Summary

 

Information related to the properties owned by the Joint Ventures follows:

 

    111 Southchase Boulevard in Fountain Inn, South Carolina, is currently vacant. We are pursuing a number of market opportunities for this asset.

 

    The 20/20 Building, located in Leawood, Kansas, is currently vacant. We have engaged our local leasing team and are marketing this asset aggressively for lease.

 

    The Johnson Matthey Building was sold on October 5, 2004. The Partnership received approximately $1,653,000 in net sale proceeds. The General Partners are currently scheduled to distribute approximately $1,450,000 of these proceeds to the limited partners in the second quarter 2005. The remaining net sale proceeds are being reserved to fund capital costs discussed previously.

 

   

The Gartner Building located in Fort Myers, Florida was sold on April 13, 2005, as part of a larger package sale. As a result of the sale, the Partnership received net sale proceeds of approximately

 

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$2,100,000. The General Partners will review the potential capital needs at the remaining properties in the portfolio to determine if all, or a portion of, these proceeds can be distributed in 2005.

 

    The Siemens Building is located in Troy, Michigan. The property is 100% leased, and the lease extends to 2010.

 

    The AT&T Oklahoma Building located in Oklahoma City, Oklahoma was sold on April 13, 2005, as part of a larger package sale. As a result of the sale, the Partnership received net sale proceeds of approximately $9,600,000. The General Partners will review the potential capital needs at the remaining properties in the portfolio to determine if all, or a portion of, these proceeds can be distributed in 2005.

 

    The Comdata Building in Brentwood, Tennessee, outside Nashville, is 100% leased through May 2016.

 

As we continue to operate in the holding phase, we will continue to focus on re-leasing vacant space and space that may become vacant upon the expiration of our current leases. In doing so, we will seek to maximize returns to the limited partners by negotiating long-term leases at market rental rates while attempting to minimize down time, re-leasing expenditures, ongoing property level costs and portfolio costs. Later as we move into the positioning-for-sale and disposition-and-liquidation phases, our attention will shift to locating suitable buyers and negotiating purchase-sale contracts that will attempt to maximize the total return to the limited partners, and minimize contingencies and our post-closing involvement with the buyer.

 

Industry Factors

 

Our results continue to be impacted by a number of factors influencing the real estate industry.

 

General Economic and Real Estate Market Commentary

 

Management reviews a number of economic forecasts and market commentaries in order to evaluate general economic conditions and formulate a view of the current environment’s effect on the real estate markets in which we operate.

 

Management believes that the U.S. economy is continuing on the path of slow, but steady recovery. Job growth is improving, with 2.2 million jobs created in 2004, and with another 2.4 to 2.8 million projected to be added in 2005. Gross Domestic Product growth and renewed business confidence are fueling the job growth. However, uncertainty still exists in the economy, primarily due to high oil prices, the war in Iraq, the trade deficit, and other global issues.

 

The U.S. office real estate market has begun to show modest improvement. The strength of the overall economy is having a positive impact on office real estate fundamentals. Positive absorption of office space combined with a decline in new construction has contributed to the increase in office occupancy rates for three consecutive quarters. Although occupancy rates have increased, management does not expect that they will rise by more than 200 basis points annually. As a result, management anticipates that it could be a minimum of two to three years before vacancy rates reach the equilibrium level of ten to twelve percent. Average asking rates stabilized in the second half of 2004. Management believes that renewed employment growth should benefit the office market; however, the uncertainty that still exists in the economy is causing many firms to continue to be more cautious with their investment and hiring decisions. Importantly, management believes the pace and strength of the recovery for office real estate will vary by market. Market conditions vary widely by geographical region, metropolitan area, submarket, and property.

 

The real estate capital transaction market continues to be very active. Capitalization rates (“cap rates”) have continued to decline in spite of the fact that the Federal Reserve (the “Fed”) increased the Federal Funds Rate five times in 2004. Management believes that the decline in cap rates is predominately driven by increased capital flows into real estate. The spread between average cap rates and 10-year U.S. Treasuries narrowed in 2004; however, this was primarily due to a drop in cap rates rather than a rise in 10-year U.S. Treasuries. In management’s opinion, absent a significant move in interest rates or a significant decrease in the number of parties interested in acquiring real estate, cap rates are not expected to significantly increase from their current levels in 2005.

 

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Real Estate Funds with Current Vacancy or Near-term Rollover Exposure

 

Real estate funds, such as the Partnership, that own interests in properties with current vacancies or near-term tenant rollover may face a challenging leasing environment. The properties within these funds will generally face lower rents and higher concession packages to the tenants in order to re-lease vacant space.

 

From a valuation standpoint, it is generally preferable to either renew an existing tenant lease or re-lease the property prior to marketing it for sale. Generally, buyers will heavily discount their offering prices to compensate for existing or pending vacancies.

 

Results of Operations

 

Equity in Income of Joint Ventures

 

Equity in income of the Joint Ventures was $445,874 and $413,146 for the three months ended March 31, 2005 and 2004, respectively. The 2005 increase in equity in income of Joint Ventures is primarily attributable to (i) a reduction in depreciation expense for the Gartner Building and the AT&T Oklahoma Building as a result of being classified as held for sale effective February 25, 2005, and (ii) a decline in depreciation expense as a result of changing the estimated weighted-average composite useful life from 25 years to 40 years for all the buildings owned through the Joint Ventures effective July 1, 2004, partially offset by (iii) a decrease in operating income generated by Fund XI-XII-REIT Associates as the sole tenant of the 20/20 Building vacated the property in May 2004, and (iv) foregone income as a result of the sale of the Johnson Matthey Building in October 2004.

 

Expenses of the Partnership

 

Total expenses of the Partnership were $61,577 and $24,802 for the three months ended March 31, 2005 and 2004, respectively. The increase is primarily attributable to taxes and licenses due to increases in the Tennessee partnership franchise and excise taxes as well as increases in administrative salaries, accounting fees, and legal fees, substantially all of which resulted from increased reporting and regulatory requirements. We anticipate additional increases related to implementing and adhering to such reporting and regulatory requirements on a going-forward basis.

 

Liquidity and Capital Resources

 

Our operating strategy entails funding expenses related to the recurring operations of the properties and the portfolio with operating cash flows, including distributions received from the Joint Ventures, and assessing the amount of remaining cash flows that will be required to fund known re-leasing costs and other capital improvements. Any residual operating cash flows are considered available for distribution to the limited partners and are generally paid quarterly. As a result, the ongoing monitoring of the Partnership’s cash position is critical to ensuring that adequate liquidity and capital resources are available. Economic downturns in one or more of our core markets could adversely impact the ability of our tenants to honor lease payments and our ability to re-lease space on favorable terms as leases expire or space otherwise becomes vacant. In the event of either situation, cash flows and, consequently, our ability to provide funding for capital needs would be adversely affected.

 

Short-Term Liquidity

 

During the three months ended March 31, 2005, we generated net operating cash flows, including operating distributions received from the Joint Ventures, of approximately $554,000 as compared to approximately $841,000 for the three months ended March 31, 2004. The decline in operating cash flows is due to a decline in operating distribution received from Joint Ventures as a result of the sale of the Johnson Matthey Building in October 2004 as well as the early lease termination of the sole tenant at the 20/20 Building in May 2004. Distributions from the Joint Ventures are generally representative of rental revenues and tenant reimbursements, less property operating expenses, management fees, general administrative expenses, and capital expenditures. The majority of such operating cash flows was used to pay operating distributions to limited partners.

 

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Our General Partners anticipate that operating distributions to limited partners may decline in the near term as we fund our pro-rata share of (i) anticipated re-leasing costs for the 20/20 Building and 111 Southchase Boulevard, both of which are vacant, (ii) anticipated capital improvements for the 20/20 Building, and (iii) loss of cash flows due to the recent sales of the Gartner Building and the AT&T Oklahoma Building in April 2005.

 

We believe that the cash on hand is sufficient to cover the Partnership’s working capital needs, including liabilities of approximately $604,000 as of March 31, 2005. During 2005, our General Partners anticipate that the Partnership will fund its proportionate share of capital expenditures noted above.

 

Long-Term Liquidity

 

We expect that our future sources of capital will be primarily derived from operating cash flows generated from the Joint Ventures and net proceeds generated from the selective and strategic sale of properties. Our future long-term liquidity requirements will include, but not be limited to, tenant improvements, renovations, expansions and other significant capital improvements necessary for properties owned through the Joint Ventures. We expect to continue to use substantially all future net cash flows from operations, including distributions received from the Joint Ventures, less, expenses related to the recurring operations of the properties and the portfolio and reserves for known capital expenditures, to pay operating distributions to the limited partners.

 

Capital Resources

 

The Partnership is an investment vehicle formed for the purpose of acquiring, owning, and operating income-producing real properties and has invested all of the partners’ original capital contributions. Thus, it is unlikely that we will acquire interests in any additional properties. Historically, our investment strategy has generally involved acquiring properties that are pre-leased to creditworthy tenants on an all-cash basis through joint ventures with affiliated partnerships.

 

The Joint Ventures fund capital expenditures primarily related to building improvements for the purpose of maintaining the quality of our properties, and tenant improvements for the purpose of readying our properties for re-leasing. As leases expire, we typically attempt to re-lease space to an existing tenant or market the space to prospective new tenants. Generally, tenant improvements funded in connection with lease renewals require less capital than those funded in connection with new leases. However, external conditions, such as the supply of and demand for comparable space available within a given market, drive capital costs as well as rental rates.

 

Operating cash flows, if available, are generally distributed from the Joint Ventures to the Partnership following each calendar quarter-end. However, the Joint Ventures will reserve operating distributions, or a portion thereof, as needed in order to fund known capital and other expenditures. Our cash management policy typically includes first utilizing current period operating cash flow until depleted, at which point operating reserves are utilized to fund capital and other required expenditures. In the event that current and prior period accumulated operating cash flows are insufficient to fund such costs, net property sale proceeds reserves, if available, would then be utilized. Any capital or other expenditures not provided for by the operations of the Joint Ventures will be funded by the Partnership and the respective Joint Venture partners on a pro-rata basis.

 

As of March 31, 2005, we have received, used, and held net proceeds from the sale of properties as presented below:

 

Property Sold


  Net Sale
Proceeds


  Partnership’s
Approximate
Ownership %


    Net Proceeds
Attributable to the
Partnership


 

Cumulative

Net Proceeds Invested


  Distributed to
Partners to date


  Undistributed Net
Proceeds as of
March 31, 2005


        Amount

  Purpose

   

Johnson Matthey Building

(sold in 2004)

  $ 9,675,000   17.1 %   $ 1,653,361   $ 0       $ 0   $ 1,653,361
               

 

     

 

 

Upon evaluating the capital needs of the existing properties in which we hold interests, our General Partners announced their intention to distribute net sale proceeds of approximately $1,450,000 in the second quarter of

 

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2005 as discussed below and retain the residual balance of approximately $200,000 to help fund the Partnership’s pro-rata share of the anticipated costs in connection with capital improvements for the 20/20 Building and the Comdata Building and re-leasing of 111 Southchase Boulevard and the 20/20 Building as of March 31, 2005. Net property sale proceeds of approximately $11,700,000 from the April 13, 2005 sale of the Gartner Building and the AT&T Oklahoma Building were held at Fund XI-XII-REIT Associates and Fund XII-REIT Associates and transferred to the Partnership in April 2005.

 

Contractual Obligations and Commitments

 

Distribution of Net Sale Proceeds

 

In December 2004, the General Partners announced their intention to distribute net sale proceeds of approximately $1,450,000 in the second quarter of 2005 to the limited partners of record as of March 31, 2005, which, under the terms of the partnership agreement, does not include limited partners acquiring units after December 31, 2004. From total net sale proceeds of approximately $1,653,361, the General Partners intend to distribute approximately $1,450,000 to the limited partners in connection with the aforementioned distribution and retain the residual balance of approximately $203,361 in reserve in order to fund future operating costs of the Partnership.

 

This distribution has not been formally declared by the General Partners. In accordance with the terms of the partnership agreement, the General Partners may elect to retain reserves deemed reasonably necessary for the Partnership at the sole discretion of the General Partners. Thus, should a change in circumstances prior to the intended distribution date require the General Partners to reevaluate the Partnership’s reserve requirements, it is possible that this distribution may not occur, or that distributions may be made at a lower amount.

 

Related-Party Transactions and Agreements

 

Related-Party Fees and Reimbursements

 

We have entered into agreements with Wells Capital, Wells Management, an affiliate of our General Partners, and their affiliates, whereby we pay certain fees and expense reimbursements to Wells Capital, Wells Management and their affiliates for asset management, the management and leasing of our properties; administrative services relating to accounting, property management, and other partnership administration; and incur the related expenses. See Note 3 to our financial statements included in this report for a description of these fees and expense reimbursements we have incurred.

 

Economic Dependency

 

We have engaged Wells Capital and its affiliates and Wells Management, to provide certain services that are essential to the Partnership, including asset management services, supervision of the management and leasing of properties owned through the Joint Ventures, asset acquisition and disposition services, as well as other administrative responsibilities for the Partnership including accounting services, shareholder communications, and investor relations. These agreements are terminable by either party on 60 days’ written notice. As a result of these relationships, the Partnership is dependent upon Wells Capital and Wells Management.

 

Wells Capital and Wells Management are all owned and controlled by Wells Real Estate Funds, Inc. (“WREF”). The operations of Wells Capital and Wells Management represent substantially all of the business of WREF. Accordingly, the Partnership focuses on the financial condition of WREF when assessing the financial condition of Wells Capital and Wells Management. In the event that WREF were to become unable to meet its obligations as they become due, the Partnership might be required to find alternative service providers.

 

WREF’s net income was approximately $5.5 million for the three months ended March 31, 2005. Future net income generated by WREF will be largely dependent upon the amount of fees earned by Wells Capital and Wells Management based on, among other things, the level of investor proceeds raised from the sale of common

 

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stock of Wells Real Estate Investment Trust II, Inc., an affiliated real estate investment trust for which Wells Capital serves as the advisor, and the volume of future acquisitions and dispositions of real estate assets by Wells-sponsored programs. As of March 31, 2005 and December 31, 2004, WREF held cash balances of approximately $16.2 million and $6.3 million, respectively. WREF believes that it has adequate liquidity available in the form of cash on hand and current receivables necessary to meet its obligations as they become due.

 

Litigation Against Related Parties

 

During early 2004, a putative class action complaint was filed against, among others, Leo F. Wells, III, our General Partner, Wells Capital, the corporate general partner of our other General Partner, and Wells Management. The Court granted the plaintiffs’ motion to permit voluntary dismissal of this suit, and it was dismissed without prejudice. In November 2004, the same plaintiffs filed a second putative class action complaint against, among others, Mr. Wells, Wells Capital, and Wells Management. On January 28, 2005, the defendants filed motions to dismiss the plaintiffs’ claims. On March 31, 2005, the plaintiffs filed briefs in opposition to the defendants’ motions to dismiss. The Court has not yet ruled on these pending motions. The details of both complaints are outlined below.

 

As a matter of background, on or about March 12, 2004, a putative class action complaint (the “Original Complaint”) was filed by four individuals (the “plaintiffs”) against Wells Real Estate Fund I, and Wells Capital, and Leo F. Wells, III (collectively, “the General Partners of Wells Real Estate Fund I”), as well as Wells Management and Wells Investment Securities, Inc. (“WIS”) (Hendry et al. v. Leo F. Wells, III et al., Superior Court of Gwinnett County, Georgia, Civil Action No. 04-A-2791 2). Wells Real Estate Fund I is a public limited partnership. The plaintiffs filed the Original Complaint purportedly on behalf of all limited partners holding B units of Wells Real Estate Fund I as of January 15, 2003. The Original Complaint alleged, among other things, that (a) the General Partners of Wells Real Estate Fund I, WIS, and Wells Real Estate Fund I negligently and fraudulently made false statements and material omissions in connection with the initial sale (September 6, 1984—September 5, 1986) of the B units to investors of Wells Real Estate Fund I by making false statements and omissions in sales literature relating to the distribution of net sale proceeds to holders of B units, among other things; (b) the General Partners of Wells Real Estate Fund I and Wells Real Estate Fund I negligently and fraudulently misrepresented and concealed disclosure of, among other things, alleged discrepancies between such statements and provisions in the partnership agreement for a period of time in order to delay such investors from taking any legal, equitable, or other action to protect their investments in Wells Real Estate Fund I, among other reasons; (c) Mr. Wells and Wells Management breached an alleged contract arising out of a June 2000 consent solicitation to the limited partners; and (d) the General Partners of Wells Real Estate Fund I and Wells Real Estate Fund I breached fiduciary duties to the limited partners. On June 3, 2004, the Court granted the plaintiffs’ motion to permit voluntary dismissal, and the Original Complaint was dismissed without prejudice.

 

On or about November 24, 2004, the plaintiffs filed a second putative class action complaint (the “Complaint”) against Mr. Wells, Wells Capital, Wells Management, and Wells Real Estate Fund I (Hendry et al. v. Leo F. Wells, III et al., Superior Court of Gwinnett County, Georgia, Civil Action No. 04A-13051 6) (the “Hendry Action”). The plaintiffs filed the Complaint purportedly on behalf of all limited partners holding B units of Wells Real Estate Fund I as of January 9, 2002. The Complaint alleges, among other things, that the General Partners of Wells Real Estate Fund I breached their fiduciary duties to the limited partners by, among other things, (a) failing to timely disclose alleged inconsistencies between sales literature and the partnership agreement relating to the distribution of net sale proceeds; (b) engaging in a scheme to fraudulently conceal alleged inconsistencies between sales literature and the partnership agreement relating to the distribution of net sale proceeds; and (c) not accepting a settlement offer proposed by a holder of A units and a holder of A and B units in other litigation naming Wells Real Estate Fund I as a defendant, in which other litigation the court subsequently granted summary judgment in favor of Wells Real Estate Fund I. The Complaint also alleges that misrepresentations and omissions in an April 2002 consent solicitation to the limited partners caused that consent solicitation to be

materially misleading. In addition, the Complaint alleges, among other things, that the General Partners of Wells Real Estate Fund I and Wells Management breached an alleged contract arising out of a June 2000 consent solicitation to the limited partners relating to an alleged waiver of deferred management fees.

 

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The plaintiffs seek, among other remedies, the following: judgment against the General Partners of Wells Real Estate Fund I, jointly and severally, in an amount to be proven at trial; punitive damages; disgorgement of fees earned by the General Partners directly or through their affiliates; a declaration that the consent obtained as a result of an April 2002 consent solicitation is null and void; enforcement of an alleged contract arising out of the June 2000 consent solicitation to waive Wells Management’s deferred management fees; and an award to plaintiffs of their attorneys’ fees, costs and expenses. The Complaint states that Wells Real Estate Fund I is named only as a necessary party defendant and that the plaintiffs seek no money from or relief at the expense of Wells Real Estate Fund I. On January 28, 2005, the defendants filed motions to dismiss the plaintiffs’ claims. On March 31, 2005, the plaintiffs filed briefs in opposition to the defendants’ motions to dismiss. The Court has not yet ruled on these pending motions. Due to the uncertainties inherent in the litigation process, it is not possible to predict the ultimate outcome of this matter at this time. However, an adverse outcome could adversely affect the ability of Wells Capital, Wells Management, and Mr. Wells to fulfill their respective duties under the agreements and relationships they have with us.

 

The Hendry Action states that Wells Real Estate Fund I is named only as a necessary defendant and that the plaintiffs are seeking no money from or relief at the expense of Wells Real Estate Fund I. Since the partnership agreement of Wells Real Estate Fund I contains no provision for advancing defense costs to the General Partners of Wells Real Estate Fund I in connection with litigation involving the partnership in instances where the plaintiffs are seeking no monetary relief from the partnership, the General Partners of Wells Real Estate Fund I, currently Wells Capital, are funding the legal fees, costs, and expenses relating to this litigation. As of March 31, 2005, Wells Capital had incurred approximately $215,000 in legal fees, costs, and expenses related to defending the Hendry Action. At this time, management is unable to determine whether the likelihood of an unfavorable outcome is either probable or remote.

 

Conflicts of Interest

 

The General Partners are also general partners of other Wells Real Estate Funds. In addition, Wells Capital sponsors and advises two affiliated real estate investment trusts (the “REITs”) in which it retains a residual interest. As such, there may exist conflicts of interest where the General Partners in their capacity as general partners of other Wells Real Estate Funds, or as the advisor to the REITs, may be in competition with us in connection with property acquisitions or for tenants in similar geographic markets.

 

Inflation

 

The real estate market has not been affected significantly by inflation in the past three years due to the relatively low inflation rate. However, there are provisions in the majority of tenant leases, which should protect us from the impact of inflation. These provisions include reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements on a per-square-foot basis, or in some cases, annual reimbursement of operating expenses above a certain per-square-foot allowance. There is no assurance, however, that we would be able to replace existing leases with new leases at higher base rental rates.

 

Application of Critical Accounting Policies

 

Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If management’s judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses.

 

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Below is a discussion of the accounting policies used by the Partnership and the Joint Ventures, which are considered to be critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.

 

Investment in Real Estate Assets

 

We will be required to make subjective assessments as to the useful lives of its depreciable assets. We will consider the period of future benefit of the asset to determine the appropriate useful lives. These assessments have a direct impact on net income. The estimated useful lives of the Joint Ventures’ assets by class are as follows:

 

Buildings

   40 years

Building improvements

   10-25 years

Land improvements

   20 years

Tenant improvements

   Lease term

 

Effective July 1, 2004, the Joint Ventures extended the weighted-average composite useful life for all building assets from 25 years to 40 years, which resulted in an increase to our net income for the three months ended March 31, 2005. We believe that this change more appropriately reflects the estimated useful lives of real estate assets and is consistent with prevailing industry practice. In the event that the Joint Ventures utilize inappropriate useful lives or methods of depreciation, our net income would be misstated.

 

Valuation of Real Estate Assets

 

We continually monitor events and changes in circumstances that could indicate that the carrying amounts of the real estate assets in which we have an ownership interest, either directly or through investments in the Joint Ventures, may not be recoverable. When indicators of potential impairment are present which indicate that the carrying amounts of real estate assets may not be recoverable, management assesses the recoverability of the real estate assets by determining whether the carrying value of the real estate assets will be recovered through the undiscounted future operating cash flows expected from the use of the asset and its eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying value, management adjusts the real estate assets to the fair value and recognizes an impairment loss. We have determined that there has been no impairment in the carrying value of real estate assets held by the Partnership at March 31, 2005.

 

Projections of expected future cash flows require management to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, discount rates, the number of months it takes to re-lease the property, and the number of years the property is held for investment. The use of inappropriate assumptions in the future cash flow analysis would result in an incorrect assessment of the property’s future cash flows and fair value, and could result in the overstatement of the carrying value of real estate assets held by the Joint Ventures and net income of the Partnership.

 

American Jobs Creation Act of 2004

 

The American Jobs Creation Act of 2004 (the “Act”) added Section 470 to the Internal Revenue Code, which provides certain limitations on the utilization of losses allocable to leased property owned by a partnership having both taxable and tax-exempt partners such as the Partnership. Currently, it is unclear as to how the transition rules and effective dates set forth in the Act will apply to entities such as the Partnership. However, on March 11, 2005, the Internal Revenue Service issued IRS Notice 2005-29 announcing that the IRS will not apply Section 470 to partnerships for taxable year 2004 based solely on the fact that a partnership had both taxable and tax-exempt partners. It is important to note that IRS Notice 2005-29 provides relief for partnerships for taxable year 2004 only. Accordingly, unless Congress passes corrective legislation which addresses this issue or some other form of relief from the provisions of Section 470 of the Act is granted, based on a strict reading of the Act, beginning in 2005 and thereafter, future passive losses allocable to Tax Preferred limited partners may only be used to offset passive income generated from the same property or within the same fund.

 

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Subsequent Event

 

On April 13, 2005, Fund XI-XII-REIT Associates and Fund XII-REIT Associates sold the Gartner Building and the AT&T Oklahoma Building, respectively, to an unrelated third party. The gross sales price, excluding closing costs, for the Gartner Building and the AT&T Oklahoma Building is approximately $12.5 million and $21.4 million, respectively. As a result of the sale, the Partnership received net sale proceeds of approximately $11.7 million and was allocated a gain of approximately $4.0 million. The Partnership holds equity interests of approximately 17% in Fund XI-XII-REIT Associates, which is the sole owner of the Gartner Building, and approximately 45% in Fund XII-REIT Associates, which is the sole owner of the AT&T Oklahoma Building. The gain recognized from the sales of the Gartner Building and the AT&T Oklahoma Building may be adjusted as additional information becomes available in subsequent periods.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Since we do not borrow any money, make any foreign investments, or invest in any market risk-sensitive instruments, we are not subject to risks relating to interest rates, foreign current exchange rate fluctuations, or the other market risks contemplated by Item 305 of Regulation S-K.

 

ITEM 4. CONTROLS AND PROCEDURES

 

The Partnership carried out an evaluation, under the supervision and with the participation of management of Wells Capital, the corporate general partner of one of our General Partners, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Partnership’s disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a—14 under the Securities Exchange Act of 1934. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Partnership’s disclosure controls and procedures were effective.

 

There were no significant changes in the Partnership’s internal control over financial reporting during the quarter ended March 31, 2005 that have materially affected, or are likely to materially affect, the Partnership’s internal control over financial reporting.

 

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PART II.    OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We were not involved in any material legal proceedings during the quarter ended March 31, 2005 requiring disclosure under Item 103 of Regulation S-K.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(a)   We did not sell any equity securities that were not registered under the Securities Act of 1933 during the quarter ended March 31, 2005.

 

(b)   Not applicable.

 

(c)   We did not redeem any securities during the quarter ended March 31, 2005.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

We were not subject to any indebtedness, and therefore, we did not default respect to any indebtedness during the quarter ended March 31, 2005.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

No matters were submitted to a vote of our limited partners during the quarter ended March 31, 2005.

 

ITEM 5. OTHER INFORMATION

 

Not applicable.

 

ITEM 6. EXHIBITS

 

The Exhibits required to be filed with this report are set forth on the Exhibit Index to First Quarter Form 10-Q attached hereto.

 

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Table of Contents

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

       

WELLS REAL ESTATE FUND XII, L.P.

(Registrant)

       

By: WELLS PARTNERS, L.P.

        (General Partner)

       

By: WELLS CAPITAL, INC.

        (Corporate General Partner)

May 13, 2005

     

/s/    LEO F. WELLS, III


Leo F. Wells, III

President, Principal Executive Officer, and Sole Director

of Wells Capital, Inc.

 

May 13, 2005

     

 

/s/    DOUGLAS P. WILLIAMS


Douglas P. Williams

Principal Financial Officer

of Wells Capital, Inc.

 

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EXHIBIT INDEX

 

TO FIRST QUARTER FORM 10-Q

OF

WELLS REAL ESTATE FUND XII, L.P.

 

Exhibit

No.


  

Description


10.1    Purchase and Sale Agreement for the Gartner Building, AT&T Oklahoma Building, AmeriCredit Building, and John Wiley Building (previously filed with the Commission as Exhibit 10.70 to the Form 10-Q of Wells Real Estate Investment Trust, Inc. for the period ending March 31, 2005, Commission File No. 0-25739, and hereby incorporated by this reference)
31.1    Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002