Item 1. Business
T. Rowe Price Realty Income Fund IV, America's Sales-Commission-Free Real Estate Limited Partnership (the "Partnership"), was formed on November 17, 1987, under the Delaware Revised Uniform Limited Partnership Act for the purpose of acquiring, operating and disposing of primarily existing income-producing commercial and industrial real properties. On February 26, 1988, the Partnership commenced an offering of $75,000,000 of Limited Partnership Units ($50 per Unit) pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933 (Registration No. 33-18965) (the "Registration Statement"). The Prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933 (the "Prospectus") sets forth a complete description of the business of the Partnership in the sections entitled "Investment Objectives" and "Fund Policies" on pages 17 - 24 of the Prospectus, which pages are incorporated by reference herein. The Gross Proceeds from the offering totaled $34,605,000, and an additional $25,000 was contributed by the initial limited partner, T. Rowe Price Real Estate Group, Inc. There were 4,657 Limited Partners as of March 17, 1997. The offering terminated on September 30, 1988, and no additional Units will be sold. The Partnership had a reinvestment plan, which was terminated in August of 1996. As of the termination of the plan, 167,874 additional Units had been sold at prices ranging from $31 to $50 per Unit, for a total of $6,947,000. Pursuant to the Partnership's Redemption Plan, 95,050 Units have been redeemed as of March 17, 1997 for a total of $3,287,000. As of March 17, 1997 there were 765,422 Units outstanding.
In December of 1991, LaSalle Advisors Limited Partnership ("LaSalle") entered into a contract with the Partnership's general partner, T. Rowe Price Realty Income Fund IV Management, Inc. ("the General Partner") and the Partnership to perform day-to-day management and real estate advisory services for the Partnership under the supervision of the General Partner and its Affiliates. LaSalle's duties under the contract include disposition and asset management services, including recordkeeping, contracting with tenants and service providers, and preparation of financial statements and other reports for management use. The General Partner continues to be responsible for overall supervision and administration of the Partnership's operations, including setting policies and making all disposition decisions, and the General Partner and its Affiliates continue to provide administrative, advisory, and oversight services to the Partnership. Compensation to LaSalle from the Partnership consists of accountable expense reimbursements, subject to a fixed maximum amount per year. All other compensation to LaSalle is paid out of compensation and distributions paid to the General Partner by the Partnership.
The Partnership is engaged solely in the business of real estate investment, therefore, presentation of information about industry segments is not applicable. In 1996, three of the Partnership's properties produced 15% or more of the Partnership's revenue: Westbrook Commons (32%), Kent Sea Park (22%), and Goshen Plaza (19%). In 1995, three of the Partnership's investments produced 15% or more of the Partnership's revenue: Westbrook Commons (32%), Kent Sea Park (21%), and Goshen Plaza (19%). In 1994, three of the Partnership's investments produced 15% or more of the Partnership's revenue: Westbrook Commons (27%), Goshen Plaza (22%), and Kent Sea Park (16%). In none of these periods did any tenant produce more than 10% of the Partnership's revenues from real estate operations.
The Partnership owned a 20% interest in a general partnership, Fairchild 234, the other general partners of which were certain other affiliated partnerships. Fairchild 234 owned a note secured by a deed of trust on Fairchild Corporate Center, located in Irvine, California. This property was acquired outright in February, 1994 by a corporation, the stockholders of which are the partners of Fairchild 234. Prior to February, 1994, the Partnership's investment in the property was accounted for as an in-substance foreclosed property. In August, 1996, Fairchild 234 sold its interest in this property for a total sales price of $10 million. The purchaser, Spieker Properties, L.P. is not an affiliate of the Partnership, its general partners, or the Partnership's investment adviser. Net book value of the Partnership's interest at the date of sale was $1.4 million, which represented approximately 6.0% of the Partnership's assets. Net proceeds to the Partnership were $1,956,000.
During 1996, the Partnership reviewed its portfolio and operating plans with the intent to dispose of all its operating properties by the end of 1998, and to thereafter distribute all of the Partnership's net assets to the partners. In this regard, the Partnership has received solicited and unsolicited offers to purchase one or more of its properties, and is pursuing some of these offers. Although there is no assurance that the Partnership will achieve the disposition of all its operating properties during the proposed time frame, the disposition of operating properties is expected to cause a significant decrease in the Partnership's operating activities in future periods.
The Partnership also sold one of its investment properties, Metropolitan Industrial, in 1994 for a net sales price of $5,870,000 resulting in a gain of approximately $577,000. The Partnership owns directly and through joint venture partnerships the properties or interests listed in Schedule III to this Report, "Real Estate and Accumulated Depreciation," which is set forth in Exhibit 99(b) to this Report, and which is incorporated
by reference herein and contains information as to acquisition date and total cost of each of the properties. Additional information regarding these properties and/or interests, including percentage leased as of December 31, 1996 is set forth in the table, "Real Estate Holdings," appearing on page 4 of the Partnership's 1996 Annual Report to Limited Partners which is hereby incorporated by reference herein. A brief narrative description of each investment follows.
Tierrasanta
The Partnership owns a 40% interest in Tierrasanta 234, a joint venture with its affiliates, T. Rowe Price Realty Income Fund II, America's Sales-Commission-Free Real Estate Limited Partnership ("RIF II") and T. Rowe Price Realty Income Fund III, America's Sales-Commission-Free Real Estate Limited Partnership ("RIF III"). Tierrasanta 234 owns a 100% interest in Tierrasanta Research Park in San Diego, California. The project contains four buildings utilized for research and development purposes, for a total of 104,000 square feet of space. It is located in the Kearny Mesa market area, north of San Diego, which is part of the larger "Interstate 15" commercial corridor.
The property lost one 39,971 square-foot tenant when the tenant's lease expired, and one tenant was renewed for 8,305 square-foot space to bring the leased status to 62% at year-end versus 100% at year-end 1995. During 1997, only one lease covering 8,900 square feet expires. There has been interest in the vacant space, and the market is tightening but several competitive properties have comparable space available.
Tierrasanta Research Park is part of the Kearny Mesa research and development ("R&D")/office market. The Park competes against both R&D and office buildings. Overall activity in the submarket has been good, with approximately 1,475,000 square feet of gross absorption for the year in R&D space, and slightly higher rents than year-end 1995, as discussed below. Vacancy rates at year-end 1996 were approximately 8.0% and 15.4% for R&D space and office space, respectively, versus approximately 13% and 19%, respectively, for the previous year.
Rental rates in this submarket at year-end for R&D space range between $6.60 and $9.00 per square foot net of expenses, with tenant improvements ranging between $5.00 and $15.00 per square foot. Office rents are ranging between $10.80 and $16.20 per square foot with tenant improvements ranging anywhere from $7.00 to $20.00 per square foot. There continue to be several 15,000 to 25,000 square foot buildings available for lease in the Kearney Mesa submarket which compete directly with the Tierrasanta vacancy.
During 1996, the Partnership recorded a provision for value impairment of $1,099,000 in connection with Tierrasanta. The General Partner determined that this adjustment was a prudent course of action based upon the uncertainty of the Partnership's ability to recover the net carrying value of the project through future operations over a shorter anticipated holding period and the ultimate sale of the property.
Westbrook Commons
The Partnership owns a 50% interest in Penasquitos 34, a joint venture with RIF III. Penasquitos 34 owns a 100% interest in Westbrook Commons Shopping Center ("Westbrook Commons"), a neighborhood shopping center in the Village of Westchester, Illinois, a Chicago suburb. The property contains 122,000 rentable square feet of space.
Three new, five renewal, and one expansion lease totaling 19,952 square feet, were signed during the year. Despite three tenants that did not renew their leases, including one tenant that was lost due to credit reasons, the property's occupancy increased slightly from 96% to 98% by year end 1996. Leases representing only 7% of the property's total leasable area expire in 1997. Activity from prospective tenants has been good.
The Westchester market in which the project is located continues to remain a stable and relatively healthy environment for retailers. Grocery anchored centers such as Westbrook Commons have proven to be the most successful for service/convenience based retailers. Little fluctuation has occurred in the overall vacancy and rental rates throughout the submarket. Industry figures place the vacancy rate for the competitive centers within a three-mile radius of Westbrook Commons at approximately 2%. The average rental rates in the submarket increased $0.00- $2.00 per square foot per year for Class A space.
Goshen Plaza Shopping Center
The Partnership owns a 90% interest in Goshen Road Limited Partnership, which owns Goshen Plaza Shopping Center ("Goshen Plaza"), a neighborhood shopping center in Montgomery County, Maryland, a suburb of the District of Columbia. The Partnership is the sole general partner of the Goshen Road Limited Partnership; the remaining 10% interest is owned by the limited partners of Goshen Road Limited Partnership who sold the Partnership its 90% interest. None of these limited partners are affiliates of the Partnership.
Goshen Plaza consists of four buildings: two multi-tenant buildings on either side of a single-tenant building occupied by a People's Drug Store and a free-standing, single-tenant
restaurant building on a pad. The total gross leasable area of the Center is 46,000 square feet.
Goshen Plaza ended the year at 88% leased which was up thirteen percentage points from the previous year. Two leases covering 2,844 square feet expired in 1996, and three new and one renewal leases totaling 9,004 square feet were signed during the year. Strong leasing efforts produced the lease signings, including a new 4,200 square foot restaurant. Leases representing 6% of the property's total leasable area expire in 1997.
Goshen Plaza competes primarily with nine other neighborhood shopping centers located within a five mile radius, ranging in size from 11,000 square feet to 165,000 square feet and totaling approximately 782,000 square feet. Vacancy in these projects is currently 9% versus 4% for the previous year. The increase in vacancy can be attributed to one large tenant who vacated a center within the subject's sub-market. Retail activity in the Montgomery County submarket continues to improve slightly from the prior year, as market rates have moved upward $2.00 to $6.00 per square foot net of taxes, insurance and utilities ("NNN") from $13.00 to $18.00 per square foot NNN in the prior year. Tenants signing new leases within this market are typically negotiating one to two months of free rent on a five-year term.
Burnham Building
The Partnership owns a 100% interest in a warehouse facility in the South Congress Industrial Park in the northern section of Boca Raton, which is in south Palm Beach County. It is leased to a single tenant, Burnham Services Corporation, under a long-term lease which expires February 28, 2000. Burnham subleases a portion of the property to other tenants. This one-story industrial facility contains 71,000 rentable square feet and is situated on 4.4 acres of land.
Burnham is a nationwide moving and storage company specializing in transportation, storage, warehouse management, and installation of high-tech electronic equipment. The Burnham Building is their Southeast Florida regional headquarters.
The downsizing of IBM's 1.0 million square-foot personal computer manufacturing headquarters in Boca Raton in the late 1980's created a glut of space that prompted the deterioration of this flex office/industrial market. In 1996, IBM continued to reduce their commitment to space in the area. However, the market is almost fully absorbed and industrial space is still somewhat scarce. Overall market rents have remained stable. Rental rates for low-finish industrial buildings are at an average of between $3.50 to $9.50 per square foot per year NNN. No new significant speculative projects are expected in the near future, due to high land costs and restrictive zoning regulations.
Kent Sea Park
The Partnership owns a 100% interest in Kent Sea Park which is located in the southern end of the Kent Valley industrial market, four miles southeast of the Seattle-Tacoma International Airport and about 15 miles south of downtown Seattle. The property consists of two one-story warehouse buildings containing 138,000 square feet located on 3.7 acres.
The property's year-end occupancy decreased to 95% from 97% in 1995. Although two new and two expansion leases totaling 26,382 square feet were signed in 1996, the Partnership was unable to release 2,400 square feet vacated by two tenants who did not renew their leases. Leases representing 15% of the project expire in 1997.
The property continues to compare favorably to the Kent Valley industrial market, which remains relatively strong overall. In 1996 there was a slight decline in the average occupancy level to 95% versus 96% the previous year due to increased construction. Total square footage in the submarket is approximately 70 million square feet. Although additional construction is expected to occur in 1997, occupancy and rental rates at Kent Sea Park should remain relatively stable near term as much of the new construction is expected to be designed for larger tenants than those which exist at the property.
Employees
The Partnership has no employees and, accordingly, the General Partner, the Partnership's investment adviser, LaSalle, and their affiliates and independent contractors perform services on behalf of the Partnership in connection with administering the affairs of the Partnership and operating properties for the Partnership. The General Partner, LaSalle and their affiliates receive compensation in connection with such activities, as described above. Compensation to the General Partner and its affiliates, and the terms of transactions between the Partnership and the General Partner and its affiliates, are set forth in Items 11. and 13. below, to which reference is made for a description of those terms and the transactions involved.
Item 2.
Item 2. Properties
The Partnership owns interests in the properties referred to under Item 1. above, to which reference is made for the name, location and description of each property. All properties were acquired on an all-cash basis.
Item 3.
Item 3. Legal Proceedings
The Partnership is not subject to any material pending legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market For The Partnership's Limited Partnership Interests and Related Security Holder Matters
There were 4,657 Limited Partners as of March 17, 1997. There is no active public market for the Units. However, in the fourth quarter of 1996, one bidder, who is not affiliated with the General Partner or LaSalle, made a tender offer for the Units, at a price of $22 per Unit, less the amount per Unit of distributions declared or paid during a specified period. As of February 28, 1997, sales of 11,323 Units to the bidder pursuant to the tender offer have been presented for processing.
The Partnership had a reinvestment plan, which was terminated in August of 1996. As of the termination of the plan, 167,874 additional Units had been sold at prices ranging from $31 to $50 per Unit, for a total of $6,947,000. Pursuant to the Partnership's Redemption Plan, 95,050 Units have been redeemed as of March 17, 1997 for a total of $3,287,000. As of March 17, 1997 there were 765,422 Units outstanding.
The Partnership has a redemption plan, whereby Limited Partners have the opportunity to present some or all of their Units to the Partnership for redemption, and to have those Units redeemed provided the Partnership then has sufficient proceeds from the reinvestment plan available for this purpose. Under the redemption plan, the redemption price per Unit is 90% of the estimated fair market value of a Unit as determined from time to time. Completed redemption requests must be received in good order by the Partnership at least 60 days prior to the end of a quarter for the Units to qualify for redemption at the end of that quarter. In addition, redemptions will only be permitted if at least one of the following conditions is satisfied: (i) total redemptions and transfers (other than Excluded Transfers, as defined below) during the Partnership's fiscal year do not exceed 5% of the Units outstanding; (ii) total redemptions and transfers (other than Excluded Transfers) during the Partnership's fiscal year do not exceed 10% of the Units outstanding and total transfers (other than redemptions and Excluded Transfers) do not exceed 2% of Units outstanding; or (iii) the General Partner has
received an opinion of counsel satisfactory to the General Partner or a favorable Internal Revenue Service ("IRS") ruling that such transfer will not result in the Partnership being classified as a "publicly traded partnership" for such year. As of March 17, 1997, 2,329 Units had been redeemed in 1997 for a total of $63,504. The plan may be terminated by the General Partner at any time.
In 1987, the IRS adopted certain rules concerning "publicly traded partnerships." The effect of being classified as a publicly traded partnership would be that income produced by the Partnership would be classified as portfolio income rather than passive income. On November 29, 1995, the IRS adopted final regulations ("Final Regulations"), describing when interests in partnerships will be considered to be publicly traded. The Final Regulations do not take effect with respect to existing partnerships until the year 2006. Due to the nature of the Partnership's income and to the low volume of transfers of Units, it is not anticipated that the Partnership will be treated as a publicly traded partnership under currently applicable rules and interpretations or under the Final Regulations. However, in the event the transfer of Units presented for transfer within a tax year of the Partnership could cause the partnership to be treated as a "publicly traded partnership" for federal tax purposes, the General Partner will accept such transfers only after receiving from the transferor or the transferee an opinion of reputable counsel satisfactory to the General Partner that the recognition of such transfers will not cause the Partnership to be treated as a "publicly traded partnership" under the Internal Revenue Code of 1986, as amended. The General Partner is closely monitoring this situation in light of the recent tender offer.
Cash distributions declared to the Limited Partners during the two most recent fiscal years are as follows:
Distribution Amount of for the Distributions Quarter Ended per Unit
March 31, 1995 0.47 June 30, 1995 0.47 September 30, 1995 0.47 December 31, 1995 0.47 March 31, 1996 0.40 June 30, 1996 0.40 September 30, 1996 2.93 December 31, 1996 0.75
All of the foregoing distributions were paid from cash flows from operating activities, with the exception of the distribution for the quarter ended September 30, 1996 which included $2.53 per Unit from the proceeds of the sale of Fairchild Corporate Center.
There are no material legal restrictions on the Partnership's present or future ability to make distributions in accordance with the provisions of the Agreement of Limited Partnership. Reference is made to Management's Discussion and Analysis of Financial Condition and Results of Operations, below, for a discussion of the Partnership's ability to continue to make future distributions.
At the end of 1996, the Partnership conducted its annual formal unit valuation. The valuation of the Partnership's properties was performed by the General Partner, and then reviewed by an independent professional appraiser to assess the analysis and assumptions utilized. The estimated investment value of limited partnership Units resulting from this process was $31.05 per Unit. After adjusting for the February 1997 distribution, the estimated value is $30.30. In general, Units cannot currently be sold at a price equal to this estimated value, and this valuation is not necessarily representative of the value of the Units when the Partnership ultimately liquidates its holdings.
Item 6.
Item 6. Selected Financial Data
The following sets forth a summary of the selected financial data for the Fund:
(Dollars in thousands except per-unit amounts)
YEARS ENDED DECEMBER 31,
1996 1995 1994 1993 1992
Total assets $22,717 $25,585 $26,206 $32,652 $33,129 at year-end
Total revenues $3,465 $3,706 $4,112 $4,230 $3,959 Net income $415 $1,044 $1,095 $1,358 $725 Net income per Unit $.53 $1.35 $1.45 $1.80 $0.97 Cash distributions declared per Unit 4.48 $1.88 $11.25 $2.57 $2.79
Notes:
1. The above financial data should be read in conjunction with the financial statements and the related notes appearing elsewhere in this report.
2. The figures for Net income include permanent value impairments of $1,099,000 in 1996 and $733 in 1994 and valuation allowances (recoveries) of $(3) in 1994, $75 in 1993 and $510 in 1992, and gain from the sale of the Partnership's interest in Fairchild Corporate Center of $582 in 1996, and from the sale of the Metropolitan Industrial property of $577 in 1994.
3. The figures above for Net income (loss) per Limited Partner Unit include permanent value impairments of $1.42 per Unit in 1996 and $0.97 per Unit in 1994, and valuation allowances (recoveries) of $(.01) per Unit in 1994, $0.10 per Unit in 1993 and $0.68 per Unit in 1992. Also includes gain from the sale of Fairchild Corporate Center of $.75 per Unit in 1996, and gain from sale of the Metropolitan Industrial Building of $0.77 per Unit in 1994.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations
Liquidity and Capital Resources
The Partnership originally sold 692,598 Units in connection with the public offering of Units, for a total of $34,630,000, including the contribution of $25,000 from the Initial Limited Partner. After deduction of organizational and offering costs of $2,078,000, the Partnership had $32,552,000 available for investment and cash reserves.
The public offering of Units was terminated on September 30, 1988, and additional Units will be sold only in connection with the Partnership's reinvestment plan. As of August, 1996, when the plan was terminated, additional capital in the amount of $6,947,000 had been raised from cash distributions reinvested and 167,874 Units issued in connection therewith. Of this amount $2,861,000 has been used to redeem Units. The remaining funds from the reinvestment plan will be used, to the extent necessary, to repurchase Units in connection with the Partnership's redemption plan; the balance will be available for investment in real estate or for cash reserves.
The Partnership originally purchased six properties or interests therein on an all-cash basis, and made an investment in an interest in a participating mortgage loan, completing the initial acquisition phase of its business plan. Through December 31, 1996 the Partnership had sold two property investments: the Metropolitan Industrial property and Fairchild Corporate Center, in which the Partnership had a 20% interest.
As of December 31, 1996 the cost of the Partnership's remaining real estate investments, including subsequent improvements, was $26,356,000. The Partnership has also recorded provisions for value impairments in connection with these properties totaling $1,832,000. In recording the new carrying basis for these properties, in accordance with Statement of Financial Accounting Standards No. 121, which was adopted in 1996, the Partnership offset the properties' accumulated depreciation balances, totaling $1,293,000 against their historical cost. Accumulated depreciation and amortization after this reclassification equals $3,050,000. Therefore, investment in real estate for financial reporting purposes including properties held for sale, after accumulated depreciation, amortization and valuation allowances, was $20,181,000 as of December 31, 1996.
The Partnership expects to incur capital expenditures during 1997 totaling approximately $400,000 for tenant improvements, lease commissions, and other major repairs and improvements. The majority of these expenditures are dependent on the execution of leases with new and renewing tenants, including a substantial portion for the renovation of the large vacant space at Tierrasanta. While the percentage of leases expiring is lower than in 1996, the Partnership's business plan now calls for the disposition of all of its real estate investments by the end of 1998. In order to strategically position the properties for sale, the Partnership will place greater emphasis on entering into longer-term leases with creditworthy tenants. This strategy is likely to result in higher leasing commission and tenant improvement costs, but should result in higher sales prices for the properties than would otherwise be the case.
The Partnership maintains cash balances to fund its operating and investing activities including the costs of tenant improvements and leasing commissions, costs which must be disbursed prior to the collection of any resultant revenues. The General Partner believes that year-end cash balances and cash generated from operating activities in 1997 will be adequate to fund the Partnership's current investing and operating needs. Based on current expectations, cash distributions to partners from operating income are expected to be lower than those in 1996, because the Partnership no longer owns the Fairchild Corporate Center property, which contributed $597,000 to 1996 net income, and because the Partnership may dispose of additional properties during 1997. In 1997, management will determine cash distributions from operations each quarter based on net cash flows for the quarter, money needed to operate the properties and pay Partnership expenses, and anticipated capital needed to repair and maintain the properties and make occupancy related tenant improvements.
As of December 31, 1996, the Partnership maintained cash and cash equivalents aggregating $1,769,000, substantially unchanged from the prior year end. Net cash provided by investing activities increased by $2,146,000 due primarily to the Fairchild Corporate Center sale in 1996. Net cash used in financing activities increased by $1,724,000 due primarily to distribution of the proceeds of the Fairchild Corporate Center sale, the termination of the reinvestment plan, and an increase in the number of Units redeemed.
Operations
1996 v. 1995
The Partnership had a loss of $167,000 from operations in 1996, before the gain on the Fairchild Corporate Center sale, compared with net income of $1,044,000 in 1995. This difference is primarily due to a downward property valuation adjustment at Tierrasanta of $1,099,000 accompanied by an decreased contribution to income of $105,000 from Westbrook Commons. While conditions in the market where Tierrasanta is located are generally improving, the shortened anticipated holding period due to the Partnership's disposition plans caused it to adjust the carrying value downward.
Revenues from rental income and interest totaled $3,465,000 for the year compared with $3,706,000 a year earlier. This comparison was negatively affected by the absence of a full year's rental income from the Fairchild Corporate Center. Results were helped by a decline of $129,000 in operating expenses before valuation adjustments during the year, largely due to a decrease in bad debt expenses at Goshen Plaza.
Leases representing 9% of the portfolio's leasable square footage are scheduled to expire in 1997. These leases represent approximately 11% of the portfolio's rental income for 1996. This amount of potential lease turnover is below normal for the types of properties in the portfolio, which typically lease to tenants under three to five year leases. The overall portfolio occupancy was 89% as of the end of 1996. Management anticipates that occupancy levels will generally remain level or increase in 1997. In most markets, new leases are generally expected to reflect level to higher market rental rates in comparison to the rates of expiring leases. To the extent that the Partnership sells one or more properties during the year, cash flow from operations would be expected to decline while cash flows from sales would increase substantially.
The Burnham property is the only single-tenant property in the Partnership's portfolio, and no single tenant accounted for more than 10% of the Partnership's revenue in 1996. The Partnership therefore does not expect any material adverse effect on revenue on account of the failure of any single tenant in 1997.
1995 v. 1994
Net income from operations in 1995 was $1,044,000, an increase of $526,000 from 1994 (before gain on real estate sold). Properties held throughout both years contributed $675,000 over 1994 operations. Metropolitan contributed $149,000 to net income before its sale in 1994 but nothing in 1995. The effect of increased bad debt expense in 1995 at Goshen Plaza, Kent Sea Park, and Tierrasanta was more than offset by not having any valuation adjustments that year compared with $730,000 in 1994.
The absence of operations at Metropolitan accounted for a decline of $379,000 in revenues and $230,000 in expenses in 1995 relative to 1994. Proceeds from the sale of Metropolitan in June 1994 contributed a gain of $577,000 to net income in 1994.
The leased status of the portfolio at the end of 1995 was the same as it was in 1994, but the average for the year was lower, primarily driven by Goshen Plaza and Fairchild Corporate Center. Even so, revenue gains at other properties offset the effect of the declines at these two properties.
Within the expense categories, management fees experienced a sharp drop from 1994 primarily because there was less cash available for distribution in 1995.
The cash position declined from the beginning of year level. Cash from operating activities declined by $325,000 during the year, and capital improvements increased $343,000. Proceeds from dividend reinvestments net of redemptions increased $540,000.
The Partnership's net income of $1,044,000 for 1995 equates to $1.35 per share compared with $1,095,000, or $1.45 per share, in 1994.
Reconciliation of Financial and Tax Results
For 1996, the Partnership's book net income was $415,000 and its taxable loss was $2,084,000. The loss for tax purposes on the Fairchild Corporate Center sale was the primary reason for the difference. For 1995, the Partnership's book net income was $1,044,000 and its taxable income was $1,414,000. Interest on the loan secured by Fairchild Corporate Center, which was recognized only for tax purposes, and bad debt expense, which was recognized only for book purposes, were the primary differences between the two. For 1994, the Partnership's book net income was $1,095,000 and its taxable income was $2,167,000. The gain for tax purposes on the sale of the Metropolitan Industrial property was the primary reason for the difference. For a complete reconciliation see Note 7 to the Partnership's financial statements, which note is hereby incorporated by reference herein.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements appearing on pages 5 through 12 of the Partnership's 1996 Annual Report to Limited Partners are incorporated by reference in this Form 10-K Annual Report. The report on such financial statements of KPMG Peat Marwick LLP dated January 27, 1997, is filed as Exhibit 99(c) to this form 10-K Annual Report and is hereby incorporated by reference herein. Financial Statement Schedule III, Consolidated Real Estate and Accumulated Depreciation, is filed as Exhibit 99(b) to this Form 10-K Annual Report, and is incorporated by reference herein.
All other schedules are omitted either because the required information is not applicable or because the information is shown in the financial statements or notes thereto.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None. PART III
Item 10.
Item 10. Directors and Executive Officers of the Partnership
The General Partner of the Partnership is T. Rowe Price Realty Income Fund IV Management, Inc. ("RIF IV Management"), 100 East Pratt Street, Baltimore, Maryland 21202. The General Partner has the primary responsibility for overseeing the selection, evaluation, structuring, negotiation, management, and liquidation of the Partnership's investments as well as the cash management of the Partnership's liquid assets and the administration of investor services of the Partnership, including general communications, periodic reports and distributions to Limited Partners, and filings with the Securities and Exchange Commission. RIF IV Management is a wholly-owned subsidiary of T. Rowe Price Real Estate Group, Inc. ("Real Estate Group"), which is, in turn, a wholly-owned subsidiary of T. Rowe Price Associates, Inc. ("Associates"). Affiliates of the General Partner, T. Rowe Price Realty Income Fund I Management, Inc., T. Rowe Price Realty Income Fund II Management, Inc., and T. Rowe Price Realty Income Fund III Management, Inc. are the General Partners of other real estate limited partnerships sponsored by Associates. Real Estate Group is investment manager to T. Rowe Price Renaissance Fund, Ltd., a Sales-Commission-Free Real Estate Investment ("Renaissance Fund"), a real investment trust sponsored by Associates. Associates was founded in 1937 and as of December 31, 1996 managed over $99 billion in assets.
The directors and executive officers of Fund IV Management are as follows:
Position with T. Rowe Price Realty Name Income Fund IV Management, Inc.
James S. Riepe Chairman of the Board, President, also Principal Executive Officer for the Partnership Henry H. Hopkins Vice President and Director Lucy B. Robins Vice President and Secretary Mark B. Ruhe Vice President Alvin M. Younger, Jr. Treasurer and Director Kenneth J. Rutherford Vice President Joseph P. Croteau Controller and Director, also Principal Financial Officer for the Partnership Mark S. Finn Chief Accounting Officer for the Partnership
Mr. Riepe was elected President in 1991. Mr. Ruhe was first elected Vice President in 1988. Mr. Croteau was first elected as Controller in 1988 and as a director in 1996, and was designated as Principal Financial Officer for the Partnership in 1992. Mr. Rutherford was first elected Vice President in 1994. Mr. Finn was designated as Chief Accounting Officer in 1996. In all other cases these individuals have served in these capacities since the inception of Fund IV Management in November, 1987. There is no family relationship among the foregoing directors or officers.
The background and business experience of the foregoing individuals is as follows:
James S. Riepe (Born 1943) is Managing Director and Director, T. Rowe Price Associates, Inc. ("Associates") and Director of its Investment Services Division; President and Chairman of Real Estate Group and each of the general partners of T. Rowe Price Realty Income Fund I, A No-Load Limited Partnership ("RIF I"), RIF II, and RIF III,(the "Realty Income Funds"); Chairman of six of the 42 mutual funds sponsored by Associates on which he serves as a director or trustee; Chairman of New Age Media Fund; Director, Rhone-Poulenc Rorer, Inc., a pharmaceuticals company.
Henry H. Hopkins (Born 1942) is a Managing Director, Director, and Legal Counsel of Associates. In addition, Mr. Hopkins is Vice President and Director of each of the general partners of the Realty Income Funds. He is also a Vice President certain of the mutual funds managed by Associates. Mr. Hopkins joined Associates in 1972.
Lucy B. Robins (Born 1952) is Vice President and Associate Legal Counsel of Associates and Vice President of Real Estate Group and each of the general partners of the Realty Income Funds. Ms. Robins joined Associates in 1986.
Mark B. Ruhe (Born 1954) is an Asset Manager for Real Estate Group, and Vice President of the Investment Manager and each of the general partners of the Realty Income Funds. Mr. Ruhe joined Associates in 1987.
Alvin M. Younger, Jr. (Born 1949) is Treasurer and Director of each of the general partners of the Realty Income Funds and a Managing Director, Secretary and Treasurer of Associates, and Secretary and Treasurer of Real Estate Group. Mr. Younger joined Associates in 1973.
Kenneth J. Rutherford (Born 1963) is Marketing Manager for Associates since 1996 and Vice President of each of the general partners of the Realty Income Funds. Mr. Rutherford joined Associates in 1992. From 1992 to 1996 he was Assistant to the Director of Associates' Investment Services Division. From 1990 to 1992 he was a student at the Stanford Graduate School of Business.
Joseph P. Croteau (Born 1954) is a Vice President and Controller of Associates, and Director and Controller of each of the general partners of the Realty Income Funds. Mr. Croteau joined Associates in 1987.
Mark S. Finn (Born 1963) is an Assistant Vice President of Associates, and Chief Accounting Officer of the Realty Income Funds and the Renaissance Fund. Mr. Finn joined Associates in 1990.
No Forms 3, or Forms 4, or amendments to either of them, were furnished to the Partnership for its most recent fiscal year. Based on a review of Forms 5 furnished the Partnership for its most recent fiscal year and written representations pursuant to Item 405(b)(2)(I) of Regulation S-K, none of the directors, officers, or beneficial owners of more than 10% of the Units, if any, nor the General Partner failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during the most recent fiscal or prior fiscal years.
Item 11.
Item 11. Executive Compensation
The directors and executive officers of the General Partner receive no current or proposed remuneration from the Partnership.
The General Partner is entitled to receive a share of cash distributions and a share of profits or losses as described under the captions "Compensation and Fees," and "Income and Losses and Cash Distributions" of the Prospectus, on pages 6-7 and 31-34 respectively, which pages are incorporated herein by reference.
For a discussion of compensation and fees to which the General Partner is entitled, see Item 13., which is incorporated herein by reference.
As discussed in Item 1, above, LaSalle receives reimbursement from the Partnership for certain expenses incurred in performance of its responsibilities under the advisory contract. In addition, under the contract, LaSalle receives from the General Partner a portion of the compensation and distributions received by the General Partner from the Partnership.
In addition to the foregoing, certain officers and directors of the General Partner receive compensation from Associates and/or its affiliates (but not from the Partnership) for services performed for various affiliated entities, which may include services performed for the Partnership. Such compensation may be based, in part, on the performance of the Partnership. Any portion of such compensation which may be attributable to such performance is not material.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Partnership is a limited partnership which issues units of limited partnership interest. No limited partner is known by the Partnership to own beneficially more than 5% of the outstanding interests of the Partnership.
The percentage of outstanding interests of the Partnership held by all directors and officers of the General Partner is less than 1%. Certain officers and/or directors of the General Partner presently own securities in Associates. As of February 1, 1997, the directors and officers of the General Partner, as a group, beneficially owned 4.77% of the common stock of Associates, including options to purchase 336,000 shares exercisable within 60 days of February 1, 1997, and shares as to which voting power is shared with others. Of this amount, Mr. Riepe owned 2.34% of such stock (1,380,978 shares, including 106,400 shares which may be acquired by Mr. Riepe upon the exercise of stock options, 140,000 shares held in trusts for members of Mr. Riepe's family and 40,000 shares held by a member of Riepe's family, as to which Mr. Riepe disclaims beneficial ownership, and 82,000 shares held in a charitable foundation of which Mr. Riepe is a trustee and as to which Mr. Riepe has shared voting and disposition power). Mr. Hopkins owned 1.11% (643,768 shares, including 120,800 shares which may be acquired by Mr. Hopkins upon the exercise of stock options). Mr. Younger owned 1% (580,000 shares, including 16,500 shares which may be acquired by Mr. Younger upon the exercise of stock options, and 25,000 shares owned by a member of Mr. Younger's family as to which Mr. Younger disclaims beneficial ownership). No other director or officer owns 1% or more of the common stock of Associates.
There exists no arrangement, known to the Partnership, the operation of which may at any subsequent date result in a change in control of the Partnership.
Item 13.
Item 13. Certain Relationships and Related Transactions
The General Partner and its affiliates are permitted to engage in transactions with the Partnership as described under the captions "Compensation and Fees," and "Conflicts of Interest" of the Prospectus, on pages 6-11, which pages are hereby incorporated by reference herein.
In 1996, the General Partner has been reimbursed for expenses incurred by it in the administration of the Partnership and the operation of the Partnership's investments in the amount of $74,000. The General Partner's management fee in 1996 was $191,000 and its share of cash distributions totaled $15,000. An affiliate of the General Partner received a fee of $3,000 from the money market mutual funds in which the Partnership made its interim cash investments in 1996.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Incorporated by reference from the indicated pages of the Partnership's 1996 Annual Report to Limited Partners:
Page
Consolidated Balance Sheets at 5 December 31, 1996 and 1995 Consolidated Statements of Operations 6 for each of the three years in the period ended December 31, 1996 Consolidated Statements of Partners' Capital 7 for each of the three years in the period ended December 31, 1996 Consolidated Statements of Cash Flows for 8 each of the three years in the period ended December 31, 1996 Notes to Consolidated Financial Statements 9-12
Independent Auditors' Report - Incorporated by reference from Exhibit 99(c) hereof.
(2) Financial Statement Schedules:
III - Consolidated Real Estate and Accumulated Depreciation, incorporated by reference to Exhibit 99(b) hereof.
All other schedules are omitted because they are not applicable or the required information is presented in the financial statements and notes hereto.
(3) Exhibits
3, 4. (a) Agreement of Limited Partnership of the Partnership dated November 17, 1987, as amended and restated as of February 23, 1988, included as Exhibit A to the Prospectus of the Partnership, dated February 26, 1988, File Number 33-18965, as filed with the Commission pursuant to Rule 424(b) ("the Prospectus"), incorporated by reference herein.
(b) Certificate of Limited Partnership, incorporated by reference to Exhibit 3,4(b) to the Partnership's Registration Statement, File No. 33-19865, as filed on December 9, 1987.
(c) Amendment No. 5 to Amended and Restated Limited Partnership Agreement, incorporated by reference to Exhibit 3,4(g) to Post-Effective Amendment No. 1 to the Partnership's Registration Statement, File No. 33-18965, filed on February 25, 1988 ("Post-Effective Amendment No. 1").
10. (a) Advisory Agreement dated as of July 15, 1991 by and between the Partnership, the General Partner, and LaSalle Advisors Limited Partnership, incorporated by reference to Exhibit 10(c) of the registrant's report on Form 10-K for the year ended December 31, 1991.
13. Annual Report for the year ended December 31, 1996, distributed to limited partners on or about March 10, 1997.
24. Accountants' Consent of KPMG Peat Marwick LLP.
27. Financial Data Schedule
99. (a) Pages 6-11, 17-24 and 31-34 of the Prospectus of the Partnership dated July 15, 1991, incorporated by reference to Exhibit 99(a) of the registrant's report on Form 10-K for the year ended December 31, 1994, File Number 0-17636
(b) Financial Statement Schedule III - Consolidated Real Estate and Accumulated Depreciation.
(c) Report of KPMG Peat Marwick LLP dated January 27, 1997 regarding the financial statements of the Partnership.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed for the last quarter of the period covered by this report.
(1) Report on Form 8-K dated January 17, 1997 regarding the valuation of the Partnership's Units.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:
Dated: March 27, 1997 T. ROWE PRICE REALTY INCOME FUND IV, AMERICA'S SALES-COMMISSION- FREE REAL ESTATE LIMITED PARTNERSHIP
By: T. Rowe Price Realty Income Fund IV Management, Inc., General Partner
By: /s/James S. Riepe James S. Riepe, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities (with respect to the General Partner) and on the dates indicated:
/s/James S. Riepe Date: March 27, 1997 James S. Riepe, Director and Chairman of the Board, President T. Rowe Price Realty Income Fund IV Management, Inc., Principal Executive Officer for the Partnership
/s/Henry H. Hopkins Date: March 27, 1997 Henry H. Hopkins, Director and Vice President, T. Rowe Price Realty Income Fund IV Management, Inc.
/s/Alvin M. Younger, Jr. Date: March 27, 1997 Alvin M. Younger, Jr., Director and Treasurer, T Rowe Price Realty Income Fund IV Management, Inc.
/s/Joseph P. Croteau Date: March 27, 1997 Joseph P. Croteau, Controller, Director and Principal Financial for the Partnership
/s/Mark S. Finn Date: March 27, 1997 Mark S. Finn Chief Accounting Officer for the Partnership T. Rowe Price Realty Income Fund IV Management, Inc. The Annual Report to Limited Partners for the Year ended December 31, 1996 should be inserted here.
ANNUAL REPORT FOR THE PERIOD ENDED DECEMBER 31, 1996
FELLOW PARTNERS:
Now that we have initiated the disposition phase of your Fund, the amount of your distributions and the estimated value of a Fund unit will be influenced more by sales than by operations. As a result, we thought it appropriate to begin this report by providing you with the estimated unit value of the Fund and then with a report on your fourth quarter distribution. At this stage of your Fund's life cycle, our primary focus is shifting from the production of income to the strategic positioning of Fund properties to maximize potential sales proceeds.
Unit Valuation
As you know, at the end of each year we employ a third-party appraiser to review and assess the analysis and assumptions used to prepare an estimated current value of the properties held in your Fund. We then use these valuations to prepare an estimated unit value, which may not be representative of the value of your units when the Fund ultimately liquidates. Nor is there any assurance that you could sell your units today at a price equal to the current estimated value. At December 31, 1996, the estimated unit value of the Fund was $31.05. After adjusting for our February distribution of $0.75, the value per unit is $30.30. Total appreciation for the year, including net appreciation on the property sold, is 5.9%. As you may recall, we mailed this information to you in a letter dated January 22, 1997, in response to the offerings made to you by other investors. While we cannot assure that you will ultimately receive the exact amount of the estimated unit value, we believe our valuation process has been sound, and we want you to be as well-informed as possible about the value of your investment. Our objective is to supply you with the information you need to make the best decisions based on your particular circumstances.
Real Estate Investments (Dollars in thousands) _________________________________________________________________
Average Contribution Leased Status Leased Status to Net Income ___________ _____________ ____________
Gross Twelve Twelve Leasable Months Ended Months Ended Property Area December 31, December 31, December 31, Name (Sq. Ft.) 1996 1995 1996 1995 1996 _________ __________ __________ _____ _____ _____ _____
Tierrasanta 104,200 62% 75% 87% $ 113 $(976)
Goshen Plaza 45,500 88 84 81 80 143
Westbrook Commons 121,600 98 98 96 472 367
Burnham Building 71,200 100 100 100 199 181
Kent Sea Park 138,200 95 97 99 341 355 ________ ____ ____ ____ _____ ______
480,700 89 92 94 1,205 70
Properties Sold - - - - 31 597 Fund Expenses Less Interest Income - - - - (192) (252) ________ ____ ____ ____ _____ ______
Total 480,700 89% 92% 94% $1,044 $ 415
Cash Distributions
The Fund declared a fourth quarter distribution from operations of $0.75 per unit, bringing the total distributions from operations for the year to $1.95. Additionally, $2.53 per unit was paid out to you during the year from sales proceeds for the Fund's 20% share of Fairchild, resulting in total distributions of $4.48 per unit for 1996. Future distributions will be determined each quarter based on cash flow, anticipated capital requirements, and the status of property dispositions.
Results of Operations
The Fund had a loss of $167,000 from operations in 1996, before the gain on property sold during the year, compared with net income of $1,044,000 in 1995. This difference is primarily due to a valuation impairment of $1,099,000 at Tierrasanta, accompanied by a $105,000 decline in contribution to income from Westbrook Commons caused by normal tenant turnover. This decline in income from operations was partly offset by the $582,000 gain on the sale of Fairchild. While conditions in Tierrasanta's submarket are generally improving, the shortened anticipated holding period due to our disposition plans caused us to adjust the carrying value downward. Property carrying amounts for financial statement purposes should not be confused with the estimated fair market values used to determine your estimated unit value. Revenues from rental income and interest income resulted in total gross revenues of $3,465,000 for the year compared with $3,706,000 a year earlier. This comparison was negatively affected by the absence of a full year's rental income from Fairchild. Results were helped by a decline of $129,000 in operating expenses before the valuation adjustment during the year, largely due to a decrease in bad debt expenses at Goshen Plaza. At the property level, the average leased status of Fund properties increased by two percentage points to 94% in 1996. At Westbrook Commons, three new leases, five renewals, and one expansion lease were signed during the year. Previously, three tenants had not renewed, including one lost due to credit reasons. The lower average leased status at this property was temporary and the property remains healthy. As we reported previously, a tenant that occupied 38% of Tierrasanta did not renew its lease, which expired at the end of August. There is interest in the property and the market is tightening, but several competitive properties have comparable space available, and we cannot be sure when this space will be re-leased. Goshen enjoyed an increase in leased status over the year. Three new leases and one renewal accounted for much of the boost. New tenants in this suburban Maryland retail center include a large restaurant, which has brought the property to near market occupancy levels.
Outlook
Currently, the Fund has no properties held for sale, but we will begin to market them soon. Some of you have asked why we are beginning to sell now, just as the market has been exhibiting signs of strengthening. Our primary goal is to take advantage of rising property values as the Fund nears the end of its planned lifespan. As real estate markets have been improving during the past few years, we have used the opportunity to capture higher prices for investors. As usually happens in improving markets, the turnaround in real estate is broadly encouraging an increasing supply of new properties, which could eventually lead to an oversupply and softer prices down the road. This is normal as the real estate cycle runs its course. While we do not expect a recession in either real estate or the general economy to emerge in the near future, the country's economic expansion is almost six years old and is approaching an advanced stage, by historical measures. It is possible that by selling Fund properties during the next few years, we might miss some further advances in real estate values. However, with prices currently rising due to strong tenant and investor demand, supply growing in many markets, and the Fund nearing the end of its planned lifespan, we believe it is prudent to sell into that strength while prices are on the upswing.
Sincerely,
James S. Riepe Chairman
February 7, 1997
REAL ESTATE HOLDINGS December 31, 1996 (In thousands)
Date Carrying Property Name Type and Location Acquired Amount _______________ ________________ _________ ________
Tierrasanta Business Park 5/88 $ 2,303 San Diego, California
Goshen Plaza Retail 11/90 6,146 Gaithersburg, Maryland
Westbrook Retail 12/90 4,897 Commons Westchester, Illinois
Burnham Building Warehouse 01/91 2,225 Boca Raton, Florida
Kent Sea Park Industrial 08/91 4,610 Kent, Washington _______
$ 20,181 _______ _______
CONSOLIDATED BALANCE SHEETS (In thousands)
December 31, December 31, 1996 1995 ___________ ____________
Assets
Real Estate Property Investments Land . . . . . . . . . . . . . . . $ 7,413 $ 8,502 Buildings and Improvements. . . . . 15,818 18,295 ________ ________
23,231 26,797
Less: Accumulated Depreciation and Amortization . . . . . . . . . . (3,050) (3,848) ________ ________
20,181 22,949 Cash and Cash Equivalents. . . . . . 1,769 1,733 Accounts Receivable (less allowances of $28 and $367) . . . . . . . . . . . . . 525 623 Other Assets . . . . . . . . . . . . 242 280 ________ ________
$ 22,717 $ 25,585 ________ ________ ________ ________
Liabilities and Partners' Capital Security Deposits and Prepaid Rents . . . . . . . . . . . $ 209 $ 200 Accrued Real Estate Taxes. . . . . . 358 353 Accounts Payable and Other Accrued Expenses. . . . . . . . . . . . . . 270 234 Minority Interest. . . . . . . . . . 688 688 ________ ________
Total Liabilities. . . . . . . . . . 1,525 1,475
Partners' Capital. . . . . . . . . . 21,192 24,110 ________ ________
$ 22,717 $ 25,585 ________ ________ ________ ________
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per-unit amounts)
Years Ended December 31, 1996 1995 1994 _________ __________________
Revenues
Rental Income. . . . . . . . $ 3,366 $ 3,616 $ 3,950 Interest Income. . . . . . . 99 90 162 _______ _______ _______
3,465 3,706 4,112 _______ _______ _______
Expenses
Property Operating Expenses . . . . . . . . . 709 940 823 Real Estate Taxes. . . . . . 568 589 635 Depreciation and Amortization . . . . . . . 745 786 873 Decline of Property Values . . . . . . . . . . 1,099 - 730 Management Fee to General Partner. . . . . . . . . . 191 85 267 Partnership Management Expenses . . . . . . . . . 320 262 266 _______ _______ _______
3,632 2,662 3,594 _______ _______ _______
Income (Loss) from Operations before Real Estate Sold . . . . . (167) 1,044 518 Gain on Real Estate Sold . . 582 - 577 _______ _______ _______
Net Income . . . . . . . . . $ 415 $ 1,044 $ 1,095 _______ _______ _______ _______ _______ _______
Activity per Limited Partnership Unit
Net Income . . . . . . . . . $ 0.53 $ 1.35 $ 1.45 _______ _______ _______ _______ _______ _______
Cash Distributions Declared from Operations. . . . . . $ 1.95 $ 1.88 $ 2.62 as Return of Capital. . . . . . . . . . - - 0.78 from Sale Proceeds . . . . 2.53 - 7.85 _______ _______ _______
Total Distributions Declared . . . . . . . . . $ 4.48 $ 1.88 $ 11.25 _______ _______ _______ _______ _______ _______
Weighted Average Number of Units Outstanding. . . . . 773,703 766,443 747,028 _______ _______ _______ _______ _______ _______
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (In thousands)
General Limited Partner Partners Total ________ ________ ________
Balance, December 31, 1993. . . . . $ (47) $31,186 $31,139 Net Income . . . . . . . . . 8 1,087 1,095 Reinvestments in Units. . . . . . . . . . . - 792 792 Redemptions of Units. . . . . . . . . . . - (632) (632) Cash Distributions . . . . . (19) (7,700) (7,719) _______ _______ _______
Balance, December 31, 1994. . . . . (58) 24,733 24,675 Net Income . . . . . . . . . 10 1,034 1,044 Reinvestments in Units. . . . . . . . . . . - 999 999 Redemptions of Units. . . . . . . . . . . - (299) (299) Cash Distributions . . . . . (24) (2,285) (2,309) _______ _______ _______
Balance, December 31, 1995. . . . . (72) 24,182 24,110 Net Income . . . . . . . . . 4 411 415 Reinvestments in Units. . . . . . . . . . . - 421 421 Redemptions of Units. . . . . . . . . . . - (502) (502) Cash Distributions . . . . . (7) (3,245) (3,252) _______ _______ _______
Balance, December 31, 1996 . $ (75) $21,267 $21,192 . . . . . . . . . . . . . _______ _______ _______ . . . . . . . . . . . . . _______ _______ _______
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Years Ended December 31, 1996 1995 1994 _______ _______ _______
Cash Flows from Operating Activities Net Income . . . . . . . . . . $ 415 $ 1,044 $ 1,095 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Depreciation and Amortization . . . . . . . 745 786 873 Decline of Property Values . . . . . . . . . . 1,099 - 730 Gain on Real Estate Sold . . . . . . . . . . . (582) - (577) Change in Accounts Receivable, Net of Allowances. . . . . . . 94 (1) (139) Change in Other Assets . . . . . . . . . . 35 (125) (27) Change in Accounts Payable and Other Accrued Expenses . . . . . . . . . 36 (86) 24 Other Changes in Assets and Liabilities. . . . . . . . 14 30 (6) _______ _______ _______ Net Cash Provided by Operating Activities . . . . . . . . . 1,856 1,648 1,973 _______ _______ _______
Cash Flows from Investing Activities Proceeds from Property Disposition. . . . . . . . . 1,956 - 5,870 Investments in Real Estate . . . . . . . . . . . (443) (633) (290) _______ _______ _______
Net Cash Provided by (Used in) Investing Activities . . . . . . . . . 1,513 (633) 5,580 _______ _______ _______
Cash Flows Used in Financing Activities Cash Distributions . . . . . . (3,252) (2,309) (7,719) Reinvestments in Units. . . . . . . . . . . . 421 999 792 Redemptions of Units. . . . . . . . . . . . (502) (299) (632) _______ _______ _______
Net Cash Used in Financing Activities . . . . . . . . . (3,333) (1,609) (7,559) _______ _______ _______
Cash and Cash Equivalents Net Increase (Decrease) during Year. . . . . . . . . 36 (594) (6) At Beginning of Year. . . . . . . . . . . 1,733 2,327 2,333 _______ _______ _______
At End of Year . . . . . . . . . . . . $ 1,769 $ 1,733 $ 2,327 _______ _______ _______ _______ _______ _______
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
T. Rowe Price Realty Income Fund IV, America's Sales-Commission-Free Real Estate Limited Partnership (the "Partnership"), was formed on November 17, 1987, under the Delaware Revised Uniform Limited Partnership Act for the purpose of acquiring, operating, and disposing of existing income-producing commercial and industrial real estate properties. T. Rowe Price Realty Income Fund IV Management, Inc., is the sole General Partner. The initial offering resulted in the sale of 692,598 limited partnership units at $50 per unit. The Partnership had a reinvestment plan whereby the Limited Partners could elect to have their cash distributions automatically reinvested in additional units of the Partnership, or fractions thereof, instead of receiving cash payments. The reinvestment price per unit was the estimated fair market value of the unit as determined by the General Partner in accordance with the partnership agreement. During 1996, the reinvestment program was terminated. A total of 167,874 units were purchased under this plan from reinvestments of $6,947,000. The Partnership has a redemption plan whereby Limited Partners may request that the Partnership redeem their units. Since September 30, 1992, the redemption price of a unit has been equal to 90% of the estimated fair market value of a unit as determined by the General Partner in accordance with the partnership agreement. As of December 31, 1996, 92,722 units had been redeemed under this plan for a total of $3,227,000. In accordance with provisions of the partnership agreement, income from operations is allocated and related cash distributions are generally paid to the General and Limited Partners at the rates of 1% and 99%, respectively. Sale or refinancing proceeds are generally allocated first to the Limited Partners in an amount equal to their capital contributions, next to the Limited Partners to provide specified returns on their adjusted capital contributions, next 3% to the General Partner, with any remaining proceeds allocated 85% to the Limited Partners and 15% to the General Partner. Gain on property sold is generally allocated first between the General Partner and Limited Partners in an amount equal to the depreciation previously allocated from the property and then in the same ratio as the distribution of sale proceeds. Cash distributions, if any, are made quarterly based upon cash available for distribution, as defined in the partnership agreement. Cash available for distribution will fluctuate as changes in cash flows and adequacy of cash balances warrant.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Partnership's financial statements are prepared in accordance with generally accepted accounting principles which requires the use of estimates and assumptions by the General Partner. The accompanying consolidated financial statements include the accounts of the Partnership and its pro-rata share of the accounts of Tierrasanta 234 and Penasquitos 34 (Westbrook Commons), both of which are California general partnerships, in which the Partnership has 40% and 50% interests, respectively. They also include the Partnership's pro-rata share of the accounts of Fairchild 234, a California general partnership in which the Partnership had a 20% interest prior to disposition of the property on August 28, 1996. The other partners in these ventures are affiliates of the Partnership. Additionally, the accounts of Goshen Road Limited Partnership, a Maryland limited partnership in which the Partnership has a 90% controlling general partnership interest have been consolidated. All intercompany accounts and transactions have been eliminated in consolidation. Depreciation is calculated primarily on the straight-line method over the estimated useful lives of buildings and improvements, which range from five to 40 years. Lease commissions and tenant improvements are capitalized and amortized over the life of the lease using the straight-line method. Cash equivalents consist of money market mutual funds, the cost of which approximates fair value. The Partnership uses the allowance method of accounting for doubtful accounts. Provisions for uncollectible tenant receivables in the amounts of $34,000, $269,000, and $102,000 were recorded in 1996, 1995, and 1994, respectively. Bad debt expense is included in Property Operating Expenses. The Partnership will review its real estate property investments for impairment whenever events or changes in circumstances indicate that the property carrying amounts may not be recoverable. Such a review results in the Partnership recording a provision for impairment of the carrying value of its real estate property investments whenever the estimated future cash flows from a property's operations and projected sale are less than the property's net carrying value. The General Partner believes that the estimates and assumptions used in evaluating the carrying value of the Partnership's properties are appropriate; however, changes in market conditions and circumstances could occur in the near term which would cause these estimates to change. Rental income is recognized on a straight-line basis over the term of each lease. Rental income accrued, but not yet billed, is included in Other Assets and aggregates $188,000 and $192,000 at December 31, 1996 and 1995, respectively. Under provisions of the Internal Revenue Code and applicable state taxation codes, partnerships are generally not subject to income taxes; therefore, no provision has been made for such taxes in the accompanying consolidated financial statements.
NOTE 3 - TRANSACTIONS WITH RELATED PARTIES
As compensation for services rendered in managing the affairs of the Partnership, the General Partner earns a partnership management fee equal to 9% of net operating proceeds. The General Partner earned partnership management fees of $191,000, $85,000, and $267,000 in 1996, 1995, and 1994, respectively. In addition, the General Partner's share of cash available for distribution from operations, as discussed in Note 1, totaled $15,000, $15,000, and $20,000 in 1996, 1995, and 1994, respectively. In accordance with the partnership agreement, certain operating expenses are reimbursable to the General Partner. The General Partner's reimbursement of such expenses totaled $74,000, $58,000, and $55,000 for communications and administrative services performed on behalf of the Partnership during 1996, 1995, and 1994, respectively. An affiliate of the General Partner earned a normal and customary fee of $3,000, $6,000, and $17,000 from the money market mutual funds in which the Partnership made its interim cash investments during 1996, 1995, and 1994, respectively. LaSalle Advisors Limited Partnership ("LaSalle") is the Partnership's advisor and is compensated for its advisory services directly by the General Partner. LaSalle is reimbursed by the Partnership for certain operating expenses pursuant to its contract with the Partnership to provide real estate advisory, accounting, and other related services to the Partnership. LaSalle's reimbursement for such expenses during each of the last three years totaled $80,000. An affiliate of LaSalle earned $84,000, $78,000, and $73,000 in 1996, 1995, and 1994, respectively, for property management fees and leasing commissions on tenant renewals and extensions at several of the Partnership's properties.
NOTE 4 - PROPERTY DISPOSITIONS
In June 1994, the Partnership sold Metropolitan Industrial and received net proceeds of $5,870,000. The net book value of this property at the time of disposition was $5,293,000, after accumulated depreciation expense. Accordingly, the Partnership recognized a gain of $577,000. Results of operations at the property were $149,000 in 1994. On August 28, 1996, Fairchild Corporate Center, an office property in which the Partnership had a 20% interest, was sold. The Partnership received net proceeds of $1,956,000. The net book value of the Partnership's interest at the date of sale was $1,374,000, after deduction of accumulated depreciation, and previously recorded impairments. Accordingly, the Partnership recognized a $582,000 gain on the sale of this property. Income from operations for this property, before the gain on real estate sold, was $15,000, $31,000, and $82,000 in 1996, 1995, and 1994, respectively.
NOTE 5 - PROPERTY VALUATIONS
On January 1, 1996, the Partnership adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which changed the Partnership's method of accounting for its real estate property investments when circumstances indicate that the carrying amount of a property may not be recoverable. Measurement of an impairment loss on an operating property is now based on the estimated fair value of the property, which becomes the property's new cost basis, rather than the sum of expected future cash flows. Properties held for sale continue to be reflected at the lower of historical cost or estimated fair value less anticipated selling costs. In addition, properties held for sale are no longer depreciated. Based upon a review of current market conditions, estimated holding period, and future performance expectations of each Partnership property, the General Partner has determined that the net carrying value of Tierrasanta may not be fully recoverable from future operations and disposition, and recognized impairment charges of $1,099,000 in 1996 and $730,000 in 1994.
NOTE 6 - LEASES
Future minimum rentals (in thousands) to be received by the Partnership under noncancelable operating leases in effect at December 31, 1996, are:
1997 $ 2,227 1998 1,840 1999 1,242 2000 891 2001 677 Thereafter 3,841 _______
Total $10,718 _______ _______
NOTE 7 - RECONCILIATION OF FINANCIAL STATEMENT TO TAXABLE INCOME
As described in Note 2, the Partnership has not provided for an income tax liability; however, certain timing differences exist between amounts reported for financial reporting and federal income tax purposes. These differences are summarized below for the last three years:
1996 1995 1994 ___________________ ________ (In thousands)
Book net income (loss) . . . . . . . . . . $ 415 $ 1,044 $ 1,095 Allowance for doubtful accounts. . . . . (320) 246 74 Property valuation and losses on disposition. . . . . . . . (2,218) - 730 Normalized and prepaid rents . . . . . . 44 (93) (65) Interest income. . . . . . . - 252 254 Other items. . . . . . . . . (5) (35) 79 ________ ________ ________
Taxable income (loss) . . . . . . . . . . $(2,084) $ 1,414 $ 2,167 ________ ________ ________ ________ ________ ________
NOTE 8 - SUBSEQUENT EVENT
The Partnership declared a quarterly cash distribution of $.75 per unit to Limited Partners of the Partnership as of the close of business on December 31, 1996. The Limited Partners will receive $576,000, and the General Partner will receive $6,000.
INDEPENDENT AUDITORS' REPORT
To the Partners T. Rowe Price Realty Income Fund IV, America's Sales-Commission-Free Real Estate Limited Partnership:
We have audited the accompanying consolidated balance sheets of T. Rowe Price Realty Income Fund IV, America's Sales-Commission-Free Real Estate Limited Partnership and its consolidated ventures as of December 31, 1996 and 1995, and the related consolidated statements of operations, partners' capital and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of T. Rowe Price Realty Income Fund IV, America's Sales-Commission-Free Real Estate Limited Partnership and its consolidated ventures as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois January 27, 1997