Item 1. Business. ---------
Registrant is engaged in the business of investing in commercial and industrial real estate properties which are net leased to commercial and industrial entities. Registrant was organized as a California limited partnership on July 24, 1978. The General Partners of Registrant are W.P. Carey & Co., Inc. (the "Corporate General Partner" or "W.P. Carey") and William Polk Carey (the "Individual General Partner"). The Corporate General Partner, the Individual General Partner and/or certain affiliates are also the General Partners of Corporate Property Associates 2 ("CPA(R):2"), Corporate Property Associates 3 ("CPA(R):3"), Corporate Property Associates 4, a California limited partnership ("CPA(R):4"), Corporate Property Associates 5 ("CPA(R):5"), Corporate Property Associates 6 - a California limited partnership ("CPA(R):6"), Corporate Property Associates 7 - a California limited partnership ("CPA(R):7"), Corporate Property Associates 8, L.P., a Delaware limited partnership ("CPA(R):8"), Corporate Property Associates 9, L.P., a Delaware limited partnership ("CPA(R):9") and the advisor of Corporate Property Associates 10 Incorporated ("CPA(R):10"), Carey Institutional Properties Incorporated ("CIP(TM)") and Corporate Property Associates 12 Incorporated ("CPA(R):12"). Registrant has a management agreement with Carey Corporate Property Management Company ("Carey Management"), a division of W.P. Carey. According to the terms of this agreement, Carey Management performs a variety of management services for Registrant. Registrant has entered into an agreement with Fifth Rock L.P., an affiliate, for the purpose of leasing office space. Reference is made to the Prospectus of Registrant dated January 16, 1979, as supplemented by Supplements dated January 19, 1979 and April 30, 1979, filed pursuant to Rules 424(b) and 424(c) under the Securities Act of 1933 and such Prospectus and such Supplements are incorporated herein by reference (said Prospectus, as so supplemented, is hereinafter called the "Prospectus").
The properties owned by Registrant are described in Item 2.
Item 2. Properties. -----------
Registrant's properties are as follows:
(1) These properties are encumbered by mortgage notes payable. (2) Only one of the locations is encumbered by a mortgage note payable. (3) This property is vacant
- 3 -
The material terms of Registrant's leases with its tenants are summarized in the following table:
- 4 -
(1) Represents rate for rent per square foot when combined with rents applicable to tenants-in-common. (2) Includes original cost net of increases or decreases to net investment subsequent to purchase. (3) Partnership's share of equity rent of $497,104 plus variable debt rent.
The material terms on the mortgage debt of Registrant's properties are summarized in the following table:
(1) Variable rate indexed to lender's prime rate. (2) Estimate based on current interest rates. (3) Fully amortizing.
- 5 -
Item 3.
Item 3. Legal Proceedings. ------------------
As of the date hereof, Registrant is not a party to any material pending legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders. ----------------------------------------------------
No matter was submitted during the fourth quarter of the year ended December 31, 1996 to a vote of security holders, through the solicitation of proxies or otherwise.
PART II -------
Item 5.
Item 5. Market for Registrant's Common Equity and Related ------------------------------------------------- Stockholder Matters. -------------------
Information with respect to Registrant's common equity is hereby incorporated by reference to page 19 of Registrant's Annual Report contained in Appendix A.
Item 6.
Item 6. Selected Financial Data. ------------------------
Selected Financial Data are hereby incorporated by reference to page 1 of Registrant's Annual Report contained in Appendix A.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition ----------------------------------------------------------- and Results of Operations. -------------------------
Management's Discussion and Analysis are hereby incorporated by reference to pages 2 to 4 of Registrant's Annual Report contained in Appendix A.
Item 8.
Item 8. Financial Statements and Supplementary Data. --------------------------------------------
The following financial statements and supplementary data are hereby incorporated by reference to pages 5 to 15 of Registrant's Annual Report contained in Appendix A.
(i) Report of Independent Accountants. (ii) Balance Sheets as of December 31, 1995 and 1996. (iii) Statements of Income for the years ended December 31, 1994, 1995 and 1996. (iv) Statements of Partners' Capital for the years ended December 31, 1994, 1995 and 1996. (v) Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996. (vi) Notes to Financial Statements.
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure. -----------------------------------------------------
NONE
- 6 -
PART III --------
Item 10.
Item 10. Directors and Executive Officers of the Registrant. ---------------------------------------------------
Registrant has no officers or directors. The directors and executive officers of the Corporate General Partner are as follows:
(1) Each officer and director of the Corporate General Partner will hold office until the next annual meeting of the Board of Directors and thereafter until his successor shall have been elected and shall have qualified or until his prior death, resignation or removal.
William Polk Carey and Francis J. Carey are brothers. H. Augustus Carey is the nephew of William Polk Carey and the son of Francis J. Carey.
A description of the business experience of each officer and director of the Corporate General Partner is set forth below:
William Polk Carey, Chairman and Chief Executive Officer, has been active in lease financing since 1959 and a specialist in net leasing of corporate real estate property since 1964. Before founding W.P. Carey & Co., Inc. ("W.P. Carey") in 1973, he served as Chairman of the Executive Committee of Hubbard,
- 7 -
Westervelt & Mottelay (now Merrill Lynch Hubbard), head of Real Estate and Equipment Financing at Loeb Rhoades & Co. (now Lehman Brothers), head of Real Estate and Private Placements, Director of Corporate Finance and Vice Chairman of the Investment Banking Board of duPont Glore Forgan Inc. A graduate of the University of Pennsylvania's Wharton School of Finance and Commerce, Mr. Carey is a Governor of the National Association of Real Estate Investment Trusts (NAREIT). He also serves on the boards of The Johns Hopkins University, The James A. Baker III Institute for Public Policy at Rice University, Templeton College of Oxford University and other educational and philanthropic institutions. He founded the Visiting Committee to the Economics Department of the University of Pennsylvania and co-founded with Dr. Lawrence R. Klein the Economics Research Institute at that University. Mr. Carey is also a Director of CPA(R):10, CIP(TM) and CPA(R):12.
Francis J. Carey was elected President and a Managing Director of W.P. Carey in April 1987, having served as a Director since its founding in 1973. Prior to joining the firm full-time, he was a senior partner in Philadelphia, head of the Real Estate Department nationally and a member of the executive committee of the Pittsburgh based firm of Reed Smith Shaw & McClay, counsel for Registrant, the General Partners, the CPA(R) Partnerships, W.P. Carey and some of its affiliates. He served as a member of the Executive Committee and Board of Managers of the Western Savings Bank of Philadelphia from 1972 until its takeover by another bank in 1982 and is former chairman of the Real Property, Probate and Trust Section of the Pennsylvania Bar Association. Mr. Carey served as a member of the Board of Overseers of the School of Arts and Sciences of the University of Pennsylvania from 1983 through 1990. He has also served as a member of the Board of Trustees of the Investment Program Association since 1990 and on the Business Advisory Council of the Business Council for the United Nations since 1994. He holds A.B. and J.D. degrees from the University of Pennsylvania. Mr. Carey is also a Director of CPA(R):10 and CIP(TM).
George E. Stoddard, Chief Investment Officer, was until 1979 head of the bond department of The Equitable Life Assurance Society of the United States, with responsibility for all activities related to Equitable's portfolio of corporate investments acquired through direct negotiation. Mr. Stoddard was associated with Equitable for over 30 years. He holds an A.B. degree from Brigham Young University, an M.B.A. from Harvard Business School and an LL.B. from Fordham University Law School.
Madelon DeVoe Talley, Vice Chairman, is a member of the New York State Controller's Investment Committee, a Commissioner of the Port Authority of New York and New Jersey, former CIO of New York State Common Retirement Fund and a Trustee of the New York State Teachers Retirement System. She also served as a managing director of Rothschild, Inc. and as the President of its asset management division. Mrs. Talley was also a former Governor of the N.A.S.D. and a director of Biocraft Laboratories, a New York Stock Exchange company. She is an alumna of Sarah Lawrence College and the graduate school of International and Public Affairs at Columbia University.
Lawrence R. Klein, Chairman of the Economic Policy Committee since 1984, is Benjamin Franklin Professor of Economics Emeritus at the University of Pennsylvania, having joined the faculty of Economics and the Wharton School in 1958. He holds earned degrees from the University of California at Berkeley and Massachusetts Institute of Technology and has been awarded the Nobel Prize in Economics as well as over 20 honorary degrees. Founder of Wharton Econometric Forecasting Associates, Inc., Dr. Klein has been counselor to various corporations, governments, and government agencies including the Federal Reserve Board and the President's Council of Economic Advisers.
Barclay G. Jones III, Executive Vice President, Managing Director, and head of the Investment Department. Mr. Jones joined W.P. Carey as Assistant to the President in July 1982 after his graduation from the Wharton School of the University of Pennsylvania, where he majored in Finance and Economics. He was elected to the Board of Directors of W.P. Carey in April 1992. Mr. Jones is also a Director of the Wharton Business School Club of New York.
- 8 -
Claude Fernandez, Chief Administrative Officer, Managing Director, and Executive Vice President, joined W.P. Carey in 1983. Previously associated with Coldwell Banker, Inc. for two years and with Arthur Andersen & Co., he is a Certified Public Accountant. Mr. Fernandez received his B.S. degree in accounting from New York University in 1975 and his M.B.A. in finance from Columbia University Graduate School of Business in 1981.
H. Augustus Carey, Senior Vice President, returned to W.P. Carey in 1988 and is President of W.P. Carey's broker-dealer subsidiary. Mr. Carey previously worked for W.P. Carey from 1979 to 1981 as Assistant to the President. Prior to rejoining W.P. Carey, Mr. Carey served as a loan officer of the North American Department of Kleinwort Benson Limited in London, England. He received an A.B. from Amherst College in 1979 and an M.Phil. in Management Studies from Oxford University in 1984. Mr. Carey is a trustee of the Oxford Management Centre Associates Council.
Anthony S. Mohl, Senior Vice President and Director of Portfolio Management, joined W.P. Carey & Co., in 1987 as Assistant to the President after receiving his M.B.A. from the Columbia University Graduate School of Business. Mr. Mohl was employed as an analyst in the strategic planning group at Kurt Salmon Associates after receiving an undergraduate degree from Wesleyan University.
John J. Park, Senior Vice President, Treasurer and Director of Research, joined W.P. Carey as an Investment Analyst in December 1987. Mr. Park received his undergraduate degree from Massachusetts Institute of Technology and his M.B.A. in Finance from New York University.
Michael D. Roberts joined W. P. Carey as a Second Vice President and Assistant Controller in April 1989 and is currently First Vice President and Controller. Prior to joining W.P. Carey, Mr. Roberts was employed by Coopers & Lybrand for over 8 years, where he attained the title of audit manager. A certified public accountant, Mr. Roberts received a B.A. in sociology from Brandeis University and an M.B.A. from Northeastern University.
Item 11.
Item 11. Executive Compensation. -----------------------
Under the Amended Agreement of Limited Partnership of Registrant (the "Agreement"), 9/10th of 1% of Distributable Cash From Operations, as defined, is payable to the Corporate General Partner and 1/10 of 1% of Distributable Cash From Operations is payable to the Individual General Partner. The Corporate General Partner and the Individual General Partner received $12,936 and $1,418, respectively, from Registrant as their share of Distributable Cash From Operations during the year ended December 31, 1996. As owner of 200 Limited Partnership Units, the Corporate General Partner received cash distributions of $7,016 ($35.08 per Unit) during the year ended December 31, 1996. See Item 6 for the net income allocated to the General Partners under the Agreement. Registrant is not required to pay, and has not paid, any remuneration to the officers or directors of the Corporate General Partner or any other affiliate of Registrant during the year ended December 31, 1996. Although Registrant is authorized to pay the Individual General Partner a fee of up to $15,000 in any year beginning after December 31, 1978, no fee will be paid so long as Mr. Carey is the Individual General Partner and no fee may be paid to any successor Individual General Partner appointed by Mr. Carey pursuant to the Agreement.
In the future, the Corporate General Partner will expect to receive 9/10th of 1% of Distributable Cash From Operations, the Individual General Partner will expect to receive 1/10th of 1% of Distributable Cash From Operations and each General Partner will continue to be allocated the same percentage of the profits and losses of Registrant as had been allocated in the past. For a description of the subordinated interest of the Corporate General Partner and the Individual General Partner in Cash From Sales and Cash From Financings, reference is made to the materials contained in the Prospectus under the heading MANAGEMENT COMPENSATION.
- 9 -
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and --------------------------------------------------- Management. -----------
As of December 31, 1996, no person owned of record, or was known by Registrant to own beneficially more than 5% of the Limited Partnership Units of Registrant.
The following table sets forth as of March 15, 1997 certain information as to the ownership by directors and executive officers of securities of Registrant:
(1) As of March 15, 1997, the Corporate General Partner, W. P. Carey & Co., Inc., owned 205 Limited Partnership Units of Registrant. William Polk Carey, the sole shareholder of the Corporate General Partner, is the beneficial owner of these Units.
There exists no arrangement, known to Registrant, the operation of which may at a subsequent date result in a change of control of Registrant.
Item 13.
Item 13. Certain Relationships and Related Transactions. -----------------------------------------------
For a description of transactions and business relationships between Registrant and its affiliates and their directors and officers, see Notes 2 and 3 to the Financial Statements in Item 8. Michael B. Pollack, Senior Vice President and Secretary of the Corporate General Partner, is a partner of Reed Smith Shaw & McClay which is engaged to perform legal services for Registrant.
No officer or director of the Corporate General Partner or any other affiliate of Registrant or any member of the immediate family or associated organization of any such officer or director was indebted to Registrant at any time since the beginning of Registrant's last fiscal year.
- 10 -
PART IV -------
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on ------------------------------------------------------ Form 8-K --------
(a) 1. Financial Statements: ---------------------
The following financial statements are filed as a part of this Report:
Report of Independent Accountants.
Balance Sheets, December 31, 1995 and 1996.
Statements of Income for the years ended December 31, 1994, 1995 and 1996.
Statements of Partners' Capital for the years ended December 31, 1994, 1995 and 1996.
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996.
Notes to Financial Statements.
The financial statements are hereby incorporated by reference to pages 5 to 15 of Registrant's Annual Report contained in Appendix A.
(a) 2. Financial Statement Schedule: -----------------------------
The following schedule is filed as a part of this Report:
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1996.
Notes to Schedule III.
Schedule III and notes thereto are hereby incorporated by reference to pages 16 to 17 of Registrant's Annual Report contained in Appendix A.
Financial Statement Schedules other than those listed above are omitted because the required information is given in the Financial Statements, including the Notes thereto, or because the conditions requiring their filing do not exist.
- 11 -
(a) 3 Exhibits: ---------
The following exhibits are filed as part of this Report. Documents other than those designated as being filed herewith are incorporated herein by reference.
- 12 -
- 13 -
- 14 -
(b) Reports on Form 8-K -------------------
During the quarter ended December 31, 1996 the Registrant was not required to file any reports on Form 8-K.
- 15 -
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES (a California limited partnership)
BY: W. P. CAREY & CO., INC.
4/3/97 BY: /s/ Claude Fernandez ---------------- --------------------- Date Claude Fernandez Executive Vice President and Chief Administrative Officer (Principal Financial Officer)
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 and on the dates indicated.
BY: W. P. CAREY & CO., INC.
William P. Carey Chairman of the Board and Director (Principal Executive Officer)
Francis J. Carey BY: /s/ George E. Stoddard President and Director ----------------------- George E. Stoddard Attorney in fact April 3, 1997 George E. Stoddard Chairman of the Investment Committee and Director
Dr. Lawrence R. Klein Chairman of the Economic Policy Committee and Director
Madelon DeVoe Talley Vice Chairman of the Board of Directors and Director
4/3/97 BY: /s/ Claude Fernandez ------------------ --------------------- Date Claude Fernandez Executive Vice President and Chief Administrative Officer (Principal Financial Officer)
4/3/97 BY: /s/ Michael D. Roberts ------------------ ----------------------- Date Michael D. Roberts First Vice President and Controller (Principal Accounting Officer)
- 16 -
APPENDIX A TO FORM 10-K
CORPORATE PROPERTY ASSOCIATES (A CALIFORNIA LIMITED PARTNERSHIP)
1996 ANNUAL REPORT
SELECTED FINANCIAL DATA - --------------------------------------------------------------------------------
(In thousands except per unit amounts)
(1) Includes distributions attributable to the fourth quarter of each fiscal year payable in the following fiscal year less distributions in the first fiscal quarter attributable to the prior year. (2) Represents scheduled mortgage principal amortization paid. (3) Represents mortgage obligations due after more than one year.
- 1 -
MANAGEMENT'S DISCUSSION AND ANALYSIS - --------------------------------------------------------------------------------
Results of Operations ---------------------
Net income for the year ended December 31, 1996 decreased by $170,000 as compared with the prior year, primarily due to the effect of $244,000 of nonrecurring other income items included in 1995 operating results and an extraordinary charge of $255,000 relating to the prepayment of higher interest mortgage debt in 1996. Income, after adjusting for the effects of these items and a $23,000 loss from the sale of two properties, would have reflected an increase of $352,000. In spite of the lower net income for 1996, cash flow provided by operations increased.
The increase in income, as adjusted, in 1996 was due to decreases in interest and depreciation expenses. The decrease in interest expense was due to the continuing amortization of the Partnership's limited recourse mortgage debt and the benefit from the refinancing of the mortgage loan collateralized by the property leased to The Gap, Inc. (the "Gap") in April 1996. As a result of the refinancing, the annual interest rate on the Gap property mortgage loan decreased to 7.25% from 10%. Depreciation expense decreased as the result of the full depreciation of certain components of properties of which the Partnership uses component depreciation methods. Leasing revenues were stable; however, as described below, the Partnership anticipates a decrease in lease revenues in 1997. The extraordinary charge on the extinguishment of debt resulted from prepayment charges and the costs incurred in connection with paying off the mortgage loan on the Gap property.
Net income for the year ended December 31, 1995 increased by $734,000, compared with net income for the year ended December 31, 1994. The results for 1995 benefited from certain nonrecurring items totaling $244,000 of nonrecurring other income. The results of operations for 1995 also benefited from a decrease in property and interest expenses, and an increase in rental revenues. The decrease in property expense was due to higher costs incurred in 1994 in connection with the assessment of liquidity alternatives which included environmental reviews and property valuations. The increase in lease revenues was primarily the result of an increase in the variable mortgage interest rate on the debt component of rentals from Pre Finish Metals Incorporated ("Pre Finish"). The increased debt service payments on the Pre Finish mortgage loan were directly passed through to the tenant in the form of a rent adjustment, thereby having no impact on the Partnership's cash flow. Interest expense decreased as a result of principal payments of $1,417,000 of mortgage balances. Other income included approximately $119,000 received in cash and securities as final settlement of a bankruptcy claim on a lease which was terminated in 1985.
Leasing revenues are projected to decrease in 1997 as the result of the sale of two properties to Kobacker Stores, Inc. ("Kobacker") in November 1996, the anticipated sale of the property leased to Winn-Dixie Stores, Inc. ("Winn-Dixie") and the termination of one of the Partnership's leases with IMO Industries, Inc. ("IMO"). The Kobacker, IMO and Winn-Dixie leases provided annual revenues of $36,000, $91,000 and $102,000, respectively. As the sale of the Winn-Dixie property is subject to certain contingencies, there is no assurance that the sale will be completed. In the event that the Winn-Dixie sale is not completed, the lease will expire in 1999. A portion of the proceeds of the Kobacker sale was applied as a principal prepayment on the mortgage loan collateralized by the Kobacker properties. The loan has been reamortized and the annual debt service requirement on the loan has been reduced by $24,000. In addition, in October 1997, annual rents on the remaining IMO lease will increase by $135,000. Accordingly, $159,000 of the $229,000 decrease in cash flow will be offset. Because the rents on the IMO lease are recorded on a straight-line basis for financial reporting purposes, the rental increase will not increase reported income. Operating cash flow will also benefit from the full year effect of the mortgage refinancing on the Gap property. As a result of this refinancing, annual debt service decreased by $143,000. In addition, a rent increase on the Gap lease is scheduled in 1998.
Because of the long-term nature of the Partnership's net leases, inflation and changing prices have not unfavorably affected the Partnership's revenues and net income. Certain of the Partnership's net leases have increases based on formulas indexed to increases in the Consumer Price Index ("CPI") and may have caps on such CPI increases, periodic mandated rent increases or sales overrides which should increase operating revenues in the future. Future rent increases may be affected by changes in the method of the calculation of the CPI. Although there are indications that there may be legislation which changes the method
- 2 -
of calculating the CPI, the Partnership cannot predict the outcome of any proposed changes relating to the CPI formula.
Financial Condition -------------------
Except for a property in Garland, Texas formerly leased to IMO, all of the Partnership's properties are leased to corporate tenants under long-term net leases which generally require tenants to pay all operating expenses relating to the leased properties. The Partnership depends on relatively stable cash flow from its net leases to meet operating expenses, service its debt, fund distributions and maintain adequate cash reserves. The Partnership maintains a cash reserve to fund major outlays such as capital improvements and balloon debt payments. Such expenditures may also be funded from additional borrowing on the Partnership's real estate portfolio. Since its inception, the Partnership has distributed to its partners a substantial portion of its cash flow. The Partnership's current strategy has been to utilize its funds from operations and excess cash reserves to fund an increasing rate of distributions to its partners. The Partnership's cash balance of $865,000 at December 31, 1996 is substantially unchanged from the prior year.
Cash generated from operating activities has generally remained stable or increased over the past several years. Management generally considers its projections of cash flows and cash provided from operations as well as the Partnership's current cash balances rather than reported earnings in determining the distributions paid to limited partners. In 1996, cash provided from operations of $2,827,000 was sufficient to fund distributions of $1,418,000 and $1,325,000 of scheduled mortgage principal amortization. Management believes that its cash flow from operations and cash reserves are sufficient to continue to sustain the rate of distributions As discussed above, cash flows from operating activities are expected to decrease in 1997 due to the termination of certain leases; however, due to future rent increases and the current benefit being realized from the refinancing of a mortgage loan, such decrease is not expected to negatively impact the ability of the Partnership to maintain the current distribution rate.
The Partnership's net cash from investing activities for 1996 consisted of $356,000 received from the sale of two properties leased to Kobacker and $100,000 from the release of funds from an escrow account. The Partnership assigned $240,000 of such proceeds to mortgage lenders as mandatory partial prepayments on mortgage loan obligations. The Partnership was not required to fund any improvements during 1996. In connection with the February 1997 agreement to release IMO from a lease on one of its properties, IMO has deposited $485,000 in an escrow account held by an affiliate of the Partnership which will be used to fund necessary repairs and maintenance on the property. Accordingly, the Partnership does not expect to use any cash reserves to maintain or improve the property. The Partnership is also considering the possibility of attempting to sell the property in its current condition in which event, it would be entitled to receive any unused funds remaining in escrow. If the proposed sale of the Winn-Dixie property is completed, the Partnership would realize net proceeds of approximately $1,000,000.
In addition to paying quarterly distributions to partners of $1,418,000 and $1,325,000 of scheduled principal payment installments on mortgage debt, the Partnership's financing activities in 1996 included paying off the existing mortgage loan of $6,195,000 on the Gap property and obtaining a new limited recourse mortgage loan of $6,400,000 collateralized by the Gap property. The excess funds from the refinancing were used to pay the costs of obtaining the funds. Annual cash flow will increase by $143,000 as a result of the substantial decrease in the annual interest rate on the property loan.
As a result of its stable cash flow and ability to maintain adequate reserves, the Partnership has no lines of credit or other short-term financing arrangements. Management believes the Partnership has additional borrowing capacity based on the unleveraged portion of its real estate portfolio and the continuing principal reductions of existing mortgage loans. Except for the mortgage loan on the Gap property which matures with a balloon payment of $5,608,000 in 1999, all of the Partnership's mortgage debt is fully amortizing, with such loans scheduled to be fully paid between 1998 and 2011.
Pre Finish may exercise an option to purchase its leased property between June 1998 and 2003. Pre Finish's option would be exercisable at the greater of fair market value or $7,873,000 plus 2 1/2% per annum from December 1980 (the date of the Partnership's purchase of the property) to the closing date of sale. The Pre Finish lease provides annual cash flow (rent, net of mortgage debt service) of $497,000. Broomfield
- 3 -
Tech Center Corporation has an option to purchase its leased properties. Exercise of such option has not been consummated due to lack of agreement as to the option purchase price.
Except for a property in Garland, Texas, all of the properties are currently leased to corporate tenants, all of whom are subject to environmental statutes and regulations regarding the discharge of hazardous materials and any related remediation obligations. The Partnership normally structures its leases to require tenants to comply with all laws. In addition, substantially all of the Partnership's net leases include indemnification provisions which require tenants to indemnify the Partnership from all liabilities and losses related to their operations at the leased properties. If the Partnership undertakes to clean up or remediate any of its leased properties, the General Partners believe that in most cases the Partnership will be entitled to full reimbursement from tenants for such costs. If the Partnership either is responsible or becomes responsible for such costs because of a tenant's failure to fulfill its obligations, the General Partners believe that the ultimate resolution of the aforementioned environmental matters will not have a material adverse effect on the Partnership's financial condition, liquidity or results of operations.
In 1994, the Partnership voluntarily conducted Phase II reviews of certain of its properties based on the results of the Phase I environmental reviews conducted in 1993. The Partnership believes, based on the results of such reviews, that its properties are in substantial compliance with Federal and state environmental statutes and regulations. Portions of certain properties have been documented as having a limited degree of contamination, principally in connection with either leakage from underground storage tanks or surface spills from facility activities. For those conditions which were identified, the Partnership advised its tenants of such findings and of their obligations, if any, to perform any required remediation.
The General Partners are continuing to investigate ways to provide liquidity for limited partners on a tax-effective basis.
- 4 -
REPORT of INDEPENDENT ACCOUNTANTS
To the Partners of Corporate Property Associates:
We have audited the accompanying balance sheets of Corporate Property Associates (a California limited partnership) as of December 31, 1995 and 1996, and the related statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 1996. We have also audited the financial statement schedule included on pages 16 to 17 of this Annual Report. These financial statements and financial statement schedule are the responsibility of the General Partners. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the General Partners, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Corporate Property Associates (a California limited partnership) as of December 31, 1995 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the Schedule of Real Estate and Accumulated Depreciation as of December 31, 1996, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the financial information required to be included therein pursuant to Securities and Exchange Commission Regulation S-X Rule 12-28.
/s/ Coopers & Lybrand L.L.P. New York, New York March 17, 1997
- 5 -
CORPORATE PROPERTY ASSOCIATES (a California limited partnership)
BALANCE SHEETS
December 31, 1995 and 1996
The accompanying notes are an integral part of the financial statements.
- 6 -
CORPORATE PROPERTY ASSOCIATES (a California limited partnership)
STATEMENTS of INCOME
For the years ended December 31, 1994, 1995 and 1996
The accompanying notes are an integral part of the financial statements.
- 7 -
CORPORATE PROPERTY ASSOCIATES (a California limited partnership)
STATEMENTS of PARTNERS' CAPITAL
For the years ended December 31, 1994, 1995 and 1996
(a) Based on 40,000 Units issued and outstanding during all periods.
The accompanying notes are an integral part of the financial statements.
- 8 -
CORPORATE PROPERTY ASSOCIATES (a California limited partnership)
STATEMENTS of CASH FLOWS For the years ended December 31, 1994, 1995 and 1996
The accompanying notes are an integral part of the financial statements.
- 9 -
CORPORATE PROPERTY ASSOCIATES (a California limited partnership)
NOTES to FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies: -------------------------------------------
Use of Estimates: -----------------
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Real Estate Leased to Others: -----------------------------
Real estate is leased to others on a net lease basis, whereby the tenant is generally responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance, repairs, renewals and improvements.
Corporate Property Associates (the "Partnership") diversifies its real estate investments among various corporate tenants engaged in different industries and by property type throughout the United States.
The leases are accounted for under either the direct financing or operating methods. Such methods are described below:
Direct financing method - Leases accounted for under the direct ----------------------- financing method are recorded at their net investment (Note 5). Unearned income is deferred and amortized to income over the lease terms so as to produce a constant periodic rate of return on the Partnership's net investment in the lease.
Operating method - Real estate is recorded at cost, revenue is ---------------- recognized as rentals are earned and expenses (including depreciation) are charged to operations as incurred.
The Partnership assesses the recoverability of its real estate assets, including residual interests, based on projections of undiscounted cash flows over the life of such assets. In the event that such cash flows are insufficient, the assets are adjusted to their estimated net realizable value.
Substantially all of the Partnership's leases provide for either scheduled rent increases, periodic rent increases based on formulas indexed to increases in the Consumer Price Index or sales overrides.
Depreciation: -------------
Depreciation is computed using the straight-line method over the estimated useful lives of components of the particular properties, which range from 5 to 50 years.
Cash Equivalents: -----------------
The Partnership considers all short-term, highly-liquid investments that are both readily convertible to cash and have a maturity of generally three months or less at the time of purchase to be cash equivalents. Items classified as cash equivalents include commercial paper and money market funds. Substantially all of the Partnership's cash and cash equivalents for both years ended December 31, 1995 and 1996 were held in the custody of three financial institutions.
Continued
- 10 -
CORPORATE PROPERTY ASSOCIATES (a California limited partnership)
NOTES to FINANCIAL STATEMENTS, Continued
Other Assets: -------------
Included in other assets are deferred rental income, deferred charges and marketable equity securities. Deferred rental income is the aggregate difference for operating method leases between scheduled rents which vary during the lease term and income recognized on a straight- line basis. Deferred charges are primarily costs incurred in connection with mortgage note refinancing and are amortized on a straight-line basis over the terms of the mortgages.
The Partnership's marketable equity securities, which consist of 1,948 shares of Storage Technology Corporation common stock are classified as available-for-sale securities and are reported at fair market value with the Partnership's interest in unrealized gains and losses on these securities reported as a separate component of partners' capital.
Income Taxes: -------------
A partnership is not liable for federal income taxes as each partner recognizes his proportionate share of the partnership income or loss in his tax return. Accordingly, no provision for income taxes is recognized for financial statement purposes.
Reclassification: -----------------
Certain 1994 and 1995 amounts have been reclassified to conform to the 1996 financial statement presentation.
2. Partnership Agreement: ----------------------
The Partnership was organized on July 24, 1978 under the Uniform Limited Partnership Act of the State of California for the purpose of engaging in the business of investing in and leasing industrial and commercial real estate. The Corporate General Partner purchased 200 limited partnership units in connection with the Partnership's public offering. The Partnership will terminate on December 31, 2016, or sooner, in accordance with the terms of the Amended Agreement of Limited Partnership (the "Agreement").
The Agreement provides that the General Partners are allocated 1% (1/10 of 1% to the Individual General Partner, William P. Carey, and 9/10 of 1% to the Corporate General Partner, W. P. Carey & Co., Inc. ("W.P. Carey")) and the Limited Partners are allocated 99% of the profits and losses as well as distributions of Distributable Cash From Operations, as defined in the Agreement. The partners are also entitled to receive net proceeds from the sale of the Partnership properties as defined in the Agreement. The General Partners may be entitled to receive a subordinated preferred return, measured based upon the cumulative proceeds arising from the sale of Partnership assets. Pursuant to the subordination provisions of the Agreement, the preferred return may be paid only after the limited partners receive 100% of their initial investment from the proceeds of asset sales and a cumulative annual return ranging from 6% to 9% since the inception of the Partnership. The General Partners interest in such preferred return amounts to approximately $145,000 based upon the cumulative proceeds from the sale of assets since the inception of the Partnership through December 31, 1996. The Partnership's ability to satisfy the subordination provisions of the Agreement may not be determinable until liquidation of a substantial portion of the Partnership's assets has been made.
3. Transactions with Related Parties: ----------------------------------
The Partnership holds a 60% ownership interest in a property as tenants- in-common with an affiliate which holds the remaining 40% interest. The Partnership accounts for its assets and liabilities relating to tenants- in-common interests on a proportional basis.
Continued
- 11 -
CORPORATE PROPERTY ASSOCIATES (a California limited partnership)
NOTES to FINANCIAL STATEMENTS, Continued
Under the Agreement, a division of W.P. Carey is entitled to receive a property management fee and reimbursement of certain expenses incurred in connection with the Partnership's operations. General and administrative expense reimbursements consist primarily of the actual cost of personnel needed in providing administrative services necessary for the operation of the Partnership. Property management fees and general and administrative expense reimbursements are summarized as follows:
During 1994, 1995 and 1996, fees aggregating $97,438, $18,338 and $10,329, respectively, were incurred for legal services performed by a firm in which the Secretary of the Corporate General Partner and other affiliates is a partner.
The Partnership is a participant in an agreement with W.P. Carey and certain other affiliates for the purpose of leasing office space used for the administration of real estate entities and W.P. Carey and for sharing the associated costs. Pursuant to the terms of the agreement, the Partnership's share of rental, occupancy and leasehold improvement costs is based on adjusted gross revenues, as defined. Net expenses incurred in 1994, 1995 and 1996 were $15,615, $61,243 and $30,477, respectively.
4. Real Estate Leased to Others Accounted for Under the Operating Method: ----------------------------------------------------------------------
Scheduled future minimum rents, exclusive of renewals, under noncancellable operating leases amount to approximately $3,708,000 in 1997; $3,804,000 in each of the years 1998 through 2001; and aggregate approximately $23,526,000 through 2006.
Contingent rents were approximately $56,000 in 1995 and $89,000 in 1996. There were no contingent rents in 1994.
5. Net Investment in Direct Financing Leases: ------------------------------------------
Net investment in direct financing leases is summarized as follows:
Scheduled future minimum rents, exclusive of renewals, under noncancellable direct financing leases amount to approximately $477,000 in each of the years 1997 to 1999, $492,000 in each of the years 2000 and 2001 and aggregate approximately $5,945,000 through 2009.
Continued
- 12 -
CORPORATE PROPERTY ASSOCIATES (a California limited partnership)
NOTES to FINANCIAL STATEMENTS, Continued
6. Mortgage Notes Payable: -----------------------
Mortgage notes payable, all of which are limited recourse obligations of the Partnership or the partners, are collateralized by real property with a carrying amount as of December 31, 1996 of approximately $34,206,000, before accumulated depreciation, and the assignment of various leases. As of December 31, 1996, mortgage notes payable bear interest at rates varying from 7.25% to 10.5% per annum and mature between 1998 and 2011.
Scheduled principal payments during each of the next five years following December 31, 1996 are as follows:
Interest paid was $1,604,379, $1,536,914 and $1,363,083 in 1994, 1995 and 1996, respectively.
7. Distributions to Partners: --------------------------
Distributions are declared and paid to partners quarterly and are summarized as follows:
Distributions of $3,556 to the General Partners and $352,000 to the Limited Partners for the quarter ended December 31, 1996 were declared and paid in January 1997.
8. Income for Federal Tax Purposes: --------------------------------
Income for financial statement purposes differs from income for Federal income tax purposes because of the difference in the treatment of certain items for income tax purposes and financial statement purposes. A reconciliation of accounting differences is as follows:
Continued
- 13 -
CORPORATE PROPERTY ASSOCIATES (a California limited partnership)
NOTES to FINANCIAL STATEMENTS, Continued
9. Industry Segment Information: -----------------------------
The Partnership's operations consist of the investment in and the leasing of industrial and commercial real estate.
In 1994, 1995 and 1996, the Partnership earned its total operating revenues (rental income plus interest income from direct financing leases) from the following lease obligors:
10. Sale of Real Estate: --------------------
On October 17, 1996, Kobacker Stores, Inc. ("Kobacker") exercised options under the terms of its leases for properties in Eastlake and Cleveland, Ohio to purchase such properties for stated purchase prices of $165,000 and $200,000, respectively, resulting in a loss of $22,871. A portion of the net sales proceeds was assigned to the mortgage lender on the Kobacker properties as a partial prepayment. As a result of the sale and the related mortgage prepayment of $139,507, Kobacker's annual rent will decrease by $36,225 and the Partnership's debt service on the mortgage loan will decrease $23,756.
11. Real Estate Held for Sale: --------------------------
On September 17, 1996, the Partnership entered into a purchase and sale agreement for the sale of the Partnership's property in Louisville, Kentucky, leased to Winn-Dixie Stores, Inc. ("Winn-Dixie") for $1,100,000, less selling costs, including a 5% brokerage commission. The transaction is subject to completion of certain due diligence procedures and the ability of the buyer to obtain debt financing. Accordingly, there can be no assurance that the sale of the property will be completed. The Winn-Dixie lease, which is scheduled to expire in December 1999, provides annual rentals of $102,000.
12. Settlement Agreement: ---------------------
One of the Partnership's leases with IMO Industries, Inc. ("IMO") had been scheduled to terminate in March 1996. The Partnership granted IMO an extension of three months to enable IMO to meet its lease obligation to return the property in suitable condition. As IMO did not satisfy such
Continued
- 14 -
CORPORATE PROPERTY ASSOCIATES (a California limited partnership)
NOTES to FINANCIAL STATEMENTS, Continued
obligation, the Partnership refused to release IMO from the lease and continued to collect monthly rental payments from IMO. On February 12, 1997, the Partnership and IMO entered into an agreement which released IMO from the lease. Under the agreement, IMO returned the property in "as is" condition to the Partnership, paid $485,766, representing estimated repair costs and construction management fees, into an escrow account held by an affiliate of the Partnership. Funds in escrow will only be released under certain conditions including, but not limited to, the payment of repairs and maintenance for the property.
Rents from the terminated IMO lease contributed annual revenues of approximately $91,000. The Partnership's lease with IMO for an adjacent property currently provides for annual rent of $687,750 and has a lease term through 2002.
13. Disclosures About Fair Value of Financial Instruments: ------------------------------------------------------
The carrying amounts of cash, receivables and accounts payable and accrued expenses approximate fair value because of the short maturity of these items.
The Partnership's estimate of fair value of mortgage notes payable approximates the carrying amount of such mortgage note at December 31, 1996. The fair value of debt instruments was evaluated using a discounted cash flow model with discount rates which take into account the credit of the tenants and interest rate risk.
14. Environmental Matters: ----------------------
The Partnership's properties are currently leased to corporate tenants, all of which are subject to environmental statutes and regulations regarding the discharge of hazardous materials and related remediation obligations. The Partnership generally structures a lease to require the tenant to comply with all laws. In addition, substantially all of the Partnership's net leases include provisions which require tenants to indemnify the Partnership from all liabilities and losses related to their operations at the leased properties. Any costs of remediation are expected to be performed and paid by the affected tenant. In the event that the Partnership absorbs a portion of any costs because of a tenant's failure to fulfill its obligations, the General Partners believe such expenditures will not have a material adverse effect on the Partnership's financial condition, liquidity or results of operations.
In 1994, based on the results of Phase I environmental reviews performed in 1993, the Partnership voluntarily conducted Phase II environmental reviews on certain of its properties. The Partnership believes, based on the results of Phase I and Phase II reviews, that its properties are in substantial compliance with Federal and state environmental statutes and regulations. Portions of certain properties have been documented as having a limited degree of contamination, principally in connection with either leakage from underground storage tanks or surface spills from facility activities. For those conditions which were identified, the Partnership advised the affected tenants of the Phase II findings and of their obligations to perform required remediation.
- 15 -
CORPORATE PROPERTY ASSOCIATES (a California limited partnership)
SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1996
See accompanying notes to Schedule.
- 16 -
CORPORATE PROPERTY ASSOCIATES (a California limited partnership)
NOTES to SCHEDULE of REAL ESTATE and ACCUMULATED DEPRECIATION
(a) Consists of the cost of improvements and acquisition costs subsequent to acquisition, including legal fees, appraisal fees, title costs and other related professional fees.
(b) The decrease in net investment is due to (i) the amortization of unearned income producing a constant periodic rate of return on the net investment which is less than lease payments received and (ii) sales of property.
(c) At December 31, 1996, the aggregate cost of real estate owned for Federal income tax purposes is $39,079,392.
(d)
Reconciliation of Real Estate Accounted --------------------------------------- for Under the Operating Method ------------------------------
Reconciliation of Accumulated Depreciation ------------------------------------------
- 17 -
PROPERTIES - --------------------------------------------------------------------------------
(1) These properties are encumbered by mortgage notes payable. (2) This property is currently vacant.
- 18 -
MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED UNITHOLDER MATTERS - --------------------------------------------------------------------------------
Except for limited or sporadic transactions, there is no established public trading market for the Limited Partnership Units of the Partnership. As of December 31, 1996 there were 1,714 holders of record of the Limited Partnership Units of the Partnership.
In accordance with the requirements of the Partnership's Amended Agreement of Limited Partnership (the "Agreement"), contained as Exhibit A to the Prospectus, the Corporate General Partner expects to continue to make quarterly distributions of Distributable Cash from Operations as defined in the Agreement. The following table shows the frequency and amount of distributions paid per Unit since 1993:
REPORT ON FORM 10-K - --------------------------------------------------------------------------------
The Corporate General Partner will supply to any owner of Limited Partnership Units, upon written request and without charge, a copy of the Annual Report on Form 10-K for the year ended December 31, 1996 as filed with the Securities and Exchange Commission.
- 19 -