ITEM 1. BUSINESS - --------------------
GENERAL - -------
Wells Real Estate Fund II-OW (the "Partnership") is a Georgia public limited partnership having Leo F. Wells, III and Wells Capital, Inc., as General Partners. The Partnership was formed on October 13, 1987, for the purpose of acquiring, developing, constructing, owning, operating, improving, leasing and otherwise managing for investment purposes income-producing commercial or industrial properties.
On November 6, 1987, the Partnership commenced a public offering of its limited partnership units pursuant to a Registration Statement filed on Form S-11 under the Securities Act of 1933. The Partnership terminated its offering on September 7, 1988, and received gross proceeds of $1,922,000 representing subscriptions from 219 Limited Partners, composed of two classes of limited partnership interests, Class A and Class B limited partnership units.
As of December 31, 1996, the Partnership owned interests in the following properties: (i) a retail shopping and commercial office complex located in Tucker, Georgia, (ii) a shopping center located in Cherokee County, Georgia, (iii) a two-story office building located in Charlotte, North Carolina, (iv) a four-story office building located in metropolitan Houston, Texas, (v) a restaurant located in Fulton County, Georgia, and (vi) an office/retail shopping center currently being developed in Fulton County, Georgia. All of the foregoing properties were acquired on an all cash basis and are described in more detail in Item 2
ITEM 2. PROPERTIES - --------------------
The Partnership owns all of its properties through a joint venture (the "Fund II-Fund II-OW Joint Venture") formed on March 1, 1988, between the Partnership and Wells Real Estate Fund II ("Well Fund II"). Wells Fund II is a Georgia public limited partnership affiliated with the Partnership through common general partners. The investment objectives of Wells Fund II are substantially identical to those of the Partnership. As of December 31, 1996, the Partnership's equity interest in the Fund II-Fund II-OW Joint Venture was approximately 5% and the equity interest of Wells Fund II was approximately 95%.
The Partnership does not have control over the operations of the joint ventures; however, it does exercise significant influence. Accordingly, investment in joint ventures is recorded on the equity method.
Of the six properties owned by the joint venture, three are retail shopping centers, two are office buildings and one is a restaurant. As of December 31, 1996, these properties were 63.69% occupied, down from 95.87% at December 31, 1995, 97.34% at December 31, 1994, 66.90% at December 31, 1993, and 93.76% at December 31, 1992.
The following table shows lease expirations during each of the next ten years for all leases as of December 31, 1996, assuming no exercise of renewal options or termination rights:
(1) Average monthly gross rent over the life of the lease, annualized.
(2) Expiration of First Union Bank with 70,752 square feet at the Charlotte project.
The following describes the properties in which the Partnership owns an interest as of December 31, 1996:
THE CHARLOTTE PROPERTY/FUND II-FUND II-OW JOINT VENTURE - -------------------------------------------------------
On May 9, 1988, the Fund II-Fund II-OW Joint Venture acquired a two-story building containing approximately 70,752 net leasable square feet, located on a 9.54 acre tract of land located in Charlotte, Mecklenburg County, North Carolina (the "Charlotte Property") for a purchase price of $8,550,000.
While the entire project was originally leased under a net lease to IBM, IBM elected not to exercise its second three year option to extend its lease and vacated the building effective September 30, 1993, after paying a $425,000 lease termination fee.
On May 1, 1994, First Union Bank assumed occupancy of the Charlotte property under a lease which expires April 30, 2001. The principal terms of the lease provide for First Union's sole tenancy of the project as a regional operations center for the initial term of seven years. Because First Union Bank invested approximately $1 million on tenant improvements at the Charlotte property, a lower rental rate was accepted for the first five years. There are presently no plans for improvement or further development of the project.
The annual base rent during the initial term is $412,705 payable in equal monthly installments of $34,392.08 during the first two years, annual base rent of $454,651 payable in equal monthly installments of $37,887.58 during the third year, annual base rent of $489,650 payable in equal monthly installments of $40,804.17 during the fourth year and annual base rent of $524,625 payable in equal monthly installments of $43,718.75 during the fifth year. Rental rates during the remaining two years of the lease term will be determined by market rates.
The occupancy rates at the Charlotte Property as of December 31 were 100% in 1996, 1995, 1994, 0% in 1993, and 100% in 1992.
The average effective annual rental per square foot at the Charlotte Property was $6.51 for 1996, $5.83 for 1995, $3.88 for 1994, $28.12 for 1993 and $15.69 for 1992. The higher effective annual rental rate for 1993 is due to the payment of $425,000 in lease termination fees by IBM.
THE ATRIUM/FUND II & FUND III JOINT VENTURE - -------------------------------------------
On April 3, 1989, the Fund II-Fund II-OW Joint Venture formed a joint venture (the "Fund II-Fund III Joint Venture") with Wells Real Estate Fund III, L.P. ("Wells Fund III"), a public Georgia limited partnership affiliated with the Partnership through common general partners. The investment objectives of Wells Fund III are substantially identical to those of the Partnership.
In April 1989, the Fund II-Fund III Joint Venture acquired a four-story office building located on a 5.6 acre tract of land adjacent to the Johnson Space Center in metropolitan Houston, in the City of Nassau Bay, Harris County, Texas, know as "The Atrium at Nassau Bay" (the "Atrium").
The funds used by the Fund II-Fund III Joint Venture to acquire the Atrium were derived from capital contributions made to the Fund II-Fund III Joint Venture by the Fund II-Fund II-OW Joint Venture and Wells Fund III in the amounts of $8,327,856 and $2,538,000, respectively, for total initial capital contributions of $10,865,856. As of December 31, 1996, the Fund II-Fund II-OW Joint Venture and Wells Fund III had made total capital contributions to the Fund II-Fund III Joint Venture of approximately $8,330,000 and $4,448,000, respectively, for the acquisition and development of the Atrium. The Fund II - Fund II-OW Joint Venture holds approximately 66% equity interest in the Fund II - Fund III Joint Venture, and Wells Funds III holds approximately 34% equity interest in the Fund II -Fund III Joint Venture.
The Atrium was first occupied in 1987 and contains approximately 119,000 net leasable square feet. Each floor of the Atrium was originally under a separate lease to Lockheed Engineering and Science Company, Inc., a wholly-owned subsidiary of the Lockheed Company, each of which leases had terms of approximately eight years and expired June 30, 1996.
Since Lockheed vacated the building as of June 30, 1996, the occupancy rate of the Atrium Property as of December 31, 1996, was 0% and 100% for 1992 through 1995. The average annual effective rate was $8.81 for 1996, and $17.47 for 1992 through 1995. As set forth above,
the lease with Lockheed Company expired on June 30, 1996, and although the Partnership has responded to various potential tenants regarding leasing portions of the Atrium, no leases have been signed as of December 31, 1996. It is anticipated that when leases are obtained for the Atrium, rental rates will be lower than those paid by the previous tenant, and income could decrease significantly under the new leases. In addition, such leases are likely to require substantial tenant finish and refurbishment expenditures by the Partnership which could further significantly reduce future cash distributions to Limited Partners.
THE BROOKWOOD GRILL PROPERTY/FUND II - FUND III JOINT VENTURE - -------------------------------------------------------------
On January 31, 1990, the Fund II-Fund II-OW Joint Venture acquired a 5.8 acre tract of undeveloped real property at the intersection of Warsaw Road and Holcomb Bridge Road in Roswell, Fulton County, Georgia (the "Brookwood Grill Property"). The Fund II - Fund II-OW Joint Venture paid $1,848,561, including acquisition expenses, for the 5.8 acre tract of undeveloped property.
On September 20, 1991, the Fund II-Fund II-OW Joint Venture contributed the Brookwood Grill, along with its interest as landlord under the lease agreement referred to below, as a capital contribution to the Fund II-Fund III Joint Venture. As of September 20, 1991, the Fund II-Fund II-OW Joint Venture had expended approximately $2,128,000 for the land acquisition and development of the Brookwood Grill Property.
As of September 20, 1991, a lease agreement was entered into with the Brookwood Grill of Roswell, Inc. for the development of approximately 1.5 acres and the construction of a 7,440 square foot restaurant. This Roswell site, which opened early March 1992, is the second location in the Atlanta area for what is anticipated as a southeastern chain of restaurants similar in concept to Houston's, Ruby Tuesday, and Friday's. This chain is principally owned by David Rowe, an Atlanta real estate developer of Kroger shopping centers, and several operating partners formerly with Houston's. The terms of the lease call for an initial term of 9 years and 11 months, with two additional 10-year option periods. The agreement calls for a base rental of $217,006 per year for Years 1 through 5, with a 15% increase over the remainder of the initial term. Rental rates for all option periods will be based on the prevailing market values and rates for those periods. The Fund II-Fund III Joint Venture has expended approximately $1,100,000 for the development and construction of the restaurant building together with parking areas, driveways, landscaping and other improvements. In addition to the base rent described above, the tenant is required to pay "additional rent" in amounts equal to a 12% per annum return on all amounts expended for such improvements.
The occupancy rate for the Brookwood Grill, a sole tenant, was 100% for 1996, 1995, 1994, 1993 and 1992. The average effective rental per square foot at the Brookwood Grill is $30.29 for 1996, $30.21 for 1995, 1994 and 1993, and $24.60 for 1992, the first year of occupancy.
As of December 31, 1996, the Fund II-Fund II-OW Joint Venture and Wells Fund III had made total contributions to the Fund II-Fund III Joint Venture of approximately $2,128,000 and $1,330,000, respectively, for the acquisition and development of the Brookwood Grill. The Fund II-Fund II-OW Joint Venture holds an approximately 62% equity interest in the Brookwood Grill property, and Wells Fund III holds an approximately 38% equity interest in the project.
On January 10, 1995, the remaining 4.3 undeveloped acres of land comprising the Holcomb Bridge Road Property was contributed to a new joint venture, Fund II, III, VI, and VII Associates by Fund II-Fund III Joint Venture. This property is described below.
FUND II, III, VI AND VII ASSOCIATES/HOLCOMB BRIDGE ROAD PROPERTY - ----------------------------------------------------------------
On January 10, 1995, Fund II-Fund III Joint Venture, Wells Real Estate Fund VI , L.P. ("Wells Fund VI"), a Georgia public limited partnership having Leo F. Wells, III and Wells Partners, L.P., a Georgia limited partnership, as general partners, and Wells Real Estate Fund VII, L.P. ("Wells Fund VII"), a Georgia public limited partnership having Leo F. Wells, III and Wells Partners, L.P., a Georgia limited partnership, as general partners, entered into a Joint Venture Agreement known as Fund II, III, VI and VII Associates ("Fund II, III, VI and VII Joint Venture"). Wells Partners, L.P. is a private limited partnership having Wells Capital, Inc., a General Partner of the Partnership, as its sole general partner. The investment objectives of Wells Fund VI and Wells Fund VII are substantially identical to those of the Partnership.
In January 1995, the Fund II-Fund III Joint Venture contributed to the Fund II- III-VI-VII Joint Venture approximately 4.3 acres of land at the intersection of Warsaw Road and Holcomb Bridge Road in Roswell, Fulton County, Georgia (the "Holcomb Bridge Road Property") including land improvements. Development is substantially complete on two buildings containing a total of approximately 49,500 square feet.. Nine tenants occupied the Holcomb Bridge Road Property as of December 31, 1996, for an occupancy rate of 63%. The average effective annual rental was $9.87 per square foot for 1996.
As of December 31, 1996, Fund II and Fund III Joint Venture had contributed $1,729,116 in land and improvements for an equity interest of approximately 25.2%, Wells Fund VI had contributed $1,699,846 for an equity interest of approximately 26.0%, and Wells Fund VII had contributed $3,217,154 for an equity interest of approximately 48.8%. The total cost to develop the Holcomb Bridge Road Property is currently estimated to be approximately $5,100,000, excluding land. It is anticipated that of the remaining cost of approximately $183,000, $100,000 will be contributed by Wells Fund VI and $83,000 by Wells Fund VII, after which the equity interests in the property will be 48.3% for Wells Fund VII, 26.4% for Wells Fund VI, and 25.3% for the Fund II-Fund III Joint Venture. Wells Fund VI and Wells Fund VII have reserved sufficient funds for this purpose. The Partnership is not obligated to provide any additional funding for the Holcomb Bridge Road Property.
TUCKER PROPERTY/FUND I - FUND II JOINT VENTURE - ----------------------------------------------
The Tucker Property consists of a retail shopping center and a commercial office building complex located in Tucker, DeKalb County, Georgia (the "Tucker Property"). The retail shopping center at the Tucker Property contains approximately 29,858 net leasable square feet. The commercial office space at the Tucker Property, which is divided into seven separate buildings, contains approximately 67,465 net leasable square feet.
On January 9, 1987, the Partnership acquired an interest in the Tucker Property which was acquired by a joint venture (the "Tucker Joint Venture") originally between the Partnership and Wells Real Estate Fund I ("Wells Fund I"). Wells Fund I is a Georgia public limited partnership affiliated with the Partnership through common general partners. The investment objectives of Wells Fund I are substantially identical to those of the Partnership. Upon the formation of the Fund II-Fund II-OW Joint Venture in March 1988, the Partnership contributed its joint venture interest in the Tucker Joint Venture to the Fund II-Fund II-OW Joint Venture as a part of its capital contribution. On January 1, 1991, the Cherokee Joint Venture, which is defined below, was merged into the Tucker Joint Venture forming a new joint venture (the "Tucker-Cherokee Joint Venture"). As described below, the Cherokee Joint Venture was also a joint venture between the Fund II-Fund II-OW Joint Venture and Wells Fund I. Under the terms of the Amended and Restated Joint Venture Agreement of Fund I and Fund II Tucker- Cherokee, the percentage interest of the Fund II-Fund II-OW Joint Venture in the Tucker Project remained unchanged as a result of the merger of the Tucker Joint Venture into the Tucker-Cherokee Joint Venture.
On August 1, 1995, Wells Fund I and the Fund II-Fund-II-OW Joint Venture entered into another amendment to effect the contribution of the Cherokee Project to the Fund I, II, II-OW, VI, VII Joint Venture, as described below. As a result, the name of the joint venture was changed back to "Fund I and Fund II Tucker", and is therefore no longer merged with the Cherokee Joint Venture. The Partnership's percentage interest in the Tucker Project remained unchanged as a result of the transaction.
Both Wells Fund I and the Fund II-Fund II-OW Joint Venture have funded the cost of completing the Tucker Property through capital contributions which have been paid as progressive stages of construction were completed. As of December 31, 1996, Wells Fund I had contributed a total of $6,399,854, and the Fund II-Fund II-OW Joint Venture had contributed a total of $4,826,015 to the Tucker Property. As of December 31, 1996, Wells Fund I had an approximately 55% equity interest in the Tucker Property and the Fund II-Fund II-OW Joint Venture had an approximately 45% equity interest in the Tucker Property. As of December 31, 1996, the Tucker Property was 77% occupied by 31 tenants.
There are no tenants in the project occupying ten percent or more of the rentable square footage. The principal businesses, occupations, and professions carried on in the building are typical retail shopping/commercial office services.
The occupancy rate at the Tucker Property was 77% in 1996, 83% in 1995, 96% in 1994, 89% in 1993, and 80% in 1992.
The average effective annual rental per square foot at the Tucker Property was $13.78 for 1996, $12.61 for 1995, $12.63 for 1994, $11.37 for 1993, and $11.37 for 1992.
CHEROKEE PROPERTY/FUND I, II, II-OW, VI, VII JOINT VENTURE - ----------------------------------------------------------
The Cherokee Property consists of a retail shopping center known as "Cherokee Commons Shopping Center" located in metropolitan Atlanta, Cherokee County, Georgia (the "Cherokee Property"). The Cherokee Property consists of approximately 103,755 net leasable square feet.
On June 30, 1987, the Partnership acquired an interest in the Cherokee Property through a joint venture (the "Cherokee Joint Venture") between the Wells Fund II-Fund II-OW Joint Venture and Wells Fund I.
On August 1, 1995, the Fund II-Fund II-OW Joint Venture, Wells Fund I, Wells Real Estate Fund VI, L.P. ("Wells Fund VI"), a Georgia public limited partnership having Leo F. Wells, III and Wells Partners, L.P., a Georgia limited partnership, as general partners, and Wells Real Estate Fund VII, L.P. ("Wells Fund VII"), a Georgia public limited partnership having Leo F. Wells, III and Wells Partners, L.P., a Georgia limited partnership, as general partners entered into a joint venture agreement known as Fund I, II, II-OW, VI, VII Associates (the "Fund I, II, II-OW, VI, VII Joint Venture"), which was formed to own and operate the Cherokee Project. Wells Partners, L.P. is a private limited partnership having Wells Capital, Inc., a General Partnership, as its sole general partner. The investment objectives of Wells Fund I, Wells Fund VI and Wells Fund VII are substantially identical to those of the Partnership.
As of December 31, 1996, Wells Fund I had contributed property with a book value of $2,139,900, the Fund II-Fund II-OW Joint Venture had contributed property with a book value of $4,860,100, Wells Fund VI had contributed cash in the amount of $953,798 and Wells Fund VII had contributed cash in the amount of $953,798 to the Fund I, II, II-OW, VI, VII Joint Venture. As of December 31, 1996, the equity interests in the Fund I, II, II-OW, VI, VII Joint Venture were approximately as follows: Wells Fund I - 24%, Fund II-Fund II-OW Joint Venture - - 54%, Wells Fund VI - 11% and Wells Fund VII - 11%.
The Cherokee Property is anchored by a 67,115 square foot lease with Kroger Food/Drug which expires in 2011. Kroger's original lease was for 45,528 square feet. In 1994, Kroger expanded to the current 67,115 square feet which is approximately 65% of the total rentable square feet in the property. As of December 31, 1996, the Cherokee Property was approximately 93% occupied by 19 tenants, including Kroger. Kroger, a retail grocery chain, is the only tenant occupying ten percent or more of the rentable square footage. The other tenants in the shopping center provide typical retail shopping services.
The Kroger lease provides for an annual rent of $392,915 which increased to $589,102 on August 16, 1995 due to the expansion from 45,528 square feet to 67,115 square feet. The lease expires March 31, 2011 with Kroger entitled to five successive renewals each for a term of five years at the same rental rate as the original lease.
The occupancy rate at the Cherokee Property was 93% in 1996, 94% in 1995, 91% in 1994, 89% in 1993, and 88% in 1992.
The average effective annual rental per square foot at the Cherokee Property was $8.59 for 1996, $7.50 for 1995, $5.33 for 1994, $6.47 for 1993, and $6.46 for 1992.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - ---------------------------
There were no material pending legal proceedings or proceedings known to be contemplated by governmental authorities involving the Partnership during 1996.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - -------------------------------------------------------------
No matters were submitted to a vote of the Limited Partners during the fourth quarter of 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR PARTNERSHIP UNITS AND RELATED SECURITY HOLDER MATTERS - --------------------------------------------------------------------------
As of February 28, 1997, the Partnership had 6,062 outstanding Class A Units held by a total of 181 Limited Partners and 1,626 outstanding Class B Units held by a total of 41 Limited Partners. The capital contribution per unit is $250. There is no established public trading market for the Partnership's limited partnership units, and it is not anticipated that a public trading market for the units will develop. Under the Partnership Agreement, the General Partners have the right to prohibit transfers of units.
Class A Unit holders are entitled to an annual 8% non-cumulative distribution preference over Class B Unit holders as to cash distributions from Net Cash from Operations, defined in the Partnership Agreement as Cash Flow, less adequate cash reserves for other obligations of the Partnership for which there is no provision, but are initially allocated none of the depreciation, amortization, cost recovery and interest expense. These items are allocated to Class B Unit holders until their capital account balances have been reduced to zero.
Cash distributions from Net Cash from Operations to the Limited Partners is distributed on a quarterly basis unless Limited Partners elect to have their cash distributions paid monthly. Cash distributions made to the Limited Partners for the two most recent fiscal years were as follows:
The fourth quarter distributions of cash available for distribution were accrued for accounting purposes in 1996 and were not actually paid until February 1997.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - ---------------------------------
The following sets forth a summary of the selected financial data for the fiscal years ended December 31, 1996, 1995, 1994, 1993, and 1992:
Cash distributions per unit have been paid from net cash from operations and do not constitute a return of capital.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND - -------------------------------------------------------------------------- RESULTS OF OPERATION --------------------
The following discussion and analysis should be read in conjunction with the selected financial data and the accompanying financial statements of the Partnership and notes thereto.
This Report contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934, including discussion and analysis of the financial condition of the Partnership, anticipated capital expenditures required to complete certain projects, amounts of cash distributions anticipated to be distributed to Limited Partners in the future and certain other matters. Readers of this Report should be aware that there are various factors that could cause actual results to differ materially from any forward-looking statement made in the Report, which include construction costs which may exceed estimates, construction delays, lease-up risks, inability to obtain new tenants upon the expiration of existing leases, and the potential need to fund tenant improvements or other capital expenditures out of operating cash flow.
RESULTS OF OPERATIONS AND CHANGES IN FINANCIAL CONDITIONS - ---------------------------------------------------------
General - -------
As of December 31, 1996, the developed properties owned by the Fund II-Fund II- OW Joint Venture, excluding the Holcomb Bridge Road Property which is not yet fully developed, were 64% leased, as compared to 1995, and 1994 when the properties were 96% and 98% leased respectively. The decrease in the leased percentages for 1996 compared to 1995 and 1994 is due to the vacancy of the Atrium for the last six months of 1996.
Gross revenues of the Partnership were $6,273 for the year ended December 31, 1996, as compared to $56,702 for the fiscal year ended December 31, 1995, and $28,120 for the fiscal year ended December 31, 1994. The decrease in gross revenues for fiscal year 1996 compared to fiscal year 1995 is due primarily to the vacancy of the Atrium for the last six months of 1996. The increase in gross revenues for the fiscal year ended 1995 from fiscal 1994 was due primarily to the full year occupancy at the Charlotte Property.
Administrative expenses of the Partnership are incurred at the joint venture level. Depreciation expense increased from 1995 to 1996 due to change in the estimated useful lives of buildings and improvements from 40 years to 25 years, which became effective October 1, 1995. For further discussion of depreciation expense, please refer to the notes to the accompanying financial statements.
Partnership distributions paid during the fiscal year ended December 31, 1996, totaled $70,360, as compared to $105,270 during the fiscal year ended December 31, 1995 and $84,967 during the fiscal year ended December 31, 1994. The decrease in partnership distributions paid for fiscal year 1996 as compared to fiscal years 1995 and 1994 was primarily due to the vacancy of the Atrium in the last six months of 1996.
The Partnership made cash distributions to Limited Partners holding Class A units of $11.61 per Unit for fiscal year ended December 31, 1996, $17.37 per Unit for the fiscal year ended December 31, 1995, and $14.02 per Unit for fiscal year ended December 31, 1994. The Partnership made no cash distributions to Limited Partners holding Class B Units for fiscal year ended 1996, 1995, or 1994.
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of", which is effective for fiscal years beginning after December 15, 1995. SFAS No. 121 established standards for determining when impairment losses on long-lived assets have occurred and how impairment losses should be measured. The joint venture adopted SFAS No. 121, effective January 1, 1995. The impact of adopting SFAS No. 121 was not material to the financial statements of the joint ventures.
PROPERTY OPERATIONS - -------------------
As of December 31, 1996, the Partnership's percentage ownership in properties was as follows: 5.3% in the Charlotte Property, 3.5% in The Atrium, 3.3% in the Brookwood Grill Property, 0.8% in the Holcomb Bridge Road Property, 2.4% in the Tucker Property and 2.9% in the Cherokee Property.
As of December 31, 1996, the Partnership owned interests in the following properties through the Fund II - Fund II-OW Joint Venture:
Charlotte Property/Fund II - Fund II-OW Joint Venture - -----------------------------------------------------
* The Partnership holds a 5% ownership in the Fund II-Fund II-OW Joint Venture. For allocations to the Partnership, see footnotes in the audited financial statements.
Rental income increased slightly in 1996 compared to 1995 due to the increase in rent at the Property as of April 1996. Rental income increased to $458,867 for 1995 as compared to $275,137 in 1994 due to the occupancy of the building by First Union Bank for a full year. Depreciation expense increased to $367,667 in 1996 compared to $235,794 in 1995 due to recording a full year's depreciation expense reflecting the change in estimated useful lives which was made beginning in fourth quarter, 1995. Depreciation expense increased from $194,278 in 1994 to $235,794 in 1995 as a result of the change in the estimated useful lives of buildings and improvements as previously discussed under the "General" section of "Results of Operations and Change in Financial Conditions". Management and leasing expenses are stable for the years ended 1996, 1995, and 1994 in proportion to rental revenues. Other operating expenses decreased slightly from 1995 to 1996 due primarily to a decrease in architectural fees. Other operating expenses decreased to $39,203 in 1995 compared to $142,231 expended in 1994 due mainly to marketing and administrative expenses incurred in efforts to lease the property. Net income decreased to $28,857 in 1996 compared to $156,338 due primarily to the increase in depreciation expense discussed above. Net income increased to $156,338 in 1995 compared to the loss of $79,727 in 1994 for the reasons stated above. (Note: Expenses, income and cash generated to the joint venture have been restated for 1994. The 1994 statement included expenses paid by the joint venture on behalf of the Partnership.) The Charlotte Property lease agreement is one in which the tenant is directly responsible for primarily all operational expenses including real estate taxes.
For comments on the general conditions to which the property may be subject, see Item 1, Business, page 2. For additional information on the property, tenants, etc., see Item 2, Properties, page 3.
The Atrium/Fund II - Fund III Joint Venture - -------------------------------------------
* The Partnership holds a 5% ownership in the Fund II-Fund II-OW Joint Venture. For allocations to the Partnership, see footnotes in the audited financial statements.
Rental income decreased to $1,048,583 in 1996 compared to $2,079,345 due to the termination of the Lockheed lease as of June 30, 1996. Revenues, expenses and net income have remained relatively stable for the years ended December 31, 1995 and 1994. Depreciation expense increased in 1996 compared to 1995 due to recording a full year's depreciation expense reflecting the change in estimated useful lives which was made beginning in fourth quarter 1995. In 1995, the increase in depreciation expense due to the change in the estimated useful lives of buildings and improvements was offset by a decrease in other operating expenses. Management and leasing fees decreased in 1996 compared to 1995 due to the decrease in rental income for the last six months of 1996. Other operating expenses decreased from $451,362 in 1995 to $158,405 in 1996 primarily due to the vacancy of the Atrium for the last six months of the year.
The real estate taxes were $150,105 for 1996, $182,687 for 1995, and $186,273 for 1994.
The lease with Lockheed Company expired on June 30, 1996, and although the Partnership has responded to various potential tenants regarding leasing the Atrium, no leases have been signed as of December 31, 1996. It is anticipated that when leases are obtained for the Atrium, rental rates will be lower than those paid by the previous tenant, and income could decrease significantly under these new leases. In addition, such leases are likely to require significant tenant finish and refurbishment expenditures by the Partnership which could substantially reduce future cash distributions to Limited Partners.
For comments on the general condition to which the property may be subject, see Item 1, Business, page 2. For additional information on the property, tenants, etc., see Item 2, Properties, page 3.
The Brookwood Grill Property/Fund II - Fund III Joint Venture - -------------------------------------------------------------
* The Partnership holds a 5% ownership in the Fund II - Fund II-OW Joint Venture. For allocations to the Partnership, see footnotes in the audited financial statements.
Rental income decreased in 1996 compared to 1995 due to a decrease in billing of expenses to the tenant. Rental income and expenses were relatively stable for 1995 and 1994. Although there was a change in useful lives of assets from 40 years to 25 years in the fourth quarter of 1995, depreciation expense decreased in 1996, compared to 1995, due to the contribution of land and land improvements by Brookwood Grill to the Holcomb Bridge Road Property. Other operating expenses increased in 1996 compared to 1995 due to decreased property tax reimbursements from tenant, and a reimbursement to the tenant in first quarter, 1996, of administrative charges paid in 1995. Net income decreased to $15,485 in 1996 compared to $92,344 in 1995 due primarily to the increased operating expenses in 1996, and due to the net loss generated by the Fund II, III, VI and VII Joint Venture.
Real estate taxes were $33,494 for 1996, $39,668 for 1995, and $38,091 for 1994.
For comments on the general competitive conditions to which the property may be subject, see Item 1, Business, page 2. For additional information on the property, tenants, etc., see Item 2, Properties, page 3.
Holcomb Bridge Road Property/Fund II, III, VI, VII Joint Venture - ----------------------------------------------------------------
* The Partnership holds a 3.30% ownership in the Fund II-Fund III Joint Venture.
Since the Holcomb Bridge Property was under construction and not occupied until first quarter, 1996, comparative income and expense figures for the years ended December 31, 1995 and 1994, are not available.
In January 1995, the Fund II-Fund III Joint Venture contributed 4.3 acres of land and land improvements at 880 Holcomb Bridge Road to the Fund II-III-VI-VII Joint Venture. Development is being completed on two buildings containing a total of approximately 49,500 square feet. As of December 31, 1996, nine tenants occupied approximately 31,144 square feet of space in the retail and office building under leases of varying lengths.
As of December 31, 1996, the Fund II-Fund III Joint Venture contributed to $1,729,116 in land and improvements for an equity interest of approximately 25.2%, Wells Fund VI had contributed $1,699,846 for an equity interest of approximately 26.0%, and Wells Fund VII had contributed $3,217,154 for an equity interest of approximately 48.8%. The total cost to develop the Holcomb Bridge Road Property is currently estimated to be approximately $5,100,000, excluding land. It is anticipated that of the remaining cost of approximately $183,000, $100,000 will be contributed by Wells Fund VI and $83,000 by Wells Fund VII, after which the equity interests in the property will be 48.3% for Wells Fund VII, 26.4% for Wells Fund VI, and 25.3% for the Fund II-Fund III Joint Venture. Wells Fund VI and Wells Fund VII have reserved sufficient funds for this purpose.
Real estate taxes were $37,191 for 1996.
Tucker Property/Fund I - Fund II Joint Venture - ----------------------------------------------
* The Partnership holds a 5% ownership in the Fund II-Fund II-OW Joint Venture. For allocations to the Partnership, see footnotes in the audited financial statements.
Rental income decreased from 1995 to 1996 due primarily to decreased tenant occupancy. Operating expenses increased in 1996 over 1995 due to an increase in HVAC repairs, painting expense and maintenance. Operating expenses decreased in 1995 as compared to 1994 due chiefly to an increase in property taxes, utilities and other repairs/maintenance. The increase in depreciation expense in 1996 over 1995 and 1994 is a result of the change in the estimated useful lives of buildings and improvements as previously discussed under the "General Section of Results of Operations and Changes in Financial Conditions."
Net income decreased in 1996 to ($35,166) from $253,287 in 1995 due to increased depreciation and operating expenses, as discussed above. Further, a fire occurred in September 1996 resulting in estimated repair costs of $210,927. An insurance check in the amount of $143,944 has been received; repairs are expected to be completed by the end of the first quarter of 1997. A loss on real estate assets of $61,985 is reflected in the aforementioned loss of income. Net income decreased in 1995 to $253,287 from $359,847 in 1994 due to decreased tenant occupancy and an increase in operating expenses as discussed above.
The property was 77% leased as of December 31, 1996, as compared to 83% as of December 31, 1995, and 96% as of December 31, 1994. Rental income for 1996 decreased over the 1995 level due to the loss of tenants occupying 8,500 square feet.
Real estate taxes were $111,947 for 1996, $127,484 for 1995, and $105,042 for 1994.
For comments on the general conditions to which the property may be subject, see Item 1, Business, Page 2. For additional information on the property, tenants, etc., see Item 2, Properties, page 3.
Cherokee Property/Fund I, II, II-OW, VI and VII Joint Venture - -------------------------------------------------------------
* The Partnership holds a 5% ownership in the Fund II-Fund II-OW Joint Venture. For allocations to the Partnership, see footnotes in the audited financial statements.
Rental income increased in 1996 over 1995 due to the Kroger expansion which was completed in November 1994. Rental income for the year ended December 31, 1995 increased approximately $225,500 from the rental income for the year ended December 31, 1994. This increase is due to excess rents relating to the Kroger expansion which, although completed in November of 1994, was billed retroactively and paid in September 1995. The decrease in occupancy is due to the current vacancy of 2,380 square feet; however, a lease is being negotiated for 1,200 square feet with anticipated occupancy in February 1997. Operating expenses of the property increased to $180,841 in 1996 from $115,885 in 1995 and decreased from $569,830 in 1994. The increase from 1995 to 1996 is due primarily to repairs and maintenance (roof repairs, painting and tenant
finish) and general and administrative expenses. The decrease in operating expenses in 1995 over 1994 is due to retirement of tenant improvements which resulted from the Kroger expansion. The increase in depreciation expense for 1996 as compared to 1995 and 1994 is a result of the change in the estimated useful lives of buildings and improvements which became effective in the fourth quarter of 1995, as previously discussed. Net income of the property decreased to $231,882 in 1996 from $349,097 in 1995 and increased from ($211,950) in 1994, due to the increase in operating expenses as discussed above.
A lease amendment has been executed with Kroger expanding its existing store at the Cherokee Commons Shopping Center from 45,528 square feet to 66,918 square feet. In November, 1994 construction was completed on the Kroger expansion and remodeling of the center. The total cost for both the Kroger expansion and remodeling of the Center was $2,807,367. The costs of this expansion were funded in the following amounts: Wells Fund I, $94,679 and the Fund II-Fund II- OW Joint Venture $805,092, as of December 31, 1994 and Wells Fund VI $953,798 and Wells Fund VII $953,798 as of December 31, 1995.
Real estate taxes were $63,696 for 1996, $63,694 for 1995 and $56,080 for 1994.
For comments on the general conditions to which the property may be subject, see Item 1, Business, Page 2. For additional information on the property, tenants, etc., see Item 2, Properties, page 3.
LIQUIDITY AND CAPITAL RESOURCES - -------------------------------
During its offering, which terminated on September 7, 1988, the Partnership raised a total of $1,922,000 through the sale of 7,688 units. No additional units will be sold by the Partnership. As of December 31, 1996, the Partnership contributed an aggregate of $1,537,600 in capital contributions to the Fund II - Fund II-OW Joint Venture, after incurring approximately $384,000 in offering costs.
Since the Partnership is an investment partnership formed for the purpose of acquiring, owning and operating income-producing real property and has invested all of its funds available for investment, it is highly unlikely that the Partnership will acquire interests in any additional properties, and the Partnership's capital resources are anticipated to remain relatively stable over the holding period of its investments.
The Partnership's net cash provided by operating activities increased to $1,183 in 1996 from ($13,812) in 1995 due primarily to the payment in 1995 of a $14,000 accrual. The Partnership's net cash used in operating activities increased to $13,812 in 1995 from net cash provided by activities of $7,497 in 1994 due primarily to the distribution to the partners of prior year tenant improvement reserves of approximately $7,000 and accrual of the payable to the affiliate of $14,000.
Net cash used in investing activities was $0.00 in 1996 and decreased to $0.00 in 1995 from net cash used of $19,220 in 1994 due to investment in the Fund II- Fund IIOW Joint Venture for the Cherokee Commons Property.
Partnership distributions paid to limited partners decreased from $103,444 in 1995 to $88,743 in 1996 due primarily to decreased distributions from the joint ventures which were the result of reduced rental revenue. Partnership distributions paid to limited partners increased from $82,891 in 1994 to $103,444 in 1995 due to increased distributions from the Fund II-Fund II-OW Joint Venture. Cash and cash equivalents increased for the year ended December 31, 1996 compared to 1995 due primarily to reimbursement of state taxes by Limited Partners. Cash and cash equivalents decreased for the year ended December 31, 1995 as compared to 1994 due primarily to additional investment of $14,824 in the Fund II-Fund IIOW Joint Venture from the Partnership's working capital revenue for the Kroger expansion at Cherokee Commons Shopping Center.
The Partnership's cash distribution to Class A Unit holders paid and payable through the fourth quarter of 1996 have been paid from Net Cash from Operations, which does not constitute a return of capital, and the Partnership anticipates that distributions will continue to be paid on a quarterly basis from Net Cash from Operations. No cash distributions were paid to Class B Unit holders for 1996.
The Partnership expects to meet liquidity requirements and budget demands through cash flow from operations subject to the potential need to fund tenant improvements which may be required for new tenants at the Atrium, as previously discussed. The Partnership is unaware of any known demands, commitments, events or capital expenditures other than that which is required for the normal operation of its properties that will result in the Partnership's liquidity increasing or decreasing in any material way. The Partnership is not obligated to fund any additional costs for the Holcomb Bridge Road project. Additional funding for the Holcomb Bridge Road Project is anticipated to be provided by capital contributions from Wells Fund VI and Wells Fund VII, which have reserved sufficient capital for this purpose.
INFLATION - ---------
Real estate has not been affected significantly by inflation in the past three years due to the relatively low inflation rate. There are provisions in the majority of the tenant leases to protect the Partnership from the impact of inflation. These leases contain common area maintenance charges (CAM charges), real estate tax and insurance reimbursements on a per square foot basis, or in some cases, annual reimbursement of operating expenses above a certain per square foot allowance. These provisions reduce the Partnership's exposure to increases in costs and operating expenses resulting from inflation. In addition, a number of the Partnership's leases are for terms of less than five years which may permit the Partnership to replace existing leases with new leases at higher base rental rates if the existing leases are below market rate. There is no assurance, however, that the Partnership would be able to replace existing leases with new leases at higher base rentals.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - -----------------------------------------------------
The financial statements of the Registrant and supplementary data are detailed under Item 14(a) and filed as part of the report on the pages indicated.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------------------------------------------------------------------------- FINANCIAL DISCLOSURE --------------------
The Partnership's change in accountants during 1995 was previously reported in the Partnership's Form 8-K dated September 11, 1995. There were no disagreements with the Partnership's accountants or other reportable events during 1996.
PART III
ITEM 10.
ITEM 10. GENERAL PARTNERS OF THE PARTNERSHIP - ---------------------------------------------
WELLS CAPITAL, INC. Wells Capital, Inc. ("Capital") is a Georgia corporation - ------------------- formed in April 1984. The executive offices of Capital are located at 3885 Holcomb Bridge Road, Norcross, Georgia 30092. Leo F. Wells, III is the sole shareholder, sole Director and the President of Capital.
LEO F. WELLS, III. Mr. Wells is a resident of Atlanta, Georgia, is 53 years of - ----------------- age and holds a Bachelor of Business Administration Degree in Economics from the University of Georgia. Mr. Wells is the President and sole Director of Capital. Mr. Wells is the President of Wells & Associates, Inc., a real estate brokerage and investment company formed in 1976 and incorporated in 1978, for which he serves as principal broker. Mr. Wells is also currently the sole Director and President of Wells Management Company, Inc., a property management company he founded in 1983. In addition, Mr. Wells is the President and Chairman of the Board of Wells Investment Securities, Inc., Wells & Associates, Inc., Wells Management Company, Inc. and Wells Investment Securities, Inc. which are affiliates of the General Partners. From 1980 to February 1985, Mr. Wells served as Vice-President of Hill-Johnson, Inc., a Georgia corporation engaged in the construction business. From 1973 to 1976, he was associated with Sax Gaskin Real Estate Company and from 1970 to 1973, he was a real estate salesman and property manager for Roy D. Warren & Company, an Atlanta real estate company.
ITEM 11.
ITEM 11. COMPENSATION OF GENERAL PARTNERS AND AFFILIATES - ---------------------------------------------------------
The following table summarizes the compensation and fees paid to the General Partners and their affiliates during the year ended December 31, 1996:
(1) The majority of these fees are not paid directly by the Partnership but are paid by the joint venture entities which own properties for which the property management and leasing services relate and include management and leasing fees which were accrued for accounting purposes in 1996 but not actually paid until January, 1997.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------
No Limited Partner is known by the Partnership to own beneficially more than 5% of the outstanding units of the Partnership.
Set forth below is the security ownership of management as of February 28, 1997.
The General Partner did not receive any distribution from cash flows or sale proceeds in 1996.
No arrangements exist which would, upon operation, result in a change in control of the Partnership.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - --------------------------------------------------------
The compensation and fees paid or to be paid by the Partnership to the General Partners and their affiliates in connection with the operation of the Partnership are as follows:
INTEREST IN PARTNERSHIP CASH FLOW AND NET SALE PROCEEDS - -------------------------------------------------------
The General Partners will receive a subordinated participation in distributions from cash available for distribution equal to 10% of the total distributions for such year payable only after the Limited Partners receive distributions from cash available for distribution equal to 8% of their adjusted capital accounts in each fiscal year. In addition, after Limited Partners receive their distributions equal to 8% of their adjusted capital contributions and the General Partners receive their distributions equal to 10% of the total distributions for such year, the General Partners will receive a participation of 10% of the additional distributions from cash available for a distribution, 9% of which shall be paid to the General Partners as a Partnership Management Fee. The General Partners will also receive a return of their adjusted capital contributions plus a 12% cumulative return on their adjusted capital contributions. The General Partners did not receive any distributions from net cash flow from operations or net sale proceeds for the year ended December 31, 1996.
PROPERTY MANAGEMENT AND LEASING FEES - ------------------------------------
Wells Management Company, Inc., an affiliate of the General Partners, will receive compensation for supervising the management of the Partnership properties equal to 6%(3% management and 3% leasing) of rental income. In no event will such fees exceed the sum of (i) 6% of the gross receipts of each property, plus (ii) a separate one-time fee for initial rent-up or leasing-up of development properties in an amount not to exceed the fee customarily charged in arm's-length transactions by others rendering similar services in the same geographic area for similar properties. With respect to properties leased on a net basis for a period of ten years or longer, property management fees will not exceed 1% of gross revenues from such leases, plus a one-time initial leasing fee of 3% of the gross revenues which are payable over the first five years of the term of such net leases. Management and leasing fees are not paid directly by the Partnership but by the joint venture entities which own the properties. The Partnership's share of these fees which were paid to Wells Management Company, Inc. totalled $9,255 for the year ended December 31, 1996.
REAL ESTATE COMMISSIONS - -----------------------
In connection with the sale of Partnership properties, the General Partners or their affiliates may receive commissions not exceeding the lesser of (A) 50% of the commissions customarily charged by other brokers in arm's-length transactions involving comparable properties in the same geographic area or (B) 3% of the gross sales price of the property, and provided that payments of such commissions will be made only after Limited Partners have received prior distributions totaling 100% of their capital contributions plus a 6% cumulative return on their adjusted capital contributions. No real estate commissions were paid to the General Partners or affiliates for the year ended December 31, 1996.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - --------------------------------------------------------------------------
(a)1. Financial Statements Information with respect to this item is contained on Pages to of this Annual Report on Form 10-K. See Index to Financial Statements on Page.
(a)2. Financial Statement Schedule III Information with respect to this item begins on Page S-1 of this Annual Report on Form 10-K
(a)3. The Exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto.
(b) No reports on Form 8-K were filed with the Commission during the fourth quarter of 1996.
(c) The Exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto.
(d) See (a)2 above.
SIGNATURES ----------
Pursuant to the requirements of Sections 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 this 17th day of March, 1997.
WELLS REAL ESTATE FUND II-OW (Registrant)
By: /s/Leo F. Wells, III ------------------------------ LEO F. WELLS, III Individual General Partner and as President of Wells Capital, Inc., the Corporate General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacity as and on the date indicated.
Signature Title - --------- -----
/s/Leo F. Wells, III Individual General Partner, March 17, 1997 - -------------------- President and Sole Director of Leo F. Wells, III Wells Capital, Inc., the Corporate General Partner
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRARS WHICH HAVE NOT BEEN REGISTERED PURSUANT TO SECTION 12 OF THE ACT.
No annual report or proxy material relating to an annual or other meeting of security holders has been sent to security holders.
EXHIBIT INDEX -------------
(Wells Real Estate Fund II-OW)
The following documents are filed as exhibits to this report. Those exhibits previously filed and incorporated herein by reference are identified below by an asterisk. For each such asterisked exhibit, there is shown below the description of the previous filing. Exhibits which are not required for this report are omitted.
-----------------------------
Arthur Andersen L.L.P
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Wells Real Estate Fund II-OW:
We have audited the accompanying balance sheets of WELLS REAL ESTATE FUND II-OW (a Georgia public limited partnership) as of December 31, 1996 and 1995 and the related statements of income, partners' capital, and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of Wells Real Estate Fund II-OW for the year ended December 31, 1994 were audited by other auditors whose report dated January 13, 1995 expressed an unqualified opinion on those statements.
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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Wells Real Estate Fund II-OW as of December 31, 1996 and 1995 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
/s/ Arthur Andersen L.L.P
Atlanta, Georgia January 10, 1997
[LETTERHEAD OF KPMG PEAT MARWICK LLP APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
The Partners Wells Real Estate Fund II-OW:
We have audited the balance sheet (which is not presented separately herein) of Wells Real Estate Fund II-OW (a limited partnership) as of December 31, 1994, and the related statements of income, partners' capital, and cash flows for the year then ended. In connection with our audit of the financial statements, we have also audited the information for the year ended December 31, 1994 included in the December 31, 1996 financial statement Schedule III - Real Estate and Accumulated Depreciation. These financial statements and information included in the financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and information included in the financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 Wells Real Estate Fund II-OW as of December 31, 1994, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Also in our opinion, the related information for 1994 included in the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
January 13, 1995 Atlanta, Georgia
WELLS REAL ESTATE FUND II-OW
(A GEORGIA PUBLIC LIMITED PARTNERSHIP)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
The accompanying notes are an integral part of these balance sheets.
WELLS REAL ESTATE FUND II-OW
(A GEORGIA PUBLIC LIMITED PARTNERSHIP)
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
The accompanying notes are an integral part of these statements.
WELLS REAL ESTATE FUND II-OW
(A GEORGIA PUBLIC LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
The accompanying notes are an integral part of these statements.
WELLS REAL ESTATE FUND II-OW
(A GEORGIA PUBLIC LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
The accompanying notes are an integral part of these statements.
WELLS REAL ESTATE FUND II-OW
(A GEORGIA PUBLIC LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Wells Real Estate Fund II-OW (the "Partnership") is a public limited partnership organized on October 13, 1987 under the laws of the state of Georgia. The general partners are Leo F. Wells, III and Wells Capital, Inc. (the "Company"). The Partnership has two classes of limited partnership interests, Class A and Class B units. Limited partners may vote to, among other things, (a) amend the partnership agreement, subject to certain limitations, (b) change the business purpose or investment objectives of the Partnership, and (c) remove a general partner. A majority vote on any of the described matters will bind the Partnership, without the concurrence of the general partners. Each limited partnership unit has equal voting rights regardless of class.
The Partnership was formed to acquire and operate commercial real properties, including both properties which are either to be developed, currently under development or construction, newly constructed, or have operating histories. The Partnership owns an interest in several properties through a joint venture between the Partnership and Wells Real Estate Fund II ("Wells Fund II"), referred to as Fund II and II-OW.
Through its investment in Fund II and II-OW joint venture, the Partnership owns interests in the following properties: (i) a two-story office building located in Charlotte, North Carolina (the "Charlotte Property"), (ii) a retail shopping and commercial office complex located in Tucker, Georgia, Heritage Place at Tucker ("Tucker"), (iii) a shopping center located in Cherokee County, Georgia, the Cherokee Commons Shopping Center ("Cherokee Commons"), (iv) a four-story office building located in metropolitan Houston, Texas, the Atrium at Nassau Bay ("The Atrium"), (v) a restaurant located in Fulton County, Georgia, and (vi) a retail shopping center in Fulton County, Georgia. Fund II and II-OW joint venture owns 100% of the Charlotte Property. All remaining properties are owned by Fund II and II-OW joint venture through investments in joint ventures with other Wells funds.
USE OF ESTIMATES AND FACTORS AFFECTING THE PARTNERSHIP
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.
The carrying values of real estate assets are based on management's current intent to hold the real estate assets as long-term investments. The success of the Partnership's future operations and the ability to realize the investment in its assets will be dependent upon the Partnership's ability to maintain rental rates, occupancy, and an appropriate level of operating expenses in future years. Management believes that the steps it is taking will enable the Partnership to realize its investment in its assets.
The lease with one significant tenant at The Atrium contributed approximately 14% and 43% of rental income to the Partnership for the years ended December 31, 1996 and 1995, respectively. This tenant's lease expired in June 1996. As of December 31, 1996, the Partnership has been unable to re-lease The Atrium. If the Partnership is able to obtain leases with new tenants for The Atrium, such leases are likely to require substantial tenant finish and refurbishment expenditures by the Partnership and may be re-leased at rates substantially lower than those previously obtained, which could have the effect of substantially reducing future cash distributions to the partners.
INCOME TAXES
The Partnership is not subject to federal or state income taxes, and therefore, none have been provided for in the accompanying financial statements. The partners are required to include their respective shares of profits and losses in their individual income tax returns.
DISTRIBUTION OF NET CASH FROM OPERATIONS
Cash available for distribution is distributed on a cumulative noncompounded basis to limited partners on a quarterly basis. In accordance with the partnership agreement, distributions first are paid to limited partners holding Class A units until they have received an 8% return on their adjusted capital contributions, as defined. Cash available for distribution is then distributed to limited partners holding Class B units until they have received an 8% return on their adjusted capital contributions, as defined. Excess cash available for distribution will be distributed to the general partners until each has received 10% of total distributions to limited partners for the year. Thereafter, cash available for distribution is distributed 90% to the limited partners and 10% to the general partners.
DISTRIBUTION OF SALES PROCEEDS
Upon sales of properties, the net sales proceeds are distributed in the following order:
. To limited partners until each limited partner has received 100% of his adjusted capital contribution, as defined
. To limited partners holding Class B units until they receive an amount equal to the net cash available for distribution received by the limited partners holding Class A units
. To all limited partners until they receive a cumulative 12% per annum return on their adjusted capital contribution, as defined
. To all limited partners until they receive an amount equal to their respective cumulative distributions
. To all general partners until they have received 100% of their capital contribution
. Thereafter, 85% to the limited partners and 15% to the general partners
ALLOCATION OF NET INCOME, NET LOSS, AND GAIN ON SALE
Net income is defined as net income recognized by the Partnership, excluding deductions for depreciation, amortization, and cost recovery. Net income, as defined, of the Partnership will be allocated each year in the same proportions that net cash from operations is distributed to the partners. To the extent that the Partnership's net income in any year exceeds net cash from operations, it will be allocated 99% to the limited partners and 1% to the general partners.
Net loss, depreciation, amortization, and cost recovery deductions for each fiscal year will be allocated as follows: (a) 99% to the limited partners holding Class B units and 1% to the general partners until their capital accounts are reduced to zero, (b) then, to any partner having a positive balance in his capital account in an amount not to exceed such positive balance, and (c) thereafter, to the general partners.
Gain on the sale or exchange of the Partnership's properties will be allocated generally in the same manner that the net proceeds from such sale are distributed to partners after the following allocations are made, if applicable: (a) allocations made pursuant to a qualified income offset provision in the partnership agreement, (b) allocations to partners having negative capital accounts until all negative capital accounts have been restored to zero, and (c) allocations to Class B limited partners in amounts equal to deductions for depreciation, amortization, and cost recovery previously allocated to them with respect to the specific partnership property sold but not in excess of the amount of gain on sale recognized by the Partnership with respect to the sale of such property.
INVESTMENT IN JOINT VENTURE
BASIS OF PRESENTATION. The Partnership does not have control over the operations of the joint venture; however, it does exercise significant influence. Accordingly, the investment in joint venture is recorded using the equity method of accounting. The joint ventures in which Fund II and II-OW hold an ownership interest follow the same significant accounting policies as the Partnership.
REAL ESTATE ASSETS. Real estate assets held by Fund II and II-OW are stated at cost less accumulated depreciation. Major improvements and betterments are capitalized when they extend the useful life of the related asset. All repairs and maintenance are expensed as incurred.
In March 1995, the Financial Accounting Standards Board issued 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 is effective for fiscal years beginning after December 15, 1995. SFAS No. 121 establishes standards for determining
when impairment losses on long-lived assets have occurred and how impairment losses should be measured. Fund II and II-OW, and the entities in which it holds joint venture interests, adopted SFAS No. 121 effective January 1, 1995. The impact of adopting SFAS No. 121 was not material to the financial statements of Fund II and II-OW or its affiliated joint ventures.
Management continually monitors events and changes in circumstances which could indicate that carrying amounts of real estate assets may not be recoverable. When events or changes in circumstances are present which indicate that the carrying amount of real estate assets may not be recoverable, management assesses the recoverability of real estate assets under SFAS No. 121 by determining whether the carrying value of such real estate assets will be recovered through the future cash flows expected from the use of the asset and its eventual disposition. Management has determined that there has been no impairment in the carrying value of real estate assets held by Fund II and II-OW or its affiliated joint ventures as of December 31, 1996.
Depreciation is calculated using the straight-line method over the useful lives of the real estate assets. Effective October 1, 1995, the joint venture revised its estimate of the useful lives of buildings and improvements from 40 years to 25 years. This change was made to better reflect the estimated periods during which such assets will remain in service. The change had the effect on the Partnership through its ownership interest in the joint venture, of increasing depreciation expense approximately $6,328 in the fourth quarter of 1995 and $27,841 in the year ended December 31, 1996.
REVENUE RECOGNITION. All leases on real estate assets held by the joint venture are classified as operating leases, and the related rental income is recognized on a straight-line basis over the terms of the respective leases.
PARTNERS' DISTRIBUTIONS AND ALLOCATIONS OF PROFIT AND LOSS. Cash available for distribution and allocations of profit and loss to the Partnership by Fund II and II-OW are made in accordance with the terms of the individual joint venture agreement. Generally, these items are allocated in proportion to the partners' respective ownership interests. Cash is paid from the joint venture to the Partnership on a quarterly basis.
DEFERRED LEASE ACQUISITION COSTS. Costs incurred to procure operating leases are capitalized and amortized on a straight-line basis over the terms of the related leases.
CASH AND CASH EQUIVALENTS
For the purposes of the statements of cash flows, the Partnership considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents include cash and short-term investments. Short-term investments are stated at cost which approximates fair value and consist of investments in money market accounts.
PER UNIT DATA
Net income (loss) per unit with respect to the Partnership for the years ended December 31, 1996, 1995, and 1994 is computed based on the number of units outstanding during the period.
RECLASSIFICATIONS
Certain 1995 and 1994 amounts have been reclassified to conform with the 1996 financial statement presentation.
2. RELATED-PARTY TRANSACTIONS
Due from affiliate at December 31, 1996 and 1995 represents the Partnership's share of cash to be distributed from Fund II and II-OW for the fourth quarters of 1996 and 1995.
The Partnership entered into a property management agreement with Wells Management Company, Inc. ("Wells Management"), an affiliate of the general partners. In consideration for supervising the management of the Partnership's properties, the Partnership will generally pay Wells Management management and leasing fees equal to (a) 3% of the gross revenues for management and 3% of the gross revenues for leasing (aggregate maximum of 6%) plus a separate fee for the one-time lease-up of newly constructed properties in an amount not to exceed the fee customarily charged in arm's-length transactions by others rendering similar services in the same geographic area for similar properties or (b) in the case of industrial and commercial properties, which are leased on a long-term net basis (ten or more years), 1% of the gross revenues except for initial leasing fees equal to 3% of the gross revenues over the first five years of the lease term.
The Partnership incurred management and leasing fees and lease acquisition costs, at the joint venture level, of $9,255, $11,036, and $10,968 payable for the years ended December 31, 1996, 1995, and 1994, respectively, which were paid to Wells Management.
The Company performs certain administrative services for the Partnership such as accounting and other Partnership administration and incurs the related expenses. Such expenses are allocated among the various Wells Real Estate funds based upon time spent on each fund by individual administrative personnel. In the opinion of management, such allocation is a reasonable estimation of such expenses.
The general partners are also general partners of other Wells Real Estate funds. As such, there may exist conflicts of interest where the general partners, while serving in the capacity as general partners of other Wells Real Estate funds, may be in competition with the Partnership for tenants in similar geographic markets.
3. INVESTMENT IN JOINT VENTURE
On March 1, 1988, the Partnership entered into a joint venture agreement with Wells Fund II. The joint venture, Fund II and II-OW, was formed for the purpose of investing in
commercial real properties. Fund II and II-OW owns the Charlotte Property directly and has investments in several other joint ventures. The Partnership's ownership percentage interest in Fund II and II-OW was approximately 5% at December 31, 1996 and 1995.
The following is a roll forward of the Partnership's investment in joint venture for the years ended December 31, 1996 and 1995:
Following are the financial statements for Fund II and II-OW:
FUND II AND II-OW (A GEORGIA JOINT VENTURE) BALANCE SHEETS DECEMBER 31, 1996 AND 1995
Assets
FUND II AND II-OW (A GEORGIA JOINT VENTURE) STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
FUND II AND II-OW (A GEORGIA JOINT VENTURE) STATEMENTS OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
FUND II AND II-OW (A GEORGIA JOINT VENTURE) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
Fund II and II-OW's investment and percentage ownership in other joint ventures at December 31, 1996 and 1995 are summarized as follows:
The following are descriptions of the joint ventures in which Fund II and II-OW has investments.
FUND I AND II TUCKER
Tucker and Cherokee Commons were previously held in joint ventures between Wells Real Estate Fund I ("Fund I") and Fund II and II-OW. The joint ventures were formed for the purpose of owning, developing, and operating Cherokee Commons and Tucker. In 1991, the Tucker and Cherokee joint ventures were merged into a new joint venture, the Tucker-Cherokee Joint Venture. Under the terms of the joint venture agreement, the ownership interests of Fund I and Fund II and II-OW in each individual property remained unchanged.
On August 1, 1995, the Fund I and II Tucker-Cherokee joint venture assigned its ownership in Cherokee Commons to the Fund I, II, II-OW, VI, and VII Associates--Cherokee joint venture. Upon the assignment of Cherokee Commons, the joint venture was renamed Fund I and II Tucker. Tucker is a retail shopping center containing approximately 29,858 square feet and a commercial office building complex containing approximately 67,465 square feet in Tucker, DeKalb County, Georgia.
In 1996, one of the tenants in Tucker experienced a fire. Fund I and II Tucker received an insurance settlement of $143,944 for damages to the building. The loss on real estate assets of $61,985 is included in the accompanying statements of (loss) income.
FOLLOWING ARE THE FINANCIAL STATEMENTS FOR FUND I AND II TUCKER:
FUND I AND II TUCKER (A GEORGIA JOINT VENTURE) BALANCE SHEETS DECEMBER 31, 1996 AND 1995
FUND I AND II TUCKER (A GEORGIA JOINT VENTURE) STATEMENTS OF (LOSS) INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
FUND I AND II TUCKER (A GEORGIA JOINT VENTURE) STATEMENTS OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
FUNDS I AND II TUCKER (A GEORGIA JOINT VENTURE) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
FUND I, II, II-OW, VI, AND VII ASSOCIATES--CHEROKEE
In August 1995, Cherokee Commons was transferred to a new joint venture between Fund I, Fund II and II-OW, Wells Real Estate Fund VI, L.P. ("Fund VI"), and Wells Real Estate Fund VII, L.P. ("Fund VII"). The joint venture, Fund I, II, II-OW, VI, and VII Associates--Cherokee, was formed for the purpose of owning and operating Cherokee Commons, a retail shopping center containing approximately 103,755 square feet located in Cherokee County, Georgia. Percentage ownership interests in Fund I, II, II-OW, VI, and VII Associates--Cherokee were determined at the time of formation based on contributions. Under terms of the joint venture agreement, Fund VI and Fund VII each contributed approximately $1 million to the new joint venture in return for a 10.7% ownership interest. Fund I's ownership interest in the Cherokee joint venture changed from 30.6% to 24% and Fund II and II-OW joint venture's ownership interest changed from 69.4% to 54.6%. The $2 million in cash contributed to Cherokee was used to fund an expansion of the property for an existing tenant.
Following are the financial statements for Fund I, II, II-OW, VI, and VII Associates--Cherokee:
FUND I, II, II-OW, VI, AND VII ASSOCIATES--CHEROKEE (A GEORGIA JOINT VENTURE) BALANCE SHEETS DECEMBER 31, 1996 AND 1995
FUND I, II, II-OW, VI AND VII ASSOCIATES--CHEROKEE (A GEORGIA JOINT VENTURE) STATEMENTS OF INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
FUND I, II, II-OW, VI AND VII ASSOCIATES--CHEROKEE (A GEORGIA JOINT VENTURE) STATEMENTS OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
FUND I, II, II-OW, VI, AND VII ASSOCIATES--CHEROKEE (A GEORGIA JOINT VENTURE) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
FUND II AND III ASSOCIATES
On April 3, 1989, Fund II and II-OW entered into a joint venture agreement with Wells Real Estate Fund III, L.P. The new joint venture, Fund II and III Associates, was formed for the purpose of investing in commercial and industrial real properties. In April 1989, Fund II and III Associates acquired The Atrium. In 1991, Fund II and II-OW contributed its interest in a parcel of land known as the 880 Property located in Roswell, Georgia, to Fund II and III Associates. The property is a 5.8-acre tract of land. A restaurant was developed on 1.5 acres of the 880 Property is currently operating as the Brookwood Grill restaurant ("Fund II and III Associates-- Brookwood Grill"). The remaining 4.3 acres of the 880 Property was transferred at cost to the Fund II, III, VI, and VII Associates joint venture
during 1995. Fund II and III Associates' investment in this transferred parcel was $1,690,244 and $1,729,116 at December 31, 1996 and 1995, respectively, which represented a 25% and 33% interest, respectively.
Following are the financial statements for Fund II and III Associates--The Atrium:
FUND II AND III ASSOCIATES--THE ATRIUM (A GEORGIA JOINT VENTURE) BALANCE SHEETS DECEMBER 31, 1996 AND 1995
FUND II AND III ASSOCIATES--THE ATRIUM (A GEORGIA JOINT VENTURE) STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
FUND II AND III ASSOCIATES--THE ATRIUM (A GEORGIA JOINT VENTURE) STATEMENTS OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
FUND II AND III ASSOCIATES--THE ATRIUM (A GEORGIA JOINT VENTURE) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
Following are the financial statements for Fund II and III Associates-- Brookwood Grill:
FUND II AND III ASSOCIATES--BROOKWOOD GRILL (A GEORGIA JOINT VENTURE) BALANCE SHEETS DECEMBER 31, 1996 AND 1995
FUND II AND III ASSOCIATES--BROOKWOOD GRILL (A GEORGIA JOINT VENTURE) STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
FUND II AND III ASSOCIATES--BROOKWOOD GRILL (A GEORGIA JOINT VENTURE) STATEMENTS OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
FUND II AND III ASSOCIATES--BROOKWOOD GRILL (A GEORGIA JOINT VENTURE) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
FUND II, III, VI, AND VII ASSOCIATES
On January 1, 1995, the Fund II and III Associates joint venture entered into a joint venture agreement with Fund VI and Fund VII. The joint venture, Fund II, III, VI, and VII Associates was formed for the purpose of acquiring, developing, operating, and selling real properties. During 1995, Fund II and III Associates contributed a 4.3 acre tract of land from its 880 Property to the Fund II, III, VI, and VII Associates joint venture. Development is substantially complete on two retail and office buildings containing a total of approximately 49,500 square feet. During 1996, leases commenced on approximately half of the available space.
The following are the financial statements for Fund II, III, VI, and VII Associates:
FUND II, III, VI, AND VII ASSOCIATES (A GEORGIA JOINT VENTURE) BALANCE SHEETS DECEMBER 31, 1996 AND 1995
FUND II, III, VI, AND VII ASSOCIATES (A GEORGIA JOINT VENTURE) STATEMENT OF LOSS FOR THE YEAR ENDED DECEMBER 31, 1996
FUND II, III, VI, AND VII ASSOCIATES (A GEORGIA JOINT VENTURE) STATEMENTS OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
FUND II, III, VI, AND VII ASSOCIATES (A GEORGIA JOINT VENTURE) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
4. INCOME TAX BASIS NET INCOME AND PARTNERS' CAPITAL
The Partnership's income tax basis net income for the years ended December 31, 1996, 1995, and 1994 were calculated as follows:
The Partnership's income tax partners' capital at December 31, 1996, 1995, and 1994 was computed as follows:
5. RENTAL INCOME
The future minimum rental income due from the Partnership's respective ownership interest in the joint venture under noncancelable operating leases at December 31, 1996 is as follows:
Three significant tenants contributed approximately 67%, 14%, and 12% of rental income, which is included in equity of income in joint ventures for the year ended December 31, 1996. Three significant tenants will contribute approximately 56%, 14%, and 10% of future minimum rental income.
The future minimum rental income due Fund II and II-OW for the Charlotte Property under noncancelable operating leases at December 31, 1996 is as follows:
One significant tenant at the Charlotte Property contributed 100% of rental income for the year ended December 31, 1996 and will contribute 100% of future minimum rental income.
The future minimum rental income due Fund I and II Tucker under noncancelable operating leases at December 31, 1996 is as follows:
Two significant tenants will contribute approximately 16% and 14% of future minimum rental income.
The future minimum rental income due Fund I, II, II-OW, VI, and VII Associates--Cherokee under noncancelable operating leases at December 31, 1996 is as follows:
One significant tenant contributed approximately 66% of rental income for the year ended December 31, 1996. In addition, one significant tenant will contribute approximately 93% of future minimum rental income.
One significant tenant at The Atrium contributed 100% of rental income for the year ended December 31, 1996. At December 31, 1996, there are no leases signed at The Atrium. Accordingly, no future minimum rental income is due Fund II and III Associates--The Atrium.
The future minimum rental income due Fund II and III Associates--Brookwood Grill under noncancelable operating leases at December 31, 1996 is as follows:
One significant tenant contributed 100% of rental income for the year ended December 31, 1996 and will contribute 100% of future minimum rental income.
The future minimum rental income due Fund II, III, VI, and VII Associates under noncancelable operating leases at December 31, 1996 is as follows:
Four significant tenants contributed approximately 38%, 16%, 14%, and 11% of rental income for the year ended December 31, 1996. In addition, two significant tenants will contribute approximately 46% and 15% of future minimum rental income.
6. COMMITMENTS AND CONTINGENCIES
Management, after consultation with legal counsel, is not aware of any significant litigation or claims against the Company. In the normal course of business, the Company may become subject to such litigation or claims.
WELLS REAL ESTATE FUND II-OW
(A GEORGIA PUBLIC LIMITED PARTNERSHIP)
SCHEDULE III--REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(a) The Charlotte Property is a two-story office building located in Charlotte, North Carolina. It is owned by Fund II and II-OW. The Partnership owned a 5% interest in Fund II and II-OW at December 31, 1996.
(b) The 880 Property is a 4.3-acre tract of real property under development located in Fulton County, Georgia. It is owned by Fund II, III, VI, and VII Associates. The Partnership owns a 5% interest in the Fund II and II-OW joint venture, which owned a 62% interest in Fund II, III, VI and VII Associates at December 31, 1996.
(c) The Atrium at Nassau Bay is a four-story office building located in Houston, Texas. It is owned by Fund II and III Associates--The Atrium. The Partnership owns a 5% interest in the Fund II and II- OW joint venture, which owned a 66% interest in Fund II and III Associates at December 31, 1996.
(d) Cherokee Commons is a retail shopping center located in Cherokee County, Georgia. It is owned by Fund I, II, II-OW, VI and VII Associates--Cherokee. The Partnership owns a 5% interest in the Fund II and II-OW joint venture, which owned a 54% interest in Fund I, II, II-OW, VI, and VII Associates--Cherokee at December 31, 1996.
(e) Heritage Place at Tucker is a center offering retail, shopping, and commercial office space located in Tucker, Georgia. It is owned by Fund I and II--Tucker. The Partnership owns a 5% interest in the Fund II and II-OW joint venture, which owned a 45% interest in Fund I and II--Tucker at December 31, 1996.
(f) The 880 Property--Brookwood Grill is a 7,440-square-foot restaurant located in Fulton County, Georgia. It is owned by Fund II and III Associates. The Partnership owns a 5% interest in the Fund II and II-OW joint venture, which owned a 62% interest in the 880 Property--Brookwood Grill at December 31, 1996.
(g) Depreciation lives used for buildings are 40 years through September 1995, changed to 25 years thereafter. Depreciation lives used for land improvements are 20 years.
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WELLS REAL ESTATE FUND II-OW
(A GEORGIA PUBLIC LIMITED PARTNERSHIP)
SCHEDULE III--REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
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