Item 1. Business
T. Rowe Price Realty Income Fund III, America's Sales-Commission-Free Real Estate Limited Partnership (the "Partnership"), was formed on October 20, 1986, under the Delaware Revised Uniform Limited Partnership Act for the purpose of acquiring, operating and disposing of existing income-producing commercial and industrial real estate properties. On January 5, 1987, the Partnership commenced an offering of $100,000,000 of Limited Partnership Units ($250 per Unit) pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933 (Registration No. 33-9899) (the "Registration Statement"). The Prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933 (the "Prospectus") sets forth a complete description of the business of the Partnership in the sections entitled "Investment Objectives" and "Fund Policies" on pages 18 - 25 of the Prospectus, which pages are incorporated by reference herein. The Gross Proceeds from the offering totaled $63,385,000, and an additional $25,000 was contributed by the initial limited partner, T. Rowe Price Real Estate Group, Inc. The offering terminated on June 30, 1987, and no additional Units will be sold. Forty-two Units have been redeemed by the Partnership on a "hardship" basis; there were 253,599 Units outstanding and 10,364 Limited Partners as of March 17, 1997.
In December of 1991, LaSalle Advisors Limited Partnership ("LaSalle") entered into a contract with the general partner of the Partnership, T. Rowe Price Realty Income Fund III Management, Inc. ("the General Partner") and the Partnership to perform day-to-day management and real estate advisory services for the Partnership under the supervision of the General Partner and its Affiliates. LaSalle's duties under the contract include disposition and asset management services, including recordkeeping, contracting with tenants and service providers, and preparation of financial statements and other reports for management use. The General Partner continues to be responsible for overall supervision and administration of the Partnership's operations, including setting policies and making all disposition decisions, and the General Partner and its Affiliates continue to provide administrative, advisory, and oversight services to the Partnership. Compensation to LaSalle from the Partnership consists of accountable expense reimbursements, subject to a fixed maximum amount per year. All other compensation to LaSalle is paid out of compensation and distributions paid to the General Partner by the Partnership.
The Partnership is engaged solely in the business of real estate investment; therefore, presentation of information about industry segments is not applicable. In 1996, three of the Partnership's properties produced 15% or more of the Partnership's revenues
from operations: River Run Shopping Center (20%), Winnetka Industrial Park (18%), and Westbrook Commons (17%). In 1995, two of the Partnership's properties produced 15% or more of the Partnership's revenues from operations: Westbrook Commons (21%), and Winnetka Industrial Park (19%). In 1994, three of the Partnership's properties produced 15% of more of the Partnership's revenues from operations: Westbrook Commons (20%), Winnetka Industrial Park (19%), and Brinderson Plaza (16%). In none of these periods did any single tenant produce more than 10% of the Partnership's revenue.
The Partnership owned a 56% interest in a general partnership, Fairchild 234, the other general partners of which were certain other affiliated partnerships. Fairchild 234 owned a note secured by a deed of trust on Fairchild Corporate Center, located in Irvine, California. This property was acquired outright in February, 1994 by a corporation, the stockholders of which are the partners of Fairchild 234. In August, 1996, Fairchild 234 sold its interest in this property for a total sales price of $10 million. The purchaser, Spieker Properties, L.P., is not an affiliate of the Partnership, its general partner, or the Partnership's investment adviser. Net book value of the Partnership's interest at the date of sale was $3.8 million, which represented approximately 8.6% of the Partnership's assets. Net proceeds to the Partnership were $5.4 million.
During 1996, the Partnership reviewed its portfolio and operating plans with the intent to dispose of all its operating properties by the end of 1998, and to thereafter distribute all of the Partnership's net assets to the partners. In this regard the Partnership has received solicited and unsolicited offers to purchase one or more of its properties. The Partnership is pursuing some of these offers. Although there is no assurance that the Partnership will achieve the disposition of all its operating properties during the proposed time-frame, the disposition of operating properties is expected to cause a significant decrease in the Partnership's operating activities in future periods.
The Partnership owns directly or through joint venture partnerships the properties or interests set forth in Schedule III to this Report, "Real Estate and Accumulated Depreciation," which is set forth in Exhibit 99(b)to this Report, and which is incorporated by reference herein and contains information as to acquisition date and total costs of each of the properties. Additional information regarding these properties and/or interests, including percentage leased as of December 31, 1996 is set forth in the table, "Real Estate Holdings," appearing on page 4 of the Partnership's 1996 Annual Report to Limited Partners which is hereby incorporated by reference herein. A brief
narrative description of each property or investment therein which the Partnership owns is as follows.
Scripps Terrace
The Partnership owns a 100% interest in this property which consists of two one-story research and development/office/service buildings containing 57,000 square feet of space. The property is located in the center of the Scripps Ranch planned community in the I-15 Corridor in suburban San Diego, California.
Activity at the property during the year consisted of three new leases totaling 18,206 square feet, two lease expirations covering 14,176 square feet, and two renewals totaling 14,489 square feet. Thus, the property was 90% leased at year-end 1996 versus 82% twelve months earlier. There are no leases expiring in 1997.
Net absorption for the year in the Scripps Ranch/Scripps Mesa market totaled approximately 19,621 square feet. The year-end vacancy rate for the submarket decreased by one percentage point from one year ago to approximately 7%. However, there continues to be limited demand for space in multi-tenant properties such as Scripps Terrace. Total inventory (leased and available) at year-end 1996 remained at approximately 1.7 million square feet. Average net effective rents remained at roughly the same level as the previous year - around an average of $6.00 per square foot per year net of taxes, insurance and utilities ("NNN") for competitive properties. There appears to be some activity in the planning stages for new construction of industrial/R&D buildings in the Scripps Ranch area.
During 1996, the Partnership recorded a provision for value impairment of $1,086,000 in connection with Scripps Terrace. The General Partner determined that this adjustment was a prudent course of action based upon the uncertainty of the Partnership's ability to recover the net carrying value of the project through future operations over a shorter anticipated holding period and the ultimate sale of the property. This determination was based upon the current market conditions and future performance expectations for this investment.
Winnetka
The Partnership owns a 100% interest in Winnetka Industrial Park which is located in Crystal, Minnesota, a suburb of Minneapolis. The property consists of two multi-tenant industrial buildings containing 188,000 square feet of space.
In 1996 a 35,000 square foot tenant, representing 19% of the
property, renewed its lease. As a result, the property remained 100% leased at year end. There are no leases expiring in 1997.
The recent National Association of Industrial and Office Parks ("NAIOP") survey of the Twin Cities' West/Northwest Suburban office/warehouse submarket cited an approximate vacancy rate of 3% versus 5% in 1995. The west and northwest suburban submarket contains approximately 7.7 million square feet, with approximately 388,000 square feet of space available. Net absorption of approximately 106,000 square feet was recorded during the four quarters ended June 30, 1996. Average asking rates for comparable space increased to approximately $7.22 per square foot per year net of taxes, insurance, and utilities ("NNN") for the office portion of industrial buildings while asking rates rose to approximately $3.69 NNN for the warehouse portion. Virtually no free rent is being offered as a concession to negotiate a transaction, except when space is taken "as-is." With the reduction in vacancy rates, speculative construction is underway. At present, 20 new buildings are under construction in the nearby suburb of Plymouth. These buildings are expected to compete directly with Winnetka.
During 1996, Winnetka, together with the Riverview and Wood Dale properties, was marketed for sale along with two similar properties owned by T. Rowe Price Realty Income Fund II, America's Sales-Commission-Free Real Estate Limited Partnership ("RIF II "). The General Partner believes that marketing the properties together will maximize the sale price of each of the properties. The properties were placed for sale as investor interest is strong in the markets where the assets are located. In addition, the projected supply response caused by increased rental rates is such that future cash flows and values could be compromised through slowing or decreasing rental rate growth and higher vacancy. A letter of intent to sell all five properties to a single buyer was signed in January, 1997. Upon completion of its due diligence the buyer exercised its right to cancel the purchase. The Partnership is evaluating other offers on these properties.
South Point Plaza
The Partnership owns a 50% interest in South Point Partners, a joint venture with its affiliate, RIF II. South Point Partners owns a 100% interest in South Point Plaza Shopping Center ("South Point"), in Tempe, Arizona. The property consists of two multi- tenant buildings in a neighborhood shopping center, which is also occupied by a supermarket. The total square footage of the multi-tenant buildings is 49,000 square feet. The Partnership
also owns pads for two 3,000 square foot single-tenant buildings, one of which is built-out and currently leased as a restaurant and one of which was paved over to expand parking area to accommodate a building expansion.
One new lease of 18,615 square feet and five renewal leases totaling 6,412 square feet were signed during the year. This positive activity was partially offset by the loss of one 1,499 square foot tenant who vacated upon its lease expiration. Thus, at year-end, the property improved its leased status to 90% versus 68% in 1995. Subsequent to year-end, the tenant on the new lease indicated that due to poor customer traffic it may be vacating the space and attempting to sublease it. The tenant remains obligated for its rent payments over the balance of its initial lease term, which expires in August, 2001. Scheduled expirations in 1997 represent 18% of the property's leasable area.
The metropolitan area Phoenix retail market remains somewhat strong. In the Tempe submarket, approximately 298,895 net square feet were absorbed during the first three quarters of 1996. Although there were additions to the inventory of retail space in the Tempe submarket, vacancy remained stable at 7%. This level is better than the Metropolitan Phoenix vacancy rate of 8%. Average market rental rates per square foot for space in Tempe increased approximately 15% over the previous year from $9.67 to $11.15 per square foot net of taxes, insurance, and utilities. Rents at South Point are somewhat below the average, ranging from $7.50 to $11, because the property is older than competing centers and is in a less affluent section of Tempe.
During 1996, the General Partner approved a plan for the disposition of South Point Plaza. Based upon the estimated realizable value less selling costs for the property, the Partnership recorded a valuation allowance of $29,000. The Partnership is currently marketing the property for sale, and entered into a contract to sell the property on March 20, 1997. There is no assurance the sale will be consumated.
Tierrasanta
The Partnership owns a 30% interest in Tierrasanta 234, a joint venture with its affiliates, RIF II and T. Rowe Price Realty Income Fund IV, America's Sales-Commission-Free Real Estate Limited Partnership ("RIF IV"). Tierrasanta 234 owns a 100% interest in Tierrasanta Research Park in San Diego, California. The project contains four buildings utilized for research and development purposes, for a total of 104,000 square feet of space. It is located in the Kearny Mesa market area, north of San Diego, which is part of the larger "Interstate 15" commercial
corridor.
The property lost one 39,971 square-foot tenant when the tenant's lease expired, and one tenant was renewed for 8,305 square-foot space to bring the leased status to 62% at year-end, versus 100% at year-end 1995. During 1997, only one lease covering 8,900 square feet expires. There has been interest in the vacant space, and the market is tightening but several competitive properties have comparable space available.
Tierrasanta Research Park is part of the Kearny Mesa research and development ("R&D")/office market. The Park competes against both R&D and office buildings. Overall activity in the submarket has been good, with approximately 1,475,000 square feet of gross absorption for the year in R&D space, and slightly higher rents than year-end 1995, as discussed below. Vacancy rates at year-end 1996 were approximately 8.0% and 15.4% for R&D space and office space, respectively, versus approximately 13% and 19%, respectively, for the previous year.
Rental rates in this submarket at year-end for R&D space range between $6.60 and $9.00 per square foot net of expenses, with tenant improvements ranging between $5.00 and $15.00 per square foot. Office rents are ranging between $10.80 and $16.20 per square foot with tenant improvements ranging anywhere from $7.00 to $20.00 per square foot. There continue to be several 15,000 to 25,000 square foot buildings available for lease in the Kearney Mesa submarket which compete directly with the Tierrasanta vacancy.
During 1996, the Partnership recorded a provision for value impairment of $832,000 in connection with Tierrasanta. The General Partner determined that this adjustment was a prudent course of action based upon the uncertainty of the Partnership's ability to recover the net carrying value of the project through future operations over a shorter anticipated holding period and the ultimate sale of the property.
Wood Dale
The Partnership owns a 100% interest in two multi-tenant industrial warehouse/manufacturing/distribution buildings in Wood Dale, Illinois, a suburb of Chicago located immediately west of O'Hare Airport. The buildings are located within a few blocks of each other and contain a total of 90,000 square feet.
Although tenants totaling 32,344 square feet signed new and renewal leases, three tenants whose leases covered a total 39,056 square feet did not renew upon lease expiration. Thus, this suburban Chicago industrial project experienced a decline in
year-end leased status from 89% to 70%. Despite this frictional vacancy, occupancy at Wood Dale is expected to rebound during 1997.
The western O'Hare suburban Chicago industrial submarket in which the project is located consists of approximately 160 million square feet of space in all types of industrial projects. This submarket is a part of the larger west and northwest Chicago suburban industrial market which experienced net positive absorption of approximately 738,000 square feet during the year. Speculative construction has continued, but primarily in outlying areas due to the limited supply of available land. The range of average net rental rates for comparable space has increased from approximately $3.50 to $4.75 net per square foot per year last year to $3.75 to $5.00 per square foot by year-end 1996.
The property is also included in the portfolio of assets being held for sale, which is discussed above in connection with the Winnetka property.
Clark Avenue
The Partnership owns a 100% interest in this 40,000 square foot office/industrial building in King of Prussia, Pennsylvania, a northwestern suburb of Philadelphia. During the year the partnership recorded a provision for value impairment in connection with the Clark Avenue of $802,000. The General Partner determined that this adjustment was a prudent course of action based upon the uncertainty of the partnership's ability to recover the net carrying value of Clark Avenue through future operations over a shorter anticipated holding period and the ultimate sale of the property. This determination was based upon current market conditions and future performance expectations of both the property and the King of Prussia/Valley Forge market.
There was no leasing activity at the property during 1996. However, in February 1997 the one vacancy representing 28% of the project was leased to a single tenant. Leases representing 8% of the property expire in 1997.
With an inventory of approximately 10.8 million square feet, the King of Prussia office submarket has a vacancy rate of approximately 10.5% at the end of the third quarter of 1996; this represents a decrease from the 12.25% level at year-end 1995. Net absorption recorded through the third quarter of 1996 was approximately 194,000 square feet. The full impact on office requirements involving the largest tenant in the market, Lockheed Martin, is still unknown, but the company has moved some workers to other submarkets and to Maryland. At present, rental rates for comparable Class B space have remained at a range of $8.00 to
$12.00 per square foot per year net of insurance, taxes, and operating expenses. Fewer concessions are being offered. There was no new construction activity in the King of Prussia/Valley Forge market in 1996 and none is planned for 1997. Nevertheless, conditions in the overall Philadelphia industrial market are not strong, and the King of Prussia market is experiencing tenants downsizing and departing for other submarkets.
Riverview
The Partnership owns a 100% interest in the Riverview property which is located in the Riverview Industrial Park directly across the Mississippi River from the St. Paul, Minnesota Central Business District. The project consists of three multi-tenant industrial warehouse/distribution/light manufacturing buildings containing a total of 114,000 square feet of space.
Three tenants representing 25,000 square feet or 22% of the space renewed and/or expanded their leases during 1996. Additionally, one new 5,000 square foot tenant was signed. This positive activity more than offset the loss of one tenant totaling 10,000 square feet which vacated upon its lease expiration. Thus, the property increased its leased status by four percentage points over 1995 to end the year at 100% leased. Leases representing 22% of the space in the property expire in 1997.
The most recent NAIOP survey of the St. Paul, Midway, and Suburban submarket showed a vacancy rate for office/warehouse space of approximately 4% on a total inventory of approximately 11.3 million square feet. Net absorption totaled 74,300 square feet for the four quarters ending June 30, 1996. Average asking rates for the office portion were approximately $7.50 NNN per square foot per year while average asking rates for the warehouse portion were $3.25 NNN.
Riverview is also included in the portfolio of assets being held for sale, which is discussed above in connection with the Winnetka industrial property.
Westbrook Commons
The Partnership owns a 50% interest in Penasquitos 34, a joint venture with RIF IV. Penasquitos 34 owns a 100% interest in Westbrook Commons Shopping Center ("Westbrook Commons"), a neighborhood shopping center in the Village of Westchester, Illinois, a Chicago suburb. The property contains 122,000 rentable square feet of space.
Three new, five renewal, and one expansion lease totaling 19,952 square feet were signed during the year. Despite three tenants
that did not renew their leases, including one tenant that was lost due to credit reasons, the property's year-end occupancy increased slightly from 96% to 98% by year-end 1996. Leases representing only 7% of the property's leaseable area expire in 1997. Activity from prospective tenants has been good.
The Westchester market in which the project is located continues to remain a stable and relatively healthy environment for retailers. Grocery anchored centers such as Westbrook Commons have proven to be the most successful for service/convenience based retailers. While the submarket and the property have experienced some interim fluctuations in occupancy due to poor holiday sales, weakness of some smaller tenants, and lease expirations, the overall situation is positive. Industry figures place the vacancy rate for the competitive centers within a three-mile radius of Westbrook Commons at approximately 2%. The average rental rates in the submarket in 1996 were level to slightly up for Class A space.
River Run
The Partnership owns a 100% interest in River Run Shopping Center in Miramar, Florida containing 93,000 square feet of space. In July 1995, the Partnership began consensual foreclosure on the participating mortgage loan secured by the River Run Shopping Center and ceased the accrual of interest income. On October 10, 1995, the Partnership purchased the property at the foreclosure sale and, in connection therewith, reclassified the participating mortgage loan as an investment in real estate of $7,700,000.
In 1996, this South Florida retail center signed three new leases totaling 4,275 square feet and one 975 square foot renewal lease. Two tenants totaling 2,050 square feet did not renew their leases. Occupancy increased from 90% at year-end 1995 to 93% at year-end 1996. Leases covering 4% of the project are scheduled to expire in 1996.
The southwest Broward County non-regional mall submarket contains approximately 4.5 million square feet of retail space. The directly competitive market consists of four centers totaling 650,000 square feet. The vacancy rate within this smaller submarket is approximately 4%.
Leasing activity in the area continues to improve. New housing construction which is underway in the area should positively impact the center with in the foreseeable future. With the increase in activity, efforts to help reposition the property by improving credit and tenant mix are underway. Positioning of the asset will continue throughout 1997 and may result in declines in lease status until a stabilized occupancy has been achieved. Rental rates for new leases in the submarket have increased in
1996 on average $0.00 - $2.00 per square foot per year NNN.
Employees
The Partnership has no employees and, accordingly, the General Partner, the Partnership's investment adviser, LaSalle, and their affiliates and independent contractors perform services on behalf of the Partnership in connection with administering the affairs of the Partnership and operating properties for the Partnership. The General Partner, LaSalle and their affiliates receive compensation in connection with such activities, as described above. Compensation to the General Partner and its affiliates, and the terms of transactions between the Partnership and the General Partner and its affiliates, are set forth in Items 11. and 13. below, to which reference is made for a description of those terms and the transactions involved.
Item 2.
Item 2. Properties
The Partnership owns the properties referred to under Item 1. above, to which reference is made for the name, location and description of each property. All properties were acquired on an all-cash basis.
Item 3.
Item 3. Legal Proceedings
The Partnership is not subject to any material pending legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for the Partnership's Limited Partnership Interests and Related Security Holder Matters
On March 17, 1997, there were 10,365 Limited Partners. There is no active public market for the Units. However, during the period commencing in the third quarter of 1996, two bidders, neither of whom is affiliated with the General Partner or LaSalle, have made tender offers for the Units, at prices of $60 and $107 per Unit, less the amount per Unit of distributions declared or paid during a specified period. As of February 28, 1997, sales of 647 Units to the firm making offers at $60 have been presented for processing, and the firm making offers at $107 has stated that it has purchased 2,331 Units. The Partnership is not obligated to redeem or repurchase Units, but it may do so in certain defined hardship situations.
In 1987 Congress adopted certain rules concerning "publicly
traded partnerships". The effect of being classified as a publicly traded partnership would be that income produced by the Partnership would be classified as portfolio income rather than passive income. On November 29, 1995, the Internal Revenue Service adopted final regulations ("Final Regulations") describing when interests in partnerships will be considered to be publicly traded. The Final Regulations do not take effect with respect to existing partnerships until the year 2006. Due to the nature of the Partnership's income and to the low volume of transfers of Units, it is not anticipated that the Partnership will be treated as a publicly traded partnership under currently applicable rules and interpretations or under the Final Regulations. However, in the event the transfer of Units presented for transfer within a tax year of the Partnership could cause the partnership to be treated as a "publicly traded partnership" for federal tax purposes, the General Partner will accept such transfers only after receiving from the transferor or the transferee an opinion of reputable counsel satisfactory to the General Partner that the recognition of such transfers will not cause the Partnership to be treated as a "publicly traded partnership" under the Internal Revenue Code of 1986, as amended. The General Partner is closely monitoring this situation in light of the recent tender offers.
Cash distributions declared to the Limited Partners during the two most recent fiscal years are as follows:
Distribution for the Amount of Quarter Ended Distributions per Unit
March 31, 1995 $1.58 June 30, 1995 $1.58 September 30, 1995 $1.58 December 31, 1995 $6.37 March 31, 1996 $2.00 June 30, 1996 $2.00 September 30, 1996 $23.60 December 31, 1996 $2.00
All of the foregoing distributions were paid from net cash flows from operating activities, with the exception of the distribution for the quarter ended September 30, 1996, which included $21.60 per Unit from the proceeds of the sale of Fairchild Corporate Center, and the distribution for the quarter ended December 31, 1995, which included $3.25 per Unit from retained cash balances generated by operations in prior years and a return of capital of $.75 per Unit from proceeds of the initial public offering of Units, which had been retained as cash balances.
There are no material legal restrictions on the Partnership's present or future ability to make distributions in accordance
with the provisions of the Agreement of Limited Partnership, annexed to the prospectus as Exhibit A thereto. Reference is made to Item 7., below for a discussion of the Partnership's ability to continue to make future distributions.
At the end of 1996, the Partnership conducted its annual formal unit valuation. The valuation of the Partnership's properties was performed by the General Partner, and then reviewed by an independent professional appraiser to assess the analysis and assumptions utilized. The estimated investment value of limited partnership Units resulting from this process was $147 per Unit. After distributions in February, 1997 of $2.00 per Unit the estimated valuation is $145. In general, Units cannot currently be sold at a price equal to this estimated value, and this valuation is not necessarily representative of the value of the Units when the Partnership ultimately liquidates its holdings.
Item 6.
Item 6. Selected Financial Data
The following sets forth a summary of the selected financial data for the Partnership:
YEARS ENDED DECEMBER 31, (Dollars in thousands except per-unit amounts)
1996 1995 1994 1993 1992
Total assets $33,952 $41,733 $41,885 $45,780 $48,843 at year-end
Total revenues $6,280 $6,094 $6,357 $6,211 $6,078 Net income (loss) $906 $1,783 $579 $(109) $(1,268) Net income (loss) per Unit $3.54 $6.96 $2.26 $(0.43) $(4.95) Cash distributions declared per Unit $29.60 $11.11 $17.45 $11.74 $11.53
Notes:
1. The above financial data should be read in conjunction with the financial statements and the related notes appearing elsewhere in this report.
2. The figures above for Net income (loss) include valuation impairments of $2,750 and gain on real estate sold of $1,630 in 1996, a loan loss provision of $202 and a valuation recovery of $109 in 1995, provisions for value impairment of $1,467, valuation recoveries of $82, and gain from the sale of the Beinoris Building of $80 in 1994, valuation allowances of $1,968 in 1993, and a valuation allowance of $1,428 and a provision for loan loss of $1,426 in 1992.
3. The figures above for Net income (loss) per Unit include valuation impairments of $10.74 per Unit and gain on real estate sold of $6.36 per Unit in 1996, a loan loss provision of $.46 per Unit and a valuation recovery of $.43 per Unit in 1995, provisions for value impairment of $5.73 per Unit, a valuation recovery of $.32 per Unit, and gain from sale of Beinoris Building of $.31 per Unit in 1994, valuation allowances of $7.68 per Unit in 1993, and $5.57 per Unit in 1992, and a provision for loan loss of $5.57 per Unit in 1992.
4. The above distributions include a return of capital from proceeds of the initial public offering of Units, which had been retained as cash balances, in the amount per Unit of $.75 in 1995, and $.49 in 1992. The distribution for 1996 also includes $21.60 per Unit from the proceeds of the sale of Fairchild Corporate Center. The distribution for 1994 includes $3.92 per Unit from the proceeds of the sale of the Beinoris Building. The remainder of these distributions were paid from cash from operating activities.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
The Partnership sold 253,641 Units for a total of $63,410,000, including the contribution of $25,000 from the original Limited Partner. The offering was terminated on June 30, 1987 and no additional units will be sold. After deduction of organizational and offering costs of $3,805,000, the Partnership had $59,605,000 available for investment and cash reserves. Through December 31, 1996 the Partnership had declared distributions constituting return of capital from the proceeds of this offering of approximately $1.2 million.
The Partnership originally purchased nine properties or interests
therein on an all-cash basis, and made an investment in an interest in a participating mortgage loan, completing the initial acquisition phase of its business plan. Through December 31, 1996 the Partnership had sold two property investments: a portion of the Wood Dale property and Fairchild Corporate Center, in which the Partnership had a 56% interest.
As of December 31, 1996 the Partnership classified the Wood Dale, Winnetka, Riverview and South Point Plaza properties as held for sale, at a total carrying value of $11,786,000. Initial cost of the Partnership's remaining real estate investments including subsequent improvements was $28,679,000. The Partnership has also recorded provisions for value impairments in connection with these properties totaling $5,731,000. In recording the new carrying basis for these properties in accordance with Statement of Financial Accounting Standards No. 121, which was adopted in 1996, the Partnership offset these properties' accumulated depreciation balances totaling $2,954,000 against their historical cost. Accumulated depreciation and amortization after this reclassification equals $1,059,000. Therefore, investment in real estate for financial reporting purposes including properties held for sale, after accumulated depreciation, amortization and valuation changes, was $30,721,000 as of December 31, 1996.
The Partnership expects to incur capital expenditures during 1997 totaling approximately $900,000 for tenant improvements, lease commissions, and other major repairs and improvements. The majority of these expenditures are dependent on the execution of leases with new and renewing tenants, including a substantial portion for the renovation of the large vacant space at Tierrasanta. While the percentage of leases expiring is substantially lower than in 1996, the Partnership's business plan now calls for the disposition of all of its real estate investments by the end of 1998. In order to strategically position the properties for sale, the Partnership will place greater emphasis on entering into longer-term leases with creditworthy tenants. This strategy is likely to result in higher leasing commission and tenant improvement costs, but should result in higher sales prices for the properties than would otherwise be the case.
The Partnership maintains cash balances to fund its operating and investing activities including the costs of tenant improvements and leasing commissions, costs which must be disbursed prior to the collection of any resultant revenues. The General Partner believes that year-end cash balances and cash generated from operating activities in 1997 will be adequate to fund the Partnership's current investing and operating needs. Based on
current expectations, cash distributions to partners from operating income are expected to be lower than those in 1996, because the Partnership no longer owns the Fairchild Corporate Center property, which contributed $1,672,000 to 1996 net income, and because the Partnership expects to dispose of additional properties during 1997. As of March 26, 1997, the Partnership was evaluating offers on the Wood Dale, Riverview, and Winnetka properties, and the South Point property was under contract to be sold. In 1997, management will determine cash distributions from operations each quarter based on net cash flows for the quarter, money needed to operate the properties and pay Partnership expenses, and anticipated capital needed to repair and maintain the properties and make occupancy related tenant improvements.
As of December 31, 1996, the Partnership maintained cash and cash equivalents aggregating $2,468,000, a decrease of $968,000 from the prior year end. This decrease resulted primarily from additional capital improvements during the year. Net cash provided by investing activities increased by $5,572,000 due primarily to the Fairchild Corporate Center sale in 1996. Net cash used in financing activities increased by $6,604,000 due primarily to distribution of the proceeds of the Fairchild Corporate Center sale.
Operations
1996 v. 1995
The Partnership had a loss of $724,000 from operations in 1996, before the gain on the Fairchild Corporate Center sale, compared with net income of $1,783,000 in 1995. This difference is primarily due to downward property valuation adjustments at Scripps Terrace, Tierrasanta, and Clark Avenue totaling $2,750,000, which were partly offset by an increased contribution to income of $327,000 from River Run. This latter property's contributon increased as a result of the Partnership's acquisition of the asset through foreclosure late in 1995. While conditions in the markets where these properties are located are generally improving, the shortened anticipated holding period due to the Partnership's disposition plans caused it to adjust the carrying values downward.
The sale of Fairchild Corporate Center in 1996 had a negative effect on operating earnings amounting to $45,000 because of the loss of the property's income for four months of the year. However, the Partnership realized a gain of $1,630,000 on the
sale.
Revenues from rental income and interest totaled $6,280,000 for the year compared with $6,094,000 a year earlier. This comparison was negatively affected by the absence of a full year's rental income from the Fairchild Corporate Center but was positively affected by an increased contribution to income from River Run. Results were helped by a decline of $166,000 in operating expenses before valuation adjustments during the year.
Leases representing 7% of the portfolio's leasable square footage are scheduled to expire in 1997. These leases represent approximately 11% of the portfolio's rental income for 1996. This amount of potential lease turnover is below normal for the types of properties in the portfolio, which typically lease to tenants under three to five year leases. The overall portfolio occupancy was 89% as of the end of 1996. Management anticipates that occupancy levels will generally remain level or increase in 1997. In most markets, new leases are generally expected to reflect level to higher market rental rates in comparison to the rates of expiring leases. To the extent that the Partnership sells one or more properties during the year, cash flow from operations would be expected to decline while cash flows from sales would increase substantially.
There are no single-tenant properties in the Partnership's portfolio, and no single tenant accounted for more than 10% of the Partnership's revenue in 1996. The Partnership therefore does not expect any material adverse effect on revenue on account of the failure of any single tenant in 1997.
1995 v. 1994
While the Partnership's statements of operations appeared to show that the Fund's performance improved significantly over 1994, income was actually down $210,000 when the effect of value impairments, primarily at Scripps Terrace and Tierrasanta, were backed out of 1994's numbers. The change in River Run's status from a loan to an owned property had the most notable impact on the year-to-year comparison.
In the fourth quarter of 1995, the Partnership took over ownership of River Run and began accounting for it as a property rather than as a loan. This meant that its rental income and property level operating expenses, rather than interest, were included in the Partnership's results. Inclusion of its fourth quarter rental income caused that revenue category to be up for the full year over 1994. The benefit, however, was more than offset by the decrease in interest income from the River Run loan and the increase in expenses related to the property,
particularly the loan loss provisions and uncollectible interest.
The lower average leased status at Fairchild Corporate Center and Clark Avenue drove the overall decline in rental income. The absence of Beinoris, which was sold in 1994, also had a negative effect on the revenue comparison.
The most noteworthy expense item which had a positive effect on the net income comparison with 1994, other than higher valuation impairments in 1994, was depreciation. Higher tenant improvement charge-offs in 1994 at Wood Dale, Tierrasanta, Scripps Terrace, Winnetka, Clark Avenue, and Riverview led to the decrease in depreciation versus 1994.
Reconciliation of Financial and Tax Results
For 1996, the Partnership's book net income was $906,000, and its taxable loss was $5,759,000. The loss for tax purposes on the Fairchild Corporate Center sale was the primary reason for the difference. For 1995, the Partnership's book net income was $1,783,000, and its taxable income was $85,000. The provision for loan loss in connection with River Run was the primary difference. For 1994, the Partnership's book net income was $579,000, and its taxable income was $2,917,000. The valuation allowances in connection with Tierrasanta and Scripps Terrace and the continuation of the accrual of interest on the Brinderson loan for tax purposes were the primary differences. For a complete reconciliation see Note 8 to the Partnership's consolidated financial statements, which note is hereby incorporated by reference herein.
Item 8.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements appearing on pages 5 through 12 of the Partnership's 1996 Annual Report to Limited Partners are incorporated by reference in this Form 10-K Annual Report. The report on such financial statements of KPMG Peat Marwick LLP dated January 30, 1997 is filed as Exhibit 99(c) to this form 10-K Annual Report and is hereby incorporated by reference herein. Financial Statement Schedule III, Consolidated Real Estate and Accumulated Depreciation, is filed as Exhibit 99(b) to this Form 10-K Annual Report, and is hereby incorporated by reference herein. All other schedules are omitted either because the required information is not applicable or because the information is shown in the financial statements or notes thereto.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Partnership
The General Partner of the Partnership is T. Rowe Price Realty Income Fund III Management, Inc. ("Fund III Management"), 100 East Pratt Street, Baltimore, Maryland 21202. The General Partner has the primary responsibility for overseeing the evaluation, structuring, negotiation, management, and liquidation of the Partnership's investments as well as the cash management of the Partnership's liquid assets and the administration of investor services of the Partnership, including general communications, periodic reports and distributions to Limited Partners, and filings with the Securities and Exchange Commission. Fund III Management is a wholly-owned subsidiary of T. Rowe Price Real Estate Group, Inc. ("Real Estate Group"), which is, in turn, a wholly-owned subsidiary of T. Rowe Price Associates, Inc. ("Associates"). Affiliates of the General Partner, T. Rowe Price Realty Income Fund I Management, Inc. ("Fund I Management"), T. Rowe Price Realty Income Fund II Management, Inc. ("Fund II Management"), and T. Rowe Price Realty Income Fund IV Management, Inc. ("Fund IV Management") are the General Partners of other real estate limited partnerships sponsored by Associates. Real Estate Group is also investment manager for T. Rowe Price Renaissance Fund, Ltd., A Sales-Commission- Free Real Estate Investment ("Renaissance Fund"), a real estate investment trust sponsored by Associates. Associates was founded in 1937 and as of December 31, 1996 managed over $99 billion of assets.
The directors and executive officers of Fund III Management are as follows: Position with T. Rowe Price Name Realty Income Fund III Management, Inc.
James S. Riepe Chairman of the Board, President, also Principal Executive Officer for the Partnership Henry H. Hopkins Vice President and Director Lucy B. Robins Vice President and Secretary Mark B. Ruhe Vice President Alvin M. Younger, Jr. Treasurer and Director Kenneth J. Rutherford Vice President Joseph P. Croteau Controller and Director, also Principal Financial Officer for the Partnership Mark S. Finn Chief Accounting Officer for the Partnership
Mr. Riepe was elected President in 1991. Ms. Robins was first elected to her current offices in 1987, Mr. Ruhe was first elected in 1988, and Mr. Croteau was first elected as Controller in 1988, and as a director in 1996 and was designated as Principal Financial Officer for the Partnership in 1992. Mr. Rutherford was first elected as a Vice President in 1994. Mr. Hopkins was first elected a director in 1987. Mr. Finn was designated as Chief Accounting Officer in 1996. In all other cases these individuals have served in these capacities since the inception of Fund III Management in 1986. There is no family relationship among the foregoing directors or officers.
The background and business experience of the foregoing individuals is as follows:
James S. Riepe (Born 1943) is Managing Director and Director, T. Rowe Price Associates, Inc. ("Associates") and Director of its Investment Services Division; President and Chairman of Real Estate Group and each of the general partners of T. Rowe Price Realty Income Fund I, A No-Load Limited Partnership ("RIF I"), RIF II, and RIF IV,(the "Realty Income Funds"); Chairman of six of the 42 mutual funds sponsored by Associates on which he serves as a director or trustee; Chairman of New Age Media Fund; Director, Rhone-Poulenc Rorer, Inc., a pharmaceuticals company. Mr. Riepe joined Associates in 1982.
Henry H. Hopkins (Born 1942) is a Managing Director, Director, and Legal Counsel of Associates. In addition, Mr. Hopkins is Vice President and Director of each of the general partners of the Realty Income Funds. He is also a Vice President certain of the mutual funds managed by Associates. Mr. Hopkins joined Associates in 1972.
Lucy B. Robins (Born 1952) is Vice President and Associate Legal Counsel of Associates and Vice President of Real Estate Group and each of the general partners of the Realty Income Funds. Ms. Robins joined Associates in 1986.
Mark B. Ruhe (Born 1954) is an Asset Manager for the Investment Manager, and Vice President of Real Estate Group and each of the general partners of the Realty Income Funds. Mr. Ruhe joined Associates in 1987.
Alvin M. Younger, Jr. (Born 1949) is Treasurer and Director of each of the general partners of the Realty Income Funds and a Managing Director, Secretary and Treasurer of Associates, and Secretary and Treasurer of Real Estate Group. Mr. Younger joined Associates in 1973.
Kenneth J. Rutherford (Born 1963) is Marketing Manager for Associates since 1996 and Vice President of each of the general
partners of the Realty Income Funds. Mr. Rutherford joined Associates in 1992. From 1992 to 1996 he was Assistant to the Director of Associates' Investment Services Division. From 1990 to 1992 he was a student at the Stanford Graduate School of Business.
Joseph P. Croteau (Born 1954) is a Vice President and Controller of Associates, and Director and Controller of each of the general partners of the Realty Income Funds. Mr. Croteau joined Associates in 1987.
Mark S. Finn (Born 1963) is Assistant Vice President of Associates, and Chief Accounting Officer of the Realty Income Funds and the Renaissance Fund. Mr. Finn joined Associates in 1990.
No Forms 3, Forms 4, Forms 5, or amendments to any of them, were furnished to the registrant for its most recent fiscal year. Based on a review of and written representations pursuant to Item 405(b)(2)(I) of Regulation S-K, none of the directors, officers, or beneficial owners of more than 10% of the Units, if any, nor the General Partner failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during the most recent fiscal or prior fiscal years.
Item 11.
Item 11. Executive Compensation
The directors and executive officers of the General Partner receive no current or proposed remuneration from the Partnership.
The General Partner is entitled to receive a share of cash distributions and a share of profits or losses as described under the captions "Compensation and Fees," and "Income and Losses and Cash Distributions" of the Prospectus on pages 7-8, and 32-35, respectively, which pages are incorporated herein by reference.
For a discussion of compensation and fees to which the General Partner is entitled, see Item 13., which is incorporated herein by reference.
As discussed in Item 1, above, LaSalle receives reimbursement from the Partnership for certain expenses incurred in performance of its responsibilities under the advisory contract. In addition, under the contract, LaSalle receives from the General Partner a portion of the compensation and distributions received by the General Partner from the Partnership.
In addition to the foregoing, certain officers and directors of the General Partner receive compensation from Associates and/or its affiliates (but not from the Partnership) for services performed for various affiliated entities, which may include
services performed for the Partnership. Such compensation may be based, in part, on the performance of the Partnership. Any portion of such compensation which may be attributable to such performance is not material.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Partnership is a limited partnership which issues units of limited partnership interest. No limited partner is known by the Partnership to own beneficially more than 5% of the outstanding interests of the Partnership.
The percentage of outstanding interests of the Partnership held by all directors and officers of the General Partner is less than 1%. Certain officers and/or directors of the General Partner presently own securities in Associates. As of February 1, 1997, the directors and officers of the General Partner, as a group, beneficially owned 4.77% of the common stock of Associates, including options to purchase 336,000 shares exercisable within 60 days of February 1, 1997, and shares as to which voting power is shared with others. Of this amount, Mr. Riepe owned 2.34% of such stock (1,380,978 shares, including 106,400 shares which may be acquired by Mr. Riepe upon the exercise of stock options, 140,000 shares held in trusts for members of Mr. Riepe's family and 40,000 shares held by a member of Riepe's family, as to which Mr. Riepe disclaims beneficial ownership, and 82,000 shares held in a charitable foundation of which Mr. Riepe is a trustee and as to which Mr. Riepe has shared voting and disposition power). Mr. Hopkins owned 1.11% (643,768 shares, including 120,800 shares which may be acquired by Mr. Hopkins upon the exercise of stock options). Mr. Younger owned 1% (580,000 shares, including 16,500 shares which may be acquired by Mr. Younger upon the exercise of stock options, and 25,000 shares owned by a member of Mr. Younger's family as to which Mr. Younger disclaims beneficial ownership). No other director or officer owns 1% or more of the common stock of Associates.
There exists no arrangement, known to the Partnership, the operation of which may at any subsequent date result in a change in control of the Partnership.
Item 13.
Item 13. Certain Relationships and Related Transactions
The General Partner and its affiliates are permitted to engage in transactions with the Partnership as described under the captions "Compensation and Fees," and "Conflicts of Interest" of the Prospectus on pages 7-12, which pages are hereby incorporated by reference herein.
As compensation for services rendered in managing the affairs of the Partnership, the General Partner earned a partnership management fee of $164,000 in 1996, and received 1% of the cash
distributions, totaling $20,000 in 1996. In addition, certain operating expenses incurred on behalf of the Partnership are reimbursable to the General Partner. In 1996 the General Partner was reimbursed for expenses incurred by it in the administration of the Partnership and the operation of the Partnership's investments, which amounted to $90,000. An affiliate of the General Partner has earned a fee of $4,000 from the money market mutual funds in which the Partnership made its interim cash investments in 1996.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Incorporated by reference from the indicated pages of the Partnership's 1996 Annual Report to Limited Partners:
Page
Consolidated Balance Sheets at 5 December 31, 1996 and 1995 Consolidated Statements of Operations 6 for each of the three years in the period ended December 31, 1996 Consolidated Statements of Partners' Capital 7 for each of the three years in the period ended December 31, 1996 Consolidated Statements of Cash Flows for 8 each of the three years in the period ended December 31, 1996 Notes to Consolidated Financial Statements 9-12
Independent Auditors' Report - Incorporated by reference from Exhibit 99(c) hereof.
(2) Financial Statement Schedules:
III - Consolidated Real Estate and Accumulated Depreciation, incorporated by reference to Exhibit 99(b) hereof.
All other schedules are omitted because they are not
applicable or the required information is presented in the financial statements and notes hereto.
(3) Exhibits
3, 4. (a) Agreement of Limited Partnership of the Partnership dated October 20, 1986, as amended and restated as of January 5, 1987, included as Exhibit A to the Prospectus of the Partnership, dated January 5, 1987, File Number 33-9899, as filed with the Commission pursuant to Rule 424(b) ("the Prospectus"), incorporated by reference herein.
(b) Certificate of Limited Partnership, incorporated by reference to Exhibit 3,4 to the Partnership's Registration Statement, File No. 33-9899, as filed on January 5, 1987.
(c) Amendment to the Partnership Agreement dated April l, 1987, incorporated by reference to Exhibit 3,4(b) to Registrant's Report on Form 10-K for the year ended December 31, 1987 ("the 1987 10-K").
(d) Amendment to the Partnership Agreement dated May l, 1987, incorporated by reference to Exhibit 3,4(c) to the 1987 10-K.
(e) Amendment to the Partnership Agreement dated June l, 1987, incorporated by reference to Exhibit 3,4(d) to the 1987 10-K.
(f) Amendment to the Partnership Agreement dated July l, 1987, incorporated by reference to Exhibit 3,4(e) to the 1987 10-K.
(g) Amendment to the Partnership Agreement dated August l, 1987, incorporated by reference to Exhibit 3,4(f) to the 1987 10-K.
(h) Amendment to the Partnership Agreement dated September l, 1987, incorporated by reference to Exhibit 3,4(g) to the 1987 10-K.
(i) Amendment to the Partnership Agreement dated March 28, 1988, incorporated by reference to Exhibit 3,4(h) to the 1987 10-K.
10. (a) Joint Venture Agreement of Fairchild 234, dated as of May 25, 1988, incorporated by reference to Exhibit 10(f) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1988 ("the 1988 10-K").
(b) First Amendment to Joint Venture Agreement of Fairchild 234, dated as of July 13, 1988, incorporated by reference to Exhibit 10(g) to the 1988 10-K.
(c) Forbearance and Loan Modification Agreement relating to River Run Dated November 17, 1993, between Stiles Hunt Properties as Borrower and the Partnership as Lender, incorporated by reference to Exhibit 10(j) to Registrant's Report on Form 10-K for the year ended December 31, 1994.
(d) Agreement of Purchase and Sale of Mortgage Loan and Joint Escrow Instructions relating to Fairchild Corporate Center dated August 2, 1996.
13. Annual Report for the year ended December 31, 1996, distributed to limited partners on or about March 6, 1997.
27. Financial Data Schedule
99. (a) Pages 7-12, 18-25 and 32-35 of the Prospectus of the Partnership dated January 5, 1987, incorporated by reference to Exhibit 99(a) of the registrant's report on Form 10-K for the year ended December 31, 1994, File Number 0-16542.
(b) Financial Statement Schedule III - Consolidated Real Estate and Accumulated Depreciation.
(c) Report of KPMG Peat Marwick LLP dated January 30, 1997 regarding the financial statements of the Partnership.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed for the last quarter of the period covered by this report.
(1) Report on Form 8-K dated November 12, 1996
regarding the valuation of the Partnership's Units.
(2) Report on Form 8-K dated January 17, 1997 regarding the valuation of the Partnership's Units.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:
Dated: March 27, 1997 T. ROWE PRICE REALTY INCOME FUND III, AMERICA'S SALES-COMMISSION-FREE REAL ESTATE LIMITED PARTNERSHIP
By: T. Rowe Price Realty Income Fund III Management, Inc., General Partner
By: /s/James S. Riepe James S. Riepe, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities (with respect to the General Partner) and on the dates indicated:
/s/James S. Riepe Date: March 27, 1997 James S. Riepe, Director and Chairman of the Board, President T. Rowe Price Realty Income Fund III Management, Inc., Principal Executive Officer for the Partnership
/s/Henry H. Hopkins Date: March 27,1997 Henry H. Hopkins, Director and Vice President, T. Rowe Price Realty Income Fund III Management, Inc.
/s/Alvin M. Younger, Jr. Date: March 27, 1997 Alvin M. Younger, Jr., Director and Treasurer, T Rowe Price Realty Income Fund III Management, Inc.
/s/Joseph P. Croteau Date: March 27, 1997 Joseph P. Croteau, Director and Controller, T. Rowe Price Realty Income Fund III Management, Inc., Principal Financial Officer for the Partnership
/s/Mark S. Finn Date: March 27, 1997 Mark S. Finn Chief Accounting Officer for the Partnership