Item 1. Business. --------
Copley Realty Income Partners 1; A Limited Partnership (the "Partnership") was organized under the Uniform Limited Partnership Act of the Commonwealth of Massachusetts on November 20, 1985, to invest primarily in newly constructed and existing income-producing real properties.
The Partnership was initially capitalized with contributions of $2,000 in the aggregate from First Income Corp. (the "Managing General Partner") and CCOP Associates Limited Partnership (the "Associate General Partner") (collectively, the "General Partners") and $10,000 from Copley Real Estate Advisors, Inc. (the "Initial Limited Partner"). The Partnership filed a Registration Statement on Form S-11 (the "Registration Statement") with the Securities and Exchange Commission on December 5, 1985, with respect to a public offering of 40,000 units of limited partnership interest at a purchase price of $1,000 per unit (the "Units") with an option to sell up to an additional 60,000 Units (an aggregate of $100,000,000). The Registration Statement was declared effective on March 27, 1986.
The first sale of Units occurred on August 7, 1986, at which time the Initial Limited Partner withdrew its contribution from the Partnership. Investors were admitted to the Partnership thereafter at monthly closings; the offering terminated and the last group of initial investors was admitted to the Partnership on April 9, 1987. As of April 9, 1987, a total of 34,581 Units had been sold, a total of 2,188 investors had been admitted as limited partners (the "Limited Partners") and a total of $34,322,210 had been contributed to the capital of the Partnership.
As of December 31, 1997 the Partnership had disposed of all of its real estate investments. The Partnership plans to liquidate and dissolve in 1998 after settling its remaining assets and liabilities. In 1990, a third-party mortgage lender foreclosed on one real estate investment (Investment One). The principal terms of the sales of the Partnership's other investments are set forth in the following table:
The Partnership has no employees. Services are performed for the Partnership by the Managing General Partner and affiliates of the Managing General Partner.
- -------- 1 Represents net sale proceeds to the Partnership after repayment of related mortgage loan. 2 The Partnership will make a distribution of net sales proceeds in 1998.
Item 3.
Item 3. Legal Proceedings. -----------------
The Partnership is not a party to, nor are any of its previously owned properties subject to, any material pending legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders. ---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Annual Report on Form 10-K.
PART II -------
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matter. ---------------------------------------------------------------------
There is no active market for the Units. Trading in the Units is sporadic and occurs solely through private transactions.
As of December 31, 1997, there were 2,291 holders of Units.
The Partnership's Amended and Restated Agreement of Limited Partnership dated August 7, 1986, as amended to date (the "Partnership Agreement"), requires that any Distributable Cash (as defined therein) be distributed quarterly to the Partners in specified proportions and priorities. There are no restrictions on the Partnership's present or future ability to make distributions of Distributable Cash. For the year ended December 31, 1997, cash distributions paid in 1997, or distributed after year end with respect to 1997, to the Limited Partners as a group totaled $5,986,316 ($173.11 per limited partnership unit), including $5,221,731 ($151 per limited partnership unit) representing proceeds from the sale of one property. For the year ended December 31, 1996, cash distributions paid in 1996, or distributed after year end with respect to 1996, to the Limited Partners as a group totaled $12,452,964, including $11,307,987 ($327 per limited partnership unit) representing proceeds from the sales of two properties.
Largely due to the capital distribution mentioned above, total cash distributions exceeded net income in 1997, and reduced partners' capital accordingly. Regular cash distributions from operations, however, were less than cash provided by operations. Reference is made to the Partnership's Statement of Partners' Capital (Deficit) and Statement of Cash Flows in Item 8 hereof.
Item 6.
Item 6. Selected Financial Data. -----------------------
(1) Net Income (Loss) includes charges of $250,000, $2,600,000 and $200,000 in 1996, 1995 and 1994, respectively, related to impairment of the carrying values of certain investments.
(2) Net Income includes gains totaling $1,608,395 on the sales of properties. Cash distributions include a return of capital of $151.00 per Limited Partnership Unit.
(3) Net Income includes gains totaling $906,542 on the sales of properties. Cash distributions include returns of capital totaling $327.00 per Limited Partnership Unit.
Item 7.
Item 7. - ------
Management's Discussion and Analysis of Financial Condition and Results of - -------------------------------------------------------------------------- Operations - ----------
Liquidity and Capital Resources - -------------------------------
The Partnership completed its offering of units of limited partnership interest in April 1987, and a total of 34,581 units were sold. The Partnership received proceeds of $30,812,718, net of selling commissions and other offering costs, which have been invested in real estate, used to pay related acquisition costs or retained as working capital reserves.
On April 9, 1996, the Partnership sold the Zehntel property for $11,449,612, of which $4,215,073 was used to pay off the related mortgage loan and $506,687 was used to complete certain improvements as a condition of the sale. Net proceeds to the Partnership, after closing costs, were $11,148,837. A disposition fee of $343,488 was accrued but not paid to AEW Real Estate Advisors, Inc. ("AEW") On April 25, 1996, the Partnership made a capital distribution of $6,120,837 ($177 per limited partnership unit), which reduced the adjusted capital contribution to $823 per unit.
On August 13, 1996, the United Exposition property was sold for $5,372,500. The Partnership received net proceeds of $5,202,964, after closing costs. A disposition fee of $161,175 was accrued but not paid to AEW. On August 29, 1996, the Partnership made a capital distribution of $5,187,150 ($150 per limited partnership unit), which reduced the adjusted capital contribution to $673 per unit.
On May 2, 1997, the Medlock Oaks buildings, which were owned by the Partnership (57%) and an affiliate (43%), were sold for a total sales price of $9,402,779. The Partnership received net proceeds of $5,246,979, after closing costs, and recognized a gain of $678,548 ($19.62 per limited partnership unit) on the sale. On May 29, 1997, the Partnership made a capital distribution of $5,221,731 ($151 per limited partnership unit), which reduced the adjusted capital contribution to $522 per unit.
On October 24, 1997, the East Anaheim property was sold for $4,700,000. The Partnership received net proceeds of $4,677,970, after closing costs, and recognized a gain of $929,847 ($26.89 per limited partnership unit). As this is the last property in the Partnership, the net proceeds are being held in reserves pending Partnership dissolution and liquidation later in 1998.
At December 31, 1997, the Partnership had $5,559,042 in cash and cash equivalents and short-term investments, of which $91,168 was used for cash distributions to partners on January 29, 1998; the remainder is being retained pending dissolution and liquidation of the Partnership later in 1998, and for working capital reserves. The source of future liquidity and cash distributions to partners will be cash generated by the Partnership's short-term investments. Distributions of cash from operations relating to all four quarters of 1996 were made at an annualized rate of 4.0%; the first quarter 1996 distribution was based on a capital contribution of $1,000 per unit; the second and third quarter 1996 distributions were based on the weighted average adjusted capital contribution; the fourth quarter 1996 distribution was based on the adjusted capital contribution of $673 per unit. Distributions of cash from operations were made at an annualized rate of 2.0% for all four quarters of 1997; the first quarter 1997 distribution was based on the adjusted capital contribution of $673 per unit; the second quarter 1997 distribution was based on the weighted average adjusted capital contribution; the third and fourth quarter 1997 distributions were based on the adjusted capital contribution of $522 per unit. The distribution rate was decreased in 1997, in line with the cash flow decreases resulting from the sale of the Zehntel and United Exposition investments, and the sale of Medlock Oaks during the second quarter of 1997.
The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Partnership's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in normal business operations. The Managing General Partner and its affiliates are assessing the modifications or replacement of its software that may be required due to the Year 2000 Issue. The Managing General Partner and its affiliates do not believe that the cost of either modifying existing software or converting to new software will be significant or that the Year 2000 Issue will pose significant operational problems.
Results of Operations - ---------------------
Form of Real Estate Investments
The Medlock Oaks investment was structured as a joint venture with an affiliate of the Partnership. The Anaheim investment was structured as a joint venture with a real estate management/development firm. Effective January 1, 1996, however, the venture was dissolved and all of its assets and liabilities were transferred to the Partnership, whereby the property became wholly-owned by the Partnership. The Zehntel and United Exposition investments, which were sold in April and August of 1996, respectively, were wholly-owned properties.
Operating Factors
The Zehntel property, which is comprised of two R&D buildings, was fully leased to a single tenant through June, 1996. During the third quarter of 1995, the Partnership signed a lease extension with the lessee for one of the buildings through December, 2000. The extension was retroactive to April 1, 1995, and was at a lower rental rate than under the previous lease. In the third quarter of 1995, the tenant sub-leased the second building to a sub-tenant which executed a primary lease for the building through June 2002. During the third quarter of 1995, after deciding to market the Zehntel property for sale, the Managing General Partner determined that the Partnership would not likely recover its carrying value over the shortened investment period. Accordingly, the Partnership reduced the carrying value to its estimated net fair market value, net of selling costs, with a charge to operations of $2,200,000. The carrying value was further reduced by $400,000 in the fourth quarter of 1995, with the refinement of the estimate based on the terms of the sale transaction discussed above. The Partnership recognized a gain of $21,483 ($.62 per limited partnership unit) upon final settlement of the sale transaction.
The United Exposition property also consists of two buildings which were 100% leased to one tenant since 1987. The Partnership recognized a gain of $885,059 ($25.34 per limited partnership unit) on the sale.
At Medlock Oaks, occupancy was 100%, 97% and 95% as of May 2, 1997, December 31, 1996 and December 31, 1995, respectively. The Managing General Partner determined in 1994 that the carrying value of this investment would likely not be recoverable, and reduced the carrying value to estimated net realizable value with a charge to operations of $200,000. In the first quarter of 1996, the Managing General Partner determined that the Partnership would be unable to recover the carrying value of this investment and, accordingly, the carrying value was further reduced by $250,000 through a charge to operations. As mentioned above, the Partnership and its affiliate sold the Medlock Oaks buildings on May 2, 1997, and recognized a gain of $678,548 ($19.62 per limited partnership unit) from the sale.
Occupancy at the Anaheim Distribution Center property was 100% as of October 24, 1997, December 31, 1996 and December 31, 1995. As discussed above, the Partnership sold this property on October 24, 1997, and recognized a gain of $929,847 ($26.89 per limited partnership unit) from the sale.
Three tenants each contributed more than 10% of the total rental revenue from the Partnership's investments (collectively 68%) in 1997.
Investment Results
1997 Compared to 1996
Exclusive of the valuation allowance related to Medlock Oaks in 1996, aggregate operating results from real estate investments ere $280,665 in 1997 and $1,176,591 in 1996. The sale of the Zehntel and United Exposition properties during 1996 resulted in a decrease in operating results of approximately $609,000. The remainder of the decrease is comprised of reduced operating income from the sales of Medlock Oaks and East Anaheim during 1997 of approximately $211,000 and $76,000, respectively.
Other income of $504,663 in 1997 represents the reversal of previously accrued disposition fees related to the sales of two real estate investments in 1996. During the fourth quarter of 1997, the Managing General Partner determined that the limited partners would not receive the cumulative return which would entitle AEW to payment of these fees.
Interest on cash equivalents and short-term investments increased by approximately $19,000, or 18%, between 1996 and 1997 primarily due to higher average invested balances, as well as higher short-term yields.
Cash flow provided by operating activities decreased by $387,000 between 1996 and 1997. This change was primarily caused by the Zehntel and United Exposition property sales in 1996. Cash flow also declined due to a decrease in cash distributions from Medlock Oaks and East Anaheim as a result of their partial ownership during 1997.
1996 Compared to 1995
Exclusive of the valuation allowances on Medlock Oaks in 1996 and Zehntel in 1995, aggregate real estate operating results were $1,176,591 in 1996 and $1,870,411 in 1995. The Zehntel and United Exposition properties were owned for only a portion of 1996, which resulted in a decrease in operating income of $784,000. Operating income from Anaheim Distribution Center increased by $46,000 between 1996 and 1995 primarily due to rental increases and lower depreciation charges. Operating income from Medlock Oaks also increased by $40,000 due to rental increases.
Interest on cash equivalents and short-term investments decreased by $3,000 in 1996 as compared to 1995, primarily due to lower invested balances as well as lower short-term yields.
Cash flow provided by operating activities decreased by $1,103,000 between 1996 and 1995. This change was primarily caused by the Zehntel and United Exposition sales during 1996. These decreases were partially offset by an increase in cash flow from Medlock Oaks and by changes in working capital items.
Portfolio Expenses
General and administrative expenses primarily consist of real estate appraisal, legal, accounting, printing and servicing agent fees. These expenses decreased $29,000 or 25% between 1996 and 1997, primarily due to decreases in accounting and appraisal fees. General and administrative expenses decreased approximately $32,000 or 22%, in 1996 as compared to 1995, primarily due to a decrease in legal and professional fees. The Partnership management fee is 9% of distributable cash flow from operations after any increase or decrease in working capital reserves as determined by the Managing General Partner. Management fees decreased in both 1997 and 1996 compared to the respective prior years due to the decreases in distributable cash flow.
Inflation - ---------
By their nature, real estate investments tend not to be adversely affected by inflation. Inflation may tend to result in appreciation in the value of the Partnership's real estate investments over time, if rental rates and replacement costs increase. Declines in real property values during the period of Partnership operations, due to market and economic conditions, have overshadowed the overall positive effect inflation may have on the value of the Partnership's investments.
Item 8.
Item 8. Financial Statements and Supplementary Data. -------------------------------------------
See the Financial Statements of the Partnership included as a part of this Annual Report on Form 10-K.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure. - --------------------
The Partnership has had no disagreements with its accountants on any matters of accounting principles or practices or financial statement disclosure.
PART III --------
Item 10.
Item 10. Directors and Executive Officers of the Registrant. --------------------------------------------------
(a) and (b) Identification of Directors and Executive Officers. --------------------------------------------------
The following table sets forth the names of the directors and executive officers of the Managing General Partner and the age and position held by each of them as of December 31, 1997.
(c) Identification of Certain Significant Employees. -----------------------------------------------
None.
(d) Family Relationships. --------------------
None.
(e) Business Experience. -------------------
The Managing General Partner was incorporated in Massachusetts on November 14, 1985. The background and experience of the executive officers and directors of the Managing General Partner are as follows:
Wesley M. Gardiner, Jr. joined AEW Real Estate Advisors, Inc. ("AEW") , formerly known as Copley Real Estate Advisors, Inc., in 1990 and has been a Vice President at AEW since January, 1994. AEW is a subsidiary of AEW Capital Management, L.P. ("AEW Capital Management"). From 1982 to 1990, he was employed by Metric Realty, a nationally-known real estate investment advisor and syndication firm, as a portfolio manager responsible for several public and private limited partnerships. His career at AEW has included asset management responsibility for the company's Georgia and Texas holdings. Presently, Mr. Gardiner has overall responsibility for all the partnerships advised by AEW
whose securities are registered under the Securities and Exchange Act of 1934. He received a B.A. in Economics from the University of California at San Diego.
Pamela J. Herbst directs AEW Capital Management's Portfolio Advisory Services, with oversight responsibility for the asset and portfolio management areas. Ms. Herbst is a member of AEW Capital Management's Investment Policy Group and Management Committee. She came to AEW Capital Management in December 1996 as a result of the firm's merger with Copley Real Estate Advisors, Inc., where she held various senior level positions in asset and portfolio management, acquisitions, and corporate operations since 1982. Ms. Herbst is a graduate of the University of Massachusetts (B.A.) and Boston University (M.B.A.).
J. Grant Monahon is AEW Capital Management's General Counsel and a member of the firm's Management Committee and Investment Policy Group. He has over 25 years of experience in real estate law and investments. Prior to joining AEW Capital Management in 1987, Mr. Monahon was a partner with a major Boston law firm. As the head of that firm's real estate finance department, he represented a wide variety of institutional clients, both domestic and international, in complex equity and debt transactions. He is the former Chairman of the General Counsel section of the National Association of Real Estate Investment Managers. Mr. Monahon is a graduate of Dartmouth College (B.A.) and Georgetown University Law Center (J.D.).
James J. Finnegan is the Assistant General Counsel of AEW Capital Management. Mr. Finnegan served as Vice President and Assistant General Counsel of Aldrich, Eastman & Waltch, L.P., a predecessor to AEW Capital Management. Mr. Finnegan has over ten years of experience in real estate law, including seven years of experience in private practice with major New York City and Boston law firms. Mr. Finnegan also serves as AEW's securities and regulatory compliance officer. Mr. Finnegan is a graduate of the University of Vermont (B.A.) and Fordham University School of Law (J.D.).
Karin J. Lagerlund directs the Advisory Services Portfolio Accounting Group at AEW Capital Management, overseeing portfolio accounting, performance measurement and client financial reporting for AEW's private equity investment portfolios. Ms. Lagerlund is a Certified Public Accountant and has over ten years experience in real estate consulting and accounting. Prior to joining AEW Capital Management in 1994, she was an Audit Manager at EY/Kenneth Leventhal LLP. Ms. Lagerlund is a graduate of Washington State University (B.A.).
(f) Involvement in Certain Legal Proceedings. ---------------------------------------- None.
Item 11.
Item 11. Executive Compensation. ----------------------
Under the Partnership Agreement, the General Partners and their affiliates are entitled to receive various fees, commissions, cash distributions, allocations of taxable income or loss and expense reimbursements from the Partnership. See Notes 1, 2 and 6 of Notes to the Financial Statements.
The following table sets forth the amounts of the fees and cash distributions and reimbursements of out-of-pocket expenses which the Partnership paid to or accrued for the account of the General Partners and their affiliates for the year ended December 31, 1997. Cash distributions to General Partners include amounts distributed after year end with respect to 1997.
For the year ended December 31, 1997, the Partnership allocated $27,372 of taxable income to the General Partners. See Note 1 of Notes to Financial Statements for additional information about transactions between the Partnership and the General Partners and their affiliates.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management. --------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners -----------------------------------------------
No person or group is known by the Partnership to be the beneficial owner of more than 5% of the outstanding Units at December 31, 1997. Under the Partnership Agreement, the voting rights of the Limited Partners are limited and, in some circumstances, are subject to the prior receipt of certain opinions of counsel or judicial decisions.
Except as expressly provided in the Partnership Agreement, the right to manage the business of the Partnership is vested exclusively in the Managing General Partner.
(b) Security Ownership of Management. --------------------------------
The General Partners of the Partnership owned no Units at December 31, 1997.
(c) Changes in Control. ------------------
There exists no arrangement known to the Partnership, the operation of which may at a subsequent date result in a change in control of the Partnership.
Item 13.
Item 13. Certain Relationships and Related Transactions. ----------------------------------------------
The Partnership has no relationships or transactions to report other than as reported in Item 11, above.
PART IV
Item 14.
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K. -------------------------------------------------------
(a) The following documents are filed as part of this report:
(1) Financial Statements--The Financial Statements listed on the accompanying Index to Financial Statements are filed as part of this Annual Report.
(2) Financial Statement Schedule--The Financial Statement Schedule listed on the accompanying Index to Financial Statements and Schedule is filed as part of this Annual Report.
(3) Exhibits--The Exhibits listed in the accompanying Exhibit Index are filed as a part of this Annual Report and incorporated in this Annual Report as set forth in said Index.
(b) Reports on Form 8-K. On November 10, 1997, the Partnership filed one Current Report on Form 8-K disclosing the sale of the East Anaheim property on October 24, 1997.
Copley Realty Income Partners 1;
A Limited Partnership
Financial Statements
* * * * * * *
December 31, 1997
COPLEY REALTY INCOME PARTNERS 1; A LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Report of Independent Accountants
Financial Statements:
Balance Sheets - December 31, 1997 and 1996
Statements of Operations - For the Years Ended December 31, 1997, 1996 and 1995
Statements of Partners' Capital (Deficit) - For the Years Ended December 31, 1997, 1996 and 1995
Statements of Cash Flows - For the Years Ended December 31, 1997, 1996 and 1995
Notes to Financial Statements
Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation at December 31, 1997, 1996 and 1995
Report of Independent Accountants ---------------------------------
To the Partners
Copley Realty Income Partners 1; A Limited Partnership
In our opinion, based on our audits and the reports of other auditors for the years ended December 31, 1997, 1996 and 1995, the financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Copley Realty Income Partners 1; A Limited Partnership (the "Partnership") at December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of First Income Corp., the Managing General Partner of the Partnership; our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of the Partnership's Medlock Oaks joint venture investee for the years ended December 31, 1996 and 1995, which results of operations are recorded using the equity method of accounting in the Partnership's financial statements. Equity in joint venture income for this joint venture investee was $280,509 and $240,331 for the years ended December 31, 1996 and 1995, respectively. We also did not audit the financial statements of the Partnership's investment in Anaheim Distribution Center for the years ended December 31, 1996 and 1995. Operating income for this investment totalled $410,656 for the year ended December 31, 1996, and equity in joint venture income was $250,312 for the year ended December 31, 1995. Those statements were audited by other auditors whose reports thereon have been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for the equity in joint venture income for Medlock Oaks for the years ended December 31, 1996 and 1995, and for the operating income and the equity in joint venture income for Anaheim Distribution Center for the years ended December 31, 1996 and 1995, is based solely on the reports of the other auditors. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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 accounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by the Managing General Partner, and evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors for the years ended December 31, 1997, 1996 and 1995 provide a reasonable basis for the opinion expressed above.
/s/Price Waterhouse LLP - ----------------------- Boston, Massachusetts March 9, 1998
COPLEY REALTY INCOME PARTNERS 1; A LIMITED PARTNERSHIP
BALANCE SHEETS
(See accompanying notes to financial statements)
COPLEY REALTY INCOME PARTNERS 1; A LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(See accompanying notes to financial statements)
COPLEY REALTY INCOME PARTNERS 1; A LIMITED PARTNERSHIP
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
(See accompanying notes to financial statements)
COPLEY REALTY INCOME PARTNERS 1; A LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
Non-cash transaction:
Effective January 1, 1996, the Partnership's joint venture investment in East Anaheim Distribution Center Associates was converted to a wholly-owned property. The carrying value of this investment at conversion was $3,763,820.
(See accompanying notes to financial statements)
COPLEY REALTY INCOME PARTNERS 1; A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS - ----------------------------------
General - -------
Copley Realty Income Partners 1; A Limited Partnership (the "Partnership") is a Massachusetts limited partnership organized for the purpose of investing primarily in newly-constructed and existing income-producing real properties. The Partnership commenced operations in August 1986, and acquired five real estate investments prior to the end of 1987. The Partnership sold its last remaining investment in October 1997 and therefore intends to liquidate and dissolve in 1998.
The Managing General Partner of the Partnership is First Income Corp., a wholly-owned subsidiary of AEW Real Estate Advisors, Inc. ("AEW"), formerly known as Copley Real Estate Advisors, Inc. ("Copley"). The associate general partner is CCOP Associates Limited Partnership, a Massachusetts limited partnership. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by AEW pursuant to an advisory contract.
On December 10, 1996, Copley's parent, New England Investment Companies, Limited Partnership ("NEIC"), a publicly traded master limited partnership, acquired certain assets subject to then existing liabilities from Aldrich, Eastman & Waltch, Inc. and its affiliates and principals (collectively, "the AEW Operations"). Simultaneously, a new entity, AEW Capital Management, L.P. was formed, into which NEIC contributed its interests in Copley and its affiliates. As a result, the AEW Operations were combined with Copley to form the business operations of AEW Capital Management, L.P. At year end 1997, NEIC completed a restructuring plan under which it contributed all of its operations to a newly formed private partnership, NEIC Operating Partnership, L.P., in exchange for a general partnership interest in the newly formed entity. As such, at December 31, 1997, AEW Capital Management, L.P. is wholly owned by NEIC Operating Partnership, L.P. AEW is a subsidiary of AEW Capital Management, L.P.
Prior to August 30, 1996, New England Mutual Life Insurance Company ("The New England") was NEIC's principal unit holder and owner of all the outstanding stock of NEIC's general partner. On August 30, 1996, The New England merged with and into Metropolitan Life Insurance Company ("Met Life"). Met Life is the surviving entity and, therefore, through a wholly-owned subsidiary, became the owner of the units of partnership interest previously owned by The New England and of the stock of NEIC's general partner.
Management - ----------
AEW, as advisor, is entitled to receive stipulated fees from the Partnership in consideration of services performed in connection with the management of the Partnership and acquisition and disposition of Partnership investments in real property. Partnership management fees are 9% of distributable cash flow from operations, as defined, before deducting such fees. AEW is also reimbursed for expenses incurred in connection with administering the Partnership ($16,165 in 1997, $16,000 in 1996, and $17,746 in 1995). Acquisition fees were based on 3% of the gross proceeds from the offering available for investment and paid at the time commitments were initially funded. Disposition fees are limited to the lesser of 3% of the selling price
of the property, or 50% of the standard real estate commission customarily charged by an independent real estate broker. Payments of disposition fees are subject to the prior receipt by the limited partners of their capital contributions plus a stipulated return thereon.
New England Securities Corporation, an indirect subsidiary of Met Life, is engaged by the Partnership to act as its unit holder servicing agent. Fees and out-of-pocket expenses for such services totaled $3,715, $3,541 and $3,193 in 1997, 1996 and 1995, respectively.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------
Accounting Estimates - --------------------
The preparation of financial statements in conformity with generally accepted accounting principles requires the Managing General Partner to make estimates affecting the reported amounts of assets and liabilities, and of revenues and expenses. In the Partnership's business, certain estimates require an assessment of factors not within management's control, such as the ability of tenants to perform under long-term leases and the ability of the properties to sustain their occupancies in changing markets. Actual results, therefore, could differ from those estimates.
Real Estate Joint Ventures - --------------------------
Investments in joint ventures, including loans made to joint ventures, which are in substance real estate investments, are stated at cost plus (minus) equity in undistributed joint venture income (losses). Allocations of joint venture income (losses) were made to the Partnership's venture partners as long as they had substantial economic equity in the project. Economic equity is measured by the excess of the appraised value of the property over the Partnership's total cash investment plus accrued preferential returns and interest thereon. For the Medlock Oaks joint venture investment, the Partnership recorded its ownership share of the operating results, after the elimination of all inter-entity transactions, since its venture partner, an affiliate of the Partnership, had substantial economic equity in the project. Joint ventures are consolidated with the accounts of the Partnership if, and when, the venture partner no longer shares in the control of the business.
Property - --------
Property includes land and buildings and improvements, which are stated at cost less accumulated depreciation, plus other operating net assets. The Partnership's initial carrying value of a property previously owned by a joint venture equals the Partnership's carrying value of the predecessor investment on the conversion date.
Capitalized Costs, Depreciation and Amortization - ------------------------------------------------
Maintenance and repair costs are expensed as incurred; significant improvements and renewals are capitalized. Depreciation is computed using the straight-line method based on the estimated useful lives of the buildings and improvements.
Acquisition fees have been capitalized as part of the cost of real estate investments. Amounts not related to land are amortized using the straight-line method over the estimated useful lives of the underlying real property.
Leases - ------ Leases are accounted for as operating leases. Leasing commissions are amortized over the terms of the respective leases. Rental income is recognized on a straight-line basis over the terms of the respective leases.
Realizability of Real Estate Investments - ----------------------------------------
The Partnership considers a real estate investment to be impaired when it determines the carrying value of the investment is not recoverable through expected undiscounted cash flows from the operations and disposition of the property. The impairment loss is based on the excess of the investment's carrying value over its estimated fair market value. For investments being held for sale, the impairment loss also includes estimated costs of sale. Property held for sale is not depreciated during the holding period.
The carrying value of an investment may be more or less than its current appraised value. At December 31, 1996, the aggregate appraised value of the Partnership's investments was approximately $800,000 greater than their carrying value after giving effect to previously recorded valuation allowances.
The appraised value of real estate investments at December 31, 1996 was estimated by the Managing General Partner and was generally based on a combination of traditional appraisal approaches performed by AEW and independent appraisers.
Cash Equivalents and Short-Term Investments - -------------------------------------------
Cash equivalents are stated at cost, plus accrued interest. The Partnership considers all highly liquid debt instruments purchased with a maturity of ninety days or less to be cash equivalents; otherwise, they are classified as short-term investments.
The Partnership has the positive intent and ability to hold all short-term investments to maturity; therefore, short-term investments are carried at cost plus accrued interest, which approximates market value. At December 31, 1997 and 1996, all investments are in commercial paper with less than one month and two months, respectively, remaining to maturity.
Deferred Disposition Fees - -------------------------
According to the terms of the advisory contract, AEW is entitled to disposition fees related to sales of real estate investments. Payment of the fees, however, is contingent upon the limited partners first receiving their capital, plus a stipulated return thereon. After diposing of the Partnership's remaining real property asset during the fourth quarter of 1997, the Managing General Partner determined that the return of the limited partners' original invested capital would not occur. As a result, previously accrued disposition fees payable to AEW totaling $504,663 ($14.59 per limited partnership unit) were reversed and recognized as other income in 1997.
Income Taxes - ------------
A partnership is not liable for income taxes and, therefore, no provision for income taxes is made in the financial statements of the Partnership. A proportionate share of the Partnership's income is reportable on each partner's tax return.
Per Unit Computations - ---------------------
Per unit computations are based on the number of units of limited partnership interest outstanding during the year. The actual per unit amount will vary by partner depending on the date of admission to, or withdrawal from, the Partnership.
Effective January 1, 1998, the Partnership adopted FAS 128 "Earnings per Share," which simplifies the standards of reporting earnings per share (EPS) previously found in APB Opinion No. 15. It provides guidance on the computation and disclosure of basic and diluted EPS and requires restatement of prior periods for comparative purposes. The adoption of FAS 128 did not have a material impact on the Partnership's financial statements.
NOTE 3 - INVESTMENT IN PROPERTY - -------------------------------
The following is a summary of the Partnership's investment in property:
The net carrying value at December 31, 1996 relates solely to Anaheim Distribution Center.
The buildings and improvements of Anaheim Distribution Center were depreciated over 30 years, beginning January 1, 1996.
Anaheim Distribution Center - ---------------------------
On December 30, 1986, the Partnership entered into a joint venture with an affiliate of Davis Development to construct and operate an industrial facility located in East Anaheim, California. The Partnership invested $5,216,276 in the joint venture in the form of capital contributions and loans. Effective January 1, 1996, the joint venture was dissolved and ownership of the venture's net assets was assigned to the Partnership. Accordingly, as of that date, the investment was accounted for as a wholly-owned property. The carrying value of the joint venture investment at conversion ($3,763,820) was allocated to land, building and improvements, and other net operating assets.
On October 24, 1997, the Partnership sold the East Anaheim property to an institutional buyer, which is unaffiliated with the Partnership, for $4,700,000. The Partnership received net proceeds of $4,677,970, after closing costs, and recognized a gain of $929,847 ($26.89 per limited partnership unit).
Zehntel - -------
On September 11, 1986, the Partnership acquired two one-story research and development buildings and land located in Walnut Creek, California, subject to a first mortgage loan. The property was listed for sale during the third quarter of 1995, and the indication from the market was that the Partnership would likely not recover its net carrying value over the shortened investment period. Accordingly, the Partnership recognized an investment valuation allowance of $2,200,000 through a charge to operations. The carrying value was further reduced by $400,000 in the fourth quarter of 1995, with the refinement of the fair market value estimate based on the terms of the pending sale transaction. The property was sold on April 9, 1996 for $11,449,612, of which $4,215,073 was used to repay the related mortgage loan and $506,687 was used to complete certain improvements and pay certain costs, as conditions of the sale. After closing costs, the Partnership received net proceeds of $11,148,837 and recognized a gain of $21,483
($0.62 per limited partnership unit) on the sale. (Approximately $50,000 was received in the fourth quarter of 1996, upon the finalization of all conditions.) A disposition fee of $343,488 was accrued but not paid to AEW. During 1997, the Partnership determined that the disposition fee would not be paid and therefore reversed the accrued disposition fee and recognized it as other income. On April 25, 1996, the Partnership made a capital distribution of $6,120,837 ($177 per limited partnership unit) from the proceeds.
United Exposition - -----------------
On October 28, 1987, the Partnership acquired two industrial buildings and land located in Las Vegas, Nevada. On August 13, 1996, the United Exposition property was sold for $5,372,500. The Partnership received net proceeds of $5,202,964, after closing costs, and recognized a gain of $885,059 ($25.34 per limited partnership unit). A disposition fee of $161,175 was accrued but not paid to AEW. During 1997, the Partnership determined that the disposition fee would not be paid and therefore reversed the accrued disposition fee and recognized it as other income. On August 29, 1996, the Partnership made a capital distribution of $5,187,150 ($150 per limited partnership unit) from the proceeds.
NOTE 4 - REAL ESTATE JOINT VENTURES - -----------------------------------
The Partnership had invested in two real estate joint ventures organized as general partnerships with a real estate management/development firm. One joint venture investment was restructured into a wholly-owned property effective January 1, 1996. The remaining joint venture investment was sold on May 2, 1997. The Partnership made capital contributions to the ventures, which were subject to preferential cash distributions at a specified rate and to priority distributions with respect to sale or refinancing proceeds. The Partnership also made loans to these ventures. The joint venture agreements provided for the funding of cash flow deficits by the venture partners in proportion to ownership interests, and for the dilution of ownership share in the event a venture partner did not contribute proportionately.
The respective real estate management/development firm was responsible for day-to-day development and operating activities, although overall authority and responsibility for the business is shared by the venturers. The real estate management/development firms, or their affiliates, also provided various services to the joint ventures for a fee.
The following is a summary of cash invested in joint ventures, net of returns of capital or principal, and excluding investment acquisition fees:
(C) Capital contribution (L) Loan
Medlock Oaks - ------------
On December 4, 1987, the Partnership entered into a joint venture with an affiliate of the Partnership and with an affiliate of Hill Properties, Ltd., to construct and operate five warehouse and service center buildings located in Atlanta, Georgia. The Partnership made a capital contribution of $1,932,300 to the venture which was subject to preferential returns of 10.25% per annum. In addition, the Partnership made a construction/permanent mortgage loan to the venture of $4,964,700, which bore interest at 10.25% per annum.
On September 3, 1991, ownership of the investment was restructured as a result of the management/development firm's decision not to contribute its required proportionate share of capital to fund operating deficits. Its ownership interest was assigned pro rata to the Partnership and its affiliate. As a result, the Partnership's ownership interest increased from 38.19% to 57%.
The Managing General Partner determined in 1994 that the carrying value of this investment should be reduced to its net realizable value. Accordingly, the carrying value was reduced by $200,000 with a charge to operations. In the first quarter of 1996, the Managing General Partner determined that the Partnership would be unable to recover the carrying value of this investment and, accordingly, the carrying value was reduced by $250,000 through a charge to investment valuation allowances.
On May 2, 1997, the Medlock Oaks buildings were sold to an institutional buyer, which is unaffiliated with the Partnership, for a total sales price of $9,402,779. The Partnership received net proceeds of $5,246,979, after closing costs, and recognized a gain of $678,548 ($19.62 per limited partnership unit) on the sale. On May 29, 1997, the Partnership made a capital distribution of $5,221,731 ($151 per limited partnership unit) from the proceeds of the sale.
Summarized Financial Information - --------------------------------
The following summarized financial information is presented in the aggregate for the investments in joint ventures:
Assets and Liabilities ----------------------
December 31, ------------------------------------------ 1997 1996 ------------------ ------------------
Assets Real property, at cost less accumulated depreciation of $0 and $2,821,679 $ - $ 7,702,658 Other - 288,149 ------------------ ------------------ 7,990,807
Liabilities - 86,084 ------------------ ------------------
Net assets $ - $ 7,904,723 ================== ==================
Results of Operations ---------------------
Liabilities and expenses exclude amounts owed and attributable to the Partnership and (with respect to one joint venture) its affiliate on behalf of their various financing arrangements with the joint ventures.
Effective January 1, 1996, the Anaheim joint venture was dissolved. Accordingly, the 1997 and 1996 amounts relate only to the Medlock Oaks joint venture.
NOTE 5 - INCOME TAXES - ---------------------
The Partnership's income for federal income tax purposes differs from that reported in the accompanying statement of operations as follows:
NOTE 6 - PARTNERS' CAPITAL - --------------------------
Allocation of net income (losses) from operations and distributions of distributable cash from operations, as defined, are in the ratio of 99% to the limited partners and 1% to the general partners. Cash distributions are made quarterly.
Net sale proceeds and financing proceeds will be allocated first to limited partners to the extent of their contributed capital plus a stipulated return thereon, as defined, second to pay disposition fees, and then 85% to the limited partners and 15% to the general partners. Income from sales is allocated in proportion to the distribution of related proceeds, provided that the general partners are allocated at least 1%. Income or losses from sales, if there are no residual proceeds after the repayment of the related debt, are allocated 99% to the limited partners and 1% to the general partners.
NOTE 7 - SUBSEQUENT EVENT - -------------------------
Distributions of cash from operations relating to the quarter ended December 31, 1997 were made on January 29, 1998 in the aggregate amount of $91,168 ($2.61 per limited partnership unit).
COPLEY REALTY INCOME PARTNERS 1; A LIMITED PARTNERSHIP
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997
Note: (A) First mortgage with principal balance of $4,215,073 held by John Hancock Mutual Life Ins. Co. was paid off with proceeds of sale on April 9, 1996.
COPLEY REALTY INCOME PARTNERS 1. A LIMITED PARTNERSHIP
SCHEDULE III-NOTE B REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1995, 1996 & 1997
COPLEY REALTY INCOME PARTNERS 1; A LIMITED PARTNERSHIP
SCHEDULE III - NOTE C REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997, 1996 & 1995
EXHIBIT INDEX -------------
Exhibit Number Page Number - -------------- ----------- 10A. Corporation Grant Deed as recorded * September 10, 1986 from NBS Equity Corporation to the Registrant.
10B. Assignment of Lease, Escrow Agreement, * Construction Contracts and Warranties dated as of September 10, 1986 by and between NBS Equity Corporation and the Registrant.
10C. Spanish Trace Joint Venture Agreement * dated as of October 15, 1986 between Oxford Spanish Trace Partners and the Registrant.
10D. Joint Venture Agreement of East Anaheim * Distribution Center Associates ("East Anaheim"), dated as of December 31, 1986, by and between Davis Anaheim Distribution Center Associates, a California general partnership ("Davis") and the Partnership.
10E. Joint Venture Agreement of Medlock Oaks * Associates ("Medlock Oaks"), dated as of December 4, 1987, by and between the Partnership and Copley Realty Income Partners 2, a Limited Partnership (collectively, the "Affiliates") and Hill Limited #10, a Georgia limited partnership ("Hill").
10F. Promissory Note dated December 4, 1987 from * Medlock Oaks to the Affiliates.
10G. Deed to Secure Debt and Security Agreement * dated as of December 4, 1987 between Medlock Oaks and the Affiliates.
10H. Loan Agreement dated as of December 4, 1987 * between Medlock Oaks and the Affiliates.
10I. Office Warehouse Lease dated as of October 28, * 1987, by and between the Partnership and United Exposition Service Co., Inc., a Texas corporation.
- ----------------------------------------------------- * Previously filed and incorporated herein by reference.
EXHIBIT INDEX -------------
Exhibit Number Page Number - -------------- -----------
10J. Lease dated June 27, 1986 by and between * NBS Equity Corporation, as Landlord and Zehntel, Inc., as Tenant.
10K. Second Amendment to Joint Venture Agreement * of Medlock Oaks Associates ("Medlock Oaks"), dated as of January 1, 1990, by and among the Registrant, Copley Realty Income Partners 2; A Limited Partnership (collectively, the "Affiliates") and Hill Limited #10, a Georgia limited partnership ("Hill").
10L. Amended and Restated Promissory Note dated * as of January 1, 1990, from Medlock Oaks to the Affiliates.
10M. First Amendment to Deed to Secure Debt and * Security Agreement dated as of January 1, 1990 between Medlock Oaks and the Affiliates.
10N. First Amendment to Loan Agreement dated as * of January 1, 1990 between Medlock Oaks and the Affiliates.
10O. First Amendment to Promissory Note effective * as of January 1, 1991 by and between East Anaheim Distribution Center Associates and the Registrant.
10P. First Amendment to Construction Loan Agreement * effective as of January 1, 1991 by and between East Anaheim Distribution Center Associates and the Registrant.
10Q. Transfer and Assignment of Joint Venture Interest * in Medlock Oaks made and entered into as of September 3, 1991 by and between Hill Limited #10, a Georgia limited partnership, and the Registrant and Copley Realty Income Partners 2; A Limited Partnership, a Massachusetts limited partnership.
10R. Sublease dated as of March 16, 1994 by and between * United Exposition Co., Inc. ("sublessor")and Hydra Trucking, Inc. ("sublessee").
10S. Consent to Assignment of Property Management * Agreement between Medlock Oaks Associates and Anderson & Senkbeil, Inc. dated June 1, 1991, assigned to Weeks Corporation dated October 1 1992, to Weeks Realty Services, Inc., L.P. dated August 1, 1994.
27. Financial Data Schedule
- ----------------------------------------------------- * Previously filed and incorporated herein by reference.
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.
COPLEY REALTY INCOME PARTNERS 1; A LIMITED PARTNERSHIP
Date: March 25, 1998 By: /s/ Wesley M. Gardiner, Jr. --------------------------- Wesley M. Gardiner, Jr. President of the Managing General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
President, Chief Executive Officer and /s/ Wesley M. Gardiner, Jr Director March 25, 1998 - ------------------------------- Wesley M. Gardiner, Jr
Vice President and /s/ Pamela J. Herbst Director March 25, 1998 - --------------------------- Pamela J. Herbst
Vice President and /s/ J. Grant Monahon Director March 25, 1998 - --------------------------- J. Grant Monahon
/s/ James J. Finnegan Vice President March 25, 1998 - --------------------------- James J. Finnegan
Treasurer and Principal Financial /s/ Karin J. Lagerlund and Accounting Officer March 25, 1998 - --------------------------- Karin J. Lagerlund