Item 1. Business.
General
Corporate Realty Income Fund I, L.P. ("Registrant") is a Delaware limited partnership organized on November 25, 1985 pursuant to the Delaware Revised Uniform Limited Partnership Act. The general partners of Registrant are 1345 Realty Corporation, a Delaware corporation (the "Corporate General Partner"), and Robert F. Gossett, Jr. (the "Individual General Partner") (collectively, the "General Partners"). The limited partners of Registrant are hereinafter collectively referred to as the "Limited Partners."
Registrant's business consists of owning and leasing to others the properties described in Item 2
Item 2. Properties.
GE Medical Systems Office Building
On July 10, 1986, Registrant acquired the GE Medical Systems Office Building, located in Monterey Park, California, for approximately $4,182,000, inclusive of acquisition fees. Registrant owns fee title to the GE Building and its 90,000 square feet of underlying land, subject to the lien of the Loan (See Item 1. - "Business-Fleet Bank Loan"). The property was built in 1985 and contains 20,250 net rentable square feet, of which approximately 60% is office space and the remainder is warehouse space. The building contains an unusually high percentage of office space for a mixed use property, but Registrant prefers to avoid reconfiguring the space, both to avoid the construction cost and to obtain the higher rent for office space.
General Electric Company ("GE") leases 10,600 square feet in the building, on a net lease basis, until October 31, 2000. Annual net rent is $95,400 ($9.00 per square foot); GE also reimburses Registrant for its proportionate share of operating expenses.
Effective August 1, 1997, Registrant leased the other 9,650 square feet (approximately 55% of which is office space) to American Color Graphics, Inc. for an initial five year term with a five year renewal option. Annual rent is $48,078 ($9.00 per square foot for the office space only) until July 31, 1998 and $86,850 ($9.00 per square foot for all 9,650 square feet) from August 1, 1998 to February 29, 2000. The annual rent for the period from March 1, 2000 to July 31, 2002 is $86,850, increased by the cumulative increase in the Consumer Price Index from August 1, 1997 to March 1, 2000 (but not more than a three percent increase). The tenant also reimburses Registrant for its proportionate share of operating expenses. In 1997, Registrant became obligated to expend approximately $75,000 in tenant improvements in connection with this lease.
Market conditions in the Monterey Park area have improved in recent years after sharp declines from those prevailing at the time GE executed its initial lease for the building. The vacancy rate for commercial properties in such area approximates 20% for office buildings and 10% for industrial space. The GE Building is situated next to a 200,000 square foot Public Storage facility which, like the GE Building, consists of a front office with
warehouse space in the rear. Such facility is currently approximately 95% occupied; rents approximate $8.64 per square foot. Rents approximate $21.00 per square foot for office space, $6.00 per square foot for warehouse space, and $12.00 per square foot for mixed office/warehouse space in this area.
The Directory Building (formerly, the IBM Building)
On October 27, 1986, Registrant acquired the Directory Building, located in Las Colinas, Texas, for a purchase price of $24,580,375, inclusive of acquisition fees. Registrant owns fee title to the Directory Building and its 6.67 acres of underlying land, subject to the lien of the Loan. The Directory Building was built in 1982 and contains approximately 152,100 net rentable square feet (reduced from 154,300 square feet during IBM's tenancy).
The building is 100% leased to GTE pursuant to a lease dated as of April 20, 1994, as subsequently amended by amendments dated as of July 29, 1994 and as of February 22, 1995. The initial term of the lease expires on September 30, 2000, subject to a five-year renewal option at a rate equal to 95% of the then market rate.
The amended lease requires approximate monthly rent of $173,800 through September 30, 2000. GTE must also pay additional rent equal to excess electric charges and operating expenses over base levels.
In 1997, Registrant expended approximately $128,000 on capital improvements at the building, including installing a new airconditioning chiller. In connection with the GTE lease, Registrant has expended approximately $2,628,000 for tenant improvements, none of which was in 1997.
The Las Colinas office market includes approximately 13,237,900 leasable square feet, of which approximately 94% was leased as of December 31, 1997. Weighted average rental rates for new leases at such properties range from approximately $22.43 to $23.09 per square foot.
Austin Place Building
On December 30, 1986, Registrant acquired the Austin Place Building, a two-wing office building located in South Plainfield, New Jersey, for a purchase price of approximately $16,473,000, inclusive of acquisition fees. Registrant owns fee title to the Austin Place Building and its underlying five acres of land, subject to the lien of the Loan. The property was built in 1986 and contains approximately 106,600 net rentable square feet for use as a multi-tenant facility (reduced from 108,000 square feet as a single tenant facility).
As of March 17, 1998, the property is approximately 83.8% leased, with 45,700 square feet leased to Austin (as discussed below) and the remaining approximate 43,650 square feet at an
average current rent of approximately $18.45 per square foot. One of such leases has been extended past expiration pending negotiation of an expansion (approximately 4,100 square feet) and such other leases expire in December 2000 (approximately 17,900 square feet) and on May 31, 2007 (approximately 21,650 square feet). South Plainfield is included in the Route 287 submarket (approximately 6,400,000 square feet of which 15% is vacant), the Somerset County area (approximately 8,720,000 square feet, of which 6% is vacant), and the Central New Jersey area (approximately 41,373,000 square feet, of which 11% is vacant). Average rents for office space in such area approximate $18.00 to $22.00 per square foot. Registrant has expended approximately $2,205,000 for tenant improvements, all of which was incurred before 1997.
Austin's lease is for 45,700 square feet and expires on December 31, 2001. It requires monthly rent payments of $92,009, adjusted to reflect consumer price index changes. Austin's lease also requires it to pay Registrant an amount equal to the operating costs of its allocable share of the property. Austin has vacated its space but has continued to make its lease payments in full. Austin's lease requires rent payments at a rate which is approximately 100% above the rental rate otherwise obtainable for such space.
The James River Warehouse (formerly, the Crown Zellerbach Warehouse)
On February 28, 1997, Registrant sold the James River Warehouse (formerly, the Crown Zellerbach Warehouse). See Item 1 - "Business-James River Warehouse."
Flatiron Building (formerly, the Cadnetix Building)
On January 5, 1988, Registrant acquired the Flatiron Building, located in Flatiron Industrial Park, Boulder, Colorado, for $9,003,085, inclusive of acquisition fees. Registrant owns fee title to the Flatiron Building and its 5 acres of underlying land, subject to the lien of the Loan. The property contains approximately 96,070 net rentable square feet for use as a multi-tenant facility (reduced from 102,000 square feet as a single tenant facility).
As of March 19, 1998, Registrant has rented all available space in the building to various tenants pursuant to leases providing for an average current rent of approximately $9.56 per square foot (exclusive of expenses). Such leases expire in 1998 (approximately 69,015 square feet), in 2001 (approximately 10,820 square feet), and in 2002 (approximately 16,235 square feet).
On March 9, 1998, Integral Peripherals Inc., a tenant with an aggregate of approximately 54,135 square feet of space (56.3%) in the Flatiron Building filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Such space is leased pursuant to three separate leases, at rental rates ranging from $7.42 to $9.84 per square foot, all of which expire on October 31, 1998, and one of
which (for approximately 22,315 square feet) has been the subject of early termination negotiations. This tenant is current on its rent payments under these leases. There is no assurance that the leases will be affirmed in the bankruptcy proceeding. There is also no assurance that the early termination agreement will be approved by the Bankruptcy Court. Such termination, and early terminations of leases of two other tenants, would provide space for a new prospective tenant which is negotiating a lease for approximately 33,000 square feet. Depending upon the outcome of this tenant's bankruptcy proceeding and Registrant's negotiations to lease its space for expiring tenancies, the Flatiron Building may experience significant vacancies.
The Flatiron Building is zoned IG (Industrial General), which permits office use by manufacturers and industrial users (including software developers), but does not permit general office use by service providers such as attorneys and accountants. Registrant does not believe that such classification will adversely affect its ability to fully lease this building at market rates, and such classification does not affect any existing tenants (other than tenancies expiring in 1998 which are not being renewed).
Market conditions in the Boulder area remain favorable for owners of commercial buildings. The market for the Boulder area contains approximately 7.0 million square feet of commercial space of which approximately 8.85% is vacant. Average rents for office space in such area range from approximately $12.00 to $16.00 per square foot, exclusive of expenses. Registrant has expended approximately $455,000, none of which was in 1997, for tenant improvements for the Flatiron Building.
Marathon Oil Building (formerly, the Tenneco Building)
On March 21, 1988, Registrant acquired the Marathon Oil Building (formerly, the Tenneco Building), an office building located in Oklahoma City, Oklahoma, for approximately $10,736,200, inclusive of acquisition fees. Registrant owns fee title to the Marathon Oil Building with its 6.1 acres of underlying land, subject to the lien of the Loan. The property contains 90,925 net rentable square feet on two floors, plus a 10,016 square foot basement.
Marathon and its former affiliate, Koch Midstream Services Company ("Koch"), lease 62,625 square feet (including 4,344 in the basement) and 24,704 square feet (including 567 in the basement), respectively, in the building. Marathon's lease expires in 2001, subject to two five-year renewal options; Koch's lease also expires in 2001, but without any renewal option.
Annual rent under such leases is approximately $750,600 ($8.75 per square foot, plus $6.00 per square foot for basement space). Marathon and Koch must also pay additional rent equal to their proportionate share of any increases in operating costs of the building after 1996. Registrant has funded tenant improvements of
approximately $350,000 for Marathon and Koch, none of which was expended in 1997.
Registrant leased approximately an additional 5,600 square feet in the building in January 1997 for a five-year term at a rent of $11.00 per square foot. Registrant funded tenant improvements of approximately $74,000 in 1997 in connection with this lease. The remaining space (approximately 3.2% of the office space, plus approximately 51% of the basement) is vacant and Registrant is seeking a tenant for such space; however, the space is difficult to rent and would require significant tenant improvements.
Market conditions in the northwest section of Oklahoma City have continued recent improvements from the declines experienced after Tenneco executed its lease for the building. Such market contains approximately 4.85 million square feet of commercial space of which approximately 6.5% is vacant. Average rents for commercial space range from $8.00 to $18.00 per square foot, with a weighted average rate of $12.06 per square foot.
475 Fifth Avenue
On December 6, 1996, Registrant purchased the land, building and other improvements commonly known as 475 Fifth Avenue, and situated in New York, New York, for $27,439,998, including capitalized closing and related costs. The property contains a multi-tenant office building comprised of approximately 240,000 square feet and is located on the southeast corner of 41st Street and Fifth Avenue in New York City; Registrant owns fee title to 475 Fifth Avenue, subject to the lien of the Fleet Bank loan, described above.
475 Fifth Avenue is a 23-story office building with approximately 19,200 square feet of retail space on the first floor and basement, 215,700 square feet of office space, and 5,000 square feet of basement storage space. As of March 17, 1998, approximately 85.3% of the rentable square footage in the building was leased (including approximately 84.1% of the office space, 100% of the retail space, and 80.1% of the basement space), at an average current base rent of approximately $26.92 per square foot (approximately $23.33 per square foot of office space and $60.75 per square foot of retail space). Following is a schedule of the expirations of such leases.
================================================================================ Avg. Current Expiration Approximate Base Rent/ Year Square Feet % of Total Sq. Ft. - - -------------------------------------------------------------------------------- 1998 11,949 5.1% $15.89 - - -------------------------------------------------------------------------------- 1999 8,044 3.4% $15.84 - - -------------------------------------------------------------------------------- 2000 9,308 4.0% $22.92 - - -------------------------------------------------------------------------------- 2001 18,453 7.9% $28.13 - - -------------------------------------------------------------------------------- 2002 1,296 0.6% $25.00 - - -------------------------------------------------------------------------------- 2003 6,823 2.9% $25.93 - - -------------------------------------------------------------------------------- 2004 40,110 17.1% $29.29 - - -------------------------------------------------------------------------------- 2005 32,507 13.8% $34.22 - - -------------------------------------------------------------------------------- 2006 16,144 6.9% $24.52 - - -------------------------------------------------------------------------------- 2007 5,636 2.4% $26.15 - - -------------------------------------------------------------------------------- 2008 47,399 20.2% $22.39 - - -------------------------------------------------------------------------------- 2012 2,947 1.3% $84.68 ================================================================================
Registrant's leases generally provide for a base rent, inclusive of an electricity charge, plus additional rent in the form of operating expense and real estate tax escalation factors. Registrant has commenced a capital improvement program, designed to increase rental rates and the value of the building, which includes the following: replacement of heating system risers ($400,000, completed in 1997 and early 1998) and radiators (estimated at $1,100,000, of which approximately $265,000 has been expended); installing a building-wide sprinkler system (estimated at $600,000 to $700,000 plus $10,000 to $35,000 for the distribution system on each floor); installing airconditioning in the lobby (approximately $100,000 to $150,000); upgrading the fire system and electrical closets on each floor (estimated at $300,000, of which approximately $65,000 has been expended); and window replacement (approximately $400,000, of which approximately $150,000 has been completed). Certain of such improvements can only be made as tenancies expire and thus will not be made for several years. These improvements have been, and are expected in the future to be, funded from working capital and loan drawdowns and eventually from anticipated increases in rental income.
475 Fifth Avenue is situated in the Grand Central district of the New York City midtown market. Such district includes 79 buildings with approximately 34,200,000 aggregate rentable square feet, of which approximately 11.3% is currently vacant. Asking rents in this district average approximately $33.30 per square foot. The entire midtown market includes 361 buildings with
approximately 194,500,000 aggregate rentable square feet, an approximate 9.1% vacancy rate, and average asking rents of approximately $35.86 per square foot.
Alamo Towers
On March 17, 1997, Registrant acquired the Alamo Towers in San Antonio, Texas. See Item 1 - "Business-Alamo Towers."
Item 3.
Item 3. Legal Proceedings.
Registrant does not know of any material legal proceedings, other than ordinary immaterial routine litigation incidental to its business, pending against or involving Registrant or any of its properties.
Item 4.
Item 4. Submission of Matters to a Vote of Security-Holders.
There were no matters submitted to a vote of Limited Partners or Unitholders and none were required to be submitted during the fourth quarter of the fiscal year covered by this report through the solicitation of proxies or otherwise.
PART II
Item 5.
Item 5. Market for Registrant's Securities and Related Security- Holder Matters.
The Units of Registrant are not traded in any established public trading market. Because of certain provisions of the Internal Revenue Code of 1986, as amended (the "Code"), as described below, the General Partners have not applied to include the Units for quotation or listing on any national or regional stock exchange or any other established securities market.
Registrant has administered a Unit Repurchase Plan since 1995, pursuant to which Registrant, in its discretion, has purchased outstanding Units. Any such purchases are made at prices no higher than the lowest current independent offer quotation. During 1997, Registrant repurchased 50,895 Units at a price of $10.75 per Unit. Registrant is limited by the terms of the Loan to an aggregate of $3,000,000 in Unit repurchases. In addition, repurchases both divert funds otherwise available for capital improvements and require a monthly reallocation of Unitholders' interests. For these reasons, in February 1998 Registrant suspended its Unit Repurchase Plan, electing to limit future repurchases, if any, to the final one or two months of a calendar year. To provide an alternative outlet for Unit sales, the General Partners or their affiliates may, during any periods of suspension in Registrant's Unit Repurchase Plan, purchase Units on the same terms and conditions as under the Unit Repurchase Plan.
Provisions found in Section 7704 of the Code have an adverse impact on investors in a "publicly traded partnership" ("PTP"). A PTP is a partnership whose interests are traded on an established securities market or readily tradeable on a secondary market (or the substantial equivalent thereof). If Registrant were classified as a PTP, (i) Registrant may be taxed as a corporation or (ii) income derived from an investment in Registrant would be treated as non-passive income.
The IRS has established alternative safe harbors that allow interests in a partnership to be transferred or redeemed in certain circumstances without causing the partnership to be characterized a PTP. Although the Units are not listed or quoted for trading on an established securities market, it is possible that transfers of Units could occur in a secondary market in sufficient amount and frequency to cause Registrant to be treated as a PTP. To the extent that any proposed transfer of Units in secondary market transactions would exceed a safe harbor volume limitation, the proposed transfer will be restricted pursuant to a policy adopted by Registrant. Such a restriction could impair the ability of an investor to liquidate its investment quickly and thus, possibly prevent the reclassification of Registrant as a corporation pursuant to Code Section 7704. It is anticipated that Registrant's policy will remain in effect until such time, if ever, as further clarification of Code Section 7704 permits Registrant to lessen the scope of its policy.
The General Partners, if so authorized, will take such steps as are necessary, if any, to prevent the reclassification of Registrant as a PTP.
As of March 30, 1998, there were 2,996 Unitholders of record.
The following represents per Unit cash distributions to investors for the fiscal years ended December 31, 1997 and 1996.
Distribution Quarter Ended Per Unit Payment Date - - ------------- -------- ------------ December 31, 1997 $ 0.30 February 1998
September 30, 1997 $ 0.30 November 1997
June 30, 1997 $ 0.30 August 1997
March 31, 1997 $ 0.30 May 1997
December 31, 1996 $ 0.30 February 1997
September 30, 1996 $ 0.30 November 1996
June 30, 1996 $ 0.30 August 1996
March 31, 1996 $ 0.30 May 1996
There are no material legal restrictions upon Registrant's present or future ability to make distributions in accordance with the provisions of Registrant's Agreement of Limited Partnership, as amended through the date of this report. However, the Loan Agreements limit distributions to 90% of the sum of cash from operations, depreciation and amortization. See, however, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of economic conditions affecting Registrant's ability to make distributions in the future.
Item 6.
Item 6. Selected Financial Data.
- - ---------- (1) Per Unit numbers are based on 3,200,000 Units for all years except 1997, 1996 and 1995, which use a weighted average number of Units of 3,022,594, 3,087,170 and 3,184,222, respectively.
(2) Each year's distributions include funds distributed after the end of the year which are attributable to that year.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Liquidity and Capital Resources
At December 31, 1997, Registrant had cash and receivables of approximately $1,334,000 as contrasted to accounts payable and accrued expenses of approximately $1,986,000. Registrant measures its liquidity by its ability to generate sufficient cash flow from operations to meet its current operating and debt service requirements on a short-term and long-term basis. Registrant's operations have provided this liquidity and are expected to continue to do so. To the extent additional funds are required, the Loan provides a source of additional capital.
Registrant has been investing capital in acquiring additional properties and improving its existing and additional properties with a view to increasing its revenues from real estate operations and ultimately realizing appreciation in property values. Registrant's acquisition of 475 Fifth Avenue in New York, New York
and Alamo Towers in San Antonio, Texas and its sale of the James River Warehouse in Woodland, California demonstrate this policy. Capital resources have also been employed since the beginning of 1997 to make the following capital improvements: approximately $75,000 in tenant improvements in connection with a new lease at the GE Medical Systems Office Building; approximately $128,000 for capital improvements, including installing a new airconditioning chiller at the Directory Building; approximately $74,000 in tenant improvements in connection with a new lease at the Marathon Oil Building; approximately $880,000 in capital improvements at 475 Fifth Avenue; and approximately $89,000 in capital improvements and $121,200 in tenant improvements at Alamo Towers. Registrant may also require capital to fund additional tenant improvements as tenancies turn over at its properties as well as further capital improvements at 475 Fifth Avenue (estimated at $2,445,000) and Alamo Towers (estimated at $260,000 to $270,000). These additional capital improvements are expected to be made over several years, as tenancies expire.
Integral Peripherals Inc., which leases approximately 56% of the Flatiron Building, pursuant to leases expiring in October 1998, has filed for protection under Chapter 11 of the U.S. Bankruptcy Code. To the extent all or a portion of such space is unproductive for any length of time, Registrant will face an additional capital demand. However, this tenant's rental payments constituted only approximately three percent of Registrant's aggregate 1997 property revenues, so any effect is expected to be limited.
To date, Registrant has funded its capital requirements from the Loan and, previously, out of working capital and through reductions in distributions to partners. Registrant's quarterly distribution to partners for each of the four quarters of 1997 was $0.30 per Unit. Registrant intends to maintain this level of distributions through 1998 and, if possible, thereafter. However, to the extent Registrant's sources of capital are inadequate for its requirements, Registrant may need to reduce or suspend distributions to partners, incur additional indebtedness, and/or dispose of one or more of its properties.
The Loan has provided Registrant with available capital to acquire properties, fund improvements and leasing commissions, repurchase outstanding Units, and otherwise fund capital requirements. The cost of such financing ultimately must be offset by increased property revenues or Registrant's operations and capital will be compromised. Upon maturity of the Loan in 2000, Registrant anticipates satisfying the Loan out of the proceeds of a refinancing or a sale of assets.
Registrant has used working capital reserves provided from the net proceeds of the Offering, loan proceeds, and any undistributed cash from operations as its primary source of liquidity. Registrant generally intends to distribute its distributable cash from operations to Unitholders. However, such distributions are subject to suspension or reduction to meet capital requirements and
are also limited by the Loan Agreements to 90% of cash from operations plus depreciation and amortization.
Results of Operations
1997 versus 1996
Rental revenues increased significantly (61.8%) from 1996 to 1997, reflecting a full year's operations at 475 Fifth Avenue and the acquisition of Alamo Towers, more than offsetting the sale of the James River Warehouse, plus the leasing in 1997 of previously vacant space in the GE Medical Systems Office Building and the Marathon Oil Building.
Interest expense in 1997 increased substantially (232.2%) from 1996, reflecting a full year's expense of the Fleet Bank loan ($42,600,000 in aggregate advances) as compared to the PNC Bank loan ($7,800,000 line of credit). Depreciation increased in 1997 by 19.6% because of the excess of property acquisitions (475 Fifth Avenue and Alamo Towers) over dispositions (James River Warehouse) and because of capital improvements made at 475 Fifth Avenue, Alamo Towers, and the Directory Building. Amortization increased by 53.6% from 1996 to 1997 primarily because of financing costs related to the Fleet Bank loan. The net effect of the acquisition of 475 Fifth Avenue and Alamo Towers as contrasted to the disposition of the James River Warehouse is primarily responsible for the 136.4% increase in property operation expenses in 1997. Management fees increased by 78.3% in 1997 primarily due to property management fees computed as a percentage of Registrant's increased rental revenues. General and administrative expenses decreased by 7.6% primarily because of the absence in 1997 of due diligence expenses incurred in 1996 in investigating property acquisitions which were not ultimately consummated.
Registrant realized a net loss from real estate operations of $1,333,393 in 1997 as compared to net income of $677,914 in 1996. A $912,501 gain from the sale of the James River Warehouse in 1997 reduced the net loss to $420,892. After adjusting for non-cash items (principally depreciation and amortization), operations generated cash flows of approximately $2,710,000 in 1997 and $3,620,000 in 1996 (a 25.2% decrease). The $912,501 gain from the sale of the James River Warehouse increased cash flows in 1997 to approximately $3,620,000, the level achieved in 1996.
The net loss from real estate operations in 1997 is primarily attributable to the inability of current operations at 475 Fifth Avenue and Alamo Towers to offset the financing costs of the Loan. Registrant expects the combination of its capital improvement program and rising market rental rates to restore its real estate operations to profitability. Registrant initially concentrated its capital improvement program on 475 Fifth Avenue, conditioning the building, after tenant improvement construction and any rent concession periods, to realize the benefits of rising market rental rates as it leases vacant space and renews or replaces expiring
tenancies. Registrant intends to fully implement its capital improvement program at Alamo Towers in 1998. Leasing its vacant space (approximately 16% of office space at 475 Fifth Avenue and 13% of office space at Alamo Towers) will provide additional rental revenues with little additional operating expenses.
1996 versus 1995
Rental revenues in 1996 decreased slightly (0.3%) from 1995 primarily as a result of the expiration of Tenneco's original lease for the Marathon Oil Building in February 1996 and the subsequent leasing of less than all of such space to Marathon and Koch at lower rents. Other income dropped significantly (94.2%) from 1995 to 1996, reflecting the receipt in 1995 of $227,000 of other income attributable to Gypsum (a former tenant of the Austin Place Building) and Registrant's receipt in 1995 of a large real estate tax refund attributable to the Austin Place Building.
Interest expense in 1996 increased by 31.7% from 1995, primarily because of the replacement of the PNC Bank loan with the greater amount of the Fleet Bank loan. Depreciation increased by 5.3% because of additional tenant improvements made by Registrant and the purchase in December 1996 of 475 Fifth Avenue. Amortization increased by 44.6% in 1996 primarily due to financing costs incurred in connection with the Fleet Bank loan. The acquisition of 475 Fifth Avenue in December 1996 is largely responsible for the increase (9.4%) in property operation expenses. Professional fees decreased in 1996 (61.8%) in comparison to the increased level of due diligence investigations of possible property acquisitions in 1995. General and administrative expenses increased by 53.8% in 1996 primarily due to significant due diligence expenses incurred by Registrant in 1996 in investigating possible property acquisitions which were not ultimately consummated.
Net income was $677,914 in 1996 as compared to $2,008,688 in 1995 (a 66.3% decrease). After adjusting for non-cash items (principally deferred revenue, depreciation, and amortization), operations generated cash flows of approximately $3,620,000 in 1996 and $4,160,000 in 1995 (a 13.0% decrease).
Inflation
In the past, inflation has not had a material impact on Registrant's operations or financial condition, as certain leases of Registrant's properties provide for increases in rents based on changes in the consumer price index, and other leases provide lease payments that escalate over time. Registrant's properties with performing leases are protected by arrangements whereby the tenants pay to Registrant an amount equal to all or a portion of the operating costs of the properties, with Registrant's share of expenses, if any, subject to a predetermined limit. These arrangements help to insulate Registrant from the effects of any increases in operating costs. However, to the extent that there is vacant space or nonperforming leases at any of the Registrant's
properties, Registrant lacks this protection against inflation, particularly with regards to increased expenses that are not reimbursed.
Year 2000 Considerations
Registrant has determined that it will need to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and beyond. Registrant also has initiated discussions with its significant suppliers, large customers and financial institutions to ensure that those parties have appropriate plans to remediate Year 2000 issues where their systems interface with Registrant's systems or otherwise impact its operations. Registrant is assessing the extent to which its operations are vulnerable should those organizations fail to remediate properly their computer systems.
Registrant is currently replacing its computer software system, which is scheduled to be completed in early 1999. While Registrant believes its planning efforts are adequate to address its Year 2000 concerns, there can be no guarantee that the systems of other companies on which Registrant's systems and operations rely will be converted on a timely basis and will not have a material effect on Registrant. The cost of the Year 2000 initiatives is not expected to be material to Registrant's results of operation or financial position.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Registrant does not invest in any market risk sensitive instruments, for trading purposes or for other purposes.
Item 8.
Item 8. Financial Statements and Supplementary Data.
See list of Financial Statements and Financial Statement Schedules at page, filed as part of this report.
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 Registrant.
Registrant has no officers or directors. The General Partners manage and control substantially all of Registrant's affairs and have general responsibility and ultimate authority in all matters affecting Registrant's business.
The Individual General Partner is Robert F. Gossett, Jr. The Corporate General Partner is 1345 Realty Corporation. All of the outstanding capital stock of 1345 Realty Corporation is owned by the Individual General Partner and his wife.
The directors and executive officers of the Corporate General Partner are as follows:
Officer/ Director Name Age Position Since ---- --- -------- -----
Robert F. Gossett, Jr. 54 President, Treasurer and Director 1994 Pauline G. Gossett 54 Secretary 1994
Information with respect to the Individual General Partner and with respect to the above officers and directors is set forth below:
Robert F. Gossett, Jr., the Individual General Partner since 1985, is Managing Director of Vance Capital Corporation (1981 to present), a real estate management and finance company. Between 1978 and 1981, Mr. Gossett served as Executive Vice President and Director of Loeb Capital Corporation. From 1974 until 1978, he was a Vice President of Oppenheimer Properties, Inc. and, between 1969 and 1974, was associated with the Investment Banking Division of Merrill, Lynch, Pierce, Fenner & Smith, Inc. He received a B.A. degree from the University of Texas, a J.D. degree from Georgetown University, and an M.B.A. degree from the University of Pennsylvania. He is a member of the Texas Bar.
Pauline G. Gossett, the Secretary of the Corporate General Partner, is a stockholder and Director of Vance Capital Corporation (1981 to present). Mrs. Gossett received an Associate of Arts degree from Briarcliff College. Mrs. Gossett is the wife of Robert F. Gossett, Jr.
Registrant employs the following employees who make significant contributions to the business of Registrant:
Employee Name Age Position Since ---- --- -------- -----
James N. Walsh 44 Property Manager 1997 John R. Anthis, Jr. 57 Property Manager 1997 Wallis J. Hoskins 44 Property Manager 1993 Madeline Matlak 32 Fund Administrator 1994
James N. Walsh is the Property Manager for 475 Fifth Avenue. Mr. Walsh has been designated a Real Property Administrator (RPA) by the Building Owners and Managers Association. From 1989 to 1997, he was a building manager, comptroller, and leasing manager for 584 Operating Corp., the owner of an office building in New York, New York which is similarly sized to 475 Fifth Avenue. Prior thereto, Mr. Walsh served for four years as an assistant comptroller and construction accountant for the residential division of Cadillac Fairview. He also acted for four years as a project accountant for residential properties owned by Olympia & York. Mr. Walsh received a B.B.A. degree in accounting from Iona College.
John R. Anthis, Jr. is the Property Manager for Alamo Towers. Mr. Anthis has been designated a Real Property Administrator (RPA, 1983) by the Building Owners and Managers Association (San Antonio BOMA Manager of the Year, 1986-1987) and a Certified Property Manager (CPM, 1988) and is a licensed real estate broker in Texas. Mr. Anthis was a member of the Board of Directors of the Texas State Building Owners and Managers Association (1978 to 1980 and 1982 to 1990; President 1988 to 1989), the San Antonio Building Owners and Managers Association (1979 to 1982 and 1984 to 1986; President 1978 to 1979), and San Antonio Institute of Real Estate Management (1992 to present; President in 1995). From 1995 to 1997, he was a sales representative and a branch manager for Associated Building Services, a commercial real estate cleaning company in San Antonio. Mr. Anthis was General Manager of Homart Development Co. from 1987 to 1994, managing a 200,000 square foot office building and parking garage. From 1975 to 1986, he was a Vice President for Bank Alamo (and its pre-merger predecessor, San Antonio Bank & Trust Co.), managing office buildings and parking garages. Mr. Anthis also served as a Manager for Koger Properties, Inc. from 1973 to 1975, leasing a 14 building office park. Mr. Anthis served in the U.S. Army from 1963 to 1969, earning the Bronze Star Medal-Meritorious Service. He received a B.S. degree in Civil Engineering from Texas A&M University and an M.B.A. degree in Management from Georgia State University.
Wallis J. Hoskins is the Property Manager for the Austin Place Building. For the 20 years prior thereto he was employed by The Prudential Insurance Company of America, from 1981 to 1992 as a facilities manager for company-owned buildings and from 1973 to 1980 as a claims approver.
Madeline Matlak is the Fund Administrator of the Registrant. Mrs. Matlak was formerly employed as a Fund Administrator in the Direct Investment Department of Smith Barney, Inc. (1989 through 1994).
Based solely upon its review of copies of Forms 3 received by it during 1997, and written representations from reporting persons that no Forms 5 were required for such persons for 1997, Registrant believes that all filing requirements applicable to its General Partners and the directors and officers of the Corporate General Partner pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended, for 1997 and prior years were complied with on a timely basis except as previously reported.
Item 11.
Item 11. Executive Compensation.
Registrant is not required to and did not pay remuneration to the officers and directors of the Corporate General Partner. However, the General Partners and/or their affiliates receive compensation for services performed for Registrant.
Summary Compensation Table
Share of Adjusted Cash Management Leasing Expense Name Year from Operations Fees Commissions Reimbursement - - ---- ---- --------------- ---- ----------- -------------
Corporate General Partner 1997 $29,419 $806,602 -0- $ 48,298
Individual General Partner 1997 $ 7,355 $201,650 -0- $ 12,074
Corporate General Partner 1996 $30,071 $452,415 88,467 $132,829
Individual General Partner 1996 $ 7,518 $113,104 22,117 $ 33,207
Corporate General Partner 1995 $31,006 $445,625 $194,490 $106,714
Individual General Partner 1995 $ 7,752 $111,406 $ 48,623 $ 26,679
See Item 13 - "Certain Relationships and Related Transactions" for a discussion of the above compensation.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
As of March 15, 1998 no person was known by Registrant to be the beneficial owner of more than five percent (5%) of the outstanding Units of Registrant.
As of March 15, 1998, neither the Individual General Partner nor the Corporate General Partner nor any of its directors or officers owned any Units of Registrant.
Robert F. Gossett, Jr., the Individual General Partner and an officer and director of the Corporate General Partner, and Pauline G. Gossett, an officer of the Corporate General Partner, own all of the outstanding capital stock of the Corporate General Partner.
Item 13.
Item 13. Certain Relationships and Related Transactions.
Registrant has and will continue to have certain relationships with the General Partners and their affiliates as discussed below.
The General Partners received $36,774 ($29,419 to the Corporate General Partner and $7,355 to the Individual General Partner) as their allocable share (1%) of adjusted cash from operations with respect to the year ended December 31, 1997. For the year ended December 31, 1997, $4,209 (1%) of Registrant's net loss was allocated to the General Partners ($3,367 to the Corporate General Partner and $842 to the Individual General Partner).
The General Partners or their affiliates are also entitled to receive: a partnership management fee for managing the affairs of Registrant, equal to 7% of adjusted cash from operations less the asset management fee; an asset management fee for managing Registrant's funds which are not invested in properties, equal to 0.5% per annum of the average amount of outstanding funds during each calendar month which are not otherwise invested in properties; and a property management fee for property management services for Registrant's properties, equal to the normal and competitive fees customarily charged by unaffiliated parties rendering similar services in the same geographic area, not to exceed 1% of the annual gross revenues for leases with terms of ten years or more or 6% of the annual gross revenues for replacement leases. During the year ended December 31, 1997, the General Partners earned and were paid an aggregate of $1,008,252 of such management fees ($806,602 to the Corporate General Partner and $201,650 to the Individual General Partner). At December 31, 1997 all of such fees had been paid.
The General Partners are also entitled to receive leasing commissions in connection with leasing, releasing or
leasing related services performed on behalf of the Registrant in connection with the negotiation of tenant leases. Such fees are computed at a rate equal to 3% of the gross revenue for the first five years of each lease signed where the General Partners performed such leasing services. During the year ended December 31, 1997, no such fees were paid to the General Partners.
During the year ended December 31, 1997, the General Partners were also entitled to reimbursement for expenses incurred in connection with Registrant's operations aggregating $60,372 ($48,298 to the Corporate General Partner and $12,074 to the Individual General Partner).
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1), (2)See page. Sequential Page Number ---------- (a)(3) Exhibits:
3. Certificate of Limited Partnership, incorporated by reference to Exhibit 4 to Registration Statement No. 33-2258 (the "Registration Statement").
4.(a) Amended and Restated Agreement of Limited Partnership dated as of July 24, 1995, incorporated by reference to Exhibit 4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995.
10.(a) Property Management Agreement, incorporated by reference to Exhibit 10B to the Registration Statement.
(b) Lease for Los Angeles District Sales and Service Office, Monterey Park, California, dated as of December 15, 1984 between James E. Pohrer & Associates and General Electric Company, incorporated by reference to Exhibit 10(e) to Form 8, Amendment No. 1 to Registrant's Current Report on Form 8-K Dated July 10, 1986.
Sequential Page Number ----------
(c) Lease Amendment dated October 31, 1989 by and between Registrant and General Electric Company, incorporated by reference to Exhibit 10(c) to Registrant's Report on Form 10-K for the year ended December 31, 1989.
(d) Lease dated as of December 30, 1986 by and between Registrant and Austin, incorporated by reference to Exhibit 10(b) to Registrant's Current Report on Form 8-K Dated December 30, 1986.
(e) Management Agreement dated January 5, 1988 by and between Registrant and Colorado Management Group, incorporated by reference to Exhibit 10(e) to Registrant's Current Report on Form 8-K Dated January 5, 1988.
(f) Lease dated as of April 20, 1994 between Registrant and GTE.1
(g) Amendment No. 1 to Lease dated as of July 29, 1994 between Registrant and GTE.1
- - ---------- 1 Incorporated by reference to Exhibits 10(y), (z), and (aa) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
Sequential Page Number ----------
(h) Amendment No. 2 to Lease dated as of February 22, 1995 between Registrant and GTE.1
(i) Secured Promissory Note dated September 26, 1996, made by Registrant.2
(j) Loan Agreement dated as of September 26, 1996 between Registrant and Fleet Bank, N.A.2
(k) Environmental Compliance and Indemnification Agreement dated __________, 1996, made by Registrant.2
(l) First Amendment of Loan Agreement and Note dated December __, 1996 between Registrant and Fleet Bank, N.A..2
(m) Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated September 26, 1996, made by Registrant with respect to the GE Medical Systems Office Building.2
(n) First Amendment to Deed of Trust dated December __, 1996, made by Registrant with respect to the GE Medical Systems Office Building.2
- - ---------- 2 Incorporated by reference to Exhibits 10(i), (j), (k), (l), (m), (n), (o), (p), (q), (r), (s), (t), (u), (v), (w), (x), (y), (z), (aa), (bb), and (cc) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.
Sequential Page Number ----------
(o) Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated September 26, 1996, made by Registrant with respect to the Flatiron Building.2
(p) First Amendment to Deed of Trust dated December __, 1996, made by Registrant with respect to the Flatiron Building.2
(q) Mortgage, Assignment of Leases and Rents and Security Agreement dated September 26, 1996, made by Registrant with respect to the Austin Place Building.2
(r) First Amendment to Mortgage dated December __, 1996, made by Registrant with respect to the Austin Place Building.2
(s) Mortgage, Assignment of Leases and Rents and Security Agreement dated December __, 1996, made by Registrant with respect to 475 Fifth Avenue.2
(t) Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated September 26, 1996, made by Registrant with respect to the Marathon Oil Building.2
- - ----------
Sequential Page Number ----------
(u) First Amendment to Mortgage dated December __, 1996, made by Registrant with respect to the Marathon Oil Building.2
(v) Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated September 26, 1996, made by Registrant with respect to the Directory Building.2
(w) First Amendment to Deed of Trust dated December __, 1996, made by Registrant with respect to the Directory Building.2
(x) Sale Agreement dated as of November 13, 1996 between Metropolitan Life Insurance Company and Registrant with respect to 475 Fifth Avenue, including as Exhibits:
(i) Bargain and Sale Deed; (ii) Form of Assignment of Leases; (iii) Form of Assignment of Contracts.2
(y) Purchase and Sale Agreement dated as of February 5, 1997 between Registrant and Pacific Gulf Properties Inc. with respect to the James River Warehouse, including as Exhibits:
(i) Assignment and Assumption Agreement; (ii) Form of Deed.2
(z) First Amendment to Purchase and Sale Agreement dated February 21, 1997 with respect to the James River Warehouse.2
- - ----------
(aa) Purchase and Sale Agreement dated as of January 28, 1997 between St. Paul Properties, Inc. and Registrant with respect to the Alamo Towers, including as Exhibits:
(i) Bill of Sale; (ii) Assignment and Assumption Agreement; (iii) Form of Deed.2
(bb) First Amendment to Purchase and Sale Agreement dated February 19, 1997 with respect to the Alamo Towers.2
(cc) Second Amendment of Loan Agreement dated March 17, 1997 among Fleet Bank, First American Bank Texas SSB, and Registrant.2
27. Financial Data Schedule.
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the last quarter of the period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CORPORATE REALTY INCOME FUND I, L.P. (Registrant)
By: 1345 REALTY CORPORATION as Corporate General Partner
Dated: March 30, 1998 By: /s/ Robert F. Gossett, Jr. ---------------------------------- ROBERT F. GOSSETT, JR., President
Dated: March 30, 1998 By: /s/ Robert F. Gossett, Jr. ---------------------------------- ROBERT F. GOSSETT, JR. Individual 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 (with respect to the Corporate General Partner) and on the dates indicated.
1345 REALTY CORPORATION
Dated: March 30, 1998 By: /s/ Robert F. Gossett, Jr. ---------------------------------- Robert F. Gossett, Jr. President, Director
Dated: March 30, 1998 By: /s/ Pauline G. Gossett ---------------------------------- Pauline G. Gossett Secretary
Corporate Realty Income Fund I, L.P.
List of Financial Statements and Financial Statement Schedules
The following financial statements of Corporate Realty Income Fund I, L.P. are included in Item 8:
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted since (1) the information required is disclosed in the financial statements and notes thereto; (2) the schedules are not required under the related instructions; or (3) the schedules are inapplicable.
Report of Independent Auditors
To the Partners of Corporate Realty Income Fund I, L.P.
We have audited the accompanying balance sheet of Corporate Realty Income Fund I, L.P. (a Delaware limited partnership) as of December 31, 1997 and the related statements of operations, changes in partners' capital and cash flows for the year then ended. We also have audited the financial statement schedule listed on the Index at Item 14 (a). These financial statements and the financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Corporate Realty Income Fund I, L.P. as of December 31, 1997 and the results of its operations and its cash flows for the year ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
New York, New York January 30, 1998
Independent Auditors' Report
The Partners Corporate Realty Income Fund I, L.P.:
We have audited the financial statements of Corporate Realty Income Fund I, L.P. (a Delaware limited partnership) as listed in the accompanying index insofar as they relate to December 31, 1996 and each of the years in the two-year period ended December 31, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurances about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Corporate Realty Income Fund I, L.P. as of December 31, 1996 and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 1996, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
New York, New York February 5, 1997
Corporate Realty Income Fund I, L.P. (A Delaware Limited Partnership)
Balance Sheets
See accompanying notes.
Corporate Realty Income Fund I, L.P. (A Delaware Limited Partnership)
Statements of Operations
See accompanying notes.
Corporate Realty Income Fund I, L.P. (A Delaware Limited Partnership)
Statements of Changes in Partners' Capital
See accompanying notes.
Corporate Realty Income Fund I, L.P. (A Delaware Limited Partnership)
Statements of Cash Flows
See accompanying notes.
Corporate Realty Income Fund I, L.P. (A Delaware Limited Partnership)
Notes to Financial Statements
December 31, 1997
1. Organization
Corporate Realty Income Fund I, L.P. (the "Partnership") was formed as a limited partnership on November 25, 1985 under the laws of the State of Delaware. The Partnership was formed for the purpose of acquiring and owning income-producing commercial and industrial real estate properties for lease to others. The Partnership will terminate on December 31, 2010 or sooner, in accordance with the Partnership Agreement.
The general partners of the Partnership are 1345 Realty Corporation, the corporate general partner, and Robert F. Gossett, Jr., the individual general partner.
On November 30, 1994, all of the outstanding capital stock of the corporate general partner was acquired by the individual general partner in a transaction which was effective as of July 1, 1994. As a result of this acquisition, the entire interest of the general partners is controlled by the individual general partner.
The initial capital was $1,025 representing capital contributions of $1,000 by the general partners and $25 by the original limited partner. The Partnership commenced operations on June 2, 1986 with the acceptance of subscriptions for 1,082,640 Depositary Units of limited partnership interest (the "Units"). The Partnership has authorized the issuance of up to 4,000,000 Units. The Partnership sold 3,200,000 Units, representing $80,000,000, which completed the offering. Upon the first admittance of the additional limited partners and unitholders, the original limited partner withdrew from the Partnership.
Offering costs incurred in connection with the initial offering are nonamortizable and have been deducted from limited partners' capital.
During 1997 and 1996, 50,895 and 84,778 units, respectively, were redeemed from unitholders and canceled.
Corporate Realty Income Fund I, L.P. (A Delaware Limited Partnership)
Notes to Financial Statements (continued)
2. Significant Accounting Policies
Depreciation
Depreciation of buildings for financial reporting purposes is computed under the straight-line method over an estimated economic useful life of forty years. Depreciation of buildings for tax purposes is determined in accordance with the Accelerated Cost Recovery System.
Deferred Financing Costs
Deferred financing costs are being amortized using the straight-line method over the term of the loan agreement.
Deferred Rent
Rental income is recognized on the straight-line basis over the entire term of the lease including rent-free periods. Accordingly, rental income for the years ended December 31, 1997, 1996 and 1995, includes approximately $169,154, $160,361 and $543,871, respectively, of the excess of income on the straight-line basis over the actual amount billed. During 1997, upon the sale of the James River Building, deferred rent receivable of approximately $158,933 was written-off.
Income Taxes
No provision for income taxes has been made since all items of income or losses and tax benefits are passed through to the individual partners. At December 31, 1997 and 1996, the net difference between the tax bases and the reported amounts of assets and liabilities was $13,839,658 and $14,367,316, respectively.
Cash Equivalents
The Partnership considers all highly liquid financial instruments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents, which consist principally of money market funds, are carried at cost which approximates market value.
Corporate Realty Income Fund I, L.P. (A Delaware Limited Partnership)
Notes to Financial Statements (continued)
2. Significant Accounting Policies (continued)
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The Partnership's accounts receivable and note receivable, deposits, accounts payable and accrued expenses, interest payable and mortgage loan payable are carried at cost, which approximates fair value.
Adoption of Recently Issued Accounting Standards
The Partnership adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the Partnership's assets, which are held for use, are measured by a comparison of the carrying amount of an asset to future net cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by which the carrying amount of the assets exceeds the fair value. Assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. No impairment losses were required on any of the properties owned by the Partnership.
Use of Estimates
The general partners have made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards No. 131 "Disclosure about Segments of an Enterprise and Related Information", ("Statement 131") is effective for financial statements issued for periods beginning after December 15, 1997. Statement 131 requires disclosures about segments of an enterprise and related information regarding the
Corporate Realty Income Fund I, L.P. (A Delaware Limited Partnership)
Notes to Financial Statements (continued)
2. Significant Accounting Policies (continued)
Recently Issued Accounting Pronouncements (continued)
different types of business activities in which an enterprise engages and the different economic environments in which it operates.
The Partnership does not believe that the implementation of Statement 131 will have a material impact on its financial statements.
3. Partnership Agreement
The Partnership Agreement provides that profits, losses and distributions shall be allocated 99% to the limited partners and 1% to the general partners.
Sale or refinancing proceeds will generally be distributed 99% to the limited partners and 1% to the general partners until the limited partners have received an amount which, when added to all prior distributions of cash, will equal their original invested capital plus an 8% per annum cumulative noncompounded return. Thereafter, after payment of the subordinated disposition fee, proceeds will be distributed 75% to the limited partners and 25% to the general partners.
The Partnership Agreement further provides that net income shall be allocated to each calendar month of the year and shall be apportioned on a monthly basis to the holders of interests in the ratio in which the number of interests owned by each limited partner or unitholder on the first day of the month bears to the total number of interests owned by the limited partners and unitholders as of that date.
The amount of net income per limited partnership unit was calculated using the weighted average number of units outstanding of 3,022,492, 3,087,170 and 3,184,222 in 1997, 1996 and 1995, respectively.
Corporate Realty Income Fund I, L.P. (A Delaware Limited Partnership)
Notes to Financial Statements (continued)
4. Investments in Real Estate
GE Medical Systems Office Building
On July 10, 1986, the Partnership purchased the GE Medical Systems Office Building, an office building located in Monterey Park, California, and the 90,000 square feet of underlying land. The property contains approximately 20,250 square feet of net rentable area.
The terms of the agreement with the seller provided for a purchase price, including acquisition fees, of $4,182,000.
The building was fully leased to GE through October 21, 1995. In October 1995, GE renewed its lease with respect to 52% of the rentable area of the building for a term which expires in October 2000. The remaining 48% of the building is leased to American Color Graphics, Inc. for a term which expires in July 2002.
The Directory Building
On October 27, 1986, the Partnership purchased the Directory Building (formerly the IBM Building), an office building located in Las Colinas, Texas, and the 6.67 acres of underlying land. The property contains approximately 152,100 square feet of net rentable area.
The terms of the agreement with the seller provided for a purchase price, including acquisition fees, of $24,580,375.
As of December 31, 1997, the building was 100% leased to GTE Directories Corporation for a term which expires on September 30, 2000. Rent from the tenant represented 16% and 25% of the Partnership's total rental revenue in 1997 and 1996, respectively.
Austin Place Building
On December 30, 1986, the Partnership purchased the Austin Place Building, an office building located in South Plainfield, New Jersey, and the five acres of underlying land. The property contains approximately 106,600 square feet of net rentable area.
Corporate Realty Income Fund I, L.P. (A Delaware Limited Partnership)
Notes to Financial Statements (continued)
4. Investments in Real Estate (continued)
Austin Place Building (continued)
The terms of the agreement with the seller provided for a purchase price, including acquisition fees, of $16,473,000.
As of December 31, 1997, the building was 100% leased to various tenants under leases with terms ranging from four to fifteen years.
Rent from one of the tenants, The Austin Company, represented 10% and 29% of the Partnership's total rental revenue in 1997 and 1996, respectively.
James River Building
On October 16, 1987, the Partnership purchased the James River Building (formerly the Crown Zellerbach building) located in Woodland, California (a suburb of Sacramento), and the 21 acres of underlying land. The building contains approximately 570,000 square feet of net rentable area.
The terms of the agreement with the seller provided for a purchase price, including acquisition fees, of $14,551,456. The building was net leased to James River Corporation of Nevada, Inc. for a term which expires in January, 2002. On February 28, 1997, the land and building were sold to an unrelated party for $12,875,000.
Rent from the tenant, James River Corporation of Nevada, Inc., represented 16% of the Partnership's total rental revenue in 1996.
Flatiron Building
On January 5, 1988, the Partnership purchased the Flatiron Building (formerly the Cadnetix Building) located in Boulder, Colorado, and the five acres of underlying land. The building contains approximately 96,000 square feet of net rentable area.
The terms of the agreement with the seller provided for a purchase price, including acquisition fees, of $9,003,085.
Corporate Realty Income Fund I, L.P. (A Delaware Limited Partnership)
Notes to Financial Statements (continued)
4. Investments in Real Estate (continued)
Flatiron Building (continued)
As of December 31, 1997, the building was 100% leased to various tenants under leases with terms ranging from three to five years.
Marathon Oil Building
On March 21, 1988, the Partnership purchased the Marathon Oil Building (formerly the Tenneco Oil Building) located in Oklahoma City, Oklahoma, and the 6.1 acres of underlying land. The building contains approximately 90,925 net rentable square feet plus a 10,016 square foot basement.
The terms of the agreement with the seller provided for a purchase price, including acquisition fees, of $10,736,200.
As of December 31, 1997, the building was 93% leased to various tenants. The Marathon Oil Company ("Marathon") leases 62,600 square feet of space pursuant to five-year lease which expires in February, 2001, and a two-year lease with a former affiliate of Marathon with respect to 24,700 square feet of space which expires in February 2001. Approximately 5,600 square feet of remaining space is leased to another tenant for a term of five years.
475 Fifth Avenue
On December 6, 1996 the Partnership purchased an office building and the underlying land located at 475 Fifth Avenue, New York, New York. The building contains approximately 240,000 net rentable square feet.
The terms of the agreement with the seller provided for a purchase price, including acquisition fees of $27,439,998.
As of December 31, 1997, the building was 85% leased to various tenants under operating leases with remaining terms ranging from one to eleven years.
Corporate Realty Income Fund I, L.P. (A Delaware Limited Partnership)
Notes to Financial Statements (continued)
4. Investments in Real Estate (continued)
Alamo Towers
On March 17, 1997, the Partnership purchased an office building and the underlying land located in San Antonio, Texas, for a purchase price, excluding capitalized closing and related costs, of $12,002,375. The building contains approximately 196,000 net rentable square feet.
As of December 31, 1997, the building was 80% leased to various tenants under operating leases with remaining terms ranging from one to seven years.
5. Leases
Minimum future rentals from tenants under noncancellable operating leases as of December 31, 1997 are approximately as follows:
Year ending December 31:
1998 $12,012,000 1999 11,229,000 2000 10,213,000 2001 7,264,000 2002 5,137,000 Thereafter 15,494,000 ----------- Total $61,349,000 ===========
In addition to the minimum lease amounts, the leases provide for escalation charges to the tenants for operating expenses, electric and real estate taxes. For the years ended December 31, 1997, 1996, and 1995, escalation charges amounting to approximately $2,735,000, $1,765,000, and $1,735,000, respectively, have been included in rental income.
Corporate Realty Income Fund I, L.P. (A Delaware Limited Partnership)
Notes to Financial Statements (continued)
6. Transactions With General Partners and Affiliates
The general partners or their affiliates receive a property management fee equal to either 1% for a long-term net lease or 6% for other types of leases on the gross revenue from the property, and a partnership management fee equal to 7% of adjusted cash from operations, as defined, and reimbursement of administrative expenses. The general partners also receive leasing commissions in connection with leasing, re-leasing or leasing related services performed on behalf of the Partnership in connection with the negotiation of tenant leases. Such commissions are computed at a rate equal to 3% of the gross revenues for the first five years of each lease signed where the general partners have performed such leasing services.
Following is a summary of the fees earned and reimbursable expenses for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 ------------------------------------ Partnership management fees $257,664 $263,577 $271,302 Property management fees 750,588 301,942 285,729 Administrative expenses 60,372 166,036 133,393
During 1996 and 1995, leasing commissions of $110,584 and $243,113, respectively were billed to the Partnership by the general partners and recorded by the Partnership as deferred leasing commissions on the accompanying balance sheet. There were no leasing commissions billed by the general partner in 1997.
7. Loan Payable
In March 1996, the Partnership extended the $7,800,000 line of credit from PNC Bank, N.A. (the "Lender") for an additional six-month period which ended on September 30, 1996. In connection with this extension, the structure of the indebtedness was changed from a term loan to a secured revolving line of credit. Interest only was payable monthly on the first day of each calendar month with all unpaid interest and outstanding principal due on September 30, 1996. In connection with the extension of the loan, the Partnership paid fees of $24,500. The loan was secured by a deed of trust given with respect to the Directory, James River, Austin Place and GE properties. In September 1996, this loan was repaid with the proceeds of a new line of credit obtained from Fleet Bank.
Corporate Realty Income Fund I, L.P. (A Delaware Limited Partnership)
Notes to Financial Statements (continued)
7. Loan Payable (continued)
On September 26, 1996, the Partnership entered into a loan agreement (the "Mortgage") with Fleet Bank, N.A. The purpose of the Mortgage was to refinance the existing indebtedness to PNC Bank, to provide working capital for tenant improvements and leasing commissions with respect to the properties owned by the Partnership, and to provide funds for the acquisition of additional properties.
The terms of the Mortgage, as amended, provide for a term of four years and maximum gross borrowings of $44,000,000. Borrowings under the Mortgage bear interest monthly at a rate, selected at the option of the Partnership at the time of the associated borrowing, based on (I) the lender's Peg Rate (as defined in the loan agreement) plus .50% or (ii) the applicable LIBOR rate or other market rate offered to the bank plus 2%. The Mortgage requires monthly amortization of principal in an amount equal to 1/500th of the outstanding principal amount of the Mortgage on the first day of the applicable month with a final payment of the then outstanding balance at maturity. The Mortgage may be prepaid at any time. Borrowings under the Mortgage are secured by all of the properties of the Partnership. Upon the sale of any property, the Partnership is required to repay principal on the total indebtedness under the Mortgage in an amount equal to 110% of that portion of outstanding balance of the loan attributable to the sold property, as defined in the Mortgage agreement. The Mortgage requires the Partnership to comply with certain covenants, including but not limited to, maintenance of certain financial ratios. In addition the Mortgage provides that the Partnership may distribute to its partners up to 90% of the sum of its operating net income plus depreciation and amortization.
Through December 31, 1997, the Partnership had borrowed $42,600,000 under the Mortgage, of which $41,578,800 was outstanding at December 31, 1997 at varying interest rates, (7.97% at December 31, 1997).
In connection with the Mortgage, the Partnership incurred fees and expenses of $1,522,626, which have been capitalized and are being amortized over the term of the loan agreement.
8. Supplemental Disclosure of Cash Flow Information
1997 1996 1995 ------------------------------------
Cash paid during the year for interest $3,154,925 $ 789,306 $ 734,608 ========== ========== ==========
Corporate Realty Income Fund I, L.P. (A Delaware Limited Partnership)
Notes to Financial Statements (continued)
9. Employee Savings Plan
During 1997, the Partnership established an employee savings plan (the "Plan") in accordance with Section 401(K) of the Internal Revenue Code. The Plan permits eligible employees to make contributions through salary reductions. For the period ended December 31, 1997, the Partnership has not made any contributions to the Plan.
10. Earnings per Limited Partnership Unit
Basic earnings per limited partnership unit amounts were computed based on 3,022,492, 3,087,170 and 3,184,222 weighted average limited partnership units outstanding in 1997, 1996 and 1995, respectively.
For the three years ended December 31, 1997, there were no partnership unit equivalents and in accordance with the provisions of SFAS No. 128, dilutive earnings per limited partnership unit for the three years ended December 31, 1997, were computed based on the weighted average limited partnership units outstanding.
Corporate Realty Income Fund I, L.P. (a Delaware Limited Partnership)
Schedule III - Real Estate and Accumulated Depreciation (continued)
December 31, 1997
Notes:
(A) Encumbrances represent a loan secured by a deed of trust given with respect to all of the properties of the Partnership.
(B) The initial cost to the Partnership represents the original purchase price of the properties net of purchase price adjustments, including amounts incurred subsequent to acquisition which were contemplated. The initial cost includes the purchase price paid by the Partnership and acquisition fees and expenses. There is no difference between costs for financial reporting purposes and cost for federal income tax purposes.
(C) Reconciliation Summary of Transactions - Real Estate Owned
(D) Reconciliation Summary of Transactions - Accumulated Depreciation