ITEM 1. BUSINESS
The Registrant, Dean Witter Realty Income Partnership III, L.P. (the "Partnership"), is a limited partnership formed in August 1985 under the Uniform Limited Partnership Act of the State of Delaware for the purpose of investing primarily in income-producing office, industrial and retail properties.
The Managing General Partner of the Partnership is Dean Witter Realty Income Properties III Inc. (the "Managing General Partner"), a Delaware corporation which is wholly owned by Dean Witter Realty Inc. ("Realty"). The Associate General Partner is Dean Witter Realty Income Associates III, L.P. (the "Associate General Partner"), a Delaware limited partnership, the general partner of which is the Managing General Partner. The Managing General Partner manages and controls all aspects of the business of the Partnership. The terms of transactions between the Partnership and its affiliates are set forth below in Note 8 to the consolidated financial statements included in Item 8 and in Item 13.
The Partnership issued 534,020 units of limited partnership interest (the "Units") with gross proceeds from the offering of $267,010,000. The offering has been terminated and no additional Units will be sold.
The proceeds from the offering were used to make equity investments in six office properties (one of which was sold in fiscal 1997, and one of which was sold subsequent to fiscal 1997) and five retail properties (three of which were sold in fiscal 1996) which were acquired without mortgage debt. The properties are described in Item 2
ITEM 2. PROPERTIES
The Partnership's principal offices are located at Two World Trade Center, New York, New York 10048. The Partnership has no other offices.
As of October 31, 1997, the Partnership owned directly or through partnership interests the following seven property interests, none of which is encumbered by indebtedness. Generally, the leases pertaining to the properties provide for pass-throughs to the tenants of their pro-rata share of certain operating expenses. In the opinion of the Managing General Partner, all of the properties are adequately covered by insurance.
1 The remaining general partnership ("GP") interest is held by the Managing Partner.
2 The remaining GP interests are held by Dean Witter Realty Income partnership II, L.P. (14.8%) and Dean Witter Realty Income Partnership IV, L.P. (40.6%), affiliates of the Partnership. The total cost of the property was $51.8 million.
3 The remaining GP interests are owned by Dean Witter Realty Income Partnership IV, L.P. (41.2%) and an affiliate of the Managing General Partner (32.1%). The total cost of the property was $121.3 million.
4 Sold subsequent to year-end. See note 5 to the consolidated financial statements.
Each property was built with on-site parking facilities.
In the first quarter of fiscal 1997 Technology Park Associates (which is owned 35% by the Partnership and 65% by Dean Witter Realty Income Partnership IV, L.P., an affiliated public partnership), and DW Technology Park II Associates, L.P. (which is owned by affiliates of the General Partner) sold the Technology Park Reston office park ("Tech Park") property. See note 6 to the consolidated financial statements.
An affiliate of the Partnership is the property manager for Laurel Lakes Centre, Taxter Corporate Park, and Westland Crossing and the co-property manager for the Glenhardie buildings and five buildings at the Chesterbrook Corporate Center.
Further information relating to the Partnership's properties is included in Item 7 and footnotes 4, 5 and 6 to the consolidated financial statements in Item 8.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On December 27, 1995, a purported class action lawsuit (the "Grigsby Action") naming various public real estate partnerships sponsored by Realty (including the Partnership and its Managing General Partner and Associate General Partner), Realty, Dean Witter Reynolds Inc. ("DWR") and others as defendants was filed in Superior Court in California. The complaint alleged fraud, negligent misrepresentation, intentional and negligent breach of fiduciary duty, unjust enrichment and related claims and sought compensatory and punitive damages in unspecified amounts and injunctive and other equitable relief. The defendants removed the case to the United States District Court for the Southern District of California. Pursuant to an order of the U.S. District Court for the southern District of California entered May 24, 1996, the Grigsby Action was transferred to the U.S. District Court for the Southern District of New York.
On February 14, 1996, a purported class action lawsuit (the "Schectman Action") naming various public real estate partnerships sponsored by Realty (including the Partnership and its Managing General Partner), Realty, Dean Witter, Discover & Co. ("DWD") and DWR as defendants was filed in the Chancery Court of Delaware for New Castle County (the "Delaware Chancery Court"). On February 23, 1996, a purported class action lawsuit (the "Dosky Action") naming various public real estate partnerships sponsored by Realty (including the Partnership and its Managing General Partner), Realty, DWD, DWR and others as defendants was filed in the Delaware Chancery Court. On February 29, 1996, a purported class action lawsuit (the "Segal Action') naming various public real estate partnerships sponsored by Realty (including the Partnership and its Managing General Partner), Realty, DWR, DWD and others as defendants was filed in the Delaware Chancery Court. On March 13, 1996, a purported class action lawsuit (the "Young Action") naming the partnership, other unidentified limited partnerships, DWD, DWR and others as defendants was filed in the Circuit Court for Baltimore City in Baltimore, Maryland. The defendants removed the Young Action to the United States District Court for the District of Maryland.
Thereafter, the Schectman Action, the Dosky Action and the Segal Action were consolidated in a single action (the "Consolidated Action") in the Delaware Chancery Court. The Young Action was dismissed without prejudice. The plaintiffs in the Young Action and the Grigsby Action joined the Consolidated Action. The Grigsby Action remains stayed indefinitely subject to being reopened for good cause.
On October 7, 1996, the plaintiffs in the Consolidated Action filed a First Consolidated and Amended Class Action Complaint naming various public real estate partnerships sponsored by Realty (including the Partnership and its Managing General Partner), Realty, DWD, DWR and others as defendants. This complaint alleges breach of fiduciary duty and seeks an accounting of profits, compensatory damages in an unspecified amount, possible liquidation of the Partnership under a receiver's supervision and other equitable relief. The defendants filed a motion to dismiss this complaint on December 10, 1996.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year to a vote of Unit holders.
PART II.
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
An established public trading market for the Units does not exist, and it is not anticipated that such a market will develop in the future. Accordingly, information as to the market value of a Unit at any given date is not available. However, the Partnership does allow its limited partners (the "Limited Partners") to transfer their Units if a suitable buyer can be located.
As of January 6, 1998, there were 35,285 holders of limited partnership interests.
The Partnership is a limited partnership and, accordingly, does not pay dividends. It does, however, make quarterly distributions of cash to its partners. Pursuant to the partnership agreement, distributable cash, as defined, is paid 90% to the Limited Partners and 10% to the general partners (the "General Partners").
During the year ended October 31, 1997, the Partnership paid quarterly cash distributions aggregating $49.95 per Unit (including $31.55 of proceeds from the sale of the Tech Park property. Total distributions were $27,765,758, with $26,673,984 distributed to the Limited Partners and $1,091,774 to the General Partners. The distribution of proceeds from the Tech Park property was paid 100% to the Limited Partners. During the year ended October 31, 1996, the Partnership paid quarterly cash distributions aggregating $87.98 per Unit, including $66.40 of proceeds from properties sold in 1996. Total distributions were $48,260,574, with $46,980,410 distributed to Limited Partners and $1,280,164 to the General Partners.
On November 25, 1997, the Partnership paid the fourth quarter distribution of $2.30 per Unit to the Limited Partners. The total cash distribution amounted to $1,364,718, with $1,228,246 distributed to the Limited Partners and $136,472 to the General Partners.
On November 26, 1997, the Partnership distributed $18,722,741 of the net proceeds from the sale of the Holcomb Woods property ($35.06 per Unit). The distribution was paid 100% to Limited Partners.
The Partnership anticipates making regular distributions to its partners in the future. Future cash distribution levels will fluctuate based on cash flow generated by the Partnership's remaining properties and proceeds received from property sales.
Sale or financing proceeds will be distributed, to the extent available, first, to each Limited Partner, until there has been a return of the Limited Partner's capital contribution plus cumulative distributions of distributable cash and sale or financing proceeds in an amount sufficient to provide a 9% cumulative annual return on the Limited Partner's adjusted capital contribution. Thereafter, any remaining sale or financing proceeds will be distributed 85% to the Limited Partners and 15% to the General Partners after the Managing General Partner receives a brokerage fee, if earned, of up to 3% of the selling price of any equity investment.
Taxable income generally will be allocated in the same proportions as distributions of distributable cash or sale or financing proceeds (except that the General Partners must be allocated at least 1% of taxable income from the sale or financing). In the event there is no distributable cash or sale or financing proceeds, taxable income will be allocated 90% to the Limited Partners and 10% to the General Partners. Any tax loss will be allocated 90% to the Limited Partners and 10% to the General Partners.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth a summary of selected financial data for the Partnership:
1 Revenues and net income include the effect of the sale of the Tech Park property. See Note 6 to the consolidated financial statements.
2 Revenues and net loss include the effect of the sale of the Delta Center, Fashion Corners, and Hall Road shopping centers. Net loss also includes losses on impairment of the Glenhardie and Holcomb Woods properties of $4.7 million and $7.7 million, respectively.
3 Includes a $1.3 million writedown of real estate held for sale and the Partnership's share ($11.5 million) of loss on impairment of the Chesterbrook property.
4 Includes the Partnership's $12.4 million share of loss on impairment of the Taxter property.
5 Distributions paid to limited partners include returns of capital per Unit of limited partnership interest of $49.95, $87.98, $22.81, $8.69 and $20.00 for the years ended October 31, 1997, 1996, 1995, 1994, and 1993, respectively, calculated as the excess of cash distributed per Unit over accumulated earnings per Unit not previously distributed.
The above financial data should be read in conjunction with the consolidated financial statements and the related notes in Item 8.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Partnership raised $267,010,000 in a public offering of 534,020 Units which was terminated in 1987. The Partnership has no plans to raise additional capital.
The Partnership purchased, directly or through a partnership interest six office properties (one of which was sold in fiscal 1997, and one of which was sold subsequent to fiscal 1997) and five retail properties (three of which were sold in fiscal 1996). The Partnership's acquisition program has been completed. No additional investments are planned.
In 1997 limited speculative construction and the strong economy, low unemployment and corporate growth continued to positively impact the demand for office properties. In many markets, tenant competition for a shrinking amount of office space has had a positive influence on rental rates and lease terms. Capital has been readily available for investment and financing of real estate. Investors, including institutional, foreign and REIT investors, have been buying office buildings in many markets.
In the retail sector, consolidation among retailers continued to lessen the demand for retail space. The abundance of available retail space and sub-lease space being offered by retailers (usually at lower rents) has exerted downward pressure on rents in many markets. Despite the oversupply of retail space, new projects are being built and planned, although the pace of new construction has slowed considerably. Many outdated properties are being redeveloped in order to compete with newer retail properties.
On December 31, 1996 Technology Park Associates (which is owned 35% by the Partnership and 65% by Dean Witter Realty Income Partnership IV, L.P., an affiliated public partnership), and DW Technology Park II Associates, L.P. (which is owned by affiliates of the General Partner) sold the Technology Park Reston office park. See note 6 to the consolidated financial statements.
The Partnership's liquidity depends upon cash flow from operations of its properties and expenditures for tenant improvements and leasing commissions in connection with the leasing of space. In 1997, all of the Partnership's properties and joint venture interests generated positive cash flow from operations, and it is anticipated that they will continue to do so in fiscal 1998.
In addition, the Partnership's liquidity has been and will continue to be affected by the sale of the Partnership's properties. The Holcomb Woods property was sold on November 7, 1997 (See Note 5 to the consolidated financial statements), and the Managing General Partner currently plans to market for sale the Partnership's remaining office properties in 1998, with the objective of completing sales of all the Partnership properties by the end of fiscal 1998. There is no assurance the Partnership will be able to achieve these objectives. As the properties are sold, the Partnership has fewer income producing investments and Partnership cash from operations and Partnership distributions will decline.
In 1997, excluding proceeds and distribution amounts relating to property sales, Partnership distributions to investors, capital expenditures, leasing commissions, and contributions to its joint ventures exceeded cash flow from operations and distributions received from its joint ventures. This shortfall was funded from cash reserves, which the MGP determined were in excess of the Partnership's needs. The Partnership believes, remaining cash reserves will be sufficient for its future needs.
In 1997, the Partnership (a) incurred approximately $753,000 of tenant improvements and leasing commissions, primarily relating to the Glenhardie (approximately $218,000) and Holcomb Woods (approximately $424,000) properties; and (b) contributed approximately $346,000 to the Chesterbrook joint venture and $232,000 to the Taxter joint venture for its share of capital expenditures and leasing commissions.
As of October 31, 1997, the Partnership has commitments to fund capital expenditures and leasing commissions totaling approximately $1,219,000, primarily at the Glenhardie property. The Partnership also has commitments to fund approximately $332,000 for its share of capital expenditures and leasing commissions at the Taxter and Chesterbrook properties.
In connection with a new lease at Westland Crossing, the Partnership committed to demolish approximately 20,000 square feet of existing tenant space and to construct an additional 7,000 square feet of new space for a PetsMart store at a cost of approximately $1.7 million. Construction is to commence in the spring of 1998. The Partnership anticipates funding the construction costs from cash reserves and proceeds from future property sales. The Partnership may incur material capital expenditures to lease vacant space at the Laurel Lakes Centre shopping center. The amount of such expenditures is uncertain at this time. To the extent that the vacant space at the property is not re-leased, the Partnership's cash flow will be reduced.
A portion of capital expenditures and leasing commissions is expected to be funded from Partnership cash reserves in 1998. The Managing General Partner believes cash reserves will be sufficient for the Partnership's future needs.
Total distributions in fiscal 1997 were $27,765,758, with $26,673,984 ($49.95 per Unit) distributed to the Limited Partners, of which $16,848,016 ($31.55 per Unit) was from the sale of Tech Park, and $1,091,774 to the General Partners. The Partnership decreased its cash distribution per Unit from $4.25 per quarter to $2.30 for the quarterly distribution paid on November 25, 1997. The total cash distribution amounted to $1,364,718, with $1,228,246 distributed to the Limited Partners and $136,472 to the General Partners.
On November 26, 1997, the Partnership distributed $18,722,741 of the net proceeds from the sale of the Holcomb Woods property ($35.06 per Unit). The distribution was paid 100% to Limited Partners. See note 5 to the consolidated financial statements.
Future cash distribution levels will fluctuate based on cash flow generated by the Partnership's remaining properties and proceeds received from future property sales.
Except as described above and in the consolidated financial statements, the Managing General Partner is not aware of any trends or events, commitments or uncertainties that may impact liquidity in a material way.
Operations
Fluctuations in the Partnership's operating results for the year ended October 31, 1997 compared to 1996 and for the year ended October 31, 1996 compared to 1995 were primarily attributable to the following:
Rental revenues decreased in the respective comparative periods due to decreased revenues at the Laurel Lakes Centre of approximately $605,000 and $803,000 due to lower occupancy and reduced passthrough income and the absence of rental income of approximately $441,000 and $4.7 million from three shopping centers which were sold in the first quarter of fiscal 1996 (the "Shopping Centers Sold"). These decreases in 1996 vs. 1995 were offset by increases at the Partnership's other properties; no individual property accounted for a material portion of the change.
No individual factor accounted for a material portion of the increase in equity in earnings of joint ventures in 1997 compared to 1996. The increase in equity in earnings of joint ventures in 1996 compared to 1995 was primarily due to the 1995 recognition by the Partnership of its share (approximately $11.5 million) of the writedown on the impairment of the Chesterbrook property.
Operating expenses decreased in the respective comparative periods, primarily due to the absence of operating expenses of the Shopping Centers Sold. Operating expenses also decreased in 1997 vs. 1996 because of decreased building service expenses and other operating expenses of approximately $255,000 at Laurel Lakes Centre.
Depreciation decreased by approximately $1.2 million in 1996 compared to 1995 due to the absence of depreciation in 1996 on the Shopping Centers Sold and the writedown of the Glenhardie and Holcomb Woods properties in January 1996.
The 1996 loss on impairment of real estate was due to the impairment writedowns on the Glenhardie and Holcomb Woods properties totaling approximately $12.4 million. The 1995 loss on writedown of real estate held for sale is due to the reduction of the carrying values of the Shopping Centers Sold and Westland Crossing to the price at which it was agreed they would be sold, net of closing costs.
A summary of the markets in which the Partnership's office properties are located and the performance of each property is as follows:
The Business Park at Holcomb Woods is located in the north central corridor of suburban Atlanta where continued economic recovery has resulted in increased office occupancies. The current market vacancy rate is approximately 3%. During fiscal 1997, the average occupancy at the property was 98%, and at October 31, 1997 the property was 99% leased to 26 tenants. The property was 96% leased at October 31, 1996. The Holcomb Woods property was sold subsequent to year end. See note 5 to the consolidated financial statements.
The office market in Valley Forge, Pennsylvania, the location of the Chesterbrook Corporate Center, has shown continued improvement with rental rates rising and limited availability of larger space. Market vacancy improved to less than 12%. At October 31, 1997 the property was 100% leased to 29 tenants, compared to 99% at the prior fiscal year-end. The average occupancy during fiscal 1997 was 99%. Leases for approximately 16% of total space expire in fiscal 1998. The leases of Philadelphia Electric Company (for approximately 20% of total space), Aetna Health Plan (for approximately 12% of total space) and Dun & Bradstreet (for approximately 12% of total space) expire in fiscal year 2000. There are no other significant tenants.
Glenhardie Corporate Center III & IV is also located in Valley Forge, Pennsylvania. During 1997, average occupancy at the property was 94%, and at October 31, 1997 the property was 100% leased to 26 tenants, compared to 97% at the prior fiscal year-end. Significant tenants and the year of their lease expiration are: Allstate Insurance Company which vacated in May 1997 on expiration of its lease and, in October leased approximately 11% of total space - 2002; New England Life, which signed a lease in October 1997 for approximately 14% of space - 2004; and Dean Witter Reynolds, (an affiliate of the Managing General Partner) for approximately 10% of total space - 2005.
The overall vacancy level in the office market in Westchester County, New York, the location of Taxter Corporate Park, decreased from 24% to 17% in 1997. The vacancy level in the west Westchester market in which the building is located is currently 11%, reflecting a 4% absorption in fiscal 1997 over the prior year. During 1997, average occupancy at the property was approximately 99%, and at October 31, 1997, the property was 100% occupied. The property is leased to 21 tenants. KLM Royal Dutch Airlines owns a long-term leasehold in approximately 20% of the space at the property. Leases aggregating approximately 15% of the property's space expire in fiscal 1999. The lease of Fuji Photo Film (for approximately 28% of the property's space) expires in fiscal 2001. No other tenants occupy more than 10% of the property.
Tech Park Reston, located in the Reston Virgnia market, was 100% leased during 1996 to Sprint Communications. The property was sold on December 31, 1996. See Note 6 to the consolidated financial statements.
A summary of the markets in which the Partnership's retail properties are located and the leasing status of each property is as follows:
Laurel Lakes Centre is located in a suburb of Baltimore and Washington, D.C., where retail centers continue to experience lower net rental rates. The market vacancy rate is currently approximately 16%. Some retailers in this market are experiencing financial difficulties. However, the property's design, location and tenant mix has enabled it to maintain relatively stable rental rates. At October 31, 1997, occupancy at the property decreased to 79% (leased to 29 tenants) from 81% at October 31, 1996. The Partnership is considering the consolidation of portions of the vacant small shop space at the center and other redevelopment alternatives which would enhance the value of the property, some of which would require additional investment by the Partnership. The leases of K-Mart (18% of total space), Hoyts Cinemas (10% of total space), Safeway Stores (11% of total space) and Best Buy (11% of total space), expire in 2005, 2005, 2006 and 2010, respectively. No other tenant occupies more than 10% of the property, and no leases for significant amounts of space expire until 2005.
Westland Crossing is situated outside downtown Detroit and is in an overbuilt market with a current vacancy rate of approximately 20%. Nevertheless, a significant amount of new retail space is under construction which, when complete, will compete with Westland Crossing for tenants. The property has a current occupancy rate of 69%, leased to 14 tenants, (vs. 67% at the prior fiscal year-end), and an average occupancy rate of 58% in fiscal 1997. In the fourth quarter of fiscal 1997 the Partnership leased 25,000 square feet of vacant anchor space to Office Depot. As described above, a lease agreement was signed with PetsMart for approximately 27,000 square feet of space. The Partnership continues to look for opportunities to consolidate vacant small shop space to make room for larger tenants. Leases for approximately 9% of the property's space expire in fiscal 1998. The lease of Frank's Supercrafts, which occupies approximately 16% of the shopping center, expires in fiscal 2006. No other tenant occupies more than 10% of the property.
Inflation
Inflation has been consistently low during the periods presented in the financial statements and, as a result, has not had a significant effect on the operations of the Partnership or its properties. ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DEAN WITTER REALTY INCOME PARTNERSHIP III, L.P.
INDEX
Page
Independent Auditors' Report [UPDATE] Consolidated Balance Sheets at October 31, 1997 and 1996 Consolidated Statements of Operations for the years ended October 31, 1997, 1996 and 1995 Consolidated Statements of Partners' Capital for the years ended October 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the years ended October 31, 1997, 1996, and 1995 Notes to Consolidated Financial Statements
Real Estate and Accumulated Depreciation Schedule III
All schedules other than those indicated above have been omitted because either the required information is not applicable or the information is shown in the consolidated financial statements or notes thereto.
Independent Auditors' Report
To The Partners of Dean Witter Realty Income Partnership III, L.P.:
We have audited the accompanying consolidated balance sheets of Dean Witter Realty Income Partnership III, L.P. and consolidated partnerships (the "Partnership") as of October 31, 1997 and 1996 and the related consolidated statements of operations, partners' capital and cash flows for each of the three years in the period ended October 31, 1997. Our audits also included the financial statement schedule listed in the Index at Item 8. These financial statements and financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Dean Witter Realty Income Partnership III, L.P. and consolidated partnerships as of October 31, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/Deloitte & Touche LLP DELOITTE & TOUCHE LLP
January 16, 1998
DEAN WITTER REALTY INCOME PARTNERSHIP III, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1997, 1996 and 1995
1. The Partnership
Dean Witter Realty Income Partnership III, L.P. (the "Partnership") is a limited partnership organized under the laws of the State of Delaware in 1985. The Partnership is managed by Dean Witter Realty Income Properties III Inc. (the "Managing General Partner"). The Partnership's fiscal year ends on October 31.
In 1986 and 1987, the Partnership issued 534,020 units of limited partnership interest (the "Units") for $267,010,000. No additional Units will be sold. The proceeds of the offering were used to make investments in income-producing office, industrial and retail properties which were not encumbered by debt.
2. Summary of Significant Accounting Policies
The financial statements include the accounts of the Partnership, Part Six Associates (owner of Glenhardie IV) and Laurel-Vincent Place Associates Limited Partnership (owner of the Laurel Lakes Centre) on a consolidated basis. The Partnership owns 99.9% and 99.999% General Partnership interests in Part Six Associates and Laurel-Vincent Place Associates Limited Partnership, respectively. The remaining interests in these partnerships are held by the Managing General Partner.
The Partnership's 44.6% general partnership interest in Taxter Corporate Park, 35% general partnership interest in Tech Park Reston and 26.7% general partnership interest in the partnership which owns interests in Chesterbrook Corporate Center are accounted for on the equity method.
The Partnership's records are maintained on the accrual basis of accounting for financial reporting and tax purposes. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
DEAN WITTER REALTY INCOME PARTNERSHIP III, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents consist of cash and highly liquid investments with maturities, when purchased, of three months or less.
The carrying value of real estate includes the purchase price paid by the Partnership and acquisition fees and expenses. Costs of improvements to the properties are capitalized, and repairs are expensed. Depreciation is recorded on the straight-line method. The Partnership stops recording depreciation on a property when it is reclassified as held for sale.
At least annually, and more often if circumstances dictate, the Partnership evaluates the recoverability of the net carrying value of its real estate and any related assets. As part of this evaluation, the Partnership assesses, among other things, whether there has been a significant decrease in the market value of any of its properties. If events or circumstances indicate that the net carrying value of a property may not be recoverable, the expected future net cash flows from the property are estimated for a period of approximately five years (or a shorter period if the Partnership expects that the property may be disposed of sooner), along with estimated sales proceeds at the end of the period. If the total of these future undiscounted cash flows were less than the carrying amount of the property, the property would be written down to its fair value as determined (in some cases with the assistance of outside real estate consultants) based on discounted cash flows, and a loss on impairment recognized by a charge to earnings. The Partnership's accounting policy complies with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
Because the determination of fair value is based upon projections of future economic events such as property occupancy rates, rental rates, operating cost inflation and market capitalization rates which are inherently subjective, the amounts ultimately realized at disposition may differ materially from the net carrying values as of October 31, 1997.
DEAN WITTER REALTY INCOME PARTNERSHIP III, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The cash flows used to evaluate the recoverability of the assets and to determine fair value are based on good faith estimates and assumptions developed by the Managing General Partner. Unanticipated events and circumstances may occur and some assumptions may not materialize; therefore actual results may vary from the estimates and the variances may be material. The Partnership may provide additional write- downs, which could be material, in subsequent years if real estate markets or local economic conditions change.
Deferred leasing commissions are amortized over the applicable lease terms.
Rental income is accrued on a straight-line basis over the terms of the leases. Accruals in excess of amounts payable by tenants pursuant to their leases (resulting from rent concessions or rents which periodically increase over the term of a lease) are recorded as receivables and included in other assets.
Net income (loss) per Unit amounts are calculated by dividing net income (loss) allocated to Limited Partners, in accordance with the Partnership Agreement, by the weighted average number of Units outstanding.
No provision for income taxes has been made in the financial statements, since the liability for such taxes is that of the partners rather than the Partnership.
For income tax purposes, Partnership results are reported for the calendar year. The accounting policies used for tax reporting purposes differ from those used for financial reporting as follows: (a) depreciation is calculated using accelerated methods; (b) rental income is recognized based on the payment terms in the applicable leases; and (c) writedowns for impairment of real estate are not deductible. In addition, offering costs are treated differently for tax and financial reporting purposes. The tax basis of the Partnership's assets and
DEAN WITTER REALTY INCOME PARTNERSHIP III, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
liabilities is approximately $48.5 million higher than the amounts reported for financial statement purposes.
The Financial Accounting Standards Board has recently issued several new accounting pronouncements. Statement No. 128, "Earnings per Share" establishes standards for computing and presenting earnings per share, and Statement No. 129, "Disclosure of Information about Capital Structure" establishes standards for disclosing information about an entity's capital structure. These two standards will be effective for the Partnership's 1998 year-end financial statements. Statement No. 130, "Reporting Comprehensive Income" establishes standards for reporting and display of comprehensive income and its components. Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosure about products and services, geographic areas, and major customers. These two standards are effective for the Partnership's 1999 financial statements.
Management of the Partnership does not believe that these new standards will have any effect on the Partnership's computation or presentation of net income or net income per Unit of limited partnership interest, or its disclosures of capital structure, or other disclosures.
3. Partnership Agreement
The Partnership Agreement provides that distributable cash, as defined, will be paid 90% to the Limited Partners and 10% to the General Partners. Sale or financing proceeds will be distributed, to the extent available, first, to each Limited Partner, until there has been a return of the Limited Partner's capital contribution plus cumulative distributions of distributable cash and sale or financing proceeds in an amount sufficient to provide a 9% cumulative annual return on the Limited Partner's adjusted capital contribution. Thereafter, any remaining sale or
DEAN WITTER REALTY INCOME PARTNERSHIP III, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
financing proceeds will be distributed 85% to the Limited Partners and 15% to the General Partners after the Managing General Partner receives a brokerage fee, if earned, of up to 3% of the selling price of any equity investment.
Taxable income generally is allocated in the same proportion as distributions of distributable cash or sale or financing proceeds (except that the General Partners must be allocated at least 1% of taxable income from sales or financings). In the event there is no distributable cash or sale or financing proceeds, taxable income is allocated 90% to the Limited Partners and 10% to the General Partners. Any tax loss will be allocated 90% to the Limited Partners and 10% to the General Partners.
Distributions paid to Limited Partners include returns of capital per Unit of limited partnership interest of $49.95, $87.98 and $22.81 for the years ended October 31, 1997, 1996 and 1995, respectively, calculated as the excess of cash distributed per Unit over accumulated earnings per Unit not previously distributed.
4. Real Estate Investments
The location, year of acquisition and net carrying values of the properties are as follows:
DEAN WITTER REALTY INCOME PARTNERSHIP III, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net carrying value of Holcomb Woods property was reclassified to Real Estate Held For Sale in the fourth quarter of fiscal 1997. See Note 5.
In the first quarter of fiscal 1996, in accordance with the impairment evaluation policy described in Note 2, the Partnership evaluated the recoverability of its investments in real estate and concluded that, based on revised expectations as to the holding periods of the properties, the Partnership would be unable to recover its investments in the Glenhardie and Holcomb Woods properties. Accordingly, the Partnership wrote these properties down to fair value (based on independent appraisals), and recorded losses on impairment of approximately $4.7 million and $7.7 million, respectively.
5. Real Estate Held for Sale
Pursuant to an agreement dated as of October 1, 1997 (as amended) the Partnership agreed to sell the Holcomb Woods property to an unaffiliated party, for $19,112,500.
The closing of the sale took place on November 7, 1997. At closing, the Partnership received proceeds of approximately $18.7 million net of closing costs and other deductions. The net proceeds from the sale $35.06 per Unit) were distributed 100% to Limited Partners in November 1997.
Net income and cash flow from the Holcomb Woods property in fiscal year 1997 were approximately $927,000 and $1,873,000 respectively.
6. Investments in Joint Ventures
Taxter Corporate Park, Westchester County, New York
The Partnership owns a 44.6% partnership interest in the general partnership which owns the property. Affiliates of the
DEAN WITTER REALTY INCOME PARTNERSHIP III, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Partnership, Dean Witter Realty Income Partnership II, L.P., and Dean Witter Realty Income Partnership IV, L.P., own the remaining interests of 14.8% and 40.6%, respectively.
The partners each receive cash flow and profits and losses according to their interests.
Summarized balance sheet information of the joint venture is as follows:
DEAN WITTER REALTY INCOME PARTNERSHIP III, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Chesterbrook Corporate Center, Valley Forge, Pennsylvania
The Partnership, Dean Witter Realty Income Partnership IV, L.P. and an affiliate of the Managing General Partner own 26.7%, 41.2% and 32.1% interests in the general partnership which owns the property.
The partners receive cash flow and profits and losses according to their interests.
In fiscal 1995, the partners concluded that the property's value was impaired and, in accordance with its policy for evaluating the recoverability of its real estate (which is the same as the Partnership's), the partnership which owns the property recorded an impairment loss of approximately $43.2 million at October 31, 1995. The Partnership's share of this loss (approximately $11.5 million) was included in equity in earnings (losses) of joint ventures in fiscal 1995.
Summarized balance sheet information of the joint venture is as follows:
Tech Park Reston, Reston, Virginia
In 1987, the Partnership purchased a 35% partnership interest in the general partnership ("TPA") which owns the property, which consists of three office buildings in the Technology Park Reston office park. The remaining 65% interest in TPA is owned by Dean Witter Realty Income Partnership IV, L.P.
The partners received cash flow and profits and losses according to their interests.
On December 31, 1996, TPA and an affiliate of the Managing General Partner (the "Affiliate"), which owns the fourth building at the property, sold the property to Sprint Communications Company L.P., the sole tenant at the property, for a negotiated sale price of $76,300,000. $51,483,000 of the sales price was allocated to TPA and $24,817,000 was allocated to the Affiliate, based on the relative square footage of the buildings each owned at the property.
The sale price was received in cash at closing. The Partnership received approximately $17.7 million of such cash, representing its 35% share of the cash received by TPA, net of closing costs. In February
DEAN WITTER REALTY INCOME PARTNERSHIP III, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1997, the Partnership distributed $16,848,016 of the net proceeds from the sale ($31.55 per Unit). The distribution was paid 100% to Limited Partners.
Cash flow from operations for the Tech Park joint venture was approximately $273,000 in 1997.
Summarized balance sheet information of the joint venture is as follows:
The accounting policies of the Joint Ventures are the same as those of the Partnership.
7. Leases
Minimum future rental income under noncancellable operating leases (excluding the leases of space at real estate held for sale) as of October 31, 1997 is as follows:
The Partnership has determined that all leases relating to its properties are operating leases. The terms range from one to twenty-one years, and generally provide for fixed minimum rents with rental escalation and/or expense reimbursement clauses.
8. Related Party Transactions
An affiliate of the Managing General Partner provided property management services for five properties in 1997 and eight properties in 1996 and 1995, as well as for five buildings at the Chesterbrook Corporate Center in each year. The Partnership incurred management fees of $244,266, $478,220 and $466,198 for the years ended October 31, 1997, 1996 and
DEAN WITTER REALTY INCOME PARTNERSHIP III, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1995, respectively. These amounts are included in property operating expenses.
Another affiliate of the Managing General Partner performs administrative functions, processes investor transactions and prepares tax information for the Partnership. The Partnership incurred approximately $630,000, $661,000 and $756,000 for these services in each of the years ended October 31, 1997, 1996 and 1995. These amounts are included in general and administrative expenses.
As of October 31, 1997, the affiliates were owed a total of approximately $70,000 for these services.
9. Litigation
Various public partnerships sponsored by Dean Witter Realty Inc. (including the Partnership and its Managing General Partner) are defendants in a number of class action lawsuits pending in state and federal courts. The complaints allege a variety of claims, including breach of fiduciary duty, fraud, misrepresentation and related claims, and seek compensatory and other damages and equitable relief. The defendants intend to vigorously defend the actions. It is impossible to predict the effect, if any, the outcome of these actions might have on the Partnership's financial statements.
10. Distributions Subsequent to Year-End
On November 25, 1997, the Partnership paid a cash distribution of $2.30 per Unit to the Limited Partners. The total cash distribution amounted to $1,364,718, with $1,228,246 distributed to the Limited Partners and $136,472 to the General Partners.
On November 26, 1997 the partnership distributed $18,722,741 of the net proceeds from the sale of the Holcomb Woods property ($35.06 per Unit). The distribution was paid 100% to Limited Partners. See Note 5.
DEAN WITTER REALTY INCOME PARTNERSHIP III, L.P.
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
The Partnership is a limited partnership which has no directors or officers.
The directors and executive officers of the Managing General Partner are as follows: Position with the Name Managing General Partner William B. Smith Chairman of the Board of Directors E. Davisson Hardman, Jr. President and Director Lawrence Volpe Controller and Director Ronald T. Carman Secretary and Director
All of the directors have been elected to serve until the next annual meeting of the shareholder of the Managing General Partner or until their successors are elected and qualify. Each of the executive officers has been elected to serve until his successor is elected and qualifies.
William B. Smith, age 54, has been a Managing Director of Morgan Stanley and co-head of Morgan Stanley Realty Incorporated since 1997, and a Managing Director of Dean Witter Realty Inc., which he joined in 1982. He is an Executive Vice President of Dean Witter Reynolds Inc.
E. Davisson Hardman, Jr., age 48, has been a Managing Director of Morgan Stanley Asia, Ltd. since 1997, and a Managing Director of Dean Witter Realty Inc., which he joined in 1982.
Lawrence Volpe, age 50, is a Director and the Controller of Dean Witter Realty Inc. He is a Senior Vice President and Controller of Dean Witter Reynolds Inc., which he joined in 1983.
DEAN WITTER REALTY INCOME PARTNERSHIP III, L.P.
Ronald T. Carman, age 46, is a Director and the Secretary of Dean Witter Realty Inc. He is an Assistant Secretary of MWD and a Senior Vice President and Associate General Counsel of Dean Witter Reynolds Inc., which he joined in 1984.
There is no family relationship among any of the foregoing persons.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The General Partners are entitled to receive cash distributions, when and as cash distributions are made to the Limited Partners, and a share of taxable income or tax loss. Descriptions of such distributions and allocations are in Item 5 above. The General Partners received cash distributions of $1,091,774, $1,280,164 and $1,353,593 during the years ended October 31, 1997, 1996 and 1995, respectively.
The General Partners and their affiliates were paid certain fees and reimbursed for certain expenses. Information concerning such fees and reimbursements is contained in Note 8 to the consolidated financial statements in Item 8 above.
The directors and officers of the Partnership's Managing General Partner received no remuneration from the Partnership.
DEAN WITTER REALTY INCOME PARTNERSHIP III, L.P.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) No person is known to the Partnership to be the beneficial owner of more than five percent of the Units.
(b) The directors and executive officers of the Managing General Partner own the following Units as of December 31, 1997:
Amount and Title of Name of Nature of Class Beneficial Owner Beneficial Ownership Limited All directors and * Partnership executive officers of Interests the Managing General Partner, as a group
* Own, by virtue of ownership of limited partnership interests in the Associate General Partner, less than 1% of the Units of the Partnership.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As a result of their being partners of a limited partnership which is the Limited Partner of the Associate General Partner, certain current and former officers and directors of the Managing General Partner also own indirect partnership interests in the Partnership. The Partnership Agreement of the Partnership provides that cash distributions and allocations of income and loss to the General Partners shall be distributed or allocated 50% to the Managing General Partner and 50% to the Associate General Partner. The General Partners' share of cash distributions and income or loss is described in Item 5 above.
All of the outstanding shares of common stock of the Managing General Partner are owned by Dean Witter Realty Inc. ("Realty"), a Delaware corporation which is a wholly- owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co. The general partner of the Associate General Partner is the Managing General Partner. The limited partner of the Associate General Partner is LSA 86 L.P., a Delaware limited partnership. Realty and certain current and former officers and directors of the
DEAN WITTER REALTY INCOME PARTNERSHIP III, L.P.
Managing General Partner are partners of LSA 86 L.P. Additional information with respect to the directors and executive officers and compensation of the Managing General Partner and affiliates is contained in Items 10 and 11 above.
The General Partners and their affiliates were paid certain fees and reimbursed for certain expenses. Information concerning such fees and reimbursements is contained in Note 8 to the Consolidated Financial Statements in Item 8 above. The Partnership believes that the payment of fees and the reimbursement of expenses to the General Partners and their affiliates are on terms as favorable as would be obtained from unrelated third parties.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report:
1. Financial Statements (see Index of Financial Statements filed as part of Item 8 of this Annual Report).
2. Financial Statement Schedules (see Index to Financial Statements filed as part of Item 8 of this Annual Report).
3. Exhibits
(3)(a) Certificate of Limited Partnership included in the Registration Statement Number 33- 1912 is incorporated by reference.
(3)(b) Amended and Restated Agreement of Limited Partnership dated as of February 11, 1986 set forth in Exhibit A to the Prospectus in the Registration Statement Number 33-1912 is incorporated herein by reference.
(4)(a) Certificate of Limited Partnership included in the Registration Statement Number 33- 1912 is incorporated by reference.
DEAN WITTER REALTY INCOME PARTNERSHIP III, L.P.
(4)(b) Amended and Restated Agreement of Limited Partnership dated as of February 11, 1986 set forth in Exhibit A to the Prospectus included in the Registration Statement Number 33-1912 is incorporated herein by reference.
(10)(a) Purchase and Sale Agreements for properties purchased filed as Exhibits to Form 8-K on June 27, 1986, December 29, 1986, December 29, 1986, December 29, 1986, December 29, 1986, December 30, 1986, December 30, 1986k, June 1, 1987, December 7, 1987, and December 15, 1987 are incorporated herein by reference.
(b) Purchase and Sale Agreement, dated October 19, 1995 between Dean Witter Realty Income Partnership II, L.P., Midway Crossing Limited Partnership, Dean Witter Realty Income Partnership III, L.P., Genesee Crossing Limited Partnership, Farmington/9 Mile Associates, a Michigan Limited Partnership, Hampton Crossing Associates, Rochester Hills Limited Partnership, Dean Witter Realty Yield Plus, L.P. and New Plan Realty Trust (including Exhibit J thereto) filed as exhibit to Form 8-K on December 11, 1995 is incorporated herein by reference.
(c) First Amendment to Agreement of Purchase and Sale by and between Dean Witter Realty Income Partnership II, L.P., Midway Crossing Limited Partnership, Dean Witter Realty Income Partnership III, L.P., Genesee Crossing Limited Partnership, Farmington/9 Mile Associates, a Michigan Limited Partnership, Hampton Crossing Associates, Rochester Hills Limited Partnership, Dean Witter Realty Yield Plus, L.P. and New Plan Realty Trust (including Exhibit J thereto) filed as exhibit to Form 8-K on December 11, 1995 is incorporated herein by reference.
(d) Purchase and Sale Agreement between Technology Park Associates, Dean Witter/Technology Park II Associates, L.P., and Sprint Communications Company, L.P. a Delaware Limited Partnership filed as exhibit 2 to the Registrant's Report on Form 8-K on December 31, 1996 is incorporated herein by reference. DEAN WITTER REALTY INCOME PARTNERSHIP III, L.P.
(e) Purchase and Sale Agreement, dated as of October 1, 1997, First Amendment to Purchase and Sale Agreement dated as of October 15, 1997 and Second Amendment to Purchase and Sale Agreement dated as of October 27, 1997 between Dean Witter Realty Income Partnership III, L.P., as Seller and LPC Commercial Services, Inc. as Purchaser, filed as Exhibit 2 to the Registrant's Report on Form 8- K on November 7, 1997 is incorporated herein by reference.
(21) Subsidiaries: Park Six Associates, a Pennsylvania limited partnership. Laurel Vincent Place Associates, a Maryland limited partnership.
(b) No Forms 8-K were filed by the Partnership during the last quarter of the period covered by this report.
Except for losses on impairment of real estate and the adjustment to Westland Crossing for accumulated depreciation described in note 1, there is no difference between cost for financial reporting purposes and cost for federal income tax purposes.
DEAN WITTER REALTY INCOME PARTNERSHIP III, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
DEAN WITTER REALTY INCOME PARTNERSHIP III, L.P.
By: Dean Witter Realty Income Properties III Inc. Managing General Partner
By: /s/E. Davisson Hardman, Jr. Date: January 28, 1998 E. Davisson Hardman, Jr. President
By: /s/Lawrence Volpe Date: January 28, 1998 Lawrence Volpe Controller (Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
DEAN WITTER REALTY INCOME PROPERTIES III INC. Managing General Partner
/s/William B. Smith Date: January 28, 1998 William B. Smith Chairman of the Board of Directors
/s/E. Davisson Hardman, Jr. Date: January 28, 1998 E. Davisson Hardman, Jr. Director
/s/Lawrence Volpe Date: January 28, 1998 Lawrence Volpe Director
/s/Ronald T. Carman Date: January 28, 1998 Ronald T. Carman Director DEAN WITTER REALTY INCOME PARTNERSHIP III, L.P.
Year Ended October 31, 1997
Exhibit Index
Exhibit No.
27 Financial Data Schedule
E1 _______________________________