Item 1. Business.
Copley Pension Properties VII; A Real Estate Limited Partnership (the "Partnership") was organized under the Uniform Limited Partnership Act of the Commonwealth of Massachusetts on October 3, 1988, to invest primarily in to-be-developed, newly constructed and existing income-producing real properties.
The Partnership was initially capitalized with contributions of $2,000 in the aggregate from Seventh Copley Corp. (the "Managing General Partner") and ICOP Associates Limited Partnership (the "Associate General Partner") (collectively, the "General Partners") and $10,000 from Copley Real Estate Advisors, Inc. (the "Initial Limited Partner"). The Partnership filed a Registration Statement on Form S-11 (the "Registration Statement") with the Securities and Exchange Commission on October 17, 1988, with respect to a public offering of 80,000 units of limited partnership interest at a price of $1,000 per unit (the "Units") with an option to sell up to an additional 80,000 Units (an aggregate of $160,000,000). The Registration Statement was declared effective on January 9, 1989.
The first sale of Units occurred on April 27, 1989, at which time the Initial Limited Partner withdrew its contribution from the Partnership. Investors were admitted to the Partnership thereafter at monthly closings; the offering terminated on September 30, 1990 and the last group of initial investors was admitted to the Partnership on October 10, 1990. As of December 31, 1990, a total of 42,076 Units had been sold, a total of 5,965 investors had been admitted as limited partners (the "Limited Partners") and a total of $41,956,740 net of discounts had been contributed to the capital of the Partnership. The remaining 117,924 units were deregistered on February 20, 1991.
As of December 31, 1999, the Partnership had the three real property investments described below in A. B. and C. Four additional investments have been sold: a research and development facility in 1991 and an apartment complex; in each of 1994, 1998 and 1999. Sales proceeds have been distributed in the amount of $523 per Unit as a result of these sales. In addition, capital of $22.90 per Unit has been distributed as a result of a discretionary reduction in cash reserves. The Partnership has no current plan to renovate, improve, or further develop any of its existing real property. In the opinion of the Managing General Partner of the Partnership, the properties are adequately covered by insurance.
The Partnership has no employees. Services are performed for the Partnership by the Managing General Partner and affiliates of the Managing General Partner.
A. Retail Center in San Jose, California ("Parkmoor Plaza").
On September 20, 1989, the Partnership acquired a 75% interest in a joint venture formed with SBC & D Co., Inc. As of December 31, 1999, the Partnership had contributed $9,786,330 to the capital of the joint venture out of a maximum commitment of $10,000,000. The joint venture agreement entitles the Partnership to receive a preferred return on its invested capital at the rate of 10% per annum. During the first 120 months following the date of the joint venture agreement, to the extent sufficient cash flow is not available therefor, up to 1% of such preferred return was permitted to accrue and bear interest at the rate of 10% per annum, compounded monthly. The balance of the preferred return was payable monthly on a current basis. Commencing with the 121st month following the date of the joint venture agreement, the full amount of the preferred return has been payable monthly on a current basis. The joint venture agreement also entitles the Partnership to receive 75% of remaining cash flow and 75% of sale and refinancing proceeds following the return of the Partnership's investment.
The joint venture owns a leasehold interest pursuant to a ground lease in 13.791 acres of land and a fee interest in three retail buildings totaling approximately 149,825 square feet in San Jose, California. The ground lease terminates on November 12, 2014 and provides for an annual rental of $73,230 payable in equal monthly installments. The joint venture has the option to extend the lease for an additional 25 years. The rent for the extended term will be determined in accordance with provisions set forth in the lease. The joint venture also has the option to purchase the land upon notice from the owner of its intention to sell to an unrelated third party and its acceptance of a bona fide offer. The property has been fully converted from industrial to retail use. As of December 31, 1999, this retail center was 100% leased.
B. Office/Warehouse Building in Houston, Texas ("Drilex").
On December 18, 1990, the Partnership acquired a 75% interest in a joint venture formed with an affiliate of The Trammell Crow Company ("Trammel Crow"). The Partnership had contributed $2,294,713 to the capital of the joint venture. The joint venture agreement entitled the Partnership to receive a preferred return on its invested capital at the rate of 11% per annum, which was payable currently until the Partnership had received an aggregate of $56,115. Upon completion of construction the preferred return would accrue, if sufficient cash flow was not available therefor. In addition, upon rental of the building, the joint venture was also obligated to pay to the Partnership the amount of $2,755 on a monthly basis. This amount represented full amortization over a ten year period of the cost of special tenant improvements and was applied against both the contributed capital and the preferred return. The joint venture agreement also entitled the Partnership to receive 50% of the net proceeds of sales after return of its capital if the building was sold within one year of the tenant's occupancy for a cash price of greater than $2,800,000. Under any other circumstances, the Partnership's share of sale proceeds was 75%. As of January 1, 1993, the Partnership acquired Trammell Crow's equity interest in the joint venture for $70,000.
The Partnership owns approximately 3.4 acres of land in Houston, Texas, improved with an approximately 53,750 square foot single story office/warehouse building constructed in 1991. As of December 31, 1999, the building was 100% occupied by a single tenant under a long-term lease that expires in January 2010.
C. Industrial Building in Itasca, Illinois ("Prentiss Copystar").
On May 23, 1991, the Partnership acquired a 23.25% interest in a joint venture formed with Copley Pension Properties VI; A Real Estate Limited Partnership, an affiliate of the Partnership (the "Affiliate") with a 51.75% interest, and with an affiliate of Prentiss Properties, Ltd. As of December 31, 1999, the Partnership had contributed $1,025,607 to the capital of the joint venture out of a maximum commitment of $1,029,084, of which $716,882 is characterized as Senior Capital and $308,725 is characterized as Junior Capital. The joint venture agreement entitles the Partnership to receive a preferred return, compounded monthly, of 11% per annum of which the return on Senior Capital will be payable currently and the return on Junior Capital may accrue and compound monthly if sufficient cash flow is not available therefor. If the Senior Capital is repaid prior to the termination of the joint venture, the Partnership would be entitled to receive a return on the Senior Capital at the lesser of 11% per annum or the interest rate for treasury bonds having a maturity date coinciding with the termination of the joint venture, plus 75 basis points. The joint venture agreement also entitles the Partnership to receive 23.25% of the net proceeds of sales and financings after return of its capital and 23.25% of cash flow remaining after payment of the preferred return.
The joint venture owns approximately 3.75 acres of land in Itasca, Illinois and during 1991 completed construction thereon of an approximately 70,535 square foot single-story industrial building. As of December 31, 1999, the building was vacant. The Partnership is currently negotiating a long term lease with a single tenant.
D. Apartment Complex in Sherman Oaks, California ("Regency Court Apartments")
On April 14, 1995, Regency Court Associates, L.P., a California limited partnership (the "Acquisition Partnership"), acquired a 174-unit apartment complex located in Sherman Oaks, California for $9,605,021. The sole limited partner of the Acquisition Partnership is the Partnership, and the sole general partner of the Acquisition Partnership is Copp VII Holding Corp., a Massachusetts corporation which is a wholly-owned subsidiary of the Partnership (the "Subsidiary"). As of December 31, 1999, the Partnership had contributed $9,700,000 to the capital of the Acquisition Partnership. The partnership agreement of the Acquisition Partnership entitles the Partnership to receive 99% of cash flow and 99% of sale and financing proceeds. The Subsidiary has a 1% interest in cash flow and sale and financing proceeds. The Subsidiary has been capitalized with a $1,000,000 demand promissory note from the Partnership.
The Acquisition Partnership owned a 174-unit apartment complex known as Regency Court Apartments located on approximately 1.64 acres of land.
On March 25, 1999, the Partnership sold the Regency Court Apartments to an unaffiliated third party for a gross sale price of $13,050,000. The Partnership received net proceeds of $12,486,618 and recognized a gain of $3,287,303 ($77.35 per Limited Partnership Unit). On April 29, 1999, the Partnership made a capital distribution of $12,033,736 ($286 per Limited Partnership Unit) from the proceeds of the sale.
Item 2.
Item 2. Properties
The following table sets forth the annual realty taxes for the Partnership's properties and information regarding tenants who occupy 10% or more of gross leasable area (GLA) in the Partnership's properties:
(1) Tenant responsible for real property taxes.
The following table sets forth for each of the last five years the gross leasable area, occupancy rates, rental revenue, and net effective rent for the Partnership's properties:
*Net effective rent calculation is based on average occupancy during the respective year.
Following is a schedule of lease expirations for each of the next ten years for the Partnership's properties based on the annual contract rent in effect at December 31, 1999:
*Rent received for a telecommunication company satellite dish mounted on a building at the property.
* Does not include expenses paid by tenants.
(1) Remaining leases do not expire within 10 years.
The following table sets forth for each of the Partnership's properties the: (i) federal tax basis, (ii) rate of depreciation, (iii) method of depreciation, (iv) life claimed, and (v) accumulated depreciation, with respect to each property or component thereof for purposes of depreciation:
SL = Straight Line
Following is information regarding the competitive market conditions for each of the Partnership's properties. This information has been gathered from sources deemed reliable. However, the Partnership has not independently verified the information and, as such, cannot guarantee its accuracy or completeness:
Industrial Building in Itasca, Illinois
The Metropolitan Chicago Industrial Market contains approximately 933 million square feet of inventory with a year-end 1999 vacancy rate of 8.0%, an increase from the 6.9% vacancy at year-end 1998. Currently, there is more than 3.2 million square feet of inventory under construction and an additional 8.5 million square feet proposed. Due to the scarcity of land located close to our property, new construction has moved out, mainly west and south along the I-55 and I-80 corridors. The availability of new competitively priced product will limit the growth of rental rates, but more so in the outlying markets with ample land available for development. The property is located in the North DuPage County submarket. Most tenants in this submarket rely on close proximity to the O'Hare International Airport, and to convenient access to interstates 355, 290, 90, and the Elgin-O'Hare Expressway.
Retail Center in San Jose, California
The center is located in the San Jose metropolitan market. It is ranked number 2 among American cities in terms of exports, and is home to over 40% of the greater Silicon Valley workforce. Over 11,000 high tech companies employ more than 241,000 workers in the San Jose metropolitan area. Due to its tenant mix and excellent regional accessibility, Parkmoor Plaza draws customers from a larger-than-normal retail trade area. The trade area boasts a current population of 228,000 which is estimated to grow to over 243,000 by the year 2004.
Office/Warehouse Building in Houston, Texas
Houston's Industrial market of high quality, investment grade product contains in excess of 93 million square feet in eight submarkets. Drilex is located in the Northwest Far Industrial Market, which contains nearly 33.7 million square feet of primarily bulk warehouse space. This submarket is comprised of industrial projects extending Northwest along US 290 and Hempstead Highway from the I-610 interchange out to Highway 6. The Northwest Far submarket is by far the largest in terms of square footage and most active in terms of new development. Most of the new product is front-load distribution facilities. Through Q4 1999 new product or product under construction was estimated at 703,000 SF, of which 325,00 SF was pre-leased. Overall net absorption outpassed new construction with approximately 730,000 SF of space being absorbed through Q4 1999. Less than 4% of the total space in the market is actually vacant, which has made for strong demand and the concern that the area is poised for over development in the next few years.
Item 3.
Item 3. Legal Proceedings.
A partner in a joint venture in which the Partnership holds an interest has filed a declaratory judgment action with respect to certain provisions of the joint venture agreement.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Annual Report on Form 10-K.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
There is no active market for the Units. Trading in the Units is sporadic and occurs solely through private transactions.
As of December 31, 1999, there were 5,760 holders of Units.
The Partnership's Amended and Restated Agreement of Limited Partnership dated April 27, 1989, as amended to date (the "Partnership Agreement"), requires that any Distributable Cash (as defined therein) be distributed quarterly to the Partners in specified proportions and priorities. There are no restrictions on the Partnership's present or future ability to make distributions of Distributable Cash. For the year ended December 31, 1999, cash distributions paid in 1999 or distributed after year end with respect to 1999 to the Limited Partners totaled $13,696,999 including $12,033,736 of returned capital from the proceeds of a sale of real property and $79,944 of returned capital from original working capital reserves. For the year ended December 31, 1998, cash distributions paid in 1998 or distributed after year end with respect to 1998 to the Limited Partners totaled $8,434,977 including $5,427,804 of returned capital from the proceeds of a sale by a joint venture of real property and $541,939 of returned capital from original working capital reserves.
Cash distributions exceeded net income in 1999 and 1998. However, distributions of operating cash flow were less than cash generated by operating activities. Reference is made to the Partnership's Statement of Changes in Partner's Capital (Deficit) and Statement of Cash Flows in Item 8 hereof.
(1) 1999 Net Income includes a gain on sale of investment of $3,287,303. Cash distributions include a return of capital of $286.
(2) 1998 Net Income includes a gain on sale of investment of $2,076,945. Cash distributions include a return of capital of $141.88.
(3) 1996 Cash Distributions include a return of capital of $8.00.
(4) 1995 Net Income includes a gain on sale of investment of $228,086. Cash distributions include a return of capital of $80.00.
Item 7.
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
The Partnership completed its offering of units of limited partnership interest in September, 1990 and a total of 42,076 units were sold. The Partnership received proceeds of $36,522,542, net of selling commissions and other offering costs, which have been used for investment in real estate and the payment of related acquisition costs, and for working capital reserves. The Partnership made the three investments it currently owns described in Item 1 hereof, and four additional investments which were sold in 1991, 1994, 1998 and 1999, respectively. Through December 31, 1999, capital of $22,884,295 ($543.88 per Limited Partnership Unit) has been returned to the limited partners; $22,005,748 as a result of sales, $336,608 in 1996 as a result of a discretionary reduction of cash reserves and $621,883 as a result of a distribution of original working capital. As a result of sales and similar transactions, the adjusted capital contribution was reduced to $454.22.
On August 7, 1998, the Waterford Apartments, in Frederick, Maryland, which was owned by the Partnership (25%) and an affiliate (75%), was sold to an institutional buyer which is unaffiliated with the Partnership. The total gross sale price was $21,800,000. The Partnership received its share of the net proceeds totaling $5,446,250, after closing costs and recognized a gain of $2,076,945 ($48.87 per Limited Partnership Unit). A disposition fee was accrued but not paid to AEW Real Estate Advisors, Inc. ("AEW"). On August 26, 1998, the Partnership made a capital distribution of $5,427,804 ($129 per Limited Partnership Unit) from the proceeds of the sale.
On March 25, 1999, the Partnership sold the Regency Court Apartments to an unaffiliated third party for a gross sale price of $13,050,000. The Partnership received net proceeds of $12,486,618 and recognized a gain of $3,287,303 ($77.35 per Limited Partnership Unit). A disposition fee was accrued but not paid to AEW Real Estate Advisors, Inc ("AEW"). On April 29, 1999, the Partnership made a capital distribution of $12,033,736 ($286 per Limited Partnership Unit) from the proceeds of the sale.
At December 31, 1999, the Partnership had $4,169,397 in cash and cash equivalents of which $483,236 was used for operating distributions to partners on January 27, 1999; the remainder will primarily be used as working capital reserves. The source of future liquidity and cash distributions to partners will primarily be cash flow generated by the Partnership's cash equivalents and real estate investments and proceeds from the sale of such investments. Distributions of cash from operations relating to the first quarter of 1999 were made at an annualized rate of 6% on the adjusted capital contribution of $742.12 per Limited Partnership Unit. Cash distributions relating to the second quarter of 1999 were made at an annualized rate of 5.25% on the weighted average adjusted capital contribution of $545.10 per Limited Partnership Unit. Cash distributions relating to the third quarter of 1999 were made at an annualized rate of 7.00% on the weighted average adjusted capital contribution of $456.12 per Limited Partnership Unit. Cash distributions relating to the fourth quarter of 1999 were made at an annualized rate of 10.00% on the weighted average adjusted capital contribution of $454.78 per Limited Partnership Unit. The increase in the annualized rate is due to an increase in cash flow from properties which was higher than anticipated. Distributions of cash from operations relating to the first and second quarters of 1998 were made at an annualized rate of 7.00% on the adjusted capital contribution. Distributions of cash from operations relating to the third and fourth quarters of 1998 were made at an annualized rate of 7.00% on the weighted average adjusted capital contribution, which was adjusted due to the mid-quarter sale of Waterford Apartments as well as a distribution of original working capital.
The carrying value of real estate investments in the financial statements at December 31, 1999 is at depreciated cost, or if the investment's carrying value is determined not to be recoverable through expected undiscounted future cash flows, the carrying value is reduced to estimated fair market value.
The fair market value of such investments is further reduced by the estimated cost of sale for properties held for sale. Carrying value may be greater or less than current appraised value. At December 31, 1999, the appraised value of each real estate investment exceeded its carrying value; the aggregate excess was approximately $3,555,000. The current appraised value of real estate investments has been estimated by the Managing General Partner and is generally based on a combination of traditional appraisal approaches performed by AEW and independent appraisers. Because of the subjectivity inherent in the valuation process, the estimated current appraised value may differ significantly from that which could be realized if the real estate were actually offered for sale in the marketplace.
Results of Operations
Form of Real Estate Investments
The Drilex investment is a wholly-owned property and the Prentiss Copystar and Parkmoor Plaza investments are joint ventures.
Operating Factors
The Partnership's industrial property, Drilex, was 100% leased at December 31, 1999 as it has been for the last seven years. The other industrial property, Prentiss Copystar, was vacant at December 31, 1999 and 100% leased at December 31, 1998. The Partnership is currently negotiating a long term lease with a single tenant for the Prentiss Copystar property.
As previously discussed, the Waterford Apartments was sold on August 7, 1998, and the Partnership recognized a gain of $2,076,945. At the time of the sale, the Waterford Apartments was 96% leased.
As previously discussed, the Regency Court Apartments was sold on March 25, 1999, and the Partnership recognized a gain of $3,287,303. At the time of the sale, the Regency Court Apartments was 97% leased. At December 31,1998 it was 96% leased.
Occupancy at Parkmoor Plaza was 100% at December 31, 1999, where it has remained since the second quarter of 1995. On February 29, 2000, the Partnership executed a Purchase and Sale Agreement to sell the Parkmoor Plaza investment. Although there can be no assurance that this sale will occur, it is anticipated to be concluded during the second quarter of 2000.
Investment Results
Interest on short-term investments and cash equivalents increased approximately $21,500 or 9% in 1999 as compared to 1998, due to an increase in average investment balances as a result of the receipt of the Regency Court Apartments sales proceeds.
1999 Compared to 1998
Total real estate operations for the twelve months ended December 31, 1999 and 1998 was $1,656,933 and $2,063,956, respectively. The decrease of $407,023 is primarily due to the sale of the Regency Court Apartments in the first quarter of 1999 and the Waterford Apartments sale in August 1998. Partially offsetting this is improved operating results at Parkmoor Plaza of approximately $73,000 as a result of increased rental revenues due to improved market conditions during 1999 as compared to 1998.
Cash flow from operations decreased approximately $778,000 between the twelve-month periods. This change is primarily due to the sales of Regency Court Apartments and Waterford Apartments in 1998.
1998 Compared to 1997
Total real estate operations for the twelve months ended December 31, 1998 and 1997 was $2,063,956 and $2,137,069, respectively. The decrease of $73,113 is primarily due to lower joint venture earnings due to the sale of Waterford Apartments. Partially offsetting this is improved operating results at Regency Court Apartments of approximately $49,000 as a result of increased rental revenues due to improved market conditions during 1998 as compared to 1997. Operating results at the three remaining properties were relatively unchanged between the respective periods.
Portfolio Expenses
The Partnership management fee is 9% of distributable cash flow from operations after any increase or decrease in working capital reserves as determined by the Managing General Partner. General and administrative expenses primarily consist of real estate appraisal, printing, legal, accounting and investor servicing fees.
1999 Compared to 1998
The Partnership management fee decreased between 1999 and 1998 due to a decrease in distributable cash flow as a result of the sale of the Regency Court Apartments on March 25, 1999. General and administrative expenses increased approximately $2,100 or 1%, due to increase in out-of-pocket and investor servicing fees which is offset by a decrease in printing and appraisal fees.
1998 Compared to 1997
The Partnership management fee decreased between 1998 and 1997 due to a decrease in distributable cash flow as a result of the sale of Waterford Apartments on August 7, 1998. General and administrative expenses increased approximately $6,500 primarily due to an increase in legal and investor servicing fees.
Inflation
By their nature, real estate investments tend not to be adversely affected by inflation. Inflation may result in appreciation in the value of real estate investments over time, if rental rates and replacement costs increase. Declines in property values during the period of Partnership operations, due to market and economic conditions, have overshadowed the positive affect inflation may have on the value of the Partnership's investments.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Partnership was not party to derivative financial instruments or derivative commodity instruments at or during the year ended December 31, 1999. The Partnership's only other financial instruments (as defined by Financial Accounting Standards Board Statement No. 107) are its cash and cash equivalents for which cost approximates market value.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The independent auditor's reports, financial statements and financial statement schedule listed in the accompanying index are filed as part of this report. See Index to the Financial Statements and Financial Statement Schedules on page 21.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
The Partnership has had no disagreements with its accountants on any matters of accounting principles or practices or financial statement disclosure.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
(a) and (b) Identification of Directors and Executive Officers.
The following table sets forth the names of the directors and executive officers of the General Partner and the age and position held by each of them as of December 31, 1999.
(c) Identification of Certain Significant Employees.
None.
(d) Family Relationships.
None.
(e) Business Experience.
The Managing General Partner was incorporated in Massachusetts on October 3, 1988. The background and experience of the executive officers and directors of the Managing General Partner are as follows:
Alison Husid Cutler is a Portfolio Manager in AEW Institutional Real Estate Services, with responsibility for several real estate equity portfolios representing approximately $800 million in client capital. She has over 12 years of experience in real estate finance and investment management. Ms. Cutler joined the predecessor of AEW Capital Management, L.P. ("AEW Capital Management") in 1987 as Controller for a portfolio management team responsible for the acquisition, management, restructuring and disposition of client assets in New England and the western U.S. She later served as Asset Manager for a portfolio of assets in Arizona and the West Coast. Prior to joining AEW, Ms. Cutler worked for several years as a Senior Auditor with Peat Marwick, Main & Co. She is a Certified Public Accountant and a graduate of the University of Massachusetts (B.A.).
Pamela J. Herbst directs AEW Capital Management, L.P.'s ("AEW Capital Management")Institutional Real Estate Services, with oversight responsibility for the direct equity investing and asset and portfolio management of existing core and core-plus commingled funds and separate accounts. Ms. Herbst is a member of AEW Capital Management's Investment Policy Group and Operating Committee. She came to AEW Capital Management in December 1996 as a result of the firm's merger with Copley Real Estate Advisors, Inc., where she held various senior level positions in asset and portfolio management, acquisitions, and corporate operations since 1982. Ms. Herbst is a graduate of the University of Massachusetts (B.A.) and Boston University (M.B.A.).
J. Grant Monahon is AEW Capital Management's Chief Operating Officer and a member of the firm's Management Committee and Investment Policy Group. He has over 25 years of experience in real estate law and investments. Prior to joining the predecessor of AEW Capital Management in 1987, Mr. Monahon was a partner with a major Boston law firm. As the head of that firm's real estate finance department, he represented a wide variety of institutional clients, both domestic and international, in complex equity and debt transactions. He is the former Chairman of the General Counsel section of the National Association of Real Estate Investment Managers. Mr. Monahon is a graduate of Dartmouth College (B.A.) and Georgetown University Law Center (J.D.).
James J. Finnegan is the General Counsel of AEW Capital Management. Mr. Finnegan served as Vice President and Assistant General Counsel of Aldrich, Eastman & Waltch, L.P., a predecessor to AEW Capital Management. Mr. Finnegan has over ten years of experience in real estate law, including seven years of experience in private practice with major New York City and Boston law firms. Mr. Finnegan also serves as AEW's securities and regulatory compliance officer. Mr. Finnegan is a graduate of the University of Vermont (B.A.) and Fordham University School of Law (J.D.).
Karin J. Lagerlund directs the Institutional Real Estate Services Portfolio Accounting Group at AEW Capital Management, overseeing portfolio accounting, performance measurement and client financial reporting for AEW's private equity investment portfolios. Ms. Lagerlund is a Certified Public Accountant and has over ten years experience in real estate consulting and accounting. Prior to joining AEW Capital Management in 1994, she was an Audit Manager at EY/Kenneth Leventhal LLP. Ms. Lagerlund is a graduate of Washington State University (B.A.).
(f) Involvement in Certain Legal Proceedings.
None.
Item 11.
Item 11. Executive Compensation.
Under the Partnership Agreement, the General Partners and their affiliates are entitled to receive various fees, commissions, cash distributions, allocations of taxable income or loss and expense reimbursements from the Partnership. See Notes 1, 2 and 6 of Notes to Financial Statements.
The following table sets forth the amounts of the fees and cash distributions and reimbursements for out-of-pocket expenses which the Partnership paid to or accrued for the account of the General Partners and their affiliates for the year ended December 31, 1999. Cash distributions to General Partners include amounts paid after year end with respect to 1999.
For the year ended December 31, 1999 the Partnership allocated $61,884 of taxable income to the General Partners.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) Security Ownership of Certain Beneficial Owners
No person or group is known by the Partnership to be the beneficial owner of more than 5% of the outstanding Units at December 31, 1999. Under the Partnership Agreement, the voting rights of the Limited Partners are limited and, in some circumstances, are subject to the prior receipt of certain opinions of counsel or judicial decisions.
Except as expressly provided in the Partnership Agreement, the right to manage the business of the Partnership is vested exclusively in the Managing General Partner.
(b) Security Ownership of Management.
The General Partners of the Partnership owned no Units at December 31, 1999.
(c) Changes in Control.
There exists no arrangement known to the Partnership the operation of which may at a subsequent date result in a change in control of the Partnership.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The Partnership has no relationships or transactions to report other than as reported in Item 11, above.
PART IV
Item 14.
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements--The Financial Statements listed on the accompanying Index to Financial Statements and Schedule and Financial Statement Index No. 2 are filed as part of this Annual Report.
(2) Financial Statement Schedule--The Financial Statement Schedule listed on the accompanying Index to Financial Statements and Schedule is filed as part of this Annual Report.
(3) Exhibits--The Exhibits listed in the accompanying Exhibit Index are filed as a part of this Annual Report and incorporated in this Annual Report as set forth in said Index.
(b) Reports on Form 8-K: During the last quarter of the year ended December 31, 1999, the Partnership filed no Current Report on Form 8-K.
Copley Pension Properties VII; A Real Estate Limited Partnership
Financial Statements
* * * * * * *
December 31, 1999
COPLEY PENSION PROPERTIES VII A REAL ESTATE LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Report of Independent Accountants
Financial Statements:
Balance Sheets - December 31, 1999 and 1998
Statements of Operations - Years ended December 31, 1999, 1998 and 1997
Statements of Partners' Capital (Deficit) - Years ended December 31, 1999, 1998 and 1997
Statements of Cash Flows - Years ended December 31, 1999, 1998 and 1997
Notes to Financial Statements
Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation at December 31, 1999
All other schedules are omitted because they are not applicable
Report of Independent Accountants
To the Partners of Copley Pension Properties VII; A Real Estate Limited Partnership:
In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Copley Pension Properties VII; A Real Estate Limited Partnership (the "Partnership") at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and the financial statement schedule are the responsibility of Seventh Copley Corp., the Managing General Partner of the Partnership (the "Managing General Partner"); our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by the Managing General Partner, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP - ------------------------------ Boston, Massachusetts March 21, 2000
(See accompanying notes to financial statements)
(See accompanying notes to financial statements)
(See accompanying notes to financial statements)
(See accompanying notes to financial statements)
COPLEY PENSION PROPERTIES VII; A REAL ESTATE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
Note 1 - Organization and Business
General
Copley Pension Properties VII; A Real Estate Limited Partnership (the "Partnership") is a Massachusetts limited partnership organized for the purpose of investing primarily in newly constructed and existing income-producing real properties. It primarily serves as an investment for qualified pension and profit sharing plans and other entities intended to be exempt from federal income tax. The Partnership commenced operations in March 1989 and, acquired the three real estate investments it currently owns prior to the end of 1991. The Partnership intends to dispose of its investments within eight to twelve years of their acquisition, and then liquidate.
The Managing General Partner of the Partnership is Seventh Copley Corp., a wholly-owned subsidiary of AEW Real Estate Advisors, Inc. ("AEW"), formerly known as Copley Real Estate Advisors, Inc. ("Copley"). The associate general partner is ICOP Associates Limited Partnership, a Massachusetts limited partnership. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by AEW pursuant to an advisory contract.
On December 10, 1996, Copley's parent, New England Investment Companies, Limited Partnership ("NEIC"), a publicly traded master limited partnership, acquired certain assets subject to then existing liabilities from Aldrich Eastman & Waltch, Inc. and its affiliates and principals (collectively, "the AEW operations"). Simultaneously, a new entity, AEW Capital Management, L.P., was formed into which NEIC contributed its interest in Copley and its affiliates. As a result, the AEW operations were combined with Copley to form the business operations of AEW Capital Management, L.P. At the end of 1997, NEIC completed a restructuring plan under which it contributed all of its operations to a newly formed private partnership, NEIC Operating Partnership, L.P., in exchange for a general partnership interest in the newly formed entity. Accordingly, at December 31, 1997, AEW Capital Management, L.P. was wholly owned by NEIC Operating Partnership, L.P. AEW is a subsidiary of AEW Capital Management, L.P. Effective April 1, 1998, NEIC changed its name to Nvest, L.P. and NEIC Operating Partnership, L.P. changed its name to Nvest Companies, L.P.
Prior to August 30, 1996, New England Mutual Life Insurance Company ("The New England") was NEIC's principal unit holder and owner of all of the outstanding stock of NEIC's general partner. On August 30, 1996, The New England merged with and into Metropolitan Life Insurance Company ("Met Life"). Met Life is the surviving entity and, therefore, through a wholly-owned subsidiary, became the owner of the units of partnership interest previously owned by The New England and of the stock of NEIC's general partner.
Management
AEW, as advisor, is entitled to receive stipulated fees from the Partnership in consideration of services performed in connection with the management of the Partnership and the acquisition and disposition of Partnership investments in real property. Partnership management fees are 9% of distributable cash from operations, as defined, before deducting such fees. Payment of a portion of the management fees incurred through 1991 had been deferred in accordance with the advisory agreement; however, in 1995 these deferred fees totaling $203,452 were paid to AEW in connection with a distribution of sale proceeds (See Note 3). AEW is also reimbursed for expenses incurred in connection with administering the Partnership ($12,000 in 1999, 1998, and 1997). Acquisition fees were paid at the time
commitments were initially funded in an amount equal to 2% of the gross proceeds from the offering. Disposition fees are limited to the lesser of 3% of the selling price of the property, or 50% of the standard real estate commission customarily charged by an independent real estate broker. Payments of disposition fees are subject to the prior receipt by the limited partners of their capital contributions plus a stipulated return thereon.
New England Securities Corporation ("NESC"), an indirect subsidiary of Met Life, is engaged by the Partnership to act as its unitholder servicing agent. Fees and out-of-pocket expenses for such services totaled $9,685 in 1999, $8,911 in 1998, and $8,371 in 1997. Fees to Back Bay Advisors, L.P., a wholly-owned subsidiary of Nvest Companies, L.P., for short-term investment advisory services totaled, $0, $0, and $4,412 for the same annual periods.
Note 2 - Summary of Significant Accounting Policies
Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires the Managing General Partner to make estimates affecting the reported amounts of assets and liabilities, and of revenues and expenses. In the Partnership's business, certain estimates require an assessment of factors not within management's control, such as the ability of tenants to perform under long-term leases and the ability of the properties to sustain their occupancies in changing markets. Actual results, therefore, could differ from those estimates.
Real Estate Joint Ventures
Investments in joint ventures are stated at cost plus (minus) equity in undistributed joint venture income (losses). Allocations of joint venture income (losses) were made to the Partnership's venture partners as long as they had substantial economic equity in the project. Economic equity is measured by the excess of the appraised value of the property over the Partnership's total cash investment plus accrued preferential returns thereon. Currently, the Partnership records an amount equal to 100% of the operating results of each joint venture, after the elimination of all inter-entity transactions, except for the two ventures which include an affiliate of the Partnership, which has substantial economic equity in the respective projects. Joint ventures are consolidated with the accounts of the Partnership if, and when, the venture partner no longer shares in the control of the business.
Property
Property includes land and buildings, which are stated at cost less accumulated depreciation, plus other operating net assets (liabilities). The Partnership's initial carrying value of a property previously owned by a joint venture equals the Partnership's carrying value of the prior investment on the conversion date.
Capitalized Costs, Depreciation and Amortization
Maintenance and repair costs are expensed as incurred. Significant improvements and renewals are capitalized. Depreciation is computed using the straight-line method based on estimated useful lives of the buildings and improvements. Leasing costs are also capitalized and amortized over the related lease term.
Acquisition fees have been capitalized as part of the cost of real estate investments. Amounts not related to land are amortized using the straight-line method over the estimated useful lives of the underlying property.
Certain tenant leases provide for rental increases over the respective lease terms. Rental revenue is being recognized on a straight-line basis over the lease terms.
Realizability of Real Estate Investments
The Partnership considers a real estate investment to be impaired when it determines the carrying value of the investment is not recoverable through undiscounted cash flows generated from the operations and disposition of the property. The impairment loss is based on the excess of the investment's carrying value over its estimated fair market value. For investments held for disposition, the impairment loss also includes estimated costs of sale. Property held for disposition is not depreciated during the holding period. Investments are considered to be held for disposition at the time management commits the Partnership to a plan to dispose of the investment.
Cash Equivalents
Cash equivalents are stated at cost, plus accrued interest. The Partnership considers all highly liquid investments purchased with a maturity of ninety days or less to be cash equivalents; otherwise, they are classified as short-term investments.
Deferred Disposition Fees
Disposition fees due to AEW related to sales of investments are included in the determination of gains or losses resulting from such transactions. According to the terms of the advisory contract, payment of such fees has been deferred until the limited partners first receive their capital contributions, plus stipulated returns thereon.
Income Taxes
A partnership is not liable for income taxes and, therefore, no provision for income taxes is made in the financial statements of the Partnership. A proportionate share of the Partnership's income is reportable on each partner's tax return.
Per Unit Computations
Per unit computations are based on the number of units of limited partnership interest outstanding during the year. The actual per unit amount will vary by partner depending on the date of admission to, or withdrawal from, the Partnership.
Segment Data
Effective January 1, 1998, the Partnership adopted Financial Accounting Standards Board Statement No. 131, "Disclosure about Segments on an Enterprise and Related Information" (FAS 131). Based on the criteria established in FAS 131, the Managing General Partner has determined that the Partnership operates in one operating segment: investing in real estate properties which are domiciled in the United States of America.
Reclassifications
Certain amounts in prior year financial statements have been reclassified to conform with the current year presentation.
Note 3 - Real Estate Joint Ventures
The Partnership invested in six real estate joint ventures, organized as general partnerships with different real estate management/development firms, and in two cases, with an affiliate of the Partnership. One such investment was sold in each of 1991, 1994 and 1998. The Drilex investment was converted to a wholly-owned property in 1993. The Partnership has committed to make capital contributions to the ventures, which are subject to preferential cash distributions at a specified rate and to priority distributions with respect to sale or refinancing proceeds. The joint venture agreements provide for the funding of cash flow deficits by the venture partners in proportion to ownership interests, and for the dilution of ownership share in the event a venture partner does not contribute proportionately.
The respective real estate management/development firm is responsible for day-to-day development and operating activities, although overall authority and responsibility for the business is shared by the venturers. The real estate management/development firm, or its affiliates, also provides various services to the respective joint ventures for a fee.
The following is a summary of cash invested in joint ventures, net of returns of capital and acquisition fees:
Waterford Apartments
On March 20, 1989, the Partnership entered into a joint venture with an affiliate of Bozzuto and Associates, and with an affiliate of the Partnership, to develop and operate a garden-style apartment complex. The Partnership and its affiliate collectively had a 65% ownership interest in the joint venture. The Partnership committed to contribute up to $4,700,000 to the capital of the joint venture. The preferential return related to $1,175,000 was payable currently only to the extent of available cash flow. In the event of a sale or refinancing prior to the tenth anniversary of the joint venture agreement, 25% of the Partnership's contribution would first be repaid at par. The remaining 75% would be repaid subject to a premium designed to preserve the stipulated rate of return through the ninth anniversary of the joint venture agreement.
On August 7, 1998, the joint venture sold the Waterford Apartments to an institutional buyer which is unaffiliated with the Partnership. The total sales price was $21,800,000. The Partnership received its share of the net proceeds totaling $5,446,250, after closing costs, and recognized a gain of $2,076,945 ($48.87 per Limited Partnership Unit). A disposition fee of $163,500 was accrued but not paid to AEW Real Estate Advisors, Inc. On August 26, 1998, the Partnership made a capital distribution of $5,427,804 ($129 per Limited Partnership Unit) from the proceeds of the sale.
Parkmoor Plaza
On September 20, 1989, the Partnership entered into a joint venture with South Bay Construction and Development Company, Inc. to acquire a leasehold interest in three industrial/service center buildings and to renovate and operate these buildings. The Partnership committed to make a maximum capital contribution of $10,000,000. The payment of up to 1% per annum of the preferential return is deferrable during the first ten years if sufficient operating cash flow is not available. The joint venture is required to return all cash contributions made by the Partnership by the tenth anniversary of its initial funding. The non-cancelable ground lease has an initial expiration date of November 12, 2014 and requires annual ground rental payments by the venture of $73,230. The joint venture also has an option to extend the term of the ground lease for an additional 25 years. Future minimum rental payments due to the venture under non-cancelable operating leases are: $1,540,986 in 2000; $1,476,147 in 2001; $1,478,683 in 2002; $1,541,262 in 2003; $1,519,865 in 2004 and $5,454,744 thereafter.
On February 29, 2000, the Partnership executed a Purchase and Sale Agreement to sell the Parkmoor Plaza investment. Although there can be no assurance that this sale will occur, it is expected to be concluded during the second quarter of 2000. This investment is classified as Joint Venture Held for Disposition on the 1999 Balance Sheet. During 1999, the Partnership recognized $1,017,944 in joint venture earnings from this investment.
Prentiss Copystar
On May 23, 1991, the Partnership entered into a joint venture with an affiliate of Prentiss Properties, Ltd., and an affiliate of the Partnership, to develop and operate an industrial facility. The Partnership and its affiliate collectively have a 75% interest in the joint venture. The Partnership committed to make a maximum capital contribution of $1,029,084. The preferential return related to $308,725 of the Partnership's capital contribution is payable currently only to the extent of available cash flow. If $720,359, or any portion thereof, is returned to the Partnership between the second and tenth anniversary of the joint venture agreement, the return will be increased by an amount sufficient to preserve the stipulated rate of return through the tenth anniversary. As of December 31, 1999 the property is vacant. The Partnership is currently negotiating a long term lease with a single tenant.
Summarized Financial Information
The following summarized financial information is presented in the aggregate for the joint ventures: Assets and Liabilities
Results of Operations
Liabilities and expenses exclude amounts owed and attributable to the Partnership and its affiliate on behalf of their various financing arrangements with the joint ventures.
Note 4 - Property
Regency Court Apartments
On April 14, 1995, the Partnership acquired, through a limited partnership it controls, a 174-unit apartment complex in Sherman Oaks, California, known as Regency Court Apartments, for a total price of $9,605,021. The purchase and sale agreement required the seller to supplement the monthly rental income generated from the property to the extent such income was less than $125,000 per month during the one-year period ended April 13, 1996, with such supplement not to exceed $300,000 in total. The supplemental rental was $115,323, which was applied to reduce the purchase price in 1995 and 1996.
The buildings and improvements were being depreciated over 30 years using the straight-line method.
On March 25, 1999, the Partnership sold the Regency Court Apartments to an unaffiliated third party for a gross sale price of $13,050,000. The Partnership received net proceeds of $12,486,618 and recognized a gain of $3,287,303 ($77.35 per Limited Partnership Unit). A disposition fee was accrued but not paid to AEW Real Estate Advisors, Inc. ("AEW"). On April 29, 1999, the Partnership made a capital distribution of $12,033,736 ($286 per Limited Partnership Unit) from the proceeds of the sale.
Drilex
On December 18, 1990, the Partnership entered into a joint venture with an affiliate of The Trammell Crow Company to develop and own a build-to-suit industrial building for the Drilex Corporation, Inc. The Partnership contributed $2,294,713 to the capital of the venture. The Partnership acquired the venture partner's interest for a payment of $70,000, and the investment became a wholly-owned property as of September 30, 1993.
The building and improvements are being depreciated over 25 years. The building is leased to a single tenant under an agreement which continues through January 2010. The lease provides for annual rents of $287,028 for the first 3 years; $299,928 for the next 2 years and $1,577,016 thereafter.
The following is a summary of the Partnership's property investments (one at December 31, 1999 and two at December 31, 1998):
During 1998 the Partnership recognized $665,849 from the Regency Court Apartments which was held for disposition at December 31, 1998.
Note 5 - Income Taxes
The Partnership's income for federal income tax purposes differs from that reported in the accompanying statement of operations as follows:
Note 6 - Partners' Capital
Allocation of net income (losses) from operations and distributions of distributable cash from operations, as defined, are in the ratio of 99% to the limited partners and 1% to the general partners. Cash distributions are made quarterly.
Net sale proceeds and refinancing proceeds are allocated first to limited partners to the extent of their contributed capital plus a stipulated return thereon, as defined, second to pay disposition fees, and then 85% to the limited partners and 15% to the general partners. The adjusted capital contribution per limited partnership unit was reduced from $1,000 to $996 during 1991, and from $996 to $892 in 1995, as a result of capital returned from sale transactions. The adjusted capital contribution was further reduced to $884 in 1996, as a result of capital returned from a discretionary reduction of cash reserves. In 1998 the adjusted capital contribution was reduced from $884 to $755 as a result of capital returned from the sale of Waterford Apartments and further reduced to $742.12 as a result of capital returned from a discretionary reduction of original working capital. In 1999 the adjusted capital contribution was reduced from $742.12 to $456.12 as a result of capital returned from the sale of Regency Court and further reduced to $454.22 as a result of capital returned from a discretionary reduction of original working
capital. No capital distributions have been made to the general partners. Income from a sale is allocated in proportion to the distribution of related proceeds, provided that the general partners are allocated at least 1%. Income or losses from a sale, if there are no residual proceeds after the repayment of the related debt, will be allocated 99% to the limited partners and 1% to the general partners.
Note 7 - Subsequent Event
Distributions of cash from operations relating to the quarter ended December 31, 1999 were made on January 27, 2000 in the aggregate amount of $483,236 ($11.37 per Limited Partnership Unit).
FINANCIAL STATEMENTS INDEX NO. 2
Auditor's Report and Financial Statements
of SouthBay Associates
Report of Independent Auditors from Soren McAdam Bartells
Balance Sheets - December 31, 1999 and 1998
Statements of Operations - For the Years ended December 31, 1999, 1998 and 1997
Statements of Partners' Capital - For the Years ended December 31, 1999, 1998 and 1997
Statements of Cash Flows - For the Years ended December31, 1999, 1998 and 1997
Notes to Finacial Statements
SOUTH BAY/COPLEY VII ASSOCIATES (A California General Partnership)
Financial Statements
With
Independent Auditors' Report
For the Years Ended December 31, 1999 and 1998
Independent Auditors' Report
Balance Sheets
Statements of Operations
Statements of Partners' Equity
Statements of Cash Flows
Notes to Financial Statements
[LETTERHEAD OF SOREN o McADAM o BARTELLS]
Independent Auditors' Report
To the Partners South Bay/Copley VII Associates
We have audited the accompanying balance sheets of South Bay/Copley VII Associates (a California General Partnership) as of December 31, 1999 and 1998 and the related statements of operations, partners' equity, and cash flows for each of the three years in the period ended December 31, 1999. 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 assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of South Bay/Copley VII Associates (a California General Partnership) as of December 31, 1999 and 1998, and the results of its operations and cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles.
SOREN o McADAM o BARTELLS Certified Public Accountants, Inc.
By: /s/ Douglas R. McAdam Redlands, California ----------------------- January 14, 2000 Douglas R. McAdam, CPA
SOUTH BAY/COPLEY VII ASSOCIATES (A California General Partnership)
Balance Sheets
The accompanying notes are an integral part of these financial statements.
SOUTH BAY/COPLEY VII ASSOCIATES (A California General Partnership)
Statements of Operations
The accompanying notes are an integral part of these financial statements.
SOUTH BAY/COPLEY VII ASSOCIATES (A California General Partnership)
Statements of Partners' Equity
The accompanying notes are an integral part of these financial statements.
SOUTH BAY/COPLEY VII ASSOCIATES (A California General Partnership)
Statements of Cash Flows
The accompanying notes are an integral part of these financial statements.
SOUTH BAY/COPLEY VII ASSOCIATES (A California General Partnership)
Notes to Financial Statements
1. Summary of Significant Accounting Policies
The Partnership was formed for the purpose of developing and leasing approximately 13.8 acres in the City of San Jose, California. The project includes the developing, leasing and management of the buildings. The Partnership has concentrations of credit risk for rents receivable, as all of the balances are due from businesses located within the same geographic region. The partners are: Copley Pension Properties VII (a Massachusetts Limited Partnership) and SBC&D Co., Inc. (a California corporation).
The preparation of these financial statements requires management to make estimates and assumptions. Those estimates and assumptions affect the reported amounts of assets, liabilities, revenue, and expenses, as well as the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Management also determines the accounting principles to be used in the preparation of financial statements. A description of the significant accounting policies employed in the preparation of these financial statements follows:
Rental Revenue
Revenue from leases is recognized on a straight-line basis over the lease term, irrespective of when payments are due under the terms of the leases.
Properties
Properties consisting of buildings and site improvements are reported at cost less accumulated depreciation and include improvements that significantly add to utility or extend useful lives. Maintenance and repairs are charged to expense as incurred. When items of property are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in the results of operations.
Depreciation is provided using the straight-line method over the estimated useful lives of the buildings and improvements, 40 years and 20 years, respectively. These useful lives do not exceed the term of the land lease, including the option period. Certain building improvements related to specific tenants are depreciated over the respective lease term, which is generally 15 years.
Income Taxes
Income or loss of the Partnership is allocated to the partners in accordance with the Partnership Agreement. No income tax provision has been included in the financial statements since all taxable items of the Partnership are required to be reported by the respective partners on their income tax returns.
SOUTH BAY/COPLEY VII ASSOCIATES (A California General Partnership)
Notes to Financial Statements
1. Summary of Significant Accounting Policies (Continued)
Additionally, the tax returns and the amount of distributable Partnership income or loss are subject to examination by federal and state taxing authorities. If the Partnership's taxable income or loss is ultimately changed by the taxing authorities, the tax liability of the partners could be changed accordingly.
The income or loss reported for tax purposes may differ from the amount of the income or loss on these financial statements primarily due to differences in rental income recognition for federal income tax reporting purposes and financial accounting purposes. In addition, in accordance with federal tax requirements and certain provisions of the Partnership Agreement, the allocation of income or loss for tax purposes may differ from these financial statements.
2. Income-Producing Properties
Income-producing properties consisted of the following:
Depreciation charged to operations during the years ended December 31, 1999, 1998, and 1997 was $267,926, $265,252, and $265,252, respectively.
The Partnership evaluates its properties for impairment of value under standards established under Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Under these standards, an impairment occurs if the estimated undiscounted cash flows from the properties were less than the carrying amount of the asset. At December 31, 1999, the Partnership does not hold any assets that meet the impairment criteria of SFAS No. 121.
SOUTH BAY/COPLEY VII ASSOCIATES (A California General Partnership)
Notes to Financial Statements
3. Rents Receivable
Rents receivable include building rental revenue recognized in excess of amounts due under the terms of the leases in addition to amounts due for reimbursable charges. Included in rents receivable at December 31, 1999 and 1998 is $713,390 and $723,947, respectively, of rents in excess of amounts due currently under the leases. During the year ended December 31, 1999, building rental revenue recognized was $10,557 less than the amounts due under the terms of the leases. For the year ended December 31, 1998, building rental revenue recognized was $11,845 less than the amounts due under the terms of the leases. For the year ended December 31, 1997, building rental revenue recognized exceeded the amounts due under the terms of the leases in the amount of $73,742.
4. Other Assets
Other assets consisted of the following:
Capitalized leasing costs represent initial direct costs incurred to acquire leases and are amortized over the life of the related lease. Amortization of capitalized leasing costs charged to property operations for the years ended December 31, 1999, 1998 and 1997 was $28,018, $25,597, and $25,227, respectively.
5. Related Party Transactions
Copley Pension Properties VII
Copley Pension Properties VII is entitled to receive a monthly Priority Return at the rate of ten percent per annum on the balance of its Invested Capital. The Partnership is permitted to defer payment of the Priority Return equal to one percent per annum for the first 120 months from the date of the Partnership Agreement. Any amounts deferred also bear interest at ten percent. Copley Pension Properties VII has committed to a maximum Invested Capital of $10,000,000 which, at December 31, 1999, was $9,786,330. All unpaid Invested Capital and accrued Priority Return is required to be paid in full no later than June 30, 2000.
SOUTH BAY/COPLEY VII ASSOCIATES (A California General Partnership)
Notes to Financial Statements
5. Related Party Transactions (Continued)
The following is a summary of information relative to the Priority Return:
SBC&D Co., Inc. and SBCC Co., Inc.
The Partnership has entered into a Property Management Agreement with SBC&D Co., Inc. for management of the property, in which SBC&D Co., Inc. is to receive three percent of gross rents plus lease commissions equal to one-third of the then prevailing market rate for each new lease, lease renewal, or lease extension. SBCC Co., Inc. is the general contractor for improvements and repairs to the Partnership properties. SBC&D Co., Inc. and SBCC Co., Inc. have common shareholders, although only SBC&D Co., Inc. is a partner in the Partnership.
Charges related to these transactions were as follows:
At December 31, 1999 and 1998, the Partnership had accounts payable to SBC&D Co., Inc. of $4,611 and $3,591, respectively. At December 31, 1999 and 1998, the Partnership had accounts payable to SBCC Co., Inc. of $16,950 and $-0-, respectively.
SOUTH BAY/COPLEY VII ASSOCIATES (A California General Partnership)
Notes to Financial Statements
6. Rental Revenue
Portions of the project's buildings are rented under noncancellable leases with initial lease terms of up to twenty years. The following is a schedule by years of minimum future rentals on these leases as of December 31, 1999:
The above schedule includes minimum future rentals of three significant tenants that represent greater than 80 percent of the minimum future rentals.
Certain lease agreements provide that rental amounts can be increased in accordance with the Consumer Price Index for all wage earners and clerical workers, San Francisco/Oakland metropolitan area, published by the United States Department of Labor, Bureau of Labor Statistics. In addition, one lease agreement is subject to a yearly fixed rate increase over its term. Under certain of the lease agreements, the lessees are required to pay their proportionate shares of property taxes, insurance, and common area maintenance charges.
7. Land Lease
The Partnership leases the land used in its operations under a noncancellable operating lease which has an initial expiration date of November 12, 2014 and an option to extend the lease for an additional 25 years.
The following is a schedule by years of minimum future rentals as of December 31, 1999:
The total rental expense under this operating lease was $73,230 for each of the years ended December 31, 1999, 1998, and 1997.
SOUTH BAY/COPLEY VII ASSOCIATES (A California General Partnership)
Notes to Financial Statements
8. Subsequent Event
In January 2000, the Partnership entered into a contract for the sale of all of the Partnership's buildings and related improvements.
EXHIBIT INDEX
Exhibit Page Number Number
10B. General Partnership Agreement of South Bay/ * Copley VII Associates dated as of September 20, 1989 between SBC & D Co., Inc. and Copley Pension Properties VII, A Real Estate Limited Partnership.
10H. Ground Lease dated as of October 14, 1976, * between Park West Associates, as Landlord and Carl N. Swenson Co., Inc., as Tenant.
10I. Assignment of Ground Lease and Grant of Real * Property dated as of September 20, 1989 by and between Property Resources Fund III, as Assignor and the Registrant as Assignee.
10S. Prentiss/Copley Itasca Associates General * Partnership Agreement dated as of May 20, 1991 between Prentiss Properties Itasca L.P., a Texas limited partnership, and Copley Pension Properties VI; A Real Estate Limited Partnership and Registrant.
27. Financial Data Schedule
- -----------------------------------------------
* Previously filed and incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COPLEY PENSION PROPERTIES VII; A REAL ESTATE LIMITED PARTNERSHIP
Date: March 29, 2000 By: /s/ Alison Husid Cutler ------------------------- Alison Husid Cutler President of the Managing General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.