ITEM 1. BUSINESS
General
Wells Real Estate Fund II-OW (the "Partnership") is a Georgia public limited partnership having Leo F. Wells, III and Wells Capital, Inc., a Georgia corporation, as General Partners. The Partnership was formed on October 13, 1987, for the purpose of acquiring, developing, constructing, owning, operating, improving, leasing and otherwise managing for investment purposes income- producing commercial or industrial properties.
On November 6, 1987, the Partnership commenced a public offering of its limited partnership units pursuant to a Registration Statement filed on Form S-11 under the Securities Act of 1933. The Partnership terminated its offering on September 7, 1988, and received gross proceeds of $1,922,000 representing subscriptions from 219 Limited Partners, composed of two classes of limited partnership interests, Class A and Class B limited partnership units.
The Partnership owns equity interests in properties through its ownership in the following joint ventures: (i) Fund II-Fund II-OW Joint Venture, a joint venture between the Partnership and Wells Real Estate Fund II (the "Fund II-Fund II-OW Joint Venture"); (ii) Fund II-Fund III Joint Venture, a joint venture between the Fund II-Fund II-OW Joint Venture and Wells Real Estate Fund III, L.P. (the "Fund II-Fund III Joint Venture"); (iii) Fund II-III-VI-VII Associates, a joint venture among the Fund II-Fund III Joint Venture, Wells Real Estate Fund VI, L.P., and Wells Real Estate Fund VII, L.P. (the "Fund II, III, VI, VII Joint Venture"); (iv) Fund I-Fund II Joint Venture, a joint venture between the Fund II-Fund II-OW Joint Venture and Wells Real Estate Fund I ("the Tucker Joint Venture"); and (v) Fund I, II, II-OW, VI, VII Associates, a joint venture among Wells Real Estate Fund I, the Fund II-Fund II-OW Joint Venture, Wells Real Estate Fund VI, L.P., and Wells Real Estate Fund VII, L.P. (the "Fund I, II, II- OW, VI, VII Joint Venture").
As of December 31, 2000 the Partnership owned interests in the following properties through its ownership of the foregoing joint ventures: (i) a two- story office building located in Charlotte, North Carolina ("First Union at Charlotte"); (ii) a four-story office building located in metropolitan Houston, Texas (the "Atrium"); (iii) a restaurant located in Fulton County, Georgia ("the Brookwood Grill"); (iv) an office/retail center in Fulton County, Georgia ("Holcomb Bridge Road"); (v) a retail shopping and commercial office complex located in Tucker, Georgia ("Heritage Place at Tucker"); and (vi) a shopping center located in Cherokee County, Georgia ("Cherokee Commons"). All of the foregoing properties were acquired on an all cash basis.
Employees
The Partnership has no direct employees. The employees of Wells Capital, Inc., a General Partner of the Partnership, perform a full range of real estate services including leasing and property management, accounting, asset management and investor relations for the Partnership. See Item 11 - -"Compensation of General Partners and Affiliates" for a summary of the fees paid to the General Partners and their affiliates during the fiscal year ended December 31, 2000.
Insurance
Wells Management Company, Inc., an affiliate of the General Partners, carries comprehensive liability and extended coverage with respect to all the properties owned directly or indirectly by the Partnership. In the opinion of management, the properties are adequately insured.
Competition
The Partnership will experience competition for tenants from owners and managers of competing projects which may include the General Partners and their affiliates. As a result, the Partnership may be required to provide free rent, reduced charges for tenant improvements, and other inducements, all of which may have an adverse impact on results of operations. At the time the Partnership elects to dispose of its properties, the Partnership will also be in competition with sellers of similar properties to locate suitable purchasers for its properties.
ITEM 2.
ITEM 2. PROPERTIES
The Partnership owns all of its properties through a joint venture (the "Fund II-Fund II-OW Joint Venture") formed on March 1, 1988, between the Partnership and Wells Real Estate Fund II ("Well Fund II"). Wells Fund II is a Georgia public limited partnership affiliated with the Partnership through common general partners. The investment objectives of Wells Fund II are substantially identical to those of the Partnership. As of December 31, 2000, the Partnership's equity interest in the Fund II-Fund II-OW Joint Venture was approximately 5% and the equity interest of Wells Fund II was approximately 95%. The Partnership does not have control over the operations of the joint ventures; however, it does exercise significant influence. Accordingly, investment in joint ventures is recorded on the equity method.
Of the six properties owned by the joint venture, three are retail shopping centers, two are office buildings and one is a restaurant. As of December 31, 2000, these properties were 98% occupied. As of December 31, 1999, these properties were 97% occupied. As of December 31, 1998, these properties were 95% occupied.
The following table shows lease expirations during each of the next ten years for all leases as of December 31, 2000, assuming no exercise of renewal options or termination rights:
(1) Average monthly gross rent over the life of the lease, annualized.
(2) Expiration of First Union Bank with 70,752 square feet at the First Union project.
(3) Expiration of Boeing Company lease with 119,040 square feet at the Atrium.
The following describes the properties in which the Partnership owns an interest as of December 31, 2000:
The First Union Property/Fund II-Fund II-OW Joint Venture
On May 9, 1988, the Fund II-Fund II-OW Joint Venture acquired a two- story building containing approximately 70,752 net leaseable square feet, located on a 9.54 acre tract of land located in Charlotte, Mecklenburg County, North Carolina (the "Charlotte Property") for a purchase price of $8,550,000.
On May 1, 1994, First Union Bank assumed occupancy of the First Union Property under a lease which expires April 30, 2001. The principal terms of the lease provide for First Union's sole tenancy of the project as a regional operations center for the initial term of seven years. Because First Union Bank invested approximately $1 million on tenant improvements at the First Union Property, a lower rental rate was accepted for the first five years of the lease term.
The annual base rent during the initial term is $412,705 payable in equal monthly installments of $34,392 during the first two years, annual base rent of $454,651 payable in equal monthly installments of $37,887 during the third year, annual base rent of $489,650 payable in equal monthly installments of $40,804 during the fourth year and annual base rent of $524,625 payable in equal monthly installments of $43,718 during the fifth year. Rental rates during the remaining two years of the lease term will be determined by market rates which is $844,071 payable in equal monthly installments of $70,339 for the last two years.
The occupancy rates at the Charlotte Property as of December 31 were 100% in 2000, 1999, and 1998.
The average effective annual rental per square foot at the First Union Property was $11.93 for 2000, $10.14 for 1999, $6.49 for 1998 and 1997, and $6.51 for 1996.
The Atrium/Fund II--Fund III Joint Venture
On April 3, 1989, the Fund II-Fund II-OW Joint Venture formed a joint venture (the "Fund II-Fund III Joint Venture") with Wells Real Estate Fund III, L.P. ("Wells Fund III"), a public Georgia limited partnership affiliated with the Partnership through common general partners. The investment objectives of Wells Fund III are substantially identical to those of the Partnership.
In April 1989, the Fund II-Fund III Joint Venture acquired a four- story office building located on a 5.6 acre tract of land adjacent to the Johnson Space Center in metropolitan Houston, in the City of Nassau Bay, Harris County, Texas, know as "The Atrium at Nassau Bay" (the "Atrium").
The funds used by the Fund II-Fund III Joint Venture to acquire the Atrium were derived from capital contributions made to the Fund II- Fund III Joint Venture by the Fund II-Fund II-OW Joint Venture and Wells Fund III in the amounts of $8,327,856 and $2,538,000, respectively, for total initial capital contributions of $10,865,856. As of December 31, 2000, the Fund II-Fund II-OW Joint Venture and Wells Fund III had made total capital contributions to the Fund II- Fund III Joint Venture of approximately $8,330,000 and $4,448,000, respectively, for the acquisition and development of the Atrium.
The Atrium was first occupied in 1987 and contains approximately 119,000 net leaseable square feet. Each floor of the Atrium was originally under a separate lease to Lockheed Engineering and Science Company, Inc., a wholly-owned subsidiary of the Lockheed Company, each of which leases had terms of approximately eight years and expired June 30, 1996, and upon which date Lockheed vacated the property.
On March 3, 1997, a lease was signed with The Boeing Company for the entire Atrium building. The lease is for a period of five years with an option to renew for an additional five year term. The rental rate for the first three years of the lease term is $12.25 per square foot and $12.50 per square foot for the final two years of initial lease term. The rate for the optional five year term will be determined based upon then current market rates. Upon 150 day prior written notice, Boeing has the right to cancel its lease in the event that NASA or another prime contractor were to cancel or substantially reduce its contract. In addition, there is a no-cause cancellation provision at the end of the first three year period. This no-cause cancellation was not exercised. The lease also provides that tenant will pay certain operating expenses in excess of $5.50 per square foot on an annual basis.
Boeing began the move-in phase of its occupancy on April 15, 1997, and occupied the Atrium and began paying rent on May 15, 1997. The total cost of completing the required tenant improvements and outside broker commissions of approximately $1.4 million was funded out of reserves and cash flows of the Partnership, Wells Fund II-OW and Wells Fund III. As of December 31, 2000, the Partnership had contributed approximately $21,744, Wells Fund II had contributed approximately $387,752, Wells Fund III had contributed approximately $659,810, and the Fund II - Fund III Joint Venture had contributed $330,694 to Fund the tenant improvements and outside broker commissions required. As of December 31, 2000, the Fund II- Fund II-OW Joint Venture holds approximately 61%, and Wells Fund III holds approximately 39%.
The occupancy rate at the Atrium property was 100% as of December 31, 2000, 1999, and 1998. The average effective rental per square foot at the Atrium is $12.34 for 2000, $12.35 for 1999 and 1998, $7.77 for 1997, and $8.81 for 1996.
The Brookwood Grill Property/Fund II - Fund III Joint Venture
On January 31, 1990, the Fund II-Fund II-OW Joint Venture acquired a 5.8 acre tract of undeveloped real property at the intersection of Warsaw Road and Holcomb Bridge Road in Roswell, Fulton County, Georgia (the "Holcomb Bridge Road Property"). The Fund II - Fund II-OW Joint Venture paid $1,848,561, including acquisition expenses, for the 5.8 acre tract of undeveloped property.
On September 20, 1991, the Fund II-Fund II-OW Joint Venture contributed approximately 1.5 acres of the Holcomb Bridge Road Property (the "Brookwood Grill Property"), along with its interest as landlord under the lease agreement referred to below, as a capital contribution to the Fund II-Fund III Joint Venture. As of September 20, 1991, the Fund II-Fund II-OW Joint Venture had expended approximately $2,128,000 for the land acquisition and development of the Brookwood Grill Property.
As of September 20, 1991, a lease agreement was entered into with the Brookwood Grill of Roswell, Inc. for the development of approximately 1.5 acres and the construction of a 7,440 square foot restaurant. This restaurant, which opened early in March 1992, is similar in concept to Houston's, Ruby Tuesday, and Friday's. It is principally owned by David Rowe, an Atlanta real estate developer of Kroger shopping centers, and several operating partners, formerly with Houston's. The terms of the lease call for an initial term of 9 years and 11 months, with two additional 10-year option periods. In January 2001, the tenant renewed a ten-year lease with a base rental of $286,983 per year for years one through five, and $330,030 per year for years six through ten. The Fund II-Fund III Joint Venture has expended approximately $1,100,000 for the development and construction of the restaurant building together with parking areas, driveways, landscaping, and other improvements. In addition to the base rent described above, the tenant is required to pay additional rent in amounts equal to a 12% per annum return on all amounts expended for such improvements.
The occupancy rate for the Brookwood Grill, a sole tenant, was 100% as of December 31, 2000, 1999, and 1998. The average effective rental per square foot at the Brookwood Grill is $30.22 for 2000 and 1999, $30.26 for 1998 and 1997, and $30.29 for 1996.
As of December 31, 1999, the Fund II-Fund II-OW Joint Venture and Wells Fund III had made total contributions to the Fund II-Fund III Joint Venture of approximately $2,128,000 and $1,330,000, respectively, for the acquisition and development of the Brookwood Grill. The Fund II-Fund II-OW Joint Venture holds an approximately 62% equity interest in the Brookwood Grill Property, and Wells Fund III holds an approximately 38% equity interest in the project.
On January 10, 1995, the remaining 4.3 undeveloped acres of land comprising the Holcomb Bridge Road Property was contributed to a new joint venture, Fund II, III, VI, and VII Associates by Fund II-Fund III Joint Venture. This property is described below.
Holcomb Bridge Road Property/Fund II, III, VI and VII Associates
On January 10, 1995, Fund II-Fund III Joint Venture, Wells Real Estate Fund VI , L.P. ("Wells Fund VI"), a Georgia public limited partnership having Leo F. Wells, III and Wells Partners,
L.P., a Georgia limited partnership, as general partners, and Wells Real Estate Fund VII, L.P. ("Wells Fund VII"), a Georgia public limited partnership having Leo F. Wells, III and Wells Partners, L.P., a Georgia limited partnership, as general partners, entered into a Joint Venture Agreement known as Fund II, III, VI and VII Associates ("Fund II, III, VI and VII Joint Venture"). Wells Partners, L.P. is a private limited partnership having Wells Capital, Inc., a General Partner of the Partnership, as its sole general partner. The investment objectives of Wells Fund VI and Wells Fund VII are substantially identical to those of the Partnership.
In January 1995, the Fund II-Fund III Joint Venture contributed to the Fund II-III-VI-VII Joint Venture approximately 4.3 acres of land at the intersection of Warsaw Road and Holcomb Bridge Road in Roswell, Fulton County, Georgia (the "Holcomb Bridge Road Property") including land improvements for the development and construction on two buildings with a total of 49,534 square feet. Fourteen tenants occupied the Holcomb Bridge Road Property as of December 31, 2000 for an occupancy rate of 92% in 2000, 100% in 1999, and 94% in 1998. The average effective annual rental per square foot at the Holcomb Bridge Property was $17.55 for 2000, $19.36 for 1999, $17.63 for 1998, $13.71 for 1997, and $9.87 for 1996.
As of December 31, 2000, Fund II and Fund III Joint Venture had contributed $1,729,116 in land and improvements for an equity interest of approximately 24.1%, Wells Fund VI had contributed $1,929,541 for an equity interest of approximately 26.9%, and Wells Fund VII had contributed $3,525,041 for an equity interest of approximately 49.0%. The total cost to develop the Holcomb Bridge Road Property was $5,454,582, excluding land.
Tucker Property/Fund I - Fund II Joint Venture
The Tucker Property consists of a retail shopping center and a commercial office building complex located in Tucker, DeKalb County, Georgia (the "Tucker Property"). The retail shopping center at the Tucker Property contains approximately 29,858 net leaseable square feet. The commercial office space at the Tucker Property, which is divided into seven separate buildings, contains approximately 67,465 net leaseable square feet.
On January 9, 1987, the Partnership acquired an interest in the Tucker Property which was acquired by a joint venture (the "Tucker Joint Venture") originally between the Partnership and Wells Real Estate Fund I ("Wells Fund I"). Wells Fund I is a Georgia public limited partnership affiliated with the Partnership through common general partners. The investment objectives of Wells Fund I are substantially identical to those of the Partnership. Upon the formation of the Fund II-Fund II-OW Joint Venture in March 1988, the Partnership contributed its joint venture interest in the Tucker Joint Venture to the Fund II- Fund II-OW Joint Venture as a part of its capital contribution. On January 1, 1991, the Cherokee Joint Venture, which is defined below, was merged into the Tucker Joint Venture forming a new joint venture (the "Tucker-Cherokee Joint Venture"). As described below, the Cherokee Joint Venture was also a joint venture between the Fund II- Fund II-OW Joint Venture and Wells Fund I. Under the terms of the Amended and Restated Joint Venture Agreement of Fund I and Fund II Tucker-Cherokee, the percentage interest of the Fund II-Fund II-OW Joint Venture in the Tucker Project remained unchanged as a result of the merger of the Tucker Joint Venture into the Tucker-Cherokee Joint Venture.
On August 1, 1995, Wells Fund I and the Fund II-Fund-II-OW Joint Venture entered into another amendment to effect the contribution of the Cherokee Project to the Fund I, II, II-OW, VI, VII Joint Venture, as described below. As a result, the name of the joint venture owning the Tucker Property was changed back to "Fund I and Fund II Tucker," and is therefore no longer merged
with the Cherokee Joint Venture. The Partnership's percentage interest in the Tucker Project remained unchanged as a result of the transaction.
Both Wells Fund I and the Fund II-Fund II-OW Joint Venture have funded the cost of completing the Tucker Property through capital contributions which have been paid as progressive stages of construction were completed. As of December 31, 2000, Wells Fund I had contributed a total of $6,194,634, and the Fund II-Fund II-OW Joint Venture had contributed a total of $4,764,585 for the acquisition and development of the Tucker Property. As of December 31, 2000, Wells Fund I had an approximate 55% equity interest in the Tucker Property and the Fund II-Fund II-OW Joint Venture had an approximate 45% equity interest in the Tucker Property. As of December 31, 2000, the Tucker Property was 89% occupied by 36 tenants.
There are no tenants in the property occupying ten percent or more of the rentable square footage. The principal businesses, occupations, and professions carried on in the building are typical retail shopping/commercial office services.
The occupancy rate at the Tucker Property was 89% in 2000, 87% in 1999, and 94% in 1998.
The average effective annual rental per square foot at the Tucker Property was $14.29 for 2000, $14.11 for 1999, $12.76 for 1998, $11.08 for 1997, and $13.78 for 1996.
This property is currently being marketed for sale by The First Fidelity Companies. The management team is considering separating the retail and creating a condominium for the office buildings. The legal and site work have been completed so that the management team can market this property to investors. The Partnership's goal is to have this property sold by the end of 2002.
Cherokee Property/Fund I, II, II-OW, VI, VII Joint Venture
The Cherokee Property consists of a retail shopping center known as "Cherokee Commons Shopping Center" located in metropolitan Atlanta, Cherokee County, Georgia (the "Cherokee Property"). The Cherokee Property consists of approximately 103,755 net leaseable square feet.
On June 30, 1987, the Partnership acquired an interest in the Cherokee Property through a joint venture (the "Cherokee Joint Venture") between the Wells Fund I and Wells Fund II-Fund II-OW Joint Venture. On January 1, 1991, the Cherokee Joint Venture merged with the Tucker Joint Venture to form the Tucker-Cherokee Joint Venture. As described above, the Tucker Joint Venture was also a joint venture between the Wells Fund I and the Fund II-Fund II-OW Joint Venture. Under the terms of the Amended and Restated Joint Venture Agreement of Fund I and Fund II Tucker-Cherokee, the Fund II-Fund II-OW Joint Venture's percentage interest in the Cherokee Property remained unchanged as a result of the merger of the Cherokee Joint Venture into the Tucker-Cherokee Joint Venture.
On August 1, 1995, the Fund II-Fund II-OW Joint Venture, Wells Fund I, Wells Real Estate Fund VI, L.P. ("Wells Fund VI"), a Georgia public limited partnership having Leo F. Wells, III and Wells Partners, L.P., a Georgia limited partnership, as general partners, and Wells Real Estate Fund VII, L.P. ("Wells Fund VII"), a Georgia public limited partnership having Leo F. Wells, III and Wells Partners, L.P., a Georgia limited partnership, as general partners entered into a joint venture agreement known as Fund I, II, II-OW, VI, VII Associates (the "Fund I, II, II-OW, VI, VII Joint Venture"), which was formed to own and operate the Cherokee Project. Wells Partners, L.P. is a private limited partnership having Wells Capital, Inc., a General Partner, as its
sole general partner. The investment objectives of Wells Fund I, Wells Fund VI, and Wells Fund VII are substantially identical to those of the Partnership.
As of December 31, 2000, Wells Fund I had contributed property with a book value of $2,139,900, the Fund II-Fund II-OW Joint Venture had contributed property with a book value of $4,860,100, Wells Fund VI had contributed cash in the amount of $953,798 and Wells Fund VII had contributed cash in the amount of $953,798 to the Fund I, II, II-OW, VI, VII Joint Venture. As of December 31, 2000, the equity interests in the Fund I, II, II-OW, VI, VII Joint Venture were approximately as follows: Wells Fund I--24%, Fund II-Fund II-OW Joint Venture--54%, Wells Fund VI--11% and Wells Fund VII--11%.
The Cherokee Property is anchored by a 67,115 square foot lease with Kroger Food/Drug which expires in 2011. Kroger's original lease was for 45,528 square feet. In 1994, Kroger expanded to the current 67,115 square feet which is approximately 65% of the total rentable square feet in the property. Kroger, a retail grocery chain, is the only tenant occupying ten percent or more of the rentable square footage. The other tenants in the shopping center provide typical retail shopping services.
The Kroger lease provides for an annual rent of $392,915 which increased to $589,102 on August 16, 1995 due to the expansion from 45,528 square feet to 67,115 square feet. The lease expires March 31, 2011 with Kroger entitled to five successive renewals each for a term of five years at the same rental rate as the original lease.
The occupancy rate at the Cherokee Property was 98% in 2000, 97% in 1999, and 91% in 1998.
The average effective annual rental per square foot at the Cherokee Property was $9.31 for 2000, $9.11 for 1999, $8.78 for 1998, $8.49 for 1997, and $8.59 for 1996.
This property is currently being marketed for sale by CB Richard Ellis. The marketing piece is being broadly distributed to investors throughout the country. The Partnership's goal is to have this property sold by the end of 2002.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There were no material pending legal proceedings or proceedings known to be contemplated by governmental authorities involving the Partnership during 2000.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Limited Partners during 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR PARTNERSHIP'S UNITS AND RELATED SECURITY HOLDER MATTERS
As of February 28, 2001, the Partnership had 6,062 outstanding Class A Units held by a total of 179 Limited Partners and 1,626 outstanding Class B Units held by a total of 41 Limited Partners. The capital contribution per unit is $250. There is no established public trading market for the Partnership's limited partnership units, and it is not anticipated that a public trading market for the units will develop. Under the Partnership Agreement, the General Partners have the right to prohibit transfers of units.
The General Partners have estimated the investment value of properties held by the Partnership as of December 31, 2000 to be $158.82 per Class A Unit and $358.59 per Class B Unit based on market conditions existing in early December 2000. The methodology used for this valuation was to estimate the amount a holder of Partnership Unites would receive if the Partnership's properties were all sold in the ordinary course of business as of December 31, 2000, and the proceeds from such sales (without reduction for selling expenses), together with Partnership funds held as of such date, were distributed in a liquidation of the Partnership. This value was confirmed as reasonable by an independent MAI appraiser, David L. Beal Company, although no actual MAI appraisal was performed due to the inordinate expense involved with such an undertaking. The valuation does not include any fractional interest valuation.
Class A Unit holders are entitled to an annual 8% non-cumulative distribution preference over Class B Unit holders as to cash distributions from Net Cash from Operations, defined in the Partnership Agreement as Cash Flow, less adequate cash reserves for other obligations of the Partnership for which there is no provision, but are initially allocated none of the depreciation, amortization, cost recovery and interest expense. These items are allocated to Class B Unit holders until their capital account balances have been reduced to zero.
Cash distributions from Net Cash from Operations to the Limited Partners is distributed on a quarterly basis unless Limited Partners elect to have their cash distributions paid monthly. Cash distributions made to the Limited Partners for the two most recent fiscal years were as follows:
The fourth quarter distributions of cash available for distribution were accrued for accounting purposes in 2000 and were not actually paid until February 2001.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth a summary of the selected financial data for the fiscal years ended December 31, 2000, 1999, 1998, 1997, and 1996:
Cash distributions per unit were comprised of $4.64 paid from net cash from operations and $13.15 paid from capital in 2000.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL AND CONDITIONS RESULTS OF OPERATION
The following discussion and analysis should be read in conjunction with the selected financial data and the accompanying financial statements of the Partnership and notes thereto.
This Report contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934, including discussion and analysis of the financial condition of the Partnership, anticipated capital expenditures required to complete certain projects, amounts of cash distributions anticipated to be distributed to Limited Partners in the future and certain other matters. Readers of this Report should be aware that there are various factors that could cause actual results to differ materially from any forward-looking statement made in this Report, which include construction costs which may exceed estimates, construction delays, lease-up risks, inability to obtain new tenants upon the expiration of existing leases, and the potential need to fund tenant improvements or other capital expenditures out of operating cash flow.
Results of Operations and Changes in Financial Conditions
General
As of December 31, 2000, the properties owned by the Fund II-Fund II-OW Joint Venture were 97% occupied, as compared to 97% in 1999, and 95% in 1998.
Gross revenues of the Partnership were $28,101 for the year ended December 31, 2000 compared to $20,918 for the year ended December 31, 1999, and $5,190 for the fiscal year ended December 31, 1998. The increase in gross revenues is primarily due to increased rental renewal rates in April 1999 for First Union at Charlotte.
Administrative expenses of the Partnership are incurred at the joint venture level.
The Partnership made cash distributions to Limited Partners holding Class A units of $17.79 per unit for fiscal year ended December 31, 2000, $15.63 per unit for fiscal year ended December 31, 1999, and $13.96 per unit for fiscal year ended December 31, 1998. The Partnership made no cash distributions to Limited Partners holding Class B units for fiscal year ended 2000, 1999, and 1998.
Property Operations
As of December 31, 2000, the Partnership's percentage ownership in properties was as follows: 5.3% in the First Union Property, 3.26% in the Atrium, 3.31% in the Brookwood Grill Property, 0.79% in the Holcomb Bridge Road Property, 2.38% in the Tucker Property and 2.90% in the Cherokee Property.
As of December 31, 2000, the Partnership owned interests in the following properties through the Fund II-Fund II-OW Joint Venture:
First Union Property/Fund II - Fund II-OW Joint Venture
*The Partnership holds a 5% ownership in the Fund II-Fund II-OW Joint Venture.
Rental income and net income increased, as compared to 1999 and 1998, due primarily to increased rental renewal rates in April 1999. Management and leasing expenses increased due primarily to increased rental income.
Real estate taxes and all operational expenses for the building are the responsibility of the tenant.
For comments on the general conditions to which the property may be subject, see Item 1, Business, page 1. For additional information on the property, tenants, etc., see Item 2, Properties, page 3.
The Atrium/Fund II-Fund III Joint Venture
*The Partnership holds a 5% ownership in the Fund II-Fund II-OW Joint Venture.
Rental income remained relatively stable in 2000, as compared to 1999 and 1998. Management and leasing expenses increased, as compared to 1999, due to a change in estimated fees recorded in 1998, which resulted in decreased fees in 1999. Other operating expenses increased due primarily to increased expenditures in electricity, HVAC repairs, plumbing repairs, and glass maintenance in the building. As a result, net income and cash distribution to the Fund II-Fund II- OW Joint Venture decreased.
The Atrium property incurred property taxes of $187,536 for 2000, $175,360 for 1999, and $148,006 for 1998.
For comments on the general competitive conditions to which the property may be subject, see Item 1, Business, page 2. For additional information on the property, tenants, etc. see Item 2, Properties, page 3.
The Brookwood Grill Property/Fund II-Fund III Joint Venture
*The Partnership holds a 5% ownership in the Fund II-Fund II-OW Joint Venture.
Although rental income remained relatively stable in 2000, 1999, and 1998 total revenues decreased in 2000 due to the decrease in equity income from Fund II, III, VI, VII Joint Venture, as the Holcomb Bridge Property decreased its occupancy rate.
Management and leasing expenses decreased in 2000, as compared to 1999, due to a change in estimated fees recorded in 1999. Other operating expenses increased due primarily to appraisal fees for this property and increased administrative salaries.
The Brookwood Grill Property incurred property taxes of $17,973 for 2000, $18,055 for 1999, and $16,270 for 1998.
This property is currently being marketed for sale by CB Richard Ellis. The marketing piece is being broadly distributed to investors throughout the country. The Partnership's goal is to have this property sold by the end of 2002.
For comments on the general competitive conditions to which the property may be subject, see Item 1, Business, page 2. For additional information on the property, tenants, etc., see Item 2, Properties, page 3.
Holcomb Bridge Road Property/Fund II, III, VI, VII Joint Venture
*The Partnership holds a 3.30% ownership in the Fund II-Fund III Joint Venture.
Rental income decreased in 2000, as compared to 1999 and 1998, due to decreased occupancy. Depreciation expense was higher in 1999, as compared to 1998 and 2000, due to increased tenant improvement for new tenants for 1999 and some tenant improvement becoming fully depreciated in 1999. Other operating expenses increased due to appraisal fees for this property and a bad debt recorded in this year.
The Holcomb Bridge Property incurred property taxes of $52,887 for 2000, $53,896 for 1999, and $52,162 for 1998.
This property is currently being marketed for sale by CB Richard Ellis. The marketing piece is being broadly distributed to investors throughout the country. The Partnership's goal is to have this property sold by the end of 2002.
For comments on the general competitive conditions to which the property may be subject, see Item 1, Business, page 2. For additional information on the property, tenants, etc., see Item 2, Properties, page 3.
Tucker Property/Fund I--Fund II Joint Venture
*The Partnership holds a 5% ownership in the Fund II-Fund II-OW Joint Venture.
Rental income increased in 1999, compared to 1998, even though occupancy decreased due to increased rental renewal rates and the decrease in occupancy moving slowly downward throughout the year. The rental income increase in 2000, as compared to 1999, was due to increased tenant occupancy at the property. The increase in depreciation expense for 1999 was due to capitalized building repairs. The management and leasing expenses decreased in 2000, as compared to 1999, due to an adjustment of the estimated tenant billings. Other operating expenses decreased for 1999, as compared to 1998, due to significant variable expenses for those years. Expenses were higher in 1998 due to sewer and main water line repairs. The cash distribution increased in 2000, as compared to 1999, due to a decrease in capital expenditures in 2000.
Real estate taxes were $111,946 in 2000, $91,970 in 1999, and $93,697 in 1998.
This property is currently being marketed for sale by The First Fidelity Companies. The management team is considering separating the retail and creating a condominium for the office buildings. The legal and site work has been completed so that the management team can market this property to investors. The Partnership's goal is to have this property sold by the end of 2002.
For comments on the general conditions to which the property may be subject, see Item 1, Business, page 2. For additional information on the property, tenants, etc., see Item 2, Properties, page 3.
Cherokee Commons Shopping Center/Fund I, II, II-OW, VI, and VII Joint Venture
*The Partnership holds a 5% ownership in the Fund II-Fund II-OW Joint Venture.
Rental income increased in 2000, as compared to 1999 and 1998, due to an increase in occupancy and rental renewals. Management and leasing expenses decreased in 2000, as compared to 1999, due to decreased leasing commission. Management and leasing expenses increased in 1999, as compared to 1998, due to an increase in occupancy and rental renewal rates. Depreciation expense decreased in 2000, as compared to 1999, due to some tenant improvements becoming fully depreciated in 1999. Operating expenses decreased in 2000, as compared to 1999, due to a reimbursable tenant improvement write-off in 1999, and decreased in 1999, as compared to 1998, due to differences and adjustments of CAM billings to tenants offset by increased expenses for tenant improvements, HVAC repairs, and a partial demolition of a tenant suite in 1999. Tenants are billed an estimated amount for the current year common area maintenance which is ten reconciled the next year and the difference is billed to the tenant.
Real estate taxes were $82,048 for 2000, $87,411 for 1999, and $77,311 for 1998.
For comments on the general conditions to which the property may be subject, see Item 1, Business, page 2. For additional information on the property, tenants, etc., see Item 2, Properties, page 3.
Liquidity and Capital Resources
During its offering, which terminated on September 7, 1988, the Partnership raised a total of $1,921,600 through the sale of 7,688 units. No additional units will be sold by the Partnership. As of December 31, 2000, the Partnership contributed an aggregate of $1,537,600 in capital contributions to the Fund II - Fund II-OW Joint Venture, after incurring approximately $384,000 in offering costs, commissions and acquisitions and advisory fees.
Since the Partnership is an investment partnership formed for the purpose of acquiring, owning and operating income-producing real property and has invested all of its funds available for investment, it is unlikely that the Partnership will acquire interests in any additional properties, and the Partnership's capital resources are anticipated to remain relatively stable over the holding period of its investments.
Net cash provided by investing activities increased from $90,167 to $104,801 in 2000, and net cash used in financing activities increased from $87,200 to $108,010 in 2000 due to the increase in distributions from joint ventures as net income increased.
The Partnership's cash distribution to Class A Unit holders paid and payable through the fourth quarter of 2000 have been paid from Net Cash from Operations and a Return of Capital. The Partnership anticipates that distributions will continue to be paid on a quarterly basis from such sources. No cash distributions were paid to Class B Unit holders for 2000.
The Partnership expects to meet liquidity requirements and budget demands through cash flow from operations. The Partnership is unaware of any known demands, commitments, events or capital expenditures other than that which is required for the normal operation of its properties that will result in the Partnership's liquidity increasing or decreasing in any material way.
The Partnership has recently made the decision to begin selling its properties. At this time, two properties have been identified that will be offered for sale within the next several months. The Partnership's goal is to have all Fund II-OW properties sold by the end of 2002. As the properties are sold, all proceeds will be returned to limited partners in accordance with the Partnership's prospectus. Management estimates that the net realizable value of each of the properties exceeds the carrying value of the corresponding real estate assets; consequently, no impairment loss has been recorded. In the event that the net sales proceeds are less than the carrying value of the property sold, the Partnership would recognize a loss on the sale. Management is not contractually or financially obligated to sell any of its properties, and it is management's current intent to fully realize the Partnership's investment in real estate. The success of the partnership's future operations and the ability to realize the investment in its assets will be dependent on the Partnership's ability to maintain rental rates, occupancy, and an appropriate level of operating expenses in future years. Management believes that the steps that it is taking will enable the Partnership to realize its investment in its assets.
Inflation
Real estate has not been affected significantly by inflation in the past three years due to the relatively low inflation rate. There are provisions in the majority of tenant leases executed by the Partnership to protect the Partnership from the impact of inflation. Most leases contain common area maintenance charges ("CAM charges"), real estate tax and insurance reimbursements on a per square foot bases, or in some cases, annual reimbursement of operating expenses above a certain per square foot allowance. These provisions should reduce the Partnership's exposure to increases in costs and operating expenses resulting from inflation. In addition, a number of the Partnership's leases are for terms of less than five years which may permit the Partnership to replace existing leases with new leases at higher base rental rates if
the existing leases are below market rate. There is no assurance, however, that the Partnership would be able to replace existing leases with new leases at higher base rentals.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements of the Registrant and supplementary data are detailed under Item 14(a) and filed as part of the report on the pages indicated.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements with the Partnership's accountants or other reportable events during 2000.
PART III
ITEM 10.
ITEM 10. GENERAL PARTNERS OF THE PARTNERSHIP
Wells Capital, Inc.
Wells Capital, Inc. ("Capital") is a Georgia corporation formed in April 1984. The executive offices of Capital are located at 6200 The Corners Parkway, Norcross, Georgia 30092. Leo F. Wells, III is the sole Director and the President of Capital.
Leo F. Wells, III.
Mr. Wells is a resident of Atlanta, Georgia, is 57 years of age and holds a Bachelor of Business Administration Degree in Economics from the University of Georgia. Mr. Wells is the President and sole Director of Wells Capital. Mr. Wells is the President of Wells & Associates, Inc., a real estate brokerage and investment company formed in 1976 and incorporated in 1978, for which he serves as principal broker. Mr. Wells is also currently the sole Director and President of Wells Management Company, Inc., a property management company he founded in 1983. In addition, Mr. Wells is the President and Chairman of the Board of Wells Investment Securities, Inc., Wells & Associates, Inc., and Wells Management Company, Inc. which are affiliates of the General Partners. From 1980 to February 1985, Mr. Wells served as Vice-President of Hill-Johnson, Inc., a Georgia corporation engaged in the construction business. From 1973 to 1976, he was associated with Sax Gaskin Real Estate Company and from 1970 to 1973, he was a real estate salesman and property manager for Roy D. Warren & Company, an Atlanta real estate company.
ITEM 11.
ITEM 11. COMPENSATION OF GENERAL PARTNERS AND AFFILIATES
The following table summarizes the compensation and fees paid to the General Partners and their affiliates during the year ended December 31, 2000:
(1) The majority of these fees are not paid directly by the Partnership but are paid by the joint venture entities which own properties to which the property management and leasing services relate and include management and leasing fees.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No Limited Partner is known by the Partnership to own beneficially more than 5% of the outstanding units of the Partnership.
Set forth below is the security ownership of management as of December 31, 2000:
The General Partners did not receive any distributions from cash flows or sale proceeds in 2000.
No arrangements exist which would, upon implementation, result in a change in control of the Partnership.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following are compensation and fees paid or to be paid by the Partnership to the General Partners and their affiliates in connection with the operation of the Partnership.
Interest in Partnership Cash Flow and Net Sale Proceeds
The General Partners will receive a subordinated participation in net cash flow from operations equal to 10% of net cash flow after the Limited Partners have received preferential distributions equal to 9% of their adjusted capital accounts in each fiscal year. In addition, after the Limited Partners receive their distributions equal to 9% of their capital contributions and the General Partners receive their distributions equal to 10% of the total distributions for such year, the General Partners will receive a participation of 10% of the additional distributions from cash available for distribution, 9% of which shall be paid to the General Partners as a Partnership Management Fee. The General Partners will also receive a participation in net sale proceeds and net financing proceeds equal to 15% of the residual proceeds available for distribution after the Limited Partners have received a return of their adjusted capital contributions plus a 15% cumulative return on their adjusted capital contributions. The General Partners received no partnership cash flow or net sale proceeds during 2000.
Property Management and Leasing Fees
Wells Management Company, Inc., an affiliate of the General Partners, will receive compensation for supervising the management of the Partnership properties equal to 6% (3% management and 3% leasing) of rental income. In no event will such fees exceed the sum of (i) 6% of the gross receipts of each property, plus (ii) a separate one-time fee for initial rent-up or leasing-up of development properties in an amount not to exceed the fee customarily charged in arm's-length transactions by others rendering similar services in the same geographic area for similar properties. With respect to properties leased on a net basis for a period of ten years or longer, property management fees will not exceed 1% of gross revenues
from such leases, plus a one-time initial leasing fee of 3% of the gross revenues which are payable over the first five years of the term of such net leases. Management and leasing fees are not paid directly by the Partnership but by the joint venture entities which own the properties. The Partnership's share of these fees which were paid to Wells Management Company, Inc. totaled $12,565 for the year ended December 31, 2000.
Real Estate Commissions
In connection with the sale of Partnership properties, the General Partners or their affiliates may receive commissions not exceeding the lesser of (A) 50% of the commissions customarily charged by other brokers in arm's-length transactions involving comparable properties in the same geographic area or (B) 3% of the gross sales price of the property, and provided that payments of such commissions will be made only after Limited Partners have received prior distributions totaling 100% of their capital contributions plus a 6% cumulative return on their adjusted capital contributions. During 2000, no real estate commissions were paid to the General Partners or their affiliates.
(THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.)
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. The financial statements are contained on pages through of this Annual Report on Form 10-K, and the list of the financial statements contained herein is set forth on page, which is hereby incorporated by reference.
(a)2. The Exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto.
(b) No reports on Form 8-K were filed with the commission during the year of 2000.
(c) The exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto.
(d) See (a) 2 above.
(THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK)
SIGNATURES
Pursuant to the requirements of Sections 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 this 27th day of March 2001.
Wells Real Estate Fund II-OW (Registrant)
By: /s/Leo F. Wells, III ------------------------------------ Leo F. Wells, III Individual General Partner and as President and Chief Financial Officer of Wells Capital, Inc., the Corporate General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacity as and on the date indicated.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRARS WHICH HAVE NOT BEEN REGISTERED PURSUANT TO SECTION 12 OF THE ACT.
No annual report or proxy material relating to an annual or other meeting of security holders has been sent to security holders.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wells Real Estate Fund II-OW:
We have audited the accompanying balance sheets of WELLS REAL ESTATE FUND II-OW (a Georgia public limited partnership) as of December 31, 2000 and 1999 and the related statements of income, partners' capital, and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States. 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 Wells Real Estate Fund II-OW as of December 31, 2000 and 1999 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Atlanta, Georgia January 30, 2001
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
ASSETS
2000 1999 ---------- ---------- INVESTMENT IN JOINT VENTURE $1,082,280 $1,159,995
CASH AND CASH EQUIVALENTS 1,127 3,865
DUE FROM AFFILIATE 26,245 25,335 ---------- ---------- Total assets $1,109,652 $1,189,195 ========== ==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES: Accounts payable $ 630 $ 264 Partnership distributions payable 26,342 26,536 ---------- ---------- Total liabilities 26,972 26,800 ---------- ----------
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL Limited partners: Class A--6,062 units 1,082,680 1,162,395 Class B--1,626 units 0 0 ---------- ---------- Total partners' capital 1,082,680 1,162,395 ---------- ---------- Total liabilities and partners' capital $1,109,652 $1,189,195 ========== ==========
The accompanying notes are an integral part of these balance sheets.
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
The accompanying notes are an integral part of these statements.
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
The accompanying notes are an integral part of these statements.
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
The accompanying notes are an integral part of these statements.
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Wells Real Estate Fund II-OW (the "Partnership") is a public limited partnership organized on October 13, 1987 under the laws of the state of Georgia. The general partners are Leo F. Wells, III and Wells Capital, Inc. (the "Company"). The Partnership has two classes of limited partnership interests, Class A and Class B units. Limited partners may vote to, among other things, (a) amend the partnership agreement, subject to certain limitations, (b) change the business purpose or investment objectives of the Partnership, and (c) remove a general partner. A majority vote on any of the above described matters will bind the Partnership, without the concurrence of the general partners. Each limited partnership unit has equal voting rights regardless of class.
The Partnership was formed to acquire and operate commercial real properties, including properties which are either to be developed, currently under development or construction, newly constructed, or have operating histories. The Partnership owns an interest in several properties through a joint venture between the Partnership and Wells Real Estate Fund II ("Wells Fund II"), referred to as "Fund II and II-OW."
Through its investment in Fund II and II-OW, the Partnership owns interests in the following properties: (i) a retail shopping and commercial office complex located in Tucker, Georgia, Heritage Place at Tucker ("Tucker"); (ii) a shopping center located in Cherokee County, Georgia, the Cherokee Commons Shopping Center ("Cherokee Commons"); (iii) a four-story office building located in metropolitan Houston, Texas, the Atrium at Nassau Bay ("The Atrium"); (iv) a restaurant located in Fulton County, Georgia, and (v) two retail and office buildings in Fulton County, Georgia. Fund II and II-OW joint venture owns 100% of the First Union Property. All remaining properties are owned by Fund II and II-OW through investments in joint ventures with other Wells Real Estate Funds.
Use of Estimates and Factors Affecting the Partnership
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Partnership recently began considering selling its properties. Management estimates that the net realizable value of each of the properties exceeds the carrying value of the corresponding real estate assets; consequently, no impairment loss has been recorded. In the event that the net sales proceeds are less than the carrying value of the property sold, the Partnership would recognize a loss on the sale. Management is not contractually or financially obligated to sell any of its properties, and it is management's current intent to fully realize the Partnership's investment in real estate. The success of the Partnership's future operations and the ability to realize the investment in its assets will be dependent on the Partnership's ability to maintain rental rates, occupancy, and an appropriate level of operating
expenses in future years. Management believes that the steps that it is taking will enable the Partnership to realize its investment in its assets.
Income Taxes
The Partnership is not subject to federal or state income taxes, and therefore, none have been provided for in the accompanying financial statements. The partners are required to include their respective shares of profits and losses in their individual income tax returns.
Distribution of Net Cash From Operations
Cash available for distribution is distributed on a cumulative noncompounded basis to limited partners quarterly. In accordance with the partnership agreement, distributions are paid first to limited partners holding Class A units until they have received an 8% per annum return on their adjusted capital contributions, as defined. Cash available for distribution is then distributed to limited partners holding Class B units until they have received an 8% per annum return on their adjusted capital contributions, as defined. Excess cash available for distribution will be distributed to the general partners until each has received 10% of total distributions to limited partners for the year. Any remaining cash available for distribution is distributed 90% to the limited partners and 10% to the general partners.
Distribution of Sales Proceeds
Upon sales of properties, the net sales proceeds are distributed in the following order:
. To limited partners until each limited partner has received 100% of his adjusted capital contribution, as defined
. To limited partners holding Class B units until they receive an amount equal to the net cash available for distribution received by the limited partners holding Class A units
. To all limited partners until they receive a cumulative 12% per annum return on their adjusted capital contributions, as defined
. To all limited partners until they receive an amount equal to their respective cumulative distributions, as defined
. To all general partners until they have received 100% of their capital contributions, as defined
. Thereafter, 85% to the limited partners and 15% to the general partners
Allocation of Net Income, Net Loss, and Gain on Sale
Net income is defined as net income recognized by the Partnership, excluding deductions for depreciation and amortization. Net income, as defined, of the Partnership will be allocated each year in the same proportions that net cash from operations is distributed to the partners. To the extent that the Partnership's net income in any year exceeds net cash from operations, it will be allocated 99% to the limited partners and 1% to the general partners.
Net loss, depreciation, and amortization deductions for each fiscal year will be allocated as follows: (a) 99% to the limited partners holding Class B units and 1% to the general partners until their capital accounts are reduced to zero, (b) then to any partner having a positive balance in his capital account in an amount not to exceed such positive balance, and (c) thereafter to the general partners.
Gain on the sale or exchange of the Partnership's properties will be allocated generally in the same manner that the net proceeds from such sale are distributed to partners after the following allocations are made, if applicable: (a) allocations made pursuant to a qualified income offset provision in the
partnership agreement, (b) allocations to partners having negative capital accounts until all negative capital accounts have been restored to zero, and (c) allocations to Class B limited partners in amounts equal to deductions for depreciation and amortization previously allocated to them with respect to the specific partnership property sold but not in excess of the amount of gain on sale recognized by the Partnership with respect to the sale of such property.
Investment in Joint Venture
Basis of Presentation
The Partnership does not have control over the operations of the joint venture; however, it does exercise significant influence. Accordingly, the Partnership's investment in the joint venture is recorded using the equity method of accounting. The joint ventures in which Fund II and II-OW hold an ownership interest follow the same accounting policies as the Partnership.
Real Estate Assets
Real estate assets held by Fund II and II-OW are stated at cost less accumulated depreciation. Major improvements and betterments are capitalized when they extend the useful life of the related asset. All repairs and maintenance are expensed as incurred.
Management continually monitors events and changes in circumstances which could indicate that carrying amounts of real estate assets may not be recoverable. When events or changes in circumstances are present which indicate that the carrying amounts of real estate assets may not be recoverable, management assesses the recoverability of real estate assets by determining whether the carrying value of such real estate assets will be recovered through the future cash flows expected from the use of the asset and its eventual disposition. Management has determined that there has been no impairment in the carrying value of real estate assets held by Fund II and II-OW or its affiliated joint ventures as of December 31, 2000.
Depreciation is calculated using the straight-line method over 25 years.
Revenue Recognition
All leases on real estate assets held by the joint venture are classified as operating leases, and the related rental income is recognized on a straight-line basis over the terms of the respective leases.
Partners' Distributions and Allocations of Profit and Loss
Cash available for distribution and allocations of profit and loss to the Partnership by Fund II and II-OW are made in accordance with the terms of the individual joint venture agreement. Generally, these items are allocated in proportion to the partners' respective ownership interests. Cash is paid from the joint venture to the Partnership on a quarterly basis.
Deferred Lease Acquisition Costs
Costs incurred to procure operating leases are capitalized and amortized on a straight-line basis over the terms of the related leases.
Cash and Cash Equivalents
For the purposes of the statements of cash flows, the Partnership considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents include cash and short-term investments. Short-term investments are stated at cost, which approximates fair value, and consist of investments in money market accounts.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current year financial statement presentation.
2. RELATED-PARTY TRANSACTIONS
Due from affiliate at December 31, 2000 and 1999 represents the Partnership's share of cash to be distributed from Fund II and II-OW for the fourth quarters of 2000 and 1999.
The Partnership entered into a property management agreement with Wells Management Company, Inc. ("Wells Management"), an affiliate of the general partners. In consideration for supervising the management of the Partnership's properties, the Partnership will generally pay Wells Management management and leasing fees equal to (a) 3% of the gross revenues for management and 3% of the gross revenues for leasing (aggregate maximum of 6%) plus a separate fee for the one-time lease-up of newly constructed properties in an amount not to exceed the fee customarily charged in arm's-length transactions by others rendering similar services in the same geographic area for similar properties or (b) in the case of industrial and commercial properties, which are leased on a long-term net basis (ten or more years), 1% of the gross revenues except for initial leasing fees equal to 3% of the gross revenues over the first five years of the lease term.
The Partnership incurred management and leasing fees and lease acquisition costs, at the joint venture level, of $12,565, $12,033, and $10,264 for the years ended December 31, 2000, 1999, and 1998, respectively, which were paid to Wells Management.
The Company performs certain administrative services for the Partnership, such as accounting and other Partnership administration, and incurs the related expenses. Such expenses are allocated among the various Wells Real Estate Funds based on time spent on each fund by individual administrative personnel. In the opinion of management, such allocation is a reasonable estimation of such expenses.
The general partners are also general partners of other Wells Real Estate Funds. As such, there may exist conflicts of interest where the general partners in the capacity as general partners of other Wells Real Estate Funds may be in competition with the Partnership for tenants in similar geographic markets.
3. INVESTMENT IN JOINT VENTURE
On March 1, 1988, the Partnership entered into a joint venture agreement with Wells Fund II. The joint venture, Fund II and II-OW, was formed for the purpose of investing in commercial real properties. Fund II and II-OW owns the First Union Property directly and has investments in several other joint ventures. The Partnership's ownership percentage interest in Fund II and II-OW was approximately 5% at December 31, 2000 and 1999.
The following is a rollforward of the Partnership's investment in joint venture for the years ended December 31, 2000 and 1999:
Following are the financial statements for Fund II and II-OW:
Fund II and II-OW (A Georgia Joint Venture) Balance Sheets December 31, 2000 and 1999
Fund II and II-OW (A Georgia Joint Venture) Statements of Income for the Years Ended December 31, 2000, 1999, and 1998
Fund II and II-OW (A Georgia Joint Venture) Statements of Partners' Capital for the Years Ended December 31, 2000, 1999, and 1998
Fund II and II-OW (A Georgia Joint Venture) Statements of Cash Flows for the Years Ended December 31, 2000, 1999, and 1998
The following is a rollforward of Fund II and II-OW investment in joint venture for the years ended December 31, 2000 and 1999.
2000 1999 ----------- ----------- Investment in joint venture, beginning of year $15,654,420 $16,676,111 Equity in income of joint venture 251,609 242,690 Distributions from joint venture (1,329,166) (1,264,381) ----------- ----------- Investment in joint venture, end of year $14,576,863 $15,654,420 =========== ===========
Fund II and II-OW's investment and percentage ownership in other joint ventures at December 31, 2000 and 1999 are summarized as follows:
The following are descriptions of the joint ventures in which Fund II and II-OW has investments.
Fund I and II Tucker
Tucker and Cherokee Commons were previously held in joint ventures between Wells Real Estate Fund I ("Fund I") and Fund II and II-OW. The joint ventures were formed for the purpose of owning, developing, and operating Cherokee Commons and Tucker. In 1991, the Tucker and Cherokee Commons joint ventures were merged into a new joint venture, the Fund I and II Tucker- Cherokee Joint Venture. Under the terms of the joint venture agreement, the ownership interests of Fund I and Fund II and II-OW in each individual property remained unchanged.
On August 1, 1995, the Fund I and II Tucker-Cherokee joint venture assigned its ownership in Cherokee Commons to the Fund I, II, II-OW, VI, and VII Associates--Cherokee joint venture. Upon the assignment of Cherokee Commons, the joint venture was renamed Fund I and II Tucker. Tucker is a retail shopping center containing approximately 29,858 square feet and a commercial office building complex containing approximately 67,465 square feet in Tucker, DeKalb County, Georgia.
In 1996, one of the tenants in Tucker experienced a fire. In 1996, Fund I and II Tucker received an initial insurance settlement of $143,944 for damages to the building. In 1997, an additional $104,895 was received as a final insurance settlement for the fire damages discussed above and storm damages that occurred in 1997. In addition, a loss from the retirement of real estate assets of $58,952 was incurred. Additional insurance proceeds of $27,319 related to these damages were received in 1998 and are reflected as a gain on real estate assets in the following statement of income.
Following are the financial statements for Fund I and II Tucker:
Fund I and II Tucker (A Georgia Joint Venture) Balance Sheets December 31, 2000 and 1999
Fund I and II Tucker (A Georgia Joint Venture) Statements of Income for the Years Ended December 31, 2000, 1999, and 1998
Fund I and II Tucker (A Georgia Joint Venture) Statements of Partners' Capital for the Years Ended December 31, 2000, 1999, and 1998
Funds I and II Tucker (A Georgia Joint Venture) Statements of Cash Flows for the Years Ended December 31, 2000, 1999, and 1998
Fund I, II, II-OW, VI, and VII Associates--Cherokee
In August 1995, Cherokee Commons was transferred to a new joint venture between Fund I, Fund II and II-OW, Wells Real Estate Fund VI, L.P. ("Fund VI"), and Wells Real Estate Fund VII, L.P. ("Fund VII"). The joint venture, Fund I, II, II-OW, VI, and VII Associates--Cherokee, was formed for the purpose of owning and operating Cherokee Commons, a retail shopping center containing approximately 103,755 square feet located in Cherokee County, Georgia. Percentage ownership interests in Fund I, II, II-OW, VI, and VII Associates--Cherokee were determined at the time of formation based on contributions. Under the terms of the joint venture agreement, Fund VI and Fund VII each contributed approximately $1 million to the new joint venture in return for a 10.7% ownership interest. Fund I's ownership interest in the Cherokee joint venture changed from 30.6% to 24%, and Fund II and II-OW joint venture's ownership interest changed from 69.4% to 54.6%. The $2 million in cash contributed to Cherokee was used to fund an expansion of the property for an existing tenant.
Following are the financial statements for Fund I, II, II-OW, VI, and VII Associates--Cherokee:
Fund I, II, II-OW, VI, and VII Associates--Cherokee (A Georgia Joint Venture) Balance Sheets December 31, 2000 and 1999
Fund I, II, II-OW, VI and VII Associates--Cherokee (A Georgia Joint Venture) Statements of Income for the Years Ended December 31, 2000, 1999, and 1998
Fund I, II, II-OW, VI and VII Associates--Cherokee (A Georgia Joint Venture) Statements of Partners' Capital for the Years Ended December 31, 2000, 1999, and 1998
Fund I, II, II-OW, VI, and VII Associates--Cherokee (A Georgia Joint Venture) Statements of Cash Flows for the Years Ended December 31, 2000, 1999, and 1998
Fund II and III Associates
On April 3, 1989, Fund II and II-OW entered into a joint venture agreement with Wells Real Estate Fund III, L.P ("Fund III"). The new joint venture, Fund II and III Associates, was formed for the purpose of investing in commercial and industrial real properties. In April 1989, Fund II and III Associates acquired The Atrium. In 1991, Fund II and II-OW contributed its interest in a parcel of land known as the 880 Property located in Roswell, Georgia, to Fund II and III Associates. The property is a 5.8-acre tract of land. A restaurant was developed on 1.5 acres of the 880 Property and is currently operating as the Brookwood Grill restaurant ("Fund II and III Associates--Brookwood Grill"). The remaining 4.3 acres of the 880 Property was transferred at cost to the Fund II, III, VI, and VII Associates joint venture during 1995. Fund II and III Associates' investment in this transferred parcel of the 880 Property was $1,305,317 and $1,406,591 at December 31, 2000 and 1999, respectively, which represented a 24% interest for each year.
The Atrium was fully occupied from inception through June 1996, at which time the previous tenant's lease expired. In March 1997, a lease was signed with a new tenant for the entire building and the new tenant began paying rent in May 1997. The lease term is for five years with an option to renew for an additional five years. There is a no-cause cancellation provision at the end of the first three-year period. If this no-cause cancellation is exercised, the tenant would be required to pay unamortized, up-front tenant improvement costs. The cost of completing the required tenant improvements and outside broker commissions was funded out of reserves and contributions by Fund II and II-OW and Fund III.
Following are the financial statements for Fund II and III Associates--The Atrium:
Fund II and III Associates--The Atrium (A Georgia Joint Venture) Balance Sheets December 31, 2000 and 1999
Fund II and III Associates--The Atrium (A Georgia Joint Venture) Statements of Loss for the Years Ended December 31, 2000, 1999, and 1998
Fund II and III Associates--The Atrium (A Georgia Joint Venture) Statements of Partners' Capital for the Years Ended December 31, 2000, 1999, and 1998
Fund II and III Associates--The Atrium (A Georgia Joint Venture) Statements of Cash Flows for the Years Ended December 31, 2000, 1999, and 1998
Following are the financial statements for Fund II and III Associates-- Brookwood Grill:
Fund II and III Associates--Brookwood Grill (A Georgia Joint Venture) Balance Sheets December 31, 2000 and 1999
Assets
Fund II and III Associates--Brookwood Grill (A Georgia Joint Venture) Statements of Income for the Years Ended December 31, 2000, 1999, and 1998
Fund II and III Associates--Brookwood Grill (A Georgia Joint Venture) Statements of Partners' Capital for the Years Ended December 31, 2000, 1999, and 1998
Fund II and III Associates--Brookwood Grill (A Georgia Joint Venture) Statements of Cash Flows for the Years Ended December 31, 2000, 1999, and 1998
Fund II, III, VI, and VII Associates
On January 1, 1995, the Fund II and III Associates joint venture entered into a joint venture agreement with Fund VI and Fund VII. The joint venture, Fund II, III, VI, and VII Associates, was formed for the purpose of acquiring, developing, operating, and selling real properties. During 1995, Fund II and III Associates contributed a 4.3-acre tract of land from its 880 Property--Holcomb Bridge to the Fund II, III, VI, and VII Associates joint venture. During 1996, 1997, and 1998, Fund VI and Fund VII made contributions to the joint venture. Ownership percentage interests were recomputed accordingly. Development was substantially completed in 1996 on two retail and office buildings containing a total of approximately 49,500 square feet.
The following are the financial statements for Fund II, III, VI, and VII Associates:
Fund II, III, VI, and VII Associates (A Georgia Joint Venture) Balance Sheets December 31, 2000 and 1999
Assets
Fund II, III, VI, and VII Associates (A Georgia Joint Venture) Statements of Income for the Years Ended December 31, 2000, 1999, and 1998
Fund II, III, VI, and VII Associates (A Georgia Joint Venture) Statements of Partners' Capital for the Years Ended December 31, 2000, 1999, and 1998
Fund II, III, VI, and VII Associates (A Georgia Joint Venture) Statements of Cash Flows for the Years Ended December 31, 2000, 1999, and 1998
4. INCOME TAX BASIS NET INCOME AND PARTNERS' CAPITAL
The Partnership's income tax basis net income for the years ended December 31, 2000, 1999, and 1998 is calculated as follows:
The Partnership's income tax partners' capital at December 31, 2000, 1999, and 1998 computed as follows:
5. RENTAL INCOME
The future minimum rental income due from the Partnership's respective ownership interest in the joint venture under noncancelable operating leases at December 31, 2000 is as follows:
Year ending December 31: 2001 $138,610 2002 75,982 2003 38,724 2004 28,228 2005 23,809 Thereafter 100,227 -------- $405,580 ========
Three tenants contributed approximately 28%, 26%, and 10% of rental income. In addition, two tenants will contribute approximately 43% and 17% of future minimum rental income.
The future minimum rental income due Fund II and II-OW for the First Union Property under noncancelable operating leases at December 31, 2000 is as follows:
Year ending December 31: 2001 $281,357
One tenant at the First Union Property contributed 100% of rental income for the year ended December 31, 2000 and will contribute 100% of future minimum rental income.
The future minimum rental income due Fund I and II Tucker under noncancelable operating leases at December 31, 2000 is as follows:
Year ending December 31: 2001 $1,105,038 2002 842,503 2003 463,520 2004 206,361 2005 122,848 Thereafter 344,503 ---------- $3,084,773 ==========
One tenant contributed 10% of rental income for the year ended December 31, 2000 and will contribute approximately 19% of future minimum rental income.
The future minimum rental income due Fund I, II, II-OW, VI, and VII Associates--Cherokee under noncancelable operating leases at December 31, 2000 is as follows:
Year ending December 31: 2001 $ 951,376 2002 908,795 2003 819,757 2004 689,164 2005 653,219 Thereafter 3,159,986 ---------- $7,182,297 ==========
One tenant contributed approximately 61% of rental income for the year ended December 31, 2000 and will contribute approximately 84% of future minimum rental income.
The future minimum rental income due Fund II and III Associates--The Atrium under noncancelable operating leases at December 31, 2000 is as follows:
Year ending December 31: 2001 $1,488,000 2002 620,000 ---------- $2,108,000 ==========
One tenant at The Atrium contributed 100% of rental income for the year ended December 31, 2000 and will contribute 100% of future minimum rental income.
The future minimum rental income due Fund II and III Associates--Brookwood Grill under noncancelable operating leases at December 31, 2000 is as follows:
Year ending December 31: 2001 $249,550 2002 25,995 ======== $275,545 ========
One tenant contributed 100% of rental income for the year ended December 31, 2000 and will contribute 100% of future minimum rental income.
The future minimum rental income due Fund II, III, VI, and VII Associates under noncancelable operating leases at December 31, 2000 is as follows:
Year ending December 31: 2001 $ 816,533 2002 539,270 2003 255,097 2004 219,315 2005 127,850 Thereafter 21,308 ---------- $1,979,377 ==========
Three tenants contributed approximately 15%, 14%, and 13% of rental income for the year ended December 31, 2000. In addition, four tenants will contribute approximately 33%, 13%, 13%, and 11% of future minimum rental income.
6. QUARTERLY RESULTS (UNAUDITED)
Presented below is a summary of the unaudited quarterly financial information for the years ended December 31, 2000 and 1999:
7. COMMITMENTS AND CONTINGENCIES
Management, after consultation with legal counsel, is not aware of any significant litigation or claims against the Partnership or the Company. In the normal course of business, the Partnership or the Company may become subject to such litigation or claims.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wells Real Estate Fund II, Wells Real Estate Fund II-OW, and Wells Real Estate Fund III, L.P.:
We have audited the accompanying balance sheets of THE ATRIUM BUILDING as of December 31, 2000 and 1999 and the related statements of loss, partners' capital, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the building's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 The Atrium Building as of December 31, 2000 and 1999 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Atlanta, Georgia January 30, 2001
THE ATRIUM BUILDING
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
The accompanying notes are an integral part of these balance sheets.
THE ATRIUM BUILDING
STATEMENTS OF LOSS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
The accompanying notes are an integral part of these statements.
THE ATRIUM BUILDING
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
The accompanying notes are an integral part of these statements.
THE ATRIUM BUILDING
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
The accompanying notes are an integral part of these statements.
THE ATRIUM BUILDING
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
The Atrium Building ("Atrium") is a four-story office building located in Houston, Harris County, Texas. The building is owned by Fund II and III Associates, a joint venture between Wells Real Estate Fund II ("Fund II"), Wells Real Estate Fund II-OW ("Fund II-OW"), and Wells Real Estate Fund III, L.P. ("Fund III). Fund II owns 58% of Atrium, Fund II-OW owns 3% of Atrium, and Fund III owns 39% of Atrium at December 31, 2000. Allocation of net loss and distributions are made in accordance with ownership percentages.
Use of Estimates
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 and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Income Taxes
Atrium is not deemed to be a taxable entity for federal income tax purposes.
Real Estate Assets
Real estate assets are stated at cost, less accumulated depreciation. Major improvements and betterments are capitalized when they extend the useful life of the related asset. All repairs and maintenance are expensed as incurred.
Management continually monitors events and changes in circumstances which could indicate that carrying amounts of real estate assets may not be recoverable. When events or changes in circumstances are present which indicate that the carrying amounts of real estate assets may not be recoverable, management assesses the recoverability of real estate assets by determining whether the carrying value of such real estate assets will be recovered through the future cash flows expected from the use of the asset and its eventual disposition. Management has determined that there has been no impairment in the carrying value of Atrium as of December 31, 2000.
Depreciation is calculated using the straight-line method over 25 years.
Revenue Recognition
The lease on Atrium is classified as an operating lease, and the related rental income is recognized on a straight-line basis over the term of the lease.
Deferred Lease Acquisition Costs
Costs incurred to procure operating leases are capitalized and amortized on a straight-line basis over the terms of the related leases.
Cash and Cash Equivalents
For the purposes of the statements of cash flows, Atrium considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents include cash and short-term investments. Short-term investments are stated at cost, which approximates fair value, and consist of investments in money market accounts.
2. RENTAL INCOME
The future minimum rental income due to Atrium under noncancelable operating leases at December 31, 2000 is as follows:
Year ending December 31: 2001 $1,488,000 2002 620,000 ---------- $2,108,000 ==========
One tenant contributed 100% of rental income for the year ended December 31, 2000 and represents 100% of the future minimum rental income above. This tenant has the option to renew an additional five-year lease term upon the expiration of the current lease during 2002.
3. RELATED-PARTY TRANSACTIONS
Fund II and II-OW and Fund III entered into a property management agreement with Wells Management Company, Inc. ("Wells Management"), an affiliate of Fund II and II-OW and Fund III. In consideration for supervising the management of Atrium, Fund II and II-OW and Fund III will generally pay Wells Management management and leasing fees equal to (a) 3% of the gross revenues for management and 3% of the gross revenues for leasing (aggregate maximum of 6%) plus a separate fee for the one-time initial lease-up of newly constructed properties in an amount not to exceed the fee customarily charged in arm's-length transactions by others rendering similar services in the same geographic area for similar properties or (b) in the case of commercial properties which are leased on a long-term net basis (ten or more years), 1% of the gross revenues except for initial leasing fees equal to 3% of the gross revenues over the first five years of the lease term.
Atrium incurred management and leasing fees of $95,290, $90,018, and $186,102, for the years ended December 31, 2000, 1999, and 1998, respectively, which were paid to Wells Management.
4. COMMITMENTS AND CONTINGENCIES
Management, after consultation with legal counsel, is not aware of any significant litigation or claims against Atrium or its partners. In the normal course of business, Atrium or its partners may become subject to such litigation or claims.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wells Real Estate Fund II and Wells Real Estate Fund II-OW:
We have audited the accompanying balance sheets of THE FIRST UNION PROPERTY as of December 31, 2000 and 1999 and the related statements of income, partners' capital, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the property's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 The First Union Property as of December 31, 2000 and 1999 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Atlanta, Georgia January 30, 2001
THE FIRST UNION PROPERTY
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
The accompanying notes are an integral part of these balance sheets.
THE FIRST UNION PROPERTY
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
The accompanying notes are an integral part of these statements.
THE FIRST UNION PROPERTY
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
The accompanying notes are an integral part of these statements.
THE FIRST UNION PROPERTY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
The accompanying notes are an integral part of these statements.
THE FIRST UNION PROPERTY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
The First Union Property ("First Union") is a two-story office building located in Charlotte, North Carolina. The property is owned by Fund II and Fund II-OW, a joint venture between Wells Real Estate Fund II ("Fund II") and Wells Real Estate Fund II-OW ("Fund II-OW"). Fund II owns 95% of Fund II and Fund II-OW and Fund II-OW owns 5% of Fund II and Fund II-OW at December 31, 2000. Allocation of net income and distributions are made in accordance with ownership percentages.
Use of Estimates
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 and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Income Taxes
First Union is not deemed to be a taxable entity for federal income tax purposes.
Real Estate Assets
Real estate assets held by First Union are stated at cost, less accumulated depreciation. Major improvements and betterments are capitalized when they extend the useful life of the related asset. All repairs and maintenance are expensed as incurred.
Management continually monitors events and changes in circumstances which could indicate that carrying amounts of real estate assets may not be recoverable. When events or changes in circumstances are present which indicate that the carrying amounts of real estate assets may not be recoverable, management assesses the recoverability of real estate assets by determining whether the carrying value of such real estate assets will be recovered through the future cash flows expected from the use of the asset and its eventual disposition. Management has determined that there has been no impairment in the carrying value of First Union as of December 31, 2000.
Depreciation is calculated using the straight-line method over 25 years.
Revenue Recognition
The lease on First Union is classified as an operating lease, and the related rental income is recognized on a straight-line basis over the term of the lease.
Deferred Lease Acquisition Costs
Costs incurred to procure operating leases are capitalized and amortized on a straight-line basis over the terms of the related leases.
Cash and Cash Equivalents
For the purposes of the statements of cash flows, First Union considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents include cash and short-term investments. Short-term investments are stated at cost, which approximates fair value, and consist of investments in money market accounts.
2. RENTAL INCOME
The future minimum rental income due to First Union under noncancelable operating leases at December 31, 2000 is as follows:
Year ended December 31: 2001 $281,357
One tenant at First Union contributed 100% of rental income for the year ended December 31, 2000 and represents 100% of the future minimum rental income above. The lease for this tenant expires on April 30, 2001. Management is currently negotiating with prospective tenants to lease 100% of the space at this property effective May 1, 2001.
3. RELATED-PARTY TRANSACTIONS
Fund II and Fund II-OW entered into a property management agreement with Wells Management Company, Inc. ("Wells Management"), an affiliate of Fund II and Fund II-OW. In consideration for supervising the management of First Union, Fund II and Fund II-OW will generally pay Wells Management management and leasing fees equal to (a) 3% of the gross revenues for management and 3% of the gross revenues for leasing (aggregate maximum of 6%) plus a separate fee for the one-time initial lease-up of newly constructed properties in an amount not to exceed the fee customarily charged in arm's-length transactions by others rendering similar services in the same geographic area for similar properties or (b) in the case of commercial properties which are leased on a long-term net basis (ten or more years), 1% of the gross revenues except for initial leasing fees equal to 3% of the gross revenues over the first five years of the lease term.
First Union incurred management and leasing fees and lease acquisition costs of $50,773, $61,295, and $45,887, respectively, for the years ended December 31, 2000, 1999, and 1998, respectively, which were paid to Wells Management.
4. COMMITMENTS AND CONTINGENCIES
Management, after consultation with legal counsel, is not aware of any significant litigation or claims against First Union and its partners. In the normal course of business, First Union and its partners may become subject to such litigation or claims.
EXHIBIT INDEX -------------
(Wells Real Estate Fund II-OW)
The following documents are filed as exhibits to this report. Those exhibits previously filed and incorporated herein by reference are identified below by an asterisk. For each such asterisked exhibit, there is shown below the description of the previous filing. Exhibits which are not required for this report are omitted.
Exhibit Number Description of Document - ------- -----------------------
*4 Restated and Amended Certificate and Agreement of Limited Partnership of Wells Real Estate Fund II-OW (Registration Statement of Wells Real Estate Fund II-OW, Exhibit B to the Prospectus, File No. 33-17977)
*10(a) Management Agreement between Registrant and Wells Management Company, Inc. (Exhibit to Form 10-K of Wells Real Estate Fund II- OW for the fiscal year ended December 31, 1990, File No. 0-17876)
*10(b) Leasing and Tenant Coordination Agreement between Registrant and Wells Management Company, Inc. (Exhibit to Form 10-K of Wells Real Estate Fund II-OW for the fiscal year ended December 31, 1990, File No. 0-17876)
*10(c) Purchase Agreement for the acquisition of Heritage Place at Tucker dated April 25, 1986 (Exhibit 10(f) to Form 10-K of Wells Real Estate Fund I for the fiscal year ended December 31, 1990, File No. 0-14463)
*10(d) Joint Venture Agreement of Fund I and Fund II Tucker dated January 9, 1987 (Exhibit 10(g) to Form 10-K of Wells Real Estate Fund I for the fiscal year ended December 31, 1990, File No. 0-14463)
*10(e) Purchase Agreement for the acquisition of the Cherokee Commons Shopping Center dated December 31, 1986 (Exhibit 10(h) to Form 10-K of Wells Real Estate Fund I for the fiscal year ended December 31, 1990, File No. 0-14463)
*10(f) Joint Venture Agreement of Fund I and Fund II Cherokee dated June 27, 1987 (Exhibit 10(i) to Form 10-K of Wells Real Estate Fund I for the fiscal year ended December 31, 1990, File No. 0-14463)
*10(g) Fund II - Fund II-OW Joint Venture Agreement dated March 1, 1988 (Exhibit 10(g) to Form 10-K of Wells Real Estate Fund II for the fiscal year ended December 31, 1990, File No. 0-16518)
*10(h) Lease with IBM dated March 17, 1987 (Exhibit 10(h) to Form 10-K of Wells Real Estate Fund II for the fiscal year ended December 31, 1990, File No. 0-16518)
*10(i) Purchase Agreement for the Acquisition of the Atrium at Nassau Bay dated March 1, 1989 (Exhibit 10(i) to Form 10-K of Wells Real Estate Fund II for the fiscal year ended December 31, 1990, File No. 0-16518)
*10(j) Joint Venture Agreement of Fund II and Fund III Associates dated March 1, 1989 (Exhibit to Post-Effective Amendment No. 2 to Registration Statement of Wells Real Estate Fund III, L.P., File No. 33-24063)
*10(k) First Amendment to Joint Venture Agreement of Fund II and Fund III Associates dated April 1, 1989 (Exhibit 10(k) to Form 10-K of Wells Real Estate Fund II for the fiscal year ended December 31, 1990, File No. 0-16518)
*10(l) Leases with Lockheed Engineering and Sciences Company, Inc. (Exhibit 10(l) to Form 10-K of Wells Real Estate Fund II for the fiscal year ended December 31, 1990, File No. 0-16518)
*10(m) Cost Sharing Agreement between Registrant, Wells Fund II and the Fund II- Fund II-OW Joint Venture dated January 1, 1990 (Exhibit 10(m) to Form 10-K of Wells Real Estate Fund II for the fiscal year ended December 31, 1990, File No. 0-16518)
*10(n) Amended and Restated Joint Venture Agreement of Fund I and Fund II Tucker-Cherokee dated January 1, 1991 (Exhibit 10(j) to Form 10-K of Wells Real Estate Fund I for the fiscal year ended December 31, 1991, File No. 0-14463)
*10(o) Amended and Restated Joint Venture Agreement of Fund II and Fund III Associates (Exhibit 10(o) to Form 10-K of Wells Real Estate Fund II for the fiscal year ended December 31, 1991, File No. 0-16518)
*10(p) Land and Building Lease Agreement between Fund II and Fund II-OW and Brookwood Grill of Roswell, Inc. (Exhibit 10(p) to Form 10-K of Wells Real Estate Fund II for the fiscal year ended December 31, 1991, File No. 0-16518)
*10(q) Assignment and Assumption of Lease dated September 20, 1991 between Fund II and Fund II-OW and Fund II and Fund III Associates (Exhibit 10(q) to Form 10-K of Wells Real Estate Fund II for the fiscal year ended December 31, 1991, File No. 0-16518)
*10(r) Lease Modification Agreement No. 3 with The Kroger Co. dated December 21, 1993 (Exhibit 10(k) to Form 10-K of Wells Real Estate Fund I for the fiscal year ended December 31, 1993, File No. 0-14463)
*10(s) Lease Agreement with First Union National Bank of N.C. dated March 31, 1994, and First Amendment to Lease Agreement dated April 14, 1994 (Exhibit 10(s) to Form 10-K of Wells Real Estate Fund II for the fiscal year ended December 31, 1994, File No. 0- 16518)
*10(t) Joint Venture Agreement of Fund II, III, VI and VII Associates dated January 10, 1995 (Exhibit to Form 10-K of Wells Real Estate Fund VI, L.P. for the fiscal year ended December 31, 1995, File No. 0-23656)
*10(u) Joint Venture Agreement of Fund I, II, II-OW, VI and VII Associates dated August 1, 1995 (Exhibit to Form 10-K of Wells Real Estate Fund VI, L.P. for the fiscal year ended December 31, 1995, File No. 0-23656)
*10(v) First Amendment to Amended and Restated Joint Venture Agreement of Fund I and Fund II Tucker (formerly Fund I and Fund II Tucker- Cherokee) dated August 1, 1995 (Exhibit 10(m) to Form 10-K of Wells Real Estate Fund I for the fiscal year ended December 31, 1995, File No. 0-14463)
*10(w) Custodial Agency Agreement between Wells Real Estate Fund II-OW and NationsBank of Georgia, N.A. dated January 10, 1995 (Exhibit to Form 10-K of Wells Real Estate Fund II-OW for the fiscal year ended December 31, 1995, File No. 0-17876)
*10(x) Amended and Restated Custodial Agency Agreement between Wells Real Estate Fund II-OW and NationsBank of Georgia, N.A. dated August 1, 1995 (Exhibit to Form 10-K of Wells Real Estate Fund II-OW for the fiscal year ended December 31, 1995, File No. 0-17876)
10(y) Amendment to Amended and Restated Certificate and Agreement of Limited Partnership of Wells Real Estate Fund II-OW dated January 1, 2000 (filed herewith)