Item 1. Business.
Corporate Property Associates 12 (CPA(R):12) Incorporated is a real estate investment trust ("REIT") that acquires and owns commercial properties leased to companies nationwide, primarily on a triple net basis. As of December 31, 2000, CPA(R):12's portfolio consisted of 93 properties leased to 40 tenants and totaling more than 9.4 million square feet.
CPA(R):12's core investment strategy is to purchase and own properties leased to a variety of companies on a single tenant net lease basis. These leases generally place the economic burden of ownership on the tenant by requiring them to pay the costs of maintenance, insurance, taxes, structural repairs and other operating expenses. CPA(R):12 also generally includes in its leases:
- clauses providing for mandated rent increases or periodic rent increases tied to increases in the consumer price index or other indices or, when appropriate, increases tied to the volume of sales at the property;
- covenants restricting the activity of the tenant to reduce the risk of a change in credit quality;
- indemnification of CPA(R):12 for environmental and other liabilities; and
- guarantees from parent companies or other entities.
CPA(R):12 was formed as a Maryland corporation on July 30, 1993. Between February 1994 and September 1997, CPA(R):12 sold a total of 28,334,451 shares of common stock for a total of $283,344,510 in offering proceeds. These proceeds have been combined with limited recourse mortgage debt to purchase CPA(R):12's property portfolio. As a REIT, CPA(R):12 is not subject to federal income taxation as long as it satisfies certain requirements relating to the nature of its income, the level of its distributions and other factors.
W.P. Carey & Co. LLC and its wholly-owned management subsidiary, Carey Asset Management Corp., provide both strategic and day-to-day management for CPA(R):12, including acquisition services, research, investment analysis, asset management, capital funding services, disposition of assets, investor relations and administrative services. A wholly-owned subsidiary of W.P. Carey & Co. LLC, Carey Asset Management Corp., also provides office space and other facilities for CPA(R):12. Carey Asset Management Corp. has dedicated senior executives in each area of its organization so that CPA(R):12 functions as a fully integrated operating company. CPA(R):12 pays asset management fees to Carey Asset Management Corp. and pays certain transactional fees. CPA(R):12 also reimburses W.P. Carey & Co. LLC for certain expenses. Carey Asset Management Corp. serves in this capacity for Corporate Property Associates 10 Incorporated, Carey Institutional Properties Incorporated and Corporate Property Associates 14 Incorporated.
CPA(R):12's principal executive offices are located at 50 Rockefeller Plaza, New York, NY 10020 and its telephone number is (212) 492-1100. As of December 31, 2000, CPA(R):12 had no employees. Carey Asset Management Corp. employs 24 individuals who perform services for CPA(R):12.
BUSINESS OBJECTIVES AND STRATEGY
CPA(R):12's objectives are to:
- pay quarterly dividends at an increasing rate that for taxable shareholders may be partially free from current taxation;
- purchase and own a portfolio of real estate that will increase in value; and
- increase the equity in its real estate by making regular mortgage principal payments.
CPA(R):12 seeks to achieve these objectives by purchasing and holding industrial and commercial properties each net leased to a single corporate tenant. CPA(R):12's portfolio is diversified by geography, property type and by tenant.
DEVELOPMENTS DURING 2000
In February 1995, CPA(R):12 was granted warrants to purchase 159,314 shares of Etec common stock, exercisable at $0.45 share, in connection with structuring its net lease with Etec. CPA(R):12 subsequently agreed to cancel its rights to 90,546 warrants for $2,634,000 and used such funds to prepay a portion of the then outstanding mortgage loan on the Etec property. In September 1997, CPA(R):12 exercised a cashless conversion for 68,261 shares of Etec stock. CPA(R):12 sold 57,000 Etec shares in December 1999 and the remaining 11,261 shares in January 2000.
In February 1997, CPA(R):12 purchased land and building in Mobile, Alabama and entered into a net lease agreement with QMS, Inc. ("QMS"). In June 2000, CPA(R):12 sold the QMS property for $14,479,000 and recognized a gain on sale of $1,212,886. In November 2000, CPA(R):12 converted QMS warrants for QMC common stock it received in connection with structuring the QMS lease for 100,000 shares of QMS and sold the shares at a gain of $269,215.
In connection with structuring its net lease with Texas Freezer Company, Inc. ("Texas Freezer") in September 1997, CPA(R):12 was granted warrants to purchase 30,390 shares of Texas Freezer. In June 2000, Texas Freezer sold substantially all of its assets to Pacific Logistics, L.P. and P&O Cold Logistics, LLC. In connection with the sale, Texas Freezer was required to satisfy the rights of warrant holders. Accordingly, CPA(R):12 recognized a gain of $191,000 in connection with receiving a lump sum payment in satisfaction of its rights.
On June 29, 2000, CPA(R):12 acquired two properties located in Fairfax, Virginia and Lombard, Illinois subject to existing net leases with Galyan's Trading Company for $24,204,421, of which $16,588,659 was financed by the assumption of existing limited recourse mortgage debt on the two properties. The Fairfield and Lombard leases currently provide for combined annual rent of $2,350,000, with stated annual increases of 1.5% beginning in September 2000. The leases have initial terms through August 31, 2019, followed by eight five-year renewal options.
The limited recourse mortgage loans on the Fairfax and Lombard properties, which have remaining balances as of the date of acquisition of $8,257,015 and $8,331,644, respectively, provide for monthly payments of interest and principal of $66,059 and $66,668, respectively, at annual interest rates of 8.751% and 8.753%, respectively. The loans mature on September 10, 2009, at which time balloon payments totaling $14,881,850 will be due.
In 1999, CPA(R):12 entered into a credit agreement for a $40,000,000 credit facility that allows it to fund acquisitions on a transitional basis. The term of the credit agreement was extended through June 2001; however, the amount available under the line was reduced to $20,000,000.
CPA(R):12 and Corporate Property Associates 14 Incorporated, an affiliate, structured two net leases with Ameriserve Food Distribution, Inc. in 1999 for four distribution centers. As structured, CPA(R):12 and CPA(R):14, with 40% and 60% ownership interests, respectively, were committed to invest up to $55,800,000 in the properties, with $32,000,000 of this commitment financed with limited recourse mortgage debt. In addition, Ameriserve provided CPA(R):12 and CPA(R):14 with irrevocable letters of credit of $8,700,000 as a security deposit. During 2000, Ameriserve declared bankruptcy and subsequently entered into a settlement agreement with CPA(R):12 and CPA(R):14. The settlement agreement provided for a cash payment of $3,100,000 and allowed CPA(R):12 and CPA(R):14 to draw on the full amount of the letters of credit. CPA(R):12 and CPA(R):14 were obligated to assign a substantial portion of these funds to the mortgage lenders, who used such funds in the first quarter of 2001 to reduce the outstanding balance of the mortgage loans. CPA(R):12 and CPA(R):14 entered into net leases for three of the properties with the company that purchased Ameriserve's operations. The guarantor of the three new leases is McLane Company, Inc., a wholly-owned subsidiary of Wal-Mart Stores, Inc.
On December 7, 2000, CPA(R):12 purchased a property in Hickory Creek, Texas on which a building is being constructed on a build-to-suit basis and entered into a net lease with Rave Reviews Hickory Creek I L.P. The lease obligations are unconditionally guaranteed by Rave Reviews Cinemas, L.L.C. The total purchase price including construction costs will not exceed $6,936,372. The lease has an initial term of 20 years with one ten-year renewal term and provides for an initial annual rent, which will be based on the total costs necessary to complete the project, of up to $778,347, with annual increases based on a formula indexed to the Consumer Price Index beginning on the second lease anniversary. Construction was completed in February 2001.
ACQUISITION STRATEGIES
W.P. Carey & Co. LLC has a well-developed process with established procedures and systems for acquiring net leased property on behalf of CPA(R):12. As a result of its reputation and experience in the industry and the contacts
maintained by its professionals, W.P. Carey & Co. LLC has a presence in the net lease market that has provided it with the opportunity to invest in a significant number of transactions on an ongoing basis. CPA(R):12 takes advantage of W.P. Carey & Co. LLC's presence in the net lease market to build its portfolio. In evaluating opportunities for CPA(R):12, W.P. Carey & Co. LLC carefully examines the credit, management and other attributes of the tenant and the importance of the property under consideration to the tenant's operations. Careful credit analysis is a crucial aspect of every transaction. CPA(R):12 believes that W.P. Carey & Co. LLC has one of the most extensive underwriting processes in the industry and has an experienced staff of professionals involved with underwriting transactions. W.P. Carey & Co. LLC seeks to identify those prospective tenants whose creditworthiness is likely to improve over time. CPA(R):12 believes that the experience of W.P. Carey & Co. LLC's management in structuring sale-leaseback transactions to meet the needs of a prospective tenant enables W.P. Carey & Co. LLC to obtain a higher return for a given level of risk than would typically be available by purchasing a property subject to an existing lease.
W.P. Carey & Co. LLC's strategy in structuring its net lease investments for CPA(R):12 is to:
- combine the stability and security of long-term lease payments, including rent increases, with the appreciation potential inherent in the ownership of real estate;
- enhance current returns by utilizing varied lease structures;
- reduce credit risk by diversifying investments by tenant, type of facility, geographic location and tenant industry; and
- increase potential returns by obtaining equity enhancements from the tenant when possible, such as warrants to purchase tenant common stock. As of December 31, 2000, CPA(R):12 held warrant positions in 5 tenants.
FINANCING STRATEGIES
Consistent with its investment policies, CPA(R):12 uses leverage when available on favorable terms. CPA(R):12 has approximately $155,581,000 in property level debt outstanding. These mortgages mature between the current year and 2020 and have interest rates between 6.5% and 10.5%. CPA(R):12 also maintains a credit facility that provides for borrowings of up to $20,000,000, of which $4,300,000 was outstanding on December 31, 2000. W.P. Carey & Co. LLC continually seeks opportunities and considers alternative financing techniques to finance properties not currently subject to debt, refinance debt, reduce interest expense or improve its capital structure.
TRANSACTION ORIGINATION
In analyzing potential acquisitions, W.P. Carey & Co. LLC reviews and structures many aspects of a transaction, including the tenant, the real estate and the lease, to determine whether a potential acquisition can be structured to satisfy CPA(R):12's acquisition criteria. The aspects of a transaction which are reviewed and structured by W.P. Carey & Co. LLC include the following:
Tenant Evaluation. W.P. Carey & Co. LLC subjects each potential tenant to an extensive evaluation of its credit, management, position within its industry, operating history and profitability.
W.P. Carey & Co. LLC seeks tenants it believes will have stable or improving credit. By leasing properties to these types of tenants, CPA(R):12 can generally charge rent that is higher than the rent charged to tenants with recognized credit and, thereby, enhance its current return from these properties as compared with properties leased to companies whose credit potential has already been recognized by the market. Furthermore, if a tenant's credit does improve, the value of CPA(R):12's properties leased to that tenant will likely increase (if all other factors affecting value remain unchanged). W.P. Carey & Co. LLC may also seek to enhance the likelihood of a tenant's lease obligations being satisfied, such as through a letter of credit or a guaranty of lease obligations from the tenant's corporate parent. This credit enhancement provides CPA(R):12 with additional financial security.
Leases with Increasing Rents. W.P. Carey & Co. LLC seeks to include clauses in CPA(R):12's leases that provide for increases in rent over the term of the leases. These increases are generally tied to increases in certain indices such as the consumer price index, in the case of retail stores, participation in gross sales above a stated level, mandated rental increases on specific dates and through other methods. CPA(R):12 seeks to avoid entering into leases that provide for contractual reductions in rents during their primary term (other than reductions related to reductions in debt service).
Properties Important to Tenant Operations. W.P. Carey & Co. LLC, on behalf of CPA(R):12, generally seeks to acquire properties with operations that are essential or important to the ongoing operations of the tenant. CPA(R):12 believes that these properties provide better protection in the event that tenants file for bankruptcy, because leases on properties essential or important to the operations of a bankrupt tenant are less likely to be rejected and terminated by a bankrupt tenant. W.P. Carey & Co. LLC also seeks to assess the income, cash flow and profitability of the business conducted at the property, so that, if the tenant is unable to operate its business, CPA(R):12 can either continue operating the business conducted at the property or release the property to another entity in the industry which can operate the property profitably.
Lease Provisions that Enhance and Protect Value. When appropriate, W.P. Carey & Co. LLC attempts to include provisions in CPA(R):12's leases that require CPA(R):12's consent to certain tenant activity or require the tenant to satisfy certain operating tests. These provisions include, for example, operational and financial covenants of the tenant, prohibitions on a change in control of the tenant and indemnification from the tenant against environmental and other contingent liabilities. Including these provisions in its leases enables CPA(R):12 to protect its investment from changes in the operating and financial characteristics of a tenant that may impact its ability to satisfy its obligations to CPA(R):12 or could reduce the value of CPA(R):12's properties.
Diversification. W.P. Carey & Co. LLC tries to diversify CPA(R):12's portfolio of properties to avoid dependence on any one particular tenant, type of facility, geographic location and tenant industry. By diversifying its portfolio, CPA(R):12 reduces the adverse effect on CPA(R):12 of a single under-performing investment or a downturn in any particular industry or geographic location.
W.P. Carey & Co. LLC employs a variety of other strategies and practices in connection with CPA(R):12's acquisitions. These strategies include attempting to obtain equity enhancements in connection with transactions. Typically, these equity enhancements involve warrants to purchase stock of the tenant to which the property is leased or the stock of the parent of the tenant. In certain instances, CPA(R):12 grants to the tenant a right to purchase the property leased by the tenant, but generally the option purchase price will be not less than the fair market value of the property. W.P. Carey & Co. LLC's practices include performing evaluations of the physical condition of properties and performing environmental surveys in an attempt to determine potential environmental liabilities associated with a property prior to its acquisition.
As a transaction is structured, it is evaluated by the Chairman of the Investment Committee with respect to the potential tenant's credit, business prospects, position within its industry and other characteristics important to the long-term value of the property and the capability of the tenant to meet its lease obligations. Before a property is acquired, the transaction is reviewed by the Investment Committee to ensure that it satisfies CPA(R):12's investment criteria. Aspects of the transaction that are typically reviewed by the Investment Committee include the expected financial returns, the creditworthiness of the tenant, the real estate characteristics and the lease terms.
The Investment Committee is not directly involved in originating or negotiating potential acquisitions, but instead functions as a separate and final step in the acquisition process. W.P. Carey & Co. LLC places special emphasis on having experienced individuals serve on its Investment Committee and does not invest in a transaction unless it is approved by the Investment Committee.
CPA(R):12 believes that the Investment Committee review process gives it a unique, competitive advantage over other unaffiliated net lease companies because of the substantial experience and perspective that the Investment Committee has in evaluating the blend of corporate credit, real estate and lease terms that combine to make an acceptable risk.
The following people serve on the Investment Committee:
- George E. Stoddard, Chairman, was formerly responsible for the direct corporate investments of The Equitable Life Assurance Society of the United States and has been involved with the CPA(R) Programs for over 20 years.
- Frank J. Hoenemeyer, Vice Chairman, was formerly Vice Chairman, Director and Chief Investment Officer of The Prudential Insurance Company of America. As Chief Investment Officer, Mr. Hoenemeyer was responsible for all of Prudential's investments, including stocks, bonds, private placements, real estate and mortgages.
- Nathaniel S. Coolidge previously served as Senior Vice President - Head of Bond & Corporate Finance Department of the John Hancock Mutual Life Insurance Company. His responsibilities included overseeing $21 billion of Fixed income investments for Hancock, its affiliates and outside clients.
- Lawrence R. Klein is Benjamin Franklin Professor of Economics Emeritus at the University of Pennsylvania and its Wharton School. Dr. Klein has been awarded the Alfred Nobel Memorial Prize in Economic Sciences and currently advises various governments and government agencies.
ASSET MANAGEMENT
CPA(R):12 believes that effective management of its net lease assets is essential to maintain and enhance property values. Important aspects of asset management include restructuring transactions to meet the evolving needs of current tenants, releasing properties, refinancing debt, selling properties and knowledge of the bankruptcy process.
W.P. Carey & Co. LLC monitors, on an ongoing basis, compliance by tenants with their lease obligations and other factors that could affect the financial performance of any of its properties. Monitoring involves receiving assurances that each tenant has paid real estate taxes, assessments and other expenses relating to the properties it occupies and confirming that appropriate insurance coverage is being maintained by the tenant. W.P. Carey & Co. LLC reviews financial statements of its tenants and undertakes regular physical inspections of the condition and maintenance of its properties. Additionally, W.P. Carey & Co. LLC periodically analyzes each tenant's financial condition, the industry in which each tenant operates and each tenant's relative strength in its industry.
HOLDING PERIOD
CPA(R):12 intends to hold each property it acquires for an extended period. The determination of whether a particular property should be sold or otherwise disposed of will be made after consideration of relevant factors with a view to achieving maximum capital appreciation and after-tax return for the CPA(R):12 shareholders. If CPA(R):12's common stock is not listed for trading on a national securities exchange or included for quotation on Nasdaq, CPA(R):12 will generally begin selling properties within ten years after the proceeds of the public offering are substantially invested, subject to market conditions. The board of directors will make the decision whether to list the shares, liquidate or devise an alternative liquidation strategy which is likely to result in the greatest value for the shareholders.
COMPETITION
CPA(R):12 faces competition for the acquisition of office and industrial properties in general, and such properties net leased to major corporations in particular, from insurance companies, credit companies, pension funds, private individuals, investment companies and other REITs. CPA(R):12 also faces competition from institutions that provide or arrange for other types of commercial financing through private or public offerings of equity or debt or Traditional bank financings. CPA(R):12 believes its management's experience in real estate, credit underwriting and transaction structuring will allow CPA(R):12 to compete effectively for office and industrial properties.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, regulations and ordinances, current or former owners of real estate, as well as other parties, may be required to investigate and clean up hazardous or toxic chemicals, substances or waste or petroleum product or waste, releases on, under, in or from a property. These parties may be held liable to governmental entities or to third parties for specified damages and for investigation and cleanup costs incurred by these parties in connection with the release or threatened release of hazardous materials. These laws typically impose responsibility and liability without regard to whether the owner knew of or was responsible for the presence of hazardous materials, and the liability under these laws has been interpreted to be joint and several under some circumstances. CPA(R):12's leases often provide that the tenant is responsible for all environmental liability and for compliance with environmental regulations relating to the tenant's operations.
CPA(R):12 typically undertakes an investigation of potential environmental risks when evaluating an acquisition. Phase I environmental assessments are performed by independent environmental consulting and engineering firms for all properties acquired by CPA(R):12. Where warranted, Phase II environmental assessments are performed. Phase I assessments do not involve subsurface testing, whereas Phase II assessments involve some degree of soil and/or groundwater testing. CPA(R):12 may acquire a property which is known to have had a release of hazardous materials in the past, subject to a determination of the level of risk and potential cost of remediation. CPA(R):12 normally requires property sellers to indemnify it fully against any environmental problem existing as of the date of purchase.
Additionally, CPA(R):12 often structures its leases to require the tenant to assume most or all responsibility for compliance with the environmental provisions of the lease or environmental remediation relating to the tenant's operations and to provide that non-compliance with environmental laws is a lease default. In some cases, CPA(R):12 may also require a cash reserve, a letter of credit or a guarantee from the tenant, the tenant's parent company or a third party to assure lease compliance and funding of remediation. The value of any of these protections depends on the amount of the collateral and/or financial strength of the entity providing the protection. Such a contractual arrangement does not eliminate CPA(R):12's statutory liability or preclude claims against CPA(R):12 by governmental authorities or persons who are not a party to the arrangement. Contractual arrangements in CPA(R):12's leases may provide a basis for CPA(R):12 to recover from the tenant damages or costs for which it has been found liable.
INDUSTRY SEGMENT
CPA(R):12 operates in one industry segment, investment in net leased real property. For the year ended December 31, 2000, Applied Materials, Inc. represented 11% of the total operating revenue of CPA(R):12. No other lessee represented 10% or more of total operating revenue.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The provisions of the Private Securities Litigation Reform Act of 1995 (the "Act") became effective in December 1995. The Act provides a "safe harbor" for companies that make forward-looking statements providing prospective information. The "safe harbor" under the Act relates to protection for companies with respect to litigation filed on the basis of such forward-looking statements.
CPA(R):12 wishes to take advantage of the "safe harbor" provisions of the Act and is therefore including this section in its Annual Report on Form 10-K. The statements contained in this Annual Report, if not historical, are forward-looking statements and involve risks and uncertainties which are described below that could cause actual results to differ materially from the results, financial or otherwise, or other expectations described in such forward-looking statements. These statements are identified with the words "anticipated," "expected," "intends," "seeks" or "plans" or words of similar meaning. Therefore, forward-looking statements should not be relied upon as a prediction of actual future results or occurrences.
CPA(R):12's future results may be affected by certain risks and uncertainties including the following:
Single tenant leases increase our exposure in the event of a failure of tenant.
We focus our acquisition activities on net leased real properties or interests therein. Due to the fact that our net leased real properties are leased to single tenants, the financial failure of or other default by a tenant resulting in the termination of a lease is likely to cause a reduction in the operating cash flow of CPA(R):12 and might decrease the value of the property leased to such tenant.
We depend on major tenants.
Revenues from several of our tenants and/or their guarantors constitute a significant percentage of our consolidated rental revenues. Our five largest tenants/guarantors, which occupy 10 properties, represent 30% of annualized revenues. The default, financial distress or bankruptcy of any of the tenants of such properties could cause interruptions in the receipt of lease revenues from such tenants and/or result in vacancies in the respective properties, which would reduce our revenues until the affected property is re-let, and could decrease the ultimate sale value of each such property.
We can borrow a significant amount of funds.
We have incurred, and may continue to incur, indebtedness (secured and unsecured) in furtherance of our activities. Neither the certificate of incorporation, bylaws nor any policy statement formally adopted by the board of directors limits either the total amount of indebtedness or the specified percentage of indebtedness (based upon the total market capitalization of CPA(R):12) that may be incurred. Accordingly, we could become more highly leveraged, resulting in increased risk of default on our obligations and in an increase in debt service requirements which could adversely affect our financial condition and results of operations and our ability to pay distributions.
We may not be able to refinance balloon payments on our mortgage debts.
A significant number of our properties are subject to mortgages with balloon payments. Scheduled balloon payments for the next five years are as follows:
2001 - $7.5 million; 2002 - None 2003 - $5.1 million; 2004 - None; and 2005 - $4.1 million.
Our ability to make such balloon payments will depend upon our ability either to refinance the obligation when due, invest additional equity in the property or to sell the related property. Our ability to accomplish these goals will be affected by various factors existing at the relevant time, such as the state of the national and regional economies, local real estate conditions, available mortgage rates, our equity in the mortgaged properties, our financial condition, the operating history of the mortgaged properties and tax laws.
We may be unable to renew leases or re-let vacated spaces.
We will be subject to the risks that, upon expiration of leases, the premises may not be re-let or the terms of re-letting (including the cost of concessions to tenants) may be less favorable than current lease terms. If we are unable to re-let promptly all or a substantial portion of our properties or if the rental rates upon such re-letting were significantly lower than current rates, our net income and ability to make expected distributions to our shareholders would be adversely affected. There can be no assurance that we will be able to retain tenants in any of our properties upon the expiration of their leases.
We are subject to possible liabilities relating to environmental matters.
We own industrial and commercial properties and are subject to the risk of liabilities under federal, state and local environmental laws. Some of these laws could impose the following on CPA(R):12:
- Responsibility and liability for the cost of investigation and removal or remediation of hazardous substances released on our property, generally without regard to our knowledge or responsibility of the presence of the contaminants;
- Liability for the costs of investigation and removal or remediation of hazardous substances at disposal facilities for persons who arrange for the disposal or treatment of such substances; and
- Potential liability for common law claims by third parties based on damages and costs of environmental contaminants.
We may be unable to make acquisitions on an advantageous basis.
The consummation of any future acquisition will be subject to satisfactory completion of our extensive analysis and due diligence review and to the negotiation of definitive documentation. There can be no assurance that we will be able to identify and acquire additional properties or that we will be able to finance acquisitions in the future. In addition, there can be no assurance that any such acquisition, if consummated, will be profitable for us. If we are unable to consummate the acquisition of additional properties in the future, there can be no assurance that we will be able to increase the cash available for distribution to our shareholders.
We may suffer uninsured losses.
There are certain types of losses (such as due to wars or some natural disasters) that generally are not insured because they are either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of the limits of our insurance occur, we could lose capital invested in a property, as well as the anticipated future revenues from a property, while remaining obligated for any mortgage indebtedness or other financial obligations related to the property. Any such loss would adversely affect our financial condition.
We face intense competition.
The real estate industry is highly competitive. Our principal competitors include national REITs, many of which are substantially larger and have substantially greater financial resources than us.
The value of our real estate is subject to fluctuation.
We are subject to all of the general risks associated with the ownership of real estate. In particular, we face the risk that rental revenue from the properties will be insufficient to cover all corporate operating expenses and debt service payments on indebtedness we incur. Additional real estate ownership risks include:
- Adverse changes in general or local economic conditions;
- Changes in supply of or demand for similar or competing properties;
- Changes in interest rates and operating expenses;
- Competition for tenants;
- Changes in market rental rates;
- Inability to lease properties upon termination of existing leases;
- Renewal of leases at lower rental rates;
- Inability to collect rents from tenants due to financial hardship, including bankruptcy;
- Changes in tax, real estate, zoning and environmental laws that may have an adverse impact upon the value of real estate;
- Uninsured property liability;
- Property damage or casualty losses;
- Unexpected expenditures for capital improvements or to bring properties into compliance with applicable federal, state and local laws; and
- Acts of God and other factors beyond the control of our management.
We depend on key personnel for our future success.
We depend on the efforts of the executive officers and key employees of W.P. Carey & Co. LLC. The loss of the services of these executive officers and key employees could have a material adverse effect on our operations.
The risk factors may have affected, and in the future could affect, our actual operating and financial results and could cause such results to differ materially from those in any forward-looking statements. You should not consider this list exhaustive. New risk factors emerge periodically, and we cannot completely assure you that the factors we describe above list all material risks to CPA(R):12 at any specific point in time. We have disclosed many of the important risk factors discussed above in our previous filings with the Securities and Exchange Commission.
Item 2.
Item 2. Properties.
Set forth below is certain information relating to the Company's properties owned as of December 31, 2000.
1. Percentage of ownership in land and building, except as noted.
2. Share of Current Annual Rents is the product of the Square Footage, the Rent per Square Foot, and the Ownership Interest percentage.
3. These properties are encumbered by mortgage notes payable.
4. Includes percentage of sales rents.
Item 3.
Item 3. Legal Proceedings.
As of the date hereof, Registrant is not a party to any material pending legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the year ended December 31, 2000 to a vote of security holders, through the solicitation of proxies or otherwise.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Information with respect to the Company's common equity is hereby incorporated by reference to page 21 of Registrant's Annual Report contained in Appendix A.
Item 6.
Item 6. Selected Financial Data.
Selected Financial Data are hereby incorporated by reference to page 1 of the Company's Annual Report contained in Appendix A.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Management's Discussion and Analysis are hereby incorporated by reference to pages 2 to 5 of the Company's Annual Report contained in Appendix A.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk:
Approximately $141,223,000 of the Company's long-term debt bears interest at fixed rates, and therefore the fair value of these instruments is affected by changes in the market interest rates. The following table presents principal cash flows based upon expected maturity dates of the debt obligations and the related weighted-average interest rates by expected maturity dates for the fixed rate debt. The interest rate on the variable rate debt as of December 31, 2000 ranged from LIBOR plus 3.5% to the lender's prime rate plus 2%.
(in thousands)
As of December 31, 2000, CPA(R):12 had no other material exposure to market risk.
Item 8.
Item 8. Consolidated Financial Statements and Supplementary Data.
The following consolidated financial statements and supplementary data of Registrant are hereby incorporated by reference to pages 6 to 20 of the Company's Annual Report contained in Appendix A:
(i) Report of Independent Accountants. ( ii) Consolidated Balance Sheets as of December 31, 1999 and 2000 (iii) Consolidated Statements of Income for the years ended December 31, 1998, 1999 and 2000. (iv) Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1999 and 2000. (v) Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000. (vi) Notes to Consolidated Financial Statements.
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure.
NONE
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
This information will be contained in Registrant's definitive Proxy Statement with respect to the Company's Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year, and is hereby incorporated by reference.
Item 11.
Item 11. Executive Compensation.
This information will be contained in Registrant's definitive Proxy Statement with respect to the Company's Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year, and is hereby incorporated by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
This information will be contained in Registrant's definitive Proxy Statement with respect to the Company's Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year, and is hereby incorporated by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions.
This information will be contained in Registrant's definitive Proxy Statement with respect to the Company's Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year, and is hereby incorporated by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Consolidated Financial Statements:
The following consolidated financial statements are filed as a part of this Report:
Report of Independent Accountants.
Consolidated Balance Sheets, December 31, 1999 and 2000.
Consolidated Statements of Operations for the years ended December 31, 1998, 1999 and 2000.
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1999 and 2000.
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000.
Notes to Consolidated Financial Statements.
The consolidated financial statements are hereby incorporated by reference to pages 6 to 20 of the Company's Annual Report contained in Appendix A.
(a) 2. Financial Statement Schedules:
The following schedules are filed as a part of this Report:
Schedule III -Real Estate and Accumulated Depreciation as of December 31, 2000.
Schedule III of the Company is contained on pages 22 to 25 of this Form 10-K.
Financial Statement Schedules other than those listed above are omitted because the required information is given in the Consolidated Financial Statements, including the Notes thereto, or because the conditions requiring their filing do not exist.
(a) 3. Exhibits:
The following exhibits are filed as part of this Report. Documents other than those designated as being filed herewith are incorporated herein by reference.
(b) Reports on Form 8-K
During the quarter ended December 31, 2000 the Registrant was not required to file any reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED a Maryland corporation
3/27/2001 BY: /s/ John J. Park - -------------- ------------------------ Date John J. Park Executive Vice President, Chief Legal Officer and Chief Financial Officer (Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
3/27/2001 BY: /s/ William P. Carey - --------------- ----------------------------------- Date William P. Carey Chairman of the Board and Director (Principal Executive Officer)
3/27/2001 BY: /s/ H. Augustus Carey - --------------- ----------------------------------- Date H. Augustus Carey Vice Chairman
3/27/2001 BY: /s/ W. Sean Sovak - --------------- ----------------------------------- Date W. Sean Sovak President
3/27/2001 BY: /s/ Ralph G. Coburn - --------------- ----------------------------------- Date Ralph G. Coburn Director
3/27/2001 BY: /s/ William Ruder - --------------- ----------------------------------- Date William Ruder Director
3/27/2001 BY: /s/ George E. Stoddard - --------------- ----------------------------------- Date George E. Stoddard Director
3/27/2001 BY: /s/ Thomas E. Zacharias - --------------- ----------------------------------- Date Thomas E. Zacharias Director
3/27/2001 BY: /s/ John J. Park - --------------- ----------------------------------- Date John J. Park Executive Vice President and Chief Financial Officer (Principal Financial Officer)
3/27/2001 BY: /s/ Claude Fernandez - --------------- ----------------------------------- Date Claude Fernandez Executive Vice President and Chief Administrative Officer (Principal Accounting Officer)
REPORT of INDEPENDENT ACCOUNTANTS
To the Board of Directors of Corporate Property Associates 12 Incorporated and Subsidiaries:
Our audits of the consolidated financial statements referred to in our report dated March 13, 2001 appearing on page 6 of the 2000 Annual Report to Shareholders of Corporate Property Associates 12 Incorporated and Subsidiaries (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
New York, New York March 13, 2001
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED and SUBSIDIARIES
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED and SUBSIDIARIES
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
See accompanying notes to Schedule
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED and SUBSIDIARIES
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
See accompanying notes to Schedule
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED and SUBSIDIARIES
NOTES to SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
(a) Consists of the costs of improvements subsequent to purchase and acquisition costs including legal fees, appraisal fees, title costs and other related professional fees.
(b) Represents (i) partial refund of purchase price and (ii) writedown to fair value.
(c) The increase in net investment is due (i) to the amortization of unearned income producing a constant periodic rate of return on the net investment which is more than lease payments received, (ii) the writedown of a property to its estimated fair value.
(d) At December 31, 2000, the aggregate cost of real estate owned by Registrant and its subsidiaries for Federal income tax purposes is $310,709,987.
(e)
APPENDIX A TO FORM 10-K
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
AND SUBSIDIARIES
2000 ANNUAL REPORT
SELECTED FINANCIAL DATA
(In thousands except share amounts)
(1) The Company has a simple equity capital structure with only common stock outstanding. As a result, the Company has presented basic per share amounts only.
(2) Represents scheduled mortgage principal amortization paid.
(3) Represents mortgage obligations and deferred acquisition fees due after more than one year.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
The following discussion and analysis of financial condition and results of operations of Corporate Property Associates 12 Incorporated ("CPA(R):12") should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2000. The following discussion includes forward looking statements. Forward looking statements, which are based on certain assumptions, describe future plans, strategies and expectations of CPA(R):12. Such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievement of CPA(R):12 to be materially different from the results of operations or plan expressed or implied by such forward looking statements. Accordingly, such information should not be regarded as representations by CPA(R):12 that the results or conditions described in such statements or objectives and plans of CPA(R):12 will be achieved.
CPA(R):12 was formed in 1993 for the purpose of engaging in the business of investing in and owning commercial and industrial real estate. In February 1994, CPA(R):12 commenced a public offering of common stock at $10 per share on a "best efforts" basis. A second public offering of common stock at $10 per share on a "best efforts" basis concluded in September 1997. Through these offerings, CPA(R):12 issued 28,334,451 shares of common stock raising $283,344,510.
CPA(R):12 used the proceeds from the public offerings along with limited recourse mortgage financing to purchase properties and enter into long-term net leases with corporate tenants. Substantially all of CPA(R):12's net leases have been structured to place certain economic burdens of ownership on these corporate tenants by requiring them to pay the costs of maintenance and repair, insurance and real estate taxes. The leases have generally been structured to include periodic rent increases that are stated or based on increases in the consumer price index or, for certain retail properties, provide for additional rents based on sales in excess of a specified base amount.
CPA(R):12's primary objectives are to provide rising cash flow and to protect its investors from the effects of inflation through rent escalation provisions, property appreciation, tenant credit improvement and regular paydown of limited recourse mortgage debt. In addition, CPA(R):12 has successfully negotiated grants of common stock warrants from selected tenants and expects to realize the benefits of appreciation from those grants. CPA(R):12 cannot guarantee that its objectives will be ultimately realized.
Public business enterprises are required to report financial and descriptive information about their reportable operating segments. Operating segments are components of an enterprise about which financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Management evaluates the performance of its portfolio of properties as a whole, rather than by identifying discrete operating segments. This evaluation includes assessing CPA(R):12's ability to meet distribution objectives, increase the dividend and increase value by evaluating potential investments in single tenant net lease real estate and by seeking opportunities such as refinancing mortgage debt at lower rates of interest, restructuring leases or paying off lenders at a discount to the face value of the outstanding mortgage balance.
Results of Operations:
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net income for the year ended December 31, 2000 increased by $5,139,000 as compared with the year ended December 31, 1999. Approximately $4,000,000 of the increase in income reflects amounts recognized in connection with a bankruptcy settlement as described below. Net of this settlement, which is included in income from equity investments, income would have increased $1,139,000, or approximately 6%. The increase was primarily due to increases in lease revenues (rental income and interest income from direct financing leases) and was partially offset by increases in depreciation and interest and property expenses.
The increase in lease revenues was due to (a) the purchase of the properties leased to Galyan's Trading Company, Inc. in June 2000, (b) the completion of several build-to-suit and expansion projects in 1999 including the $52,000,000 addition to the Applied Materials, Inc. property and (c) scheduled rent increases with nine existing
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
lessees in 2000. The increase in depreciation was also due to the purchase of the Galyan's property and the completion of expansion and build-to-suit projects during 1999. The increase in interest expense was primarily due to a $16,588,000 limited recourse mortgage loan obligation that CPA(R):12 assumed with the Galyan's property purchase and the placement of a $30,000,000 loan on the Applied Materials property in September 1999. The increase in property expenses was due to an increase in asset management and performance fees, and is directly related to the growth of CPA(R):12'S portfolio, and, to a lesser extent, the increase in the appraised value of the portfolio. CPA(R):12's Advisor elected to receive its performance fee in CPA(R):12 shares rather than cash in 1999 and 2000 so that a substantial part of the increase in property expenses does not result in a corresponding reduction in operating cash flow. Over the past two years, approximately $4,750,000 of performance fees have been satisfied through the issuance of stock.
CPA(R):12 and Corporate Property Associates 14 Incorporated ("CPA(R):14"), an affiliate, structured two net leases with Ameriserve Food Distribution, Inc. in 1999 for four distribution centers. As structured, CPA(R):12 and CPA(R):14, with 40% and 60% ownership interests, respectively, were committed to invest up to $55,800,000 in the properties, with $32,000,000 of this commitment financed with limited recourse mortgage debt. In addition, Ameriserve provided the Company and CPA(R):14 with irrevocable letters of credit of $8,700,000 as a security deposit. During 2000, Ameriserve declared bankruptcy and subsequently entered into a settlement agreement with CPA(R):12 and CPA(R):14. The settlement agreement provided for a cash payment of $3,100,000 and allowed CPA(R):12 and CPA(R):14 to draw on the full amount of the letters of credit. CPA(R):12 and CPA(R):14 were obligated to assign a substantial portion of these funds to the mortgage lenders, who used such funds in the first quarter of 2001 to reduce the outstanding balance of the mortgage loans. CPA(R):12 and CPA(R):14 entered into net leases for three of the properties with the company that purchased Ameriserve's operations. The guarantor of the three new leases is McLane Company, Inc., a wholly-owned subsidiary of Wal-Mart Stores, Inc. CPA(R):12 was able to limit its risk by entering into the initial transaction by investing with an affiliate, using limited recourse mortgage financing and receiving a security deposit in the form of letters of credit. Management is actively remarketing the fourth facility in Grand Rapids, Michigan.
CPA(R):12 realized significant gains on sales of securities and real estate in 1999 and 2000. The gains on sale of securities represent equity interest in lessees that were granted to CPA(R):12 in connection with negotiating and structuring their net leases.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net income for 1999 increased by $8,172,000 as compared with 1998. Excluding the effect of net gains from the sale of securities and real estate of $2,309,000 in 1999 and an extraordinary charge on the early extinguishment of debt of $379,000 and a noncash writedown of a property of $4,281,000 in 1998, income, as adjusted, would have reflected an increase of $1,203,000, or 7%, from the prior year. The increase in income was due to increases in lease revenues (rental income and interest income from direct financing leases) and income from equity investments and was partially offset by increases in depreciation and amortization and interest and property expenses.
The increase in lease revenues was primarily due to the completion of build-to-suit projects in 1999 and the commencement of lease terms at those properties. The projects completed in 1999 included the new building at the Etec property and new buildings or expansions for Career Education Corporation, Randall International, Inc., Balanced Care Corporation, Childtime Childcare, Inc. and International Management Consulting, Inc. and the completions in 1998 of construction of a cold storage facility leased to Texas Freezer Company and two other build-to-suit projects. Solely as a result of completing these projects, annual lease revenue increased by $7,278,000 of which $5,265,000 was realized in 1999. The increase in income from equity investments was attributable to acquiring interests in properties net leased to Advanced Micro Devices, Inc., Intesys Technologies, Inc. and Compucom Systems, Inc. in December 1998, February 1999 and March 1999, respectively. The equity investment in the net lease with Ameriserve Food Distribution did not result in any significant contribution to the results of operations as three of the four Ameriserve properties were either under construction or being expanded. The increase in depreciation and amortization, noncash charges, was attributable to the completion of build-to-suit projects and new debt financing. The increase in interest expense was due to new limited recourse mortgage debt placed on the new Applied Materials building of $30,000,000 and additional mortgage financing of $2,500,000 on the Childtime properties as well as $30,500,000 of mortgage financing obtained during 1998. The increase in property expenses was due to the increase in asset management and performance fees. This increase was solely the result of the increase in the Company's real estate base.
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
During 1999, CPA(R):12 recognized a gain of $2,505,000 on the sale of 57,000 shares of Etec Systems, Inc.. In connection with structuring its initial transaction with Etec, CPA(R):12 had been granted warrants for the Etec common stock at an exercise price of $0.45 per share. Etec subsequently became a publicly-traded company. In 2000, Applied Materials purchased Etec and provided CPA(R):12 with an unconditional guaranty of Etec's lease obligations.
Other interest income decreased in both 1998 and 1999 as cash balances decreased. This decrease was expected as CPA(R):12 used its cash balances for additional real estate purchases. This trend should continue, as an objective of CPA(R):12 is to hold cash balances only sufficient for a working capital reserve.
During 1998, CPA(R):12 recognized a noncash charge of $4,281,000 for the writedown of a property leased to Lanxide Corporation to its expected fair value as Lanxide vacated the property and CPA(R):12 expected Lanxide to terminate the lease in connection with its bankruptcy. The Lanxide lease was structured so that the leases of three subtenants would be assumed by CPA(R):12 if Lanxide did not meet its lease obligations. With the lease termination, annual rental income from the Lanxide property decreased by approximately $445,000.
Because of the long-term nature of CPA(R):12's net leases, inflation and changing prices have not unfavorably affected CPA(R):12's revenues and net income. CPA(R):12's net leases generally have rent increases based on formulas indexed to increases in the Consumer Price Index, sales overrides or other periodic increases which are designed to increase lease revenues in the future.
Financial Condition
One of CPA(R):12's objectives is to use its cash flow from operations to meet operating expenses, service its mortgage debt, meet distribution requirements to minority interests, maintain adequate cash reserves and fund an increasing rate of dividends to shareholders. During 2000, cash flow from operations of $30,782,000 was used to pay dividends of $23,435,000, mortgage principal installments of $3,998,000 and distributions to holders of minority interests of $1,014,000. CPA(R):12 completed a build-to-suit project in February 2001 for Rave Reviews Cinemas, L.L.C. in Hickory Creek, Texas that will provide annual rents of $778,000.
CPA(R):12's investing activities included using $18,634,000 for investment in real estate including purchasing the Galyan's property and funding construction for the Rave Reviews Cinemas build-to-suit. CPA(R):12 received $15,752,000 on asset dispositions, primarily from the sale of the QMS, Inc. property. CPA(R):12 has no other commitments to fund major outlays at its properties. CPA(R):12 paid its Advisor deferred acquisition fees of $1,044,000 relating to purchases completed prior to 1999 in accordance with its Advisory Agreement. CPA(R):12 also received $4,195,000 as a return of capital from its equity investment in the Ameriserve properties. The return of the investment included mortgage funds that had been placed in an escrow account and held by the mortgage lender until certain conditions relating to the construction of the properties were satisfied. As of December 31, 2000, CPA(R):12 had fully funded its commitment for the Rave Reviews build-to-suit. As intended, CPA(R):12 continued to use available cash flow for additional investments in real estate during the year. CPA(R):12 continues to evaluate potential investments for acquisition and has the ability to provide additional funding for investment by obtaining funds from the placement of mortgage debt on several unleveraged properties and from its $20,000,000 line of credit.
In addition to paying dividends, making distributions to holders of minority interests and mortgage principal installments, CPA(R):12's significant financing activities included obtaining $28,589,000 of limited recourse mortgage debt, of which $16,589,000 was assumed on the purchase of Galyan's and $12,000,000 was placed on an existing property. CPA(R):12's financing strategy is to leverage substantially all of its properties with limited recourse mortgage debt so that the portfolio will be diversified to limit risk. A lender on a limited recourse mortgage loan has recourse only to the property collateralizing the loan and not to any of CPA(R):12's other assets. In addition, CPA(R):12 used $4,300,000 from its credit line of $20,000,000 to fund the Rave Reviews Cinemas construction. A balloon payment of $2,309,000 was paid in 2000. Scheduled balloon payments in 2001 are approximately $2,000,000. In 1999, CPA(R):12 entered into a credit agreement for a $40,000,000 credit facility that allows it to fund acquisitions on a transitional basis. The term of the credit agreement was extended through June 2001, and the Company reduced the amount available under the line to $20,000,000.
In January 2001, the Company obtained $10,000,000 from the issuance of shares of common stock pursuant to a private placement offering to an institutional shareholder. The shareholder had previously purchased 1,000,000 shares in CPA(R):12's public offering.
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
In connection with the purchase of its properties, CPA(R):12 requires the sellers to perform environmental reviews. Management believes, based on the results of such reviews, that CPA(R):12's properties were in substantial compliance with Federal and state environmental statutes at the time the properties were acquired. However, portions of certain properties have been subject to some degree of contamination, principally in connection with either leakage from underground storage tanks, surface spills from facility activities or historical on-site activities. In most instances where contamination has been identified, tenants are actively engaged in the remediation process and addressing identified conditions. Tenants are generally subject to environmental statutes and regulations regarding the discharge of hazardous materials and any related remediation obligations. In addition, CPA(R):12's leases generally require tenants to indemnify CPA(R):12 from all liabilities and losses related to the leased properties with provisions of such indemnification specifically addressing environmental matters. The leases generally include provisions which allow for periodic environmental assessments, paid for by the tenant, and allow CPA(R):12 to extend leases until such time as a tenant has satisfied its environmental obligations. Certain of the leases allow CPA(R):12 to require financial assurances from tenants such as performance bonds or letters of credit if the costs of remediating environmental conditions are, in the estimation of CPA(R):12, in excess of specified amounts. Accordingly, Management believes that the ultimate resolution of any environmental matter will not have a material adverse effect on CPA(R):12's financial condition, liquidity or results of operations.
REPORT of INDEPENDENT ACCOUNTANTS
To the Board of Directors of Corporate Property Associates 12 Incorporated and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Corporate Property Associates 12 Incorporated and Subsidiaries at December 31, 1999 and 2000, and the results of their operations and their 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 of America. These financial statements are the responsibility of Carey Asset Management Corp. (the "Advisor"); our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by the Advisor, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York March 13, 2001
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS of INCOME
The accompanying notes are an integral part of the consolidated financial statements.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS of SHAREHOLDERS' EQUITY For the years ended December 31, 1998, 1999 and 2000
The accompanying notes are an integral part of the consolidated financial statements.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS of CASH FLOWS
(a) Excludes changes in accounts payable and accrued expenses and accounts payable to affiliates balances which relate to the raising of capital (financing activities) rather than the Company's real estate operations.
(b) In connection with the acquisition of properties in 2000, the Company assumed mortgage payable obligations of $16,588,659.
The accompanying notes are an integral part of the consolidated financial statements.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Basis of Consolidation:
The consolidated financial statements include the accounts of Corporate Property Associates 12 Incorporated, its wholly-owned subsidiaries and a controlling interest in a limited liability company (collectively, the "Company"). All material inter-entity transactions have been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. The most significant estimates relate to the assessment of the recoverability of real estate assets and investments. Actual results could differ from those estimates.
Real Estate Leased to Others:
Real estate is leased to others on a net lease basis, whereby the tenant is generally responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance, repairs, renewals and improvements.
The Company diversifies its real estate investments among various corporate tenants engaged in different industries and by property type throughout the United States.
The leases are accounted for under either the direct financing or operating methods. Such methods are described below.
Direct financing method - Leases accounted for under the direct financing method are recorded at their net investment (Note 5). Unearned income is deferred and amortized to income over the lease terms so as to produce a constant periodic rate of return on the Company's net investment in the lease.
Operating method - Real estate is recorded at cost less accumulated depreciation, minimum rental revenue is recognized on a straight-line basis over the term of the leases, and expenses (including depreciation) are charged to operations as incurred.
When events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, the Company assesses the recoverability of its long-lived assets, including residual interests of real estate assets and investments, based on projections of undiscounted cash flows, without interest charges, over the life of such assets. In the event that such cash flows are insufficient, the assets are adjusted to their estimated fair value.
Substantially all of the Company's leases provide for either scheduled rent increases, periodic rent increases based on formulas indexed to increases in the Consumer Price Index or sales overrides.
For properties under construction, interest on mortgages is capitalized rather than expensed and rentals received are recorded as a reduction of capitalized project (i.e., construction) costs.
Depreciation:
Depreciation is computed using the straight-line method over the estimated useful lives of properties - generally 40 years.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Equity Investments:
The Company's interests in general partnerships and limited liability companies in which its ownership interests range from 33 1/3% to 50%, are accounted for under the equity method, i.e. at cost, increased or decreased by the Company's share of earnings or losses, less distributions.
Cash and Cash Equivalents:
The Company considers all short-term, highly liquid investments that are both readily convertible to cash and have a maturity of generally three months or less at the time of purchase to be cash equivalents. Items classified as cash equivalents include commercial paper and money market funds. At December 31, 1999 and 2000, the Company's cash and cash equivalents were held in the custody of two financial institutions, and which balances at times exceed federally insurable limits. The Company mitigates this risk by depositing funds with major financial institutions.
Other Assets:
Included in other assets are deferred charges and deferred rental income. Deferred charges are costs incurred in connection with mortgage financings and refinancings and are amortized over the terms of the mortgages. Deferred rental income is the aggregate difference for operating leases between scheduled rents which vary during the lease term and rent recognized on a straight-line basis.
The Company's marketable equity securities at December 31, 1999 consisted of 11,261 shares of common stock of Etec Systems, Inc. ("Etec") and were classified as available-for-sale securities and reported at fair value with the Company's interest in unrealized gains and losses on these securities reported as a separate component of shareholder's equity (accumulated other comprehensive income). As of December 31, 1999, fair value of the Etec common stock was $483,269. The Company sold the remaining 11,261 Etec shares in January 2000 at a gain of approximately $775,000. The Company disposed of its marketable equity securities in 2000.
Offering Costs:
Costs incurred in connection with the raising of capital through the sale of common stock are charged to shareholders' equity upon the issuance of shares.
Treasury Stock:
Treasury stock is recorded at cost.
Deferred Acquisition Fees:
Fees are payable for services provided by W.P. Carey & Co. LLC (the "Advisor") to the Company relating to the identification, evaluation, negotiation, financing and purchase of properties. A portion of such fees are deferred and are payable in annual installments with each installment equal to .25% of the purchase price of the properties over no less than eight years following the first anniversary of the date a property was purchased.
Earnings Per Share:
The Company has a simple equity capital structure with only common stock outstanding. As a result, the Company has presented basic per-share amounts only for all periods presented in the accompanying consolidated financial statements.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Federal Income Taxes:
The Company is qualified as a REIT as of December 31, 2000 as defined under the Internal Revenue Code of 1986. The Company is not subject to Federal income taxes on amounts distributed to shareholders provided it distributes at least 95% of its REIT taxable income to its shareholders through December 31, 2000 and 90% thereafter, and meets certain other conditions.
Operating Segments:
Accounting standards have been established for the way public business enterprises report selected information about operating segments and guidelines for defining the operating segments of an enterprise. Based on the standards' definition, the Company has concluded that it engages in a single operating segment.
Reclassification:
Certain prior year amounts have been reclassified to conform to the current year's financial statement presentation.
2. Organization and Offering:
The Company was formed on July 30, 1993 for the purpose of engaging in the business of investing in and owning industrial and commercial real estate. Subject to certain restrictions and limitations, the business of the Company is managed by the Advisor.
An initial offering of the Company's shares which commenced on February 18, 1994 concluded on January 26, 1996, at which time the Company had issued an aggregate of 8,135,992 shares ($81,359,920). On February 2, 1996, the Company commenced an offering for a maximum of 20,000,000 shares of common stock. The shares were offered to the public on a "best efforts" basis at a price of $10 per share. On August 22, 1997, the Company registered an additional 300,000 shares. The second offering was concluded on September 18, 1997, by which time 20,198,459 ($201,984,590) shares were issued.
In connection with performing services relating to the Company's real estate purchases, affiliates of the Company received acquisition fees of $724,763, $305,783 and $173,004 in 1998, 1999 and 2000, respectively.
3. Transactions with Related Parties:
The Company's asset management and performance fees are each 1/2 of 1% of Average Invested Assets, as defined in the Advisory Agreement between the Company and the Advisor. Asset management fees were $1,751,817, $2,084,495 and $2,723,011 in 1998, 1999 and 2000, respectively, with performance fees in like amount. General and administrative expense reimbursements consist primarily of the actual cost of personnel needed to provide administrative services necessary to the operation of the Company. General and administrative expense reimbursements were $560,957, $794,930 and $1,097,817 in 1998, 1999 and 2000, respectively.
In connection with performing services related to the Company's real estate purchases in 1998, 1999 and 2000, affiliates of the Company received structuring and development fees of $1,811,907, $764,458 and $432,511, respectively. The affiliate is also entitled to receive deferred acquisition fees over a period of no less than eight years, subject to the 2%/25% Guidelines limitation.
The Advisor is obligated to reimburse the Company for the amount by which operating expenses of the Company exceed the 2%/25% Guidelines (the greater of 2% of Average Invested Assets or 25% of Net Income) as defined in the Advisory Agreement. If in any year when the operating expenses of the Company exceed the 2%/25% Guidelines, the Advisor will have an obligation to reimburse the Company for such excess, subject to certain conditions. If the Independent Directors find that such expenses were justified based on any unusual and nonrecurring factors which they deem sufficient, the Advisor may be reimbursed in future years for the full amount or any portion of such excess expenses, but only to the extent such reimbursement would not cause the Company's operating expenses to exceed the 2%/25% Guidelines in any such year.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Advisor will be entitled to receive subordinated disposition fees based upon the cumulative proceeds arising from the sale of Company assets since the inception of the Company, subject to certain conditions. Pursuant to the subordination provisions of the Advisory Agreement, the disposition fees may be paid only after the shareholders receive 100% of their initial investment from the proceeds of asset sales and a cumulative annual return of 6% since the inception of the Company. The Advisor's interest in such disposition fees amounts to $448,681 through December 31, 2000. Payment of such amount, however, cannot be made until the subordination provisions are met. Management has concluded that payment of such disposition fees is probable and all fees from completed property sales have been accrued. Subordinated disposition fees are included in the determination of realized gain or loss on the sale of properties. The obligation for disposition fees is included in accounts payable to affiliates in the accompanying consolidated financial statements.
The Company is a participant in an agreement with certain affiliates for the purpose of leasing office space used for the administration of real estate entities and for sharing the associated costs. Pursuant to the terms of the agreement, the Company's share of rental, occupancy and leasehold improvement costs is based on gross revenues. Expenses incurred in 1998, 1999 and 2000 were $143,003, $208,046 and $234,774, respectively.
The Company's interests in properties jointly held with affiliated entities range from 27.38% to 50.1% with such interests held as tenants-in-common and through ownership interests in general partnerships and limited liability companies. The Company accounts for its undivided interest in assets and liabilities relating to tenants-in-common interests on a proportional basis. Ownership interests in general partnerships and limited liability companies, owned with an affiliate, are accounted for under the equity method when such ownership interest is 50% or less. Ownership interests in general partnership and limited liability companies which are greater than 50% are consolidated with the ownership interest of the affiliate accounted for as a minority interest.
4. Real Estate Leased to Others Accounted for Under the Operating Method:
Scheduled future minimum rents, exclusive of renewals, under noncancellable operating leases amount to approximately $37,991,000 in 2001; $38,123,000 in 2002; $38,373,000 in 2003; $38,535,000 in 2004, $38,260,000 in 2005 and aggregate approximately $545,788,000 through 2021.
Contingent rents were approximately $71,000, $189,000 and $746,000 in 1998, 1999 and 2000, respectively.
5. Net Investment in Direct Financing Leases:
Net investment in direct financing leases is summarized as follows:
Scheduled future minimum rents, exclusive of renewals, under noncancellable direct financing leases are approximately $4,857,000 in each of the years 2001 through 2003, $4,897,000 in 2004 and $4,903,000 in 2005 and aggregate approximately $80,997,000 through 2024.
Contingent rents were approximately $13,000, $77,000 and $194,000 in 1998, 1999 and 2000 respectively.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Mortgage Notes Payable and Line of Credit:
Mortgage notes payable, all of which are limited recourse to the Company, are collateralized by an assignment of various leases and by real property with a carrying value of approximately $265,157,000. As of December 31, 2000, mortgage notes payable had interest rates ranging from 6.5% to 10.5% per annum.
Scheduled principal payments during each of the five years following December 31, 2000 are as follows:
The Company maintains a credit facility that provides for borrowings of up to $20,000,000. Advances from the line of credit bear interest at an annual rate indexed to the LIBOR rate. The credit agreement has financial covenants that require the Company to maintain certain balance sheet items and meet or exceed certain operating and coverage ratios. The Company is in compliance with these covenants. The facility expires in June 2001 and had a balance of $4,300,000 as of December 31, 2000.
Advances from the credit agreement will bear interest, at the option of the Company, at an annual rate of either (i) the London InterBank Offered Rate plus 1.8% or (ii) the lesser of the lender's prime rate plus .25% or the Federal Fund Effective Rate plus .50%. In addition, the Company will pay a fee of .25% per annum on the unused portion of the credit line.
The credit agreement has financial covenants that require the Company to (i) maintain a minimum equity value of $200,000,000 plus 85% of the cash proceeds received by the Company from issuance of any new equity interests, (ii) maintain cash balances of at least $2,000,000 and (iii) meet or exceed certain operating and coverage ratios. As of December 31, 2000, the Company was in compliance with the financial covenants.
Interest paid, excluding capitalized interest, was $7,758,956, $10,460,588 and $11,210,107 in 1998, 1999 and 2000, respectively.
In connection with the placement of mortgages, fees of $724,763, $705,783 and $573,004 were paid to an affiliate of the Company in 1998, 1999 and 2000, respectively.
7. Dividends Payable:
Dividends paid to shareholders consist of ordinary income, capital gains, return of capital or a combination thereof for income tax purposes. For the three years ended December 31, 2000, dividends paid per share reported for tax purposes were as follows:
A dividend of $.2047 per share for the quarter ended December 31, 2000 ($5,871,722) was declared in December 2000 and paid in January 2001.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Acquisition of Real Estate:
On December 7, 2000, the Company purchased a property in Hickory Creek, Texas on which a building is being constructed on a build-to-suit basis and entered into a net lease with Rave Reviews Hickory Creek I L.P. The lease obligations are unconditionally guaranteed by Rave Reviews Cinemas, L.L.C. The total purchase price was $6,936,372. The lease has an initial term of 20 years with one ten-year renewal term and provides for an initial annual rent, which will be based on the total costs necessary to complete the project, of up to $778,347, with annual increases based on a formula indexed to the Consumer Price Index beginning on the second lease anniversary. Construction was completed in February 2001. Rave Reviews has granted warrants to the Company that represent 3.22% of Rave Reviews' Class A Units.
9. Lease Revenues:
The Company's operations consist of the investment in and the leasing of industrial and commercial real estate. The financial reporting sources of 1998, 1999 and 2000 lease revenues are as follows:
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In 1998, 1999 and 2000, the Company earned its share of net lease revenues from its direct and indirect ownership of real estate from the following lease obligors:
(a) Net of amounts applicable to minority interests owned by Corporate Property Associates 14 Incorporated ("CPA(R): 14")
(b) Represents the Company's proportionate share of lease revenues from its equity investment.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Equity Investments:
The Company owns equity interests with affiliates in eight partnerships and limited liability companies. The affiliates have investment objectives that are similar to those of the Company. These ownership interests consist of a 37% interest in a general partnership which net leases 17 retail stores to Best Buy Co., Inc., a 50% interest in a general partnership that net leases two office buildings to Sicor, Inc., a 50% interest in a limited liability company that net leases two office buildings to The Upper Deck Company, a 33 1/3% interest in a limited liability company that net leases a building to Advanced Micro Devices, Inc., a 33 1/3 % interest in a limited liability company that net leases a building to Compucom Systems, Inc. ("Compucom"), a 50% interest in a limited liability company that net leases a building to Intesys Technologies, Inc. ("Intesys") and 40% interests in two limited liability companies that own four properties, including three leased to Ameriserve Food Distribution, Inc. ("Ameriserve"). The interests in the Intesys, Compucom and Ameriserve properties were acquired in 1999.
Summarized combined financial information of the Company's equity investees is as follows:
11. Writedown to Fair Value:
In March 1996, the Company entered into a direct financing lease for a property in Newark, Delaware with Lanxide Corporation ("Lanxide") that was purchased for $8,679,000. The Company financed the purchase with $4,400,000 from two limited recourse mortgages. In January 1998, Lanxide filed a voluntary bankruptcy petition and subsequently vacated the property. Based on the Company's expectation that future cash flow from the properties would be reduced, Management concluded that there had been an impairment of the value to the property. Based on a writedown of the Company's interest in the property to an estimated fair value of $4,398,000, the Company incurred a noncash charge of $4,281,421 in 1998.
12. Extraordinary Charge on Extinguishment of Debt:
In February 1995, the Company purchased land and buildings in Hayward, California for $11,860,000 and entered into a net lease with Etec Systems, Inc. ("Etec"). In August 1996, the Company entered into a commitment to construct an additional building at the Etec property, and in January 1997, the Company completed construction of the building for $5,241,000.
In February 1998, the Company entered into a series of transactions including paying off the existing limited recourse mortgage loan on the Etec property, funding additional improvements at the Etec property of approximately $11,518,000, entering into a commitment and construction agency agreement to fund additional improvements of $52,356,000, completed in 1999, amending the existing lease with Etec and transferring ownership of the Etec property to a limited liability company in which CPA(R):14 has an ownership interest. At that time, the Company paid off the $7,957,947 existing limited recourse mortgage loan collateralized by the Etec property. In connection with paying off the loan, the Company incurred a prepayment charge of $379,246 which has been recorded in 1998 as an extraordinary charge on the extinguishment of debt. In 2000, Etec was purchased by Applied Materials, Inc. In connection with the change in control of Etec, Applied Materials, Inc. agreed to provide an unconditional guarantee of Etec's lease obligations.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Gains (Losses) on Sale of Real Estate and Securities:
In July 1999, the Company sold excess land at the property leased to Rheometric Scientific, Inc. ("Rheometric"). Pursuant to an agreement between the Company and Rheometric, a portion of the sales proceeds from the sale of the land would be due to Rheometric. Rheometric agreed that its share of any proceeds be held in an interest-bearing escrow account, and be released to Rheometric only upon Rheometric's satisfaction of certain financial covenants under the lease. The Company recognized a loss on sale of $196,323, and currently holds $256,315 in an interest-bearing account on behalf of Rheometric.
In February 1995, the Company was granted warrants for 159,314 shares of Etec Systems, Inc. ("Etec") common stock, exercisable at $0.45 share in connection with structuring its net lease with ETEC. The Company agreed, subsequently to cancel its rights to 90,546 warrants for $2,634,000 and used such funds to prepay a portion of the then outstanding mortgage loan on the Etec property. In September 1997, the Company exercised a cashless conversion of its remaining 68,768 Etec warrants for which it received 68,261 Etec shares. In December 1999, the Company sold 57,000 shares of its Etec stock at a gain of $2,356,001.
The Company recognized a gain of $148,877 in connection with the redemption of warrants that had been granted by Q Clubs, Inc. in connection with structuring net leases with the Company.
In January 2000, the Company sold its remaining 11,261 Etec shares at a gain of $778,946.
In February 1997, the Company purchased land and building in Mobile, Alabama and entered into a net lease agreement with QMS, Inc. ("QMS"). In June 2000, the Company sold the QMS property for $14,479,000 and recognized a gain on sale of $1,201,121. In November 2000, the Company converted QMS warrants for QMC common stock it received in connection with structuring the QMS lease for 100,000 shares of QMS and sold the shares at a gain of $269,215.
In connection with structuring its net lease with Texas Freezer Company, Inc. ("Texas Freezer") in September 1997, the Company was granted warrants to purchase 30,390 shares of Texas Freezer. In June 2000, Texas Freezer sold substantially all of its assets to Pacific Logistics, L.P. and P&O Cold Logistics, LLC. In connection with the sale, Texas Freezer was required to satisfy the rights of warrant holders. Accordingly, the Company recognized a gain of $191,000 in connection with receiving a lump sum payment in satisfaction of its rights.
14. Disclosures About Fair Value of Financial Instruments:
The carrying amounts of cash, receivables and accounts payable and accrued expenses approximate fair value because of the short maturity of these items.
The Company estimates that the fair value of mortgage notes payable approximates the carrying value of such mortgage notes was approximately $135,848,000 and $159,174,000 at December 31, 1999 and 2000, respectively. The fair value of the mortgage notes payable was evaluated using a cash flow model with a discount rate that takes into account the credit of the tenant and interest rate risk.
In conjunction with executing a number of its leases, the Company was granted warrants to purchase common stock of the lessee or lease guarantor. To the extent that the lessee is not a publicly traded company, the warrants were judged at the time of issuance to be speculative in nature and a nominal cost basis is attributed to them. The Company believes it is not practicable to estimate the fair value of its stock warrants for closely-held companies. For publicly traded companies, fair value represents the amount by which quoted market value of common stock exceeds the exercise price at December 31, 1999 and 2000. The Company has warrants to purchase 150,000 shares of Vermont Teddy Bear Co., Inc. ("Vermont Teddy Bear") common stock and 464,160 shares of Rheometric Scientific, Inc. ("Rheometric") common stock, both of which have publicly-traded common stock. There is no established market for the stock
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
warrants of these companies. As of December 31, 1999, the warrants had no fair value as the exercise prices were greater than the quoted market value, and at December 31, 2000 the warrants had a fair value of $1,138,170.
15. Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", effective January 1, 2001, which establishes accounting and reporting standards for derivative instruments. The Company believes that upon adoption SFAS No. 133 will not have a material impact on the consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 1 ("SAB 101") which provides guidance on several revenue recognition issues including recognition of rents based upon lessees' sales. Certain of the Company's leases provide for additional rents to be paid based upon the level of sales achieved by the lessee. The percentage rents are recorded once the required sales level is achieved and are included in the consolidated statements of income in rental revenue and interest income from direct financing leases. The adoption of SAB 101 did not have a significant impact on the consolidated financial statements.
MARKET FOR THE PARTNERSHIP'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Shares of the Company.
As of December 31, 2000 there were 13,852 holders of record of the Shares of the Company.
In accordance with the Prospectus of the Company, dividends will be paid quarterly regardless of the frequency with which such dividends are declared. The Company is required to distribute annually 95% of its Distributable REIT Taxable Income (90% in 2001 and thereafter) to maintain its status as a REIT. The following shows the frequency and amount of dividends paid for the past three years.
REPORT ON FORM 10-K
The Advisor will supply to any shareholder, upon written request and without charge, a copy of the Annual Report on Form 10-K for the year ended December 31, 2000 as filed with the Securities and Exchange Commission.