-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G8xxw4O02cTpDf0Gn+E2YEbxSX29BH0YcERn6baMYMNBlxq9GKy8BbEJ0LNykoko hK+fFHoki+wzK9HsngfooQ== 0000928790-96-000103.txt : 19960514 0000928790-96-000103.hdr.sgml : 19960514 ACCESSION NUMBER: 0000928790-96-000103 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960510 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HUTTON GSH COMMERCIAL PROPERTIES 3 CENTRAL INDEX KEY: 0000725767 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 112680561 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13341 FILM NUMBER: 96561753 BUSINESS ADDRESS: STREET 1: 388 GREENWICH ST CITY: NEW YORK STATE: NY ZIP: 10013 BUSINESS PHONE: 212-526-32 MAIL ADDRESS: STREET 1: 3 WORLD FINANCIAL CENTER STREET 2: 29TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10285 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] Commission file number: 0-13341 COMMERCIAL PROPERTIES 3, L.P. (formerly Hutton/GSH Commercial Properties 3) Exact name of registrant as specified in its charter Virginia 11-2680561 - ------------------------- ---------------------- State or other jurisdiction of I.R.S. Employer Identification No. incorporation or organization 3 World Financial Center, 29th Floor New York, NY ATTN: Andre Anderson 10285 - -------------------------------------- -------- Address of principal executive offices zip code Registrant's telephone number, including area code: (212) 526-3237 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: UNITS OF LIMITED PARTNERSHIP INTEREST Title of Class Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X DOCUMENTS INCORPORATED BY REFERENCE: Portions of Prospectus of Registrant dated December 13, 1983 (included in Amendment No. 1 to Registration Statement No. 2-85936, of Registrant filed December 13, 1983) are incorporated by reference to Part III. Portions of Parts I, II and IV are incorporated by reference to the Partnership's Annual Report to Unitholders for the year ended December 31, 1995 filed as an exhibit under Item 14. PART I Item 1. Business (a) General Development of Business Commercial Properties 3, L.P. (the "Registrant" or the "Partnership") (formerly Hutton/GSH Commercial Properties 3), is a Virginia limited partnership formed on April 19, 1984, of which Real Estate Services VII, Inc. ("RES"), formerly Hutton Real Estate Services VII, Inc. (See Item 10. "Certain Matters Involving Affiliates"), and HS Advisors III, Ltd. ("HS Advisors"), are the general partners (the "General Partners"). Commencing December 13, 1983, the Registrant began offering through E.F. Hutton & Company Inc., a former affiliate of the Registrant, up to a maximum of 120,000 units of limited partnership interest (the "Units") at $500 per Unit. The Units were registered under the Securities Act of 1933, as amended (the "Act"), under Registration Statement No. 2-85936, which Registration Statement was declared effective on December 13, 1983. The offering of Units was terminated on August 9, 1984. Upon termination of the offering, the Registrant had accepted subscriptions for 109,378 Units for an aggregate of $54,689,000. After deducting offering costs and initial working capital reserves, approximately $46,000,000 was available for investment in real estate. As of December 31, 1995, $44,995,452 of such proceeds had been invested in an office and light industrial complex, one limited partnership and two joint ventures, each of which owns a specific office building, and $1,093,780 of uncommitted funds were distributed to the Limited Partners as a return of capital on May 15, 1986. The Registrant also distributed $437,512 in 1986 and $218,756 in 1985 to the Limited Partners as a return of capital, which sums represented the excess of the initial working capital reserves set aside for present and future operating requirements. To the extent that funds committed for investment or held as a working capital reserve have not been expended (and have not otherwise been distributed to the Limited Partners as a return of capital), the Registrant has invested such funds in bank certificates of deposit, unaffiliated money market funds or other highly liquid short-term investments where there is appropriate safety of principal, in accordance with the Registrant's investment objectives and policies. (b) Financial Information About Industry Segment The Registrant's sole business is the ownership and operation of the Properties. All of the Registrant's revenues, operating profit or losses and assets relate solely to such industry segment. (c) Narrative Description of Business Incorporated by reference to Note 1 "Organization" of the Notes to the Consolidated Financial Statements in the Partnership's Annual Report to Unitholders for the year ended December 31, 1995 filed as an exhibit under Item 14. The Registrant's principal investment objectives with respect to the Properties (in no particular order of priority) are: 1) Capital appreciation; 2) Distributions of net cash from operations attributable to rental income; and 3) Preservation and protection of capital. Distributions of net cash from operations will be the Registrant's objective during its operational phase, while the preservation and appreciation of capital will be the Registrant's long-term objective. Future distributions will be made from rental operations with respect to the Registrant's investment in the Properties, as well as from interest on short-term investments and return of capital. The attainment of the Registrant's investment objectives will depend on many factors, including future economic conditions in the United States as a whole and, in particular, in the localities in which the Registrant's Properties are located, especially with regard to achievement of capital appreciation. The Registrant expects to sell its Properties at such time or times as it deems appropriate, taking into consideration such factors as market conditions for these types of properties, leasing conditions, property cash flow and the possible risks of continued ownership. No Property will be sold, financed or refinanced by the Registrant without agreement of both General Partners. Proceeds from any future sale, financing or refinancing of the Properties will not be reinvested but will be distributed to the Limited Partners as a return of capital, so that the Registrant, in effect, will be self-liquidating. As partial payment for Properties sold, the Registrant may receive purchase money obligations collateralized by mortgages or deeds of trust. In such cases, the amount of such obligations will not be included in net proceeds from sale or refinancing (distributable to the Limited Partners) until and to the extent the obligations are realized in cash, sold or otherwise liquidated. (d) Competition Incorporated by reference to the section entitled "Property Profiles & Leasing Update" in the Partnership's Annual Report to Unitholders for the year ended December 31, 1995 filed as an exhibit under Item 14. (e) Employees The Registrant has no employees. Item 2. Properties Description of Properties and material leases incorporated by reference to the section entitled "Property Profiles & Leasing Update" in the Partnership's Annual Report to Unitholders for the year ended December 31, 1995 filed as an exhibit under Item 14 and Note 5 "Rental Income Under Operating Leases" of the Notes to the Consolidated Financial Statements. Item 3. Legal Proceedings The Registrant is not subject to any material pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of Unitholders during the fourth quarter of 1995. PART II Item 5. Market for Registrant's Limited Partnership Units and Related Unitholder Matters (a) Market Information No established public trading market has developed for the Units, and it is not anticipated that such a market will develop in the future. (b) Holders As of December 31, 1995, the number of holders of Units was 5,452. (c) Distributions Cash distributions paid to the Limited Partners for the two years ended December 31, 1995 incorporated by reference to the section entitled "Message to Investors" in the Partnership's Annual Report to Unitholders for the year ended December 31, 1995 filed as an exhibit under Item 14. Item 6. Selected Financial Data Incorporated by reference to the section entitled "Financial Highlights" in the Partnership's Annual Report to Unitholders for the year ended December 31, 1995, which is filed as an exhibit under Item 14. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources - ------------------------------- The Partnership had cash and cash equivalents totaling $2,134,370 at December 31, 1995, compared with $1,637,501 at December 31, 1994. The increase is due to net cash provided by operating activities in excess of additions to real estate assets totaling $458,496 and the payment of cash distributions to partners totaling $1,212,179. The Partnership had a restricted cash balance of $237,566 at December 31, 1995, compared with $216,079 at December 31, 1994. Tenant security deposits comprise the restricted cash balance. Unexpended funds and working capital reserves are invested in unaffiliated money market funds and interest on such invested balances accrues to the benefit of the Partnership. Accounts and rent receivable totaled $64,616 at December 31, 1995 compared to $28,326 at December 31, 1994. The increase is due primarily to the timing of the receipt of rental payments. Real estate assets decreased by $5,532,585 in 1995 due primarily to the Partnership's write down of the Quorum property to its estimated fair market value, pursuant to the requirements of FAS 121. The determination of the estimated fair market value of the property was based upon the most recent appraisal of the property, which is conducted annually. The balance of the decrease is due to depreciation of $2,062,083 offset by additions to real estate of $458,496. Accounts payable and accrued expenses decreased to $237,185 at December 31, 1995 from $426,642 at year-end 1994. The decrease is primarily due to tenant and building improvement invoices received but unpaid at December 31, 1994. Due to affiliates totaled $28,479 at December 31, 1995, compared to $50,702 at December 31, 1994. The decrease is due largely to the timing of payments. Distribution payable increased to $563,804 at December 31, 1995 from $281,902 at December 31, 1994 primarily reflecting an increase in the Partnership's quarterly cash distribution. The Registrant declared cash distributions to Limited Partners of $13.25 per Unit for the year ended December 31, 1995. Included in this total is a cash distribution of $5.00 per Unit for the quarter ended December 31, 1995, which was paid on February 12, 1996. Due to improving Partnership operations, and following a review of the Partnership's anticipated future cash needs and current cash position, the General Partners increased the 1995 fourth quarter distribution from its previous level of $2.50 per Unit for the first and second quarters and $3.25 per Unit for the third quarter to $5 per Unit. In addition, on March 29, 1996 the Partnership paid a special cash distribution in the amount of $13.30 per Unit. The distribution was made from the Partnership's cash reserves. The timing and amount of future distributions will be determined quarterly and will depend on several factors, including the adequacy of rental income generated by current leases and Partnership cash flow. On March 15, 1996, based upon, among other things, the advice of Partnership counsel, Skadden, Arps, Slate, Meagher & Flom, the General Partners adopted a resolution that states, among other things, if a Change of Control (as defined below) occurs, the General Partners may distribute the Partnership's cash balances not required for its ordinary course day-to-day operations. "Change of Control" means any purchase or offer to purchase more than 10% of the Units that is not approved in advance by the General Partners. In determining the amount of the distribution, the General Partners may take into account all material factors. In addition, the Partnership will not be obligated to make any distribution to any partner and no partner will be entitled to receive any distribution until the General Partners have declared the distribution and established a record date and distribution date for the distribution. The Partnership filed a Form 8-K disclosing this resolution on March 21, 1996. Results of Operations 1995 vs 1994 - ------------ Partnership operations resulted in a net loss of $3,631,162 for the year ended December 31, 1995, compared to net loss of $331,534 for the corresponding period in 1994. The increase in net loss is primarily attributable to a $3,928,998 loss recognized on the write down of the Quorum II property. This write down was recorded on the 1995 Financial Statements only and had no impact on Limited Partners' tax basis capital accounts. See Note 2 "Significant Accounting Policies - Accounting for Impairment", Note 4 "Real Estate Investments" and Note 7 "Reconciliation of Financial Statement Net Loss to Federal Income Tax Basis Net Loss" of the Notes to the Consolidated Financial Statements in the Partnership's Annual Report to Unitholders for the year ended December 31, 1995 filed as an exhibit under Item 14. Rental income totaled $5,047,528 for the year ended December 31, 1995 compared to $4,641,823 for the year ended December 31, 1994. The increase is due to higher occupancy and rent escalations at three of the Partnership's four properties. Interest income totaled $110,529 for the year ended December 31, 1995, compared to $49,446 for the year ended December 31, 1994. The increase is due primarily to a larger average cash balance in 1995. Property operating expenses totaled $2,283,025 for the year ended December 31, 1995, compared to $2,231,683 for the year ended December 31, 1994. The increase is largely due to higher grounds maintenance expense at Fort Lauderdale Commerce Center. Depreciation and amortization decreased to $2,278,567 for the year ended December 31, 1995 from $2,388,925 for the year ended December 31, 1994, primarily due to a lower depreciable asset base in 1995. The Partnership incurred bad debt expense of $77,710 for the year ended December 31, 1994 reflecting the uncollectibility of delinquent rent. The Partnership incurred no bad debt expense in 1995. For the year ended December 31, 1995, net income of $50,022 was allocated to the co-venturer of Three Financial Centre. This allocation resulted from the property's net income, prior to depreciation expense, being in excess of net cash distributed from operations. As of December 31, 1995, lease levels at each of the properties were as follows: Metro Park Executive Center - 78%; Fort Lauderdale Commerce Center - 88%; Three Financial Centre - 94 %; Quorum II Office Building - 98%. 1994 vs 1993 - ------------ For the year ended December 31, 1994, the Partnership's operations resulted in a net loss of $331,534, compared to a net loss of $910,071 for the corresponding period in 1993. The decrease in net loss is primarily attributable to an increase in rental income and lower depreciation and amortization expense. Rental income totaled $4,641,823 for the year ended December 31, 1994 compared to $4,181,367 for the year ended December 31, 1993. The increase is due to higher occupancy and rent escalations at three of the Partnership's four properties. Property operating expenses totaled $2,231,683 for the year ended December 31, 1994 compared with $2,114,664 for the year ended December 31, 1993. The increase is primarily attributable to an increase in building repairs and maintenance during 1994, and to increases in insurance premiums. Bad debt expense, reflecting the uncollectibility of delinquent rent, was $77,710 for the year ended December 31, 1994, compared to $14,427 for the corresponding period in 1993. Depreciation and amortization decreased to $2,388,925 for the year ended December 31, 1994, from $2,680,516 for the year ended December 31, 1993. The decline is primarily attributable to a lower depreciable asset base in 1994. For the year ended December 31, 1994, net income of $62,186 and $22,225, was allocated to the co-venturers of Three Financial Centre and Quorum, respectively. This allocation resulted from the properties' net income, prior to depreciation expense, being in excess of net cash distributed from operations. As of December 31, 1994, lease levels at each of the properties were as follows: Metro Park Executive Center - 91%; Fort Lauderdale Commerce Center - 82%; Three Financial Centre - 93 %; Quorum II Office Building - 90%. Item 8. Financial Statements and Supplementary Data Incorporated by reference to the Partnership's Annual Report to Unitholders for the year ended December 31, 1995, which is filed as an exhibit under Item 14. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant The Registrant has no officers and directors. RES and HS Advisors, the General Partners of the Registrant, jointly manage and control the affairs of the Registrant and have general responsibility and authority in all matters affecting its business. Real Estate Services VII, Inc. - ------------------------------ Real Estate Services VII, Inc. ("RES"), formerly known as Hutton Real Estate Services VII, Inc., is a Delaware corporation formed on August 2, 1982 and is an affiliate of Lehman Brothers Inc. ("Lehman"). See the section captioned "Certain Matters Involving Hutton Affiliates" below for a description of the Hutton Group's acquisition by Shearson Lehman Brothers, Inc. ("Shearson") and the subsequent sale of certain of Shearson's domestic retail brokerage and asset management businesses to Smith Barney, Harris Upham & Co. Incorporated, which resulted in a change in the general partner's name. The names and ages of, as well as the positions held by, the directors and executive officers of RES are set forth below. There are no family relationships between any officer or director and any other officer or director. Certain officers and directors of RES are now serving (or in the past have served) as officers and directors of entities which act as general partners of a number of real estate limited partnerships which have sought protection under the provisions of the Federal Bankruptcy Code. The partnerships which have filed bankruptcy petitions own real estate which has been adversely affected by the economic conditions in the markets in which that real estate is located and, consequently, the partnerships sought the protection of the bankruptcy laws to protect the partnership's assets from loss through foreclosure. Name Office ------------ ------------ Rocco F. Andriola Director, President, Chief Financial Officer Kenneth L. Zakin Director, Vice President William Caulfield Vice President Michael Marron Vice President Lawrence M. Ostow Vice President Roy W. Pollitt Vice President Rocco F. Andriola, 37, is a Senior Vice President of Lehman Brothers in its Diversified Asset Group. Since joining Lehman Brothers in 1986, Mr. Andriola has been involved in a wide range of restructuring and asset management activities involving real estate and other direct investment transactions. From 1986-89, Mr. Andriola served as a Vice President in the Corporate Transactions Group of Shearson Lehman Brothers' office of the general counsel. Prior to joining Lehman Brothers, Mr. Andriola practiced corporate and securities law at Donovan Leisure Newton & Irvine in New York. Mr. Andriola received a B.A. degree from Fordham University, a J.D. degree from New York University School of Law, and an LL.M degree in Corporate Law from New York University's Graduate School of Law. Kenneth L. Zakin, 48, is a Senior Vice President of Lehman Brothers Inc. and has held such title since November 1988. He is currently a senior manager in Lehman Brothers' Diversified Asset Group and was formerly group head of the Commercial Property Division of Shearson Lehman Brothers' Direct Investment Management Group responsible for the management and restructuring of limited partnerships owning commercial properties throughout the United States. From January 1985 through November 1988, Mr. Zakin was a Vice President of Shearson Lehman Brothers Inc. Mr. Zakin is a director of Lexington Corporate Properties, Inc. He is a member of the Bar of the State of New York and previously practiced as an attorney in New York City from 1973 to 1984 specializing in the financing, acquisition, disposition, and restructuring of real estate transactions. Mr. Zakin is a member of the Real Estate Lender's Association and is currently an associate member of the Urban Land Institute and a member o f the New York District Council Advisory Services Committee. He received a Juris Doctor degree from St. John's University School of Law in 1973 and a B.A. degree from Syracuse University in 1969. William Caulfield, 36, is a Vice President of Lehman Brothers Inc. and is responsible for investment management of commercial real estate in the Diversified Asset Group. Prior to the Shearson/Hutton merger in 1988, Mr. Caulfield was a Senior Analyst with E.F. Hutton since October 1986 in Hutton's Partnership Administration Group. Before joining Hutton, Mr. Caulfield was a Business Systems Analyst at Eaton Corp. from 1985 to 1986. Prior to Eaton, he was an Assistant Treasurer with National Westminster Bank USA. Mr. Caulfield holds a B.S. degree in Finance from St. John's University and an M.B.A. from Long Island University - C.W. Post Campus. Michael Marron, 32, is a Vice President of Lehman Brothers Inc. and has been a member of the Diversified Asset Group since 1990 where he has actively managed and restructured a diverse portfolio of syndicated limited partnerships. Prior to joining Lehman Brothers, Mr. Marron was associated with Peat Marwick Mitchell & Co. serving in both its audit and tax divisions from 1985 to 1989. Mr. Marron received a B.S. degree in accounting from the State University of New York at Albany in 1985 and is a Certified Public Accountant. Lawrence M. Ostow, 28, is a Vice President of Lehman Brothers Inc. and is responsible for the management of commercial real estate in the Diversified Asset Group. Mr. Ostow joined Lehman Brothers in September 1992. Prior to that, Mr. Ostow was a Senior Consultant with Arthur Andersen & Co. in the Real Estate Services Group, beginning in July 1990. Mr. Ostow is a candidate for an M.B.A. from the Stern School of Business in 1997 and earned a B.A. degree in Economics from the University of Michigan in 1990. Roy W. Pollitt, 24, is an Associate of Lehman Brothers Inc. and is responsible for the management of various commercial real estate portfolios in the Diversified Asset Group. Mr. Pollitt joined Lehman Brothers in November 1995. Prior to that, Mr. Pollitt had attained Senior status with Arthur Anderson L.L.P. in the Real Estate Services Group, where he had been employed since May 1992. Mr. Pollitt is a candidate to become a Certified Public Accountant and earned a B.A. degree in Accounting from the Hagan School of Business at Iona College in May 1993. HS Advisors III, Ltd. - --------------------- HS Advisors, a California limited partnership formed on August 11, 1982, the sole general partner of which is Hogan Stanton Investment, Inc. ("HS Inc."), a wholly-owned subsidiary of Goodman Segar Hogan, Inc. The names and ages of, as well as the positions held by, the directors and executive officers of HS Inc. are as set forth below. There are no family relationships between or among any officer and any other officer or director. Name Office Robert M. Stanton Chairman Mark P. Mikuta President John L. Cote Vice President and Treasurer Julie R. Adie Vice President and Secretary Robert M. Stanton, 57, is the retired Chairman and Chief Executive Officer of Goodman Segar Hogan, Inc., a diversified commercial real estate company headquartered in Norfolk, Virginia. Mr. Stanton joined Goodman Segar Hogan in 1966 and retired from the company in 1993. He is currently President of Stanton Partners, Inc., a real estate investment and advisory firm. Mr. Stanton serves as a Trustee of the Urban Land Institute (ULI) and is a past Trustee and State Director of the International Council of Shopping Centers (ICSC). He was chairman of the 1981 edition of The Dollars and Cents of Shopping Centers, published by ULI. Mr. Stanton co-authored The Valuation of Shopping Centers, published by the American Institute of Real Estate Appraisers. Currently, he serves on the advisory board of Norfolk Southern Corporation and is Chairman of the Greater Norfolk Corporation. He holds the Certified Property Manager (CPM) designation conferred by the Institute of Real Estate Management. Mr. Stanton also serves as Chairman of American Storage Properties. A graduate of Old Dominion University with a B.A. Degree in Banking and Finance, he served as Rector of the Board of Visitors. Mark P. Mikuta, 41, is President of Goodman Segar Hogan, Inc. and is Controller of Dominion Capital, Inc., a wholly-owned subsidiary of Dominion Resources. Mr. Mikuta joined Dominion Resources in 1987. Prior to joining Dominion Resources, he was an internal auditor with Virginia Commonwealth University in Richmond, Virginia from 1980 - 1987 and an accountant with Coopers & Lybrand from 1977 - 1980. Mr. Mikuta earned a bachelor of science degree in accounting from the University of Richmond in 1977. He is a Certified Public Accountant (CPA) and Certified Financial Planner (CFP) in the state of Virginia and a member of the American Institute of Certified Public Accountants. John L. Cote, 51, is a Vice President of Goodman Segar Hogan, Inc. and Senior Vice President of Goodman Segar Hogan Hoffler, L.P. ("GSHH"). He heads that company's Asset Management Division, where he is responsible for the portfolio of the office, retail and industrial properties throughout the southeastern United States. Prior to joining GSHH, Mr. Cote was Vice President of Armada-Hoffler Holdings, Inc., a real estate developer and construction company located in Chesapeake, Virginia. He was employed by Armada-Hoffler from 1980 through 1993. He holds a B.S. Degree in Political Science from the University of Southern Mississippi. Julie R. Adie, 41, is a Vice President of Goodman Segar Hogan, Inc. and Vice President of Goodman Segar Hogan Hoffler, L.P. ("GSHH"). She responsible for investment management of a commercial real estate portfolio for the company's Asset Management Division. Prior to GSHH, Ms. Adie was an asset manager with Aetna Real Estate Investors from 1986 to 1988. Ms. Adie practiced as an attorney from 1978 through 1984 and is currently a member of the Virginia Bar Association. She holds a B.A. Degree from Duke University, a Juris Doctor from University of Virginia and an M.B.A. from Dartmouth College. Certain Matters Involving Affiliates - ------------------------------------ On July 31, 1993, Shearson Lehman Brothers Inc. sold certain of its domestic retail brokerage and asset management businesses to Smith Barney, Harris Upham & Co. Incorporated ("Smith Barney"). Subsequent to the sale, Shearson Lehman Brothers Inc. changed its name to Lehman Brothers Inc. The transaction did not affect the ownership of the General Partners. However, the assets acquired by Smith Barney included the name "Hutton." Consequently, Hutton Real Estate Services VII, Inc., a General Partner, changed its name to Real Estate Services VII Inc. Additionally, effective August 3, 1995, the Partnership changed its name to Commercial Properties 3, L.P., to delete any reference to "Hutton." On August 1, 1993, GSH transferred all of its leasing, management and sales operations to Goodman Segar Hogan Hoffler, L.P., a Virginia limited partnership ("GSHH"). On that date, the leasing, management and sales operations of a portfolio of properties owned by the principals of Armada/Hoffler ("HK") were also obtained by GSHH. The General Partner of GSHH is Goodman Segar Hogan Hoffler, Inc., a Virginia corporation ("GSHH Inc."), which has a one percent interest in GSHH. The stockholders of GSHH Inc. are GSH with a sixty-two percent stock interest and H.K. Associates, L.P., an affiliate of HK, with a thirty-eight percent stock interest. The remaining ninety-nine percentage interests in GSHH are limited partnership interests owned fifty percent by GSH and forty-nine percent by HK. The transaction did not affect the ownership of the general partners. Item 11. Executive Compensation Neither of the General Partners nor any of their directors and officers received any compensation from the Registrant. See Item 13 below with respect to a description of certain transactions of the General Partners and their affiliates with the Registrant. Item 12. Security Ownership of Certain Beneficial Owners and Management (a) Security Ownership of Certain Beneficial Owners No person (including any "group" as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) is known to the Registrant to be the beneficial owner of more than five percent of the outstanding Units as of December 31, 1995. (b) Security Ownership of Management No officer or director of the General Partners beneficially owned or owned of record directly or indirectly any Units of the Registrant as of December 31, 1995. (c) Changes In Control None Item 13. Certain Relationships and Related Transactions Pursuant to the Certificate and Agreement of Limited Partnership of the Registrant, for the year ended December 31, 1995, $36,312 of the Registrant's loss was allocated to the General Partners ($24,208 to RES and $12,104 to HS Advisors). For a description of the share of net cash from operations and the allocation of income and loss to which the General Partners are entitled, reference is made to the material contained on pages 45 through 48 of the Prospectus of Registrant dated December 13, 1983 (the "Prospectus"), contained in Amendment No. 1 to Registrant's Registration Statement No. 2-85936, under the section captioned "Distributions and Allocations," which section is incorporated herein by reference thereto. The Registrant may enter into one or more property management agreements with GSH pursuant to which GSH will provide certain property management services with respect to certain Properties owned by the Registrant or its joint ventures. For such services GSH will be entitled to receive a management fee as described under the section captioned "Investment Objectives and Policies -- Management of Properties" in the Prospectus, which section is incorporated herein by reference thereto. Pursuant to Section 12(g) of the Registrant's Certificate and Agreement of Limited Partnership, the General Partners and certain affiliates may be reimbursed by the Registrant for certain costs as described on page 16 of the Prospectus, which description is incorporated herein by reference thereto. First Data Investor Services Group (formerly "The Shareholder Services Group") ("FDISG") provides partnership accounting and investor relations services for the Registrant. Prior to May 1993, these services were provided by an affiliate of a general partner. The Registrant's transfer agent and certain tax reporting services are provided by Service Data Corporation ("SDC"). Both FDISG and SDC are unaffiliated companies. Disclosure relating to amounts paid to the General Partners or their affiliates during the past three years is incorporated by reference to Note 6 "Transactions With the General Partners and Affiliates" of Notes to the Consolidated Financial Statements contained in the Partnership's Annual Report to Unitholders for the year ended December 31, 1995 filed as an exhibit under Item 14. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following documents are filed as part of this report: Page Number (1) Financial Statements: Report of Independent Auditors (1) Consolidated Balance Sheets - At December 31, 1995 and 1994 (1) Consolidated Statements of Partners' Capital (Deficit) - For the years ended December 31, 1995, 1994 and 1993 (1) Consolidated Statements of Operations - For the years ended December 31, 1995, 1994 and 1993 (1) Consolidated Statements of Cash Flows - For the years ended December 31, 1995, 1994 and 1993 (1) Notes to the Consolidated Financial Statements (1) (2) Financial Statement Schedule: Schedule III - Real Estate and Accumulated Depreciation F-1 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (1) Incorporated by reference to the Partnership's Annual Report to Unitholders for the year ended December 31, 1995, which is filed as exhibit 13. (b) Reports on Form 8-K filed in the fourth quarter of calendar year 1995: None. (c) See Exhibit Index contained herein. EXHIBIT INDEX Exhibit No. (4) (A) Certificate and Agreement of Limited Partnership (included as, and incorporated herein by reference to, Exhibit A to the Prospectus of Registrant dated December 13, 1983 (the "Prospectus"), contained in Amendment No. 1 to Registration Statement, No. 2-85936, of the Registrant filed December 13, 1983 (the "Registration Statement")). (B) First Amendment to Certificate and Agreement of Limited Partnership (included as, and incorporated herein by reference to, Exhibit 4(B) of the Registrant's Annual Report on Form 10-K for the fiscal year ended November 30, 1984 (the "1984 Annual Report")). (C) Subscription Agreement and Signature Page (included as, and incorporated herein by reference to, Exhibit 3.1 to the 1983 Registration Statement). (10)(A) Agreements relating to Quorum II Office Building (included as, and incorporated herein by reference to, Exhibit (10)(A) to the 1984 Annual Report). (B) Agreements relating to Three Financial Centre Office Building (included as, and incorporated herein by reference to, Exhibit (10)(B) to the 1984 Annual Report). (C) Agreements relating to Fort Lauderdale Commerce Center (included as, and incorporated herein by reference to, Exhibit (10)(C) to the 1984 Annual Report). (D) Agreements relating to Metro Park Executive Center (included as, and incorporated herein by reference to, Exhibit (10)(D) to the 1984 Annual Report). (13) Annual report to the Unitholders for the year ended December 31, 1995. (27) Financial Data Schedule (28) Portions of Prospectus of Registrant dated December 13, 1983. 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. Dated: April 1, 1996 COMMERCIAL PROPERTIES 3, L.P. BY: HS Advisors III, Ltd. General Partner Hogan Stanton Investment, Inc. General Partner BY: /s/Robert M. Stanton Name: Robert M. Stanton Title: Chairman of the Board BY: Real Estate Services VII, Inc. General Partner BY: /s/Rocco F. Andriola Name: Rocco F. Andriola Title: Director, President and Chief 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 in the capabilities and on the dates indicated. REAL ESTATE SERVICES VII, INC. A General Partner Date: April 1, 1996 BY: /s/Rocco F. Andriola Rocco F. Andriola Director, President and Chief Financial Officer Date: April 1, 1996 BY: /s/William Caulfield William Caulfield Vice President Date: April 1, 1996 BY: /s/Kenneth L. Zakin Kenneth L. Zakin Vice President and Director Date: April 1, 1996 BY: /s/Michael T. Marron Michael T. Marron Vice President Date: April 1, 1996 BY: /s/Lawrence M. Ostow Lawrence M. Ostow Vice President Date: April 1, 1996 BY: /s/Roy W. Pollitt Roy W. Pollitt Vice President 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 in the capabilities and on the dates indicated. HS ADVISORS III, LTD. A General Partner Date: April 1, 1996 BY: /s/Robert M. Stanton Robert M. Stanton Chairman of the Board of Hogan Stanton Investment, Inc., as general partner of HS Advisors III, Ltd. Date: April 1, 1996 BY: /s/Mark P. Mikuta Mark P. Mikuta President of Hogan Stanton Investment, Inc., as general partner of HS Advisors III, Ltd. Date: April 1, 1996 BY: /s/John L. Cote John L. Cote Vice President and Treasurer of Hogan Stanton Investment, Inc., as general partner of HS Advisors III, Ltd. Date: April 1, 1996 BY: /s/Julie R. Adie Julie R. Adie Vice President and Secretary of Hogan Stanton Investments, Inc. as general partner of HS Advisors III, Ltd. EX-13 2 Exhibit 13 ------------- Commercial Properties 3, L.P. 1995 Annual Report ---------------------------------- Commercial Properties 3, L.P., formerly Hutton/GSH Commercial Properties 3 (the "Partnership"), is a limited partnership formed in 1984 to acquire, operate and hold for investment commercial real estate properties. The Partnership's investments are comprised of three office buildings located in Dallas, Texas, Little Rock, Arkansas, and Fort Myers, Florida, and a combined office/warehouse and office/showroom property located in Fort Lauderdale, Florida. Provided below is a comparison of lease levels at the properties as of December 31, 1995 and 1994. Percentage Leased Property Location 1995 1994 Metro Park Executive Center Fort Myers, FL 78% 91% Fort Lauderdale Commerce Center Fort Lauderdale, FL 88% 82% Three Financial Centre Little Rock, AR 94% 93% Quorum II Office Building Dallas, TX 98% 90% Administrative Inquiries Performance Inquiries/Form 10-Ks Address Changes/Transfers First Data Investor Services Group Service Data Corporation P.O. Box 1527 2424 South 130th Circle Boston, Massachusetts 02104-1527 Omaha, Nebraska 68144-2596 Attn: Financial Communications 800-223-3464 (select option 1) 800-223-3464 (select option 2) ---------- Message to Investors ---------- Presented for your review is the 1995 Annual Report for Commercial Properties 3, L.P. Included in this report is an update of property operations, cash distributions, a review of national and local market conditions for each of the Partnership's properties, and financial highlights. 1995 was a challenging year for the Partnership as a significant number of leases expired at the Partnership's properties. We are pleased to report that the majority of the expiring leases at Fort Lauderdale Commerce Center, Quorum II Office Building and Three Financial Centre were renewed. The General Partners also executed new leases at these three properties which not only replaced the tenants that vacated during the year, but also resulted in increased occupancy. As a result of such higher occupancy levels, the Partnership's 1995 fourth quarter cash distribution was increased, as discussed below. This leasing progress was partially offset by the vacancy of several tenants at Metro Park Executive Center. A complete leasing update for each of the Partnership's properties is provided in the Property Profiles & Leasing Update, beginning on page 3 of this report. Cash Distributions We are pleased to report that due to higher occupancy and improved operations at three of the Partnership's properties and following a review of the Partnership's anticipated future cash needs and current cash position, the General Partners increased the 1995 fourth quarter distribution from its previous level of $3.25 per Unit to $5.00 per Unit. This distribution was paid on February 12, 1996 and was either credited to your brokerage account or sent directly to you. For the year ended December 31, 1995, the Partnership declared cash distributions to the Limited Partners totaling $13.25 per Unit. In addition, on March 29, 1996 the Partnership paid a special cash distribution in the amount of $13.30 per Unit. This distribution was made from the Partnership's cash reserves. Since inception, including the special distribution, the Partnership has paid cash distributions totaling $149.81 per original $500 Unit, including $16 per Unit in return of capital payments which have reduced the Unit size from $500 to $484. The timing and amount of future cash distributions will depend on several factors, including the adequacy of cash flow and the Partnership's cash reserve requirements. Information regarding the payment of cash distributions for the last two years is provided below. Cash Distributions Per Limited Partnership Unit First Second Third Fourth Quarter Quarter Quarter Quarter Total 1994 $1.00 $1.00 $1.00 $2.50 $ 5.50 1995 $2.50 $2.50 $3.25 $5.00 $13.25 Market Overview Although still lagging behind other sectors of real estate, the commercial office market showed signs of improvement during 1995, particularly in the suburban office sector. The national vacancy rate declined to 11.5% as of the fourth quarter of 1995, down from approximately 16% as of year-end 1994. In general, the gap between supply and demand is gradually narrowing as the existing supply of office space continues to be absorbed. However, demand for office space varies widely from region to region as corporate layoffs persist and companies continue to be very selective in their choice of location. Moreover, despite the resurgence of investment in other segments of the real estate industry, lenders continue to be selective in providing capital for commercial office properties. With the exception of the Metro Park Executive Center's submarket, which was adversely impacted by the relocation of several tenants during 1995 outside of the market, the markets in which the Partnership's properties are located improved during 1995, with declines in their respective vacancy rates and slight increases in rental rates. Summary During 1996, we will focus on leasing the vacant space at the Partnership's properties, particularly at Metro Park Executive Center, and renewing any leases which are scheduled to expire, especially at Fort Lauderdale Commerce Center and Quorum II Office Building. Additionally, the General Partners intend to closely monitor generally improving market conditions to determine the future strategy for marketing the properties for sale. We will update you with respect to any such efforts in future investor reports. Very truly yours, Real Estate Services VII, Inc. Hogan Stanton Investment, Inc. General Partner General Partner of HS Advisors III, Ltd. /s/Kenneth L. Zakin /s/Robert M. Stanton Kenneth L. Zakin Robert M. Stanton Vice President Chairman April 1, 1996 ---------- Property Profiles and Leasing Update ---------- METRO PARK EXECUTIVE CENTER Fort Myers, Florida Metro Park Executive Center is situated in a suburban office park just east of the Fort Myers central business district in the Edison Central submarket. The property is one of five class "A" commercial office buildings located within the office park. The property contains 60,597 leasable square feet of commercial office space. Leasing Update - The General Partners executed two new leases totaling 3,332 square feet and two lease renewals in 1995. In addition, a tenant expanded its space by 4,008 square feet to lease a total of 20,525 square feet. Three tenants leasing a total of 8,479 square feet vacated their spaces upon expiration of their respective leases, one tenant reduced its occupancy by 3,514 square feet, and another tenant prematurely vacated 1,965 square feet. As a result, the property was 78% leased at December 31, 1995, compared with 91% at year-end 1994. None of the property's tenants generated rental income in excess of 10% of the Partnership's consolidated rental income. Four leases totaling 10,723 square feet or approximately 19% of the property's space are scheduled to expire during 1996, and one lease for 16,517 square feet can be cancelled at any time throughout 1996 by the tenant. The General Partners will approach each of these tenants regarding lease renewals when appropriate. Fort Myers Market Update - The commercial office market in Fort Myers remained stable during 1995 as the vacancy rate declined to approximately 14% as of the fourth quarter of 1995, down from 18% for the fourth quarter of 1994. However, the Edison Central submarket was adversely impacted by the relocation of several tenants during 1995 outside of the market resulting in an increased vacancy rate for commercial office space of approximately 17% as of the fourth quarter of 1995, compared with 15% for the fourth quarter of 1994. Leasing conditions are expected to remain competitive in the Edison Central submarket and throughout the Fort Myers market in 1996. FORT LAUDERDALE COMMERCE CENTER Fort Lauderdale, Florida Fort Lauderdale Commerce Center contains 186,884 leasable square feet of office/showroom and office/warehouse space. The property is located in the Cypress Creek submarket in the north central section of Broward County, approximately five miles north of the central business district of Fort Lauderdale. Leasing Update - During the year, the General Partners executed two new leases totaling 9,200 square feet and five lease renewals totaling 17,853 square feet, including two tenants which expanded their space by a total of 2,860 square feet. Another tenant leasing 5,428 square feet terminated its lease during the fourth quarter. Consequently, the property's lease level was 88% at December 31, 1995, compared with 82% at December 31, 1994. None of the property's tenants accounted for 10% or more of the Partnership's consolidated rental income. As reported previously, the property currently has 15,000 square feet of contiguous vacant space, which the General Partners are aggressively marketing. While a number of prospective tenants have expressed an interest in the space, no assurance can be made that the space will be leased, in the near term. During 1996, seven leases representing 33,202 square feet or approximately 17% of the property's leasable space, are scheduled to expire. These tenants have been contacted by the General Partners to discuss the renewal of their leases, however, it is uncertain whether they will renew. Fort Lauderdale Market Update - Demand for office space in Broward County was relatively strong during 1995 as companies continued to relocate to the area to expand their businesses into the Caribbean and South America. Although the overall vacancy rate for office/service space in Broward County was unchanged from the previous year, at 7.5% as of the 1995 fourth quarter, rental concessions are no longer required to attract and retain tenants and rental rates have increased slightly. The Cypress Creek submarket benefitted by the relatively strong demand and the vacancy rate for office/service space and distribution space decreased to 12.1% and 7.3%, respectively, as of the 1995 fourth quarter, from 15.5% and 10.4%, respectively, a year earlier. Market conditions are expected to gradually improve throughout 1996. THREE FINANCIAL CENTRE Little Rock, Arkansas Three Financial Centre is a 123,833 leasable square foot, eight-story brick office building situated in the Financial Centre Complex located in west Little Rock. The property affords easy access to downtown Little Rock and the Little Rock Regional Airport, and is located near two interstate highways, I-630 and I-430. Leasing Update - The General Partners faced significant challenges at the property during 1995 as a tenant which occupied 18,854 square feet or approximately 15% of the property's leasable area vacated the premises in July 1995, upon the expiration of its lease. Nevertheless, they were able to re-lease all of the space by year-end. The General Partners executed a lease expansion with an existing tenant for the space pursuant to a lease scheduled to expire in September 2000. The tenant now leases 37,352 square feet or approximately 30% of the property's leasable space. In addition, the General Partners executed three lease renewals totaling 11,100 square feet during the year and two tenants expanded their spaces by 8,910 square feet. At year-end 1995, the property's lease level was 94%, relatively unchanged from 93% a year earlier. None of the property's tenants accounted for 10% or more of the Partnership's consolidated rental income. Six leases representing 21,230 square feet or approximately 17% of the property's leasable area are scheduled to expire during 1996. The General Partners will approach each of these tenants regarding lease renewals when appropriate. Little Rock Market Update - The Little Rock office market remained stable during 1995 as evidenced by an overall vacancy rate for office properties of 10%, unchanged from 1994. The suburban office market also remained stable with a slight increase in rental rates. Despite the completion of three new office buildings in 1995 for 248,613 square feet, the vacancy rate for office space in the suburban market was 8% for the fourth quarter of 1995, compared with 7% for the same period a year earlier. Although three additional new office buildings for approximately 265,000 square feet are slated for completion in the Little Rock area in late 1996 and 1997, demand is expected to remain in line with the available supply. QUORUM II OFFICE BUILDING Dallas, Texas Quorum II Office Building is located in the LBJ/Quorum submarket in northwestern Dallas. The property contains 84,094 leasable square feet of commercial office space and affords easy access to Loop 635, Dallas Parkway, the Dallas North Tollway and Inwood Road. Leasing Update - The General Partners executed five new leases totaling 9,162 square feet, during 1995, including a three-year lease for 4,977 square feet. Additionally, three tenants leasing 15,317 square feet each executed three-year lease renewals for their respective spaces. In addition, a lease totaling 9,761 square feet that was scheduled to expire on December 31, 1995, was extended to March 31, 1997. As a result, the property was 98% leased at December 31, 1995, compared to 90% leased at year-end 1994. None of the property's tenants accounted for 10% or more of the Partnership's consolidated rental income. Three leases representing 24,777 square feet or approximately 29% of the property's leasable area are scheduled to expire in 1996. These tenants have been contacted by the General Partners to discuss the renewal of their leases, however, it is uncertain whether they will renew or extend their terms. Dallas Market Update - The Dallas commercial real estate market improved in 1995 primarily as a result of companies migrating into the region, increasing demand for office space. Accordingly, operating conditions for property owners in the LBJ/Quorum submarket improved during the past year. As of the second quarter of 1995, the submarket's vacancy rate for office space declined to 10% versus 16% a year earlier. The use of rental concessions has abated and rental rates have increased by approximately 5% in 1995. The improving conditions are expected to continue in 1996 as no new office construction is planned for the submarket. ---------- Financial Highlights ---------- For the years ended December 31, (dollars in thousands, except for per Unit data) 1995 1994 1993 1992 1991 Total income $ 5,158 $ 4,691 $ 4,211 $ 4,034 $ 3,981 Net loss (3,631) (332) (910) (712) (766) Total assets 27,842 32,837 33,454 35,220 37,448 Net cash from operations 2,168 1,859 1,536 1,592 1,221 Net loss per Limited Partnership Unit (32.87) (3.00) (8.24) (6.45) (6.94) Cash distributions per Limited Partnership Unit 13.25 5.50 4.00 14.00 14.00 The above selected financial data should be read in conjunction with the financial statements and related notes included in this report. - - Total income increased in 1995 primarily as a result of higher rental income generated by three of the Partnership's four properties, in addition to higher other income. - - The increase in net loss is primarily attributable to a $3,928,998 loss recognized on the write down of the Quorum II Office Building, implemented in compliance with Financial Accounting Standard No. 121, a new accounting standard which was issued in March 1995. Please see Notes 2 and 4 to the Consolidated Financial Statements for more details. It should be noted that as a result of this write down, the present book value of the property is now consistent with the property's 1995 appraised value. Additionally, this write down was recorded on the 1995 Consolidated Financial Statements only and had no impact on Limited Partners' tax basis capital accounts. - - The increase in net cash from operations in 1995 is primarily attributable to higher total income. - - Total assets declined by approximately $5 million, largely as a result of the write down of the Quorum II Office Building as cited above. Total assets are now consistent with the Partnership's current calculation of Net Asset Value and in line with prior years' calculation of Net Asset Value, which has been previously reported. Consolidated Balance Sheets December 31, 1995 and 1994 Assets 1995 1994 Real estate investments, at cost: Land $ 5,808,694 $ 6,422,301 Buildings and improvements 31,446,737 39,764,931 37,255,431 46,187,232 Less accumulated depreciation (12,714,080) (16,113,296) 24,541,351 30,073,936 Cash and cash equivalents 2,134,370 1,637,501 Restricted cash 237,566 216,079 Accounts and rent receivable, net of allowance for doubtful accounts of $5,486 in 1995 and $14,557 in 1994 64,616 28,326 Deferred rent receivable 230,626 235,246 Prepaid leasing costs and other assets, net of accumulated amortization of $900,609 in 1995 and $718,547 in 1994 633,476 645,993 Total Assets $27,842,005 $32,837,081 Liabilities and Partners' Capital (Deficit) Liabilities: Accounts payable and accrued expenses $ 237,185 $ 426,642 Due to affiliates 28,479 50,702 Distributions payable 563,804 281,902 Security deposits 214,388 204,465 Total Liabilities 1,043,856 963,711 Minority Interest 221,337 171,315 Partners' Capital (Deficit): General Partners (402,866) (321,732) Limited Partners (109,378 units outstanding) 26,979,678 32,023,787 Total Partners' Capital 26,576,812 31,702,055 Total Liabilities and Partners' Capital $27,842,005 $32,837,081 Consolidated Statements of Partners' Capital (Deficit) For the years ended December 31, 1995, 1994 and 1993 General Limited Partners Partners Total Balance at December 31, 1992 $ (277,177) $34,292,067 $34,014,890 Net loss (9,101) (900,970) (910,071) Distributions (13,533) (437,512) (451,045) Balance at December 31, 1993 (299,811) 32,953,585 32,653,774 Net loss (3,315) (328,219) (331,534) Distributions (18,606) (601,579) (620,185) Balance at December 31, 1994 (321,732) 32,023,787 31,702,055 Net loss (36,312) (3,594,850) (3,631,162) Distributions (44,822) (1,449,259) (1,494,081) Balance at December 31, 1995 $ (402,866) $26,979,678 $26,576,812 Consolidated Statements of Operations For the years ended December 31, 1995, 1994 and 1993 Income 1995 1994 1993 - ---------------- Rent $5,047,528 $4,641,823 $4,181,367 Interest 110,529 49,446 29,571 Total Income 5,158,057 4,691,269 4,210,938 Expenses - ---------------- Property operating 2,283,025 2,231,683 2,114,664 Loss on write-down of real estate 3,928,998 -- -- Depreciation and amortization 2,278,567 2,388,925 2,680,516 General and administrative 248,607 240,074 224,498 Bad debt -- 77,710 14,427 Total Expenses 8,739,197 4,938,392 5,034,105 Net loss before minority interest (3,581,140) (247,123) (823,167) Minority interest (50,022) (84,411) (86,904) Net Loss $(3,631,162) $ (331,534) $ (910,071) Net Loss Allocated: To the General Partners $ (36,312) $ (3,315) $ (9,101) To the Limited Partners (3,594,850) (328,219) (900,970) $(3,631,162) $ (331,534) $ (910,071) Per limited partnership unit (109,378 outstanding) $(32.87) $(3.00) $(8.24) Consolidated Statements of Cash Flows For the years ended December 31, 1995, 1994 and 1993 Cash Flows from Operating Activities: 1995 1994 1993 Net loss $(3,631,162) $ (331,534) $ (910,071) Adjustments to reconcile net loss to net cash provided by operating activities: Minority Interest 50,022 84,411 86,904 Loss on write-down of real estate 3,928,998 -- -- Depreciation and amortization 2,278,567 2,388,925 2,680,516 Increase (decrease) in cash arising from changes in operating assets and liabilities: Restricted cash (21,487) (3,925) (6,039) Accounts and rent receivable, net (36,290) 112,971 9,248 Deferred rent receivable 4,620 (136,873) 34,755 Notes receivable -- 51,403 58,519 Prepaid expenses (203,967) (237,210) (207,489) Accounts payable and accrued expenses (189,457) (105,068) (218,713) Due to affiliates (22,223) 18,446 4,234 Security deposits 9,923 17,235 4,630 Net cash provided by operating activities 2,167,544 1,858,781 1,536,494 Cash Flows from Investing Activities: Additions to real estate assets (458,496) (504,597) (646,560) Net cash used for investing activities (458,496) (504,597) (646,560) Cash Flows from Financing Activities: Cash distributions (1,212,179) (451,044) (732,947) Net cash used for financing activities (1,212,179) (451,044) (732,947) Net increase in cash and cash equivalents 496,869 903,140 156,987 Cash and cash equivalents at beginning of year 1,637,501 734,361 577,374 Cash and cash equivalents at end of year $2,134,370 $1,637,501 $ 734,361 Supplemental Schedule of Non-Cash Investing Activity: Additions to real estate assets capitalized but unpaid at end of period $ -- $ 150,247 $ -- Notes to the Consolidated Financial Statements December 31, 1995, 1994 and 1993 1. Organization Commercial Properties 3, L.P. (the "Partnership") was organized as a limited partnership under the laws of the State of Virginia pursuant to a Certificate and Agreement of Limited Partnership dated and filed April 19, 1984 (the "Partnership Agreement"). The Partnership was formed for the purpose of acquiring and operating certain types of commercial real estate. The General Partners of the Partnership are Real Estate Services VII, Inc. ("Real Estate Services"), formerly Hutton Real Estate Services VII, Inc. , which is an affiliate of Lehman Brothers Inc. ("Lehman Brothers") and HS Advisors III, Ltd. ("HS Advisors"), which is an affiliate of Goodman Segar Hogan, Inc. The Partnership will continue until December 31, 2010, unless terminated sooner in accordance with the terms of the Partnership Agreement. On July 31, 1993, Shearson Lehman Brothers Inc. sold certain of its domestic retail brokerage and asset management businesses to Smith Barney, Harris Upham & Co. incorporated ("Smith Barney"). Subsequent to the sale, Shearson Lehman Brothers Inc. changed its name to Lehman Brothers Inc. The transaction did not affect the ownership of the General Partners. However, the assets acquired by Smith Barney included the name "Hutton." Consequently, effective October 22, 1993, the Hutton Real Estate Services VII, Inc. General Partner changed its name to delete any reference to Hutton. Additionally, effective August 3, 1995, the Partnership changed its name to Commercial Properties 3, L.P., to delete any reference to "Hutton." On March 15, 1996, based upon, among other things, the advice of Partnership counsel, Skadden, Arps, Slate, Meagher & Flom, the General Partners adopted a resolution that states, among other things, if a Change of Control (as defined below) occurs, the General Partners may distribute the Partnership's cash balances not required for its ordinary course day-to-day operations. "Change of Control" means any purchase or offer to purchase more than 10% of the Units that is not approved in advance by the General Partners. In determining the amount of the distribution, the General Partners may take into account all material factors. In addition, the Partnership will not be obligated to make any distribution to any partner and no partner will be entitled to receive any distribution until the General Partners have declared the distribution and established a record date and distribution date for the distribution. The Partnership filed a Form 8-K disclosing this resolution on March 21, 1996. 2. Significant Accounting Policies Basis of Accounting - The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. Revenues are recognized as earned and expenses are recorded as obligations are incurred. Consolidation - The consolidated financial statements include the accounts of the Partnership and its ventures, Metro Park Associates Joint Venture ("Metro Park"), Three Financial Centre Joint Venture ("Three Financial Centre"), and 14850 Quorum Associates, Ltd. ("Quorum"). Intercompany accounts and transactions between the Partnership and the ventures are eliminated in consolidation. Real Estate Investments - Real estate investments, which consist of commercial buildings and capital improvements (the "Properties"), are recorded at cost, which includes the initial purchase price of the property plus closing costs, acquisition and legal fees and other miscellaneous acquisition costs. Depreciation is computed using the straight-line method based upon the estimated useful lives of 3 to 25 years except for tenant improvements which are depreciated over the terms of the respective leases. Accounting for Impairment - In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121") which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. FAS 121 also addresses the accounting for long-lived assets that are expected to be disposed of. Pursuant to this issuance, the Partnership implemented FAS 121 in the fourth quarter of 1995. The effect of the adoption was the recognition of an impairment loss on the Partnership's investments in real estate in 1995 in the amount of $3,928,998 (see note 4). Cash Equivalents - Cash equivalents consist of short-term highly liquid investments which have maturities of three months or less from the date of purchase. The carrying amount approximates fair value because of the short maturity of these instruments. Restricted Cash - Restricted cash consists of amounts held for tenant security deposits. Concentration of Credit Risk - Financial instruments which potentially subject the Partnership to a concentration of credit risk principally consist of cash in excess of the financial institution's insurance limits. The Partnership invests available cash with high credit quality financial institutions. Deferred Rent Receivable - Deferred rent receivable consists of rental income which is recognized on a straight-line basis over the terms of the respective leases even though rent is not received until later periods as a result of rental escalations. Prepaid Leasing Costs - Leases are accounted for as operating leases. Leasing commissions generally are amortized over the terms of the respective leases. Income Taxes - No provision for income taxes has been made in the financial statements of the Partnership since such taxes are the responsibility of the individual partners rather than of the Partnership. 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. 3. Partnership Agreement The Partnership agreement provides that net cash from operations, as defined, will be distributed on a quarterly basis as follows: 97% to the Limited Partners and 3% to the General Partners until each Limited Partner has received a 9% annual noncumulative return on his adjusted capital investment, as defined. The net cash from operations will then be distributed to the General Partners until the General Partners have received 10% of the aggregate net cash from operations distributed to all partners. The balance of net cash from operations, if any, will then be distributed 90% to the Limited Partners and 10% to the General Partners. Net proceeds from sales or refinancings shall be distributed as follows: 99% to the Limited Partners and 1% to the General Partners until each Limited Partner has received an amount equal to his adjusted capital investment, as defined, and a 10% cumulative annual return thereon, reduced by any net cash from operations actually distributed to such Limited Partner. The balance of net proceeds, if any, will then be distributed 85% to the Limited Partners and 15% to the General Partners. Losses and all depreciation for any fiscal year shall be allocated 99% to the Limited Partners and 1% to the General Partners. If income exceeds the amount of net cash from operations distributable to the Partners for any fiscal year, the excess will be allocated (1) 100% to the General Partners in an amount equal to the excess, if any, of General Partners' deficit in their capital accounts, over an amount equal to 1% of the total capital contributions to the Partnership as reduced by the amount of the General Partners' capital contributions and (2) 99% to the Limited Partners and 1% to the General Partners. If income does not exceed the amount of net cash from operations distributable to the Partners for any fiscal year, income will be allocated 90% to the Limited Partners and 10% to the General Partners. Upon the dissolution of the Partnership, the General Partners shall contribute to the capital of the Partnership, an amount not to exceed 1% of the total capital contributions made by all the Partners, less any prior capital contributions made by the General Partners. In no event shall the General Partners be obligated to contribute an amount in excess of any negative balance in their respective capital accounts. If as a result of the dissolution of the Partnership, the sum of the Limited Partners' capital contribution plus an amount equal to a 6% cumulative annual return on each Limited Partner's adjusted capital value less any distributions made to each Limited Partner from net cash flow from operations, exceeds total distributions to the Limited Partners of net proceeds from a sale or refinancing, the General Partners will contribute to the Partnership for distribution to the Limited Partners an amount equal to the lesser of such excess or the aggregate distribution of net proceeds from a sale or refinancing distributed to the General Partners. 4. Real Estate Investments Since inception, the Partnership has acquired, directly or indirectly, the following three commercial office buildings and an office and light industrial complex. The purchase price amounts exclude acquisition fees and other closing costs. Net Leasable Square Date Type of Purchase Property Name Feet Location Acquired Ownership Price Metro Park Fort Myers, Joint Executive Center 60,597 Florida 1/17/85 Venture $ 5,136,504 Three Financial Little Rock, Joint Centre 123,833 Arkansas 1/22/85 Venture $10,452,005 Fort Lauderdale Fort Lauderdale, Fee Commerce Center 186,884 Florida 4/18/85 Simple $12,843,569 Quorum II Dallas, Office Building 84,094 Texas 6/12/85 (A) $12,995,384 (A) The Partnership is the General Partner in a Limited Partnership. The Joint Venture and Limited Partnership agreements substantially provide that: i. Net cash from operations will be distributed 100% to the Partnership until it has received an annual, noncumulative return on its adjusted capital balance, as defined, of 10.5% for Three Financial Centre, 12% for Metro Park, and 10% for Quorum. With regard to Three Financial Centre, net cash from operations will then be distributed 100% to the co-venturer until it has received an annual amount of $115,000. Thereafter, any remaining net cash from operations will be distributed 80% to the Partnership and 20% to the respective co-venturers. ii. Net proceeds from a sale or other refinancing of the properties will be distributed 100% to the Partnership until it has received 115% of its capital contribution and a cumulative return of 10.5% for Three Financial Centre, 12% for Metro Park, and 10% for Quorum on its adjusted capital investment, as defined. With regard to Three Financial Centre, net proceeds will then be distributed 100% to the co-venturer until it has received $1,100,000. Thereafter, any remaining net proceeds will be distributed ranging from 75% to 80% to the Partnership and the balance to the respective co-venturers. iii. Income will be allocated in substantially the same manner as net cash from operations. For Three Financial Centre and Metro Park, net income in excess of net cash from operations distributed in such year shall be allocated 80% to the Partnership and 20% to the co-venturers. Losses and all depreciation will generally be allocated 100% to the Partnership. During the fourth quarter of 1995 management evaluated its plans for the Quorum II Office Building ("Quorum"). At such time, management concluded that it may not hold Quorum for a period sufficient for rental rates to improve and the Partnership to recover its December 31, 1995 carrying value. As a consequence of this decision, and pursuant to the requirements of FAS 121, the Partnership recognized an impairment loss of $3,928,998 to write down Quorum to its estimated fair value of $4.6 million as of December 31, 1995. The loss is reflected as a loss on the write-down of real estate in the accompanying consolidated statement of operations. Fair value was determined using an independent appraisal of the operating property, which is consistent with that used to determine the Partnership's Net Asset Value. Such appraisals make use of a combination of certain generally accepted valuation techniques, including direct capitalization, discounted cash flows and comparative sales analysis. 5. Rental Income Under Operating Leases Future minimum rental income to be received on noncancellable operating leases as of December 31, 1995 is as follows: 1996 $ 4,016,343 1997 2,979,828 1998 1,771,191 1999 897,684 2000 658,282 Thereafter 890,520 $11,213,848 Generally, leases are for terms of 2 to 10 years and contain renewal options. The leases allow for increases in certain property operating costs to be passed on to the tenants. 6. Transactions with General Partners and Affiliates The following is a summary of the amounts earned by or reimbursed to the General Partners and their affiliates for administrative salaries and expenses during the years ended December 31, 1995, 1994 and 1993: Unpaid at December 31, Earned --------------------------------- Administrative salaries and expenses 1995 1995 1994 1993 Real Estate Services and affiliates $20,000 $ 71,776 $ 96,376 $61,112 HS Advisors and affiliates 8,479 31,815 37,566 31,871 $28,479 $103,591 $133,942 $92,983 The above amounts have been included in general and administrative expenses. 7. Reconciliation of Financial Statement Net Loss to Federal Income Tax Basis Net Income (Loss) Years Ended December 31, 1995 1994 1993 Financial statement net loss $(3,631,162) $ (331,534) $ (910,071) Tax basis depreciation over financial statement depreciation (8,921) (192,309) 102,820 Write-down of real estate 3,928,998 -- -- Deferred rent 23,757 (82,128) 34,755 Minority interest adjustment 3,343 10,133 1,543 Prepaid rent (47,283) 48,674 -- Bad debt expense -- 134 14,423 Federal income tax basis net income (loss) $ 268,732 $ (547,030) $ (756,530) ---------- Report of Independent Auditors ---------- The Partners Commercial Properties 3 and Consolidated Ventures We have audited the accompanying consolidated balance sheets of Commercial Properties 3 and Consolidated Ventures as of December 31, 1995 and 1994, and the related consolidated statements of operations, partners' capital (deficit), and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements 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 consolidated financial position of Commercial Properties 3 and Consolidated Ventures at December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 2 to the financial statements, in 1995 the Partnership changed its method of accounting for impairment of long-lived assets. ERNST & YOUNG LLP Boston, Massachusetts February 5, 1996, except for Note 1, as to which the date is March 15, 1996 Comparison of Acquisition Costs to Appraised Value and Determination of Net Asset Value Per $484 Unit at December 31, 1995 (Unaudited) Acquisition Appraised Property Date of Acquisition Cost (1) Value (2) Metro Park Executive Center 01-17-85 $ 5,543,159 $ 3,100,000 Three Financial Centre 01-22-85 11,378,512 11,000,000 Fort Lauderdale Commerce Center 04-18-85 14,125,050 11,085,000 Quorum Building II 06-12-85 13,939,093 4,600,000 $44,985,814 $29,785,000 Cash and cash equivalents 2,134,370 Accounts receivable 64,616 2,198,986 Less: Accounts payable and accrued expenses (237,185) Due to affiliates (28,479) Distribution payable (563,804) Minority Interest (221,337) Partnership Net Asset Value (3) $30,933,181 Net Asset Value Allocated: Limited Partners $30,623,849 General Partners 309,332 $30,933,181 Net Asset Value Per Unit (109,378 units outstanding) $279.98 (1) The acquisition cost of each property is comprised of fundings made through December 31, 1995, the acquisition fee paid to the General Partners and an amount estimated to fund the completion of tenant improvements. (2) This represents the Partnership's share of the December 31, 1995 Appraised Values which were determined by an independent property appraisal firm. The Partnership's share of the December 31, 1995 Appraised Values takes into account the allocation provisions of the Joint Venture and Limited Partnership Agreements governing the distribution of sales proceeds for each of the above properties. (3) The Net Asset Value assumes a hypothetical sale at December 31, 1995 of all Partnership properties at their appraised values and the distribution of the proceeds of such sales, together with the Partnership's cash and the proceeds from temporary investments, to the Partners. Real estate brokerage commissions payable to the General Partners or others are not determinable at this time and have not been included in the determination. Since the Partnership would incur real estate brokerage commissions and other selling expenses in connection with the sale of its properties and other assets, cash available for distribution to the Partners would be less than the appraised Net Asset Value. Limited Partners should note that appraisals are only estimates of current value and actual values realizable upon sale may be significantly different. A significant factor in establishing an appraised value is the actual selling price for properties which the appraiser believes are comparable. Further, the appraised value does not reflect the actual costs which would be incurred in selling the property. As a result of these factors and the illiquid nature of an investment in Units of the Partnership, the variation between the appraised value of the Partnership's properties and the price at which Units of the Partnership could be sold is likely to be significant. Fiduciaries of Limited Partners which are subject to ERISA or other provisions of law requiring valuation of Units should consider all relevant factors, including, but not limited to Net Asset Value per Unit, in determining the fair market value of the investment in the Partnership for such purposes. COMMERCIAL PROPERTIES 3, L.P. Schedule III - Real Estate and Accumulated Depreciation December 31, 1995 Cost Capitalized Subsequent Initial Cost to Partnership To Acquisition --------------------------- ---------------- Buildings and Buildings and Description Encumbrances Land Improvements Improvements Commercial Property: Consolidated Ventures: Partnership Owned: Ft. Lauderdale Commerce Center Ft. Lauderdale, FL $ -- $2,741,551 $10,102,018 $2,511,898 Consolidated Ventures: Metro Park Executive Center Ft. Myers, FL -- 548,643 4,587,861 727,216 Three Financial Center Little Rock, AK -- 1,018,332 9,433,673 985,487 Quorum II Office Building Dallas, TX -- 2,113,775 10,881,609 539,368 Provision for Loss -- -- -- -- $ -- $6,422,301 $35,005,161 $4,763,969 COMMERCIAL PROPERTIES 3, L.P. Schedule III - Real Estate and Accumulated Depreciation December 31, 1995 Gross Amount at Which Carried at Close of Period ------------------------------- Buildings and Accumulated Description Land Improvements Total(2) Depreciation(1) Commercial Property: Consolidated Ventures: Partnership Owned: Ft. Lauderdale Commerce Center Ft. Lauderdale, FL $2,741,551 $12,613,916 $15,355,467 $5,480,615 Consolidated Ventures: Metro Park Executive Center Ft. Myers, Fl 548,643 5,315,077 5,863,720 2,421,332 Three Financial Center Little Rock, AK 1,018,332 10,419,160 11,437,492 4,812,133 Quorum II Office Building Dallas, TX 2,113,775 11,420,977 13,534,752 5,007,002 Provision for Loss (613,607) (8,322,393) (8,936,000) (5,007,002) $5,808,694 $31,446,737 $37,255,431 12,714,080 (1) (2) COMMERCIAL PROPERTIES 3, L.P. Schedule III - Real Estate and Accumulated Depreciation December 31, 1995 Life on which Depreciation in Latest Date of Date Income Statements Description Construction Acquired is Computed Commercial Property: Consolidated Venture: Partnership Owned: Ft. Lauderdale Commerce Center Ft. Lauderdale, FL 1985 04/18/85 25 years Consolidated Ventures: Metro Park Executive Center Ft. Myers, FL 1984 01/07/85 25 years Three Financial Center Little Rock, AK 1984 01/22/85 25 years Quorum II Office Building Dallas, TX 1985 06/12/85 25 years (1) For Federal income tax purposes, the amount of accumulated depreciation is $24,334,676. (2) For Federal income tax purposes, the basis of land, building and improvements is $47,999,410. A reconciliation of the carrying amount of real estate and accumulated depreciation for the years ended December 31, 1995, 1994 and 1993: Real Estate Investments: 1995 1994 1993 Beginning of year $46,187,232 $45,533,902 $46,247,218 Additions 458,496 654,844 646,560 Write-down (8,936,000) -- -- Deletions (454,297) (1,514) (1,359,876) End of year $37,255,431 $46,187,232 $45,533,902 Accumulated Depreciation: Beginning of year $16,113,296 $13,941,302 $12,840,967 Depreciation expense 2,062,083 2,173,508 2,460,211 Deletions (454,297) (1,514) (1,359,876) Write-down (5,007,002) -- -- End of year $12,714,080 $16,113,296 $13,941,302 Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of Commercial Properties 3, L.P. of our report dated February 5, 1996, except for Note 1, as to which the date is March 15, 1996, included in the 1995 Annual Report to Shareholders of Commercial Properties 3, L.P. and Consolidated Ventures. Our audit also included the financial statements schedule of Commercial Properties 3, L.P. and Consolidated Ventures listed in Item 14(a). This schedule is the responsibility of the Partnership's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth herein. ERNST & YOUNG LLP Boston, Massachusetts February 5, 1996, except for Note 1, as to which the date is March 15, 1996 EX-27 3 CP3 FINANCIAL DATA SCHEDULE FOR 1995 10-K
5 12-MOS DEC-31-1995 DEC-31-1995 2,371,936 000 300,728 (5,486) 000 000 37,255,431 (12,714,080) 27,842,005 1,043,856 000 000 000 000 26,576,812 27,842,005 000 5,158,057 000 000 4,810,199 3,928,998 000 (3,631,162) 000 (3,631,162) 000 000 000 (3,631,162) (32.87) 000
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