-----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, R865VPsLK3TtiZY4FXmhwfvht9YLH5inYOGFZeiPTZb2dhQdtf6aM8xpRb6x1wGH ZmB2Dm0xyWhgT8bTrT+XIg== 0000928790-97-000024.txt : 19970326 0000928790-97-000024.hdr.sgml : 19970326 ACCESSION NUMBER: 0000928790-97-000024 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970325 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: 97562673 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. For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 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 incorporation or organization I.R.S. Employer Identification No. 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, 1996 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, 1996, $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, 1996 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: - - Capital appreciation; - - Distributions of net cash from operations attributable to rental income; and - - Preservation and protection of capital. - - Equity build-up through principal reduction of mortgage loans, if any, on the Properties. 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, 1996 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" and Note 5 "Rental Income Under Operating Leases" of the Notes to the Consolidated Financial Statements in the Partnership's Annual Report to Unitholders for the year ended December 31, 1996 filed as an exhibit under Item 14. Item 3. Legal Proceedings The Registrant is presently appealing a $200,000 default judgment in connection with a legal dispute with a former tenant at the Quorum II Office Building in Dallas. Although the Registrant is confident that the Texas Court of Appeals will dismiss the judgment, the Registrant was forced to purchase a security bond for the entire amount and if the appeal is not successful then the Registrant may be forced to pay $200,000 to the tenant in order to satisfy the judgment. 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 1996. 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, 1996, the number of holders of Units was 5,411. (c) Distributions Cash distributions paid to the Limited Partners for the two years ended December 31, 1996 and December 31, 1995 are incorporated by reference to the section entitled "Message to Investors" in the Partnership's Annual Report to Unitholders for the year ended December 31, 1996 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, 1996, 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 $1,228,502 at December 31, 1996, compared with $2,134,370 at December 31, 1995. The decrease is due to the payment of cash distributions to partners totaling $3,078,650 and additions to real estate assets totaling $386,746 in excess of the $2,559,528 net cash provided by operating activities. The Partnership had a restricted cash balance of $232,330 at December 31, 1996, compared with $237,566 at December 31, 1995. 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 $40,090 at December 31, 1996 compared to $64,616 at December 31, 1995. The decrease is due primarily to the timing of the receipt of rental payments. Prepaid leasing costs and other assets totaled $563,611 at December 31, 1996 compared to $633,476 at December 31, 1995. The decrease is primarily due to the amortization of leasing commissions. Deferred rent receivable decreased to $205,718 at December 31, 1996 from $230,626 a year earlier, due to the amortization of deferred rent associated with older leases at all of the Partnership's properties. Distribution payable decreased to $338,282 at December 31, 1996 from $563,804 at December 31, 1995 reflecting a decrease in the Partnership's quarterly cash distribution. The Registrant declared cash distributions to Limited Partners totaling $25.30 per Unit for the year ended December 31, 1996. Included in this total is a cash distribution of $3.00 per Unit for the quarter ended December 31, 1996, which was paid on February 14, 1997. The timing and amount of future distributions will be determined quarterly and will depend on the adequacy of Partnership cash flow and cash reserve requirements. On March 15, 1996, based upon, among other things, the advice of legal 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. Results of Operations 1996 vs. 1995 Partnership operations resulted in a net income of $567,637 for the year ended December 31, 1996, compared to a net loss of $3,631,162 in 1995. The change from net loss in 1995 to net income in 1996 is primarily attributable to a $3,928,998 loss recognized in 1995 on the write down of the Quorum II Office Building to its estimated Fair Value pursuant to the requirements of FAS 121. Rental income totaled $5,209,134 for the year ended December 31, 1996 compared to $5,047,528 for the year ended December 31, 1995. The increase is due to rental rate increases at three of the Partnership's four properties. Interest income totaled $69,645 for the year ended December 31, 1996, compared to $110,529 for the year ended December 31, 1995. The decrease is due primarily to a lower average cash balance in 1996. Property operating expenses totaled $2,291,679 for the year ended December 31, 1996, relatively unchanged from $2,283,025 for the year ended December 31, 1995. Depreciation and amortization decreased to $2,074,246 for the year ended December 31, 1996 from $2,278,567 for the year ended December 31, 1995, primarily due to a lower depreciable asset base in 1996. The Partnership incurred bad debt expense of $33,361 for the year ended December 31, 1996 reflecting the uncollectibility of delinquent rent. The Partnership incurred no bad debt expense in 1995. For the year ended December 31, 1996, net income of $42,140 was allocated to the co-venturer of Quorum II Office Building. 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, 1996, lease levels at each of the properties were as follows: Metro Park Executive Center - 81%; Fort Lauderdale Commerce Center - 85%; Three Financial Centre - 94 %; Quorum II Office Building - 84%. 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 was 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, 1996 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 was 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 was 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 was largely due to higher grounds maintenance expense at Fort Lauderdale Commerce Center. Depreciation 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%. Item 8. Financial Statements and Supplementary Data Incorporated by reference to the Partnership's Annual Report to Unitholders for the year ended December 31, 1996, 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., 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, Executive Vice President William Caulfield Vice President Michael Marron Vice President Lawrence M. Ostow Vice President John H. Ng Vice President Moshe Braver Vice President Rocco F. Andriola, 38, is a Managing Director of Lehman Brothers in its Diversified Asset Group and has held such position since October 1996. 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 June 1991 through September 1996, Mr. Andriola held the position of Senior Vice President in Lehman's Diversified Asset Group. From June 1989 through May 1991, Mr. Andriola held the position of First Vice President in Lehman's Capital Preservation and Restructuring Group. 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. from Fordham University, a J.D. from New York University School of Law, and an LL.M in Corporate Law from New York University's Graduate School of Law. Kenneth L. Zakin, 49, is a Senior Vice President of Lehman Brothers 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 was a director of Lexington Corporate Properties, Inc. from 1993 to 1996. 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 of 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, 37, is a Vice President of Lehman Brothers 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, 33, is a Vice President of Lehman Brothers 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 from the State University of New York at Albany in 1985 and is a Certified Public Accountant. Lawrence M. Ostow, 29, 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. John H. Ng, 46, is a Vice President of Lehman Brothers Inc. and has been employed by Lehman since November 1977. He is an asset manager of the Diversified Asset Group of Lehman and has held such position since 1985. From 1980 to 1985, Mr. Ng served as Senior Financial Analyst in the Corporate Planning and Development Department and from 1977 to 1980 he was an analyst in the Controller's Department. Prior to joining Lehman, he served as a Teaching Assistant in Finance and Economics at the University of Minnesota. Mr. Ng received an M.B.A. with a concentration in Corporate Finance from the University of Minnesota in 1977 and a B.A. magna cum laude in Economics with a specialization in Monetary Economics from Moorhead State University in 1975. Moshe Braver, 43, is currently a Managing Director of Lehman Brothers and has held such position since October 1985. During this time, he has held positions with the Business Analysis Group, International and Capital Markets Administration and currently, with the Diversified Asset Group. Mr. Braver joined Shearson Lehman Brothers in August 1983 as Senior Vice President. Prior to joining Shearson, Mr. Braver was employed by the accounting firm of Coopers & Lybrand from January 1975 through August 1983 as an Audit Manager. He received a Bachelor of Business Administration degree from Bernard Baruch College in January 1975 and is a Certified Public Accountant. 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 Mark P. Mikuta President Donald T. Herrick, Jr. Vice President and Treasurer Julie R. Adie Vice President and Secretary Mark P. Mikuta, 43, is Senior Vice President of Goodman Segar Hogan, Inc. and is Vice President and 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. Donald T. Herrick, Jr., 53, is President of Goodman Segar Hogan, Inc. He is also President of Dominion Lands, Inc. and Vice President of Dominion Capital, Inc., both of which are wholly-owned subsidiaries of Dominion Resources, Inc. Mr. Herrick joined Dominion Resources in 1970. He earned a Bachelor of Business Administration degree from the University of Michigan in 1965 and a Masters of Business Administration from American University in 1969. Mr. Herrick has completed all course work towards the M.A.I. designation. Julie R. Adie, 42, is a Vice President of Goodman Segar Hogan, Inc. and Senior Vice President of Goodman Segar Hogan Hoffler, L.P. ("GSHH"). She is 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, Goodman Segar Hogan ("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 interests in GSHH are limited partnership interests owned by GSH, HK and 23 employees of GSHH. 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, 1996. (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, 1996. (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, 1996, $120,389 of the Registrant's income was allocated to the General Partners ($80,259 to RES and $40,130 to HS Advisors). For a description of the allocation 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, 1996 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, 1996 and 1995 (1) Consolidated Statements of Partners' Capital (Deficit) - For the years ended December 31, 1996, 1995 and 1994 (1) Consolidated Statements of Operations - For the years ended December 31, 1996, 1995 and 1994 (1) Consolidated Statements of Cash Flows - For the years ended December 31, 1996, 1995 and 1994 (1) Notes to the Consolidated Financial Statements (1) (2) Financial Statement Schedule: Schedule III - Real Estate and Accumulated Depreciation 12 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, 1996, which is filed as exhibit 13. (b) Reports on Form 8-K filed in the fourth quarter of calendar year 1996: 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, 1996. (27) Financial Data Schedule. (28) Portions of Prospectus of Registrant dated December 13, 1983. Schedule III - Real Estate and Accumulated Depreciation December 31, 1996 Fort Metro Lauderdale Three Park Quorum II Center Financial Executive Office Consolidated Ventures: Commerce Centre Center Building Total Location Ft. Lauderdale Little Rock Fort Myers Dallas , FL , AR , FL , TX na Construction date 1985 1984 1984 1985 na Acquisition date 04-18-85 01-22-85 01-07-85 06-12-85 na Life on which depreciation in latest income statements is computed 1-25 yrs 1-25 yrs 1-25 yrs 1-25 yrs na Encumbrances Initial cost to Partnership: Land $ 2,741,551 1,018,332 $ 548,643 $ 1,500,168 $ 5,808,694 Buildings and improvements 12,613,916 10,419,160 5,315,077 3,098,584 31,446,737 Costs capitalized subsequent to acquisition: Land, buildings and improvements (289,578) (262,490) (197,249) 134,112 (615,205) Gross amount at which carried at close of period(1): Land $ 2,741,551 $ 1,018,332 $ 548,643 $ 1,500,168 $ 5,808,694 Buildings and improvements 12,324,338 10,156,670 5,117,828 3,232,696 30,831,532 15,065,889 11,175,002 5,666,471 4,732,864 36,640,226 Accumulated depreciation (2) $ 5,841,219 $ 4,934,366 $2,432,938 $ 338,390 $13,546,913 (1) For Federal income tax purposes, the basis of land, building and improvements is $48,384,595. (2) For Federal income tax purposes, the amount of accumulated depreciation is $26,394,178. A reconciliation of the carrying amount of real estate and accumulated depreciation for the years ended December 31, 1996, 1995, and 1994 follows: 1996 1995 1994 Real estate investments: Beginning of year $37,255,431 $46,187,232 $45,533,902 Additions 386,746 458,496 654,844 Write-down - (8,936,000) - Deletions (1,001,951) (454,297) (1,514) End of year $36,640,226 $37,255,431 $46,187,232 Accumulated depreciation: Beginning of year $12,714,080 $16,113,296 $13,941,302 Depreciation expense 1,834,784 2,062,083 2,173,508 Deletions (1,001,951) (454,297) (1,514) Write-down - (5,007,002) - End of year $13,546,913 $12,714,080 $16,113,296 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. COMMERCIAL PROPERTIES 3, L.P. Dated: March 21, 1997 BY: HS Advisors III, Ltd. General Partner Hogan Stanton Investment, Inc. General Partner BY: /s/Mark P. Mikuta Name: Mark P. Mikuta Title: President Dated: March 21, 1997 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 Dated: March 21, 1997 BY: /s/Rocco F. Andriola Rocco F. Andriola Director, President and Chief Financial Officer Dated: March 21, 1997 BY: /s/William Caulfield William Caulfield Vice President Dated: March 21, 1997 BY: /s/Kenneth L. Zakin Kenneth L. Zakin Vice President and Director Dated: March 21, 1997 BY: /s/Michael T. Marron Michael T. Marron Vice President Dated: March 21, 1997 BY: /s/Lawrence M. Ostow Lawrence M. Ostow Vice President Dated: March 21, 1997 BY: /s/John H. Ng John H. Ng Vice President Date: March 21, 1997 BY: /s/Moshe Braver Moshe Braver 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: March 21, 1997 BY: /s/Mark P. Mikuta Mark P. Mikuta President of Hogan Stanton Investment, Inc., as general partner of HS Advisors III, Ltd. Date: March 21, 1997 BY: /s/Donald T. Herrick, Jr. Donald T. Herrick, Jr. Vice President and Treasurer of Hogan Stanton Investment, Inc., as general partner of HS Advisors III, Ltd. Date: March 21, 1997 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. 1996 Annual Report to Unitholders Commercial Properties 3, L.P. (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, 1996 and 1995. Percentage Leased Property Location 1996 1995 Metro Park Executive Center Fort Myers, FL 81% 78% Fort Lauderdale Commerce Center Fort Lauderdale, FL 85% 88% Three Financial Centre Little Rock, AR 94% 94% Quorum II Office Building Dallas, TX 84% 98% 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 800-223-3464 Message to Investors We are pleased to present the 1996 Annual Report for Commercial Properties 3, L.P. (the "Partnership"). Included in this report is a review of national market conditions, an update of Partnership operations, and financial highlights for the year. Please refer to the Property Profiles & Leasing Update section of this report for additional information regarding local market conditions for each of the Partnership's properties, as well as their operating performance and lease levels at December 31, 1996. Market Overview The commercial office market continued to recover throughout the year, particularly in the suburban office sector. Suburban office vacancy rates declined to approximately 11% at year-end 1996 versus approximately 15% a year earlier. Overall, demand for office space continues to increase, bringing about continually lower vacancy rates and, in many regions of the country, enabling property owners to raise rental rates. Accordingly, the availability of financing for investment in this sector has also improved. Conditions in the markets where the Partnership's properties are located generally paralleled those in the national market, and three of the Partnership's four properties reported stable occupancy rates at year-end 1996. In view of these ongoing improvements in the real estate and capital markets, we believe that the current favorable environment may present opportunities to sell the Partnership's properties. As a result, the General Partners anticipate marketing for sale at least one of the properties in 1997 as various leasing issues are resolved. It should be noted that there can be no assurance that any of the Partnership's future marketing efforts will result in a sale of a property. Cash Distributions The Partnership paid cash distributions to Limited Partners totaling $25.30 per Unit for the year ended December 31, 1996, including a fourth quarter cash distribution of $3.00 per Unit that was either credited to your brokerage account or sent directly to you on February 14, 1997. Since inception, the Partnership has paid total cash distributions of $161.81 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 be determined quarterly and will depend on the adequacy of the Partnership's cash flow and cash reserve requirements. Cash Distributions Per Limited Partnership Unit First Second Third Fourth Quarter Quarter Quarter Quarter Total 1995 $2.50 $2.50 $3.25 $5.00 $13.25 1996 $16.30* $3.00 $3.00 $3.00 $25.30 * Includes a special cash distribution of $13.30 per Unit paid on March 29, 1996. General Information As you are probably aware, several third parties have commenced partial tender offers to purchase units of the Partnership at prices which are substantially below the Partnership's Net Asset Value. In response to these offers, we have recommended that limited partners reject these offers because they do not reflect the underlying value of the Partnership's assets. According to published industry sources, most investors who hold units of limited partnerships similar to the Partnership have rejected these types of tender offers due to their inadequacy. Please be assured that if any additional tender offers are made for your units, we will make every effort to provide you with our position regarding those offers on a timely basis. Summary In the coming year the General Partners will explore opportunities to sell the Partnership's properties. Additionally, we will continue to focus on leasing vacant space and renewing any leases which are scheduled to expire in 1997 so as to further improve the properties' sales opportunities. We will keep you apprised of significant developments affecting your investment in future 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/Mark P. Mikuta Kenneth L. Zakin Mark P. Mikuta Executive Vice President President March 21, 1997 Property Profiles & 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 one new lease representing 1,212 square feet and two three-year lease renewals representing 3,933 square feet in 1996. In addition, a tenant occupying 4,773 square feet, whose lease expired in December 1996, extended its lease for ten years. As a result, the property was 81% leased at December 31, 1996, compared with 78% at year-end 1995. None of the property's tenants generated rental income in excess of 10% of the Partnership's consolidated rental income. Six leases totaling 24,844 square feet or approximately 41% of the property's space are scheduled to expire during 1997, including one lease for 16,517 square feet. Fort Myers Market Update - The Fort Myers commercial office market improved during 1996 and vacancy rates declined to approximately 12% for the fourth quarter of 1996, down from approximately 14% for the fourth quarter of 1995. While the Edison Central submarket was adversely impacted by the relocation of several tenants during 1995 outside of the market, the area rebounded during 1996 as vacancy rates for commercial office space declined to approximately 15% at year-end 1996 from approximately 17% at year-end 1995. Rental rates increased slightly and are expected to rise further during the upcoming year. 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 one new lease representing 5,428 square feet and two lease renewals totaling 14,615 square feet. One tenant, leasing a total of 6,425 square feet pursuant to two leases originally scheduled to expire in July 1996, extended its leases until October 1997. Another tenant, leasing 6,000 square feet, who's lease expired during the fourth quarter, vacated its space in December 1997. As a result, the property was 85% leased at year- end 1996 compared with 88% at year-end 1995. None of the property's tenants accounted for 10% or more of the Partnership's consolidated rental income. The General Partners continue to aggressively market the property's vacant space. During 1997, six leases representing 28,040 square feet or approximately 15% 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 - The Broward County office market remained stable during 1996, ranking among the top markets nationwide. Recent economic indicators, such as the area's low 4% unemployment rate, have contributed to the county's strong position. The vacancy rate for office/service space in Broward County was relatively unchanged from the previous year, and decreased slightly to 7% as of year-end 1996 compared with 7.5% as of year-end 1995. In keeping with these strong conditions, rental rates increased by approximately 12% over the year and the use of rental concessions has been eliminated. The Cypress Creek market, situated in north central Broward County, also benefited from the relatively strong office environment and the vacancy rate for office/service space decreased to 7.8% as of the 1995 fourth quarter, from 12.1% a year earlier. General market conditions are expected to remain healthy in 1997. 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 - At December 31, 1996, the property's lease level was 94%, unchanged from December 31, 1995. During the year, the General Partners executed two new leases totaling 2,858 square feet and two new short-term leases totaling 1,284 square feet. The General Partners also re-leased 6,533 square feet of the property's vacant space to an existing tenant, which expanded its space to a total of 12,240 square feet and extended its lease for three years. Additionally, two tenants expanded their spaces by a total of 3,205 square feet and renewed their respective leases. However, three tenants leasing a total of 10,580 square feet vacated the premises upon the expiration of their leases during 1996. None of the property's tenants accounted for 10% or more of the Partnership's consolidated rental income. A tenant leasing 4,747 square feet pursuant to a lease that expired on January 31, 1997, vacated its space. No other leases are scheduled to expire during 1997. Market Update - The Little Rock office market remained relatively stable during the year and the area's overall vacancy rate for office properties remained at 10% for year-end 1996, unchanged from a year earlier. The leasing environment in west Little Rock, the submarket where Three Financial Centre is located, remained very competitive during the year, primarily due to the construction of three new commercial office buildings which were completed in late 1996 and early 1997. Nevertheless, the west Little Rock office market improved during 1996 as evidenced by a decrease in the area's overall vacancy rate for office properties to 6% at year-end 1996 from 8% at year-end 1995. As a result, rental rates increased and property values continued to rise. As a result of the favorable market conditions combined with the property's stabilized operations, the General Partners will evaluate potential sales opportunities during 1997. 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 two new leases totaling 7,290 square feet during 1996. Additionally, two tenants leasing a total of 10,622 square feet whose leases expired during the year, continue to occupy their respective spaces on a month- to-month basis. However, a tenant leasing 14,175 square feet vacated its space upon the expiration of its lease in November 1996. As a result, the property was 84% leased at December 31, 1996 compared with 98% at December 31, 1995. None of the property's tenants accounted for 10% or more of the Partnership's consolidated rental income. Seven leases representing 28,251 square feet or approximately 34% of the property's leasable area are scheduled to expire in 1997. 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 continued to improve in 1996 driven primarily by the region's continued strong employment growth. The area's healthy business climate, low tax rate and high quality of life have led to a steady migration of companies to the region, increasing demand for office space. The LBJ/Quorum submarket, where the property is located, benefited from these conditions, as evidenced by a decrease in the submarket's vacancy rate to 6% at year-end 1996, compared with 9% a year earlier. Additionally, rental rates increased by approximately 10% in 1996 and property values have risen. Financial Highlights For The Years Ended December 31, (dollars in thousands except per Unit data) 1996 1995 1994 1993 1992 Total income $ 5,279 $ 5,158 $ 4,691 $ 4,211 $ 4,034 Net income (loss) 568 (3,631) (332) (910) (712) Total assets 25,364 27,842 32,837 33,454 35,220 Net cash from operations 2,560 2,168 1,859 1,536 1,592 Net income (loss) per Unit 4.09 (32.87) (3.00) (8.24) (6.45) Cash distributions per Limited Partnership Unit 25.30(1) 13.25 5.50 4.00 14.00 (1) Includes a special cash distribution of $13.30 per Unit paid on March 29, 1996. The above selected financial data should be read in conjunction with the consolidated financial statements and related notes included in this report. - - The change to net income in 1996 from net loss in 1995 is primarily attributable to a $3,928,998 loss recognized in 1995 on the write down of the Quorum II Office Building, implemented in compliance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The net income is also attributable to lower depreciation and amortization and higher rental income 1996. - - Net cash from operations increased in 1996 primarily due to higher net income. Consolidated Balance Sheets At December 31, At December 31, 1996 1995 Assets Property: Land $ 5,808,694 $ 5,808,694 Buildings, building improvements and equipment 30,831,532 31,446,737 36,640,226 37,255,431 Less accumulated depreciation (13,546,913) (12,714,080) 23,093,313 24,541,351 Cash and cash equivalents 1,228,502 2,134,370 Restricted cash 232,330 237,566 Accounts and rent receivable, net of allowance for doubtful accounts of $5,444 in 1996 and $5,486 in 1995 40,090 64,616 Deferred rent receivable 205,718 230,626 Prepaid leasing costs and other assets, net of accumulated amortization of $805,502 in 1996 and $900,609 in 1995 563,611 633,476 Total Assets $ 25,363,564 $ 27,842,005 Liabilities and Partners' Capital (Deficit) Liabilities: Accounts payable and accrued expenses $ 249,517 $ 257,185 Due to affiliates 5,941 8,479 Distributions payable 338,282 563,804 Security deposits payable 215,026 214,388 Total Liabilities 808,766 1,043,856 Minority Interest 263,477 221,337 Partners' Capital (Deficit): General Partners (368,069) (402,866) Limited Partners (109,378 units outstanding) 24,659,390 26,979,678 Total Partners' Capital 24,291,321 26,576,812 Total Liabilities and Partners' Capital $ 25,363,564 $ 27,842,005 Consolidated Statements of Partners' Capital (Deficit) For the years ended December 31, 1996, 1995 and 1994 General Limited Partners Partners Total 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 Net Income 120,389 447,248 567,637 Distributions (85,592) (2,767,536) (2,853,128) Balance at December 31, 1996 $(368,069) $24,659,390 $24,291,321 Consolidated Statements of Operations For the years ended December 31, 1996 1995 1994 Income Rental $5,209,134 $ 5,047,528 $4,641,823 Interest 69,645 110,529 49,446 Total Income 5,278,779 5,158,057 4,691,269 Expenses Property operating 2,291,679 2,283,025 2,231,683 Loss on write-down of real estate - 3,928,998 - Depreciation and amortization 2,074,246 2,278,567 2,388,925 General and administrative 269,716 248,607 240,074 Bad debt 33,361 - 77,710 Total Expenses 4,669,002 8,739,197 4,938,392 Net income (loss) before minority interest 609,777 (3,581,140) (247,123) Minority interest (42,140) (50,022) (84,411) Net Income (Loss) $ 567,637 $(3,631,162) $ (331,534) Net Income (Loss) Allocated: To the General Partners $ 120,389 $ (36,312) $ (3,315) To the Limited Partners 447,248 (3,594,850) (328,219) $ 567,637 $(3,631,162) $ (331,534) Per limited partnership unit (109,378 outstanding) $4.09 $(32.87) $(3.00) Consolidated Statements of Cash Flows For the years ended December 31, 1996 1995 1994 Cash Flows From Operating Activities Net Income (Loss) $ 567,637 $(3,631,162) $ (331,534) Adjustments to reconcile net income(loss) to net cash provided by operating activities: Minority interest 42,140 50,022 84,411 Loss on write-down of real estate - 3,928,998 - Depreciation 1,834,784 2,062,083 2,173,508 Amortization 239,462 216,484 215,417 Increase (decrease) in cash arising from changes in operating assets and liabilities: Restricted cash 5,236 (21,487) (3,925) Accounts and rent receivable, net 24,526 (36,290) 112,971 Deferred rent receivable 24,908 4,620 (136,873) Notes receivable - - 51,403 Prepaid leasing costs and other assets (169,597) (203,967) (237,210) Accounts payable and accrued expenses (7,668) (210,984) (91,761) Due to affiliates (2,538) (696) 5,139 Security deposits payable 638 9,923 17,235 Net cash provided by operating activities 2,559,528 2,167,544 1,858,781 Cash Flows From Investing Activities Additions to real estate (386,746) (458,496) (504,597) Net cash used for investing activities (386,746) (458,496) (504,597) Cash Flows From Financing Activities Cash distributions (3,078,650) (1,212,179) (451,044) Net cash used for financing activities (3,078,650) (1,212,179) (451,044) Net increase (decrease) in cash and cash equivalents (905,868) 496,869 903,140 Cash and cash equivalents, beginning of period 2,134,370 1,637,501 734,361 Cash and cash equivalents, end of period $ 1,228,502 $ 2,134,370 $ 1,637,501 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, 1996, 1995 and 1994 1. Organization Commercial Properties 3, L.P. (the "Partnership") was organized as a limited partnership under the laws of the Commonwealth 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 legal 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. 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 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. Fair Value of Financial Instruments - Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments " ("FAS 107"), requires that the Partnership disclose the estimated fair values of its financial instruments. Fair values generally represent estimates of amounts at which a financial instrument could be exchanged between willing parties in a current transaction other than in forced liquidation. Fair value estimates are subjective and are dependent on a number of significant assumptions based on management's judgment regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. In addition, FAS 107 allows a wide range of valuation techniques, therefore, comparisons between entities, however similar, may be difficult. 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. Reclassifications - Certain prior year amounts have been reclassified in order to conform to the current year's presentation. 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 refinancing or other interim capital transaction 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 in amounts ranging from 75% to 80% to the Partnership and the balance to the respective co-venturers. iii. Net proceeds from a sale of the properties will generally be distributed to the venturers, pro rata in accordance with each venturer's capital account balance. iv. 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 II"). At such time, management concluded that it may not hold Quorum II 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 II to it 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, 1996 is as follows: 1997 $ 3,640,026 1998 2,478,158 1999 1,529,119 2000 1,723,324 2001 526,642 Thereafter 328,211 $10,225,480 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 amounts earned by, or reimbursed to, the General Partners and their affiliates for property management fees and out-of-pocket expenses during the years ended December 31, 1996, 1995 and 1994: Unpaid at Earned December 31, 1996 1996 1995 1994 Real Estate Services and affiliates Out-of-pocket expenses $3,175 $12,895 $ - $20,951 HS Advisors and affiliates Out of pocket expenses - 6,039 - 7,275 Property management fees (GSH) 2,766 32,219 31,815 30,291 $5,941 $51,153 $31,815 $58,517 7. Reconciliation of Financial Statement Net Loss to Federal Income Tax Basis Net Income (Loss) Years Ended December 31, 1996 1995 1994 Financial statement net income (loss) $ 567,637 $(3,631,162) $(331,534) Tax basis depreciation over financial statement depreciation (224,715) (8,921) (192,309) Write-down of real estate - 3,928,998 - Deferred rent 212 23,757 (82,128) Minority interest adjustment (12,041) 3,343 10,133 Prepaid rent - (47,283) 48,674 Bad debt expense (42) - 134 Federal income tax basis net income (loss) $ 331,051 $ 268,732 $(547,030) Report of Independent Auditors The Partners Commercial Properties 3, L.P. and Consolidated Ventures We have audited the accompanying consolidated balance sheets of Commercial Properties 3, L.P. and Consolidated Ventures as of December 31, 1996 and 1995, 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, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above represent fairly, in all material respects, the consolidated financial position of Commercial Properties 3, L.P. and Consolidated Ventures at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepting 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 3, 1997 Net Asset Valuation Comparison of Acquisition Costs to Appraised Value and Determination of Net Asset Value Per $484 Unit at December 31, 1996 (Unaudited) Acquisition 1996 Appraised Property Date of Acquisition Cost (1) Value (2) Metro Park Executive Center 01-17-85 $ 5,543,159 $ 3,600,000 Three Financial Centre 01-22-85 11,378,512 11,800,000 Fort Lauderdale Commerce Center 04-18-85 14,125,050 11,400,000 Quorum II Office Building 06-12-85 13,939,093 6,200,000 $44,985,814 $33,000,000 Cash and cash equivalents 1,228,502 Accounts and rent receivable 40,090 34,268,592 Less: Accounts payable and accrued expenses (249,517) Due to affiliates (5,941) Distribution payable (338,282) Minority Interest (263,477) Partnership Net Asset Value (3) $33,411,375 Net Asset Value Allocated: Limited Partners $33,077,261 General Partners 334,114 $33,411,375 Net Asset Value Per Unit (109,378 units outstanding) $ 302.41 (1) The acquisition cost of each property is comprised of fundings made through December 31, 1996, 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, 1996 Appraised Values which were determined by an independent property appraisal firm. The Partnership's share of the December 31, 1996 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, 1996 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. EX-23 3 EXHIBIT 23 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 3, 1997, included in the 1996 Annual Report to Shareholders of Commercial Properties 3, L.P. and Consolidated Ventures. Our audit also included the financial statement 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 3, 1997 EX-27 4 FINANCIAL DATA SCHEDULE FOR 1996 FORM 10-K COMMERCIAL PROPERTIES 3, L.P.
5 12-mos Dec-31-1996 Dec-31-1996 1,228,502 000 251,252 5,444 000 2,270,251 36,640,226 13,546,913 25,363,564 808,766 000 000 000 000 24,291,321 25,363,564 000 5,278,779 000 000 4,669,002 000 000 567,637 000 567,637 000 000 000 567,637 4.09 4.09
-----END PRIVACY-ENHANCED MESSAGE-----